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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
----------------
The Company has only one class of common stock, par value $.01 per share,
with 58,705,087 shares outstanding as of August 10, 1998.
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HIGHWOODS PROPERTIES, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 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 June 30, 1998
and December 31, 1997 4
Consolidated statements of income of Highwoods Properties, Inc. for the three
and six month periods ended June 30, 1998 and 1997 5
Consolidated statements of cash flows of Highwoods Properties, Inc. for the
six month periods ended June 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 10
Results of Operations 10
Liquidity and Capital Resources 11
Recent Developments 14
Funds From Operations and Cash Available for Distributions 15
Disclosure Regarding Forward-Looking Statements 16
Property Information 17
Inflation 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
</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>
June 30,
1998 December 31, 1997
-------------- ------------------
(Unaudited)
<S> <C> <C>
Assets
Real estate assets, at cost:
Land and improvements ............................................... $ 466,881 $ 344,315
Buildings and tenant improvements ................................... 2,748,809 2,194,641
Development in process .............................................. 138,818 95,387
Land held for development ........................................... 104,893 64,454
Furniture, fixtures and equipment ................................... 4,457 3,362
---------- ----------
3,463,858 2,702,159
Less -- accumulated depreciation .................................... (122,414) (87,505)
---------- ----------
Net real estate assets .............................................. 3,341,444 2,614,654
Cash and cash equivalents ............................................. 7,035 10,146
Restricted cash ....................................................... 11,723 9,341
Accounts receivable ................................................... 21,009 17,701
Advances to related parties ........................................... 11,413 9,072
Accrued straight line rents receivable ................................ 19,205 13,033
Other assets:
Deferred leasing costs .............................................. 31,060 21,688
Deferred financing costs ............................................ 30,279 22,294
Prepaid expenses and other .......................................... 13,589 17,607
---------- ----------
74,928 61,589
Less -- accumulated amortization .................................... (17,833) (13,230)
---------- ----------
57,095 48,359
---------- ----------
$3,468,924 $2,722,306
========== ==========
Liabilities and stockholders' equity
Mortgages and notes payable ........................................... $1,408,700 $ 978,558
Accounts payable, accrued expenses and other liabilities .............. 69,164 55,121
---------- ----------
Total liabilities ................................................... 1,477,864 1,033,679
Minority interest ..................................................... 295,422 287,186
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 June 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 June 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 June 30, 1998 and December 31, 1997,
respectively ....................................................... 100,000 --
Common stock, $.01 par value, authorized 200,000,000 shares; issued and
outstanding 52,942,747 at June 30, 1998 and 46,838,600 at
December 31, 1997 ................................................... 529 468
Additional paid-in capital ............................................ 1,332,853 1,132,100
Distributions in excess of net income ................................. (35,244) (28,627)
---------- ----------
Total stockholders' equity .......................................... 1,695,638 1,401,441
---------- ----------
$3,468,924 $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 Six Months Ended
June 30, June 30,
------------------------ -------------------------
1998 1997 1998 1997
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Rental property .................................................... $113,079 $ 59,423 $ 213,410 $115,478
Interest and other income .......................................... 2,562 1,815 4,719 4,081
-------- -------- --------- --------
115,641 61,238 218,129 119,559
Operating expenses:
Rental property .................................................... 35,827 16,246 65,555 31,588
Depreciation and amortization ...................................... 20,340 10,590 37,501 19,900
Interest expense:
Contractual ....................................................... 17,221 11,056 34,383 22,516
Amortization of deferred financing costs .......................... 616 547 1,232 1,122
-------- -------- --------- --------
17,837 11,603 35,615 23,638
General and administrative ......................................... 4,386 2,204 8,170 4,284
-------- -------- --------- --------
Income before minority interest and
extraordinary item ............................................... 37,251 20,595 71,288 40,149
Minority interest .................................................... (6,266) (3,295) (11,874) (6,424)
-------- -------- --------- --------
Income before extraordinary item ................................... 30,985 17,300 59,414 33,725
Extraordinary item -- loss on early
extinguishment of debt ............................................. -- -- (46) (3,337)
-------- -------- --------- --------
Net income ......................................................... 30,985 17,300 59,368 30,388
Dividends on Preferred Stock ......................................... (7,656) (2,695) (13,801) (4,102)
-------- -------- --------- --------
Net income available for common stockholders ....................... $ 23,329 $ 14,605 $ 45,567 $ 26,286
======== ======== ========= ========
Net income per common share -- Basic:
Income before extraordinary item ................................... $ 0.45 $ 0.41 $ 0.90 $ 0.84
Extraordinary item -- loss on early extinguishment of debt ......... -- -- -- (0.10)
-------- -------- --------- --------
Net income ......................................................... $ 0.45 $ 0.41 $ 0.90 $ 0.74
======== ======== ========= ========
Weighted average shares outstanding -- Basic ....................... 52,359 35,824 50,714 35,375
======== ======== ========= ========
Net income per common share -- Diluted:
Income before extraordinary item ................................... $ 0.44 $ 0.40 $ 0.89 $ 0.83
Extraordinary item loss on early extinguishment of debt ............ -- -- -- (0.09)
-------- -------- --------- --------
Net income ......................................................... $ 0.44 $ 0.40 $ 0.89 $ 0.74
======== ======== ========= ========
Weighted average shares outstanding -- Diluted ..................... 52,751 36,090 51,221 35,755
======== ======== ========= ========
</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>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1998 1997
------------- ------------
<S> <C> <C>
Operating activities:
Net income .............................................................. $ 59,368 $ 30,388
