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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, 1996
Commission file number: 001-13100
HIGHWOODS PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
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MARYLAND 56-1871668
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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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 31,784,220 shares outstanding as of August 9, 1996.
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HIGHWOODS PROPERTIES, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 1996
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements 3
Consolidated balance sheets of Highwoods Properties, Inc. as of June 30, 1996 and December 4
31, 1995
Consolidated statements of income of Highwoods Properties, Inc. for the three and six month 5
periods ended June 30, 1996 and 1995
Consolidated statements of cash flows of Highwoods Properties, Inc. for the six months ended 6
June 30, 1996 and 1995
Notes to the consolidated financial statements of Highwoods Properties, Inc. 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Overview and Background 9
Results of Operations 9
Liquidity and Capital Resources 10
Recent Developments 12
Funds From Operations and Cash Available for Distribution 12
Property Information 14
Third-Party Service Operations 16
Inflation 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
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2
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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)
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JUNE 30, 1996 DECEMBER 31, 1995
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(UNAUDITED)
ASSETS
Real estate assets, at cost:
Land........................................................................ $ 132,991 $ 106,955
Buildings................................................................... 578,198 491,581
Development in process...................................................... 37,752 15,508
Furniture, fixtures and equipment........................................... 1,649 1,288
750,590 615,332
Less -- accumulated depreciation (29,435) (22,266)
Net real estate assets...................................................... 721,155 593,066
Cash and cash equivalents..................................................... 227,156 6,838
Accounts and notes receivable................................................. 6,264 6,338
Notes receivable from service subsidiaries.................................... 1,377 1,274
Accrued straight line rents receivable........................................ 4,306 3,407
Other assets:
Deferred leasing costs...................................................... 5,345 4,253
Deferred financing costs and interest rate cap.............................. 9,221 8,268
Prepaid expenses and other.................................................. 2,774 1,521
17,340 14,042
Less -- accumulated amortization............................................ (5,062) (3,831)
12,278 10,211
$ 972,536 $ 621,134
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable................................................... $ 214,058 $ 182,736
Distributions payable......................................................... 17,026 --
Accounts payable, accrued expenses and other liabilities...................... 12,324 11,052
Total liabilities........................................................... 243,408 193,788
Minority interest............................................................. 83,636 73,536
Stockholders' equity:
Common stock, $.01 par value, authorized 100,000,000 shares; issued and
outstanding 31,533,970 at June 30, 1996 and 19,404,411 at December 31,
1995........................................................................ 315 194
Additional paid-in capital.................................................... 663,603 355,248
Retained deficits............................................................. (18,426) (1,632)
Total stockholders' equity.................................................. 645,492 353,810
$ 972,536 $ 621,134
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
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HIGHWOODS PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
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REVENUE:
Rental property............................................. $26,905 $17,278 $50,290 $29,971
Interest and other income................................... 775 240 1,147 393
27,680 17,518 51,437 30,364
OPERATING EXPENSES:
Rental property............................................. 7,041 4,198 13,195 7,251
Depreciation and amortization............................... 4,182 2,622 7,898 4,543
Interest expense:
Contractual.............................................. 4,705 2,842 8,247 4,908
Amortization of deferred financing costs and interest
rate cap............................................... 418 426 827 830
5,123 3,268 9,074 5,738
General and administrative.................................. 1,200 601 2,134 1,124
Income before minority interest and extraordinary item... 10,134 6,829 19,136 11,708
MINORITY INTEREST............................................. (1,753) (1,270) (3,324) (2,070)
Income before extraordinary item............................ 8,381 5,559 15,812 9,638
Extraordinary item -- loss on early extinguishment of debt.... -- -- -- (875)
Net income.................................................. $ 8,381 $ 5,559 $15,812 $ 8,763
Weighted average shares outstanding........................... 20,022 14,626 19,714 12,923
NET INCOME (LOSS) PER COMMON SHARE:
Income before extraordinary item............................ $ 0.42 $ 0.38 $ 0.80 $ 0.75
Extraordinary item -- loss on early extinguishment of
debt..................................................... $ -- $ -- $ -- $ (0.07)
Net income.................................................. $ 0.42 $ 0.38 $ 0.80 $ 0.68
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
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HIGHWOODS PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
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SIX MONTHS ENDED
JUNE 30,
1996 1995
