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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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, par value $.01 per share,
with 35,877,715 shares outstanding as of May 13, 1997.
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HIGHWOODS PROPERTIES, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED MARCH 31, 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 March 31, 1997 and December 4
31, 1996
Consolidated statements of income of Highwoods Properties, Inc. for the three months ended 5
March 31, 1997 and 1996
Consolidated statements of cash flows of Highwoods Properties, Inc. for the three months 6
ended March 31, 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 10
Results of Operations 10
Liquidity and Capital Resources 11
Funds From Operations and Cash Available for Distribution 12
Acquisition of Century Center and Anderson Properties Portfolios 13
Disclosure Regarding Forward-Looking Statements 14
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 18
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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 and Management's Discussion and
Analysis of Financial Condition and Results of Operations and the Company's 1996
Annual Report on Form 10-K.
3
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HIGHWOODS PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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MARCH 31, 1997 DECEMBER 31, 1996
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(UNAUDITED)
ASSETS
Real estate assets, at cost:
Land...................................................................... $ 261,285 $ 237,090
Buildings and improvements................................................ 1,362,029 1,152,990
Development in process.................................................... 38,393 28,858
Furniture, fixtures and equipment......................................... 2,269 2,096
1,663,976 1,421,034
Less -- accumulated depreciation (52,028) (43,160)
Net real estate assets.................................................... 1,611,948 1,377,874
Cash and cash equivalents................................................... 8,246 11,070
Restricted cash............................................................. 9,099 8,539
Accounts receivable......................................................... 9,697 9,039
Advances to subsidiaries.................................................... 3,538 2,406
Accrued straight line rents receivable...................................... 7,437 6,185
Other assets:
Deferred leasing costs.................................................... 11,787 9,601
Deferred financing costs.................................................. 21,950 21,789
Prepaid expenses and other................................................ 4,662 3,901
38,399 35,291
Less -- accumulated amortization.......................................... (8,158) (6,964)
30,241 28,327
$1,680,206 $ 1,443,440
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable................................................. $ 589,053 $ 555,876
Accounts payable, accrued expenses and other liabilities.................... 30,481 27,600
Total liabilities......................................................... 619,534 583,476
Minority interest........................................................... 169,752 89,617
Stockholders' equity:
Preferred stock $.01 par value, authorized 10,000,000 shares; issued and
outstanding 125,000 shares of Series A Cumulative Redeemable Preferred
Shares (liquidation preference of $1,000 per share) at March 31, 1997..... 125,000 --
Common stock, $.01 par value, authorized 100,000,000 shares; issued and
outstanding 35,857,950 at March 31, 1997 and 35,636,155 at December 31,
1996...................................................................... 359 356
Additional paid-in capital.................................................. 781,648 780,562
Distributions in excess of net income....................................... (16,087) (10,571)
Total stockholders' equity................................................ 890,920 770,347
$1,680,206 $ 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
MARCH 31,
1997 1996
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REVENUE:
Rental property....................................................................... $56,055 $23,385
Interest and other income............................................................. 2,266 372
58,321 23,757
OPERATING EXPENSES:
Rental property....................................................................... 15,342 6,154
Depreciation and amortization......................................................... 9,310 3,716
Interest expense:
Contractual........................................................................ 11,460 3,542
Amortization of deferred financing costs........................................... 575 409
12,035 3,951
General and administrative............................................................ 2,080 934
Income before minority interest and extraordinary item............................. 19,554 9,002
MINORITY INTEREST....................................................................... (3,129) (1,571)
Income before extraordinary item...................................................... 16,425 7,431
EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF DEBT.............................. (3,337) --
Net income............................................................................ 13,088 7,431
Dividends on preferred shares........................................................... (1,407) --
Net income available for common stockholders.......................................... $11,681 $ 7,431
NET INCOME (LOSS) PER COMMON SHARE:
Income before extraordinary item...................................................... $ .43 $ .38
Extraordinary item -- loss on early extinguishment of debt............................ (0.10) $ --
Net income............................................................................ $ 0.33 $ 0.38
Weighted average shares outstanding..................................................... 35,250 19,406
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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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THREE MONTHS ENDED MARCH 31,
1997 1996
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OPERATING ACTIVITIES:
Net income..................................................................... $ 13,088 $ 7,431
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization................................................ 9,885 4,125
Minority interest in income.................................................. 2,493 1,571
Loss on early extinguishment of debt......................................... 3,973 --
