-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FmogpGrhIYCqhbPefO98ZvAghFQrgPMPEdIkNAhBGfGmEz741voKlfgc9Apy6cFb /q8ZDGvC4hDajjcOy7H0dg== 0000931763-01-501480.txt : 20010815 0000931763-01-501480.hdr.sgml : 20010815 ACCESSION NUMBER: 0000931763-01-501480 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HIGHWOODS PROPERTIES INC CENTRAL INDEX KEY: 0000921082 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 561871668 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13100 FILM NUMBER: 1712112 BUSINESS ADDRESS: STREET 1: 3100 SMOKETREE CT STREET 2: STE 600 CITY: RALEIGH STATE: NC ZIP: 27604 BUSINESS PHONE: 9198724924 MAIL ADDRESS: STREET 1: 3100 SMOKETREE COURT STREET 2: STE 600 CITY: RALEIGH STATE: NC ZIP: 27604 10-Q 1 d10q.txt FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 Commission file number: 001-13100 __________________ HIGHWOODS PROPERTIES, INC. (Exact name of registrant as specified in its charter) Maryland 56-1871668 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3100 Smoketree Court, Suite 600, Raleigh, N.C. (Address of principal executive office) 27604 (Zip Code) (919) 872-4924 Registrant's telephone number, including area code: __________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] __________________ The Company has only one class of common stock, par value $.01 per share, with 53,817,223 shares outstanding as of July 27, 2001. ================================================================================ HIGHWOODS PROPERTIES, INC. QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 2001 TABLE OF CONTENTS
Page ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements........................................................................................ 3 Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000....................................... 4 Consolidated Statements of Income for the three and six months ended June 30, 2001 and 2000................. 5 Consolidated Statements of Stockholders' Equity for the six months ended June 30, 2001...................... 6 Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000....................... 7 Notes to Consolidated Financial Statements.................................................................. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 12 Results of Operations....................................................................................... 12 Liquidity and Capital Resources............................................................................. 13 Recent Developments......................................................................................... 15 Possible Environmental Liabilities.......................................................................... 15 Compliance with the Americans with Disabilities Act......................................................... 16 Funds From Operations and Cash Available for Distributions.................................................. 16 Disclosure Regarding Forward-Looking Statements............................................................. 18 Property Information........................................................................................ 20 Inflation................................................................................................... 28 Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................................. 29 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders......................................................... 30 Item 6. Exhibits and Reports on Form 8-K............................................................................ 30
2 PART I--FINANCIAL INFORMATION Item 1. Financial Statements We refer to (1) Highwoods Properties, Inc. as the "Company," (2) Highwoods Realty Limited Partnership as the "Operating Partnership," (3) the Company's common stock as "Common Stock" and (4) the Operating Partnership's common partnership interests as "Common Units." The information furnished in the accompanying balance sheets, statements of income, statements of stockholders' equity and statements of cash flows reflect all adjustments (consisting of normal recurring accruals) that are, in our opinion, necessary for a fair presentation of the aforementioned financial statements for the interim period. The aforementioned financial statements should be read in conjunction with the notes to consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included herein and in our 2000 Annual Report on Form 10-K. 3 HIGHWOODS PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands)
June 30, December 31, 2001 2000 ---- ---- (Unaudited) ASSETS Real estate assets, at cost: Land and improvements....................................................................... $ 423,705 $ 421,270 Buildings and tenant improvements........................................................... 2,850,270 2,742,946 Development in process...................................................................... 128,790 87,622 Land held for development................................................................... 150,938 145,598 Furniture, fixtures and equipment........................................................... 12,527 11,433 ------------- ----------- 3,566,230 3,408,869 Less--accumulated depreciation.............................................................. (330,858) (280,610) ------------- ----------- Net real estate assets...................................................................... 3,235,372 3,128,259 Property held for sale.......................................................................... 57,937 127,824 Cash and cash equivalents....................................................................... 30,113 104,780 Restricted cash................................................................................. 2,295 2,192 Accounts receivable, net........................................................................ 22,795 24,003 Advances to related parties..................................................................... -- 27,560 Notes receivable................................................................................ 61,325 80,918 Accrued straight-line rents receivable.......................................................... 45,146 39,295 Investment in unconsolidated affiliates......................................................... 75,484 78,423 Other assets: Deferred leasing costs...................................................................... 95,574 83,269 Deferred financing costs (Se Notes 3 and 4)................................................. 26,185 43,110 Prepaid expenses and other.................................................................. 9,807 11,878 -------------- ----------- 131,566 138,257 Less--accumulated amortization.............................................................. (52,018) (49,909) ------------- ----------- Other assets, net....................................................................... 79,548 88,348 ------------- ----------- Total Assets.................................................................................... $ 3,610,015 $ 3,701,602 ============= =========== LIABILITIES AND STOCKHOLDERS' EQUITY Mortgages and notes payable..................................................................... $ 1,655,459 $ 1,587,019 Accounts payable, accrued expenses and other liabilities........................................ 92,937 109,824 ------------- ----------- Total Liabilities........................................................................... 1,748,396 1,696,843 Minority interest............................................................................... 213,197 213,214 Stockholders' Equity: Preferred stock, $.01 par value, 50,000,000 authorized shares; 8 5/8% Series A Cumulative Redeemable Preferred Shares (liquidation preference $1,000 per share), 125,000 shares issued and 104,945 shares outstanding at June 30, 2001 and 125,000 shares issued and outstanding at December 31, 2000........................................ 104,945 125,000 8% Series B Cumulative Redeemable Preferred Shares (liquidation preference $25 per share), 6,900,000 shares issued and outstanding at June 30, 2001 and December 31, 2000............ 172,500 172,500 8% Series D Cumulative Redeemable Preferred Shares (liquidation preference $250 per share), 400,000 shares issued and outstanding at June 30, 2001 and December 31, 2000.............. 100,000 100,000 Common stock, $.01 par value, 200,000,000 authorized shares; 53,817,223 shares issued and outstanding at June 30, 2001 and 58,124,205 shares issued and outstanding at December 31, 2000. 538 581 Additional paid-in capital...................................................................... 1,399,404 1,506,161 Distributions in excess of net earnings......................................................... (114,702) (110,209) Accumulated other comprehensive loss (See Notes 3 and 4)........................................ (10,227) -- Deferred compensation--restricted stock......................................................... (4,036) (2,488) ------------- ----------- Total Stockholders' Equity.................................................................. 1,648,422 1,791,545 ------------- ----------- Total Liabilities and Stockholders' Equity...................................................... $ 3,610,015 $ 3,701,602 ============= ===========
See accompanying notes to consolidated financial statements. 4 HIGHWOODS PROPERTIES, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited and in thousands except per share amounts)
Three Months Six Months Ended June 30, Ended June 30, ---------------------- ------------------------ 2001 2000 2001 2000 ------------- ---------- -------------- --------- Revenue: Rental property......................................... $ 126,194 $ 137,719 $ 254,815 $ 273,620 Equity in earnings of unconsolidated affiliates......... 1,592 944 2,425 1,887 Interest and other income............................... 7,780 6,458 15,593 10,773 --------- ---------- ----------- ----------- Total Revenue............................................... 135,566 145,121 272,833 286,280 Operating expenses: Rental property......................................... 38,363 41,427 75,272 80,888 Depreciation and amortization........................... 29,117 29,362 58,323 57,690 Interest expense: Contractual........................................ 26,253 27,775 54,574 54,822 Amortization of deferred financing costs........... 675 577 1,340 1,298 --------- ---------- ----------- ----------- 26,928 28,352 55,914 56,120 General and administrative.............................. 5,451 5,443 10,663 10,539 --------- ---------- ----------- ----------- Income before gain/(loss) on disposition of land and depreciable assets, minority interest and extraordinary item................................ 35,707 40,537 72,661 81,043 Gain/(loss) on disposition of land and depreciable assets... 5,670 (26,062) 12,741 (19,116) --------- --------- ----------- ----------- Income before minority interest and extraordinary item................................. 41,377 14,475 85,402 61,927 Minority interest........................................... (5,095) (1,822) (10,346) (7,842) --------- --------- ----------- ----------- Income before extraordinary item................... 36,282 12,653 75,056 54,085 Extraordinary item--loss on early extinguishment of debt.... (325) (839) (518) (1,034) --------- --------- ----------- ----------- Net income......................................... 35,957 11,814 74,538 53,051 Dividends on preferred stock................................ (7,929) (8,145) (16,074) (16,290) --------- --------- ----------- ----------- Net income available for common shareholders....... $ 28,028 $ 3,669 $ 58,464 $ 36,761 ========= ========= =========== =========== Net income per common share--basic: Income before extraordinary item........................ $ 0.53 $ 0.08 $ 1.07 $ 0.63 Extraordinary item--loss on early extinguishment of debt.............................................. (0.01) (0.01) (0.01) (0.01) --------- --------- ----------- ----------- Net income.............................................. $ 0.52 $ 0.07 $ 1.06 $ 0.62 --------- ========= =========== =========== Weighted average shares outstanding--basic.............. 53,927 59,293 55,153 59,850 ========= ========= =========== =========== Net income per common share--diluted: Income before extraordinary item........................ $ 0.52 $ 0.08 $ 1.06 $ 0.63 Extraordinary item--loss on early extinguishment of debt.............................................. (0.01) (0.01) (0.01) (0.01) --------- --------- ----------- ----------- Net income.............................................. $ 0.51 $ 0.07 $ 1.05 $ 0.62 --------- ========= =========== =========== Weighted average shares outstanding--diluted............ 54,318 59,608 55,542 60,055 ========= ========= =========== =========== Distributions declared per common share..................... .57 .555 1.14 1.11 ========= ========= =========== ===========
