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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 September 30, 1998
Commission file number: 001-13100
HIGHWOODS PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
MARYLAND 56-1871668
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
3100 SMOKETREE COURT, SUITE 600, RALEIGH, N.C.
(Address of principal executive office)
27604
(Zip Code)
Registrant's telephone number, including area code:
(919) 872-4924
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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The Company has only one class of common stock, par value $.01 per share,
with 59,441,225 shares outstanding as of November 13, 1998.
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HIGHWOODS PROPERTIES, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated balance sheets of Highwoods Properties, Inc. as of September 30, 1998
and December 31, 1997 4
Consolidated statements of income of Highwoods Properties, Inc. for the three
and nine month periods ended September 30, 1998 and 1997 5
Consolidated statements of cash flows of Highwoods Properties, Inc. for the
nine month periods ended September 30, 1998 and 1997 6
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 10
Liquidity and Capital Resources 11
Year 2000 14
Funds From Operations and Cash Available for Distributions 15
Disclosure Regarding Forward-Looking Statements 17
Property Information 18
Inflation 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
</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 1997 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)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 DECEMBER 31, 1997
-------------- ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Real estate assets, at cost:
Land and improvements ................................................. $ 582,031 $ 344,315
Buildings and tenant improvements ..................................... 3,172,487 2,194,641
Development in process ................................................ 170,744 95,387
Land held for development ............................................. 159,438 64,454
Furniture, fixtures and equipment ..................................... 6,753 3,362
---------- ----------
4,091,453 2,702,159
Less -- accumulated depreciation ...................................... (166,187) (87,505)
---------- ----------
Net real estate assets ................................................ 3,925,266 2,614,654
Cash and cash equivalents ............................................... 21,951 10,146
Restricted cash ......................................................... 22,377 9,341
Accounts receivable ..................................................... 24,746 17,701
Advances to related parties ............................................. 8,914 9,072
Notes receivable ........................................................ 17,691 --
Accrued straight line rents receivable .................................. 23,100 13,033
Investment in unconsolidated affiliates ................................. 30,465 --
Other assets:
Deferred leasing costs ................................................ 42,064 21,688
Deferred financing costs .............................................. 32,094 22,294
Prepaid expenses and other ............................................ 17,818 17,607
---------- ----------
91,976 61,589
Less -- accumulated amortization ...................................... (21,548) (13,230)
---------- ----------
70,428 48,359
---------- ----------
$4,144,938 $2,722,306
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable ............................................. $1,857,013 $ 978,558
Accounts payable, accrued expenses and other liabilities ................ 112,202 55,121
---------- ----------
Total liabilities ..................................................... 1,969,215 1,033,679
Minority interest ....................................................... 289,461 287,186
Stockholders' equity:
Preferred stock, $.01 par value, 50,000,000 authorized shares;
8 5/8% Series A Cumulative Redeemable Preferred Shares
(liquidation preference $1,000 per share), 125,000 shares issued
and outstanding at September 30, 1998 and December 31, 1997 .......... 125,000 125,000
8% Series B Cumulative Redeemable Preferred Shares
(liquidation preference $25 per share), 6,900,000 shares issued and
outstanding at September 30, 1998 and December 31, 1997 .............. 172,500 172,500
8% Series D Cumulative Redeemable Preferred Shares
(liquidation preference $250 per share), 400,000 shares and 0 shares
issued and outstanding at September 30, 1998 and December 31, 1997,
respectively ......................................................... 100,000 --
Common stock, $.01 par value, authorized 200,000,000 shares; issued and
outstanding 59,263,412 at September 30, 1998 and 46,838,600 at
December 31, 1997 ..................................................... 593 468
Additional paid-in capital .............................................. 1,529,093 1,132,100
Distributions in excess of net income ................................... (40,924) (28,627)
---------- ----------
Total stockholders' equity ............................................ 1,886,262 1,401,441
---------- ----------
$4,144,938 $2,722,306
========== ==========
</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)
<TABLE>
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Rental property .................................................... $138,793 $ 61,768 $ 352,203 $177,246
Equity in earnings of unconsolidated affiliates .................... 194 -- 194 --
Interest and other income .......................................... 3,953 1,887 8,672 5,968
-------- -------- --------- --------
142,940 63,655 361,069 183,214
OPERATING EXPENSES:
Rental property .................................................... 43,117 17,407 108,672 48,995
Depreciation and amortization ...................................... 24,464 11,151 61,965 31,051
Interest expense:
Contractual ....................................................... 28,452 10,566 62,835 33,082
Amortization of deferred financing costs .......................... 683 567 1,915 1,689
-------- -------- --------- --------
29,135 11,133 64,750 34,771
General and administrative ......................................... 5,915 2,410 14,085 6,694
-------- -------- --------- --------
Income before minority interest and
extraordinary item ............................................... 40,309 21,554 111,597 61,703
MINORITY INTEREST .................................................... (6,031) (3,448) (17,905) (9,872)
-------- -------- --------- --------
Income before extraordinary item ................................... 34,278 18,106 93,692 51,831
EXTRAORDINARY ITEM -- LOSS ON EARLY
EXTINGUISHMENT OF DEBT ............................................. (324) (1,328) (370) (4,665)
-------- -------- --------- --------
Net income ......................................................... 33,954 16,778 93,322 47,166
Dividends on Preferred Stock ......................................... (8,145) (2,870) (21,946) (6,972)
-------- -------- --------- --------
Net income available for common stockholders ....................... $ 25,809 $ 13,908 $ 71,376 $ 40,194
======== ======== ========= ========
NET INCOME PER COMMON SHARE -- BASIC:
Income before extraordinary item ................................... $ 0.45 $ 0.42 $ 1.35 $ 1.25
Extraordinary item -- loss on early extinguishment of debt ......... (0.01) (0.04) (0.01) (0.13)
-------- -------- --------- --------
Net income ......................................................... $ 0.44 $ 0.38 $ 1.34 $ 1.12
======== ======== ========= ========
Weighted average shares outstanding -- Basic ....................... 58,059 36,582 53,189 35,777
======== ======== ========= ========
NET INCOME PER COMMON SHARE -- DILUTED:
Income before extraordinary item ................................... $ 0.45 $ 0.41 $ 1.34 $ 1.24
Extraordinary item loss on early extinguishment of debt ............ (0.01) (0.03) (0.01) (0.13)
-------- -------- --------- --------
Net income ......................................................... $ 0.44 $ 0.38 $ 1.33 $ 1.11
======== ======== ========= ========
Weighted average shares outstanding -- Diluted ..................... 58,228 36,964 53,510 36,248
======== ======== ========= ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
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HIGHWOODS PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
<TABLE>
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NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income .................................................................. $ 93,322 $ 47,166
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................................. 61,965 32,520
Minority interest ......................................................... 17,905 8,979
Loss on early extinguishment of debt ...................................... 370 5,534
Changes in operating assets and liabilities ............................... 15,892 2,338
---------- ----------
Net cash provided by operating activities ................................ 189,454 96,537
---------- ----------
INVESTING ACTIVITIES:
Additions to real estate assets ............................................. (756,794) (149,458)
Cash paid in exchange for partnership net assets ............................ (108,257) (5,314)
Other ....................................................................... (21,000) (15,005)
---------- ----------
Net cash used in investing activities .................................... (886,051) (169,777)
---------- ----------
FINANCING ACTIVITIES:
Distributions paid on Common Stock and Common Units ......................... (99,483) (57,770)
Dividends paid on Preferred Stock ........................................... (21,946) (5,959)
Payments of prepayment penalties ............................................ (370) (5,534)
Borrowings on mortgages and notes payable ................................... 529,941 183,000
Repayment of mortgages and notes payable .................................... (130,993) (223,388)
Borrowings on revolving loans ............................................... 792,500 --
Payments on revolving loans ................................................. (648,000) --
Net proceeds from the sale of Common Stock .................................. 196,930 58,463
Net proceeds from the sale of 8 5/8% Series A Cumulative Redeemable
Preferred Shares .......................................................... -- 121,804
Net proceeds from sale of 8% Series B Cumulative Redeemable Preferred Shares -- 167,066
Net proceeds from the sale of 8% Series D Cumulative Redeemable Preferred
Shares .................................................................... 96,809 --
Net change in deferred financing costs ...................................... (6,986) (425)
---------- ----------
Net cash provided by financing activities ................................ 708,402 237,257
---------- ----------
Net increase in cash and cash equivalents ................................... 11,805 164,017
Cash and cash equivalents at beginning of the period ........................ 10,146 11,070
---------- ----------
Cash and cash equivalents at end of the period .............................. $ 21,951 $ 175,087
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ...................................................... $ 60,325 $ 7,763
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
HIGHWOODS PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The following summarizes the net assets contributed by holders of limited
partnership interests ("Common Units") in Highwoods Realty Limited Partnership
(the "Operating Partnership") or acquired subject to mortgage notes payable:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
----------- -----------
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ASSETS:
Rental property and equipment, net .......... $491,863 $226,051
LIABILITIES:
Mortgages and notes payable assumed ......... $327,214 $133,736
-------- --------
Net assets ............................... $164,649 $ 92,315
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company,
the Operating Partnership and certain subsidiaries, including the following
significant subsidiaries:
Highwoods/Tennessee Holdings, L.P.
