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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 September 30, 1998
Commission file number: 000-21731
HIGHWOODS REALTY LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
NORTH CAROLINA 56-1864557
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
3100 SMOKETREE COURT, SUITE 600, RALEIGH, N.C.
(Address of principal executive office)
27604
(Zip Code)
Registrant's telephone number, including area code:
(919) 872-4924
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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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<PAGE>
HIGHWOODS REALTY LIMITED PARTNERSHIP
QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
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PAGE
PART I. FINANCIAL INFORMATION -----
<S> <C> <C>
Item 1. Financial Statements 3
Consolidated balance sheets of Highwoods Realty Limited 4
Partnership as of September 30, 1998 and December 31, 1997
Consolidated statements of income of Highwoods Realty Limited 5
Partnership for the three and nine month periods ended
September 30, 1998 and 1997
Consolidated statements of cash flows of Highwoods Realty Limited 6
Partnership for the nine month periods ended September 30, 1998
and 1997
Notes to the consolidated financial statements of Highwoods Realty 8
Limited Partnership
Item 2. Management's Discussion and Analysis of Financial Condition and 10
Results of Operations
Results of Operations 10
Liquidity and Capital Resources 12
Year 2000 15
Funds From Operations and Cash Available for Distributions 16
Disclosure Regarding Forward-Looking Statements 17
Property Information 18
Inflation 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
</TABLE>
2
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The information furnished in the accompanying balance sheets, statements
of operations and statements of cash flows reflect all adjustments that are, in
the opinion of management, necessary for a fair presentation of the
aforementioned financial statements for the interim period.
The aforementioned financial statements should be read in conjunction with
the notes to consolidated financial statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations and the 1997 Annual
Report on Form 10-K of Highwoods Realty Limited Partnership (the "Operating
Partnership").
3
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HIGHWOODS REALTY LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
-------------------- ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Real estate assets, at cost:
Land and improvements ................................................ $ 565,538 $ 341,623
Buildings and tenant improvements .................................... 3,159,502 2,183,454
Development in process ............................................... 170,744 95,387
Land held for development ............................................ 158,438 64,454
Furniture, fixtures and equipment .................................... 6,725 3,339
---------- ----------
4,060,947 2,688,257
Less -- accumulated depreciation ..................................... (165,508) (87,046)
---------- ----------
Net real estate assets ............................................... 3,895,439 2,601,211
Cash and cash equivalents .............................................. 21,083 8,816
Restricted cash ........................................................ 22,377 9,341
Accounts receivable .................................................... 23,881 17,426
Advances to related parties ............................................ 8,914 9,072
Notes receivable ....................................................... 17,691 --
Accrued straight line rents receivable ................................. 23,100 13,033
Investment in unconsolidated affiliates ................................ 17,486 --
Other assets:
Deferred leasing costs ............................................... 42,064 21,688
Deferred financing costs ............................................. 32,094 22,294
Prepaid expenses and other ........................................... 17,816 17,575
---------- ----------
91,974 61,557
Less -- accumulated amortization ..................................... (21,548) (13,216)
---------- ----------
70,426 48,341
---------- ----------
$4,100,397 $2,707,240
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Mortgages and notes payable ............................................ $1,778,013 $ 978,558
Accounts payable, accrued expenses and other liabilities ............... 107,267 52,152
---------- ----------
Total liabilities .................................................... 1,885,280 1,030,710
Redeemable operating partnership units:
Class A Common Units outstanding, 10,111,978 at September 30,
1998 and 10,256,936 at December 31, 1997 ............................ 280,607 381,631
Class B Common Units outstanding, 291,756 at September 30, 1998
and 187,528 at December 31, 1997 .................................... 8,096 6,974
Series A Preferred Units outstanding, 125,000 at September 30, 1998
and December 31, 1997 ............................................... 121,809 121,809
Series B Preferred Units outstanding, 6,900,000 at September 30,
1998 and December 31, 1997 .......................................... 166,346 166,346
Series D Preferred Units outstanding, 400,000 at September 30, 1998
and -0- at December 31, 1997 ........................................ 96,842 --
Partners' capital:
Class A Common Units:
General partner Common Units outstanding, 688,860 at
September 30, 1998 and 566,108 at December 31, 1997 ................ 15,414 9,997
Limited partner Common Units outstanding, 58,085,132 at
September 30, 1998 and 45,783,071 at December 31, 1997 ............. 1,526,003 989,773
---------- ----------
Total partners' capital ............................................ 1,541,417 999,770
---------- ----------
$4,100,397 $2,707,240
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
HIGHWOODS REALTY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
-------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Rental property .................................................... $138,198 $ 61,768 $351,608 $177,246
Equity in earnings of unconsolidated affiliates .................... (2) -- (2) --
Interest and other income .......................................... 3,577 1,534 7,951 4,705
--------- -------- ---------- --------
141,773 63,302 359,557 181,951
OPERATING EXPENSES:
Rental property .................................................... $42,938 $ 17,407 $108,493 $ 48,995
Depreciation and amortization ...................................... 24,359 11,083 61,740 30,915
Interest expense:
Contractual ....................................................... 27,341 10,566 61,724 33,082
Amortization of deferred financing costs .......................... 683 567 1,915 1,689
--------- -------- ---------- --------
28,024 11,133 63,639 34,771
General and administrative ......................................... 5,904 2,410 14,074 6,694
--------- -------- ---------- --------
Income before extraordinary item ................................... 40,548 21,269 111,611 60,576
EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF DEBT ........... (324) (1,561) (370) (5,534)
--------- -------- ---------- --------
Net income ......................................................... $40,224 $ 19,708 $111,241 55,042
========= ======== ========== ========
DIVIDENDS ON PREFERRED UNITS ......................................... (8,145) (2,870) (21,946) (6,972)
--------- -------- ---------- --------
Net income available for Class A Common Units ...................... 32,079 16,838 89,295 48,070
========= ======== ========== ========
NET INCOME (LOSS) PER CLASS A COMMON UNIT -- BASIC:
Income before extraordinary item ................................... $ .48 $ .43 $ 1.42 $ 1.27
Extraordinary item -- loss on early extinguishment of debt ......... -- (.04) -- ( .13)
--------- -------- ---------- --------
Net income ......................................................... .48 .39 1.42 1.14
========= ======== ========== ========
NET INCOME (LOSS) PER CLASS A COMMON UNIT -- DILUTED:
Income before extraordinary item ................................... $ .47 $ .43 $ 1.41 $ 1.26
Extraordinary item -- loss on early extinguishment of debt ......... -- (.04) -- ( .13)
========= ======== ========== ========
Net income ......................................................... .47 .39 1.41 1.13
========= ======== ========== ========
NET INCOME PER CLASS A COMMON UNIT -- BASIC:
General Partner .................................................... $ .48 $ .39 $ 1.42 $ 1.14
========= ======== ========== ========
Limited Partners ................................................... .48 .39 1.42 1.14
========= ======== ========== ========
NET INCOME PER CLASS B COMMON UNIT -- BASIC:
Limited Partners ................................................... $ -- $ -- $ -- $ --
========= ======== ========== ========
NET INCOME PER CLASS A COMMON UNIT -- DILUTED:
General Partner .................................................... $ .47 $ .39 $ 1.41 $ 1.13
========= ======== ========== ========
Limited Partners ................................................... .47 .39 1.41 1.13
========= ======== ========== ========
NET INCOME PER CLASS B COMMON UNIT -- DILUTED:
Limited Partners ................................................... $ -- $ -- $ -- $ --
========= ======== ========== ========
WEIGHTED AVERAGE COMMON UNITS OUTSTANDING -- BASIC:
Class A Common Units:
General Partner ................................................... 679 429 631 421
Limited Partners .................................................. 67,250 42,436 62,441 41,604
Class B Common Units:
Limited Partners .................................................. 292 187 280 163
--------- -------- ---------- --------
Total .............................................................. 68,221 43,052 63,352 42,188
========= ======== ========== ========
WEIGHTED AVERAGE COMMON UNITS OUTSTANDING -- DILUTED:
Class A Common Units:
General Partner ................................................... 681 432 634 425
Limited Partners .................................................. 67,417 42,815 62,759 42,071
Class B Common Units:
Limited Partners .................................................. 292 187 280 163
--------- -------- ---------- --------
Total .............................................................. 68,390 43,434 63,673 42,659
========= ======== ========== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
HIGHWOODS REALTY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income .......................................................... $ 111,241 $ 55,042
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ...................................... 61,740 32,037
Loss on early extinguishment of debt ............................... 370 5,534
Changes in operating assets and liabilities ........................ 15,967 1,629
---------- ----------
Net cash provided by operating activities ........................ 189,318 94,242
---------- ----------
INVESTING ACTIVITIES:
Additions to real estate assets ..................................... (756,408) (149,087)
Cash paid in exchange for partnership net assets .................... (47,752) (5,314)
Other ............................................................... (19,544) (14,614)
---------- ----------
Net cash used in investing activities ............................ (823,704) (169,015)
---------- ----------
FINANCING ACTIVITIES:
Distributions paid .................................................. (99,483) (57,536)
Payment of preferred unit dividends ................................. (21,946) (5,959)
Payment of prepayment penalties ..................................... (370) (5,534)
Borrowings on mortgages and notes payable ........................... 529,941 183,000
Repayment of mortgages and notes payable ............................ (130,993) (223,424)
Borrowings on revolving loans ....................................... 672,500 --
Repayment on revolving loans ........................................ (588,000) --
Net proceeds from contributed capital ............................... 294,026 348,079
Net change in deferred financing costs .............................. (9,022) (425)
---------- ----------
Net cash provided by financing activities ........................ 646,653 238,201
---------- ----------
Net increase in cash and cash equivalents ........................... 12,267 163,428
Cash and cash equivalents at beginning of the period ................ 8,816 10,618
---------- ----------
Cash and cash equivalents at end of the period ...................... $ 21,083 $ 174,046
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest .............................................. $ 59,857 $ 7,763
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
HIGHWOODS REALTY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The following summarizes the net assets contributed by holders of limited
partnership interests ("Common Units") in the Operating Partnership or acquired
subject to mortgage notes payable:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS:
Rental property and equipment, net .......... $491,863 $226,051
LIABILITIES:
Mortgages and notes payable assumed ......... $327,214 $133,736
-------- --------
Net assets ............................... $164,649 $ 92,315
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE>
HIGHWOODS REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The Operating Partnership is a subsidiary of Highwoods Properties, Inc.
