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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 June 30, 1999
Commission file number: 000-21731
HIGHWOODS REALTY LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1864557
(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
---------------
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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HIGHWOODS REALTY LIMITED PARTNERSHIP
QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 1999
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION -----
Item 1. Financial Statements 3
Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998 4
Consolidated Statements of Income for the three and six months
ended June 30, 1999 and 1998 5
Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and 1998 6
Notes to consolidated financial statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Results of Operations 11
Liquidity and Capital Resources 12
Recent Developments 14
Year 2000 15
Possible Environmental Liabilities 16
Impact of Recently Issued Accounting Standards 17
Compliance with the Americans with Disabilities Act 17
Funds From Operations and Cash Available for Distributions 17
Disclosure Regarding Forward-Looking Statements 19
Property Information 20
Inflation 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
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 operations and statements of cash flows reflect all adjustments (consisting
of normal recurring accruals) 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 included herein and
our 1998 Annual Report on Form 10-K.
3
HIGHWOODS REALTY LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30, 1999 DECEMBER 31, 1998
--------------- ------------------
(UNAUDITED)
ASSETS
Real estate assets, at cost:
Land and improvements .............................................. $ 458,062 $ 538,814
Buildings and tenant improvements .................................. 2,862,300 3,173,825
Development in process ............................................. 173,077 189,465
Land held for development .......................................... 152,143 150,622
Furniture, fixtures and equipment .................................. 7,155 7,665
---------- ----------
3,652,737 4,060,391
Less -- accumulated depreciation ................................... (196,600) (168,508)
---------- ----------
Net real estate assets ............................................. 3,456,137 3,891,883
Property held for sale ............................................... 202,698 131,262
Cash and cash equivalents ............................................ 94,229 30,696
Restricted cash ...................................................... 11,969 24,263
Accounts receivable .................................................. 22,711 27,644
Advances to related parties .......................................... 14,251 10,420
Notes receivable ..................................................... 44,125 12,865
Accrued straight line rents receivable ............................... 29,527 27,194
Investment in unconsolidated affiliates .............................. 27,884 15,234
Other assets:
Deferred leasing costs ............................................. 54,006 45,785
Deferred financing costs ........................................... 42,903 38,750
Prepaid expenses and other ......................................... 15,983 15,162
---------- ----------
112,892 99,697
Less -- accumulated amortization ................................... (28,782) (23,458)
---------- ----------
84,110 76,239
---------- ----------
3,987,641 $4,247,700
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Mortgages and notes payable .......................................... 1,727,370 $1,906,216
Accounts payable, accrued expenses and other liabilities ............. 94,883 125,168
---------- ----------
Total liabilities .................................................. 1,822,253 2,031,384
Redeemable operating partnership units:
Class A Common Units outstanding, 8,722,369 at June 30, 1999 and
10,111,978 at December 31, 1998 ................................... 239,342 260,383
Class B Common Units outstanding, 196,496 at June 30, 1999 and
291,756 at December 31, 1998 ...................................... 5,391 7,513
Series A Preferred Units outstanding, 125,000 at June 30, 1999 and
December 31, 1998 ................................................. 121,809 121,809
Series B Preferred Units outstanding, 6,900,000 at June 30, 1999 and
December 31, 1998 ................................................. 166,346 166,346
Series D Preferred Units outstanding, 400,000 at June 30, 1999 and
December 31, 1998 ................................................. 96,842 96,842
Partners' capital:
Class A Common Units:
General partner Common Units outstanding, 699,294 at
June 30, 1999 and 690,955 at December 31, 1998 .................. 15,357 15,634
Limited partner Common Units outstanding, 60,507,766 at June 30,
1999 and 58,292,597 at December 31, 1998 ........................ 1,520,301 1,547,789
---------- ----------
Total Partners' capital ......................................... 1,535,658 1,563,423
---------- ----------
$3,987,641 $4,247,700
========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
HIGHWOODS REALTY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
REVENUE:
Rental property ......................................... $141,267 $113,079 $ 287,135 $ 213,410
Equity in earnings of unconsolidated affiliates ......... 336 -- 457 --
Interest and other income ............................... 4,652 2,321 9,249 4,374
-------- -------- --------- ---------
146,255 115,400 296,891 217,784
OPERATING EXPENSES:
Rental property ......................................... 44,082 35,827 89,374 65,555
Depreciation and amortization ........................... 27,655 20,268 55,729 37,381
Interest expense:
Contractual ............................................ 27,882 17,221 57,727 34,383
Amortization of deferred financing costs ............... 734 616 1,512 1,232
-------- -------- --------- ---------
28,616 17,837 59,239 35,615
General and administrative .............................. 5,762 4,386 11,555 8,170
-------- -------- --------- ---------
Income before gain on disposition of assets, net of
income tax provision and extraordinary item ............ 40,140 37,082 80,944 71,063
Gain on disposition of assets, net of income tax
provision .............................................. 1,524 -- 2,093 --
-------- -------- --------- ---------
Income before extraordinary item ........................ 41,664 37,082 83,037 71,063
EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF
DEBT .................................................... (777) -- (777) (46)
-------- -------- --------- ---------
Net income .............................................. 40,887 37,082 82,260 71,017
Dividends on preferred units .............................. (8,145) (7,656) (16,290) (13,801)
-------- -------- --------- ---------
Net income available for Class A Common Units ........... $ 32,742 $ 29,426 $ 65,970 $ 57,216
======== ======== ========= =========
NET INCOME/(LOSS) PER COMMON UNIT -- BASIC:
Income before extraordinary item ........................ $ .48 $ .47 $ .95 $ .94
Extraordinary item -- loss on early extinguishment of
debt ................................................... ( .01) -- ( .01) --
-------- -------- --------- ---------
Net income .............................................. $ .47 $ .47 $ .94 $ .94
======== ======== ========= =========
NET INCOME/(LOSS) PER COMMON UNIT -- DILUTED:
Income before extraordinary item ........................ $ .48 $ .47 $ .95 $ .94
Extraordinary item -- loss on early extinguishment of
debt ................................................... ( .01) -- ( .01) --
======== ======== ========= =========
Net income .............................................. $ .47 $ .47 $ .94 $ .94
======== ======== ========= =========
Distributions declared per Common Unit .................... $ 0.54 $ 0.51 $ 1.08 $ 1.02
======== ======== ========= =========
Weighted average Common Units outstanding -- basic:
Class A Common Units:
General Partner ........................................ 698 623 696 606
Limited Partners ....................................... 69,062 61,723 68,925 59,998
Class B Common Units:
Limited Partners ....................................... 196 292 196 280
-------- -------- --------- ---------
Total ................................................... 69,956 62,638 69,817 60,884
======== ======== ========= =========
Weighted average Common Units outstanding -- diluted:
Class A Common Units:
General Partner ........................................ 698 627 696 611
Limited Partners ....................................... 69,084 62,110 68,938 60,498
Class B Common Units:
Limited Partners ....................................... 196 292 196 280
-------- -------- --------- ---------
Total ................................................... 69,978 63,029 69,830 61,389
======== ======== ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
HIGHWOODS REALTY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
----------------------------
1999 1998
------------- ------------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES:
Net income ...................................................................... $ 82,260 $ 71,017
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................. 55,729 37,381
Loss on early extinguishment of debt .......................................... 777 46
Gain on disposition of assets, net of income tax provision .................... (2,093) --
Changes in operating assets and liabilities ................................... (40,370) 2,008
---------- ----------
Net cash provided by operating activities .................................... 96,303 110,452
---------- ----------
INVESTING ACTIVITIES:
Additions to real estate assets ................................................. (244,575) (646,510)
Proceeds from disposition of assets ............................................. 502,737 --
Cash from contributed net assets ................................................ -- --
Repayment of advances from subsidiaries ......................................... (3,831) (2,341)
Cash paid in exchange for partnership net assets ................................ (697) (20,601)
Other ........................................................................... (33,326) (6,853)
---------- ----------
Net cash provided by/(used in) investing activities .......................... 220,308 (676,305)
---------- ----------
FINANCING ACTIVITIES:
Distributions paid on Common Units .............................................. (76,147) (62,158)
Distributions paid on Preferred Units ........................................... (16,290) (13,801)
Payment of prepayment penalties ................................................. (777) (46)
Borrowings on mortgages and notes payable ....................................... 4,385 521,941
Repayment of mortgages and notes payable ........................................ (22,700) (118,120)
Borrowings on revolving loans ................................................... 210,500 535,000
Repayment on revolving loans .................................................... (362,500) (582,500)
Net proceeds from contributed capital ........................................... 14,945 290,603
Net change in deferred financing costs .......................................... (4,494) (5,950)
---------- ----------
Net cash (used in)/provided by financing activities .......................... (253,078) 564,969
---------- ----------
Net increase/(decrease) in cash and cash equivalents ............................ 63,533 (884)
Cash and cash equivalents at beginning of the period ............................ 30,696 8,816
---------- ----------
Cash and cash equivalents at end of the period .................................. $ 94,229 $ 7,932
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest .......................................................... $ 73,670 $ 36,277
========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
HIGHWOODS REALTY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The following summarizes (i) the net assets contributed by the holders of
Common Units in the Operating Partnership, (ii) the change in the net assets as
a result of the reorganization of our ownership in the Des Moines properties
(see Note 5) and (iii) the net assets acquired subject to mortgage notes
payable.
