-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MAIoIbBf+mY/PCNRffkpx2wa123p7z4y7s6bx6RiMX7vNz82w+kCo5W84oNmrAtj FZ45GEYVX5HfQBsZt+4prA== 0000950168-97-003377.txt : 19971117 0000950168-97-003377.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950168-97-003377 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HIGHWOODS PROPERTIES INC CENTRAL INDEX KEY: 0000921082 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 561871668 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13100 FILM NUMBER: 97720668 BUSINESS ADDRESS: STREET 1: 3100 SMOKETREE CT STREET 2: STE 600 CITY: RALEIGH STATE: NC ZIP: 27604 BUSINESS PHONE: 9198724924 MAIL ADDRESS: STREET 1: 3100 SMOKETREE COURT STREET 2: STE 700 CITY: RALEIGH STATE: NC ZIP: 27604 10-Q 1 HIGHWOODS PROPERTIES 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 September 30, 1997 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) Registrant's telephone number, including area code: (919) 872-4924 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No The Company has only one class of common stock, par value $.01 per share, with 46,697,501 shares outstanding as of November 7, 1997. HIGHWOODS PROPERTIES, INC. QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 1997 TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements 3 Consolidated balance sheets of Highwoods Properties, Inc. as of September 30, 1997 and 4 December 31, 1996 Consolidated statements of income of Highwoods Properties, Inc. for the three and nine month 5 periods ended September 30, 1997 and 1996 Consolidated statements of cash flows of Highwoods Properties, Inc. for the nine months ended 6 September 30, 1997 and 1996 Notes to the consolidated financial statements of Highwoods Properties, Inc. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Results of Operations 9 Liquidity and Capital Resources 10 Recent Developments 12 Funds From Operations and Cash Available for Distribution 13 Disclosure Regarding Forward-Looking Statements 14 Property Information 15 Inflation 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Changes in Securities and Use of Proceeds 19 Item 3. Defaults Upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K
2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The information furnished in the accompanying balance sheets, statements of operations and statements of cash flows reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the aforementioned financial statements for the interim period. The aforementioned financial statements should be read in conjunction with the notes to consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations and the 1996 Annual Report on Form 10-K of Highwoods Properties, Inc. (the "Company"). 3 HIGHWOODS PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, 1997 DECEMBER 31, 1996 (UNAUDITED) ASSETS Real estate assets, at cost: Land and improvements..................................................... $ 235,473 $ 219,539 Buildings and tenant improvements......................................... 1,452,381 1,152,990 Development in process.................................................... 59,071 28,858 Land held for development................................................. 53,290 17,551 Furniture, fixtures and equipment......................................... 3,010 2,096 1,803,225 1,421,034 Less -- accumulated depreciation (72,319) (43,160) Net real estate assets.................................................... 1,730,906 1,377,874 Cash and cash equivalents................................................... 175,087 11,070 Restricted cash............................................................. 9,143 8,539 Accounts receivable......................................................... 11,831 9,039 Advances to subsidiaries.................................................... 4,967 2,406 Accrued straight line rents receivable...................................... 10,024 6,185 Other assets: Deferred leasing costs.................................................... 16,750 9,601 Deferred financing costs.................................................. 21,940 21,789 Prepaid expenses and other................................................ 11,029 3,901 49,719 35,291 Less -- accumulated amortization.......................................... (11,499) (6,964) 38,220 28,327 $1,980,178 $ 1,443,440 LIABILITIES AND STOCKHOLDERS' EQUITY Mortgages and notes payable................................................. $ 649,188 $ 555,876 Accounts payable, accrued expenses and other liabilities.................... 41,565 27,600 Total liabilities......................................................... 690,753 583,476 Minority interest........................................................... 174,913 89,617 Stockholders' equity: Preferred stock $.01 par value; 10,000,000 authorized 8 5/8% Series A Cumulative Redeemable Preferred Shares (liquidation preference of $1,000 per share), 125,000 shares issued and outstanding at September 30, 1997...................................... 125,000 -- 8% Series B Cumulative Redeemable Preferred Shares (liquidation preference $25 per share), 6,900,000 shares issued and outstanding at September 30, 1997............. 172,500 -- Common stock, $.01 par value, authorized 100,000,000 shares; issued and outstanding 37,948,435 at September 30, 1997 and 35,636,155 at December 31, 1996.................................................................. 379 356 Additional paid-in capital.................................................. 839,912 780,562 Distributions in excess of net income....................................... (23,279) (10,571) Total stockholders' equity................................................ 1,114,512 770,347 $1,980,178 $ 1,443,440