(the "Company"). At September 30, 1998 the Company owned 85% of the Common
Units of the Operating Partnership.
The consolidated financial statements include the accounts of the
Operating Partnership and certain subsidiaries, including the following
significant subsidiaries:
Highwoods/Tennessee Holdings, L.P.
AP Southeast Portfolio Partners, L.P.
Highwoods/Florida Holdings, L.P.
The Operating Partnership's investment in Highwoods Services, Inc. (the
"Service Company") is accounted for using the equity method of accounting. All
significant intercompany balances and transactions have been eliminated in the
financial statements.
The Operating Partnership's 125,000 Series A Preferred Units are senior to
the Class A and B Common Units and rank pari passu with the Series B and D
Preferred Units. The Series A Preferred Units have a liquidation preference of
$1,000 per unit. Distributions are payable on the Series A Preferred Units at
the rate of $86.25 per annum per unit.
The Operating Partnership's 6,900,000 Series B Preferred Units are senior
to the Class A and B Common Units and rank pari passu with the Series A and D
Preferred Units. The Series B Preferred Units have a liquidation preference of
$25 per unit. Distributions are payable on the Series B Preferred Units at the
rate of $2.00 per annum per unit.
The Operating Partnership's 400,000 Series D Preferred Units are senior to
the Class A and B Common Units and rank pari passu with the Series A and B
Preferred Units. The Series D Preferred Units have a liquidation preference of
$250 per unit. Distributions are payable on Series D Preferred Units at a rate
of $20.00 per annum per unit.
The Class A Common Units are owned by the Company and by certain limited
partners of the Operating Partnership. The Class A Common Units owned by the
Company are classified as general partners' capital and limited partners'
capital. The Class B Common Units are owned by certain limited partners (not
the Company) and only differ from the Class A Common Units in that they are not
eligible for allocation of income and distributions. The Class B Common Units
will convert to Class A Common Units in 25% annual installments commencing one
year from the date of issuance. Prior to such conversion, such Class B Common
Units will not be redeemable for cash or shares of the Company's common stock,
$.01 par value (the "Common Stock").
Generally one year after issuance, the Operating Partnership is obligated
to redeem each of the Class A Common Units not owned by the Company (the
"Redeemable Operating Partnership Units") at the request of the holder thereof
for cash, provided that the Company at its option may elect to acquire such
unit for one share of Common Stock or the cash value thereof. The Company's
Class A Common Units are not redeemable for cash. The Redeemable Operating
Partnership Units are classified outside of the permanent partners' capital in
the accompanying balance sheet at their fair market value (equal to the fair
market value of a share of Common Stock) at the balance sheet date.
The extraordinary loss represents the write-off of loan origination fees
and prepayment penalties paid on the early extinguishment of debt.
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings Per Share," which is effective for financial
statements for periods ending after December 15, 1997. FASB Statement No. 128
requires the restatment of prior period earnings per Common Unit and requires
the disclosure of additional supplemental information detailing the calculation
of earnings per Common Unit.
8
<PAGE>
FASB Statement No. 128 replaced the calculation of primary and fully
diluted earnings per Common Unit with basic and diluted earnings per Common
Unit. Unlike primary earnings per Common Unit, basic earnings per Common Unit
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per Common Unit is very similar to the previously reported
fully diluted earnings per Common Unit. It is computed using the weighted
average number of Common Units and the dilutive effect of options, warrants and
convertible securities outstanding, using the "treasury stock" method. Earnings
per Common Unit data are required for all periods for which an income statement
or summary of earnings is presented, including summaries outside the basic
financial statements. All earnings per Common Unit amounts for all periods
presented have, where appropriate, been restated to conform to the FASB
Statement No. 128 requirements.
In 1997, the FASB issued Statements No. 130, "Reporting Comprehensive
Income" ("SFAS 130") and No. 131, "Disclosures About Segments of an Enterprise
and Related Information" ("SFAS 131"), which are both effective for fiscal
years beginning after December 15, 1997. As of January 1, 1998, the Operating
Partnership adopted SFAS 130 which established new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this statement had no impact on the Operating Partnership's net income or
partners' capital. SFAS 131, which addresses reporting segment information, is
not required for interim reporting in the first year of application. The
Operating Partnership does not believe the adoption of SFAS 130 and 131 will
have a material impact on its financial statements.
Emerging Issues Task Forces ("EITF") Issue No. 97-11, Accounting for
Internal Cost Relating to Real Estate Property Acquisitions, requires internal
acquisition costs related to the purchase of an operating property to be
expensed as incurred. The Operating Partnership's financial statements for the
nine months ended September 30, 1998 reflect the change, effective March 19,
1998, as required by the EITF, in accounting for acquisition costs. The
Operating Partnership believes the effect of this change on future periods will
be immaterial.
The "Year 2000" issue is a general term used to describe the various
problems that may result from the improper processing of dates and calculations
involving years by many computers throughout the world as the Year 2000 is
approached and reached. The Operating Partnership has reviewed the impact of
Year 2000 issues and does not expect Year 2000 issues to be material to its
business, operations, or financial condition. The Year 2000 issue is discussed
more fully in "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The accompanying financial information has not been audited, but in the
opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the financial position, results
of operations and cash flows of the Operating Partnership have been made. For
further information, refer to the financial statements and notes thereto
included in the Operating Partnership's 1997 Annual Report on Form 10-K.
2. ACQUISITIONS
On July 13, 1998, the Company completed its merger (the "J.C. Nichols
Transaction") with J.C. Nichols Company, a Missouri real estate operating
company ("J.C. Nichols"). As a result of the J.C. Nichols Transaction the
Operating Partnership acquired ownership of or an ownership interest in 79
office, industrial and retail properties and 18 multifamily communities in the
Kansas City and Des Moines, Iowa metropolitan areas. The $544 million purchase
price consisted of the issuance of approximately $180 million in equity, or 5.63
million shares of the Company's Common Stock, the assumption of approximately
$229 million of debt, approximately $15 million in transaction costs and a cash
payment of approximately $120 million, net of cash acquired of approximately $59
million.
3. DEBT AND EQUITY TRANSACTIONS
On January 27, 1998, the Company sold 2,000,000 shares of Common Stock in
an underwritten public offering for net proceeds of approximately $68.2
million. The net proceeds of the offering were contributed to the Operating
Partnership in exchange for Common Units.
On February 2, 1998, the Operating Partnership sold $125 million of 6.835%
MOPPRSSM due February 1, 2013 and $100 million of 7 1/8% notes due February 1,
2008 in an underwritten public offering for net proceeds of approximately
$226.3 million.
9
<PAGE>
On February 18, 1998, the Company sold an aggregate of 1,553,604 shares of
Common Stock in two underwritten public offerings for net proceeds of
approximately $51.2 million. The net proceeds of the offerings were contributed
to the Operating Partnership in exchange for Common Units.
On March 30, 1998, the Company sold 428,572 shares of Common Stock in an
underwritten public offering for net proceeds of approximately $14.2 million.
The net proceeds of the offering were contributed to the Operating Partnership
in exchange for Common Units.
On April 20, 1998, the Operating Partnership sold $200 million of 7 1/2%
notes due April 15, 2018 in an underwritten public offering for net proceeds of
approximately $197.4 million.
On April 21, 1998, the Company sold 441,176 shares of Common Stock in an
underwritten public offering for net proceeds of approximately $14.2 million.
The net proceeds of the offering were contributed to the Operating Partnership
in exchange for Common Units.
On April 23, 1998, the Company sold 4,000,000 Depositary Shares (the
"Depositary Shares"), each representing 1/10 of a share of the Company's 8%
Series D Cumulative Redeemable Preferred Shares, par value $.01 per share (the
"Series D Preferred Shares"), in an underwritten public offering for net
proceeds of approximately $96.8 million. The net proceeds of the offering of
the Series D Preferred Shares were contributed to the Operating Partnership in
exchange for Series D Preferred Units, the economic terms of which are
substantially identical to the Series D Preferred Shares.
On April 29, 1998, the Company sold 1,080,443 shares of Common Stock in an
underwritten public offering for net proceeds of approximately $34.6 million.
The net proceeds of the offering were contributed to the Operating Partnership
in exchange for Common Units.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with all of the
financial statements appearing elsewhere in the report. The following
discussion is based primarily on the consolidated financial statements of the
Operating Partnership.
RESULTS OF OPERATIONS
On July 13, 1998, the Company completed its previously reported merger
(the "J.C. Nichols Transaction") with J.C. Nichols Company, a Missouri real
estate operating company ("J.C. Nichols"). As a result of the J.C. Nichols
Transaction, the Operating Partnership acquired ownership of or an ownership
interest in 79 office, industrial and retail properties encompassing
approximately 5.8 million rentable square feet and 18 multifamily communities
with 2,325 apartment units.
THREE MONTHS ENDED SEPTEMBER 30, 1998
Revenues from rental operations increased $76.4 million, or 124%, from
$61.8 million for the three months ended September 30, 1997 to $138.2 million
for the comparable period in 1998. The increase is primarily a result of the
acquisition of 22.0 million square feet of office, industrial and retail
properties and 2,325 apartment units and the completion of 1.5 million square
feet of development activity during the last three months of 1997 and the first
nine months of 1998. The Operating Partnership's portfolio increased from 21.9
million square feet at September 30, 1997 to 45.4 million square feet at
September 30, 1998. Same property revenues, which are the revenues of the 360
in-service properties owned on July 1, 1997, increased 4% for the three months
ended September 30, 1998, compared to the same three months of 1997.
