<PAGE>
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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, 1999
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 61,696,481 shares outstanding as of August 9, 1999.
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HIGHWOODS PROPERTIES, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998 4
Consolidated Statements of Income for the three
and six months ended June 30, 1999 and 1998 5
Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 1999 6
Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998 7
Notes to consolidated financial statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 11
Results of Operations 11
Liquidity and Capital Resources 13
Recent Developments 15
Year 2000 16
Possible Environmental Liabilities 17
Impact of Recently Issued Accounting Standards 18
Compliance with the Americans with Disabilities Act 18
Funds From Operations and Cash Available for Distributions 18
Disclosure Regarding Forward-Looking Statements 19
Property Information 21
Inflation 29
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Changes in Securities and Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 32
</TABLE>
2
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
We refer to (1) Highwoods Properties, Inc. as the "Company," (2) Highwoods
Realty Limited Partnership as the "Operating Partnership," (3) the Company's
common stock as "Common Stock" and (4) the Operating Partnership's common
partnership interests as "Common Units."
The information furnished in the accompanying balance sheets, statements
of income, statements of stockholders' equity and statements of cash flows
reflect all adjustments (consisting of normal recurring accruals) that are, in
our opinion, 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 included herein and
our 1998 Annual Report on Form 10-K.
3
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HIGHWOODS PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
1999 DECEMBER 31, 1998
-------------- ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Real estate assets, at cost:
Land and improvements ................................................ $ 483,969 $ 559,100
Buildings and tenant improvements .................................... 2,875,956 3,186,584
Development in process ............................................... 173,077 189,465
Land held for development ............................................ 152,143 150,622
Furniture, fixtures and equipment .................................... 7,183 7,693
---------- ----------
3,692,328 4,093,464
Less -- accumulated depreciation ..................................... (197,494) (169,272)
---------- ----------
Net real estate assets ................................................ 3,494,834 3,924,192
Property held for sale ................................................ 202,698 131,262
Cash and cash equivalents ............................................. 104,004 31,445
Restricted cash ....................................................... 11,969 24,263
Accounts receivable ................................................... 23,050 27,948
Advances to related parties ........................................... 14,251 10,420
Notes receivable ...................................................... 51,803 40,225
Accrued straight line rents receivable ................................ 29,527 27,194
Investment in unconsolidated affiliates ............................... 33,463 21,088
Other assets:
Deferred leasing costs ............................................... 54,006 45,785
Deferred financing costs ............................................. 42,903 38,750
Prepaid expenses and other ........................................... 16,155 15,237
---------- ----------
113,064 99,772
Less -- accumulated amortization ..................................... (28,802) (23,476)
---------- ----------
84,262 76,296
---------- ----------
$4,049,861 $4,314,333
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and Notes payable ........................................... $1,779,870 $2,008,716
Accounts payable, accrued expenses and other liabilities .............. 100,374 130,575
---------- ----------
Total liabilities .................................................... 1,880,244 2,139,291
Minority interest ..................................................... 241,951 279,043
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, 1999 and December 31, 1998 ............. 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, 1999 and December 31, 1998 ................. 172,500 172,500
8% Series D Cumulative Redeemable Preferred Shares
(liquidation preference $250 per share), 400,000 shares issued and
outstanding at June 30, 1999 and December 31, 1998 ................. 100,000 100,000
Common stock, $.01 par value, authorized 200,000,000 shares; 61,696,481
shares issued and outstanding at June 30, 1999 and 59,865,259 shares
issued and outstanding at December 31, 1998 .......................... 617 599
Additional paid-in capital ............................................ 1,589,620 1,546,592
Distributions in excess of net earnings ............................... (60,071) (48,692)
---------- ----------
Total stockholders' equity ........................................... 1,927,666 1,895,999
---------- ----------
$4,049,861 $4,314,333
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
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HIGHWOODS PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE:
Rental property ......................................... $142,079 $113,079 $ 288,800 $ 213,410
Equity in earnings of unconsolidated affiliates ......... 490 -- 687 --
Interest and other income ............................... 5,273 2,562 10,560 4,719
-------- -------- --------- ---------
147,842 115,641 300,047 218,129
OPERATING EXPENSES:
Rental property ......................................... 43,761 35,827 89,106 65,555
Depreciation and amortization ........................... 27,705 20,340 55,861 37,501
Interest expense:
Contractual ........................................... 29,717 17,221 61,559 34,383
Amortization of deferred financing costs .............. 734 616 1,512 1,232
-------- -------- --------- ---------
30,451 17,837 63,071 35,615
General and administrative .............................. 6,212 4,386 12,005 8,170
-------- -------- --------- ---------
Income before gain on disposition of assets, net
of income tax provision, minority interest and
extraordinary item .................................... 39,713 37,251 80,004 71,288
Gain on disposition of assets, net of income tax
provision ............................................. 1,524 -- 2,093 --
-------- -------- --------- ---------
Income before minority interest and
extraordinary item ................................... 41,237 37,251 82,097 71,288
MINORITY INTEREST ........................................ (4,879) (6,266) (10,705) (11,874)
-------- -------- --------- ---------
Income before extraordinary item ........................ 36,358 30,985 71,392 59,414
EXTRAORDINARY ITEM -- LOSS ON EARLY
EXTINGUISHMENT OF DEBT .................................. (777) -- (777) (46)
-------- -------- --------- ---------
Net income .............................................. 35,581 30,985 70,615 59,368
Dividends on preferred shares ............................ (8,145) (7,656) (16,290) (13,801)
-------- -------- --------- ---------
Net income available for common shareholders ............ $ 27,436 $ 23,329 $ 54,325 $ 45,567
======== ======== ========= =========
NET INCOME/(LOSS) PER COMMON SHARE -- BASIC:
Income before extraordinary item ........................ $ 0.46 $ 0.45 $ 0.90 $ 0.90
Extraordinary item -- loss on early
extinguishment of debt ................................ (0.01) -- (0.01) --
-------- -------- --------- ---------
Net income .............................................. $ 0.45 $ 0.45 $ 0.89 $ 0.90
======== ======== ========= =========
Weighted average shares outstanding -- basic ............ 61,529 52,359 60,930 50,714
======== ======== ========= =========
NET INCOME/(LOSS) PER COMMON SHARE -- DILUTED:
Income before extraordinary item ........................ $ 0.46 $ 0.44 $ 0.90 $ 0.89
Extraordinary item loss on early extinguishment
of debt ............................................... (0.01) -- (0.01) --
-------- -------- --------- ---------
Net income .............................................. $ 0.45 $ 0.44 $ 0.89 $ 0.89
======== ======== ========= =========
Weighted average shares outstanding -- diluted .......... 61,722 52,751 60,954 51,221
======== ======== ========= =========
Distributions declared per common share ................. $ 0.54 $ 0.51 $ 1.08 $ 1.02
======== ======== ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
HIGHWOODS PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER OF
COMMON COMMON SERIES A SERIES B
SHARES STOCK PREFERRED PREFERRED
-------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 ......... 59,865,259 $599 $125,000 $172,500
---------- ---- -------- --------
Issuance of Common Stock ............. 821,595 8
Common Stock Dividends ...............
Preferred Stock Dividends ............
Net Income ...........................
Shares issued upon redemption
of Common Units ..................... 1,256,051 12
Forward Equity Swap
Settlement (see Note 8) .............
Retirement of Common Stock
(see Note 8) ........................ (246,424) (2)
---------- ------
Balance at June 30, 1999 ............. 61,696,481 $617 $125,000 $172,500
========== ===== ======== ========
<CAPTION>
RETAINED
EARNINGS
ADDITIONAL (DISTRIBUTIONS
SERIES D PAID-IN IN EXCESS OF
PREFERRED CAPITAL NET EARNINGS) TOTAL
----------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 ......... $100,000 $1,546,592 $ (48,692) $1,895,999
-------- ---------- --------- ----------
Issuance of Common Stock ............. 15,256 15,264
Common Stock Dividends ............... (65,554) (65,554)
Preferred Stock Dividends ............ (16,290) (16,290)
Net Income ........................... 70,615 70,615
Shares issued upon redemption
of Common Units ..................... 40,555 40,567
Forward Equity Swap
Settlement (see Note 8) ............. (12,783) (12,783)
Retirement of Common Stock
(see Note 8) ........................ (150) (152)
--------- ----------
Balance at June 30, 1999 ............. $100,000 $1,589,620 $ (60,071) $1,927,666
======== ========== ========= ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
HIGHWOODS PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1999 1998
------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income .............................................................. $ 70,615 $ 59,368
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ......................................... 55,861 37,501
Minority interest ..................................................... 10,705 11,874
Loss on early extinguishment of debt .................................. 777 46
Gain on disposition of assets, net of income tax provision ............ (2,093) --
Changes in operating assets and liabilities ........................... (40,336) 1,656
---------- ----------
Net cash provided by operating activities ............................ 95,529 110,445
---------- ----------
INVESTING ACTIVITIES:
Additions to real estate assets ......................................... (245,342) (647,142)
Cash paid in exchange for partnership net assets ........................ (847) (20,601)
Proceeds from disposition of assets ..................................... 502,737 --
Repayment of advances from subsidiaries and related parties ............. (3,831) (2,341)
Other ................................................................... (21,666) (8,441)
---------- ----------
Net cash provided by/(used in) investing activities .................. 231,051 (678,525)
---------- ----------
FINANCING ACTIVITIES:
Distributions paid on common stock and common units ..................... (76,147) (62,158)
Dividends paid on preferred stock ....................................... (16,290) (13,801)
Payments of prepayment penalties ........................................ (777) (46)
Borrowings on mortgages and notes payable ............................... 4,385 521,941
Repayment of mortgages and notes payable ................................ (22,700) (118,120)
Borrowings on revolving loans ........................................... 210,500 535,000
Payments on revolving loans ............................................. (362,500) (582,500)
Net proceeds from the sale of common stock .............................. 14,002 193,761
Net proceeds from the sale of 8% Series D Cumulative Redeemable Preferred
Shares ................................................................ -- 96,842
Net change in deferred financing costs .................................. (4,494) (5,950)
---------- ----------
Net cash (used in)/provided by financing activities .................. (254,021) 564,969
---------- ----------
Net increase/(decrease) in cash and cash equivalents .................... 72,559 (3,111)
Cash and cash equivalents at beginning of the period .................... 31,445 10,146
---------- ----------
Cash and cash equivalents at end of the period .......................... $ 104,004 $ 7,035
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest .................................................. $ 78,057 $ 36,277
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE>
HIGHWOODS PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The following summarizes (i) the net assets contributed by the holders of
Common Units in the Operating Partnership, (ii) the change in net assets
contributed as a result of the reorganization of our ownership in the Des
Moines Properties (see Note 6) and (iii) the net assets acquired subject to
mortgage notes payable.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1999 1998
------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS:
Rental property and equipment, net .......... $ (25,879) $93,979
LIABILITIES:
Mortgages and notes payable assumed ......... $ (52,165) $73,821
--------- -------
Net assets ............................... $ 26,286 $20,158
========= =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
8
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HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and the Operating Partnership and its majority controlled affiliates. 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, net of the
minority interest.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, which is required to be adopted in fiscal years beginning after
June 15, 1999. In June 1999, FASB issued Statement No. 137, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -- DEFERRAL OF THE FASB STATEMENT
NO. 133, which stipulates the required adoption date to be all fiscal years
beginning after June 15, 2000. Statement No. 133 requires us to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The fair market value of the Company's derivatives is
discussed in Item 2.
