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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
Commission file number: 001-13100
HIGHWOODS PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 56-1871668
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3100 SMOKETREE COURT, SUITE 600, RALEIGH, N.C.
(Address of principal executive office)
27604
(Zip Code)
Registrant's telephone number, including area code:
(919) 872-4924
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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The Company has only one class of common stock, par value $.01 per share,
with 61,661,891 shares outstanding as of May 14, 1999.
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HIGHWOODS PROPERTIES, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED MARCH 31, 1999
TABLE OF CONTENTS
PAGE
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated balance sheets of Highwoods Properties, Inc. as of March 31, 1999
and December 31, 1998 4
Consolidated statements of income of Highwoods Properties, Inc. for the three
month periods ended March 31, 1999 and 1998 5
Consolidated statements of cash flows of Highwoods Properties, Inc. for the
three month periods ended March 31, 1999 and 1998 6
Notes to consolidated financial statements of Highwoods Properties, Inc. 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 10
Results of Operations 10
Liquidity and Capital Resources 11
Year 2000 13
Funds From Operations and Cash Available for Distributions 16
Disclosure Regarding Forward-Looking Statements 17
Property Information 19
Inflation 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Changes in Securities and Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
We refer to (1) Highwoods Properties, Inc. as the "Company," (2) Highwoods
Realty Limited Partnership as the "Operating Partnership," (3) the Company's
common stock as "Common Stock" and (4) the Operating Partnership's common
partnership interests as "Common Units."
The information furnished in the accompanying balance sheets, statements
of income and statements of cash flows reflect all adjustments that are, in our
opinion, necessary for a fair presentation of the aforementioned financial
statements for the interim period.
The aforementioned financial statements should be read in conjunction with
the notes to consolidated financial statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations and our 1998 Annual
Report on Form 10-K.
3
HIGHWOODS PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
MARCH 31,
1999 DECEMBER 31, 1998
-------------- ------------------
(UNAUDITED)
ASSETS
Real estate assets, at cost:
Land and improvements ................................................ $ 506,078 $ 559,100
Buildings and tenant improvements .................................... 2,950,479 3,186,584
Development in process ............................................... 223,545 189,465
Land held for development ............................................ 154,020 150,622
Furniture, fixtures and equipment .................................... 7,891 7,693
---------- ----------
3,842,013 4,093,464
Less -- accumulated depreciation ..................................... (202,246) (169,272)
---------- ----------
Net real estate assets ............................................... 3,639,767 3,924,192
Property held for sale ................................................ 396,160 131,262
Cash and cash equivalents ............................................. 38,325 31,445
Restricted cash ....................................................... 11,668 24,263
Accounts receivable ................................................... 23,039 27,948
Advances to related parties ........................................... 3,166 10,420
Notes receivable ...................................................... 47,054 40,225
Accrued straight line rents receivable ................................ 30,016 27,194
Investment in unconsolidated affiliates ............................... 36,746 21,088
Other assets:
Deferred leasing costs ............................................... 51,419 45,785
Deferred financing costs ............................................. 43,409 38,750
Prepaid expenses and other ........................................... 15,331 15,237
---------- ----------
110,159 99,772
Less -- accumulated amortization ..................................... (27,006) (23,476)
---------- ----------
83,153 76,296
---------- ----------
$4,309,094 $4,314,333
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable ........................................... $2,030,849 $2,008,716
Accounts payable, accrued expenses and other liabilities .............. 111,252 130,575
---------- ----------
Total liabilities .................................................... 2,142,101 2,139,291
Minority interest ..................................................... 241,105 279,043
Stockholders' equity:
Preferred stock, $.01 par value, 50,000,000 authorized shares;
8 5/8% Series A Cumulative Redeemable Preferred Shares
(liquidation preference $1,000 per share), 125,000 shares issued
and outstanding at March 31, 1999 and December 31, 1998 ............ 125,000 125,000
8% Series B Cumulative Redeemable Preferred Shares
(liquidation preference $25 per share), 6,900,000 shares issued and
outstanding at March 31, 1999 and December 31, 1998 ................ 172,500 172,500
8% Series D Cumulative Redeemable Preferred Shares
(liquidation preference $250 per share), 400,000 shares issued and
outstanding at March 31, 1999 and December 31, 1998 ................ 100,000 100,000
Common stock, $.01 par value, authorized 200,000,000 shares; 61,628,377
shares issued and outstanding at March 31, 1999 and 59,865,259 shares
issued and outstanding at December 31, 1998 .......................... 616 599
Additional paid-in capital ............................................ 1,581,853 1,546,592
Distributions in excess of net income ................................. (54,081) (48,692)
---------- ----------
Total stockholders' equity ........................................... 1,925,888 1,895,999
---------- ----------
$4,309,094 $4,314,333
========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
HIGHWOODS PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
----------- -----------
REVENUE:
Rental property .................................................... $146,721 $100,331
Equity in earnings of unconsolidated affiliates .................... 197 --
Gain on disposition of assets ...................................... 569 --
Interest and other income .......................................... 5,287 2,157
-------- --------
152,774 102,488
OPERATING EXPENSES:
Rental property .................................................... 45,345 29,728
Depreciation and amortization ...................................... 28,156 17,161
Interest expense:
Contractual ...................................................... 31,842 17,162
Amortization of deferred financing costs ......................... 778 616
-------- --------
32,620 17,778
General and administrative ......................................... 5,793 3,784
-------- --------
Income before minority interest and
extraordinary item .............................................. 40,860 34,037
MINORITY INTEREST ................................................... (5,826) (5,608)
-------- --------
Income before extraordinary item ................................... 35,034 28,429
EXTRAORDINARY ITEM -- LOSS ON EARLY
EXTINGUISHMENT OF DEBT ............................................. -- (46)
-------- --------
Net income ......................................................... 35,034 28,383
Dividends on preferred stock ........................................ (8,145) (6,145)
-------- --------
Net income available for common stockholders ....................... $ 26,889 $ 22,238
======== ========
NET INCOME PER COMMON SHARE -- BASIC:
Income before extraordinary item ................................... $ 0.45 $ 0.45
Extraordinary item -- loss on early extinguishment of debt ......... -- --
-------- --------
Net income ......................................................... $ 0.45 $ 0.45
======== ========
Weighted average shares outstanding -- basic ....................... 60,272 49,051
======== ========
NET INCOME PER COMMON SHARE -- DILUTED:
Income before extraordinary item ................................... $ 0.45 $ 0.45
Extraordinary item loss on early extinguishment of debt ............ -- --
-------- --------
Net income ......................................................... $ 0.45 $ 0.45
======== ========
Weighted average shares outstanding -- diluted ..................... 60,409 49,688
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
HIGHWOODS PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
------------ -------------
OPERATING ACTIVITIES:
Net income ..................................................... $ 35,034 $ 28,383
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ................................ 28,156 17,161
Minority interest ............................................ 5,826 5,608
Loss on early extinguishment of debt ......................... -- 46
Gain on disposition of assets ................................ (569) --
Changes in operating assets and liabilities .................. (18,056) 773
---------- ----------
Net cash provided by operating activities ................... 50,391 51,971
---------- ----------
INVESTING ACTIVITIES:
Additions to real estate assets ................................ (122,860) (311,362)
Cash paid in exchange for partnership net assets ............... (1,008) (12,383)
Proceeds from disposition ...................................... 124,463 --
Repayment of advances from subsidiaries ........................ 7,254 --
Other .......................................................... (30,467) (2,099)
---------- ----------
Net cash used in investing activities ....................... (22,618) (325,844)
---------- ----------
FINANCING ACTIVITIES:
Distributions paid on common stock and common units ............ (38,072) (30,097)
Dividends paid on preferred stock .............................. (8,145) (6,145)
Payments of prepayment penalties ............................... -- (46)
Borrowings on mortgages and notes payable ...................... 4,385 287,188
Repayment of mortgages and notes payable ....................... (3,252) (102,450)
Borrowings on revolving loans .................................. 95,000 247,000
Payments on revolving loans .................................... (74,000) (240,500)
Net proceeds from the sale of common stock ..................... 7,850 139,167
Net (payment) receipt of deferred financing costs .............. (4,659) 1,860
---------- ----------
Net cash (used in) provided by financing activities ......... (20,893) 295,977
---------- ----------
Net increase in cash and cash equivalents ...................... 6,880 22,104
Cash and cash equivalents at beginning of the period ........... 31,445 10,146
---------- ----------
Cash and cash equivalents at end of the period ................. $ 38,325 $ 32,250
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ......................................... $ 30,207 $ 12,324
========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
HIGHWOODS PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The following summarizes the net assets contributed by holders of Common
Units in the Operating Partnership or acquired subject to mortgage notes
payable:
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
--------- ----------
ASSETS:
Rental property and equipment, net .......... $2,241 $76,125
LIABILITIES:
Mortgages and notes payable assumed ......... $ -- $61,303
------ -------
Net assets ............................... $2,241 $14,822
====== =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and the Operating Partnership and its majority controlled affiliates. All
significant intercompany balances and transactions have been eliminated in the
consolidated financial statements.
The extraordinary loss represents the write-off of loan origination fees
and prepayment penalties paid on the early extinguishment of debt, net of the
minority interest.
The Company has elected and expects to continue to qualify as a REIT under
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is
required to be adopted in fiscal years beginning after June 15, 1999. The
Statement will require the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The fair market value of the Company's derivatives is March 31, 1999 are
discussed in Item 2.
The "Year 2000" issue is a general term used to describe the various
problems that may result from the improper processing of dates and calculations
involving years by many computers throughout the world as the Year 2000 is
approached and reached. We have reviewed the impact of Year 2000 issues and do
not expect Year 2000 issues to be material to our business, operations or
financial condition. The Year 2000 issue is discussed more fully in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Minority interest in the Company represents Common Units owned by various
individuals and entities and not the Company in the Operating Partnership, the
entity that owns substantially all of the Company's properties and through
which the Company, as the sole general partner, conducts substantially all of
its operations. Per share information is calculated using the weighted average
number of shares outstanding (including common share equivalents). In addition,
minority interest includes equity of consolidated real estate partnerships
which are owned by various individuals and entities and not the Company. The
Company acquired greater than 50% of the interest in real estate partnerships
as part of its acquisition of J.C. Nichols Company.
The accompanying financial information has not been audited, but in the
opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of our financial position, results
of operations and cash flows have been made. For further information, refer to
the financial statements and notes thereto included in our 1998 Annual Report
on Form 10-K.