AP Southeast Portfolio Partners, L.P.
Highwoods/Florida Holdings, L.P.
The Company's investment in Highwoods Services, Inc. (the "Service
Company") 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 Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended.
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings Per Share," which is effective for financial
statements for periods ending after December 15, 1997. FASB Statement No. 128
requires the restatement of prior period earnings per share and requires the
disclosure of additional supplemental information detailing the calculation of
earnings per share.
FASB Statement No. 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. It is computed using the weighted average number of shares of the
Company's common stock, $.01 par value per share (the "Common Stock"), and the
dilutive effect of options, warrants and convertible securities outstanding,
using the "treasury stock" method. Earnings per share data are required for all
periods for which an income statement or summary of earnings is presented,
including summaries outside the basic financial statements. All earnings per
share amounts for all periods presented have, where appropriate, been restated
to conform to the FASB Statement No. 128 requirements.
In 1997, the FASB issued Statements No. 130, "Reporting Comprehensive
Income" ("SFAS 130") and No. 131, "Disclosures About Segments of an Enterprise
and Related Information" ("SFAS 131"), which are both effective for fiscal
years beginning after December 15, 1997. As of January 1, 1998, the Company
adopted SFAS 130 which established new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this
statement had no impact on the Company's net income or shareholders' equity.
SFAS 131, which addresses reporting segment information, is not required for
interim reporting in the first year of application. The Company does not
believe the adoption of SFAS 130 and 131 will have a material impact on its
financial statements.
Emerging Issues Task Forces ("EITF") Issue No. 97-11, Accounting for
Internal Cost Relating to Real Estate Property Acquisitions, requires internal
acquisition costs related to the purchase of an operating property to be
expensed as incurred. The Company's financial statements for the nine months
ended September 30, 1998 reflect the change, effective March 19, 1998, as
required by the EITF, in accounting for acquisition costs. The Company believes
the effect of this change on future periods will be immaterial.
The "Year 2000" issue is a general term used to describe the various
problems that may result from the improper processing of dates and calculations
involving years by many computers throughout the world as the Year 2000 is
approached and reached. The Company has reviewed the impact of the Year 2000
issues and does not expect Year 2000 issues to be material to its business,
operations or financial condition. The Year 2000 issue is discussed more fully
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
8
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Minority interest in the Company represents 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). In addition,
minority interest includes equity of consolidated real estate partnerships
which are owned by various individuals and entities and not the Company. The
Company acquired greater than 50% of the interest in real estate partnerships
as part of its acquisition of J.C. Nichols Company.
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 1997 Annual Report on Form 10-K.
2. ACQUISITIONS
On July 13, 1998, the Company completed its merger (the "J.C. Nichols
Transaction") with J.C. Nichols Company, a Missouri real estate operating
company ("J.C. Nichols"). As a result of the J.C. Nichols Transaction the
Company acquired ownership of or an ownership interest in 79 office, industrial
and retail properties and 18 multifamily communities in the Kansas City and Des
Moines, Iowa metropolitan areas. The $544 million purchase price consisted of
the issuance of approximately $180 million in equity, or 5.63 million shares of
the Company's Common Stock, the assumption of approximately $229 million of
debt, approximately $15 million in transaction costs and a cash payment of
approximately $120 million, net of cash acquired of approximately $59 million.
3. DEBT AND EQUITY TRANSACTIONS
On January 27, 1998, the Company sold 2,000,000 shares of Common Stock in
an underwritten public offering for net proceeds of approximately $68.2
million.
On February 2, 1998, the Operating Partnership sold $125 million of 6.835%
MOPPRSSM due February 1, 2013 and $100 million of 7 1/8% notes due February 1,
2008 in an underwritten public offering for net proceeds of approximately
$226.3 million.
On February 18, 1998, the Company sold an aggregate of 1,553,604 shares of
Common Stock in two underwritten public offerings for net proceeds of
approximately $51.2 million.
On March 30, 1998, the Company sold 428,572 shares of Common Stock in an
underwritten public offering for net proceeds of approximately $14.2 million.
On April 20, 1998, the Operating Partnership sold $200 million of 7 1/2%
notes due April 15, 2018 in an underwritten public offering for net proceeds of
approximately $197.4 million.
On April 21, 1998, the Company sold 441,176 shares of Common Stock in an
underwritten public offering for net proceeds of approximately $14.2 million.
On April 23, 1998, the Company sold 4,000,000 Depositary Shares, each
representing 1/10 of a share of the Company's 8% Series D Cumulative
Redeemable Preferred Shares, par value $.01 per share, in an underwritten
public offering for net proceeds of approximately $96.8 million.
On April 29, 1998, the Company sold 1,080,443 shares of Common Stock in an
underwritten public offering for net proceeds of approximately $34.6 million.
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.
9
<PAGE>
RESULTS OF OPERATIONS
On July 13, 1998, the Company completed its previously reported merger
(the "J.C. Nichols Transaction") with J.C. Nichols Company, a Missouri real
estate operating company ("J.C. Nichols"). As a result of the J.C. Nichols
Transaction, the Company acquired ownership of or an ownership interest in 79
office, industrial and retail properties encompassing approximately 5.8 million
rentable square feet and 18 multifamily communities with 2,325 apartment units.
THREE MONTHS ENDED SEPTEMBER 30, 1998
Revenues from rental operations increased $77.0 million, or 125%, from
$61.8 million for the three months ended September 30, 1997 to $138.8 million
for the comparable period in 1998. The increase is primarily a result of the
acquisition of 22.0 million square feet of office, industrial and retail
properties and 2,325 apartment units, and the completion of 1.5 million square
feet of development activity during the last three months of 1997 and the first
nine months of 1998. The Company's portfolio increased from 21.9 million square
feet at September 30, 1997 to 45.4 million square feet at September 30, 1998.
Same property revenues, which are the revenues of the 360 in-service properties
owned on July 1, 1997, increased 4% for the three months ended September 30,
1998, compared to the same three months of 1997.
During the three months ended September 30, 1998, 365 leases representing
1.9 million square feet of office, industrial and retail space commenced at an
average rate per square foot which was 6.4% higher than the average rate per
square foot on the expired leases.
Interest and other income increased $2.1 million, or 111%, from $1.9
million for the three months ended September 30, 1997 to $4.0 million for the
comparable period in 1998. The increase is a result of higher cash balances in
1998, and additional income generated from management fees, development fees
and leasing commissions. The Company generated $270,000 in auxiliary income
(vending and parking) as a result of acquiring multifamily communities in the
J.C. Nichols Transaction.
Rental operating expenses increased $25.7 million, or 148%, from $17.4
million for the three months ended September 30, 1997 to $43.1 million for the
comparable period in 1998. The increase is a result of the addition of 23.5
million square feet and 2,325 apartment units through a combination of
acquisitions and developments during the last three months of 1997 and the
first nine months of 1998. Rental operating expenses as a percentage of related
revenues increased from 28.2% for the three months ended September 30, 1997 to
31.1% for the comparable period in 1998. 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 September 30,
1998 and 1997 was $24.5 million and $11.2 million, respectively. The increase
of $13.3 million, or 119%, is due to a 107% increase in average depreciable
asset balance over the prior year. Interest expense increased $18.0 million, or
162%, from $11.1 million for the three months ended September 30, 1997 to $29.1
million for the comparable period in 1998. The increase is attributable to the
increase in the outstanding debt for the entire quarter. Interest expense for
the three months ended September 30, 1998 and 1997 included $683,000 and
$567,000, 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 increased from 3.9% of rental revenue for
the three months ended September 30, 1997 to 4.3% for the comparable period in
1998.
Net income before minority interest and extraordinary item equaled $40.3
million and $21.6 million for the three months ended September 30, 1998 and
1997, respectively. The Company's net income allocated to minority interest
totaled $6.0 million and $3.4 million for the three months ended September 30,
1998 and 1997, respectively. The Company recorded $8.1 million and $2.9 million
in preferred stock dividends for the three months ended September 30, 1998 and
1997, respectively (see " -- Liquidity and Capital Resources" below).
NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenue from rental operations increased $175.0 million, or 99%, from
$177.2 million for the nine months of 1997 to $352.2 million for the nine
months of 1998. The increase is a result of the Company's acquisition and
development activity in 1997 and 1998. In total, 296 office, industrial and
retail properties encompassing 23.5 million square feet and 2,325 apartment
units were added in the last three months of 1997 and the first nine
10
<PAGE>
months of 1998. Same property revenues, which are the revenues of the 291
in-service properties (encompassing 17.1 million square feet) owned on January
1, 1997, increased 5% for the nine months ended September 30, 1998, compared to
the same nine months of 1997.