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ......................................... 37,501 21,022
Minority interest in income ........................................... 11,874 5,788
Loss on early extinguishment of debt .................................. 46 3,973
Changes in operating assets and liabilities ........................... 1,656 (6,364)
---------- ----------
Net cash provided by operating activities ............................ 110,445 54,807
---------- ----------
Investing activities:
Additions to real estate assets ......................................... (647,142) (85,097)
Cash paid in exchange for partnership net assets ........................ (20,601) (5,081)
Advances to subsidiaries and related parties ............................ (2,341) --
Other ................................................................... (8,441) (7,847)
---------- ----------
Net cash used in investing activities ................................ (678,525) (98,025)
---------- ----------
Financing activities:
Distributions paid on Common Stock and Common Units ..................... (62,158) (39,389)
Dividends paid on Preferred Stock ....................................... (13,801) (1,407)
Payments of prepayment penalties ........................................ (46) (3,973)
Borrowings on mortgages and notes payable ............................... 521,941 124,000
Repayment of mortgages and notes payable ................................ (118,120) (161,637)
Borrowings on Revolving Loans ........................................... 535,000 --
Payments on Revolving Loans ............................................. (582,500) --
Net proceeds from the sale of Common Stock .............................. 193,761 1,815
Net proceeds from the sale of 8 5/8% Series A Cumulative Redeemable
Preferred Shares ...................................................... -- 121,804
Net proceeds from the sale of 8% Series D Cumulative Redeemable Preferred
Shares ................................................................ 96,842 --
Net change in deferred financing costs .................................. (5,950) (161)
---------- ----------
Net cash provided by financing activities ............................ 564,969 41,052
---------- ----------
Net decrease in cash and cash equivalents ............................... (3,111) (2,166)
Cash and cash equivalents at beginning of the period .................... 10,146 11,070
---------- ----------
Cash and cash equivalents at end of the period .......................... $ 7,035 $ 8,904
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest .................................................. $ 36,277 $ 23,189
========== ==========
</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 Realty Limited Partnership (the "Operating
Partnership") or acquired subject to mortgage notes payable:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1998 1997
---------- -----------
<S> <C> <C>
Assets:
Rental property and equipment, net .......... $93,979 $214,497
Liabilities:
Mortgages and notes payable assumed ......... $73,821 $129,270
------- --------
Net assets ............................... $20,158 $ 85,227
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Highwoods
Properties, Inc. (the "Company"), Highwoods Realty Limited Partnership (the
"Operating Partnership") and the following subsidiaries:
Highwoods/Tennessee Holdings, L.P.
AP Southeast Portfolio Partners, L.P.
Highwoods/Florida Holdings, L.P.
Highwoods Services, 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' equity.
SFAS 131, which addresses reporting segment information, is not required for
interim reporting in the
8
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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 six months
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.
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 Year 2000 issues
and does not expect year 2000 issues to be material to its business, operations
or financial condition.
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 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.
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 (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.
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 (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 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
9
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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 5/8% 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.
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.
Results of Operations
Three Months Ended June 30, 1998
Revenues from rental operations increased $53.7 million, or 90%, from
$59.4 million for the three months ended June 30, 1997 to $113.1 million for
the comparable period in 1998. The increase is primarily a result of the
acquisition of 17.4 million square feet of office and industrial properties
(net of 400,000 square feet of dispositions) and the completion of 1.7 million
square feet of development activity during the last six months of 1997 and the
first six months of 1998. The Company's portfolio increased from 21.6 million
square feet at June 30, 1997 to 40.7 million square feet at June 30, 1998. Same
property revenues, which are the revenues of the 345 in-service properties
owned on April 1, 1997, increased 4% for the three months ended June 30, 1998,
compared to the same three months of 1997.
During the three months ended June 30, 1998, 326 leases representing 1.3
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 $800,000, or 44%, from $1.8 million
for the three months ended June 30, 1997 to $2.6 million for the comparable
period in 1998.
Rental operating expenses increased $19.6 million, or 121%, from $16.2
million for the three months ended June 30, 1997 to $35.8 million for the
comparable period in 1998. The increase, net of dispositions, is a result of
the addition of 19.1 million square feet through a combination of acquisitions
and developments during the last six months of 1997 and the first six months of
1998. Rental operating expenses as a percentage of related revenues increased
from 27.3% for the three months ended June 30, 1997 to 31.7% 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 June 30, 1998 and
1997 was $20.3 million and $10.6 million, respectively. The increase of $9.7
million, or 92%, is due to a 90% increase in average depreciable asset balance
over the prior year. Interest expense increased $6.2 million, or 53%, from
$11.6 million for the three months ended June 30, 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 June 30, 1998 and 1997 included $616,000 and $547,000, respectively, of
amortization of non-cash deferred
10
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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 June 30, 1997 to 3.9% for the comparable
period in 1998.
Net income before minority interest and extraordinary item equaled $37.3
million and $20.6 million for the three months ended June 30, 1998 and 1997,
respectively. The Company's net income allocated to minority interest totaled
$6.3 million and $3.3 million for the three months ended June 30, 1998 and
1997, respectively. The Company recorded $7.7 million and $2.7 million in
preferred stock dividends for the three months ended June 30, 1998 and 1997,
respectively (see " -- Liquidity and Capital Resources" below).