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OPERATING ACTIVITIES:
Net income.............................................................................. $ 15,812 $ 8,763
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization......................................................... 8,725 5,373
Minority interest in income........................................................... 3,324 1,877
Changes in operating assets and
liabilities........................................................................ (353) (1,912)
Net cash provided by operating
activities....................................................................... 27,508 14,101
INVESTING ACTIVITIES:
Additions to real estate assets......................................................... (66,330) (28,927)
Proceeds from disposition of real estate assets......................................... 900 --
Cash from contributed net assets........................................................ -- 549
Cash paid in exchange for partnership net assets........................................ -- (5,793)
Other................................................................................... (2,148) (317)
Net cash used in investing activities.............................................. (67,578) (34,488)
FINANCING ACTIVITIES:
Distributions paid...................................................................... (20,912) (11,418)
Repayment of mortgages and notes payable................................................ (73,105) (125,230)
Borrowings on mortgages and notes
payable............................................................................... 62,500 47,500
Net proceeds from the sale of common
stock................................................................................. 292,858 109,589
Payment of deferred financing costs..................................................... (953) (667)
Net cash provided by financing activities.......................................... 260,388 19,774
Net increase (decrease) in cash and cash equivalents.................................... 220,318 (613)
Cash and cash equivalents at beginning of the
period................................................................................ 6,838 6,258
Cash and cash equivalents at end
of the period......................................................................... $227,156 $ 5,645
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................................................. $ 8,179 $ 4,637
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
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HIGHWOODS PROPERTIES, INC.
COMBINED 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:
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SIX MONTHS ENDED
JUNE 30,
1996 1995
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ASSETS:
Rental property and equipment, net..................................................... $70,153 $197,953
Deferred financing costs, net.......................................................... -- 842
Accounts receivable and other.......................................................... -- 6,290
Total assets......................................................................... $70,153 $205,085
LIABILITIES:
Mortgages and notes payable assumed.................................................... $41,927 $157,371
Total liabilities.................................................................... 41,927 157,371
Net assets........................................................................ $28,226 $ 47,714
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
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HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 owns the Company's properties and through
which the Company, as the sole general partner, conducts substantially all of
its operations. Per share information is calculated using the weighted average
number of shares outstanding.
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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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 JUNE 30, 1996
Revenues from rental operations increased $9.6 million, or 55%, from $17.3
million in 1995 to $26.9 million in 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 and Smith portfolio. Same property
(the 108 properties owned on April 1, 1995) revenues increased 1.5% for the
three months ended June 30, 1996, compared to the same three months of 1995.
Expected vacancies in two of the Company's properties offset a 3% increase in
the revenues of the other 106 properties.
During the three months ended June 30, 1996, 132 leases representing
665,262 square feet of office and industrial space commenced at an average rate
per square foot 5.7% higher than the average rate per square foot on the expired
leases. Interest and other income increased $535,000 from $240,000 in 1995 to
$775,000 in 1996. The increase is related to an increase in cash available for
investment from the June 20, 1996 equity offering. Third-party management and
leasing fees derived primarily from the Eakin and Smith service operations also
contributed to the increase in other income.
Rental operating expenses increased $2.8 million, or 67%, from $4.2 million
in 1995 to $7.0 million in 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 24.3% in 1995 to 26.2% in 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 June 30, 1996 and
1995 was $4.2 million and $2.6 million, respectively. The increase of $1.6
million, or 62%, is due to an increase in depreciable assets. Interest expense
increased $1.8 million, or 55%, from $3.3 million in 1995 to $5.1 million in
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 June 30, 1996 and 1995 included $418,000 and
$426,000, 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 in 1995 to
4.5% in 1996. The increase is attributable to the addition of two regional
offices as a result of acquisitions in Richmond and Nashville.
Net income before minority interest and extraordinary item equaled $10.1
million and $6.8 million for the three-month periods ended June 30, 1996 and
1995, respectively. The Operating Partnership's net income allocated to the
minority interest totaled $1.8 million and $1.3 million for 1996 and 1995,
respectively.