During the three months ended September 30, 1998, 365 leases representing
1.9 million square feet of office, industrial and retail space commenced at an
average rate per square foot which was 6.4% higher than the average rate per
square foot on the expired leases.
Interest and other income increased $2.1 million, or 140%, from $1.5
million for the three months ended September 30, 1997 to $3.6 million for the
comparable period in 1998. The increase was due to an increase in cash
available for investment in 1998. The Operating Partnership generated
additional income from management fees, development fees and leasing
commissions in the three months ended September 30, 1998. In addition, the
10
<PAGE>
Operating Partnership generated $270,000 in auxiliary income (vending and
parking) as a result of the acquisition of multifamily communities in the J.C.
Nichols Transaction.
Rental operating expenses increased $25.5 million, or 147%, from $17.4
million for the three months ended September 30, 1997 to $42.9 million for the
comparable period in 1998. The increase is a result of the addition of 23.5
million square feet of office, industrial and retail space and 2,325 apartment
units through a combination of acquisitions and developments during the last
three months of 1997 and the first nine months of 1998. Rental operating
expenses as a percentage of related revenues increased from 28.2% for the three
months ended September 30, 1997 to 31.0% for the comparable period in 1998.
This increase is a result of an increase in the percentage of office properties
in the portfolio, which have fewer triple net lease pass throughs.
Depreciation and amortization for the three months ended September 30,
1998 and 1997 was $24.4 million and $11.1 million, respectively. The increase
of $13.3 million, or 120%, is due to a 103% increase in depreciable assets over
the prior year. Interest expense increased $16.9 million, or 152%, from $11.1
million for the three months ended September 30, 1997 to $28.0 million for the
comparable period in 1998. The increase is attributable to the increase in the
average outstanding debt for the quarter. Interest expense for the three months
ended September 30, 1998 and 1997 included $683,000 and $567,000, respectively,
of amortization of non-cash deferred financing costs and the costs related to
the Operating Partnership's interest rate protection agreements. General and
administrative expenses increased from 3.9% of rental revenue for the three
months ended September 30, 1997 to 4.3% for the comparable period in 1998.
Net income before extraordinary item equaled $40.5 million and $21.3
million for the three months ended September 30, 1998 and 1997, respectively.
The Company recorded $8.1 million and $2.9 million in preferred unit dividends
for the three months ended September 30, 1998 and 1997, respectively (see " --
Liquidity and Capital Resources" below).
NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenue from rental operations increased $174.4 million, or 98%, from
$177.2 million for the nine months of 1997 to $351.6 million for the nine
months of 1998. The increase is a result of the Operating Partnership's
acquisition and development activity in 1997 and 1998. In total, 296 office,
industrial and retail properties encompassing 23.5 million square feet and
2,325 apartment units were added in the last three months of 1997 and the first
nine months of 1998. Same property revenues, which are the revenues of the 291
in-service properties (encompassing 17.1 million square feet) owned on January
1, 1997, increased 5% for the nine months ended September 30, 1998, compared to
the same nine months of 1997.
During the nine months ended September 30, 1998, 963 leases representing
4.5 million square feet of office and industrial space commenced at an average
rate per square foot which was 6.9% higher than the average rate per square
foot on the expired leases.
Interest and other income increased $3.3 million from $4.7 million in 1997
to $8.0 million in 1998. The increase is primarily related to an increase in
interest income as the Operating Partnership maintained a higher cash position.
The Operating Partnership also generated additional management fees,
development fees and leasing commissions in 1998. The Operating Partnership
generated $270,000 in auxiliary income (vending and parking) as a result of
acquiring multifamily communities in the J.C. Nichols Transaction.
Rental operating expenses increased $59.5 million, or 121%, from $49.0
million in 1997 to $108.5 million in 1998. Rental expenses as a percentage of
related rental revenues increased from 27.7% in 1997 to 30.9% in 1998. The
increase is a result of an increase in the percentage of office properties in
the portfolio, which have fewer triple net lease pass throughs.
Depreciation and amortization for the nine months ended September 30,
1998, and 1997 was $61.7 million and $30.9 million, respectively. The increase
of $30.8 million, or 100%, is due to a 107% average increase in depreciable
assets. Interest expense increased $28.8 million, or 83%, from $34.8 million in
1997 to $63.6 million in 1998. The increase is attributable to an average
increase in outstanding debt related to the Operating Partnership's acquisition
activities. Interest expense for the nine months ended September 30, 1998 and
1997 included $1.9 million and $1.7 million, respectively, of amortization of
non-cash deferred financing costs and of the costs related to the Operating
Partnership's interest rate protection agreements. General and administrative
expenses increased from 3.8% of total rental revenue in 1997 to 4.0% in 1998.
11
<PAGE>
Net income before extraordinary item equaled $111.6 million and $60.6
million for the nine-month periods ended September 30, 1998, and 1997,
respectively. The Operating Partnership incurred an extraordinary loss in the
first quarter of 1997 of $4.0 million related to the early extinguishment of
debt assumed in the acquisition of the Anderson Properties and Century Center
portfolios. The Operating Partnership also recorded $21.9 million and $7.0
million in preferred unit dividends for the nine months ended September 30,
1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
STATEMENT OF CASH FLOWS
For the nine months ended September 30, 1998, cash provided by operating
activities increased by $95.1 million, or 101%, to $189.3 million, as compared
to $94.2 million for the same period in 1997. The increase is primarily due to
the increase in net income resulting from the Operating Partnership's property
acquisitions in 1997 and 1998. Cash used for investing activities increased by
$654.7 million, to $823.7 million for the first nine months of 1998, as
compared to $169.0 million for the same period in 1997. The increase is
attributable to the Operating Partnership's acquisition activity in the first
nine months of 1998. Cash provided by financing activities increased by $408.5
to $646.7 million for the first nine months of 1997, as compared to $238.2
million for the same period in 1997. During the first six months of 1998, cash
provided by financing activities consisted primarily of $824.0 million in
aggregate net proceeds from the sale of common and preferred stock and the sale
of MandatOry Par Put Remarketed SecuritiesSM ("MOPPRSSM") and unsecured notes.
The cash provided by financing activity was offset by net payments of $131.0
million to reduce existing indebtedness. Additionally, payments of
distributions increased by $42.0 million to $99.5 million for the first nine
months of 1998, as compared with $57.5 million for the same period in 1997. The
increase is due to the greater number of Common Units outstanding and a 6%
increase in the distribution rate. Payment of preferred unit dividends
increased by $15.9 million to $21.9 million for the first nine months of 1998,
as compared to $6.0 million for the same period in 1997.
CAPITALIZATION
The Operating Partnership's total indebtedness at September 30, 1998
totaled $1.8 billion and was comprised of $622 million of secured indebtedness
with a weighted average interest rate of 7.7% and 1.2 billion of unsecured
indebtedness with a weighted average interest rate of 6.9%. Except as stated
below, all of the mortgage and notes payable outstanding at September 30, 1998
were either fixed rate obligations or variable rate obligations covered by
interest rate protection agreements. A portion of the Operating Partnership's
$600 million unsecured revolving loan (see below) and approximately $69 million
in floating rate notes payable assumed upon consummation of the J.C. Nichols
Transaction were not covered by interest rate protection agreements on such
date.
On July 3, 1998, the Operating Partnership obtained a new $600 million
revolving line of credit (the "Revolving Loan") from a group of 14 lender
banks. The Revolving Loan matures in July 2001 and replaced the Operating
Partnership's previously existing revolving loans aggregating $430 million. The
Revolving Loan carries an interest rate based upon the Operating Partnership's
senior unsecured credit rating. At the Operating Partnership's current BBB/Baa2
senior unsecured rating, interest accrues on borrowings at an average interest
rate of LIBOR plus 80 basis points and will adjust based on the Operating
Partnership senior unsecured credit rating within a range of LIBOR plus 65
basis points to LIBOR plus 150 basis points. The Revolving Loan requires
monthly payments of interest only with the balance of all principal and accrued
but unpaid interest due July 3, 2001. The Revolving Loan also includes a $300
million competitive bid sub-facility. The obligations of the Operating
Partnership under the Revolving Loan are guaranteed by the Company, its sole
general partner, and certain subsidiaries of the Company and the Operating
Partnership.
To protect the Operating Partnership from increases in interest expense
due to changes in the variable rate, the Operating Partnership (i) purchased an
interest rate collar limiting its exposure to an increase in interest rates to
7.05% with respect to $80 million of its $600 million unsecured Revolving Loan
excluding the effect of changes in the Operating Partnership's credit risk,
under which the Operating Partnership had $399 million outstanding at September
30, 1998, (ii) purchased a one year interest rate swap limiting its exposure to
an increase in interest rates to 5.77% with respect to an additional $100
million of its Revolving Loan excluding the effect
12
<PAGE>
of changes in the Operating Partnership's credit risk, and (iii) entered into
interest rate swaps that limit its exposure to an increase in interest rates to
6.95% in connection with $21 million of variable rate mortgages. The interest
rate on all such variable rate debt is adjusted at one and three month month
intervals, subject to the Operating Partnership's interest rate protection
program. No payments were received from counterparties under the interest rate
protection agreements for the nine months ended September 30, 1998 and 1997.