During the nine months ended September 30, 1998, 963 leases representing
4.5 million square feet of office and industrial space commenced at an average
rate per square foot which was 6.9% higher than the average rate per square
foot on the expired leases.
Interest and other income increased $2.7 million from $6.0 million in 1997
to $8.7 million in 1998. The increase is primarily related to an increase in
interest income as the Company maintained a higher cash position. The Company
also generated addition management fees, development fees and leasing
commissions in 1998. The Company generated $270,000 in auxiliary income
(vending and parking) as a result of acquisition of multifamily communities in
the J.C. Nichols Transaction.
Rental operating expenses increased $59.7 million, or 122%, from $49.0
million in 1997 to $108.7 million in 1998. Rental expenses as a percentage of
related rental revenues increased from 27.7% in 1997 to 30.9% in 1998. 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 nine months ended September 30,
1998, and 1997 was $62.0 million and $31.1 million, respectively. The increase
of $30.9 million, or 99%, is due to a 106% average increase in depreciable
assets. Interest expense increased $30.0 million, or 86%, from $34.8 million in
1997 to $64.8 million in 1998. The increase is attributable to an average
increase in outstanding debt related to the Company's acquisition activities.
Interest expense for the nine months ended September 30, 1998 and 1997 included
$1.9 million and $1.7 million, respectively, of amortization of non-cash
deferred financing costs and of the costs related to the Company's interest
rate protection agreements. General and administrative expenses increased from
3.7% of total rental revenue in 1997 to 3.9% in 1998.
Net income before minority interest and extraordinary item equaled $111.6
million and $61.7 million for the nine-month periods ended September 30, 1998,
and 1997, respectively. The Company's net income allocated to the minority
interest totaled $17.9 million and $9.9 million for 1998 and 1997,
respectively. The Company incurred an extraordinary loss in the first quarter
of 1997 of $3.3 million related to the early extinguishing of debt assumed in
the acquisition of the Anderson Properties and Century Center portfolios. The
Company also recorded $21.9 million and $7.0 million in preferred stock
dividends for the nine months ended September 30, 1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
STATEMENT OF CASH FLOWS
For the nine months ended September 30, 1998, cash provided by operating
activities increased by $93.0 million, or 96%, to $189.5 million, as compared
to $96.5 million for the same period in 1997. The increase is primarily due to
the increase in net income resulting from the Company's property acquisitions
in 1997 and 1998. Cash used for investing activities increased by $716.3
million, to $886.1 million for the first nine months of 1998, as compared to
$169.8 million for the same period in 1997. The increase is attributable to the
Company's acquisition activity in the first nine months of 1998. Cash provided
by financing activities increased by $471.1 million to $708.4 million for the
first nine months of 1998, as compared to $237.3 million for the same period in
1997. During the first nine months of 1998, cash provided by financing
activities consisted primarily of $823.8 million in aggregate net proceeds from
the sale of common and preferred stock and the sale by the Operating
Partnership of MandatOry Par Put Remarketed SecuritiesSM ("MOPPRSSM") and
unsecured notes. The cash provided by financing activity was offset by net
payments of $131.0 million to reduce existing indebtedness. Additionally,
payments of distributions increased by $41.7 million to $99.5 million for the
first nine months of 1998, as compared with $57.8 million for the same period
in 1997. The increase is due to the greater number of shares outstanding and a
6% increase in the distribution rate. Preferred stock dividend payments were
$21.9 million for the first nine months of 1998, as compared to $6.0 million
for the same period in 1997.
11
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CAPITALIZATION
The Company's total indebtedness at September 30, 1998 totaled $1.9
billion and was comprised of $641.8 million of secured indebtedness with a
weighted average interest rate of 7.7% and $1.2 billion of unsecured
indebtedness with a weighted average interest rate of 6.8%. Except as stated
below, all of the mortgage and notes payable outstanding at September 30, 1998
were either fixed rate obligations or variable rate obligations covered by
interest rate protection agreements. A portion of the Company's $600 million
unsecured revolving loan (see below) and approximately $69 million of floating
rate notes payable assumed upon consummation of the J.C. Nichols Transaction
were not covered by interest rate protection agreements on such date.
Based on the Company's total market capitalization of $4.2 billion at
September 30, 1998, (at the September 30, 1998 stock price of $27.75 and
assuming the redemption for shares of Common Stock of the 10,404,000 Common
Units of minority interest in the Operating Partnership), the Company's debt
represented approximately 44% of its total market capitalization.
On July 3, 1998, the Company obtained a new $600 million revolving line of
credit (the "Revolving Loan") from a group of 14 lender banks. The Revolving
Loan matures in July 2001 and replaced the Company's previously existing
revolving loans aggregating $430 million. The Revolving Loan carries an
interest rate based upon the Operating Partnership's senior unsecured credit
rating. At the Operating Partnership's current BBB/Baa2 senior unsecured
rating, interest accrues on borrowings at an average interest rate of LIBOR
plus 80 basis points and will adjust based on the Company's senior unsecured
credit rating within a range of LIBOR plus 65 basis points to LIBOR plus 150
basis points. The Revolving Loan requires monthly payments of interest only
with the balance of all principal and accrued but unpaid interest due July 3,
2001. The Revolving Loan also includes a $300 million competitive bid
sub-facility. The obligations of the Operating Partnership under the Revolving
Loan are guaranteed by the Company, its sole general partner, and certain
subsidiaries of the Company and the Operating Partnership.
To protect the Company from increases in interest expense due to changes
in variable interest rates, the Company: (i) purchased an interest rate collar
limiting its exposure to an increase in interest rates to 7.05% with respect to
$80 million of its $600 million Revolving Loan excluding the effect of changes
in the Company's credit risk, under which the Company had $459 million
outstanding at September 30, 1998, (ii) purchased a one year interest rate swap
limiting its exposure to an increase in interest rates to 5.77% with respect to
an additional $100 million of its Revolving Loan excluding the effect of
changes in the Company's credit risk and (iii) entered into interest rate swaps
that limit its exposure to an increase in interest rates to 6.95% in connection
with $21 million of variable rate mortgages. The interest rate on all such
variable rate debt is adjusted at one and three month 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 nine
months ended September 30, 1998 and 1997. 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 such counterparties
were to default on their obligations under the arrangements, the Company could
be required to pay the full rates under the Revolving Loan and the variable
rate mortgages, even if such rates 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.
In anticipation of future debt offerings, the Company has entered into
four forward treasury lock agreements as described below:
<TABLE>
<CAPTION>
NOTIONAL AMOUNTS
(IN MILLIONS) FIXED RATE (1) TERMINATION DATE
- ----------------- ---------------- -----------------
<S> <C> <C>
$ 50 5.7% 1/99
$ 50 5.6% 3/99
$ 100 5.7% 7/99
$ 100 5.7% 10/99
</TABLE>
- ----------
(1) Rate is a combination of the treasury rate plus forward premium.
12
<PAGE>
CURRENT AND FUTURE CASH NEEDS
Historically, rental revenue has been the principal source of funds to pay
operating expenses, debt service, stockholder distributions and capital
expenditures, excluding non-recurring capital expenditures. In addition,
construction management, maintenance, leasing and management fees have provided
sources of cash flow. Except for an $8 million renovation of the common areas
of a 639,000-square foot property acquired from Associated Capital Properties,
Inc., 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's long-term liquidity needs generally include the funding of
existing and future development activity, selective asset acquisitions, and the
retirement of mortgage debt, amounts outstanding under the Revolving Loan and
long-term unsecured debt. The Company had approximately $459 million outstanding
on its Revolving Loan as of September 30, 1998. The Company has $124 million
available on its $600 million Revolving Loan as an unconsolidated affiliate has
an additional borrowing of $17 million outstanding on the Revolving Loan. As of
September 30, 1998, the Company had under development 52 properties, which will
encompass approximately 6.1 million rentable square feet. The budgeted cost of
such development activity is $691 million, $201 million of which had been funded
as of September 30, 1998. The Company remains committed to maintaining a
flexible and conservative capital structure. Accordingly, the Company expects to
meet certain of its long-term liquidity requirements, including funding its
development activity, through a combination of: (i) additional borrowings under
the Revolving Loan; (ii) the issuance by the Operating Partnership of additional
unsecured debt securities; (iii) the issuance of additional equity securities by
the Company and the Operating Partnership; (iv) the selective disposition of
underperforming and/or non-core assets; and (v) the sale or contribution of
certain of the Company's wholly owned properties to strategic joint ventures to
be formed with selected institutional investors interested in investing with the
Company, which will have the net effect of generating additional capital through
such sales or contributions. For a discussion of certain such arrangements, see
"Recent Developments." The Company expects to use such sources to meet its
long-term liquidity requirements either through direct payments or repayment of
borrowings under the Revolving Loan. The Company does not intend to reserve
funds to retire existing secured or unsecured indebtedness 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.