Six Months Ended June 30, 1998
Revenue from rental operations increased $97.9 million or 85%, from $115.5
million for the six months of 1997 to $213.4 million for the six months of
1998. The increase is a result of the Company's acquisition and development
activity in 1997 and 1998. In total, 120 office and industrial properties
encompassing 9.1 million square feet were added in the last six months of 1997
(net of 400,000 square feet of dispositions) and 113 properties encompassing
10.0 million square feet were added in the first six 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 6%
for the six months ended June 30, 1998, compared to the same six months of
1997.
During the six months ended June 30, 1998, 634 leases representing 2.6
million square feet of office and industrial space commenced at an average rate
per square foot which was 7.2% higher than the average rate per square foot on
the expired leases.
Interest and other income increased $600,000 from $4.1 million in 1997 to
$4.7 million in 1998. The increase is primarily related to an increase in
interest income as the Company maintained a higher cash position.
Rental operating expenses increased $34.0 million, or 108%, from $31.6
million in 1997 to $65.6 million in 1998. Rental expenses as a percentage of
related rental revenues increased from 27.4% in 1997 to 30.7% 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 six months ended June 30, 1998, and
1997 was $37.5 million and $19.9 million, respectively. The increase of $17.6
million, or 88%, is due to a 93% average increase in depreciable assets.
Interest expense increased $12.0 million, or 51%, from $23.6 million in 1997 to
$35.6 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 six months ended June 30, 1998 and 1997 included $1.2 million
and $1.1 million, respectively, of amortization of non-cash deferred financing
costs and of the costs related to the Company's interest rate protection
agreement. General and administrative expenses increased from 3.7% of total
rental revenue in 1997 to 3.8% in 1998.
Net income before minority interest and extraordinary item equaled $71.3
million and $40.1 million for the six-month periods ended June 30, 1998, and
1997, respectively. The Company's net income allocated to the minority interest
totaled $11.9 million and $6.4 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 $13.8 million and $4.1 million in preferred stock dividends for the
six months ended June 30, 1998 and 1997, respectively.
Liquidity and Capital Resources
Statement of Cash Flows
For the six months ended June 30, 1998, cash provided by operating
activities increased by $55.6 million, or 101%, to $110.4 million, as compared
to $54.8 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 $580.5
million, to $678.5 million for the first six months of 1998, as compared to
$98.0 million for the same period in 1997. The increase is attributable to the
Company's acquisition activity in the first six months of 1998. Cash provided
by financing activities increased by $523.9 million to $565.0 million for the
first six months of 1998, as compared to $41.1 million for the same period in
1997.
11
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During the first six months of 1998, cash provided by financing activities
consisted, primarily, of $703.0 million in net proceeds from the sale of common
and preferred stock, the sale by the Operating Partnership of $125 million of
MandatOry Par Put Remarketed Securities(SM) ("MOPPRS(SM)") and unsecured notes.
The cash provided by financing activity was offset by net payments of $118.1
million to reduce existing indebtedness. Additionally, payments of distributions
increased by $22.8 million to $62.2 million for the first six months of 1998, as
compared with $39.4 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 $13.8 million for the first six
months of 1998, as compared to $1.4 million for the same period in 1997.
Capitalization
The Company's total indebtedness at June 30, 1998 totaled $1.4 billion and
was comprised of $385.3 million of secured indebtedness with a weighted average
interest rate of 8.2% and $1.0 billion of unsecured indebtedness with a
weighted average interest rate of 7.0%. All of the mortgage and notes payable
outstanding at June 30, 1998 were either fixed rate obligations or variable
rate obligations covered by interest rate protection agreements with the
exception of a portion of the Company's $600 million unsecured revolving loan
(see below).
Based on the Company's total market capitalization of $4.1 billion at June
30, 1998, (at the June 30, 1998 stock price of $35.31 and assuming the
redemption for shares of Common Stock of the 10,710,000 Common Units of
minority interest in the Operating Partnership), the Company's debt represented
approximately 36% of its total market capitalization.
The Company and the Operating Partnership completed the following
financing activities during the quarter ended June 30, 1998:
o 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.
o Series D Preferred Offering. On April 23, 1998, the Company sold
4,000,000 Depositary Shares, each representing 1/10 of a share of the
Company's Series D Preferred Shares, for net proceeds of approximately
$96.7 million. 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 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
Series A Preferred Shares and 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.
o April 1998 Debt Offering. On April 20, 1998, the Operating Partnership
sold $200 million 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.
o 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.
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
12
<PAGE>
respect to $80 million of its $600 million unsecured revolving loan (the
"Revolving Loan") excluding the effect of changes in the Company's credit risk,
under which the Company had $267 million outstanding at June 30, 1998, and (ii)
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. For a discussion of the Company's Revolving Loan, see " -- Recent
Developments." 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 six months ended June 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 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.
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 5.6% 9/98
$ 100 5.5% 10/98
$ 50 5.7% 1/99
$ 100 5.7% 6/99
</TABLE>
- ----------
(1) Rate is a combination of the treasury rate plus forward premium.
Current and Future Cash Needs
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 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 expects to meet certain of its financing
requirements through long-term secured and unsecured borrowings and the
issuance of debt securities or additional equity securities of the Company and
Operating Partnership. In addition, the Company anticipates utilizing the
Revolving Loan primarily to fund construction and development activities. The
Company does not intend to reserve funds to retire existing mortgage
indebtedness or indebtedness under the Revolving Loan upon maturity. Instead,
the Company will seek to refinance such debt at maturity or retire such debt
through the issuance of 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.
