<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission file number: 000-21731
Highwoods/Forsyth 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
---------------
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/FORSYTH LIMITED PARTNERSHIP
QUARTERLY REPORT FOR THE PERIOD ENDED MARCH 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION -----
<S> <C> <C>
Item 1. Financial Statements 3
Consolidated balance sheets of Highwoods/Forsyth Limited 4
Partnership as of March 31, 1998 and December 31, 1997
Consolidated statements of income of Highwoods/Forsyth Limited 5
Partnership for the three months ended March 31, 1998 and 1997
Consolidated statements of cash flows of Highwoods/Forsyth Limited 6
Partnership for the three months ended March 31, 1998 and 1997
Notes to the consolidated financial statements of Highwoods/Forsyth 8
Limited Partnership
Item 2. Management's Discussion and Analysis of Financial Condition and 9
Results of Operations
Results of Operations 9
Liquidity and Capital Resources 10
Funds From Operations and Cash Available for Distribution 11
Disclosure Regarding Forward-Looking Statements 12
Property Information 12
Inflation 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
2
<PAGE>
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/Forsyth Limited Partnership (the "Operating
Partnership").
3
<PAGE>
HIGHWOODS/FORSYTH LIMITED PARTNERSHIP
Consolidated Balance Sheets
(in thousands except per unit amounts)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
---------------- ------------------
(Unaudited)
<S> <C> <C>
Assets
Real estate assets, at cost:
Land and improvements ............................................... $ 391,633 $ 341,623
Buildings and tenant improvements ................................... 2,499,121 2,183,454
Development in process .............................................. 105,631 95,387
Land held for development ........................................... 87,879 64,454
Furniture, fixtures and equipment ................................... 3,860 3,339
---------- ----------
3,088,124 2,688,257
Less -- accumulated depreciation .................................... (102,982) (87,046)
---------- ----------
Net real estate assets .............................................. 2,985,142 2,601,211
Cash and cash equivalents ............................................. 31,923 8,816
Restricted cash ....................................................... 10,186 9,341
Accounts receivable ................................................... 18,278 17,426
Advances to related parties ........................................... 13,380 9,072
Accrued straight line rents receivable ................................ 16,189 13,033
Other assets:
Deferred leasing costs .............................................. 25,390 21,688
Deferred financing costs ............................................ 20,434 22,294
Prepaid expenses and other .......................................... 11,372 17,575
---------- ----------
57,196 61,557
Less -- accumulated amortization .................................... (14,918) (13,216)
---------- ----------
42,278 48,341
---------- ----------
$3,117,376 $2,707,240
========== ==========
Liabilities and partners' capital
Mortgages and notes payable ........................................... $1,231,099 $ 978,558
Accounts payable, accrued expenses and other liabilities .............. 59,570 52,152
---------- ----------
Total liabilities ................................................... 1,290,669 1,030,710
Redeemable operating partnership units:
Class A Common Units outstanding, 10,326,335 at March 31, 1998 and
10,256,936 at December 31, 1997 .................................... 368,303 381,631
---------- ----------
Class B Common Units outstanding, 291,756 at March 31, 1998 and
187,528 at December 31, 1997 ....................................... 10,302 6,974
---------- ----------
Series A Preferred Units outstanding, 125,000 at March 31, 1998 and
December 31, 1997 .................................................. 121,809 121,809
Series B Preferred Units outstanding, 6,900,000 at March 31, 1998 and
December 31, 1997 .................................................. 166,346 166,346
---------- ----------
Partners' capital:
Class A Common Units:
General partner Common Units outstanding, 610,569 at March 31,
1998 and 566,108 at December 31, 1997 ............................ 11,599 9,997
Limited partner Common Units outstanding, 50,120,001 at March 31,
1998 and 45,783,071 at December 31, 1997 ......................... 1,148,348 989,773
---------- ----------
Total partners' capital .......................................... 1,159,947 999,770
---------- ----------
$3,117,376 $2,707,240
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
HIGHWOODS/FORSYTH LIMITED PARTNERSHIP
Consolidated Statements of Income
(unaudited and in thousands except per unit amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Revenue:
Rental property .................................................... $100,331 $ 56,055
Interest and other income .......................................... 2,053 1,721
-------- --------
102,384 57,776
Operating expenses:
Rental property .................................................... $ 29,728 $ 15,342
Depreciation and amortization ...................................... 17,113 9,242
Interest expense:
Contractual ....................................................... 17,162 11,460
Amortization of deferred financing costs .......................... 616 575
-------- --------
17,778 12,035
General and administrative ......................................... 3,784 2,080
-------- --------
Income before extraordinary item ................................... 33,981 19,077
-------- --------
Extraordinary item -- loss on early extinguishment of debt ........... (46) (3,973)
-------- --------
Net income ......................................................... $ 33,935 $ 15,104
======== ========
Dividends on preferred units ......................................... (6,145) (1,407)
-------- --------
Net income available for Class A Common Units ...................... 27,790 13,697
======== ========
Net income (loss) per Class A Common Unit -- Basic:
Income before extraordinary item ................................... $ .47 $ .43
======== ========
Extraordinary item -- loss on early extinguishment of debt ......... -- (.10)
======== ========
Net income ......................................................... $ .47 $ .33
======== ========
Net income (loss) per Class A Common Unit -- Diluted:
Income before extraordinary item ................................... $ .47 $ .42
======== ========
Extraordinary item -- loss on early extinguishment of debt ......... -- (.10)
======== ========
Net income ......................................................... $ .47 $ .32
======== ========
Net income per Class A Common Unit -- Basic:
General Partner .................................................... $ .47 $ .33
======== ========
Limited Partners ................................................... $ .47 $ .33
======== ========
Net income per Class B Common Unit:
Limited Partners ................................................... $ -- $ --
======== ========
Net income per Class A Common Unit -- Diluted:
General Partner .................................................... $ .47 $ .32