Changes in operating assets and
liabilities............................................................... (588) (1,682)
Net cash provided by operating
activities.............................................................. 28,851 11,445
INVESTING ACTIVITIES:
Additions to real estate assets................................................ (24,594) (13,643)
Proceeds from disposition of real estate assets................................ -- 900
Cash paid in exchange for partnership net assets............................... (5,081) --
Other.......................................................................... (4,487) (591)
Net cash used in investing activities..................................... (34,162) (13,334)
FINANCING ACTIVITIES:
Distributions paid............................................................. (19,147) (10,399)
Repayment of mortgages and notes payable....................................... (110,093) (1,018)
Payment of prepayment penalties................................................ (3,973) --
Borrowings on mortgages and notes
payable...................................................................... 14,000 15,000
Net proceeds from the sale of common
stock........................................................................ 57 --
Net proceeds from sale of preferred stock...................................... 121,804 --
Payment of deferred financing costs............................................ (161) (149)
Net cash provided by financing activities................................. 2,487 3,434
Net (decrease) increase in cash and cash equivalents........................... (2,824) 1,545
Cash and cash equivalents at beginning of the
period....................................................................... 11,070 6,838
Cash and cash equivalents at end
of the period................................................................ $ 8,246 $ 8,383
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest......................................................... $ 8,414 $ 4,005
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
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HIGHWOODS PROPERTIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The following summarizes the net assets contributed by the unit holders of
the Operating Partnership or acquired subject to mortgage notes payable:
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THREE MONTHS ENDED
MARCH 31,
1997
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ASSETS:
Rental property and equipment, net.................................................................... $213,090
LIABILITIES:
Mortgages and notes payable assumed................................................................... 129,270
Net assets....................................................................................... $ 83,820
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
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HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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
interest ("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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HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED
2. PRO FORMA INFORMATION
The following unaudited pro forma information has been prepared assuming
the following transactions all occurred as of January 1, 1996; (1) the 1997
acquisition of the Century Center and Anderson Properties portfolios and (2) the
February 1997 issuance of $125,000,000 of Preferred Stock.
In connection with these transactions, the Company issued Units totaling
2,676,273 in 1997, which were recorded at their fair market value upon the
closing date of the transactions.
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PRO FORMA PRO FORMA
QUARTER ENDED QUARTER ENDED
MARCH 31, MARCH 31,
1997 1996
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(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Revenues................................................ $58,966 $29,783
Net Income before Extraordinary Item.................... $17,493 $ 9,784
Net Income.............................................. $14,156 $ 6,447
Net Income per Common Share............................. $ .33 $ .19
</TABLE>
The pro forma information is not necessarily indicative of what the
Company's results of operations would have been if the transactions had occurred
at the beginning of each period presented. Additionally, the pro forma
information does not purport to be indicative of the Company's results of
operations for future periods.
9
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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 MARCH 31, 1997
Revenues from rental operations increased $32.7 million, or 140%, from
$23.4 million for the three months ended March 31, 1996 to $56.1 million for the
comparable 1997 period. The increase is primarily a result of the acquisition of
7.3 million square feet of office and industrial properties, the completion of
984,000 square feet of development activity during 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. (See " -- Acquisition of
Century Center and Anderson Properties Portfolios.") The Company's portfolio
increased from 9.2 million square feet at March 31, 1996 to 21.2 million square
feet at March 31, 1997. Same property revenues, which are the revenues of the
190 properties owned on January 1, 1996, increased 1% for the three months ended
March 31, 1997, compared to the same three months of 1996. Expected vacancies in
two of the Company's properties offset a 3% increase in the revenues of the
other 188 properties.
During the three months ended March 31, 1997, 167 leases representing
1,351,000 square feet of office and industrial space commenced at an average
rate per square foot which was 5.4% higher than the average rate per square foot
on the expired leases.
Interest and other income increased $1.9 million from $400,000 in 1996 to
$2.3 million in 1997. The increase is related to the receipt of $800,000 in
lease termination fees in the first quarter of 1997 and an increase in
third-party management fees derived from the management contracts assumed in the
merger with Eakin & Smith, Inc. on April 1, 1996.
Rental operating expenses increased $9.1 million or 147% from $6.2 million
in 1996 to $15.3 million in 1997. The increase is a result of the addition of
12.0 million square feet through a combination of acquisitions and developments
during 1996 and the first quarter of 1997. Rental operating expenses as a
percentage of related revenues increased from 26.3% in 1996 to 27.4% 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 March 31, 1997 and
1996 was $9.3 million and $3.7 million, respectively. The increase of $5.6
million, or 151%, is due to a 155% average increase in depreciable assets.
