<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 June 30, 1997
Commission file number: 001-13100
HIGHWOODS PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
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, par value $.01 per share,
with 36,042,356 shares outstanding as of August 8, 1997.
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HIGHWOODS PROPERTIES, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 1997
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, 1997 and December 4
31, 1996
Consolidated statements of income of Highwoods Properties, Inc. for the three and six month 5
periods ended June 30, 1997 and 1996
Consolidated statements of cash flows of Highwoods Properties, Inc. for the six months ended 6
June 30, 1997 and 1996
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
Results of Operations 9
Liquidity and Capital Resources 10
Funds From Operations and Cash Available for Distribution 12
Disclosure Regarding Forward-Looking Statements 13
Property Information 14
Inflation 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
</TABLE>
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 and Management's Discussion and
Analysis of Financial Condition and Results of Operations and the 1996 Annual
Report on Form 10-K of Highwoods Properties, Inc. (the "Company").
3
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HIGHWOODS PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
<S> <C> <C>
(UNAUDITED)
ASSETS
Real estate assets, at cost:
Land and improvements..................................................... $ 227,277 $ 219,539
Buildings and tenant improvements......................................... 1,408,436 1,152,990
Development in process.................................................... 49,488 28,858
Land held for development................................................. 39,119 17,551
Furniture, fixtures and equipment......................................... 2,493 2,096
1,726,813 1,421,034
Less -- accumulated depreciation (62,062) (43,160)
Net real estate assets.................................................... 1,664,751 1,377,874
Cash and cash equivalents................................................... 8,904 11,070
Restricted cash............................................................. 9,721 8,539
Accounts receivable......................................................... 10,444 9,039
Advances to subsidiaries.................................................... 3,634 2,406
Accrued straight line rents receivable...................................... 8,682 6,185
Other assets:
Deferred leasing costs.................................................... 13,829 9,601
Deferred financing costs.................................................. 21,676 21,789
Prepaid expenses and other................................................ 5,762 3,901
41,267 35,291
Less -- accumulated amortization.......................................... (9,865) (6,964)
31,402 28,327
$1,737,538 $ 1,443,440
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable................................................. $ 647,473 $ 555,876
Accounts payable, accrued expenses and other liabilities.................... 28,211 27,600
Total liabilities......................................................... 675,684 583,476
Minority interest........................................................... 171,759 89,617
Stockholders' equity:
Preferred stock $.01 par value, authorized 10,000,000 shares; issued and
outstanding 125,000 shares of 8 5/8% Series A Cumulative Redeemable
Preferred Shares (liquidation preference of $1,000 per share) at June 30,
1997...................................................................... 125,000 --
Common stock, $.01 par value, authorized 100,000,000 shares; issued and
outstanding 35,931,307 at June 30, 1997 and 35,636,155 at December 31,
1996...................................................................... 364 356
Additional paid-in capital.................................................. 783,437 780,562
Distributions in excess of net income....................................... (18,706) (10,571)
Total stockholders' equity................................................ 890,095 770,347
$1,737,538 $ 1,443,440
</TABLE>
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,
1997 1996 1997 1996
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REVENUE:
Rental property......................................... $59,423 $26,905 $115,478 $50,290
Interest and other income............................... 1,815 775 4,081 1,147
61,238 27,680 119,559 51,437
OPERATING EXPENSES:
Rental property......................................... 16,246 7,041 31,588 13,195
Depreciation and amortization........................... 10,590 4,182 19,900 7,898
Interest expense:
Contractual.......................................... 11,056 4,705 22,516 8,247
Amortization of deferred financing costs............. 547 418 1,122 827
11,603 5,123 23,638 9,074
General and administrative.............................. 2,204 1,200 4,284 2,134
Income before minority interest and extraordinary
item............................................... 20,595 10,134 40,149 19,136
MINORITY INTEREST......................................... (3,295) (1,753) (6,424) (3,324)
Income before extraordinary item........................ 17,300 8,381 33,725 15,812
EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF
DEBT.................................................... -- -- (3,337) --
Net income.............................................. 17,300 8,381 30,388 15,812
Dividends on 8 5/8% Series A Cumulative Redeemable
Preferred Shares........................................ (2,695) -- (4,102) --
Net income available for common stockholders............ $14,605 $ 8,381 $ 26,286 $15,812
NET INCOME (LOSS) PER COMMON SHARE:
Income before extraordinary item........................ $ 0.41 $ 0.42 $ 0.84 $ 0.80
Extraordinary item -- loss on early extinguishment of
debt................................................. -- -- (0.10) --
Net income.............................................. $ 0.41 $ 0.42 $ 0.74 $ 0.80
Weighted average shares outstanding....................... 35,824 20,022 35,375 19,714
</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)
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SIX MONTHS ENDED JUNE 30,
1997 1996
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OPERATING ACTIVITIES:
Net income..................................................................... $ 30,388 $ 15,812
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization................................................ 21,022 8,725
Minority interest in income.................................................. 5,788 3,324
Loss on early extinguishment of debt......................................... 3,973 --
Changes in operating assets and
liabilities............................................................... (6,364) (353)
Net cash provided by operating
activities.............................................................. 54,807 27,508
INVESTING ACTIVITIES:
Additions to real estate assets................................................ (85,097) (66,330)
Proceeds from disposition of real estate assets................................ -- 900
Cash paid in exchange for partnership net assets............................... (5,081) --
Other.......................................................................... (7,847) (2,148)
Net cash used in investing activities..................................... (98,025) (67,578)
FINANCING ACTIVITIES:
Distributions paid............................................................. (39,389) (20,912)
Payment of preferred dividends................................................. (1,407) --
Repayment of mortgages and notes payable....................................... (161,637) (73,105)
Payment of prepayment penalties................................................ (3,973) --
Borrowings on mortgages and notes
payable...................................................................... 124,000 62,500
Net proceeds from the sale of common
stock........................................................................ 1,815 292,858
Net proceeds from sale of 8 5/8% Series A Cumulative Redeemable Preferred
Shares....................................................................... 121,804 --
Payment of deferred financing costs............................................ (161) (953)
Net cash provided by financing activities................................. 41,052 260,388
Net (decrease) increase in cash and cash equivalents........................... (2,166) 220,318
Cash and cash equivalents at beginning of the
period....................................................................... 11,070 6,838
Cash and cash equivalents at end
of the period................................................................ $ 8,904 $ 227,156
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest......................................................... $ 23,189 $ 8,179
</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 Highwoods/Forsyth Limited Partnership (the "Operating Partnership") or
acquired subject to mortgage notes payable:
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SIX MONTHS ENDED
JUNE 30,
1997 1996
<S> <C> <C>
ASSETS:
Rental property and equipment, net........................................................ $214,497 $70,153
LIABILITIES:
Mortgages and notes payable assumed....................................................... 129,270 41,927
Net assets........................................................................... $ 85,227 $28,226
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
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HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Highwoods
Properties, Inc. (the "Company"), Highwoods/Forsyth Limited Partnership (the
"Operating Partnership") and the following subsidiaries:
Highwoods/Florida GP Corp.