SIX MONTHS ENDED JUNE 30, 1996
Revenue from rental operations increased $20.3 million, or 68%, from $30.0
million in 1995 to $50.3 million in 1996. The increase is a result of the
properties 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 second quarter of 1996. In total, 147 properties encompassing 6.5
million square feet were added to the portfolio in 1995 and ten properties
encompassing 1.2 million square feet were added in 1996.
During the six months ended June 30, 1996, 253 leases representing 1.5
million square feet of office and industrial space commenced at an average rate
per square foot 5.1% higher than the average rate per square foot on the expired
leases. Interest and other income increased $700,000 from $400,000 in 1995 to
$1.1 million in 1996. The increase is related to an increase in cash available
for investment for the six months ended June 30, 1996 and an increase in
third-party management and leasing income.
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Rental operating expenses increased $5.9 million, or 81%, from $7.3 million
in 1995 to $13.2 million in 1996. Rental expenses as a percentage of related
rental revenues increased from 24.3% in 1995 to 26.2% in 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 six months ended June 30, 1996 and 1995
was $7.9 million and $4.5 million, respectively. The increase of $3.4 million,
or 76%, is due to the increase in depreciable assets noted above. Interest
expense increased $3.4 million, or 60%, from $5.7 million in 1995 to $9.1
million in 1996. The increase is attributable to the increase in outstanding
debt related to the Company's acquisition and development activities. Interest
expense for the six months ended June 30, 1996 and 1995 included $827,000 and
$830,000, respectively, of amortization of non-cash deferred financing costs and
of the costs related to the Company's interest rate protection agreement.
General and administrative expenses increased from 3.8% of total rental revenue
in 1995 to 4.2% in 1996. This increase is attributable to the addition of two
regional offices associated with the Richmond and Nashville acquisitions.
Net income before minority interest and extraordinary item equaled $19.1
million and $11.7 million for the six-month periods ended June 30, 1996 and
1995, respectively. The Operating Partnership's net income allocated to the
minority interest totaled $3.3 million and $2.1 million for 1996 and 1995,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $27.5 million in cash flow from operating activities
and $260.4 million in cash flow from financing activities for the six months
ended June 30, 1996. The cash flow from financing activities is a result of the
11.5 million share stock offering, which closed on June 26, 1996. The Company
utilized $66.3 million of this cash flow to invest in real property assets,
primarily development in process and an acquisition of additional rental
property.
CAPITALIZATION
The Company's total indebtedness at June 30, 1996 totaled $214.1 million
and was comprised of $160.2 million of conventional fixed rate mortgage
indebtedness with an average rate of 8.7%, $48.9 million outstanding under
variable rate mortgages (see below for a discussion of interest rate protection
agreements) and a 9%, $5.0 million unsecured note. The Company did not have any
outstanding debt under the current $140 million unsecured credit facility (the
"Credit Facility").
Based on the Company's total market capitalization of $1.2 billion at June
30, 1996, (at the June 30, 1996 stock price of $27.63 and including the
conversion of the 4,134,550 units of minority interest in the Operating
Partnership), the Company's debt represented approximately 18% of its total
market capitalization.
The Credit Facility requires monthly payments of interest only, with the
balance of all principal and accrued but unpaid interest due on September 30,
1999. The initial interest rate on the facility is LIBOR plus 150 basis points
and will adjust based on the Company's senior unsecured credit rating within a
range of LIBOR plus 100 basis points to LIBOR plus 175 basis points, subject to
the interest rate protection agreement described below. At June 30, 1996,
one-month LIBOR was 5.50%. (See "Recent Developments" below for a description of
the proposed revolving loan (the "Revolving Loan"), which would replace the
Credit Facility.)
To protect the Company from increases in interest expense due to changes in
the variable rate, the Company: (i) purchased an interest rate cap limiting its
exposure to an increase in interest rates (one-month LIBOR plus 150 basis
points) to 7.0% with respect to $80 million of the $140 million Credit Facility,
and (ii) in connection with the $48.9 million variable rate mortgages, entered
into interest rate swaps that limit its exposure to an increase in the interest
rates to 7.45%, and (iii) in connection with a proposed refinancing of up to
$200 million of the Company's indebtedness (including indebtedness to be
incurred in connection with the acquisition of Crocker described below) in the
fourth quarter of 1996, the Company has 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. It is the Company's
intent to terminate these agreements at the
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time of the refinancing 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 all such variable rate debt is adjusted at
monthly intervals, subject to the Company's interest rate protection program.
