================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission file number: 001 - 13100
Highwoods Properties, Inc.
(Exact name of registrant as specified in its charter)
Maryland 56-1871668
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3100 Smoketree Court, Suite 600, Raleigh, N.C.
(Address of principal executive office)
27604
(Zip Code)
Registrant's telephone number, including area code:
(919) 872-4924
------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
------------------
The Company has only one class of common stock, par value $.01 per share,
with 58,415,950 shares outstanding as of November 10, 2000.
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<PAGE>
HIGHWOODS PROPERTIES, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999 4
Consolidated Statements of Income for the three
and nine months ended September 30, 2000 and 1999 5
Consolidated Statements of Stockholders' Equity
for the nine months ended September 30, 2000 6
Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999 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
Possible Environmental Liabilities 16
Impact of Recently Issued Accounting Standards 17
Compliance with the Americans with Disabilities Act 17
Funds From Operations and Cash Available for Distributions 17
Disclosure Regarding Forward-Looking Statements 19
Property Information 20
Inflation 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
PART II OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
</TABLE>
2
<PAGE>
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 in our 1999 Annual Report on Form 10-K.
3
<PAGE>
HIGHWOODS PROPERTIES, INC.
Consolidated Balance Sheets
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------- ---------------
(Unaudited)
<S> <C> <C>
Assets
Real estate assets, at cost:
Land and improvements ........................................... $ 423,699 $ 491,273
Buildings and tenant improvements................................ 2,750,696 3,056,962
Development in process........................................... 78,108 186,925
Land held for development........................................ 152,799 168,396
Furniture, fixtures and equipment................................ 10,422 7,917
---------- ----------
3,415,724 3,911,473
Less - accumulated depreciation.................................. (262,749) (238,135)
---------- ----------
Net real estate assets......................................... 3,152,975 3,673,338
Property held for sale............................................. 340,923 48,960
Cash and cash equivalents.......................................... 29,906 34,496
Restricted cash.................................................... 8,998 1,842
Accounts receivable, net........................................... 23,765 22,847
Advances to related parties........................................ 13,164 15,096
Notes receivable................................................... 77,085 58,241
Accrued straight-line rents receivable............................. 39,415 35,951
Investment in unconsolidated affiliates............................ 55,877 38,977
Other assets:
Deferred leasing costs........................................... 76,877 66,783
Deferred financing costs......................................... 40,229 40,125
Prepaid expenses and other....................................... 11,112 15,614
---------- ----------
128,218 122,522
Less - accumulated amortization.................................. (45,490) (36,073)
---------- ----------
Other assets, net 82,728 86,449
---------- ----------
Total Assets....................................................... $3,824,836 $4,016,197
========== ==========
Liabilities and Stockholders' Equity
Mortgages and Notes payable........................................ $1,686,529 $1,766,117
Accounts payable, accrued expenses and other liabilities........... 126,432 111,945
---------- ----------
Total Liabilities................................................ 1,812,961 1,878,062
Minority interest.................................................. 213,580 245,665
Stockholders' Equity:
Preferred stock, $.01 par value, 50,000,000 authorized shares;
8 5/8% Series A Cumulative Redeemable Preferred Shares (liquidation
preference $1,000 per share), 125,000 shares issued and outstanding
at September 30, 2000 and December 31, 1999................... 125,000 125,000
8% Series B Cumulative Redeemable Preferred Shares
(liquidation preference $25 per share), 6,900,000 shares issued and
outstanding at September 30, 2000 and December 31, 1999....... 172,500 172,500
8% Series D Cumulative Redeemable Preferred Shares
(liquidation preference $250 per share), 400,000 shares issued and
outstanding at September 30, 2000 and December 31, 1999....... 100,000 100,000
Common stock, $.01 par value, 200,000,000 authorized shares; issued
62,232,642 (includes 3,811,086 shares in treasury) and 62,068,613
(includes 1,150,000 shares in treasury) at September 30, 2000 and
December 31, 1999, respectively................................ 622 621
Additional paid-in capital......................................... 1,601,045 1,597,494
Distributions in excess of net earnings............................ (111,321) (77,670)
Less treasury shares at cost, 3,811,086 at September 30, 2000
and 1,150,000 at December 31, 1999............................... (86,791) (25,475)
Deferred compensation - restricted stock (2,760) --
---------- ----------
Total Stockholders' Equity....................................... 1,798,295 1,892,470
---------- ----------
Total Liabilities and Stockholders' Equity $3,824,836 $4,016,197
========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Income
(Unaudited and in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ------------------------------
2000 1999 2000 1999
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Rental property................................. $ 131,118 $ 136,304 $ 404,738 $ 425,104
Equity in earnings of unconsolidated affiliates. 1,320 702 3,207 1,389
Interest and other income....................... 6,548 3,621 17,321 14,181
------------ ----------- ----------- -----------
Total Revenue..................................... 138,986 140,627 425,266 440,674
Operating expenses:
Rental property................................. 39,470 41,002 120,358 130,108
Depreciation and amortization................... 30,123 26,116 87,813 81,977
Interest expense:
Contractual.................................. 27,172 25,715 81,994 87,274
Amortization of deferred financing costs..... 564 696 1,862 2,208
------------ ----------- ----------- -----------
27,736 26,411 83,856 89,482
General and administrative...................... 5,719 4,883 16,258 16,888
------------ ----------- ----------- -----------
Income before gain/(loss) on disposition of
land and depreciable assets, net of income tax
provision, minority interest and extraordinary
item......................................... 35,938 42,215 116,981 122,219
Gain/(loss) on disposition of land and depreciable
assets, net of income tax provision.......... 10,552 846 (8,564) 2,939
------------ ----------- ----------- -----------
Income before minority interest and
extraordinary item........................... 46,490 43,061 108,417 125,158
Minority interest................................. (5,298) (5,065) (13,140) (15,770)
------------ ----------- ----------- -----------
Income before extraordinary item................ 41,192 37,996 95,277 109,388
Extraordinary item - loss on early
extinguishment of debt.......................... (3,310) (4,997) (4,344) (5,774)
------------ ----------- ----------- -----------
Net income...................................... 37,882 32,999 90,933
103,614
Dividends on preferred stock...................... (8,145) (8,145) (24,435) (24,435)
------------ ----------- ----------- -----------
Net income available for common shareholders...... $ 29,737 $ 24,854 $ 66,498 $ 79,179
============ ============ =========== ============
Net income per common share - basic:
Income before extraordinary item................ $ 0.56 $ 0.48 $ 1.19 $ 1.38
Extraordinary item - loss on early
extinguishment of debt....................... (0.06) (0.08) (0.07) (0.09)
------------ ----------- ----------- -----------
Net income...................................... $ 0.50 $ 0.40 $ 1.12 $ 1.29
============ ============ =========== ============
Weighted average shares outstanding - basic..... 58,609 61,863 59,433 61,233
============ ============ =========== ============
Net income per common share - diluted:
Income before extraordinary item................ $ 0.56 $ 0.48 $ 1.19 $ 1.38
Extraordinary item - loss on early extinguishment
of debt...................................... (0.06) (0.08) (0.08) (0.09)
------------ ----------- ----------- -----------
Net income...................................... $ 0.50 $ 0.40 $ 1.11 $ 1.29
============ ============ =========== ============
Weighted average shares outstanding - diluted... 59,029 62,169 59,672 61,493
============ ============ =========== ============
Distributions declared per common share $ 0.57 $ 0.555 $ 1.68 $ 1.635
============ ============ =========== ============
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Stockholders' Equity
For the Nine Months Ended September 30, 2000
(Unaudited and $ in thousands)
<TABLE>
<CAPTION>
Number of Additional
Common Common Series A Series B Series D Treasury Paid-In Deferred Retained
Shares Stock Preferred Preferred Preferred Stock Capital Compensation Earnings Total
------ ----- --------- --------- --------- ----- ------- ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1999.......... 60,918,613 $621 $125,000 $172,500 $100,000 $(25,475) $1,597,494 $ -- $(77,670) $1,892,470