SIX MONTHS ENDED
JUNE 30,
--------------------------
1999 1998
------------- ----------
ASSETS:
Rental property and equipment, net .......... $ (25,879) $93,979
LIABILITIES:
Mortgages and notes payable assumed ......... $ (52,165) $73,821
--------- -------
Net assets ............................... $ 26,286 $20,158
========= =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
The Operating Partnership is a subsidiary of the Company. At June 30,
1999, the Company owned 87% of the Common Units in the Operating Partnership.
The consolidated financial statements include the accounts of the
Operating Partnership and its majority controlled affiliates. All significant
intercompany balances and transactions have been eliminated in the consolidated
financial statements.
The Operating Partnership's 125,000 Series A Preferred Units are senior to
the Class A and B Common Units and rank pari passu with the Series B and D
Preferred Units. The Series A Preferred Units have a liquidation preference of
$1,000 per unit. Distributions are payable on the Series A Preferred Units at
the rate of $86.25 per annum per unit.
The Operating Partnership's 6,900,000 Series B Preferred Units are senior
to the Class A and B Common Units and rank pari passu with the Series A and D
Preferred Units. The Series B Preferred Units have a liquidation preference of
$25 per unit. Distributions are payable on the Series B Preferred Units at the
rate of $2.00 per annum per unit.
The Operating Partnership's 400,000 Series D Preferred Units are senior to
the Class A and B Common Units and rank pari passu with the Series A and B
Preferred Units. The Series D Preferred Units have a liquidation preference of
$250 per unit. Distributions are payable on Series D Preferred Units at a rate
of $20.00 per annum per unit.
The Class A Common Units are owned by the Company and by certain limited
partners of the Operating Partnership. The Class A Common Units owned by the
Company are classified as general partners' capital and limited partners'
capital. The Class B Common Units are owned by certain limited partners (not
the Company) and only differ from the Class A Common Units in that they are not
eligible for allocation of income and distributions. The Class B Common Units
will convert to Class A Common Units in 25% annual installments commencing one
year from the date of issuance. Prior to such conversion, such Class B Common
Units will not be redeemable for cash or shares of the Company's Common Stock.
Generally one year after issuance, the Operating Partnership is obligated
to redeem each of the Class A Common Units not owned by the Company (the
"Redeemable Operating Partnership Units") at the request of the holder thereof
for cash, provided that the Company at its option may elect to acquire such
unit for one share of Common Stock or the cash value thereof. The Company's
Class A Common Units are not redeemable for cash. The Redeemable Operating
Partnership Units are classified outside of the permanent partners' capital in
the accompanying balance sheet at their fair market value (equal to the fair
market value of a share of Common Stock) at the balance sheet date.
The extraordinary loss represents the write-off of loan origination fees
and prepayment penalties paid on the early extinguishment of debt.
In June 1998, the Financial Accounting Standards Board ("FASB") 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. In June 1999, FASB issued Statement No. 137, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -- DEFERRAL OF THE EFFECTIVE DATE
OF FASB STATEMENT NO. 133, which stipulates the required adoption date to be
all fiscal years beginning after June 15, 2000. Statement No. 133 requires 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
8
earnings. The ineffective portion of a derivative's change in fair value will
be immediately recognized in earnings. The fair market value of the Operating
Partnership derivatives is 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."
2. SEGMENT INFORMATION
Our sole business is the acquisition, development and operation of rental
real estate properties. We operate office, industrial and retail properties and
apartment units. There are no material inter-segment transactions.
Our 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.
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 total assets for each
reportable segment for the quarter ended June 30, 1999 and 1998.
FOR THREE MONTHS ENDED FOR SIX MONTHS ENDED
--------------------------------- --------------------------------
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
--------------- --------------- --------------- --------------
RENTAL INCOME:
Office segment ................................. 116,233 103,002 237,995 194,398
Industrial segment ............................. 12,783 10,077 25,006 19,012
Retail segment ................................. 8,156 -- 15,940 --
Apartment segment .............................. 4,095 -- 8,194 --
------- ------- ------- -------
$ 141,267 $ 113,079 $ 287,135 $ 213,410
========== ========== ========== ==========
NET OPERATING INCOME:
Office segment ................................. 78,607 68,878 161,554 132,097
Industrial segment ............................. 10,645 8,374 20,846 15,758
Retail segment ................................. 5,561 -- 10,704 --
Apartment segment .............................. 2,372 -- 4,657 --
---------- ---------- ---------- ----------
97,185 77,252 197,761 147,855
---------- ---------- ---------- ----------
RECONCILIATION TO INCOME BEFORE
EXTRAORDINARY ITEMS:
Equity in income of uncons affiliates .......... 336 -- 457 --
Gain on disposition of assets, net of income tax
provision .................................... 1,524 -- 2,093 --
Interest and other income ...................... 4,652 2,321 9,249 4,374
Interest expense ............................... (28,616) (17,837) (59,239) (35,615)
General and admin expense ...................... (5,762) (4,386) (11,555) (8,170)
Depreciation and amortization .................. (27,655) (20,268) (55,729) (37,381)
---------- ---------- ---------- ----------
Income before Minority Interest and
Extraordinary Item.......................... $ 41,664 $ 37,082 $ 83,037 $ 71,063
========== ========== ========== ==========
TOTAL ASSETS:
Office segment ................................. 2,914,562 3,070,914 2,914,562 3,070,914
Industrial segment ............................. 454,023 310,534 454,023 310,534
Retail segment ................................. 250,534 -- 250,534 --
Apartment segment .............................. 119,868 -- 119,868 --
Corporate and other ............................ 248,654 74,032 248,654 74,032
---------- ---------- ---------- ----------
Total Assets ................................... $3,987,641 $3,455,480 $3,987,641 $3,455,480
========== ========== ========== ==========
9
3. 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.