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;
13
<PAGE>
(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. 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"), pursuant to
a merger agreement dated as of December 22, 1997 (as amended on April 29, 1998,
the "Merger Agreement"). Prior to consummation of the J.C. Nichols Transaction,
J.C. Nichols had been subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, filed reports
and other information with the Securities and Exchange Commission.
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 following tables set forth certain information
about the properties acquired in the Kansas City and Des Moines metropolitan
areas as of June 30, 1998:
KANSAS CITY PROPERTIES
<TABLE>
<CAPTION>
Wholly Partially Weighted Average Rentable Sq. Ft.
Type of Owned Owned Total Ownership or # of Percent
Property Properties Properties Properties Interest Units Leased
<S> <C> <C> <C> <C> <C> <C>
Office 24 2 26 79% 1,459,000 95%
Industrial 13 -- 13 100% 337,000 75%
Retail 18 -- 18 100% 2,443,000 96%
Multifamily 17 -- 17 100% 1,906 Units 96%
</TABLE>
DES MOINES PROPERTIES
<TABLE>
<CAPTION>
Wholly Partially Weighted Average Rentable Sq. Ft.
Type of Owned Owned Total Ownership or # of Percent
Property Properties Properties Properties Interest Units Leased
<S> <C> <C> <C> <C> <C> <C>
Office -- 21 21 56% 1,345,000 96%
Industrial -- 1 1 49.5% 200,000 100%
Multifamily -- 1 1 65% 418 Units 98%
</TABLE>
Additionally, the Company acquired over 500 acres of land for future
development in Kansas City and Des Moines.
The J.C. Nichols Transaction was valued at approximately $544 million and
consisted of the issuance of approximately 5.63 million shares of the Company's
Common Stock, the assumption of approximately $229 million of debt, the
incurrence of approximately $15 million in transaction costs and a cash payment
of approximately $120 million, net of cash acquired of approximately $59
million.
The properties acquired in the J.C. Nichols Transaction include the Country
Club Plaza in Kansas City, of which the Company owns approximately 1.0 million
square feet of retail space (encompassing 15 square blocks), approximately
940,000 square feet of office space and 510 apartment units. As of June 30,
1998, the Country Club Plaza was approximately 96% leased. The Country Club
Plaza is presently undergoing an expansion and restoration expected to add
approximately 800,000 square feet of retail, office and hotel space and 350
apartment units with an estimated cost of approximately $240 million. The
Company intends to complete the development in the Country Club Plaza previously
planned by J.C. Nichols.
In connection with the J.C. Nichols Transaction, the Company succeeded 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 in the greater Kansas
City metropolitan area. The Company 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. The Company
has also succeeded 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 the Company has an ownership interest in the
14
<PAGE>
Des Moines area. The Company has an ownership interest of 50% or more (R&R has
the remaining ownership interest in all but one of these properties) in each of
the properties in the Des Moines area.
As a result of the J.C. Nichols Transaction, the J.C. Nichols operations
have become a division of the Company; Barrett Brady, former president and chief
executive officer of J.C. Nichols, has become a senior vice president of the
Company responsible for its midwest operations; and approximately 100 employees
of J.C. Nichols have joined the Company. In addition, Kay Nichols Callison has
joined the Company's board of directors.
Easton-Babcock Transaction. The Company has terminated its previously
reported agreement to acquire The Easton-Babcock Companies, a real estate
operating company in Miami, Florida.
Revolving Loan
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 was arranged and syndicated by NationsBanc Montgomery Securities LLC.
NationsBank is the administrative agent, First Union National Bank is the
syndication agent and Wells Fargo Bank is the documentation agent. Other
lenders include: Managing Agents -- Bank of America, CommerzBank AG, Wachovia
Bank, Centura Bank, and PNC Bank; Co-Agents -- Fleet National Bank, AmSouth
Bank, and Dresdner Bank AG; and Participants -- DG Bank, Mellon Bank and
Firstrust Savings.
The Revolving Loan matures in July 2001 and replaces the Company's two
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.
Funds From Operations and Cash Available for Distributions
The Company considers Funds from Operations ("FFO") to be a useful
financial performance measure of its operating performance because, together
with net income and cash flows, FFO provides investors with an additional basis
to evaluate its ability to incur and service debt and to fund acquisitions and
other capital expenditures. FFO does not represent net income or cash flows
from operations as defined by GAAP, and FFO should not be considered as an
alternative to net income as an indicator of the Company's operating
performance or as an alternative to cash flows as a measure of liquidity. FFO
does not measure whether cash flow is sufficient to fund all of the Company's
cash needs including principal amortization, capital improvements and
distributions to stockholders. FFO does not represent cash flows from
operating, investing or financing activities as defined by GAAP. Further, FFO
as disclosed by other REITs may not be comparable to the Company's calculation
of FFO, as described below.
FFO is defined as net income (computed in accordance with generally
accepted accounting principles) excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation of real estate assets,
and after adjustments for unconsolidated partnerships and joint ventures. In
March 1995, the National Association of Real Estate Investment Trusts
("NAREIT") issued a clarification of the definition of FFO. The clarification
provides that amortization of deferred financing costs and depreciation of
non-real estate assets are no longer to be added back to net income in arriving
at FFO. Cash available for distribution is defined as funds from operations
reduced by non-revenue enhancing capital expenditures for building improvements
and tenant improvements and lease commissions related to second generation
space.