Issuance of
Common Stock.. 54,026 -- -- -- -- -- 892 -- -- 892
Common Stock
Dividends..... -- -- -- -- -- -- -- -- (100,149) (100,149)
Preferred
Stock
Dividends.... -- -- -- -- -- -- -- -- (24,435) (24,435)
Issuance of
restricted
stock......... 110,003 1 -- -- -- -- 2,659 (3,151) -- (491)
Amortization
of deferred
compensation -- -- -- -- -- -- -- 391 -- 391
Purchase of
Treasury Stock (2,661,086) -- -- -- -- (61,316) -- -- -- (61,316)
Net Income.... -- -- -- -- -- -- -- -- 90,933 90,933
---------- ---- -------- -------- -------- -------- ---------- ------- --------- ----------
Balance at
September 30,
2000.......... 58,421,556 $622 $125,000 $172,500 $100,000 $(86,791) $1,601,045 $(2,760) $(111,321) $1,798,295
========== ==== ======== ======== ======== ======== ========== ======= ========= ==========
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Operating activities:
Net income............................................................ $ 90,933 $103,614
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization......................................... 87,813 81,977
Minority interest..................................................... 13,140 15,770
Loss/(Gain) on disposition of land and depreciable assets, net of
income tax provision.............................................. 8,564 (2,939)
Amortization of deferred compensation................................. 391 --
Changes in operating assets and liabilities........................... (12) (23,959)
---------- ---------
Net cash provided by operating activities.......................... 200,829 174,463
---------- ---------
Investing activities:
Additions to real estate assets....................................... (221,055) (414,168)
Cash paid in exchange for partnership net assets...................... -- (991)
Proceeds from disposition of real estate assets...................... 339,600 550,039
Repayment of advances to subsidiaries/(advances to subsidiaries)...... 1,932 (4,005)
Other ................................................................ (14,600) (37,512)
---------- ---------
Net cash provided by investing activities ......................... 105,877 93,363
---------- ---------
Financing activities:
Distributions paid on common stock and common units................... (114,187) (114,724)
Dividends paid on preferred stock..................................... (24,435) (24,435)
Borrowings on mortgages and notes payable............................. 73,198 4,385
Repayments on mortgages and notes payable............................. (147,286) (172,568)
Borrowings on revolving loans......................................... 295,500 408,000
Repayments on revolving loans......................................... (301,000) (362,500)
Net proceeds from the sale of common stock............................ 401 22,940
Net payment of deferred financing costs............................... (104) (4,494)
Purchase of treasury stock and units.................................. (90,342) --
Other................................................................. (3,041) (8,375)
---------- ---------
Net cash used in financing activities.............................. (311,296) (251,771)
---------- ---------
Net (decrease)/increase in cash and cash equivalents.................. (4,590) 16,055
Cash and cash equivalents at beginning of the period.................. 34,496 31,445
---------- ---------
Cash and cash equivalents at end of the period........................ $ 29,906 $ 47,500
=========== =========
Supplemental disclosure of cash flow information:
Cash paid for interest................................................ $ 94,853 $103,603
=========== =========
See accompanying notes to consolidated financial statements.
</TABLE>
7
<PAGE>
HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows
(Unaudited and in thousands)
Supplemental disclosure of non-cash investing and financing activities
The following summarizes (1) the net assets contributed by the holders
of Common Units in the Operating Partnership, (2) the change in net assets
contributed as a result of the reorganization of our Des Moines partnerships and
(3) the net assets acquired subject to mortgage notes payable.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
2000 1999
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Assets:
Rental property and equipment, net................................. $ (24,656) $ (18,513)
Notes Receivable................................................... 23,775 --
Liabilities:
Mortgages and notes payable ....................................... -- (52,165)
---------- ----------
Net assets.................................................... $ (881) $ 33,652
========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
8
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September, 30, 2000
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and the Operating Partnership and their 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.
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 stockholders. However, during 1999, a provision was
made related to a portion of REIT taxable income that resulted from a gain on
disposition of assets that had not been distributed to stockholders at September
30, 1999.
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. In June 2000, FASB issued Statement No. 138 , Accounting
for Certain Derivative Instruments and Certain Hedging Activities - an amendment
of FASB Statement No. 133. Statement No. 133, as amended by Statement No. 138,
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 our derivatives is
discussed in Item 2.
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.
2. 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.
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 nine months ended September 30, 2000 and 1999.
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Rental Income:
Office segment............................ $ 106,593 $ 109,581 $ 333,123 $ 348,337
Industrial segment........................ 11,523 13,842 33,288 39,753
Retail segment............................ 8,631 8,597 25,285 24,536
Apartment segment......................... 4,371 4,284 13,042 12,478
----------- ----------- ----------- -----------
Total Rental Income.................... $ 131,118 $ 136,304 $ 404,738 $ 425,104
=========== =========== =========== ===========
Net operating income:
Office segment............................ $ 74,384 $ 76,082 $ 231,326 $ 238,944
Industrial segment........................ 9,793 11,423 28,026 32,897
Retail segment............................ 5,163 5,454 17,464 16,156
Apartment segment......................... 2,308 2,343 7,564 6,999
----------- ----------- ----------- -----------
Total Net operating income............. $ 91,648 $ 95,302 $ 284,380 $ 294,996
----------- ----------- ----------- -----------
Reconciliation to income before minority
interest and extraordinary item:
Equity in income of unconsolidated affiliates $ 1,320 $ 702 $ 3,207 $ 1, 389
Gain/(loss) on disposition of land and
depreciable assets, net of income tax
provision.............................. 10,552 846 (8,564) 2,939
Interest and other income................. 6,548 3,621 17,321 14,181
Interest expense.......................... (27,736) (26,411) (83,856) (89,482)
General and administrative expenses....... (5,719) (4,883) (16,258) (16,888)
Depreciation and amortization............. (30,123) (26,116) (87,813) (81,977)
----------- ----------- ----------- -----------
Income before minority interest and
extraordinary item..................... $ 46,490 $ 43,061 $ 108,417 $ 125,158
=========== =========== =========== ===========
Total assets:
Office segment............................ $ 2,874,681 $ 3,021,160 $ 2,874,681 $ 3,021,160
Industrial segment........................ 365,217 496,428 365,217 496,428
Retail segment............................ 269,865 256,197 269,865 256,197
Apartment segment......................... 116,163 119,356 116,183 119,356
Corporate and other....................... 198,910 227,466 198,910 227,466
----------- ----------- ----------- -----------
Total assets.............................. $ 3,824,836 $ 4,120,607 $ 3,824,836 $ 4,120,607
=========== =========== =========== ===========
</TABLE>
3. DISPOSITION AND JOINT VENTURE ACTIVITY
On May 9, 2000, we closed a transaction with Dreilander-Fonds 97/26 and
99/32 ("DLF II") pursuant to which we sold or contributed five in-service office
properties encompassing 570,000 rentable square feet and a 246,000-square-foot
development project valued at approximately $117.0 million to a newly created
limited partnership (the "DLF II Joint Venture"). DLF II contributed $24.0
million in cash for a 40.0% ownership interest in the DLF II Joint Venture and
the DLF II Joint Venture borrowed approximately $60.0 million from third-party
lenders. We initially retained the remaining 60.0% interest in the DLF II Joint
Venture, received net cash proceeds of approximately $74.0 million and are the
sole and exclusive manager and leasing agent of the DLF II Joint Venture's
properties, for which we receive customary management fees and leasing
commissions. On August 31, 2000, DLF II contributed an additional $7.1 million
in cash to the DLF II Joint Venture, which increased its ownership percentage to
51.0%. It is anticipated that DLF II will exercise its option to contribute up
to an additional $17.0 million in cash to the DLF II Joint Venture before March
31, 2001 to increase its ownership percentage to 80.0%. We have adopted the
equity method of accounting for this joint venture.
