-----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, Iwh0LcAK8Gg2JHhVIOBgW640sLeAioqQDE+8aU/6DdssdSEHbDhakR49Zm3eHfHl l5J3WL70LNLof3kFGixB2w== 0000950109-01-501394.txt : 20010516 0000950109-01-501394.hdr.sgml : 20010516 ACCESSION NUMBER: 0000950109-01-501394 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 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: SEC FILE NUMBER: 001-13100 FILM NUMBER: 1638900 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 March 31, 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. l(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 53,875,783 shares outstanding as of May 1, 2001. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- HIGHWOODS PROPERTIES, INC. QUARTERLY REPORT FOR THE PERIOD ENDED MARCH 31, 2001 TABLE OF CONTENTS
Page ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements........................................... 3 Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000....................................................... 4 Consolidated Statements of Income for the three months ended March 31, 2001 and 2000........................................ 5 Consolidated Statements of Stockholders' Equity for the three months ended March 31, 2001................................................ 6 Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2000................................................. 7 Notes to Consolidated Financial Statements..................... 9 Management's Discussion and Analysis of Financial Condition and Item 2. Results of Operations.......................................... 12 Results of Operations.......................................... 12 Liquidity and Capital Resources................................ 13 Recent Developments............................................ 14 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........................................... 19 Inflation...................................................... 27 Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 28 PART II OTHER INFORMATION Item 1. Legal Proceedings.............................................. 28 Item 6. Exhibits and Reports on Form 8-K............................... 29
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)
March 31, December 31, 2001 2000 ----------- ------------ (Unaudited) ASSETS Real estate assets, at cost: Land and improvements................................ $ 415,301 $ 421,270 Buildings and tenant improvements.................... 2,790,722 2,742,946 Development in process............................... 110,425 87,622 Land held for development............................ 148,374 145,598 Furniture, fixtures and equipment.................... 11,736 11,433 ---------- ---------- 3,476,558 3,408,869 Less--accumulated depreciation....................... (306,120) (280,610) ---------- ---------- Net real estate assets............................... 3,170,438 3,128,259 Property held for sale................................ 96,910 127,824 Cash and cash equivalents............................. 46,119 104,780 Restricted cash....................................... 2,145 2,192 Accounts receivable, net.............................. 18,389 24,003 Advances to related parties........................... -- 27,560 Notes receivable...................................... 71,559 80,918 Accrued straight-line rents receivable................ 41,996 39,295 Investment in unconsolidated affiliates............... 78,777 78,423 Other assets: Deferred leasing costs............................... 88,953 83,269 Deferred financing costs (See Note 4)................ 26,350 43,110 Prepaid expenses and other........................... 11,161 11,878 ---------- ---------- 126,464 138,257 Less--accumulated amortization....................... (48,605) (49,909) ---------- ---------- Other assets, net.................................. 77,859 88,348 ---------- ---------- Total Assets.......................................... $3,604,192 $3,701,602 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Mortgages and notes payable........................... $1,606,208 $1,587,019 Accounts payable, accrued expenses and other liabilities.......................................... 107,375 109,824 ---------- ---------- Total Liabilities.................................... 1,713,583 1,696,843 Minority interest..................................... 211,201 213,214 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 outstanding at March 31, 2001 and December 31, 2000.......................... 125,000 125,000 8% Series B Cumulative Redeemable Preferred Shares (liquidation preference $25 per share), 6,900,000 shares issued and outstanding at March 31, 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 March 31, 2001 and December 31, 2000.......................... 100,000 100,000 Common stock, $.01 par value, 200,000,000 authorized shares; 54,239,673 shares issued and outstanding at March 31, 2001 and 58,124,205 at December 31, 2000... 542 581 Additional paid-in capital............................ 1,408,002 1,506,161 Distributions in excess of net earnings............... (111,972) (110,209) Accumulated other comprehensive loss (See Note 4)..... (10,598) -- Deferred compensation--restricted stock............... (4,066) (2,488) ---------- ---------- Total Stockholders' Equity........................... 1,679,408 1,791,545 ---------- ---------- Total Liabilities and Stockholders' Equity............ $3,604,192 $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 Ended March 31, ------------------ 2001 2000 -------- -------- Revenue: Rental property.......................................... $128,621 $136,574 Equity in earnings of unconsolidated affiliates.......... 833 943 Interest and other income................................ 7,813 3,642 -------- -------- Total Revenue.............................................. 137,267 141,159 Operating expenses: Rental property.......................................... 36,909 39,461 Depreciation and amortization............................ 29,206 28,328 Interest expense: Contractual............................................ 28,321 27,047 Amortization of deferred financing costs............... 665 721 -------- -------- 28,986 27,768 General and administrative............................... 5,212 5,096 -------- -------- Income before gain on disposition of land and depreciable assets, minority interest and extraordinary item ................................... 36,954 40,506 Gain on disposition of land and depreciable assets....... 7,071 6,946 -------- -------- Income before minority interest and extraordinary item.................................................. 44,025 47,452 Minority interest.......................................... (5,251) (6,020) -------- -------- Income before extraordinary item......................... 38,774 41,432 Extraordinary item--loss on early extinguishment of debt... (193) (195) -------- -------- Net income............................................... 38,581 41,237 Dividends on preferred stock............................... (8,145) (8,145) -------- -------- Net income available for common shareholders............... $ 30,436 $ 33,092 ======== ======== Net income per common share--basic: Income before extraordinary item......................... $ 0.54 $ 0.55 Extraordinary item--loss on early extinguishment of debt.................................................... -- -- -------- -------- Net income............................................... $ 0.54 $ 0.55 ======== ======== Weighted average shares outstanding--basic............... 56,393 60,406 ======== ======== Net income per common share--diluted: Income before extraordinary item......................... $ 0.54 $ 0.55 Extraordinary item--loss on early extinguishment of debt.................................................... -- -- -------- -------- Net income............................................... $ 0.54 $ 0.55 ======== ======== Weighted average shares outstanding--diluted............. 56,659 60,492 ======== ======== Distributions declared per common share.................... $ 0.57 $ 0.555 ======== ========