Highwoods Realty GP Corp.
Highwoods/Tennessee Properties, Inc.
Highwoods/Florida Holdings GP, L.P.
AP-GP Southeast Portfolio Partners, L.P.
Highwoods/Tennessee Holdings GP, L.P.
Highwoods/Tennessee Holdings, L.P.
AP Southeast Portfolio Partners, L.P.
Highwoods/Florida Holdings, L.P.
Forsyth Properties Services, Inc.
Highwoods Services, Inc.
Southeast Realty Options Corp.
The Company's investment in Highwoods Services, Inc. and Forsyth Properties
Services, Inc. (the "Service Companies") is accounted for using the equity
method of accounting. All significant intercompany balances and transactions
have been eliminated in the consolidated financial statements.
The extraordinary loss represents the write-off of loan origination fees
and prepayment penalties paid on the early extinguishment of debt.
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.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, EARNINGS PER SHARE, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact of Statement 128 on the
calculation of primary and fully diluted earnings per share for these quarters
is not material.
Minority interest in the Company represents the limited partnership
interests ("Common Units") owned by various individuals and entities and not the
Company in the Operating Partnership, the entity that owns substantially all of
the Company's properties and through which the Company, as the sole general
partner, conducts substantially all of its operations. Per share information is
calculated using the weighted average number of shares outstanding (including
common share equivalents).
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 1996 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, 1997
Revenues from rental operations increased $32.5 million, or 121%, from
$26.9 million for the three months ended June 30, 1996 to $59.4 million for the
comparable period in 1997. The increase is primarily a result of the acquisition
of 6.4 million square feet of office and industrial properties and the
completion of 763,000 square feet of development activity during the third and
fourth quarters of 1996 and the addition of 3.2 million square feet in the first
quarter of 1997 from the acquisition of the Anderson Properties and Century
Center portfolios. The Company's portfolio increased from 10.4 million square
feet at June 30, 1996 to 21.6 million square feet at June 30, 1997. Same
property revenues, which are the revenues of the 199 in-service properties owned
on April 1, 1996, increased 1% for the three months ended June 30, 1997,
compared to the same three months of 1996. Expected vacancies in two of the
Company's properties offset a 2% increase in the revenues of the other 197
in-service properties.
During the three months ended June 30, 1997, 205 leases representing
1,164,000 square feet of office and industrial space commenced at an average
rate per square foot which was 9.2% higher than the average rate per square foot
on the expired leases.
Interest and other income increased $1.0 million from $800,000 for the
three months ended June 30, 1996 to $1.8 million for the comparable period in
1997. The increase is related to the receipt of $800,000 in lease termination
fees and other miscellaneous property income in the second quarter of 1997 and
an increase in interest income resulting from additional cash available for
investment in 1997.
Rental operating expenses increased $9.2 million, or 131%, from $7.0
million for the three months ended June 30, 1996 to $16.2 million for the
comparable period in 1997. The increase is a result of the addition of 10.2
million square feet through a combination of acquisitions and developments
during the last two quarters of 1996 and the first two quarters of 1997. Rental
operating expenses as a percentage of related revenues increased from 26.2% for
the three months ended June 30, 1996 to 27.3% for the comparable period in 1997.
This increase is a result of an increase in the percentage of office properties
in the portfolio, which have fewer triple net lease pass throughs.
Depreciation and amortization for the three months ended June 30, 1997 and
1996 was $10.6 million and $4.2 million, respectively. The increase of $6.4
million, or 152%, is due to a 158% average increase in depreciable assets.
Interest expense increased $6.5 million, or 127%, from $5.1 million for the
three months ended June 30, 1996 to $11.6 million for the comparable period in
1997. The increase is attributable to the 201% average increase in outstanding
debt for the quarter related to the Company's acquisition activities, which was
partially offset by lower interest rates on the Company's outstanding debt.
Interest expense for the three months ended June 30, 1997 and 1996 included
$547,000 and $418,000, respectively, of amortization of non-cash deferred
financing costs and the costs related to the Company's interest rate protection
agreements. General and administrative expenses decreased from 4.5% of rental
revenue for the three months ended June 30, 1996 to 3.7% for the comparable
period in 1997. The decrease is attributable to the realization of the economies
of scale related to the acquisition of the 5.7-million square foot Crocker
portfolio, which was completed in September 1996.
Net income before minority interest and extraordinary item equaled $20.6
million and $10.1 million for the three-month periods ended June 30, 1997 and
1996, respectively. The Company's net income allocated to minority interest
totaled $3.3 million and $1.8 million for the three-month periods ended June 30,
1997 and 1996, respectively. The Company accrued $2.7 million in dividends in
the second quarter of 1997 for the 125,000 shares of preferred stock that the
Company issued in February 1997 (see " -- Liquidity and Capital Resources"
below).
9
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SIX MONTHS ENDED JUNE 30, 1997
Revenue from rental operations increased $65.2 million or 130%, from $50.3
million for the six months of 1996 to $115.5 million for the six months of 1997.
The increase is a result of the Company's acquisition and development activity
in 1996 and 1997. In total, 103 office and industrial properties encompassing
8.2 million square feet were added in 1996 and 68 properties encompassing 4.1
million square feet were added in the first six months of 1997.
During the six months ended June 30, 1997, 372 leases representing
2,516,000 square feet of office and industrial space commence at an average rate
per square foot 7.2% higher than the average rate per square foot on the expired
leases.
Interest and other income increased $3.0 million from $1.1 million in 1996
to $4.1 million in 1997. The increase is related to the receipt of $1.6 million
in lease termination fees and other miscellaneous property income in the first
six months of 1997, a full six months of third-party management fees derived
from the management contracts assumed in the merger with Eakin & Smith, Inc. on
April 1, 1996 and an increase in interest income resulting from additional cash
available for investment in 1997.
Rental operating expenses increased $18.4 million, or 139%, from $13.2
million in 1996 to $31.6 million in 1997. Rental expenses as a percentage of
related rental revenues increased from 26.2% in 1996 to 27.3% in 1997. The
increase is a result of an increase in the percentage of office properties in
the portfolio, which have fewer triple net lease pass throughs.
Depreciation and amortization for the six months ended June 30, 1997, and
1996 was $19.9 million and $7.9 million, respectively. The increase of $12.0
million, or 152% is due to a 139% average increase in depreciable assets.
Interest expense increased $14.5 million or 159%, from $9.1 million in 1996 to
$23.6 million in 1997. The increase is attributable to a 203% average increase
in outstanding debt related to the Company's acquisition activities. Interest
expense for the six months ended June 30, 1997, and 1996 included $1.1 million
and $827,000, 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 decreased from 4.2% of total rental revenue
in 1996 to 3.7% in 1997. This decrease is attributable to the realization of the
economies of scale related to the acquisition of the 5.7 million-square foot
Crocker portfolio, which was completed in September 1996.
