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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, 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
----------------
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 52,755,173 shares outstanding as of May 8, 1998.
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HIGHWOODS PROPERTIES, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED MARCH 31, 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 March 31, 1998
and December 31, 1997 4
Consolidated statements of income of Highwoods Properties, Inc. for the three
months ended March 31, 1998 and 1997 5
Consolidated statements of cash flows of Highwoods Properties, Inc. for the three
months ended March 31, 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 9
Liquidity and Capital Resources 9
Recent Developments 11
Funds From Operations and Cash Available for Distribution 12
Disclosure Regarding Forward-Looking Statements 13
Property Information 14
Inflation 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 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
</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>
March 31,
1998 December 31, 1997
-------------- ------------------
(Unaudited)
<S> <C> <C>
Assets
Real estate assets, at cost:
Land and improvements ................................................ $ 394,325 $ 344,315
Buildings and tenant improvements .................................... 2,510,309 2,194,641
Development in process ............................................... 105,631 95,387
Land held for development ............................................ 87,879 64,454
Furniture, fixtures and equipment .................................... 3,884 3,362
---------- ----------
3,102,028 2,702,159
Less -- accumulated depreciation ..................................... (103,489) (87,505)
---------- ----------
Net real estate assets ............................................... 2,998,539 2,614,654
Cash and cash equivalents .............................................. 32,250 10,146
Restricted cash ........................................................ 10,186 9,341
Accounts receivable .................................................... 18,896 17,701
Advances to related parties ............................................ 13,380 9,072
Accrued straight line rents receivable ................................. 16,189 13,033
Other assets:
Deferred leasing costs ............................................... 25,390 21,688
Deferred financing costs ............................................. 20,434 22,294
Prepaid expenses and other ........................................... 11,401 17,607
---------- ----------
57,225 61,589
Less -- accumulated amortization ..................................... (14,933) (13,230)
---------- ----------
42,292 48,359
---------- ----------
$3,131,732 $2,722,306
========== ==========
Liabilities and stockholders' equity
Mortgages and notes payable ............................................ $1,231,099 $ 978,558
Accounts payable, accrued expenses and other liabilities ............... 61,640 55,121
---------- ----------
Total liabilities .................................................... 1,292,739 1,033,679
Minority interest ...................................................... 301,031 287,186
Stockholders' equity:
Preferred stock $.01 par value; 10,000,000 authorized
8 5/8% Series A Cumulative Redeemable Preferred Shares
(liquidation preference of $1,000 per share), 125,000 shares issued
and outstanding at March 31, 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 March 31, 1998 and December
31, 1997 ............................................................ 172,500 172,500
Common stock, $.01 par value, authorized 100,000,000 shares; issued and
outstanding 51,036,840 at March 31, 1998 and 46,838,600 at
December 31, 1997 .................................................... 510 468
Additional paid-in capital ............................................. 1,271,266 1,132,100
Distributions in excess of net income .................................. (31,314) (28,627)
---------- ----------
Total stockholders' equity ........................................... 1,537,962 1,401,441
---------- ----------
$3,131,732 $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>
<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Revenue:
Rental property .................................................... $100,331 $ 56,055
Interest and other income .......................................... 2,157 2,266
-------- --------
102,488 58,321
Operating expenses:
Rental property .................................................... 29,728 15,342
Depreciation and amortization ...................................... 17,161 9,310
Interest expense:
Contractual ...................................................... 17,162 11,460
Amortization of deferred financing costs ......................... 616 575
-------- --------
17,778 12,035
General and administrative ......................................... 3,784 2,080
-------- --------
Income before minority interest and
extraordinary item .............................................. 34,037 19,554
Minority interest ................................................... (5,608) (3,129)
-------- --------
Income before extraordinary item ................................... 28,429 16,425
Extraordinary item -- loss on early
extinguishment of debt ............................................. (46) (3,337)
-------- --------
Net income ......................................................... 28,383 13,088
Dividends on Preferred Stock ........................................ (6,145) (1,407)
-------- --------
Net income available for common stockholders ....................... $ 22,238 $ 11,681
======== ========
Net income per common share -- Basic:
Income before extraordinary item ................................... $ 0.45 $ 0.43
Extraordinary item -- loss on early extinguishment of debt ......... -- ( .10)
-------- --------
Net income ......................................................... $ 0.45 $ 0.33
======== ========
Weighted average shares outstanding -- Basic ....................... 49,051 35,250
======== ========
Net income per common share -- Diluted:
Income before extraordinary item ................................... $ 0.45 $ 0.42
Extraordinary item loss on early extinguishment of debt ............ -- (0.09)
-------- --------
Net Income ......................................................... $ 0.45 $ 0.33
======== ========
Weighted average shares outstanding -- Diluted ..................... 49,688 35,612
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows
(unaudited and in thousands)
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<CAPTION>
Three Months Ended
March 31,
----------------------------
1998 1997
------------- ------------
<S> <C> <C>
Operating activities:
Net income .................................................... $ 28,383 $ 13,088
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................... 17,161 9,885
Minority interest in income ................................. 5,608 2,493
Loss on early extinguishment of debt ........................ 46 3,973
Changes in operating assets and liabilities ................. 773 (588)
