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, 2002 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 53,415,547 shares outstanding as of August 1, 2002. ================================================================================ HIGHWOODS PROPERTIES, INC. QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 2002 TABLE OF CONTENTS
PAGE ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements......................................................................... 3 Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001........................ 4 Consolidated Statements of Income for the three and six months ended June 30, 2002 and 2001.................................................................................... 5 Consolidated Statements of Stockholders' Equity for the six months ended June 30, 2002............................................................................... 6 Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001.................................................................................... 7 Notes to Consolidated Financial Statements................................................... 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................................. 14 Disclosure Regarding Forward-Looking Statements.............................................. 14 Overview..................................................................................... 14 Critical Accounting Policies................................................................. 15 Results of Operations........................................................................ 18 Liquidity and Capital Resources.............................................................. 21 Recent Developments.......................................................................... 25 Impact of Recently Issued Accounting Standards............................................... 25 Funds From Operations and Cash Available for Distributions................................... 26 Property Information......................................................................... 28 Inflation.................................................................................... 37 Item 3. Quantitative and Qualitative Disclosures About Market Risk................................... 38 PART II OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds.................................................... 39 Item 4. Submission of Matters to a Vote of Security Holders.......................................... 39 Item 6. Exhibits and Reports on Form 8-K............................................................. 39
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 2001 Annual Report on Form 10-K. 3 HIGHWOODS PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS ($ in thousands)
JUNE 30, DECEMBER 31, 2002 2001 -------------- -------------- (UNAUDITED) ASSETS Real estate assets, at cost: Land and improvements......................................................... $ 443,929 $ 437,399 Buildings and tenant improvements............................................. 2,949,380 2,924,384 Development in process........................................................ 53,787 108,118 Land held for development..................................................... 183,267 153,468 Furniture, fixtures and equipment............................................. 19,842 19,398 -------------- -------------- 3,650,205 3,642,767 Less - accumulated depreciation............................................... (431,065) (381,773) -------------- -------------- Net real estate assets........................................................ 3,219,140 3,260,994 Property held for sale.......................................................... 68,754 101,292 Cash and cash equivalents....................................................... 14,194 576 Restricted cash................................................................. 4,556 5,685 Accounts receivable, net........................................................ 15,423 23,659 Advances to related parties..................................................... 788 788 Notes receivable................................................................ 33,181 43,761 Accrued straight-line rents receivable.......................................... 49,407 49,078 Investment in unconsolidated affiliates......................................... 79,603 83,393 Other assets: Deferred leasing costs........................................................ 110,584 102,135 Deferred financing costs...................................................... 25,916 26,121 Prepaid expenses and other.................................................... 12,086 10,461 -------------- -------------- 148,586 138,717 Less - accumulated amortization............................................... (67,867) (59,657) -------------- -------------- Other assets, net........................................................... 80,719 79,060 -------------- -------------- Total Assets.................................................................... $ 3,565,765 $ 3,648,286 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Mortgages and notes payable..................................................... $ 1,675,358 $ 1,719,230 Accounts payable, accrued expenses and other liabilities........................ 99,275 120,235 -------------- -------------- Total Liabilities............................................................. 1,774,633 1,839,465 Minority interest............................................................... 192,879 203,181 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), 104,945 shares issued and outstanding at June 30, 2002 and December 31, 2001.............................................................. 104,945 104,945 8% Series B Cumulative Redeemable Preferred Shares (liquidation preference $25 per share), 6,900,000 shares issued and outstanding at June 30, 2002 and December 31, 2001.............................................................. 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, 2002 and December 31, 2001.............................................................. 100,000 100,000 Common stock, $.01 par value, 200,000,000 authorized shares; 53,423,488 and 52,891,822 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively................................................ 534 529 Additional paid-in capital...................................................... 1,390,238 1,376,546 Distributions in excess of net earnings......................................... (157,223) (135,878) Accumulated other comprehensive loss............................................ (8,260) (9,441) Deferred compensation--restricted stock......................................... (4,481) (3,561) -------------- -------------- Total Stockholders' Equity.................................................... 1,598,253 1,605,640 -------------- -------------- Total Liabilities and Stockholders' Equity...................................... $ 3,565,765 $ 3,648,286 ============== ==============
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 JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 2002 2001 2002 2001 ----------- ------------- ----------- ----------- REVENUE: Rental property........................................... $ 118,613 $ 124,385 $ 242,569 $ 251,226 Equity in earnings of unconsolidated affiliates........... 2,475 1,592 5,039 2,425 Interest and other income................................. 2,764 7,774 6,169 15,585 ----------- ------------- ----------- ----------- Total Revenue............................................... 123,852 133,751 253,777 269,236 OPERATING EXPENSES: Rental property........................................... 36,940 37,775 75,059 74,167 Depreciation and amortization............................. 31,298 28,773 62,309 57,630 Interest expense: Contractual............................................. 27,117 26,253 53,151 54,574 Amortization of deferred financing costs................ 341 675 680 1,340 ----------- ------------- ----------- ----------- 27,458 26,928 53,831 55,914 General and administrative.................................. 5,537 5,451 10,711 10,663 ----------- ------------- ----------- ----------- Income before gain on disposition of land and depreciable assets, minority interest, discontinued operations and extraordinary item...................... 22,619 34,824 51,867 70,862 Gain on disposition of land and depreciable assets........ 6,673 5,670 7,617 12,741 ----------- ------------- ----------- ----------- Income before minority interest, discontinued operations and extraordinary item................................. 29,292 40,494 59,484 83,603 Minority interest........................................... (3,471) (4,985) (7,149) (10,124) ----------- ------------- ----------- ----------- Income from continuing operations......................... 25,821 35,509 52,335 73,479 DISCONTINUED OPERATIONS: Income from discontinued operations, net of minority interest................................................. 43 773 564 1,576 Gain on sale of discontinued operations, net of minority interest................................................. 2,611 - 2,611 - ----------- ------------- ----------- ----------- 2,654 773 3,175 1,576 Net income before extraordinary item........................ 28,475 36,282 55,510 75,055 Extraordinary item--loss on early extinguishment of debt.... - (325) - (518) ----------- ------------- ----------- ----------- Net income................................................ 28,475 35,957 55,510 74,537 Dividends on preferred stock................................ (7,713) (7,929) (15,426) (16,074) ----------- ------------- ----------- ----------- Net income available for common shareholders................ $ 20,762 $ 28,028 $ 40,084 $ 58,463 =========== ============= =========== =========== NET INCOME PER COMMON SHARE--BASIC: Income from continuing operations......................... $ 0.34 $ 0.52 $ 0.70 $ 1.04 Income from discontinued operations....................... 0.05 0.01 0.06 0.03 Extraordinary item--loss on early extinguishment of debt. - (0.01) - (0.01) ----------- ------------- ----------- ----------- Net income................................................ $ 0.39 $ 0.52 $ 0.76 $ 1.06 =========== ============= =========== =========== Weighted average shares outstanding--basic................ 53,205 53,927 53,060 55,153 =========== ============= =========== =========== NET INCOME PER COMMON SHARE--DILUTED: Income from continuing operations......................... $ 0.34 $ 0.51 $ 0.69 $ 1.03 Income from discontinued operations....................... 0.05 0.01 0.06 0.03 Extraordinary item--loss on early extinguishment of debt.. - (0.01) - (0.01) ----------- ------------- ----------- ----------- Net income................................................ $ 0.39 $ 0.51 $ 0.75 $ 1.05 =========== ============= =========== =========== Weighted average shares outstanding--diluted.............. 53,691 54,318 53,512 55,542 =========== ============= =========== =========== Distributions declared per common share..................... $ 0.585 $ 0.57 $ 1.17 $ 1.14 =========== ============= =========== ===========
See accompanying notes to consolidated financial statements. 5 HIGHWOODS PROPERTIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2002 (Unaudited and $ in thousands, except for number of common shares)
NUMBER OF COMMON COMMON SERIES A SERIES B SERIES D SHARES STOCK PREFERRED PREFERRED PREFERRED ------------ -------- ------------ ------------ ----------- Balance at December 31, 2001 52,891,822 $ 529 $ 104,945 $ 172,500 $ 100,000 Issuance of Common Stock 474,586 5 - - - Common Stock Dividends - - - - - Preferred Stock Dividends - - - - - Issuance of restricted stock 57,080 - - - - Amortization of deferred compensation - - - - - Net Income - - - - - Other comprehensive income - - - - - ------------ -------- ------------ ------------ ----------- Balance at June 30, 2002 53,423,488 $ 534 $ 104,945 $ 172,500 $ 100,000 ============ ======== ============ ============ =========== ACCUMULATED OTHER ADDITIONAL DEFERRED COMPRE- DISTRIBUTIONS PAID-IN COMPEN- HENSIVE IN EXCESS OF CAPITAL SATION LOSS NET EARNINGS TOTAL ------------ -------- ------------ ------------- ----------- Balance at December 31, 2001 $ 1,376,546 $ (3,561) $ (9,441) $ (135,878) $ 1,605,640 Issuance of Common Stock 12,125 - - - 12,130 Common Stock Dividends - - - (61,429) (61,429) Preferred Stock Dividends - - - (15,426) (15,426) Issuance of restricted stock 1,567 (1,567) - - - Amortization of deferred compensation - 647 - - 647 Net Income - - - 55,510 55,510 Other comprehensive income - - 1,181 - 1,181 ------------ -------- ------------ ------------- ----------- Balance at June 30, 2002 $ 1,390,238 $ (4,481) $ (8,260) $ (157,223) $ 1,598,253 ============ ======== ============ ============= ===========