See accompanying notes to consolidated financial statements. 5 HIGHWOODS PROPERTIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Six Months Ended June 30, 2001 (Unaudited and in thousands except share amounts)
Accumulated Number of Additional Other Common Common Series A Series B Series D Paid-In Deferred Comprehensive Shares Stock Preferred Preferred Preferred Capital Compensation Loss ------ ----- --------- --------- --------- ------- ------------ ---- Balance at December 31, 2000..................... 58,124,205 $ 581 $ 125,000 $ 172,500 $ 100,000 $1,506,161 $ (2,488) $ -- Issuance of Common Stock.................... 21,481 -- -- -- -- 602 -- -- Common Stock Dividends................ -- -- -- -- -- -- -- -- Preferred Stock Dividends................ -- -- -- -- -- -- -- -- Issuance of restricted stock.................... 81,137 -- -- -- -- 2,028 (2,028) -- Amortization of deferred compensation............. -- -- -- -- -- -- 480 -- Repurchase of Common Stock.................... (4,409,600) (43) -- -- -- (110,941) -- -- Repurchase of Preferred Stock...................... -- -- (20,055) -- -- 1,554 Net Income................. -- -- -- -- -- -- -- -- Reclassification of derivative instruments... -- -- -- -- -- -- -- (10,227) ---------- ------ --------- --------- -------- ---------- ------------ --------- Balance at June 30, 2001..................... 53,817,223 $ 538 $ 104,945 $ 172,500 $ 100,000 $1,399,404 $ (4,036) $ (10,227) ========== ====== ========= ========= ========= ========== ============ ========= Distributions in excess of Net Earnings Total -------- ----- Balance at December 31, 2000..................... $ (110,209) $1,791,545 Issuance of Common Stock.................... -- 602 Common Stock Dividends................ (62,957) (62,957) Preferred Stock Dividends................ (16,074) (16,074) Issuance of restricted stock.................... -- -- Amortization of deferred compensation............. -- 480 Repurchase of Common Stock.................... -- (110,984) Repurchase of Preferred Stock...................... (18,501) Net Income................. 74,538 74,538 Reclassification of derivative instruments... -- (10,227) ---------- ---------- Balance at June 30, 2001..................... $ (114,702) $1,648,422 ========== ==========
See accompanying notes to consolidated financial statements. 6 HIGHWOODS PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited and in thousands)
Six Months Ended June 30, -------- 2001 2000 ---- ---- Operating activities: Net income........................................................................................... $ 74,538 $ 53,051 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................................................................... 59,663 58,988 Amortization of deferred compensation............................................................ 480 227 Minority interest................................................................................ 10,346 7,842 Equity in earnings of unconsolidated affiliates.................................................. (2,425) (1,887) (Gain)/loss on disposition of land and depreciable assets............................................ (12,741) 19,116 Loss on early extinguishment of debt................................................................. 518 1,034 Transition adjustment upon adoption of FASB 133...................................................... 556 --- Loss on ineffective portion of derivative instruments................................................ 428 --- Changes in operating assets and liabilities.......................................................... (14,326) (3,827) --------- ---------- Net cash provided by operating activities................................................... 117,037 134,544 --------- ---------- Investing activities: Additions to real estate assets...................................................................... (140,630) (126,256) Proceeds from disposition of real estate assets...................................................... 105,500 216,443 Repayment of advances to subsidiaries................................................................ 27,560 1,921 Distributions from unconsolidated affiliates......................................................... 4,350 3,180 Investments in notes receivable...................................................................... 18,918 15,145 Other investing activities........................................................................... (9,920) (34,685) --------- ---------- Net cash provided by investing activities................................................... 5,778 75,748 --------- ---------- Financing activities: Distributions paid on common stock and common units.................................................. (71,603) (76,241) Dividends paid on preferred stock.................................................................... (16,074) (16,290) Loss on early extinguishment of debt................................................................. (518) (1,034) Borrowings on mortgages and notes payable............................................................ 8,780 72,442 Repayments on mortgages and notes payable............................................................ (92,671) (89,028) Borrowings on revolving loans........................................................................ 215,000 279,500 Repayments on revolving loans........................................................................ (103,500) (314,500) Net proceeds from the sale of common stock........................................................... 2,157 707 Net change in deferred financing costs............................................................... (164) ( 86) Repurchase of stock and units........................................................................ (138,889) (55,549) Other................................................................................................ --- (202) --------- ---------- Net cash used in financing activities....................................................... (197,482) (200,281) --------- ---------- Net (decrease)/increase in cash and cash equivalents................................................. (74,667) 10,011 Cash and cash equivalents at beginning of the period................................................. 104,780 34,496 --------- ---------- Cash and cash equivalents at end of the period....................................................... $ 30,113 $ 44,507 ========= ========== Supplemental disclosure of cash flow information: Cash paid for interest............................................................................... $ 61,837 $ 68,306 ========= ==========
See accompanying notes to consolidated financial statements. 7 HIGHWOODS PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued) (Unaudited and in thousands) Supplemental disclosure of non-cash investing and financing activities The following table summarizes the net assets contributed by the holders of Common Units in the Operating Partnership and the net assets acquired subject to mortgage notes payable.
Six Months Ended June 30, -------- 2001 2000 ---- ---- (Unaudited) (Unaudited) Assets: Notes receivable .................................................................................. $ 675 $ --- Cash and cash equivalents.......................................................................... 1,074 --- Rental property and equipment, net................................................................. 48,646 1,356 Liabilities: Accounts payable, accrued expenses and other liabilities........................................... 2,084 --- Mortgages and notes payable........................................................................ 48,831 --- ------- -------- Net assets.................................................................................... $ (520) $ 1,356 ======= ========
See accompanying notes to consolidated financial statements. 8 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001 (Unaudited) 1. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and the Operating Partnership and their wholly owned affiliates. All significant intercompany balances and transactions have been eliminated. The extraordinary loss represents the write-off of loan origination fees and prepayment penalties paid on the early extinguishment of debt, net of the minority interest. The Company has elected and expects to continue to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. Therefore, no provision has been made for income taxes related to REIT taxable income to be distributed to stockholders. Minority interest in the Company represents Common Units owned by various individuals and entities other than the Company in the Operating Partnership, the entity that owns substantially all of the Company's properties and through which the Company, as the sole general partner, conducts substantially all of its operations. Per share information is calculated using the weighted average number of shares of Common Stock outstanding (including common share equivalents). In addition, minority interest includes equity of consolidated real estate partnerships which are owned by various individuals and entities other than the Company. Certain amounts in the June 30, 2000 financial statements have been reclassified to conform to the June 30, 2001 presentation. These reclassifications had no material effect on net income or stockholders' equity as previously reported. 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 our financial position, results of operations and cash flows have been made. For further information, refer to the financial statements and notes thereto included in our 2000 Annual Report on Form 10-K. 2. SEGMENT INFORMATION Our sole business is the acquisition, development and operation of rental real estate properties. We operate office, industrial and retail properties and apartment units. There are no material inter-segment transactions. Our chief operating decision maker ("CDM") assesses and measures operating results based upon property level net operating income. The operating results for the individual assets within each property type have been aggregated since the CDM evaluates operating results and allocates resources on a property-by- property basis within the various property types. The accounting policies of the segments are the same as those described in Note 1. Further, all operations are within the United States and no tenant comprises more than 10% of consolidated revenues. The following table summarizes the rental income, net operating income and total assets for each reportable segment for the three and six months ended June 30, 2001 and 2000. 9