See accompanying notes to consolidated financial statements. 5 HIGHWOODS PROPERTIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Three Months Ended March 31, 2001 (Unaudited and in thousands except share amounts)
Accumulated Number of Additional Other Distributions Common Common Series A Series B Series D Paid-In Deferred Comprehensive in excess of Shares Stock Preferred Preferred Preferred Capital Compensation Loss Net Earnings ---------- ------ --------- --------- --------- ---------- ------------ ------------- ------------- Balance at December 31, 2000........... 58,124,205 $581 $125,000 $172,500 $100,000 $1,506,161 $(2,488) -- $(110,209) Issuance of Common Stock... 11,178 -- -- -- -- 68 -- -- -- Common Stock Dividends...... -- -- -- -- -- -- -- -- (32,199) Preferred Stock Dividends...... -- -- -- -- -- -- -- -- (8,145) Issuance of restricted stock.......... 71,190 -- -- -- -- 1,779 (1,779) -- -- Amortization of deferred compensation... -- -- -- -- -- -- 201 -- -- Repurchase of Common Stock... (3,966,900) (39) -- -- -- (100,006) -- -- -- Net Income...... -- -- -- -- -- -- -- -- 38,581 Reclassification of derivative instruments.... -- -- -- -- -- -- -- (10,598) -- ---------- ---- -------- -------- -------- ---------- ------- -------- --------- Total other comprehensive loss........... Balance at March 31, 2001....... 54,239,673 $542 $125,000 $172,500 $100,000 $1,408,002 $(4,066) $(10,598) $(111,972) ========== ==== ======== ======== ======== ========== ======= ======== ========= Other Comprehensive Total Loss ----------- ------------- Balance at December 31, 2000........... $1,791,545 -- Issuance of Common Stock... 68 -- Common Stock Dividends...... (32,199) -- Preferred Stock Dividends...... (8,145) -- Issuance of restricted stock.......... -- -- Amortization of deferred compensation... 201 -- Repurchase of Common Stock... (100,045) -- Net Income...... 38,581 38,581 Reclassification of derivative instruments.... (10,598) (10,598) ----------- ------------- Total other comprehensive loss........... 27,983 ============= Balance at March 31, 2001....... $1,679,408 ===========
See accompanying notes to consolidated financial statements. 6 HIGHWOODS PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited and in thousands)
Three Months Ended March 31, ----------------- 2001 2000 -------- ------- Operating activities: Net income................................................. $ 38,581 $41,237 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................ 29,871 29,049 Amortization of deferred compensation.................... 201 -- Minority interest........................................ 5,251 6,020 Equity in earnings of unconsolidated affiliates.......... (833) (943) Loss on early extinguishment of debt....................... 193 195 Gain on disposition of land and depreciable assets......... (7,071) (6,946) Transition adjustment upon adoption of FASB 133............ 556 -- Loss on ineffective portion of derivative instruments...... 466 -- Changes in operating assets and liabilities................ (446) (9,507) -------- ------- Net cash provided by operating activities.............. 66,769 59,105 -------- ------- Investing activities: Additions to real estate assets............................ (59,310) (49,787) Proceeds from disposition of real estate assets............ 49,700 20,666 Payment from advances to subsidiaries...................... 27,560 1,237 Distributions from unconsolidated affiliates............... 1,333 622 Investments in notes receivable............................ 8,684 (5,001) Other investing activities................................. (5,705) (1,046) -------- ------- Net cash provided by /(used in) investing activities... 22,262 (33,309) -------- ------- Financing activities: Distributions paid on common stock and common units........ (36,506) (38,438) Dividends paid on preferred stock.......................... (8,145) (8,145) Payment of prepayment penalties............................ (193) (195) Borrowings on mortgages and notes payable.................. 16,402 72,215 Repayments on mortgages and notes payable.................. (33,733) (67,334) Borrowings on revolving loans.............................. 69,000 129,000 Repayments on revolving loans.............................. (47,000) (88,000) Net proceeds from the sale of common stock................. 68 107 Net change in deferred financing costs..................... (738) (418) Repurchase of common stock and units....................... (106,847) (35,301) -------- ------- Net cash used in financing activities.................. (147,692) (36,509) -------- ------- Net decrease in cash and cash equivalents.................. (58,661) (10,713) Cash and cash equivalents at beginning of the period....... 104,780 34,496 -------- ------- Cash and cash equivalents at end of the period............. $ 46,119 $23,783 ======== ======= Supplemental disclosure of cash flow information: Cash paid for interest..................................... $ 23,489 $24,583 ======== =======
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.
Three Months Ended March 31, ---------------------- 2001 2000 ----------- ---------- (Unaudited) (Unaudited) Assets: Notes receivable ..................................... $ 675 -- Cash and cash equivalents............................. 551 -- Rental property and equipment, net.................... 19,881 $1,356 Liabilities: Accounts payable, accrued expenses and other liabilities.......................................... 22,520 -- Mortgages and notes payable........................... 1,392 -- ------- ------ Net assets.......................................... $(2,805) $1,356 ======= ======
See accompanying notes to consolidated financial statements. 8 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 (Unaudited) 1. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and the Operating Partnership and their majority-controlled affiliates. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. The extraordinary loss represents the write-off of loan origination fees and prepayment penalties paid on the early extinguishment of debt, net of the minority interest. The Company has elected and expects to continue to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. Therefore, no provision has been made for income taxes related to REIT taxable income to be distributed to stockholders. Minority interest in the Company represents Common Units owned by various individuals and entities and not the Company in the Operating Partnership, the entity that owns substantially all of the Company's properties and through which the Company, as the sole general partner, conducts substantially all of its operations. Per share information is calculated using the weighted average number of shares outstanding (including common share equivalents). In addition, minority interest includes equity of consolidated real estate partnerships which are owned by various individuals and entities and not the Company. Certain amounts in the March 31, 2000 financial statements have been reclassified to conform to the March 31, 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. 9 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 months ended March 31, 2001 and 2000.