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, -------------------------- 2002 2001 ----------- ----------- OPERATING ACTIVITIES: Net income...................................................................... $ 55,510 $ 74,537 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................................. 62,934 59,664 Amortization of deferred compensation......................................... 647 480 Minority interest............................................................. 7,580 10,346 Equity in earnings of unconsolidated affiliates............................... (5,039) (2,425) Gain on disposition of land and depreciable assets.............................. (10,581) (12,741) Reserve for deferred rent receivable............................................ 3,110 - Loss on early extinguishment of debt............................................ - 518 Transition adjustment upon adoption of FASB 133................................. - 556 Loss on ineffective portion of derivative instruments........................... - 428 Changes in operating assets and liabilities..................................... (14,224) (14,326) ----------- ----------- Net cash provided by operating activities................................... 99,937 117,037 ----------- ----------- INVESTING ACTIVITIES: Additions to real estate assets................................................. (63,268) (140,630) Proceeds from disposition of real estate assets................................. 120,200 105,500 Payment from/(advances to) subsidiaries......................................... - 27,560 Distributions from unconsolidated affiliates.................................... 5,301 4,350 Investments in notes receivable................................................. 11,080 18,918 Other investing activities...................................................... (6,514) (9,920) ----------- ----------- Net cash provided by investing activities................................... 66,799 5,778 ----------- ----------- FINANCING ACTIVITIES: Distributions paid on common stock and common units............................. (69,984) (71,603) Dividends paid on preferred stock............................................... (15,426) (16,074) Payment of prepayment penalties................................................. - (518) Borrowings on mortgages and notes payable....................................... 13,403 8,780 Repayments on mortgages and notes payable....................................... (55,973) (92,671) Borrowings on revolving loans................................................... 174,500 215,000 Repayments on revolving loans................................................... (203,500) (103,500) Net proceeds from the sale of common stock...................................... 4,821 2,157 Net change in deferred financing costs.......................................... 1,386 (164) Repurchase of stock and units................................................... (2,762) (138,889) Other financing activities...................................................... 417 -- ----------- ----------- Net cash used in financing activities....................................... (153,118) (197,482) ----------- ----------- Net increase/(decrease) in cash and cash equivalents............................ 13,618 (74,667) Cash and cash equivalents at beginning of the period............................ 576 104,780 ----------- ----------- Cash and cash equivalents at end of the period.................................. $ 14,194 $ 30,113 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest.......................................................... $ 60,590 $ 61,837 =========== ===========
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, -------------------------- 2002 2001 ----------- ----------- ASSETS: Notes receivable................................................................ $ 500 $ 675 Accounts receivable............................................................. 139 - Cash and cash equivalents....................................................... 1,114 1,074 Rental property and equipment, net.............................................. 36,828 48,646 Deferred leasing costs.......................................................... 995 - LIABILITIES: Mortgages and notes payable..................................................... 27,698 48,831 Accounts payable, accrued expenses and other liabilities........................ 10,321 2,084 ----------- ----------- Net assets.................................................................... $ 1,557 $ (520) =========== ===========
See accompanying notes to consolidated financial statements. 8 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 (Unaudited) 1. DESCRIPTION OF THE COMPANY The Company is a self-administered and self-managed REIT that operates in the southeastern and midwestern United States. The Company's wholly-owned assets include: 500 in-service office, industrial and retail properties; 1,304 acres of undeveloped land suitable for future development; and an additional 10 properties under development. The Company conducts substantially all of its activities through, and substantially all of its interests in the properties are held directly or indirectly by, the Operating Partnership. The Company is the sole general partner of the Operating Partnership. At June 30, 2002, the Company owned 88.3% of the Common Units in the Operating Partnership. Limited partners (including certain officers and directors of the Company) own the remaining Common Units. Holders of Common Units may redeem them for the cash value of one share of Common Stock or, at the Company's option, one share of Common Stock. When a Common Unit holder redeems a Common Unit for a share of Common Stock or cash, the minority interest will be reduced and the Company's share in the Operating Partnership will be increased. The Common Units owned by the Company are not redeemable for cash. 2. 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 in the Operating Partnership owned by various individuals and entities other than the Company. 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 June 30, 2001 and December 31, 2001 financial statements have been reclassified to conform to the June 30, 2002 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 2001 Annual Report on Form 10-K. 9 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 3. 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. 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, 2002 and 2001 ($ in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- --------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- RENTAL PROPERTY INCOME: Office segment....................................... $ 98,316 $ 102,235 $ 201,625 $ 206,223 Industrial segment................................... 10,783 11,933 21,329 23,513 Retail segment....................................... 9,256 8,653 19,003 18,355 Apartment segment.................................... 258 1,564 612 3,135 ----------- ----------- ----------- ----------- Total Rental Property Income....................... $ 118,613 $ 124,385 $ 242,569 $ 251,226 =========== =========== =========== =========== NET OPERATING INCOME: Office segment....................................... $ 66,676 $ 64,460 $ 136,992 $ 143,414 Industrial segment................................... 8,843 11,933 17,579 19,837 Retail segment....................................... 6,071 8,653 12,689 12,175 Apartment segment.................................... 83 1,564 250 1,633 ----------- ----------- ----------- ----------- Total Net Operating Income......................... $ 81,673 $ 86,610 $ 167,510 $ 177,059 ----------- ----------- ----------- ----------- Reconciliation to income before gain on disposition of land and depreciable assets, minority interest, discontinued operations and extraordinary item: Equity in earnings of unconsolidated affiliates...... $ 2,475 $ 1,592 $ 5,039 $ 2,425 Interest and other income............................ 2,764 7,774 6,169 15,585 Interest expense..................................... (27,458) (26,928) (53,831) (55,914) General and administrative expenses.................. (5,537) (5,451) (10,711) (10,663) Depreciation and amortization........................ (31,298) (28,773) (62,309) (57,630) ----------- ----------- ----------- ----------- Income before gain on disposition of land and depreciable assets, minority interest, discontinued operations and extraordinary item.... $ 22,619 $ 34,824 $ 51,867 $ 70,862 =========== =========== =========== =========== TOTAL ASSETS: Office segment....................................... $ 2,805,585 $ 2,708,324 $ 2,805,585 $ 2,708,324 Industrial segment................................... 328,320 398,740 328,320 398,740 Retail segment....................................... 249,797 258,135 249,797 258,135 Apartment segment.................................... 11,741 39,607 11,741 39,607 Corporate and other.................................. 170,322 205,209 170,322 205,209 ----------- ----------- ----------- ----------- Total Assets....................................... $ 3,565,765 $ 3,610,015 $ 3,565,765 $ 3,610,015 =========== =========== =========== ===========
10 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES During the past several years, we have formed various joint ventures with unrelated investors. We have retained minority equity interests ranging from 12.50% to 50.00% in these joint ventures. As required by GAAP, we have accounted for our joint venture activity using the equity method of accounting, as we do not control these joint ventures. As a result, the assets and liabilities of our joint ventures are not included on our balance sheet. As of June 30, 2002, our joint ventures have approximately $566.5 million of outstanding debt. All of the joint venture debt is non-recourse to us except (1) in the case of customary exceptions pertaining to such matters as misuse of funds, environmental conditions and material misrepresentations and (2) with respect to $5.0 million of construction debt related to the MG-HIW Metrowest I, LLC, which has been guaranteed in part by us subject to a pro rata indemnity from our joint venture partner. Our guarantee of the MG-HIW Metrowest I, LLC debt represented 50.00% of the outstanding loan balance at June 30, 2002. Selected financial data for unconsolidated affiliates for the six months ended June 30, 2002 and 2001 is presented below ($ in thousands):
PERCENT OWNED AT JUNE 30, -------------------------- 2002 2001 ----------- ----------- Board of Trade Investment Company..................................... 49.00% 49.00% Dallas County Partners I, LP.......................................... 50.00 50.00 Dallas County Partners II, LP......................................... 50.00 50.00 Dallas County Partners III, LP........................................ 50.00 50.00 Fountain Three........................................................ 50.00 50.00 Kessinger/Hunter, LLC................................................. 30.00 30.00 4600 Madison Associates, LP........................................... 12.50 12.50 Dreilander-Fonds 98/29................................................ 22.81 22.81 Dreilander-Fonds 97/26 and 99/32...................................... 42.93 44.70 RRHWoods, LLC......................................................... 50.00 50.00 Highwoods-Markel Associates, LLC...................................... 50.00 50.00 MG-HIW, LLC........................................................... 20.00 20.00 MG-HIW Peachtree Corners, LLC......................................... 50.00 50.00 MG-HIW Rocky Point, LLC (1)........................................... -- 50.00 MG-HIW Metrowest I, LLC............................................... 50.00 50.00 MG-HIW Metrowest II, LLC.............................................. 50.00 50.00 Concourse Center Associates, LLC...................................... 50.00 -- Plaza Colonnade, LLC.................................................. 50.00 --
JUNE 30, JUNE 30, 2002 2001 ----------- ----------- Total assets.......................................................... $ 891,175 $ 886,671 Total debt............................................................ 566,462 556,505 Total liabilities..................................................... 593,701 587,508
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- -------------------------- 2002 2001 2002 2001 ----------- ------------ ----------- ----------- Total net income....................... $ 8,123 $ 6,238 $ 17,025 $ 10,049
---------- (1) On June 26, 2002, we acquired our joint venture partner's interest in MG-HIW Rocky Point, LLC to bring our ownership interest in that entity to 100.0%. At June 30, 2002, the assets and liabilities of this entity are included in the consolidated balance sheet and, thus, are not included under "Total assets", "Total debt" or "Total liabilities" in the above table. However, net income from this joint venture is included in the 'Total net income' in the above table. 11 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 5. 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 the derivative 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. On the date that we enter into a derivative contract, we designate the derivative as (1) a hedge of the variability of cash flows that are to be received or paid in connection with a recognized liability (a "cash flow" hedge), or (2) an instrument that is held as a non-hedge derivative. Changes in the fair value of highly effective cash flow hedges, to the extent that the hedge is effective, are recorded in AOCL, until earnings are affected by the hedged transaction (i.e. until periodic settlements of a variable-rate liability are recorded in earnings). Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative exceed the variability in the cash flows of the transaction) is recorded in current-period earnings. Changes in the fair value of non-hedging instruments are reported in current-period earnings. We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to (1) specific assets and liabilities on the balance sheet or (2) forecasted transactions. We also assess and document, both at the hedging instrument's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows associated with the hedged items. When we determine that a derivative is not (or has ceased to be) highly effective as a hedge, we discontinue hedge accounting prospectively. During the six months ended June 30, 2002, we had an interest rate swap and an interest rate collar each mature, resulting in a debit to interest rate derivative liability and an offsetting credit to AOCL of $411,000. As of June 30, 2002, we had no derivative instruments reported as Other Liabilities or Assets. However, $8.3 million of deferred financing costs from past cash flow hedging instruments remain in AOCL at June 30, 2002 and will be recognized into earnings as the underlying debt is repaid. We expect that the portion of the cumulative loss recorded in AOCL at June 30, 2002 associated with the derivative instruments, which will be recognized within the next 12 months, will be approximately $1.6 million. On July 31, 2002, we entered into two $24.0 million five-year treasury lock agreements with two financial counterparties at a fixed rate of 3.695% to mitigate the change in expected interest payments on an anticipated five-year fixed-rate financing. We expect that these treasury lock agreements will be deemed highly effective in accordance with SFAS 133/138 and will be initially reflected in AOCL on the consolidated balance sheet. 12 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 6. OTHER COMPREHENSIVE INCOME /(LOSS) Other comprehensive income/(loss) represents net income plus the results of certain non-stockholders' equity changes not reflected in the Consolidated Statements of Income. The components of other comprehensive income/(loss) are as follows ($ in thousands):