Three Months Six Months Ended June 30, Ended June 30, -------------------------- -------------------------- 2001 2000 2001 2000 --------- ----------- ---------- ----------- (in thousands) (in thousands) Rental Income: Office segment............................ $ 104,044 $ 112,032 $ 209,812 $ 223,449 Industrial segment........................ 11,933 12,281 23,513 24,028 Retail segment............................ 8,653 9,069 18,355 17,473 Apartment segment......................... 1,564 4,337 3,135 8,670 ---------- ----------- ---------- ----------- Total rental income.................... $ 126,194 $ 137,719 $ 254,815 $ 273,620 ========== =========== ========== =========== Net operating income: Office segment............................ $ 71,400 $ 77,215 $ 145,898 $ 155,314 Industrial segment........................ 9,989 10,295 19,837 20,075 Retail segment............................ 5,584 6,267 12,175 12,213 Apartment segment......................... 858 2,515 1,633 5,130 ---------- ----------- ---------- ----------- Total net operating income............. $ 87,831 $ 96,292 $ 179,543 $ 192,732 ---------- ----------- ---------- ----------- Reconciliation to income before minority interest and extraordinary item: Equity in income of unconsolidated affiliates $ 1,592 $ 944 $ 2,425 $ 1,887 Gain/(loss) on disposition of land and depreciable assets..................... 5,670 (26,062) 12,741 (19,116) Interest and other income................. 7,780 6,458 15,593 10,773 Interest expense.......................... (26,928) (28,352) (55,914) (56,120) General and administrative expenses....... (5,451) (5,443) (10,663) (10,539) Depreciation and amortization............. (29,117) (29,362) (58,323) (57,690) ---------- ----------- ---------- ----------- Income before minority interest and extraordinary item..................... $ 41,377 $ 14,475 $ 85,402 $ 61,927 ========== =========== ========== =========== Total assets: Office segment............................ $2,708,324 $ 2,872,033 $2,708,324 $ 2,872,033 Industrial segment........................ 398,740 410,855 398,740 410,855 Retail segment............................ 258,135 287,412 258,135 287,412 Apartment segment......................... 39,607 114,528 39,607 114,528 Corporate and other....................... 205,209 198,911 205,209 198,911 ---------- ----------- ---------- ----------- Total assets.............................. $3,610,015 $ 3,883,739 $3,610,015 $ 3,883,739 ========== =========== ========== ===========
3. DERIVATIVE FINANCIAL INSTRUMENTS On January 1, 2001, we adopted Financial Accounting Standards Board Statement (SFAS) No. 133/138, "Accounting for Derivative Instruments and Hedging Activities," as amended. This Statement requires us to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings, or recognized in Accumulated Other Comprehensive Loss ("AOCL") until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value is recognized in earnings. In connection with the adoption of SFAS 133/138 in January 2001, we recorded a net transition adjustment of $555,962 of unrealized loss in interest and other income and a net transition adjustment of $125,000 in AOCL. Adoption of the standard also resulted in our recognizing $127,000 of derivative instrument liabilities and a reclassification of approximately $10.6 million of deferred financing costs from past cashflow hedging relationships from other assets to AOCL. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cashflows and to lower overall borrowing costs. To achieve these objectives, we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not hold these derivatives for trading or speculative purposes. All of our derivatives are designated as cashflow hedges (i.e., hedging the exposure of variability in expected future cash flows that is attributable to a particular risk) at June 30, 2001. The effective portion of the cumulative loss on the derivative instruments was $10.2 million at June 30, 2001 and is reported as a component of AOCL in shareholders' equity and recognized into earnings in the same period or periods during which the hedged transaction affects earnings (as the underlying debt is paid down). We expect that the portion of the cumulative loss recorded in AOCL at June 30, 2001 associated with the derivative instruments which will be recognized within the next 12 months will be approximately $1.6 million. The ineffective portion of 10 our derivatives' changes in fair value has resulted in a loss of $984,000 for the six months ended June 30, 2001 and is included in interest and other income on the Consolidated Statements of Income at June 30, 2001. Derivative liabilities totaling approximately $844,000 related to our interest rate swap, cap and collar agreements, with a notional amount of $99.5 million, are recorded in other accounts payable, accrued expenses and other liabilities in the Consolidated Balance Sheets at June 30, 2001. The fair value of our interest rate swap, cap and collar agreements was ($844,000) at June 30, 2001 and is based on individual market values as calculated monthly using a published forward curve for the floating portion and the agreed upon fixed rate for the fixed portion of the interest rate swap, cap and collar agreements. 4. ACCUMULATED OTHER COMPREHENSIVE LOSS Accumulated other comprehensive loss represents net income plus the results of certain non-shareholders' equity changes not reflected in the Consolidated Statements of Income. The components of accumulated other comprehensive loss are as follows:
Six Months Ended June 30, ----------------------- 2001 2000 -------- ------- Net Income................................................................................ $ 74,538 $ 53,051 Accumulated other comprehensive loss: Unrealized derivative gains/(losses) on cashflow hedges................................ (414) --- Reclassification of past hedging relationships......................................... (10,597) --- Amortization of past hedging relationships............................................. 784 --- -------- -------- Total accumulated comprehensive loss................................................. (10,227) --- Total comprehensive income........................................................... $ 64,311 $ 53,051 ======== ========
11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with all of the financial statements appearing elsewhere in the report and is based primarily on the consolidated financial statements of the Company. Results of Operations Three Months Ended June 30, 2001. Revenues from rental operations decreased $11.5 million, or 8.4% from $137.7 million for the three months ended June 30, 2000 to $126.2 million for the comparable period in 2001. The decrease is primarily a result of the disposition and contribution of 4.7 million square feet of wholly owned office, industrial and retail properties and 1,160 apartment units, offset in part by the acquisition of 740,000 square feet of wholly owned office, industrial and retail properties and the completion of 2.1 million square feet of development activity during the last six months of 2000 and the first six months of 2001. Our in-service portfolio decreased from 38.5 million square feet at June 30, 2000 to 36.7 million square feet at June 30, 2001. Same property revenues, which are the revenues of the 465 in-service properties and 725 apartment units owned on April 1, 2000, increased 3.1% for the three months ended June 30, 2001, compared to the same three months in 2000. During the three months ended June 30, 2001, 192 leases representing 937,000 square feet of office, industrial and retail space were executed at an average rate per square foot which was 4.9% higher than the average rate per square foot on the expired leases. Interest and other income increased $1.3 million, or 20.0% from $6.5 million for the three months ended June 30, 2000 to $7.8 million for the comparable period in 2001. The increase was a result of an increase in interest income, and leasing, development and management fees, partly offset by an adjustment related to the adoption of FASB 133. Rental operating expenses decreased $3.0 million, or 7.2% from $41.4 million for the three months ended June 30, 2000 to $38.4 million for the comparable period in 2001. The decrease is primarily a result of the disposition and contribution of 4.7 million square feet of wholly owned office, industrial and retail properties and 1,160 apartment units, offset in part by the acquisition of 740,000 square feet of wholly owned office, industrial and retail properties and the completion of 2.1 million square feet of development activity during the last six months of 2000 and the first six months of 2001. Rental operating expenses as a percentage of related revenues was 30.4% for the three months ended June 30, 2001 and 30.1% for the three months ended June 30, 2000. Depreciation and amortization for the three months ended June 30, 2001 and 2000 totaled $29.1 million and $29.4 million, respectively. The decrease of $0.3 million, or 1.0% is due to a decrease in depreciable assets over the prior year. Interest expense decreased $1.5 million, or 5.3% from $28.4 million for the three months ended June 30, 2000 to $26.9 million for the comparable period in 2001. The decrease is attributable to a decrease in outstanding debt and weighted average interest rates for the entire quarter of 2001 partly offset by a decrease in capitalized interest in 2001. Interest expense for the three months ended June 30, 2001 and 2000 included $675,000 and $577,000, respectively, of amortization of deferred financing costs and the costs related to our interest rate hedge contracts. General and administrative expenses was 4.0% of total revenue for the three months ended June 30, 2001 and 3.7% for the comparable period in 2000. Net income before minority interest and extraordinary item equaled $41.4 million and $14.5 million for the three months ended June 30, 2001 and 2000, respectively. The Company's net income allocated to minority interest totaled $5.1 million and $1.8 million for the three months ended June 30, 2001 and 2000, respectively. The Company recorded $7.9 million in preferred stock dividends for the three months ended June 30, 2001 and $8.1 million in preferred stock dividends for the six months ended June 30, 2000. Six Months Ended June 30, 2001. Revenues from rental operations decreased $18.8 million, or 6.9% from $273.6 million for the six months ended June 30, 2000 to $254.8 million for the comparable period in 2001. The decrease is primarily a result of the disposition and contribution of 4.7 million square feet of wholly owned office, industrial and retail properties and 1,160 apartment units, offset in part by the acquisition of 740,000 square feet of wholly owned office properties and the completion of 2.1 million square feet of development activity during the last six months of 2000 and the first six months of 2001. Our in-service portfolio decreased from 38.5 million square feet at June 30, 2000 to 36.7 million square feet at June 30, 2001. Same property revenues, which are the revenues of the 454 12 in-service properties and 725 apartment units owned on January 1, 2000, increased 2.8% for the six months ended June 30, 2001, compared to the same six months in 2000. During the six months ended June 30, 2001, 360 leases representing 2.1 million square feet of office, industrial and retail space were executed at an average rate per square foot which was 6.5% higher than the average rate per square foot on the expired leases. Interest and other income increased $4.8 million, or 44.4% from $10.8 million for the six months ended June 30, 2000 to $15.6 million for the comparable period in 2001. The increase was a result of an increase in interest income and leasing, development and management fees, partly offset by an adjustment related to the adoption of FASB 133. Rental operating expenses decreased $5.6 million, or 6.9%, from $80.9 million for the