<PAGE>
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 September 30, 1996
Commission file number: 001-13100
HIGHWOODS PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MARYLAND 56-1871668
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
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
The Company has only one class of common stock, issued at $.01 par value
per share with 31,788,067 shares outstanding as of November 8, 1996.
<PAGE>
HIGHWOODS PROPERTIES, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements 3
Consolidated Balance Sheets of Highwoods Properties, Inc. as of September 30, 1996 and 4
December 31, 1995
Consolidated Statements of Income of Highwoods Properties, Inc. for the three and nine month 5
periods ended September 30, 1996 and 1995
Consolidated Statements of Cash Flows of Highwoods Properties, Inc. for the nine months ended 6
September 30, 1996 and 1995
Notes to the Consolidated Financial Statements of Highwoods Properties, Inc. 8
Highwoods Properties, Inc. Pro Forma Financial Information 9
Pro Forma Condensed Combining Statement of Operations for the nine months ended September 30, 10
1996
Notes to Pro Forma Condensed Combining Statement of Operations for the nine months ended 11
September 30, 1996
Pro Forma Condensed Combining Statement of Operations for the year ended December 31, 1995 13
Notes to the Pro Forma Condensed Combining Statement of Operations for the year ended 14
December 31, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Results of Operations 16
Liquidity and Capital Resources 17
Funds From Operations and Cash Available for Distribution 18
Acquisition of Crocker Realty Trust, Inc. 19
Disclosure Regarding Forward-Looking Statements 20
Property Information 21
Third-Party Service Operations 24
Inflation 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The information furnished in the accompanying balance sheets, statements of
operations and statements of cash flows reflect all adjustments that are, in the
opinion of management, 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, Management's Discussion and
Analysis of Financial Condition and Results of Operations and the Company's 1995
Annual Report on Form 10-K.
3
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HIGHWOODS PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
<S> <C> <C>
(UNAUDITED)
ASSETS
Real estate assets, at cost:
Land................................................................... $ 240,033 $ 106,955
Buildings.............................................................. 1,075,169 491,581
Development in process................................................. 37,656 15,508
Furniture, fixtures and equipment...................................... 1,888 1,288
1,354,746 615,332
Less -- accumulated depreciation (33,988) (22,266)
Net real estate assets................................................. 1,320,758 593,066
Cash and cash equivalents................................................ 19,305 6,838
Restricted cash.......................................................... 11,532 --
Accounts and notes receivable............................................ 7,313 6,338
Notes receivable from service subsidiaries............................... 1,404 1,274
Accrued straight line rents receivable................................... 4,957 3,407
Other assets:
Deferred leasing costs................................................. 5,869 4,253
Deferred financing costs and interest rate cap......................... 11,968 8,268
Prepaid expenses and other............................................. 3,721 1,521
21,558 14,042
Less -- accumulated amortization....................................... (5,917) (3,831)
15,641 10,211
$1,380,910 $ 621,134
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable.............................................. $ 597,734 $ 182,736
Accounts payable, accrued expenses and other liabilities................. 28,767 11,052
Total liabilities...................................................... 626,501 193,788
Minority interest........................................................ 92,283 73,536
Stockholders' equity:
Common stock, $.01 par value, authorized 100,000,000 shares; issued and
outstanding 31,788,067 at September 30, 1996 and 19,404,411 at December
31, 1995............................................................... 318 194
Additional paid-in capital............................................... 670,032 355,248
Accumulated deficit...................................................... (8,224) (1,632)
Total stockholders' equity............................................. 662,126 353,810
$1,380,910 $ 621,134
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
HIGHWOODS PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
REVENUE:
Rental property............................................. $33,076 $19,673 $83,366 $49,644
Interest and other income................................... 3,253 887 4,400 11,917
36,329 20,560 87,766 50,924
OPERATING EXPENSES:
Rental property............................................. 9,015 4,666 22,210 11,917
Depreciation and amortization............................... 5,459 3,069 13,357 7,612
Interest expense:
Contractual.............................................. 5,539 3,812 13,786 8,720
Amortization of deferred financing costs and interest
rate cap............................................... 461 385 1,288 1,215
6,000 4,197 15,074 9,935
General and administrative.................................. 1,632 689 3,766 1,813
Income before minority interest and extraordinary item... 14,223 7,939 33,359 19,647
MINORITY INTEREST............................................. (1,881) (1,381) (5,205) (3,451)
Income before extraordinary item............................ 12,342 6,558 28,154 16,196
Extraordinary item -- loss on early extinguishment of debt.... (2,140) -- (2,140) (875)
Net income.................................................. $10,202 $ 6,558 $26,014 $15,321
Weighted average shares outstanding........................... 31,763 16,943 23,730 14,623
NET INCOME PER COMMON SHARE:
Income before extraordinary item............................ $ 0.39 $ 0.39 $ 1.19 $ 1.11
Extraordinary item -- loss on early extinguishment of
debt..................................................... $ (0.07) $ -- $ (0.09) $ (0.06)
Net income.................................................. $ 0.32 $ 0.39 $ 1.10 $ 1.05
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
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HIGHWOODS PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.............................................................................. $ 26,014 $ 15,321
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization......................................................... 14,645 8,827
Minority interest in income........................................................... 4,858 3,258
Loss on early extinguishment of debt.................................................. 2,432 1,068
Changes in operating assets and
liabilities........................................................................ (59) 1,104
Net cash provided by operating
activities....................................................................... 47,890 29,578
INVESTING ACTIVITIES:
Additions to real estate assets......................................................... (113,250) (73,097)
Proceeds from disposition of real estate assets......................................... 900 --
Cash from contributed net assets........................................................ 20,711 549
Cash paid in exchange for partnership net assets........................................ (322,276) (6,539)
Other................................................................................... (2,755) (1,539)
Net cash used in investing activities.............................................. (416,670) (80,626)
FINANCING ACTIVITIES:
Distributions paid...................................................................... (37,938) (19,508)
Repayment of mortgages and notes payable................................................ (184,858) (200,794)
Payment of prepayment penalties......................................................... (1,184) (1,068)
Borrowings on mortgages and notes
payable............................................................................... 307,500 121,500
Net proceeds from the sale of common
stock................................................................................. 298,804 220,055
Payment of deferred financing costs..................................................... (1,077) (519)
Net cash provided by financing activities.......................................... 381,247 119,666
Net increase in cash and cash equivalents............................................... 12,467 68,618
Cash and cash equivalents at beginning of the
period................................................................................ 6,838 6,258
Cash and cash equivalents at end
of the period......................................................................... $ 19,305 $ 74,876
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................................................. $ 12,816 $ 3,841
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
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HIGHWOODS PROPERTIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The following summarizes the net assets contributed by the unit holders of
the Operating Partnership or acquired subject to mortgage notes payable:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
<S> <C> <C>
ASSETS:
Rental property and equipment, net.................................................... $614,329 $241,468
Restricted cash....................................................................... 11,476 --
Deferred financing costs, net......................................................... 3,871 842
Accounts receivable and other......................................................... 1,653 6,290
Total assets........................................................................ $631,329 $248,600
LIABILITIES:
Mortgages and notes payable assumed................................................... 292,356 194,182
Accounts payable, accrued expenses and other liabilities.............................. 19,142 --
Total liabilities................................................................... 311,498 194,182
Net assets....................................................................... $319,831 $ 54,418
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Highwoods
Properties, Inc. (the "Company") and Highwoods/Forsyth Limited Partnership (the
"Operating Partnership"). The Company's investment in Highwoods Services, Inc.