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. We have reviewed the impact of Year 2000 issues and do
not expect Year 2000 issues to be material to our business, operations, or
financial condition. The Year 2000 issue is discussed more fully in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Minority interest in the Company represents Common Units owned by various
individuals and entities and not the Company in the Operating Partnership, the
entity that owns substantially all of the Company's properties and through
which the Company, as the sole general partner, conducts substantially all of
its operations. Per share information is calculated using the weighted average
number of shares outstanding (including common share equivalents). In addition,
minority interest includes equity of consolidated real estate partnerships
which are owned by various individuals and entities and not the Company. The
Company acquired greater than 50% of the interest in certain real estate
partnerships as part of its acquisition of J.C. Nichols.
2. INCOME TAXES
The Company has elected and expects to continue to qualify as a REIT under
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended.
Therefore, no provision has been made for income taxes related to REIT taxable
income to be distributed to shareholders. However, a provision has been made
resultant from the portion of REIT taxable income related to the gain on
disposition of assets that will not be distributed to shareholders.
3. SEGMENT INFORMATION
Our sole business is the acquisition, development and operation of rental
real estate properties. We operate office, industrial and retail properties and
apartment units. There are no material inter-segment transactions.
Our chief operating decision maker ("CDM") assesses and measures operating
results based upon property level net operating income. The operating results
for the individual assets within each property type have been aggregated since
the CDM evaluates operating results and allocates resources on a
property-by-property basis within the various property types.
9
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The accounting policies of the segments are the same as those described in
Note 1. Further, all operations are within the United States and no tenant
comprises more than 10% of consolidated revenues. The following table
summarizes the rental income, net operating income and total assets for each
reportable segment for the three and six months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------- -----------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
RENTAL INCOME:
Office segment ..................................................... $ 117,045 $ 103,002 $ 239,660 $ 194,398
Industrial segment ................................................. 12,783 10,077 25,006 19,012
Retail segment ..................................................... 8,156 -- 15,940 --
Apartment segment .................................................. 4,095 -- 8,194 --
---------- ---------- ---------- ----------
$ 142,079 $ 113,079 $ 288,800 $ 213,410
========== ========== ========== ==========
NET OPERATING INCOME:
Office segment ..................................................... $ 79,740 $ 68,878 $ 163,487 $ 132,097
Industrial segment ................................................. 10,645 8,374 20,846 15,758
Retail segment ..................................................... 5,561 -- 10,704 --
Apartment segment .................................................. 2,372 -- 4,657 --
---------- ---------- ---------- ----------
98,318 77,252 199,694 147,855
---------- ---------- ---------- ----------
RECONCILIATION TO INCOME BEFORE MINORITY INTEREST AND
EXTRAORDINARY ITEM:
Equity in income of unconsolidated affiliates ...................... 490 -- 687 --
Gain on disposition of assets, net of income tax provision ......... 1,524 -- 2,093 --
Interest and other income .......................................... 5,273 2,562 10,560 4,719
Interest expense ................................................... (30,451) (17,837) (63,071) (35,615)
General and administrative expenses ................................ (6,212) (4,386) (12,005) (8,170)
Depreciation and amortization ...................................... (27,705) (20,340) (55,861) (37,501)
---------- ---------- ---------- ----------
Income before minority interest and extraordinary item ............. $ 41,237 $ 37,251 $ 82,097 $ 71,288
========== ========== ========== ==========
TOTAL ASSETS:
Office segment ..................................................... $2,950,888 $3,084,351 $2,950,888 $3,084,351
Industrial segment ................................................. 454,023 310,534 454,023 310,534
Retail segment ..................................................... 250,534 -- 250,534 --
Apartment segment .................................................. 119,868 -- 119,868 --
Corporate and other ................................................ 274,548 74,039 274,548 74,039
---------- ---------- ---------- ----------
Total Assets ....................................................... $4,049,861 $3,468,924 $4,049,861 $3,468,924
========== ========== ========== ==========
</TABLE>
4. JOINT VENTURE ACTIVITY
On March 15, 1999, we closed a transaction with Schweiz-Deutschland-USA
Dreilander Beteiligung Objekt-DLF 98/29-Walker Fink-KG ("DLF"), pursuant to
which we sold or contributed certain office properties valued at approximately
$142 million to a newly created limited partnership (the "Joint Venture"). DLF
contributed approximately $55 million for a 77.19% interest in the Joint
Venture, and the Joint Venture borrowed approximately $71 million from
third-party lenders. We retained the remaining 22.81% interest in the Joint
Venture, received net cash proceeds of approximately $124 million and are the
sole and exclusive manager and leasing agent of the Joint Venture's properties,
for which we receive customary management fees and leasing commissions. We used
the cash proceeds received in the transaction to fund existing development
activity either through direct payments or repayment of borrowings under the
Revolving Loan.
5. LEGAL CONTINGENCIES
On October 2, 1998, John Flake, a former stockholder of J.C. Nichols
Company, filed a putative class action lawsuit on behalf of himself and the
other former stockholders of J.C. Nichols in the United States District Court
for the District of Kansas against J.C. Nichols, certain of its former officers
and directors and the Company. The complaint alleges, among other things, that
in connection with the merger of J.C. Nichols and the Company, (1) J.C. Nichols
and the named directors and officers of J.C. Nichols breached their fiduciary
duties to J.C. Nichols' stockholders, (2) J.C. Nichols and the named directors
and officers of J.C. Nichols breached their fiduciary duties to members of the
J.C. Nichols Company Employee Stock Ownership Trust, (3) all defendants
participated in the dissemination of a proxy statement containing materially
false and misleading statements and omissions of
10
<PAGE>
material facts in violation of Section 14(a) of the Exchange Act of 1934 and
(4) the Company filed a registration statement with the SEC containing
materially false and misleading statements and omissions of material facts in
violation of Sections 11 and 12(2) of the Securities Act of 1933. The
plaintiffs seek equitable relief and monetary damages. We believe that the
defendants have meritorious defenses to the plaintiffs' allegations. We intend
to vigorously defend this litigation. By order dated June 18, 1999, the court
granted in part and denied in part our motions to dismiss. The plaintiff has
filed a motion seeking certification of the proposed class of plaintiffs. All
defendants will oppose that motion, which remains pending. Discovery in this
matter is proceeding. Due to the inherent uncertainties of the litigation
process, we are not able to predict the outcome of this litigation. If this
litigation is not resolved in our favor, it could have a material adverse
effect on our business, financial condition and results of operations.
In addition, we are a party to a variety of legal proceedings arising in
the ordinary course of our business. We believe that we are adequately covered
by insurance and indemnification agreements. Accordingly, none of such
proceedings are expected to have a material adverse affect on our business,
financial condition and results of operations.
6. DES MOINES PARTNERSHIPS
In connection with our merger with J.C. Nichols in July 1998, we succeeded
to the interests of J.C. Nichols in a strategic alliance with R&R Investors,
Ltd. pursuant to which R&R Investors manages and leases certain co-venture
properties located in the Des Moines area. As a result of the merger, we
acquired an ownership interest of 50% or more in a series of nine co-ventures
with R&R Investors. Certain of these properties were previously included in our
consolidated financial statements. On June 2, 1999, we agreed with R&R Investors
to reorganize our respective ownership interests in the Des Moines properties
such that each would own a 50% interest in the properties in the Des Moines
area. Accordingly, we have adopted the equity method of accounting for our
investment in each of the Des Moines properties as a result of such
reorganization. The impact of the reorganization was immaterial to the
consolidated financial statements of the Company.
7. DISPOSITION ACTIVITY
On June 7, 1999, we sold approximately 3.3 million rentable square feet of
non-core office and industrial properties and 49 acres of development land in
the South Florida area for gross proceeds of approximately $323.0 million. In
addition, during the six months ended June 30, 1999, we sold approximately 1.6
million rentable square feet of non-core office and industrial properties in
the Baltimore area and certain other non-core office and industrial properties
for gross proceeds of $108.9 million. We recorded a gain, net of income tax
provision, of $2.1 million related to these dispositions. Non-core office and
industrial properties generally include single buildings or business parks that
do not fit our long-term strategy.
In addition, we have entered into various agreements to sell approximately
2.8 million rentable square feet of non-core office and industrial properties
for gross proceeds of $220.0 million. These transactions are subject to
customary closing conditions, including due diligence and documentation, and
are expected to close during the third and fourth quarters of 1999. However, we
can provide no assurance that all or parts of these transactions will be
consummated.
8. EQUITY SETTLEMENT
On June 9, 1999, the Company settled on it's August 1997 forward equity
transaction with UBS, AG, London Branch ("UBS") through a combination of cash
and shares of Common Stock. In connection with the settlement, 246,424 shares
of the Company's common stock were returned and retired.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following should be read in conjunction with all of the financial
statements appearing elsewhere in the report and is based primarily on the
consolidated financial statements of the Company.
11
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999. Revenues from rental operations increased
$29.0 million, or 25.6%, from $113.1 million for the three months ended June 30,
1998 to $142.1 million for the comparable period in 1999. The increase is
primarily a result of the acquisition of 4.2 million square feet of majority
owned office, industrial and retail properties and 2,326 apartment units, and
the completion of 1.6 million square feet of development activity during the
last six months of 1998 and the first six months of 1999, slightly offset by the
disposition and removal of 6.6 million square feet of majority owned office,
industrial and retail properties and 418 apartment units (including the removal
of certain properties from our consolidated financial statements as a result of
the reorganization of the Des Moines Partnerships). Our in-service portfolio
decreased from 40.7 million square feet at June 30, 1998 to 39.9 million square
feet at June 30, 1999. Same property revenues, which are the revenues of the 490
in-service properties owned on April 1, 1998, increased 3.1% for the three
months ended June 30, 1999, compared to the same three months of 1998.
During the three months ended June 30, 1999, 382 leases representing 2.1
million square feet of office, industrial and retail space commenced at an
average rate per square foot which was 6.4% higher than the average rate per
square foot on the expired leases.