The Operating Partnership is exposed to certain losses in the event of
non-performance by the counterparties under the cap and swap arrangements. The
counterparties are major financial institutions and are expected to perform
fully under the agreements. However, if such counterparties were to default on
their obligations under the arrangements, the Operating Partnership could be
required to pay the full rates under the Revolving Loan and the variable rate
mortgages, even if such rates were in excess of the rate in the cap and swap
agreements. In addition, the Operating Partnership may incur other variable
rate indebtedness in the future. Increases in interest rates on its
indebtedness could increase the Operating Partnership's interest expense and
could adversely affect the Operating Partnership's cash flow and its ability to
pay expected distributions to unitholders.
In anticipation of future debt offerings, the Operating Partnership has
entered into four forward treasury lock agreements as described below:
<TABLE>
<CAPTION>
NOTIONAL AMOUNTS
(IN MILLIONS) FIXED RATE (1) TERMINATION DATE
- ----------------- ---------------- -----------------
<S> <C> <C>
$ 50 5.7% 1/99
$ 50 5.6% 3/99
$ 100 5.7% 7/99
$ 100 5.7% 10/99
</TABLE>
- ----------
(1) Rate is a combination of the treasury rate plus forward premium.
CURRENT AND FUTURE CASH NEEDS
Historically, rental revenue has been the principal source of funds to pay
operating expenses, debt service, unitholder distributions and capital
expenditures, excluding non-recurring capital expenditures. In addition,
construction management, maintenance, leasing and management fees have provided
sources of cash flow. Except for an $8 million renovation of the common areas
of a 639,000-square foot property acquired from Assocated Capital Properties,
Inc., the Operating Partnership presently has no plans for major capital
improvements to the existing properties, other than normal recurring
non-revenue enhancing expenditures. The Operating Partnership expects to meet
its short-term liquidity requirements generally through its working capital and
net cash provided by operating activities along with the Revolving Loan.
The Operating Partnership's 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. The Operating Partnership had
approximately $399 million outstanding on its Revolving Loan as of September 30,
1998. The Operating Partnership has $124 million available on its $600 million
Revolving Loan as the Company and an unconsolidated affiliate have $60 million
and $17 million, respectively, of additional borrowings outstanding on the
Revolving Loan. As of September 30, 1998, the Operating Partnership had under
development 52 properties, which will encompass approximately 6.1 million
rentable square feet. The budgeted cost of such development activity is $691
million, $201 million of which had been funded as of September 30, 1998. The
Operating Partnership remains committed to maintaining a flexible and
conservative capital structure. Accordingly, the Operating Partnership expects
to meet certain of its long-term liquidity requirements, including funding its
development activity, through a combination of: (i) additional borrowings under
the Revolving Loan; (ii) the issuance by the Operating Partnership of additional
unsecured debt securities; (iii) the issuance of additional equity securities by
the Company and the Operating Partnership; (iv) the selective disposition of
and/or non-core assets; and (v) the sale or contribution of certain of the
Operating Partnership's wholly owned properties to strategic joint ventures to
be formed with selected institutional investors interested in investing with the
Operating Partnership, which will have the net effect of generating additional
capital through such sales or contributions. For a discussion of certain such
arrangements, see "Recent Developments." The Operating Partnership expects to
use such sources to meet its long-term liquidity requirements either through
direct payments or repayment of borrowings under the Revolving Loan. The
Operating Partnership does not intend to reserve funds to retire existing
secured or unsecured indebtedness upon maturity. Instead,
13
<PAGE>
the Operating Partnership will seek to refinance such debt at maturity or
retire such debt through the issuance of equity or debt securities.
On August 28, 1997, the Company entered into a purchase agreement with UBS
AG, London Branch ("UB-LB") involving the sale of 1.8 million shares of Common
Stock and a related Forward Contract providing for certain purchase price
adjustments (the "Forward Contract"). The Forward Contract generally provides
that if the Market Price (as defined below) of a share of Common Stock on the
maturity date is less than a certain amount (the "Forward Price"), the Company
must pay UB-LB the difference times 1.8 million. (Similarly, if the Market
Price of a share of Common Stock is above the Forward Price, UB-LB must pay us
the difference in shares of Common Stock.) If the Company chooses not to or
cannot settle in freely tradable shares of Common Stock, the Company must
repurchase the 1.8 million shares at the Forward Price in cash. The Forward
Price is approximately $32.16 and will be adjusted by LIBOR plus 75 basis
points, minus any dividends received on the shares. (As of August 28, 1998, the
Forward Price had increased by $.04 since August 28, 1997.)
In addition, the Forward Contract provides for quarterly payments of
collateral equal to 1.8 million times 110% of the amount by which the market
price of a share of Common Stock is below the Forward Price. The collateral may
be in the form of cash or freely tradeable shares of Common Stock. As a result
of the difference between the closing price of a share of Common Stock on
August 28, 1998 and the Forward Price, the Company gave UB-LB cash collateral
of $12.8 million on September 12, 1998. UB-LB will return the cash with
interest for freely tradeable shares of Common Stock of equal value.
The maturity date of the Forward Contract is February 28, 1999; however,
if the closing price of the Common Stock falls below $19.28, UB-LB has the
right to force a complete settlement under the Forward Contract. UB-LB also has
the right to force a complete settlement under the Forward Contract if, among
other things, the Company (i) is in default with respect to certain financial
covenants under the Forward Contract, (ii) is in default under the Revolving
Loan or any other unsecured lending agreement or (iii) fails to post sufficient
cash collateral.
Settlement of the Forward Contract in cash would reduce the Operating
Partnership's liquidity. Settlement in cash would involve the repurchase of 1.8
million shares at a price per share equal to the Forward Price. Assuming the
Forward Price remains at $32.16, the repurchase price would total approximately
$57.9 million. Having already paid $12.8 million as collateral, settlement in
cash would require the Company to pay approximately $45.1 million in additional
funds.
The Operating Partnership anticipates that its available cash and cash
equivalents and cash flows from operating activities, together with cash
available from borrowings and other sources, will be adequate to meet the
capital and liquidity needs of the Operating Partnership in both the short and
long-term. However, if these sources of funds are insufficient or unavailable,
the Operating Partnership's ability to make distributions to holders of Common
Units and satisfy other cash requirements may be adversely affected.
RECENT DEVELOPMENTS
In October 1998, the Operating Partnership signed a letter of intent to
form a joint venture with an institutional investor representing certain
foreign funds ("Investor"), pursuant to which the Operating Partnership would
sell or contribute certain office properties valued at approximately $150
million to a newly created limited partnership (the "Joint Venture"). The
Investor would contribute approximately $55 million for a 72% interest in the
Joint Venture, and the Joint Venture would borrow approximately $75 million
from third-party lenders. The Operating Partnership would retain the remaining
28% interest in the Joint Venture, receive cash proceeds of approximately $129
million and be the sole and exclusive manager and leasing agent of the Joint
Venture's properties, for which it would receive customary management fees and
leasing commissions. The Operating Partnership intends to use the cash proceeds
received in the transaction to fund existing development activity either
through direct payments or repayment of borrowings under the Revolving Loan.
Although both parties intend to sign definitive agreements related to the
transaction and to close the transaction by March 31, 1999, no assurance can be
given that all or part of the transaction will be consummated.
In November 1998, the Operating Partnership signed a letter of intent to
sell certain non-core properties in Florida for gross proceeds of approximately
$130 million. Non-core properties generally include single buildings that do not
fit the Operating Partnership's long-term strategy. Although the Operating
Partnership believes that the disposition transaction in Florida will close
14
<PAGE>
by January 31, 1999, no assurance can be given that all or part of the
transaction will be consummated. In addition, the Operating Partnership has
under contract to sell or has sold certain other non-core properties for gross
proceeds of $20 million.
See " -- Disclosure Regarding Forward-Looking Statements" contained below.
YEAR 2000
BACKGROUND
The Year 2000 compliance issue refers to the inability of computer systems
and computer software to correctly process any date after 1999. The date change
to the new millennium is a problem because computer hardware and software were
designed to use only two digits to represent a year. As a result, some systems
may interpret 1/1/00 to be the year 1900. In addition, some systems may not
recognize that the year 2000 is a leap year. Both problems could result in
system failure or miscalculations causing disruptions of operations.
APPROACH AND STATUS
The Operating Partnership's Year 2000 compliance efforts are divided into
two areas -- the "operations level" and the "property level." The operations
level includes those information technology ("IT") systems used by the
Operating Partnership in its corporate and division offices to perform its real
estate functions. The property level includes the IT and non-IT systems at the
Operating Partnership's individual properties.
The Operating Partnership's Information Technology Department is
overseeing the Operating Partnership's operations level compliance program. At
the operations level, all of the Operating Partnership's computer systems are
off-the-shelf packages that have not been modified. The corporate accounting
and property management package, which is widely used in the industry, released
a Year 2000 compliant version in the third quarter of 1998. The Operating
Partnership is currently testing the revision and expects the new version to be
installed, tested and operational by the end of 1998. As part of a current
revamping and standardization of our technology infrastructure, all computer
hardware and software that was not Year 2000 compliant has been upgraded. The
majority of the system tests have been completed and the Operating Partnership
expects to complete the system tests in the first quarter of 1999.
The Chief Operating Officer is overseeing the Operating Partnership's
property level compliance program. The Operating Partnership is currently
conducting an inventory of all of its properties' known IT and non-IT systems
(including systems with embedded technology, such as security systems, HVAC,
elevator, and fire and safety systems). This inventory is 50% complete and is
expected to be completed by the end of the first quarter of 1999. As part of
the inventory, the Operating Partnership is also instructing the appropriate
vendors and manufacturers to certify that their products are Year 2000
compliant. As the final phase of the property level compliance program, the
Operating Partnership, will conduct equipment trial runs, where feasible. This
testing is projected to be completed by the end of 1998.