2. SEGMENT INFORMATION
The sole business of the Company is the acquisition, development and
operation of rental real estate properties. The Company operates office,
industrial and retail properties and apartment units. There are no material
inter-segment transactions.
The Company's chief operating decision maker ("CDM") assesses and measures
operating results based upon property level net operating income. The operating
results for the individual assets within each property type have been
aggregated since the CDM evaluates operating results and allocates resources on
a property-by-property basis within the various property types.
8
The accounting policies of the segments are the same as those described in
note 1. Further, all operations are within the United States and no tenant
comprises more than 10% of consolidated revenues. The following table
summarizes the rental income, net operating income and assets for each
reportable segment for the quarter ended March 31, 1999 and 1998.
THREE MONTHS ENDED MARCH 31,
-------------------------------
1999 1998
-------------- --------------
(IN THOUSANDS)
RENTAL INCOME:
Office segment .......................................................... $ 121,208 $ 91,412
Industrial segment ...................................................... 13,054 8,919
Retail segment .......................................................... 7,568 --
Apartment segment ....................................................... 4,891 --
---------- ----------
$ 146,721 $ 100,331
========== ==========
NET OPERATING INCOME:
Office segment net operating income ..................................... $ 82,709 $ 63,225
Industrial segment net operating income ................................. 10,943 7,378
Retail segment net operating income ..................................... 5,069 --
Apartment segment net operating income .................................. 2,655 --
---------- ----------
$ 101,376 $ 70,603
Reconciliation to income before minority interest and extraordinary item:
Equity in income of unconsolidated affiliates ........................... 197 --
Gain on disposition of assets ........................................... 569 --
Interest and other income ............................................... 5,287 2,157
Interest expense ........................................................ (32,620) (17,778)
General and administrative expenses ..................................... (5,793) (3,784)
Depreciation and amortization ........................................... (28,156) (17,161)
---------- ----------
Income before minority interest and extraordinary item .................. $ 40,860 $ 34,037
========== ==========
TOTAL ASSETS:
Office segment .......................................................... $3,229,735 $2,739,906
Industrial segment ...................................................... 490,452 304,175
Retail segment .......................................................... 256,869 --
Apartment segment ....................................................... 136,339 --
Corporate and other ..................................................... 195,699 87,651
---------- ----------
Total Assets ............................................................ $4,309,094 $3,131,732
========== ==========
3. JOINT VENTURE ACTIVITY
On March 15, 1999, the Company closed a transaction with
Schweiz-Deutschland-USA Dreilander Beteiligung Objekt-DLF 98/29-Walker Fink-KG
("DLF"), pursuant to which the Company sold or contributed certain office
properties valued at approximately $142 million to a newly created limited
partnership (the "Joint Venture"). DLF contributed approximately $55 million
for a 77.19% interest in the Joint Venture, and the Joint Venture borrowed
approximately $71 million from third-party lenders. The Company retained the
remaining 22.81% interest in the Joint Venture, received net cash proceeds of
approximately $124 million and are the sole and exclusive manager and leasing
agent of the Joint Venture's properties, for which the Company receives
customary management fees and leasing commissions. The Company used the cash
proceeds received in the transaction to fund existing development activity
either through direct payments or repayment of borrowings under the Revolving
Loan.
4. CONTINGENCIES
LITIGATION. On October 2, 1998, John Flake, a former stockholder of J.C.
Nichols Company, filed a putative class action lawsuit on behalf of himself and
the other former stockholders of J.C. Nichols in the United States District
Court for the District of Kansas against J.C. Nichols, certain of its former
officers and directors
9
and the Company. The complaint alleges, among other things, that in connection
with the merger of J.C. Nichols and the Company (1) J.C. Nichols and the named
directors and officers of J.C. Nichols breached their fiduciary duties to J.C.
Nichols' stockholders, (2) J.C. Nichols and the named directors and officers of
J.C. Nichols breached their fiduciary duties to members of the J.C. Nichols
Company Employee Stock Ownership Trust, (3) all defendants participated in the
dissemination of a proxy statement containing materially false and misleading
statements and omissions of material facts in violation of Section 14(a) of the
Securities and Exchange Act of 1934 and (4) the Company filed a registration
statement with the Securities and Exchange Commission containing materially
false and misleading statements and omissions of material facts in violation of
Sections 11 and 12(2) of the Securities Act of 1933. The plaintiffs seek
equitable relief and monetary damages. The Company believes that the defendants
have meritorious defenses to the plaintiffs' allegations. The Company intends
to vigorously defend this litigation and has filed a motion to dismiss all
claims asserted against the defendants. Due to the inherent uncertainties of
the litigation process and the judicial system, the Company is not able to
predict the outcome of this litigation. If this litigation is not resolved in
our favor, it could have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition, the Company is a party to a variety of legal proceedings
arising in the ordinary course of our business. The Company believes that it is
adequately covered by insurance and indemnification agreements. Accordingly,
none of such proceedings are expected to have a material adverse affect on the
Company's business, financial condition and results of operations.
5. SUBSEQUENT EVENTS
PENDING DISPOSITION ACTIVITY. The Company recently entered into agreements
to sell approximately 3.3 million rentable square feet of non-core office and
industrial properties and 49 acres of development land in the South Florida
area for gross proceeds of approximately $323.2 million. The South Florida
transaction is expected to close by June 1, 1999. The Company recently also
entered into agreements to sell approximately 737,000 rentable square feet of
non-core office and industrial properties and 10.5 acres of development land in
the Baltimore area for gross proceeds of approximately $82.2 million. The
Baltimore transaction is expected to close by June 30, 1999. Non-core office
and industrial properties generally include single buildings or business parks
that do not fit our long-term strategy. The Company can provide no assurance
that all or parts of the transactions will be consummated. Both transactions
are subject to customary closing conditions, and the Baltimore transaction is
also subject to the completion of due diligence.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with all of the
financial statements appearing elsewhere in the report. The following
discussion is based primarily on the consolidated financial statements of the
Company.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999. Revenues from rental operations
increased $46.4 million, or 46%, from $100.3 million for the three months ended
March 31, 1998 to $146.7 million for the comparable period in 1999. The
increase is primarily a result of our acquisition of 9.6 million square feet of
majority owned office, industrial and retail properties and 2,325 apartment
units, and the completion of 4.2 million square feet of development activity
during the last nine months of 1998 and the first three months of 1999. Our
in-service portfolio increased from 33.9 million square feet at March 31, 1998
to 43.6 million square feet at March 31, 1999. Same property revenues, which
are the revenues of the 471 in-service properties owned on January 1, 1998,
increased 4% for the three months ended March 31, 1999, compared to the same
three months of 1998.
During the three months ended March 31, 1999, 373 leases representing 2.3
million square feet of office, industrial and retail space commenced at an
average rate per square foot which was 5% higher than the average rate per
square foot on the expired leases.
10
Interest and other income increased $3.1 million, or 141%, from $2.2
million for the three months ended March 31, 1998 to $5.3 million for the
comparable period in 1999. The increase was a result of higher cash balances in
1999, and additional income generated from management fees, development fees
and leasing commissions. The Company generated $313,000 in auxiliary income
(vending and parking) as a result of acquiring multifamily communities in the
merger with J.C. Nichols.
Rental operating expenses increased $15.6 million, or 53%, from $29.7
million for the three months ended March 31, 1998 to $45.3 million for the
comparable period in 1999. The increase is a result of our addition of 13.8
million square feet of office, industrial and retail space and 2,325 apartment
units through a combination of acquisitions and developments during the last
nine months of 1998 and the first three months of 1999. Rental operating
expenses as a percentage of related revenues increased from 30% for the three
months ended March 31, 1998 to 31% for the comparable period in 1999.
Depreciation and amortization for the three months ended March 31, 1999
and 1998 was $28.2 million and $13.8 million, respectively. The increase of
$11.0 million, or 64%, is due to an increase in depreciable assets over the
prior year. Interest expense increased $14.8 million, or 83%, from $17.8
million for the three months ended March 31, 1998 to $32.6 million for the
comparable period in 1999. The increase is attributable to the increase in the
outstanding debt for the entire quarter. Interest expense for the three months
ended March 31, 1999 and 1998 included $778,000 and $616,000, respectively, of
amortization of non-cash deferred financing costs and the costs related to the
Company's interest rate hedge contracts. General and administrative expenses
increased from 3.8% of rental revenue for the three months ended March 31, 1998
to 3.9% for the comparable period in 1999.
Net income before minority interest and extraordinary item equaled $40.9
million and $34.0 million for the three months ended March 31, 1999 and 1998,
respectively. The Company's net income allocated to minority interest totaled
$5.8 million and $5.6 million for the three months ended March 31, 1999 and
1998, respectively. The Company recorded $8.1 million and $6.1 million in
preferred stock dividends for the three months ended March 31, 1999 and 1998,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
STATEMENT OF CASH FLOWS. For the three months ended March 31, 1999, cash
provided by operating activities decreased by $1.6 million, or 3%, to $50.4
million, as compared to $52.0 million for the same period in 1998. The decrease
is primarily due to the payment of real estate taxes due in the first quarter
of 1999 offset by the increase in net income resulting from our property
acquisitions in 1998 and 1999. Cash used for investing activities decreased by
$303.2 million, to $22.6 million, for the first three months of 1999, as
compared to $325.8 million for the same period in 1998. The decrease is due to
a decline in acquisition activity during the first three months of 1999 as
compared to the same period in 1998 and the sale or contribution of certain
office properties to a newly created joint venture as described under " --
Recent Developments," partially offset by an increase in development activity.
Cash provided by financing activities decreased by $316.9 million to $(20.9)
million for the first three months of 1999, as compared to $296.0 million for
the same period in 1998. Payments of distributions increased by $8.0 million to
$38.1 million for the first three months of 1999, as compared with $30.1
million for the same period in 1998. The increase is due to the greater number
of shares outstanding and a 6% increase in the distribution rate. Preferred
stock dividend payments were $8.1 million for the first three months of 1999,
as compared to $6.1 million for the same period in 1998. The increase is due to
the issuance of Preferred Series D Shares in the first quarter of 1998.