15
<PAGE>
Funds from operations and cash available for distribution for the three
and six month periods ended June 30, 1998 and 1997 are summarized in the
following table (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Funds from Operations:
Income before minority interest and extraordinary item ......... $ 37,251 $ 20,595 $ 71,288 $ 40,149
Add (deduct):
Dividends to preferred shareholders .......................... (7,656) (2,695) (13,801) (4,102)
Depreciation and amortization ................................ 20,340 10,590 37,501 19,900
-------- -------- --------- --------
Funds from operations before minority interest .............. 49,935 28,490 94,988 55,947
Cash Available for Distribution:
Add (deduct):
Rental income from straight-line rents ....................... (2,976) (1,245) (6,092) (2,475)
Amortization of deferred financing costs ..................... 616 547 1,232 1,122
Non-incremental revenue generating capital expenditures (1):
Building improvements paid .................................. (1,678) (938) (2,697) (2,008)
Second generation tenant improvements paid .................. (4,868) (2,076) (7,304) (3,447)
Second generation lease commissions paid .................... (1,785) (1,243) (3,511) (2,334)
-------- -------- --------- --------
Cash available for distribution ............................ $ 39,244 $ 23,535 $ 76,616 $ 46,805
======== ======== ========= ========
Weighted average common shares/Common Units
outstanding -- Basic (2) ....................................... 63,126 42,750 61,370 42,254
======== ======== ========= ========
Weighted average common shares/Common Units
outstanding -- Diluted (2) ..................................... 63,518 43,016 61,877 42,634
======== ======== ========= ========
Dividend payout ratio -- Diluted:
Funds from operations ........................................ 64.9% 72.5% 66.4% 73.2%
======== ======== ========= ========
Cash available for distribution .............................. 82.5% 87.7% 82.4% 87.4%
======== ======== ========= ========
</TABLE>
- ----------
(1) Amounts represent cash expenditures.
(2) Assumes redemption of Common Units for shares of Common Stock. Minority
interest Common Unit holders and the stockholders of the Company share
equally on a per share and per Common Unit basis; therefore, the resultant
per share information is unaffected by the conversion.
On July 27, 1998, the Company's Board of Directors declared a dividend of
$.54 per share ($2.16 on an annualized basis) payable on August 19, 1998 to
stockholders of record on August 6, 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.
16
<PAGE>
Property Information
The following table sets forth certain information with respect to the
Company's properties as of June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Rentable Number of Percent Leased/
June 30, 1998 Square Feet Properties Pre-Leased
- --------------------- ------------- ------------ ----------------
<S> <C> <C> <C>
In-Service:
Office ............. 28,850,000 414 94%
Industrial ......... 11,863,000 180 94
---------- --- --
Total ............ 40,713,000 594 94%
========== === ==
Under Development:
Office ............. 3,261,000 30 44%
Industrial ......... 705,000 7 43
---------- --- --
Total ............ 3,966,000 37 44%
========== === ==
Total:
Office ............. 32,111,000 444
Industrial ......... 12,568,000 187
---------- ---
Total ............ 44,679,000 631
========== ===
June 30, 1997
- ----------------------
In-Service:
Office ............. 14,439,000 223 94%
Industrial ......... 7,144,000 138 90
---------- --- --
Total ............ 21,583,000 361 93%
========== === ==
Under Development:
Office ............. 1,780,000 21 38%
Industrial ......... 484,000 5 40
---------- --- --
Total ............ 2,264,000 26 38%
========== === ==
Total:
Office ............. 16,219,000 244
Industrial ......... 7,628,000 143
---------- ---
Total ............ 23,847,000 387
========== ===
</TABLE>
17
<PAGE>
The following table sets forth certain information with respect to the
Company's properties under development as of June 30, 1998 (dollars in
thousands):
<TABLE>
<CAPTION>
Budgeted Cost at Pre-Leasing Estimated
Name Location Square Footage Cost 6/30/98 Percentage(1) Completion
- -------------------------------- ------------------- ---------------- ---------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Office:
Ridgefield III Asheville 57,000 $ 5,500 $ 3,716 29% 3Q98
10 Glenlakes Atlanta 254,000 35,100 7,990 0 4Q98
2400 Century Center Atlanta 135,000 16,200 11,866 100 3Q98
Automatic Data Processing Baltimore 110,000 12,400 8,017 100 3Q98
Highwoods I Baltimore 125,000 13,800 2,530 0 2Q99
Parkway 11 Charlotte 22,000 1,800 191 0 1Q99
Parkway 12 Charlotte 32,000 2,600 278 41 1Q99
BB & T(2) Greenville 71,000 5,900 3,697 100 3Q98
Patewood VI Greenville 107,000 11,400 8,638 78 3Q98
Southwind Building C Memphis 74,000 7,700 2,534 100 4Q98
Southwind Building D Memphis 64,000 6,800 808 0 3Q99
Caterpillar Financial Center Nashville 313,000 54,000 6,830 64 1Q00