COSTS
The Operating Partnership expects that the costs directly associated with
the Year 2000 efforts will not be material. With the exception of the Operating
Partnership's accounting software and property management system, operational
Year 2000 issues are being handled as a part of an existing and unaccelerated
infrastructure upgrade and standardization project. The cost of the upgrades
and infrastructure standardization was under $600,000. The property management
and accounting system upgrade costs were already included in our annual
software maintenance agreement with the vendor. The costs associated with
upgrading our non-compliant property level systems are not expected to be
material.
RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE
The Operating Partnership is exposed to the potential risk of
non-compliance by vendors and service providers. Given the availability of
multiple vendors and service providers, management believes that there will be
no material effect on the Operating Partnership's operations due to the failure
or interruption of service by a vendor or service provider.
15
<PAGE>
In addition, the Operating Partnership is exposed to the risk that its
tenants could be impacted by the Year 2000 issue such that they would be unable
to pay their rent to the Operating Partnership on time. Management does not
believe that enough of the Operating Partnership's tenants are going to be
affected in a sufficient manner to have a material impact on the Operating
Partnership. Also, the Operating Partnership's leases with its tenants protect
the Operating Partnership in the event of default and require the payment of
delinquent fees on late rental payments. However, the effects of non-compliance
by the Operating Partnership's tenants cannot be ascertained at this time.
Given the Operating Partnership's efforts on its operations level to date,
the Operating Partnership believes that it will be Year 2000 compliant on the
operations level by December 31, 1999. The Operating Partnership does not
expect any adverse effects on its operational systems that would affect the
Operating Partnership's ability to meet its financial and reporting
requirements. In addition, based on the assessment of the Operating
Partnership's property level systems, the Operating Partnership does not
believe that a material number of property level systems will be non-compliant.
The Operating Partnership will create contingency plans during the fourth
quarter of 1999 for such systems that are then-expected to be non-compliant.
FUNDS FROM OPERATIONS AND CASH AVAILABLE FOR DISTRIBUTIONS
The Operating Partnership considers Funds from Operations ("FFO") to be a
useful financial performance measure of its operating performance because,
together with net income and cash flows, FFO provides investors with an
additional basis to evaluate its ability to incur and service debt and to fund
acquisitions and other capital expenditures. FFO does not represent net income
or cash flows from operations as defined by GAAP, and FFO should not be
considered as an alternative to net income as an indicator of the Operating
Partnership's operating performance or as an alternative to cash flows as a
measure of liquidity. FFO does not measure whether cash flow is sufficient to
fund all of the Operating Partnership's cash needs including principal
amortization, capital improvements and distributions to stockholders. FFO does
not represent cash flows from operating, investing or financing activities as
defined by GAAP. Further, FFO as disclosed by other REITs may not be comparable
to the Operating Partnership's calculation of FFO, as described below.
FFO is defined as net income (computed in accordance with generally
accepted accounting principles) excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation of real estate assets,
and after adjustments for unconsolidated partnerships and joint ventures. In
March 1995, the National Association of Real Estate Investment Trusts
("NAREIT") issued a clarification of the definition of FFO. The clarification
provides that amortization of deferred financing costs and depreciation of
non-real estate assets are no longer to be added back to net income in arriving
at FFO. Cash available for distribution is defined as funds from operations
reduced by non-revenue enhancing capital expenditures for building improvements
and tenant improvements and lease commissions related to second generation
space.
16
<PAGE>
Funds from operations and cash available for distribution for the three
and nine month periods ended September 30, 1998 and 1997 are summarized in the
following table (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
FUNDS FROM OPERATIONS:
Income before extraordinary item ............................. $ 40,548 $ 21,269 $ 111,611 $ 60,576
Add (deduct):
Dividends to preferred unitholders........................... (8,145) (2,870) (21,946) (6,972)
Cost of unsucessful transactions ............................ 146 -- 146 --
Depreciation and amortization ............................... 24,359 11,083 61,740 30,915
Depreciation unconsolidated Subsidiary ...................... 311 -- 311 --
-------- -------- --------- --------
FUNDS FROM OPERATIONS BEFORE MINORITY INTEREST ............ 57,219 29,482 151,862 84,519
CASH AVAILABLE FOR DISTRIBUTION:
Add (deduct):
Rental income from straight-line rents ...................... (3,200) (1,347) (9,292) (3,822)
Amortization of deferred financing costs .................... 683 567 1,915 1,689
Non-incremental revenue generating capital expenditures (1):
Building improvements paid ................................ (1,986) (933) (4,683) (2,941)
Second generation tenant improvements paid ................ (3,988) (2,063) (11,292) (5,510)
Second generation lease commissions paid .................. (5,530) (1,201) (9,041) (3,535)
-------- -------- --------- --------
CASH AVAILABLE FOR DISTRIBUTION .......................... $ 43,198 $ 24,505 $ 119,469 $ 70,400
======== ======== ========= ========
Weighted average Common Units outstanding -- Basic ........... 68,221 43,052 63,352 42,188
======== ======== ========= ========
Weighted average Common Units outstanding -- Diluted ......... 68,391 43,434 63,673 42,659
======== ======== ========= ========
DIVIDEND PAYOUT RATIO -- DILUTED:
Funds from operations ....................................... 64.5% 75.1% 65.4% 74.2%
======== ======== ========= ========
Cash available for distribution ............................. 85.5% 90.4% 83.1% 89.1%
======== ======== ========= ========
</TABLE>
- ----------
(1) Amounts represent cash expenditures.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements are identified by
words such as "expect," "anticipate," "should" and words of similar import.
Forward-looking statements are inherently subject to risks and uncertainties,
many of which cannot be predicted with accuracy and some of which might not
even be anticipated. Future events and actual results, financial and otherwise,
may differ materially from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in the Operating Partnership's Annual Report on
Form 10-K for the year ended December 31, 1997.
17
<PAGE>
PROPERTY INFORMATION
The following table sets forth certain information with respect to the
Operating Partnership's properties as of September 30, 1998 and 1997:
<TABLE>
<CAPTION>
RENTABLE NUMBER OF PERCENT LEASED/
SEPTEMBER 30, 1998 SQUARE FEET PROPERTIES PRE-LEASED
- ---------------------------- --------------- ------------ ----------------
<S> <C> <C> <C>
IN-SERVICE:
Office .................... 30,856,000 453 94%
Industrial ................ 12,227,000 194 92%
Retail .................... 2,337,000 18 96%
---------- --- --
Total ................... 45,420,000 665 93%
========== === ==
DEVELOPMENT:
COMPLETED -- NOT STABILIZED
Office .................... 426,000 5 63%
Industrial ................ 241,000 3 28%
Retail .................... -- -- --
---------- --- --
Total ................... 667,000 8 50%
========== === ==
IN PROCESS
Office .................... 4,637,000 37 64%
Industrial ................ 629,000 5 55%
Retail .................... 200,000 2 36%
---------- --- --
Total ................... 5,466,000 44 62%
========== === ==
TOTAL:
Office .................... 35,919,000 495
Industrial ................ 13,097,000 202
Retail .................... 2,537,000 20
---------- ---
Total ................... 51,553,000 717
========== ===
MULTI-FAMILY 9/30/98
----------
Number of Units ........... 2,325
Occupancy % ............... 96%
SEPTEMBER 30, 1997
- -----------------------------
IN-SERVICE:
Office .................... 15,022,000 230 94%
Industrial ................ 6,882,000 139 92%
Retail .................... -- -- --
---------- --- --
Total ................... 21,904,000 369 94%
========== === ==
DEVELOPMENT:
COMPLETED -- NOT STABILIZED
Office .................... N/A N/A N/A
Industrial ................ N/A N/A N/A
Retail .................... N/A N/A N/A
---------- --- ----
Total ................... N/A N/A N/A
========== === ====
IN PROCESS
Office .................... 2,259,000 24 39%
Industrial ................ 585,000 7 7%
Retail .................... -- -- --
---------- --- ----
Total ................... 2,844,000 31 33%
========== === ====
TOTAL:
Office .................... 17,281,000 254
Industrial ................ 7,467,000 146
Retail .................... -- --
---------- ---
Total ................... 24,748,000 400
========== ===
</TABLE>
18
<PAGE>
The following table sets forth certain information with respect to the
Operating Partnership's properties under development as of September 30, 1998
(dollars in thousands):
<TABLE>
<CAPTION>
ESTIMATED
SQUARE BUDGETED COST AT PRE-LEASING ESTIMATED STABILIZATION
NAME LOCATION FOOTAGE COST 9/30/98 PERCENTAGE(1) COMPLETION DATE
- --------------------------------- ---------------- ------------ ---------- ----------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
IN-PROCESS
OFFICE:
10 Glenlakes Atlanta 254,000 $ 35,100 $ 17,802 59% 1Q 99 4Q 99
Highwoods Center at Tradeport Atlanta 45,000 3,717 765 100% 1Q 99 2Q 99
Automatic Data Processing Baltimore 110,000 12,400 10,816 100% 4Q 98 4Q 98