Net income before minority interest and extraordinary item equaled $40.1
million and $19.1 million for the six-month periods ended June 30, 1997, and
1996, respectively. The Operating Partnership's net income allocated to the
minority interest totaled $6.4 million and $3.3 for 1997 and 1996, respectively.
The Company incurred an extraordinary loss in the first quarter of 1997 of $3.3
million related to the early extinguishment of debt assumed in the acquisition
of the Anderson Properties and Century Center portfolios. The Company also
recorded $4.1 million in dividends on the 125,000 shares of preferred stock for
the six months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1997, cash provided by operating
activities increased by $27.3 million, or 99%, to $54.8 million, as compared to
$27.5 million for the same period in 1996. The increase is primarily due to the
increase in net income resulting from the Company's property acquisitions in
1996 and the first quarter of 1997. Cash used for investing activities increased
by $30.4 million, or 45.0%, to $98.0 million for the first six months of 1997,
as compared to $67.6 million for the same 1996 period. The increase is
attributable to the Company's ongoing acquisition and development of suburban
office and industrial properties. Cash provided by financing activities
decreased by $219.3, or 84.2%, to $41.1 million for the first six months of
1997, as compared to $260.4 million for the same period in 1996. During the
first six months of 1997, cash provided by financing activities consisted,
primarily, of $121.8 million in net proceeds from the sale of preferred stock
and the sale of $100 million of Exercisable Put Option Securities (see below),
which were offset by net payments of $56.6 million to reduce existing
indebtedness and $105 million to pay off the assumed indebtedness associated
with the acquisition of the Century Center and Anderson Properties portfolios.
Additionally, payments of distributions increased by $18.5 million to $39.4
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million for the first six months of 1997, as compared with $20.9 million for the
same period in 1996. The increase is due to the greater number of shares
outstanding and a 7% increase in the distribution rate.
On February 12, 1997, the Company issued 125,000 shares of 8 5/8% Series A
Cumulative Redeemable Preferred Shares for net proceeds of $121.8 million. The
shares of preferred stock have a liquidation preference of $1,000 per share, are
not redeemable prior to February 2027, are not subject to any sinking fund or
mandatory redemption and are not convertible into any other securities of the
Company.
On June 24, 1997, a trust formed by the Operating Partnership sold $100
million of Exercisable Put Option Securities ("X-POSSM"), which represent
fractional undivided beneficial interests in the trust. The assets of the trust
consist of, among other things, $100 million of Exercisable Put Option Notes due
June 15, 2011 issued by the Operating Partnership (the "Put Option Notes").
The X-POSSM bear a coupon interest rate of 7.19% and mature on June 15, 2004,
representing an effective borrowing cost of 7.09%, net of a related put option
and certain interest rate protection agreement costs. Under certain
circumstances, the Put Option Notes could also become subject to early maturity
on June 15, 2004. The X-POSSM financing structure enabled the Operating
Partnership to obtain a more favorable rate than that available under
traditional unsecured or put bond securities. Proceeds from the offering will be
used to reduce outstanding mortgages and notes payable with an average interest
rate of 8.50% and to repay amounts outstanding on the Company's existing
revolving credit facility.
Effective May 27, 1997, the Company's syndicate of lenders lowered the
interest rate to 100 basis points over LIBOR (from the previous rate of 135
basis points over LIBOR), on the Company's $280 million revolving loan.
The Company's total indebtedness at June 30, 1997, totaled $647.5 million
and was comprised of $315.5 million of secured indebtedness with an average rate
of 8.3% and $332.0 million of unsecured indebtedness with an average rate of
7.0%. All of the mortgage and notes payable outstanding at June 30, 1997 were
either fixed rate obligations or variable rate obligations covered by interest
rate protection agreements.
Based on the Company's total market capitalization of $2.2 billion at June
30, 1997, (at the June 30, 1997 stock price of $32.19 and assuming the
redemption for shares of Common Stock of the 6,970,000 Common Units of minority
interest in the Operating Partnership), the Company's debt represented
approximately 30% of its total market capitalization.
To protect the Company from increases in interest expense due to changes in
the variable rate, the Company: (i) purchased an interest rate collar limiting
its exposure to an increase in interest rates (one-month LIBOR plus 100 basis
points) to 7.25% with respect to $80 of the Company's $280 million unsecured
revolving loan (the "Revolving Loan"), under which the Company had $0
outstanding at June 30, 1997, and (ii) entered into interest rate swaps that
limit its exposure to an increase in the interest rates to 7.24% in connection
with the $34 million of variable rate mortgages. The interest rate on all such
variable rate debt is adjusted at monthly intervals, subject to the Company's
interest rate protection program. No payments were received from the
counterparties under the interest rate protection agreements for the three
months ended June 30, 1997 and 1996. 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 perform fully 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 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.
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 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
Revolving Loan. The Company expects to meet certain of its financing
requirements through long-term
11
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secured and unsecured borrowings and the issuance of debt securities or
additional equity securities of the Company and Operating Partnership. In
addition, the Company anticipates utilizing the Revolving Loan primarily to fund
construction and development activities. The Company does not intend to reserve
funds to retire existing mortgage indebtedness or 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 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.
FUNDS FROM OPERATIONS AND CASH AVAILABLE FOR DISTRIBUTIONS
The Company considers Funds from Operations ("FFO") to be a useful
financial performance measure of its operating performance because, together
with net income and cash flows, FFO provides investors with an additional basis
to evaluate its ability to incur and service debt and to fund acquisitions and
other capital expenditures. FFO 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. FFO 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
stockholders. FFO 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.
FFO 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, the National Association of Real Estate Investment Trusts ("NAREIT")
issued a clarification of the definition of FFO. The clarification provides that
amortization of deferred financing costs and depreciation of non-real estate
assets are no longer to be added back to net income in arriving at FFO. Cash
available for distribution is defined as funds from operations reduced by
non-revenue enhancing capital expenditures for building improvements and tenant
improvements and lease commissions related to second generation space.
12
<PAGE>
Funds from operations and cash available for distribution for the three and
six months ended June 30, 1997 and 1996 are summarized in the following table
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
FUNDS FROM OPERATIONS:
Income before minority interest and extraordinary item.............. $20,595 $10,134 $40,149 $19,136
Add (deduct):
Dividends to preferred shareholders............................... (2,695) -- (4,102) --
Depreciation and amortization..................................... 10,590 4,182 19,900 7,898
Third-party service company cash flow............................. -- 105 -- 255
FUNDS FROM OPERATIONS BEFORE MINORITY INTEREST................. 28,490 14,421 55,947 27,289
CASH AVAILABLE FOR DISTRIBUTION:
Add (deduct):
Rental income from straight-line rents............................ (1,245) (499) (2,475) (915)
Amortization of deferred financing costs.......................... 547 418 1,122 827
Non-incremental revenue generating capital expenditures (1):
Building improvements paid..................................... (938) (726) (2,008) (1,200)
Second generation tenant improvements paid..................... (2,076) (558) (3,447) (1,308)
Second generation lease commissions paid....................... (1,243) (467) (2,334) (579)
CASH AVAILABLE FOR DISTRIBUTION.............................. $23,535 $12,589 $46,805 $24,114
Weighted average shares/Common Units outstanding (2)................ 42,750 24,206 42,254 23,673
DIVIDEND PAYOUT RATIO:
Funds from operations............................................. 72.0% 75.5% 72.5% 78.1%
Cash available for distribution................................... 87.2% 86.5% 86.7% 88.4%
</TABLE>
(1) Amounts represent cash expenditures.