Three Months Ended March 31, ---------------------- 2001 2000 ---------- ---------- Rental Income: Office segment........................................ $ 103,941 $ 110,510 Industrial segment.................................... 11,715 13,115 Retail segment........................................ 9,695 8,395 Apartment segment..................................... 3,270 4,554 ---------- ---------- Total Rental Income............................... $ 128,621 $ 136,574 ========== ========== Net Operating Income: Office segment........................................ $ 73,361 $ 77,396 Industrial segment.................................... 9,976 10,851 Retail segment........................................ 6,584 6,049 Apartment segment..................................... 1,791 2,817 ---------- ---------- Total Net Operating Income........................ 91,712 97,113 ---------- ---------- Reconciliation to income before minority interest and extraordinary item: Equity in income of unconsolidated affiliates......... 833 943 Gain on disposition assets............................ 7,071 6,946 Interest and other income............................. 7,813 3,642 Interest expense...................................... (28,986) (27,768) General and administrative expense.................... (5,212) (5,096) Depreciation and amortization......................... (29,206) (28,328) ---------- ---------- Income before minority interest and extraordinary item................................................. $ 44,025 $ 47,452 ========== ========== Total Assets: Office segment........................................ $2,700,177 $2,996,001 Industrial segment.................................... 337,605 438,389 Retail segment........................................ 243,538 272,664 Apartment segment..................................... 86,761 115,387 Corporate and other................................... 236,111 198,910 ---------- ---------- Total Assets...................................... $3,604,192 $4,021,351 ========== ==========
3. LEGAL CONTINGENCIES On October 2, 1998, John Flake, a former stockholder of J.C. Nichols, filed a putative class action lawsuit on behalf of himself and the other former stockholders of J.C. Nichols in the United States District Court for the District of Kansas against J.C. Nichols, certain of its former officers and directors and the Company. The complaint asserts claims against J.C. Nichols and certain named directors and officers of J.C. Nichols for breach of fiduciary duty to J.C. Nichols' stockholders, and to members of the J.C. Nichols Company Employee Stock Ownership Trust, as well as claims under Section 14(a) of the Securities Exchange Act of 1934 Sections 11 and 12(2) of the Securities Act of 1933 variously against J.C. Nichols, the named directors and officers of J.C. Nichols and the Company. By order dated June 18, 1999, the court granted in part and denied in 10 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) part our motion to dismiss, and the court thereafter certified the proposed class of plaintiffs with respect to the remaining claims. By order dated August 28, 2000, the court granted in part and denied in part defendants' summary judgment motion. Defendants sought reconsideration of the court's ruling with respect to certain of the securities claims as to which the court denied their summary judgment motion, and by order dated January 11, 2001, the court granted in part that reconsideration motion. On the eve of the trial of this matter, the parties settled all their remaining claims. The parties have executed a Stipulation of Settlement, which has been submitted to the court. The final settlement hearing is scheduled for May 24, 2001. We do not believe the settlement will have a material adverse effect on our business, financial condition or results of operations. 4. 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 March 31, 2001. The effective portion of the cumulative loss on the derivative instruments was $10.6 million at March 31, 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 March 31, 2001 associated with the derivative instruments which will be recognized within the next 12 months will be approximately $1.5 million. The ineffective portion of our derivatives' changes in fair value has resulted in a loss of $1.0 million and is reported in interest and other income on the Consolidated Statements of Income at March 31, 2001. Derivative liabilities totaling approximately $860,788 related to our interest rate swap, cap and collar agreements, with a notional amount of $113.1 million, are recorded in other accounts payable, accrued expenses and other liabilities in the Consolidated Condensed Balance Sheets at March 31, 2001. The fair value of our interest rate swap, cap and collar agreements was ($860,788) at March 31, 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. 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 March 31, 2001. Revenues from rental operations decreased $8.0 million, or 5.9%, from $136.6 million for the three months ended March 31, 2000 to $128.6 million for the comparable period in 2001. The decrease is primarily a result of the disposition of and contribution of 6.5 million square feet of wholly owned office, industrial and retail properties and 277 apartment units, offset in part by the acquisition of 741,000 square feet of wholly owned office properties and the completion of 2.2 million square feet of development activity during the last nine months of 2000 and the first three months of 2001. Our in-service portfolio decreased from 40.2 million square feet at March 31, 2000 to 36.5 million square feet at March 31, 2001. Same property revenues, which are the revenues of the 455 in-service properties and 1,608 apartment units owned on January 1, 2000, increased 3.3% for the three months ended March 31, 2001, compared to the same three months in 2000. During the three months ended March 31, 2001, 161 leases representing 1.1 million square feet of office, industrial and retail space were executed at an average rate per square foot which was 7.9% higher than the average rate per square foot on the expired leases. Interest and other income increased $4.2 million, or 116.7%, from $3.6 million for the three months ended March 31, 2000 to $7.8 million for the comparable period in 2001. The increase was a result of an increase in interest income and third party fee income partly offset by an adjustment related to the adoption of FASB 133. Rental operating expenses decreased $2.6 million, or 6.6%, from $39.5 million for the three months ended March 31, 2000 to $36.9 million for the comparable period in 2001. The decrease is primarily a result of the disposition of and contribution of 6.5 million square feet of wholly owned office, industrial and retail properties and 277 apartment units, offset in part by the acquisition of 741,000 square feet of wholly owned office properties and the completion of 2.2 million square feet of development activity during the last nine months of 2000 and the first three months of 2001. Rental operating expenses as a percentage of related revenues was 28.7% and 28.9% for the three months ended March 31, 2001 and 2000, respectively. Depreciation and amortization for the three months ended March 31, 2001 and 2000 totaled $29.2 million and $28.3 million, respectively. The increase of $878,000, or 3.1%, is due to an increase in tenant improvements in 2000 and 2001. Interest expense increased $1.2 million, or 4.3%, from $27.8 million for the three months ended March 31, 2000 to $29.0 million for the comparable period in 2001. The increase is attributable to a decrease in capitalized interest in 2001 from 2000. Interest expense for the three months ended March 31, 2001 and 2000 included $665,000 million and $721,000 million, respectively, of amortization of deferred financing costs and the costs related to our interest rate hedge contracts. General and administrative expenses increased 0.2% from 3.6% of total revenue for the three months ended March 31, 2000 to 3.8% for the comparable period in 2001. Income before minority interest and extraordinary item was $44.0 million and $47.5 million for the three months ended March 31, 2001 and 2000, respectively. The Company's net income allocated to minority interest totaled $5.3 million and $6.0 million for the three months ended March 31, 2001 and 2000, respectively. The Company recorded $8.1 million in preferred stock dividends for the three months ended March 31, 2001 and 2000. 