and Forsyth Properties Services, Inc. (the "Service Companies") is accounted for
on the equity method. All significant intercompany balances and transactions
have been eliminated in the consolidated financial statements.
The Company has elected and expects to continue to qualify as a real estate
investment trust ("REIT") under Section 856 through 860 of the Internal Revenue
Code of 1986, as amended.
Minority interest in the Company represents the limited partnership
interest owned by various individuals and entities and not the Company in the
Operating Partnership, the entity that holds substantially all of the Company's
interest in the properties and through which the Company, as the sole general
partner, conducts substantially all of its operations. Per share information is
calculated using the weighted average number of shares outstanding.
The accompanying financial information has not been audited, but in the
opinion of management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the financial position, results of
operations and cash flows of the Company have been made. For further
information, refer to the financial statements and notes thereto included in the
Company's 1995 Annual Report on Form 10-K.
8
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HIGHWOODS PROPERTIES, INC.
PRO FORMA FINANCIAL INFORMATION
The accompanying unaudited Pro Forma Condensed Consolidated Statements of
Operations for the year ended December 31, 1995 assume that the following
transactions all occurred as of January 1, 1995: (i) the merger with Forsyth
Properties, Inc. and its affiliates (the "Forsyth Transaction"), (ii) the
acquisition of the Research Commons Properties, (iii) the issuance of 5,640,000
shares of common stock of the Company at a price of $20.75 per share (the
"February 1995 Offering"), (iv) the issuance of 4,774,989 shares of common stock
of the Company at a price of $24.50 per share (the "August 1995 Offering"), (v)
acquisitions of a total of 77 Properties and 68 acres of Development Land (the
"Other 1995 Acquisitions"), (vi) the merger with Eakin & Smith, Inc. and its
affiliates (the "Eakin & Smith Transaction"), (vii) the issuance of 11,500,000
and 250,000 shares of common stock of the Company at per share prices of $26.875
and $27.375, respectively (the "Summer 1996 Offerings") and (viii) the merger
with Crocker Realty Trust, Inc. (the "Crocker Merger"). The pro forma operating
data for the nine months ended September 30, 1996 assumes that (i) this
Offering, (ii) the Eakin & Smith Transaction, (iii) the Summer 1996 Offerings
and (iv) the Crocker Merger occurred as of January 1, 1995. These unaudited
statements should be read in conjunction with the respective financial
statements and notes thereto of the Company and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included herein. In
the opinion of management, the pro forma condensed consolidated financial
information provides all adjustments necessary to reflect the effects of the
above transactions.
The pro forma condensed consolidated financial information is unaudited and
is not necessarily indicative of the consolidated results which would have
occurred if the transactions had been consummated in the periods presented, or
on any particular date in the future, nor does it purport to represent the
financial position, results of operations or changes in cash flows for future
periods.
9
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HIGHWOODS PROPERTIES, INC.
PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
PRE-ACQUISITION RESULTS
CROCKER CROCKER
HISTORICAL EAKIN & SMITH HISTORICAL ACQUISITIONS PRO FORMA
(A) (B) (C) (D) ADJUSTMENTS
<S> <C> <C> <C> <C> <C>
REVENUE:
Rental property.................................... $ 83,366 $ 3,000 $ 47,372 $520 $ 900(E)
Other income....................................... 4,400 512 2,607 12 (4,043)(F)
87,766 3,512 49,979 532 (3,143)
OPERATING EXPENSES:
Rental property.................................... 22,210 957 17,170 179 (1,640)(G)
Depreciation and amortization...................... 13,357 526 8,516 108 351(H)
Interest expense:
Contractual....................................... 13,786 739 15,055 215 (1,754)(I)
Amortization of deferred financing costs.......... 1,288 -- 849 -- (475)(J)
15,074 739 15,904 215 (2,229)
General and administrative......................... 3,766 153 4,134 -- (3,816)(K)
Income before minority interest.................... 33,359 1,137 4,255 30 4,191
Minority interest.................................. (5,205) 5(L)
Income before extraordinary item................... $ 28,154 $ 1,137 $ 4,255 $ 30 $ 4,196
Net income per share..............................
Weighted average shares...........................
<CAPTION>
PRO FORMA
<S> <C>
REVENUE:
Rental property.................................... $135,158
Other income....................................... 3,488
138,646
OPERATING EXPENSES:
Rental property.................................... 38,876
Depreciation and amortization...................... 22,858
Interest expense:
Contractual....................................... 28,041
Amortization of deferred financing costs.......... 1,662
29,703
General and administrative......................... 4,237
Income before minority interest.................... 42,972
Minority interest.................................. (5,200 )
Income before extraordinary item................... $ 37,772
Net income per share.............................. $ 1.19
Weighted average shares........................... 31,788
</TABLE>
See Notes to Pro Forma Condensed Combining Statement of Operations
10
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED, IN THOUSANDS)
(A.) Reflects the Company's historical statement of operations contained in
its Quarterly Report on form 10-Q for the nine months ended September 30, 1996.
(B.) Reflects the historical statement of operations of Eakin & Smith, Inc.
for the three months ended March 31, 1996, which was acquired by the Company on
April 1, 1996.
(C.) Represents the historical statement of operations of Crocker Realty
Trust, Inc. ("Crocker") for the period from January 1, 1996 to September 5,
1996.
(D.) Reflects the historical operations of the Towermarc properties, which
were acquired by Crocker on January 16, 1996, adjusted on a pro forma basis for
interest and depreciation expense, for the period from January 1, 1996 to
January 16, 1996, the date of the acquisition of Towermarc. Depreciation expense
is calculated on the purchase price allocated to buildings, site improvements
and tenant improvements with depreciation calculated on a straight-line basis
over useful lives of 40 years, 15 years and the life of the respective leases,
respectively.