---------- ----------
Net cash provided by operating activities .................. 51,971 28,851
---------- ----------
Investing activities:
Additions to real estate assets ............................... (311,362) (24,594)
Proceeds from disposition of real estate assets ............... -- --
Cash from contributed net assets .............................. -- (5,081)
Cash paid in exchange for partnership net assets .............. (12,383) --
Other ......................................................... (2,099) (4,487)
---------- ----------
Net cash used in investing activities ...................... (325,844) (34,162)
---------- ----------
Financing activities:
Distributions paid on Common Stock and Common Units ........... (30,097) (19,147)
Dividends paid on Preferred Stock ............................. (6,145) --
Payments of prepayment penalties .............................. (46) (3,973)
Borrowings on mortgages and notes payable ..................... 287,188 14,000
Repayment of mortgages and notes payable ...................... (102,450) (110,093)
Borrowings on Revolving Loans ................................. 247,000 --
Payments on Revolving Loans ................................... (240,500) --
Net proceeds from the sale of Common Stock .................... 139,167 57
Net proceeds from sale of 8 5/8% Series A Cumulative Redeemable
Preferred Shares ............................................ -- 121,804
Net Change in deferred financing costs ........................ 1,860 (161)
---------- ----------
Net cash provided by financing activities .................. 295,977 2,487
---------- ----------
Net increase (decrease) in cash and cash equivalents .......... 22,104 (2,824)
Cash and cash equivalents at beginning of the period .......... 10,146 11,070
---------- ----------
Cash and cash equivalents at end of the period ................ $ 32,250 $ 8,246
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................ $ 12,324 $ 8,414
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
6
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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 the Common Unit
holders of the Highwoods/ Forsyth Limited Partnership (the "Operating
Partnership") or acquired subject to mortgage notes payable:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1997
---------- -----------
<S> <C> <C>
Assets:
Rental property and equipment, net .......... $76,125 $213,090
Liabilities:
Mortgages and notes payable assumed ......... $61,303 $129,270
------- --------
Net assets ............................... $14,822 $ 83,820
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
7
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HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(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.
AP-GP Southeast Portfolio Partners, L.P.
Highwoods/Tennessee Holdings, L.P.
AP Southeast Portfolio Partners, L.P.
Highwoods/Florida Holdings, L.P.
Highwoods Services, Inc.
Southeast Realty Options Corp.
Florida Transition Co. II
Jackson Acquisition Corp.
Shockoe Plaza Investors L.C.
RC One LLC
PSC Acquisition Corporation
Pikesville Sportsman's Club of Baltimore County
Maryland, Inc.
Atrium Acquisition Corporation
9690 Derecho Road LLC
Seven Crondall Associates LLC
Eight Crondall Associates LLC
Nine Crondall Associates LLC
Pinellas Pinebrook Partners, Ltd.
SISBROS, Ltd.
Pinellas Bay Vista Partners, Ltd.
Pinellas Northside Partners, Ltd.
Cross Bayou, Ltd.
Downtown Clearwater Tower, Ltd.
BDBP, Ltd.
Interstate Business Park, Ltd.
Garcia Meyers Co.
Garcia Property Management, Inc.
Westshore Square, Inc.
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 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'
8
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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 quarter ended
March 31, 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.
Minority interest in the Company represents the limited partnership
interests ("Common Units") owned by various individuals and entities and not
the Company in the Operating Partnership, the entity that owns substantially
all of the Company's properties and through which the Company, as the sole
general partner, conducts substantially all of its operations. Per share
information is calculated using the weighted average number of shares
outstanding (including common share equivalents).
The accompanying financial information has not been audited, but in the
opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the financial position, results
of operations and cash flows of the Company have been made. For further
information, refer to the financial statements and notes thereto included in
the Company's 1997 Annual Report on Form 10-K.
2. DEBT AND EQUITY TRANSACTION
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.
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.
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, 1998
Revenues from rental operations increased $44.2 million, or 79%, from
$56.1 million for the three months ended March 31, 1997 to $100.3 million for
the comparable period in 1998. The increase is primarily a result of the
acquisition of 12.3 million square feet of office and industrial properties and
the completion of 1.1 million square feet of development activity during the
last nine months of 1997 and the first quarter of 1998. The Company's portfolio
increased from 21.0 million square feet at March 31, 1997 to 33.9 million
square feet at March 31, 1998. Same property revenues, which are the revenues
of the 344 in-service properties owned on January 1, 1997, increased 6% for the
three months ended March 31, 1998, compared to the same three months of 1997.
During the three months ended March 31, 1998, 308 leases representing
1,276,000 square feet of office and industrial space commenced at an average
rate per square foot which was 7.7% higher than the average rate per square
foot on the expired leases.
Interest and other income decreased $100,000, or 4%, from $2.3 million for
the three months ended March 31, 1997 to $2.2 million for the comparable period
in 1998.
Rental operating expenses increased $14.4 million, or 94%, from $15.3
million for the three months ended March 31, 1997 to $29.7 million for the
comparable period in 1998. The increase is a result of the addition of 13.4
million square feet through a combination of acquisitions and developments
during the last nine months of 1997 and the first quarter of 1998. Rental
operating expenses as a percentage of related revenues increased from 27.4% for
the three months ended March 31, 1997 to 29.6% 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 March 31, 1998
and 1997 was $17.2 million and $9.3 million, respectively. The increase of $7.9
million, or 85%, is due to an 87% increase in average depreciable asset balance
over the prior year. Interest expense increased $5.8 million, or 48%, from
$12.0 million for the three months ended March 31, 1997 to $17.8 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 March 31, 1998 and 1997 included $616,000 and $575,000,
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 3.7% of rental revenue for the three
months ended March 31, 1997 to 3.8% for the comparable period in 1998.