CAPITALIZATION. The Company's total indebtedness at March 31, 1999 totaled
$2.0 billion and was comprised of $641.9 million of secured indebtedness with a
weighted average interest rate of 7.7% and $1.4 billion of unsecured
indebtedness with a weighted average interest rate of 7.0%. Except as stated
below, all of the mortgage and notes payable outstanding at March 31, 1999 were
either fixed rate obligations or variable rate obligations covered by interest
rate hedge contracts. A portion of our $600 million unsecured revolving loan
(the "Revolving Loan") and approximately $73 million of floating rate notes
payable assumed upon consummation of the merger with J.C. Nichols were not
covered by interest rate hedge contracts on March 31, 1999.
11
Based on the Company's total market capitalization of $4.1 billion at
March 31, 1999, (at the March 31, 1999 stock price of $23.56 and assuming the
redemption for shares of Common Stock of the 8,877,978 Common Units of minority
interest in the Operating Partnership), the Company's debt represented
approximately 50% of its total market capitalization.
To meet in part our long-term liquidity requirements, we borrow funds at a
combination of fixed and variable rates. Borrowings under our Revolving Loan
bear interest at variable rates. Our long-term debt, which consists of
long-term financings and the issuance of debt securities, typically bears
interest at fixed rates. In addition, we have assumed fixed rate and variable
rate debt in connection with acquiring properties. Our interest rate risk
management objective is to limit the impact of interest rate changes on
earnings and cash flows and to lower our overall borrowing costs. To achieve
these objectives, from time to time we enter into interest rate hedge contracts
such as collars, swaps, caps and treasury lock agreements in order to mitigate
our interest rate risk with respect to various debt instruments. We do not hold
or issue these derivative contracts for trading or speculative purposes.
The following table sets forth information regarding our interest rate
hedge contracts as of March 31, 1999:
NOTIONAL MATURITY FIXED FAIR MARKET
TYPE OF HEDGE AMOUNT DATE REFERENCE RATE RATE VALUE
- ---------------- ---------- ---------- ----------------------- ------------- ------------
(DOLLARS IN THOUSANDS)
Treasury Lock $100,000 10/1/99 10-Year Treasury 5.725% $ (3,331)
Treasury Lock 50,000 6/10/99 10-Year Treasury 5.276 114
Treasury Lock 100,000 7/1/99 10-Year Treasury 5.674 (3,166)
Swap 100,000 10/1/99 3-Month LIBOR 4.970 22
Swap 20,970 6/10/02 1-Month LIBOR + 0.75% 7.700 (1,333)
Collar 80,000 10/15/01 1-Month LIBOR 5.40 - 6.25 (482)
We enter into swaps, collars and caps to limit our exposure to an increase
in variable interest rates, particularly with respect to amounts outstanding
under our Revolving Loan. The interest rate on all of our variable rate debt is
adjusted at one- and three-month intervals, subject to settlements under these
contracts. We also enter into treasury lock agreements from time to time in
order to limit our exposure to an increase in interest rates with respect to
future debt offerings.
In addition, we are exposed to certain losses in the event of
nonperformance by the counterparties under the interest rate hedge contracts.
We expect the counterparties, which are major financial institutions, to
perform fully under these contracts. However, if the counterparties were to
default on their obligations under the interest rate hedge contracts, we could
be required to pay the full rates on our debt, even if such rates were in
excess of the rates in the contracts.
CURRENT AND FUTURE CASH NEEDS. Historically, rental revenue has been the
principal source of funds to pay operating expenses, debt service, stockholder
distributions and capital expenditures, excluding nonrecurring capital
expenditures. In addition, construction management, maintenance, leasing and
management fees have provided sources of cash flow. We presently have no plans
for major capital improvements to the existing in-service properties, other
than normal recurring building improvements, tenant improvements and lease
commissions. We expect to meet our short-term liquidity requirements generally
through working capital and net cash provided by operating activities along
with the Revolving Loan.
Our short-term (within the next 12 months) liquidity needs also include,
among other things, the funding of approximately $310 million of our existing
development activity. We expect to fund our short-term liquidity needs through
a combination of:
o additional borrowings under our Revolving Loan (approximately $144
million was available as of March 31, 1999);
o the issuance of secured debt;
o the selective disposition of non-core assets; and
12
o the sale or contribution of some of our wholly owned properties to
strategic joint ventures to be formed with selected partners interested in
investing with us, which will have the net effect of generating additional
capital through such sale or contributions.
Because of certain financial covenants set forth in the Revolving Loan, we
intend to finance a significant portion of our short-term development expenses
through asset sales and joint ventures. Although we believe that we will be
able to fund our short-term development commitments, an inability to sell a
sufficient number of non-core assets or to enter into significant joint venture
arrangements of the type described above could adversely affect our liquidity.
See " -- Recent Developments."
Our long-term liquidity needs generally include the funding of existing
and future development activity, selective asset acquisitions and the
retirement of mortgage debt, amounts outstanding under the Revolving Loan and
long-term unsecured debt. We remain committed to maintaining a flexible and
conservative capital structure. Accordingly, we expect to meet our long-term
liquidity needs through a combination of (1) the issuance by the Operating
Partnership of additional unsecured debt securities, (2) the issuance of
additional equity securities by the Company and the Operating Partnership as
well as (3) the sources described above with respect to our short-term
liquidity. We expect to use such sources to meet our long-term liquidity
requirements either through direct payments or repayment of borrowings under
the Revolving Loan. We do not intend to reserve funds to retire existing
secured or unsecured indebtedness upon maturity. Instead, we will seek to
refinance such debt at maturity or retire such debt through the issuance of
equity or debt securities.
We anticipate that our available cash and cash equivalents and cash flows
from operating activities, together with cash available from borrowings and
other sources, will be adequate to meet our capital and liquidity needs in both
the short and long term. However, if these sources of funds are insufficient or
unavailable, the Company's ability to make the expected distributions to
stockholders discussed below and satisfy other cash requirements may be
adversely affected.
DISTRIBUTIONS TO STOCKHOLDERS. In order to qualify as a REIT for Federal
income tax purposes, the Company is required to make distributions to its
stockholders of at least 95% of REIT taxable income. The Company expects to use
its cash flow from operating activities for distributions to stockholders and
for payment of recurring, non-incremental revenue-generating expenditures. The
following factors will affect cash flows from operating activities and,
accordingly, influence the decisions of the Board of Directors regarding
distributions: (1) debt service requirements after taking into account the
repayment and restructuring of certain indebtedness; (2) scheduled increases in
base rents of existing leases; (3) changes in rents attributable to the renewal
of existing leases or replacement leases; (4) changes in occupancy rates at
existing properties and procurement of leases for newly acquired or developed
properties; and (5) operating expenses and capital replacement needs.
RECENT DEVELOPMENTS
JOINT VENTURE ACTIVITY. On March 15, 1999, we closed a transaction with
Schweiz-Deutschland-USA Dreilander Beteiligung Objekt-DLF 98/29-Walker Fink-KG
("DLF"), pursuant to which we sold or contributed certain office properties
valued at approximately $142 million to a newly created limited partnership
(the "Joint Venture"). DLF contributed approximately $55 million for a 77.19%
interest in the Joint Venture, and the Joint Venture borrowed approximately $71
million from third-party lenders. We retained the remaining 22.81% interest in
the Joint Venture, received net cash proceeds of approximately $124 million and
are the sole and exclusive manager and leasing agent of the Joint Venture's
properties, for which we receive customary management fees and leasing
commissions. We used the cash proceeds received in the transaction to fund
existing development activity either through direct payments or repayment of
borrowings under the Revolving Loan.
PENDING DISPOSITION ACTIVITY. We recently entered into agreements to sell
approximately 3.3 million rentable square feet of non-core office and
industrial properties and 49 acres of development land in the South Florida
area for gross proceeds of approximately $323.2 million. The South Florida
transaction is expected to close by June 1, 1999. We recently also entered into
agreements to sell approximately 737,000 rentable square feet of non-core
office and industrial properties and 10.5 acres of development land in the
Baltimore area for gross proceeds of approximately $82.2 million. The Baltimore
transaction is expected to close by June 30, 1999. Non-core office and
industrial properties generally include single buildings or business parks that
do not fit our long-term strategy. We can provide no assurance that all or
parts of the transactions will be consummated. Both
13
transactions are subject to customary closing conditions, and the Baltimore
transaction is also subject to the completion of due diligence.
YEAR 2000
BACKGROUND. The Year 2000 compliance issue refers to the inability of
computer systems and computer software to correctly process any date after
1999. The date change to the new millennium may be a problem because some
computer hardware and software was designed to use only two digits to represent
a year. As a result, some systems may interpret 1/1/00 to be the year 1900. In
addition, some systems may not recognize that the Year 2000 is a leap year.
Both problems could result in system failure or miscalculations, which may
cause disruptions of operations.
The Year 2000 issue, if not corrected, could result in the failure of the
information technology ("IT") systems that we use in our business operations,
such as computer programs related to property management, leasing, financial
reporting, employee benefits, asset management and energy management. In
addition, computerized systems and microprocessors are embedded in a variety of
products used in our operations and properties, such as HVAC controls, lights,
power generators, elevators, life safety systems, phones and security systems.
APPROACH AND STATUS. Our Year 2000 compliance efforts are divided into two
areas -- "operations level" and "property level." Operations level includes
those information technology systems used in our corporate and division offices
to perform real estate, accounting and human resources functions. Property
level includes the non-information technology systems at our individual
properties. Our Y2K remediation plan at both the operations and property levels
has three phases:
o assessment (inventory and testing of computer systems),
o renovation (repairing or replacing non-compliant systems) and
o validation (testing of repaired or replaced systems).
Our Information Technology Department is overseeing our operations level
compliance program. With respect to our operations level IT software, we have
completed all three phases of our Year 2000 remediation plan. As part of a
standardization of our technology infrastructure in 1998, computer software
that was not Year 2000 compliant was upgraded or replaced. These software
upgrades were off-the-shelf Year 2000 compliant packages. Additionally, we
successfully upgraded and tested a Year 2000 compliant version of our corporate
accounting and property management software in December 1998. With respect to
our operations level IT hardware, we have completed the assessment phase of our
remediation plan and are 90% complete (in terms of labor) with the renovation
and validation phases of the plan. We expect to complete the renovation and
validation phases with respect to our operations level hardware by the third
quarter of 1999.