Highwoods I Baltimore 125,000 15,300 3,206 0% 2Q 99 4Q 99
Parkway 11 Charlotte 22,000 1,800 872 41% 1Q 99 3Q 99
Parkway 12 Charlotte 32,000 2,600 607 0% 1Q 99 3Q 99
Parkway Plaza 14 Charlotte 90,000 7,690 898 53% 2Q 99 4Q 99
Lakefront Plaza I Hampton Roads 76,000 7,477 1,006 15% 2Q 99 1Q 00
Valencia Place Kansas City 241,000 34,020 2,632 42% 1Q 00 2Q 00
Southwind Building C Memphis 74,000 7,700 3,743 100% 4Q 98 4Q 98
Southwind Building D Memphis 64,000 6,800 1,037 20% 2Q 99 4Q 99
Caterpillar Financial Center Nashville 313,000 54,000 9,152 74% 1Q 00 2Q 00
Lakeview Ridge III Nashville 131,000 13,100 3,747 0% 2Q 99 3Q 99
Westwood South Nashville 125,000 13,530 3,354 53% 3Q 99 1Q 00
Maitland I (C N A) Orlando 180,000 24,400 11,332 100% 1Q 99 1Q 99
Capital Plaza Orlando 341,000 53,000 3,069 30% 1Q 00 4Q 01
Hard Rock Orlando 63,000 7,000 3,765 100% 4Q 98 4Q 98
Maitland III (C N A) Orlando 78,000 9,885 1,255 100% 2Q 99 2Q 99
Concourse Center One Piedmont Triad 86,000 8,400 1,503 25% 2Q 99 1Q 00
3737 Glenwood Ave. RTP 107,000 16,700 1,835 56% 3Q 99 1Q 00
Highwoods Centre RTP 76,000 8,300 6,149 91% 4Q 98 1Q 99
Overlook RTP 97,000 10,500 6,756 54% 4Q 98 2Q 99
Red Oak RTP 65,000 6,000 3,612 0% 4Q 98 2Q 99
Eastshore II Richmond 76,000 7,842 4,465 3% 4Q 98 3Q 99
Highwoods Common Richmond 49,000 4,840 703 0% 1Q 99 3Q 99
Stony Point II Richmond 133,000 13,881 4,493 32% 2Q 99 4Q 99
Sportsline USA South Florida 80,000 10,000 -- 100% 3Q 99 3Q 00
Highwoods Square South Florida 93,000 12,500 5,788 26% 4Q 98 4Q 99
380 Park Place Tampa 83,000 9,000 -- 100% 4Q 99 1Q 00
Intermedia Building 1 Tampa 200,000 27,040 -- 100% 1Q 00 1Q 00
Intermedia Building 2 Tampa 30,000 4,056 -- 100% 1Q 00 1Q 00
Intermedia Building 3 Tampa 170,000 22,984 -- 100% 1Q 00 1Q 00
Intermedia Building 4 Tampa 200,000 29,219 -- 100% 2Q 00 2Q 00
Intermedia Building 5 Tampa 200,000 29,219 -- 100% 3Q 01 3Q 01
Interstate Corporate Center (2) Tampa 309,000 15,600 13,435 90% 4Q 98 2Q 99
Sabal Pavillion Phase I Tampa 121,000 12,500 8,395 100% 4Q 98 4Q 98
Highwoods Centre Virginia Beach 98,000 9,925 4,718 36% 4Q 98 3Q 99
------- -------- -------- ---
Total or Weighted Average 4,637,000 $568,025 $140,910 64%
--------- -------- -------- ---
INDUSTRIAL:
HIW Distribution Center Richmond 166,000 $ 5,764 $ 1,927 33% 4Q 98 3Q 99
Chastain III Atlanta 54,000 2,098 1,471 75% 4Q 98 1Q 99
Newpoint III Atlanta 84,000 3,000 2,158 74% 4Q 98 2Q 99
Air Park South Warehouse II Piedmont Triad 136,000 4,200 2,361 0% 4Q 98 1Q 99
Air Park South Warehouse VI Piedmont Triad 189,000 8,000 2,093 100% 1Q 99 1Q 99
--------- -------- -------- ---
Total or Weighted Average 629,000 $ 23,062 $ 10,010 55%
--------- -------- -------- ---
RETAIL:
Seville Square (2) Kansas City 119,000 $ 32,100 9,377 60% 1Q 99 3Q 99
Valencia Place Kansas City 81,000 14,362 1,128 0% 4Q 99 2Q 00
--------- -------- -------- ---
Total or Weighted Average 200,000 $ 46,462 $ 10,505 36%
--------- -------- -------- ---
Total or Weighted Average 5,466,000 $637,549 $161,425 62%
========= ======== ======== ===
- ----------
(1) Includes the effect of letters of intent
(2) Redevelopment Project
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
ESTIMATED
SQUARE BUDGETED COST AT PRE-LEASING ESTIMATED STABILIZATION
NAME LOCATION FOOTAGE COST 9/30/98 PERCENTAGE(1) COMPLETION DATE
- ----------------------------- ------------ ------------ ---------- ----------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
COMPLETED -- NOT STABILIZED
OFFICE:
Ridgefield III Asheville 57,000 $ 5,500 $ 4,129 29% 3Q 98 3Q 99
Situs II RTP 59,000 6,300 4,614 48% 3Q 98 2Q 99
Patewood VI Greenville 107,000 11,400 9,938 90% 3Q 98 1Q 99
Cool Springs I Nashville 153,000 16,800 10,770 50% 3Q 98 1Q 99
Maitland II (C N A) Orlando 50,000 4,950 3,503 100% 3Q 98 1Q 99
------- -------- -------- ---
Total or Weighted Average 426,000 $ 44,950 $ 32,955 63%
------- -------- -------- ---
INDUSTRIAL:
Chastain II Atlanta 67,000 2,602 1,791 100% 3Q 98 4Q 98
Tradeport 1 Atlanta 87,000 3,100 2,448 0% 3Q 98 1Q 99
Tradeport 2 Atlanta 87,000 3,100 2,449 0% 3Q 98 2Q 99
------- -------- -------- ---
Total or Weighted Average 241,000 $ 8,802 $ 6,688 28%
------- -------- -------- ---
Total or Weighted Average 667,000 $ 53,752 $ 39,643 50%
------- -------- -------- ---
Grand Total 6,133,000 $691,301 $201,068 60%
========= ======== ======== ===
</TABLE>
- ----------
(1) Includes the effect of letters of intent
(2) Redevelopment Project
20
<PAGE>
<TABLE>
<CAPTION>
DEVELOPMENT ANALYSIS
SQUARE BUDGETED PRE-LEASING
DOLLARS IN THOUSANDS FOOTAGE COST PERCENTAGE(1)
- ---------------------------------------- ------------------ ---------------- ----------------
<S> <C> <C> <C>
SUMMARY BY ESTIMATED STABILIZATION DATE:
Fourth Quarter 1989 .................. 435,000 $ 42,202 100%
First Quarter 1999 ................... 1,032,000 83,248 68%
Second Quarter 1999 .................. 824,000 58,102 66%
Third Quarter 1999 ................... 750,000 83,471 25 %
Fourth Quarter 1999 .................. 759,000 91,271 37%
First Quarter 2000 ................... 877,000 109,187 73%
Second Quarter 2000 .................. 835,000 131,601 64%
Third Quarter 2000 ................... 80,000 10,000 100%
Third Quarter 2001 ................... 200,000 29,219 100%
Fourth Quarter 2001 .................. 341,000 53,000 30%
----------- -------- --------------
Total or Weighted Average ........... 6,133,000 $691,301 60%
=========== ======== ==============
SUMMARY BY MARKET:
Asheville ............................ 57,000 $ 5,500 29%
Atlanta .............................. 678,000 52,717 54%
Baltimore ............................ 235,000 27,700 47%
Charlotte ............................ 144,000 12,090 39%
Greenville ........................... 107,000 11,400 90%
Hampton Roads ........................ 76,000 7,477 15%
Kansas City .......................... 441,000 80,482 39%
Memphis .............................. 138,000 14,500 63%
Nashville ............................ 722,00 97,430 52%
Orlando .............................. 712,000 99,235 66%
Piedmont Triad ....................... 411,000 20,600 51%
Research Triangle .................... 404,000 47,800 52%
Richmond ............................. 424,000 32,327 23%
South Florida ........................ 173,000 22,500 60%
Tampa ................................ 1,313,000 149,618 98%
Virginia Beach ....................... 98,000 9,925 36%
----------- -------- --------------
Total ............................... 6,133,000 $691,301 60%
=========== ======== ==============
Build-to-Suit ....................... 1,394,000 $185,203 100%
Multi-Tenant ........................ 4,739,000 506,098 49%
----------- -------- --------------
6,133,000 $691,301 60%
=========== ======== ==============
AVERAGE RENTABLE AVERAGE AVERAGE
SQUARE FEET BUDGETED COST PRE-LEASING(1)
------------------ ---------------- --------------
PER PROPERTY TYPE:
Office ............................... 120,548 $ 14,595 64%
Industrial ........................... 108,750 3,983 48%
Retail ............................... 100,000 23,231 36%
----------- -------- --------------
117,942 $ 13,294 60%
=========== ======== ==============
</TABLE>
- ----------
(1) Includes the effect of letters of intent
21
<PAGE>
The following tables set forth certain information about the Operating
Partnership's leasing activities for the three months ended September 30,
June 30, and March 31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
OFFICE LEASING STATISTICS
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
9/30/98 6/30/98 3/31/98 12/31/97 WEIGHTED AVERAGE
--------------- -------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
NET EFFECTIVE RENTS RELATED TO
RE-LEASED SPACE:
Number of lease transactions
(signed leases) 207 285 242 158 223
Rentable square footage leased 1,645,913 1,099,805 966,990 772,149 1,121,214
Average per rentable square foot
over the lease term:
Base rent $ 16.18 $ 15.53 $ 15.54 $ 15.91 $ 15.79
Tenant improvements ( 0.71) ( 1.00) ( 0.70) ( 1.16) ( 0.89)
Leasing commissions ( 0.42) ( 0.27) ( 0.30) ( 0.32) ( 0.33)
Rent concessions 0.00 ( 0.03) ( 0.03) ( 0.02) ( 0.02)
----------- ---------- ---------- ---------- ----------
Effective rent 15.05 14.23 14.51 14.41 14.55
Expense stop(1) ( 4.45) ( 4.22) ( 4.35) ( 3.73) ( 4.19)
----------- ---------- ---------- ---------- ----------
Equivalent effective net rent $ 10.60 $ 10.01 $ 10.16 $ 10.68 $ 10.36
=========== ========== ========== ========== ==========
Average term in years 5 5 5 4 5
=========== ========== ========== ========== ==========
CAPITAL EXPENDITURES RELATED TO
RE-LEASED SPACE:
Tenant Improvements:
Total dollars committed under
signed leases $ 6,754,100 $5,849,409 $3,717,938 $3,784,078 $5,026,381
Rentable square feet 1,645,913 1,099,805 966,990 772,149 1,121,214
----------- ---------- ---------- ---------- ----------
Per rentable square foot $ 4.10 $ 5.32 $ 3.84 $ 4.90 $ 4.48
=========== ========== ========== ========== ==========
Leasing Commissions:
Total dollars committed under
signed leases $ 3,694,473 $1,356,002 $1,349,444 $1,041,790 $1,860,427
Rentable square feet 1,645,913 1,099,805 966,990 772,149 1,121,214
----------- ---------- ---------- ---------- ----------
Per rentable square foot $ 2.24 $ 1.23 $ 1.40 $ 1.35 $ 1.66
=========== ========== ========== ========== ==========
Total:
Total dollars committed under
signed leases $10,448,573 $7,205,411 $5,067,382 $4,825,868 $6,886,808
Rentable square feet 1,645,913 1,099,805 966,990 772,149 1,121,214
----------- ---------- ---------- ---------- ----------
Per rentable square foot $ 6.35 $ 6.55 $ 5.24 $ 6.25 $ 6.14
=========== ========== ========== ========== ==========
RENTAL RATE TRENDS:
Average final rate with expense
pass throughs $ 14.51 $ 13.91 $ 13.56 $ 13.23 $ 13.80
Average first year cash rental rate $ 15.43 $ 14.87 $ 14.65 $ 14.04 $ 14.75
----------- ---------- ---------- ---------- ----------
Percentage increase 6.34% 6.90% 8.04% 6.12% 6.85%
=========== ========== ========== ========== ==========
</TABLE>
- ----------
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintainance) for
which the Operating Partnership will not be reimbursed by the tenants.