Net income before minority interest and extraordinary item equaled $34.0
million and $19.6 million for the three months ended March 31, 1998 and 1997,
respectively. The Company's net income allocated to minority interest totaled
$5.6 million and $3.1 million for the three months ended March 31, 1998 and
1997, respectively. The Company recorded $6.1 million and $1.4 in preferred
stock dividends for the three months ended March 31, 1998 and 1997,
respectively, (see " -- Liquidity and Capital Resources" below).
Liquidity and Capital Resources
For the three months ended March 31, 1998, cash provided by operating
activities increased by $23.1 million, or 80%, to $52.0 million, as compared to
$28.9 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 $291.6 million,
to $325.8 million for the first three months of 1998, as compared to $34.2
million for the same period in 1997. The increase is attributable to the
Company's acquisition activity in the first three months of 1998. Cash provided
by financing activities increased by $293.5 to $296.0 million for the first
three months of 1998, as compared to $2.5 million for the same period in 1997.
10
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During the first three months of 1998, cash provided by financing activities
consisted, primarily, of $359.9 million in net proceeds from the sale of common
stock, the sale of $125 million of MandatOry Par Put Remarketed SecuritiesSM
("MOPPRSSM") and $100 million of unsecured notes (see below), which were offset
by net payments of $102.5 million to reduce existing indebtedness.
Additionally, payments of distributions increased by $11.0 million to $30.1
million for the first three months of 1998, as compared with $19.1 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 $6.1 million for the first three months of 1998, as
compared to no preferred stock dividend payments for the same period in 1997.
The first dividend payment on the Company's 8 5/8% Series A Cumlative Redemable
Preferred Shares, issued in February 1997, was not due until June 1997.
The Company's total indebtedness at March 31, 1998 totaled $1.2 billion
and was comprised of $353.5 million of secured indebtedness with a weighted
average interest rate of 8.2% and $877.5 million of unsecured indebtedness with
a weighted average interest rate of 6.9%. All of the mortgage and notes payable
outstanding at March 31, 1998 were either fixed rate obligations or variable
rate obligations covered by interest rate protection agreements.
Based on the Company's total market capitalization of $3.7 billion at
March 31, 1998, (at the March 31, 1998 stock price of $35.31 and assuming the
redemption for shares of Common Stock of the 10,801,000 Common Units of
minority interest in the Operating Partnership), the Company's debt represented
approximately 33% of its total market capitalization.
To protect the Company from increases in interest expense due to changes
in the variable rate, the Company: (i) purchased an interest rate collar
limiting its exposure to an increase in interest rates to 7.25% with respect to
$80 million of its $430 million aggregate amount of unsecured revolving loans
(the "Revolving Loans") excluding the effect of changes in the Company's credit
risk, under which the Company had $321 million outstanding at March 31, 1998,
and (ii) entered into interest rate swaps that limit its exposure to an
increase in interest rates to 6.95% in connection with $22 million of variable
rate mortgages. The interest rate on all such variable rate debt is adjusted at
monthly intervals, subject to the Company's interest rate protection program.
No payments were recieved from the counterparties under the interest rate
protection agreement for the three months ended March 31, 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 they were to default on their obligations under the
arrangements, the Company could be required to pay the full rates under the
Revolving Loans 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.
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.
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.
In anticipation of a 1998 debt offering, on September 17, 1997, the
Company entered into a swap agreement with a notional amount of $114 million
that carried a fixed rate of 6.6%, which is a combination of the treasury rate
plus the swap spread and the forward premium. The swap agreement was terminated
on April 20, 1998.
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.
Except for an $8 million renoration
11
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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 Loans. 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 Loans 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 Loans upon maturity. Instead, the Company will seek to refinance such
debt at maturity or retire such debt through the issuance of equity or debt
securities. The Company anticipates that its available cash and cash
equivalents and cash flows from operating activities, together with cash
available from borrowings and other sources, will be adequate to meet the
capital and liquidity needs of the Company in both the short and long-term.
However, if these sources of funds are insufficient or unavailable, the
Company's ability to make the expected distributions discussed below may be
adversely affected.
In order to qualify as a REIT for Federal income tax purposes, the Company
is required to make distributions to its stockholders of at least 95% of REIT
taxable income. The Company expects to use its cash flow from operating
activities for distributions to stockholders and for payment of recurring,
non-incremental revenue-generating expenditures. The Company intends to invest
amounts accumulated for distribution in short-term investments. The following
factors will affect cash flows from operating activities and, accordingly,
influence the decisions of the Board of Directors regarding distributions: (i)
debt service requirements after taking into account the repayment and
restructuring of certain indebtedness; (ii) scheduled increases in base rents
of existing leases; (iii) changes in rents attributable to the renewal of
existing leases or replacement leases; (iv) changes in occupancy rates at
existing properties and procurement of leases for newly acquired or developed
properties; and (v) operating expenses and capital replacement needs.
Recent Developments
J.C. Nichols Transaction. The Company entered into a merger agreement on
December 22, 1997 (as amended on April 29, 1998, the "Merger Agreement") with
J.C. Nichols Company, a publicly traded Kansas City, Missouri real estate
operating company ("J.C. Nichols"), pursuant to which the Company would acquire
J.C. Nichols with the view that the Operating Partnership would combine its
property operations with J.C. Nichols (the "J.C. Nichols Transaction"). J.C.
Nichols is subject to the information requirements of the Securities Exchange
Act of 1934, as amended, and, in accordance therewith, files reports and other
information with the Securities and Exchange Commission.