(2) Assumes redemption of Common Units for shares of Common Stock. Minority
interest Common Unit holders and the stockholders of the Company share
equally on a per share and per Common Unit basis; therefore, the resultant
per share information is unaffected by the conversion.
On July 29, 1997, the Company's Board of Directors declared a dividend of
$.51 per share ($2.04 on an annualized basis) payable on August 20, 1997 to
stockholders of record on August 8, 1997.
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, 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 the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
13
<PAGE>
PROPERTY INFORMATION
The following table sets forth certain information with respect to the
Company's properties as of June 30, 1997:
<TABLE>
<CAPTION>
RENTABLE NUMBER OF PERCENT LEASED/
SQUARE FEET PROPERTIES PRE-LEASED
<S> <C> <C> <C>
IN-SERVICE:
Office............................................................. 14,439,000 223 94%
Industrial......................................................... 7,144,000 138 90%
Total........................................................... 21,583,000 361 93%
UNDER DEVELOPMENT:
Office............................................................. 1,802,000 21 38%
Industrial......................................................... 487,000 5 40%
Total........................................................... 2,289,000 26 38%
TOTAL:
Office............................................................. 16,241,000 244
Industrial......................................................... 7,631,000 143
Total........................................................... 23,872,000 387
</TABLE>
14
<PAGE>
The following table sets forth certain information with respect to the
Company's properties under development as of June 30, 1997:
<TABLE>
<CAPTION>
COST AT PRE-LEASING ESTIMATED
NAME LOCATION SQUARE FOOTAGE BUDGETED COST 6/30/97 PERCENTAGE COMPLETION
<S> <C> <C> <C> <C> <C> <C>
OFFICE:
Ridgefield III Asheville 57,000 $ 5,200 $ 14 0.0% 1Q98
2400 Century Center Atlanta 135,000 16,200 207 0.0% 2Q98
Patewood VI Greenville 107,000 11,400 2,451 0.0% 4Q98
Southwind III Memphis 69,000 7,000 2,598 100.0% 4Q97
Colonnade Memphis 89,000 9,400 2,047 44.0% 1Q98
SouthPointe Nashville 104,000 10,900 2,004 0.0% 2Q98
Harpeth V Nashville 65,000 6,900 1,093 0.0% 1Q98
Lakeview Ridge II Nashville 61,000 6,100 768 0.0% 1Q98
Highwoods Plaza II Nashville 103,000 10,400 5,733 100.0% 3Q97
RMIC Piedmont Triad 90,000 7,700 32 100.0% 2Q98
Highwoods Center Research Triangle 76,000 8,300 3 0.0% 3Q98
Overlook Research Triangle 97,000 9,900 410 0.0% 3Q98
Red Oak Research Triangle 65,000 6,000 399 0.0% 3Q98
Situs Two Research Triangle 59,000 5,900 758 0.0% 3Q98
Rexwood V Research Triangle 60,000 7,400 1,933 28.0% 4Q97
ClinTrials Research Triangle 178,000 21,500 4,242 100.0% 2Q98
Highwoods V Richmond 67,000 6,600 921 0.0% 2Q98
Markel-American Richmond 106,000 10,600 120 48.0% 2Q98
Grove Park 1 Richmond 61,000 5,900 2,143 15.0% 3Q97
Highwoods Two Richmond 76,000 7,300 4,958 77.0% 3Q97
West Shore III Richmond 55,000 5,300 3,429 87.0% 3Q97
OFFICE TOTAL OR WEIGHTED AVERAGE............... 1,780,000 $ 185,900 $36,263 38.0%
INDUSTRIAL PROPERTIES
TradePort-1 Atlanta 87,000 3,100 1,262 0.0% 4Q97
TradePort-2 Atlanta 87,000 3,100 -- 0.0% 4Q97
Newpoint Atlanta 119,000 4,700 2,160 0.0% 3Q97
R.F. Micro Devices Piedmont Triad 49,000 8,400 4,089 100.0% 4Q97
Highwoods Airport Center Richmond 142,000 6,100 4,997 100.0% 3Q97
INDUSTRIAL TOTAL OR WEIGHTED AVERAGE........... 484,000 $ 25,400 $12,508 40.0%
COMPANY TOTAL OR WEIGHTED AVERAGE.............. 2,264,000 $ 211,300 $48,771 38.0%
</TABLE>
15
<PAGE>
The following tables set forth certain information about the Company's
leasing activities for the three and six months ended June 30, 1997.
<TABLE>
<CAPTION>
OFFICE INDUSTRIAL
THREE MONTHS SIX MONTHS THREE MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1997 1997 1997
<S> <C> <C> <C> <C>
NET EFFECTIVE RENTS RELATED TO RE-LEASED SPACE:
Number of lease transactions (signed leases)......... 139 251 66 121
Rentable square footage leased....................... 646,699 1,385,160 517,613 1,130,398
Average per rentable square foot over the lease term:
Base rent.......................................... $ 16.76 $ 16.07 $ 5.36 $ 5.23
Tenant improvements................................ (0.85) (0.97) (0.23) (0.21)
Leasing commissions................................ (0.50) (0.45) (0.14) (0.15)
Rent concessions................................... (0.01) (0.01) -- --
Effective rent..................................... $ 15.40 $ 14.64 $ 4.99 $ 4.87
Expense stop....................................... (4.18) (3.88) (0.30) (0.25)
Equivalent effective net rent...................... $ 11.22 $ 10.76 $ 4.69 $ 4.62
Average term in years................................ 4 4 4 4
CAPITAL EXPENDITURES RELATED TO RE-LEASED SPACE:
Tenant improvements:
Total dollars committed under signed leases........ $2,163,050 $5,845,282 $450,875 $ 844,673
Rentable square feet............................... 646,699 1,385,160 517,613 1,130,398
Per rentable square foot........................... $ 3.34 $ 4.22 $ 0.87 $ 0.75
Leasing commissions:
Total dollars committed under signed leases........ $1,279,100 $2,704,953 $273,473 $ 581,260
Rentable square feet............................... 646,699 1,385,160 517,613 1,130,398
Per rentable square foot........................... $ 1.98 $ 1.95 $ 0.53 $ 0.51
Total:
Total dollars committed under signed leases........ $3,442,150 $8,550,235 $724,348 $1,425,933
Rentable square feet............................... 646,699 1,385,160 517,613 1,130,398
Per rentable square foot........................... $ 5.32 $ 6.17 $ 1.40 $ 1.26
RENTAL RATE TRENDS:
Average final rate with expense pass throughs........ $ 14.15 $ 13.85 $ 4.81 $ 4.98
Average first year cash rental rate.................. $ 15.56 $ 14.93 $ 5.10 $ 5.24
Percentage increase.................................. 9.96% 7.80% 6.03% 5.22%
</TABLE>
16
<PAGE>
The following tables set forth scheduled lease expirations for executed
leases as of June 30, 1997 assuming no tenant exercises renewal options.