======== ========
Limited Partners ................................................... $ .47 $ .33
======== ========
Net income per Class B Common Unit:
Limited Partners ................................................... $ -- $ --
======== ========
Weighted average Common Units outstanding -- Basic:
Class A Common Units:
General Partner ................................................... 588 413
Limited Partners .................................................. 58,252 40,735
Class B Common Units:
Limited Partners .................................................. 269 121
-------- --------
Total .............................................................. 59,109 41,269
======== ========
Weighted average Common Units outstanding -- Diluted:
Class A Common Units:
General Partner ................................................... 595 415
Limited Partners .................................................. 58,882 41,095
Class B Common Units:
Limited Partners .................................................. 269 121
-------- --------
Total .............................................................. 59,746 41,631
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
HIGHWOODS/FORSYTH LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(unaudited and in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
------------- ------------
<S> <C> <C>
Operating activities:
Net income .......................................................... $ 33,935 $ 15,104
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ..................................... 17,113 9,817
Loss on early extinguishment of debt .............................. 46 3,973
Changes in operating assets and liabilities ....................... 3,410 (519)
---------- ----------
Net cash provided by operating activities ........................ 54,504 28,375
---------- ----------
Investing activities:
Additions to real estate assets ..................................... (311,408) (24,594)
Cash from contributed net assets .................................... (12,383)
Cash paid in exchange for partnership net assets .................... -- (5,081)
Other ............................................................... (2,179) (4,428)
---------- ----------
Net cash used in investing activities ............................ (325,970) (34,103)
---------- ----------
Financing activities:
Distributions paid .................................................. (30,097) (18,913)
Payment of preferred unit dividends ................................. (6,145) --
Payment of prepayment penalties ..................................... (46) (3,973)
Borrowings on mortgages and notes payable ........................... 287,188 14,000
Repayment of mortgages and notes payable ............................ (102,450) (110,093)
Borrowings on Revolving Loans ....................................... 247,000 --
Repayment on Revolving Loans ........................................ (240,500) --
Net proceeds from contributed capital ............................... 137,763 121,861
Net change in deferred financing costs .............................. 1,860 (161)
---------- ----------
Net cash provided by financing activities ........................ 294,573 2,721
---------- ----------
Net increase (decrease) in cash and cash equivalents ................ 23,107 (3,007)
Cash and cash equivalents at beginning of the period ................ 8,816 10,618
---------- ----------
Cash and cash equivalents at end of the period ...................... $ 31,923 $ 7,611
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest .............................................. $ 12,324 $ 8,414
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
HIGHWOODS/FORSYTH 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 the Common Unit
holders of the Operating Partnership or acquired subject to mortgage notes
payable:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1997
---------- -----------
<S> <C> <C>
Assets:
Rental property and equipment, net .......... $76,125 $213,090
Liabilities:
Mortgages and notes payable assumed ......... $61,303 $129,270
------- --------
Net assets ............................... $14,822 $ 83,820
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
HIGHWOODS/FORSYTH LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
1. BASIS OF PRESENTATION
Highwoods/Forsyth Limited Partnership (the "Operating Partnership") is a
subsidiary of Highwoods Properties, Inc. (the "Company"). At March 31, 1998 the
Company owned 83% of the limited partnership units (the "Common Units") of the
Operating Partnership.
The consolidated financial statements include the accounts of the
Operating Partnership and the following subsidiaries:
Highwoods/Florida GP Corp.
AP-GP Southeast Portfolio Partners, L.P.
Highwoods/Tennessee Holdings, L.P.
AP Southeast Portfolio Partners, L.P.
Highwoods Realty GP Corp.
Highwoods/Florida Holdings, L.P.
Highwoods Services, Inc.
Southeast Realty Options Corp.
Florida Transition Co. II
Jackson Acquisition Corp.
Shockoe Plaza Investors L.C.
RC One LLC
PSC Acquisition Corporation
Pikesville Sportsman's Club of Baltimore County
Maryland, Inc.
Atrium Acquisition Corporation
9690 Derecho Road LLC
Seven Crondall Associates LLC
Eight Crondall Associates LLC
Nine Crondall Associates LLC
Pinellas Pinebrook Partners, Ltd.
SISBROS, Ltd.
Pinellas Bay Vista Partners, Ltd.
Pinellas Northside Partners, Ltd.
Cross Bayou, Ltd.
Downtown Clearwater Tower, Ltd.
BDBP, Ltd.
Interstate Business Park, Ltd.
Garcia Meyers Co.
Garcia Property Management, Inc.
Westshore Square, Inc.
Highwoods/Tennessee Properties, Inc.
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 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
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 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 presented for redemption by exchanging cash at the fair market value or
one share of Common Stock for the unit. 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 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.
8
<PAGE>
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.
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
quarter ended March 31, 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 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. 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.
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.
9
<PAGE>
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
Three Months Ended March 31, 1998
Revenues from rental operations increased $44.2 million, or 79%, from
$56.1 million for the three months ended March 31, 1997 to $100.3 million for
the comparable period in 1998. The increase is primarily a result of the
acquisition of 12.3 million square feet of office and industrial properties and
the completion of 1.1 million square feet of development activity during the
last nine months of 1997 and the first quarter of 1998. The Operating
Partnership's portfolio increased from 21.0 million square feet at March 31,
1997 to 33.9 million square feet at March 31, 1998. Same property revenues,
which are the revenues of the 344 in-service properties owned on January 1,
1997 increased 6% for the three months ended March 31. 1998, compared to the
same three months of 1997.