4. LEGAL CONTINGENCIES
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 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. By
order dated June 18, 1999, the court granted in part and denied in part our
motion to dismiss. The plaintiff has filed a motion seeking certification of
the proposed class of plaintiffs. All defendants will oppose that motion, which
remains pending. Discovery in this matter is proceeding. Due to the inherent
uncertainties of the litigation process, 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.
In addition, we are a party to a variety of legal proceedings arising in
the ordinary course of our business. We believe we are adequately covered by
insurance and indemnification agreements. Accordingly, none of such proceedings
are expected to have a material adverse affect on our business, financial
condition and results of operations.
5. DES MOINES PARTNERSHIPS
In connection with our merger with J.C. Nichols in July 1998, we succeeded
to the interests of J.C. Nichols in a strategic alliance with R&R Investors,
Ltd. pursuant to which R&R Investors manages and leases certain co-venture
properties located in the Des Moines area. As a result of the merger, we
acquired an ownership interest of 50% or more in a series of nine co-ventures
with R&R Investors. Certain of these properties were previously included in our
consolidated financial statements. On June 2, 1999, we agreed with R&R
Investors to reorganize our respective ownership interests in the Des Moines
properties such that each would own a 50% interest in the properties in the Des
Moines area. Accordingly, we have adopted the equity method of accounting for
our investment in each of the Des Moines properties as a result of such
reorganization. The impact of the reorganization was immaterial to the
consolidated financial statements of the Operating Partnership.
6. DISPOSITION ACTIVITY
On June 7, 1999, we sold 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 $323.0 million. In
addition, during the six months ended June 30, 1999, we sold approximately 1.6
million rentable square feet of non-core office and industrial properties in
the Baltimore area and certain other non-core office and industrial properties
for gross proceeds of $108.9 million. We recorded a gain, net of income tax
provision,
10
of $2.1 million related to these dispositions. Non-core office and industrial
properties generally include single buildings or business parks that do not fit
our long-term strategy.
In addition, we have entered into various agreements to sell approximately
2.8 million rentable square feet of non-core office and industrial properties
for gross proceeds of $220.0 million. These transactions are subject to
customary closing conditions, including due diligence and documentation, and
are expected to close during the third and fourth quarters of 1999. However, we
can provide no assurance that all or parts of these transactions will be
consummated.
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
Operating Partnership.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999. Revenues from rental operations
increased $28.2 million, or 24.9%, from $113.1 million for the three months
ended June 30, 1998 to $141.3 million for the comparable period in 1999. The
increase is primarily a result of our acquisition of 4.2 million square feet of
majority owned office, industrial and retail properties and 2,326 apartment
units and the completion of 1.6 million square feet of development activity
during the last six months of 1998 and the first six months of 1999, slightly
offset by the disposition and removal of 6.6 million square feet of majority
owned office, industrial and retail properties and 418 apartment units
(including the removal of certain properties from our consolidated financial
statements as a result of the reorganization of the Des Moines Partnerships).
Our in-service portfolio decreased from 40.7 million square feet at June 30,
1998 to 39.9 million square feet at June 30, 1999. Same property revenues,
which are the revenues of the 490 in-service properties owned on April 1, 1998,
increased 3.1% for the three months ended June 30, 1999, compared to the same
three months of 1998.
During the three months ended June 30, 1999, 382 leases representing 2.1
million square feet of office, industrial and retail space commenced at an
average rate per square foot which was 6.4% higher than the average rate per
square foot on the expired leases.
Interest and other income increased $2.4 million, or 104.3%, from $2.3
million for the three months ended June 30, 1998 to $4.7 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 Operating Partnership generated $274,000 in
auxiliary income (vending and parking) as a result of acquiring multifamily
communities in the merger with J.C. Nichols.
Rental operating expenses increased $8.3 million, or 23.2%, from $35.8
million for the three months ended June 30, 1998 to $44.1 million for the
comparable period in 1999. The increase is a result of our addition of 5.8
million square feet of majority owned office, industrial and retail space and
2,326 apartment units through a combination of acquisitions and developments
during the last six months of 1998 and the first six months of 1999, slightly
offset by the disposition and removal of 6.6 million square feet of majority
owned office, industrial and retail properties and 418 apartment units
(including the removal of certain properties from our consolidated financial
statements as a result of the reorganization of the Des Moines partnerships).
Rental operating expenses as a percentage of related revenues decreased from
31.7% for the three months ended June 30, 1998 to 31.2% for the comparable
period in 1999.
Depreciation and amortization for the three months ended June 30, 1999 and
1998 was $27.7 million and $20.3 million, respectively. The increase of $7.4
million, or 36.5%, is due to an increase in depreciable assets over the prior
year. Interest expense increased $10.8 million, or 60.7%, from $17.8 million
for the three months ended June 30, 1998 to $28.6 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 June
30, 1999 and 1998 included $734,000 and $616,000, respectively, of amortization
of deferred financing costs and the costs related to our interest rate hedge
contracts. General and administrative expenses increased from 3.9% of rental
revenue for the three months ended June 30, 1998 to 4.1% for the comparable
period in 1999.
11
Net income before extraordinary item equaled $41.7 million and $37.1
million for the three months ended June 30, 1999 and 1998, respectively. The
Operating Partnership recorded $8.1 million and $7.7 million in preferred unit
dividends for the three months ended June 30, 1999 and 1998, respectively.
SIX MONTHS ENDED JUNE 30, 1999. Revenues from rental operations increased
$73.7 million, or 34.5%, from $213.4 million for the six months ended June 30,
1998 to $287.1 million for the comparable period in 1999. The increase is
primarily a result of our acquisition of 4.2 million square feet of majority
owned office, industrial and retail properties and 2,326 apartment units and
the completion of 1.6 million square feet of development activity during the
last six months of 1998 and the first six months of 1999, slightly offset by
the disposition and removal of 6.6 million square feet of majority owned
office, industrial and retail properties and 418 apartment units (including
the removal of certain properties from our consolidated financial statements as
a result of the reorganization of the Des Moines partnerships). Our in-service
portfolio decreased from 40.7 million square feet at June 30, 1998 to 39.9
million square feet at June 30, 1999. Same property revenues, which are the
revenues of the 440 in-service properties owned on January 1, 1998, increased
3.2% for the six months ended June 30, 1999, compared to the same six months of
1998.
During the six months ended June 30, 1999, 755 leases representing 4.4
million square feet of office, industrial and retail space commenced at an
average rate per square foot which was 5.7% higher than the average rate per
square foot on the expired leases.
Interest and other income increased $4.8 million, or 109.1%, from $4.4
million for the six months ended June 30, 1998 to $9.2 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 Operating Partnership generated $587,000 in
auxiliary income (vending and parking) as a result of acquiring multifamily
communities in the merger with J.C. Nichols.