In addition to the properties sold or contributed to the DLF II Joint
Venture, during the nine months ended September 30, 2000, we sold approximately
4.6 million rentable square feet of non-core office and industrial properties
and 192.0 acres of development land for gross proceeds of $339.6 million. We
recorded a loss of $8.6 million related to these dispositions. Included in these
sales were certain properties encompassing 2.0 million square feet sold to an
entity majority-owned by a related party for a selling price of $169.0 million.
Non-core office and industrial properties generally include single buildings or
business parks that do not fit our long-term strategy. Since September 30, 2000,
an additional 55,000 square feet of non-core office and industrial properties,
which are included in property held for sale in the Consolidated Balance Sheet
at September 30, 2000, have been sold for gross proceeds of $6.4 million.
10
<PAGE>
On August 9, 2000, we agreed to form two joint ventures with an
institutional investor. In the first joint venture, we expect to sell or
contribute 21 in-service office properties encompassing approximately 3.0
million rentable square feet valued at approximately $345.3 million (including
approximately $4.5 million of development land) to a newly created limited
liability company. As part of the formation of the first joint venture, the
institutional investor will contribute approximately $85.0 million in cash for
an 80.0% ownership interest and the joint venture will borrow approximately
$245.0 million from third-party lenders. We will retain the remaining 20.0%
ownership interest and receive net cash proceeds of approximately $311.0
million. In the second joint venture, we will contribute approximately $7.2
million of development land we currently own to a second newly created limited
liability company. The second joint venture expects to develop four properties
encompassing 435,000 rentable square feet with a budgeted cost of approximately
$61.0 million. We will each own 50.0% of the second joint venture. In addition,
we will be the sole and exclusive manager and leasing agent for the properties
in both joint ventures, and will receive customary management fees and leasing
commissions. We will be adopting the equity method for both of these joint
ventures. These transactions are subject to customary closing conditions,
including the completion of due diligence, the execution of other definitive
agreements and the ability to obtain satisfactory financing, and are expected
to close before the end of 2000. However, we cannot assure you that these
transactions will be consummated or that they will be consummated on the terms
described in this quarterly report.
4. LEGAL CONTINGENCIES
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 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 Securities 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 plaintiff seeks equitable relief and monetary
damages. We believe that the defendants have meritorious defenses to the
plaintiff's allegations and intend to vigorously defend this litigation. By
order dated June 18, 1999, the court granted in part and denied in part our
motion to dismiss. The court has granted the plaintiff's motion seeking
certification of the proposed class of plaintiffs with respect to the remaining
claims. Discovery in this matter has now been completed. Plaintiff John Flake
passed away on or about April 2, 2000, and plaintiff's counsel has substituted
his estate as the representative plaintiff in this action. Defendants filed a
summary judgment motion as to all claims asserted by the plaintiff, who opposed
defendants' motion. By order dated August 28, 2000, the court granted
defendants' motion as to plaintiff's claims that J.C. Nichols and the named
directors and officers of J.C. Nichols breached fiduciary duties to members of
the J.C. Nichols Company Employee Stock Ownership Trust. The court also granted
in part and denied in part defendants' summary judgment motion as to the
remaining claims asserted by the plaintiff. Defendants have sought
reconsideration of the court's ruling as to certain of the securities claims as
to which the court denied their summary judgment motion. Due to the inherent
uncertainties of the litigation process and the judicial system, we are not able
to predict the outcome of this litigation. However, at this time, we do not
expect the result of this litigation to have a material adverse effect on our
business, financial condition and results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with all of the
financial statements appearing elsewhere in the report and is based primarily on
the consolidated financial statements of the Company.
Results of Operations
Three Months Ended September 30, 2000. Revenues from rental operations
decreased $5.2 million, or 3.8%, from $136.3 million for the three months ended
September 30, 1999 to $131.1 million for the comparable period in 2000. The
decrease is primarily a result of the disposition and contribution of 7.9
million square feet of majority-owned office, industrial and retail properties,
offset in part by the acquisition of 700,000 square feet of majority-owned
office, industrial and retail properties and
11
<PAGE>
the completion of 4.2 million square feet of development activity during the
last three months of 1999 and the first nine months of 2000. Our in-service
portfolio decreased from 40.8 million square feet at September 30, 1999 to 37.8
million square feet at September 30, 2000. Same property revenues, which are the
revenues of the 461 in-service properties and 1,885 apartment units owned on
July 1, 1999, increased 2.4% for the three months ended September 30, 2000,
compared to the same three months in 1999.
During the three months ended September 30, 2000, 226 leases
representing 1.5 million square feet of office, industrial and retail space were
executed at an average rate per square foot which was 6.5% higher than the
average rate per square foot on the expired leases.
Interest and other income increased $2.9 million, or 80.6%, from $3.6
million for the three months ended September 30, 1999 to $6.5 million for the
comparable period in 2000. The increase was a result of an increase in
development fees in 2000 related to the DLF II Joint Venture.
Rental operating expenses decreased $1.5 million, or 3.7%, from $41.0
million for the three months ended September 30, 1999 to $39.5 million for the
comparable period in 2000. The decrease is primarily a result of the disposition
and contribution of 7.9 million square feet of majority owned office, industrial
and retail properties offset in part by the acquisition of 700,000 square feet
of majority-owned office, industrial and retail properties and the completion of
4.2 million square feet of development activity during the last three months of
1999 and the first nine months of 2000. Rental operating expenses as a
percentage of related revenues were 30.1% for the three months ended September
30, 2000 and 1999.
Depreciation and amortization for the three months ended September 30,
2000 and 1999 totaled $30.1 million and $26.1 million, respectively. The
increase of $4.0 million, or 15.3%, is due to an increase in depreciation on
leasing commissions and tenant improvements, partly offset by a decrease in
depreciation on buildings, due to the disposition activity in 1999 and 2000.
Interest expense increased $1.3 million, or 4.9%, from $26.4 million for the
three months ended September 30, 1999 to $27.7 million for the comparable
period in 2000. The increase is attributable to an increase in the weighted
average interest rates from 1999 to 2000. Interest expense for the three months
ended September 30, 2000 and 1999 included $564,000 and $696,000 respectively,
of amortization of deferred financing costs and the costs related to our
interest rate hedge contracts. General and administrative expenses was 4.1% of
total revenue for the three months ended September 30, 2000 and 3.8% for the
comparable period in 1999.
Income before minority interest and extraordinary item was $46.5
million and $43.1 million for the three months ended September 30, 2000 and
1999, respectively. The Company's net income allocated to minority interest
totaled $5.3 million and $5.1 million for the three months ended September 30,
2000 and 1999, respectively. The Company recorded $8.1 million in preferred
stock dividends for the three months ended September 30, 2000 and 1999.
Nine Months Ended September 30, 2000. Revenues from rental operations
decreased $20.4 million, or 4.8%, from $425.1 million for the nine months ended
September 30, 1999 to $404.7 million for the comparable period in 2000. The
decrease is primarily a result of the disposition and contribution of 7.9
million square feet of majority-owned office, industrial and retail properties
offset in part by the acquisition of 700,000 square feet of majority-owned
office, industrial and retail properties and the completion of 4.2 million
square feet of development activity during the last three months of 1999 and the
first nine months of 2000. Our in-service portfolio decreased from 40.8 million
square feet at September 30, 1999 to 37.8 million square feet at September 30,
2000. Same property revenues, which are the revenues of the 445 in-service
properties and 1,885 apartment units owned on January 1, 1999, increased 3.1%
for the nine months ended September 30, 2000, compared to the same nine months
in 1999.
