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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
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The Company has only one class of common stock, par value $.01 per share,
with 58,751,536 shares outstanding as of August 7, 2000.
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<PAGE>
HIGHWOODS PROPERTIES, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999 4
Consolidated Statements of Income for the Three
and Six Months Ended June 30, 2000 and 1999 5
Consolidated Statements of Stockholders' Equity
for the Six Months Ended June 30, 2000 6
Consolidated Statements of Cash Flows for the
Six Months Ended June 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 16
Possible Environmental Liabilities 17
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>
June 30, December 31,
2000 1999
----------------- -----------------
(Unaudited)
Assets
Real estate assets, at cost:
<S> <C> <C>
Land and improvements ........................................... $ 472,811 $ 491,273
Buildings and tenant improvements................................ 2,980,623 3,056,962
Development in process........................................... 77,216 186,925
Land held for development........................................ 150,145 168,396
Furniture, fixtures and equipment................................ 9,310 7,917
--------- ---------
3,690,105 3,911,473
Less - accumulated depreciation.................................. (268,884) (238,135)
--------- ---------
Net real estate assets........................................... 3,421,221 3,673,338
Property held for sale............................................. 142,924 48,960
Cash and cash equivalents.......................................... 44,507 34,496
Restricted cash.................................................... 8,405 1,842
Accounts receivable, net........................................... 20,018 22,847
Advances to related parties........................................ 13,175 15,096
Notes receivable................................................... 43,096 58,241
Accrued straight line rents receivable............................. 41,308 35,951
Investment in unconsolidated affiliates............................ 60,827 38,977
Other assets:
Deferred leasing costs........................................... 78,095 66,783
Deferred financing costs......................................... 40,211 40,125
Prepaid expenses and other....................................... 13,509 15,614
--------- ---------
131,815 122,522
Less - accumulated amortization.................................. (43,557) (36,073)
--------- ---------
Other assets, net............................................. 88,258 86,449
--------- ---------
Total Assets....................................................... $3,883,739 $4,016,197
========== ==========
Liabilities and Stockholders' Equity
Mortgages and notes payable........................................ $1,714,531 $1,766,117
Accounts payable, accrued expenses and other liabilities........... 117,206 111,945
--------- ---------
Total Liabilities................................................ 1,831,737 1,878,062
Minority interest.................................................. 235,146 245,665
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 June 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 June 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 June 30, 2000 and December 31, 1999............ 100,000 100,000
Common stock, $.01 par value, 200,000,000 authorized shares; issued
62,191,568 (includes 3,214,200 shares in treasury) and 62,068,613
(includes 1,150,000 shares in treasury) at June 30, 2000 and
December 31, 1999, respectively................................ 621 621
Additional paid-in capital......................................... 1,600,079 1,597,494
Distributions in excess of net earnings............................ (107,601) (77,670)
Less Treasury stock at cost, 3,214,200 shares at June 30, 2000 and
1,150,000 shares at December 31, 1999............................ (71,601) (25,475)
Deferred compensation - restricted stock (2,142) --
--------- ---------
Total Stockholders' Equity....................................... 1,816,856 1,892,470
--------- ---------
Total Liabilities and Stockholders' Equity $3,883,739 $4,016,197
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Income
(Unaudited and in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ------------- -------------
Revenue:
<S> <C> <C> <C> <C>
Rental property................................. $ 137,719 $ 142,079 $ 273,620 $ 288,800
Equity in earnings of unconsolidated affiliates. 944 490 1,887 687
Interest and other income....................... 6,458 5,273 10,773 10,560
----------- ----------- ---------- -----------
Total Revenue 145,121 147,842 286,280 300,047
Operating expenses:
Rental property................................. 41,427 43,761 80,888 89,106
Depreciation and amortization................... 29,362 27,705 57,690 55,861
Interest expense:
Contractual.................................. 27,775 29,717 54,822 61,559
Amortization of deferred financing costs..... 577 734 1,298 1,512
------------ ------------ ----------- ----------
28,352 30,451 56,120 63,071
General and administrative...................... 5,443 6,212 10,539 12,005
------------ ------------ ----------- ----------
Income before (loss)/gain on disposition of
assets, net of income tax provision, minority
interest and extraordinary item.............. 40,537 39,713 81,043 80,004
(Loss)/Gain on disposition of assets, net of
income tax provision......................... (26,062) 1,524 (19,116) 2,093
------------ ------------ ----------- ----------
Income before minority interest and
extraordinary item........................... 14,475 41,237 61,927 82,097
Minority interest................................. (1,822) (4,879) (7,842) (10,705)
------------ ------------ ----------- ----------
Income before extraordinary item................ 12,653 36,358 54,085 71,392
Extraordinary item - loss on early
extinguishment of debt.......................... (839) (777) (1,034) (777)
------------ ------------ ----------- ----------
Net income...................................... 11,814 35,581 53,051 70,615
Dividends on preferred stock...................... (8,145) (8,145) (16,290) (16,290)
------------ ------------ ----------- ----------
Net income available for common shareholders...... $ 3,669 $ 27,436 $ 36,761 $ 54,325
============ =========== =========== ===========
Net income per common share - basic:
Income before extraordinary item................ $ 0.08 $ 0.46 $ 0.63 $ 0.90
Extraordinary item - loss on early
extinguishment of debt....................... (0.01) (0.01) (0.01) (0.01)
------------ ------------ ----------- ----------
Net income...................................... $ 0.07 $ 0.45 $ 0.62 $ 0.89
============ ============ =========== ============
Weighted average shares outstanding - basic..... 59,293 61,529 59,850 60,930
============ =========== =========== ===========
Net income per common share - diluted:
Income before extraordinary item................ $ 0.08 $ 0.46 $ 0.63 $ 0.90
Extraordinary item - loss on early extinguishment
of debt...................................... (0.01) (0.01) (0.01) (0.01)
------------ ------------ ----------- ----------
Net income...................................... $ 0.07 $ 0.45 $ 0.62 $ 0.89
============ =========== =========== ===========
Weighted average shares outstanding - diluted... 59,608 61,722 60,055 60,954
============ =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Stockholders' Equity
For the Six Months Ended June 30, 2000
(Unaudited and in thousands)
<TABLE>
<CAPTION>
Retained
Earnings
Number of Additional (Distributions in
Common Common Series A Series B Series D Treasury Paid-In Deferred excess of Net
Shares Stock Preferred Preferred Preferred Stock Capital Compensation Earnings)
---------- --------- ---------- --------- --------- ---------- ----------- ------------ -----------------
<S> <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)
Issuance of
Common
Stock.. 41,804 -- -- -- -- -- 707 -- --
Common
Stock
Dividends..... -- -- -- -- -- -- -- -- (66,692)
Preferred
Stock
Dividends.... -- -- -- -- -- -- -- -- (16,290)
Issuance of
restricted
stock......... 81,151 -- -- -- -- -- 1,878 (2,369) --
Amortization
of deferred
compensation -- -- -- -- -- -- -- 227 --
Purchase of
Treasury
Stock......... (2,064,200) -- -- -- -- (46,126) -- -- --
Net Income.... -- -- -- -- -- -- 53,051 -- 53,051