six months ended June 30, 2000 to $75.3 million for the comparable period in 2001. The decrease is primarily a result of the disposition and contribution of 4.7 million square feet of wholly owned office, industrial and retail properties and 1,160 apartment units, offset in part by the acquisition of 740,000 square feet of wholly owned office properties and the completion of 2.1 million square feet of development activity during the last six months of 2000 and the first six months of 2001. Rental operating expenses as a percentage of related revenues was 29.6% for the six months ended June 30, 2001 and 2000. Depreciation and amortization for the six months ended June 30, 2001 and 2000 totaled $58.3 million and $57.7 million, respectively. The increase of $0.6 million, or 1.0%, is due to an increase in tenant improvements in 2000 and 2001, partly offset by a decrease in depreciable assets from 2000 to 2001. Interest expense decreased $0.3 million, or 0.5%, from $56.1 million for the six months ended June 30, 2000 to $55.8 million for the comparable period in 2001. The decrease is attributable to a decrease in outstanding debt and weighted average interest rates for the six months ended June 30, 2001, partly offset by a decrease in capitalized interest in 2001. Interest expense for the six months ended June 30, 2001 and 2000 included $1.3 million of amortization of deferred financing costs and the costs related to our interest rate hedge contracts. General and administrative expenses increased from 3.7% of total revenue for the six months ended June 30, 2000 to 3.9% for the comparable period in 2001. Income before minority interest and extraordinary item was $85.4 million and $61.9 million for the six months ended June 30, 2001 and 2000, respectively. The Company's net income allocated to minority interest totaled $10.3 million and $7.8 million for the six months ended June 30, 2001 and 2000, respectively. The Company recorded $16.1 million in preferred stock dividends for the six months ended June 30, 2001 and $16.3 million in preferred stock dividends for the six months ended June 30, 2000. Liquidity and Capital Resources Statement of Cash Flows. For the six months ended June 30, 2001, the Company generated $117.0 million in cash flows from operating activities and $5.8 million in investing activities (primarily as a result of dispositions of real estate assets, collection of notes receivable and repayments from subsidiaries, partly offset by additions to real estate assets). These combined cash flows of $123.0 million were used during the quarter to partly fund financing activities of $197.5 million, primarily consisting of the repurchase of Common Stock, Common Units and Preferred Stock and the payment of distributions. Capitalization. Our total indebtedness at June 30, 2001 totaled $1.7 billion and was comprised of $593.0 million of secured indebtedness with a weighted average interest rate of 7.8% and $1.1 billion of unsecured indebtedness with a weighted average interest rate of 7.1%. Except as stated below, all of the mortgage and notes payable outstanding at June 30, 2001 were either fixed rate obligations or variable rate obligations covered by interest rate hedge contracts. Approximately $76.3 million of floating rate notes were not covered by interest rate hedge contracts on June 30, 2001. Based on the Company's total market capitalization of $3.7 billion at June 30, 2001 (at the June 30, 2001 stock price of $26.65 and assuming the redemption for shares of Common Stock of the 7.6 million Common Units of minority interest in the Operating Partnership), the Company's debt represented approximately 45.1% of its total market capitalization. To meet in part our long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Borrowings under our $300.0 million unsecured revolving loan (the "Revolving Loan") bear interest at 13 variable rates. Our long-term debt, which consists of long-term financings and the issuance of debt securities, typically bears interest at fixed rates. In addition, we have assumed fixed rate and variable rate debt in connection with acquiring properties. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not hold or issue these derivative contracts for trading or speculative purposes. The following table sets forth information regarding our interest rate hedge contracts as of June 30, 2001:
Fair Notional Maturity Market Type of Hedge Amount Date Reference Rate Fixed Rate Value - ------------- ------ ---- -------------- ---------- ----- Swap........................... $19,504 06/10/02 1-Month LIBOR + 0.75% 6.95% $(413,903) Collar......................... $80,000 10/15/01 1-Month LIBOR 5.60-6.25% $(430,022)
The interest rate on our variable rate debt is adjusted at one-month intervals, subject to settlements under these contracts. Net payments made to counterparties under interest rate hedge contracts were $214,853 during the first six months of 2001 and were recorded as increases to interest expense. In addition, we are exposed to certain losses in the event of nonperformance by the counterparties under the interest rate hedge contracts. We expect the counterparties, which are major financial institutions, to perform fully under these contracts. However, if the counterparties were to default on their obligations under the interest rate hedge contracts, we could be required to pay the full rates on our debt, even if such rates were in excess of the rates in the contracts. Current and Future Cash Needs. Historically, rental revenue has been the principal source of funds to pay operating expenses, debt service, stockholder distributions and capital expenditures, excluding nonrecurring capital expenditures. In addition, construction management, maintenance, leasing and management fees have provided sources of cash flow. We presently have no plans for major capital improvements to the existing in-service properties, other than normal recurring building improvements, tenant improvements and lease commissions. We expect to meet our short-term liquidity requirements generally through working capital and net cash provided by operating activities along with the Revolving Loan. Our short-term (within the next 12 months) liquidity needs also include, among other things, the funding of approximately $75.0 million of our existing development activity. We expect to fund our short-term liquidity needs through a combination of: . borrowings under our Revolving Loan (approximately $160.0 million was available at June 30, 2001); . the issuance of secured debt; . the selective disposition of non-core assets; and . the sale or contribution of some of our wholly owned properties to strategic joint ventures to be formed with selected partners interested in investing with us, which will have the net effect of generating additional capital through such sale or contributions. Our long-term liquidity needs generally include the funding of existing and future development activity, selective asset acquisitions and the retirement of mortgage debt, amounts outstanding under the Revolving Loan and long-term unsecured debt. We remain committed to maintaining a flexible and conservative capital structure. Accordingly, we expect to meet our long-term liquidity needs through a combination of (1) the issuance by the Operating Partnership of additional unsecured debt securities, (2) the issuance of additional equity securities by the Company and the Operating Partnership as well as (3) the sources described above with respect to our short-term liquidity. We expect to use such sources to meet our long-term liquidity requirements either through direct payments or repayment of borrowings under the Revolving Loan. We do not intend to reserve funds to retire existing secured or unsecured indebtedness upon maturity. Instead, we will seek to refinance such debt at maturity or retire such debt through the issuance of equity or debt securities or the incurrence of other debt. 14 We anticipate that our available cash and cash equivalents and cash flows from operating activities, together with cash available from borrowings and other sources, will be adequate to meet our capital and liquidity needs in both the short and long term. However, if these sources of funds are insufficient or unavailable, the Company's ability to make the expected distributions to stockholders discussed below and satisfy other cash requirements may be adversely affected. Distributions to Stockholders. In order to qualify as a REIT for Federal income tax purposes, the Company is required to make distributions to its stockholders of at least 95% of REIT taxable income. The Company expects to use its cash flow from operating activities for distributions to stockholders and for payment of recurring, non-incremental revenue-generating expenditures. The following factors will affect cash flows from operating activities and, accordingly, influence the decisions of the Board of Directors regarding distributions: (1) debt service requirements after taking into account the repayment and restructuring of certain indebtedness; (2) scheduled increases in base rents of existing leases; (3) changes in rents attributable to the renewal of existing leases or replacement leases; (4) changes in occupancy rates at existing properties and procurement of leases for newly acquired or developed properties; and (5) operating expenses and capital replacement needs. Recent Developments Stock Repurchases. On May 31, 2001, we completed our previously announced 10.0 million share and unit repurchase program pursuant to which we repurchased shares of Common Stock and Common Units at a weighted average price of $24.19 and a total purchase price of $241.9 million. In addition, on April 25, 2001, we announced that our board of directors has authorized the repurchase of up to an additional 5.0 million shares of Common Stock and Common Units. As of July 27, 2001, we have repurchased 81,622 shares of Common Stock and Common Units at a weighted average purchase price of $24.99 per share and a total purchase price of $2.0 million under this new repurchase program. Separately, on June 19, 2001, we repurchased in a privately negotiated transaction 20,055 Series A Preferred Shares at $922.50 per share, for a total purchase price of $18.5 million. Disposition Activity. During the six months ended June 30, 2001, we sold approximately 164,000 rentable square feet of office properties, 1,160 apartment units and 98.8 acres of development land for gross proceeds of $105.5 million. In addition, we currently have 326,000 rentable square feet of wholly owned properties and 413 apartment units under contract for sale in various transactions totaling $75.4 million. These transactions are subject to customary closing conditions, including due diligence and documentation, and are expected to close at various times throughout 2001. However, we can provide no assurance that all or parts of these transactions will be consummated. As of August 10, 2001, we expect to use a portion of the cash proceeds from our recent and pending disposition activity to reinvest in tax-deferred exchange transactions under Section 1031 of the Internal Revenue Code. We expect to reinvest up to $14.2 million of the cash proceeds from completed disposition activity and up to $64.7 million of the cash proceeds from pending disposition activity to acquire, in tax-deferred exchange transactions, in-service properties, development land and development projects located in core markets and in sub-markets where we have a strong presence. For an exchange to qualify for tax-deferred treatment under Section 1031, the net proceeds from the sale of a property must be held by an escrow agent until applied toward the purchase of real estate qualifying for gain deferral. Given the competition for properties meeting our investment criteria, there may be some delay in reinvesting such proceeds. Delays in reinvesting