Rental operating expenses increased $23.8 million, or 36.3%, from $65.6
million for the six months ended June 30, 1998 to $89.4 million for the
comparable period in 1999. The increase is a result of our addition of 5.8
million square feet of majority owned office, industrial and retail space and
2,326 apartment units through a combination of acquisitions and developments
during the last six months of 1998 and the first six months of 1999, slightly
offset by the disposition and removal of 6.6 million square feet of majority
owned office, industrial and retail properties and 418 apartment units
(including the removal of certain properties from our consolidated financial
statements as a result of the reorganization of the Des Moines partnerships).
Rental operating expenses as a percentage of related revenues increased from
30.7% for the six months ended June 30, 1998 to 31.1% for the comparable period
in 1999.
Depreciation and amortization for the six months ended June 30, 1999 and
1998 was $55.7 million and $37.4 million, respectively. The increase of $18.3
million, or 48.9%, is due to an increase in depreciable assets over the prior
year. Interest expense increased $23.6 million, or 66.3%, from $35.6 million for
the six months ended June 30, 1998 to $59.2 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 six months ended June 30, 1999 and
1998 included $1,512,000 and $1,232,000, respectively, of amortization of
deferred financing costs and the costs related to our interest rate hedge
contracts. General and administrative expenses increased from 3.8% of rental
revenue for the six months ended June 30, 1998 to 4.0% for the comparable period
in 1999.
Net income before extraordinary item equaled $83.0 million and $71.1
million for the six months ended June 30, 1999 and 1998, respectively. The
Operating Partnership recorded $16.3 million and $13.8 million in preferred
unit dividends for the six months ended June 30, 1999 and 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
STATEMENT OF CASH FLOWS. For the six months ended June 30, 1999, cash
provided by operating activities decreased by $14.1 million, or 12.8%, to $96.3
million, as compared to $110.4 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 provided by investing activities
was $220.3 million for the first six months of 1999, as compared to $676.3 used
in investing activities for the same period in 1998. The increase is primarily
due to the disposition of certain properties during the first six months of
1999 and the decline in acquisition activity during the first six months of
1999, as
12
compared to the same period in 1998. Cash used in financing activities was
$253.1 million for the first six months of 1999, as compared to $565.0 provided
by investing activities for the same period in 1998. The decrease is primarily
due to the decrease in the borrowings on mortgages, notes payable and revolving
loans as well as a decrease net proceeds from contributed capital in the first
six months of 1999, as compared to the same period in 1998. Payments of
distributions increased by $14.0 million to $76.1 million for the first six
months of 1999, as compared with $62.1 million for the same period in 1998. The
increase is due to the greater number of Common Units outstanding and a 6.0%
increase in the distribution rate. Payment of preferred unit distributions
increased by $2.5 million to $16.3 million for the first six months of 1999, as
compared to $13.8 million for the same period in 1998. The increase is due to
the issuance of Preferred Series D Units in the first quarter of 1998.
CAPITALIZATION. The Operating Partnership's total indebtedness at June 30,
1999 totaled $1.7 billion and was comprised of $533 million of secured
indebtedness with a weighted average interest rate of 7.8% and $1.2 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 June 30, 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 $43.7 million in floating rate
notes payable assumed upon consummation of the merger with J.C. Nichols were not
covered by interest rate hedge contracts on June 30, 1999.
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 June 30, 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% $ 486
Treasury Lock 100,000 7/1/99 10-Year Treasury 5.674 782
Swap 100,000 10/1/99 3-Month LIBOR 4.970 281
Swap 20,828 6/10/02 1-Month LIBOR + 0.75% 7.700 (945)
Collar 80,000 10/15/01 1-Month LIBOR 5.40 - 6.25 175
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.
13
Our short-term (within the next 12 months) liquidity needs also include,
among other things, the funding of approximately $210 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 $318.5
million was available as of June 30, 1999);
o the issuance of secured debt;
o the selective disposition of non-core assets; and
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.
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.
RECENT DEVELOPMENTS
On June 7, 1999, we sold 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 $323.0 million. In
addition, during the six months ended June 30, 1999, we sold approximately 1.6
million rentable square feet of non-core office and industrial properties in
the Baltimore area and certain other non-core office and industrial properties
for gross proceeds of approximately $108.9 million. The Operating Partnership
recorded a gain, net of income tax provision, of $2.1 million related to these
dispositions. Non-core office and industrial properties generally include
single buildings or business parks that do not fit our long-term strategy.
In addition, we have entered into various agreements to sell approximately
2.8 million rentable square feet of non-core office and industrial properties
for gross proceeds of $220.0 million. These transactions are subject to
customary closing conditions, including due diligence and documentation, and
are expected to close during the third and fourth quarters of 1999. However, we
can provide no assurance that all or parts of these transactions will be
consummated.
We intend to use the net proceeds from our recent and pending disposition
activity to reinvest in tax-deferred exchange transactions under Section 1031
of the Internal Revenue Code and to fund existing development activity, either
through direct payments or repayment of borrowings under our Revolving Loan. We
expect to reinvest up to $72 million of the net proceeds from recent
disposition activity and up to $123 million of the net proceeds from pending
disposition activity to acquire in tax-deferred exchange transactions
in-service properties, development land and development projects located in
core markets and in sub-markets where we have a strong presence. For an
exchange to qualify for tax-deferred treatment under Section 1031, the net
proceeds from the sale of a property must be held by an escrow agent until
applied toward the purchase of real estate qualifying for gain deferral. Given
the competition for properties meeting our investment criteria, there may be
some delay in reinvesting such proceeds. Delays in reinvesting such proceeds
will reduce our income from operations. In addition, the use of net proceeds
from dispositions to fund development activity, either through direct payments
14
or repayment of borrowings under our Revolving Loan, will reduce our income
from operations until such development projects are placed in service.
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 Year 2000 remediation plan at both the operations and property
levels has three phases:
o assessment (inventory and testing of computer systems),
o renovation (repairing and 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 95% 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 end of
the third quarter of 1999.
Our Chief Operating Officer is overseeing our property level compliance
program. We are near completing our inventory of all of our properties'
non-information technology systems. This assessment process is 100% complete.
As part of the inventory process, we requested appropriate vendors and
manufacturers to certify that their products are Year 2000 compliant. Most
indicated that their products are Year 2000 compliant. We are approximately 90%
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 of 1999.
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 Year 2000 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:
15
o we do not rely on a small number of tenants for a significant portion of
our rental revenue;
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
16
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.
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 ("FASB") 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. In June 1999, the FASB issued Statement No. 137, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -- DEFERRAL OF THE EFFECTIVE DATE
OF FASB STATEMENT NO. 133, which stipulates the required adoption date to be
all fiscal years beginning after June 15, 2000. Statement No. 133 requires 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. The fair market value of the Company's
derivatives is discussed in Item 2.
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.