(E.) Reflects incremental rental income from a supplemental lease agreement
entered into in connection with the Company's merger with Crocker (the "Crocker
Merger"). The lease agreement was a condition of the Crocker Merger.
(F.) Reflects the elimination of certain third-party leasing and property
management income of Crocker not retained by the Company ($1,824) and the
elimination of interest income on short-term investments advanced to a wholly
owned subsidiary (the "Merger Subsidiary") in connection with the Crocker Merger
($2,219).
(G.) Reflects the net adjustment to rental property expenses to eliminate
the costs related to certain assets (primarily land held for development) which
were retained by the prior shareholders of Crocker ($800) and to eliminate
certain other property operating costs (primarily personnel and office costs for
duplicative property management operations) which have been eliminated upon the
completion of the Crocker Merger ($840).
(H.) Represents the net adjustment to depreciation expense based upon an
assumed allocation of the purchase price to land, buildings and development in
process and building depreciation computed on a straight-line basis using an
estimated life of 40 years for buildings and 7 years for furniture, fixtures and
equipment as follows:
<TABLE>
<S> <C>
Eakin & Smith Transaction.................... $ (73)
Crocker Merger............................... 424
Total................................. $(351)
</TABLE>
(I.) Represents the net adjustment to interest expense to reflect interest
costs on the net incremental borrowings related to the Eakin & Smith
Transaction, the Crocker Merger (including effects of refinancing of certain
Crocker mortgage debt with borrowings under a $280 million revolving loan (the
"Revolving Loan")) and the issuance of 11,750,000 shares of common stock. The
adjustments are as follows:
<TABLE>
<S> <C>
Eakin & Smith Transaction (1).............. $ 468
Crocker Merger (2)......................... (2,222)
Total............................... $(1,754)
</TABLE>
(1) $26.6 million in incremental borrowing in the Eakin & Smith Transaction
at an average rate under the Revolving Loan of 7% for three months.
11
<PAGE>
(2) The incremental effect of refinancing mortgage debt with an average
outstanding balance of $104,000 and an average rate of 10% with
borrowings under the Revolving Loan with an average rate of 7% for the
for period from January 1, 1996 to September 30, 1996.
(J.) Represents the incremental adjustment to amortization to reflect the
commitment fee on the Revolving Loan and the reduction in the amortization to
reflect the Crocker mortgage loans repaid.
(K.) Represents the net adjustment to general administrative expense to
reflect the estimated incremental costs (primarily salaries) to the Operating
Partnership of operating a Nashville division and to reflect the elimination of
certain costs (primarily executive salaries, administrative costs, the expenses
incurred to generate third-party revenue and the expenses to operate the public
entity) of Crocker not expected to be incurred by the Operating Partnership as
follows (in thousands):
<TABLE>
<S> <C>
Eakin & Smith Transaction.................. $ 47
Crocker Merger............................. (3,863)
Total............................... $(3,816)
</TABLE>
(L.) Reflects the net adjustment to minority interest to reflect the pro
forma minority interest percentage of 12.1%.
12
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HIGHWOODS PROPERTIES, INC.
PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA CROCKER TRANSACTION
ADJUSTMENTS PRE-CROCKER AND EAKIN & SMITH CROCKER PRE-ACQUISITION
HISTORICAL TRANSACTIONS EAKIN & SMITH TRANSACTIONS HISTORICAL RESULTS PRO FORMA
(A) (B) PRO FORMA (C) (D) (E) ADJUSTMENTS
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Rental property....... $ 71,217 $ 17,020 $88,237 $ 9,222 $ 42,489 $23,985 $ 1,200(F)
Other income.......... 2,305 50 2,355 2,542 1,777 2,380 (2,628)(G)
73,522 17,070 90,592 11,764 44,266 26,365 (1,428)
OPERATING EXPENSES:
Rental property....... 17,049 4,426 21,475 2,977 13,601 9,619 (2,030)(H)
Depreciation and
amortization......... 11,082 2,868 13,950 1,956 6,773 4,881 (972)(I)
Interest expense:
Contractual.......... 12,101 2,876 14,977 2,161 16,214 5,689 387(J)
Amortization of
deferred financing
costs............... 1,619 46 1,665 -- 594 -- 312(K)
13,720 2,922 16,642 2,161 16,808 5,689 699
General and
administrative....... 2,737 181 2,918 763 2,813 2,376 (4,652)(L)
Income before minority
interest............. 28,934 6,673 35,607 3,907 4,271 3,800 5,527
Minority interest..... (4,937) (760) (5,697) (730)(M)
Income before
extraordinary
item................ $ 23,997 $ 5,913 $29,910 $ 3,907 $ 4,271 $ 3,800 $ 4,797
Net income per
share...............
Weighted average
shares..............
<CAPTION>
PRO FORMA
<S> <C>
REVENUE:
Rental property....... $165,133
Other income.......... 6,426
171,559
OPERATING EXPENSES:
Rental property....... 45,642
Depreciation and
amortization......... 26,588
Interest expense:
Contractual.......... 39,428
Amortization of
deferred financing
costs............... 2,571
41,999
General and
administrative....... 4,218
Income before minority
interest............. 53,112
Minority interest..... (6,427 )
Income before
extraordinary
item................ $ 46,685
Net income per
share............... $ 1.47
Weighted average
shares.............. 31,788
</TABLE>
See Notes to Pro Forma Condensed Combining Statement of Operations.
13
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO THE PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED, IN THOUSANDS, EXCEPT UNIT DATA)
(A.) Represents the Company's historical statement of operations contained
in its Annual Report on Form 10-K for the year ended December 31, 1995.
(B.) Reflects the February 1995 Offering and the August 1995 offering and
the historical operations of Forsyth Properties, Inc. and its affiliates, the
Research Commons Properties and the Other 1995 Acquisitions, adjusted on a pro
forma basis for interest and depreciation expense, for the period of time during
1995 prior to their acquisition by the Company.
(C.) Represents the historical statement of operations of Eakin & Smith for
the year ended December 31, 1995.
(D.) Represents the historical statement of operations of Crocker contained
in its Annual Report on Form 10-K for the year ended December 31, 1995.