On August 28, 1997, the Company entered into a purchase agreement with UBS
AG, London Branch ("UB-LB") involving the sale of 1.8 million shares of Common
Stock and a related Forward Contract providing for certain purchase price
adjustments (the "Forward Contract"). The Forward Contract generally provides
that if the Market Price (as defined below) of a share of Common Stock on the
maturity date is less than a certain amount (the "Forward Price"), the Company
must pay UB-LB the difference times 1.8 million. (Similarly, if the Market
Price of a share of Common Stock is above the Forward Price, UB-LB must pay us
the difference in shares of Common Stock.) If the Company chooses not to or
cannot settle in freely tradable shares of Common Stock, the Company must
repurchase the 1.8 million shares at the Forward Price in cash. The Forward
Price is approximately $32.16 and will be adjusted by LIBOR plus 75 basis
points, minus any dividends received on the shares. (As of August 28, 1998, the
Forward Price had increased by $.04 since August 28, 1997.)
In addition, the Forward Contract provides for quarterly payments of
collateral equal to 1.8 million times 110% of the amount by which the market
price of a share of Common Stock is below the Forward Price. The collateral may
be in the form of cash or freely tradeable shares of Common Stock. As a result
of the difference between the closing price of a share of Common Stock on
August 28, 1998 and the Forward Price, the Company gave UB-LB cash collateral
of $12.8 million on September 12, 1998. UB-LB will return the cash with
interest for freely tradeable shares of Common Stock of equal value.
The maturity date of the Forward Contract is February 28, 1999; however,
if the closing price of the Common Stock falls below $19.28, UB-LB has the
right to force a complete settlement under the Forward Contract. UB-LB also has
the right to force a complete settlement under the Forward Contract if, among
other things, the Company (i) is in default with respect to certain financial
covenants under the Forward Contract, (ii) is in default under the Revolving
Loan or any other unsecured lending agreement or (iii) fails to post sufficient
cash collateral.
13
<PAGE>
Settlement of the Forward Contract in cash would reduce the Company's
liquidity. Settlement in cash would involve the repurchase of 1.8 million
shares at a price per share equal to the Forward Price. Assuming the Forward
Price remains at $32.16, the repurchase price would total approximately $57.9
million. Having already paid $12.8 million as collateral, settlement in cash
would require the Company to pay approximately $45.1 million in additional
funds.
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 to stockholders discussed below and satisfy
other cash requirements may be adversely affected.
DISTRIBUTIONS TO STOCKHOLDERS
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.
RECENT DEVELOPMENTS
In October 1998, the Company signed a letter of intent to form a joint
venture with an institutional investor representing certain foreign funds
("Investor"), pursuant to which the Company would sell or contribute certain
office properties valued at approximately $150 million to a newly created
limited partnership (the "Joint Venture"). The Investor would contribute
approximately $55 million for a 72% interest in the Joint Venture, and the Joint
Venture would borrow approximately $75 million from third-party lenders. The
Company would retain the remaining 28% interest in the Joint Venture, receive
cash proceeds of approximately $129 million and be the sole and exclusive
manager and leasing agent of the Joint Venture's properties, for which it would
receive customary management fees and leasing commissions. The Company intends
to use the cash proceeds received in the transaction to fund existing
development activity either through direct payments or repayment of borrowings
under the Revolving Loan. Although both parties intend to sign definitive
agreements related to the transaction and to close the transaction by March 31,
1999, no assurance can be given that all or part of the transaction will be
consummated.
In November 1998, the Company signed a letter of intent to sell certain
non-core properties in Florida for gross proceeds of approximately $130 million.
Non-core properties generally include single buildings that do not fit the
Company's long-term strategy. Although the Company believes that the disposition
transaction in Florida will close by January 31, 1999, no assurance can be given
that all or part of the transaction will be consummated. In addition, the
Company has under contract to sell or has sold certain other non-core properties
for gross proceeds of $20 million.
See " -- Disclosure Regarding Forward-Looking Statements" contained below.
YEAR 2000
BACKGROUND
The Year 2000 compliance issue refers to the inability of computer systems
and computer software to correctly process any date after 1999. The date change
to the new millennium is a problem because computer hardware and software were
designed to use only two digits to represent a year. As a result, some systems
may interpret 1/1/00 to be the year 1900. In addition, some systems may not
recognize that the year 2000 is a leap year. Both problems could result in
system failure or miscalculations causing disruptions of operations.
14
<PAGE>
APPROACH AND STATUS
The Company's Year 2000 compliance efforts are divided into two areas --
the "operations level" and the "property level." The operations level includes
those information technology ("IT") systems used by the Company in its
corporate and division offices to perform its real estate functions. The
property level includes the IT and non-IT systems at the Company's individual
properties.
The Company's Information Technology Department is overseeing the
Company's operations level compliance program. At the operations level, all of
the Company's computer systems are off-the-shelf packages that have not been
modified. The corporate accounting and property management package, which is
widely used in the industry, released a Year 2000 compliant version in the
third quarter of 1998. The Company is currently testing the revision and
expects the new version to be installed, tested and operational by the end of
1998. As part of a current revamping and standardization of our technology
infrastructure, all computer hardware and software that was not Year 2000
compliant has been upgraded. The majority of the system tests have been
completed and the Company expects to complete the system tests in the first
quarter of 1999.
The Chief Operating Officer is overseeing the Company's property level
compliance program. The Company is currently conducting an inventory of all of
its properties' known IT and non-IT systems (including systems with embedded
technology, such as security systems, HVAC, elevator, and fire and safety
systems). This inventory is 50% complete and is expected to be completed by the
end of the first quarter of 1999. As part of the inventory, the Company is also
instructing the appropriate vendors and manufacturers to certify that their
products are Year 2000 compliant. As the final phase of the property level
compliance program, the Company will conduct equipment trial runs, where
feasible. This testing is projected to be completed by the end of 1998.
COSTS
The Company expects that the costs directly associated with the Year 2000
efforts will not be material. With the exception of the Company's accounting
software and property management system, operational Year 2000 issues are being
handled as a part of an existing and unaccelerated infrastructure upgrade and
standardization project. The cost of the upgrades and infrastructure
standardization was under $600,000. The property management and accounting
system upgrade costs were already included in our annual software maintenance
agreement with the vendor. The costs associated with upgrading our
non-compliant property level systems are not expected to be material.
RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE
The Company is exposed to the potential risk of non-compliance by vendors
and service providers. Given the availability of multiple vendors and service
providers, management believes that there will be no material effect on the
Company's operations due to the failure or interruption of service by a vendor
or service provider.
In addition, the Company is exposed to the risk that its tenants could be
impacted by the Year 2000 issue such that they would be unable to pay their
rent to the Company on time. Management does not believe that enough of the
Company's tenants are going to be affected in a sufficient manner to have a
material impact on the Company. Also, the Company's leases with its tenants
protect the Company in the event of tenant default and require the payment of
delinquent fees on late rental payments. However, the effects of non-compliance
by the Company's tenants cannot be ascertained at this time.
Given the Company's efforts on its operations level compliance program to
date, the Company believes that it will be Year 2000 compliant on the
operations level by December 31, 1999. The Company does not expect any adverse
effects on its operational systems that would affect the Company's ability to
meet its financial and reporting requirements. In addition, based on the
assessment of our property level systems, the Company does not believe that a
material number of property level systems will be non-compliant. The Company
will create contingency plans during the fourth quarter of 1999 for such
systems that are then-expected to be non-compliant.
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
15
<PAGE>
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.
Funds from operations and cash available for distribution for the three
and nine month periods ended September 30, 1998 and 1997 are summarized in the
following table (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
FUNDS FROM OPERATIONS:
Income before minority interest and extraordinary item ......... $ 40,309 $ 21,554 $ 111,597 $ 61,703
Add (deduct):
Dividends to preferred shareholders .......................... (8,145) (2,870) (21,946) (6,972)
Cost of unsuccessful transactions ............................ 146 -- 146 --
Depreciation and amortization ................................ 24,464 11,151 61,965 31,051
Depreciation unconsolidated subsidiaries ..................... 311 -- 311 --
-------- -------- --------- --------
FUNDS FROM OPERATIONS BEFORE MINORITY INTEREST .............. 57,085 29,835 152,073 85,782
CASH AVAILABLE FOR DISTRIBUTION:
Add (deduct):
Rental income from straight-line rents ....................... (3,200) (1,347) (9,292) (3,822)
Amortization of deferred financing costs ..................... 683 567 1,915 1,689
Non-incremental revenue generating capital expenditures (1):
Building improvements paid .................................. (1,986) (933) (4,683) (2,941)
Second generation tenant improvements paid .................. (3,988) (2,063) (11,292) (5,510)
Second generation lease commissions paid .................... (5,530) (1,201) (9,041) (3,535)
-------- -------- --------- --------
CASH AVAILABLE FOR DISTRIBUTION ............................ $ 43,064 $ 24,858 $ 119,680 $ 71,663
======== ======== ========= ========
Weighted average common shares/Common Units
outstanding -- Basic (2) ....................................... 68,711 43,550 63,845 42,686
======== ======== ========= ========
Weighted average common shares/Common Units
outstanding -- Diluted (2) ..................................... 68,880 43,932 64,166 43,157
======== ======== ========= ========
DIVIDEND PAYOUT RATIO -- DILUTED:
Funds from operations ........................................ 65.2% 75.1% 65.8% 74.0%
======== ======== ========= ========
Cash available for distribution .............................. 86.4% 90.1% 83.6% 88.5%
======== ======== ========= ========
</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 October 30, 1998, the Company's Board of Directors declared a dividend
of $.54 per share ($2.16 on an annualized basis) payable on November 18, 1998
to stockholders of record on November 10, 1998.