OFFICE PROPERTIES:
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL PERCENTAGE OF ANNUAL RENTS AVERAGE ANNUAL LEASED RENTS
YEAR OF RENTABLE LEASED SQUARE FOOTAGE UNDER RENTAL RATE REPRESENTED
LEASE NUMBER OF SQUARE FEET REPRESENTED BY EXPIRING FOR EXPIRATIONS BY EXPIRING
EXPIRATION LEASES EXPIRING EXPIRING LEASES LEASES (1) (1) LEASES
<S> <C> <C> <C> <C> <C> <C>
Remainder of 1997 264 935,786 7.0% $ 13,535,393 $ 14.46 6.8%
1998 370 2,234,760 16.7 31,763,448 14.21 15.9
1999 349 1,816,663 13.5 26,791,104 14.75 13.4
2000 346 2,236,795 16.7 33,707,771 15.07 17.0
2001 245 1,932,678 14.4 31,370,340 16.23 15.7
2002 174 1,495,622 11.2 22,950,491 15.35 11.5
2003 48 881,484 6.6 12,748,402 14.46 6.4
2004 22 382,144 2.8 6,180,812 16.17 3.1
2005 16 449,289 3.3 4,919,152 10.95 2.5
2006 13 550,512 4.1 7,523,576 13.67 3.8
2007+ 26 496,173 3.7 7,725,916 15.57 3.9
Total or average 1,873 13,411,906 100.0% $199,216,405 $ 14.85 100.0%
</TABLE>
INDUSTRIAL PROPERTIES:
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL PERCENTAGE OF AVERAGE ANNUAL LEASED RENTS
RENTABLE LEASED SQUARE FOOTAGE ANNUAL RENTS RENTAL RATE REPRESENTED
YEAR OF LEASE NUMBER OF SQUARE FEET REPRESENTED BY UNDER EXPIRING FOR EXPIRATIONS BY EXPIRING
EXPIRATION LEASES EXPIRING EXPIRING LEASES LEASES (1) (1) LEASES
<S> <C> <C> <C> <C> <C> <C>
Remainder of 1997 146 1,165,617 18.0% $ 5,918,185 $5.08 17.2%
1998 157 1,230,918 19.0 7,001,490 5.69 20.3
1999 143 1,433,055 22.3 7,232,120 5.05 20.9
2000 91 990,004 15.3 5,958,163 6.02 17.3
2001 55 582,021 9.0 3,619,216 6.22 10.5
2002 28 779,372 12.0 3,164,340 4.06 9.2
2003 2 9,295 0.1 64,301 6.92 0.2
2004 6 112,069 1.7 619,202 5.53 1.8
2005 5 38,532 0.6 316,250 8.21 0.9
2006 1 127,600 2.0 575,476 4.51 1.7
2007+ 0 -- 0.0 -- -- 0.0
Total or average 634 6,468,483 100.0% $ 34,468,743 $5.33 100.0%
</TABLE>
(1) Includes operating expense pass throughs and excludes the effect of future
contractual rent increases.
INFLATION
Historically inflation has not had a significant impact on 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.
17
<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>
On April 29, 1997, 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>
<CAPTION>
MATTER FOR AGAINST ABSTAIN
<S> <C> <C> <C> <C>
(A) Election of Directors
Ronald P. Gibson 26,957,190 -- 326,281
O. Temple Sloan, Jr. 26,973,090 -- 310,381
John L. Turner 26,973,096 -- 310,381
John W. Eakin 26,972,883 -- 310,588
Willard H. Smith Jr. 26,982,590 -- 300,881
Gene H. Anderson 26,973,090 -- 310,381
(B) Proposal to adopt the 1997 Employee Stock Purchase Plan 26,324,354 714,825 244,293
(C) Proposal to amend the Amended and Restated 1994 Stock Option Plan 17,413,462 9,379,176 490,834
(D) Ratify appointment of Ernst & Young, LLP as Independent Auditors 27,067,059 16,777 199,636
</TABLE>
<TABLE>
<S> <C>
Item 5. Other Information
</TABLE>
On July 29, 1997, the partners of the Operating Partnership, through which
the Company conducts substantially all of its operations, approved an amendment
(the "Amendment") to its agreement of limited partnership. A copy of the
Amendment is filed as an exhibit to this Form 10-Q. The following summary of the
Amendment does not purport to be complete and is qualified by the Amendment to
which reference is made for a full description of the Amendment.
The purpose of the Amendment is to clarify a limited partner's redemption
right in the event of certain changes of control of the Company and enable
limited partners to continue to hold Common Units in the Operating Partnership
following such a change of control, thereby maintaining the tax basis in their
Common Units.
The Amendment sets forth a limited partner's redemption right in the event
of certain changes of control of the Company. The covered changes of control
(each, a "Trigger Event") are: (i) a merger involving the Company in which the
Company is not the surviving entity; (ii) a merger involving the Company in
which the Company is the survivor but all or part of the Company's shares are
converted into securities of another entity or the right to receive cash; and
(iii) the transfer by the Company to another entity of substantially all of the
assets or earning power of the Company or the Operating Partnership.
Upon occurrence of a Trigger Event, the rights of a limited partner to
receive a share of the Company's common stock (a "REIT Share") or cash equal to
the fair market value of a REIT Share upon redemption of a Common Unit is
converted into the right to receive a share (a "Replacement Share") or cash
equal to the fair market value thereof of the acquiror or a parent of the
acquiror. If the acquiror does not have publicly traded securities and a parent
of the acquiror does, the publicly traded equity securities of the parent entity
with the highest market capitalization will be the Replacement Shares. If
neither the acquiror nor any parent has publicly traded equity securities, the
Replacement Shares will be the equity securities of the entity with the highest
market capitalization. The number of Replacement Shares to be received by a
limited partner (or to be used to calculate the cash payment due) upon a
redemption of Common Units shall be equal to the number of REIT Shares issuable
prior to the Trigger Event multiplied by (i) the number of Replacement Shares
the holder of a single REIT Share would have received as a result of the Trigger
Event or, if the Replacement Shares have not been publicly traded for one year,
(ii) a fraction, the numerator of which is the
18
<PAGE>
Average Trading Price (as defined in the Amendment) of a REIT Share as of the
Trigger Event and the denominator of which is the Average Trading Price of a
Replacement Share as of the Trigger Event.