Interest and other income increased $2.7 million, or 103.8%, from $2.6
million for the three months ended June 30, 1998 to $5.3 million for the
comparable period in 1999. The increase was a result of higher cash balances in
1999 and additional income generated from management fees, development fees
and leasing commissions. The Company generated $274,000 in auxiliary income
(vending and parking) as a result of acquiring multifamily communities in the
merger with J.C. Nichols.
Rental operating expenses increased $8.0 million, or 22.3%, from $35.8
million for the three months ended June 30, 1998 to $43.8 million for the
comparable period in 1999. The increase is primarily a result of the
acquisition of 4.2 million square feet of majority owned office, industrial and
retail properties and 2,326 apartment units, and the completion of 1.6 million
square feet of development activity during the last six months of 1998 and the
first six months of 1999, slightly offset by the disposition and removal of 6.6
million square feet of majority owned office, industrial and retail properties
and 418 apartment units (including the removal of certain properties from our
consolidated financial statements as a result of the reorganization of the Des
Moines Partnerships). Rental operating expenses as a percentage of related
revenues decreased from 31.7% for the three months ended June 30, 1998 to 30.8%
for the comparable period in 1999.
Depreciation and amortization for the three months ended June 30, 1999 and
1998 was $27.7 million and $20.3 million, respectively. The increase of $7.4
million, or 36.5%, is due to an increase in depreciable assets over the prior
year. Interest expense increased $12.7 million, or 71.3%, from $17.8 million
for the three months ended June 30, 1998 to $30.5 million for the comparable
period in 1999. The increase is attributable to the increase in the outstanding
debt for the entire quarter. Interest expense for the three months ended June
30, 1999 and 1998 included $734,000 and $616,000, respectively, of amortization
of deferred financing costs and the costs related to our interest rate hedge
contracts. General and administrative expenses increased from 3.9% of rental
revenue for the three months ended June 30, 1998 to 4.4% for the comparable
period in 1999.
Net income before minority interest and extraordinary item equaled $41.2
million and $37.3 million for the three months ended June 30, 1999 and 1998,
respectively. The Company's net income allocated to minority interest totaled
$4.8 million and $6.3 million for the three months ended June 30, 1999 and
1998, respectively. The Company recorded $8.1 million and $7.7 million in
preferred stock dividends for the three months ended June 30, 1999 and 1998,
respectively.
SIX MONTHS ENDED JUNE 30, 1999. Revenues from rental operations increased
$75.4 million, or 35.3%, from $213.4 million for the six months ended June 30,
1998 to $288.8 million for the comparable period in 1999. The increase is
primarily a result of the acquisition of 4.2 million square feet of majority
owned office, industrial and retail properties and 2,326 apartment units, and
the completion of 1.6 million square feet of development activity during the
last six months of 1998 and the first six months of 1999, slightly offset by
the disposition and removal of 6.6 million square feet of majority owned
office, industrial and retail properties and 418 apartment units (including the
removal of certain properties from our consolidated financial statements as a
result of the reorganization of the Des Moines Partnership). Our in-service
portfolio decreased from 40.7 million square
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<PAGE>
feet at June 30, 1998 to 39.9 million square feet at June 30, 1999. Same
property revenues, which are the revenues of the 440 in-service properties
owned on January 1, 1998, increased 3.2% for the six months ended June 30,
1999, compared to the same six months of 1998.
During the six months ended June 30, 1999, 755 leases representing 4.4
million square feet of office, industrial and retail space commenced at an
average rate per square foot which was 5.7% higher than the average rate per
square foot on the expired leases.
Interest and other income increased $5.9 million, or 125.5%, from $4.7
million for the six months ended June 30, 1998 to $10.6 million for the
comparable period in 1999. The increase was a result of higher cash balances in
1999, and additional income generated from management fees, development fees
and leasing commissions. The Company generated $587,000 in auxiliary income
(vending and parking) as a result of acquiring multifamily communities in the
merger with J.C. Nichols.
Rental operating expenses increased $23.5 million, or 35.8%, from $65.6
million for the six months ended June 30, 1998 to $89.1 million for the
comparable period in 1999. The increase is primarily a result of the
acquisition of 4.2 million square feet of majority owned office, industrial and
retail properties and 2,326 apartment units, and the completion of 1.6 million
square feet of development activity during the last six months of 1998 and the
first six months of 1999, slightly offset by the disposition and removal of 6.6
million square feet of majority owned office, industrial and retail properties
and 418 apartment units (including the removal of certain properties from our
consolidated financial statements as a result of the reorganization of the Des
Moines Partnerships). Rental operating expenses as a percentage of related
revenues increased from 30.7% for the six months ended June 30, 1998 to 30.9%
for the comparable period in 1999.
Depreciation and amortization for the six months ended June 30, 1999 and
1998 was $55.9 million and $37.5 million, respectively. The increase of $18.4
million, or 49.1%, is due to an increase in depreciable assets over the prior
year. Interest expense increased $27.5 million, or 77.2%, from $35.6 million
for the six months ended June 30, 1998 to $63.1 million for the comparable
period in 1999. The increase is attributable to the increase in the outstanding
debt for the entire six months. Interest expense for the six months ended June
30, 1999 and 1998 included $1,512,000 and $1,232,000, respectively, of
amortization of deferred financing costs and the costs related to our interest
rate hedge contracts. General and administrative expenses increased from 3.8%
of rental revenue for the six months ended June 30, 1998 to 4.2% for the
comparable period in 1999.
Net income before minority interest and extraordinary item equaled $82.1
million and $71.3 million for the six months ended June 30, 1999 and 1998,
respectively. The Company's net income allocated to minority interest totaled
$10.7 million and $11.9 million for the six months ended June 30, 1999 and
1998, respectively. The Company recorded $16.3 million and $13.8 million in
preferred stock dividends for the six months ended June 30, 1999 and 1998,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
STATEMENT OF CASH FLOWS. For the six months ended June 30, 1999, cash
provided by operating activities decreased by $14.9 million, or 13.5%, to $95.5
million, as compared to $110.4 million for the same period in 1998. The decrease
is primarily due to the payment of real estate taxes due in the first quarter of
1999 offset by the increase in net income resulting from our property
acquisitions in 1998 and 1999. Cash provided by investing activities was $231.0
million for the first six months of 1999, as compared to $678.5 used in
investing activities for the same period in 1998. The increase is primarily due
to the disposition of certain properties and the decline in acquisition activity
during the first six months of 1999, as compared to the same period in 1998.
Cash used in financing activities was $254.0 million for the first six months of
1999, as compared to $565.0 provided by investing activities for the same period
in 1998. The decrease is primarily due to the decrease in the borrowings on
mortgages, notes payable and revolving loans as well as a decrease in common and
preferred stock offerings in the first six months of 1999, as compared to the
same period in 1998. Payments of distributions increased by $14.0 million to
$76.2 million for the first six months of 1999, from $62.2 million for the same
period in 1998. The increase is due to the greater number of shares outstanding
and a 6.0% increase in the distribution rate. Preferred stock dividend payments
were $16.3 million for the first six months of 1999, as compared to $13.8
million for the same period in 1998. The increase is due to the issuance of 8%
Series D Cumulative Redeemable Preferred Shares in the first quarter of 1998.
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<PAGE>
CAPITALIZATION. The Company's total indebtedness at June 30, 1999 totaled
$1.8 billion and was comprised of $552 million of secured indebtedness with a
weighted average interest rate of 7.8% and $1.2 billion of unsecured
indebtedness with a weighted average interest rate of 7.0%. Except as stated
below, all of the mortgage and notes payable outstanding at June 30, 1999 were
either fixed rate obligations or variable rate obligations covered by interest
rate hedge contracts. A portion of our $600 million unsecured revolving loan
(the "Revolving Loan") and approximately $43.7 million of floating rate notes
payable assumed upon consummation of the merger with J.C. Nichols were not
covered by interest rate hedge contracts on June 30, 1999.
Based on the Company's total market capitalization of $4.1 billion at June
30, 1999 (at the June 30, 1999 stock price of $27.44 and assuming the
redemption for shares of Common Stock of the 8.9 million Common Units of
minority interest in the Operating Partnership), the Company's debt represented
approximately 43% of its total market capitalization.
To meet in part our long-term liquidity requirements, we borrow funds at a
combination of fixed and variable rates. Borrowings under our Revolving Loan
bear interest at variable rates. Our long-term debt, which consists of
long-term financings and the issuance of debt securities, typically bears
interest at fixed rates. In addition, we have assumed fixed rate and variable
rate debt in connection with acquiring properties. Our interest rate risk
management objective is to limit the impact of interest rate changes on
earnings and cash flows and to lower our overall borrowing costs. To achieve
these objectives, from time to time we enter into interest rate hedge contracts
such as collars, swaps, caps and treasury lock agreements in order to mitigate
our interest rate risk with respect to various debt instruments. We do not hold
or issue these derivative contracts for trading or speculative purposes.
The following table sets forth information regarding our interest rate
hedge contracts as of June 30, 1999:
<TABLE>
<CAPTION>
NOTIONAL MATURITY FIXED FAIR MARKET
TYPE OF HEDGE AMOUNT DATE REFERENCE RATE RATE VALUE
- ---------------- ---------- ---------- ----------------------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Treasury Lock $100,000 10/1/99 10-Year Treasury 5.725% $ 486
Treasury Lock 100,000 7/1/99 10-Year Treasury 5.674 782
Swap 100,000 10/1/99 3-Month LIBOR 4.970 281
Swap 20,828 6/10/02 1-Month LIBOR + 0.75% 7.700 (945)
Collar 80,000 10/15/01 1-Month LIBOR 5.40 - 6.25 175
</TABLE>
We enter into swaps, collars and caps to limit our exposure to an increase
in variable interest rates, particularly with respect to amounts outstanding
under our Revolving Loan. The interest rate on all of our variable rate debt is
adjusted at one and three-month intervals, subject to settlements under these
contracts. We also enter into treasury lock agreements from time to time in
order to limit our exposure to an increase in interest rates with respect to
future debt offerings.
In addition, we are exposed to certain losses in the event of
nonperformance by the counterparties under the interest rate hedge contracts.
We expect the counterparties, which are major financial institutions, to
perform fully under these contracts. However, if the counterparties were to
default on their obligations under the interest rate hedge contracts, we could
be required to pay the full rates on our debt, even if such rates were in
excess of the rates in the contracts.
CURRENT AND FUTURE CASH NEEDS. Historically, rental revenue has been the
principal source of funds to pay operating expenses, debt service, stockholder
distributions and capital expenditures, excluding nonrecurring capital
expenditures. In addition, construction management, maintenance, leasing and
management fees have provided sources of cash flow. We presently have no plans
for major capital improvements to the existing in-service properties, other
than normal recurring building improvements, tenant improvements and lease
commissions. We expect to meet our short-term liquidity requirements generally
through working capital and net cash provided by operating activities along
with the Revolving Loan.