16
<PAGE>
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, 1997.
17
<PAGE>
PROPERTY INFORMATION
The following table sets forth certain information with respect to the
Company's properties as of September 30, 1998 and 1997:
<TABLE>
<CAPTION>
RENTABLE NUMBER OF PERCENT LEASED/
SEPTEMBER 30, 1998 SQUARE FEET PROPERTIES PRE-LEASED
- ---------------------------- --------------- ------------ ----------------
<S> <C> <C> <C>
IN-SERVICE:
Office .................... 30,856,000 453 94%
Industrial ................ 12,227,000 194 92%
Retail .................... 2,337,000 18 96%
---------- --- --
Total ................... 45,420,000 665 93%
========== === ==
DEVELOPMENT:
COMPLETED -- NOT STABILIZED
Office .................... 426,000 5 63%
Industrial ................ 241,000 3 28%
Retail .................... -- -- --
---------- --- --
Total ................... 667,000 8 50%
========== === ==
IN PROCESS
Office .................... 4,637,000 37 64%
Industrial ................ 629,000 5 55%
Retail .................... 200,000 2 36%
---------- --- --
Total ................... 5,466,000 44 62%
========== === ==
TOTAL:
Office .................... 35,919,000 495
Industrial ................ 13,097,000 202
Retail .................... 2,537,000 20
---------- ---
Total ................... 51,553,000 717
========== ===
MULTI-FAMILY 9/30/98
----------
Number of Units ........... 2,325
Occupancy % ............... 96%
SEPTEMBER 30, 1997
- -----------------------------
IN-SERVICE:
Office .................... 15,022,000 230 94%
Industrial ................ 6,882,000 139 92%
Retail .................... -- -- --
---------- --- --
Total ................... 21,904,000 369 94%
========== === ==
DEVELOPMENT:
COMPLETED -- NOT STABILIZED
Office .................... N/A N/A N/A
Industrial ................ N/A N/A N/A
Retail .................... N/A N/A N/A
---------- --- ----
Total ................... N/A N/A N/A
========== === ====
IN PROCESS
Office .................... 2,259,000 24 39%
Industrial ................ 585,000 7 7%
Retail .................... -- -- --
---------- --- ----
Total ................... 2,844,000 31 33%
========== === ====
TOTAL:
Office .................... 17,281,000 254
Industrial ................ 7,467,000 146
Retail .................... -- --
---------- ---
Total ................... 24,748,000 400
========== ===
</TABLE>
18
<PAGE>
The following table sets forth certain information with respect to the
Company's properties under development as of September 30, 1998 (dollars in
thousands):
<TABLE>
<CAPTION>
ESTIMATED
SQUARE BUDGETED COST AT PRE-LEASING ESTIMATED STABILIZATION
NAME LOCATION FOOTAGE COST 9/30/98 PERCENTAGE(1) COMPLETION DATE
- --------------------------------- ---------------- ------------ ---------- ----------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
IN-PROCESS
OFFICE:
10 Glenlakes Atlanta 254,000 $ 35,100 $ 17,802 59% 1Q 99 4Q 99
Highwoods Center at Tradeport Atlanta 45,000 3,717 765 100% 1Q 99 2Q 99
Automatic Data Processing Baltimore 110,000 12,400 10,816 100% 4Q 98 4Q 98
Highwoods I Baltimore 125,000 15,300 3,206 0% 2Q 99 4Q 99
Parkway 11 Charlotte 22,000 1,800 872 41% 1Q 99 3Q 99
Parkway 12 Charlotte 32,000 2,600 607 0% 1Q 99 3Q 99
Parkway Plaza 14 Charlotte 90,000 7,690 898 53% 2Q 99 4Q 99
Lakefront Plaza I Hampton Roads 76,000 7,477 1,006 15% 2Q 99 1Q 00
Valencia Place Kansas City 241,000 34,020 2,632 42% 1Q 00 2Q 00
Southwind Building C Memphis 74,000 7,700 3,743 100% 4Q 98 4Q 98
Southwind Building D Memphis 64,000 6,800 1,037 20% 2Q 99 4Q 99
Caterpillar Financial Center Nashville 313,000 54,000 9,152 74% 1Q 00 2Q 00
Lakeview Ridge III Nashville 131,000 13,100 3,747 0% 2Q 99 3Q 99
Westwood South Nashville 125,000 13,530 3,354 53% 3Q 99 1Q 00
Maitland I (C N A) Orlando 180,000 24,400 11,332 100% 1Q 99 1Q 99
Capital Plaza Orlando 341,000 53,000 3,069 30% 1Q 00 4Q 01
Hard Rock Orlando 63,000 7,000 3,765 100% 4Q 98 4Q 98
Maitland III (C N A) Orlando 78,000 9,885 1,255 100% 2Q 99 2Q 99
Concourse Center One Piedmont Triad 86,000 8,400 1,503 25% 2Q 99 1Q 00
3737 Glenwood Ave. RTP 107,000 16,700 1,835 56% 3Q 99 1Q 00
Highwoods Centre RTP 76,000 8,300 6,149 91% 4Q 98 1Q 99
Overlook RTP 97,000 10,500 6,756 54% 4Q 98 2Q 99
Red Oak RTP 65,000 6,000 3,612 0% 4Q 98 2Q 99
Eastshore II Richmond 76,000 7,842 4,465 3% 4Q 98 3Q 99
Highwoods Common Richmond 49,000 4,840 703 0% 1Q 99 3Q 99
Stony Point II Richmond 133,000 13,881 4,493 32% 2Q 99 4Q 99
Sportsline USA South Florida 80,000 10,000 -- 100% 3Q 99 3Q 00
Highwoods Square South Florida 93,000 12,500 5,788 26% 4Q 98 4Q 99
380 Park Place Tampa 83,000 9,000 -- 100% 4Q 99 1Q 00
Intermedia Building 1 Tampa 200,000 27,040 -- 100% 1Q 00 1Q 00
Intermedia Building 2 Tampa 30,000 4,056 -- 100% 1Q 00 1Q 00
Intermedia Building 3 Tampa 170,000 22,984 -- 100% 1Q 00 1Q 00
Intermedia Building 4 Tampa 200,000 29,219 -- 100% 2Q 00 2Q 00
Intermedia Building 5 Tampa 200,000 29,219 -- 100% 3Q 01 3Q 01
Interstate Corporate Center (2) Tampa 309,000 15,600 13,435 90% 4Q 98 2Q 99
Sabal Pavillion Phase I Tampa 121,000 12,500 8,395 100% 4Q 98 4Q 98
Highwoods Centre Virginia Beach 98,000 9,925 4,718 36% 4Q 98 3Q 99
------- -------- -------- ---
Total or Weighted Average 4,637,000 $568,025 $140,910 64%
--------- -------- -------- ---
INDUSTRIAL:
HIW Distribution Center Richmond 166,000 $ 5,764 $ 1,927 33% 4Q 98 3Q 99
Chastain III Atlanta 54,000 2,098 1,471 75% 4Q 98 1Q 99
Newpoint III Atlanta 84,000 3,000 2,158 74% 4Q 98 2Q 99
Air Park South Warehouse II Piedmont Triad 136,000 4,200 2,361 0% 4Q 98 1Q 99
Air Park South Warehouse VI Piedmont Triad 189,000 8,000 2,093 100% 1Q 99 1Q 99
--------- -------- -------- ---
Total or Weighted Average 629,000 $ 23,062 $ 10,010 55%
--------- -------- -------- ---
RETAIL:
Seville Square (2) Kansas City 119,000 $ 32,100 9,377 60% 1Q 99 3Q 99
Valencia Place Kansas City 81,000 14,362 1,128 0% 4Q 99 2Q 00
--------- -------- -------- ---
Total or Weighted Average 200,000 $ 46,462 $ 10,505 36%
--------- -------- -------- ---
Total or Weighted Average 5,466,000 $637,549 $161,425 62%
========= ======== ======== ===
- ----------
(1) Includes the effect of letters of intent
(2) Redevelopment Project
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
ESTIMATED
SQUARE BUDGETED COST AT PRE-LEASING ESTIMATED STABILIZATION
NAME LOCATION FOOTAGE COST 9/30/98 PERCENTAGE(1) COMPLETION DATE
- ----------------------------- ------------ ------------ ---------- ----------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
COMPLETED -- NOT STABILIZED
OFFICE:
Ridgefield III Asheville 57,000 $ 5,500 $ 4,129 29% 3Q 98 3Q 99