12 Liquidity and Capital Resources Statement of Cash Flows. For the three months ended March 31, 2001, the Company generated $66.8 million in cash flows from operating activities and $22.3 million in investing activities (primarily as a result of dispositions of real estate assets and repayments from subsidiaries, partly offset by additions to real estate assets). These combined cash flows of $89.1 million were used during the quarter to partly fund financing activities of $147.7 million, primarily consisting of the repurchase of Common Stock and Common Units and the payment of distributions. Capitalization. Our total indebtedness at March 31, 2001 totaled $1.6 billion and was comprised of $629.0 million of secured indebtedness with a weighted average interest rate of 7.8% and $1.0 billion of unsecured indebtedness with a weighted average interest rate of 7.3%. Except as stated below, all of the mortgage and notes payable outstanding at March 31, 2001 were either fixed rate obligations or variable rate obligations covered by interest rate hedge contracts. Approximately $32.5 million of floating rate notes were not covered by interest rate hedge contracts on March 31, 2001. Based on the Company's total market capitalization of $3.5 billion at March 31, 2001 (at the March 31, 2001 stock price of $24.65 and assuming the redemption for shares of Common Stock of the 7.7 million Common Units of minority interest in the Operating Partnership), the Company's debt represented approximately 45.5% 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 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 March 31, 2001:
Fair Notional Maturity Fixed Market Type of Hedge Amount Date Reference Rate Rate Value - ------------- -------- -------- -------------------- --------- --------- Swap............. $19,671 06/10/02 1-Month LIBOR + 0.75% 6.95% $(392,540) Collar........... $80,000 10/15/01 1-Month LIBOR 5.60-6.25% $(468,248) Cap.............. $13,434 06/15/01 1-Month LIBOR 7.75% --
The interest rate on our variable rate debt is adjusted at one-month intervals, subject to settlements under these contracts. Net (receipts)/payments made to counterparties under interest rate hedge contracts were $(24,105) during the first quarter of 2001 and $7,545 during the first quarter of 2000 and were recorded as (decreases)/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 13 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 $80.0 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 $248.0 million was available at March 31, 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. 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 April 25, 2001, we announced that we had essentially completed our previously announced 10.0 million share and unit repurchase program pursuant to which we repurchased 9.9 million shares of Common Stock and Common Units at a weighted average price of $24.18 per share/unit, for a total 14 purchase price of $239.2 million. In addition, the Company announced that its board of directors has authorized the repurchase of up to an additional 5 million shares of Common Stock and Common Units. To date, we have not repurchased any shares or units under our new program. Disposition Activity. During the three months ended March 31, 2001, we sold approximately 76,000 rentable square feet of office properties, 277 apartment units and 73.0 acres of development land for gross proceeds of $49.7 million. In addition, we currently have 182,000 rentable square feet of wholly owned properties and 1,395 apartment units under contract for sale in various transactions totaling $120.0 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 May 14, 2001, we expect to use a portion of the net proceeds from our recent and pending disposition activity to reinvest in tax-deferred exchange transactions under Section 1031 of the Internal Revenue Code. We expect to reinvest up to $10.0 million of the net proceeds from completed disposition activity and up to $112.0 million of the net 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 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. 15 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 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 16 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. FFO and cash available for distribution for the three month period ended March 31, 2001 and 2000 are summarized in the following table (in thousands):
Three Months Ended March 30, ---------------- 2001 2000 ------- ------- Funds from operations: Income before minority interest and extraordinary item...... $44,025 $47,452 Add/(Deduct): Dividends to preferred stockholders....................... (8,145) (8,145) Transition adjustment upon adoption of FASB 133........... 556 -- Gain on disposition of land and depreciable assets........ (7,071) (6,946) Gain on disposition of land............................... 1,026 -- Depreciation and amortization............................. 29,206 28,328 Depreciation of unconsolidated affiliates................. 1,992 878 ------- ------- Funds from operations................................... 61,589 61,567 Cash available for distribution: Add/(Deduct): Rental income from straight-line rents.................... (3,102) (3,800) Amortization of deferred financing costs.................. 665 721 Non-incremental revenue generating capital expenditures(1): Building improvements paid.............................. (1,073) (1,369) Second generation tenant improvements paid.............. (3,755) (4,782) Second generation lease commissions paid................ (4,787) (3,131) ------- ------- Cash available for distribution....................... $49,537 $49,206 ======= ======= Weighted average common shares/common units outstanding-- basic(2)................................................... 64,094 69,256 ======= ======= Weighted average common shares/common units outstanding-- diluted(2)................................................. 64,359 69,341 ======= ======= Dividend payout ratios: Funds from operations..................................... 59.6% 62.5% ======= ======= Cash available for distribution........................... 74.1% 78.2% ======= =======
- -------- (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 April 25, 2001, the Company's Board of Directors declared a dividend for the first quarter ended March 31, 2001 of $0.57 per share ($2.28 on an annualized basis) payable on May 17, 2001 to stockholders of record on May 4, 2001. 17 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; . 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. 18 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 March 31, 2001 and 2000:
Rentable Percent Leased/ March 31, 2001 Square Feet Pre-Leased - -------------- ----------- --------------- In-Service: Office............................................ 24,509,000 94% Industrial........................................ 10,358,000 95% Retail(1)......................................... 1,645,000 94% ---------- --- Total or Weighted Average......................... 36,512,000 94% ========== === Development: Completed--Not Stabilized Office............................................ 524,000 78% Industrial........................................ 306,000 52% Retail............................................ -- -- ---------- --- Total or Weighted Average......................... 830,000 69% ========== === In Process Office............................................ 2,079,000 52% Industrial........................................ 122,000 -- Retail............................................ 20,000 34% ---------- --- Total or Weighted Average......................... 2,221,000 49% ========== === Total: Office............................................ 27,112,000 Industrial........................................ 10,786,000 Retail............................................ 1,665,000 ---------- Total or Weighted Average......................... 39,563,000 ========== Rentable Percent Leased/ March 31, 2000 Square Feet Pre-Leased - -------------- ----------- --------------- In-Service: Office............................................ 27,517,000 94% Industrial........................................ 11,153,000 93% Retail............................................ 1,543,000 95% ---------- --- Total or Weighted Average......................... 40,213,000 94% ========== === Development: Completed--Not Stabilized Office............................................ 1,745,000 69% Industrial........................................ 297,000 60% Retail............................................ 180,000 94% ---------- --- Total or Weighted Average......................... 2,222,000 70% ========== === In Process Office............................................ 1,101,000 78% Industrial........................................ 284,000 57% Retail............................................ -- -- ---------- --- Total or Weighted Average......................... 1,385,000 74% ========== === Total: Office............................................ 30,363,000 Industrial........................................ 11,734,000 Retail............................................ 1,723,000 ---------- Total or Weighted Average......................... 43,820,000 ==========
- -------- (1) Excludes basement space 19 As of March 31, 2001, we were developing 24 suburban office properties, 4 industrial properties and 1 retail property totaling 3.1 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 seven additional properties totaling 859,000 rentable square feet. At March 31, 2001, these seven development projects had an aggregate budgeted cost of $107.1 million and were 67.0% pre-leased. In-Process
Rentable Square Estimated Cost at Pre-Leasing Estimated Estimated Name Market Feet Cost 3/31/01 Percentage(1) Completion Stabilization ---- ----------------- --------- --------- ------- ------------- ---------- -------------- ($ in thousands) Office: Highwoods Preserve V Tampa 185,000 $ 27,633 $17,273 100% 3Q01 3Q01 Met Life Building at Brookfield(2) Greenville 118,000 13,220 3,938 67% 3Q01 4Q01 Romac Tampa 128,000 18,582 5,967 100% 4Q01 4Q01 Verizon Wireless(2) Greenville 193,000 16,356 2,975 100% 1Q02 1Q02 International Place 3 Memphis 214,000 34,272 5,462 100% 2Q02 2Q02 Cool Springs II Nashville 205,000 22,718 16,294 19% 2Q01 2Q02 Centre Green Two(2) Research Triangle 97,000 11,596 6,225 61% 2Q01 2Q02 ParkWest One(2) Research Triangle 46,000 4,364 1,871 28% 2Q01 2Q02 ParkWest Two(2) Research Triangle 48,000 4,544 1,998 100% 2Q01 2Q02 Hickory Trace Nashville 52,000 5,933 4,260 -- 3Q01 3Q02 Centre Green Four(2) Research Triangle 100,000 11,764 4,418 -- 3Q01 3Q02 North Shore Commons A Richmond 115,000 13,084 9,003 58% 2Q01 3Q02 Stony Point III(2) Richmond 107,000 11,425 2,577 45% 2Q01 3Q02 Shadow Creek II(2) Memphis 81,000 8,750 1,877 -- 4Q01 4Q02 Highwoods Park at Jefferson Village(2) Piedmont Triad 101,000 9,839 1,159 -- 4Q01 4Q02 GlenLake I(2) Research Triangle 158,000 19,089 3,011 -- 4Q01 4Q02 Seven Springs I(2) Nashville 131,000 15,556 3,739 -- 1Q02 1Q03 --------- -------- ------- ---- In-Process Office Total or Weighted Average 2,079,000 $248,725 $92,047 52% ========= ======== ======= ==== Industrial: Tradeport Place IV Atlanta 122,000 $ 4,447 $1,988 -- 3Q01 3Q02 --------- -------- ------- ---- In-Process Industrial Total or Weighted Average 122,000 $ 4,447 $1,988 -- ========= ======== ======= ==== Retail: Plaza Redevelopment (Granada Shops) Kansas City 20,000 $ 4,680 $176 34% 4Q01 4Q01 --------- -------- ------- ---- In-Process Retail Total or Weighted Average 20,000 $ 4,680 $176 34% ========= ======== ======= ==== Total or Weighted Average of all In-Process Development Projects 2,221,000 $257,852 $94,211 49% ========= ======== ======= ====
- -------- (1) Letters of intent comprise 2% of the Total Pre-Leasing Percentage. (2) We are developing these properties for a third party and own an option to purchase each property. 20 Completed--Not Stabilized
Rentable Square Estimated Cost at Pre-Leasing Estimated Estimated Name Market Feet Cost 3/31/01 Percentage(1) Completion Stabilization ---- ----------------- --------- --------- -------- ------------- ---------- ------------- ($ in thousands) Office: Deerfield III Atlanta 54,000 $ 5,276 $ 4,185 100% 4Q00 3Q01 Shadow Creek Memphis 80,000 8,989 7,547 82% 4Q00 4Q01 380 Park Place Tampa 82,000 9,675 8,419 78% 1Q01 4Q01 Highwoods Plaza Tampa 66,000 7,505 6,436 30% 4Q00 1Q02 Situs III Research Triangle 39,000 4,543 2,693 94% 1Q01 1Q02 Maplewood Research Triangle 36,000 3,901 3,240 100% 1Q01 1Q02 Highwoods Tower II Research Triangle 167,000 25,134 19,601 75% 1Q01 2Q02 --------- -------- -------- --- ---- ---- Office Total or Weighted Average 524,000 $ 65,023 $52,121 78% ========= ======== ======== === Industrial: Holden Road Piedmont Triad 64,000 $ 2,014 $1,750 60% 1Q01 3Q01 Tradeport Place III Atlanta 122,000 4,780 4,568 100% 4Q00 4Q01 Enterprise Center I Piedmont Triad 120,000 3,807 3,218 -- 4Q00 4Q01 --------- -------- -------- --- Completed-Not Stabilized Retail Total or Weighted Average 306,000 $ 10,601 $9,536 52% ========= ======== ======== === Total or Weighted Average of all Completed-Not Stabilized Development Projects 830,000 $ 75,624 $ 61,657 69% --------- -------- -------- --- Total or Weighted Average of all Development Projects 3,051,000 $333,476 $155,868 54% ========= ======== ======== ===
- -------- (1) Letters of intent comprise 2% of the Total Pre-Leasing Percentage. 21
Rentable Square Estimated Pre-Leasing Feet Cost Percentage(1) -------- --------- ------------- (in thousands) Development Analysis
Summary by Estimated Stabilization Date: Second Quarter 2001................................... -- -- -- Third Quarter 2001.................................... 303,000 $ 34,923 92% Fourth Quarter 2001................................... 670,000 63,733 69% First Quarter 2002.................................... 334,000 32,305 85% Second Quarter 2002................................... 777,000 102,628 64% Third Quarter 2002.................................... 496,000 46,653 23% Fourth Quarter 2002................................... 340,000 37,678 -- First Quarter 2003.................................... 131,000 15,556 -- --------- -------- --- Total or Weighted Average........................... 3,051,000 $333,476 54% ========= ======== === Summary by Market: Atlanta............................................... 298,000 $ 14,503 59% Greenville............................................ 311,000 29,576 87% Kansas City........................................... 20,000 4,680 34% Memphis............................................... 375,000 52,011 75% Nashville............................................. 388,000 44,207 10% Piedmont Triad........................................ 285,000 15,660 13% Research Triangle..................................... 691,000 84,935 46% Richmond.............................................. 222,000 24,509 52% Tampa................................................. 461,000 63,395 86% --------- -------- --- Total or Weighted Average........................... 3,051,000 $333,476 54% ========= ======== === Build-to-Suit......................................... 720,000 $ 96,843 100% Multi-Tenant.......................................... 2,331,000 236,633 40% --------- -------- --- Total or Weighted Average........................... 3,051,000 $333,476 54% ========= ======== ===
Average Rentable Average Square Estimated Pre-Leasing Feet Cost Percentage(1) -------- --------- ------------- (in thousands) Per Property Type: Office....................................... 108,458 $13,073 57% Industrial................................... 107,000 3,762 37% Retail....................................... 20,000 4,680 34% ------- ------- --- All.......................................... 105,207 $11,499 54% ======= ======= ===
- -------- (1) Letters of intent comprise 2% of the Total pre-leasing percentage. 22 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 March 31, 2001 and December 31, September 30 and June 30, 2000.