J.C. Nichols owns or has an ownership interest in 27 office properties
encompassing approximately 1.5 million rentable square feet, 13 industrial
properties encompassing approximately 337,000 rentable square feet, 33 retail
properties encompassing approximately 2.5 million rentable square feet and 16
multifamily communities with 1,816 apartment units in Kansas City, Missouri and
Kansas. Additionally, J.C. Nichols has an ownership interest in 21 office
properties encompassing approximately 1.3 million rentable square feet, one
industrial property encompassing approximately 200,000 rentable square feet and
one multifamily community with 418 apartment units in Des Moines, Iowa. As of
December 31, 1997, the properties to be acquired in the J.C. Nichols
Transaction were 95% leased.
Consummation of the J.C. Nichols Transaction is subject, among other
things, to the approval of 66 2/3% of the shareholders of J.C. Nichols. Under
the terms of the Merger Agreement, the Company would acquire all of the
outstanding common stock, $.01 par value, of J.C. Nichols ("J.C. Nichols Common
Stock"). Under the Merger Agreement, J.C. Nichols shareholders may elect to
receive between 1.84 and 2.03 shares of Common Stock or $65 in cash for each
share of J.C. Nichols Common Stock. However, the cash payment to J.C. Nichols
shareholders cannot exceed 40% of the total consideration. To the extent the
average of the daily average of the high and low sale price for the 20 trading
days preceding the effective date of the merger (the "Value") of a share of
Common Stock is $35.36 or higher, J.C. Nichols shareholders may receive Common
Stock worth more than $65 per share of J.C. Nichols Common Stock; to the extent
the Value of a share of Common Stock is under $32.00, J.C. Nichols shareholders
may receive Common Stock worth less than $65 per share of J.C. Nichols Common
Stock. The cost of the J.C. Nichols Transaction under the Merger Agreement is
expected to be approximately $570 million, including assumed debt of
approximately $250 million, net of cash of approximately $65
12
<PAGE>
million. The Merger Agreement provides for payment by J.C. Nichols to the
Company of a termination fee and expenses of up to $17.2 million if J.C.
Nichols enters into an acquisition proposal other than the Merger Agreement and
certain other conditions are met. The failure of J.C. Nichols shareholders to
approve the J.C. Nichols Transaction, however, will not trigger the payment of
a termination fee, except for a fee of $2.5 million, if, among other things,
J.C. Nichols enters into another acquisition proposal before December 22, 1998.
No assurance can be given that all or part of the J.C. Nichols Transaction
will be consummated or that, if consummated, it would follow the terms set
forth in the Merger Agreement. As of the date hereof, certain third parties
have expressed an interest to J.C. Nichols and/or certain of its shareholders
in purchasing all or a portion of the outstanding J.C. Nichols Common Stock at
a price in excess of $65 per share. No assurance can be given that a third
party will not make an offer to J.C. Nichols or its shareholders to purchase
all or a portion of the outstanding J.C. Nichols Common Stock at a price in
excess of $65 per share or that the board of directors of J.C. Nichols would
reject any such offer. The Company and/or J.C. Nichols may terminate the Merger
Agreement if the J.C. Nichols Transaction is not consummated by June 30, 1998.
The properties to be acquired in the J.C. Nichols Transaction include the
Country Club Plaza in Kansas City, which covers 15 square blocks and includes
1.0 million square feet of retail space, 1.1 million square feet of office
space and 462 apartment units. As of December 31, 1997, the Country Club Plaza
was approximately 96% leased. The Country Club Plaza is presently undergoing an
expansion and restoration expected to add 800,000 square feet of retail,
office, hotel and residential space with an estimated cost of approximately
$240 million. Assuming consummation of the J.C. Nichols Transaction, the
Company intends to complete the development in the Country Club Plaza
previously planned by J.C. Nichols.
Assuming completion of the J.C. Nichols Transaction, the Company would
succeed to the interests of J.C. Nichols in a strategic alliance with
Kessinger/Hunter & Company, Inc. ("Kessinger/Hunter") pursuant to which
Kessinger/Hunter manages and leases the office, industrial and retail
properties presently owned by J.C. Nichols in the greater Kansas City
metropolitan area. J.C. Nichols currently has a 30% ownership interest in the
strategic alliance with Kessinger/Hunter and has two additional options to
acquire up to a 65% ownership interest in the strategic alliance. Assuming
completion of the J.C. Nichols Transaction, the Company would also succeed to
the interests of J.C. Nichols in a strategic alliance with R&R Investors, Ltd.
("R&R") pursuant to which R&R manages and leases the properties in which J.C.
Nichols has an ownership interest in Des Moines. J.C. Nichols has an ownership
interest of 50% or more in each of the properties in Des Moines with R&R or its
principal.
Easton-Babcock Transaction. The Company has entered into an agreement with
The Easton-Babcock Companies, a real estate operating company in Miami, Florida
("Easton-Babcock"), pursuant to which the Company will combine its property
operations with Easton-Babcock and acquire a portfolio of 11 industrial
properties encompassing 1.8 million rentable square feet, three office
properties encompassing 197,000 rentable square feet and 110 acres of land for
development, of which 88 acres will be acquired over a three-year period (the
"Easton-Babcock Transaction"). As of December 31, 1997, the industrial
properties to be acquired in the Easton-Babcock Transaction were 88% leased and
the office properties to be acquired in the Easton-Babcock Transaction were 50%
leased. The cost of the Easton-Babcock Transaction is expected to be $143
million (inclusive of the 88 acres of development land to be acquired over a
three-year period) and will consist of an undetermined combination of the
issuance of Common Units, the assumption of mortgage debt and a cash payment.