such proceeds will reduce our income from operations. In addition, the use of net proceeds from dispositions to fund development activity, either through direct payments or repayment of borrowings under our Revolving Loan, will reduce our income from operations until such development projects are placed in service. Possible Environmental Liabilities In connection with owning or operating our properties, we may be liable for certain costs due to possible environmental liabilities. Under various laws, ordinances and regulations, such as the Comprehensive Environmental Response Compensation and Liability Act, and common law, an owner or operator of real estate is liable for the costs to remove or remediate certain hazardous or toxic chemicals or substances on or in the property. Owners or operators are also liable for certain other costs, including governmental fines and injuries to persons and property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic chemicals or substances. The presence of such substances, or the failure to remediate such substances properly, may adversely affect the owner's or operator's ability to sell or 15 rent such property or to borrow using such property as collateral. Persons who arrange for the disposal, treatment or transportation of hazardous or toxic chemicals or substances may also be liable for the same types of costs at a disposal, treatment or storage facility, whether or not that person owns or operates that facility. Certain environmental laws also impose liability for releasing asbestos- containing materials. Third parties may seek recovery from owners or operators of real property for personal injuries associated with asbestos-containing materials. A number of our properties have asbestos-containing materials or material that we presume to be asbestos-containing materials. In connection with owning and operating our properties, we may be liable for such costs. In addition, it is not unusual for property owners to encounter on-site contamination caused by off-site sources. The presence of hazardous or toxic chemicals or substances at a site close to a property could require the property owner to participate in remediation activities or could adversely affect the value of the property. Contamination from adjacent properties has migrated onto at least three of our properties; however, based on current information, we do not believe that any significant remedial action is necessary at these affected sites. As of the date hereof, we have obtained Phase I environmental assessments (and, in certain instances, Phase II environmental assessments) on substantially all of our in-service properties. These assessments have not revealed, nor are we aware of, any environmental liability at our properties that we believe would materially adversely affect our financial position, operations or liquidity taken as a whole. This projection, however, could be incorrect depending on certain factors. For example, material environmental liabilities may have arisen after the assessments were performed or our assessments may not have revealed all environmental liabilities or may have underestimated the scope and severity of environmental conditions observed. There may also be unknown environmental liabilities at properties for which we have not obtained a Phase I environmental assessment or have not yet obtained a Phase II environmental assessment. In addition, we base our assumptions regarding environmental conditions, including groundwater flow and the existence and source of contamination, on readily available sampling data. We cannot guarantee that such data is reliable in all cases. Moreover, we cannot provide any assurances (1) that future laws, ordinances or regulations will not impose a material environmental liability or (2) that tenants, the condition of land or operations in the vicinity of our properties or unrelated third parties will not affect the current environmental condition of our properties. Some tenants use or generate hazardous substances in the ordinary course of their respective businesses. In their leases, we require these tenants to comply with all applicable laws and to be responsible to us for any damages resulting from their use of the property. We are not aware of any material environmental problems resulting from tenants' use or generation of hazardous or toxic chemicals or substances. We cannot provide any assurances, however, that all tenants will comply with the terms of their leases or remain solvent. If tenants do not comply or do not remain solvent, we may at some point be responsible for contamination caused by such tenants. Compliance with the Americans with Disabilities Act Under the Americans with Disabilities Act (the "ADA"), all public accommodations and commercial facilities are required to meet certain federal requirements related to access and use by disabled persons. These requirements became effective in 1992. Compliance with the ADA requirements could require removal of access barriers, and noncompliance could result in imposition of fines by the U.S. government or an award of damages to private litigants. Although we believe that our properties are substantially in compliance with these requirements, we may incur additional costs to comply with the ADA. Although we believe that such costs will not have a material adverse effect on us, if required changes involve a greater expenditure than we currently anticipate, our results of operations, liquidity and capital resources could be materially adversely affected. Funds From Operations and Cash Available for Distributions We consider funds from operations ("FFO") to be a useful financial performance measure of the operating performance of an equity REIT because, together with net income and cash flows, FFO provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures. FFO does not represent net income or cash flows from operating, investing or financing activities as defined by Generally Accepted Accounting Principles ("GAAP"). It should not be considered as an alternative to net income as an indicator of our operating performance or to cash flows as a measure of liquidity. FFO does not 16 measure whether cash flow is sufficient to fund all cash needs, including principal amortization, capital improvements and distributions to stockholders. Further, FFO as disclosed by other REITs may not be comparable to our calculation of FFO, as described below. FFO and cash available for distributions should not be considered as alternatives to net income as an indication of our performance or to cash flows as a measure of liquidity. FFO equals net income (computed in accordance with GAAP) excluding gains (or losses) from debt restructuring and sales of depreciable assets, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. In March 1995, the National Association of Real Estate Investment Trusts ("NAREIT") issued a clarification of the definition of FFO. This clarification provides that amortization of deferred financing costs and depreciation of non-real estate assets are no longer to be added back to net income in arriving at FFO. In October 1999, NAREIT issued an additional clarification effective as of January 1, 2000 stipulating that FFO should include both recurring and non-recurring operating results. Consistent with this clarification, non-recurring items that are not defined as "extraordinary" under GAAP will be reflected in the calculation of FFO. Gains and losses from the sale of depreciable operating property will continue to be excluded from the calculation of FFO. Cash available for distribution is defined as FFO reduced by non-revenue enhancing capital expenditures for building improvements and tenant improvements and lease commissions related to second generation space. 17 FFO and cash available for distribution for the three month period ended June 30, 2000 and 2001 are summarized in the following table (in thousands):
Three Months Ended Six Months Ended June 30, June 30, ------------------------- ---------------------- 2001 2000 2001 2000 ---------- ------------ ---------- --------- Funds from operations: Income before minority interest and extraordinary item..... $ 41,377 $ 14,475 $ 85,402 $ 61,927 Add/(Deduct): Dividends on preferred stock............................. (7,929) (8,145) (16,074) (16,290) Transition adjustment upon adoption of FAS 133........... -- -- 556 -- (Gain)/loss on disposition of land and depreciable assets................................................. (5,670) 26,062 (12,741) 19,116 Gain on disposition of land.............................. 537 -- 1,563 -- Depreciation and amortization............................ 29,117 29,362 58,323 57,690 Depreciation on unconsolidated affiliates................ 1,912 920 3,904 1,798 ----------- --------- -------- -------- Funds from operations.................................. 59,344 62,674 120,933 124,241 Cash available for distribution: Add/(Deduct): Rental income from straight-line rents................... (3,550) (3,995) (6,652) (7,795) Amortization of deferred financing costs................. 675 577 1,340 1,298 Non-incremental revenue generating capital expenditures (1): Building improvements paid............................. (2,014) (2,296) (3,087) (3,665) Second generation tenant improvements paid............. (4,021) (5,048) (7,776) (9,830) Second generation lease commissions paid............... (3,541) (3,678) (8,328) (6,809) ----------- --------- -------- -------- Cash available for distribution...................... $ 46,893 $ 48,234 $ 96,430 $ 97,440 =========== ========= ======== ======== Weighted average common shares/common units outstanding - basic (2).................................. 61,571 68,043 62,826 68,649 =========== ========= ======== ======== Weighted average common shares/common units outstanding - diluted (2)................................ 61,962 68,358 63,215 68,854 =========== ========= ======== ======== Dividend payout ratios: Funds from operations.................................... 59.5% 60.5% 59.6% 61.5% =========== ========= ======== ======== Cash available for distribution.......................... 75.3% 78.7% 74.7% 78.4% =========== ========= ======== ========