Situs II RTP 59,000 6,300 4,614 48% 3Q 98 2Q 99
Patewood VI Greenville 107,000 11,400 9,938 90% 3Q 98 1Q 99
Cool Springs I Nashville 153,000 16,800 10,770 50% 3Q 98 1Q 99
Maitland II (C N A) Orlando 50,000 4,950 3,503 100% 3Q 98 1Q 99
------- -------- -------- ---
Total or Weighted Average 426,000 $ 44,950 $ 32,955 63%
------- -------- -------- ---
INDUSTRIAL:
Chastain II Atlanta 67,000 2,602 1,791 100% 3Q 98 4Q 98
Tradeport 1 Atlanta 87,000 3,100 2,448 0% 3Q 98 1Q 99
Tradeport 2 Atlanta 87,000 3,100 2,449 0% 3Q 98 2Q 99
------- -------- -------- ---
Total or Weighted Average 241,000 $ 8,802 $ 6,688 28%
------- -------- -------- ---
Total or Weighted Average 667,000 $ 53,752 $ 39,643 50%
------- -------- -------- ---
Grand Total 6,133,000 $691,301 $201,068 60%
========= ======== ======== ===
</TABLE>
- ----------
(1) Includes the effect of letters of intent
(2) Redevelopment Project
20
<PAGE>
<TABLE>
<CAPTION>
DEVELOPMENT ANALYSIS
SQUARE BUDGETED PRE-LEASING
DOLLARS IN THOUSANDS FOOTAGE COST PERCENTAGE(1)
- ---------------------------------------- ------------------ ---------------- ----------------
<S> <C> <C> <C>
SUMMARY BY ESTIMATED STABILIZATION DATE:
Fourth Quarter 1989 .................. 435,000 $ 42,202 100%
First Quarter 1999 ................... 1,032,000 83,248 68%
Second Quarter 1999 .................. 824,000 58,102 66%
Third Quarter 1999 ................... 750,000 83,471 25 %
Fourth Quarter 1999 .................. 759,000 91,271 37%
First Quarter 2000 ................... 877,000 109,187 73%
Second Quarter 2000 .................. 835,000 131,601 64%
Third Quarter 2000 ................... 80,000 10,000 100%
Third Quarter 2001 ................... 200,000 29,219 100%
Fourth Quarter 2001 .................. 341,000 53,000 30%
----------- -------- --------------
Total or Weighted Average ........... 6,133,000 $691,301 60%
=========== ======== ==============
SUMMARY BY MARKET:
Asheville ............................ 57,000 $ 5,500 29%
Atlanta .............................. 678,000 52,717 54%
Baltimore ............................ 235,000 27,700 47%
Charlotte ............................ 144,000 12,090 39%
Greenville ........................... 107,000 11,400 90%
Hampton Roads ........................ 76,000 7,477 15%
Kansas City .......................... 441,000 80,482 39%
Memphis .............................. 138,000 14,500 63%
Nashville ............................ 722,00 97,430 52%
Orlando .............................. 712,000 99,235 66%
Piedmont Triad ....................... 411,000 20,600 51%
Research Triangle .................... 404,000 47,800 52%
Richmond ............................. 424,000 32,327 23%
South Florida ........................ 173,000 22,500 60%
Tampa ................................ 1,313,000 149,618 98%
Virginia Beach ....................... 98,000 9,925 36%
----------- -------- --------------
Total ............................... 6,133,000 $691,301 60%
=========== ======== ==============
Build-to-Suit ....................... 1,394,000 $185,203 100%
Multi-Tenant ........................ 4,739,000 506,098 49%
----------- -------- --------------
6,133,000 $691,301 60%
=========== ======== ==============
AVERAGE RENTABLE AVERAGE AVERAGE
SQUARE FEET BUDGETED COST PRE-LEASING(1)
------------------ ---------------- --------------
PER PROPERTY TYPE:
Office ............................... 120,548 $ 14,595 64%
Industrial ........................... 108,750 3,983 48%
Retail ............................... 100,000 23,231 36%
----------- -------- --------------
117,942 $ 13,294 60%
=========== ======== ==============
</TABLE>
- ----------
(1) Includes the effect of letters of intent
21
<PAGE>
The following tables set forth certain information about the Company's
leasing activities for the three months ended September 30, June 30, and March
31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
OFFICE LEASING STATISTICS
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
9/30/98 6/30/98 3/31/98 12/31/97 WEIGHTED AVERAGE
--------------- -------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
NET EFFECTIVE RENTS RELATED TO
RE-LEASED SPACE:
Number of lease transactions
(signed leases) 207 285 242 158 223
Rentable square footage leased 1,645,913 1,099,805 966,990 772,149 1,121,214
Average per rentable square foot
over the lease term:
Base rent $ 16.18 $ 15.53 $ 15.54 $ 15.91 $ 15.79
Tenant improvements ( 0.71) ( 1.00) ( 0.70) ( 1.16) ( 0.89)
Leasing commissions ( 0.42) ( 0.27) ( 0.30) ( 0.32) ( 0.33)
Rent concessions 0.00 ( 0.03) ( 0.03) ( 0.02) ( 0.02)
----------- ---------- ---------- ---------- ----------
Effective rent 15.05 14.23 14.51 14.41 14.55
Expense stop(1) ( 4.45) ( 4.22) ( 4.35) ( 3.73) ( 4.19)
----------- ---------- ---------- ---------- ----------
Equivalent effective net rent $ 10.60 $ 10.01 $ 10.16 $ 10.68 $ 10.36
=========== ========== ========== ========== ==========
Average term in years 5 5 5 4 5
=========== ========== ========== ========== ==========
CAPITAL EXPENDITURES RELATED TO
RE-LEASED SPACE:
Tenant Improvements:
Total dollars committed under
signed leases $ 6,754,100 $5,849,409 $3,717,938 $3,784,078 $5,026,381
Rentable square feet 1,645,913 1,099,805 966,990 772,149 1,121,214
----------- ---------- ---------- ---------- ----------
Per rentable square foot $ 4.10 $ 5.32 $ 3.84 $ 4.90 $ 4.48
=========== ========== ========== ========== ==========
Leasing Commissions:
Total dollars committed under
signed leases $ 3,694,473 $1,356,002 $1,349,444 $1,041,790 $1,860,427
Rentable square feet 1,645,913 1,099,805 966,990 772,149 1,121,214
----------- ---------- ---------- ---------- ----------
Per rentable square foot $ 2.24 $ 1.23 $ 1.40 $ 1.35 $ 1.66
=========== ========== ========== ========== ==========
Total:
Total dollars committed under
signed leases $10,448,573 $7,205,411 $5,067,382 $4,825,868 $6,886,808
Rentable square feet 1,645,913 1,099,805 966,990 772,149 1,121,214
----------- ---------- ---------- ---------- ----------
Per rentable square foot $ 6.35 $ 6.55 $ 5.24 $ 6.25 $ 6.14
=========== ========== ========== ========== ==========
RENTAL RATE TRENDS:
Average final rate with expense
pass throughs $ 14.51 $ 13.91 $ 13.56 $ 13.23 $ 13.80
Average first year cash rental rate $ 15.43 $ 14.87 $ 14.65 $ 14.04 $ 14.75
----------- ---------- ---------- ---------- ----------
Percentage increase 6.34% 6.90% 8.04% 6.12% 6.85%
=========== ========== ========== ========== ==========
</TABLE>
- ----------
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintainance) for
which the Company will not be reimbursed by the tenants.