---------- ---- -------- -------- -------- -------- --------- ------- ----------
Balance at
June 30, 2000. 58,977,368 $621 $125,000 $172,500 $100,000 $(71,601) $1,600,079 $(2,142) $ (107,601)
========== ==== ======== ======== ======== ======== ========= ======= ==========
<CAPTION>
Total
-----
<S> <C>
Balance at
December 31,
1999.......... $1,892,470
Issuance of
Common
Stock.. 707
Common
Stock
Dividends..... (66,692)
Preferred
Stock
Dividends.... (16,290)
Issuance of
restricted
stock......... (491)
Amortization
of deferred
compensation 227
Purchase of
Treasury
Stock......... (46,126)
Net Income.... 53,051
----------
Balance at
June 30, 2000. $1,816,856
==========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows
(unaudited and in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
2000 1999
---------- ---------
Operating activities:
<S> <C> <C>
Net income............................................................ $ 53,051 $ 70,615
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization......................................... 57,690 55,861
Minority interest..................................................... 7,842 10,705
Loss/(Gain) on disposition of assets................................. 19,116 (2,093)
Amortization of deferred compensation................................. 227 --
Changes in operating assets and liabilities........................... (3,382) (39,559)
--------- ---------
Net cash provided by operating activities.......................... 134,544 95,529
--------- ---------
Investing activities:
Additions to real estate assets....................................... (126,256) (245,342)
Cash paid in exchange for partnership net assets...................... -- (847)
Proceeds from disposition of real estate assets....................... 216,443 502,737
Advances to and repayments from subsidiaries ......................... 1,921 (3,831)
Other ................................................................ (16,360) (21,666)
--------- ---------
Net cash provided by investing activities ......................... 75,748 231,051
--------- ---------
Financing activities:
Distributions paid on common stock and common units................... (76,241) (76,147)
Dividends paid on preferred stock..................................... (16,290) (16,290)
Borrowings on mortgages and notes payable............................. 72,442 4,385
Repayments on mortgages and notes payable............................. (89,028) (22,700)
Borrowings on revolving loans......................................... 279,500 210,500
Repayments on revolving loans......................................... (314,500) (362,500)
Net proceeds from the sale of common stock............................ 707 14,002
Net payment of deferred financing costs............................... (86) (4,494)
Purchase of treasury stock and units.................................. (55,549) --
Other................................................................. (1,227) (777)
--------- ---------
Net cash used in financing activities.............................. (200,281) (254,021)
--------- ---------
Net increase in cash and cash equivalents............................. 10,011 72,559
Cash and cash equivalents at beginning of the period.................. 34,496 31,445
--------- ---------
Cash and cash equivalents at end of the period........................ $ 44,507 $ 104,004
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest................................................ $ 68,306 $ 78,057
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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>
Six Months Ended
June 30,
--------------------------------
2000 1999
----------- -----------
(Unaudited) (Unaudited)
Assets:
<S> <C> <C>
Rental property and equipment, net................................. $ 1,356 $ (25,879)
Liabilities:
Mortgages and notes payable ....................................... -- (52,165)
------------ -----------
Net assets.................................................... $ 1,356 $ 26,286
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and the Operating Partnership and its majority controlled affiliates.
All significant intercompany balances and transactions have been eliminated in
the consolidated financial statements.
The extraordinary loss represents the write-off of loan origination
fees and prepayment penalties paid on the early extinguishment of debt, net of
the minority interest.
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 was not distributed to stockholders at June 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 to
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 six months ended June 30, 2000 and 1999.
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ---------- ----------- ---------
(in thousands) (in thousands)
Rental Income:
<S> <C> <C> <C> <C>
Office segment............................ $ 112, 032 $ 117,045 $ 223,449 $ 239,660
Industrial segment........................ 12,281 12,783 24,028 25,006
Retail segment............................ 9,069 8,156 17,473 15,940
Apartment segment......................... 4,337 4,095 8,670 8,194
------------ ------------ ------------ ------------
Total Rental Income.................... $ 137,719 $ 142,079 $ 273,620 $ 288,800
============ ============ ============ ============
Net Operating Income:
Office segment............................ $ 77,215 $ 79,740 $ 155,314 $ 163,487
Industrial segment........................ 10,295 10,645 20,075 20,846
Retail segment............................ 6,267 5,561 12,213 10,704
Apartment segment......................... 2,515 2,372 5,130 4,657
------------ ------------ ------------ ------------
Total Net Operating Income............. $ 96,292 $ 98,318 $ 192,732 $ 199,694
------------ ------------ ------------ ------------
Reconciliation to income before minority
interest and extraordinary item:
Equity in income of unconsolidated affiliates $ 944 $ 490 $ 1,887 $ 687
(Loss)/Gain on disposition of assets, net of
income tax provision................... (26,062) 1,524 (19,116) 2,093
Interest and other income................. 6,458 5,273 10,773 10,560
Interest expense.......................... (28,352) (30,451) (56,120) (63,071)
General and administrative expenses....... (5,443) (6,212) (10,539) (12,005)
Depreciation and amortization............. (29,362) (27,705) (57,690) (55,861)
------------ ------------ ------------ ------------
Income before minority interest and
extraordinary item..................... $ 14,475 $ 41,237 $ 61,927 $ 82,097
============ ============ ============ ============
Total Assets:
Office segment............................ $ 2,872,033 $ 2,950,888 $ 2,872,033 $ 2,950,888
Industrial segment........................ 410,855 454,023 410,855 454,023
Retail segment............................ 287,412 250,534 287,412 250,534
Apartment segment......................... 114,528 119,868 114,528 119,868
Corporate and other....................... 198,911 274,548 198,911 274,548
------------ ------------ ------------ ------------
Total Assets.......................... $ 3,883,739 $ 4,049,861 $ 3,883,739 $ 4,049,861
============ ============ ============ ============
</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 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. It is
anticipated that DLF II will exercise its option to contribute up to an
additional $24.0 million in cash to the DLF II Joint Venture before the end of
2000 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 six months ended June 30, 2000, we sold approximately 2.5
million rentable square feet of non-core office and industrial properties and
89.0 acres of development land for gross proceeds of $153.9 million. We recorded
a gain of $3.9 million related to these dispositions. Included in these sales
were certain properties encompassing 887,000 square feet sold to an entity
majority-owned by a related party for a selling price of $69.0 million. Non-core
office and industrial properties generally include single buildings or business
parks that do not fit our long-term strategy. Since June 30, 2000, an additional
1.7 million square feet of non-core office and industrial properties, which are
included in property held for sale in the Consolidated Balance Sheet at June 30,
2000, have been sold for gross proceeds of $137.2 million. Included in these
sales were certain properties encompassing 1.1 million square feet sold to an
entity majority-owned by a related party for a selling price of $100.0 million.