During the three months ended March 31, 1998, 308 leases representing
1,276,000 square feet of office and industrial space commenced at an average
rate per square foot which was 7.7% higher than the average rate per square
foot on the expired leases.
Interest and other income increased $400,000 from $1.7 million for the
three months ended March 31, 1998 to $2.1 million for the comparable period in
1998. The increase was due to an increase in cash available for investment in
1998.
Rental operating expenses increased $14.4 million, or 94%, from $15.3
million for the three months ended March 31, 1997 to $29.7 million for the
comparable period in 1998. The increase is a result of the addition of 13.4
million square feet through a combination of acquisitions and developments
during the last nine months of 1997 and the first quarter of 1998. Rental
operating expenses as a percentage of related revenues increased from 27.4% for
the three months ended March 31, 1997 to 29.6% 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 March 31, 1998
and 1997 was $17.1 million and $9.2 million, respectively. The increase of $7.9
million, or 86%, is due to an increase in depreciable assets over the prior
year. Interest expense increased $5.8 million, or 48%, from $12.0 million for
the three months ended March 31, 1997 to $17.8 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
March 31, 1998 and 1997 included $616,000 and $575,000, 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 3.7% of rental revenue for the three
months ended March 31, 1997 to 3.8% for the comparable period in 1998.
Net income before extraordinary item equaled $34.0 million and $19.0
million for the three months ended March 31, 1998 and 1997, respectively. The
Company recorded $6.1 million and $1.4 million in preferred unit dividends for
the three months ended March 31, 1998 and 1997, respectively (see " --
Liquidity and Capital Resources" below).
Liquidity and Capital Resources
For the three months ended March 31, 1998, cash provided by operating
activities increased by $26.1 million, or 92%, to $54.5 million, as compared to
$28.4 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
$291.9 million, to $326.0 million for the first three months of 1998, as
compared to $34.1 million for the same period in 1997. The increase is
attributable to the Operating Partnership's acquisition activity in the first
three months of 1998. Cash provided by financing activities increased by $291.9
to $294.6 million for the first three months of 1997, as compared to $2.7
million for
10
<PAGE>
the same period in 1997. During the first three months of 1998, cash provided
by financing activities consisted, primarily, of $359.9 million in net proceeds
from the sale of common stock, the sale of $125 million of MandatOry Par Put
Remarketed SecuritiesSM ("MOPPRSSM") and $100 million of unsecured notes (see
below), which were offset by net payments of $102.5 million to reduce existing
indebtedness. Additionally, payments of distributions increased by $11.2
million to $30.1 million for the first three months of 1998, as compared with
$18.9 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 dividends increased by $6.1 million to $6.1 million for
the first three months of 1998, as compared to $0 for the same period in 1997.
The Operating Partnership's total indebtedness at March 31, 1998 totaled
$1.2 billion and was comprised of $353.5 million of secured indebtedness with a
weighted average interest rate of 8.2% and $877.5 million of unsecured
indebtedness with a weighted average interest rate of 6.9%. All of the mortgage
and notes payable outstanding at March 31, 1998 were either fixed rate
obligations or variable rate obligations covered by interest rate protection
agreements.
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
7.25% with respect to $80 million of its $430 million aggregate amount of
unsecured revolving loans (the "Revolving Loans") excluding the effect of
changes in the Operating Partnership's credit risk, under which the Operating
Partnership had $321 million outstanding at March 31, 1998, and (ii) entered
into interest rate swaps that limit its exposure to an increase in interest
rates to 6.95% in connection with $22 million of variable rate mortgages. The
interest rate on all such variable rate debt is adjusted at monthly intervals,
subject to the Operating Partnership's interest rate protection program. No
payments were received from counterparties under the interest rate protection
agreement for the three months ended March 31, 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 they were to default on their obligations under the
arrangements, the Operating Partnership could be required to pay the full rates
under the Revolving Loans and the variable rate mortgages, even if such rates
were in excess of the rate in the cap and swap agreements. In addition, the
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.
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.
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.
In anticipation of a 1998 debt offering, on September 17, 1997, the
Operating Partnership entered into a swap agreement with a notional amount of
$114 million that carried a fixed rate of 6.6%, which is a combination of the
treasury rate plus the swap spread and the forward premium. The swap agreement
was terminated on April 20, 1998.
Historically, rental revenue has been the principal source of funds to pay
operating expenses, debt service and capital expenditures, excluding
non-recurring capital expenditures. In addition, construction management,
maintenance, leasing and management fees have provided sources of cash flow.
Except for an $8 million renovation of the common areas of a 639,000-square
foot property acquired from Assocated Capital Properties, Inc., the Operating
Partnership presently has no plans for major capital improvements to the
existing properties, other
11
<PAGE>
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 Loans. The Operating Partnership expects to meet certain of
its financing requirements through long-term secured and unsecured borrowings
and the issuance of debt securities or additional equity securities of the
Company and Operating Partnership. In addition, the Operating Partnership
anticipates utilizing the Revolving Loans primarily to fund construction and
development activities. The Operating Partnership does not intend to reserve
funds to retire existing mortgage indebtedness or indebtedness under the
Revolving Loans upon maturity. Instead, the Operating Partnership will seek to
refinance such debt at maturity or retire such debt through the issuance of
equity or debt securities. 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 the
expected distributions discussed below may be adversely affected.
Recent Developments
J.C. Nichols Transaction. The Company entered into a merger agreement on
December 22, 1997 (as amended on April 29, 1998, the "Merger Agreement") with
J.C. Nichols Company, a publicly traded Kansas City, Missouri real estate
operating company ("J.C. Nichols"), pursuant to which the Company would acquire
J.C. Nichols with the view that the Operating Partnership would combine its
property operations with J.C. Nichols (the "J.C. Nichols Transaction"). J.C.