Our Chief Operating Officer is overseeing our property level compliance
program. We have completed our inventory of all of our properties'
non-information technology systems. As part of the inventory process, we
requested appropriate vendors and manufacturers to certify that their products
are Year 2000 compliant. We are approximately 75% complete (in terms of labor)
with the renovation and validation phases of our remediation plan at the
property level. We expect to complete both phases in the third quarter.
With respect to Year 2000 issues relating to our customer base, we have
not sought representations from our tenants with respect to their Year 2000
readiness because no one tenant represents more than 3% of our annualized
rental revenue. With respect to suppliers and vendors, our material purchases
are generally from those in competitive fields where others will be able to
meet any of our needs unmet by suppliers or vendors with Year 2000
difficulties. (Although we have no reason to expect a significant interruption
of utility services for our properties, we have not received (nor sought)
written assurances from utility providers that Y2K issues will not cause an
interruption in service.)
COSTS. To date, the costs directly associated with our Year 2000 efforts
have not been material, and we estimate our future costs to be immaterial as
well.
RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE. We do not expect Year 2000
failures to have a material adverse effect on our results of operations or
liquidity because:
o we do not rely on a small number of tenants for a significant portion of
our rental revenue;
14
o we stand ready to switch vendors or suppliers whose Year 2000 failures
adversely affect their products or services; and
o our remediation plan is expected to be complete prior to the Year 2000.
As a result, we do not expect to develop a contingency plan for Year 2000
failures.
Our assessment of the likely impact of Year 2000 issues on us, which is a
forward-looking statement, depends on numerous factors, such as the continued
provision of utility services, and we remain exposed to the risk of Year 2000
failures. See " -- Disclosure Regarding Forward-Looking Statements."
Our disclosures and announcements concerning our Year 2000 programs are
intended to constitute "Year 2000 Readiness Disclosures" as defined in the
recently-enacted Year 2000 Information and Readiness Disclosure Act. The Act
provides added protection from liability for certain public and private
statements concerning an entity's Year 2000 readiness and the Year 2000
readiness of its products and services. The Act also potentially provides added
protection from liability for certain types of Year 2000 disclosures made after
January 1, 1996, and before the date of enactment of the Act.
POSSIBLE ENVIRONMENTAL LIABILITIES
In connection with owning or operating our properties, we may be liable
for certain costs due to possible environmental liabilities. Under various
laws, ordinances and regulations, such as the Comprehensive Environmental
Response Compensation and Liability Act, and common law, an owner or operator
of real estate is liable for the costs to remove or remediate certain hazardous
or toxic chemicals or substances on or in the property. Owners or operators are
also liable for certain other costs, including governmental fines and injuries
to persons and property. Such laws often impose liability without regard to
whether the owner or operator knew of, or was responsible for, the presence of
the hazardous or toxic chemicals or substances. The presence of such
substances, or the failure to remediate such substances properly, may adversely
affect the owner's or operator's ability to sell or rent such property or to
borrow using such property as collateral. Persons who arrange for the disposal,
treatment or transportation of hazardous or toxic chemicals or substances may
also be liable for the same types of costs at a disposal, treatment or storage
facility, whether or not that person owns or operates that facility.
Certain environmental laws also impose liability for releasing
asbestos-containing materials. Third parties may seek recovery from owners or
operators of real property for personal injuries associated with asbestos-
containing materials. A number of our properties have asbestos-containing
materials or material that we presume to be asbestos-containing materials. In
connection with owning and operating our properties, we may be liable for such
costs.
In addition, it is not unusual for property owners to encounter on-site
contamination caused by off-site sources. The presence of hazardous or toxic
chemicals or substances at a site close to a property could require the
property owner to participate in remediation activities or could adversely
affect the value of the property. Contamination from adjacent properties has
migrated onto at least three of our properties; however, based on current
information, we do not believe that any significant remedial action is
necessary at these affected sites.
As of the date hereof, we have obtained Phase I environmental assessments
(and, in certain instances, Phase II environmental assessments) on
substantially all of our in-service properties. These assessments have not
revealed, nor are we aware of, any environmental liability at our properties
that we believe would materially adversely affect our financial position,
operations or liquidity taken as a whole. This projection, however, could be
incorrect depending on certain factors. For example, material environmental
liabilities may have arisen after the assessments were performed or our
assessments may not have revealed all environmental liabilities or may have
underestimated the scope and severity of environmental conditions observed.
There may also be unknown environmental liabilities at properties for which we
have not obtained a Phase I environmental assessment or have not yet obtained a
Phase II environmental assessment. In addition, we base our assumptions
regarding environmental conditions, including groundwater flow and the
existence and source of contamination, on readily available sampling data. We
cannot guarantee that such data is reliable in all cases. Moreover, we cannot
provide any assurances (1) that future laws, ordinances or regulations will not
impose a material environmental liability or (2) that tenants, the condition of
land or operations in the vicinity of our properties or unrelated third parties
will not affect the current environmental condition of our properties.
15
Some tenants use or generate hazardous substances in the ordinary course
of their respective businesses. In their leases, we require these tenants to
comply with all applicable laws and to be responsible to us for any damages
resulting from their use of the property. We are not aware of any material
environmental problems resulting from tenants' use or generation of hazardous
or toxic chemicals or substances. We cannot provide any assurances, however,
that all tenants will comply with the terms of their leases or remain solvent.
If tenants do not comply or do not remain solvent, we may at some point be
responsible for contamination caused by such tenants.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is
required to be adopted in fiscal years beginning after June 15, 1999. The
Statement will require us to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's
change in fair value will be immediately recognized in earnings.
COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT
Under the Americans with Disabilities Act (the "ADA"), all public
accommodations and commercial facilities are required to meet certain federal
requirements related to access and use by disabled persons. These requirements
became effective in 1992. Compliance with the ADA requirements could require
removal of access barriers, and noncompliance could result in imposition of
fines by the U.S. government or an award of damages to private litigants.
Although we believe that our properties are substantially in compliance with
these requirements, we may incur additional costs to comply with the ADA.
Although we believe that such costs will not have a material adverse effect on
us, if required changes involve a greater expenditure than we currently
anticipate, our results of operations, liquidity and capital resources could be
materially adversely affected.
FUNDS FROM OPERATIONS AND CASH AVAILABLE FOR DISTRIBUTIONS
We consider funds from operations ("FFO") to be a useful financial
performance measure of the operating performance of an equity REIT because,
together with net income and cash flows, FFO provides investors with an
additional basis to evaluate the ability of a REIT to incur and service debt
and to fund acquisitions and other capital expenditures. FFO does not represent
net income or cash flows from operating, investing or financing activities as
defined by Generally Accepted Accounting Principles ("GAAP"). It should not be
considered as an alternative to net income as an indicator of our operating
performance or to cash flows as a measure of liquidity. FFO does not measure
whether cash flow is sufficient to fund all cash needs, including principal
amortization, capital improvements and distributions to stockholders. Further,
FFO as disclosed by other REITs may not be comparable to our calculation of
FFO, as described below. FFO and cash available for distributions should not be
considered as alternatives to net income as an indication of our performance or
to cash flows as a measure of liquidity.
FFO means net income (computed in accordance with generally accepted
accounting principles) excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation and amortization, and after adjustments
for unconsolidated partnerships and joint ventures. In March 1995, the National
Association of Real Estate Investment Trusts ("NAREIT") issued a clarification
of the definition of FFO. The clarification provides that amortization of
deferred financing costs and depreciation of non-real estate assets are no
longer to be added back to net income in arriving at FFO. Cash available for
distribution is defined as funds from operations reduced by non-revenue
enhancing capital expenditures for building improvements and tenant
improvements and lease commissions related to second generation space.
16
FFO and cash available for distribution for the three month periods ended
March 31, 1999 and 1998 are summarized in the following table (in thousands):
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
----------- ----------
FUNDS FROM OPERATIONS:
Income before minority interest and extraordinary item ..................... $ 40,860 $ 34,037
Add (deduct):
Dividends to preferred shareholders ....................................... (8,145) (6,145)
Gain on disposition of assets ............................................. (569) --
Depreciation and amortization ............................................. 28,156 17,161
Depreciation on unconsolidated affiliates ................................. 477 --
-------- --------
FUNDS FROM OPERATIONS BEFORE MINORITY INTEREST .......................... 60,779 45,053
CASH AVAILABLE FOR DISTRIBUTION:
Add (deduct):
Rental income from straight-line rents .................................... (3,985) (3,116)
Amortization of deferred financing costs .................................. 778 616
Non-incremental revenue generating capital expenditures (1):
Building improvements paid .............................................. (1,518) (1,019)
Second generation tenant improvements paid .............................. (6,009) (2,436)
Second generation lease commissions paid ................................ (3,531) (1,726)
-------- --------
CASH AVAILABLE FOR DISTRIBUTION ........................................ $ 46,514 $ 37,372
======== ========
Weighted average common shares/common units outstanding -- basic (2) ....... 70,114 59,598
======== ========
Weighted average common shares/common units outstanding -- diluted (2) ..... 70,251 60,235
======== ========
DIVIDEND PAYOUT RATIO -- DILUTED:
Funds from operations ..................................................... 62.4% 68.2%
======== ========
Cash available for distribution ........................................... 81.6% 82.2%
======== ========
- ----------
(1) Amounts represent cash expenditures.
(2) Assumes redemption of Common Units for shares of Common Stock. Minority
interest Common Unit holders and the stockholders of the Company share
equally on a per share and per Common Unit basis; therefore, the resultant
per share information is unaffected by the conversion.
On April 27, 1999, the Company's Board of Directors declared a dividend of
$.54 per share ($2.16 on an annualized basis) payable on May 19, 1999 to
stockholders of record on May 7, 1999.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this Quarterly Report on Form 10-Q may contain
forward-looking statements. Such statements include, in particular, statements
about our plans, strategies and prospects under "Management's Discussion and
Analysis of Financial Condition and Results of Operations." You can identify
forward-looking statements by our use of forward-looking terminology such as
"may," "will," "expect," "anticipate," "estimate," "continue" or other similar
words. Although we believe that our plans, intentions and expectations
reflected in or suggested by such forward-looking statements are reasonable, we
cannot assure you that our plans, intentions or expectations will be achieved.