(E.) Reflects the historical operations of Crocker Realty Investors, Inc.,
Crocker & Sons, Inc., Crocker Realty Management Services, Inc., the Sabal
properties and the Towermarc properties, adjusted on a pro forma basis for
interest and depreciation expense, for the period of time during 1995 prior to
their acquisition by Crocker. Interest expense reflects incremental indebtedness
of approximately $97,400 for the first half of 1995 at an average rate of 9.94%
and $57,800 for the second half of 1995 at an average rate of 9.70% plus loan
cost amortization of $292. Historical indebtedness was also reduced by $20,000
which was prepaid on December 28, 1995 using the proceeds of a private
placement. The $20,000 had a fixed rate of interest of 11.5%. Depreciation is
calculated using the respective purchase prices allocated to buildings, site
improvements and tenant improvements with depreciation calculated on a
straight-line basis over useful lives of 40 years, 15 years, and the life of the
respective leases, respectively.
(F.) Reflects incremental rental income from a supplemental lease agreement
entered into in connection with the Crocker Merger. This agreement was a
condition of the Crocker Merger.
(G.) Reflects the elimination of certain third-party leasing and property
management income of Crocker not retained by the Company.
(H.) Reflects the net adjustment to rental property expenses to eliminate
the costs related to certain assets (primarily land held for development)
distributed to the stockholders of Crocker ($800) and for other property
operating costs (primarily personnel and office expenses related to duplicative
property management operations) eliminated upon the completion of the Crocker
Merger ($1,230).
(I.) Represents the net adjustment to depreciation expense based upon an
assumed allocation of the purchase price to land, buildings, furniture, fixtures
and equipment and development in process and building depreciation computed on a
straight-line basis using an estimated life of 40 years for buildings and 7
years for furniture, fixtures and equipment as follows (in thousands):
<TABLE>
<S> <C>
Eakin & Smith Transaction.................... $(145)
Crocker Merger............................... (827)
Total................................. $(972)
</TABLE>
(J.) Represents the net adjustment to interest expense to reflect interest
costs on borrowings under the Revolving Loan at an assumed rate of 7.0% capped
(the effective interest rate based on a 30-day LIBOR rate of 5.50% plus 1.50%)
and assumed debt as follows (in thousands):
<TABLE>
<S> <C>
Eakin & Smith Transaction (1).............. $ 2,667
Crocker Merger (2)......................... (2,280)
Total............................... $ 387
</TABLE>
(1) $26,653 of borrowings under the Revolving Loan at 7% plus $10,075 of
assumed debt at 8.0%.
14
<PAGE>
(2) The incremental effect of $10,231 of borrowings under the Revolving
Loan at 7% and the effect of refinancing mortgage debt with an
outstanding balance of $100,000 and an average rate of 10% with
borrowings under the Revolving Loan with an average rate of 7%.
(K.) Represents the amortization of the commitment fee ($937) on the
Revolving Loan over the 36-month period.
(L.) Represents the net adjustment to general administrative expense to
reflect the estimated incremental costs to the Company of operating a Nashville
division (primarily salaries) and to reflect the elimination of certain costs
(primarily executive salaries ($1,020), administrative costs ($1,875), the
expenses incurred to generate third-party revenue ($994) and the expenses of
operating as a public entity ($800) of Crocker not expected to be incurred by
the Company as follows (in thousands):
<TABLE>
<S> <C>
Eakin & Smith Transaction.................. $ 37
Crocker Merger............................. (4,689)
Total............................... $(4,652)
</TABLE>
(M.) Reflects the net adjustment to minority interest to reflect the pro
forma minority interest of 12.1%.
15
<PAGE>
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 Highwoods
Properties, Inc.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996
Revenues from rental operations increased $13.4 million, or 68%, from $19.7
million for the three months ended September 30, 1995 to $33.1 million for the
three months ended September 30, 1996. The increase is a result of the
properties acquired in subsequent periods in 1995 as well as the April 1, 1996,
acquisition of the 848,000-square foot Eakin & Smith portfolio in Nashville,
Tennessee. The Crocker Merger did not materially impact revenues for the quarter
because the closing occurred at the end of the quarter.
During the three months ended September 30, 1996, 137 leases representing
981,436 square feet of office and industrial space commenced at an average rate
per square foot 8.0% higher than the average rate per square foot on the expired
leases. Interest and other income increased $2.4 million from $887,000 for the
three months ended September 30, 1995 to $3.3 million for the three months ended
September 30, 1996. The increase is related to an increase in cash available for
investment from the Summer 1996 Offerings. Third-party management and leasing
fees derived primarily from the Eakin & Smith service operations also
contributed to the increase in other income.
Rental operating expenses increased $4.3 million, or 91%, from $4.7 million
for the three months ended September 30, 1995 to $9.0 million for the three
months ended September 30, 1996. The increase is a result of additional
properties acquired in 1995 and 1996. Rental operating expenses as a percentage
of related revenues increased from 23.9% for the three months ended September
30, 1995 to 27.2% for the three months ended September 30, 1996. This increase
is a result of an increase in the percentage of office properties in the
portfolio, which have fewer "triple net" leases.
Depreciation and amortization for the three months ended September 30, 1996
and 1995 was $5.5 million and $3.1 million, respectively. The increase of $2.4
million, or 77%, is due to an increase in depreciable assets. Interest expense
increased $1.8 million, or 43%, from $4.2 million for the three months ended
September 30, 1995 to $6.0 million for the three months ended September 30,
1996. The increase is attributable to the increase in outstanding indebtedness
related to the Company's acquisition and development activities. Interest
expense for the three months ended September 30, 1996 and 1995 included $461,000
and $385,000, respectively, of amortization of non-cash deferred financing costs
and the costs related to the Company's interest rate protection agreement.
General and administrative expenses increased from 3.5% of rental revenue for
the three months ended September 30, 1995 to 4.9% for the three months ended
September 30, 1996. The increase is attributable to the addition of two regional
offices as a result of acquisitions in Richmond and Nashville. The duplication
of personnel during the integration of the acquisition of Crocker also
contributed to the increase in general and administrative expenses. Such
duplicative costs are expected to be eliminated in the fourth quarter of 1996 as
the Company realizes the planned synergies from the Crocker Merger.
Net income before minority interest and extraordinary item equaled $14.2
million and $7.9 million for the three-month periods ended September 30, 1996
and 1995, respectively. The extraordinary item consisted of prepayment penalties
incurred in connection with the extinguishment of certain debt assumed in the
Crocker Merger. The Company's net income allocated to the minority interest
totaled $1.9 million and $1.4 million for 1996 and 1995, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 1996
Revenue from rental operations increased $33.8 million, or 68%, from $49.6
million for the first nine months of 1995 to $83.4 million for the first nine
months of 1996. The increase is a result of the properties
16
<PAGE>
acquired during February 1995, which only contributed partially to revenue in
1995, as well as the acquisitions made in subsequent periods in 1995 and during
the nine months ended September 30, 1996. In total, 147 properties encompassing
6.5 million square feet were added to the portfolio in 1995 and 89 properties
encompassing 7.5 million square feet were added in the first nine months of
1996.