17
FFO and cash available for distribution for the three month periods ended
June 30, 1999 and 1998 are summarized in the following table (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
FUNDS FROM OPERATIONS:
Income before extraordinary item ...................................... $ 41,664 $ 37,082 $ 83,037 $ 71,063
Add (deduct):
Dividends to preferred unitholders................................... (8,145) (7,656) (16,290) (13,801)
Severance costs and other division closing costs: ................... 1,233 -- 1,233 --
Gain on disposition of assets, net of income tax provision ......... (1,524) -- (2,093) --
Depreciation and amortization ...................................... 27,655 20,268 55,729 37,381
Depreciation on unconsolidated affiliates .......................... 745 1,222
-------- -------- --------- ---------
FUNDS FROM OPERATIONS BEFORE MINORITY INTEREST ..................... 61,628 49,694 122,838 94,643
CASH AVAILABLE FOR DISTRIBUTION:
Add (deduct):
Rental income from straight-line rents .............................. (3,524) (2,976) (7,509) (6,092)
Amortization of deferred financing costs ............................ 734 616 1,512 1,232
Non-incremental revenue generating capital expenditures (1):
Building improvements paid ......................................... (2,957) (1,678) (4,475) (2,697)
Second generation tenant improvements paid ......................... (4,112) (4,868) (10,121) (7,304)
Second generation lease commissions paid ........................... (4,082) (1,785) (7,613) (3,511)
-------- -------- --------- ---------
CASH AVAILABLE FOR DISTRIBUTION .................................. $ 47,687 $ 39,003 $ 94,632 $ 76,271
======== ======== ========= =========
Weighted average Common Units outstanding -- Basic .................... 69,956 62,638 69,817 60,884
Weighted average Common Units outstanding -- Diluted .................. 69,978 63,029 69,830 61,389
======== ======== ========= =========
DIVIDEND PAYOUT RATIO -- DILUTED:
Funds from operations ............................................... 61.3% 64.7% 61.4% 66.2%
======== ======== ========= =========
Cash available for distribution ..................................... 79.2% 82.4% 79.7% 82.1%
======== ======== ========= =========
- ----------
(1) Amounts represent cash expenditures.
18
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;
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.
19
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 June 30, 1999 and 1998:
RENTABLE NUMBER OF PERCENT LEASED/
JUNE 30, 1999 SQUARE FEET PROPERTIES PRE-LEASED
- ---------------------------- ------------- ------------ ----------------
IN-SERVICE:
Office .................... 26,666,000 397 94%
Industrial ................ 11,497,000 193 90%
Retail .................... 1,790,000 19 91%
---------- --- --
Total .................... 39,953,000 609 93%
========== === ==
DEVELOPMENT:
COMPLETED -- NOT STABILIZED
Office .................... 1,951,000 18 78%
Industrial ................ 476,000 4 78%
Retail .................... 119,000 1 97%
---------- --- --
Total .................... 2,546,000 23 79%
========== === ==
IN PROCESS
Office .................... 3,065,000 24 69%
Industrial ................ 472,000 4 17%
Retail .................... 81,000 1 53%
---------- --- --
Total .................... 3,618,000 29 61%
========== === ==
TOTAL:
Office .................... 31,682,000 439
Industrial ................ 12,445,000 201
Retail .................... 1,990,000 21
---------- ---
Total .................... 46,117,000 661
========== ===
JUNE 30, 1998
- -----------------------------
IN-SERVICE:
Office .................... 28,850,000 382 94%
Industrial ................ 11,863,000 148 94%
Retail .................... -- -- --
---------- --- --
Total .................... 40,713,000 530 94%
========== === ==
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 .................... 3,261,000 27 44%
Industrial ................ 705,000 5 43%
Retail .................... -- -- --
---------- --- ----
Total .................... 3,966,000 32 44%
========== === ====
TOTAL:
Office .................... 32,111,000 409
Industrial ................ 12,568,000 153
Retail .................... -- --
---------- ---
Total .................... 44,679,000 562
========== ===
20
The following table sets forth certain information with respect to our
properties under development as of June 30, 1999 (dollars in thousands):
RENTABLE
SQUARE ESTIMATED COST AT PRE-LEASING ESTIMATED ESTIMATED
NAME LOCATIONS FEET COST 6/30/99 PERCENTAGE (1) COMPLETION STABILIZATION (2)
- ------------------------------ ----------------- ------------ ----------- ----------- ---------------- ------------ ----------------
IN-PROCESS
OFFICE:
C N A Maitland III Orlando 78,000 $ 9,885 $ 7,731 100% 3Q99 3Q99
Capital One Bldg 2 Richmond 44,000 5,359 5,240 100% 3Q99 3Q99
Highwoods Center II @
Tradeport Atlanta 53,000 4,825 2,527 56% 3Q99 4Q99
Capital One Bldg 3 Richmond 126,000 15,046 10,267 100% 4Q99 4Q99
Eastshore I Richmond 68,000 7,535 457 100% 4Q99 4Q99
Lakepoint II Tampa 225,000 34,106 16,153 52% 4Q99 4Q99
Deerfield I Atlanta 72,000 6,994 2,312 62% 3Q99 1Q00
Deerfield II Atlanta 45,000 4,382 3,120 -- 3Q99 1Q00
Westwood South Nashville 125,000 13,530 9,582 90% 3Q99 1Q00
3737 Glenwood Ave. Research Triangle 107,000 16,700 11,096 80% 3Q99 1Q00
Eastshore III Richmond 80,000 8,580 452 100% 1Q00 1Q00
Intermedia Building 1 Tampa 200,000 27,040 5,219 100% 1Q00 1Q00
Intermedia Building 2 Tampa 30,000 4,056 439 100% 1Q00 1Q00
Intermedia Building 3 Tampa 170,000 22,984 5,754 100% 1Q00 1Q00
Belfort Park C1 Jacksonville 54,000 4,830 2,196 -- 3Q99 2Q00
Belfort Park C2 Jacksonville 31,000 2,730 2,241 -- 3Q99 2Q00
Caterpillar Financial Center Nashville 313,000 54,000 22,400 79% 1Q00 2Q00
4101 Research Commons Research Triangle 73,000 9,311 6,052 35% 3Q99 2Q00
Peachtree Corner Atlanta 109,000 9,238 3,869 33% 3Q99 3Q00
Intermedia Building 4 Tampa 200,000 29,219 1,909 100% 3Q00 3Q00
Mallard Creek V Charlotte 118,000 12,262 7,575 -- 4Q99 4Q00
Valencia Place Kansas City 241,000 34,020 21,400 47% 1Q00 4Q00
Intermedia Building 5 Tampa 200,000 29,219 1,473 100% 3Q01 3Q01
Capital Plaza Orlando 303,000 53,000 27,554 30% 1Q00 4Q01