Nichols is subject to the information requirements of the Securities Exchange
Act of 1934, as amended, and, in accordance therewith, files reports and other
information with the Securities and Exchange Commission.
J.C. Nichols owns or has an ownership interest in 27 office properites
encompassing approximately 1.5 million rentable square feet, 13 industrial
properties encompassing approximately 337,000 rentable square feet, 33 retail
properties encompassing approximately 2.5 million rentable square feet and 16
multifamily communities with 1,816 apartment units in Kansas City, Missouri and
Kansas. Additionally, J.C. Nichols has an ownership interest in 21 office
properties enompassing approximately 1.3 million rentable square feet, one
industrial property encompassing approximately 200,000 rentable square feet and
one multifamily community with 418 apartment units in Des Moines, Iowa. As of
December 31, 1997, the properties to be acquired in the J.C. Nichols
Transaction were 95% leased.
Consummation of the J.C. Nichols Transaction is subject, among other
things, to the approval of 66 2/3% of the shareholders of J.C. Nichols. Under
the terms of the Merger Agreement, the Company would acquire all of the
outstanding common stock, $.01 par value, of J.C. Nichols ("J.C. Nichols Common
Stock"). Under the Merger Agreement, J.C. Nichols shareholders may elect to
receive between 1.84 and 2.03 shares of Common Stock or $65 in cash for each
share of J.C. Nichols Common Stock. However, the cash payment to J.C. Nichols
shareholders cannot exceed 40% of the total consideration. To the extent the
average of the daily average of the high and low sale price for the 20 trading
days preceding the effective date of the merger (the "Value") of a share of
Common Stock is $35.36 or higher, J.C. Nichols shareholders may receive Common
Stock worth more than $65 per share of J.C. Nichols Common Stock; to the extent
the Value of a share of Common Stock is under $32.00, J.C. Nichols shareholders
may receive Common Stock worth less than $65 per share of J.C. Nichols Common
Stock. The cost of the J.C. Nichols Transaction under the Merger Agreement is
expected to be approximately $570 million, including assumed debt of
approximately $250 million, net of cash of approximately $65 million. The
Merger Agreement provides for payment by J.C. Nichols to the Company of a
termination fee and expenses of up to $17.2 million if J.C. Nichols enters into
an acquisition proposal other than the Merger Agreement and certain other
conditions are met. The failure of J.C. Nichols shareholders to approve the
J.C. Nichols Transaction, however, will not trigger the payment of a
termination fee, except for a fee of $2.5 million, if, among other things, J.C.
Nichols enters into another acquisition proposal before December 22, 1998.
No assurance can be given that all or part of the J.C. Nichols Transaction
will be consummated or that, if consummated, it would follow the terms set
forth in the Merger Agreement. As of the date hereof, certain third parties
have expressed an interest to J.C. Nichols and/or certain of its shareholders
in purchasing all or a portion of the outstanding J.C. Nichols Common Stock at
a price in excess of $65 per share. No assurance can be given that a third
party will not make an offer to J.C. Nichols or its shareholders to purchase
all or a portion of the outstanding J.C. Nichols Common Stock at a price in
excess of $65 per share or that the board of directors
12
<PAGE>
of J.C. Nichols would reject any such offer. The Company and/or J.C. Nichols
may terminate the Merger Agreement if the J.C. Nichols Transaction is not
consummated by June 30, 1998.
The properties to be acquired in the J.C. Nichols Transaction include the
Country Club Plaza in Kansas City, which covers 15 square blocks and includes
1.0 million square feet of retail space, 1.1 million square feet of office
space and 462 apartment units. As of December 31, 1997, the Country Club Plaza
was approximately 96% leased. The Country Club Plaza is presently undergoing an
expansion and restoration expected to add 800,000 square feet of retail,
office, hotel and residential space with an estimated cost of approximately
$240 million. Assuming consummation of the J.C. Nichols Transaction, the
Operating Partnership intends to complete the development in the Country Club
Plaza previously planned by J.C. Nichols.
Assuming completion of the J.C. Nichols Transaction, the Company and the
Operating Partnership would succeed to the interests of J.C. Nichols in a
strategic alliance with Kessinger/Hunter & Company, Inc. ("Kessinger/ Hunter")
pursuant to which Kessinger/Hunter manages and leases the office, industrial
and retail properties presently owned by J.C. Nichols in the greater Kansas
City metropolitan area. J.C. Nichols currently has a 30% ownership interest in
the strategic alliance with Kessinger/Hunter and has two additional options to
acquire up to a 65% ownership interest in the strategic alliance. Assuming
completion of the J.C. Nichols Transaction, the Company and the Operating
Partnership would also succeed to the interests of J.C. Nichols in a strategic
alliance with R&R Investors, Ltd. ("R&R") pursuant to which R&R manages and
leases the properties in which J.C. Nichols has an ownership interest in Des
Moines. J.C. Nichols has an ownership interest of 50% or more in each of the
properties in Des Moines with R&R or its principal.