Our short-term (within the next 12 months) liquidity needs also include,
among other things, the funding of approximately $210 million of our existing
development activity. We expect to fund our short-term liquidity needs through
a combination of:
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<PAGE>
o additional borrowings under our Revolving Loan (approximately $318.5
million was available as of June 30, 1999);
o the issuance of secured debt;
o the selective disposition of non-core assets; and
o the sale or contribution of some of our wholly owned properties to
strategic joint ventures to be formed with selected partners interested
in investing with us, which will have the net effect of generating
additional capital through such sale or contributions.
Our long-term liquidity needs generally include the funding of existing
and future development activity, selective asset acquisitions and the
retirement of mortgage debt, amounts outstanding under the Revolving Loan and
long-term unsecured debt. We remain committed to maintaining a flexible and
conservative capital structure. Accordingly, we expect to meet our long-term
liquidity needs through a combination of (1) the issuance by the Operating
Partnership of additional unsecured debt securities, (2) the issuance of
additional equity securities by the Company and the Operating Partnership as
well as (3) the sources described above with respect to our short-term
liquidity. We expect to use such sources to meet our long-term liquidity
requirements either through direct payments or repayment of borrowings under
the Revolving Loan. We do not intend to reserve funds to retire existing
secured or unsecured indebtedness upon maturity. Instead, we will seek to
refinance such debt at maturity or retire such debt through the issuance of
equity or debt securities.
We anticipate that our 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 our capital and liquidity needs in both
the short and long term. However, if these sources of funds are insufficient or
unavailable, the Company's ability to make the expected distributions to
stockholders discussed below and satisfy other cash requirements may be
adversely affected.
DISTRIBUTIONS TO STOCKHOLDERS. In order to qualify as a REIT for Federal
income tax purposes, the Company is required to make distributions to its
stockholders of at least 95% of REIT taxable income. The Company expects to use
its cash flow from operating activities for distributions to stockholders and
for payment of recurring, non-incremental revenue-generating expenditures. The
following factors will affect cash flows from operating activities and,
accordingly, influence the decisions of the Board of Directors regarding
distributions: (1) debt service requirements after taking into account the
repayment and restructuring of certain indebtedness; (2) scheduled increases in
base rents of existing leases; (3) changes in rents attributable to the renewal
of existing leases or replacement leases; (4) changes in occupancy rates at
existing properties and procurement of leases for newly acquired or developed
properties; and (5) operating expenses and capital replacement needs.
RECENT DEVELOPMENTS
On June 7, 1999, we sold approximately 3.3 million rentable square feet of
non-core office and industrial properties and 49 acres of development land in
the South Florida area for gross proceeds of approximately $323.0 million. In
addition, during the six months ended June 30, 1999, we sold approximately 1.6
million rentable square feet of non-core office and industrial properties in
the Baltimore area and certain other non-core office and industrial properties
for gross proceeds of approximately $108.9 million. The Company recorded a
gain, net of income tax provision, of $2.1 million related to these
dispositions. Non-core office and industrial properties generally include
single buildings or business parks that do not fit our long-term strategy.
In addition, we have entered into various agreements to sell approximately
2.8 million rentable square feet of non-core office and industrial properties
for gross proceeds of $220.0 million. These transactions are subject to
customary closing conditions, including due diligence and documentation, and
are expected to close during the third and fourth quarters of 1999. However, we
can provide no assurance that all or parts of these transactions will be
consummated.
We intend to use the net proceeds from our recent and pending disposition
activity to reinvest in tax-deferred exchange transactions under Section 1031
of the Internal Revenue Code and to fund existing development activity, either
through direct payments or repayment of borrowings under our Revolving Loan. We
expect to reinvest up to $72 million of the net proceeds from recent
disposition activity and up to $123 million of the net proceeds from pending
disposition activity to acquire in tax-deferred exchange transactions
in-service properties,
15
<PAGE>
development land and development projects located in core markets and in
sub-markets where we have a strong presence. For an exchange to qualify for
tax-deferred treatment under Section 1031, the net proceeds from the sale of a
property must be held by an escrow agent until applied toward the purchase of
real estate qualifying for gain deferral. Given the competition for properties
meeting our investment criteria, there may be some delay in reinvesting such
proceeds. Delays in reinvesting such proceeds will reduce our income from
operations. In addition, the use of net proceeds from dispositions to fund
development activity, either through direct payments or repayment of borrowings
under our Revolving Loan, will reduce our income from operations until such
development projects are placed in service.
YEAR 2000
BACKGROUND. The Year 2000 compliance issue refers to the inability of
computer systems and computer software to correctly process any date after
1999. The date change to the new millennium may be a problem because some
computer hardware and software was designed to use only two digits to represent
a year. As a result, some systems may interpret 1/1/00 to be the year 1900. In
addition, some systems may not recognize that the Year 2000 is a leap year.
Both problems could result in system failure or miscalculations, which may
cause disruptions of operations.
The Year 2000 issue, if not corrected, could result in the failure of the
information technology ("IT") systems that we use in our business operations,
such as computer programs related to property management, leasing, financial
reporting, employee benefits, asset management and energy management. In
addition, computerized systems and microprocessors are embedded in a variety of
products used in our operations and properties, such as HVAC controls, lights,
power generators, elevators, life safety systems, phones and security systems.
APPROACH AND STATUS. Our Year 2000 compliance efforts are divided into two
areas -- "operations level" and "property level." Operations level includes
those information technology systems used in our corporate and division offices
to perform real estate, accounting and human resources functions. Property
level includes the non-information technology systems at our individual
properties. Year 2000 remediation plan at both the operations and property
levels has three phases:
o assessment (inventory and testing of computer systems),
o renovation (repairing or replacing non-compliant systems) and
o validation (testing of repaired or replaced systems).
Our Information Technology Department is overseeing our operations level
compliance program. With respect to our operations level IT software, we have
completed all three phases of our Year 2000 remediation plan. As part of a
standardization of our technology infrastructure in 1998, computer software
that was not Year 2000 compliant was upgraded or replaced. These software
upgrades were off-the-shelf Year 2000 compliant packages. Additionally, we
successfully upgraded and tested a Year 2000 compliant version of our corporate
accounting and property management software in December 1998. With respect to
our operations level IT hardware, we have completed the assessment phase of our
remediation plan and are 95% complete (in terms of labor) with the renovation
and validation phases of the plan. We expect to complete the renovation and
validation phases with respect to our operations level hardware by end of the
third quarter of 1999.
Our Chief Operating Officer is overseeing our property level compliance
program. We have completed our inventory of all of our properties'
non-information technology systems. As part of the inventory process, we
requested appropriate vendors and manufacturers to certify that their products
are Year 2000 compliant. We are approximately 90% complete (in terms of labor)
with the renovation and validation phases of our remediation plan at the
property level. We expect to complete both phases in the third quarter of 1999.
With respect to Year 2000 issues relating to our customer base, we have
not sought representations from our tenants with respect to their Year 2000
readiness because no one tenant represents more than 3% of our annualized
rental revenue. With respect to suppliers and vendors, our material purchases
are generally from those in competitive fields where others will be able to
meet any of our needs unmet by suppliers or vendors with Year 2000
difficulties. (Although we have no reason to expect a significant interruption
of utility services for our properties, we have not received (nor sought)
written assurances from utility providers that Year 2000 issues will not cause
an interruption in service.)
16
<PAGE>
COSTS. To date, the costs directly associated with our Year 2000 efforts
have not been material, and we estimate our future costs to be immaterial as
well.
RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE. We do not expect Year 2000
failures to have a material adverse effect on our results of operations or
liquidity because:
o we do not rely on a small number of tenants for a significant portion of
our rental revenue;
o we stand ready to switch vendors or suppliers whose Year 2000 failures
adversely affect their products or services; and
o our remediation plan is expected to be complete prior to the Year 2000.
As a result, we do not expect to develop a contingency plan for Year 2000
failures.
Our assessment of the likely impact of Year 2000 issues on us, which is a
forward-looking statement, depends on numerous factors, such as the continued
provision of utility services, and we remain exposed to the risk of Year 2000
failures. See " -- Disclosure Regarding Forward-Looking Statements."
Our disclosures and announcements concerning our Year 2000 programs are
intended to constitute "Year 2000 Readiness Disclosures" as defined in the
recently-enacted Year 2000 Information and Readiness Disclosure Act. The Act
provides added protection from liability for certain public and private
statements concerning an entity's Year 2000 readiness and the Year 2000
readiness of its products and services. The Act also potentially provides added
protection from liability for certain types of Year 2000 disclosures made after
January 1, 1996, and before the date of enactment of the Act.
POSSIBLE ENVIRONMENTAL LIABILITIES
In connection with owning or operating our properties, we may be liable
for certain costs due to possible environmental liabilities. Under various
laws, ordinances and regulations, such as the Comprehensive Environmental
Response Compensation and Liability Act, and common law, an owner or operator
of real estate is liable for the costs to remove or remediate certain hazardous
or toxic chemicals or substances on or in the property. Owners or operators are
also liable for certain other costs, including governmental fines and injuries
to persons and property. Such laws often impose liability without regard to
whether the owner or operator knew of, or was responsible for, the presence of
the hazardous or toxic chemicals or substances. The presence of such
substances, or the failure to remediate such substances properly, may adversely
affect the owner's or operator's ability to sell or rent such property or to
borrow using such property as collateral. Persons who arrange for the disposal,
treatment or transportation of hazardous or toxic chemicals or substances may
also be liable for the same types of costs at a disposal, treatment or storage
facility, whether or not that person owns or operates that facility.
Certain environmental laws also impose liability for releasing
asbestos-containing materials. Third parties may seek recovery from owners or
operators of real property for personal injuries associated with asbestos-
containing materials. A number of our properties have asbestos-containing
materials or material that we presume to be asbestos-containing materials. In
connection with owning and operating our properties, we may be liable for such
costs.
In addition, it is not unusual for property owners to encounter on-site
contamination caused by off-site sources. The presence of hazardous or toxic
chemicals or substances at a site close to a property could require the
property owner to participate in remediation activities or could adversely
affect the value of the property. Contamination from adjacent properties has
migrated onto at least three of our properties; however, based on current
information, we do not believe that any significant remedial action is
necessary at these affected sites.
As of the date hereof, we have obtained Phase I environmental assessments
(and, in certain instances, Phase II environmental assessments) on
substantially all of our in-service properties. These assessments have not
revealed, nor are we aware of, any environmental liability at our properties
that we believe would materially adversely affect our financial position,
operations or liquidity taken as a whole. This projection, however, could be
incorrect depending on certain factors. For example, material environmental
liabilities may have arisen after the assessments were performed or our
assessments may not have revealed all environmental liabilities or may have
underestimated the scope and severity of environmental conditions observed.