____________ (1) Amounts represent cash expenditures. (2) Assumes redemption of Common Units for shares of Common Stock. Minority interest Common Unit holders and the stockholders of the Company share equally on a per share and per Common Unit basis; therefore, the resultant per share information is unaffected by the conversion. On July 31, 2001, the Company's Board of Directors declared a dividend for the second quarter ended June 30, 2001 of $0.585 per share ($2.34 on an annualized basis) payable on August 23, 2001 to stockholders of record on August 10, 2001. Disclosure Regarding Forward-Looking Statements Some of the information in this Quarterly Report on Form 10-Q may contain forward-looking statements. Such statements include, in particular, statements about our plans, strategies and prospects under "Management's Discussion and Analysis of Financial Condition and Results of Operations." You can identify forward-looking statements by our use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate," "continue" or other similar words. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that our plans, intentions or expectations will be achieved. When considering such forward-looking statements, you should keep in mind the following important factors that could cause our actual results to differ materially from those contained in any forward-looking statement: . our markets could suffer unexpected increases in development of office, industrial and retail properties; . the financial condition of our tenants could deteriorate; 18 . the costs of our development projects could exceed our original estimates; . we may not be able to complete development, acquisition, reinvestment, disposition or joint venture projects as quickly or on as favorable terms as anticipated; . we may not be able to lease or release space quickly or on as favorable terms as old leases; . we may have incorrectly assessed the environmental condition of our properties; . an unexpected increase in interest rates would increase our debt service costs; . we may not be able to continue to meet our long-term liquidity requirements on favorable terms; . we could lose key executive officers; and . our southeastern markets may suffer an unexpected decline in economic growth or increase in unemployment rates. Given these uncertainties, we caution you not to place undue reliance on forward-looking statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances or to reflect the occurrence of unanticipated events. 19 Property Information The following table sets forth certain information with respect to our wholly owned in-service and development properties (excluding apartment units) as of June 30, 2001 and 2000:
Rentable Percent Leased/ June 30, 2001 Square Feet Pre-Leased - ------------- ----------- ---------- In-Service: Office................................................................................. 24,639,000 93% Industrial............................................................................. 10,396,000 93% Retail (1)............................................................................. 1,628,000 95% ------------ ------ Total or Weighted Average.............................................................. 36,663,000 93% ============ ====== Development: Completed--Not Stabilized Office................................................................................. 1,019,000 51% Industrial............................................................................. 184,000 21% Retail................................................................................. -- -- ------------ ------ Total or Weighted Average.............................................................. 1,203,000 47% ============ ====== In Process Office................................................................................. 1,669,000 61% Industrial............................................................................. 258,000 9% Retail................................................................................. 20,000 72% ------------ ------ Total or Weighted Average.............................................................. 1,947,000 54% ============ ====== Total: Office................................................................................. 27,327,000 Industrial............................................................................. 10,838,000 Retail (1)............................................................................. 1,648,000 ------------ Total or Weighted Average.............................................................. 39,813,000 ============ Rentable Percent Leased/ June 30, 2000 Square Feet Pre-Leased - ------------- ----------- ---------- In-Service: Office.................................................................................. 26,227,000 94% Industrial.............................................................................. 10,607,000 93% Retail.................................................................................. 1,660,000 94% ------------ ---- Total or Weighted Average............................................................... 38,494,000 93% ============ ==== Development: Completed--Not Stabilized Office.................................................................................. 1,334,000 75% Industrial.............................................................................. 131,000 69% Retail.................................................................................. 81,000 89% ------------ ---- Total or Weighted Average............................................................... 1,546,000 75% ============ ==== In Process Office.................................................................................. 1,498,000 61% Industrial.............................................................................. 395,000 82% Retail.................................................................................. -- -- ------------ ---- Total or Weighted Average............................................................... 1,893,000 65% ============ ==== Total: Office.................................................................................. 29,059,000 Industrial.............................................................................. 11,133,000 Retail.................................................................................. 1,741,000 ------------ Total or Weighted Average............................................................... 41,933,000 ============
___________ (1) Excludes basement space. 20 As of June 30, 2001, we were developing 24 suburban office properties, 4 industrial properties and 1 retail property totaling 3.2 million rentable square feet of office and industrial space. The following table summarizes these development projects. In addition to the properties described in this table, we are developing with our joint venture partners five additional properties totaling 660,000 rentable square feet. At June 30, 2001, these five development projects had an aggregate budgeted cost of $99.7 million and were 60.0% pre- leased. In-Process
Rentable Square Estimated Cost at Pre-Leasing Estimated Estimated Name Market Feet Cost 6/30/01 Percentage(1) Completion Stabilization ---- ------ ---- ---- ------- -------------- ---------- ------------- ($ in thousands) Office: Highwoods Preserve V Tampa 185,000 $ 27,633 $ 22,936 100% 3Q01 3Q01 Met Life Building at Brookfield(2) Greenville 117,000 13,220 8,058 75% 3Q01 4Q01 Romac Tampa 128,000 18,582 12,288 100% 4Q01 4Q01 Verizon Wireless(2) Greenville 193,000 16,356 7,745 100% 1Q02 1Q02 International Place 3 Memphis 214,000 34,272 12,821 100% 2Q02 2Q02 1825 Century Center Atlanta 101,000 16,254 570 100% 3Q02 3Q02 Highwoods Center III at Tradeport(2) Atlanta 43,000 4,037 825 100% 4Q01 3Q02 Hickory Trace Nashville 52,000 5,933 5,145 15% 3Q01 3Q02 Centre Green Four(2) Research Triangle 100,000 11,764 7,351 -- 3Q01 3Q02 Shadow Creek II(2) Memphis 81,000 8,750 3,870 -- 4Q01 4Q02 Highwoods Park at Jefferson Village(2) Piedmont Triad 101,000 9,839 4,704 -- 4Q01 4Q02 GlenLake I(2) Research Triangle 158,000 22,417 12,733 -- 4Q01 4Q02 Seven Springs I(2) Nashville 131,000 15,556 8,164 -- 1Q02 1Q03 Innslake(2) Richmond 65,000 7,214 2,604 100% 4Q01 1Q03 --------- --------- -------- ------ In-Process Office Total or Weighted Average 1,669,000 $ 211,827 $109,814 61% ========= ========= ======== ====== Industrial: Newpoint IV Atlanta 136,000 $ 5,288 $ 1,762 -- 3Q01 3Q02 Tradeport Place IV Atlanta 122,000 4,447 3,152 18% 3Q01 3Q02 --------- --------- -------- ------ In-Process Industrial Total or Weighted Average 258,000 $ 9,735 $ 4,914 9% ========= ========= ======== ====== Retail: Plaza Redevelopment (Granada Shops) Kansas City 20,000 $ 4,680 $ 1,402 72% 4Q01 4Q01 --------- --------- -------- -------- In-Process Retail Total or Weighted Average 20,000 $ 4,680 $ 1,402 72% ========= ========= ======== ======== Total or Weighted Average of all In-Process Development Projects 1,947,000 $ 226,242 $116,130 54% ========= ========= ======== ========
________________ (1) Letters of intent comprise 5% of the Total Pre-Leasing Percentage. (2) We are developing these properties for a third party and own an option to purchase each property. 21 Completed--Not Stabilized
Rentable Square Estimated Cost at Pre-Leasing Estimated Estimated Name Market Feet Cost 6/30/01 Percentage(1) Completion Stabilization ----- ------- ----- ---- -------- ------------- ---------- ------------- ($ in thousands) Office: Deerfield III Atlanta 54,000 $ 5,276 $ 4,309 -- 4Q00 4Q01 Shadow Creek Memphis 80,000 8,989 7,912 75% 4Q00 4Q01 380 Park Place Tampa 82,000 9,675 9,104 92% 1Q01 4Q01 Highwoods Plaza Tampa 66,000 7,505 6,601 37% 4Q00 1Q02 Cool Springs II Nashville 205,000 22,718 18,192 19% 2Q01 2Q02 Highwoods Tower II Research Triangle 167,000 25,134 22,161 75% 1Q01 2Q02 Centre Green Two Research Triangle 97,000 11,596 9,036 31% 2Q01 2Q02 ParkWest One Research Triangle 46,000 4,364 3,192 55% 2Q01 2Q02 North Shore Commons A Richmond 115,000 13,084 12,624 62% 2Q01 3Q02 Stony Point III Richmond 107,000 11,425 9,997 69% 2Q01 3Q02 ------------ ---------- -------- ------- Office Total or Weighted Average 1,019,000 $ 119,766 $103,128 51% ============ ========== ======== ======= Industrial: Holden Road Piedmont Triad 64,000 $ 2,014 $ 2,467 60% 1Q01 3Q01 Enterprise Center I Piedmont Triad 120,000 3,807 3,310 -- 4Q00 4Q01 ------------ ---------- -------- ------- Industrial Total or Weighted Average 184,000 $ 5,821 $ 5,777 21% ============ ========== ======== ======= Total or Weighted Average of all Completed-Not Stabilized Development Projects 1,203,000 $ 125,587 $ 108,905 47% ------------ ---------- --------- ------- Total or Weighted Average of all Development Projects 3,150,000 $ 351,829 $ 225,035 52% ============ ========== ========= =======
______________ (1) Letters of intent comprise 5% of the Total Pre-Leasing Percentage. 22
Rentable Square Estimated Pre-Leasing Feet Cost Percentage(1) ---- ---- ------------- (in thousands) Development Analysis Summary by Estimated Stabilization Date: Third Quarter 2001..................................... 249,000 $ 29,647 90% Fourth Quarter 2001.................................... 601,000 64,229 61% First Quarter 2002..................................... 259,000 23,861 84% Second Quarter 2002.................................... 729,000 98,084 59% Third Quarter 2002..................................... 776,000 72,232 41% Fourth Quarter 2002.................................... 340,000 41,006 -- First Quarter 2003..................................... 196,000 22,770 33% --------- --------- ----- Total or Weighted Average........................... 3,150,000 $ 351,829 52% ========= ========= ===== Summary by Market: Atlanta ............................................... 456,000 $ 35,302 36% Greenville............................................. 310,000 29,576 91% Kansas City............................................ 20,000 4,680 72% Memphis 375,000 52,011 73% Nashville.............................................. 388,000 44,207 12% Piedmont Triad......................................... 285,000 15,660 13% Research Triangle...................................... 568,000 75,275 32% Richmond............................................... 287,000 31,723 73% Tampa.................................................. 461,000 63,395 90% --------- --------- ----- Total or Weighted Average........................... 3,150,000 $ 351,829 52% ========= ========= ===== Build-to-Suit.......................................... 821,000 $ 113,097 100% Multi-Tenant........................................... 2,329,000 238,732 34% --------- --------- ----- Total or Weighted Average........................... 3,150,000 $ 351,829 52% ========= ========= ===== Average Rentable Average Square Estimated Pre-Leasing Feet Cost Percentage(1) ----- ---- ------------- (in thousands) Per Property Type: Office................................................. 112,000 $ 13,816 58% Industrial............................................. 110,500 3,889 14% Retail................................................. 20,000 4,680 72% --------- --------- ----- All.................................................... 108,621 $ 12,132 52% ========= ========= =====
_______________ (1) Letters of intent comprise 5% of the Total pre-leasing percentage. 23 The following table sets forth certain information about leasing activities at our wholly owned in-service properties (excluding apartment units) for the three months ended June 30 and March 31, 2001 and December 31 and September 30, 2000.