During the nine months ended September 30, 1996, 390 leases representing
2.4 million square feet of office and industrial space commenced at an average
rate per square foot 6.2% higher than the average rate per square foot on the
expired leases. Interest and other income increased $3.1 million from $1.3
million for the first nine months of 1995 to $4.4 million for the first nine
months of 1996. The increase is related to an increase in cash available for
investment for the nine months ended September 30, 1996 from the Summer 1996
Offerings and an increase in third-party management and leasing income.
Rental operating expenses increased $10.3 million, or 87%, from $11.9
million for the first nine months of 1995 to $22.2 million for the first nine
months of 1996. Rental expenses as a percentage of related rental revenues
increased from 24.0% for the first nine months of 1995 to 26.6% for the first
nine months of 1996. The increase is a result of an increase in the percentage
of office properties in the portfolio, which have fewer "triple net" leases, and
approximately $300,000 in additional expenses relating to snow removal and the
severe winter weather in 1996. Depreciation and amortization for the nine months
ended September 30, 1996 and 1995 was $13.4 million and $7.6 million,
respectively. The increase of $5.8 million, or 76%, is due to the increase in
depreciable assets noted above. Interest expense increased $5.2 million, or 53%,
from $9.9 million for the first nine months of 1995 to $15.1 million for the
first nine months of 1996. The increase is attributable to the increase in
outstanding debt related to the Company's acquisition and development
activities. Interest expense for the nine months ended September 30, 1996 and
1995 included $1.3 million and $1.2 million, respectively, of amortization of
non-cash deferred financing costs and of the costs related to the Company's
interest rate protection agreements. General and administrative expenses
increased from 3.7% of total rental revenue in 1995 to 4.7% in 1996. This
increase is attributable to the addition of two regional offices associated with
the Richmond and Nashville acquisitions. The duplication of certain personnel
costs during the acquisition of Crocker also contributed to higher general and
administrative expenses for the nine months ended September 30, 1996. Such
duplicative costs are expected to be eliminated in the fourth quarter of 1996 as
the Company realizes the planned synergies from the Crocker Merger.
Net income before minority interest and extraordinary item equaled $33.4
million and $19.6 million for the nine-month periods ended September 30, 1996
and 1995, respectively. The extraordinary item consisted of prepayment penalties
incurred in connection with the extinguishment of certain debt assumed in the
Crocker Merger. The Company's net income allocated to the minority interest
totaled $5.2 million and $3.5 million for 1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $47.9 million in cash flow from operating activities
and $381.2 million in cash flow from financing activities for the nine months
ended September 30, 1996. The cash flow from financing activities is a result of
the issuance of 11.75 million shares of the Company's common stock in the Summer
1996 Offerings. The Company utilized $416.7 million of this cash flow to invest
in real property assets, primarily development in process, an acquisition of an
848,000-square foot office portfolio in Nashville, Tennessee through the Eakin &
Smith Transaction and the acquisition of Crocker.
CAPITALIZATION
The Company's total indebtedness at September 30, 1996 totaled $597.7
million and was comprised of $300.7 million of conventional fixed rate mortgage
indebtedness with an average rate of 8.2%, $47.0 million outstanding under
variable rate mortgages (see below for a discussion of interest rate protection
agreements), $245.0 million under the Company's $280 million unsecured Revolving
Loan and a 9%, $5.0 million unsecured note.
The Revolving Loan requires monthly payments of interest only, with the
balance of all principal and accrued but unpaid interest due on October 31,
1999. The initial interest rate on the Revolving Loan is LIBOR plus 150 basis
points and will adjust based on the Company's senior unsecured credit rating
within
17
<PAGE>
a range of LIBOR plus 100 basis points to LIBOR plus 175 basis points. At
September 30, 1996, one-month LIBOR was 5.43%.
To protect the Company from increases in interest expense due to
fluctuations in its variable rate mortgages and Revolving Loan, the Company: (i)
purchased an interest rate collar limiting its exposure to an increase in
one-month LIBOR to 5.4% with respect to $80 million of the $280 million
Revolving Loan, (ii) entered into interest rate swaps that limit its
exposure to an increase in the interest rates to 7.45% in connection with the
$47.0 million variable rate mortgages, and (iii) entered into three separate
forward-starting interest rate swap agreements in the aggregate amount of $125
million to limit its exposure to rising interest rates in connection with the
offering of $200 million unsecured non-convertible debt securities of the
Operating Partnership (the "Offering"). It is the Company's intent to terminate
these agreements at the time of the Offering in order to effectively lock the
interest rate on the underlying seven and ten-year treasury notes at
approximately 6.75% and 6.72%, respectively. The interest rate on the Company's
variable rate debt is adjusted at monthly intervals, subject to its interest
rate protection program. The Company is exposed to certain losses in the event
of non-performance by the counterparties under the collar and swap arrangements.
The counterparties are major financial institutions and are expected to fully
perform under the agreements. However, if they were to default on their
obligations under the arrangements, the Company could be required to pay the
full rate under the Revolving Loan and the variable rate mortgages, even if such
rate were in excess of the rate in the collar and swap agreements. In addition,
the Company may incur other variable rate indebtedness in the future. Increases
in interest rates on its indebtedness could increase the Company's interest
expense and could adversely affect the Company's cash flow.
Historically, rental revenue has been the principal source of funds to pay
operating expenses, debt service and capital expenditures, excluding
non-recurring capital expenditures. In addition, construction management,
maintenance, leasing and management fees have provided sources of cash flow. The
Company presently has no plans for major capital improvements to its developed
properties, other than normal recurring non-revenue-enhancing expenditures. The
Company expects to meet its short-term liquidity requirements generally through
its working capital and net cash provided by operating activities along with the
borrowings under the Revolving Loan. The Company expects to meet certain of its
financing requirements through long-term secured and unsecured borrowings and
the issuance of debt securities or additional equity securities of the Company.
In addition, the Company anticipates utilizing the Revolving Loan to fund
construction and development activities. The Company does not intend to reserve
funds to retire indebtedness under the Revolving Loan upon maturity. Instead,
the Company will seek to refinance such debt at maturity or retire such debt
through the issuance of additional equity or debt securities. The Company
anticipates that its 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 the capital and liquidity needs of the Company
in both the short and long-term.