Office Leasing Statistics Three Months Ended ------------------------------------------------------------ 3/31/01 12/31/00 9/30/00 6/30/00 Average ----------- ----------- ---------- ---------- ---------- Net Effective Rents Related to Re-Leased Space: Number of lease transactions (signed leases)........ 132 199 174 221 182 Rentable square footage leased................. 941,419 1,187,466 1,056,239 990,663 1,043,947 Average per rentable square foot over the lease term: Base rent............ $ 17.73 $ 17.51 $ 15.23 $ 18.43 $ 17.23 Tenant improvements.. (1.13) (1.14) (1.21) (1.39) (1.22) Leasing commissions.. (0.57) (0.59) (0.40) (0.57) (0.53) Rent concessions..... (0.01) (0.03) (0.03) (0.05) (0.03) ----------- ----------- ---------- ---------- ---------- Effective rent....... 16.02 15.75 13.59 16.42 15.45 Expense stop(1)...... (2.96) (4.73) (4.03) ( 5.37) (4.27) ----------- ----------- ---------- ---------- ---------- Equivalent effective net rent............ $ 13.06 $ 11.02 $ 9.56 $ 11.05 $ 11.17 =========== =========== ========== ========== ========== Average term in years... 5.3 4.6 4.9 4.6 4.8 =========== =========== ========== ========== ========== Capital Expenditures Related to Released Space: Tenant Improvements: Total dollars committed under signed leases........ $ 7,103,609 $ 7,273,031 $6,676,576 $5,510,054 $6,640,817 Rentable square feet.. 941,419 1,187,466 1,056,239 990,663 1,043,947 ----------- ----------- ---------- ---------- ---------- Per rentable square foot................. $ 7.55 $ 6.12 $ 6.32 $ 5.56 $ 6.36 =========== =========== ========== ========== ========== Leasing Commissions: Total dollars committed under signed leases........ $ 3,361,410 $ 2,873,345 $1,910,278 $2,392,441 $2,634,369 Rentable square feet.. 941,419 1,187,466 1,056,239 990,663 1,043,947 ----------- ----------- ---------- ---------- ---------- Per rentable square foot................. $ 3.57 $ 2.42 $ 1.81 $ 2.41 $ 2.52 =========== =========== ========== ========== ========== Total: Total dollars committed under signed leases........ $10,465,020 $10,146,377 $8,586,853 $7,902,495 $9,275,186 Rentable square feet.. 941,419 1,187,466 1,056,239 990,663 1,043,947 ----------- ----------- ---------- ---------- ---------- Per rentable square foot................. $ 11.12 $ 8.54 $ 8.13 $ 7.98 $ 8.88 =========== =========== ========== ========== ========== Rental Rate Trends: Average final rate with expense pass throughs............. $ 15.05 $ 15.83 $ 14.30 $ 16.59 $ 15.44 Average first year cash rental rate..... $ 16.04 $ 16.38 $ 14.96 $ 17.58 $ 16.24 ----------- ----------- ---------- ---------- ---------- Percentage increase... 6.6% 3.5% 4.6% 6.0% 5.2% =========== =========== ========== ========== ==========
- -------- (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. 23
Industrial Leasing Statistics Three Months Ended ------------------------------------------------ 3/31/01 12/31/00 9/30/00 6/30/00 Average -------- -------- -------- -------- -------- Net Effective Rents Related to Re-Leased Space: Number of lease transactions (signed leases) 27 31 31 46 34 Rentable square footage leased..................... 190,663 355,947 349,079 362,521 314,553 Average per rentable square foot over the lease term: Base rent................. $ 5.88 $ 5.29 $ 4.54 $ 5.14 $ 5.21 Tenant improvements....... (0.20) (0.29) (0.32) (0.28) (0.27) Leasing commissions....... (0.09) (0.15) (0.15) (0.12) (0.13) Rent concessions.......... (0.00) (0.00) (0.00) (0.01) (0.00) -------- -------- -------- -------- -------- Effective rent............ 5.59 4.85 4.07 4.73 4.81 Expense stop (1).......... (0.74) (0.30) (0.23) (0.48) (0.44) -------- -------- -------- -------- -------- Equivalent effective net rent..................... $ 4.85 $ 4.55 $ 3.84 $ 4.25 $ 4.37 ======== ======== ======== ======== ======== Average term in years....... 2.5 2.7 3.6 4.2 3.3 ======== ======== ======== ======== ======== Capital Expenditures Related to Re-leased Space: Tenant Improvements: Total dollars committed under signed leases...... $ 91,304 $412,679 $510,520 $389,592 $351,023 Rentable square feet...... 190,663 355,947 349,079 362,521 314,553 -------- -------- -------- -------- -------- Per rentable square foot.. $ 0.48 $ 1.16 $ 1.46 $ 1.07 $ 1.12 ======== ======== ======== ======== ======== Leasing Commissions: Total dollars committed under signed leases...... $ 61,239 $145,117 $167,772 $185,028 $139,789 Rentable square feet...... 190,663 355,947 349,079 362,521 314,553 -------- -------- -------- -------- -------- Per rentable square foot.. $ 0.32 $ 0.41 $ 0.48 $ 0.51 $ 0.44 ======== ======== ======== ======== ======== Total: Total dollars committed under signed leases...... $152,542 $557,796 $678,292 $574,620 $490,813 Rentable square feet...... 190,663 355,947 349,079 362,521 314,553 -------- -------- -------- -------- -------- Per rentable square foot.. $ 0.80 $ 1.57 $ 1.94 $ 1.59 $ 1.56 ======== ======== ======== ======== ======== Rental Rate Trends: Average final rate with expense pass throughs...... $ 4.89 $ 4.92 $ 4.11 $ 4.44 $ 4.59 Average first year cash rental rate................ $ 5.06 $ 5.23 $ 4.51 $ 4.72 $ 4.88 -------- -------- -------- -------- -------- Percentage increase......... 3.4% 6.3% 9.6% 6.4% 6.3% ======== ======== ======== ======== ========
- -------- (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