SIX MONTHS ENDED JUNE 30, --------------------------- 2002 2001 ----------- ---------- Net Income..................................................................... $ 55,510 $ 74,537 Accumulated other comprehensive income/(loss): Unrealized derivative gains/(losses) on cashflow hedges...................... 411 (414) Reclassification of past hedging relationships............................... -- (10,597) Amortization of past hedging relationships................................... 770 784 ----------- ---------- Total other comprehensive income/(loss).................................... 1,181 (10,227) ----------- ---------- Total comprehensive income................................................. $ 56,691 $ 64,310 =========== ==========
7. DISCONTINUED OPERATIONS AND THE IMPAIRMENT OF LONG-LIVED ASSETS As of January 1, 2002, we adopted Financial Accounting Standards Board Statement (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," and the appropriate amounts are disclosed separately under income from discontinued operations on the consolidated income statement. Below represents the total revenues, rental operating expenses, depreciation and amortization, income from discontinued operations, net of minority interest, gain on sale of discontinued operations, net of minority interest and net carrying value of the properties sold and held for sale at June 30, 2002 (which account for 834,128 rentable square feet) as a result of our capital recycling program and included in income from discontinued operations for the three and six months ended June 30, 2002 and 2001 ($ in thousands):
INCOME FROM GAIN ON SALE RENTAL DEPRECIATION DISCONTINUED OF DISCONTINUED TOTAL OPERATING AND OPERATIONS, NET OF OPERATIONS, NET OF NET CARRYING TYPE REVENUES EXPENSES AMORTIZATION MINORITY INTEREST MINORITY INTEREST VALUE -------------------------------------------------------------------------------------------------- Three Months Ended June 30, 2002 Office $ 769 $ 450 $ 270 $ 43 $ 2,611 $ 19,411 ----------------------------------------------------------------------------------------- Total $ 769 $ 450 $ 270 $ 43 $ 2,611 $ 19,411 ========================================================================================= June 30, 2001 Office $ 1,815 $ 588 $ 344 $ 773 $ - $ 44,258 ----------------------------------------------------------------------------------------- Total $ 1,815 $ 588 $ 344 $ 773 $ - $ 44,258 ========================================================================================= Six Months Ended June 30, 2002 Office $ 2,226 $ 959 $ 626 $ 564 $ 2,611 $ 19,411 ----------------------------------------------------------------------------------------- Total $ 2,226 $ 959 $ 626 $ 564 $ 2,611 $ 19,411 ========================================================================================= June 30, 2001 Office $ 3,597 $ 1,105 $ 693 $ 1,576 $ - $ 44,258 ----------------------------------------------------------------------------------------- Total $ 3,597 $ 1,105 $ 693 $ 1,576 $ - $ 44,258 =========================================================================================
In addition, in accordance with SFAS 144, we have determined that as of June 30, 2002, the carrying value of one industrial property held for sale is greater than its fair value, less costs to sell. Additionally, we have determined that the carrying value of one office property held and used will not be recovered from its undiscounted future operating cash flows. In total, we have recognized a $9.9 million impairment loss, which is included in the gain on the sale of land and depreciable assets in the consolidated statements of income for the three and six months ended June 30, 2002. 13 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. 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 this section and under the heading "Business". 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: . speculative development activity by our competitors in our existing markets could result in an excessive supply of office, industrial and retail properties relative to tenant demand; . 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 re-lease 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 and midwestern markets may suffer additional declines in economic growth or may not recover as fully or as quickly as expected. This list of risks and uncertainties, however, is not intended to be exhaustive. You should also review the other cautionary statements we make in "Business - Risk Factors" set forth in our 2001 Annual Report. 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. OVERVIEW We are a self-administered and self-managed equity REIT that began operations through a predecessor in 1978. Since the Company's initial public offering in 1994, we have evolved into one of the largest owners and operators of suburban office, industrial and retail properties in the southeastern and midwestern United States. At June 30, 2002, we: . owned 500 in-service office, industrial and retail properties, encompassing approximately 37.9 million rentable square feet; 14 . owned an interest (50.0% or less) in 76 in-service office and industrial properties, encompassing approximately 7.4 million rentable square feet and 418 apartment units; . owned 1,304 acres (and have agreed to purchase an additional eight acres over the next year) of undeveloped land suitable for future development; . owned 10 development properties, encompassing approximately 992,000 rentable square feet; and . owned an interest (50.0% or less) in two development properties, encompassing 373,000 rentable square feet. The following summarizes our capital recycling program since the beginning of 2000:
SIX MONTHS ENDED YEAR ENDED YEAR ENDED JUNE 30, 2002 2001 2000 ------------- ---------- ---------- OFFICE, INDUSTRIAL AND RETAIL PROPERTIES (rentable square feet in thousands) Dispositions (1)......................................... (856) (268) (4,743) Contributions to Joint Ventures (1)...................... -- (118) (2,199) Developments Placed In-Service........................... 1,337 1,351 3,480 Acquisitions............................................. 205 72 669 ------------- ---------- ---------- Net Change in Wholly-owned In-Service Properties................................... 686 1,037 (2,793) ============= ========== ========== APARTMENT PROPERTIES (in units) Dispositions............................................. -- (1,672) -- ============= ========== ==========
---------- (1) Excludes wholly-owned development projects sold or contributed to joint ventures. In addition to the above property activity, we repurchased $2.8 million, $147.4 million and $100.2 million of Common Stock and Common Units during 2002, 2001 and 2000, respectively, and $18.5 million of Preferred Stock during 2001. The Company conducts substantially all of its activities through, and substantially all of its interests in the properties are held directly or indirectly by, the Operating Partnership. The Company is the sole general partner of the Operating Partnership. At June 30, 2002, the Company owned 88.3% of the Common Units in the Operating Partnership. CRITICAL ACCOUNTING POLICIES Our discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements contained elsewhere in this Quarterly Report. Our Consolidated Financial Statements include the accounts of the Company and the Operating Partnership and their majority-controlled affiliates. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from our estimates. The estimates used in the preparation of our Consolidated Financial Statements are more fully described in Note (1) to our audited Consolidated Financial Statements for the year ended December 31, 2001, included in our 2001 Form 10-K. However, certain of our significant accounting policies are considered critical accounting policies due to the increased level of assumptions used or estimates made in determining their impact on our Consolidated Financial Statements presented for any interim period. Management has reviewed our critical accounting policies and estimates with the audit committee of the Company's board of directors. We consider our critical accounting policies to be those used in the determination of the reported amounts and disclosure related to the following: 15 . Impairment of long-lived assets; . Allowance for doubtful accounts; . Capitalized costs; . Fair value of derivative instruments; . Rental revenue; and . Investments in joint ventures. Impairment of long-lived assets. Real estate and leasehold improvements are classified as long-lived assets held for sale or as long-lived assets to be held and used. In accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," we record assets held for sale at the lower of the carrying amount or fair value less cost to sell. The impairment loss is the amount by which the carrying amount exceeds the fair value less cost to sell. With respect to assets classified as held and used, we periodically review these assets to determine whether our carrying amount will be recovered from their undiscounted future operating cash flows and we recognize an impairment loss to the extent we believe the carrying amount is not recoverable. Our determination of future operating cash flows requires us to make assumptions related to future rental rates, tenant concessions, operating expenditures, property taxes and capital improvements. If our assumptions prove incorrect and our estimates of future operating cash flows are materially overstated, we could be required to recognize future impairment losses on our properties. Allowance for doubtful accounts. Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. Our receivable balance is comprised primarily of rents and operating cost recoveries due from tenants as well as accrued rental rate increases to be received over the life of the existing leases. We regularly evaluate the adequacy of our allowance for doubtful accounts considering such factors as the credit quality of our tenants, delinquency of payment, historical trends and current economic conditions. Actual results may differ from these estimates under different assumptions or conditions. If our assumptions regarding the collectibility of accounts receivables prove incorrect, we could experience write-offs of accounts receivable or accrued straight-line rents receivable in excess of our allowance for doubtful accounts. Capitalized costs. Expenditures directly related to both the development of real estate assets and the leasing of properties are included in net real estate assets and are stated at cost in the consolidated balance sheets. The development expenditures include pre-construction costs essential to the development of properties, development and construction costs, interest costs, real estate taxes, salaries and other costs incurred during the period of development. The leasing expenditures include all general and administrative costs, including salaries incurred in connection with successfully securing leases on the properties. Estimated costs related to unsuccessful leases are expensed as incurred. If our assumptions regarding the successful efforts of development and leasing are incorrect, the resulting adjustments could impact earnings. Fair value of derivative instruments. In the normal course of business, we are exposed to the effect of interest rate changes. We limit our exposure by following established risk management policies and procedures including the use of derivatives. To mitigate our exposure to unexpected changes in interest rates, derivatives are used primarily to hedge against rate movements on our related debt. We are required to recognize all derivatives as either assets or liabilities in the consolidated balance sheets and to measure those instruments at fair value. Changes in fair value will affect either stockholders' equity or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes. To determine the fair value of derivative instruments, we use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the majority of financial instruments, including most derivatives, standard market conventions and techniques such as discounted cash flow analysis, option pricing modes, replacement cost and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized. 16 Rental revenue. Rental revenue is comprised of base rent, including termination fees, recoveries from tenants and parking and other income. In accordance with