There may also be unknown environmental liabilities at properties for which we
have not obtained a Phase I environmental assessment or
17
<PAGE>
have not yet obtained a Phase II environmental assessment. In addition, we base
our assumptions regarding environmental conditions, including groundwater flow
and the existence and source of contamination, on readily available sampling
data. We cannot guarantee that such data is reliable in all cases. Moreover, we
cannot provide any assurances (1) that future laws, ordinances or regulations
will not impose a material environmental liability or (2) that tenants, the
condition of land or operations in the vicinity of our properties or unrelated
third parties will not affect the current environmental condition of our
properties.
Some tenants use or generate hazardous substances in the ordinary course
of their respective businesses. In their leases, we require these tenants to
comply with all applicable laws and to be responsible to us for any damages
resulting from their use of the property. We are not aware of any material
environmental problems resulting from tenants' use or generation of hazardous
or toxic chemicals or substances. We cannot provide any assurances, however,
that all tenants will comply with the terms of their leases or remain solvent.
If tenants do not comply or do not remain solvent, we may at some point be
responsible for contamination caused by such tenants.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, which is required to be adopted in fiscal years beginning after
June 15, 1999. In June 1999, FASB issued Statement No. 137, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -- DEFERRAL OF THE FASB STATEMENT
NO. 133, which stipulates the required adoption date to be all fiscal years
beginning after June 15, 2000. Statement No. 133 requires us to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The fair market value of the Company's derivatives is
discussed in Item 2.
COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT
Under the Americans with Disabilities Act (the "ADA"), all public
accommodations and commercial facilities are required to meet certain federal
requirements related to access and use by disabled persons. These requirements
became effective in 1992. Compliance with the ADA requirements could require
removal of access barriers, and noncompliance could result in imposition of
fines by the U.S. government or an award of damages to private litigants.
Although we believe that our properties are substantially in compliance with
these requirements, we may incur additional costs to comply with the ADA.
Although we believe that such costs will not have a material adverse effect on
us, if required changes involve a greater expenditure than we currently
anticipate, our results of operations, liquidity and capital resources could be
materially adversely affected.
FUNDS FROM OPERATIONS AND CASH AVAILABLE FOR DISTRIBUTIONS
We consider funds from operations ("FFO") to be a useful financial
performance measure of the operating performance of an equity REIT because,
together with net income and cash flows, FFO provides investors with an
additional basis to evaluate the ability of a REIT to incur and service debt
and to fund acquisitions and other capital expenditures. FFO does not represent
net income or cash flows from operating, investing or financing activities as
defined by Generally Accepted Accounting Principles ("GAAP"). It should not be
considered as an alternative to net income as an indicator of our operating
performance or to cash flows as a measure of liquidity. FFO does not measure
whether cash flow is sufficient to fund all cash needs, including principal
amortization, capital improvements and distributions to stockholders. Further,
FFO as disclosed by other REITs may not be comparable to our calculation of
FFO, as described below. FFO and cash available for distributions should not be
considered as alternatives to net income as an indication of our performance or
to cash flows as a measure of liquidity.
FFO means net income (computed in accordance with generally accepted
accounting principles) excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation and amortization, 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
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<PAGE>
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.
FFO and cash available for distribution for the three and six month
periods ended June 30, 1999 and 1998 are summarized in the following table (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30
------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
FUNDS FROM OPERATIONS:
Income before minority interest and extraordinary item ......... $ 41,237 $ 37,251 $ 82,097 $ 71,288
Add (deduct):
Dividends to preferred shareholders ........................... (8,145) (7,656) (16,290) (13,801)
Severance costs and other division closing expenses ........... 1,233 -- 1,233 --
Gain on disposition of assets, net of income tax
provision ................................................... (1,524) -- (2,093) --
Depreciation and amortization ................................. 27,705 20,340 55,861 37,501
Depreciation on unconsolidated affiliates ..................... 745 -- 1,222
-------- -------- --------- ---------
FUNDS FROM OPERATIONS BEFORE MINORITY INTEREST .............. 61,251 49,935 122,030 94,988
CASH AVAILABLE FOR DISTRIBUTION:
Add (deduct):
Rental income from straight-line rents ........................ (3,524) (2,976) (7,509) (6,092)
Amortization of deferred financing costs ...................... 734 616 1,512 1,232
Non-incremental revenue generating capital
expenditures (1):
Building improvements paid .................................. (2,957) (1,678) (4,475) (2,697)
Second generation tenant improvements paid .................. (4,112) (4,868) (10,121) (7,304)
Second generation lease commissions paid .................... (4,082) (1,785) (7,613) (3,511)
-------- -------- --------- ---------
CASH AVAILABLE FOR DISTRIBUTION ............................ $ 47,310 $ 39,244 $ 93,824 $ 76,616
======== ======== ========= =========
Weighted average common shares/common units
outstanding -- basic (2) ...................................... 70,445 63,126 70,329 61,370
======== ======== ========= =========
Weighted average common shares/common units
outstanding -- diluted (2) .................................... 70,468 63,518 70,360 61,877
======== ======== ========= =========
DIVIDEND PAYOUT RATIO -- DILUTED:
Funds from operations ......................................... 62.1% 64.9% 62.3% 66.4%
======== ======== ========= =========
Cash available for distribution ............................... 80.4% 82.5% 81.0% 82.4%
======== ======== ========= =========
</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 26, 1999, the Company's Board of Directors declared a dividend of
$.555 per share ($2.22 on an annualized basis) payable on August 18, 1999 to
stockholders of record on August 5, 1999.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this Quarterly Report on Form 10-Q may contain
forward-looking statements. Such statements include, in particular, statements
about our plans, strategies and prospects under "Management's Discussion and
Analysis of Financial Condition and Results of Operations." You can identify
forward-looking statements by our use of forward-looking terminology such as
"may," "will," "expect," "anticipate," "estimate," "continue" or other similar
words. Although we believe that our plans, intentions and expectations
reflected in or suggested by such forward-looking statements are reasonable, we
cannot assure you that our plans, intentions or expectations will be achieved.
When considering such forward-looking statements, you should keep in mind
19
<PAGE>
the following important factors that could cause our actual results to differ
materially from those contained in any forward-looking statement:
o our markets could suffer unexpected increases in development of office,
industrial and retail properties;
o the financial condition of our tenants could deteriorate;
o the costs of our development projects could exceed our original
estimates;
o we may not be able to complete development, acquisition, disposition or
joint venture projects as quickly or on as favorable terms as
anticipated;
o we may not be able to lease or release space quickly or on as favorable
terms as old leases;
o we may have incorrectly assessed the environmental condition of our
properties;
o an unexpected increase in interest rates would increase our debt service
costs;
o we may not be able to continue to meet our long-term liquidity
requirements on favorable terms;
o we could lose key executive officers; and
o our southeastern markets may suffer an unexpected decline in economic
growth or increase in unemployment rates.
Given these uncertainties, we caution you not to place undue reliance on
forward-looking statements. We undertake no obligation to publicly release the
results of any revisions to these forward-looking statements that may be made
to reflect any future events or circumstances or to reflect the occurrence of
unanticipated events.
20
<PAGE>
PROPERTY INFORMATION
The following table sets forth certain information with respect to our
majority owned in-service and development properties (excluding apartment
units) as of June 30, 1999 and 1998:
<TABLE>
<CAPTION>
RENTABLE NUMBER OF PERCENT LEASED/
JUNE 30, 1999 SQUARE FEET PROPERTIES PRE-LEASED
- ---------------------------- ------------- ------------ ----------------
<S> <C> <C> <C>
IN-SERVICE:
Office .................... 26,666,000 397 94%
Industrial ................ 11,497,000 193 90%
Retail .................... 1,790,000 19 91%
---------- --- --
Total .................... 39,953,000 609 93%
========== === ==
DEVELOPMENT:
COMPLETED -- NOT STABILIZED
Office .................... 1,951,000 18 78%
Industrial ................ 476,000 4 78%
Retail .................... 119,000 1 97%
---------- --- --
Total .................... 2,546,000 23 79%
========== === ==
IN PROCESS
Office .................... 3,065,000 24 69%
Industrial ................ 472,000 4 17%
Retail .................... 81,000 1 53%
---------- --- --
Total .................... 3,618,000 29 61%
========== === ==
TOTAL:
Office .................... 31,682,000 439
Industrial ................ 12,445,000 201
Retail .................... 1,990,000 21
---------- ---
Total .................... 46,117,000 661
========== ===
JUNE 30, 1998
- -----------------------------
IN-SERVICE:
Office .................... 28,850,000 382 94%
Industrial ................ 11,863,000 148 94%
Retail .................... -- -- --
---------- --- --
Total .................... 40,713,000 530 94%
========== === ==
DEVELOPMENT:
COMPLETED -- NOT STABILIZED
Office .................... N/A N/A N/A
Industrial ................ N/A N/A N/A
Retail .................... N/A N/A N/A
---------- --- ----
Total .................... N/A N/A N/A
========== === ====
IN PROCESS
Office .................... 3,261,000 27 44%
Industrial ................ 705,000 5 43%
Retail .................... -- -- --
---------- --- ----
Total .................... 3,966,000 32 44%
========== === ====
TOTAL:
Office .................... 32,111,000 409
Industrial ................ 12,568,000 153
Retail .................... -- --
---------- ---
Total .................... 44,679,000 562
========== ===
</TABLE>
21
<PAGE>
The following table sets forth certain information with respect to our
properties under development as of June 30, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
RENTABLE
SQUARE ESTIMATED COST AT PRE-LEASING ESTIMATED ESTIMATED
NAME LOCATION FEET COST 6/30/99 PERCENTAGE (1) COMPLETION STABILIZATION (2)
- ------------------------ ------------------- ------------ ----------- ----------- ---------------- ------------ ------------------
IN-PROCESS
<S> <C> <C> <C> <C> <C> <C> <C>
OFFICE:
C N A Maitland III Orlando 78,000 $ 9,885 $ 7,731 100% 3Q99 3Q99
Capital One Bldg 2 Richmond 44,000 5,359 5,240 100% 3Q99 3Q99
Highwoods Center II @
Tradeport Atlanta 53,000 4,825 2,527 56% 3Q99 4Q99
Capital One Bldg 3 Richmond 126,000 15,046 10,267 100% 4Q99 4Q99
Eastshore I Richmond 68,000 7,535 457 100% 4Q99 4Q99
Lakepoint II Tampa 225,000 34,106 16,153 52% 4Q99 4Q99
Deerfield I Atlanta 72,000 6,994 2,312 62% 3Q99 1Q00
Deerfield II Atlanta 45,000 4,382 3,120 -- 3Q99 1Q00
Westwood South Nashville 125,000 13,530 9,582 90% 3Q99 1Q00
3737 Glenwood Ave. Research Triangle 107,000 16,700 11,096 80% 3Q99 1Q00
Eastshore III Richmond 80,000 8,580 452 100% 1Q00 1Q00
Intermedia Building 1 Tampa 200,000 27,040 5,219 100% 1Q00 1Q00
Intermedia Building 2 Tampa 30,000 4,056 439 100% 1Q00 1Q00
Intermedia Building 3 Tampa 170,000 22,984 5,754 100% 1Q00 1Q00
Belfort Park C1 Jacksonville 54,000 4,830 2,196 -- 3Q99 2Q00
Belfort Park C2 Jacksonville 31,000 2,730 2,241 -- 3Q99 2Q00
Caterpillar Financial
Center Nashville 313,000 54,000 22,400 79% 1Q00 2Q00
4101 Research Commons Research Triangle 73,000 9,311 6,052 35% 3Q99 2Q00
Peachtree Corner Atlanta 109,000 9,238 3,869 33% 3Q99 3Q00
Intermedia Building 4 Tampa 200,000 29,219 1,909 100% 3Q00 3Q00
Mallard Creek V Charlotte 118,000 12,262 7,575 -- 4Q99 4Q00
Valencia Place Kansas City 241,000 34,020 21,400 47% 1Q00 4Q00
Intermedia Building 5 Tampa 200,000 29,219 1,473 100% 3Q01 3Q01
Capital Plaza Orlando 303,000 53,000 27,554 30% 1Q00 4Q01
------- -------- -------- ---
In-Process Office Total
or Weighted Average 3,065,000 $418,851 $177,018 69%
--------- -------- -------- ---
INDUSTRIAL:
Newpoint II Atlanta 131,000 5,167 4,141 43% 3Q99 2Q00
Air Park South
Warehouse III Piedmont Triad 120,000 3,626 668 -- 4Q99 2Q00
Air Park South
Warehouse IV Piedmont Triad 86,000 2,750 1,754 28% 4Q99 3Q00
Bluegrass Valley I Atlanta 135,000 5,664 71 -- 2Q00 4Q00
--------- -------- -------- ---
In-Process Industrial
Total or Weighted
Average 472,000 $ 17,207 $ 6,634 17%
--------- -------- -------- ---
RETAIL:
Valencia Place Kansas City 81,000 14,362 7,193 53% 1Q00 4Q00
--------- -------- -------- ---
In-Process Retail
Total or Weighted
Average 81,000 $ 14,362 $ 7,193 53%
--------- -------- -------- ---
Total or Weighted
Average of all
In-Process
Development Projects 3,618,000 $450,420 $190,845 61%
========= ======== ======== ===
</TABLE>
- ----------
(1) Includes the effect of letters of intent.