Interest expense increased $8.0 million or 200%, from $4.0 million in 1996 to
$12.0 million in 1997. The increase is attributable to the 201% average increase
in outstanding debt for the quarter related to the Company's acquisition
activities. Interest expense for the three months ended March 31, 1997 and 1996
included $575,000 and $409,000, 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 4.0%
of rental revenue in 1996 to 3.7% 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 $19.6
million and $9.0 million for the three-month periods ended March 31, 1997 and
1996, respectively. The Company's net income allocated to minority interest
totaled $3.1 million and $1.6 million for the three-month periods ended March
31, 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 accrued $1.4 million in dividends for the $125.0
million of preferred stock that the Company issued in February 1997 (see
" -- Liquidity and Capital Resources" below).
10
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LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1997, cash provided by operating
activities increased by $17.5 million or 154% to $28.9 million, as compared to
$11.4 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 $20.9 million or 157% to $34.2 million for the first three months of 1997, as
compared to $13.3 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
$900,000 or 26% to $2.5 million for the first three months of 1997, as compared
to $3.4 million for the same period in 1996. During the first quarter of 1997,
cash provided by financing activities consisted, primarily, of $121.8 million in
net proceeds from the sale of preferred stock, which was offset by net payments
of $5 million to reduce existing indebtedness and $105 million to pay off the
assumed indebtedness associated with the Century Center and Anderson
Transactions (defined below). Additionally, payments of distributions increased
by $8.7 million to $19.1 million for the first three months of 1997, as compared
with $10.4 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 7, 1997, the Company issued 125,000 shares of 8 5/8% perpetual
preferred stock for $1,000 per share. The preferred stock is not redeemable
prior to February 2027. The preferred stock is not subject to any sinking fund
or mandatory redemption and is not convertible into any other securities of the
Company.
The Company's total indebtedness at March 31, 1997, totaled $589.1 million
and was comprised of $321.4 million of secured indebtedness with an average rate
of 8.0% and $267.7 million of unsecured indebtedness with an average rate of
7.1%. All of the mortgage and notes payable outstanding at March 31, 1997 were
either fixed rate obligations or variable rate obligations covered by interest
rate protection agreements (see below).
Based on the Company's total market capitalization of $2.1 billion at March
31, 1997, (at the March 31, 1997 stock price of $33.50 and assuming the
redemption for shares of Common Stock of the 6,916,000 Units of minority
interest in the Operating Partnership), the Company's debt represented
approximately 28% 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 cap limiting its
exposure to an increase in interest rates (one-month LIBOR plus 135 basis
points) to 7.60% with respect to $80 million of the Company's $280 million
unsecured revolving loan (the "Revolving Loan"), under which the Company had $29
million outstanding at March 31, 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. Payments received from the
counterparties under the interest rate protection agreements were $0 and $2,000
for the three months ended March 31, 1997 and 1996, respectively. 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 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. 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
11
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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 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
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.
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 stockholders. Funds from
Operations does not represent cash flows from operating, investing or financing
activities as defined by GAAP. Further, FFO as disclosed by other REITs may not
be comparable to the Company's calculation of FFO, as described below.
Funds from operations is defined as net income (computed in accordance with
generally accepted accounting principles) excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation of real estate assets,
and after adjustments for unconsolidated partnerships and joint ventures. In
March 1995, NAREIT issued a clarification of the definition of FFO. The
clarification provides that amortization of deferred financing costs and
depreciation of non-real estate assets are no longer to be added back to net
income in arriving at FFO. Cash available for distribution is defined as funds
from operations reduced by non-revenue enhancing capital expenditures for
building improvements and tenant improvements and lease commissions related to
second generation space.
12
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Funds from operations and cash available for distribution for the three
months ended March 31, 1997 and 1996 are summarized in the following table (in
thousands):
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QUARTER ENDED
MARCH 31,
1997 1996
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FUNDS FROM OPERATIONS:
Income before minority interest and extraordinary item..................................... $19,554 $ 9,002
Add (deduct):
Dividends to preferred shareholders...................................................... (1,407) --
Depreciation and amortization............................................................ 9,310 3,716
Third-party service company cash flow.................................................... -- 150
FUNDS FROM OPERATIONS BEFORE MINORITY INTEREST........................................ 27,457 12,868
CASH AVAILABLE FOR DISTRIBUTION:
Add (deduct):
Rental income from straight-line rents................................................... (1,230) (416)
Amortization of deferred financing costs................................................. 575 409
Non-incremental revenue generating capital expenditures (1):
Building improvements paid............................................................ (1,070) (474)
Second generation tenant improvements paid............................................ (1,371) (750)
Second generation lease commissions paid.............................................. (1,091) (112)
CASH AVAILABLE FOR DISTRIBUTION..................................................... $23,270 $11,525
Weighted average shares/Units outstanding (2).............................................. 41,758 23,139
DIVIDEND PAYOUT RATIO:
Funds from operations.................................................................... 73.0% 80.9%
Cash available for distribution.......................................................... 86.1% 90.3%
</TABLE>
(1) Amounts represent cash expenditures.