22
<PAGE>
<TABLE>
<CAPTION>
INDUSTRIAL LEASING STATISTICS
THREE MONTHS ENDED
-----------------------------------------------------------------------------
9/30/98 6/30/98 3/31/97 12/31/97 WEIGHTED AVERAGE
------------ ------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C>
NET EFFECTIVE RENTS RELATED TO RE-LEASED
SPACE:
Number of lease transactions (signed leases) 56 41 66 56 55
Rentable square footage leased 314,549 194,014 308,787 464,733 320,521
Average per rentable square foot over the
lease term:
Base rent $ 6.59 $ 6.99 $ 6.35 $ 4.35 $ 6.07
Tenant improvements (0.23) (0.29) (0.38) (0.12) (0.26)
Leasing commissions (0.09) (0.19) (0.15) (0.08) (0.13)
Rent concessions $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
-------- -------- -------- -------- --------
Effective rent $ 6.27 $ 6.51 $ 5.82 $ 4.15 $ 5.69
Expense stop(1) (0.44) (0.52) (0.43) (0.30) (0.42)
-------- -------- -------- -------- --------
Equivalent effective net rent $ 5.83 $ 5.99 $ 5.39 $ 3.85 $ 5.27
======== ======== ======== ======== ========
Average term in years 4 3 3 3 3
======== ======== ======== ======== ========
CAPITAL EXPENDITURES RELATED TO
RE-LEASED SPACE:
TENANT IMPROVEMENTS:
Total dollars committed under signed
leases $248,359 $239,348 $533,334 $157,152 $294,548
Rentable square feet 314,549 194,014 308,787 464,733 320,521
-------- -------- -------- -------- --------
Per rentable square foot $ 0.79 $ 1.23 $ 1.73 $ 0.34 $ 0.92
======== ======== ======== ======== ========
LEASING COMMISSIONS:
Total dollars committed under signed
leases $ 99,574 $130,243 $153,967 $108,899 $123,171
Rentable square feet 314,549 194,014 308,787 464,733 320,521
-------- -------- -------- -------- --------
Per rentable square foot $ 0.32 $ 0.67 $ 0.50 $ 0.23 $ 0.38
======== ======== ======== ======== ========
Total:
Total dollars committed under signed
leases $347,933 $369,591 $687,301 $266,051 $417,719
Rentable square feet 314,549 194,014 308,787 464,733 320,521
-------- -------- -------- -------- --------
Per rentable square foot $ 1.11 $ 1.90 $ 2.23 $ 0.57 $ 1.30
======== ======== ======== ======== ========
RENTAL RATE TRENDS:
Average final rate with expense pass
throughs $ 5.40 $ 6.09 $ 5.77 $ 4.31 $ 5.39
Average first year cash rental rate $ 5.54 $ 6.50 $ 6.09 $ 4.32 $ 5.61
-------- -------- -------- -------- --------
Percentage increase 2.59% 6.73% 5.55% 0.23% 4.08%
======== ======== ======== ======== ========
</TABLE>
- ----------
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintainance) for
which the Operating Partnership will not be reimbursed by the tenants.
23
<PAGE>
<TABLE>
<CAPTION>
RETAIL LEASING STATISTICS
THREE MONTHS ENDED
--------------------------
9/30/98
--------------------------
<S> <C>
NET EFFECTIVE RENTS RELATED TO RE-LEASED SPACE:
Number of lease transactions (signed leases) 11
Rentable square footage leased 37,258
Average per rentable square foot over the lease term:
Base rent $ 13.59
Tenant improvements ( 0.14)
Leasing commissions ( 0.44)
Rent concessions $ 0.00
--------
Effective rent $ 13.01
Expense stop ( 0.09)
--------
Equivalent effective net rent $ 12.92
--------
Average term in years 6
========
CAPITAL EXPENDITURES RELATED TO RE-LEASED SPACE:
TENANT IMPROVEMENTS:
Total dollars committed under signed leases $ 21,000
Rentable square feet 37,258
--------
Per rentable square foot $ 0.56
========
LEASING COMMISSIONS:
Total dollars committed under signed leases $ 99,268
Rentable square feet 37,258
--------
Per rentable square foot $ 2.66
========
TOTAL:
Total dollars committed under signed leases $120,268
Rentable square feet 37,258
--------
Per rentable square foot $ 3.23
========
RENTAL RATE TRENDS:
Average final rate with expense pass throughs $ 8.55
Average first year cash rental rate $ 10.53
--------
Percentage increase 23.16%
========
</TABLE>
- ----------
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintainance) for
which the Operating Partnership will not be reimbursed by the tenants.
24
<PAGE>
The following tables set forth scheduled lease expirations for executed
leases as of September 30, 1998 assuming no tenant exercises renewal options.
OFFICE PROPERTIES:
<TABLE>
<CAPTION>
AVERAGE
ANNUAL RENTS ANNUAL PERCENTAGE OF
TOTAL PERCENTAGE OF UNDER RENTAL RATE LEASED RENTS
YEAR OF RENTABLE LEASED SQUARE FOOTAGE EXPIRING PER SQUARE REPRESENTED
LEASE NUMBER OF SQUARE FEET REPRESENTED BY LEASES (1) FOOT FOR BY EXPIRING
EXPIRATION LEASES EXPIRING EXPIRING LEASES (IN THOUSANDS) EXPIRATIONS (1) LEASES
- -------------------- ----------- ------------- ----------------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Remainder of 1998 497 1,423,156 5.0% $ 21,788 $ 15.31 4.9%
1999 896 4,127,972 14.4% 60,527 14.66 13.7%
2000 882 4,107,372 14.3% 64,611 15.73 14.6%
2001 754 4,099,157 14.3% 64,207 15.66 14.6%
2002 599 4,027,554 14.0% 63,705 15.82 14.4%
2003 456 3,386,794 11.8% 52,865 15.61 12.0%
2004 102 1,492,207 5.2% 23,192 15.54 5.3%
2005 74 1,254,342 4.4% 18,380 14.65 4.2%
2006 51 1,246,624 4.3% 19,329 15.51 4.4%
2007 27 845,503 2.9% 13,611 16.10 3.1%
Thereafter 77 2,697,206 9.4% 38,906 14.42 8.8%
--- --------- ----- -------- -------- -----
Total or average 4,415 28,707,887 100.0% $441,121 $ 15.37 100.0%
===== ========== ===== ======== ======== =====
</TABLE>
INDUSTRIAL PROPERTIES:
<TABLE>
<CAPTION>
AVERAGE
ANNUAL PERCENTAGE OF
TOTAL PERCENTAGE OF ANNUAL RENTS RENTAL RATE LEASED RENTS
RENTABLE LEASED SQUARE FOOTAGE UNDER EXPIRING PER SQUARE REPRESENTED
YEAR OF LEASE NUMBER OF SQUARE FEET REPRESENTED BY LEASES (1) FOOT FOR BY EXPIRING
EXPIRATION LEASES EXPIRING EXPIRING LEASES (IN THOUSANDS) EXPIRATIONS (1) LEASES
- ------------------- ----------- ------------- ----------------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Remainder of 1998 129 1,180,807 10.4% $ 5,947 $ 5.04 10.9%
1999 195 2,279,095 20.1% 12,489 5.48 22.8%
2000 175 2,218,665 19.7% 10,791 4.86 19.7%
2001 145 1,690,266 15.0% 7,923 4.69 14.5%
2002 64 1,211,800 10.7% 5,501 4.54 10.1%
2003 45 672,037 5.9% 3,330 4.96 6.1%
2004 11 1,048,258 9.3% 3,983 3.80 7.3%
2005 8 95,380 0.8% 696 7.30 1.3%
2006 3 226,880 2.0% 1,050 4.63 1.9%
2007 5 505,989 4.5% 1,774 3.51 3.2%
Thereafter 4 185,921 1.6% 1,180 6.35 2.2%
--- --------- ----- ------- ------- -----
Total or average 784 11,315,098 100.0% $54,664 $ 4.83 100.0%
=== ========== ===== ======= ======= =====
</TABLE>
- ----------
(1) Includes operating expense pass throughs and excludes the effect of future
contractual rent increases.