During the nine months ended September 30, 2000, 743 leases
representing 4.8 million square feet of office, industrial and retail space were
executed at an average rate per square foot which was 6.6% higher than the
average rate per square foot on the expired leases.
Interest and other income increased $3.1 million, or 21.8 %, from $14.2
million for the nine months ended September 30, 1999 to $17.3 million for the
comparable period in 2000. The increase was a result of an increase in interest
income related to a $30.0 million note receivable that was recorded as a result
of certain property dispositions in June 1999, an increase in termination fees
from 1999 to 2000 and an increase in development fee income in 2000 related to
the DLF II Joint Venture.
Rental operating expenses decreased $9.7 million, or 7.5%, from $130.1
million for the nine months ended September 30, 1999 to $120.4 million for the
comparable period in 2000. The decrease is
12
<PAGE>
primarily a result of the disposition and contribution of 7.9 million square
feet of majority-owned office, industrial and retail properties offset in part
by the acquisition of 700,000 square feet of majority-owned office, industrial
and retail properties and the completion of 4.2 million square feet of
development activity during the last three months of 1999 and the first nine
months of 2000. Rental operating expenses as a percentage of related revenues
decreased from 30.6% for the nine months ended September 30, 1999 to 29.8% for
the comparable period in 2000.
Depreciation and amortization for the nine months ended September 30,
2000 and 1999 totaled $87.8 million and $82.0 million, respectively. The
increase of $5.8 million, or 7.1%, is due to an increase in depreciation on
leasing commissions and tenant improvements, partly offset by a decrease in
depreciation on buildings, due to the disposition activity in 1999 and 2000.
Interest expense decreased $5.6 million, or 6.3%, from $89.5 million for the
nine months ended September 30, 1999 to $83.9 million for the comparable period
in 2000. The decrease is attributable to the decrease in the outstanding debt
for the entire nine months in 2000. Interest expense for the nine months ended
September 30, 2000 and 1999 included $1.9 million and $2.2 million,
respectively, of amortization of deferred financing costs and the costs related
to our interest rate hedge contracts. General and administrative expenses as a
percentage of total revenues was 3.8% in 1999 and 2000.
Income before minority interest and extraordinary item equaled $108.4
million and $125.2 million for the nine months ended September 30, 2000 and
1999, respectively. The Company's net income allocated to minority interest
totaled $13.1 million and $15.8 million for the nine months ended September 30,
2000 and 1999, respectively. The Company recorded $24.4 million in preferred
stock dividends for the nine months ended September 30, 2000 and 1999.
Liquidity and Capital Resources
Statement of Cash Flows. For the nine months ended September 30, 2000,
cash provided by operating activities increased by $26.3 million, or 15.1%, to
$200.8 million, from $174.5 million for the same period in 1999. The increase is
due to the collection of a $30.0 million note receivable and the accrual of an
$18.0 million liability related to the DLF II Joint Venture during the nine
months ended September 30, 2000. Cash provided by investing activities was
$105.9 million for the first nine months of 2000, as compared to $93.4 million
for the same period in 1999. The increase of $12.5 million, or 13.4% is
primarily due to the decline in acquisition and development activity offset in
part by the decline in the disposition activity during the nine months ended
September 30, 2000, as compared to the same period in 1999. Cash used in
financing activities was $311.3 million for the nine months ended September 30,
2000, as compared to $251.8 million for the same period in 1999. The increase
is primarily due to the increase in borrowings on mortgages and notes payable
from 1999 to 2000 and the purchase of treasury stock and units in 2000. Payments
of distributions were $114.2 million and $114.7 million for the first nine
months of 2000 and 1999. Preferred stock dividend payments were $24.4 million
for the nine months ended September 30, 2000 and 1999.
Capitalization. The Company's total indebtedness at September 30, 2000
totaled $1.7 billion and was comprised of $511.5 million of secured indebtedness
with a weighted average interest rate of 7.9% and $1.2 billion of unsecured
indebtedness with a weighted average interest rate of 7.4%. Except as stated
below, all of the mortgage and notes payable outstanding at September 30, 2000
were either fixed rate obligations or variable rate obligations covered by
interest rate hedge contracts. A portion of our $450.0 million unsecured
revolving loan (the "Revolving Loan") and approximately $37.0 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 September 30, 2000.
Based on the Company's total market capitalization of $3.7 billion at
September 30, 2000 (at the September 30, 2000 stock price of $23.63 and assuming
the redemption for shares of Common Stock of the 7.9 million Common Units of
minority interest in the Operating Partnership), the Company's debt represented
approximately 46.2% 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
13
<PAGE>
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 September 30, 2000:
<TABLE>
<CAPTION>
Notional Maturity Fixed Fair Market
Type of Hedge Amount Date Reference Rate Rate Value
------------- -------- -------- -------------- ------- -----------
<S> <C> <C> <C> <C> <C>
Swap $20,006 6/10/02 1-Month LIBOR + 0.75% 6.95% $ 98
Collar 80,000 10/15/01 1-Month LIBOR 5.60 - 6.25% 298
Cap 5,434 6/15/01 1-Month LIBOR 7.75% -----
</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 $125.0 million of our
existing development activity. We expect to fund our short-term liquidity needs
through a combination of:
o additional borrowings under our Revolving Loan (approximately
$214.0 million was available as of September 30, 2000);
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
14
<PAGE>
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
Stock Repurchase. From January 1, 2000 to November 10, 2000, the
Company repurchased 3.9 million shares of Common Stock and Common Units at a
weighted average price of $23.61 per share/unit, for a total purchase price of
$92.7 million.
Disposition and Joint Venture Activity. On May 9, 2000, we closed a
transaction with Dreilander-Fonds 97/26 and 99/32 ("DLF II") pursuant to which
we sold or contributed five in-service office properties encompassing 570,000
rentable square feet and a 246,000-square-foot development project valued at
approximately $117.0 million to a newly created limited partnership (the "DLF II
Joint Venture"). DLF II contributed $24.0 million in cash for a 40.0% ownership
interest in the DLF II Joint Venture and the DLF II Joint Venture borrowed
approximately $60.0 million from third-party lenders. We initially retained the
remaining 60.0% interest in the DLF II Joint Venture, received net cash proceeds
of approximately $74.0 million and are the sole and exclusive manager and
leasing agent of the DLF II Joint Venture's properties, for which we receive
customary management fees and leasing commissions. On August 31, 2000, DLF II
contributed an additional $7.1 million in cash to the DLF II Joint Venture,
which increased its ownership percentage to 51.0%. It is anticipated that DLF II
will exercise its option to contribute up to an additional $17.0 million in cash
to the DLF II Joint Venture before March 31, 2001 to increase its ownership
percentage to 80.0%.
In addition to the properties sold or contributed to the DLF II Joint
Venture, during the nine months ended September 30, 2000, we sold approximately
4.6 million rentable square feet of non-core office and industrial properties
and 192.0 acres of development land for gross proceeds of $339.6 million
Non-core office and industrial properties generally include single buildings or
business parks that do not fit our long-term strategy. Since September 30, 2000,
we have sold an additional 55,000 square feet of non-core office and industrial
properties for gross proceeds of $6.4 million.
On August 9, 2000, we agreed to form two joint ventures with an
institutional investor. In the first joint venture, we expect to sell or
contribute 21 in-service office properties encompassing approximately 3.0
million rentable square feet valued at approximately $345.3 million (including
approximately $4.5 million of development land) to a newly created limited
liability company. As part of the formation of the first joint venture, the
institutional investor will contribute approximately $85.0 million in cash for
an 80.0% ownership interest and the joint venture will borrow approximately
$245.0 million from third-party lenders. We will retain the remaining 20.0%
ownership interest and receive net cash proceeds of approximately $311.0
million. In the second joint venture, we will contribute approximately $7.2
million of development land we currently own to a second newly created limited
liability company. The second joint venture expects to develop four properties
encompassing 435,000 rentable square feet with a budgeted cost of approximately
$61.0 million. We will each own 50.0% of the second joint venture and will be
the sole and exclusive manager and leasing agent for the properties in both
joint ventures, for which we will receive customary management fees and leasing
commissions. These transactions are subject to customary closing conditions,
including the completion of due diligence, the execution of other definitive
agreements and the ability to obtain satisfactory financing, and are expected
to close before the end of 2000. However, we cannot assure you that these
transactions will be consummated or that they will be consummated on the terms
described in this quarterly report.