GAAP, base rental revenue is recognized on a straight-line basis over the terms of the respective leases. This means that, with respect to a particular lease, actual amounts billed in accordance with the lease during any given period may be higher or lower than the amount of rental revenue recognized for the period. Accrued straight-line rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements. Recoveries from tenants represent reimbursements for certain costs as provided in the lease agreements. These costs generally include real estate taxes, utilities, insurance, common area maintenance and other recoverable costs. Investments in joint ventures. We account for our investments in unconsolidated joint ventures using the equity method of accounting because we do not control these joint venture entities. These investments are initially recorded at cost, as investments in unconsolidated affiliates, and are subsequently adjusted for equity in earnings and cash contributions and distributions. Any difference between the carrying amount of these investments on our balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in earnings of unconsolidated affiliates over 40 years. In connection with the MG-HIW, LLC joint venture, we have guaranteed Miller Global, our partner who has an 80.0% interest in the joint venture, a minimum internal rate of return on $50.0 million of their equity. If the minimum internal rate of return is not achieved upon the sale of the assets or winding up of the joint venture, Miller Global would receive a disproportionately greater interest of the cash proceeds related to the assets subject to the internal rate of return guarantee. Based upon the current operating performance of the assets and our estimate of the residual value of the subject assets, the estimated internal rate of return for Miller Global with respect to the assets exceeds the minimum required return. As a result, we do not currently expect that our interest in the joint venture will be adjusted upon the sale of the subject assets or the winding up of the joint venture as a result of the internal rate of return guarantee. However, if our assumptions and estimates prove incorrect, Miller Global could receive a greater interest of the cash proceeds from any such sale or winding up. 17 RESULTS OF OPERATIONS The following table sets forth information regarding our results of operations for the three and six months ended June 30, 2002 and 2001 ($ in millions):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------ 2002 2001 $ CHANGE 2002 2001 $ CHANGE -------- -------- --------- -------- -------- --------- REVENUE: Rental property................................... $ 118.6 $ 124.4 $ (5.8) $ 242.6 $ 251.2 $ (8.6) Equity in earnings of unconsolidated affiliates... 2.5 1.6 0.9 5.0 2.4 2.6 Interest and other income......................... 2.7 7.8 (5.1) 6.2 15.6 (9.4) -------- -------- --------- -------- -------- --------- Total Revenue....................................... 123.8 133.8 (10.0) 253.8 269.2 (15.4) OPERATING EXPENSES: Rental property................................... 37.0 37.8 (0.8) 75.1 74.2 0.9 Depreciation and amortization..................... 31.3 28.8 2.5 62.3 57.6 4.7 Interest expense: Contractual..................................... 27.1 26.2 0.9 53.1 54.6 (1.5) Amortization of deferred financing costs........ 0.3 0.7 (0.4) 0.7 1.3 (0.6) -------- -------- --------- -------- -------- --------- 27.4 26.9 0.5 53.8 55.9 (2.1) General and administrative........................ 5.5 5.5 - 10.7 10.7 - -------- -------- --------- -------- -------- --------- Income before gain on disposition of land and depreciable assets, minority interest, discontinued operations and extraordinary item. 22.6 34.8 (12.2) 51.9 70.8 (18.9) Gain on disposition of land and depreciable assets 6.7 5.7 1.0 7.6 12.7 (5.1) -------- -------- --------- -------- -------- --------- Income before minority interest, discontinued operations and extraordinary item.............. 29.3 40.5 (11.2) 59.5 83.6 (24.1) Miority interest.................................... (3.5) (5.0) 1.5 (7.2) (10.1) 2.9 -------- -------- --------- -------- -------- --------- Income from continuing operations................. 25.8 35.5 (9.7) 52.3 73.5 (21.2) DISCONTINUED OPERATIONS: Income from discontinued operations, net of minority interest............................... 0.1 0.8 0.9 0.6 1.6 (1.0) Gain on sale of discontinued operations, net of minority interest............................... 2.6 - 2.6 2.6 - 2.6 -------- -------- --------- -------- -------- --------- 2.7 0.8 3.5 3.2 1.6 1.6 Net income before extraordinary item.............. 28.5 36.3 (7.8) 55.5 75.1 (19.5) Extraordinary item -- loss on early extinguishment of debt............................................ - (0.3) 0.3 - (0.5) 0.5 -------- -------- --------- -------- -------- --------- Net income........................................ 28.5 35.9 (7.5) 55.5 74.6 (19.0) Dividends on preferred stock........................ (7.7) (7.9) 0.2 (15.4) (16.1) 0.6 -------- -------- --------- -------- -------- --------- Net income available for common shareholders..................................... $ 20.8 $ 28.0 $ (7.2) $ 40.1 $ 58.5 $ (18.4) ======== ======== ========= ======== ======== =========
Three Months Ended June 30, 2002. Revenues from rental operations decreased $5.8 million, or 4.7%, from $124.4 million for the three months ended June 30, 2001 to $118.6 million for the three months ended June 30, 2002. The decrease was primarily due to a decrease in the average occupancy rates from 93.2% in the second quarter of 2001 to 87.2% in the second quarter of 2002. In addition, we have written off approximately $3.1 million of accrued straight-line rent receivables from WorldCom and its affiliates as of June 30, 2002. Slightly offsetting the decrease was an increase in rental revenues as a result of an increase in our property portfolio in 2002 as a result of our capital recycling program, which included 1.3 million rentable square feet of properties that were placed in service during 2002. Our in-service wholly-owned portfolio increased from 36.7 million rentable square feet at June 30, 2001 to 37.9 million rentable square feet at June 30, 2002. Same property rental revenue, recorded in accordance with GAAP, generated from the 475 in-service properties wholly-owned on January 1, 2001, decreased $7.5 million, or 6.4%, for the three months ended June 30, 2002, compared to the three months ended June 30, 2001. Same store straight-line rent decreased $4.1 million, primarily as a result of the $3.1 million write-off of the WorldCom accrued straight-line rent receivable and a decrease of $1.0 million due to the impact from the straight lining of rents discussed generally in our critical accounting policies. Same store rental revenues excluding straight-line rent and termination fees decreased $3.6 million, or 3.2%. This decrease is a result of lower same store average occupancy, which declined from 93.1% in 2001 to 87.3% in 2002. 18 During the three months ended June 30, 2002, 207 second generation leases representing 1.9 million square feet of office, industrial and retail space were executed at an average rate per square foot, which was 2.7% lower than the average rate per square foot on the previous leases. Equity in earnings of unconsolidated affiliates increased $0.9 million, or 56.3%, from $1.6 million for the three months ended June 30, 2001 to $2.5 million for the three months ended June 30, 2002. The increase was primarily a result of an increase in occupancy rates in 2002 for certain joint ventures formed with unrelated investors and earnings from certain development joint ventures formed with unrelated investors in late December 2000 in which the properties have been placed in service during 2002. Interest and other income decreased $5.1 million, or 65.4%, from $7.8 million for the three months ended June 30, 2001 to $2.7 million for the three months ended June 30, 2002. The decrease primarily resulted from a decrease in leasing and development fee income in the three months ended June 30, 2002 and a decrease in interest income in the three months ended June 30, 2002 due to lower average cash balances (during 2001, we had higher cash balances as a result of proceeds from dispositions related to our capital recycling program that were ultimately used in our stock repurchase program) and the collection of notes receivable during 2001 and 2002. Rental operating expenses (real estate taxes, utilities, insurance, repairs and maintenance and other property-related expenses) decreased $0.8 million, or 2.1%, from $37.8 million for the three months ended June 30, 2001 to $37.0 million for the three months ended June 30, 2002. This decrease was primarily a result of lower occupancy relative to variable operating expenses offset by increases in real estate taxes, primarily due to higher property tax assessments, utilities and small increases in various other rental expenses in 2002. Rental operating expenses as a percentage of related revenues increased from 30.4% for the three months ended June 30, 2001 to 31.2% for the three months ended June 30, 2002. Same property rental property expenses, which are the expenses of the 475 in-service properties wholly-owned on January 1, 2001, decreased $112,713, or 0.3%, for the three months ended June 30, 2002, compared to the three months ended June 30, 2001. This decrease was primarily a result of lower occupancy relative to variable operating expenses offset by increases in real estate taxes, primarily due to higher property tax assessments, utilities and small increases in various other rental expense accounts in 2002. Depreciation and amortization for the three months ended June 30, 2002 and 2001 totaled $31.3 million and $28.8 million, respectively. The increase of $2.5 million, or 8.7%, was due to an increase in the amortization of leasing commissions and tenant improvements and an increase in depreciation expense related to buildings placed in service during 2001 and 2002, partly offset by a decrease in the depreciation expense as a result of dispositions during 2002 and 2001. Interest expense increased $0.5 million, or 1.9%, from $26.9 million for the three months ended June 30, 2001 to $27.4 million for the three months ended June 30, 2002. The increase was primarily attributable to an increase in the average outstanding debt for the three months ended June 30, 2002 partly offset by a decrease in weighted average interest rates during the three months ended June 30, 2002. Interest expense for the three months ended June 30, 2002 and 2001 included $0.3 million and $0.7 million, respectively, of amortization of deferred financing costs and the costs related to our interest rate hedge contracts. Capitalized interest for the three months ended June 30, 2002 and 2001 were $2.6 million and $4.1 million, respectively. General and administrative expenses as a percentage of total revenues was 4.5% in the second quarter of 2002 and 4.1% in the second quarter of 2001. Gain on disposition of land and depreciable assets increased $1.0 million, or 17.6%, from $5.7 million for the quarter ended June 30, 2001 to $6.7 million for the quarter ended June 30, 2002. In 2001, the majority of the gain was a result of the disposition of 883 apartment units. In 2002, the majority of the gain was related to a gain of approximately $16.4 million related to the disposition of 396,000 rentable square feet of office and development properties, partly offset by an impairment loss of approximately $9.9 million (see Note 7). Income before gain on disposition of land and depreciable assets, minority interest, discontinued operations and extraordinary item equaled $22.6 million and $34.8 million for the quarters ended June 30, 2002 and 2001, 19 respectively. The Company's net income allocated to minority interest totaled $3.5 million and $5.0 million for the quarters ended June 30, 2002 and 2001, respectively. The Company recorded $7.7 million and $7.9 million in preferred stock dividends for each of the quarters ended June 30, 2002 and 2001, respectively. The decrease in preferred stock dividends was a result of the $18.5 million repurchase by the Company of its preferred stock during 2001. Six Months Ended June 30, 2002. Revenues from rental operations decreased $8.6 million, or 3.4%, from $251.2 million for the six months ended June 30, 2001 to $242.6 million for the six months ended June 30, 2002. The decrease was primarily due to a decrease in the average occupancy rates from 93.4% for the six months ended June 30, 2001 to 88.0% for the six months ended June 30, 2002. In addition, we have written off approximately $3.1 million of accrued straight-line rent receivables from WorldCom and its affiliates as of June 30, 2002. Slightly offsetting the decrease was an increase in rental revenues as a result of an increase in our property portfolio in 2002 as a result of our capital recycling program, which included 1.3 million rentable square feet of properties that were placed in service during 2002. Our in-service wholly-owned portfolio increased from 36.7 million rentable square feet at June 30, 2001 to 37.9 million rentable square feet at June 30, 2002. Same property rental revenue, recorded in accordance with GAAP, generated from the 475 in-service properties wholly-owned on January 1, 2001, decreased $10.1 million for the six months ended June 30, 2002 compared to the six months ended June 30, 2001. Same store straight-line rent revenue decreased $5.6 million as a result of the $3.1 million write-off of the WorldCom accrued straight-line rent receivable and a decrease of $2.5 million due to the impact from the straight lining of rents discussed generally in our critical accounting policies. Same