Retail Leasing Statistics Three Months Ended -------------------------------------------------- 3/31/01 12/31/00 9/30/00 6/30/00 Average -------- -------- -------- ---------- -------- Net Effective Rents Related to Re-Leased Space: Number of lease transactions (signed leases).................. 9 15 21 15 15 Rentable square footage leased................... 38,618 35,057 53,217 37,036 40,982 Average per rentable square foot over the lease term: Base rent............. $ 29.31 $ 24.07 $ 22.26 $ 21.84 $ 24.37 Tenant improvements... (1.86) (1.90) (1.26) (1.97) (1.75) Leasing commissions... (0.29) (0.49) (0.58) (0.57) (0.48) Rent concessions...... (0.22) (0.00) (0.03) (0.00) (0.06) -------- -------- -------- ---------- -------- Effective rent........ 26.94 21.68 20.39 19.30 22.08 Expense stop (1)...... 0.00 0.00 0.00 ( 0.12) (0.03) -------- -------- -------- ---------- -------- Equivalent effective net rent............. $ 26.94 $ 21.68 $ 20.39 $ 19.18 $ 22.05 ======== ======== ======== ========== ======== Average term in years..... 9.3 6.7 7.6 8.3 8.0 ======== ======== ======== ========== ======== Capital Expenditures Related to Re-leased Space: Tenant Improvements: Total dollars committed under signed leases................. $729,480 $655,301 $600,136 $ 914,200 $724,779 Rentable square feet.... 38,618 35,057 53,217 37,036 40,982 -------- -------- -------- ---------- -------- Per rentable square foot................... $ 18.89 $ 18.69 $ 11.28 $ 24.68 $ 17.69 ======== ======== ======== ========== ======== Leasing Commissions: Total dollars committed under signed leases...... $ 93,045 $ 66,986 $143,269 $ 175,122 $119,606 Rentable square feet.... 38,618 35,057 53,217 37,036 40,982 -------- -------- -------- ---------- -------- Per rentable square foot................... $ 2.41 $ 1.91 $ 2.69 $ 4.73 $ 2.92 ======== ======== ======== ========== ======== Total: Total dollars committed under signed leases................. $822,525 $722,287 $743,406 $1,089,322 $844,385 Rentable square feet.... 38,618 35,057 53,217 37,036 40,982 -------- -------- -------- ---------- -------- Per rentable square foot................... $ 21.30 $ 20.60 $ 13.97 $ 29.41 $ 20.60 ======== ======== ======== ========== ======== Rental Rate Trends: Average final rate with expense pass throughs.... $ 12.91 $ 18.41 $ 13.85 $ 16.60 $ 15.44 Average first year cash rental rate.............. $ 19.70 $ 22.57 $ 19.40 $ 19.06 $ 20.18 -------- -------- -------- ---------- -------- Percentage increase....... 52.6% 22.6% 40.1% 14.8% 30.7% ======== ======== ======== ========== ========
- -------- (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. 25 The following tables set forth scheduled lease expirations at our wholly owned in-service properties (excluding apartment units) as of March 31, 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 Leases(1) Expirations(1) Leases ---------- --------- -------------- --------------- ------------ --------------- ------------- (in thousands) 2001.................... 599 2,431,357 10.5% $40,152 $16.51 10.3% 2002.................... 548 3,154,987 13.7% 52,079 16.51 13.4% 2003.................... 548 3,542,989 15.3% 59,604 16.82 15.3% 2004.................... 368 2,659,604 11.5% 46,824 17.61 12.1% 2005.................... 419 3,100,350 13.4% 52,818 17.04 13.6% 2006.................... 157 2,281,087 9.9% 37,545 16.46 9.7% 2007.................... 46 1,070,034 4.6% 16,668 15.58 4.3% 2008.................... 48 1,269,730 5.5% 19,018 14.98 4.9% 2009.................... 18 714,403 3.1% 11,431 16.00 2.9% 2010.................... 44 1,501,620 6.5% 26,205 17.45 6.7% 2011 and thereafter..... 45 1,382,964 6.0% 26,231 18.97 6.8% ----- ---------- ------ -------- ------ ------ 2,840 23,109,125 100.0% $388,575 $16.81 100.0% ===== ========== ====== ======== ====== ======
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) 2001.................... 110 1,450,864 14.5% $6,694 $4.61 14.4% 2002.................... 111 1,774,868 17.8% 7,797 4.39 16.7% 2003.................... 90 1,370,468 13.7% 6,875 5.02 14.7% 2004.................... 62 2,136,315 21.5% 8,912 4.17 19.1% 2005.................... 42 684,591 6.9% 3,995 5.84 8.6% 2006.................... 17 503,707 5.0% 2,806 5.57 6.0% 2007.................... 13 1,081,566 10.8% 4,425 4.09 9.5% 2008.................... 4 196,045 2.0% 1,306 6.66 2.8% 2009.................... 6 268,813 2.7% 1,819 6.77 3.9% 2010.................... 4 182,746 1.8% 1,043 5.71 2.2% 2011 and thereafter..... 6 326,680 3.3% 969 2.97 2.1% --- --------- ------ ------- ----- ------ 465 9,976,663 100.0% $46,641 $4.68 100.0% === ========= ====== ======= ===== ======
- -------- (1) Includes operating expense pass throughs and excludes the effect of future contractual rent increases. 26 Retail Properties:
Percentage of Percentage of Leased Square Average Annual Leased Rents Year of Total Rentable Footage Annual Rents Rental Rate Per Represented Lease Number Square Feet Represented by Under Expiring Square Foot for by Expiring Expiration of Leases Expiring Expiring Leases Leases(1) Expirations(1) Leases ---------- --------- -------------- --------------- -------------- --------------- ------------- (in thousands) 2001.................... 46 153,464 10.0% $2,830 $18.44 8.7% 2002.................... 33 69,975 4.5% 1,389 19.85 4.3% 2003.................... 44 108,530 7.1% 2,460 22.67 7.6% 2004.................... 35 213,016 13.8% 2,658 12.48 8.2% 2005.................... 39 90,406 5.9% 2,543 28.13 7.8% 2006.................... 23 80,907 5.3% 1,971 24.36 6.1% 2007.................... 18 74,779 4.9% 1,492 19.95 4.6% 2008.................... 16 108,901 7.1% 3,607 33.12 11.1% 2009.................... 21 169,286 11.0% 3,184 18.81 9.8% 2010.................... 