In order to qualify as a REIT for Federal income tax purposes, the Company
is required to make distributions to its stockholders of at least 95% of REIT
taxable income. The Company expects to use its cash flow from operating
activities for distributions to stockholders and for payment of recurring, non-
incremental revenue-generating expenditures. The Company intends to invest
amounts accumulated for distribution in short-term investments. The following
factors will affect cash flows from operating activities and, accordingly,
influence the decisions of the Board of Directors regarding distributions: (i)
debt service requirements after taking into account the repayment and
restructuring of certain indebtedness; (ii) scheduled increases in base rents of
existing leases; (iii) changes in rents attributable to the renewal of existing
leases or replacement leases; (iv) changes in occupancy rates at existing
properties and procurement of leases for newly acquired or developed properties;
and (v) operating expenses and capital replacement needs.
FUNDS FROM OPERATIONS AND CASH AVAILABLE FOR DISTRIBUTIONS
The Company considers 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. Funds from Operations does
not represent net income or cash flows from operations as defined by GAAP, and
FFO should not be considered as an alternative to net
18
<PAGE>
income as an indicator of the Company's operating performance or as an
alternative to cash flows as a measure of liquidity. Funds from Operations does
not measure whether cash flow is sufficient to fund all of the Company's cash
needs including principal amortization, capital improvements and distributions
to shareholders. Funds from Operations does not represent cash flows from
operating, investing or financing activities as defined by GAAP. Further, FFO as
disclosed by other REITs may not be comparable to the Company's calculation of
FFO, as described below.
Funds from operations is defined as net income (computed in accordance with
generally accepted accounting principles) excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation of real estate assets,
and after adjustments for unconsolidated partnerships and joint ventures. In
March 1995, 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.
Funds from operations and cash available for distribution for the three and
nine months ended September 30, 1996 and 1995 are summarized in the following
table (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
FUNDS FROM OPERATIONS:
Income before minority interest and extraordinary item........ $14,223 $ 7,939 $33,359 $19,647
Add (deduct):
Depreciation and amortization............................... 5,459 3,069 13,357 7,612
Minority interest in Crocker's depreciation................. (117) -- (117) --
Third-party service company cash flow....................... 75 45 330 (60)
FUNDS FROM OPERATIONS BEFORE MINORITY INTEREST........... 19,640 10,963 46,929 27,199
CASH AVAILABLE FOR DISTRIBUTION:
Add (deduct):
Rental income from straight-line rents...................... (837) (368) (1,752) (898)
Amortization of deferred financing costs.................... 461 385 1,288 1,215
Non-incremental revenue generating capital expenditures (1):
Building improvements paid............................... (818) (297) (2,018) (838)
Second generation tenant improvements paid............... (864) (475) (2,172) (1,388)
Second generation lease commissions paid................. (477) (314) (1,056) (746)
CASH AVAILABLE FOR DISTRIBUTION........................ $17,105 $ 9,894 $41,219 $24,544
Weighted average shares/units outstanding (2)................. 35,895 20,512 27,748 17,301
DIVIDEND PAYOUT RATIO:
Funds from operations....................................... 87.7% 84.2% 81.6% 82.7%
Cash available for distribution............................. 100.7% 93.3% 92.9% 91.6%
</TABLE>
(1) Amounts represent cash expenditures.
(2) Assumes conversion of limited partnership units in the Operating Partnership
to shares of the Company. Minority interest unit holders and the
shareholders of the Company share equally on a per share and per unit basis;
therefore, the resultant per share information is unaffected by the
conversion.
On November 4, 1996, the Company's Board of Directors declared a dividend
of $.48 per share ($1.92 on an annualized basis) payable on November 22, 1996 to
stockholders of record on November 14, 1996.
ACQUISITION OF CROCKER REALTY TRUST, INC.
On September 20, 1996, the Company acquired Crocker Realty Trust, Inc.
through a merger. Agreement on the terms of the Crocker Merger was reached on
April 29, 1996. At that time, the Company and the
19
<PAGE>
Merger Subsidiary entered into a Stock Purchase Agreement with certain
controlling shareholders of Crocker (the "Sellers") to purchase all of the
Sellers' shares of common stock of Crocker (the "Shares"). The Company and the
Merger Subsidiary also entered into an Agreement and Plan of Merger with Crocker
(the "Merger Agreement"). The Merger Agreement provided that the Merger
Subsidiary would be merged into Crocker, with Crocker as the surviving entity.
On September 6, 1996, the Company closed the acquisition of the Shares. The
purchase price was $249.1 million ($11.05 per Share) and included, as
contemplated by the Stock Purchase Agreement, the $1.1 million purchase of
1,056,000 options to purchase shares of Crocker owned by the Sellers.
The Crocker Merger was consummated on September 20, 1996 following its
approval at a special meeting of the shareholders of Crocker. All shares of
common stock of Crocker (other than those held by the Company) were converted
into and represented a right to receive $11.05 per share. Following the Crocker
Merger, the Company entered into various restructuring transactions culminating
in the contribution by the Company of Crocker's assets and liabilities to the
Operating Partnership. As a result of the Crocker Merger and subsequent
transactions, substantially all of the assets and liabilities of Crocker at the
time of the Crocker Merger are the assets and liabilities of the Operating
Partnership. The total cost of the acquisition of all of the outstanding shares
of Crocker was approximately $565.8 million, which included the assumption of
$243 million of Crocker debt discussed below.
Other than a $140 million mortgage note (the "Mortgage Note"), all of the
debt assumed in the Crocker Merger was repaid by the Operating Partnership using
funds available under the Revolving Loan. The Mortgage Note is secured by 46 of
the Crocker Properties (the "Mortgage Note Properties"), which are held by AP
Southeast Portfolio Partners, L.P. (the "Financing Partnership"). The Operating
Partnership has a 99.99% economic interest in the Financing Partnership, which
is managed, indirectly, by the Company. The Mortgage Note is a conventional,
monthly pay, first mortgage note in the principal amount of $140 million issued
by the Financing Partnership. The Mortgage Note is a limited recourse obligation
of the Financing Partnership as to which, in the event of a default under the
indenture or the mortgage, recourse may be had only against the Mortgage Note
Properties and other assets that have been pledged as security therefor. The
Mortgage Note was issued to Kidder Peabody Acceptance Corporation I pursuant to
an indenture, dated March 1, 1994 (the "Mortgage Note Indenture"), among the
Financing Partnership, Bankers Trust Company of California, N.A., and Bankers
Trust Company.
The Mortgage Note bears interest on its outstanding principal balance at
the rate of 7.88% per annum, subject to increase in the event of a default in
the payment of any amount due, and matures on January 3, 2001. The Mortgage Note
provides for scheduled monthly payments of interest only, which are due on the
first business day of each calendar month.