Easton-Babcock Transaction. The Operating Partnership has entered into an
agreement with The Easton-Babcock Companies, a real estate operating company in
Miami, Florida ("Easton-Babcock"), pursuant to which the Operating Partnership
will combine its property operations with Easton-Babcock and acquire a
portfolio of 11 industrial properties encompassing 1.8 million rentable square
feet, three office properties encompassing 197,000 rentable square feet and 110
acres of land for development, of which 88 acres will be acquired over a
three-year period (the "Easton-Babcock Transaction"). As of December 31, 1997,
the industrial properties to be acquired in the Easton-Babcock Transaction were
88% leased and the office properties to be acquired in the Easton-Babcock
Transaction were 50% leased. The cost of the Easton-Babcock Transaction is
expected to be $143 million (inclusive of the 88 acres of development land to
be acquired over a three-year period) and will consist of an undetermined
combination of the issuance of Common Units, the assumption of mortgage debt
and a cash payment. Also in connection with the Easton-Babcock Transaction, the
Company will issue to certain affiliates of Easton-Babcock warrants to purchase
926,000 shares of Common Stock at $35.50 per share. Although the Easton-Babcock
Transaction is expected to close by June 15, 1998, no assurance can be given
that all or part of the transaction will be consummated.
April 29, 1998 Common Stock Offering. On April 29, 1998, the Company sold
1,080,443 shares of Common Stock in an underwritten public offering for net
proceeds of approximately $34.6 million. The net proceeds of the offering were
contributed to the Operating Partnership in exchange for Common Units.
Series D Preferred Offering. On April 23, 1998, the Company sold 4,000,000
Depositary Shares (the "Depositary Shares"), each representing 1/10 of a share
of the Company's 8% Series D Cumulative Redeemable Preferred Shares, par value
$.01 per share (the "Series D Preferred Shares"), for net proceeds of
approximately $96.7 million. Dividends on the Series D Preferred Shares
represented by the Depositary Shares will be cumulative from the date of
original issuance and will be payable quarterly on or about the last day of
January, April, July and October of each year, commencing July 31, 1998, at the
rate of 8% of the liquidation preference per annum (equivalent to $2.00 per
annum per Depositary Share). The Series D Preferred Shares and the Depositary
Shares representing such Series D Preferred Shares are not redeemable prior to
April 23, 2003. The Series D Preferred Shares are thereafter subject to
redemption by the Company, in whole or in part, at a redemption price of $250
per share (equivalent to $25 per Depositary Share), plus accrued and unpaid
dividends, if any, thereon. The redemption price (other than the portion
thereof consisting of accrued and unpaid dividends) is payable solely out of
the sale proceeds of other capital stock of the Company, which may include
other series of preferred stock, and from no other source.
With respect to the payment of dividends and amounts upon liquidation, the
Series D Preferred Shares will rank pari passu with the Company's 8 3/8% Series
A Cumulative Redeemable Preferred Shares (the "Series A Preferred Shares") and
8% Series B Cumulative Redeemable Preferred Shares (the "Series B Preferred
Shares")
13
<PAGE>
and any other equity securities of the Company the terms of which provide that
such equity securities rank on a parity with the Series D Preferred Shares and
rank senior to the Common Stock and any other equity securities of the Company
that by their terms rank junior to the Series D Preferred Shares. Dividends on
the Series D Preferred Shares will accrue whether or not the Company has
earnings, whether or not there are funds legally available for the payment of
such dividends and whether or not such dividends are declared. The Series D
Preferred Shares have a liquidation preference of $250 per share (equivalent to
$25 per Depositary Share), plus an amount equal to any accrued and unpaid
dividends.
The net proceeds of the offering 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.
April 1998 Debt Offering. On April 20, 1998, the Operating Partnership
sold $200 million of 7 1/2% notes due April 15, 2018 (the "2018 Notes") in an
underwritten public offering for net proceeds of approximately $197.4 million.
Interest on the 2018 Notes is payable semi-annually on April 15 and October 15
of each year, commencing October 15, 1998. The Operating Partnership used a
portion of the net proceeds from the offering to settle the $114 million
notional treasury lock described above.
April 21, 1998 Common Stock Offering. On April 21, 1998, the Company sold
441,176 shares of Common Stock in an underwritten public offering for net
proceeds of approximately $14.2 million. The net proceeds of the offering were
contributed to the Operating Partnership in exchange for Common Units.
Swap Agreements. In anticipation of a 1998 debt offering, on April 3,
1998, the Operating Partnership entered into a swap agreement with a notional
amount of $50 million. The swap agreement has a termination date of July 2,
1998, and carries a fixed rate of 5.5%, which is a combination of the treasury
rate plus the swap spread and the forward premium.
In anticipation of a 1998 debt offering, on April 3, 1998, the Operating
Partnership entered into a swap agreement with a notional amount of $100
million. The swap agreement has a termination date of October 2, 1998, and
carries a fixed rate of 5.5%, which is a combination of the treasury rate plus
the swap spread and the forward premium.
In anticipation of a 1999 debt offering, on April 30, 1998, the Operating
Partnership entered into a swap agreement with a notional amount of $50
million. The swap agreement has a termination date of January 5, 1999, and
carries a fixed rate of 5.7%, which is a combination of the treasury rate plus
the swap spread and the forward premium.
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.
14
<PAGE>
Funds from operations and cash available for distribution for the three
months ended March 31, 1998 and 1997 are summarized in the following table (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Funds from Operations:
Income before extraordinary item ............................. $ 33,981 $ 19,077
Add (deduct):
Dividends to preferred unitholders .......................... (6,145) (1,407)
Depreciation and amortization ............................... 17,113 9,242
Third-party service company cash flow ....................... -- --
-------- --------
Funds from operations before minority interest ............ 44,949 26,912
Cash Available for Distribution:
Add (deduct):
Rental income from straight-line rents ...................... (3,116) (1,230)
Amortization of deferred financing costs .................... 616 575
Non-incremental revenue generating capital expenditures (1):
Building improvements paid ................................ (1,019) (1,070)
Second generation tenant improvements paid ................ (2,436) (1,371)
Second generation lease commissions paid .................. (1,726) (1,091)
-------- --------
Cash available for distribution .......................... $ 37,268 $ 22,725
======== ========
Weighted average Common Units outstanding -- Basic ........... 59,109 41,269
Weighted average Common Units outstanding -- Diluted ......... 59,746 41,631
======== ========
Dividend payout ratio:
Funds from operations ....................................... 67.1% 73.6%
======== ========
Cash available for distribution ............................. 80.9% 87.2%
======== ========
</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.