Also in connection with the Easton-Babcock Transaction, the Company will issue
to certain affiliates of Easton-Babcock warrants to purchase 926,000 shares of
Common Stock at $35.50 per share. Although the Easton-Babcock Transaction is
expected to close by June 15, 1998, no assurance can be given that all or part
of the transaction will be consummated.
April 29, 1998 Common Stock Offering 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.
Series D Preferred Offering. On April 23, 1998, the Company sold 4,000,000
Depositary Shares (the "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 (the "Series D Preferred Shares"), for net proceeds of
approximately $96.7 million (the "Series D Preferred Offering"). Dividends on
the Series D Preferred Shares represented by the Depositary Shares will be
cumulative from the date of original issuance and will be payable quarterly on
or about the last day of January, April, July and October of each year,
commencing July 31, 1998, at the rate of 8% of the
13
<PAGE>
liquidation preference per annum (equivalent to $2.00 per annum per Depositary
Share). The Series D Preferred Shares and the Depositary Shares representing
such Series D Preferred Shares are not redeemable prior to April 23, 2003. The
Series D Preferred Shares are thereafter subject to redemption by the Company,
in whole or in part, at a redemption price of $250 per share (equivalent to $25
per Depositary Share), plus accrued and unpaid dividends, if any, thereon. The
redemption price (other than the portion thereof consisting of accrued and
unpaid dividends) is payable solely out of the sale proceeds of other capital
stock of the Company, which may include other series of preferred stock, and
from no other source.
With respect to the payment of dividends and amounts upon liquidation, the
Series D Preferred Shares will rank pari passu with the Company's 8 3/8% Series
A Cumulative Redeemable Preferred Shares (the "Series A Preferred Shares") and
8% Series B Cumulative Redeemable Preferred Shares (the "Series B Preferred
Shares") and any other equity securities of the Company the terms of which
provide that such equity securities rank on a parity with the Series D
Preferred Shares and rank senior to the Common Stock and any other equity
securities of the Company that by their terms rank junior to the Series D
Preferred Shares. Dividends on the Series D Preferred Shares will accrue
whether or not the Company has earnings, whether or not there are funds legally
available for the payment of such dividends and whether or not such dividends
are declared. The Series D Preferred Shares have a liquidation preference of
$250 per share (equivalent to $25 per Depositary Share), plus an amount equal
to any accrued and unpaid dividends.
April 1998 Debt Offering. On April 20, 1998, the Operating Partnership
sold $200 million of 7 1/2% notes due April 15, 2018 (the "2018 Notes") in an
underwritten public offering for net proceeds of approximately $197.4 million.
Interest on the 2018 Notes is payable semi-annually on April 15 and October 15
of each year, commencing October 15, 1998. The Company used a portion of the
net proceeds from the offering to settle the $114 million notional treasury
lock described above.
April 21, 1998 Common Stock Offering. 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.
Swap Agreements. In anticipation of a 1998 debt offering, on April 3,
1998, the Company entered into a swap agreement with a notional amount of $50
million. The swap agreement has a termination date of July 2, 1998, and carries
a fixed rate of 5.5%, which is a combination of the treasury rate plus the swap
spread and the forward premium.
In anticipation of a 1998 debt offering, on April 3, 1998, the Company
entered into a swap agreement with a notional amount of $100 million. The swap
agreement has a termination date of October 2, 1998, and carries a fixed rate
of 5.5%, which is a combination of the treasury rate plus the swap spread and
the forward premium.
In anticipation of a 1999 debt offering, on April 30, 1998, the Company
entered into a swap agreement with a notional amount of $50 million. The swap
agreement has a termination date of January 5, 1999, and carries a fixed rate
of 5.7%, which is a combination of the treasury rate plus the swap spread and
the forward premium.
Funds From Operations and Cash Available for Distributions
The Company considers Funds from Operations ("FFO") to be a useful
financial performance measure of its operating performance because, together
with net income and cash flows, FFO provides investors with an additional basis
to evaluate its ability to incur and service debt and to fund acquisitions and
other capital expenditures. FFO does not represent net income or cash flows
from operations as defined by GAAP, and FFO should not be considered as an
alternative to net income as an indicator of the Company's operating
performance or as an alternative to cash flows as a measure of liquidity. FFO
does not measure whether cash flow is sufficient to fund all of the Company's
cash needs including principal amortization, capital improvements and
distributions to stockholders. FFO does not represent cash flows from
operating, investing or financing activities as defined by GAAP. Further, FFO
as disclosed by other REITs may not be comparable to the Company's calculation
of FFO, as described below.