The Company is exposed to certain losses in the event of non-performance by the
counterparties under the cap 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 its Credit Facility and
the variable rate mortgages, even if such rate were in excess of the rate in the
cap 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 and its ability to pay expected distributions to
stockholders.
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.
Management believes that the Company will have access to the capital resources
necessary to expand and develop its business. To the extent that the Company's
cash flow from operating activities is insufficient to finance its acquisition
costs and other capital expenditures, including development costs, the Company
expects to finance such activities through the Credit Facility (or the Revolving
Loan) and other debt and equity financing.
The Company presently has no plans for major capital improvements to the
existing 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 Credit Facility or 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 Credit Facility or the Revolving Loan to fund construction and development
activities. The Company does not intend to reserve funds to retire mortgage
indebtedness under the Credit Facility or 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. However, if these sources of funds are
insufficient or unavailable, the Company's ability to make the expected
distributions discussed below may be adversely affected.
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.
During the quarter, the Company completed a public offering of 11,500,000
additional shares of Common Stock (including 1,500,000 shares issued pursuant to
the underwriter's over-allotment option). The offering price per share was
$26.88 resulting in gross proceeds of approximately $309.1 million. Net of
underwriter's discount and offering costs, the Company received proceeds of
approximately $292.9 million. The proceeds from the offering will be used to
fund a portion of the purchase price of all of the outstanding shares of Crocker
Realty Trust, Inc. (see "Recent Developments" below).
11
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RECENT DEVELOPMENTS
On April 29, 1996, the Company entered into a Stock Purchase Agreement with
the owners of approximately 83% of the common stock of Crocker Realty Trust,
Inc. ("Crocker"). In addition, the Company has signed an Agreement and Plan of
Merger with Crocker pursuant to which the Company will acquire 100% of Crocker's
common stock. The transaction, which has been approved by each company's Board
of Directors, is expected to close in the third quarter of 1996.
The Crocker portfolio consists of 58 suburban office properties and 12
service center properties encompassing 5.7 million square feet. Crocker's
properties are located in 15 southeastern markets, of which four are existing
Company markets (including Charlotte, NC; Raleigh, NC; and Nashville, TN) and 11
represent new markets for the Company (including Greenville, SC; Tampa, FL;
Memphis, TN; and Atlanta, GA). The properties are 95% leased and are primarily
located in business park settings. The Company will not acquire undeveloped land
in the transaction. Crocker is expected to distribute 258 acres of undeveloped
land and certain other assets, net of certain liabilities, to its shareholders
prior to the merger.
Under the terms of the Stock Purchase Agreement, the Company will acquire
for $11.02 per share in cash, subject to adjustment, the common stock of Crocker
owned by (i) AP CRTI Holdings, L.P., an affiliate of Apollo Real Estate
Advisors, (ii) AEW Partners, L.P. (an investment partnership advised by Aldrich
Eastman Waltch) and (iii) Crocker management (Thomas J. Crocker and his wife,
Barbara F. Crocker,
Richard S. Ackerman and Robert E. Onisko). The shares to be purchased under this
agreement total 22.4 million of the approximately 27.0 million Crocker common
shares outstanding. The remaining shares will be purchased for the same cash
price per share pursuant to the Agreement and Plan of Merger. The purchase price
of the shares will total approximately $297 million. In addition, the Company
will cash out certain existing options and warrants to purchase Crocker common
stock for an estimated $4.2 million and assume approximately $240 million of
Crocker's currently outstanding indebtedness, having a weighted average interest
rate of 8.6%. The Stock Purchase Agreement and Agreement and Plan of Merger are
irrevocable, subject to certain limited conditions of closing.
The Company intends to finance the cash purchase of Crocker's shares
initially through the cash on hand from the recent 11.5 million share offering
and by utilizing its Credit Facility. The Company has received a commitment from
NationsBank and First Union National Bank of North Carolina for a $250 million
revolving line of credit (the "Revolving Loan"). The Revolving Loan will replace
the current Credit Facility, will be unsecured and will mature in July 1999. The
Revolving Loan is expected to close in September 1996.