15
<PAGE>
Property Information
The following table sets forth certain information with respect to the
Operating Partnership's properties as of March 31, 1998 and 1997:
<TABLE>
<CAPTION>
Rentable Number of Percent Leased/
Square Feet Properties Pre-Leased
------------- ------------ ----------------
<S> <C> <C> <C>
March 31, 1998
- ---------------------
In-Service:
Office ............. 26,501,000 382 94%
Industrial ......... 7,429,000 148 90
---------- --- --
Total ............ 33,930,000 530 93%
========== === ==
Under Development:
Office ............. 3,182,000 27 53%
Industrial ......... 396,000 5 25
---------- --- --
Total ............ 3,578,000 32 50%
========== === ==
Total:
Office ............. 29,683,000 409
Industrial ......... 7,825,000 153
---------- ---
Total ............ 37,508,000 562
========== ===
</TABLE>
<TABLE>
<CAPTION>
Rentable Number of Percent Leased/
Square Feet Properties Pre-Leased
------------- ------------ ----------------
<S> <C> <C> <C>
March 31, 1997
- ---------------------
In-Service:
Office ............. 13,972,000 208 94%
Industrial ......... 7,030,000 137 90
---------- --- --
Total ............ 21,002,000 345 93%
========== === ==
Under Development:
Office ............. 947,000 14 51%
Industrial ......... 595,000 6 26
---------- --- --
Total ............ 1,542,000 20 41%
========== === ==
Total:
Office ............. 14,919,000 222
Industrial ......... 7,625,000 143
---------- ---
Total ............ 22,544,000 365
========== ===
</TABLE>
16
<PAGE>
The following table sets forth certain information with respect to the
Operating Partnership's properties under development as of March 31, 1998:
<TABLE>
<CAPTION>
Cost at Pre-Leasing Estimated
Name Location Square Footage Budgeted Cost 3/31/98 Percentage(1) Completion
- ------------------------------ ------------------- ---------------- --------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Office:
Ridgefield III Asheville 57,000 $ 5,485 $ 2,024 26% 2Q98
2400 Century Center Atlanta 135,000 16,195 8,667 -- 2Q98
10 Glenlakes Atlanta 254,000 35,135 4,596 -- 4Q98
Automatic Data Processing Baltimore 110,000 12,400 5,434 100 3Q98
Highwoods I Baltimore 125,000 13,800 2,393 -- 2Q99
BB & T(2) Greenville 71,000 5,851 3,093 100 2Q98
Patewood VI Greenville 107,000 11,360 6,846 15 2Q98
Colonnade Memphis 89,000 9,400 7,750 93 2Q98
Southwind C Memphis 74,000 7,657 1,322 67 4Q98
Harpeth V Nashville 65,000 6,900 4,662 66 2Q98
Lakeview Ridge II Nashville 61,000 6,000 4,447 79 2Q98
Southpointe Nashville 104,000 10,878 5,766 61 2Q98
Caterpillar Financial Center Nashville 313,000 54,000 -- 62 1Q00
C N A Orlando 180,000 24,408 -- 95 1Q99
Hard Rock Orlando 63,000 7,000 -- 100 4Q98
Concourse Center One Piedmont Triad 86,000 8,415 701 -- 1Q99
RMIC Piedmont Triad 90,000 7,650 5,324 100 2Q98
Clintrials Research Triangle 178,000 21,490 14,626 100 2Q98
Situs II Research Triangle 59,000 5,857 2,137 -- 2Q98
Highwoods Centre Research Triangle 76,000 8,327 2,401 50 3Q98
Overlook Research Triangle 97,000 10,307 2,451 -- 4Q98
Red Oak Research Triangle 65,000 6,394 1,153 -- 3Q98
Markel-American Richmond 106,000 10,650 7,933 55 2Q98
Highwoods V Richmond 67,000 6,620 4,830 100 2Q98
Interstate Corporate
Center(2) Tampa 309,000 15,600 8,498 26 4Q98
Intermedia (Sabal) Phase I Tampa 120,500 12,500 3,578 100 4Q98
Intermedia (Sabal) Phase II Tampa 120,500 13,000 662 100 1Q00
------- -------- -------- ---
Office Total or Weighted
Average 3,182,000 $353,279 $111,294 53%
========= ======== ======== ===
Industrial:
Chastain II & III Atlanta 122,000 $ 4,686 $ 1,325 14% 3Q98
Tradeport 1 Atlanta 87,000 3,070 1,871 -- 2Q98
Tradeport 2 Atlanta 87,000 3,070 1,871 -- 2Q98
Air Park South Warehouse I Piedmont Triad 100,000 2,929 1,382 80 2Q98
--------- -------- -------- ---
Industrial Total or Weighted
Average 396,000 $ 13,755 $ 6,449 25%
========= ======== ======== ===
Total or Weighted Average 3,578,000 $367,034 $117,743 50%
========= ======== ======== ===
Summary By Estimated
Completion Date:
Second Quarter 1998 1,463,000 $133,405 $ 83,229 56%
Third Quarter 1998 373,000 31,807 10,313 44
Fourth Quarter 1998 917,500 88,199 20,445 34
First Quarter 1999 266,000 32,823 701 64
Second Quarter 1999 125,000 13,800 2,393 --
First Quarter 2000 433,500 67,000 662 73
--------- -------- -------- ---
Total or Weighted Average 3,578,000 $367,034 $117,743 50%
========= ======== ======== ===
</TABLE>
(1) Includes letters of intent
(2) Redevelopment projects
17
<PAGE>
The following tables set forth certain information about the Operating
Partnership's leasing activities for the three March 31, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1998 March 31, 1997
----------------------------- ----------------------------
Office Industrial Office Industrial