When considering such forward-looking statements, you should keep in mind the
following important factors that could cause our actual results to differ
materially from those contained in any forward-looking statement:
o our markets could suffer unexpected increases in development of office,
industrial and retail properties;
o the financial condition of our tenants could deteriorate;
o the costs of our development projects could exceed our original
estimates;
17
o we may not be able to complete development, acquisition, disposition or
joint venture projects as quickly or on as favorable terms as anticipated;
o we may not be able to lease or release space quickly or on as favorable
terms as old leases;
o we may have incorrectly assessed the environmental condition of our
properties;
o an unexpected increase in interest rates would increase our debt service
costs;
o we may not be able to continue to meet our long-term liquidity
requirements on favorable terms;
o we could lose key executive officers; and
o our southeastern markets may suffer an unexpected decline in economic
growth or increase in unemployment rates.
Given these uncertainties, we caution you not to place undue reliance on
forward-looking statements. We undertake no obligation to publicly release the
results of any revisions to these forward-looking statements that may be made
to reflect any future events or circumstances or to reflect the occurrence of
unanticipated events.
18
PROPERTY INFORMATION
The following table sets forth certain information with respect to our
majority owned in-service and development properties (excluding apartment
units) as of March 31, 1999 and 1998:
RENTABLE NUMBER OF PERCENT LEASED/
MARCH 31, 1999 SQUARE FEET PROPERTIES PRE-LEASED
- ---------------------------- ------------- ------------ ----------------
IN-SERVICE:
Office .................... 30,032,000 443 94%
Industrial ................ 11,883,000 184 91%
Retail .................... 1,661,000 18 91%
---------- --- --
Total .................... 43,576,000 645 93%
========== === ==
REDEVELOPMENT:
Office .................... 207,000 4 49%
Industrial ................ 194,000 4 1%
---------- --- --
Total .................... 401,000 8 26%
========== === ==
DEVELOPMENT:
COMPLETED -- NOT STABILIZED
Office .................... 1,564,000 15 79%
Industrial ................ 777,000 6 87%
Retail .................... -- -- --
---------- --- --
Total .................... 2,341,000 21 82%
========== === ==
IN PROCESS
Office .................... 3,764,000 30 64%
Industrial ................ 131,000 1 50%
Retail .................... 200,000 2 65%
---------- --- --
Total .................... 4,095,000 33 63%
========== === ==
TOTAL:
Office .................... 35,567,000 492
Industrial ................ 12,985,000 195
Retail .................... 1,861,000 20
---------- ---
Total .................... 50,413,000 707
========== ===
MARCH 31, 1998
- -----------------------------
IN-SERVICE:
Office .................... 26,501,000 382 94%
Industrial ................ 7,429,000 148 90%
Retail .................... -- -- --
---------- --- --
Total .................... 33,930,000 530 93%
========== === ==
REDEVELOPMENT
Office .................... N/A N/A N/A
Industrial ................ N/A N/A N/A
---------- --- ----
Total .................... N/A N/A N/A
========== === ====
DEVELOPMENT:
COMPLETED -- NOT STABILIZED
Office .................... N/A N/A N/A
Industrial ................ N/A N/A N/A
Retail .................... N/A N/A N/A
---------- --- ----
Total .................... N/A N/A N/A
========== === ====
IN PROCESS
Office .................... 3,182,000 27 53%
Industrial ................ 396,000 5 25%
Retail .................... -- -- --
---------- --- ----
Total .................... 3,578,000 32 50%
========== === ====
TOTAL:
Office .................... 29,683,000 409
Industrial ................ 7,825,000 153
Retail .................... -- --
---------- ---
Total .................... 37,508,000 562
========== ===
19
The following table sets forth certain information with respect to our
properties under development as of March 31, 1999 (dollars in thousands):
RENTABLE
SQUARE ESTIMATED
NAME LOCATION FEET COSTS
- ------------------------------- ------------------- ------------ -----------
IN-PROCESS
OFFICE:
Highwoods Center II
@ Tradeport Atlanta 53,000 $ 4,825
Peachtree Corner Atlanta 109,000 9,238
Highwoods I Baltimore 125,000 15,300
Mallard Creek V Charlotte 118,000 12,262
Parkway Plaza 14 Charlotte 90,000 7,690
Lakefront Plaza I Hampton Roads 77,000 7,477
Belfort Park C1 Jacksonville 54,000 4,830
Belfort Park C2 Jacksonville 31,000 2,730
Valencia Place Kansas City 241,000 34,020
Southwind Building D Memphis 64,000 6,800
Caterpillar Financial Center Nashville 313,000 54,000
Lakeview Ridge III Nashville 131,000 13,100
Westwood South Nashville 125,000 13,530
C N A Maitland III Orlando 78,000 9,885
Capital Plaza Orlando 303,000 53,000
Concourse Center One Piedmont Triad 86,000 8,400
3737 Glenwood Ave. Research Triangle 107,000 16,700
4101 Research Commons Research Triangle 73,000 9,311
Capital One Bldg 1 Richmond 126,000 14,795
Capital One Bldg 2 Richmond 44,000 5,125
Capital One Bldg 3 Richmond 126,000 14,380
Highwoods Common Richmond 49,000 4,840
Stony Point II Richmond 136,000 13,881
Sportsline USA South Florida 80,000 10,000
Intermedia Building 1 Tampa 200,000 27,040
Intermedia Building 2 Tampa 30,000 4,056
Intermedia Building 3 Tampa 170,000 22,984
Intermedia Building 4 Tampa 200,000 29,219
Intermedia Building 5 Tampa 200,000 29,219
Lakepoint II Tampa 225,000 34,106
------- --------
In-Process Office Total or
Weighted Average 3,764,000 $492,743
========= ========
INDUSTRIAL:
Newpoint II Atlanta 131,000 5,167
--------- --------
In-Process Industrial Total or
Weighted Average 131,000 $ 5,167
========= ========
RETAIL:
Seville Square Kansas City 119,000 32,100
Valencia Place Kansas City 81,000 14,362
--------- --------
In-Process Retail Total or
Weighted Average 200,000 $ 46,462
========= ========
Total or Weighted Average of
all In-Process Development
Projects 4,095,000 $544,372
========= ========
COST AT PRE-LEASING ESTIMATED ESTIMATED
NAME 3/31/99 PERCENTAGE(1) COMPLETION STABILIZATION(2)
- ------------------------------- ----------- --------------- ------------ -----------------
IN-PROCESS
OFFICE:
Highwoods Center II
@ Tradeport $ 994 57% 3Q 99 4Q 99
Peachtree Corner 3,042 -- 3Q 99 3Q 00
Highwoods I 8,048 -- 2Q 99 4Q 99
Mallard Creek V 5,948 -- 4Q 99 4Q 00
Parkway Plaza 14 3,236 58 2Q 99 1Q 00
Lakefront Plaza I 5,122 31 2Q 99 1Q 00
Belfort Park C1 1,579 -- 3Q 99 2Q 00
Belfort Park C2 1,130 -- 3Q 99 2Q 00
Valencia Place 16,879 41 1Q 00 4Q 00
Southwind Building D 3,869 56 2Q 99 4Q 99
Caterpillar Financial Center 16,743 79 1Q 00 2Q 00
Lakeview Ridge III 8,523 88 2Q 99 2Q 99
Westwood South 8,068 79 3Q 99 1Q 00
C N A Maitland III 5,648 100 3Q 99 3Q 99
Capital Plaza 15,721 30 1Q 00 4Q 01
Concourse Center One 4,817 32 2Q 99 1Q 00
3737 Glenwood Ave. 8,903 56 3Q 99 1Q 00
4101 Research Commons 3,919 35 3Q 99 2Q 00
Capital One Bldg 1 8,647 100 2Q 99 2Q 99
Capital One Bldg 2 3,064 100 3Q 99 3Q 99
Capital One Bldg 3 4,401 100 4Q 99 4Q 99
Highwoods Common 3,902 100 2Q 99 2Q 99
Stony Point II 9,148 52 2Q 99 4Q 99
Sportsline USA 3,153 100 3Q 99 3Q 99
Intermedia Building 1 1,298 100 1Q 00 1Q 00
Intermedia Building 2 123 100 1Q 00 1Q 00
Intermedia Building 3 1,674 100 1Q 00 1Q 00
Intermedia Building 4 -- 100 2Q 00 2Q 00
Intermedia Building 5 -- 100 3Q 01 3Q 01
Lakepoint II 8,334 52 4Q 99 4Q 99
-------- ---
In-Process Office Total or
Weighted Average $165,933 64%
======== ===
INDUSTRIAL:
Newpoint II 2,964 50% 2Q 99 2Q 00
-------- ---
In-Process Industrial Total or
Weighted Average $ 2,964 50%
======== ===
RETAIL:
Seville Square 26,913 75% 2Q 99 4Q 99
Valencia Place 3,876 50 1Q 00 4Q 00
-------- ---
In-Process Retail Total or
Weighted Average $ 30,789 65%
======== ===
Total or Weighted Average of
all In-Process Development
Projects $199,686 63%
======== ===
- ----------
(1) Includes the effect of letters of intent.
(2) We generally consider a development project to be stabilized upon the
earlier of the first date such project is at least 95% occupied or one
year from the date of completion.