We expect to use a portion of 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. As of
15
<PAGE>
November 10, 2000, we expect to reinvest up to $25.0 million of the net proceeds
from recent disposition activity to acquire in tax-deferred exchange
transactions in-service properties, 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.
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 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
16
<PAGE>
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. In June 2000, FASB issued Statement No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an amendment of
FASB Statement No. 133. Statement No. 133, as amended by Statement No. 138,
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 our derivatives is
discussed under "-Liquidity and Capital Resources."
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 equals net income (computed in accordance with GAAP) excluding
gains (or losses) from debt restructuring and sales of depreciable assets, 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 back to net
income in arriving at FFO. In October 1999, NAREIT issued an additional
clarification effective as of January 1, 2000 stipulating that FFO should
include both recurring and non-recurring operating results. Consistent with this
clarification, non-recurring items that are not defined as "extraordinary" under
GAAP will be reflected in the calculation of FFO. Gains and losses from the sale
of depreciable operating property will continue to be excluded from the
calculation of FFO.
Cash available for distribution is defined as FFO reduced by
non-revenue enhancing capital expenditures for building improvements and tenant
improvements and lease commissions related to second generation space.
17
<PAGE>
FFO and cash available for distribution for the three and nine month
periods ended September 30, 2000 and 1999 are summarized in the following table
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Funds from operations:
Income before minority interest and extraordinary
item........................................... $ 46,490 $ 43,061 $ 108,417 $ 125,158
Add/(Deduct):
Dividends on preferred stock................... (8,145) (8,145) (24,435) (24,435)
Severance costs and other division closing
expenses .................................... -- -- -- 1,233
(Gain)/Loss on disposition of land and
depreciable assets, net of income tax provision (10,552) (846) 8,564 (2,939)
Gain on disposition of land.................... 3,288 -- 3,288 --
Depreciation and amortization.................. 30,123 26,116 87,813 81,977
Depreciation of unconsolidated affiliates...... 1,752 892 3,733 2,114
--------- --------- --------- ---------
Funds from operations before minority interest 62,956 61,078 187,380 183,108
Cash available for distribution:
Add/(Deduct):
Rental income from straight-line rents......... (3,657) (3,436) (11,452) (10,945)
Amortization of deferred financing costs....... 564 696 1,862 2,208
Non-incremental revenue generating capital
expenditures (1):
Building improvements paid................... (2,248) (2,114) (5,913) (6,589)
Second generation tenant improvements paid... (7,900) (7,194) (17,730) (17,315)
Second generation lease commissions paid..... (1,859) (3,000) (8,668) (10,613)
--------- --------- --------- ---------
Cash available for distribution............ $ 47,856 $ 46,030 $ 145,479 $ 139,854
========= ========= ========= =========
Weighted average common shares/common units
outstanding - basic (2)........................ 66,634 70,959 67,978 70,521
========= ========= ========= =========
Weighted average common shares/common units
outstanding - diluted (2)...................... 67,055 71,294 68,218 70,535
========= ========= ========= =========
Dividend payout ratios:
Funds from operations.......................... 60.7% 64.8% 61.2% 63.0%
========= ========= ========= =========
Cash available for distribution................ 79.9% 86.0% 78.8% 82.5%
========= ========= ========= =========
</TABLE>
---------------------
(1) Amounts represent cash expenditures.
(2) Assumes redemption of Common Units for shares of Common Stock. Minority
interest Common Unit holders and the stockholders of the Company share equally
on a per share and per Common Unit basis; therefore, the resultant per share
information is unaffected by the conversion.
On November 6, 2000, the Company's Board of Directors declared a
dividend of $0.57 per share for the third quarter ended September 30, 2000
($2.28 million on an annualized basis) payable on November 29, 2000 to
stockholders of record as of November 16, 2000.
18
<PAGE>
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 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,
reinvestment, 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.
19
<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 September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Rentable Percent Leased/
September 30, 2000 Square Feet Pre-Leased
------------------ ----------- ----------
<S> <C> <C>
In-Service:
Office............................................. 25,984,000 94%
Industrial......................................... 10,204,000 95%
Retail............................................. 1,569,000 94%
---------- ------
Total or Weighted Average........................ 37,757,000 94%
========== ======
Development:
Completed - Not Stabilized
Office............................................. 759,000 79%
Industrial......................................... ---- ----
Retail............................................. 81,000 90%
---------- ------
Total or Weighted Average........................ 840,000 80%
========== ======
In Process
Office............................................. 1,709,000 55%
Industrial......................................... 395,000 87%
Retail............................................. ---- ----
---------- ------
Total or Weighted Average........................ 2,104,000 61%
========== ======
Total:
Office............................................. 28,452,000
Industrial......................................... 10,599,000
Retail............................................. 1,650,000
----------
Total or Weighted Average........................ 40,701,000
==========
September 30, 1999
------------------
In-Service:
Office............................................. 27,293,000 94%
Industrial......................................... 11,805,000 91%
Retail............................................. 1,676,000 91%
---------- ------
Total or Weighted Average........................ 40,774,000 93%
========== ======
Development:
Completed - Not Stabilized
Office............................................. 2,174,000 74%
Industrial......................................... 383,000 55%
Retail............................................. 119,000 97%
---------- ------
Total or Weighted Average.......................... 2,676,000 72%
========== ======
In Process
Office............................................. 2,350,000 78%
Industrial......................................... 282,000 10%
Retail............................................. 81,000 82%
---------- ------
Total or Weighted Average........................ 2,713,000 71%
========== ======
Total:
Office............................................. 31,817,000
Industrial......................................... 12,470,000
Retail............................................. 1,876,000
----------
Total or Weighted Average.......................... 46,163,000
==========
</TABLE>
20
<PAGE>
The following table sets forth certain information with respect to our
properties under development as of September 30, 2000 ($ in thousands):
In-Process
<TABLE>
<CAPTION>
Rentable Pre-Leasing Estimated
Square Estimated Cost at Percentage Estimated Stabilization
Name Market Feet Cost 9/30/00 (1) Completion (2)
------------- ------ ---------- ---------- --------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Office:
ECPI Build-to-suit Piedmont
Triad 30,000 $ 3,020 $ 2,998 100% 4Q00 4Q00
Deerfield III Atlanta 54,000 5,276 2,356 100% 4Q00 3Q01
Highwoods Plaza Tampa 66,000 7,505 5,183 20% 4Q00 3Q01
Intermedia Building 5 Tampa 185,000 27,633 6,298 100% 3Q01 3Q01
Met Life Building at
Brookfield Greenville 118,000 13,220 21 67% 3Q01 4Q01
Shadow Creek Memphis 80,000 8,989 4,472 86% 4Q00 4Q01
380 Park Place Tampa 82,000 9,675 2,590 47% 1Q01 4Q01
kforce.com Tampa 128,000 18,582 284 100% 4Q01 4Q01
Maplewood Research
Triangle 36,000 3,901 1,703 100% 1Q01 1Q02
Situs III Research
Triangle 39,000 4,543 782 94% 1Q01 1Q02
Highwoods Centre @
Peachtree Corners III Atlanta 54,000 5,140 1,333 0% 2Q01 2Q02
Cool Springs II Nashville 205,000 22,718 8,950 19% 2Q01 2Q02
Highwoods Tower II Research
Triangle 167,000 25,134 12,722 72% 1Q01 2Q02
ParkWest One Research
Triangle 46,000 4,364 127 0% 1Q01 1Q02
ParkWest Two Research 4,544
Triangle 48,000 137 0% 1Q01 1Q02
Centre Green Two Research
Triangle 97,000 11,596 1,055 0% 2Q01 2Q02
Hickory Trace Nashville 52,000 5,933 1,511 0% 3Q01 3Q02
Stony Point III Richmond 106,000 11,425 2,546 43% 2Q01 3Q02
North Shore Commons Richmond 116,000 13,084 2,030 53% 2Q01 3Q02
--------- --------- ---------- -----
In-Process Office Total or
Weighted Average 1,709,000 $ 206,282 $ 57,098 55%
--------- --------- ---------- -----
Industrial:
Jones Apparel Expansion Piedmont
Triad 209,000 $ 6,071 $ 4,241 100% 4Q00 4Q00
Holden Road Piedmont
Triad 64,000 2,014 1,032 40% 1Q01 3Q01
Tradeport Place III Atlanta 122,000 4,780 2,659 90% 4Q00 4Q01
--------- --------- ---------- -----
In-Process Industrial Total
or Weighted Average 395,000 $ 12,865 $ 7,932 87%
--------- --------- ---------- -----
Total or Weighted Average
of all In-Process
Development Projects 2,104,000 $ 219,147 $ 65,030 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 95.0% occupied or one year
from the date of completion.