Office Leasing Statistics ------------------------- Three Months Ended ------------------ 6/30/01 3/31/01 12/31/00 9/30/00 Average ------- ------- -------- ------- ------- Net Effective Rents Related to Re-Leased Space: Number of lease transactions (signed leases)...... 155 132 199 174 165 Rentable square footage leased.................... 773,415 941,419 1,187,466 1,056,239 989,635 Average per rentable square foot over the lease term: Base rent....................................... $ 16.36 $ 17.73 $ 17.51 $ 15.23 $ 16.71 Tenant improvements............................. (1.17) (1.13) (1.14) (1.21) (1.16) Leasing commissions............................. (0.67) (0.57) (0.59) (0.40) (0.56) Rent concessions................................ (0.03) (0.01) (0.03) (0.03) (0.03) ----------- ----------- ----------- ----------- ----------- Effective rent.................................. 14.49 16.02 15.75 13.59 14.96 Expense stop (1)................................ (3.37) (2.96) (4.73) (4.03) (3.77) ----------- ----------- ----------- ----------- ----------- Equivalent effective net rent................... $ 11.12 $ 13.06 $ 11.02 $ 9.56 $ 11.19 =========== =========== =========== =========== =========== Average term in years............................. 4.9 5.3 4.6 4.9 4.9 =========== =========== =========== =========== =========== Capital Expenditures Related to Re-Leased Space: Tenant Improvements: Total dollars committed under signed leases..... $ 5,052,983 $ 7,103,609 $ 7,273,031 $ 6,676,576 $ 6,526,550 Rentable square feet............................ 773,415 941,419 1,187,466 1,056,239 989,635 ----------- ----------- ----------- ----------- ----------- Per rentable square foot........................ $ 6.53 $ 7.55 $ 6.12 $ 6.32 $ 6.59 =========== =========== =========== =========== =========== Leasing Commissions: Total dollars committed under signed leases..... $ 1,991,418 $ 3,361,410 $ 2,873,345 $ 1,910,278 $ 2,534,113 Rentable square feet............................ 773,415 941,419 1,187,466 1,056,239 989,635 ----------- ----------- ----------- ----------- ----------- Per rentable square foot........................ $ 2.57 $ 3.57 $ 2.42 $ 1.81 $ 2.56 =========== =========== =========== =========== =========== Total: Total dollars committed under signed leases..... $ 7,044,401 $10,465,020 $10,146,377 8,586,853 $ 9,060,663 Rentable square feet............................ 773,415 941,419 1,187,466 1,056,239 989,635 ----------- ----------- ----------- ----------- ----------- Per rentable square foot........................ $ 9.11 $ 11.12 $ 8.54 $ 8.13 $ 9.16 =========== =========== =========== =========== =========== Rental Rate Trends: Average final rate with expense pass throughs..... $ 14.84 $ 15.05 $ 15.83 $ 14.30 $ 15.00 Average first year cash rental rate............... $ 15.54 $ 16.04 $ 16.38 $ 14.96 $ 15.73 ----------- ----------- ----------- ----------- ----------- Percentage increase............................... 4.7% 6.6% 3.5% 4.6% 4.9% =========== =========== =========== =========== ===========
______________ (1) "Expense stop" represents operating expenses (generally including taxes, utilities, routine building expense and common area maintenance) which we will not be reimbursed by our tenants. 24
Industrial Leasing Statistics ----------------------------- Three Months Ended ------------------ 6/30/01 3/31/01 12/31/00 9/30/00 Average ------- ------- -------- ------- ------- Net Effective Rents Related to Re-Leased Space: Number of lease transactions (signed leases)......... 23 27 31 31 28 Rentable square footage leased....................... 153,507 190,663 355,947 349,079 262,299 Average per rentable square foot over the lease term: Base rent.......................................... $ 5.84 $ 5.88 $ 5.29 $ 4.54 $ 5.39 Tenant improvements................................ (0.27) (0.20) (0.29) (0.32) (0.27) Leasing commissions................................ (0.15) (0.09) (0.15) (0.15) (0.14) Rent concessions................................... 0.0 0.00 0.0 0.0 0.00 --------- -------- --------- --------- --------- Effective rent..................................... 5.42 5.59 4.85 4.07 4.98 Expense stop (1)................................... (0.49) (0.74) (0.3) (0.23) (0.44) --------- -------- --------- --------- --------- Equivalent effective net rent...................... $ 4.93 $ 4.85 $ 4.55 $ 3.84 $ 4.54 ========= ======== ========= ========= ========= Average term in years.............................. 2.5 2.5 2.7 3.6 2.8 ========= ======== ========= ========= ========= Capital Expenditures Related to Re-Leased Space: Tenant Improvements: Total dollars committed under signed leases........ $ 175,777 $ 91.304 $ 412,679 $ 510,520 $ 297,570 Rentable square feet............................... 153,507 190,663 355,947 349,079 262,299 --------- -------- --------- --------- --------- Per rentable square foot........................... $ 1.15 $ 0.48 1.16 $ 1.46 $ 1.13 ========= ======== ========= ========= ========= Leasing Commissions: Total dollars committed under signed leases........ $ 63,679 $ 61,239 $ 145,117 $ 167,772 $ 109,452 Rentable square feet............................... 153,507 190,663 355,947 349,079 262,299 --------- -------- --------- --------- --------- Per rentable square foot........................... $ 0.41 $ 0.32 $ 0.41 $ 0.48 $ 0.42 ========= ======== ========= ========= ========= Total: Total dollars committed under signed leases........ $ 239,456 $152,542 $ 557,796 $ 678,292 $ 407,022 Rentable square feet............................... 153,507 190,663 355,947 349,079 262,299 --------- -------- --------- --------- --------- Per rentable square foot........................... $ 1.56 $ 0.80 $ 1.57 $ 1.94 $ 1.55 ========= ======== ========= ========= ========= Rental Rate Trends: Average final rate with expense pass throughs........ $ 5.73 $ 4.89 $ 4.92 $ 4.11 $ 4.91 Average first year cash rental rate.................. $ 5.75 $ 5.06 $ 5.23 $ 4.51 $ 5.14 --------- -------- --------- --------- --------- Percentage increase.................................. 0.4% 3.4% 6.3% 9.6% 4.5% ========= ======== ========= ========= =========
________________________ (1) "Expense stop" represents operating expenses (generally including taxes, utilities, routine building expense and common area maintenance) which we will not be reimbursed by our tenants. 25
Retail Leasing Statistics ------------------------- Three Months Ended ------------------ 6/30/01 3/31/01 12/31/00 9/30/00 Average ------- ------- -------- -------- ------- Net Effective Rents Related to Re-Leased Space: Number of lease transactions (signed leases)............. 14 9 15 21 15 Rentable square footage leased........................... 21,072 38,618 35,057 53,217 36,991 Average per rentable square foot over the lease term: Base rent.............................................. $ 22.84 $ 29.31 $ 24.07 $ 22.26 $ 24.62 Tenant improvements.................................... (0.66) (1.86) (1.90) (1.26) (1.42) Leasing commission..................................... (0.57) (0.29) (0.49) (0.58) (0.48) Rent concessions....................................... 0.00 (0.22) 0.00 (0.03) (0.06) --------- --------- --------- --------- --------- Effective rent......................................... 21.61 26.94 21.68 20.39 22.66 Expense stop (1)....................................... 0.00 0.00 0.00 0.00 0.00 --------- --------- --------- --------- --------- Equivalent effective net rent.......................... $ 21.61 $ 26.94 $ 21.68 $ 20.39 $ 22.66 ========= ========= ========= ========= ========= Average term in years.................................. 5.3 9.3 6.7 7.6 7.2 ========= ========= ========= ========= ========= Capital Expenditures Related to Re-Leased Space: Tenant Improvements: Total dollars committed under signed leases............ $ 121,713 $ 729,480 $ 655,301 $ 600,136 $ 526,658 Rentable square feet................................... 21,072 38,618 35,057 53,217 36,991 --------- --------- --------- --------- --------- Per rentable square foot............................... $ 5.78 $ 18.89 $ 18.69 $ 11.28 $ 14.24 ========= ========= ========= ========= ========= Leasing Commissions: Total dollars committed under signed leases............ $ 61,537 $ 93,045 $ 66,986 $ 143,269 $ 91,209 Rentable square feet................................... 21,072 38,618 35,057 53,217 36,991 --------- --------- --------- --------- --------- Per rentable square foot............................... $ 2.92 $ 2.41 $ 1.91 $ 2.69 $ 2.47 ========= ========= ========= ========= ========= Total: Total dollars committed under signed leases............ $ 183,249 $ 822,525 $ 722,287 $ 743,406 $ 617,867 Rentable square feet................................... 21,072 38,618 35,057 53,217 36,991 --------- --------- --------- --------- --------- Per rentable square foot............................... $ 8.70 $ 21.30 $ 20.60 $ 13.97 $ 16.70 ========== ========= ========= ========= ========= Rental Rate Trends: Average final rate with expense pass throughs............ $ 17.99 $ 12.91 $ 18.41 $ 13.85 $ 15.79 Average first year cash rental rate...................... $ 21.51 $ 19.70 $ 22.57 $ 19.40 $ 20.80 --------- --------- --------- --------- --------- Percentage increase...................................... 19.6% 52.6% 22.6% 40.1% 31.7% ========= ========= ========= ========= =========