FFO is defined as net income (computed in accordance with generally
accepted accounting principles) excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation of real estate assets,
and after adjustments for unconsolidated partnerships and joint ventures. In
March 1995, the National Association of Real Estate Investment Trusts
("NAREIT") issued a clarification of the definition of FFO. The clarification
provides that amortization of deferred financing costs and depreciation of
non-real estate assets are no longer
14
<PAGE>
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
months ended March 31, 1998 and 1997 are summarized in the following table (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Funds from Operations:
Income before minority interest and extraordinary item ..................... $ 34,037 $ 19,554
Add (deduct):
Dividends to preferred shareholders ...................................... (6,145) (1,407)
Depreciation and amortization ............................................ 17,161 9,310
Third-party service company cash flow .................................... -- --
-------- --------
Funds from operations before minority interest .......................... 45,053 27,457
Cash Available for Distribution:
Add (deduct):
Rental income from straight-line rents ................................... (3,116) (1,230)
Amortization of deferred financing costs ................................. 616 575
Non-incremental revenue generating capital expenditures (1):
Building improvements paid .............................................. (1,019) (1,070)
Second generation tenant improvements paid .............................. (2,436) (1,371)
Second generation lease commissions paid ................................ (1,726) (1,091)
-------- --------
Cash available for distribution ....................................... $ 37,372 $ 23,270
======== ========
Weighted average common shares/Common Units outstanding -- Basic (2) ....... 59,598 41,758
======== ========
Weighted average common shares/Common Units outstanding -- Diluted (2) ..... 60,235 42,120
======== ========
Dividend payout ratio:
Funds from operations .................................................... 67.5% 73.0%
======== ========
Cash available for distribution .......................................... 81.3% 86.1%
======== ========
</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 April 27, 1998, the Company's Board of Directors declared a dividend of
$.51 per share ($2.04 on an annualized basis) payable on May 20, 1998 to
stockholders of record on May 7, 1998.
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.
15
<PAGE>
Property Information
The following table sets forth certain information with respect to the
Company's properties as of March 31, 1998 and 1997:
<TABLE>
<CAPTION>
Rentable Number of Percent Leased/
March 31, 1998 Square Feet Properties Pre-Leased
- --------------------- ------------- ------------ ----------------
<S> <C> <C> <C>
In-Service:
Office ............. 26,501,000 382 94%
Industrial ......... 7,429,000 148 90
---------- --- --
Total ............ 33,930,000 530 93%
========== === ==
Under Development:
Office ............. 3,182,000 27 53%
Industrial ......... 396,000 5 25
---------- --- --
Total ............ 3,578,000 32 50%
========== === ==
Total:
Office ............. 29,683,000 409
Industrial ......... 7,825,000 153
---------- ---
Total ............ 37,508,000 562
========== ===
March 31, 1997
- ----------------------
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>
16
<PAGE>
The following table sets forth certain information with respect to the
Company's properties under development as of March 31, 1998:
<TABLE>
<CAPTION>
Cost at Pre-Leasing Estimated
Name Location Square Footage Budgeted Cost 3/31/98 Percentage(1) Completion
- ---------------------------- ------------------- ---------------- --------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Office:
Ridgefield III Asheville 57,000 $ 5,485 $ 2,024 26% 2Q98
2400 Century Center Atlanta 135,000 16,195 8,667 -- 2Q98
10 Glenlakes Atlanta 254,000 35,135 4,596 -- 4Q98
Automatic Data
Processing Baltimore 110,000 12,400 5,434 100 3Q98
Highwoods I Baltimore 125,000 13,800 2,393 -- 2Q99
BB & T(2) Greenville 71,000 5,851 3,093 100 2Q98
Patewood VI Greenville 107,000 11,360 6,846 15 2Q98
Colonnade Memphis 89,000 9,400 7,750 93 2Q98
Southwind C Memphis 74,000 7,657 1,322 67 4Q98
Harpeth V Nashville 65,000 6,900 4,662 66 2Q98
Lakeview Ridge II Nashville 61,000 6,000 4,447 79 2Q98
Southpointe Nashville 104,000 10,878 5,766 61 2Q98
Caterpillar Financial
Center Nashville 313,000 54,000 -- 62 1Q00
C N A Orlando 180,000 24,408 -- 95 1Q99
Hard Rock Orlando 63,000 7,000 -- 100 4Q98
Concourse Center One Piedmont Triad 86,000 8,415 701 -- 1Q99
RMIC Piedmont Triad 90,000 7,650 5,324 100 2Q98
Clintrials Research Triangle 178,000 21,490 14,626 100 2Q98
Situs II Research Triangle 59,000 5,857 2,137 -- 2Q98
Highwoods Centre Research Triangle 76,000 8,327 2,401 50 3Q98
Overlook Research Triangle 97,000 10,307 2,451 -- 4Q98
Red Oak Research Triangle 65,000 6,394 1,153 -- 3Q98
Markel-American Richmond 106,000 10,650 7,933 55 2Q98
Highwoods V Richmond 67,000 6,620 4,830 100 2Q98
Interstate Corporate
Center(2) Tampa 309,000 15,600 8,498 26 4Q98
Intermedia (Sabal) Phase I Tampa 120,500 12,500 3,578 100 4Q98
Intermedia (Sabal) Phase
II Tampa 120,500 13,000 662 100 1Q00
------- -------- -------- ---
Office Total or Weighted
Average 3,182,000 $353,279 $111,294 53%
========= ======== ======== ===
Industrial:
Chastain II & III Atlanta 122,000 $ 4,686 $ 1,325 14% 3Q98
Tradeport 1 Atlanta 87,000 3,070 1,871 -- 2Q98