store revenues excluding straight-line rent and termination fees decreased $5.3 million, or 2.3%. This decrease is a result of lower same store average occupancy, which declined from 93.6% in 2001 to 88.1% in 2002. During the six months ended June 30, 2002, 344 second generation leases representing 2.5 million square feet of office, industrial and retail space were executed at an average rate per square foot which was 1.7% lower than the average rate per square foot on the previous leases. Equity in earnings of unconsolidated affiliates increased $2.6 million, or 108.3%, from $2.4 million for the six months ended June 30, 2001 to $5.0 million for the six months ended June 30, 2002. The increase was primarily a result of an increase in occupancy rates in 2002 for certain joint ventures formed with unrelated investors and earnings from certain development joint ventures formed with unrelated investors in late December 2000 in which the properties have been placed in service during 2002. Interest and other income decreased $9.4 million, or 60.3%, from $15.6 million for the six months ended June 30, 2001 to $6.2 million for the six months ended June 30, 2002. The decrease primarily resulted from a decrease in leasing and development fee income in the six months ended June 30, 2002 and a decrease in interest income in the six months ended June 30, 2002 due to lower average cash balances (during 2001, we had higher cash balances as a result of proceeds from dispositions related to our capital recycling program that were ultimately used in our stock repurchase program)and the collection of notes receivable during 2001 and 2002. Rental operating expenses (real estate taxes, utilities, insurance, repairs and maintenance and other property-related expenses) increased $0.9 million, or 1.2%, from $74.2 million for the six months ended June 30, 2001 to $75.1 million for the six months ended June 30, 2002. The increase was primarily a result of an increase in real estate taxes in 2002 partly offset by a decrease resulting from lower occupancy relative to variable operating expenses. Rental operating expenses as a percentage of related revenues increased from 29.5% for the six months ended June 30, 2001 to 31.0% for the six months ended June 30, 2002. Same property rental property expenses, which are the expenses of the 475 in-service properties wholly-owned on January 1, 2001, decreased $423,368, or 0.6%, for the six months ended June 30, 2002, compared to the six months ended June 30, 2001. This decrease was primarily a result of lower occupancy relative to variable operating expenses offset by increases in real estate taxes, primarily due to higher property tax assessments, utilities and small increases in various other rental expenses. Depreciation and amortization for the six months ended June 30, 2002 and 2001 totaled $62.3 million and $57.6 million, respectively. The increase of $4.7 million, or 8.2%, was due to an increase in the amortization of leasing commissions and tenant improvements and an increase in depreciation expense related to buildings placed in service 20 during 2001 and 2002, partly offset by a decrease in the depreciation expense as a result of dispositions during 2002 and 2001. Interest expense decreased $2.1 million, or 3.8%, from $55.9 million for the six months ended June 30, 2001 to $53.8 million for the six months ended June 30, 2002. The decrease was primarily attributable to the decrease in the weighted average interest rates for the six months ended June 30, 2002, partly offset by an increase in the average outstanding debt for the six months ended June 30, 2002. Interest expense for the six months ended June 30, 2002 and 2001 included $0.7 million and $1.3 million, respectively, of amortization of deferred financing costs and the costs related to our interest rate hedge contracts. Capitalized interest for the six months ended June 30, 2002 and 2001 was $6.6 million and $7.1 million, respectively. General and administrative expenses as a percentage of total revenues was 4.2% and 4.0% in the first six months of 2002 and 2001, respectively. Gain on disposition of land and depreciable assets decreased $5.1 million, or 40.4%, from $12.7 million for the six months ended June 30, 2001 to $7.6 million for the six months ended June 30, 2002. In 2001, the majority of the gain was a result of the disposition of 1,160 apartment units. In 2002, the majority of the gain was related to a gain of approximately $ 17.4 million related to the disposition of 524,000 rentable square feet of office and development properties, partly offset by an impairment loss of approximately $9.9 million (see Note 7). Income before gain on disposition of land and depreciable assets, minority interest, discontinued operations and extraordinary item equaled $51.9 million and $70.8 million for the six months ended June 30, 2002 and 2001, respectively. The Company's net income allocated to minority interest totaled $7.2 million and $10.1 million for the six months ended June 30, 2002 and 2001, respectively. The Company recorded $15.4 million and $16.1 million in preferred stock dividends for each of the six months ended June 30, 2002 and 2001, respectively. The decrease was a result of the $18.5 million repurchase by the Company of its preferred stock during 2001. LIQUIDITY AND CAPITAL RESOURCES Statement of Cash Flows. The following table sets forth the changes in the Company's cash flows from the first six months of 2001 as compared to the first six months of 2002 ($ in thousands):
SIX MONTHS ENDED JUNE 30, --------------------------- 2002 2001 CHANGE ----------- ------------- ------------ Cash Provided By Operating Activities $ 99,937 $ 117,037 $ (17,100) Cash Provided By Investing Activities 66,799 5,778 61,021 Cash Used in Financing Activities (153,118) (197,482) 44,364
The decrease in cash provided by operating activities was primarily the result of (1) our capital recycling program and a decrease in average occupancy rates for our wholly-owned portfolio; (2) an increase in real estate taxes in the first six months of 2002, primarily due to higher property assessments; and (3) a decrease in interest income and development and leasing income in 2002. In addition, the level of net cash provided by operating activities is also affected by the timing of receipt of revenues and payment of expenses. The increase in cash provided by investing activities was primarily a result of a decrease of $77.4 million in additions to real estate assets in the first six months of 2002, partly offset by a decrease in the investments in notes receivable from the first six months of 2001 to the first six months of 2002 and a decrease in the collection of advances from subsidiaries of $27.6 million from the first six months of 2001 to the first six months of 2002. The decrease in cash used in financing activities was primarily a result of a decrease of $136.1 million in the repurchase of Common Stock and Common Units from the first six months of 2001 to the first six months of 2002, a decrease of $2.3 million in distributions paid on common stock, common units and preferred stock during 2002 and an increase in net proceeds from the sale of common stock of $2.7 million in 2002 partly offset by an increase of $99.2 million in net repayment on the unsecured revolving loan, mortgages and notes payable from the first six months of 2001 to the first six months of 2002. Capitalization. Based on our total market capitalization of $3.62 billion at June 30, 2002 (at the June 30, 2002 stock price of $26.00 and assuming the redemption for shares of Common Stock of the 7.1 million Common Units 21 of minority interest in the Operating Partnership), our debt represented approximately 46.2% of our total market capitalization. Our total indebtedness at June 30, 2002 was $1.7 billion and was comprised of $544.4 million of secured indebtedness with a weighted average interest rate of 7.7% and $1.1 billion of unsecured indebtedness with a weighted average interest rate of 6.5%. We do not intend to reserve funds to retire existing secured or unsecured debt upon maturity. For a more complete discussion of our long-term liquidity needs, see "Current and Future Cash Needs." The following table sets forth the maturity schedule of our mortgages and notes payable as of June 30, 2002 ($ in thousands):
---------------------------------------------------------------- WITHIN WITHIN WITHIN WITHIN 2-3 4-5 6 OR MORE TOTAL 1 YEAR YEARS YEARS YEARS ----------- ----------- ---------- ----------- ----------- Fixed Rate Debt: Unsecured: MOPPRS (1)............................ $ 125,000 $ - $ - $ - $ 125,000 Put Option Notes (2).................. 100,000 - - - 100,000 Notes................................. 706,500 - 246,500 110,000 350,000 Term Loan............................. - - - - - Secured: Mortgages and loans payable........... 512,223 9,726 64,284 118,237 319,976 ----------- ----------- ---------- ----------- ----------- Total Fixed Rate Debt...................... 1,443,723 9,726 310,784 228,237 894,976 ----------- ----------- ---------- ----------- ----------- Variable Rate Debt: Unsecured: Revolving Loan........................ 199,500 - 199,500 - - Secured: Revolving Loan........................ 4,409 4,409 - - - Mortgage loan payable................. 27,726 246 23,822 3,658 - ----------- ----------- ---------- ----------- ----------- Total Variable Rate Debt................... 231,635 4,655 223,322 3,658 - ----------- ----------- ---------- ----------- ----------- Total Mortgages and Notes payable.............. $ 1,675,358 $ 14,381 $ 534,106 $ 231,895 $ 894,976 =========== =========== ========== =========== ===========
---------- (1) On February 2, 1998, the Operating Partnership sold $125.0 million of MandatOry Par Put Remarketed Securities ("MOPPRS") due February 1, 2013. The MOPPRS bear an interest rate of 6.835% from the date of issuance through January 31, 2003. After January 31, 2003, the interest rate to maturity on the MOPPRS will be 5.715% plus the applicable spread determined as of January 31, 2003. In connection with the initial issuance of the MOPPRS, a counter party was granted a remarketing option to purchase the MOPPRS from the holders thereof on January 31, 2003 at 100.0% of the principal amount. If the counter party elects not to exercise this option, the Operating Partnership would be required to repurchase the MOPPRS from the holders on January 31, 2003 at 100.0% of the principal amount plus accrued and unpaid interest. (2) On June 24, 1997, a trust formed by the Operating Partnership sold $100.0 million of Exercisable Put Option Securities due June 15, 2004 ("X-POS"), which represent fractional undivided beneficial interests in the trust. The assets of the trust consist of, among other things, $100.0 million of Exercisable Put Option Notes due June 15, 2011 (the "Put Option Notes"), issued by the Operating Partnership. The Put Option Notes bear an interest rate of 7.19% from the date of issuance through June 15, 2004. After June 15, 2004, the interest rate to maturity on the Put Option Notes will be 6.39% plus the applicable spread determined as of June 15, 2004. In connection with the initial issuance of the Put Option Notes, a counter party was granted an option to purchase the Put Option Notes from the trust on June 15, 2004 at 100.0% of the principal amount. If the counter party elects not to exercise this option, the Operating Partnership would be required to repurchase the Put Option Notes from the Trust on June 15, 2004 at 100.0% of the principal amount plus accrued and unpaid interest. The mortgage and loans payable and the secured revolving loan were secured by real estate assets with an aggregate carrying value of $942.9 million at June 30, 2002. The Operating Partnership's unsecured notes of $931.5 million bear interest rates ranging from 6.8% to 8.1%, with interest payable semi-annually in arrears. The premium and discount related to the issuance of the unsecured notes is being amortized over the life of the respective notes as an adjustment to interest expense. All of the unsecured notes, except for the MOPPRS and Put Option Notes, are redeemable at any time prior to maturity at our option, subject to certain conditions including the payment of make-whole amounts. 