At June 30, 2000, the carrying value of the assets held
10
<PAGE>
for sale was reduced to fair value based on the selling price less costs to
sell. The resulting adjustment of $23.0 million to reduce the assets held for
sale to fair value was recorded, and is included in the (loss)/gain on
disposition of assets, net of income tax provision, in the Consolidated Income
Statement.
On August 9, 2000, we agreed to form two joint ventures with an
institutional investor. First, we expect to sell or contribute 20 in-service
office properties encompassing 2.6 million rentable square feet valued at
approximately $352.0 million to a newly created limited liability company. As
part of the formation of this 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 $250.0 million from
third-party lenders. We will retain the remaining 20.0% ownership interest and
receive net cash proceeds of approximately $300.0 million. Second, we expect to
develop nine additional properties encompassing 861,000 rentable square feet
with a budgeted cost of approximately $110.0 million (including approximately
$15.0 million of development land that we currently own) to a second newly
created limited liability company. We will each own 50.0% of this second joint
venture. In addition, we 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. We will be adopting the
equity method of accounting in both 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, and we are seeking
summary judgment and dismissal of all claims asserted by the plaintiff.
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. Due to the inherent uncertainties of the litigation process and the
judicial system, we are not able to predict the outcome of this litigation. 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 June 30, 2000. Revenues from rental operations
decreased $4.4 million, or 3.1%, from $142.1 million for the three months ended
June 30, 1999 to $137.7 million for the comparable period in 2000. The decrease
is primarily a result of the disposition of 6.4 million square feet of majority-
owned office, industrial and retail properties offset in part by the acquisition
of 0.8 million square feet of majority-owned office, industrial and retail
properties and the completion of 3.8 million square feet of development activity
during the last six months of 1999 and the first six months of 2000. Our
in-service portfolio decreased from 40.0 million square feet at June 30, 1999 to
38.5 million square feet at June 30,
11
<PAGE>
2000. Same property revenues, which are the revenues of the 473 in-service
properties and 1,885 apartment units owned on April 1, 1999, increased 2.8% for
the three months ended June 30, 2000, compared to the same three months in 1999.
During the three months ended June 30, 2000, 240 leases representing
1.1 million square feet of office, industrial and retail space were executed at
an average rate per square foot which was 6.4% higher than the average rate per
square foot on the expired leases.
Interest and other income increased $1.2 million, or 22.6%, from $5.3
million for the three months ended June 30, 1999 to $6.5 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 and an increase in cash balances
and termination fees from 1999 to 2000. For the three months ended June 30,
2000, the Company generated $260,788 in auxiliary income (vending and parking)
as a result of acquiring multifamily communities in the merger with J.C. Nichols
in 1998.
Rental operating expenses decreased $2.4 million, or 5.5%, from $43.8
million for the three months ended June 30, 1999 to $41.4 million for the
comparable period in 2000. The decrease is primarily a result of the disposition
of 6.4 million square feet of majority owned office, industrial and retail
properties offset in part by the acquisition of 0.8 million square feet of
majority owned office, industrial and retail properties and the completion of
3.8 million square feet of development activity during the last six months of
1999 and the first six months of 2000. Rental operating expenses as a percentage
of related revenues decreased from 31.2% for the three months ended June 30,
1999 to 30.1% for the comparable period in 2000.
Depreciation and amortization for the three months ended June 30, 2000
and 1999 totaled $29.4 million and $27.7 million, respectively. The increase of
$1.7 million, or 6.1%, is due to an increase in depreciable assets over the
prior year. Interest expense decreased $2.1 million, or 6.9%, from $30.5 million
for the three months ended June 30, 1999 to $28.4 million for the comparable
period in 2000. The decrease is attributable to a decrease in the outstanding
debt for the entire quarter of 2000. Interest expense for the three months ended
June 30, 2000 and 1999 included $577,000 and $734,000 respectively, of
amortization of deferred financing costs and the costs related to our interest
rate hedge contracts. General and administrative expenses was 3.8% of total
revenue for the three months ended June 30, 2000 and 4.2% for the comparable
period in 1999.
Net income before minority interest and extraordinary item equaled
$14.5 million and $41.2 million for the three months ended June 30, 2000 and
1999, respectively. The Company's net income allocated to minority interest
totaled $1.8 million and $4.9 million for the three months ended June 30, 2000
and 1999, respectively. The Company recorded $8.1 million in preferred stock
dividends for the three months ended June 30, 2000 and 1999.
Six Months Ended June 30, 2000. Revenues from rental operations
decreased $15.2 million, or 5.3%, from $288.8 million for the six months ended
June 30, 1999 to $273.6 million for the comparable period in 2000. The decrease
is primarily a result of the disposition of 6.4 million square feet of
majority-owned office, industrial and retail properties, offset in part by the
acquisition of 0.8 million square feet of majority-owned office, industrial and
retail properties and the completion of 3.8 million square feet of development
activity during the last six months of 1999 and the first six months of 2000.
Our in-service portfolio decreased from 40.0 million square feet at June 30,
1999 to 38.5 million square feet at June 30, 2000. Same property revenues, which
are the revenues of the 470 in-service properties owned on January 1, 1999,
increased 3.2% for the six months ended June 30, 2000, compared to the same six
months in 1999.
During the six months ended June 30, 2000, 517 leases representing 3.3
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 $0.2 million, or 1.9%, from $10.6
million for the six months ended June 30, 1999 to $10.8 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 and an increase in cash balances
and termination fees from 1999 to 2000. For the six months ended June 30, 2000,
the Company generated $481,983 in auxiliary income
12
<PAGE>
(vending and parking) as a result of acquiring multifamily communities in the
merger with J.C. Nichols in 1998.
Rental operating expenses decreased $8.2 million, or 9.2%, from $89.1
million for the six months ended June 30, 1999 to $80.9 million for the
comparable period in 2000. The decrease is primarily a result of the disposition
of 6.4 million square feet of majority-owned office, industrial and retail
properties, offset in part by the acquisition of 0.8 million square feet of
majority-owned office, industrial and retail properties and the completion of
3.8 million square feet of development activity during the last six months of
1999 and the first six months of 2000. Rental operating expenses as a percentage
of related revenues decreased from 30.9% for the six months ended June 30, 1999
to 29.6% for the comparable period in 2000.
Depreciation and amortization for the six months ended June 30, 2000
and 1999 totaled $57.7 million and $55.9 million, respectively. The increase of
$1.8 million, or 3.2%, is due to an increase in depreciable assets over the
prior year. Interest expense decreased $7.0 million, or 11.1%, from $63.1
million for the six months ended June 30, 1999 to $56.1 million for the
comparable period in 2000. The decrease is attributable to the decrease in the
outstanding debt for the entire six months of 2000. Interest expense for the six
months ended June 30, 2000 and 1999 included $1.3 million and $1.5 million,
respectively, of amortization of deferred financing costs and the costs related
to our interest rate hedge contracts. General and administrative expenses
decreased as a percentage of total revenues to 3.7% in 2000 from 4.0% in 1999.