Tradeport 2 Atlanta 87,000 3,070 1,871 -- 2Q98
Air Park South Warehouse
I Piedmont Triad 100,000 2,929 1,382 80 2Q98
--------- -------- -------- ---
Industrial Total or
Weighted Average 396,000 $ 13,755 $ 6,449 25%
========= ======== ======== ===
Total or Weighted Average 3,578,000 $367,034 $117,743 50%
========= ======== ======== ===
Summary By Estimated
Completion Date:
Second Quarter 1998 1,463,000 $133,405 $ 83,229 56%
Third Quarter 1998 373,000 31,807 10,313 44
Fourth Quarter 1998 917,500 88,199 20,445 34
First Quarter 1999 266,000 32,823 701 64
Second Quarter 1999 125,000 13,800 2,393 --
First Quarter 2000 433,500 67,000 662 73
--------- -------- -------- ---
Total or Weighted Average 3,578,000 $367,034 $117,743 50%
========= ======== ======== ===
</TABLE>
(1) Includes letters of intent
(2) Redevelopment Project
17
<PAGE>
The following tables set forth certain information about the Company's
leasing activities for the three months ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1998 March 31, 1997
----------------------------- ----------------------------
Office Industrial Office Industrial
-------------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
Net Effective Rents Related to Re-Leased Space:
Number of lease transactions (signed leases) 242 66 112 55
Rentable square footage leased 966,990 308,787 738,461 612,175
Average per rentable square foot over the lease term:
Base rent $ 15.54 $ 6.35 $ 15.47 $ 5.12
Tenant improvements ( 0.70) (0.38) ( 1.08) (0.20)
Leasing commissions ( 0.30) (0.15) ( 0.40) (0.15)
Rent concessions ( 0.03) -- ( 0.02) (0.01)
---------- -------- ---------- --------
Effective rent $ 14.51 $ 5.82 $ 13.97 $ 4.76
Expense stop(1) ( 4.35) (0.43) ( 3.62) (0.22)
---------- -------- ---------- --------
Equivalent effective net rent $ 10.16 $ 5.39 $ 10.35 $ 4.54
========== ======== ========== ========
Average term in years 5 3 5 3
========== ======== ========== ========
Capital Expenditures Related to Re-leased Space:
Tenant Improvements:
Total dollars committed under signed leases $3,717,938 $533,334 $3,745,604 $398,591
Rentable square feet 966,990 308,787 738,461 612,175
---------- -------- ---------- --------
Per rentable square foot $ 3.84 $ 1.73 $ 5.07 $ 0.65
========== ======== ========== ========
Leasing Commissions:
Total dollars committed under signed leases $1,349,444 $153,967 $1,395,209 $305,492
Rentable square feet 966,990 308,787 738,461 612,175
---------- -------- ---------- --------
Per rentable square foot $ 1.40 $ 0.50 $ 1.89 $ 0.50
========== ======== ========== ========
Total:
Total dollars committed under signed leases $5,067,382 $687,301 $5,140,813 $704,083
Rentable square feet 966,990 308,787 738,461 612,175
---------- -------- ---------- --------
Per rentable square foot $ 5.24 $ 2.23 $ 6.96 $ 1.15
========== ======== ========== ========
Rental Rate Trends:
Number of leases commenced during period 242 66 112 55
Average final rate with expense pass throughs $ 13.56 $ 5.77 $ 13.59 $ 5.12
Average first year cash rental rate $ 14.65 $ 6.09 $ 14.36 $ 5.35
---------- -------- ---------- --------
Percentage increase 8.04% 5.55% 5.67% 4.49%
========== ======== ========== ========
</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.
18
<PAGE>
The following tables set forth scheduled lease expirations for executed
leases as of March 31, 1998 assuming no tenant exercises renewal options.
Office Properties:
<TABLE>
<CAPTION>
Average
Annual Percentage of
Total Percentage of Annual Rents Rental Rate Leased Rents
Year of Rentable Leased Square Footage Under Per Square Represented
Lease Number of Square Feet Represented by Expiring Foot for by Expiring
Expiration Leases Expiring Expiring Leases Leases (1) Expirations (1) Leases
- ------------------- ----------- ------------- ----------------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Remainder of 1998 801 3,326,553 13.5% $ 50,454,459 $ 15.17 13.4%
1999 723 3,524,034 14.3 51,748,926 14.68 13.8
2000 749 3,793,344 15.3 58,752,895 15.49 15.6
2001 505 3,493,295 14.1 54,260,235 15.53 14.5
2002 487 3,526,602 14.3 54,860,834 15.56 14.7
2003 161 1,715,247 6.9 25,341,844 14.77 6.7
2004 67 1,168,541 4.7 18,366,011 15.72 4.9
2005 52 951,742 3.9 13,390,349 14.07 3.6
2006 35 1,007,727 4.1 15,184,041 15.07 4.0
2007 21 539,329 2.2 8,745,876 16.22 2.3
Thereafter 39 1,642,967 6.7 24,516,911 14.92 6.5
--- --------- ----- ------------ -------- -----
Total or average 3,640 24,689,381 100.0% $375,622,381 $ 15.21 100.0%
===== ========== ===== ============ ======== =====
</TABLE>
Industrial Properties:
<TABLE>
<CAPTION>
Average
Annual Percentage of
Total Percentage of Rental Rate Leased Rents
Rentable Leased Square Footage Annual Rents Per Square Represented
Year of Lease Number of Square Feet Represented by Under Expiring Foot for by Expiring
Expiration Leases Expiring Expiring Leases Leases (1) Expirations (1) Leases
- ------------------- ----------- ------------- ----------------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Remainder of 1998 206 1,537,953 22.9% $ 8,468,579 $ 5.51 22.7%
1999 159 1,308,279 19.5 7,457,046 5.70 19.9
2000 147 1,336,068 19.9 8,193,225 6.13 21.9
2001 75 671,101 10.0 4,097,358 6.11 11.0
2002 59 1,180,033 17.6 5,244,002 4.44 14.0
2003 21 228,322 3.4 1,446,961 6.34 3.9
2004 5 104,369 1.6 602,516 5.77 1.6
2005 4 33,832 0.5 290,630 8.59 0.8
2006 2 196,600 2.9 882,636 4.49 2.4
2007 1 19,125 0.3 238,680 12.48 0.6
Thereafter 1 95,545 1.4 464,826 4.86 1.2
--- --------- ----- ----------- ------ -----
Total or average 680 6,711,227 100.0% $37,386,459 $ 5.57 100.0%
=== ========= ===== =========== ====== =====
</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.