The Mortgage Note Indenture provides for a lockout period that prohibits
optional redemption payments in respect of principal of the Mortgage Note (other
than a $7 million premium-free redemption payment) prior to November 22, 1998.
Thereafter, the Financing Partnership may make optional redemption payments in
respect of principal of the Mortgage Note on any distribution date, subject to
the payment of a yield maintenance charge in connection with such payments made
prior to August 1, 2000.
Under the terms of the purchase agreement relating to the Mortgage Note
Properties, the Financing Partnership may be obligated to pay NationsBank, N.A.
a deferred contingent purchase price. This contingent payment, which will in no
event exceed $4.4 million, is due on April 1, 1998 if the actual four-year
cumulative cash flow of such Properties exceeds the projected four-year
cumulative cash flow. Based on the estimates of future operations, the Operating
Partnership does not believe that any deferred contingent purchase principal
price will be payable.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements are identified by
words such as "expect," "anticipate," "should" and words of similar import.
Forward-looking statements are inherently subject to risks and uncertainties,
many of which cannot be predicted with accuracy and some of which might not even
be anticipated. Future events and actual results,
20
<PAGE>
financial and otherwise, may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Management's Discussion and Analysis
of Results of Operations and Financial Condition."
PROPERTY INFORMATION
The following table sets forth certain information with respect to the
Company's properties as of September 30, 1996:
<TABLE>
<CAPTION>
RENTABLE NUMBER OF PERCENT LEASED/
SQUARE FEET PROPERTIES PRE-LEASED
<S> <C> <C> <C>
IN-SERVICE:
Office............................................................. 11,721,000 170 93%
Industrial......................................................... 5,015,000 110 89%
Total........................................................... 16,736,000 280 91%
UNDER DEVELOPMENT:
Office............................................................. 967,000 14 55%
Industrial......................................................... 286,000 3 29%
Total........................................................... 1,253,000 17 49%
TOTAL:
Office............................................................. 12,688,000 184
Industrial......................................................... 5,301,000 113
Total........................................................... 17,989,000 297
</TABLE>
21
<PAGE>
The following table sets forth certain information with respect to the
Company's properties under development as of September 30, 1996 (dollars in
thousands):
<TABLE>
<CAPTION>
RENTABLE COST ESTIMATED
SQUARE ESTIMATED INCURRED PRE-LEASING COMPLETION
LOCATION FEET COST TO DATE PERCENTAGE DATE
<S> <C> <C> <C> <C> <C> <C>
OFFICE PROPERTIES:
Highwoods Plaza I................ Nashville, TN 103,000 $ 11,500 $ 6,759 80% 4Q 96
Center Point II.................. Columbia, SC 81,000 7,600 4,856 46 4Q 96
MSA.............................. Research Triangle 55,000 6,200 3,741 100 4Q 96
Hewlett Packard.................. Charlotte, NC 35,000 3,100 939 41 4Q 96
Inacom........................... Piedmont Triad 13,000 900 541 100 4Q 96
One Shockoe Plaza................ Richmond, VA 118,000 15,400 13,388 100 1Q 97
North Park....................... Research Triangle 43,000 4,000 542 38 1Q 97
Sycamore......................... Research Triangle 70,000 6,400 776 -- 2Q 97
Two AirPark East................. Piedmont Triad 57,000 4,600 409 -- 2Q 97
AirPark East-Simplex............. Piedmont Triad 12,000 900 10 60 2Q 97
Center Point V................... Columbia, SC 19,000 1,700 279 35 2Q 97
Highwoods Plaza II............... Nashville, TN 102,000 10,300 1,774 -- 3Q 97
Highwoods Two.................... Richmond, VA 74,000 7,000 14 -- 3Q 97
Clintrials....................... Research Triangle 185,000 21,500 -- 100 2Q 98
OFFICE TOTAL OR WEIGHTED
AVERAGE........................ 967,000 $ 101,100 $ 34,028 55%
INDUSTRIAL PROPERTIES:
Regency Two...................... Piedmont Triad 96,000 2,800 1,849 40 4Q 96
Highwoods Airport Center......... Richmond 145,000 5,500 1,368 -- 2Q 97
R.F. Micro Devices............... Piedmont Triad 45,000 7,000 -- 100 4Q 97
INDUSTRIAL TOTAL OR WEIGHTED
AVERAGE........................ 286,000 $ 15,300 $ 3,217 29%
TOTAL OR WEIGHTED AVERAGE...... 1,253,000 $ 116,400 $ 37,245 49%*
</TABLE>
* Improves to 65% when letters of intent for space are included.
22
<PAGE>
The following tables set forth certain information about the Company's
leasing activities for the three and nine months ended September 30, 1996.
<TABLE>
<CAPTION>
OFFICE INDUSTRIAL
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1996 1996
<S> <C> <C> <C> <C>
NET EFFECTIVE RENTS RELATED TO RE-LEASED SPACE:
Number of lease transactions (signed leases)...... 77 213 60 177
Rentable square footage leased.................... 276,916 687,993 704,520 1,758,024
Average per rentable square foot over the lease
term:
Base rent....................................... 14.80 14.91 4.16 4.36
Tenant improvements............................. (1.21) (0.97) (0.08) (0.12)
Leasing commissions............................. (0.32) (0.32) (0.07) (0.10)
Rent concessions................................ -- -- -- --
Effective rent.................................. $ 13.27 $ 13.62 $ 4.01 $ 4.14
Expense stop.................................... (3.30) (3.28) (0.46) (0.37)
Equivalent effective net rent................... $ 9.97 $ 10.34 $ 3.55 $ 3.77
Average term in years............................. 4 4 2 2
RENTAL RATE TRENDS:
Average final rate with expense pass
throughs........................................ $ 13.21 $ 13.54 $ 3.85 $ 4.20
Average first year cash rental rate............... $ 14.34 $ 14.43 $ 4.13 $ 4.44
Percentage increase............................... 8.56% 6.59% 7.24% 5.65%
CAPITAL EXPENDITURES RELATED TO RE-LEASED OFFICE
SPACE:
Tenant Improvements:
Total dollars committed under signed
leases....................................... $ 1,357,220 $ 2,716,600 $ 104,958 $ 380,862
Rentable square feet............................ 276,916 687,993 704,520 1,758,024
Per rentable square foot........................ $ 4.90 $ 3.95 $ 0.15 $ 0.22
Leasing Commissions:
Total dollars committed under signed
leases....................................... $ 363,859 $ 891,751 $ 92,701 $ 328,924
Rentable square feet............................ 276,916 687,993 704,520 1,758,024
Per rentable square foot........................ $ 1.31 $ 1.30 $ 0.13 $ 0.19
Total:
Total dollars committed under signed
leases....................................... $ 1,721,078 $ 3,608,351 $ 197,659 $ 709,786
Rentable square feet............................ 276,916 687,993 704,520 1,758,024
Per rentable square foot........................ $ 6.22 $ 5.24 $ 0.28 $ 0.40
</TABLE>
23
<PAGE>
The following tables set forth scheduled lease expirations for executed
leases as of September 30, 1996 assuming no tenant exercises renewal options.