20
RENTABLE
SQUARE ESTIMATED
NAME LOCATION FEET COSTS
- ------------------------------- ------------------- ------------ -----------
COMPLETED -- NOT STABILIZED
OFFICE:
Ridgefield III Asheville 57,000 $ 5,500
10 Glenlakes Atlanta 254,000 35,100
Highwoods Center I
@ Tradeport Atlanta 45,000 3,717
Parkway Plaza 11 Charlotte 32,000 2,600
Parkway Plaza 12 Charlotte 22,000 1,800
Patewood VI Greenville 107,000 11,400
Highwoods Centre Hampton Roads 103,000 9,925
Cool Springs I Nashville 153,000 16,800
Highwoods Centre Research Triangle 76,000 8,300
Overlook Research Triangle 97,000 10,500
Red Oak Research Triangle 65,000 6,000
Situs II Research Triangle 59,000 6,300
Eastshore II Richmond 76,000 7,842
Highwoods Square South Florida 93,000 12,500
Interstate Corporate Center Tampa 325,000 19,100
------- --------
Completed -- Not Stabilized
Office Total or Weighted
Average 1,564,000 $157,384
========= ========
INDUSTRIAL:
Bluegrass Lakes I Atlanta 112,000 4,700
Tradeport 1 Atlanta 87,000 3,100
Tradeport 2 Atlanta 87,000 3,100
Air Park South Warehouse II Piedmont Triad 136,000 4,200
Air Park South Warehouse VI Piedmont Triad 189,000 8,000
HIW Distribution Center Richmond 166,000 5,764
--------- --------
Completed -- Not Stabilized
Industrial Total or Weighted
Average 777,000 $ 28,864
--------- --------
Total or Weighted Average of
all Completed -- Not
Stabilized Development
Projects 2,341,000 $186,248
========= ========
Total or Weighted Average of
all Development Projects 6,436,000 $730,620
========= ========
COST AT PRE-LEASING ESTIMATED ESTIMATED
NAME 3/31/99 PERCENTAGE(1) COMPLETION STABILIZATION(2)
- ------------------------------- ----------- --------------- ------------ -----------------
COMPLETED -- NOT STABILIZED
OFFICE:
Ridgefield III $ 5,046 44% 3Q 98 4Q 99
10 Glenlakes 27,469 77 1Q 99 4Q 99
Highwoods Center I
@ Tradeport 2,776 100 1Q 99 2Q 99
Parkway Plaza 11 2,212 66 1Q 99 3Q 99
Parkway Plaza 12 1,401 61 1Q 99 4Q 99
Patewood VI 11,882 92 3Q 98 2Q 99
Highwoods Centre 8,103 60 4Q 98 4Q 99
Cool Springs I 15,076 66 3Q 98 3Q 99
Highwoods Centre 8,313 100 4Q 98 3Q 99
Overlook 9,509 91 4Q 98 2Q 99
Red Oak 4,767 80 4Q 98 2Q 99
Situs II 5,986 83 3Q 98 2Q 99
Eastshore II 6,275 100 1Q 99 2Q 99
Highwoods Square 8,842 47 1Q 99 4Q 99
Interstate Corporate Center 16,527 90 1Q 99 2Q 99
-------- ---
Completed -- Not Stabilized
Office Total or Weighted
Average $134,184 79%
======== ===
INDUSTRIAL:
Bluegrass Lakes I 3,856 100% 1Q 99 2Q 99
Tradeport 1 2,605 87 3Q 98 2Q 99
Tradeport 2 2,587 96 3Q 98 2Q 99
Air Park South Warehouse II 3,216 100 4Q 98 3Q 99
Air Park South Warehouse VI 6,784 100 1Q 99 2Q 99
HIW Distribution Center 5,831 46 1Q 99 4Q 99
-------- ---
Completed -- Not Stabilized
Industrial Total or Weighted
Average $ 24,879 87%
-------- ---
Total or Weighted Average of
all Completed -- Not
Stabilized Development
Projects $159,063 82%
======== ===
Total or Weighted Average of
all Development Projects $358,749 70%
======== ===
- ----------
(1) Includes the effect of letters of intent.
(2) We generally consider a development project to be stabilized upon the
earlier of the first date such project is at least 95% occupied or one
year from the date of completion.
21
RENTABLE
SQUARE ESTIMATED PRE-LEASING
FEET COSTS PERCENTAGE(1)
DEVELOPMENT ANALYSIS ------------- ----------------------- ----------------
(DOLLARS IN THOUSANDS)
-----------------------
SUMMARY BY ESTIMATED STABILIZATION DATE:
Second Quarter 1999 .................. 1,555,000 $116,494 93%
Third Quarter 1999 ................... 599,000 56,910 89
Fourth Quarter 1999 .................. 1,543,000 191,981 57
First Quarter 2000 ................... 885,000 107,877 75
Second Quarter 2000 .................. 802,000 105,257 67
Third Quarter 2000 ................... 109,000 9,238 --
Fourth Quarter 2000 .................. 440,000 60,644 32
Third Quarter 2001 ................... 200,000 29,219 100
Fourth Quarter 2001 .................. 303,000 53,000 30
--------- -------- ---
Total or Weighted Average ........... 6,436,000 $730,620 70%
========= ======== ===
SUMMARY BY MARKET:
Asheville ............................ 57,000 5,500 44%
Atlanta .............................. 878,000 68,947 69
Baltimore ............................ 125,000 15,300 0
Charlotte ............................ 262,000 24,352 33
Greenville ........................... 107,000 11,400 92
Hampton Roads ........................ 180,000 17,402 48
Jacksonville ......................... 85,000 7,560 0
Kansas City .......................... 441,000 80,482 52
Memphis .............................. 64,000 6,800 56
Nashville ............................ 722,000 97,430 78
Orlando .............................. 381,000 62,885 44
Piedmont Triad ....................... 411,000 20,600 86
Research Triangle .................... 477,000 57,111 74
Richmond ............................. 723,000 66,627 79
South Florida ........................ 173,000 22,500 72
Tampa ................................ 1,350,000 165,724 90
--------- -------- ---
Total or Weighted Average ........... 6,436,000 $730,620 70%
========= ======== ===
Build-to-Suit ....................... 1,254,000 $166,703 100%
Multi-tenant ........................ 5,182,000 563,917 63
--------- -------- ---
Total or Weighted Average ........... 6,436,000 $730,620 70%
========= ======== ===
RENTABLE
SQUARE FEET ESTIMATED COSTS PRE-LEASING(1)
------------- ----------------------- -------------
PER PROPERTY TYPE:
Office Weighted Average............... 118,400 $ 14,447 68%
Industrial Weighted Average .......... 129,714 4,862 81
Retail Weighted Average .............. 100,000 23,231 65
--------- -------- -------------
Total Weighted Average ............... 119,400 $ 13,378 70%
========= ======== =============
- ----------
(1) Includes the effect of letters of intent.
22
The following table sets forth certain information with respect to our
properties under redevelopment as of March 31, 1999 (dollars in thousands):
RENTABLE ESTIMATED
SQUARE ESTIMATED COST AT PRE-LEASING ESTIMATED STABILIZATION
NAME LOCATION FEET COST 3/31/99 (1) COMPLETION (2)
- --------------------------- --------------- ---------- ----------- --------- ------------- ------------ --------------
OFFICE:
Highwoods Park B South Florida 27,000 $ 2,296 $ 1,834 99% 1Q 00 3Q 00
Highwoods Park C South Florida 77,000 6,667 5,347 47 1Q 00 3Q 00
Highwoods Park E South Florida 78,000 6,782 5,248 50 1Q 00 3Q 00
Highwoods Park F South Florida 25,000 2,394 1,730 -- 1Q 00 3Q 00
------ ------- ------- --
Total or Weighted Average 207,000 18,139 14,159 49
======= ======= ======= ==
INDUSTRIAL:
Highwoods Park G South Florida 66,000 4,241 2,578 1% 1Q 00 3Q 00
Highwoods Park H1 South Florida 20,000 1,426 771 -- 1Q 00 3Q 00
Highwoods Park H2 South Florida 36,000 3,022 2,385 -- 1Q 00 3Q 00
Highwoods Park J South Florida 72,000 4,501 2,725 -- 1Q 00 3Q 00
------- ------- ------- --
Total or Weighted Average 194,000 13,190 8,459 --
======= ======= ======= ==
Grand Total 401,000 31,329 22,618 26%
======= ======= ======= ==
- ----------
(1) Includes the effect of letters of intent.
(2) We generally consider a development project to be stabilized upon the
earlier of the first date such project is at least 95% occupied or one
year from the date of completion.
23
The following tables set forth certain information about our leasing
activities at our majority-owned in service properties (excluding apartment
units) for the three months ended March 31, 1999 and December 31, September 30
and June 30, 1998.
OFFICE LEASING STATISTICS
THREE MONTHS ENDED
-----------------------------------------------------------------------------------
3/31/99 12/31/98 9/30/98 6/30/98 AVERAGE
-------------- -------------- --------------- -------------- --------------
NET EFFECTIVE RENTS RELATED TO
RE-LEASED SPACE:
Number of lease transactions (signed
leases) 276 308 326 285 299
Rentable square footage leased 1,406,170 1,291,297 1,645,913 1,099,805 1,360,796
Average per rentable square foot over
the lease term:
Base rent $ 14.84 $ 16.54 $ 16.18 $ 15.53 $ 15.77
Tenant improvements (0.84) ( 0.85) ( 0.71) ( 1.00) ( 0.85)
Leasing commissions (0.42) ( 0.38) ( 0.42) ( 0.27) ( 0.37)
Rent concessions 0.00 0.00 0.00 ( 0.03) ( 0.01)
---------- ---------- ----------- ---------- ----------
Effective rent 13.58 15.31 15.05 14.23 14.54
Expense stop(1) ( 3.55) ( 3.96) ( 4.45) ( 4.22) ( 4.05)
---------- ---------- ----------- ---------- ----------
Equivalent effective net rent $ 10.03 $ 11.35 $ 10.60 $ 10.01 $ 10.49
========== ========== =========== ========== ==========
Average term in years 5 4 5 5 5
========== ========== =========== ========== ==========
CAPITAL EXPENDITURES RELATED TO
RE-LEASED SPACE:
Tenant Improvements:
Total dollars committed under signed
leases $6,848,279 $4,886,517 $ 6,754,100 $5,849,409 $6,084,576
Rentable square feet 1,406,170 1,291,297 1,645,913 1,099,805 1,360,796
---------- ---------- ----------- ---------- ----------
Per rentable square foot $ 4.87 $ 3.78 $ 4.10 $ 5.32 $ 4.47
========== ========== =========== ========== ==========
Leasing Commissions:
Total dollars committed under signed
leases $3,047,978 $2,005,094 $ 3,694,473 $1,356,002 $2,525,887
Rentable square feet 1,406,170 1,291,297 1,645,913 1,099,805 1,360,796
---------- ---------- ----------- ---------- ----------
Per rentable square foot $ 2.17 $ 1.55 $ 2.24 $ 1.23 $ 1.86
========== ========== =========== ========== ==========
Total:
Total dollars committed under signed
leases $9,896,257 $6,891,611 $10,448,573 $7,205,411 $8,610,463
Rentable square feet 1,406,170 1,291,297 1,645,913 1,099,805 1,360,796
---------- ---------- ----------- ---------- ----------
Per rentable square foot $ 7.04 $ 5.34 $ 6.35 $ 6.55 $ 6.33
========== ========== =========== ========== ==========
RENTAL RATE TRENDS:
Average final rate with expense pass
throughs $ 14.28 $ 13.57 $ 14.51 $ 13.91 $ 14.07
Average first year cash rental rate $ 15.01 $ 14.47 $ 15.43 $ 14.87 $ 14.95
---------- ---------- ----------- ---------- ----------
Percentage increase 5.11% 6.63% 6.34% 6.90% 6.24%
========== ========== =========== ========== ==========
- ----------
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintainance) for
which we will not be reimbursed by our tenants.