(2) We generally consider a development project to be stabilized upon the
earlier of the first date such project is at least 95% occupied or one
year from the date of completion.
22
<PAGE>
<TABLE>
<CAPTION>
RENTABLE
SQUARE ESTIMATED COST AT PRE-LEASING ESTIMATED ESTIMATED
NAME LOCATION FEET COST 6/30/99 PERCENTAGE (1) COMPLETION STABILIZATION (2)
- ------------------------ ------------------- ------------ ----------- ----------- ---------------- ------------ ------------------
COMPLETED -- NOT STABILIZED
<S> <C> <C> <C> <C> <C> <C> <C>
OFFICE:
Patewood VI Greenville 107,000 $ 11,400 $ 12,223 96% 3Q98 3Q99
Lakeview Ridge III Nashville 131,000 13,100 9,883 88% 2Q99 3Q99
Highwoods Centre Research Triangle 76,000 8,300 8,627 100% 4Q98 3Q99
Overlook Research Triangle 97,000 10,500 10,162 100% 4Q98 3Q99
Red Oak Research Triangle 65,000 6,000 5,978 90% 4Q98 3Q99
Situs II Research Triangle 59,000 6,300 6,648 94% 3Q98 3Q99
Interstate Corporate
Center Tampa 342,000 19,100 17,856 99% 1Q99 3Q99
Ridgefield III Asheville 57,000 5,500 5,185 53% 3Q98 4Q99
10 Glenlakes Atlanta 254,000 35,100 29,735 82% 1Q99 4Q99
Parkway Plaza 11 Charlotte 32,000 2,600 2,354 66% 1Q99 4Q99
Highwoods Centre Hampton Roads 103,000 9,925 8,501 66% 4Q98 4Q99
Southwind Building D Memphis 64,000 6,800 5,017 85% 2Q99 4Q99
Cool Springs I Nashville 153,000 16,800 15,552 66% 3Q98 4Q99
Stony Point II Richmond 136,000 13,881 10,554 58% 2Q99 4Q99
Parkway Plaza 12 Charlotte 22,000 1,800 1,445 67% 1Q99 1Q00
Parkway Plaza 14 Charlotte 90,000 7,690 5,569 58% 2Q99 1Q00
Lakefront Plaza I Hampton Roads 77,000 7,477 6,502 32% 2Q99 1Q00
Concourse Center One Piedmont Triad 86,000 8,400 6,708 32% 2Q99 1Q00
------- -------- -------- ---
Completed -- Not
Stabilized Office Total
or Weighted Average 1,951,000 $190,673 $168,499 78%
--------- -------- -------- ---
INDUSTRIAL:
Tradeport 1 Atlanta 87,000 $ 3,100 $ 2,989 82% 3Q98 3Q99
Tradeport 2 Atlanta 87,000 3,100 3,146 86% 3Q98 3Q99
Air Park South
Warehouse II Piedmont Triad 136,000 4,200 3,293 100% 4Q98 3Q99
HIW Distribution Center Richmond 166,000 5,764 5,663 53% 1Q99 4Q99
--------- -------- -------- ---
Completed -- Not
Stabilized Industrial
Total or Weighted
Average 476,000 $ 16,164 $ 15,091 78%
--------- -------- -------- ---
RETAIL:
Seville Square Kansas City 119,000 $ 32,100 $ 30,190 97% 2Q99 1Q00
--------- -------- -------- ---
Completed -- Not
Stabilized Retail Total
or Weighted Average 119,000 $ 32,100 $ 30,190 97%
--------- -------- -------- ---
Total or Weighted
Average of all
Completed -- Not
Stabilized
Development Projects 2,546,000 $238,937 $213,780 79%
--------- -------- -------- ---
Total or Weighted
Average of all
Development Projects 6,164,000 $689,357 $404,625 69%
========= ======== ======== ===
</TABLE>
- ----------
(1) Includes the effect of letters of intent.
(2) We generally consider a development project to be stabilized upon the
earlier of the first date such project is at least 95% occupied or one
year from the date of completion.
23
<PAGE>
<TABLE>
<CAPTION>
RENTABLE
SQUARE ESTIMATED PRE-LEASING
FEET COSTS PERCENTAGE (1)
DEVELOPMENT ANALYSIS --------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SUMMARY BY ESTIMATED STABILIZATION DATE:
Third Quarter 1999 ..................... 967,000 $ 81,244 94%
Fourth Quarter 1999 .................... 1,334,000 147,957 69%
First Quarter 2000 ..................... 1,146,000 154,256 81%
Second Quarter 2000 .................... 722,000 79,664 46%
Third Quarter 2000 ..................... 395,000 41,207 66%
Fourth Quarter 2000 .................... 575,000 66,308 27%
Third Quarter 2001 ..................... 200,000 29,219 100%
Fourth Quarter 2001 .................... 303,000 53,000 30%
Held for Sale .......................... 522,000 36,502 83%
--------- ------- ----
Total or Weighted Average ............. 6,164,000 $ 689,357 69%
========= ========== ====
SUMMARY BY MARKET:
Asheville .............................. 57,000 $ 5,500 53%
Atlanta ................................ 973,000 77,570 54%
Charlotte .............................. 262,000 24,352 34%
Greenville ............................. 107,000 11,400 96%
Jacksonville ........................... 85,000 7,560 --
Kansas City ............................ 441,000 80,482 62%
Memphis ................................ 64,000 6,800 85%
Nashville .............................. 722,000 97,430 80%
Orlando ................................ 381,000 62,885 44%
Piedmont Triad ......................... 428,000 18,976 44%
Research Triangle ...................... 477,000 57,111 83%
Richmond ............................... 620,000 56,165 78%
Tampa .................................. 1,025,000 146,624 89%
Held for Sale .......................... 522,000 36,502 83%
--------- ---------- ----
Total or Weighted Average ............. 6,164,000 $ 689,357 69%
========= ========== ====
Build-to-Suit ......................... 1,196,000 $ 158,923 100%
Multi-tenant .......................... 4,446,000 493,932 59%
Held for Sale ......................... 522,000 36,502 83%
--------- ---------- ----
Total or Weighted Average ............. 6,164,000 $ 689,357 69%
========= ========== ====
RENTABLE
SQUARE ESTIMATED PRE-LEASING
FEET COSTS PERCENTAGE (1)
--------- ---------- -----------------
(DOLLARS IN THOUSANDS)
PER PROPERTY TYPE:
Office Weighted Average................. 115,231 $ 14,693 71%
Industrial Weighted Average ............ 118,500 4,171 48%
Retail Weighted Average ................ 100,000 23,231 79%
Held for Sale Weighted Average ......... 174,000 12,167 83%
----------- ---------- ----
Total Weighted Average ................. 118,538 $ 13,257 69%
=========== ========== ====
</TABLE>
- ----------
(1) Includes the effect of letters of intent.
24
<PAGE>
The following tables set forth certain information about our leasing
activities at our majority-owned in service properties (excluding apartment
units) for the three months ended June 30 and March 31, 1999 and December 31
and September 30 1998.