22 We currently have a $300.0 million unsecured revolving loan (with $199.5 million outstanding at June 30, 2002) that matures in December 2003 and a $55.2 million secured revolving loan (with $4.4 million outstanding at June 30, 2002) that matures in March 2003. Our unsecured revolving loan also includes a $150.0 million competitive sub-facility. Depending upon the corporate credit ratings assigned to us from time to time by the various rating agencies, our unsecured revolving loan bears variable rate interest at a spread above LIBOR ranging from 0.70% to 1.55% and our secured revolving loan bears variable rate interest at a spread above LIBOR ranging from 0.55% to 1.50%. We currently have a credit rating of BBB- assigned by Standard & Poor's, a credit rating of BBB assigned by Fitch Inc. and a credit rating of Baa2 assigned by Moody's Investor Service. As a result, interest currently accrues on borrowings under our unsecured revolving loan at an average rate of LIBOR plus 85 basis points and under our secured revolving loan at an average rate of LIBOR plus 75 basis points. In addition, we are currently required to pay an annual facility fee equal to .20% of the total commitment under the unsecured revolving loan. The terms of each of our revolving loans and the indenture that governs our outstanding notes require us to comply with various operating and financial covenants and performance ratios. We are currently in compliance with all such requirements. In addition, based on our current expectation of future operating performance, we expect to remain in compliance for the foreseeable future. Joint Ventures. During the past several years, we have formed various joint ventures with unrelated investors. We have retained minority equity interests ranging from 12.5% to 50.0% in these joint ventures. As required by GAAP, we have accounted for our joint venture activity using the equity method of accounting, as we do not control these joint ventures. As a result, the assets and liabilities of our joint ventures are not included on our balance sheet. As of June 30, 2002, our joint ventures have approximately $566.5 million of outstanding debt. All of the joint venture debt is non-recourse to us except (1) in the case of customary exceptions pertaining to such matters as misuse of funds, environmental conditions and material misrepresentations and (2) with respect to $5.0 million of construction debt related to the MG-HIW Metrowest I, LLC, which has been guaranteed in part by us subject to a pro rata indemnity from our joint venture partner. Our guarantee of the MG-HIW Metrowest I, LLC debt represented 50.0% of the outstanding loan balance at June 30, 2002. Interest Rate Hedging Activities. To meet in part our long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Borrowings under our two revolving loans bear interest at variable rates. Our long-term debt, which consists of long-term financings and the unsecured 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 interest rate on all of our variable rate debt is adjusted at one- and three-month intervals, subject to settlements under these contracts. We also enter into treasury lock agreements from time to time in order to limit our exposure to an increase in interest rates with respect to future debt offerings. Net payments made to counterparties under interest rate hedge contracts were $415,051 during the six months ended June 30, 2002 and were recorded as additional interest expense. Current and Future Cash Needs. Historically, rental revenue has been the principal source of funds to meet our short-term liquidity requirements, which primarily consist of operating expenses, debt service, stockholder distributions and ordinary course 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 properties except for the $4.7 million renovation of Tampa Bay Park and the $7.9 million general and non-recurring renovations at Country Club Plaza. In addition, we could incur tenant improvements and lease commissions related to any releasing of space currently leased by WorldCom and US Air (see "Recent Developments") and the redevelopment of the EPA site in Research Commons. In addition to the requirements discussed above, our short-term (within the next 12 months) liquidity requirements also include the funding of approximately $50.0 million of our existing development activity, including first generation tenant improvements and lease commissions on properties placed in service that are not 23 fully leased. See "Business - Development Activity." We expect to fund our short-term liquidity requirements through a combination of working capital, cash flows from operations and the following: . borrowings under our unsecured revolving loan (up to $114.1 million of availability as of July 26, 2002); . borrowings under our secured revolving loan (up to $49.4 million of availability as of July 26, 2002); . the selective disposition of non-core assets; . the sale or contribution of some of our wholly-owned properties, development projects and development land to strategic joint ventures to be formed with unrelated investors, which will have the net effect of generating additional capital through such sale or contributions; and . the issuance of secured debt (at June 30, 2002, we had $2.8 billion of unencumbered real estate assets at cost). 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 two revolving loans and long-term unsecured debt. We remain committed to maintaining a flexible 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 unsecured 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. We anticipate that our available cash and cash equivalents and cash flows from operating activities, 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 payments may be adversely affected. Distributions to Stockholders. To maintain its qualification as a REIT, the Company must distribute to stockholders at least 90.0% 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. Share and Unit Repurchase Program. On April 25, 2001, we announced that the Company's Board of Directors authorized the repurchase of up to an additional 5.0 million shares of Common Stock and Common Units. As of July 26, 2002, under the new repurchase program, the Company had repurchased 1.4 million shares of Common Stock and Common Units at a weighted average purchase price of $24.56 per share and a total purchase price of $34.0 million. In determining whether or not to repurchase additional capital stock, we will consider, among other factors, the effect of repurchases on our liquidity and the price of our Common Stock. Disposition Activity. As part of our ongoing capital recycling program, during the six months ended June 30, 2002, we have sold 856,000 square feet of office properties and 75 acres of development land for gross proceeds of $120.2 million. In addition, we had 707,671 square feet of office properties and 99.4 acres of land under letter of intent or contract for sale in various transactions totaling $79.9 million. These transactions are subject to customary closing conditions, including due diligence and documentation, and are expected to close during the third and fourth quarters of 2002. However, we can provide no assurance that all or parts of these transactions will be consummated. 24 During the second quarter, we recorded a $9.9 million impairment reserve related to two properties we expect to sell and/or re-develop. RECENT DEVELOPMENTS WorldCom Bankruptcy. On July 21, 2002, WorldCom filed a voluntary petition with the United States Bankruptcy Court seeking relief under Chapter 11 of the United States Bankruptcy Code. We currently have 13 leases encompassing 986,082 square feet in nine locations with WorldCom and its affiliates, including four leases encompassing 828,467 square feet in four locations with Intermedia Communications, with lease expirations ranging from 2002 to 2013. Based on June 2002 rental revenue, our annualized rental revenue from these leases is $17.5 million, or approximately 3.7% of our total annualized rental revenue. Approximately 185,000 square feet of the space leased by Intermedia has not yet been upfitted or occupied and we estimate that a substantial portion of the remaining Intermedia space currently appears to be under-utilized. In addition, our joint venture with Miller Global ("MG-HIW, LLC") has 14 leases encompassing 57,252 square feet in five locations with WorldCom and its affiliates, including six leases encompassing 23,381 square feet in four locations with Intermedia Communications, with lease expirations ranging from 2002 to 2007. We have a 20.0% ownership in this joint venture and, based on June 2002 rental revenue, our proportionate share of the annualized rental revenue generated from these leases is $278,100. Approximately 81.0% of the annualized rental revenue related to our leases with WorldCom and its affiliates, including our pro rata share of the annualized rental revenue related to MG-HIW, LLC, is derived from properties in Tampa. The remainder of this revenue is derived from properties in Greenville, South Carolina, Richmond, Raleigh, Orlando and Nashville. WorldCom and its affiliates are current on base rental payments through August 31, 2002. However, we have written off approximately $3.1 million of accrued straight-line rent receivables from WorldCom and its affiliates as of June 30, 2002. Due to the inherent uncertainties of the bankruptcy process, we are not able to predict the impact of WorldCom's bankruptcy on its leasing and occupancy of our properties or on our financial condition and results of operations. U.S. Airways Bankruptcy. On August 11, 2002, US Airways Group Inc. filed a voluntary petition with the United States Bankruptcy Court seeking relief under Chapter 11 of the United States Bankruptcy Code. We currently have seven leases encompassing 414,059 square feet with US Airways and its affiliates with an average remaining lease term of 5.4 years as of June 30, 2002. Based on June 2002 rental revenue, our annualized rental revenue from these leases is $6.9 million, or approximately 1.5% of our total annualized rental revenue. Approximately 55,000 square feet of space is currently being sub-leased by US Airways to a third party and we estimate that the balance of the space is approximately 75 percent utilized by US Airways as a reservation call center and for certain revenue accounting and information technology functions. All of the 414,059 square feet of space is located in Winston-Salem, North Carolina. US Airways is current on base rental payments through August 31, 2002. We have an accrued straight line rent receivable from US Airways in the amount of $495,000 as of June 30, 2002. Due to the inherent uncertainties of the bankruptcy process, we are not able to predict the impact of US Airways' bankruptcy on its leasing and occupancy of our properties or on our financial condition and results of operations. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment of disposal of long-lived assets. This standard harmonizes the accounting for impaired assets and resolves some of the implementation issues as originally described in SFAS No. 121. We adopted SFAS No. 144 in the first quarter of 2002. Income from discontinued operations, net of minority interest and the gain on sale of discontinued operations, net of minority interest, for properties meeting the criteria in accordance with SFAS No. 144 are reflected in the consolidated statements of income as discontinued operations for all periods presented. 25 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 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 income from continuing operations before minority interest (computed in accordance with GAAP) excluding gains (or losses) from debt restructuring and sales of depreciable property and dividends paid to preferred shareholders, plus depreciation and amortization. In addition, FFO includes both recurring and non-recurring operating results and income from discontinued operations. As a result, non-recurring items that are not defined as "extraordinary" under GAAP are reflected in the calculation of FFO. Cash available for distribution is defined as funds from operations increased by the amortization of deferred financing activities and reduced by rental income from straight-line rents and non-revenue enhancing capital expenditures for building improvements and tenant improvements and lease commissions related to second generation space. 26 FFO and cash available for distribution for the three and six month periods ended June 30, 2002 and 2001 are summarized in the following table (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------ 2002 2001 2002 2001 ----------- ------------- ---------- ----------- FUNDS FROM OPERATIONS: Income before gain on disposition of land and depreciable assets, minority interest, discontinued operations and extraordinary item.......................................... $ 22,619 $ 34,824 $ 51,867 $ 70,862 Add/(Deduct): Dividends to preferred shareholders..................... (7,713) (7,929) (15,426) (16,074) Transition adjustment upon adoption of FAS 133.......... - - - 556 Income from discontinued operations..................... 49 883 641 1,799 Gain on disposition of land............................. 5,989 537 5,758 1,563 Depreciation and amortization........................... 31,568 29,117 62,934 58,323 Depreciation on unconsolidated affiliates............... 2,149 1,912 4,633 3,904 ----------- ------------- ---------- ----------- Funds from operations................................. 54,661 59,344 110,407 120,933 CASH AVAILABLE FOR DISTRIBUTION: Add/(Deduct): Rental income from straight-line rents.................. 1,049 (3,550) (1,318) (6,652) Amortization of deferred financing costs................ 341 675 680 1,340 Non-incremental revenue generating capital expenditures (1): Building improvements paid............................ (2,370) (2,014) (3,121) (3,087) Second generation tenant improvements paid............ (3,380) (4,021) (6,911) (7,776) Second generation lease commissions paid.............. (3,049) (3,541) (5,659) (8,328) ----------- ------------- ---------- ----------- Cash available for distribution..................... $ 47,252 $ 46,893 $ 94,078 $ 96,430 =========== ============= ========== =========== Weighted average shares/units outstanding - basic (2)........ 60,363 61,571 60,316 62,826 =========== ============= ========== =========== Weighted average shares/units outstanding - diluted (2)...... 60,849 61,962 60,767 63,215 =========== ============= ========== =========== DIVIDEND PAYOUT RATIOS: Funds from operations................................... 65.1% 59.5% 64.4% 59.6% =========== ============= ========== =========== Cash available for distribution......................... 75.3% 75.3% 75.6% 74.7% =========== ============= ========== ===========
---------- (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 Common Unit and per share basis; therefore, the per share information is unaffected by conversion. 27 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, 2002 and 2001:
JUNE 30, 2002 JUNE 30, 2001 ------------------------ ------------------------- PERCENT PERCENT RENTABLE LEASED/ RENTABLE LEASED/ SQUARE FEET PRE-LEASED SQUARE FEET PRE-LEASED ----------- ---------- ----------- ---------- IN-SERVICE: Office 25,787,000 87% 24,639,000 93% Industrial 10,468,000 84% 10,396,000 93% Retail (1) 1,651,000 96% 1,628,000 95% ----------- ---------- ----------- ---------- Total or Weighted Average 37,906,000 86% 36,663,000 93% =========== ========== =========== ========== DEVELOPMENT: Completed--Not Stabilized Office 735,000 29% 1,019,000 51% Industrial 136,000 29% 184,000 21% Retail 20,000 90% -- -- ----------- ---------- ----------- ---------- Total or Weighted Average 891,000 30% 1,203,000 47% =========== ========== =========== ========== IN PROCESS Office (2) 201,000 70% 1,669,000 61% Industrial (2) 60,000 0 258,000 9% Retail -- -- 20,000 72% ----------- ---------- ----------- ---------- Total or Weighted Average 261,000 54% 1,947,000 54% =========== ========== =========== ========== TOTAL: Office 26,723,000 27,327,000 Industrial 10,664,000 10,838,000 Retail (1) 1,671,000 1,648,000 ----------- ----------- Total or Weighted Average 39,058,000 39,813,000 =========== ===========
---------- (1) Excludes basement space (2) Includes properties that we have an option to purchase. 28 The following table sets forth information concerning the 20 largest customers of our wholly-owned properties as of June 30, 2002 ($ in thousands):
PERCENT OF TOTAL AVERAGE NUMBER RENTAL ANNUALIZED ANNUALIZED REMAINING LEASE CUSTOMERS OF LEASES SQUARE FEET RENTAL REVENUE (1) RENTAL REVENUE(1) TERM IN YEARS --------- --------- ----------- ------------------ ------------------ --------------- Intermedia Communications/ WorldCom.......................... 13 986,082 $ 17,466 3.71% 8.1 AT&T................................ 10 854,992 10,041 2.98 5.6 Federal Government.................. 55 644,188 12,151 2.58 4.0 Capital One Services................ 6 587,188 10,199 2.17 6.1 IBM................................. 5 354,507 7,899 1.68 6.5 Caterpillar Financial Services...... 1 300,901 7,899 1.68 12.7 PricewaterhouseCoopers.............. 7 307,158 7,038 1.50 7.7 US Air.............................. 7 414,059 6,909 1.47 5.4 State of Georgia.................... 9 349,690 6,485 1.38 6.0 Bell South.......................... 12 223,774 4,595 0.98 1.7 Sara Lee............................ 8 1,184,134 4,404 0.94 3.0 Northern Telecom, Inc............... 2 283,298 3,921 0.83 4.7 Lockton Companies, Inc.............. 1 127,485 3,117 0.66 12.7 Volvo............................... 5 214,783 2,979 0.63 7.1 Bank of America..................... 20 153,464 2,894 0.62 1.8 International Paper Co.............. 10 121,174 2,887 0.61 0.5 Hartford Insurance.................. 6 134,021 2,856 0.61 3.8 Business Telecom, Inc............... 4 145,497 2,832 0.60 2.8 Voicestream Wireless................ 2 120,561 2,765 0.59 4.0 Ford Motor Company.................. 2 129,158 2,640 0.56 7.5 --------- ----------- ------------------ ------------------ --------------- Total............................... 185 7,636,114 $ 125,977 26.78% 6.1 ========= =========== ================== ================== ===============
---------- (1) Annualized rental revenue is June 2002 rental revenue (base rent plus operating expense pass throughs) multiplied by 12. 29 As of June 30, 2002, we were developing nine suburban office properties, two industrial properties and one retail property totaling 1.2 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 partner two additional properties totaling 373,000 rentable square feet. At June 30, 2002, this development project had an aggregate anticipated total investment of $80.7 million and was 51.0% pre-leased. IN-PROCESS
ANTICIPATED RENTABLE TOTAL INVESTMENT PRE-LEASING ESTIMATED ESTIMATED NAME MARKET SQUARE FEET INVESTMENT AT 06/30/02 PERCENTAGE (1) COMPLETION STABILIZATION(3) --------------------- ----------------- ----------- ----------- ----------- -------------- ----------- ---------------- ($ IN THOUSANDS) OFFICE: 1825 Century Center Atlanta 101,000 $ 16,254 $ 14,027 100% 3Q02 3Q02 801 Raleigh Corporate Center 2) Research Triangle 100,000 12,016 5,757 40 4Q02 2Q04 ----------- ----------- ----------- -------------- In-Process Office Total or Weighted Average 201,000 $ 28,270 $ 19,784 70% =========== =========== =========== ============== INDUSTRIAL: Tradeport V (2) Atlanta 60,000 $ 2,913 $ 484 0% 4Q02 4Q03 ----------- ----------- ----------- -------------- In-Process Industrial Total or Weighted Average 60,000 $ 2,913 $ 484 0% =========== =========== =========== ============== Total or Weighted Average of all In-Process Development Projects 261,000 $ 31,183 $ 20,268 54% =========== =========== =========== ==============
---------- (1) Letters of intent comprise 1% of the total pre-leasing percentage. (2) We are developing these properties for a third party and own an option to purchase each property. (3) We consider a development project to be stabilized on the date such project is at least 95% occupied. 30 COMPLETED--NOT STABILIZED (2)
ANTICIPATED RENTABLE TOTAL INVESTMENT PRE-LEASING ESTIMATED ESTIMATED NAME MARKET SQUARE FEET INVESTMENT AT 06/30/02 PERCENTAGE (1) COMPLETION STABILIZATION(3) ------------------------ ----------------- ----------- ----------- ----------- -------------- ---------- ---------------- ($ IN THOUSANDS) OFFICE: Met Life Building At Brookfield Greenville 115,000 $ 13,220 $ 12,101 95% 3Q01 3Q02 Hickory Trace Nashville 52,000 5,933 6,623 86 3Q01 3Q02 1501 Highwoods Boulevard Piedmont Triad 98,000 11,290 9,931 4 4Q01 4Q02 Seven Springs I Nashville 131,000 15,556 12,656 12 1Q02 1Q03 Centre Green Four Research Triangle 100,000 11,764 9,395 0 4Q01 2Q03 GlenLake I Research Triangle 158,000 22,417 18,812 14 4Q01 2Q03 Shadow Creek II Memphis 81,000 8,750 6,980 19 4Q01 4Q03 ----------- ----------- ----------- -------------- Office Total or Weighted Average 735,000 $ 88,930 $ 76,498 29% =========== =========== =========== ============== INDUSTRIAL: Newpont IV Atlanta 136,000 $ 5,288 $ 4,626 29% 4Q01 1Q03 ----------- ----------- ----------- -------------- Completed-Not Stabilized Industrial Total or Weighted Average 136,000 $ 5,288 $ 4,626 29% =========== =========== =========== ============== RETAIL: Granada Shops Kansas City 20,000 $ 5,020 $ 4,173 90% 4Q01 2Q03 ----------- ----------- ----------- -------------- Completed-Not Stabilized Retail Total or Weighted Average 20,000 $ 5,020 $ 4,173 90% =========== =========== =========== ============== Total or Weighted Average of all Completed- Not Stabilized Development Projects 891,000 $ 99,238 $ 85,297 30% =========== =========== =========== ============== Total or Weighted Average of all Development Projects 1,152,000 $ 130,421 $ 105,565 36% =========== =========== =========== ==============
---------- (1) Letters of intent comprise 1% of the total pre-leasing percentage. (2) These properties contributed $362,000 in Net Operating Income (Property Revenue less Property Expense) during the three months ended June 30, 2002. (3) We consider a development project to be stabilized on the date such project is at least 95% occupied. 31 DEVELOPMENT ANALYSIS
ANTICIPATED RENTABLE TOTAL PRE-LEASING SQUARE FEET INVESTMENT PERCENTAGE (1) ----------- ----------- -------------- ($ IN THOUSANDS) SUMMARY BY ESTIMATED STABILIZATION DATE: Third Quarter 2002........................................... 268,000 $ 35,407 95% Fourth Quarter 2002.......................................... 199,000 11,290 19% First Quarter 2003........................................... 267,000 20,844 21% Second Quarter 2003.......................................... 258,000 39,201 9% Fourth Quarter 2003.......................................... 60,000 11,663 0% Second Quarter 2004.......................................... 100,000 12,016 40% ----------- ----------- -------------- Total or Weighted Average.................................... 1,152,000 $ 130,421 36% =========== =========== ============== SUMMARY BY MARKET: Atlanta...................................................... 297,000 $ 24,455 47% Greenville................................................... 115,000 13,220 95% Kansas City.................................................. 20,000 5,020 90% Memphis...................................................... 81,000 8,750 19% Nashville.................................................... 183,000 21,489 33% Piedmont Triad............................................... 98,000 11,290 4% Research Triangle............................................ 358,000 46,197 17% ----------- ----------- -------------- Total or Weighted Average.................................... 1,152,000 $ 130,421 36% =========== =========== ============== Build-to-Suit................................................ 101,000 $ 16,254 100% Multi-Tenant................................................. 1,051,000 114,167 29% ----------- ----------- -------------- Total or Weighted Average.................................... 1,152,000 $ 130,421 36% =========== =========== ============== AVERAGE AVERAGE RENTABLE ANTICIPATED SQUARE TOTAL AVERAGE FEET INVESTMENT PRE-LEASING(1) ----------- ----------- -------------- ($ IN THOUSANDS) AVERAGE PER PROPERTY BY TYPE: Office....................................................... 104,000 $ 13,022 38% Industrial................................................... 98,000 4,101 20% Retail....................................................... 20,000 5,020 90% ----------- ----------- -------------- Weighted Average............................................. 96,000 $ 10,868 36% =========== =========== ==============
---------- (1) Letters of intent comprise 1% of the total pre-leasing percentage. 32 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, 2002 and December 31 and September 30, 2001.
OFFICE LEASING STATISTICS THREE MONTHS ENDED ------------------------------------------------------------------- 6/30/02 3/31/02 12/31/01 9/30/01 AVERAGE ----------- ----------- ----------- ------------ ----------- NET EFFECTIVE RENTS RELATED TO RE-LEASED SPACE: Number of lease transactions (signed leases)... 162 110 116 135 131 Rentable square footage leased................. 874,467 417,102 437,454 630,043 589,767 Average per rentable square foot over the lease term: Base rent................................... $ 16.86 $ 16.83 $ 17.85 $ 17.03 $ 17.14 Tenant improvements......................... (0.86) (0.98) (1.19) (0.90) (0.98) Leasing commissions......................... (0.56) (0.78) (0.97) (0.59) (0.73) Rent concessions............................ (0.14) (0.15) (0.11) (0.11) (0.13) ----------- ----------- ----------- ------------ ----------- Effective rent.............................. $ 15.30 $ 14.92 $ 15.58 $ 15.43 $ 15.31 Expense stop(1)............................. (5.17) (5.17) (4.50) (4.54) (4.85) ----------- ----------- ----------- ------------ ----------- Equivalent effective net rent............... $ 10.13 $ 9.75 $ 11.08 $ 10.89 $ 10.46 =========== =========== =========== ============ =========== Average term in years.......................... 4.1 4.1 4.6 4.5 4.3 =========== =========== =========== ============ =========== CAPITAL EXPENDITURES RELATED TO RELEASED SPACE: Tenant Improvements: Total dollars committed under signed leases............................... $ 3,481,988 $ 2,031,231 $ 2,647,115 $ 2,431,063 $ 2,647,849 Rentable square feet........................ 874,467 417,102 437,454 630,043 589,767 ----------- ----------- ----------- ------------ ----------- Per rentable square foot.................... $ 3.98 $ 4.87 $ 6.05 $ 3.86 $ 4.49 =========== =========== =========== ============ =========== Leasing Commissions: Total dollars committed under signed leases............................... $ 1,272,854 $ 984,220 $ 1,277,523 $ 1,018,216 $ 1,138,203 Rentable square feet........................ 874,467 417,102 437,454 630,043 589,767 ----------- ----------- ----------- ------------ ----------- Per rentable square foot.................... $ 1.46 $ 2.36 $ 2.92 $ 1.62 $ 1.93 =========== =========== =========== ============ =========== Total: Total dollars committed under signed leases............................... $ 4,754,842 $ 3,015,450 $ 3,924,637 $ 3,449,279 $ 3,786,052 Rentable square feet........................ 874,467 417,102 437,454 630,043 589,767 ----------- ----------- ----------- ------------ ----------- Per rentable square foot.................... $ 5.44 $ 7.23 $ 8.97 $ 5.47 $ 6.42 =========== =========== =========== ============ =========== RENTAL RATE TRENDS: Average final rate with expense pass throughs................................. $ 16.85 $ 16.45 $ 16.47 $ 16.27 $ 16.51 Average first year cash rental rate (2)........ $ 16.06 $ 15.84 $ 17.25 $ 16.51 $ 16.41 ------------ ------------ ----------- ------------ ----------- Percentage (decrease)/increase................. (4.7)% (3.8)% 4.7% 1.5% (0.6)% =========== =========== =========== ============ ===========
---------- (1)"Expense stop" represents operating expenses (generally including taxes, utilities, routine building expense and common area maintenance) for which we will not be reimbursed by our tenants. (2)First year cash rental rate is equal to base rent less concessions. 33