19
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings -- None
Item 2. Changes in Securities and Use of Proceeds -- None
Item 3. Defaults Upon Senior Securities -- None
Item 4. Submission of Matters to a Vote of Security Holders -- None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- -----------------------------------------------------------------------------------------------
<S> <C>
3(1) Amended and Restated Articles of Incorporation
4.1(2) Form of certificate representing 8% Series D Cumulative Redeemable Preferred Shares
4.2(2) Deposit Agreement, dated April 23, 1998, between the Company and First Union National Bank,
as preferred share depositary
4.3(2) Form of Depositary Receipt evidencing the Depositary Shares that each represent 1/10 of an 8%
Series D Cumulative Redeemable Preferred Share
10(2) Amendment to Amended and Restated Agreement of Limited Partnership of the Operating
Partnership
27 Financial Data Schedule
</TABLE>
- ----------
(1) Filed as part of the Company's current report on Form 8-K dated September
25, 1997 and amended by articles supplimentary filed as part of the
Company's current report on Form 8-K dated October 4, 1997 and articles
supplementary filed as part of the Company's current report on Form 8-K
dated April 20, 1998, each of which is incorporated herein by reference.
(2) Filed as part of the Company's current report on Form 8-K dated April 20,
1998 and incorporated herein by reference.
(b) Reports on Form 8-K
On January 6, 1998, the Company filed a current report on Form 8-K, dated
December 22, 1997, reporting under item 5 of the Form that it had entered into
a merger agreement with J.C. Nichols Company.
On January 22, 1998, the Company filed a current report on Form 8-K, dated
January 22, 1998, setting forth under items 5 and 7 of the Form certain pro
forma financial information in connection with (i) an agreement by the Company
to sell 2,000,000 shares of common stock and (ii) an offering by the Operating
Partnership to sell an aggregate of $200 million of unsecured debt.
On February 2, 1998, the Company filed a current report on Form 8-K, dated
February 2, 1998, setting forth under items 5 and 7 of the Form certain
exhibits in connection with the sale by the Operating Partnership of an
aggregate of $225 million of unsecured debt.
On February 3, 1998, the Company filed a current report on Form 8-K, dated
November 17, 1997, setting forth under items 5 and 7 of the Form audited
financial statements of Shelton Properties, Riparius Properties and Winners
Circle for the year ended December 31, 1996.
On April 24, 1998, the Company filed a current report on Form 8-K, dated
April 20, 1998, setting forth under items 5 and 7 of the Form certain exhibits
in connection with (i) the sale by the Operating Partnership of $200 million of
unsecured debt and (ii) the sale by the Company of 4,000,000 Depositary Shares,
each representing 1/10 of an 8% Series D Cumulative Redeemable Preferred
Share.
On April 28, 1998, the Company filed an amendment to its current report on
Form 8-K, dated January 9, 1997, which reported under item 2 of the Form the
Company's acquisition of the Century Center portfolio and Anderson Properties,
Inc. The report 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.
On May 4, 1998, the Company filed a current report on Form 8-K, dated
April 29, 1997, setting forth under items 5 and 7 of the Form an amendment to
its merger agreement with J.C. Nichols Company.
20
<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, 1998
21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- -----------------------------------------------------------------------------------------------
<S> <C>
3(1) Amended and Restated Articles of Incorporation
4.1(2) Form of certificate representing 8% Series D Cumulative Redeemable Preferred Shares
4.2(2) Deposit Agreement, dated April 23, 1998, between the Company and First Union National Bank,
as preferred share depositary
4.3(2) Form of Depositary Receipt evidencing the Depositary Shares that each represent 1/10 of an 8%
Series D Cumulative Redeemable Preferred Share
10(2) Amendment to Amended and Restated Agreement of Limited Partnership of the Operating
Partnership
27 Financial Data Schedule
</TABLE>
- ----------
(1) Filed as part of the Company's current report on Form 8-K dated September
25, 1997 and amended by articles supplimentary filed as part of the
Company's current report on Form 8-K dated October 4, 1997 and articles
supplementary filed as part of the Company's current report on Form 8-K
dated April 20, 1998, each of which is incorporated herein by reference.
(2) Filed as part of the Company's current report on Form 8-K dated April 20,
1998 and incorporated herein by reference.
22
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 42,436,000
<SECURITIES> 0
<RECEIVABLES> 32,276,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 86,113,000
<PP&E> 3,102,028,000
<DEPRECIATION> 103,489,000
<TOTAL-ASSETS> 3,131,732,000
<CURRENT-LIABILITIES> 61,640,000
<BONDS> 1,231,099,000
0
297,500,000
<COMMON> 510,000
<OTHER-SE> 1,540,983,000
<TOTAL-LIABILITY-AND-EQUITY> 3,131,732,000
<SALES> 100,331,000
<TOTAL-REVENUES> 102,488,000
<CGS> 29,728,000
<TOTAL-COSTS> 46,889,000
<OTHER-EXPENSES> 3,784,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,778,000
<INCOME-PRETAX> 34,037,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 28,429,000
<DISCONTINUED> 0
<EXTRAORDINARY> 46,000
<CHANGES> 0
<NET-INCOME> 22,238,000
<EPS-PRIMARY> .45
<EPS-DILUTED> .45
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