<TABLE>
<CAPTION>
OFFICE LEASING STATISTICS
THREE MONTHS ENDED
-----------------------------------------------------------------------------------
6/30/99 3/31/99 12/31/98 9/30/98 AVERAGE
-------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
NET EFFECTIVE RENTS RELATED TO
RE-LEASED SPACE:
Number of lease transactions (signed
leases) 290 276 308 326 300
Rentable square footage leased 1,326,838 1,406,170 1,291,297 1,645,913 1,417,555
Average per rentable square foot over
the lease term:
Base rent $ 15.60 $ 14.84 $ 16.54 $ 16.18 $ 15.79
Tenant improvements ( 0.84) ( 0.84) ( 0.85) ( 0.71) ( 0.81)
Leasing commissions ( 0.38) ( 0.42) ( 0.38) ( 0.42) ( 0.40)
Rent concessions ( 0.03) ( 0.01) ( 0.03) ( 0.02) ( 0.02)
---------- ---------- ---------- ----------- ----------
Effective rent 14.35 13.57 15.28 15.03 14.56
Expense stop (1) ( 4.21) ( 3.55) ( 3.96) ( 4.45) ( 4.04)
---------- ---------- ---------- ----------- ----------
Equivalent effective net rent $ 10.14 $ 10.02 $ 11.32 $ 10.58 $ 10.52
========== ========== ========== =========== ==========
Average term in years 4 5 4 5 5
========== ========== ========== =========== ==========
CAPITAL EXPENDITURES RELATED TO
RE-LEASED SPACE:
Tenant Improvements:
Total dollars committed under signed
leases $5,073,153 $6,848,279 $4,886,517 $ 6,754,100 $5,890,512
Rentable square feet 1,326,838 1,406,170 1,291,297 1,645,913 1,417,555
---------- ---------- ---------- ----------- ----------
Per rentable square foot $ 3.82 $ 4.87 $ 3.78 $ 4.10 $ 4.16
========== ========== ========== =========== ==========
Leasing Commissions:
Total dollars committed under signed
leases $2,230,915 $3,047,978 $2,005,094 $ 3,694,473 $2,744,615
Rentable square feet 1,326,838 1,406,170 1,291,297 1,645,913 1,417,555
---------- ---------- ---------- ----------- ----------
Per rentable square foot $ 1.68 $ 2.17 $ 1.55 $ 2.24 $ 1.94
========== ========== ========== =========== ==========
Total:
Total dollars committed under signed
leases $7,304,068 $9,896,257 $6,891,611 $10,448,573 $8,635,127
Rentable square feet 1,326,838 1,406,170 1,291,297 1,645,913 1,417,555
---------- ---------- ---------- ----------- ----------
Per rentable square foot $ 5.50 $ 7.04 $ 5.34 $ 6.35 $ 6.09
========== ========== ========== =========== ==========
RENTAL RATE TRENDS:
Average final rate with expense pass
throughs $ 15.20 $ 14.28 $ 13.57 $ 14.51 $ 14.39
Average first year cash rental rate $ 15.61 $ 15.01 $ 14.47 $ 15.43 $ 15.13
---------- ---------- ---------- ----------- ----------
Percentage increase 2.70% 5.11% 6.63% 6.34% 5.14%
========== ========== ========== =========== ==========
</TABLE>
- ----------
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintainance) which we
will not be reimbursed by our tenants.
25
<PAGE>
<TABLE>
<CAPTION>
INDUSTRIAL LEASING STATISTICS
THREE MONTHS ENDED
----------------------------------------------------------------------------
6/30/99 3/31/99 12/31/98 9/30/98 AVERAGE
-------------- -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET EFFECTIVE RENTS RELATED TO RE-LEASED
SPACE:
Number of lease transactions (signed leases) 63 72 44 56 59
Rentable square footage leased 589,835 837,616 582,758 314,549 581,190
Average per rentable square foot over the
lease term:
Base rent $ 5.55 $ 5.12 $ 4.71 $ 6.59 $ 5.49
Tenant improvements (0.37) (0.22) (0.20) (0.23) (0.26)
Leasing commissions (0.22) (0.10) (0.09) (0.09) (0.13)
Rent concessions 0.00 0.00 0.00 0.00 0.00
---------- ---------- -------- -------- --------
Effective rent 4.96 4.80 4.42 6.27 5.11
Expense stop (1) (0.28) (0.28) (0.25) (0.44) (0.31)
---------- ---------- -------- -------- --------
Equivalent effective net rent $ 4.68 $ 4.52 $ 4.17 $ 5.83 $ 4.80
========== ========== ======== ======== ========
Average term in years 4 4 3 4 4
========== ========== ======== ======== ========
CAPITAL EXPENDITURES RELATED TO RE-LEASED
SPACE:
TENANT IMPROVEMENTS:
Total dollars committed under signed leases $1,064,618 $ 821,654 $712,108 $248,359 $711,685
Rentable square feet 589,835 837,616 582,758 314,549 581,190
---------- ---------- -------- -------- --------
Per rentable square foot $ 1.80 $ 0.98 $ 1.22 $ 0.79 $ 1.22
========== ========== ======== ======== ========
LEASING COMMISSIONS:
Total dollars committed under signed leases $ 527,815 $ 315,101 $173,017 $ 99,574 $278,877
Rentable square feet 589,835 837,616 582,758 314,549 581,190
---------- ---------- -------- -------- --------
Per rentable square foot $ 0.89 $ 0.38 $ 0.30 $ 0.32 $ 0.48
========== ========== ======== ======== ========
TOTAL:
Total dollars committed under signed leases $1,592,433 $1,136,755 $885,125 $347,933 $990,561
Rentable square feet 589,835 837,616 582,758 314,549 581,190
---------- ---------- -------- -------- --------
Per rentable square foot $ 2.70 $ 1.36 $ 1.52 $ 1.11 $ 1.70
========== ========== ======== ======== ========
RENTAL RATE TRENDS:
Average final rate with expense pass throughs $ 5.17 $ 4.91 $ 4.62 $ 5.40 $ 5.03
Average first year cash rental rate $ 5.62 $ 4.91 $ 4.72 $ 5.54 $ 5.20
---------- ---------- -------- -------- --------
Percentage increase 8.70% 0.00% 2.16% 2.59% 3.38%
========== ========== ======== ======== ========
</TABLE>
- ----------
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintainance) which we
will not be reimbursed by our tenants.
26
<PAGE>
<TABLE>
<CAPTION>
RETAIL LEASING STATISTICS
THREE MONTHS ENDED
----------------------------------------------------------------------------
6/30/99 3/31/99 12/31/98 9/30/98 AVERAGE
-------------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
NET EFFECTIVE RENTS RELATED TO RE-LEASED
SPACE:
Number of lease transactions (signed leases) 29 25 15 11 20
Rentable square footage leased 159,484 62,638 29,706 37,258 72,272
Average per rentable square foot over the
lease term:
Base rent $ 14.48 $ 15.37 $ 16.34 $ 13.59 $ 14.95
Tenant improvements (1.46) (0.45) (1.66) (0.14) (0.93)
Leasing commissions (0.39) (0.39) (0.76) (0.44) (0.50)
Rent concessions 0.00 0.00 0.00 0.00 0.00
---------- -------- -------- -------- ----------
Effective rent 12.63 14.53 13.92 13.01 13.52
Expense stop (1) 0.00 (0.27) (1.79) (0.09) (0.54)
---------- -------- -------- -------- ----------
Equivalent effective net rent $ 12.63 $ 14.26 $ 12.13 $ 12.92 $ 12.98
========== ======== ======== ======== ==========
Average term in years 6 6 5 6 6
CAPITAL EXPENDITURES RELATED TO RE-LEASED
SPACE:
TENANT IMPROVEMENTS:
Total dollars committed under signed leases $2,784,277 $248,531 $319,620 $ 21,000 $ 843,357
Rentable square feet 159,484 62,638 29,706 37,258 72,272
---------- -------- -------- -------- ----------
Per rentable square foot $ 17.46 $ 3.97 $ 10.76 $ 0.56 $ 11.67
========== ======== ======== ======== ==========
LEASING COMMISSIONS:
Total dollars committed under signed leases $ 393,991 $153,872 $123,047 $ 99,268 $ 192,544
Rentable square feet 159,484 62,638 29,706 37,258 72,272
---------- -------- -------- -------- ----------
Per rentable square foot $ 2.47 $ 2.46 $ 4.14 $ 2.66 $ 2.66
========== ======== ======== ======== ==========
TOTAL:
Total dollars committed under signed leases $3,178,268 $402,403 $442,667 $120,268 $1,035,901
Rentable square feet 159,484 62,638 29,706 37,258 72,272
---------- -------- -------- -------- ----------
Per rentable square foot $ 19.93 $ 6.42 $ 14.90 $ 3.23 $ 14.33
RENTAL RATE TRENDS:
Average final rate with expense pass throughs $ 9.91 $ 10.92 $ 15.91 $ 8.55 $ 11.32
Average first year cash rental rate $ 14.20 $ 16.22 $ 18.16 $ 10.53 $ 14.78
---------- -------- -------- -------- ----------
Percentage increase 43.29% 48.53% 14.14% 23.16% 30.51%
========== ======== ======== ======== ==========
</TABLE>
- ----------
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintainance) which we
will not be reimbursed by our tenants.
27
<PAGE>
The following tables set forth scheduled lease expirations for executed
leases at our majority-owned in-service properties (excluding apartment units)
as of June 30, 1999 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 1999 589 2,009,187 7.7% $ 31,033 $ 15.45 7.6%
2000 753 3,410,864 13.1% 54,052 15.85 13.3%
2001 700 4,015,449 15.5% 64,456 16.05 15.8%
2002 637 3,928,971 15.1% 62,292 15.85 15.3%
2003 500 3,857,956 14.9% 62,079 16.09 15.2%
2004 260 2,573,684 9.9% 40,959 15.91 10.0%
2005 88 1,305,799 5.0% 19,881 15.23 4.9%
2006 51 1,394,041 5.4% 21,553 15.46 5.3%
2007 29 761,892 2.9% 12,278 16.12 3.0%
2008 50 1,572,359 6.1% 21,975 13.98 5.4%
2009 and thereafter 42 1,136,541 4.4% 17,220 15.15 4.2%
--- --------- ----- -------- -------- -----
3,699 25,966,743 100.0% $407,778 $ 15.70 100.0%
===== ========== ===== ======== ======== =====
</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 1999 157 1,230,655 12.2% $ 6,146 $ 4.99 12.3%
2000 178 2,121,760 21.0% 10,700 5.04 21.3%
2001 156 1,916,091 18.9% 9,075 4.74 18.1%
2002 112 1,380,531 13.6% 6,635 4.81 13.3%
2003 57 773,676 7.6% 4,276 5.53 8.6%
2004 42 1,653,829 16.4% 6,526 3.95 13.1%
2005 12 191,086 1.9% 1,224 6.41 2.4%
2006 6 312,099 3.1% 1,500 4.81 3.0%
2007 2 39,125 0.4% 488 12.47 1.0%
2008 6 247,737 2.4% 1,981 8.00 4.0%
2009 and thereafter 5 247,876 2.5% 1,447 5.84 2.9%
--- --------- ----- ------- ------ -----
733 10,114,465 100.0% $49,998 $ 4.94 100.0%
=== ========== ===== ======= ====== =====
</TABLE>
- ----------
(1) Includes operating expense pass throughs and excludes the effect of future
contractual rent increases.