INDUSTRIAL LEASING STATISTICS THREE MONTHS ENDED -------------------------------------------------------------------- 6/30/02 3/31/02 12/31/01 9/30/01 Average ----------- ----------- ----------- ------------ ---------- NET EFFECTIVE RENTS RELATED TO RE-LEASED SPACE: Number of lease transactions (signed leases)... 32 15 31 26 26 Rentable square footage leased................. 1,005,765 78,844 894,865 285,241 566,179 Average per rentable square foot over the lease term: Base rent................................... $ 3.58 $ 6.95 $ 3.52 $ 4.71 $ 4.69 Tenant improvements......................... (0.29) (1.10) (0.24) (0.38) (0.50) Leasing commissions......................... (0.14) (0.21) (0.10) (0.11) (0.14) Rent concessions............................ (0.03) -- -- -- (0.01) ----------- ----------- ----------- ------------ ----------- Effective rent.............................. $ 3.12 $ 5.64 $ 3.18 $ 4.22 $ 4.04 Expense stop (1)............................ (0.09) (0.72) (0.18) (0.30) (0.32) ----------- ----------- ----------- ------------ ----------- Equivalent effective net rent............... $ 3.03 $ 4.92 $ 3.00 $ 3.92 $ 3.72 =========== =========== =========== ============ =========== Average term in years.......................... 6.3 4.1 2.2 3.3 4.0 =========== =========== =========== ============ =========== CAPITAL EXPENDITURES RELATED TO RE-LEASED SPACE: Tenant Improvements: Total dollars committed under signed leases. $ 2,088,547 $ 386,263 $ 661,591 $ 606,380 $ 935,695 Rentable square feet........................ 1,005,765 78,844 894,865 285,241 566,179 ----------- ----------- ----------- ------------ ----------- Per rentable square foot.................... $ 2.08 $ 4.90 $ 0.74 $ 2.13 $ 1.65 =========== =========== =========== ============ =========== Leasing Commissions: Total dollars committed under signed leases. $ 797,939 $ 44,100 $ 257,010 $ 87,034 $ 296,521 Rentable square feet........................ 1,005,765 78,844 894,865 285,241 566,179 ----------- ----------- ----------- ------------ ----------- Per rentable square foot.................... $ 0.79 $ 0.56 $ 0.29 $ 0.31 $ 0.52 =========== =========== =========== ============ =========== Total: Total dollars committed under signed leases. $ 2,886,486 $ 430,363 $ 918,601 $ 693,414 $ 1,232,216 Rentable square feet........................ 1,005,765 78,844 894,865 285,241 566,179 ----------- ----------- ----------- ------------ ----------- Per rentable square foot.................... $ 2.87 $ 5.46 $ 1.03 $ 2.43 $ 2.18 =========== =========== =========== ============ =========== RENTAL RATE TRENDS: Average final rate with expense pass throughs.. $ 3.61 $ 6.99 $ 3.58 $ 4.85 $ 4.76 Average first year cash rental rate (2)........ $ 3.53 $ 6.69 $ 3.49 $ 4.60 $ 4.58 ----------- ----------- ----------- ------------ ----------- Percentage (decrease)/increase................. (2.2)% (4.2)% (2.3)% (5.1)% (3.7)% =========== =========== =========== ============ ===========
---------- (1) "Expense stop" represents operating expenses (generally including taxes, utilities, routine building expense and common area maintenance) for which we will not be reimbursed by our tenants. (2) First year cash rental rate is equal to base rent less concessions. 34
RETAIL LEASING STATISTICS THREE MONTHS ENDED ---------------------------------------------------------------------- 6/30/02 3/31/02 12/31/01 9/30/01 AVERAGE ------------ ---------- ------------- ----------- ----------- NET EFFECTIVE RENTS RELATED TO RE-LEASED SPACE: Number of lease transactions (signed leases)... 13 12 12 9 12 Rentable square footage leased................. 52,527 59,649 26,019 40,283 44,620 Average per rentable square foot over the lease term: Base rent.................................... $ 18.15 $ 25.66 $ 15.75 $ 16.33 $ 18.97 Tenant improvements.......................... (1.83) (1.87) (0.63) (1.49) (1.46) Leasing commissions.......................... (0.65) (0.35) (0.82) (0.75) (0.64) Rent concessions............................. (0.03) (0.02) -- -- (0.01) ------------ ---------- ------------- ----------- ----------- Effective rent............................... $ 15.64 $ 23.42 $ 14.30 $ 14.09 $ 16.86 Expense stop (1)............................. (1.02) -- -- -- (0.26) ------------ ---------- ------------- ----------- ----------- Equivalent effective net rent................ $ 14.62 $ 23.42 $ 14.30 $ 14.09 $ 16.60 ============ ========== ============= =========== =========== Average term in years.......................... 7.0 6.5 6.7 8.8 7.2 ============ ========== ============= =========== =========== CAPITAL EXPENDITURES RELATED TO RE-LEASED SPACE: Tenant Improvements: Total dollars committed under signed leases.. $ 1,077,825 $ 738,605 $ 148,860 $ 526,500 $ 622,948 Rentable square feet......................... 52,527 59,649 26,019 40,283 44,620 ------------ ---------- ------------- ----------- ----------- Per rentable square foot..................... $ 20.52 $ 12.38 $ 5.72 $ 13.07 $ 13.96 ============ ========== ============= =========== =========== Leasing Commissions: Total dollars committed under signed leases.. $ 151,268 $ 61,981 $ 73,314 $ 196,296 $ 120,715 Rentable square feet......................... 52,527 59,649 26,019 40,283 44,620 ------------ ---------- ------------- ----------- ----------- Per rentable square foot..................... $ 2.88 $ 1.04 $ 2.82 $ 4.87 $ 2.71 ============ ========== ============= =========== =========== Total: Total dollars committed under signed leases.. $ 1,229,093 $ 800,586 $ 222,174 $ 722,796 $ 743,662 Rentable square feet......................... 52,527 59,649 26,019 40,283 44,620 ------------ ---------- ------------- ----------- ----------- Per rentable square foot..................... $ 23.40 $ 13.42 $ 8.54 $ 17.94 $ 16.67 ============ ========== ============= =========== =========== RENTAL RATE TRENDS: Average final rate with expense pass throughs.. $ 17.38 $ 18.25 $ 14.16 $ 11.28 $ 15.27 Average first year cash rental rate (2)........ $ 25.30 $ 23.54 $ 16.24 $ 14.82 $ 19.97 ------------ ---------- ------------- ----------- ----------- Percentage increase............................ 45.6% 28.9% 14.7% 31.4% 30.8% ============ ========== ============= =========== ===========
---------- (1) "Expense stop" represents operating expens es (generally including taxes, utilities, routine building expense and common area maintenance) for which we will not be reimbursed by our tenants. (2) First year cash rental rate is equal to base rent less concessions. 35 The following tables set forth scheduled lease expirations at our wholly owned in-service properties (excluding apartment units) as of June 30, 2002, assuming no tenant exercises renewal options. OFFICE PROPERTIES:
AVERAGE PERCENTAGE OF PERCENTAGE OF ANNUAL LEASED RENTS RENTABLE LEASED ANNUAL RENTS RENTAL RATE REPRESENTED NUMBER OF SQUARE FEET SQUARE FOOTAGE UNDER PER SQUARE BY LEASE LEASES SUBJECT TO REPRESENTED BY EXPIRING FOOT FOR EXPIRING EXPIRING EXPIRING EXPIRING LEASES EXPIRING LEASES LEASES (1) EXPIRATIONS LEASES -------- ---------- ----------------- ----------------- ----------------- ---------------- ---------------- ($ IN THOUSANDS) 2002 (2) 472 1,875,426 8.3% $ 33,142 $ 17.67 8.5% 2003 553 3,399,318 15.1% 58,294 17.15 14.8% 2004 501 2,946,726 13.1% 53,133 18.03 13.6% 2005 436 3,123,080 13.9% 55,058 17.63 14.0% 2006 312 2,835,436 12.6% 51,286 18.09 13.1% 2007 135 1,587,833 7.1% 25,028 15.76 6.4% 2008 81 1,791,348 8.0% 28,668 16.00 7.3% 2009 23 720,140 3.2% 12,388 17.20 3.2% 2010 40 1,401,967 6.2% 25,465 18.16 6.5% 2011 38 1,320,434 5.9% 22,438 16.99 5.7% Thereafter 115 1,493,851 6.6% 27,147 18.17 6.9% ---------- ----------------- ----------------- ----------------- ---------------- ---------------- 2,706 22,495,559 100.0% $ 392,047 $ 17.43 100.0% ========== ================= ================= ================= ================ ================
INDUSTRIAL PROPERTIES:
AVERAGE PERCENTAGE OF PERCENTAGE OF ANNUAL LEASED RENTS RENTABLE LEASED ANNUAL RENTS RENTAL RATE REPRESENTED NUMBER OF SQUARE FEET SQUARE FOOTAGE UNDER PER SQUARE BY LEASE LEASES SUBJECT TO REPRESENTED BY EXPIRING FOOT FOR EXPIRING EXPIRING EXPIRING EXPIRING LEASES EXPIRING LEASES LEASES (1) EXPIRATIONS LEASES -------- ---------- ----------------- ----------------- ----------------- ---------------- ---------------- ($ IN THOUSANDS) 2002(2) 108 1,302,081 14.9% $ 6,455 $ 4.96 15.9% 2003 85 1,068,830 12.2% 5,480 5.13 13.5% 2004 91 2,502,631 28.7% 9,625 3.85 23.8% 2005 52 1,006,248 11.5% 4,922 4.89 12.1% 2006 34 718,943 8.2% 3,852 5.36 9.5% 2007 23 1,230,906 14.1% 5,248 4.26 12.9% 2008 7 214,340 2.5% 1,404 6.55 3.5% 2009 7 273,813 3.1% 1,941 7.09 4.8% 2010 3 46,508 0.5% 340 7.31 0.8% 2011 1 33,555 0.4% 159 4.74 0.4% Thereafter 19 344,575 3.9% 1,140 3.31 2.8% ---------- ----------------- ----------------- ----------------- ---------------- ---------------- 430 8,742,430 100.0% $ 40,566 $ 4.64 100.0% ========== ================= ================= ================= ================ ================
---------- (1) Annual Rents Under Expiring Leases are June 2002 rental revenue (base rent plus operating expense pass-throughs) multiplied by 12. (2) Includes 196,000 square feet leases that are on a month to month basis or 0.7% of total annualized revenue (3) Includes 188,000 square feet leases that are on a month to month basis or 0.2% of total annualized revenue 36 RETAIL PROPERTIES:
AVERAGE PERCENTAGE OF PERCENTAGE OF ANNUAL LEASED RENTS RENTABLE LEASED ANNUAL RENTS RENTAL RATE REPRESENTED NUMBER OF SQUARE FEET SQUARE FOOTAGE UNDER PER SQUARE BY LEASE LEASES SUBJECT TO REPRESENTED BY EXPIRING FOOT FOR EXPIRING EXPIRING EXPIRING EXPIRING LEASES EXPIRING LEASES LEASES (1) EXPIRATIONS LEASES -------- --------- --------------- --------------- -------------- ----------- -------------- ($ IN THOUSANDS) 2002(2) 36 89,813 5.6% $ 1,236 $ 13.76 3.3% 2003 36 94,516 5.9% 2,290 24.23 6.0% 2004 40 209,108 13.1% 2,776 13.28 7.3% 2005 39 93,505 5.9% 2,665 28.50 7.0% 2006 38 111,064 7.0% 2,768 24.92 7.3% 2007 30 120,487 7.6% 2,205 18.30 5.8% 2008 25 124,318 7.8% 4,293 34.53 11.3% 2009 21 168,355 10.6% 3,298 19.59 8.7% 2010 18 97,372 6.1% 2,856 29.33 7.5% 2011 19 108,418 6.8% 2,573 23.73 6.8% Thereafter 26 375,696 23.6% 10,965 29.19 29.0% --------- --------------- --------------- -------------- ------------ -------------- 328 1,592,652 100.0% $ 37,925 $ 23.81 100.0% ========= =============== =============== =============== ==-========= ==============
TOTAL:
AVERAGE PERCENTAGE OF PERCENTAGE OF ANNUAL LEASED RENTS RENTABLE LEASED ANNUAL RENTS RENTAL RATE REPRESENTED NUMBER OF SQUARE FEET SQUARE FOOTAGE UNDER PER SQUARE BY LEASE LEASES SUBJECT TO REPRESENTED BY EXPIRING FOOT FOR EXPIRING EXPIRING EXPIRING EXPIRING LEASES EXPIRING LEASES LEASES(1) EXPIRATIONS LEASES -------- --------- --------------- --------------- -------------- ----------- -------------- ($ IN THOUSANDS) 2002(3) 616 3,267,320 10.0% $ 40,833 $ 12.50 8.7% 2003 674 4,562,664 13.9% 66,064 14.48 14.1% 2004 632 5,658,465 17.1% 65,534 11.58 14.0% 2005 527 4,222,833 12.9% 62,645 14.83 13.3% 2006 384 3,665,443 11.2% 57,906 15.80 12.3% 2007 188 2,939,226 9.0% 32,481 11.05 6.9% 2008 113 2,130,006 6.5% 34,365 16.13 7.3% 2009 51 1,162,308 3.5% 17,627 15.17 3.7% 2010 61 1,545,847 4.7% 28,661 18.54 6.1% 2011 58 1,462,407 4.5% 25,170 17.21 5.3% Thereafter 160 2,214,122 6.7% 39,252 17.73 8.3% --------- --------------- --------------- -------------- ----------- -------------- 3,464 32,830,641 100.0% $ 470,538 $ 14.33 100.0% ========= =============== =============== =============== =========== ==============
---------- (1) Annual Rents Under Expiring Leases are June 2002 rental revenue (base rent plus operating expense pass-throughs) multiplied by 12. (2) Includes 27,000 square feet leases that are on a month to month basis or 0.0% of total annualized revenue (3) Includes 413,000 square feet leases that are on a month to month basis or 1.0% of total annualized revenue INFLATION In the last five years, inflation has not had a significant impact on us because of the relatively low inflation rate in our geographic areas of operation. Most of the leases require the tenants to pay their share of increases in operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing our exposure to inflation. 37 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 our revolving loans 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. As of June 30, 2002, the Company had approximately $231.7 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, 2003, our interest expense would be increased or decreased approximately $2.3 million. 38 PART II--OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (c) During the second quarter of 2002, the Company issued 250,000 shares of Common Stock to a holder of Common Units in the Operating Partnership upon the redemption of such Common Units in a private offering exempt from the registration requirements pursuant to Section 4(2) of the Securities Act. The holder of Common Units was an accredited investor under Rule 501 of the Securities Act, and the offering did not involve a general solicitation by the Company. The Company has registered the resale of such shares under the Securities Act. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 20, 2002, 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 Thomas W. Adler...................................... 41,346,366 -- 1,046,476 Kay N. Callison...................................... 40,894,574 -- 1,498,268 William E. Graham, Jr................................ 41,326,524 -- 1,066,318 Willard H. Smith Jr.................................. 40,900,430 -- 1,492,412 John L. Turner....................................... 41,182,478 -- 1,210,364 (B) Ratify appointment of Ernst & Young, LLP as independent auditors............................. 41,509,062 755,952 129,618
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit No. Description ----------- ----------- 10.1 Amended and Restated 1994 Stock Option Plan 99.1 Statement of Chief Executive Officer of Highwoods Properties Inc. 99.2 Statement of Chief Financial Officer of Highwoods Properties Inc. 39 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HIGHWOODS PROPERTIES, INC. By: /s/ Ronald P. Gibson -------------------------------------------- Ronald P. Gibson President and Chief Executive Officer By: /s/ Carman J. Liuzzo -------------------------------------------- Carman J. Liuzzo Chief Financial Officer (Principal Accounting Officer) Date: August 14, 2002 40