21
<PAGE>
Completed -
Not Stabilized
<TABLE>
<CAPTION>
Rentable Pre-Leasing Estimated
Square Estimated Cost at Percentage Estimated Stabilization
Name Market Feet Cost 9/30/00 (1) Completion (2)
------------- ------ ---------- ---------- --------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Office:
Mallard Creek V Charlotte 118,000 12,262 11,294 70% 4Q99 4Q00
Valencia Place Kansas City 241,000 34,850 35,237 90% 1Q00 4Q00
Centre Green One Research Triangle 97,000 11,246 6,856 92% 3Q00 3Q01
Capital Plaza Orlando 303,000 53,000 44,740 69% 1Q00 4Q01
---------- --------- --------- ----- ---- ----
Completed-Not Stabilized
Office Total or Weighted
Average 759,000 $ 111,358 $ 98,127 79%
---------- --------- --------- -----
Retail:
Valencia Place Kansas City 81,000 $ 16,650 $ 14,842 90% 1Q00 4Q00
---------- --------- --------- -----
Completed-Not Stabilized
Retail Total or Weighted
Average 81,000 $ 16,650 $ 14,842 90%
---------- --------- --------- -----
Total or Weighted Average
of all Completed-Not
Stabilized Development
---------- --------- --------- -----
Projects 840,000 $ 128,008 $ 112,969 80%
---------- --------- --------- -----
Total or Weighted Average
of all Development
Projects 2,944,000 $ 347,155 $ 177,999 66%
========= ========= ========= ======
</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 95.0% occupied or one year
from the date of completion.
22
<PAGE>
<TABLE>
<CAPTION>
Rentable
Square Estimated Pre-Leasing
Development Analysis Feet Costs Percentage (1)
-------------- ------------- -------------------
(in thousands)
<S> <C> <C> <C>
Summary by Estimated Stabilization Date:
Fourth Quarter 2000................................. 679,000 $ 72,853 90%
First Quarter 2001.................................. -- -- --
Second Quarter 2001................................. -- -- --
Third Quarter 2001.................................. 466,000 53,674 79%
Fourth Quarter 2001................................. 833,000 108,246 76%
First Quarter 2002.................................. 169,000 17,352 43%
Second Quarter 2002................................. 523,000 64,588 30%
Third Quarter 2002.................................. 274,000 30,442 39%
--------- ---------- -----
Total or Weighted Average......................... 2,944,000 $ 347,155 66%
========= ========== =====
Summary by Market:
Atlanta............................................. 230,000 $ 15,196 71%
Charlotte........................................... 118,000 12,262 70%
Greenville.......................................... 118,000 13,220 67%
Kansas City......................................... 322,000 51,500 90%
Memphis............................................. 80,000 8,989 86%
Nashville........................................... 257,000 28,651 15%
Orlando............................................. 303,000 53,000 69%
Piedmont Triad...................................... 303,000 11,105 87%
Research Triangle................................... 530,000 65,328 53%
Richmond............................................ 222,000 24,509 48%
Tampa............................................... 461,000 63,395 79%
--------- ---------- -----
Total or Weighted Average......................... 2,944,000 $ 347,155 66%
========= ========== =====
Build-to-Suit..................................... 552,000 $ 55,306 100%
Multi-Tenant...................................... 2,392,000 291,849 58%
--------- ---------- -----
Total or Weighted Average......................... 2,944,000 $ 347,155 66%
========= ========== =====
<CAPTION>
Average
Rentable Average
Square Estimated Pre-Leasing
Feet Costs Percentage (1)
-------------- ------------- -------------------
(in thousands)
<S> <C> <C> <C>
Per Property Type:
Office.............................................. 107,304 $ 13,810 62%
Industrial.......................................... 131,667 4,288 87%
Retail.............................................. 81,000 16,650 90%
--------- ---------- -----
All................................................. 109,037 $ 12,858 66%
========= ========== =====
</TABLE>
------------------
(1) Includes the effect of letters of intent.
23
<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 September 30, June 30, and March 31, 2000 and
December 31, 1999.
<TABLE>
<CAPTION>
Office Leasing Statistics
Three Months Ended
------------------------------------------------------------------------
9/30/00 6/30/00 3/31/00 12/31/99 Average
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Net Effective Rents Related to
Re-Leased Space:
Number of lease transactions
(signed leases) 174 221 207 251 213
Rentable square footage leased 1,056,239 990,663 931,686 1,337,611 1,079,050
Average per rentable square foot
over the lease term:
Base rent $ 15.23 $ 18.43 $ 17.04 $ 17.28 $ 17.00
Tenant improvements (1.21) (1.39) (1.07) (0.90) (1.14)
Leasing commissions (0.40) (0.57) (0.40) (0.36) (0.43)
Rent concessions (0.03) (0.05) (0.04) (0.04) (0.04)
----------- ----------- ------------ ----------- -----------
Effective rent 13.59 16.42 15.53 15.98 15.39
Expense stop (1) (4.03) (5.37) (5.00) (5.09) (4.87)
----------- ----------- ------------ ----------- -----------
Equivalent effective net rent $ 9.56 $ 11.05 $ 10.53 $ 10.89 $ 10.52
=========== =========== ============ =========== ===========
Average term in years 5 5 4 5 5
=========== =========== ============ =========== ===========
Capital Expenditures Related to
Released Space:
Tenant Improvements:
Total dollars committed under
signed leases $ 6,676,576 $ 5,510,054 $ 4,756,023 $ 6,224,907 $ 5,791,890
Rentable square feet 1,056,239 930,663 931,686 1,337,611 1,079,050
----------- ----------- ------------ ----------- -----------
Per rentable square foot $ 6.32 $ 5.92 $ 5.10 $ 4.65 $ 5.37
=========== =========== ============ =========== ===========
Leasing Commissions:
Total dollars committed under
signed leases $ 1,910,278 $ 2,392,441 $ 1,505,559 $ 2,151,399 $ 1,989,919
Rentable square feet 1,056,239 990,663 931,686 1,337,611 1,079,050
----------- ----------- ------------ ----------- -----------
Per rentable square foot $ 1.81 $ 2.41 $ 1.62 $ 1.61 $ 1.84
=========== =========== ============ =========== ===========
Total:
Total dollars committed under
signed leases $ 8,586,853 $ 7,902,495 $ 6,261,582 $ 8,376,306 $ 7,781,809
Rentable square feet 1,056,239 990,663 931,686 1,337,611 1,079,050
----------- ----------- ------------ ----------- -----------
Per rentable square foot $ 8.13 $ 7.98 $ 6.72 $ 6.26 $ 7.21
=========== =========== ============ =========== ===========
Rental Rate Trends:
Average final rate with expense
pass throughs $ 14.30 $ 16.59 $ 15.79 $ 16.96 $ 15.91
Average first year cash rental
rate $ 14.96 $ 17.58 $ 16.76 $ 17.16 $ 16.62
----------- ----------- ------------ ----------- -----------
Percentage increase 4.61% 6.02% 6.11% 1.16% 4.43%
=========== =========== ============ =========== ===========
</TABLE>
------------
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintenance) which we will
not be reimbursed by our tenants.