22
<PAGE>
<TABLE>
<CAPTION>
INDUSTRIAL LEASING STATISTICS
THREE MONTHS ENDED
-----------------------------------------------------------------------------
9/30/98 6/30/98 3/31/97 12/31/97 WEIGHTED AVERAGE
------------ ------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C>
NET EFFECTIVE RENTS RELATED TO RE-LEASED
SPACE:
Number of lease transactions (signed leases) 56 41 66 56 55
Rentable square footage leased 314,549 194,014 308,787 464,733 320,521
Average per rentable square foot over the
lease term:
Base rent $ 6.59 $ 6.99 $ 6.35 $ 4.35 $ 6.07
Tenant improvements (0.23) (0.29) (0.38) (0.12) (0.26)
Leasing commissions (0.09) (0.19) (0.15) (0.08) (0.13)
Rent concessions $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
-------- -------- -------- -------- --------
Effective rent $ 6.27 $ 6.51 $ 5.82 $ 4.15 $ 5.69
Expense stop(1) (0.44) (0.52) (0.43) (0.30) (0.42)
-------- -------- -------- -------- --------
Equivalent effective net rent $ 5.83 $ 5.99 $ 5.39 $ 3.85 $ 5.27
======== ======== ======== ======== ========
Average term in years 4 3 3 3 3
======== ======== ======== ======== ========
CAPITAL EXPENDITURES RELATED TO
RE-LEASED SPACE:
TENANT IMPROVEMENTS:
Total dollars committed under signed
leases $248,359 $239,348 $533,334 $157,152 $294,548
Rentable square feet 314,549 194,014 308,787 464,733 320,521
-------- -------- -------- -------- --------
Per rentable square foot $ 0.79 $ 1.23 $ 1.73 $ 0.34 $ 0.92
======== ======== ======== ======== ========
LEASING COMMISSIONS:
Total dollars committed under signed
leases $ 99,574 $130,243 $153,967 $108,899 $123,171
Rentable square feet 314,549 194,014 308,787 464,733 320,521
-------- -------- -------- -------- --------
Per rentable square foot $ 0.32 $ 0.67 $ 0.50 $ 0.23 $ 0.38
======== ======== ======== ======== ========
Total:
Total dollars committed under signed
leases $347,933 $369,591 $687,301 $266,051 $417,719
Rentable square feet 314,549 194,014 308,787 464,733 320,521
-------- -------- -------- -------- --------
Per rentable square foot $ 1.11 $ 1.90 $ 2.23 $ 0.57 $ 1.30
======== ======== ======== ======== ========
RENTAL RATE TRENDS:
Average final rate with expense pass
throughs $ 5.40 $ 6.09 $ 5.77 $ 4.31 $ 5.39
Average first year cash rental rate $ 5.54 $ 6.50 $ 6.09 $ 4.32 $ 5.61
-------- -------- -------- -------- --------
Percentage increase 2.59% 6.73% 5.55% 0.23% 4.08%
======== ======== ======== ======== ========
</TABLE>
- ----------
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintainance) for
which the Company will not be reimbursed by the tenants.
23
<PAGE>
<TABLE>
<CAPTION>
RETAIL LEASING STATISTICS
THREE MONTHS ENDED
--------------------------
9/30/98
--------------------------
<S> <C>
NET EFFECTIVE RENTS RELATED TO RE-LEASED SPACE:
Number of lease transactions (signed leases) 11
Rentable square footage leased 37,258
Average per rentable square foot over the lease term:
Base rent $ 13.59
Tenant improvements ( 0.14)
Leasing commissions ( 0.44)
Rent concessions $ 0.00
--------
Effective rent $ 13.01
Expense stop ( 0.09)
--------
Equivalent effective net rent $ 12.92
--------
Average term in years 6
========
CAPITAL EXPENDITURES RELATED TO RE-LEASED SPACE:
TENANT IMPROVEMENTS:
Total dollars committed under signed leases $ 21,000
Rentable square feet 37,258
--------
Per rentable square foot $ 0.56
========
LEASING COMMISSIONS:
Total dollars committed under signed leases $ 99,268
Rentable square feet 37,258
--------
Per rentable square foot $ 2.66
========
TOTAL:
Total dollars committed under signed leases $120,268
Rentable square feet 37,258
--------
Per rentable square foot $ 3.23
========
RENTAL RATE TRENDS:
Average final rate with expense pass throughs $ 8.55
Average first year cash rental rate $ 10.53
--------
Percentage increase 23.16%
========
</TABLE>
- ----------
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintainance) for
which the Company will not be reimbursed by the tenants.
24
<PAGE>
The following tables set forth scheduled lease expirations for executed
leases as of September 30, 1998 assuming no tenant exercises renewal options.
OFFICE PROPERTIES:
<TABLE>
<CAPTION>
AVERAGE
ANNUAL RENTS ANNUAL PERCENTAGE OF
TOTAL PERCENTAGE OF UNDER RENTAL RATE LEASED RENTS
YEAR OF RENTABLE LEASED SQUARE FOOTAGE EXPIRING PER SQUARE REPRESENTED
LEASE NUMBER OF SQUARE FEET REPRESENTED BY LEASES (1) FOOT FOR BY EXPIRING
EXPIRATION LEASES EXPIRING EXPIRING LEASES (IN THOUSANDS) EXPIRATIONS (1) LEASES
- -------------------- ----------- ------------- ----------------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Remainder of 1998 497 1,423,156 5.0% $ 21,788 $ 15.31 4.9%
1999 896 4,127,972 14.3% 60,527 14.66 13.7%
2000 882 4,107,372 14.4% 64,611 15.73 14.6%
2001 754 4,099,157 14.3% 64,207 15.66 14.6%
2002 599 4,027,554 14.0% 63,705 15.82 14.4%
2003 456 3,386,794 11.8% 52,865 15.61 12.0%
2004 102 1,492,207 5.2% 23,192 15.54 5.3%
2005 74 1,254,342 4.4% 18,380 14.65 4.2%
2006 51 1,246,624 4.3% 19,329 15.51 4.4%
2007 27 845,503 2.9% 13,611 16.10 3.1%
Thereafter 77 2,697,206 9.4% 38,906 14.42 8.8%
--- --------- ----- -------- -------- -----
Total or average 4,415 28,707,887 100.0% $441,121 $ 15.37 100.0%
===== ========== ===== ======== ======== =====
</TABLE>
INDUSTRIAL PROPERTIES:
<TABLE>
<CAPTION>
AVERAGE
ANNUAL PERCENTAGE OF
TOTAL PERCENTAGE OF ANNUAL RENTS RENTAL RATE LEASED RENTS
RENTABLE LEASED SQUARE FOOTAGE UNDER EXPIRING PER SQUARE REPRESENTED
YEAR OF LEASE NUMBER OF SQUARE FEET REPRESENTED BY LEASES (1) FOOT FOR BY EXPIRING
EXPIRATION LEASES EXPIRING EXPIRING LEASES (IN THOUSANDS) EXPIRATIONS (1) LEASES
- ------------------- ----------- ------------- ----------------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Remainder of 1998 129 1,180,807 10.4% $ 5,947 $ 5.04 10.9%
1999 195 2,279,095 20.1% 12,489 5.48 22.8%
2000 175 2,218,665 19.7% 10,791 4.86 19.7%
2001 145 1,690,266 15.0% 7,923 4.69 14.5%
2002 64 1,211,800 10.7% 5,501 4.54 10.1%
2003 45 672,037 5.9% 3,330 4.96 6.1%
2004 11 1,048,258 9.3% 3,983 3.80 7.3%
2005 8 95,380 0.8% 696 7.30 1.3%
2006 3 226,880 2.0% 1,050 4.63 1.9%
2007 5 505,989 4.5% 1,774 3.51 3.2%
Thereafter 4 185,921 1.6% 1,180 6.35 2.2%
--- --------- ----- ------- ------- -----
Total or average 784 11,315,098 100.0% $54,664 $ 4.83 100.0%
=== ========== ===== ======= ======= =====
</TABLE>
- ----------
(1) Includes operating expense pass throughs and excludes the effect of future
contractual rent increases.