____________ (1) "Expense stop" represents operating expenses (generally including taxes, utilities, routine building expense and common area maintenance) which we will not be reimbursed by our tenants. 26 The following tables set forth scheduled lease expirations at our wholly owned in-service properties (excluding apartment units) as of June 30, 2001, assuming no tenant exercises renewal options. Office Properties:
Percentage of Percentage of Leased Square Annual Rents Average Annual Leased Rents Year of Total Rentable Footage Under Rental Rate Per Represented Lease Number Square Feet Represented by Expiring Square Foot for By Expiring Expiration of Leases Expiring Expiring Leases Lease (1) Expirations(1) Leases ----------- --------- -------- --------------- --------- -------------- ------ (in thousands) Remainder of 2001........ 291 1,260,498 5.4% $ 21,387 $ 16.97 5.3% 2002..................... 587 3,253,381 13.9% 54,925 16.88 13.8% 2003..................... 558 3,719,252 16.0% 62,888 16.91 15.8% 2004..................... 407 2,751,890 11.8% 49,038 17.82 12.2% 2005..................... 422 3,073,860 13.2% 52,935 17.22 13.2% 2006..................... 219 2,426,243 10.4% 41,860 17.25 10.4% 2007..................... 57 1,128,307 4.8% 17,754 15.74 4.4% 2008..................... 63 1,594,191 6.8% 24,838 15.58 6.2% 2009..................... 19 714,403 3.1% 12,105 16.94 3.0% 2010..................... 47 1,585,627 6.8% 27,768 17.51 6.9% 2011 and thereafter...... 205 1,815,546 7.8% 35,226 19.40 8.8% ----- ---------- ------ --------- ------- ------ 2,875 23,323,198 100.0% $ 400,724 $ 17.18 100.0% ===== ========== ====== ========= ======= ======
Industrial Properties:
Percentage of Percentage of Leased Square Annual Rents Average Annual Leased Rents Year of Total Rentable Footage Under Rental Rate Per Represented Lease Number Square Feet Represented by Expiring Square Foot for by Expiring Expiration of Leases Expiring Expiring Leases Leases(1) Expirations(1) Leases ----------- --------- -------- --------------- --------- -------------- ------ (in thousands) Remainder of 2001.......... 68 1,217,255 12.6% $ 5,085 $ 4.18 11.0% 2002....................... 118 1,849,649 19.1% 8,204 4.44 17.7% 2003....................... 89 1,098,740 11.4% 6,039 5.50 13.0% 2004....................... 72 2,132,957 22.1% 9,056 4.25 19.5% 2005....................... 42 684,591 7.1% 4,076 5.95 8.8% 2006....................... 23 496,125 5.1% 3,142 6.33 6.8% 2007....................... 13 1,081,566 11.2% 4,714 4.36 10.2% 2008....................... 7 241,961 2.5% 1,326 5.48 2.9% 2009....................... 6 268,813 2.8% 1,923 7.15 4.2% 2010....................... 4 182,746 1.9% 1,057 5.78 2.3% 2011 and thereafter........ 29 410,248 4.2% 1,690 4.12 3.6% --- --------- ------ --------- ------- ------ 471 9,664,651 100.0% $ 46,312 $ 4.79 100.0% === ========= ====== ========= ======= ======
__________________ (1) Includes operating expense pass throughs and excludes the effect of future contractual rent increases. 27 Retail Properties:
Percentage of Percentage of Leased Square Annual Rents Average Annual Leased Rents Year of Total Rentable Footage Under Rental Rate Per Represented Lease Number Square Feet Represented by Expiring Square Foot for by Expiring Expiration of Leases Expiring Expiring Leases Leases(1) Expirations(1) Leases ----------- --------- -------- --------------- --------- -------------- ------ (in thousands) Remainder of 2001........ 24 69,466 4.5% $ 1,997 $ 28.75 6.0% 2002..................... 41 103,999 6.8% 1,688 16.23 5.1% 2003..................... 42 107,311 7.0% 2,479 23.10 7.5% 2004..................... 37 215,604 14.1% 2,737 12.69 8.3% 2005..................... 40 95,532 6.2% 2,645 27.69 8.0% 2006..................... 28 85,718 5.6% 2,124 24.78 6.4% 2007..................... 19 76,254 5.0% 1,601 21.00 4.8% 2008..................... 19 112,174 7.3% 3,601 32.10 10.9% 2009..................... 20 168,523 11.0% 3,198 18.98 9.7% 2010..................... 17 94,138 6.2% 2,567 27.27 7.8% 2011 and thereafter...... 29 401,308 26.3% 8,451 21.06 25.5% -------- ---------- ------ -------- -------- ------ Total: 316 1,530,027 100.0% $ 33,088 $ 21.63 100.0% ======== ========== ====== ======== ======== ====== Percentage of Percentage of Leased Square Annual Rents Average Annual Leased Rents Year of Total Rentable Footage Under Rental Rate Per Represented Lease Number Square Feet Represented by Expiring Square Foot for by Expiring Expiration of Leases Expiring Expiring Leases Leases(1) Expirations(1) Leases ----------- --------- -------- --------------- --------- -------------- ------ (in thousands) Remainder of 2001........ 383 2,547,219 7.4% $ 28,469 $ 11.18 5.9% 2002..................... 746 5,207,029 15.1% 64,817 12.45 13.5% 2003..................... 689 4,925,303 14.3% 71,406 14.50 15.0% 2004..................... 516 5,100,451 14.8% 60,831 11.93 12.7% 2005..................... 504 3,853,983 11.2% 59,656 15.48 12.4% 2006..................... 270 3,008,086 8.7% 47,126 15.67 9.8% 2007..................... 89 2,286,127 6.6% 24,069 10.53 5.0% 2008..................... 89 1,948,326 5.6% 29,765 15.28 6.2% 2009..................... 45 1,151,739 3.3% 17,226 14.96 3.6% 2010..................... 68 1,862,511 5.4% 31,392 16.85 6.5% 2011 and thereafter...... 263 2,627,102 7.6% 45,367 17.27 9.4% -------- ---------- ------ -------- -------- ------ 3,662 34,517,876 100.0% $480,124 $ 13.91 100.0% ======== ========== ====== ======== ======== ======
- -------------- (1) Includes operating expenses pass throughs and excludes the effect of future contractual rent increases. Inflation Historically inflation has not had a significant impact on our operations because of the relatively low inflation rate in our geographic areas of operation. Most of the leases require the tenants to pay their pro rata share of increased incremental operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing our exposure to increases in operating expenses resulting from inflation. In addition, many of the leases are for terms of less than seven years, which may enable us to replace existing leases with new leases at a higher base rent if rents on the existing leases are below the market rate. 28 Item 3. Quantitative and Qualitative Disclosures About Market Risk The effects of potential changes in interest rates are discussed below. Our market risk discussion includes "forward-looking statements" and represents an estimate of possible changes in fair value or future earnings that would occur assuming hypothetical future movements in interest rates. These disclosures are not precise indicators of expected future losses, but only indicators of reasonably possible losses. As a result, actual future results may differ materially from those presented. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" for a description of our accounting policies and other information related to these financial instruments. To meet in part our long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Borrowings under the revolving loan bear interest at variable rates. Our long-term debt, which consists of long-term financings and the issuance of debt securities, typically bears interest at fixed rates. In addition, we have assumed fixed rate and variable rate debt in connection with acquiring properties. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not hold or issue these derivative contracts for trading or speculative purposes. Certain Variable Rate Debt. As of June 30, 2001, the Company had approximately $76.3 million of variable rate debt outstanding that was not protected by interest rate hedge contracts. If the weighted average interest rate on this variable rate debt is 100 basis points higher or lower during the 12 months ended June 30, 2002, our interest expense would be increased or decreased approximately $763,000. In addition, as of June 30, 2001, we had $80.0 million of additional variable rate debt outstanding that was protected by an interest rate collar that effectively keeps the interest rate within a range of 65 basis points. We do not believe that a 100 basis point increase or decrease in interest rates would materially affect our interest expense with respect to this $80.0 million of debt. Interest Rate Hedge Contracts. For a discussion of our interest rate hedge contracts in effect at June 30, 2001, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--Capitalization." If interest rates increase by 100 basis points, the aggregate fair market value of these interest rate hedge contracts as of June 30, 2001 would increase by approximately $438,000. If interest rates decrease by 100 basis points, the aggregate fair market value of these interest rate hedge contracts as of June 30, 2001 would decrease by approximately $1.3 million. In addition, we are exposed to certain losses in the event of nonperformance by the counterparties under the hedge contracts. We expect the counterparties, which are major financial institutions, to perform fully under these contracts. However, if the counterparties were to default on their obligations under the interest rate hedge contracts, we could be required to pay the full rates on our debt, even if such rates were in excess of the rates in the contracts. 29 PART II--OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders On May 15, 2001, we held our Annual Meeting of Stockholders. The final vote of the matters presented for a vote at such meeting was as follows:
Matter For Against Abstain - ------ ---------- ---------- ---------- (A) Election of Directors Edward J. Fritsch................... 39,888,013 -- 7,551,673 William E. Graham, Jr............... 46,507,587 -- 932,099 Lawrence S. Kaplan.................. 46,508,464 -- 931,222 L. Glenn Orr, Jr.................... 46,510,731 -- 928,955 (B) Ratify appointment of Ernst & Young, LLP as independent auditors......... 47,181,780 185,386 72,519
Item 6. Exhibits and Reports On Form 8-K (b) Reports on Form 8-K On April 27, 2001, we filed a Current Report on Form 8-K reporting under Items 5 and 7 that we had essentially completed our previously announced 10.0 million share and unit repurchase program and that our board of directors had authorized the repurchase of up to an additional 5.0 million shares of Common Stock and Common Units. 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HIGHWOODS PROPERTIES, INC. By: /s/ RONALD P. GIBSON ----------------------------------- Ronald P. Gibson President and Chief Executive By: /s/ CARMAN J. LIUZZO ----------------------------------- Carman J. Liuzzo Chief Financial Officer (Principal Accounting Officer) Date: August 14, 2001 31 -----END PRIVACY-ENHANCED MESSAGE-----