------- -------- -------- ---
In-Process Office Total or
Weighted Average 3,065,000 $418,851 $177,018 69%
========= ======== ======== ===
INDUSTRIAL:
Newpoint II Atlanta 131,000 5,167 4,141 43% 3Q99 2Q00
Air Park South Warehouse
III Piedmont Triad 120,000 3,626 668 -- 4Q99 2Q00
Air Park South Warehouse
IV Piedmont Triad 86,000 2,750 1,754 28% 4Q99 3Q00
Bluegrass Valley I Atlanta 135,000 5,664 71 -- 2Q00 4Q00
--------- -------- -------- ---
In-Process Industrial Total
or Weighted Average 472,000 $ 17,207 $ 6,634 17%
========= ======== ======== ===
RETAIL:
Valencia Place Kansas City 81,000 14,362 7,193 53% 1Q00 4Q00
--------- -------- -------- ---
In-Process Retail Total or
Weighted Average 81,000 $ 14,362 $ 7,193 53%
========= ======== ======== ===
Total or Weighted Average
of all In-Process
Development Projects 3,618,000 $450,420 $190,845 61%
========= ======== ======== ===
- ----------
(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 COST AT PRE-LEASING ESTIMATED ESTIMATED
PROPERTY LOCATION FEET COST 6/30/99 PERCENTAGE (1) COMPLETION STABILIZATION (2)
- ----------------------------- ----------------- ------------ ----------- ----------- ---------------- ------------ -----------------
COMPLETED -- NOT STABILIZED
OFFICE:
Patewood VI Greenville 107,000 $ 11,400 $ 12,223 96% 3Q98 3Q99
Lakeview Ridge III Nashville 131,000 13,100 9,883 88% 2Q99 3Q99
Highwoods Centre Research Triangle 76,000 8,300 8,627 100% 4Q98 3Q99
Overlook Research Triangle 97,000 10,500 10,162 100% 4Q98 3Q99
Red Oak Research Triangle 65,000 6,000 5,978 90% 4Q98 3Q99
Situs II Research Triangle 59,000 6,300 6,648 94% 3Q98 3Q99
Interstate Corporate Center Tampa 342,000 19,100 17,856 99% 1Q99 3Q99
Ridgefield III Asheville 57,000 5,500 5,185 53% 3Q98 4Q99
10 Glenlakes Atlanta 254,000 35,100 29,735 82% 1Q99 4Q99
Parkway Plaza 11 Charlotte 32,000 2,600 2,354 66% 1Q99 4Q99
Highwoods Centre Hampton Roads 103,000 9,925 8,501 66% 4Q98 4Q99
Southwind Building D Memphis 64,000 6,800 5,017 85% 2Q99 4Q99
Cool Springs I Nashville 153,000 16,800 15,552 66% 3Q98 4Q99
Stony Point II Richmond 136,000 13,881 10,554 58% 2Q99 4Q99
Parkway Plaza 12 Charlotte 22,000 1,800 1,445 67% 1Q99 1Q00
Parkway Plaza 14 Charlotte 90,000 7,690 5,569 58% 2Q99 1Q00
Lakefront Plaza I Hampton Roads 77,000 7,477 6,502 32% 2Q99 1Q00
Concourse Center One Piedmont Triad 86,000 8,400 6,708 32% 2Q99 1Q00
------- -------- -------- ---
Completed -- Not Stabilized
Office Total or Weighted
Average 1,951,000 $190,673 $168,499 78%
========= ======== ======== ===
INDUSTRIAL:
Tradeport 1 Atlanta 87,000 $ 3,100 $ 2,989 82% 3Q98 3Q99
Tradeport 2 Atlanta 87,000 3,100 3,146 86% 3Q98 3Q99
Air Park South Warehouse II Piedmont Triad 136,000 4,200 3,293 100% 4Q98 3Q99
HIW Distribution Center Richmond 166,000 5,764 5,663 53% 1Q99 4Q99
--------- -------- -------- ---
Completed -- Not Stabilized
Industrial Total or
Weighted Average 476,000 $ 16,164 $ 15,091 78%
========= ======== ======== ===
RETAIL:
Seville Square Kansas City 119,000 $ 32,100 $ 30,190 97% 2Q99 1Q00
--------- -------- -------- ---
Completed -- Not Stabilized
Retail Total or Weighted
Average 119,000 $ 32,100 $ 30,190 97%
========= ======== ======== ===
Total or Weighted Average
of all Completed -- Not
Stabilized Development
Projects 2,546,000 $238,937 $213,780 79%
========= ======== ======== ===
Total or Weighted Average
of
all Development Projects 6,164,000 $689,357 $404,625 69%
========= ======== ======== ===
- ----------
(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.
22
RENTABLE
SQUARE
FEET ESTIMATED COST PRE-LEASING
DEVELOPMENT ANALYSIS ------------ ------------------------ ---------------
(DOLLARS IN THOUSANDS) PERCENTAGE (1)
------------------------ ---------------
SUMMARY BY ESTIMATED STABILIZATION DATE:
Third Quarter 1999 ..................... 967,000 $ 81,244 94%
Fourth Quarter 1999 .................... 1,334,000 147,957 69%
First Quarter 2000 ..................... 1,146,000 154,256 81%
Second Quarter 2000 .................... 722,000 79,664 46%
Third Quarter 2000 ..................... 395,000 41,207 66%
Fourth Quarter 2000 .................... 575,000 66,308 27%
Third Quarter 2001 ..................... 200,000 29,219 100%
Fourth Quarter 2001 .................... 303,000 53,000 30%
Held for Sale .......................... 522,000 36,502 83%
--------- -------- ---
Total or Weighted Average ........... 6,164,000 $689,357 69%
========= ======== ===
SUMMARY BY MARKET:
Asheville ............................. 57,000 $ 5,500 53%
Atlanta ............................... 973,000 77,570 54%
Charlotte ............................. 262,000 24,352 34%
Greenville ............................ 107,000 11,400 96%
Jacksonville .......................... 85,000 7,560 --
Kansas City ........................... 441,000 80,482 62%
Memphis ............................... 64,000 6,800 85%
Nashville ............................. 722,000 97,430 80%
Orlando ............................... 381,000 62,885 44%
Piedmont Triad ........................ 428,000 18,976 44%
Research Triangle ..................... 477,000 57,111 83%
Richmond .............................. 620,000 56,165 78%
Tampa ................................. 1,025,000 146,624 89%
Held for Sale ......................... 522,000 36,502 83%
--------- -------- ---
Total or Weighted Average ........... 6,164,000 $689,357 69%
========= ======== ===
Build-to-Suit ....................... 1,196,000 $158,923 100%
Multi-tenant ........................ 4,446,000 493,932 59%
Held for Sale ....................... 522,000 36,502 83%
--------- -------- ---
Total or Weighted Average ........... 6,164,000 $689,357 69%
========= ======== ===
RENTABLE
SQUARE
FEET ESTIMATED COST PRE-LEASING
--------- ------------------------ ---------------
(DOLLARS IN THOUSANDS)
------------------------ PERCENTAGE (1)
PER PROPERTY TYPE:
Office Weighted Average ................ 115,231 $14,693 71%
Industrial Weighted Average ............ 118,500 4,171 48%
Retail Weighted Average ................ 100,000 23,231 79%
Held for Sale Weighted Average ......... 174,000 12,167 83%
------- ------- --
Total Weighted Average ................. 118,538 $13,257 69%
======= ======= ==
- ----------
(1) Includes the effect of letters of intent.