25
<PAGE>
RETAIL PROPERTIES:
<TABLE>
<CAPTION>
AVERAGE
ANNUAL RENTS ANNUAL PERCENTAGE OF
TOTAL PERCENTAGE OF UNDER RENTAL RATE LEASED RENTS
YEAR OF RENTABLE LEASED SQUARE FOOTAGE EXPIRING PER SQUARE REPRESENTED
LEASE NUMBER OF SQUARE FEET REPRESENTED BY LEASES (1) FOOT FOR BY EXPIRING
EXPIRATION LEASES EXPIRING EXPIRING LEASES (IN THOUSANDS) EXPIRATIONS (1) LEASES
- -------------------- ----------- ------------- ----------------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Remainder of 1998 49 136,095 6.1% $ 1,478 $ 10.86 5.9%
1999 73 308,281 13.9 2,906 9.43 11.6
2000 75 269,127 12.1 3,116 11.58 12.4
2001 55 213,801 9.6 2,925 13.68 11.6
2002 38 159,110 7.2 2,052 12.90 8.2
2003 33 166,182 7.5 2,504 15.07 10.0
2004 15 162,378 7.3 1,239 7.63 4.9
2005 13 88,630 4.0 1,308 14.76 5.2
2006 9 103,967 4.7 1,096 10.54 4.4
2007 9 69,144 3.1 966 13.97 3.8
Thereafter 33 539,906 24.5 5,532 10.25 22.0
-- ------- ----- ------- -------- -----
Total or average 402 2,216,621 100.0% $25,122 $ 11.33 100.0%
=== ========= ===== ======= ======== =====
</TABLE>
TOTAL:
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL PERCENTAGE OF ANNUAL RENTS LEASED RENTS
RENTABLE LEASED SQUARE FOOTAGE UNDER EXPIRING REPRESENTED
YEAR OF LEASE NUMBER OF SQUARE FEET REPRESENTED BY LEASES (1) BY EXPIRING
EXPIRATION LEASES EXPIRING EXPIRING LEASES (IN THOUSANDS) LEASES
- --------------------- ----------- ------------- ----------------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Remainder of 1998 675 2,740,058 6.5% $ 29,213 5.6%
1999 1,164 6,715,348 15.9 75,922 14.6
2000 1,132 6,595,164 15.6 78,518 15.0
2001 954 6,003,224 14.2 75,055 14.4
2002 701 5,398,464 12.8 71,258 13.7
2003 534 4,225,013 10.0 58,699 11.3
2004 128 2,702,843 6.4 28,414 5.5
2005 95 1,438,352 3.4 20,384 3.9
2006 63 1,577,471 3.7 21,475 4.1
2007 41 1,420,636 3.4 16,351 3.1
Thereafter 114 3,423,033 8.1 45,618 8.8
----- --------- ----- -------- -----
Total or average 5,601 42,239,606 100.0% $520,907 100.0%
===== ========== ===== ======== =====
</TABLE>
- ----------
(1) Includes operating expense pass throughs and excludes the effect of future
contractual rent increases.
INFLATION
Historically inflation has not had a significant impact on the Operating
Partnership's operations because of the relatively low inflation rate in the
Operating Partnership's geographic areas of operation. Most of the leases
require the tenants to pay their pro rata share of increased incremental
operating expenses, including common area maintenance, real estate taxes and
insurance, thereby reducing the Operating Partnership's exposure to increases
in operating expenses resulting from inflation. In addition, many of the leases
are for terms of less than seven years, which may enable the Operating
Partnership to replace existing leases with new leases at a higher base rent if
rents on the existing leases are below the market rate.
26
<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 (i) J.C. Nichols and the named
directors and officers of J.C. Nichols breached their fiduciary duties
to J.C. Nichols' stockholders, (ii) J.C. Nichols and the named directors
and officers of J.C. Nichols breached their fiduciary duties to members
of the J.C. Nichols Company Employee Stock Ownership Trust, (iii) 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 (iv) the Company filed a registration statement with the
Securities and Exchange Commission 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, as amended (the
"Securities Act"). The plaintiffs seek equitable relief and monetary
damages. The Company believes that the defendants have meritorious
defenses to the Plaintiffs' allegations. The Company intends to
vigorously defend this litigation. Due to the inherent uncertainties of
the litigation process and the judicial system, the Company is not able
to predict the outcome of this litigation. If this litigation is not
resolved in the Company's favor, it could have a material adverse effect
on the Operating Partnership's business, financial condition and results
of operations.
Item 2. Changes in Securities and Use of Proceeds --
(c) In connection with the acquisition of real estate, the Operating
Partnership frequently issues Common Units to sellers of real estate
in reliance on exemptions from registration under the Securities
Act. During the quarter ended June 30, 1998, the Operating
Partnership issued 116,372 Common Units in offerings exempt from the
registration requirements of the Securities Act. The Operating
Partnership exercised reasonable care to assure that each of the
offerees of Common Units during the quarter ended June 30, 1998 were
"accredited investors" under Rule 501 of the Securities Act and that
the investors were not purchasing the Common Units with a view to
their distribution. Specifically, the Operating Partnership relies
on the exemptions provided by Section 4(2) of the Securities Act or
Rule 506 of the rules promulgated by the Commission under the
Securities Act.
Item 3. Defaults Upon Senior Securities -- NA
Item 4. Submission of Matters to a Vote of Security Holders -- NA
Item 5. Other Information -- NA
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- --------------------------------------------------------------------------------------
<S> <C> <C>
2.1 (1) Agreement and Plan of Merger by and among the Company, Jackson Acquisition Corp. and
J.C. Nichols Company dated December 22, 1997
2.2 (2) Amendment No. 1 to Agreement and Plan of Merger by and among the Company, Jackson
Acquisition Corp. and J.C. Nichols Company dated April 23, 1998
10 (3) Credit Agreement among the Operating Partnership, the Company, the Subsidiaries named
therein and the Lenders named therein, dated as of July 3, 1998
12 Statement regarding computation of ratios
27 Financial Data Schedule
</TABLE>
- ----------
(1) Filed as part of the Operating Partnership's Annual Report on Form 10-K for
the year ended December 31, 1997 and incorporated herein by reference.
(2) Filed as part of Registration Statement No. 333-51671 with the Securities
and Exchange Commission and incorporated herein by reference.
(3) Filed as part of the Operating Partnership's Current Report on Form 8-K
dated July 3, 1998 and incorporated herein by reference.
(b) Reports on Form 8-K
27
<PAGE>
On July 2, 1998, the Operating Partnership filed a current report on Form
8-K, dated July 1, 1998, reporting under item 5 of the Form that shareholders
of J.C. Nichols Company had approved the merger with the Company.
On July 23, 1998, the Operating Partnership filed a current report on Form
8-K, dated July 3, 1998, reporting under item 2 of the Form that the Company
had completed its merger with J.C. Nichols Company and under item 5 of the Form
that the Operating Partnership had obtained a $600 million revolving credit
facility from a group of lenders.
On September 28, 1998, the Operating Partnership filed an amendment to its
current report on Form 8-K, dated July 3, 1998, setting forth under item 7 of
the Form certain pro forma financial information of the Operating Partnership
and audited financial statements of J.C. Nichols Company.
28
<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 REALTY LIMITED PARTNERSHIP
By: Highwoods Properties, Inc., its
general partner
By:
/s/ RONALD P. GIBSON
----------------------------------------
RONALD P. GIBSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/s/ CARMAN J. LIUZZO
----------------------------------------
CARMAN J. LIUZZO
CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
Date: November 16, 1998
29
EXHIBIT 12
HIGHWOODS REALTY LIMITED PARTNERSHIP
RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED UNIT DIVIDENDS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998 1997
-------------------- -------------
<S> <C> <C>
Earnings (1)
Income (loss) from continuing
operations ............................... $ 111,611 $ 91,552
Interest ................................... 61,724 45,138
Amortization of loan costs ................. 1,915 2,256
Total earnings ............................. 175,250 $ 138,946
Fixed charges and preferred unit
dividends
Interest ................................... $ 61,724 $ 45,138
Interest capitalized ....................... 11,097 7,238
Amortization of loan costs
expensed ................................. 1,915 2,256
Amortization of loan costs
capitalized .............................. -- --
Total fixed charges ........................ $ 74,736 $ 54,632
Preferred unit dividends ................... 21,946 13,117
Ratio of earnings to fixed charges ......... 2.34 2.54
Ratio of earnings to combined fixed
charges and preferred unit
dividends ................................ 1.81 2.05
<CAPTION>
1996 1995 1994 1993
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Earnings (1)
Income (loss) from continuing
operations ............................... $ 46,674 $ 28,934 $ 8,159 $ (155)
Interest ................................... 23,360 12,101 4,955 5,185
Amortization of loan costs ................. 1,870 1,619 738 --
Total earnings ............................. $ 71,904 $ 42,654 $ 13,852 $ 5,030
Fixed charges and preferred unit
dividends
Interest ................................... $ 23,360 $ 12,101 $ 4,955 $ 5,185
Interest capitalized ....................... 2,935 507 17 16
Amortization of loan costs
expensed ................................. 1,870 1,619 738 --
Amortization of loan costs
capitalized .............................. -- -- -- --
Total fixed charges ........................ $ 28,165 $ 14,227 $ 5,710 $ 5,201
Preferred unit dividends ................... -- -- -- --
Ratio of earnings to fixed charges ......... 2.55 3.00 2.43 0.97
Ratio of earnings to combined fixed
charges and preferred unit
dividends ................................ 2.55 3.00 2.43 0.97
</TABLE>
- ----------
(1) The calculation does not include amortization of previously capitalized
interest.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
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<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
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<PP&E> 4,060,947,000 4,060,947,000
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0 0
384,997,000 384,997,000
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