Cool Springs I Nashville 153,000 16,800 7,952 17 3Q98
Lakeview Ridge III Nashville 131,000 13,100 1,516 0 1Q99
C N A Orlando 180,000 24,400 4,888 95 1Q99
Hard Rock Orlando 63,000 7,000 4,491 100 4Q98
Maitland Preserve Orlando 50,000 4,800 1,477 0 4Q98
Concourse Center One Piedmont Triad 86,000 8,400 739 0 1Q99
Network Construction Piedmont Triad 13,000 800 394 100 3Q98
3737 Glenwood Ave. Research Triangle 107,000 16,700 442 56 3Q99
Highwoods Centre Research Triangle 76,000 8,300 4,491 82 3Q98
Overlook Research Triangle 97,000 10,500 4,336 0 4Q98
Red Oak Research Triangle 65,000 6,000 2,558 0 4Q98
Situs II Research Triangle 59,000 6,300 3,776 20 4Q98
Eastshore II Richmond 76,000 7,800 1,600 0 4Q98
Highwoods Square South Florida 93,000 12,500 2,811 0 4Q98
Intermedia (Sabal) Phase I Tampa 120,500 12,500 6,828 100 4Q98
Intermedia (Sabal) Phase II Tampa 120,500 13,000 662 100 1Q00
Interstate Corporate Center(2) Tampa 309,000 15,600 8,498 26 4Q98
Highwoods Centre Virginia Beach 98,000 9,700 1,518 0 4Q98
------- -------- -------- ---
Total or Weighted Average 3,261,000 $367,400 $116,072 44%
========= ======== ======== ===
Industrial:
Chastain II & III Atlanta 122,000 $ 4,700 $ 1,848 45% 3Q98
Newpoint III Atlanta 84,000 3,000 931 74 4Q98
Tradeport 1 Atlanta 87,000 3,100 405 0 3Q98
Tradeport 2 Atlanta 87,000 3,100 405 0 3Q98
Air Park South Warehouse II Piedmont Triad 136,000 4,200 808 0 4Q98
Air Park South Warehouse VI Piedmont Triad 189,000 8,000 859 100 1Q99
--------- -------- -------- ---
Total or Weighted Average 705,000 $ 26,100 $ 5,256 43
--------- -------- -------- ---
Total or Weighted Average 3,966,000 $393,500 $121,328 44%
========= ======== ======== ===
Summary By Estimated
Completion Date:
Third Quarter 1998 1,018,000 $ 88,200 $ 51,429 56%
Fourth Quarter 1998 1,578,500 142,700 50,156 26
First Quarter 1999 640,000 58,300 8,471 58
Second Quarter 1999 125,000 13,800 2,530 0
Third Quarter 1999 171,000 23,500 1,250 35
First Quarter 2000 433,500 67,000 7,492 74
--------- -------- -------- ---
Total or Weighted Average 3,966,000 $393,500 $121,328 44%
========= ======== ======== ===
</TABLE>
- ----------
(1) Includes letters of intent
(2) Redevelopment Project
18
<PAGE>
The following tables set forth certain information about the Company's
leasing activities for the three months ended June 30, and March 31, 1998 and
December 31, and September 30, 1997.
<TABLE>
<CAPTION>
Office Leasing Statistics
Three Months Ended
-------------------------------------------------------------------------------------
6/30/98 3/31/98 12/31/97 9/30/97 Weighted Average
-------------- -------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Net Effective Rents Related to
Re-Leased Space:
Number of lease transactions
(signed leases) 285 242 158 111 199
Rentable square footage leased 1,099,805 966,990 772,149 374,084 803,257
Average per rentable square foot
over the lease term:
Base rent $ 15.53 $ 15.54 $ 15.91 $ 16.20 $ 15.80
Tenant improvements ( 1.00) ( 0.70) ( 1.16) ( 1.21) ( 1.02)
Leasing commissions ( 0.27) ( 0.30) ( 0.32) ( 0.35) ( 0.31)
Rent concessions ( 0.03) ( 0.03) ( 0.02) ( 0.01) ( 0.02)
---------- ---------- ---------- ---------- ----------
Effective rent $ 14.23 $ 14.51 $ 14.41 $ 14.63 $ 14.45
Expense stop(1) ( 4.22) ( 4.35) ( 3.73) ( 3.87) ( 4.04)
---------- ---------- ---------- ---------- ----------
Equivalent effective net rent $ 10.01 $ 10.16 $ 10.68 $ 10.76 $ 10.41
========== ========== ========== ========== ==========
Average term in years 5 5 4 4 5
========== ========== ========== ========== ==========
Capital Expenditures Related to
Re-leased Space:
Tenant Improvements:
Total dollars committed under
signed leases $5,849,409 $3,717,938 $3,784,078 $1,779,700 $3,782,781
Rentable square feet 1,099,805 966,990 772,149 374,084 803,257
---------- ---------- ---------- ---------- ----------
Per rentable square foot $ 5.32 $ 3.84 $ 4.90 $ 4.76 $ 4.71
========== ========== ========== ========== ==========
Leasing Commissions:
Total dollars committed under
signed leases $1,356,002 $1,349,444 $1,041,790 $ 514,998 $1,065,559
Rentable square feet 1,099,805 966,990 772,149 374,084 803,257
---------- ---------- ---------- ---------- ----------
Per rentable square foot $ 1.23 $ 1.40 $ 1.35 $ 1.38 $ 1.33
========== ========== ========== ========== ==========
Total:
Total dollars committed under
signed leases $7,205,411 $5,067,382 $4,825,868 $2,294,698 $4,848,340
Rentable square feet 1,099,805 966,990 772,149 374,084 803,257
---------- ---------- ---------- ---------- ----------
Per rentable square foot $ 6.55 $ 5.24 $ 6.25 $ 6.13 $ 6.04
========== ========== ========== ========== ==========
Rental Rate Trends:
Average final rate with expense
pass throughs $ 13.91 $ 13.56 $ 13.23 $ 14.59 $ 13.82
Average first year cash rental rate $ 14.87 $ 14.65 $ 14.04 $ 15.60 $ 14.79
---------- ---------- ---------- ---------- ----------
Percentage increase 6.90% 8.04% 6.12% 6.92% 7.02%
========== ========== ========== ========== ==========
</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.