23
The following tables set forth certain information about leasing
activities at our majority-owned in-service properties (excluding apartment
units) for the three months ended June 30, 1999 and March 31, 1999 and December
31 and September 30, 1998:
OFFICE LEASING STATISTICS
THREE MONTHS ENDED
-----------------------------------------------------------------------------------
6/30/99 3/31/99 12/31/98 9/30/98 AVERAGE
-------------- -------------- -------------- --------------- --------------
NET EFFECTIVE RENTS RELATED TO
RE-LEASED SPACE:
Number of lease transactions (signed
leases) 290 276 308 326 300
Rentable square footage leased 1,326,838 1,406,170 1,291,297 1,645,913 1,417,555
Average per rentable square foot over
the lease term:
Base rent $ 15.60 $ 14.84 $ 16.54 $ 16.18 $ 15.79
Tenant improvements ( 0.84) ( 0.84) ( 0.85) ( 0.71) ( 0.81)
Leasing commissions ( 0.38) ( 0.42) ( 0.38) ( 0.42) ( 0.40)
Rent concessions ( 0.03) ( 0.01) ( 0.03) ( 0.02) ( 0.02)
---------- ---------- ---------- ----------- ----------
Effective rent 14.35 13.57 15.28 15.03 14.56
Expense stop (1) ( 4.21) ( 3.55) ( 3.96) ( 4.45) ( 4.04)
---------- ---------- ---------- ----------- ----------
Equivalent effective net rent $ 10.14 $ 10.02 $ 11.32 $ 10.58 $ 10.52
========== ========== ========== =========== ==========
Average term in years 4 5 4 5 5
========== ========== ========== =========== ==========
CAPITAL EXPENDITURES RELATED TO
RE-LEASED SPACE:
Tenant Improvements:
Total dollars committed under
signed leases $5,073,153 $6,848,279 $4,886,517 $ 6,754,100 $5,890,512
Rentable square feet 1,326,838 1,406,170 1,291,297 1,645,913 1,417,555
---------- ---------- ---------- ----------- ----------
Per rentable square foot $ 3.82 $ 4.87 $ 3.78 $ 4.10 $ 4.16
========== ========== ========== =========== ==========
Leasing Commissions:
Total dollars committed under
signed leases $2,230,915 $3,047,978 $2,005,094 $ 3,694,473 $2,744,615
Rentable square feet 1,326,838 1,406,170 1,291,297 1,645,913 1,417,555
---------- ---------- ---------- ----------- ----------
Per rentable square foot $ 1.68 $ 2.17 $ 1.55 $ 2.24 $ 1.94
========== ========== ========== =========== ==========
Total:
Total dollars committed under
signed leases $7,304,068 $9,896,257 $6,891,611 $10,448,573 $8,635,127
Rentable square feet 1,326,838 1,406,170 1,291,297 1,645,913 1,417,555
---------- ---------- ---------- ----------- ----------
Per rentable square foot $ 5.50 $ 7.04 $ 5.34 $ 6.35 $ 6.09
========== ========== ========== =========== ==========
RENTAL RATE TRENDS:
Average final rate with expense pass
throughs $ 15.20 $ 14.28 $ 13.57 $ 14.51 $ 14.39
Average first year cash rental rate $ 15.61 $ 15.01 $ 14.47 $ 15.43 $ 15.13
---------- ---------- ---------- ----------- ----------
Percentage increase 2.70% 5.11% 6.63% 6.34% 5.14%
========== ========== ========== =========== ==========
- ----------
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintainance) which we
will not be reimbursed by our tenants.
24
INDUSTRIAL LEASING STATISTICS
THREE MONTHS ENDED
----------------------------------------------------------------------------
6/30/99 3/31/99 12/31/98 9/30/98 AVERAGE
-------------- -------------- ------------ ------------ ------------
NET EFFECTIVE RENTS RELATED TO RE-LEASED
SPACE:
Number of lease transactions (signed leases) 63 72 44 56 59
Rentable square footage leased 589,835 837,616 582,758 314,549 581,190
Average per rentable square foot over the
lease term:
Base rent $ 5.55 $ 5.12 $ 4.71 $ 6.59 $ 5.49
Tenant improvements (0.37) (0.22) (0.20) (0.23) (0.26)
Leasing commissions (0.22) (0.10) (0.09) (0.09) (0.13)
Rent concessions 0.00 0.00 0.00 0.00 0.00
---------- ---------- -------- -------- --------
Effective rent 4.96 4.80 4.42 6.27 5.11
Expense stop (1) (0.28) (0.28) (0.25) (0.44) (0.31)
---------- ---------- -------- -------- --------
Equivalent effective net rent $ 4.68 $ 4.52 $ 4.17 $ 5.83 $ 4.80
========== ========== ======== ======== ========
Average term in years 4 4 3 4 4
========== ========== ======== ======== ========
CAPITAL EXPENDITURES RELATED TO RE-LEASED
SPACE:
Tenant Improvements:
Total dollars committed under signed leases $1,064,618 $ 821,654 $712,108 $248,359 $711,685
Rentable square feet 589,835 837,616 582,758 314,549 581,190
---------- ---------- -------- -------- --------
Per rentable square foot $ 1.80 $ 0.98 $ 1.22 $ 0.79 $ 1.22
========== ========== ======== ======== ========
Leasing Commissions:
Total dollars committed under signed leases $ 527,815 $ 315,101 $173,017 $ 99,574 $278,877
Rentable square feet 589,835 837,616 582,758 314,549 581,190
---------- ---------- -------- -------- --------
Per rentable square foot $ 0.89 $ 0.38 $ 0.30 $ 0.32 $ 0.48
========== ========== ======== ======== ========
Total:
Total dollars committed under signed leases $1,592,433 $1,136,755 $885,125 $347,933 $990,561
Rentable square feet 589,835 837,616 582,758 314,549 581,190
---------- ---------- -------- -------- --------
Per rentable square foot $ 2.70 $ 1.36 $ 1.52 $ 1.11 $ 1.70
========== ========== ======== ======== ========
RENTAL RATE TRENDS:
Average final rate with expense pass throughs $ 5.17 $ 4.91 $ 4.62 $ 5.40 $ 5.03
Average first year cash rental rate $ 5.62 $ 4.91 $ 4.72 $ 5.54 $ 5.20
---------- ---------- -------- -------- --------
Percentage increase 8.70% 0.00% 2.16% 2.59% 3.38%
========== ========== ======== ======== ========
- ----------
(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
----------------------------------------------------------------------------
6/30/99 3/31/99 12/31/98 9/30/98 AVERAGE
-------------- ------------ ------------ ------------ --------------
NET EFFECTIVE RENTS RELATED TO RE-LEASED
SPACE:
Number of lease transactions (signed leases) 29 25 15 11 20
Rentable square footage leased 159,484 62,638 29,706 37,258 72,272
Average per rentable square foot over the
lease term:
Base rent $ 14.48 $ 15.37 $ 16.34 $ 13.59 $ 14.95
Tenant improvements ( 1.46) ( 0.45) ( 1.66) ( 0.14) ( 0.93)
Leasing commissions ( 0.39) ( 0.39) ( 0.76) ( 0.44) ( 0.50)
Rent concessions 0.00 0.00 0.00 0.00 0.00
---------- -------- -------- -------- ----------
Effective rent 12.63 14.53 13.92 13.01 13.52
Expense stop (1) 0.00 (0.27) ( 1.79) ( 0.09) ( 0.54)
---------- -------- -------- -------- ----------
Equivalent effective net rent $ 12.63 $ 14.26 $ 12.13 $ 12.92 $ 12.98
---------- -------- -------- -------- ----------
Average term in years 6 6 5 6 6
========== ======== ======== ======== ==========
CAPITAL EXPENDITURES RELATED TO RE-LEASED
SPACE:
Tenant Improvements:
Total dollars committed under signed leases $2,784,277 $248,531 $319,620 $ 21,000 $ 843,357
Rentable square feet 159,484 62,638 29,706 37,258 72,272
---------- -------- -------- -------- ----------
Per rentable square foot $ 17.46 $ 3.97 $ 10.76 0.56 $ 11.67
========== ======== ======== ======== ==========
Leasing Commissions:
Total dollars committed under signed leases $ 393,991 $153,872 $123,047 $ 99,268 $ 192,544
Rentable square feet 159,484 62,638 29,706 37,258 72,272
---------- -------- -------- -------- ----------
Per rentable square foot $ 2.47 $ 2.46 $ 4.14 $ 2.66 $ 2.66
========== ======== ======== ======== ==========
Total:
Total dollars committed under signed leases $3,178,268 $402,403 $442,667 $120,268 $1,035,901
Rentable square feet 159,484 62,638 29,706 37,258 72,272
---------- -------- -------- -------- ----------
Per rentable square foot $ 19.93 $ 6.42 $ 14.90 $ 3.23 $ 14.33
========== ======== ======== ======== ==========
RENTAL RATE TRENDS:
Average final rate with expense pass throughs $ 9.91 $ 10.92 $ 15.91 $ 8.55 $ 11.32
Average first year cash rental rate $ 14.20 $ 16.22 $ 18.16 $ 10.53 $ 14.78
---------- -------- -------- -------- ----------
Percentage increase 43.29% 48.53% 14.14% 23.16% 30.51%
========== ======== ======== ======== ==========
- ----------
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintainance) which we
will not be reimbursed by our tenants.