On July 12, 1996 the Company sold an additional 250,000 shares of Common
Stock to the several underwriters who participated in the Company's recent
offering of 11.5 million shares. The shares were purchased so that the
underwriters could cover a portion of their short position resulting from
over-allotments in connection with the 11,500,000-share offering. The net
offering price per share was $27.38 resulting in proceeds of approximately $6.8
million.
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 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 means net income (computed in accordance with
generally accepted accounting principles) excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation of
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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
six months ended June 30, 1996 and 1995 are summarized in the following table
(in thousands):
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
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FUNDS FROM OPERATIONS:
Income before minority interest and extraordinary item.............. $10,134 $ 6,829 $19,136 $11,708
Add (deduct):
Depreciation and amortization..................................... 4,182 2,622 7,898 4,543
Third-party service company cash flow............................. 105 91 255 (15)
FUNDS FROM OPERATIONS BEFORE MINORITY INTEREST................. 14,421 9,542 27,289 16,236
CASH AVAILABLE FOR DISTRIBUTION:
Add (deduct):
Rental income from straight-line rents............................ (499) (263) (915) (530)
Amortization of deferred financing costs.......................... 418 426 827 830
Non-incremental revenue generating capital expenditures (1):
Building improvements paid..................................... (726) (413) (1,200) (541)
Second generation tenant improvements paid..................... (558) (645) (1,308) (913)
Second generation lease commissions paid....................... (467) (274) (579) (432)
CASH AVAILABLE FOR DISTRIBUTION.............................. $12,589 $ 8,373 $24,114 $14,650
Weighted average shares/units outstanding (2)....................... 24,206 17,976 23,673 15,696
DIVIDEND PAYOUT RATIO:
Funds from operations............................................. 75.53% 80.06% 78.07% 82.17%
Cash available for distribution................................... 86.53% 91.24% 88.35% 91.07%
</TABLE>
(1) Amounts represent cash expenditures.
(2) Assumes conversion of limited partnership units in the Operating Partnership
to shares of Highwoods Properties, Inc. 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 June 3, 1996, the Company's Board of Directors declared a dividend of
$.48 per share ($1.92 on an annualized basis) payable on August 21, 1996 to
stockholders of record on August 9, 1996.
13
<PAGE>
PROPERTY INFORMATION
The following table sets forth certain information with respect to the
Company's properties as of June 30, 1996:
<TABLE>
<CAPTION>
RENTABLE NUMBER OF PERCENT LEASED/
SQUARE FEET PROPERTIES PRE-LEASED
<S> <C> <C> <C>
IN-SERVICE:
Office............................................................. 6,582,000 103 95%
Industrial......................................................... 3,803,000 98 94%
Total........................................................... 10,385,000 201 95%
UNDER DEVELOPMENT:
Office............................................................. 803,000 10 64%
Industrial......................................................... 96,000 1 40%
Total........................................................... 899,000 11 62%
TOTAL:
Office............................................................. 7,385,000 113
Industrial......................................................... 3,899,000 99
Total........................................................... 11,284,000 212
</TABLE>
The following table sets forth certain information with respect to the
Company's properties under development as of June 30, 1996 (dollars in
thousands):
<TABLE>
<CAPTION>
RENTABLE ESTIMATED
ESTIMATED SQUARE PERCENTAGE COMPLETION
COST FEET PRE- LEASED DATE
<S> <C> <C> <C> <C>
OFFICE PROPERTIES:
MSA............................................................. $ 6,200 57,000 100% 4Q 96
Healthsource.................................................... 14,400 180,000 100 4Q 96
One Shockoe Plaza............................................... 15,000 118,000 100 4Q 96
Highwoods One................................................... 12,500 126,000 25 4Q 96
Situs One....................................................... 5,100 58,000 58 4Q 96
Maryland Way.................................................... 11,500 103,000 50 4Q 96
Inacom.......................................................... 900 13,000 100 4Q 96
Hewlett Packard................................................. 3,100 35,000 41 4Q 96
North Park...................................................... 4,000 43,000 38 2Q 97
Sycamore........................................................ 5,700 70,000 0 2Q 97
TOTAL OR WEIGHTED AVERAGE....................................... $78,400 803,000 64%
INDUSTRIAL PROPERTIES:
Regency Two..................................................... 2,800 96,000 40% 4Q 96
TOTAL OR WEIGHTED AVERAGE....................................... $81,200 899,000 62%
</TABLE>
14
<PAGE>
The following tables set forth certain information about the Company's
leasing activities for the three and six months ended June 30, 1996.