24
<PAGE>
<TABLE>
<CAPTION>
Industrial Leasing Statistics
Three Months Ended
---------------------------------------------------------------------
9/30/00 6/30/00 03/31/00 12/31/99 Average
------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net Effective Rents Related to
Re-Leased Space:
Number of lease transactions
(signed leases) 31 46 66 64 52
Rentable square footage leased 349,079 362,521 1,305,697 543,522 640,205
Average per rentable square foot
over the lease term:
Base rent $ 4.54 $ 5.14 $ 4.34 $ 5.85 $ 4.97
Tenant improvements (0.32) (0.28) (0.19) (0.38) (0.29)
Leasing commissions (0.15) (0.12) (0.11) (0.11) (0.12)
Rent concessions 0.00 (0.01) 0.00 (0.01) (0.01)
----------- ----------- ------------ ----------- -----------
Effective rent 4.07 4.73 4.04 5.35 4.55
Expense stop (1) (0.23) (0.48) (0.14) (0.39) (0.31)
----------- ----------- ------------ ----------- -----------
Equivalent effective net rent $ 3.84 $ 4.25 $ 3.90 $ 4.96 $ 4.24
=========== =========== ============ =========== ===========
Average term in years 4 4 5 4 4
=========== =========== ============ =========== ===========
Capital Expenditures Related to
Re-leased Space:
Tenant Improvements:
Total dollars committed under
signed leases $ 510,520 $ 389,592 $ 966,338 $1,042,852 $ 727,325
Rentable square feet 349,079 362,521 1,305,697 543,522 640,205
----------- ----------- ------------ ----------- -----------
Per rentable square foot $ 1.46 $ 1.07 $ 0.74 $ 1.92 $ 1.14
=========== =========== ============ =========== ===========
Leasing Commissions:
Total dollars committed under
signed leases $ 167,772 $ 185,028 $ 671,182 $ 222,728 $ 311,678
Rentable square feet 349,079 362,521 1,305,697 543,522 640,205
----------- ----------- ------------ ----------- -----------
Per rentable square foot $ 0.48 $ 0.51 $ 0.51 $ 0.41 $ 0.49
=========== =========== ============ =========== ===========
Total:
Total dollars committed under
signed leases $ 678,292 $ 574,620 $1,637,520 $1,265,580 $1,039,003
Rentable square feet 349,079 362,521 1,305,697 543,522 640,205
----------- ----------- ------------ ----------- -----------
Per rentable square foot $ 1.94 $ 1.59 $ 1.25 $ 2.33 $ 1.62
=========== =========== ============ =========== ===========
Rental Rate Trends:
Average final rate with expense
pass throughs $ 4.11 $ 4.44 $ 3.91 $ 5.50 $ 4.49
Average first year cash rental rate $ 4.51 $ 4.72 $ 4.19 $ 5.66 $ 4.77
----------- ----------- ------------ ----------- -----------
Percentage increase 9.55% 6.35% 6.98% 2.84% 6.15%
=========== =========== ============ =========== ===========
</TABLE>
----------------
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintenance) which we will
not be reimbursed by our tenants.
25
<PAGE>
<TABLE>
<CAPTION>
Retail Leasing Statistics
Three Months Ended
-----------------------------------------------------------------------------
9/30/00 6/30/00 3/31/00 12/31/99 Average
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Net Effective Rents Related to
Re-Leased Space:
Number of lease transactions
(signed leases) 21 15 20 28 21
Rentable square footage leased 53,217 37,036 37,556 85,476 53,321
Average per rentable square foot
over the lease term:
Base rent $ 22.26 $ 21.84 $ 19.81 $ 14.54 $ 19.61
Tenant improvements (1.26) (1.97) (0.60) (1.51) (1.34)
Leasing commissions (0.58) (0.57) (0.76) (0.59) (0.63)
Rent concessions (0.03) 0.00 0.00 0.00 0.01
----------- ----------- ------------ ----------- -----------
Effective rent 20.39 19.30 18.45 12.44 17.65
Expense stop (1) 0.00 (0.12) 0.00 0.00 (0.03)
----------- ----------- ------------ ----------- -----------
Equivalent effective net rent $ 20.39 $ 19.18 $ 18.45 $ 12.44 $ 17.62
=========== =========== ============ =========== ===========
Average term in years 8 8 5 8 7
=========== =========== ============ =========== ===========
Capital Expenditures Related to
Re-leased Space:
Tenant Improvements:
Total dollars committed under
signed leases $ 600,136 $ 914,200 $ 82,365 $1,119,000 $ 678,925
Rentable square feet 53,217 37,036 37,556 85,476 53,321
----------- ----------- ------------ ----------- -----------
Per rentable square foot $ 11.28 $ 24.68 $ 2.19 $ 13.09 $ 12.73
=========== =========== ============ =========== ===========
Leasing Commissions:
Total dollars committed under
signed leases $ 143,269 $ 175,122 $ 145,060 $ 397,123 $ 215,144
Rentable square feet 53,217 37,036 37,556 85,476 53,321
----------- ----------- ------------ ----------- -----------
Per rentable square foot $ 2.69 $ 4.73 $ 3.86 $ 4.65 $ 4.03
=========== =========== ============ =========== ===========
Total:
Total dollars committed under
signed leases $ 743,406 $1,089,322 $ 227,425 $1,516,123 $ 894,069
Rentable square feet 53,217 37,036 37,556 85,476 53,321
----------- ----------- ------------ ----------- -----------
Per rentable square foot $ 13.97 $ 29.41 $ 6.06 $ 17.74 $ 16.77
=========== =========== ============ =========== ===========
Rental Rate Trends:
Average final rate with expense
pass throughs $ 13.85 $ 16.60 $ 15.20 $ 8.87 $ 13.63
Average first year cash rental rate $ 19.40 $ 19.06 $ 18.68 $ 12.41 $ 17.39
----------- ----------- ------------ ----------- -----------
Percentage increase 40.08% 14.82% 22.83% 39.86% 27.54%
=========== =========== ============ =========== ===========
</TABLE>
------------------
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintenance) which we will
not be reimbursed by our tenants.
26
<PAGE>
The following tables set forth scheduled lease expirations for executed
leases at our majority-owned in-service properties (excluding apartment units)
as of September 30, 2000 assuming no tenant exercises renewal options.