If the acquiror in a Trigger Event is a REIT, it must make provision to
preserve an operating partnership structure with terms no less favorable to the
limited partners than currently in place. In addition, the Amendment provides
that, if a distribution of cash or property is made in respect of a Replacement
Share, the Operating Partnership will distribute the same amount in respect of a
Common Unit as would have been received by a limited partner had such partner's
Common Units been redeemed for Replacement Shares prior to such distribution.
Because the Amendment requires an acquiror to make provision under certain
circumstances to maintain the Operating Partnership structure and maintain a
limited partner's right to continue to hold Common Units with future redemption
rights, the Amendment could also have the effect of discouraging a third party
from making an acquisition proposal for the Company.
The provisions of the Amendment may only be waived or amended upon the
consent of limited partners holding at least 75% of the Common Units (excluding
those held by the Company).
<TABLE>
<S> <C>
Item 6. Exhibits and Reports on Form 8-K -- None
</TABLE>
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
10.1 Amendment to Amended and Restated Agreement of Limited Partnership of Highwoods/Forsyth Limited
Partnership
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HIGHWOODS PROPERTIES, INC.
/s/ RONALD P. GIBSON
RONALD P. GIBSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/s/ CARMAN J. LIUZZO
CARMAN J. LIUZZO
CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
Date: August 14, 1997
20
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
10.1 Amendment to Amended and Restated Agreement of Limited Partnership of Highwoods/Forsyth Limited
Partnership
27 Financial Data Schedule
</TABLE>
21
<PAGE>
EXHIBIT 10.1
AMENDMENT OF FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
HIGHWOODS/FORSYTH LIMITED PARTNERSHIP
1. Section 11.2.A shall be deleted in its entirety and a new Section 11.2.A
shall be inserted therefor to read as follows:
A. The General Partner may not transfer any of its General Partner
Interest or Limited Partner Interests or withdraw as General Partner except
as provided in Section 11.2.B or Article 16.
2. Section 11.2.C shall be deleted in its entirety and a new Section 11.2.C
shall be inserted therefor to read as follows:
C. If the General Partner is the surviving entity of a merger, it
shall contribute substantially all of the assets acquired in the merger to
the Partnership as a Capital Contribution in exchange for Partnership Units
with a fair market value, as reasonably determined by the General Partner,
equal to the 704(c) Value of the assets so contributed; provided that this
requirement shall not be applicable if such merger is a Trigger Event as
defined in Section 16.
3. Section 11.2.D shall be deleted in its entirety.
4. The reference to Section 11.2.B set forth in Section 14.1.C shall be
deleted.
5. A new Section 16 shall be inserted to read as follows:
ARTICLE 16
CONSOLIDATION, MERGER OR SALE OF ASSETS OF THE GENERAL PARTNER
SECTION 16.1 TRIGGERING EVENTS
For the purposes of this Article 16, each of the following events shall be
deemed to be a "TRIGGERING EVENT": (w) if the General Partner consolidates with,
or merges into, any other Person, and the General Partner is not the continuing
or surviving corporation of such consolidation or merger, (x) if any Person
consolidates with, or merges into, the General Partner, and the General Partner
is the continuing or surviving corporation of such consolidation or merger and,
in connection with such consolidation or merger, all or part of the outstanding
REIT Shares are converted into or exchanged for stock or other securities of any
other Person or cash or any other property, or (y) if the General Partner sells
or otherwise transfers (or one or more of its Subsidiaries sells or otherwise
transfers) to any Person or Persons, in one or more transactions, substantially
all of the assets or earning power of the General Partner or the Partnership.
SECTION 16.2 FROM AND AFTER THE OCCURRENCE OF A TRIGGERING EVENT
Effective on the date of each Triggering Event, the Redemption Right shall
be adjusted as provided in this Section 16.2.
A. From and after the occurrence of a Triggering Event (each such
occurrence, a "TRIGGER OCCURRENCE") and until the occurrence, if any, of a
subsequent Triggering Event (in which case a further adjustment shall be made
pursuant to this Section 16.2), each and every reference contained in this
Agreement to a "REIT Share" or "REIT Shares" shall be deemed to be a reference
to a share or shares, respectively (each, a "REPLACEMENT SHARE"; collectively,
"REPLACEMENT SHARES"), of: (i) if, as a result of any Triggering Event, all of
the REIT Shares are converted solely into Registered Common Stock (as
hereinafter defined), such Registered Common Stock and (ii) in all other cases,
the common stock, or, if such Person shall have no common stock, the equity
securities or other equity interest having power to control or direct the
management (the "COMMON STOCK") of (a) in the event of a Triggering Event
described in clause (w) or (x) of the first sentence of Section 16.1, (1) the
Person that is the issuer of any securities into which the REIT Shares are
converted in such merger or consolidation, or, if there is more than one such
issuer, the issuer who has
1
<PAGE>
the highest Market Capitalization (as hereinafter defined) and (2) if no
securities are so issued, the Person that is the other party to such merger or
consolidation, or if there is more than one such Person, the Person who has the
highest Market Capitalization or (b) in the event of a Triggering Event
described in clause (y) of the first sentence of Section 16.1, the Person that
is the party receiving the largest portion of the assets or earning power
transferred pursuant to such transaction or transactions, or, if the Person
receiving the largest portion of the assets or earning power cannot be
determined, whichever Person has the highest Market Capitalization; PROVIDED,
HOWEVER, that in any such case, (1) if the Common Stock of such Person is not at
such time and has not been continuously over the preceding 12-month period
registered ("REGISTERED COMMON STOCK") under Section 12 of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), or such Person is neither
a corporation nor a real estate investment trust, and such Person is a direct or
indirect Subsidiary of another Person that has Registered Common Stock
outstanding, "Replacement Shares" shall mean shares of the Common Stock of such
other Person; (2) if the Common Stock of such Person is not Registered Common
Stock or such Person is neither a corporation nor a real estate investment
trust, and such Person is a direct or indirect Subsidiary of another Person but
is not a direct or indirect Subsidiary of another Person which has Registered
Common Stock outstanding, "Replacement Shares" shall mean shares of the Common
Stock of the parent entity having the highest Market Capitalization; (3) if the
Common Stock of such Person is not Registered Common Stock or such Person is
neither a corporation nor a real estate investment trust, and such Person is
directly or indirectly controlled by more than one Person, and one of such other
Persons has Registered Common Stock outstanding, "Replacement Shares" shall mean
shares of the Common Stock of whichever of such other Persons is the issuer
having the highest Market Capitalization; and (4) if the Common Stock of such
Person is not Registered Common Stock or such Person is neither a corporation
nor a real estate investment trust, and such Person is directly or indirectly
controlled by more than one Person, and none of such other Persons have
Registered Common Stock outstanding, "Replacement Shares" shall mean shares of
the Common Stock of whichever ultimate parent entity is the corporation or real
estate investment trust having the highest aggregate shareholders' equity or, if
no such ultimate parent entity is a corporation or a real estate investment
trust, shall be deemed to refer to shares of the Common Stock of whichever
ultimate parent entity is the entity having the greatest net assets. Any issuer
of "Replacement Shares" shall be referred to as an "ISSUER." "MARKET
CAPITALIZATION" means the dollar figure equal to the product of the number of
shares of Common Stock issued and outstanding on the date of the Trigger
Occurrence in question, on a fully diluted basis, not held by Affiliates (as
defined under the Exchange Act) multiplied by the Average Trading Price (as
hereinafter defined).