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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1997 1996 1997 1996 REVENUE: Rental property......................................... $61,768 $33,076 $177,246 $83,366 Interest and other income............................... 1,887 3,253 5,968 4,400 63,655 36,329 183,214 87,766 OPERATING EXPENSES: Rental property......................................... 17,407 9,015 48,995 22,210 Depreciation and amortization........................... 11,151 5,459 31,051 13,357 Interest expense: Contractual.......................................... 10,566 5,539 33,082 13,786 Amortization of deferred financing costs............. 567 461 1,689 1,288 11,133 6,000 34,771 15,074 General and administrative.............................. 2,410 1,632 6,694 3,766 Income before minority interest and extraordinary item............................................... 21,554 14,223 61,703 33,359 MINORITY INTEREST......................................... (3,448) (1,881) (9,872) (5,205) Income before extraordinary item........................ 18,106 12,342 51,831 28,154 EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF DEBT.................................................... (1,328) (2,140) (4,665) (2,140) Net income.............................................. 16,778 10,202 47,166 $26,014 Preferred Dividends....................................... (2,870) -- (6,972) -- Net income available for common stockholders............ $13,908 $10,202 $ 40,194 $26,014 NET INCOME (LOSS) PER COMMON SHARE: Income before extraordinary item........................ $ 0.42 $ 0.39 $ 1.25 $ 1.19 Extraordinary item -- loss on early extinguishment of debt................................................. $ (0.04) $ (0.07) $ (0.13) $ (0.09) Net income.............................................. $ 0.38 $ 0.32 $ 1.12 $ 1.10 Weighted average shares outstanding....................... 36,582 31,763 35,777 23,730
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 5 HIGHWOODS PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED AND IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 OPERATING ACTIVITIES: Net income..................................................................... $ 47,166 $ 26,014 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................................ 32,520 14,645 Minority interest in income.................................................. 8,979 4,858 Loss on early extinguishment of debt......................................... 5,534 2,432 Changes in operating assets and liabilities............................................................... 2,338 (59) Net cash provided by operating activities.............................................................. 96,537 47,890 INVESTING ACTIVITIES: Additions to real estate assets................................................ (149,458) (113,250) Proceeds from disposition of real estate assets................................ -- 900 Cash from contributed net assets............................................... -- 20,711 Cash paid in exchange for partnership net assets............................... (5,314) (322,276) Other.......................................................................... (15,005) (2,755) Net cash used in investing activities..................................... (169,777) (416,670) FINANCING ACTIVITIES: Distributions paid............................................................. (57,770) (37,938) Payment of preferred dividends................................................. (5,959) -- Repayment of mortgages and notes payable....................................... (223,388) (184,858) Payment of prepayment penalties................................................ (5,534) (1,184) Borrowings on mortgages and notes payable...................................................................... 183,000 307,500 Net proceeds from the sale of common stock........................................................................ 58,463 298,804 Net proceeds from sale of 8 5/8% Series A Cumulative Redeemable Preferred Shares....................................................................... 121,804 -- Net proceeds from sale of 8% Series B Cumulative Redeemable Preferred Shares... 167,066 -- Payment of deferred financing costs............................................ (425) (1,077) Net cash provided by financing activities................................. 237,257 381,247 Net increase in cash and cash equivalents...................................... 164,017 12,467 Cash and cash equivalents at beginning of the period....................................................................... 11,070 6,838 Cash and cash equivalents at end of the period................................................................ $ 175,087 $ 19,305 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest......................................................... $ 7,763 $ 12,816
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 6 HIGHWOODS PROPERTIES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED AND IN THOUSANDS) SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES The following summarizes the net assets contributed by the unit holders of the Highwoods/Forsyth Limited Partnership (the "Operating Partnership") or acquired subject to mortgage notes payable:
NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 ASSETS: Rental property and equipment, net....................................................... $226,051 $614,329 Restricted cash.......................................................................... -- 11,476 Deferred financing costs, net............................................................ -- 3,871 Accounts receivable and other............................................................ -- 1,653 Total assets........................................................................... $226,051 $631,329 LIABILITIES: Mortgages and notes payable assumed...................................................... $133,736 $292,356 Accounts payable, accrued expenses and other liabilities................................. -- 19,142 Total liabilities...................................................................... $133,736 $311,498 Net assets.......................................................................... $ 92,315 $319,831