17 94,138 6.1% 2,471 26.25 7.6% 2011 and thereafter..... 24 375,561 24.3% 7,801 20.77 24.2% ----- ---------- ------ -------- ------ ------ 316 1,538,963 100.0% $ 32,406 $21.06 100.0% ===== ========== ====== ======== ====== ====== Total: Percentage of Percentage of Leased Square Annual Rents Average Annual Leased Rents Year of Total Rentable Footage Under Expiring Rental Rate Per Represented Lease Number Square Feet Represented by Leases(1) Square Foot for by Expiring Expiration of Leases Expiring Expiring Leases (in thousands) Expirations(1) Leases ---------- --------- -------------- --------------- -------------- --------------- ------------- 2001.................... 755 4,035,685 11.7% $49,676 $12.31 10.6% 2002.................... 692 4,999,830 14.4% 61,265 12.25 13.1% 2003.................... 682 5,021,987 14.5% 68,939 13.73 14.7% 2004.................... 465 5,008,935 14.6% 58,394 11.66 12.5% 2005.................... 500 3,875,347 11.2% 59,356 15.32 12.7% 2006.................... 197 2,865,701 8.3% 42,322 14.77 9.1% 2007.................... 77 2,226,379 6.4% 22,585 10.14 4.8% 2008.................... 68 1,574,676 4.5% 23,931 15.20 5.1% 2009.................... 45 1,152,502 3.3% 16,434 14.26 3.5% 2010.................... 65 1,778,504 5.1% 29,719 16.71 6.4% 2011 and thereafter..... 75 2,085,205 6.0% 35,001 16.79 7.5% ----- ---------- ------ -------- ------ ------ 3,621 34,624,751 100.0% $467,622 $13.51 100.0% ===== ========== ====== ======== ====== ======
- -------- (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. 27 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 March 31, 2001, the Company had approximately $32.5 million of variable rate debt outstanding that was not protected by interest rate hedge contracts. If the weighted average interest rate on this variable rate debt is 100 basis points higher or lower during the 12 months ended March 31, 2002, our interest expense would be increased or decreased approximately $325,000. In addition, as of March 31, 2001, we had $22.0 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 $22.0 million of debt. Interest Rate Hedge Contracts. For a discussion of our interest rate hedge contracts in effect at March 31, 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 March 31, 2001 would increase by approximately $559,000. If interest rates decrease by 100 basis points, the aggregate fair market value of these interest rate hedge contracts as of March 31, 2001 would decrease by approximately $648,000. In addition, we are exposed to certain losses in the event of nonperformance by the counterparties under the hedge contracts. We expect the counterparties, which are major financial institutions, to perform fully under these contracts. However, if the counterparties were to default on their obligations under the interest rate hedge contracts, we could be required to pay the full rates on our debt, even if such rates were in excess of the rates in the contracts. PART II--OTHER INFORMATION Item 1. Legal Proceedings On October 2, 1998, John Flake, a former stockholder of J.C. Nichols, filed a putative class action lawsuit on behalf of himself and the other former stockholders of J.C. Nichols in the United States District Court for the District of Kansas against J.C. Nichols, certain of its former officers and directors and the Company. The complaint asserts claims against J.C. Nichols and certain named directors and officers of J.C. Nichols for breach of fiduciary duty to J.C. Nichols' stockholders, and to members of the J.C. Nichols Company Employee Stock Ownership Trust, as well as claims under Section 14(a) of the Securities Exchange Act of 1934 Sections 11 and 1292) of the Securities Act of 1933 variously against J.C. Nichols, the named directors and 28 officers of J.C. Nichols and the company. By order dated June 18, 1999, the court granted in part and denied in part our motion to dismiss, and the court thereafter certified the proposed class of plaintiffs with respect to the remaining claims. By order dated August 28, 2000, the court granted in part and denied in part defendants' summary judgment motion. Defendants sought reconsideration of the court's ruling with respect to certain of the securities claims as to which the court denied their summary judgment motion, and by order dated January 11, 2001, the court granted in part that reconsideration motion. On the eve of the trial of this matter, the parties settled all their remaining claims. The parties have executed a Stipulation of Settlement, which has been submitted to the court. The final settlement hearing is scheduled for May 24, 2001. We do not believe the settlement will have a material adverse effect on our business, financial condition or results of operations. Item 6. Exhibits and Reports on Form 8-K (b) Reports on Form 8-K On January 25, 2001, we filed a Current Report on Form 8-K reporting under Item 5 that we had repurchased additional shares of Common Stock and Common Units. 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 million share and unit repurchase program and that our board of directors had authorized the repurchase of up to an additional 5 million shares of Common Stock and Common Units. 29 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. /s/ Ronald P. Gibson By: _________________________________ Ronald P. Gibson President and Chief Executive Officer /s/ Carman J. Liuzzo By: _________________________________ Carman J. Liuzzo Chief Financial Officer (Principal Accounting Officer) Date: May 15, 2001 30 -----END PRIVACY-ENHANCED MESSAGE-----