B. From and after a Trigger Occurrence, the "Conversion Factor" shall be
adjusted by multiplying the "Conversion Factor" existing on the day immediately
prior to such Trigger Occurrence as follows: (i) if the REIT Shares, as a result
of the Trigger Occurrence, have been converted solely into the right to receive
Registered Common Stock, by the number of shares of Registered Common Stock
which the holder of a single REIT Share was entitled to receive as a result of
the Trigger Occurrence or (ii) in all other cases, by a fraction, the numerator
of which shall be the Average Trading Price of a REIT Share as of such Trigger
Occurrence and the denominator of which shall be the Average Trading Price of a
Replacement Share as of such Trigger Occurrence. Following a Trigger Occurrence,
the Conversion Factor shall be further adjusted as set forth in the definition
of "Conversion Factor" contained in Article 1 of this Agreement and as provided
in this Section 16.2.
C. For the purpose of any computation hereunder, the "Average Trading
Price" per share of Common Stock on any date shall be deemed to be the average
of the daily closing prices per share of such shares for the ten consecutive
trading days immediately prior to the third trading day prior to such date;
PROVIDED, HOWEVER, in the event the Triggering Event occurs as part of a series
of related transactions which also includes a tender offer, the ten trading day
period shall be the ten consecutive trading day period immediately prior to the
day REIT Shares are accepted for payment pursuant to such tender offer;
PROVIDED, HOWEVER, FURTHER, if prior to the expiration of such requisite ten
trading day period the issuer announces either (A) a dividend or distribution on
such shares payable in such shares or securities convertible into such shares or
(B) any subdivision, combination or reclassification of such shares, then,
following the ex-dividend date for such dividend or the record date for such
subdivision, as the case may be, the "Average Trading Price" shall be properly
adjusted to take into account such event. The closing price for each day shall
be, if the shares are listed and admitted to trading on a national securities
exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national
2
<PAGE>
securities exchange on which such shares are listed or admitted to trading or,
if such shares are not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the high bid price in the
over-the-counter market, as reported by the NASDAQ National Market System or
such other system then in use, or, if on any such date such shares are not
quoted by any such organization, the average of the closing bid and asked prices
as furnished by a professional market maker making a market in such shares
selected by the holders of a majority of the Partnership Units held by the
Limited Partners (excluding the Partnership Units held by the General Partner
and its Affiliates). If such shares are not publicly held or not so listed or
traded or if, for the ten days prior to such date, no market maker is making a
market in such shares, the Average Trading Price of such shares on such date
shall be deemed to be the fair value of such shares as determined as set forth
in Section 16.2.D. The term "TRADING DAY" shall mean, if such shares are listed
or admitted to trading on any national securities exchange, a day on which the
principal national 'securities exchange on which such shares are listed or
admitted to trading is open for the transaction of business or, if such shares
are not so listed or admitted, a Business Day.
D. In the event that on the date of a Trigger Occurrence, the shares of a
Person are not publicly held or not so listed or traded or if, for the ten days
prior to such date, no market maker is making a market in the shares of a
Person, the Average Trading Price of the shares of such Person shall be the fair
value of the shares as determined in good faith by the holders of a majority of
the Partnership Units held by the Limited Partners (excluding the Partnership
Units held by the General Partner and its Affiliates) and the General Partner,
which determination shall be binding on all of the Limited Partners. If the
holders of a majority of the Partnership Units held by the Limited Partners
(excluding the Partnership Units held by the General Partner and its Affiliates)
and the General Partner have not agreed on the fair value of the shares and
executed and delivered between them an agreement setting forth the same within
twenty (20) days after the Trigger Occurrence in question, then either the
General Partner or the holders of a majority of the Partnership Units held by
the Limited Partners (excluding the Partnership Units held by the General
Partner and its Affiliates) may notify the other that they or it desire to
invoke the following arbitration procedure:
(1) Notice of the holders of a majority of the Partnership Units held
by the Limited Partners (excluding the Partnership Units held by the
General Partner and its Affiliates) or the General Partner of such parties'
intention to seek arbitration shall be delivered to the other parties
within ten (10) days after which all parties shall, in good faith, attempt
to agree on a single arbitrator to determine the fair value of the shares
(the "ARBITRATOR"). If the holders of a majority of the Partnership Units
held by the Limited Partners (excluding the Partnership Units held by the
General Partner and its Affiliates) and the General Partner have not agreed
on the Arbitrator within ten (10) days after the giving of the Arbitration
Notice, then either, on behalf of both, may apply to the local office of
the American Arbitration Association or any organization which is the
successor thereof (the "AAA") for appointment of the Arbitrator, or, if the
AAA shall not then exist or shall fail, refuse or be unable to act such
that the Arbitrator is not appointed by the AAA within ten (10) days after
application therefor, then either party may apply to any court of competent
jurisdiction in the State of North Carolina (the "COURT") for the
appointment of the Arbitrator and the other party shall not raise any
question as to the Court's full power and jurisdiction to entertain the
application and make the appointment. The date on which the Arbitrator is
appointed, by the agreement of the parties, by appointment by the AAA or by
appointment by the Court, is referred to herein as the "APPOINTMENT DATE."
If any Arbitrator appointed hereunder shall be unwilling or unable, for any
reason, to serve, or continue to serve, a replacement arbitrator shall be
appointed in the same manner as the original Arbitrator.
(2) The arbitration shall be conducted in accordance with the then
prevailing commercial arbitration rules of the AAA, modified as follows:
(i) To the extent that any statute imposes requirements different
than those of the AAA in order for the decision of the Arbitrator to be
enforceable in the courts of the State of North Carolina, such
requirements shall be complied with in the arbitration.
(ii) The Arbitrator shall be disinterested and impartial, shall not
be affiliated with the Limited Partners or the General Partner and shall
have at least ten (10) years experience in the market in which the
applicable Person transactions the majority of its business.
3
<PAGE>
(iii) Before hearing any testimony or receiving any evidence, the
Arbitrator shall be sworn to hear and decide the controversy faithfully
and fairly by an officer authorized to administer an oath and a written
copy thereof shall be delivered to each of the Limited Partners and the
General Partner.