24
INDUSTRIAL LEASING STATISTICS
THREE MONTHS ENDED
--------------------------------------------------------------------------
3/31/99 12/31/98 9/30/98 6/30/98 AVERAGE
-------------- ------------ ------------ ------------ ------------
NET EFFECTIVE RENTS RELATED TO RE-LEASED
SPACE:
Number of lease transactions (signed leases) 72 44 56 41 53
Rentable square footage leased 837,616 582,758 314,549 194,014 482,234
Average per rentable square foot over the
lease term:
Base rent $ 5.12 $ 4.71 $ 6.59 $ 6.99 $ 5.85
Tenant improvements (0.22) (0.20) (0.23) (0.29) (0.24)
Leasing commissions (0.10) (0.09) (0.09) (0.19) (0.12)
Rent concessions 0.00 0.00 0.00 0.00 0.00
---------- -------- -------- -------- --------
Effective rent 4.80 4.42 6.27 6.51 5.50
Expense stop(1) (0.28) (0.25) (0.44) (0.52) (0.37)
---------- -------- -------- -------- --------
Equivalent effective net rent $ 4.52 $ 4.17 $ 5.83 $ 5.99 $ 5.13
========== ======== ======== ======== ========
Average term in years 4 3 4 3 3
========== ======== ======== ======== ========
CAPITAL EXPENDITURES RELATED TO
RE-LEASED SPACE:
TENANT IMPROVEMENTS:
Total dollars committed under signed
leases $ 821,654 $712,108 $248,359 $239,348 $505,367
Rentable square feet 837,616 582,758 314,549 194,014 482,234
---------- -------- -------- -------- --------
Per rentable square foot $ 0.98 $ 1.22 $ 0.79 $ 1.23 $ 1.05
========== ======== ======== ======== ========
LEASING COMMISSIONS:
Total dollars committed under signed
leases $ 315,101 $173,017 $ 99,574 $130,243 $179,484
Rentable square feet 837,616 582,758 314,549 194,014 482,234
---------- -------- -------- -------- --------
Per rentable square foot $ 0.38 $ 0.30 $ 0.32 $ 0.67 $ 0.37
========== ======== ======== ======== ========
Total:
Total dollars committed under signed
leases $1,136,755 $885,125 $347,933 $369,591 $684,851
Rentable square feet 837,616 582,758 314,549 194,014 482,234
---------- -------- -------- -------- --------
Per rentable square foot $ 1.36 $ 1.52 $ 1.11 $ 1.90 $ 1.42
========== ======== ======== ======== ========
RENTAL RATE TRENDS:
Average final rate with expense pass
throughs $ 4.91 $ 4.62 $ 5.40 $ 6.09 $ 5.26
Average first year cash rental rate $ 4.91 $ 4.72 $ 5.54 $ 6.50 $ 5.42
---------- -------- -------- -------- --------
Percentage increase 0.00% 2.16% 2.59% 6.73% 3.04%
========== ======== ======== ======== ========
- ----------
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintainance) for
which we will not be reimbursed by our tenants.
25
RETAIL LEASING STATISTICS
THREE MONTHS ENDED
--------------------------------------------------------
3/31/99 12/31/98 9/30/98 AVERAGE
------------ ------------ ------------ -----------
NET EFFECTIVE RENTS RELATED TO RE-LEASED SPACE:
Number of lease transactions (signed leases) 25 15 11 17
Rentable square footage leased 62,638 29,706 37,258 43,201
Average per rentable square foot over the lease term:
Base rent $ 15.37 $ 16.34 $ 13.59 $ 15.10
Tenant improvements ( 0.45) ( 1.66) ( 0.14) ( 0.75)
Leasing commissions ( 0.39) ( 0.76) ( 0.44) ( 0.53)
Rent concessions 0.00 0.00 0.00 0.00
-------- -------- -------- --------
Effective rent 14.53 13.92 13.01 13.82
Expense stop ( 0.27) ( 1.79) ( 0.09) ( 0.72)
-------- -------- -------- --------
Equivalent effective net rent $ 14.26 $ 12.13 $ 12.92 $ 13.10
-------- -------- -------- --------
Average term in years 6 5 6 6
======== ======== ======== ========
CAPITAL EXPENDITURES RELATED TO RE-LEASED SPACE:
TENANT IMPROVEMENTS:
Total dollars committed under signed leases $248,531 $319,620 $ 21,000 $196,384
Rentable square feet 62,638 29,706 37,258 43,201
-------- -------- -------- --------
Per rentable square foot $ 3.97 $ 10.76 $ 0.56 $ 4.55
======== ======== ======== ========
LEASING COMMISSIONS:
Total dollars committed under signed leases $153,872 $123,047 $ 99,268 $125,396
Rentable square feet 62,638 29,706 37,258 43,201
-------- -------- -------- --------
Per rentable square foot $ 2.46 $ 4.14 $ 2.66 $ 2.90
======== ======== ======== ========
TOTAL:
Total dollars committed under signed leases $402,403 $442,667 $120,268 $321,779
Rentable square feet 62,638 29,706 37,258 43,201
-------- -------- -------- --------
Per rentable square foot $ 6.42 $ 14.90 $ 3.23 $ 7.45
======== ======== ======== ========
RENTAL RATE TRENDS:
Average final rate with expense pass throughs $ 10.92 $ 15.91 $ 8.55 $ 11.79
Average first year cash rental rate $ 16.22 $ 18.16 $ 10.53 $ 14.97
-------- -------- -------- --------
Percentage increase 48.53% 14.14% 23.16% 26.94%
======== ======== ======== ========
- ----------
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintainance) for
which we will not be reimbursed by our tenants.
(2) Note: The company did not own any retail property during the quarter ended
6/30/98.
26
The following tables set forth scheduled lease expirations for executed
leases at our majority-owned in-service properties (excluding apartment units)
as of March 31, 1999 assuming no tenant exercises renewal options.
OFFICE PROPERTIES:
AVERAGE
ANNUAL RENTS ANNUAL PERCENTAGE OF
TOTAL PERCENTAGE OF UNDER RENTAL RATE LEASED RENTS
YEAR OF RENTABLE LEASED SQUARE FOOTAGE EXPIRING PER SQUARE REPRESENTED
LEASE NUMBER OF SQUARE FEET REPRESENTED BY LEASES (1) FOOT FOR BY EXPIRING
EXPIRATION LEASES EXPIRING EXPIRING LEASES (IN THOUSANDS) EXPIRATIONS (1) LEASES
- -------------------- ----------- ------------- ----------------------- ---------------- ----------------- --------------
Remainder of 1999 955 3,288,450 11.6% $ 51,652 $ 15.71 11.4%
2000 897 4,098,481 14.4 65,965 16.09 14.6
2001 850 4,463,076 15.7 71,864 16.10 15.8
2002 671 4,159,527 14.6 67,013 16.11 14.8
2003 587 3,978,439 14.0 64,482 16.21 14.3
2004 209 2,145,807 7.5 33,410 15.57 7.4
2005 92 1,349,324 4.7 20,673 15.32 4.6
2006 49 1,267,839 4.5 19,872 15.67 4.4
2007 31 870,058 3.1 14,321 16.46 3.2
2008 54 1,707,657 6.0 24,240 14.19 5.4
Thereafter 55 1,103,252 3.9 18,311 16.60 4.1
--- --------- ----- -------- -------- -----
Total of average 4,450 28,431,910 100.0% $451,803 $ 15.89 100.0%
===== ========== ===== ======== ======== =====
INDUSTRIAL PROPERTIES:
AVERAGE
ANNUAL PERCENTAGE OF
TOTAL PERCENTAGE OF ANNUAL RENTS RENTAL RATE LEASED RENTS
RENTABLE LEASED SQUARE FOOTAGE UNDER EXPIRING PER SQUARE REPRESENTED
YEAR OF LEASE NUMBER OF SQUARE FEET REPRESENTED BY LEASES (1) FOOT FOR BY EXPIRING
EXPIRATION LEASES EXPIRING EXPIRING LEASES (IN THOUSANDS) EXPIRATIONS (1) LEASES
- ------------------- ----------- ------------- ----------------------- ---------------- ----------------- --------------
Remainder of 1999 203 1,820,161 17.0% $ 9,150 $ 5.03 17.7%
2000 172 2,157,591 20.1 10,681 4.95 20.6
2001 159 1,998,739 18.6 8,986 4.50 17.4
2002 83 1,267,253 11.8 5,929 4.68 11.5
2003 57 772,642 7.2 4,124 5.34 8.0
2004 23 1,369,816 12.8 5,275 3.85 10.2
2005 11 187,833 1.8 1,210 6.44 2.3
2006 5 224,099 2.1 1,110 4.95 2.1
2007 4 489,125 4.6 1,726 3.53 3.3
2008 8 376,536 3.5 3,245 8.62 6.3
Thereafter 3 58,876 0.5 335 5.69 0.6
--- --------- ----- ------- ------- -----
Total or average 728 10,722,671 100.0% $51,771 $ 4.83 100.0%
=== ========== ===== ======= ======= =====
- ----------
(1) Includes operating expense pass throughs and excludes the effect of future
contractual rent increases.