Net income before minority interest and extraordinary item equaled
$61.9 million and $82.1 million for the six months ended June 30, 2000 and 1999,
respectively. The Company's net income allocated to minority interest totaled
$7.8 million and $10.7 million for the six months ended June 30, 2000 and 1999,
respectively. The Company recorded $16.3 million in preferred stock dividends
for the six months ended June 30, 2000 and 1999.
Liquidity and Capital Resources
Statement of Cash Flows. For the six months ended June 30, 2000, cash
provided by operating activities increased by $39.0 million, or 40.8%, to $134.5
million, as compared to $95.5 million for the same period in 1999. The increase
is due to (1) the collection of a $30.0 million note receivable and (2) the
accrual of an $18.0 million liability related to the DLF II Joint Venture during
the six months ended June 30, 2000. Cash provided by investing activities was
$75.7 million for the first six months of 2000, as compared to $231.1 million
for the same period in 1999. The decrease is primarily due to the decline in
disposition activity, offset in part by the decline in acquisition activity
during the six months ended June 30, 2000, as compared to the same period in
1999. Cash used in financing activities was $200.3 million for the six months
ended June 30, 2000, as compared to $254.0 million for the same period in 1999.
The decrease is primarily due to the increase in borrowings on mortgages and
notes payable and under the revolving loan from 1999 to 2000, offset in part by
the decrease in net proceeds from the sale of Common Stock and the repurchase of
Common Stock and Common Units in 2000. Payments of distributions remained
constant at $76.2 million for the first six months of 2000 and 1999. Preferred
stock dividend payments were $16.3 million for the six months ended June 30,
2000 and 1999.
Capitalization. The Company's total indebtedness at June 30, 2000
totaled $1.7 billion and was comprised of $568.9 million of secured indebtedness
with a weighted average interest rate of 7.9% and $1.1 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 June 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 $37.8 million of floating rate notes
payable assumed upon consummation of the merger with J.C. Nichols were not
covered by interest rate hedge contracts on June 30, 2000.
Based on the Company's total market capitalization of $3.7 billion at
June 30, 2000 (at the June 30, 2000 stock price of $23.98 and assuming the
redemption for shares of Common Stock of the 8.7 million Common Units of
minority interest in the Operating Partnership), the Company's debt represented
approximately 45.9% 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
13
<PAGE>
rates. In addition, we have assumed fixed rate and variable rate debt in
connection with acquiring properties. Our interest rate risk management
objective is to limit the impact of interest rate changes on earnings and cash
flows and to lower our overall borrowing costs. To achieve these objectives,
from time to time we enter into interest rate hedge contracts such as collars,
swaps, caps and treasury lock agreements in order to mitigate our interest rate
risk with respect to various debt instruments. We do not hold or issue these
derivative contracts for trading or speculative purposes.
The following table sets forth information regarding our interest rate
hedge contracts as of June 30, 2000:
<TABLE>
<CAPTION>
Notional Maturity Fixed Fair Market
Type of Hedge Amount Date Reference Rate Rate Value
------------- -------- -------- --------------- -------- ------------
<S> <C> <C> <C> <C> <C>
Swap $20,117 6/10/02 1-Month LIBOR + 0.75% 6.95% $234
Collar 80,000 10/15/01 1-Month LIBOR 5.60 - 6.25% 556
</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 $122.3 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 $243.5
million was available as of June 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.
14
<PAGE>
We anticipate that our available cash and cash equivalents and cash
flows from operating activities, together with cash available from borrowings
and other sources, will be adequate to meet our capital and liquidity needs in
both the short and long term. However, if these sources of funds are
insufficient or unavailable, the Company's ability to make the expected
distributions to stockholders discussed below and satisfy other cash
requirements may be adversely affected.
Distributions to Stockholders. In order to qualify as a REIT for
Federal income tax purposes, the Company is required to make distributions to
its stockholders of at least 95% of REIT taxable income. The Company expects to
use its cash flow from operating activities for distributions to stockholders
and for payment of recurring, non-incremental revenue-generating expenditures.
The following factors will affect cash flows from operating activities and,
accordingly, influence the decisions of the Board of Directors regarding
distributions: (1) debt service requirements after taking into account the
repayment and restructuring of certain indebtedness; (2) scheduled increases in
base rents of existing leases; (3) changes in rents attributable to the renewal
of existing leases or replacement leases; (4) changes in occupancy rates at
existing properties and procurement of leases for newly acquired or developed
properties; and (5) operating expenses and capital replacement needs.
Recent Developments
Stock Repurchase. From January 1, 2000 to August 14, 2000, the Company
repurchased 3.5 million shares of Common Stock and Common Units at a weighted
average price of $23.50 per share/unit, a total purchase price of $82.6 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 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. It is anticipated that DLF II will
exercise its option to contribute up to an additional $24 million in cash to the
DLF II Joint Venture before the end of 2000 to increase its ownership percentage
to 80.0%.
In addition to the properties sold or contributed to the DLF II Joint
Venture, during the six months ended June 30, 2000, we sold approximately 2.5
million rentable square feet of non-core office and industrial properties and
89.0 acres of development land for gross proceeds of $153.9 million. Non-core
office and industrial properties generally include single buildings or business
parks that do not fit our long-term strategy. Since June 30, 2000, we have sold
an additional 1.7 million square feet of non-core office and industrial
properties for gross proceeds of $137.2 million.
On August 9, 2000, we agreed to form two joint ventures with an
institutional investor. First, we expect to sell or contribute 20 in-service
office properties encompassing 2.6 million rentable square feet valued at
approximately $352.0 million to a newly created limited liability company. As
part of the formation of this 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 $250.0 million from
third-party lenders. We will retain the remaining 20.0% ownership interest and
receive net cash proceeds of approximately $300.0 million. Second, we expect to
develop nine additional properties encompassing 861,000 rentable square feet
with a budgeted cost of approximately $110.0 million (including approximately
$15.0 million of development land that we currently own) to a second newly
created limited liability company. We will each own 50.0% of this second joint
venture. In addition, we 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.
15
<PAGE>
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 August 14, 2000, we
expect to reinvest up to $37.0 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
16
<PAGE>
substances. We cannot provide any assurances, however, that all tenants will
comply with the terms of their leases or remain solvent. If tenants do not
comply or do not remain solvent, we may at some point be responsible for
contamination caused by such tenants.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities,
which is required to be adopted in fiscal years beginning after June 15, 1999.
In June 1999, FASB issued Statement No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the FASB Statement No. 133,
which stipulates the required adoption date to be all fiscal years beginning
after June 15, 2000. 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 property, plus
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. In March 1995, the National Association of Real
Estate Investment Trusts ("NAREIT") issued a clarification of the definition of
FFO. The clarification provides that amortization of deferred financing costs
and depreciation of non-real estate assets are no longer to be added 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 six month
periods ended June 30, 2000 and 1999 are summarized in the following table (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
2000 1999 2000 1999
-------- -------- ------- -------
Funds from operations:
<S> <C> <C> <C> <C>
Income before minority interest and extraordinary item............. $14,475 $41,237 $61,927 $82,097
Add/(Deduct):
Dividends on preferred stock.................................... (8,145) (8,145) (16,290) (16,290)
Severance costs and other division closing -- 1,233 -- 1,233
expenses .....................................................