<TABLE>
<CAPTION>
OFFICE INDUSTRIAL
THREE MONTHS SIX MONTHS THREE MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1996 JUNE 30, 1996 JUNE 30, 1996 JUNE 30, 1996
<S> <C> <C> <C> <C>
NET EFFECTIVE RENTS RELATED TO RE-LEASED SPACE:
Number of lease transactions (signed leases)....... 78 136 44 117
Rentable square footage leased..................... 280,765 410,977 384,497 1,053,504
Average per rentable square foot over the lease
term:
Base rent........................................ $ 14.41 $ 14.98 $ 4.43 $ 4.50
Tenant improvements.............................. (0.49) (0.81) (0.08) (0.14)
Leasing commissions.............................. (0.30) (0.32) (0.19) (0.12)
Rent concessions................................. -- -- -- --
Effective rent................................... $ 13.62 $ 13.85 $ 4.16 $ 4.24
Expense stop..................................... (2.81) (3.26) (0.29) (0.30)
Equivalent effective net rent.................... $ 10.81 $ 10.59 $ 3.87 $ 3.94
Average term in years.............................. 4 4 1 2
RENTAL RATE TRENDS:
Average final rate with expense pass
throughs......................................... $ 13.08 $ 13.74 $ 4.41 $ 4.43
Average first year cash rental rate................ $ 13.91 $ 14.48 $ 4.60 $ 4.64
Percentage increase................................ 6.35% 5.40% 4.31% 4.74%
CAPITAL EXPENDITURES RELATED TO RE-LEASED OFFICE
SPACE:
Tenant Improvements:
Total dollars committed under signed
leases........................................ $ 609,622 $ 1,332,675 $ 40,154 $ 496,962
Rentable square feet............................. 280,765 410,977 384,497 1,053,504
Per rentable square foot......................... $ 2.17 $ 3.24 $ 0.10 $ 0.47
Leasing Commissions:
Total dollars committed under signed
leases........................................ $ 368,019 $ 524,283 $ 95,436 $ 46,380
Rentable square feet............................. 280,765 410,977 384,497 1,053,504
Per rentable square foot......................... $ 1.31 $ 1.28 $ 0.25 $ 0.04
Total:
Total dollars committed under signed
leases........................................ $ 977,641 $ 1,856,958 $ 135,590 $ 543,342
Rentable square feet............................. 280,765 410,977 384,497 1,053,504
Per rentable square foot......................... $ 3.48 $ 4.52 $ 0.35 $ 0.52
</TABLE>
15
<PAGE>
The following tables set forth scheduled lease expirations for executed
leases as of June 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 106 306,904 4.98% 4,227,880 4.71% $13.78
1997 196 822,702 13.33 11,976,776 13.32 14.56
1998 171 1,191,081 19.30 16,192,938 18.01 13.60
1999 139 800,327 12.97 11,569,383 12.87 14.46
2000 144 1,129,724 18.30 15,972,922 17.76 14.14
2001 78 824,559 13.36 12,932,547 14.38 15.68
2002 25 327,821 5.31 5,126,042 5.70 15.64
2003 15 412,082 6.68 6,623,528 7.37 16.07
2004 7 75,581 1.22 1,087,792 1.21 14.39
2005 7 88,275 1.43 1,395,071 1.55 15.80
Thereafter 8 192,677 3.12 2,808,160 3.12 14.57
Total or average 896 6,171,733 100.00% 89,913,039 100.00% $14.57
</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 111 1,452,866 41.08% 5,966,310 35.29% $ 4.11
1997 98 629,427 17.80 3,228,152 19.10 5.13
1998 84 329,680 9.32 2,195,864 12.99 6.66
1999 50 268,998 7.61 1,582,069 9.36 5.88
2000 22 293,798 8.31 1,539,649 9.11 5.24
2001 15 148,883 4.21 820,390 4.85 5.51
2002 2 257,210 7.27 767,023 4.54 2.98
2003 1 3,375 0.10 18,428 0.11 5.46
2004 1 1,920 0.05 21,718 0.13 11.31
2005 3 22,532 0.64 188,863 1.12 8.38
Thereafter 1 127,600 3.61 575,476 3.40 4.51
Total or average 388 3,536,289 100.00% 16,903,942 100.00% $ 4.78
</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 44 buildings
totaling approximately 3.2 million rentable square feet and exclusive leasing
services for 31 buildings, totaling approximately 2.0 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.