19
<PAGE>
<TABLE>
<CAPTION>
Industrial Leasing Statistics
------------------------------
Three Months Ended
-----------------------------------------------------------------------------
6/30/98 3/31/98 12/31/97 9/30/97 Weighted Average
------------ ------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C>
Net Effective Rents Related to Re-Leased
Space:
Number of lease transactions (signed leases) 41 66 56 64 57
Rentable square footage leased 194,014 308,787 464,733 363,408 332,736
Average per rentable square foot over the
lease term:
Base rent $ 6.99 $ 6.35 $ 4.35 $ 7.13 $ 6.21
Tenant improvements (0.29) (0.38) (0.12) (0.35) (0.29)
Leasing commissions (0.19) (0.15) (0.08) (0.17) (0.15)
Rent concessions $ -- $ -- $ -- $ (0.02) $ (0.01)
-------- -------- -------- -------- --------
Effective rent $ 6.51 $ 5.82 $ 4.15 $ 6.59 $ 5.76
Expense stop(1) (0.52) (0.43) (0.30) (0.25) (0.38)
-------- -------- -------- -------- --------
Equivalent effective net rent $ 5.99 $ 5.39 $ 3.85 $ 6.34 $ 5.38
-------- -------- -------- -------- --------
Average term in years 3 3 3 4 3
======== ======== ======== ======== ========
Capital Expenditures Related to
Re-leased Space:
Tenant Improvements:
Total dollars committed under signed
leases $239,348 $533,334 $157,152 $454,630 $346,116
Rentable square feet 194,014 308,787 464,733 363,408 332,736
-------- -------- -------- -------- --------
Per rentable square foot $ 1.23 $ 1.73 $ 0.34 $ 1.25 $ 1.04
======== ======== ======== ======== ========
Leasing Commissions:
Total dollars committed under signed
leases $130,243 $153,967 $108,899 $218,614 $152,931
Rentable square feet 194,014 308,787 464,733 363,408 332,736
-------- -------- -------- -------- --------
Per rentable square foot $ 0.67 $ 0.50 $ 0.23 $ 0.60 $ .46
======== ======== ======== ======== ========
Total:
Total dollars committed under signed
leases $369,591 $687,301 $266,051 $673,244 $499,047
Rentable square feet 194,014 308,787 464,733 363,408 332,736
-------- -------- -------- -------- --------
Per rentable square foot $ 1.90 $ 2.23 $ 0.57 $ 1.85 $ 1.50
======== ======== ======== ======== ========
Rental Rate Trends:
Average final rate with expense pass
throughs $ 6.09 $ 5.77 $ 4.31 $ 6.40 $ 5.64
Average first year cash rental rate $ 6.50 $ 6.09 $ 4.32 $ 7.12 $ 6.01
-------- -------- -------- -------- --------
Percentage increase 6.73% 5.55% 0.23% 11.25% 6.56%
======== ======== ======== ======== ========
</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.
20
<PAGE>
The following tables set forth scheduled lease expirations for executed
leases as of June 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 596 2,561,000 9.6% $ 38,735 $ 15.12 9.4%
1999 761 3,965,000 14.8 57,695 14.55 14.1
2000 774 3,908,000 14.6 61,566 15.75 15.0
2001 596 3,754,000 14.0 59,629 15.88 14.6
2002 513 3,684,000 13.7 57,527 15.62 14.0
2003 286 2,369,000 8.8 36,433 15.38 8.9
2004 80 1,367,000 5.1 21,380 15.64 5.2
2005 58 1,048,000 3.9 14,988 14.30 3.7
2006 42 1,025,000 3.8 15,521 15.14 3.8
2007 27 846,000 3.2 13,632 16.11 3.3
Thereafter 58 2,276,000 8.5 32,816 14.42 8.0
--- --------- ----- -------- -------- -----
Total or average 3,791 26,803,000 100.0% $409,922 $ 15.29 100.0%
===== ========== ===== ======== ======== =====
</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 160 1,513,000 13.6% $ 7,068 $ 4.67 13.6%
1999 178 2,219,000 19.9 11,814 5.32 22.8
2000 168 2,382,000 21.4 11,039 4.63 21.4
2001 108 1,498,000 13.5 6,853 4.57 13.2
2002 61 1,197,000 10.8 5,371 4.49 10.3
2003 33 410,000 3.7 2,517 6.14 4.8
2004 9 1,041,000 9.4 3,859 3.71 7.4
2005 4 34,000 0.3 295 8.68 0.6
2006 3 227,000 2.0 1,050 4.63 2.0
2007 4 486,000 4.4 1,524 3.14 2.9
Thereafter 2 115,000 1.0 537 4.67 1.0
--- --------- ----- ------- ------- -----
Total or average 730 11,122,000 100.0% $51,927 $ 4.67 100.0%
=== ========== ===== ======= ======= =====
</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.