Loss/(Gain) on disposition of assets, net of income tax 26,062 (1,524) 19,116 (2,093)
provision.....................................................
Depreciation and amortization................................... 29,362 27,705 57,690 55,861
Depreciation on unconsolidated affiliates....................... 920 745 1,798 1,222
-------- ------- ------- -------
Funds from operations before minority interest................ 62,674 61,251 124,241 122,030
Cash available for distribution:
Add/(Deduct):
Rental income from straight-line rents.......................... (3,995) (3,524) (7,795) (7,509)
Amortization of deferred financing costs........................ 577 734 1,298 1,512
Non-incremental revenue generating capital
expenditures (1):
Building improvements paid.................................... (2,296) (2,957) (3,665) (4,475)
Second generation tenant improvements paid.................... (5,048) (4,112) (9,830) (10,121)
Second generation lease commissions paid...................... (3,678) (4,082) (6,809) (7,613)
-------- ------- ------- -------
Cash available for distribution............................. $48,234 $47,310 $97,440 $93,824
======== ======= ======== =======
Weighted average common shares/common units
outstanding - basic (2)......................................... 68,043 70,445 68,649 70,329
======== ======= ======== =======
Weighted average common shares/common units
outstanding - diluted (2)....................................... 68,358 70,468 68,854 70,360
======== ======= ======== =======
Dividend payout ratios:
Funds from operations........................................... 60.5% 62.1% 61.5% 62.3%
======== ======= ======== =======
Cash available for distribution................................. 78.7% 80.4% 78.4% 81.0%
======== ======= ======== =======
</TABLE>
---------------------
(1) Amounts represent cash expenditures.
(2) Assumes redemption of Common Units for shares of Common Stock. Minority
interest Common Unit holders and the stockholders of the Company share
equally on a per share and per Common Unit basis; therefore, the resultant
per share information is unaffected by the conversion.
On July 31, 2000, the Company's Board of Directors declared a dividend
of $0.57 per share for the second quarter ended June 30, 2000 ($2.28 on an
annualized basis) payable on August 23, 2000 to stockholders of record as of
August 10, 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 June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Rentable Percent Leased/
June 30, 2000 Square Feet Pre-Leased
------------- ----------- ----------
In-Service:
<S> <C> <C>
Office............................................. 26,227,000 94%
Industrial......................................... 10,607,000 93%
Retail............................................. 1,660,000 94%
---------- ------
Total or Weighted Average........................ 38,494,000 93%
========== ======
Development:
Completed - Not Stabilized
Office............................................. 1,334,000 75%
Industrial......................................... 131,000 69%
Retail............................................. 81,000 89%
---------- ------
Total or Weighted Average........................ 1,546,000 75%
========== ======
In Process
Office............................................. 1,498,000 61%
Industrial......................................... 395,000 82%
Retail............................................. ---- ----
---------- ------
Total or Weighted Average........................ 1,893,000 65%
========== ======
Total:
Office............................................. 29,059,000
Industrial......................................... 11,133,000
Retail............................................. 1,741,000
----------
Total or Weighted Average........................ 41,933,000
==========
June 30, 1999
-------------
In-Service:
Office............................................. 26,666,000 94%
Industrial......................................... 11,497,000 90%
Retail............................................. 1,790,000 91%
---------- ------
Total or Weighted Average........................ 39,953,000 93%
========== ======
Development:
Completed - Not Stabilized
Office............................................. 1,951,000 78%
Industrial......................................... 476,000 78%
Retail............................................. 119,000 97%
---------- ------
Total or Weighted Average.......................... 2,546,000 79%
========== ======
In Process
Office............................................. 3,065,000 69%
Industrial......................................... 472,000 17%
Retail............................................. 81,000 53%
---------- ------
Total or Weighted Average........................ 3,618,000 61%
========== ======
Total:
Office............................................. 31,682,000
Industrial......................................... 12,445,000
Retail............................................. 1,990,000
----------
Total or Weighted Average.......................... 46,117,000
==========
</TABLE>
20
<PAGE>
The following table sets forth certain information with respect to our
properties under development as of June 30, 2000 ($ in thousands):
<TABLE>
<CAPTION>
Rentable Pre-Leasing Estimated
In-Process Square Estimated Cost at Percentage Estimated Stabilization
Name Market Feet Cost 6/30/00 (1) Completion (2)
-------------- ------ ---------- ---------- --------- ---------------- ---------- -------------
Office:
<S> <C> <C> <C> <C> <C> <C> <C>
Genus Orlando 30,000 $ 3,307 $ 2,282 100% 3Q00 3Q00
Intermedia Building 4 Tampa 211,000 29,773 20,542 100% 3Q00 3Q00
IXL Richmond 59,000 7,153 6,685 100% 3Q00 3Q00
ECPI Build-to-suit Piedmont
Triad 30,000 3,020 2,324 100% 4Q00 4Q00
Centre Green One Research
Triangle 97,000 11,246 6,111 94% 3Q00 3Q01
Intermedia Building 5 Tampa 185,000 27,633 3,758 100% 3Q00 3Q01
Deerfield III Atlanta 54,000 5,276 1,629 28% 4Q00 3Q01
Highwoods Plaza Tampa 66,000 7,505 1,992 20% 4Q00 3Q01
380 Park Place Tampa 82,000 9,675 1,847 47% 1Q01 4Q01
Maplewood Research
Triangle 36,000 3,901 624 100% 1Q01 1Q02
Highwoods Tower II Research
Triangle 167,000 25,134 6,812 72% 1Q01 2Q02
Cool Springs II Nashville 205,000 22,718 4,614 0% 2Q01 2Q02
Highwoods Centre @
Peachtree Corners III Atlanta 54,000 5,140 952 0% 2Q01 2Q02
North Shore Commons Richmond 116,000 13,084 1,806 32% 2Q01 3Q02
Stony Point III Richmond 106,000 11,425 ---- 44% 2Q01 3Q02