28
<PAGE>
RETAIL PROPERTIES:
<TABLE>
<CAPTION>
AVERAGE
ANNUAL RENTS ANNUAL PERCENTAGE OF
TOTAL PERCENTAGE OF UNDER RENTAL RATE LEASED RENTS
YEAR OF RENTABLE LEASED SQUARE FOOTAGE EXPIRING PER SQUARE REPRESENTED
LEASE NUMBER OF SQUARE FEET REPRESENTED BY LEASES (1) FOOT FOR BY EXPIRING
EXPIRATION LEASES EXPIRING EXPIRING LEASES (IN THOUSANDS) EXPIRATIONS (1) LEASES
- ---------------------- ----------- ------------- ----------------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Remainder of 1999 55 192,916 9.2% $ 2,004 $ 10.39 7.3%
2000 74 273,325 13.0% 3,159 11.56 11.5%
2001 60 233,221 11.2% 3,292 14.12 12.0%
2002 48 185,497 8.8% 2,425 13.07 8.8%
2003 49 217,203 10.3% 3,334 15.35 12.1%
2004 23 196,052 9.3% 1,618 8.25 5.9%
2005 13 57,731 2.8% 1,090 18.88 4.0%
2006 15 120,367 5.7% 1,352 11.23 4.9%
2007 9 67,092 3.2% 985 14.68 3.6%
2008 14 107,352 5.1% 2,365 22.03 8.6%
2009 and thereafter 26 447,832 21.4% 5,866 13.10 21.3%
-- ------- ----- ------- -------- -----
386 2,098,588 100.0% $27,490 $ 13.10 100.0%
=== ========= ===== ======= ======== =====
</TABLE>
TOTAL:
<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 1999 801 3,432,758 9.0% $ 39,183 $ 11.41 8.1%
2000 1,005 5,805,949 15.2% 67,911 11.70 14.0%
2001 916 6,164,761 16.1% 76,823 12.46 15.8%
2002 797 5,494,999 14.4% 71,352 12.98 14.7%
2003 606 4,848,835 12.7% 69,689 14.37 14.4%
2004 325 4,423,565 11.6% 49,103 11.10 10.1%
2005 113 1,554,616 4.1% 22,195 14.28 4.6%
2006 72 1,826,507 4.8% 24,405 13.36 5.0%
2007 40 868,109 2.3% 13,751 15.84 2.8%
2008 70 1,927,448 5.0% 26,321 13.66 5.4%
2009 and thereafter 73 1,832,249 4.8% 24,533 13.39 5.1%
----- --------- ----- -------- -------- -----
4,818 38,179,796 100.0% $485,266 $ 12.71 100.0%
===== ========== ===== ======== ======== =====
</TABLE>
- ----------
(1) Includes operating expenses pass throughs and excludes the effect of future
contractual rent increases.
INFLATION
Historically inflation has not had a significant impact on our operations
because of the relatively low inflation rate in our 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 our 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 us to replace existing
leases with new leases at a higher base rent if rents on the existing leases
are below the market rate.
29
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
THE EFFECTS OF POTENTIAL CHANGES IN INTEREST RATES ARE DISCUSSED BELOW.
OUR MARKET RISK DISCUSSION INCLUDES "FORWARD-LOOKING STATEMENTS" AND REPRESENTS
AN ESTIMATE OF POSSIBLE CHANGES IN FAIR VALUE OR FUTURE EARNINGS THAT WOULD
OCCUR ASSUMING HYPOTHETICAL FUTURE MOVEMENTS IN INTEREST RATES. THESE
DISCLOSURES ARE NOT PRECISE INDICATORS OF EXPECTED FUTURE LOSSES, BUT ONLY
INDICATORS OF REASONABLY POSSIBLE LOSSES. AS A RESULT, ACTUAL FUTURE RESULTS
MAY DIFFER MATERIALLY FROM THOSE PRESENTED. SEE "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES" FOR A
DESCRIPTION OF OUR ACCOUNTING POLICIES AND OTHER INFORMATION RELATED TO THESE
FINANCIAL INSTRUMENTS.
To meet in part our long-term liquidity requirements, we borrow funds at a
combination of fixed and variable rates. Borrowings under the Revolving Loan
bear interest at variable rates. Our long-term debt, which consists of
long-term financings and the issuance of debt securities, typically bears
interest at fixed rates. In addition, we have assumed fixed rate and variable
rate debt in connection with acquiring properties. Our interest rate risk
management objective is to limit the impact of interest rate changes on
earnings and cash flows and to lower our overall borrowing costs. To achieve
these objectives, from time to time we enter into interest rate hedge contracts
such as collars, swaps, caps and treasury lock agreements in order to mitigate
our interest rate risk with respect to various debt instruments. We do not hold
or issue these derivative contracts for trading or speculative purposes.
CERTAIN VARIABLE RATE DEBT. As of June 30, 1999, the Company had
approximately $136.2 million of variable rate debt outstanding that was not
protected by interest rate hedge contracts. If the weighted average interest
rate on this variable rate debt is 100 basis points higher or lower during the
12 months ended June 30, 2000, our interest expense would be increased or
decreased approximately $1.4 million. In addition, as of June 30, 1999, we had
$80 million of additional variable rate debt outstanding that was protected by
an interest rate collar that effectively keeps the interest rate within a range
of 85 basis points. We do not believe that a 100 basis point increase or
decrease in interest rates would materially affect our interest expense with
respect to this $80 million of debt.
INTEREST RATE HEDGE CONTRACTS. For a discussion of our interest rate hedge
contracts in effect at June 30, 1999, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- CAPITALIZATION." If interest rates increase by 100 basis points,
the aggregate fair market value of these interest rate hedge contracts as of
June 30, 1999 would increase by approximately $16.4 million. If interest rates
decrease by 100 basis points, the aggregate fair market value of these interest
rate hedge contracts as of June 30, 1999 would decrease by approximately $18.0
million.
In addition, we are exposed to certain losses in the event of
nonperformance by the counterparties under the hedge contracts. We expect the
counterparties, which are major financial institutions, to perform fully under
these contracts. However, if the counterparties were to default on their
obligations under the interest rate hedge contracts, we could be required to
pay the full rates on our debt, even if such rates were in excess of the rates
in the contracts.
30
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
On October 2, 1998, John Flake, a former stockholder of J.C. Nichols,
filed a putative class action lawsuit on behalf of himself and the other former
stockholders of J.C. Nichols in the United States District Court for the
District of Kansas against J.C. Nichols, certain of its former officers and
directors and the Company. The complaint alleges, among other things, that in
connection with the merger of J.C. Nichols and the Company, (1) J.C. Nichols
and the named directors and officers of J.C. Nichols breached their fiduciary
duties to J.C. Nichols' stockholders, (2) J.C. Nichols and the named directors
and officers of J.C. Nichols breached their fiduciary duties to members of the
J.C. Nichols Company Employee Stock Ownership Trust, (3) all defendants
participated in the dissemination of a proxy statement containing materially
false and misleading statements and omissions of material facts in violation of
Section 14(a) of the Exchange Act of 1934 and (4) the Company filed a
registration statement with the SEC containing materially false and misleading
statements and omissions of material facts in violation of Sections 11 and
12(2) of the Securities Act of 1933. The plaintiffs seek equitable relief and
monetary damages. We believe that the defendants have meritorious defenses to
the plaintiffs' allegations. We intend to vigorously defend this litigation. By
order dated June 18, 1999, the court granted in part and denied in part our
motions to dismiss. The plaintiff has filed a motion seeking certification of
the proposed class of plaintiffs. All defendants will oppose that motion, which
remains pending. Discovery in this matter is proceeding. Due to the inherent
uncertainties of the litigation process, we are not able to predict the outcome
of this litigation. If this litigation is not resolved in our favor, it could
have a material adverse effect on our business, financial condition and results
of operations.
Item 2. Changes in Securities and Use of Proceeds
(c) During the three months ended June 30, 1999, the Company issued an
aggregate of 13,514 shares of Common Stock to holders of Common Units in
connection with the merger of Eakin & Smith, Inc. into the Company on
April 1, 1996. The shares were issued to three principals of Eakin &
Smith, pursuant to an exemption from the registration requirements of the
Securities Act of 1933. Each of the three principals is an accredited
investor. We exercised reasonable care to assure that the principals were
not purchasing the shares with a view to their distribution.
Item 3. Defaults Upon Senior Securities -- NA
Item 4. Submission of Matters to a Vote of Security Holders
On June 2, 1999, 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
Thomas W. Adler ............................ 49,436,674 -- -- 198,868
Kay Nichols Collison ....................... 49,436,774 -- -- 198,768
William E. Graham, Jr. ..................... 49,436,774 -- -- 198,768
Willard H. Smith Jr. ....................... 49,436,774 -- -- 198,768
(B) Ratify appointment of Ernst & Young LLP as
independent auditors ....................... 49,175,764 2,947 -- 456,831
</TABLE>
Item 5. Other Information -- NA
31
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------------- -------------------------------------------------------------------------------------
<S> <C>
10.1 (1) Purchase and Sale Agreement dated March 22, 1999, by and among Highwoods/Florida
Holdings, L.P. and America's Capital Partners, LLC, as amended by First Amendment to
Purchase and Sale Agreement dated April 21, 1999
10.2 (1) Purchase and Sale Agreement dated March 22, 1999, by and among Highwoods/Florida
Holdings, L.P. and America's Capital Partners, LLC, as amended by First Amendment to
Purchase and Sale Agreement dated April 21, 1999
27 Financial Data Schedule
</TABLE>
- ----------
(1) Filed as part of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 and incorporated herein by reference.
(b) Reports on Form 8-K -- None
32
<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 16, 1999
33
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 115,973 115,973
<SECURITIES> 0 0
<RECEIVABLES> 91,195 91,195
<ALLOWANCES> 2,091 2,091
<INVENTORY> 0 0
<CURRENT-ASSETS> 169,429 169,429
<PP&E> 3,692,328 3,692,328
<DEPRECIATION> 197,494 197,494
<TOTAL-ASSETS> 4,049,861 4,049,861
<CURRENT-LIABILITIES> 100,374 100,374
<BONDS> 1,779,870 1,779,870
0 0
397,500 397,500
<COMMON> 0 0
<OTHER-SE> 1,771,500 1,771,500
<TOTAL-LIABILITY-AND-EQUITY> 4,049,861 4,049,861
<SALES> 142,079 288,800
<TOTAL-REVENUES> 147,842 300,047
<CGS> 43,761 89,106
<TOTAL-COSTS> 71,466 144,967
<OTHER-EXPENSES> 6,212 12,005
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 30,451 63,071
<INCOME-PRETAX> 36,358 71,392
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 36,358 71,392
<DISCONTINUED> 0 0
<EXTRAORDINARY> (777) (777)
<CHANGES> 0 0
<NET-INCOME> 27,436 54,325
<EPS-BASIC> 0.45 0.89
<EPS-DILUTED> 0.45 0.89
</TABLE>