21
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings -- NA
Item 2. Changes in Securities and Use of Proceeds
(c) On April 17, 1998, the Company issued 1,650 shares of common stock to
an individual limited partner in the Operating Partnership upon
redemption of such partner's 1,650 Common Units. The issuance was
exempt from registration pursuant to Section 4(2) of the Securities
Act because it was to a single, accredited investor and did not
involve a general solicitation by the Company.
Item 3. Defaults Upon Senior Securities -- NA
Item 4. Submission of Matters to a Vote of Security Holders
On May 14, 1998, the Company held its Annual Meeting of Stockholders. The
final vote of the matters presented for a vote at such meeting was as follows:
<TABLE>
<CAPTION>
Matter For Against Broker Non-Vote Abstain
- ---------------------------------------------- ------------ ------------ ----------------- ----------
<S> <C> <C> <C> <C>
(A) Election of Directors
John W. Eakin ............................. 37,567,622 -- -- 3,226,412
L. Glenn Orr, Jr. ......................... 37,593,509 -- -- 3,200,525
Stephen Timko ............................. 37,593,729 -- -- 3,200,305
James R. Heistand ......................... 37,549,019 -- -- 3,245,015
(B) Proposal to amend the Amended and Restated
1994 Stock Option Plan 25,876,058 9,548,523 5,258,266 111,187
(C) Proposal to amend the Amended and Restated
Articles of Incorporation ................. 27,673,151 9,690,667 3,241,217 188,999
(D) Ratify appointment of Ernst & Young LLP as
independent auditors ...................... 40,711,219 60,911 -- 21,904
</TABLE>
Item 5. Other Information
Pursuant to the Company's bylaws, for any stockholder proposal to be
presented in connection with an annual meeting of stockholders, including any
proposal relating to the nomination of a director to be elected to the Board of
Directors, the stockholder must have given timely written notice thereof in
writing to the Secretary of the Company. In order for such notice to be timely,
the previous year's annual meeting. With respect to the 1999 annual meeting,
such notice must be received between February 13 and March 15, 1999.
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
3(3) Amended and Restated Articles of Incorporation
4.1(4) Form of certificate representing 8% Series D Cumulative Redeemable Preferred Shares
4.2(4) Deposit Agreement, dated April 23, 1998, between the Company and First Union National
Bank, as preferred share depositary
4.3(4) Form of Depositary Receipt evidencing the Depositary Shares that each represent 1/10 of an
8% Series D Cumulative Redeemable Preferred Share
10.1(4) Amendment to Amended and Restated Agreement of Limited Partnership of the Operating
Partnership
10.2(5) Credit Agreement among the Operating Partnership, the Company, the Subsidiaries named
therein and the Lenders named therein, dated as of July 3, 1998
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.
22
<PAGE>
(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 September
25, 1997 and amended by articles supplementary 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.
(4) Filed as part of the Company's Current Report on Form 8-K dated April 20,
1998 and incorporated herein by reference.
(5) 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
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, reporting 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.
On June 5, 1998, the Company filed a current report on Form 8-K, dated
February 4, 1998, setting forth under items 5 and 7 of the Form audited
financial statements of Garcia Properties for the year ended December 31, 1997.
On June 19, 1998, the Company filed a current report on Form 8-K, dated
June 10, 1998, reporting under item 5 of the Form that the Operating
Partnership had changed its name to "Highwoods Realty Limited Partnership."
On June 23, 1998, the Company filed a current report on Form 8-K, dated
June 17, 1998, reporting under item 5 of the Form certain background
information related to the Company's proposed merger with J.C. Nichols.
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 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 and under item 5 of the Form that the Company had
obtained a $600 million revolving credit facility from a group of lenders.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HIGHWOODS PROPERTIES, INC.
/s/ RONALD P. GIBSON
----------------------------------------
Ronald P. Gibson
President and Chief Executive Officer
/s/ CARMAN J. LIUZZO
----------------------------------------
Carman J. Liuzzo
Chief Financial Officer
(Principal Accounting Officer)
Date: August 14, 1998
24
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-1-1998 JAN-1-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 18,758,000 18,758,000
<SECURITIES> 0 0
<RECEIVABLES> 32,422,000 32,422,000
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 64,769,000 64,769,000
<PP&E> 3,463,858,000 3,463,858,000
<DEPRECIATION> 122,414,000 122,414,000
<TOTAL-ASSETS> 3,468,924,000 3,468,924,000
<CURRENT-LIABILITIES> 69,164,000 69,164,000
<BONDS> 1,408,700,000 1,408,700,000
0 0
397,500,000 397,500,000
<COMMON> 529,000 529,000
<OTHER-SE> 1,593,031,000 1,593,031,000
<TOTAL-LIABILITY-AND-EQUITY> 3,468,924,000 3,468,924,000
<SALES> 113,079,000 213,410,000
<TOTAL-REVENUES> 115,641,000 218,129,000
<CGS> 35,827,000 65,555,000
<TOTAL-COSTS> 56,167,000 103,056,000
<OTHER-EXPENSES> 4,386,000 8,170,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 17,837,000 35,615,000
<INCOME-PRETAX> 30,985,000 59,414,000
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 30,985,000 59,414,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 46,000
<CHANGES> 0 0
<NET-INCOME> 23,329,000 45,567,000
<EPS-PRIMARY> .45 .90
<EPS-DILUTED> .44 .89
</TABLE>