26
The following tables set forth scheduled lease expirations for executed
leases at our majority owned in-service properties (excluding apartment units)
as of June 30, 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 589 2,009,187 7.7% $ 31,033 $ 15.45 7.6%
2000 753 3,410,864 13.1% 54,052 15.85 13.3%
2001 700 4,015,449 15.5% 64,456 16.05 15.8%
2002 637 3,928,971 15.1% 62,292 15.85 15.3%
2003 500 3,857,956 14.9% 62,079 16.09 15.2%
2004 260 2,573,684 9.9% 40,959 15.91 10.0%
2005 88 1,305,799 5.0% 19,881 15.23 4.9%
2006 51 1,394,041 5.4% 21,553 15.46 5.3%
2007 29 761,892 2.9% 12,278 16.12 3.0%
2008 50 1,572,359 6.1% 21,975 13.98 5.4%
2009 and thereafter 42 1,136,541 4.4% 17,220 15.15 4.2%
--- --------- ----- -------- -------- -----
3,699 25,966,743 100.0% $407,778 $ 15.70 100.0%
===== ========== ===== ======== ======== =====
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 157 1,230,655 12.2% $ 6,146 $ 4.99 12.3%
2000 178 2,121,760 21.0% 10,700 5.04 21.3%
2001 156 1,916,091 18.9% 9,075 4.74 18.1%
2002 112 1,380,531 13.6% 6,635 4.81 13.3%
2003 57 773,676 7.6% 4,276 5.53 8.6%
2004 42 1,653,829 16.4% 6,526 3.95 13.1%
2005 12 191,086 1.9% 1,224 6.41 2.4%
2006 6 312,099 3.1% 1,500 4.81 3.0%
2007 2 39,125 0.4% 488 12.47 1.0%
2008 6 247,737 2.4% 1,981 8.00 4.0%
2009 and thereafter 5 247,876 2.5% 1,447 5.84 2.9%
--- --------- ----- ------- ------ -----
733 10,114,465 100.0% $49,998 $ 4.94 100.0%
=== ========== ===== ======= ====== =====
- ----------
(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 55 192,916 9.2% $ 2,004 $ 10.39 7.3%
2000 74 273,325 13.0% 3,159 11.56 11.5%
2001 60 233,221 11.2% 3,292 14.12 12.0%
2002 48 185,497 8.8% 2,425 13.07 8.8%
2003 49 217,203 10.3% 3,334 15.35 12.1%
2004 23 196,052 9.3% 1,618 8.25 5.9%
2005 13 57,731 2.8% 1,090 18.88 4.0%
2006 15 120,367 5.7% 1,352 11.23 4.9%
2007 9 67,092 3.2% 985 14.68 3.6%
2008 14 107,352 5.1% 2,365 22.03 8.6%
2009 and thereafter 26 447,832 21.4% 5,866 13.10 21.3%
-- ------- ----- ------- -------- -----
386 2,098,588 100.0% $27,490 $ 13.10 100.0%
=== ========= ===== ======= ======== =====
TOTAL:
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 801 3,432,758 9.0% $ 39,183 $ 11.41 8.1%
2000 1,005 5,805,949 15.2% 67,911 11.70 14.0%
2001 916 6,164,761 16.1% 76,823 12.46 15.8%
2002 797 5,494,999 14.4% 71,352 12.98 14.7%
2003 606 4,848,835 12.7% 69,689 14.37 14.4%
2004 325 4,423,565 11.6% 49,103 11.10 10.1%
2005 113 1,554,616 4.1% 22,195 14.28 4.6%
2006 72 1,826,507 4.8% 24,405 13.36 5.0%
2007 40 868,109 2.3% 13,751 15.84 2.8%
2008 70 1,927,448 5.0% 26,321 13.66 5.4%
2009 and thereafter 73 1,832,249 4.8% 24,533 13.39 5.1%
----- --------- ----- -------- -------- -----
4,818 38,179,796 100.0% $485,266 $ 12.71 100.0%
===== ========== ===== ======== ======== =====
- ----------
(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 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 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.
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 June 30, 1999, the Operating Partnership
had approximately $102.7 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 June 30, 2000, our interest expense would be increased or
decreased approximately $1.0 million. In addition, as of June 30, 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 June 30, 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
June 30, 1999 would increase by approximately $16.4 million. If interest rates
decrease by 100 basis points, the aggregate fair market value of these interest
rate hedge contracts as of June 30, 1999 would decrease by approximately $18.0
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.
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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. By order dated June 18, 1999, the
court granted in part and denied in part our motion to dismiss. The
plaintiff has filed a motion seeking certification of the proposed class
of plaintiffs. All defendants will oppose that motion, which remains
pending. Discovery in this matter is proceeding. Due to the inherent
uncertainties of the litigation process, 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) In connection with the acquisition of real estate, the Operating
Partnership frequently issues Common Units to sellers of real estate
in reliance on exemptions from registration under the Securities Act.
During the six months ended June 30, 1999, the Operating Partnership
issued 88,668 Common Units in offerings exempt from the registration
requirements of the Securities Act. The Operating Partnership
exercised reasonable care to assure that each of the offerees of
Common Units during the six months ended June 30, 1999 were "accredited
investors" under Rule 501 of the Securities Act and that the investors
were not purchasing the Common Units with a view to their
distribution. Specifically, the Operating Partnership relies on the
exemptions provided by Section 4(2) of the Securities Act or Rule 506
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(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 Agreement dated April 21, 1999.
10.2(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 Agreement dated April 21, 1999.
27 Financial Data Schedule
(b) Reports on Form 8-K -- None
- ----------
(1) Filed as part of the Operating Partnership's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999 and incorporated herein by reference.
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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 REALTY LIMITED PARTNERSHIP
By: Highwoods Properties, Inc., its
general partner
By:
/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: August 16, 1999
31