16
<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
On April 30, 1996, the Company held its Annual Meeting of Stockholders. The final vote of the matters
presented for a vote at such meeting was as follows:
</TABLE>
<TABLE>
<CAPTION>
MATTER FOR AGAINST ABSTAIN
<S> <C> <C> <C> <C>
(A) Election of Directors:
Thomas W. Adler 15,779,147 -- 60,176
William E. Graham, Jr. 15,778,647 -- 60,676
William T. Wilson, III 15,779,147 -- 60,176
Other Directors Whose Term of Office Continues:
O. Temple Sloan, Jr.
Ronald P. Gibson
John L. Turner
Robert L. Kirby
L. Glenn Orr, Jr.
Stephen Timko
John W. Eakin
Thomas S. Smith
Willard H. Smith, Jr.
(B) Ratify Appointment of Ernst & Young LLP as Independent Auditors 15,818,436 13,763 7,124
</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>
27 Financial Data Schedule
</TABLE>
<TABLE>
<S> <C>
(b) Reports on Form 8-K
A Report on Form 8-K, dated April 1, 1996, was filed on April 16, 1996 and amended on Form 8-K/A on June
3, 1996 and June 18, 1996. The Report related to the acquisition of Eakin and Smith and included the
combined financial statements and schedule of Eakin & Smith for the year ended December 31, 1995, the
combined financial statements (unaudited) of Eakin & Smith for the three months ended March 31, 1996
and the combined pro forma financial statements (unaudited) for the year ended December 31, 1996 and
the three months ended March 31, 1996.
The Company filed a report on Form 8-K dated April 29, 1996 (as amended on Form 8-K/A on June 3, 1996
and June 18, 1996) relating to the pending acquisition of Crocker. The Report included the following
financial statements: the historical summary of gross income and direct operating expenses for certain
properties owned by Towermarc Corporation for the year ended December 31, 1995; the consolidated
financial statements of Crocker Realty Trust, Inc. for the year ended December 31, 1995; the financial
statements of Crocker & Sons, Inc. for the year ended December 31, 1994; the financial statements of
Crocker Realty Investors, Inc. for the years ended December 31, 1994 and 1993; the combined financial
statements of Southeast Realty Corp., AP Southeast Portfolio Partners, L.P. and AP Fontaine III
Partners, L.P. for the year ended December 31, 1994; the financial statements of AP Fontaine III
Partners, L.P. for the period from October 28, 1993 through December 31, 1993; the financial statements
of AP Southeast Portfolio Partners, L.P. for the period from November 17, 1993 through December 31,
1993; and the unaudited pro forma condensed combining financial statements for the year ended December
31, 1996 and the three months ended March 31, 1996.
</TABLE>
17
<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: August 14, 1996
18
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> APR-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 227,156,000 227,156,00
<SECURITIES> 0 0
<RECEIVABLES> 11,947,000 11,947,000
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 237,571,000 237,571,000
<PP&E> 750,590,000 750,590,000
<DEPRECIATION> 29,435,000 29,435,000
<TOTAL-ASSETS> 972,536,000 972,536,000
<CURRENT-LIABILITIES> 29,350,000 29,350,000
<BONDS> 214,058,000 214,058,000
315,000 315,000
0 0
<COMMON> 0 0
<OTHER-SE> 728,813,000 728,813,000
<TOTAL-LIABILITY-AND-EQUITY> 927,536,000 927,536,000
<SALES> 26,905,000 50,290,000
<TOTAL-REVENUES> 27,680,000 51,437,000
<CGS> 7,041,000 13,195,000
<TOTAL-COSTS> 11,223,000 21,093,000
<OTHER-EXPENSES> 1,200,000 2,134,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,123,000 9,074,000
<INCOME-PRETAX> 10,134,000 19,136,000
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 8,381,000 15,812,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 8,381,000 15,812,000
<EPS-PRIMARY> .42 .80
<EPS-DILUTED> .42 .80
</TABLE>