27
RETAIL PROPERTIES:
AVERAGE
ANNUAL RENTS ANNUAL PERCENTAGE OF
TOTAL PERCENTAGE OF UNDER RENTAL RATE LEASED RENTS
YEAR OF RENTABLE LEASED SQUARE FOOTAGE EXPIRING PER SQUARE REPRESENTED
LEASE NUMBER OF SQUARE FEET REPRESENTED BY LEASES (1) FOOT FOR BY EXPIRING
EXPIRATION LEASES EXPIRING EXPIRING LEASES (IN THOUSANDS) EXPIRATIONS (1) LEASES
- -------------------- ----------- ------------- ----------------------- ---------------- ----------------- --------------
Remainder of 1999 87 320,973 15.7% $ 3,060 $ 9.53 12.0%
2000 72 238,381 11.7 2,940 12.33 11.5
2001 61 235,825 11.5 3,209 13.61 12.5
2002 41 162,767 8.0 2,161 13.28 8.4
2003 47 210,935 10.3 3,214 15.24 12.6
2004 19 168,129 8.2 1,260 7.49 4.9
2005 13 64,999 3.2 1,294 19.91 5.1
2006 12 109,066 5.3 1,172 10.75 4.6
2007 8 63,125 3.1 946 14.99 3.7
2008 14 105,765 5.2 2,223 21.02 8.7
Thereafter 23 366,156 17.8 4,118 11.25 16.0
-- ------- ----- ------- ------- -----
Total or average 397 2,046,121 100.0% $25,597 $ 12.51 100.0%
=== ========= ===== ======= ======= =====
TOTAL:
PERCENTAGE OF
TOTAL PERCENTAGE OF ANNUAL RENTS LEASED RENTS
RENTABLE LEASED SQUARE FOOTAGE UNDER EXPIRING REPRESENTED
YEAR OF LEASE NUMBER OF SQUARE FEET REPRESENTED BY LEASES (1) BY EXPIRING
EXPIRATION LEASES EXPIRING EXPIRING LEASES (IN THOUSANDS) LEASES
- --------------------- ----------- ------------- ----------------------- ---------------- --------------
Remainder of 1999 1,245 5,429,584 13.2% $ 63,862 12.1%
2000 1,141 6,494,453 15.8 79,586 15.0
2001 1,070 6,697,640 16.2 84,059 15.9
2002 795 5,589,547 13.6 75,103 14.2
2003 691 4,962,016 12.0 71,820 13.6
2004 251 3,683,752 8.9 39,945 7.5
2005 116 1,602,156 3.9 23,177 4.4
2006 66 1,601,004 3.9 22,154 4.2
2007 43 1,422,308 3.5 16,993 3.2
2008 76 2,189,958 5.3 29,708 5.6
Thereafter 81 1,528,284 3.7 22,764 4.3
----- --------- ----- -------- -----
Total or average 5,575 41,200,702 100.0% $529,171 100.0%
===== ========== ===== ======== =====
- ----------
(1) Includes operating expense pass throughs and excludes the effect of future
contractual rent increases.
INFLATION
Historically inflation has not had a significant impact on our operations
because of the relatively low inflation rate in our geographic areas of
operation. Most of the leases require the tenants to pay their pro rata share
of increased incremental operating expenses, including common area maintenance,
real estate taxes and insurance, thereby reducing our exposure to increases in
operating expenses resulting from inflation. In addition, many of the leases
are for terms of less than seven years, which may enable us to replace existing
leases with new leases at a higher base rent if rents on the existing leases
are below the market rate.
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
THE EFFECTS OF POTENTIAL CHANGES IN INTEREST RATES AND EQUITY PRICES ARE
DISCUSSED BELOW. OUR MARKET RISK DISCUSSION INCLUDES "FORWARD-LOOKING
STATEMENTS" AND REPRESENTS AN ESTIMATE OF POSSIBLE CHANGES IN FAIR VALUE OR
FUTURE EARNINGS THAT WOULD OCCUR ASSUMING HYPOTHETICAL FUTURE MOVEMENTS IN
INTEREST RATES OR EQUITY MARKETS. THESE DISCLOSURES ARE NOT PRECISE INDICATORS
OF EXPECTED FUTURE LOSSES, BUT ONLY INDICATORS OF REASONABLY POSSIBLE LOSSES.
AS A RESULT, ACTUAL FUTURE RESULTS MAY DIFFER MATERIALLY FROM THOSE PRESENTED.
SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS --
LIQUIDITY AND CAPITAL RESOURCES" FOR A DESCRIPTION OF OUR ACCOUNTING POLICIES
AND OTHER INFORMATION RELATED TO THESE FINANCIAL INSTRUMENTS.
INTEREST RATE RISK
To meet in part our long-term liquidity requirements, we borrow funds at a
combination of fixed and variable rates. Borrowings under the Revolving Loan
bear interest at variable rates. Our long-term debt, which consists of
long-term financings and the issuance of debt securities, typically bears
interest at fixed rates. In addition, we have assumed fixed rate and variable
rate debt in connection with acquiring properties. Our interest rate risk
management objective is to limit the impact of interest rate changes on
earnings and cash flows and to lower our overall borrowing costs. To achieve
these objectives, from time to time we enter into interest rate hedge contracts
such as collars, swaps, caps and treasury lock agreements in order to mitigate
our interest rate risk with respect to various debt instruments. We do not hold
or issue these derivative contracts for trading or speculative purposes.
CERTAIN VARIABLE RATE DEBT. As of March 31, 1999, the Company had
approximately $325.8 million of variable rate debt outstanding that was not
protected by interest rate hedge contracts. If the weighted average interest
rate on this variable rate debt is 100 basis points higher or lower during the
12 months ended March 31, 2000, our interest expense would be increased or
decreased approximately $3.3 million. In addition, as of March 31, 1999, we had
$80 million of additional variable rate debt outstanding that was protected by
an interest rate collar that effectively keeps the interest rate within a range
of 85 basis points. We do not believe that a 100 basis point increase or
decrease in interest rates would materially affect our interest expense with
respect to this $80 million of debt.
INTEREST RATE HEDGE CONTRACTS. For a discussion of our interest rate hedge
contracts in effect at March 31, 1999, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- CAPITALIZATION." If interest rates increase by 100 basis
points, the aggregate fair market value of these interest rate hedge contracts
as of March 31, 1999 would increase by approximately $21.1 million. If interest
rates decrease by 100 basis points, the aggregate fair market value of these
interest rate hedge contracts as of March 31, 1999 would decrease by
approximately $23.1 million.
In addition, we are exposed to certain losses in the event of
nonperformance by the counterparties under the hedge contracts. We expect the
counterparties, which are major financial institutions, to perform fully under
these contracts. However, if the counterparties were to default on their
obligations under the interest rate hedge contracts, we could be required to
pay the full rates on our debt, even if such rates were in excess of the rates
in the contracts.
EQUITY PRICE RISK
On August 28, 1997, we entered into a purchase agreement with UBS AG,
London Branch ("UB-LB") involving the sale of 1.8 million shares of Common
Stock and a related forward contract providing for certain purchase price
adjustments. The forward contract (as amended) generally provides that if the
market price (defined as the weighted average closing price of the Common Stock
for the period beginning March 31, 1999 and ending when UB-LB has sold all of
the shares issued under the forward contract) is less than a certain amount,
which we refer to as the "Forward Price," we must pay UB-LB the difference
times 1.8 million. (Similarly, if the Market Price of a share of Common Stock
is above the Forward Price, UB-LB must pay us the difference in shares of
Common Stock.)
29
On February 28, 1999, the Company and UB-LB amended the forward contract.
Pursuant to the amendment:
o UB-LB applied $12.8 million in Company collateral to "buy down" the
Forward Price by approximately $7.10 (at March 31, 1999, the forward price
was approximately $25.12);
o We issued 161,924 shares of Common Stock to UB-LB as an interim
settlement payment; and
o UB-LB agreed not to sell any of the shares that we had issued to it
until not later than March 31, 1999.
If the weighted average closing price of one share of Common Stock during
the period during which UB-LB sells the shares is 10% lower or higher than on
March 31, 1999, our cost of settling the forward contract would increase or
decrease by approximately $5 million, payable in cash or shares of Common
Stock. The Company has retained the option of repurchasing any of UB-LB's
remaining shares for cash prior to their distribution by UB-LB.
30
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
On October 2, 1998, John Flake, a former stockholder of J.C. Nichols,
filed a putative class action lawsuit on behalf of himself and the other former
stockholders of J.C. Nichols in the United States District Court for the
District of Kansas against J.C. Nichols, certain of its former officers and
directors and the Company. The complaint alleges, among other things, that in
connection with the merger of J.C. Nichols and the Company, (1) J.C. Nichols
and the named directors and officers of J.C. Nichols breached their fiduciary
duties to J.C. Nichols' stockholders, (2) J.C. Nichols and the named directors
and officers of J.C. Nichols breached their fiduciary duties to members of the
J.C. Nichols Company Employee Stock Ownership Trust, (3) all defendants
participated in the dissemination of a proxy statement containing materially
false and misleading statements and omissions of material facts in violation of
Section 14(a) of the Exchange Act of 1934 and (4) the Company filed a
registration statement with the SEC containing materially false and misleading
statements and omissions of material facts in violation of Sections 11 and
12(2) of the Securities Act of 1933. The plaintiffs seek equitable relief and
monetary damages. We believe that the defendants have meritorious defenses to
the plaintiffs' allegations. We intend to vigorously defend this litigation and
have filed a motion to dismiss all claims asserted against the defendants. Due
to the inherent uncertainties of the litigation process and the judicial
system, we are not able to predict the outcome of this litigation. If this
litigation is not resolved in our favor, it could have a material adverse
effect on our business, financial condition and results of operations.
Item 2. Changes in Securities and Use of Proceeds
(c) During the three months ended March 31, 1999, the Company issued an
aggregate of 1,179,103 shares of Common Stock to holders of Common Units
in the Operating Partnership upon the redemption of such Common Units in
private offerings exempt from the registration requirements pursuant to
Section 4(2) or Rule 505 of Regulation D of the Securities Act. Each of
the holders of Common Units were accredited investors under Rule 501 of
the Securities Act, except for several holders who received their Common
Stock pursuant to a single offering made under Rule 505 of Regulation D,
and none of the offerings involved a general solicitation by the Company.
The Company has registered the resale of such shares under the Securities
Act.
Item 3. Defaults Upon Senior Securities -- NA
Item 4. Submission of Matters to a Vote of Security Holders -- NA
Item 5. Other Information -- NA
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
- ------------- -------------------------------------------------------------------------------------
10.1 Purchase and Sale Agreement dated March 22, 1999, by and among Highwoods/Florida
Holdings, L.P. and America's Capital Partners, LLC, as amended by First Amendment to
Purchase and Sale Agreement dated April 21, 1999.
10.2 Purchase and Sale Agreement dated March 22, 1999, by and among Highwoods/Florida
Holdings, L.P. and America's Capital Partners, LLC, as amended by First Amendment to
Purchase and Sale Agreement dated April 21, 1999.
27 Financial Data Schedule
(b) Reports on Form 8-K -- None
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HIGHWOODS PROPERTIES, INC.
/S/ RONALD P. GIBSON
----------------------------------------
RONALD P. GIBSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/s/ CARMAN J. LIUZZO
----------------------------------------
CARMAN J. LIUZZO
CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
Date: May 17, 1999
32