25
<PAGE>
RETAIL PROPERTIES:
<TABLE>
<CAPTION>
AVERAGE
ANNUAL RENTS ANNUAL PERCENTAGE OF
TOTAL PERCENTAGE OF UNDER RENTAL RATE LEASED RENTS
YEAR OF RENTABLE LEASED SQUARE FOOTAGE EXPIRING PER SQUARE REPRESENTED
LEASE NUMBER OF SQUARE FEET REPRESENTED BY LEASES (1) FOOT FOR BY EXPIRING
EXPIRATION LEASES EXPIRING EXPIRING LEASES (IN THOUSANDS) EXPIRATIONS (1) LEASES
- -------------------- ----------- ------------- ----------------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Remainder of 1998 49 136,095 6.1% $ 1,478 $ 10.86 5.9%
1999 73 308,281 13.9 2,906 9.43 11.6
2000 75 269,127 12.1 3,116 11.58 12.4
2001 55 213,801 9.6 2,925 13.68 11.6
2002 38 159,110 7.2 2,052 12.90 8.2
2003 33 166,182 7.5 2,504 15.07 10.0
2004 15 162,378 7.3 1,239 7.63 4.9
2005 13 88,630 4.0 1,308 14.76 5.2
2006 9 103,967 4.7 1,096 10.54 4.4
2007 9 69,144 3.1 966 13.97 3.8
Thereafter 33 539,906 24.5 5,532 10.25 22.0
-- ------- ----- ------- -------- -----
Total or average 402 2,216,621 100.0% $25,122 $ 11.33 100.0%
=== ========= ===== ======= ======== =====
</TABLE>
TOTAL:
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL PERCENTAGE OF ANNUAL RENTS LEASED RENTS
RENTABLE LEASED SQUARE FOOTAGE UNDER EXPIRING REPRESENTED
YEAR OF LEASE NUMBER OF SQUARE FEET REPRESENTED BY LEASES (1) BY EXPIRING
EXPIRATION LEASES EXPIRING EXPIRING LEASES (IN THOUSANDS) LEASES
- --------------------- ----------- ------------- ----------------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Remainder of 1998 675 2,740,058 6.5% $ 29,213 5.6%
1999 1,164 6,715,348 15.9 75,922 14.6
2000 1,132 6,595,164 15.6 78,518 15.0
2001 954 6,003,224 14.2 75,055 14.4
2002 701 5,398,464 12.8 71,258 13.7
2003 534 4,225,013 10.0 58,699 11.3
2004 128 2,702,843 6.4 28,414 5.5
2005 95 1,438,352 3.4 20,384 3.9
2006 63 1,577,471 3.7 21,475 4.1
2007 41 1,420,636 3.4 16,351 3.1
Thereafter 114 3,423,033 8.1 45,618 8.8
----- --------- ----- -------- -----
Total or average 5,601 42,239,606 100.0% $520,907 100.0%
===== ========== ===== ======== =====
</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.
26
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
On October 2, 1998, John Flake, a former stockholder of J.C. Nichols,
filed a putative class action lawsuit on behalf of himself and the other former
stockholders of J.C. Nichols in the United States District Court for the
District of Kansas against J.C. Nichols, certain of its former officers and
directors and the Company. The complaint alleges, among other things, that in
connection with the merger of J.C. Nichols and the Company (i) J.C. Nichols and
the named directors and officers of J.C. Nichols breached their fiduciary
duties to J.C. Nichols' stockholders, (ii) J.C. Nichols and the named directors
and officers of J.C. Nichols breached their fiduciary duties to members of the
J.C. Nichols Company Employee Stock Ownership Trust, (iii) all defendants
participated in the dissemination of a proxy statement containing materially
false and misleading statements and omissions of material facts in violation of
Section 14(a) of the Securities Exchange Act of 1934 and (iv) the Company filed
a registration statement with the Securities and Exchange Commission containing
materially false and misleading statements and omissions of material facts in
violation of Sections 11 and 12(2) of the Securities Act of 1933, as amended
(the "Securities Act"). The plaintiffs seek equitable relief and monetary
damages. The Company believes that the defendants have meritorious defenses to
the Plaintiffs' allegations. The Company intends to vigorously defend this
litigation. Due to the inherent uncertainties of the litigation process and the
judicial system, the Company is not able to predict the outcome of this
litigation. If this litigation is not resolved in the Company's favor, it could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Item 2. Changes in Securities and Use of Proceeds (c) During the three months
ended September 30, 1998, the Company issued an aggregate of 395,173
shares of Common Stock to holders of Common Units in the Operating
Partnership upon the redemption of such Common Units in private
offerings exempt from the registration requirements pursuant to Section
4(2) of the Securities Act. Each of the holders of Common Units were
accredited investors under Rule 501 of the Securities Act and none of
the offerings involved a general solicitation by the Company. The
Company has registered the resale of such shares under the Securities
Act.
Item 3. Defaults Upon Senior Securities -- NA
Item 4. Submission of Matters to a Vote of Security Holders -- NA
Item 5. Other Information -- NA
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- --------------------------------------------------------------------------------------
<S> <C>
2.1(1) Agreement and Plan of Merger by and among the Company, Jackson Acquisition Corp. and
J.C. Nichols Company dated December 22, 1997
2.2(2) Amendment No. 1 to Agreement and Plan of Merger by and among the Company, Jackson
Acquisition Corp. and J.C. Nichols Company dated April 23, 1998
10(3) Credit Agreement among the Operating Partnership, the Company, the Subsidiaries named
therein and the Lenders named therein, dated as of July 3, 1998
12 Statement re computation of ratios
27 Financial Data Schedule
</TABLE>
- ----------
(1) Filed as part of the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 and incorporated herein by reference.
(2) Filed as part of Registration Statement No. 333-51671 with the Securities
and Exchange Commission and incorporated herein by reference.
(3) Filed as part of the Company's Current Report on Form 8-K dated July 3,
1998 and incorporated herein by reference.
(b) Reports on Form 8-K
27
<PAGE>
On July 2, 1998, the Company filed a current report on Form 8-K, dated
July 1, 1998, reporting under item 5 of the Form that shareholders of J.C.
Nichols Company had approved the merger with the Company.
On July 23, 1998, the Company filed a current report on Form 8-K, dated
July 3, 1998, reporting under item 2 of the Form that the Company had completed
its merger with J.C. Nichols Company and under item 5 of the Form that the
Company had obtained a $600 million revolving credit facility from a group of
lenders.
On September 28, 1998, the Company filed an amendment to its current
report on Form 8-K, dated July 3, 1998, setting forth under item 7 certain pro
forma financial information of the Company and audited financial statements of
J.C. Nichols Company.
On September 30, 1998, the Company filed an amendment to its current
report on Form 8-K, dated July 3, 1998, setting forth under item 7 certain pro
forma financial information of the Company and audited financial statements of
J.C. Nichols Company.
28
<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: November 16, 1998
29
EXHIBIT 12
HIGHWOODS PROPERTIES, INC.
RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998 1997
-------------------- -------------
<S> <C> <C>
Earnings (1)
Income (loss) from continuing
operations ............................... $ 111,597 $ 92,584
Interest ................................... 62,835 45,138
Amortization of loan costs ................. 1,915 2,256
Total earnings ............................. $ 176,347 $ 139,978
Fixed charges and preferred stock
dividends
Interest ................................... $ 62,835 $ 45,138
Interest capitalized ....................... 11,097 7,238
Amortization of loan costs
expensed ................................. 1,915 2,256
Amortization of loan costs
capitalized .............................. -- --
Total fixed charges ........................ $ 75,847 $ 54,632
Preferred stock dividends .................. 21,946 13,117
Ratio of earnings to fixed charges ......... 2.33 2.56
Ratio of earnings to combined fixed
charges and preferred stock
dividends ................................ 1.80 2.07
<CAPTION>
1996 1995 1994 1993
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Earnings (1)
Income (loss) from continuing
operations ............................... $ 48,242 $ 28,934 $ 8,159 $ (155)
Interest ................................... 24,699 12,101 4,955 5,185
Amortization of loan costs ................. 1,911 1,619 738 --
Total earnings ............................. $ 74,852 $ 42,654 $ 13,852 $ 5,030
Fixed charges and preferred stock
dividends
Interest ................................... $ 24,699 $ 12,101 $ 4,955 $ 5,185
Interest capitalized ....................... 2,935 507 17 16
Amortization of loan costs
expensed ................................. 1,911 1,619 738 --
Amortization of loan costs
capitalized .............................. -- -- -- --
Total fixed charges ........................ $ 29,545 $ 14,227 $ 5,710 $ 5,201
Preferred stock dividends .................. -- -- -- --
Ratio of earnings to fixed charges ......... 2.53 3.00 2.43 0.97
Ratio of earnings to combined fixed
charges and preferred stock
dividends ................................ 2.53 3.00 2.43 0.97
</TABLE>
- ----------
(1) The calculation does not include amortization of previously capitalized
interest.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 44,328,000 44,328,000
<SECURITIES> 0 0
<RECEIVABLES> 51,351,000 51,351,000
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 113,497,000 113,497,000
<PP&E> 4,091,453,000 4,091,453,000
<DEPRECIATION> 166,187,000 166,187,000
<TOTAL-ASSETS> 4,144,938,000 4,144,938,000
<CURRENT-LIABILITIES> 112,202,000 112,202,000
<BONDS> 1,857,013,000 1,857,013,000
0 0
397,500,000 3,975,000,000
<COMMON> 593,000 593,000
<OTHER-SE> 1,777,630,000 1,777,630,000
<TOTAL-LIABILITY-AND-EQUITY> 4,144,938,000 4,144,938,000
<SALES> 138,987,000 352,397,000
<TOTAL-REVENUES> 142,940,000 361,069,000
<CGS> 43,117,000 108,672,000
<TOTAL-COSTS> 67,581,000 170,637,000
<OTHER-EXPENSES> 5,915,000 14,085,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 29,135,000 64,750,000
<INCOME-PRETAX> 34,278,000 93,692,000
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 34,278,000 34,278,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 324,000 370,000
<CHANGES> 0 0
<NET-INCOME> 25,809,000 71,376,000
<EPS-PRIMARY> .44 1.34
<EPS-DILUTED> .44 1.33
</TABLE>