--------- --------- --------- ----
In-Process Office Total or 1,498,000 $ 185,990 $ 61,978 61%
Weighted Average --------- --------- --------- ----
Industrial:
Jones Apparel Expansion
Piedmont
Triad 209,000 $ 6,071 $ 2,444 100% 4Q00 4Q00
Holden Road Piedmont
Triad 64,000 2,014 33 40% 4Q00 2Q01
Tradeport Place III Atlanta 122,000 4,780 1,500 72% 4Q00 4Q01
--------- --------- -------- ----
In-Process Industrial Total
or Weighted Average 395,000 $ 12,865 $ 3,977 82%
--------- --------- -------- ----
Total or Weighted Average
of all In-Process
Development Projects
1,893,000 $ 198,855 $ 65,955 65%
========= ========= ======== =====
</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>
<TABLE>
<CAPTION>
Completed - Not Rentable Pre-Leasing Estimated
Stabilized Square Estimated Cost at Percentage Estimated Stabilization
Name Market Feet Cost 6/30/00 (1) Completion (2)
---------------- ------ -------- --------- ------- ----------- ---------- -------------
Office:
<S> <C> <C> <C> <C> <C> <C> <C>
3737 Glenwood Avenue Research Triangle 108,000 16,700 17,095 92% 3Q99 3Q00
Deerfield II Atlanta 67,000 6,994 6,809 100% 3Q99 3Q00
Parkway Plaza 14 Charlotte 90,000 7,690 7,276 76% 3Q99 3Q00
Valencia Place Kansas City 241,000 34,850 32,403 83% 1Q00 4Q00
Lakepoint II Tampa 225,000 30,524 28,829 96% 4Q99 4Q00
Mallard Creek V Charlotte 118,000 12,262 11,717 49% 4Q99 4Q00
4101 Research Commons Research Triangle 73,000 9,311 8,771 100% 3Q99 4Q00
Highwoods Centre @
Peachtree Corners II Atlanta 109,000 9,238 8,869 60% 3Q99 4Q00
Capital Plaza Orlando 303,000 53,000 32,054 50% 1Q00 4Q01
---------- ---------- --------- ------ ----- -----
Completed-Not Stabilized
Office Total or 1,334,000 $180,569 $153,823 75%
Weighted Average ---------- ---------- --------- ------
Industrial:
Newpoint II Atlanta 131,000 $ 5,167 $ 5,300 69% 3Q99 2Q01
---------- ---------- --------- ------
Completed-Not Stabilized
Industrial Total or 131,000 $ 5,167 $ 5,300 69%
Weighted Average ---------- ---------- --------- ------
Retail:
Valencia Place Kansas City 81,000 $ 16,650 $ 13,511 89% 1Q00 4Q00
Completed-Not Stabilized ---------- ---------- --------- ------
Retail Total or 81,000 $ 16,650 $ 13,511 89%
Weighted ---------- ---------- --------- ------
Average
Total or Weighted
Average of all ---------- ---------- --------- ------
Completed-Not Stabilized 1,546,000 $ 202,386 $ 172,634 75%
Development Projects ---------- ---------- --------- ------
Total or Weighted Average 3,439,000 $ 401,241 $ 238,589 70%
Average of all ========= ========== ========= ======
Development Projects
</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)
Summary by Estimated Stabilization Date:
<S> <C> <C> <C>
Third Quarter 2000.................................. 565,000 $ 71,617 95%
Fourth Quarter 2000................................. 1,086,000 121,926 85%
First Quarter 2001.................................. -- -- --
Second Quarter 2001................................. 195,000 7,181 59%
Third Quarter 2001.................................. 402,000 51,660 76%
Fourth Quarter 2001................................. 507,000 67,455 55%
First Quarter 2002.................................. 36,000 3,901 100%
Second Quarter 2002................................. 426,000 52,992 28%
Third Quarter 2002.................................. 222,000 24,509 38%
------- ------ ---
Total or Weighted Average......................... 3,439,000 $ 401,241 70%
========= ========== ====
Summary by Market:
Atlanta............................................. 537,000 $ 36,595 61%
Charlotte........................................... 208,000 19,952 61%
Kansas City......................................... 322,000 51,500 85%
Nashville........................................... 205,000 22,718 --
Orlando............................................. 333,000 56,307 55%
Piedmont Triad...................................... 303,000 11,105 87%
Research Triangle................................... 481,000 66,292 87%
Richmond............................................ 281,000 31,662 51%
Tampa............................................... 769,000 105,110 86%
------- ------- ----
Total or Weighted Average......................... 3,439,000 $ 401,241 70%
========= ========== ====
Build-to-Suit..................................... 724,000 76,957 100%
Multi-Tenant...................................... 2,715,000 324,284 62%
--------- ------- ----
Total or Weighted Average......................... 3,439,000 $ 401,241 70%
========= ========== ====
<CAPTION>
Average
Rentable Average Pre-Leasing
Square Estimated Percentage (1)
Feet Costs
-------------- ------------- -------------------
(in thousands)
Per Property Type:
<S> <C> <C> <C>
Office.............................................. 118,000 $ 15,273 67%
Industrial.......................................... 131,500 4,508 78%
Retail.............................................. 81,000 16,650 89%
-------- --------- ----
All................................................. 118,586 $ 13,836 70%
======== ========= ====
</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 June 30 and March 31, 2000 and December 31 and
September 30, 1999.
<TABLE>
<CAPTION>
Office Leasing Statistics
Three Months Ended
------------------------------------------------------------------------
6/30/00 3/31/00 12/31/99 9/30/99 Average
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Effective Rents Related to
Re-Leased Space:
Number of lease transactions
(signed leases) 221 207 251 234 228
Rentable square footage leased 990,663 931,686 1,337,611 1,015,789 1,068,937
Average per rentable square foot
over the lease term:
Base rent 18.43 $ 17.04 $ 17.28 $ 14.61 $ 16.84
Tenant improvements (1.39) (1.07) (0.90) (0.70) (1.02)
Leasing commissions (0.57) (0.40) (0.36) (0.38) (0.43)
Rent concessions (0.05) (0.04) (0.04) (0.03) (0.04)
------------ ----------- ----------- ----------- -----------
Effective rent 16.42 15.53 15.98 13.50 15.36
Expense stop (1) (5.37) (5.00) (5.09) (3.92) (4.85)
------------ ----------- ----------- ----------- -----------
Equivalent effective net rent $ 11.05 $ 10.53 $ 10.89 $ 9.58 $ 10.51
============ =========== =========== =========== ===========
Average term in years 5 4 5 4 4
============ =========== =========== =========== ===========
Capital Expenditures Related to
Released Space:
Tenant Improvements:
Total dollars committed under $5,510,054 $4,756,023 $6,224,907 $3,602,102 $5,023,271
signed leases