Office Properties:
<TABLE>
<CAPTION>
Percentage of Annual Rents Percentage of
Leased Square Under Average Annual Leased Rents
Year of Total Rentable Footage Expiring Rental Rate Per Represented
Lease Number Square Feet Represented by Leases (1) Square Foot for by Expiring
Expiration of Leases Expiring Expiring Leases (in thousands) Expirations (1) Leases
---------- --------- -------- --------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Remainder
of 2000 353 1,289,187 5.2% $ 21,133 $ 16.39 5.1%
2001 560 3,016,085 12.2% 52,317 17.35 12.7%
2002 584 3,152,157 12.8% 52,861 16.77 12.8%
2003 531 3,716,010 15.1% 63,796 17.17 15.4%
2004 386 2,853,841 11.6% 50,191 17.59 12.1%
2005 348 2,916,045 11.8% 48,548 16.65 11.7%
2006 75 1,766,871 7.2% 29,222 16.54 7.1%
2007 46 1,074,372 4.4% 16,590 15.44 4.0%
2008 48 1,341,127 5.4% 20,352 15.18 4.9%
2009 21 724,305 2.9% 11,480 15.85 2.8%
2010 and
thereafter 106 2,815,087 11.4% 46,996 16.69 11.4%
----- ---------- ------ --------- -------- ------
3,058 24,665,087 100.0% $ 413,486 $ 16.76 100.0%
===== ========== ====== ========= ======== ======
</TABLE>
Industrial Properties:
<TABLE>
<CAPTION>
Percentage of Annual Rents Percentage of
Leased Square Under Average Annual Leased Rents
Year of Total Rentable Footage Expiring Rental Rate Per Represented
Lease Number Square Feet Represented by Leases (1) Square Foot for by Expiring
Expiration of Leases Expiring Expiring Leases (in thousands) Expirations (1) Leases
---------- --------- -------- --------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Remainder
of 2000 48 660,609 6.9% $ 3,093 $ 4.68 6.9%
2001 101 1,598,748 16.6% 7,227 4.52 16.1%
2002 101 1,637,433 17.0% 7,180 4.38 16.0%
2003 77 1,293,892 13.4% 6,211 4.80 13.8%
2004 58 2,110,324 21.9% 8,583 4.07 19.0%
2005 35 513,612 5.3% 2,812 5.47 6.3%
2006 11 356,062 3.7% 2,278 6.40 5.1%
2007 12 526,748 5.5% 2,946 5.59 6.6%
2008 4 196,045 2.0% 1,301 6.64 2.9%
2009 6 268,813 2.8% 1,806 6.72 4.0%
2010 and
thereafter 13 468,199 4.9% 1,492 3.19 3.3%
----- ---------- ------ --------- -------- ------
466 9,630,485 100.0% $ 44,929 $ 4.67 100.0%
===== ========== ====== ========= -------- ------
</TABLE>
-------------------
(1) Includes operating expense pass throughs and excludes the effect of future
contractual rent increases.
27
<PAGE>
Retail Properties:
<TABLE>
<CAPTION>
Percentage of
Leased
Square Annual Rents Average Percentage of
Total Footage Under Annual Rental Leased Rents
Year of Rentable Represented Expiring Rate Per Represented by
Lease Number of Square Feet by Expiring Leases (1) Square Foot for Expiring
Expiration Leases Expiring Leases (in thousands) Expirations (1) Leases
---------- --------- ---------- --------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Remainder
of 2000 26 111,244 7.3% $ 1,223 $10.99 4.0%
2001 43 97,113 6.4% 2,748 28.30 8.9%
2002 35 85,947 5.7% 1,826 21.25 5.9%
2003 41 104,379 6.9% 2,282 21.86 7.4%
2004 36 213,861 14.1% 2,657 12.42 8.6%
2005 34 82,735 5.5% 2,284 27.61 7.4%
2006 23 80,498 5.3% 1,902 23.63 6.2%
2007 15 65,683 4.3% 1,181 17.98 3.8%
2008 16 108,901 7.2% 3,613 33.18 11.7%
2009 21 169,286 11.2% 3,177 18.77 10.3%
2010 and
thereafter 29 397,014 26.1% 7,908 19.92 25.8%
----- --------- ------ ------- ------ ------
319 1,516,661 100.0% $30,801 $20.31 100.0%
===== ========= ====== ======= ====== ======
</TABLE>
Total:
<TABLE>
<CAPTION>
Percentage of
Leased
Square Annual Rents Average Percentage of
Total Footage Under Annual Rental Leased Rents
Year of Rentable Represented Expiring Rate Per Represented by
Lease Number of Square Feet by Expiring Leases (1) Square Foot for Expiring
Expiration Leases Expiring Leases (in thousands) Expirations (1) Leases
---------- --------- ---------- --------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Remainder
of 2000 427 2,061,040 5.8% $ 25,449 $12.35 5.2%
2001 704 4,711,946 13.2% 62,292 13.22 12.7%
2002 720 4,875,537 13.6% 61,867 12.69 12.6%
2003 649 5,114,281 14.2% 72,289 14.13 14.8%
2004 480 5,178,026 14.4% 61,431 11.86 12.6%
2005 417 3,512,392 9.8% 53,644 15.27 11.0%
2006 109 2,203,431 6.2% 33,402 15.16 6.8%
2007 73 1,666,803 4.7% 20,717 12.43 4.2%
2008 68 1,646,073 4.6% 25,266 15.35 5.2%
2009 48 1,162,404 3.2% 16,463 14.16 3.4%
2010 and
thereafter 148 3,680,300 10.3% 56,396 15.32 11.5%
----- ---------- ------ -------- ------ ------
3,843 35,812,233 100.0% $489,216 $13.66 100.0%
===== ========== ====== ======== ====== ======
</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.
28
<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 Financial Condition and 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 September 30, 2000, the Company had
approximately $180.5 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 September 30, 2001, our interest expense would be increased or
decreased approximately $1.8 million. In addition, as of September 30, 2000, we
had $80.0 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 65 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 $80.0 million of debt.
Interest Rate Hedge Contracts. For a discussion of our interest rate
hedge contracts in effect at September 30, 2000, 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 September 30, 2000 would increase by approximately $1.0 million. If
interest rates decrease by 100 basis points, the aggregate fair market value of
these interest rate hedge contracts as of September 30, 2000 would decrease by
approximately $667,000.
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.
29
<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 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 Securities 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 plaintiff seeks equitable relief and monetary
damages. We believe that the defendants have meritorious defenses to the
plaintiff's allegations and intend to vigorously defend this litigation. By
order dated June 18, 1999, the court granted in part and denied in part our
motion to dismiss. The court has granted the plaintiff's motion seeking
certification of the proposed class of plaintiffs with respect to the remaining
claims. Discovery in this matter has now been completed. Plaintiff John Flake
passed away on or about April 2, 2000, and plaintiff's counsel has substituted
his estate as the representative plaintiff in this action. Defendants filed a
summary judgment motion as to all claims asserted by the plaintiff, who opposed
defendants' motion. By order dated August 28, 2000, the court granted
defendants' motion as to plaintiff's claims that J.C. Nichols and the named
directors and officers of J.C. Nichols breached fiduciary duties to members of
the J.C. Nichols Company Employee Stock Ownership Trust. The court also granted
in part and denied in part defendants' summary judgment motion as to the
remaining claims asserted by the plaintiff. Defendants have sought
reconsideration of the court's ruling as to certain of the securities claims as
to which the court denied their summary judgment motion. Due to the inherent
uncertainties of the litigation process and the judicial system, we are not able
to predict the outcome of this litigation. However, at this time, we do not
expect the result of this litigation to have a material adverse effect on our
business, financial condition and results of operations.
Item 2. Changes in Securities and Use of Proceeds - NA
Item 3. Defaults Upon Senior Securities - NA
Item 4. Submission of Matters to a Vote of Security Holders - NA
Item 5. Other Information - NA
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
2 (1) Agreement to Form Limited Liability Companies, entered into as of
August 9, 2000, by and among Miller Global Fund III, L.P., MGA
Development Associates, L.P., Highwoods Realty Limited
Partnership and Highwoods/Florida Holdings, L.P.
27 Financial Data Schedule
----------------------
(1) Filed as part of our Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000 and incorporated by reference herein.
(b) Reports on Form 8-K - None
30
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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.
By:
/s/ RONALD P. GIBSON
--------------------------------------
Ronald P. Gibson
President and Chief Executive Officer
/s/ CARMAN J. LIUZZO
--------------------------------------
Carman J. Liuzzo
Chief Financial Officer
(Principal Accounting Officer)
Date: November 14, 2000
31