(iv) Within twenty (20) days after the Appointment Date, the
holders of a majority of the Partnership Units held by the Limited
Partners (excluding the Partnership Units held by the General Partner
and its Affiliates) and the General Partner shall deliver to the
Arbitrator two (2) copies of their respective written determinations of
the fair value of the shares (each, a "DETERMINATION") together with
such affidavits, appraisals, reports and other written evidence relating
thereto as the submitting party deems appropriate. After the submission
of any Determination, the submitting party may not make any additions to
or deletions from, or otherwise change, such Determination or the
affidavits, appraisals, reports and other written evidence delivered
therewith. If either party fails to so deliver its Determination within
such time period, time being of the essence with respect thereto, such
party shall be deemed to have irrevocably waived its right to deliver a
Determination and the Arbitrator, without holding a hearing, shall
accept the Determination of the submitting party as the fair value of
the shares. If each party submits a Determination with respect to the
fair value of the shares within the twenty (20) day period described
above, the Arbitrator shall, promptly after its receipt of the second
Determination, deliver a copy of each party's Determination to the other
party.
(v) Not less than ten (10) days nor more than twenty (20) days
after the earlier to occur of (x) the expiration of the twenty (20) day
period provided for in clause (iv) of this subparagraph or (y) the
Arbitrator's receipt of both of the Determinations from the parties
(such earlier date is referred to herein as the "SUBMISSION DATE") and
upon not less than five (5) days notice to the parties, the Arbitrator
shall hold one or more hearings with respect to the determination of the
fair value of the shares. The hearings shall be held in the
Raleigh/Durham metropolitan area of North Carolina at such location and
time as shall be specified by the Arbitrator. Each of the parties shall
be entitled to present all relevant evidence and to cross-examine
witnesses at the hearings. The Arbitrator shall have the authority to
adjourn any hearing to such later date as the Arbitrator shall specify,
provided that in all events all hearings with respect to the
determination of the fair value of the shares shall be concluded not
later than thirty (30) days after the Submission Date.
(vi) The Arbitrator shall be instructed, and shall be empowered
only, to select as the fair value of the shares that one of the
Determinations which the Arbitrator believes is the more accurate
determination of the Average Trading Price of the shares. Without
limiting the generality of the foregoing, in rendering his or her
decision, the Arbitrator shall not add to, subtract from or otherwise
modify the provisions of this Agreement or either of the Determinations.
(vii) The Arbitrator shall render his or her determination as to
the selection of a Determination in a signed and acknowledged written
instrument, original counterparts of which shall be sent simultaneously
to Limited Partners and the General Partner, within ten (10) days after
the conclusion of the hearing(s) required by clause (v) of this Section.
(3) This provision shall constitute a written agreement to submit any
dispute regarding the determination of the Average Trading Price of the
shares of a Person to arbitration.
(4) The arbitration decision, determined as provided in this Article,
shall be conclusive and binding on the parties, shall constitute an "award"
by the Arbitrator within the meaning of the AAA rules and applicable law,
and judgment may be entered thereon in any court of competent jurisdiction.
(5) The Partnership shall pay all fees and expenses relating to the
arbitration (including, without limitation, the fees and expenses of one
counsel (including local counsel, if required) chosen by the holders of a
majority of the Partnership Units held by the Limited Partners (excluding
the Partnership Units held by the General Partner and its Affiliates) and
of experts and witnesses retained or called by the Limited Partners). The
Limited Partners' counsel chosen as set forth in the preceding sentence
shall represent the interests of all of the Limited Partners and the choice
of counsel shall be binding on all of the Limited Partners.
4
<PAGE>
E. From and after a Trigger Occurrence, each and every reference to the
"General Partner" in Section 8.6 shall be deemed to be a reference to the Issuer
of the Replacement Shares. From and after a Trigger Occurrence, the Issuer shall
assume or unconditionally guaranty the performance of the General Partner's
obligations under this Agreement pursuant to an instrument in form and substance
satisfactory to the holders of a majority of the Partnership Units held by the
Limited Partners (excluding the Partnership Units held by the General Partner
and its Affiliates). From and after a Trigger Occurrence, the "Average Trading
Price" of a REIT Share or a Replacement Share, as applicable shall be
substituted for the "Value" of the same for the purposes of determining the Cash
Amount.
SECTION 16.3 ADDITIONAL ISSUER COVENANTS
The General Partner shall (i) not enter in an agreement with any Person
which would result in a Triggering Event unless such agreement provides for each
of the following and (ii) from and after any Trigger Occurrence, comply with
each of the following:
A. If, on the day immediately prior to a Trigger Occurrence, the Issuer is
qualified as a REIT, then, substantially contemporaneously with such Trigger
Occurrence, the General Partner, the Issuer and its Affiliates shall enter into
such mergers, combinations, conveyances or other transactions as shall be
required to cause substantially all of the assets of the General Partner and the
Issuer and its Affiliates to be owned, leased or held directly or indirectly by
a single operating partnership in which the Limited Partners shall hold
partnership units having the rights specified by this Agreement. The agreement
governing the resulting operating partnership shall be in a form substantially
no less favorable to each of the Limited Partners than is this Agreement.
B. From and after a Trigger Occurrence, in the event a dividend or
distribution consisting of cash or property (other than Replacement Shares) or
both is paid by the Issuer in respect of the Replacement Shares, the General
Partner shall cause the Partnership to distribute, in respect of each
Partnership Unit, the same amount of cash or property the holder of a
Partnership Unit would have received had such holder exercised its Redemption
Right and received Replacement Shares prior to such dividend or distribution.
SECTION 16.4 APPLICATION TO LATER TRANSACTIONS
This Article 16 shall apply to the initial Triggering Event and shall
continue to apply to each subsequent Triggering Event.
SECTION 16.5 WAIVERS AND AMENDMENTS
This Article 16 shall only be amended as provided in Section 14.1.D of this
Agreement and shall be deemed included in such section for all purposes;
provided that the General Partner may amend this Article 16, without the consent
of the Limited Partners for the purposes set forth at Section 14.1.B(4) prior to
a Trigger Occurence.
5
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<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 18,625,000 18,625,000
<SECURITIES> 0 0
<RECEIVABLES> 14,078,000 14,078,000
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 38,465,000 38,465,000
<PP&E> 1,726,813,000 1,726,813,000
<DEPRECIATION> 62,062,000 62,062,000
<TOTAL-ASSETS> 1,737,538,000 1,737,538,000
<CURRENT-LIABILITIES> 28,211,000 28,211,000
<BONDS> 647,473,000 647,473,000
0 0
125,000,000 125,000,000
<COMMON> 364,000 364,000
<OTHER-SE> 936,490,000 936,490,000
<TOTAL-LIABILITY-AND-EQUITY> 1,737,538,000 1,737,538,000
<SALES> 59,423,000 115,478,000
<TOTAL-REVENUES> 61,238,000 119,559,000
<CGS> 16,246,000 31,588,000
<TOTAL-COSTS> 26,836,000 51,488,000
<OTHER-EXPENSES> 2,204,000 1,200,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 11,603,000 23,638,000
<INCOME-PRETAX> 20,595,000 40,149,000
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 17,300,000 33,725,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 3,337,000
<CHANGES> 0 0
<NET-INCOME> 14,605,000 26,286,000
<EPS-PRIMARY> .41 .74
<EPS-DILUTED> .41 .74
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