Rentable square feet 990,663 931,686 1,337,611 1,015,789 1,068,937
------------ ----------- ----------- ----------- -----------
Per rentable square foot $ 5.56 $ 5.10 $ 4.65 $ 3.55 $ 4.70
============ =========== =========== =========== ===========
Leasing Commissions:
Total dollars committed under
signed leases $2,392,441 $1,505,559 $2,151,399 $1,560,041 $1,902,360
Rentable square feet 990,663 931,686 1,337,611 1,015,789 1,068,937
------------ ----------- ----------- ----------- -----------
Per rentable square foot $ 2.41 $ 1.62 $ 1.61 $ 1.54 $ 1.78
============ =========== =========== =========== ===========
Total:
Total dollars committed under
signed leases $7,902,495 $6,261,582 $8,376,306 $5,162,143 $6,925,631
Rentable square feet 990,663 931,686 1,337,611 1,015,789 1,068,937
------------ ----------- ----------- ----------- -----------
Per rentable square foot $ 7.98 $ 6.72 $ 6.26 $ 5.08 $ 6.48
============ =========== =========== =========== ===========
Rental Rate Trends:
Average final rate with expense
pass throughs $ 16.59 $ 15.79 $ 16.96 $ 14.09 $ 15.86
Average first year cash rental
rate $ 17.58 $ 16.76 $ 17.16 $ 14.93 $ 16.61
------------ ----------- ----------- ----------- -----------
Percentage increase 6.02% 6.11% 1.16% 5.94% 4.72%
============ =========== =========== =========== ===========
</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
-----------------------------------------------------------------------
6/30/00 3/31/00 12/31/99 9/30/99 Average
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Effective Rents Related to
Re-Leased Space:
Number of lease transactions
(signed leases) 46 66 64 50 57
Rentable square footage leased 362,521 1,305,697 543,522 815,044 756,696
Average per rentable square foot
over the lease term:
Base rent $ 5.14 $ 4.34 $ 5.85 $ 4.86 $ 5.05
Tenant improvements (0.28) (0.19) (0.38) (0.14) (0.25)
Leasing commissions (0.12) (0.11) (0.11) (0.10) (0.11)
Rent concessions (0.01) (0.00 (0.01) (0.00) (0.01)
----------- ----------- ---------- ---------- ----------
Effective rent 4.73 4.04 5.35 4.62 4.69
Expense stop (1) (0.48) (0.14) (0.39) (0.18) (0.30)
----------- ----------- ---------- ---------- ----------
Equivalent effective net rent $ 4.25 $ 3.90 $ 4.96 $ 4.44 $ 4.39
=========== =========== ========== ========== ==========
Average term in years 4 5 4 3 4
=========== =========== ========== ========== ==========
Capital Expenditures Related to
Re-leased Space:
Tenant Improvements:
Total dollars committed under $ 389,592 $ 966,338 $1,042,852 $ 692,497 $ 772,820
signed leases
Rentable square feet 362,521 1,305,697 543,522 815,044 759,696
----------- ----------- ---------- ---------- ----------
Per rentable square foot $ 1.07 $ 0.74 $ 1.92 $ 0.85 $ 1.02
=========== =========== ========== ========== ==========
Leasing Commissions:
Total dollars committed under $ 185,028 $ 671,182 $ 222,728 $ 271,184 $ 337,531
signed leases
Rentable square feet 362,521 1,305,697 543,522 815,044 756,696
----------- ----------- ---------- ---------- ----------
Per rentable square foot $ 0.51 $ 0.51 $ 0.41 $ 0.33 $ 0.45
=========== =========== ========== ========== ==========
Total:
Total dollars committed under $ 574,620 $ 1,637,520 $1,265,580 $ 963,681 $1,110,350
signed leases
Rentable square feet 362,521 1,305,697 543,522 815,044 756,696
----------- ----------- ---------- ---------- ----------
Per rentable square foot $ 1.59 $ 1.25 $ 2.33 $ 1.18 $ 1.47
=========== =========== ========== ========== ==========
Rental Rate Trends:
Average final rate with expense $ 4.44 $ 3.91 $ 5.50 $ 4.63 $ 4.62
pass throughs
Average first year cash rental rate $ 4.72 $ 4.19 $ 5.66 $ 4.78 $ 4.84
----------- ----------- ---------- ---------- ----------
Percentage increase 6.35% 6.98% 2.84% 3.39% 4.70%
=========== =========== ========== ========== ==========
</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
-----------------------------------------------------------------------------
6/30/00 3/31/00 12/31/99 9/30/99 Average
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Effective Rents Related to
Re-Leased Space:
Number of lease transactions
(signed leases) 15 20 28 19 21
Rentable square footage leased 37,036 37,556 85,476 70,706 57,694
Average per rentable square foot
over the lease term:
Base rent $ 21.84 $ 19.81 $ 14.54 $ 24.58 $ 20.19
Tenant improvements (1.97) (0.60) (1.51) (0.66) (1.19)
Leasing commissions (0.57) (0.76) (0.59) (0.37) (0.57)
Rent concessions 0.00 0.00 0.00 0.00 0.00
----------- --------- ---------- --------- ---------
Effective rent 19.30 18.45 12.44 23.55 18.44
Expense stop (1) (0.12) 0.00 0.00 0.00 (0.03)
----------- --------- ---------- --------- ---------
Equivalent effective net rent $ 19.18 $ 18.45 $ 12.44 $ 23.55 $ 18.41
=========== ========= ========== ========= =========
Average term in years 8 5 8 5 6
=========== ========= ========== ========= =========
Capital Expenditures Related to
Re-leased Space:
Tenant Improvements:
Total dollars committed under
signed leases $ 914,200 $ 82,365 $1,119,000 $ 437,735 $ 638,325
Rentable square feet 37,036 37,556 85,476 70,706 57,694
----------- --------- ---------- --------- ---------
Per rentable square foot $ 24.68 $ 2.19 $ 13.09 $ 6.19 $ 11.06
=========== ========= ========== ========= =========
Leasing Commissions:
Total dollars committed under
signed leases $ 175,122 $ 145,060 $ 397,123 $ 124,241 $ 210,386
Rentable square feet 37,036 37,556 85,476 70,706 57,694
----------- --------- ---------- --------- ---------
Per rentable square foot $ 4.73 $ 3.86 $ 4.65 $ 1.76 $ 3.65
=========== ========= ========== ========= =========
Total:
Total dollars committed under
signed leases $ 1,089,322 $ 227,425 $1,516,123 $ 561,976 $ 848,711
Rentable square feet 37,036 37,556 85,476 70,706 57,694
----------- --------- ---------- --------- ---------
Per rentable square foot $ 29.41 $ 6.06 $ 17.74 $ 7.95 $ 14.71
=========== ========= ========== ========= =========
Rental Rate Trends:
Average final rate with expense
pass throughs $ 16.60 $ 15.20 $ 8.87 $ 19.12 $ 14.95
Average first year cash rental rate $ 19.06 $ 18.68 $ 12.41 $ 22.30 $ 18.11
----------- --------- ---------- --------- ---------
Percentage increase 14.82% 22.83% 39.86% 16.63% 21.15%
=========== ========= ========== ========= =========
</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.
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 June 30, 2000 assuming no tenant exercises renewal options.