-------------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
Net Effective Rents Related to Re-Leased Space:
Number of lease transactions (signed leases) 242 66 112 55
Rentable square footage leased 966,990 308,787 738,461 612,175
Average per rentable square foot over the lease term:
Base rent $ 15.54 $ 6.35 $ 15.47 $ 5.12
Tenant improvements (0.70) (0.38) ( 1.08) (0.20)
Leasing commissions (0.30) (0.15) ( 0.40) (0.15)
Rent concessions (0.03) -- ( 0.02) (0.01)
---------- -------- ---------- --------
Effective rent $ 14.51 $ 5.82 $ 13.97 $ 4.76
Expense stop (1) (4.35) (0.43) ( 3.62) (0.22)
---------- -------- ---------- --------
Equivalent effective net rent $ 10.16 $ 5.39 $ 10.35 $ 4.54
========== ======== ========== ========
Average term in years 5 3 5 3
========== ======== ========== ========
Capital Expenditures Related to Re-leased Space:
Tenant Improvements:
Total dollars committed under signed leases $3,717,938 $533,334 $3,745,604 $398,591
Rentable square feet 966,990 308,787 738,461 612,175
---------- -------- ---------- --------
Per rentable square foot $ 3.84 $ 1.73 $ 5.07 $ 0.65
========== ======== ========== ========
Leasing Commissions:
Total dollars committed under signed leases $1,349,444 $153,967 $1,395,209 $305,492
Rentable square feet 966,990 308,787 738,461 612,175
---------- -------- ---------- --------
Per rentable square foot $ 1.40 $ 0.50 $ 1.89 $ 0.50
========== ======== ========== ========
Total:
Total dollars committed under signed leases $5,067,382 $687,301 $5,140,813 $704,083
Rentable square feet 966,990 308,787 738,461 612,175
---------- -------- ---------- --------
Per rentable square foot $ 5.24 $ 2.23 $ 6.96 $ 1.15
========== ======== ========== ========
Rental Rate Trends:
Number of leases commenced during period 242 66 112 55
Average final rate with expense pass throughs $ 13.56 $ 5.77 $ 13.59 $ 5.12
Average first year cash rental rate $ 14.65 $ 6.09 $ 14.36 $ 5.35
---------- -------- ---------- --------
Percentage increase 8.04% 5.55% 5.67% 4.49%
========== ======== ========== ========
</TABLE>
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expenses and common area maintainance) for
which the Operating Partnership will not be reimbursed by the tenants.
18
<PAGE>
The following tables set forth scheduled lease expirations for executed
leases as of March 31, 1998 assuming no tenant exercises renewal options.
Office Properties:
<TABLE>
<CAPTION>
Average Percentage of
Total Percentage of Annual Rents Annual Leased Rents
Year of Rentable Leased Square Footage Under Rental Rate Represented
Lease Number of Square Feet Represented by Expiring Per square foot for by Expiring
Expiration Leases Expiring Expiring Leases Leases (1) Expirations (1) Leases
- ------------------- ----------- ------------- ----------------------- -------------- --------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Remainder of 1998 801 3,326,553 13.5% $ 50,454,459 $ 15.17 13.4%
1999 723 3,524,034 14.3 51,748,926 14.68 13.8
2000 749 3,793,344 15.3 58,752,895 15.49 15.6
2001 505 3,493,295 14.1 54,260,235 15.53 14.5
2002 487 3,526,602 14.3 54,860,834 15.56 14.7
2003 161 1,715,247 6.9 25,341,844 14.77 6.7
2004 67 1,168,541 4.7 18,366,011 15.72 4.9
2005 52 951,742 3.9 13,390,349 14.07 3.6
2006 35 1,007,727 4.1 15,184,041 15.07 4.0
2007 21 539,329 2.2 8,745,876 16.22 2.3
Thereafter 39 1,642,967 6.7 24,516,911 14.92 6.5
--- --------- ----- ------------ -------- -----
Total or average 3,640 24,689,381 100.0% $375,622,381 $ 15.21 100.0%
===== ========== ===== ============ ======== =====
</TABLE>
Industrial Properties:
<TABLE>
<CAPTION>
Average Percentage of
Total Percentage of Annual Leased Rents
Rentable Leased Square Footage Annual Rents Rental Rate Represented
Year of Lease Number of Square Feet Represented by Under Expiring Per square foot for by Expiring
Expiration Leases Expiring Expiring Leases Leases (1) Expirations (1) Leases
- ------------------- ----------- ------------- ----------------------- ---------------- --------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Remainder of 1998 206 1,537,953 22.9% $ 8,468,579 $ 5.51 22.7%
1999 159 1,308,279 19.5 7,457,046 5.70 19.9
2000 147 1,336,068 19.9 8,193,225 6.13 21.9
2001 75 671,101 10.0 4,097,358 6.11 11.0
2002 59 1,180,033 17.6 5,244,002 4.44 14.0
2003 21 228,322 3.4 1,446,961 6.34 3.9
2004 5 104,369 1.6 602,516 5.77 1.6
2005 4 33,832 0.5 290,630 8.59 0.8
2006 2 196,600 2.9 882,636 4.49 2.4
2007 1 19,125 0.3 238,680 12.48 0.6
Thereafter 1 95,545 1.4 464,826 4.86 1.2
--- --------- ----- ----------- ------ -----
Total or average 680 6,711,227 100.0% $37,386,459 $ 5.57 100.0%
=== ========= ===== =========== ====== =====
</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.