(2) Assumes redemption of Units for shares of Common Stock. Minority interest
Unit holders and the stockholders 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 April 29, 1997, the Company's Board of Directors declared a dividend of
$.48 per share ($1.92 on an annualized basis) payable on May 21, 1997 to
stockholders of record on May 9, 1997.
ACQUISITION OF CENTURY CENTER AND ANDERSON PROPERTIES PORTFOLIOS
CENTURY CENTER TRANSACTION
On January 9, 1997, the Company acquired the 17-building Century Center
Office Park, four affiliated industrial properties and 20 acres of land for
development located in suburban Atlanta, Georgia (the "Century Center
Transaction"). The properties total 1.6 million rentable square feet and, as of
March 31, 1997, were 99% leased. The cost of the Century Center Transaction was
$55.6 million in Units (valued at $29.25 per Unit, the market value of a share
of Common Stock as of the signing of a letter of intent for the Century Center
Transaction), the assumption of $19.4 million of secured debt and a cash payment
of $53.1 million, drawn from the Company's Revolving Loan. All Units issued in
the transaction are subject to restrictions on transfer and redemption. Such
restrictions are scheduled to expire over a three-year period in equal annual
installments commencing one year from the date of issuance.
Century Center Office Park is located on approximately 77 acres, of which
approximately 61 acres are controlled under long-term fixed rental ground leases
that expire in 2058. The rent under the leases is approximately $180,000 per
year with scheduled 10% increases in 1999 and 2009. The leases do not contain a
right to purchase the subject land.
The Company estimates a first-year net operating income from the properties
acquired in the Century Center Transaction of $13.3 million. See " -- Disclosure
Regarding Forward-looking Statements" below.
13
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ANDERSON TRANSACTION
On February 12, 1997, the Company acquired a portfolio of industrial,
office and undeveloped properties in Atlanta from Anderson Properties, Inc. and
affiliates (the "Anderson Transaction"). The Anderson Transaction involved 22
industrial properties and six office properties totaling 1.6 million rentable
square feet, three industrial development projects totaling 402,000 square feet
and 137 acres of land for development. The in-service properties were 95% leased
as of March 31, 1997. The development projects have a cost-to-date of $4.0
million and are expected to be completed during 1997.
The cost of the Anderson Transaction consisted of the issuance of $22.9
million of Units (valued at $29.25 per Unit, the market value of a share of
Common Stock as of the signing of a letter of intent relating to the
transaction), the assumption of $7.8 million of mortgage debt and a cash payment
of $37.7 million. The cash amount does not include $10.7 million expected to be
paid to complete the three development projects. Approximately $5.5 million of
the Units are newly created Class B Units, which differ from other Units in that
they are not eligible for cash distributions from the Operating Partnership. The
Class B Units will convert to regular Units in 25% annual installments
commencing one year from the date of issuance. Prior to such conversion, such
Units will not be redeemable for cash or Common Stock. All other Units issued in
the transaction are also subject to restrictions on transfer or redemption. Such
lock-up restrictions will expire over a three-year period in equal annual
installments commencing one year from the date of issuance.
The Company estimates a first-year net operating income from the properties
acquired in the Anderson Transaction of $5.7 million. See "Disclosure Regarding
Forward-looking Statements" below.
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.