<TABLE>
<CAPTION>
Office Properties:
Percentage of Annual Rents Percentage of
Leased Square Under Average Annual Leased Rents
Year of Number of Total Rentable Footage Expiring Rental Rate Per Represented
Lease Leases Square Feet Represented by Leases (1) Square Foot for by Expiring
Expiration Expiring Expiring Leases (in thousands) Expirations (1) Leases
---------- ------ -------------- --------------- ---------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Remainder of
2000 521 2,130,058 8.5% $ 35,376 $ 16.61 8.5%
2001 581 3,461,003 13.8% 57,654 16.66 13.9%
2002 609 3,356,797 13.4% 55,888 16.65 13.5%
2003 508 3,784,766 15.1% 63,852 16.87 15.4%
2004 391 2,776,447 11.1% 47,401 17.07 11.4%
2005 270 2,438,783 9.7% 39,153 16.05 9.4%
2006 66 1,689,017 6.7% 27,623 16.35 6.7%
2007 39 981,945 3.9% 15,266 15.55 3.7%
2008 53 1,405,514 5.6% 21,190 15.08 5.1%
2009 24 926,790 3.7% 14,739 15.90 3.6%
2010 and
thereafter 92 2,136,866 8.5% 36,411 17.04 8.8%
------- ----------- --------- --------- --------- --------
3,154 25,087,986 100.0% $ 414,553 $ 16.52 100.0%
======= ========== ========= ========= ========== ========
<CAPTION>
Industrial Properties:
Percentage of Annual Rents Percentage of
Leased Square Under Average Annual Leased Rents
Year of Number of Total Rentable Footage Expiring Rental Rate Per Represented
Lease Leases Square Feet Represented by Leases (1) Square Foot for by Expiring
Expiration Expiring Expiring Leases (in thousands) Expirations (1) Leases
------------- -------- -------------- --------------- ---------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Remainder of
2000 72 844,578 8.6% 4,482 $ 5.31 9.3%
2001 106 1,721,011 17.5% 8,601 5.00 17.9%
2002 103 1,694,857 17.2% 7,508 4.43 15.6%
2003 75 1,242,504 12.6% 6,249 5.03 13.0%
2004 63 2,166,835 22.1% 9,325 4.30 19.3%
2005 29 400,902 4.1% 2,471 6.16 5.1%
2006 11 356,062 3.6% 2,277 6.39 4.7%
2007 11 451,348 4.6% 2,624 5.81 5.4%
2008 6 247,737 2.5% 2,014 8.13 4.2%
2009 6 268,813 2.7% 1,806 6.72 3.7%
2010 and
thereafter 12 438,976 4.5% 872 1.99 1.8%
----------- -------- -------- --------- -------
494 9,833,623 100.0% $48,229 $ 4.90 100.0%
====== ========== ======== ======= ========= =======
</TABLE>
-------------------
(1) Includes operating expense pass throughs and excludes the effect of future
contractual rent increases.
27
<PAGE>
<TABLE>
<CAPTION>
Retail Properties:
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 50 161,041 10.1% $ 2,270 $14.10 7.3%
2001 49 108,352 6.8% 3,036 28.02 9.8%
2002 45 135,732 8.5% 2,350 17.31 7.6%
2003 46 113,566 7.1% 2,416 21.27 7.8%
2004 37 217,192 13.6% 2,617 12.05 8.4%
2005 32 80,564 5.1% 2,244 27.85 7.2%
2006 23 80,498 5.1% 1,788 22.21 5.8%
2007 11 53,641 3.4% 1,007 18.77 3.2%
2008 15 107,595 6.8% 3,649 33.91 11.8%
2009 23 172,898 10.9% 3,269 18.91 10.5%
2010 and
thereafter 24 360,094 22.6% 6,369 17.69 20.6%
------ ---------- ------ ------ ------ ------
355 1,591,173 100.0% 31,015 $19.49 100.0%
====== ========== ====== ====== ====== ======
<CAPTION>
Total:
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 643 3,135,677 8.6% $ 42,128 $13.44 8.5%
2001 736 5,290,366 14.5% 69,291 13.10 14.1%
2002 757 5,187,386 14.3% 65,746 12.67 13.4%
2003 629 5,140,836 14.1% 72,517 14.11 14.7%
2004 491 5,160,474 14.1% 59,343 11.50 12.0%
2005 331 2,920,249 8.0% 43,868 15.02 8.9%
2006 100 2,125,577 5.8% 31,688 14.91 6.4%
2007 61 1,486,934 4.1% 18,897 12.71 3.8%
2008 74 1,760,846 4.8% 26,853 15.25 5.4%
2009 53 1,368,501 3.7% 19,814 14.48 4.0%
2010 and
thereafter 128 2,935,936 8.0% 43,652 14.87 8.8%
------- ----------- -------- ---------- ------- --------
4,003 36,512,782 100.0% $493,797 $13.52 100.0%
===== ========== ====== ======== ====== ======
</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 June 30, 2000, the Company had
approximately $151.8 million of variable rate debt outstanding that was not
protected by interest rate hedge contracts. If the weighted average interest
rate on this variable rate debt is 100 basis points higher or lower during the
12 months ended June 30, 2001, our interest expense would be increased or
decreased approximately $1.5 million. In addition, as of June 30, 2000, we had
$80 million of additional variable rate debt outstanding that was protected by
an interest rate collar that effectively keeps the interest rate within a range
of 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 million of debt.
Interest Rate Hedge Contracts. For a discussion of our interest rate
hedge contracts in effect at June 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 June 30, 2000 would increase by approximately $1.2 million. If interest
rates decrease by 100 basis points, the aggregate fair market value of these
interest rate hedge contracts as of June 30, 2000 would decrease by
approximately $1.0 million.
In addition, we are exposed to certain losses in the event of
nonperformance by the counterparties under the hedge contracts. We expect the
counterparties, which are major financial institutions, to perform fully under
these contracts. However, if the counterparties were to default on their
obligations under the interest rate hedge contracts, we could be required to pay
the full rates on our debt, even if such rates were in excess of the rates in
the contracts.
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, and we are seeking
summary judgment and dismissal of all claims asserted by the plaintiff.
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. Due to the inherent uncertainties of the litigation process and the
judicial system, we are not able to predict the outcome of this litigation. 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
(c) During the three months ended June 30, 2000, the Company issued an
aggregate of 9,911 shares of Common Stock in connection with the merger of Eakin
& Smith, Inc. into the Company on April 1, 1996. The shares were issued to
principals of Eakin & Smith, pursuant to an exemption from the registration
requirements of the Securities Act of 1933. Each of the principals is an
accredited investor. We exercised reasonable care to assure that the principals
were not purchasing the shares with a view to their distribution.
Item 3. Defaults Upon Senior Securities - NA
Item 4. Submission of Matters to a Vote of Security Holders
On May 24, 2000, we held our Annual Meeting of Stockholders. The final
vote of the matters presented for a vote at such meeting was as follows:
<TABLE>
<CAPTION>
Matter For Against Broker Non-Vote Abstain
------ --- ------- --------------- -------
(A) Election of Directors
<S> <C> <C> <C> <C>
Gene M. Anderson.................... 46,706,925 -- -- 367,833
Ronald P. Gibson.................... 46,716,534 -- -- 358,224
O. Temple Sloan, Jr................. 46,716,520 -- -- 358,238
John L. Turner...................... 46,711,267 -- -- 363,491
William E. Graham, Jr............... 46,728,262 -- -- 346,496
(B) Ratify appointment of Ernst & Young,
LLP as independent auditors......... 46,964,653 65,271 -- 44,834
</TABLE>
Item 5. Other Information - NA
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
30
<PAGE>
Exhibit No. Description
----------- -----------
2 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
(b) Reports on Form 8-K - None
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HIGHWOODS PROPERTIES, INC.
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: August 14, 2000
32