OFFICE PROPERTIES:
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL PERCENTAGE OF PERCENTAGE OF RENTAL RATE
RENTABLE LEASED SQUARE FOOTAGE ANNUAL RENTS LEASED RENTS (1)
YEAR OF LEASE NUMBER OF SQUARE FEET REPRESENTED BY UNDER EXPIRING REPRESENTED BY FOR
EXPIRATION LEASES EXPIRING EXPIRING LEASES LEASES (1) EXPIRING LEASES EXPIRATIONS
<S> <C> <C> <C> <C> <C> <C>
Remainder of 1996 95 266,697 2.5% $ 3,739,449 2.4% $14.02
1997 328 1,346,719 12.5 19,166,912 12.2 14.23
1998 285 1,909,516 17.7 26,665,888 16.9 13.96
1999 293 1,583,010 14.7 23,548,608 15.0 14.88
2000 241 1,665,840 15.5 24,925,928 15.8 14.96
2001 172 1,559,002 14.5 24,788,254 15.7 15.90
2002 57 770,511 7.1 11,768,912 7.5 15.27
2003 35 653,604 6.1 9,894,721 6.3 15.14
2004 11 137,094 1.3 2,034,102 1.3 14.84
2005 13 400,936 3.7 4,240,284 2.7 10.58
Thereafter 17 480,525 4.4 6,575,076 4.2 13.68
Total or average 1,547 10,773,454 100.0% $157,348,134 100.0% $14.61
</TABLE>
INDUSTRIAL PROPERTIES:
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL PERCENTAGE OF PERCENTAGE OF RENTAL RATE
RENTABLE LEASED SQUARE FOOTAGE ANNUAL RENTS LEASED RENTS (1)
YEAR OF LEASE NUMBER OF SQUARE FEET REPRESENTED BY UNDER EXPIRING REPRESENTED BY FOR
EXPIRATION LEASES EXPIRING EXPIRING LEASES LEASES (1) EXPIRING LEASES EXPIRATIONS
<S> <C> <C> <C> <C> <C> <C>
Remainder of 1996 56 503,210 11.2% $ 2,668,287 9.7% $ 5.30
1997 151 1,135,819 25.2 6,318,761 24.8 5.56
1998 112 691,557 15.3 4,509,234 17.7 6.52
1999 106 878,278 19.5 4,670,979 18.3 5.32
2000 39 574,849 12.8 3,839,827 15.1 6.68
2001 32 278,510 6.2 1,937,708 7.6 6.96
2002 3 283,962 6.3 901,263 3.5 3.17
2003 1 3,375 0.1 18,428 0.1 5.46
2004 2 2,569 0.1 21,891 0.1 8.52
2005 3 23,722 0.5 203,041 0.8 8.56
Thereafter 1 127,600 2.8 575,476 2.3 4.51
Total or average 506 4,503,451 100.0% $ 25,664,895 100.0% $ 5.70
</TABLE>
(1) Includes operating expense pass throughs and excludes the effect of future
contractual rent increases.
THIRD-PARTY SERVICE OPERATIONS
The Company, through the Service Companies and Forsyth-Carter Brokerage
L.L.C., provides brokerage services as well as management, development,
construction and other related services for properties owned by third parties.
The Company currently provides third-party management services for 34 buildings
totaling approximately 2.6 million rentable square feet and exclusive leasing
services for 37 buildings, totaling approximately 3.4 million rentable square
feet.
INFLATION
Historically inflation has not had a significant impact on the Company's
operations because of the relatively low inflation rate in the Company's
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 the
Company's 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 the Company to replace existing leases with new leases at a higher base
rent if rents on the existing leases are below the market rate.
24
<PAGE>
PART II -- OTHER INFORMATION
<TABLE>
<S> <C>
Item 1. Legal Proceedings -- None
Item 2. Changes in Securities -- None
Item 3. Defaults Upon Senior Securities -- None
Item 4. Submission of Matters to a Vote of Security Holders
</TABLE>
<TABLE>
<S> <C>
Item 5. Other Information -- None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C> <C> <C> <C>
10.1 Credit Agreement among Highwoods/Forsyth Limited Partnership, Highwoods
Properties, Inc., NationsBank, N.A., First Union National Bank and the other
lenders named therein dated as of September 27, 1996 (incorporated by reference
to the Operating Partnership's 8-K dated September 27, 1996).
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated September 27, 1996,
which reported the closing of the acquisition of Crocker under item 5. (The
acquisition had been previously reported under item 2 upon entering into the
acquisition agreements.)
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HIGHWOODS PROPERTIES, INC.
/s/ RONALD P. GIBSON
RONALD P. GIBSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/s/ CARMAN J. LIUZZO
CARMAN J. LIUZZO
CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
Date: November 14, 1996
26
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 30,837,000 30,837,000
<SECURITIES> 0 0
<RECEIVABLES> 13,674,000 13,674,000
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 43,275,000 43,275,000
<PP&E> 1,354,746,000 1,354,746,000
<DEPRECIATION> 33,988,000 33,988,000
<TOTAL-ASSETS> 1,380,910,000 1,380,910,000
<CURRENT-LIABILITIES> 28,767,000 28,767,000
<BONDS> 597,734,000 597,734,000
0 0
0 0
<COMMON> 318,000 318,000
<OTHER-SE> 754,091,000 754,091,000
<TOTAL-LIABILITY-AND-EQUITY> 1,380,910,000 1,380,910,000
<SALES> 33,076,000 83,366,000
<TOTAL-REVENUES> 36,329,000 87,766,000
<CGS> 9,015,000 22,210,000
<TOTAL-COSTS> 14,474,000 35,567,000
<OTHER-EXPENSES> 1,632,000 3,766,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,000,000 15,074,000
<INCOME-PRETAX> 14,223,000 33,359,000
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 12,342,000 28,154,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 2,140,000 2,140,000
<CHANGES> 0 0
<NET-INCOME> 10,202,000 24,014,000
<EPS-PRIMARY> .32 1.10
<EPS-DILUTED> .32 1.10
</TABLE>