PROPERTY INFORMATION
The following table sets forth certain information with respect to the
Company's properties as of March 31, 1997:
<TABLE>
<CAPTION>
RENTABLE NUMBER OF PERCENT LEASED/
SQUARE FEET PROPERTIES PRE-LEASED
<S> <C> <C> <C>
IN-SERVICE:
Office............................................................. 13,972,000 208 94%
Industrial......................................................... 7,030,000 137 90%
Total........................................................... 21,002,000 345 93%
UNDER DEVELOPMENT:
Office............................................................. 947,000 14 51%
Industrial......................................................... 595,000 6 26%
Total........................................................... 1,542,000 20 41%
TOTAL:
Office............................................................. 14,919,000 222
Industrial......................................................... 7,625,000 143
Total........................................................... 22,544,000 365
</TABLE>
14
<PAGE>
The following table sets forth certain information with respect to the
Company's properties under development as of March 31, 1997:
<TABLE>
<CAPTION>
COST AT PRE-LEASING ESTIMATED
NAME LOCATION SQUARE FOOTAGE BUDGETED COST 3/31/97 PERCENTAGE COMPLETION
<S> <C> <C> <C> <C> <C> <C>
OFFICE:
Center Point V......... Columbia 19,000 $ 1,700,000 $ 1,014,000 64% 2Q97
Southwind III.......... Memphis 69,000 7,000,000 1,072,000 67 4Q97
Colonnade.............. Memphis 89,000 9,400,000 -- 28 1Q98
Highwoods Plaza II..... Nashville 104,000 10,400,000 3,600,000 4 3Q97
Two AirPark East....... Piedmont Triad 57,000 4,600,000 2,400,000 0 2Q97
AirPark East-Simplex... Piedmont Triad 12,000 900,000 400,000 60 2Q97
RMIC................... Piedmont Triad 90,000 8,000,000 -- 100 2Q98
Sycamore............... Research Triangle 70,000 6,400,000 3,000,000 89 2Q97
North Park............. Research Triangle 43,000 4,000,000 2,800,000 38 2Q97
Rexwood V.............. Research Triangle 60,000 7,100,000 1,600,000 0 4Q97
ClinTrials............. Research Triangle 185,000 21,500,000 3,700,000 100 2Q98
Grove Park I........... Richmond 20,000 1,600,000 1,000,000 0 3Q97
Highwoods Two.......... Richmond 74,000 7,000,000 2,600,000 11 3Q97
West Shore III......... Richmond 55,000 5,300,000 1,600,000 43 3Q97
OFFICE TOTAL OR WEIGHTED AVERAGE.......... 947,000 $ 94,900,000 $24,786,000 51%
INDUSTRIAL PROPERTIES
Chastain Place......... Atlanta 108,000 $ 4,200,000 $ 3,000,000 10% 2Q97
TradePort-1............ Atlanta 87,000 3,000,000 -- 0 3Q97
TradePort-2............ Atlanta 87,000 3,000,000 -- 0 3Q97
Newpoint............... Atlanta 119,000 4,500,000 1,000,000 0 3Q97
R.F. Micro Devices..... Piedmont Triad 49,000 7,700,000 1,600,000 100 4Q97
Highwoods Airport
Center............... Richmond 145,000 5,500,000 2,600,000 66 2Q97
INDUSTRIAL TOTAL OR WEIGHTED AVERAGE...... 595,000 $ 27,900,000 $ 8,200,000 26%
COMPANY TOTAL OR WEIGHTED AVERAGE......... 1,542,000 $ 122,800,000 $32,986,000 41%
</TABLE>
15
<PAGE>
The following tables set forth certain information about the Company's
leasing activities for the three months ended March 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
OFFICE INDUSTRIAL OFFICE INDUSTRIAL
<S> <C> <C> <C> <C>
NET EFFECTIVE RENTS RELATED TO RE-LEASED SPACE:
Number of lease transactions (signed leases)................. 112 55 58 73
Rentable square footage leased............................... 738,461 612,175 130,312 669,007
Average per rentable square foot over the lease term:
Base rent.................................................. $ 15.47 $ 5.12 $ 16.21 $ 4.55
Tenant improvements........................................ (1.08) (0.20) (1.49) (0.18)
Leasing commissions........................................ (0.40) (0.15) (0.35) (0.08)
Rent concessions........................................... (0.02) (0.01) -- --
Effective rent............................................. $ 13.97 $ 4.76 $ 14.37 $ 4.29
Expense stop............................................... (3.62) (0.22) (4.23) (0.31)
Equivalent effective net rent.............................. $ 10.35 $ 4.54 $ 10.14 $ 3.98
Average term in years........................................ 5 3 4 2
CAPITAL EXPENDITURES RELATED TO RE-LEASED SPACE:
Tenant improvements:
Total dollars committed under signed leases................ $3,745,604 $ 398,591 $723,053 $ 456,808
Rentable square feet....................................... 738,461 612,175 130,312 669,007
Per rentable square foot................................... $ 5.07 $ 0.65 $ 5.55 $ 0.68
Leasing commissions:
Total dollars committed under signed leases................ $1,395,209 $ 305,492 $156,264 $ 158,537
Rentable square feet....................................... 738,461 612,175 130,312 669,007
Per rentable square foot................................... $ 1.89 $ 0.50 $ 1.20 $ 0.24
Total:
Total dollars committed under signed leases................ $5,140,813 $ 704,083 $879,317 $ 615,345
Rentable square feet....................................... 738,461 612,175 130,312 669,007
Per rentable square foot................................... $ 6.96 $ 1.15 $ 6.75 $ 0.92
RENTAL RATE TRENDS:
Number of leases commenced during period..................... 112 55 58 69
Average final rate with expense pass throughs................ $ 13.59 $ 5.12 $ 15.20 $ 4.45
Average first year cash rental rate.......................... $ 14.36 $ 5.35 $ 15.75 $ 4.66
Percentage increase.......................................... 5.67% 4.49% 3.62% 4.72%
</TABLE>
16
<PAGE>
The following tables set forth scheduled lease expirations for executed
leases as of March 31, 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 398 1,498,221 11.5% $ 21,069,902 $ 14.06 10.9%
1998 346 2,173,248 16.7 31,148,453 14.33 16.1
1999 358 1,815,970 14.0 26,651,573 14.68 13.7
2000 291 2,006,635 15.5 30,735,992 15.32 15.8
2001 246 1,900,736 14.6 31,454,164 16.55 16.2
2002 120 1,109,540 8.6 17,210,090 15.51 8.9
2003 44 814,967 6.3 12,379,650 15.19 6.4
2004 18 299,578 2.3 4,676,802 15.61 2.4
2005 15 420,356 3.2 4,539,398 10.80 2.3
2006 13 550,512 4.2 7,488,277 13.60 3.9
Thereafter 24 405,528 3.1 6,525,976 16.09 3.4
Total or average 1,873 12,995,291 100.0% $193,880,277 $ 14.92 100.0%
</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 192 1,498,955 23.5% $ 7,407,487 $ 4.94 22.0%
1998 151 1,208,786 18.9 6,677,064 5.52 19.9
1999 144 1,437,649 22.5 7,367,167 5.12 21.9
2000 70 929,625 14.6 5,412,980 5.82 16.1
2001 54 603,166 9.4 3,677,615 6.10 11.0
2002 15 476,789 7.5 1,722,633 3.61 5.1
2003 1 3,375 0.1 18,833 5.58 0.1
2004 4 56,069 0.9 447,992 7.99 1.3
2005 5 38,532 0.6 311,843 8.09 0.9
2006 1 127,600 2.0 575,476 4.51 1.7
Thereafter 0 -- 0.0 -- -- 0.0
Total or average 637 6,380,546 100.0% $ 33,619,090 $ 5.27 100.0%
</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 -- None
Item 5. Other Information -- None
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
During the three months ended March 31, 1997, the Company filed a
report on Form 8-K, dated January 9, 1997 (as amended by Form 8-K/A on
February 7, 1997 and by Form 8-K/A on March 10, 1997), in connection with
the Century Center Transaction and the Anderson Transaction. The Form 8-K,
as amended, included financial statements with respect to Century Center
Group dated January 9, 1997 and financial statements with respect to
Anderson Properties, Inc. dated January 23, 1997. The Company also filed a
report on Form 8-K, dated February 12, 1997, in connection with the
issuance of 125,000 8 5/8% Series A Cumulative Redeemable Preferred Shares.
18
<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: May 15, 1997
19
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
27 Financial Data Schedule
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 17,345,000
<SECURITIES> 0
<RECEIVABLES> 13,235,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 35,242,000
<PP&E> 1,662,976,000
<DEPRECIATION> 52,028,000
<TOTAL-ASSETS> 1,680,206,000
<CURRENT-LIABILITIES> 30,481,000
<BONDS> 589,053,000
0
125,000,000
<COMMON> 359,000
<OTHER-SE> 935,313,000
<TOTAL-LIABILITY-AND-EQUITY> 1,680,206,000
<SALES> 56,055,000
<TOTAL-REVENUES> 58,321,000
<CGS> 15,342,000
<TOTAL-COSTS> 24,652,000
<OTHER-EXPENSES> 2,080,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,035,000
<INCOME-PRETAX> 19,554,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 16,425,000
<DISCONTINUED> 0
<EXTRAORDINARY> 3,337,000
<CHANGES> 0
<NET-INCOME> 11,681,000
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