19
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings -- None
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities -- None
Item 4. Submission of Matters to a Vote of Security Holders--None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- --------------------------------------------------------------------------------------------
<S> <C> <C>
3 (1) Amended and Restated Articles of Incorporation of the Company
4.1 (2) Form of certificate representing 8% Series D Cumulative Redeemable Preferred Shares
4.2 (2) Deposit Agreement, dated April 23, 1998, between the Company and First Union National
Bank, as preferred share depositary
4.3 (2) Form of Depositary Receipt evidencing the Depositary Shares that each represent 1/10 of an
8% Series D Cumulative Redeemable Preferred Share
4.4 (2) Amendment to Amended and Restated Agreement of Limited Partnership of the Operating
Partnership
27 Financial Data Schedule
</TABLE>
- ----------
(1) Filed as part of the Company's current report on Form 8-K dated September
25, 1997 and amended by articles supplementary filed as part of the
Company's current report on Form 8-K dated October 4, 1997 and articles
supplementary filed as part of the Company's current report on Form 8-K
dated April 20, 1998, each of which is incorporated herein by reference.
(2) Filed as part of the Operating Partnership's current report on Form 8-K
dated April 20, 1998 and incorporated herein by reference.
(b) Reports on Form 8-K
On January 6, 1998, the Operating Partnership filed a current report on
Form 8-K, dated December 22, 1997, reporting under item 5 of the Form that the
Company had entered into a merger agreement with J.C. Nichols Company.
On January 22, 1998, the Operating Partnership filed a current report on
Form 8-K, dated January 22, 1998, setting forth under items 5 and 7 of the Form
certain pro forma financial information in connection with (i) an agreement by
the Company to sell 2,000,000 shares of common stock and (ii) an offering by
the Operating Partnership to sell an aggregate of $200 million of unsecured
debt.
On February 2, 1998, the Operating Partnership filed a current report on
Form 8-K, dated February 2, 1998, setting forth under items 5 and 7 of the Form
certain exhibits in connection with the sale by the Operating Partnership of an
aggregate of $225 million of unsecured debt.
On February 3, 1998, the Operating Partnership filed a current report on
Form 8-K, dated November 17, 1997, setting forth under items 5 and 7 of the
Form audited financial statements of Shelton Proterties, Riparius Properties
and Winners Circle for the year ended December 31, 1996.
On April 24, 1998, the Operating Partnership filed a current report on
Form 8-K, dated April 20, 1998, setting forth under items 5 and 7 of the Form
certain exhibits in connection with (i) the sale by the Operating Partnership
of $200 million of unsecured debt and (ii) the sale by the Company of 4,000,000
Depositary Shares, each representing 1/10 of an 8% Series D Cumulative
Redeemable Preferred Share.
On April 28, 1998, the Operating Partnership filed an amendment to its
current report on Form 8-K, dated January 9, 1997, which reported under item 2
of the Form the Company's acquisition of the Century Center portfolio and
Anderson Properties, Inc. The report included financial statements with respect
to Century Center Group dated January 9, 1997 and financial statements with
respect to Anderson Properties, Inc. dated January 23, 1997.
On May 4, 1998, the Operating Partnership filed a current report on Form
8-K, dated April 29, 1997, setting forth under items 5 and 7 of the Form an
amendment to the Company's merger agreement with J.C. Nichols Company.
20
<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/FORSYTH 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: May 15, 1998
21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- --------------------------------------------------------------------------------------------
<S> <C> <C>
3 (1) Amended and Restated Articles of Incorporation of the Company
4.1 (2) Form of certificate representing 8% Series D Cumulative Redeemable Preferred Shares
4.2 (2) Deposit Agreement, dated April 23, 1998, between the Company and First Union National
Bank, as preferred share depositary
4.3 (2) Form of Depositary Receipt evidencing the Depositary Shares that each represent 1/10 of an
8% Series D Cumulative Redeemable Preferred Share
4.4 (2) Amendment to Amended and Restated Agreement of Limited Partnership of the Operating
Partnership
27 Financial Data Schedule
</TABLE>
- ----------
(1) Filed as part of the Company's current report on Form 8-K dated September
25, 1997 and amended by articles supplementary filed as part of the
Company's current report on Form 8-K dated October 4, 1997 and articles
supplementary filed as part of the Company's current report on Form 8-K
dated April 20, 1998, each of which is incorporated herein by reference.
(2) Filed as part of the Operating Partnership's current report on Form 8-K
dated April 20, 1998 and incorporated herein by reference.
22
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000941713
<NAME> HIGHWOODS/FORSYTH
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 42,109,000
<SECURITIES> 0
<RECEIVABLES> 31,658,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 85,139,000
<PP&E> 3,088,124,000
<DEPRECIATION> 102,982,000
<TOTAL-ASSETS> 3,117,376,000
<CURRENT-LIABILITIES> 59,570,000
<BONDS> 1,231,099,000
0
288,155,000
<COMMON> 0
<OTHER-SE> 1,538,552,000
<TOTAL-LIABILITY-AND-EQUITY> 3,117,376,000
<SALES> 100,331,000
<TOTAL-REVENUES> 102,384,000
<CGS> 29,728,000
<TOTAL-COSTS> 46,841,000
<OTHER-EXPENSES> 3,784,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,778,000
<INCOME-PRETAX> 33,981,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 33,981,000
<DISCONTINUED> 0
<EXTRAORDINARY> 46,000
<CHANGES> 0
<NET-INCOME> 27,790,000
<EPS-PRIMARY> .47
<EPS-DILUTED> .47
</TABLE>