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 7 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Highwoods Properties, Inc. (the "Company"), Highwoods/Forsyth Limited Partnership (the "Operating Partnership") and the following subsidiaries: Highwoods/Florida GP Corp. Highwoods Realty GP Corp. Highwoods/Tennessee Properties, Inc. Highwoods/Florida Holdings GP, L.P. AP-GP Southeast Portfolio Partners, L.P. Highwoods/Tennessee Holdings GP, L.P. Highwoods/Tennessee Holdings, L.P. AP Southeast Portfolio Partners, L.P. Highwoods/Florida Holdings, L.P. Highwoods Services, Inc. Southeast Realty Options Corp. The Company's investment in Highwoods Services, Inc. (the "Service Company") is accounted for using the equity method of accounting. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. The extraordinary loss represents the write-off of loan origination fees and prepayment penalties paid on the early extinguishment of debt. The Company has elected and expects to continue to qualify as a real estate investment trust ("REIT") under Section 856 through 860 of the Internal Revenue Code of 1986, as amended. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, EARNINGS PER SHARE, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact of Statement 128 on the calculation of primary and fully diluted earnings per share for these quarters is not material. Minority interest in the Company represents the limited partnership interests ("Common Units") owned by various individuals and entities and not the Company in the Operating Partnership, the entity that owns substantially all of the Company's properties and through which the Company, as the sole general partner, conducts substantially all of its operations. Per share information is calculated using the weighted average number of shares outstanding (including common share equivalents). The accompanying financial information has not been audited, but in the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the financial position, results of operations and cash flows of the Company have been made. For further information, refer to the financial statements and notes thereto included in the Company's 1996 Annual Report on Form 10-K. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with all of the financial statements appearing elsewhere in the report. The following discussion is based primarily on the consolidated financial statements of Highwoods Properties, Inc. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1997 Revenues from rental operations increased $28.7 million, or 87%, from $33.1 million for the three months ended September 30, 1996 to $61.8 million for the comparable period in 1997. The increase is primarily a result of the acquisition of 6.4 million square feet of office and industrial properties and the completion of 763,000 square feet of development activity during latter part of the third quarter and the fourth quarter of 1996 and the addition of 3.2 million square feet in the first quarter of 1997 from the acquisition of the Anderson Properties and Century Center portfolios. The Company's portfolio increased from 16.7 million square feet at September 30, 1996 to 21.9 million square feet at September 30, 1997. Same property revenues, which are the revenues of the 204 in-service properties owned on July 1, 1996, increased 3% for the three months ended September 30, 1997, compared to the same three months of 1996. During the three months ended September 30, 1997, 175 leases representing 737,000 square feet of office and industrial space commenced at an average rate per square foot which was 8.2% higher than the average rate per square foot on the expired leases. Interest and other income decreased $1.4 million from $3.3 million for the three months ended September 30, 1996 to $1.9 million for the comparable period in 1997. The prior year amount was abnormally high as a result of the $299 million in cash available for investment raised from the sale of 11.8 million shares of Common Stock. Rental operating expenses increased $8.4 million, or 93%, from $9.0 million for the three months ended September 30, 1996 to $17.4 million for the comparable period in 1997. The increase is a result of the addition of 10.2 million square feet through a combination of acquisitions and developments during the latter part of the third quarter and the fourth quarter of 1996 and the first two quarters of 1997. Rental operating expenses as a percentage of related revenues increased from 27.3% for the three months ended September 30, 1996 to 28.2% for the comparable period in 1997. This increase is a result of an increase in the percentage of office properties in the portfolio, which have fewer triple net lease pass throughs. Depreciation and amortization for the three months ended September 30, 1997 and 1996 was $11.2 million and $5.5 million, respectively. The increase of $5.7 million, or 104%, is due to an increase in depreciable assets over the prior year. The $541 million acquisition of Crocker Realty Trust, which closed at the end of the third quarter of 1996, had very little impact on the depreciation expense in the prior year. Interest expense increased $5.1 million, or 85%, from $6.0 million for the three months ended September 30, 1996 to $11.1 million for the comparable period in 1997. The increase is attributable to the increase in the outstanding debt for the entire quarter. The closing of the Crocker acquisition at the end of the third quarter of 1996 had very little impact on the interest expense in the prior year. Interest expense for the three months ended September 30, 1997 and 1996 included $567,000 and $461,000, respectively, of amortization of non-cash deferred financing costs and the costs related to the Company's interest rate protection agreements. General and administrative expenses decreased from 4.9% of rental revenue for the three months ended September 30, 1996 to 3.9% for the comparable period in 1997. The decrease is attributable to the realization of the economies of scale related to the acquisition of the 5.7 million-square foot Crocker portfolio, which was completed in September 1996. Net income before minority interest and extraordinary item equaled $21.6 million and $14.2 million for the three-month periods ended September 30, 1997 and 1996, respectively. The Company's net income allocated to minority interest totaled $3.4 million and $1.9 million for the three-month periods ended September 30, 1997 and 1996, respectively. The Company accrued $2.9 million in dividends in the third quarter of 1997 for the 125,000 shares of preferred stock that the Company issued in February and September 1997 (see " -- Liquidity and Capital Resources" below). 9 NINE MONTHS ENDED SEPTEMBER 30, 1997 Revenue from rental operations increased $93.8 million or 112%, from $83.4 million for the nine months of 1996 to $177.2 million for the nine months of 1997. The increase is a result of the Company's acquisition and development activity in 1996 and 1997. In total, 103 office and industrial properties encompassing 8.2 million square feet were added in 1996 and 77 properties encompassing 4.8 million square feet were added in the first nine months of 1997. During the nine months ended September 30, 1997, 547 leases representing 3,253,000 square feet of office and industrial space commenced at an average rate per square foot 7.4% higher than the average rate per square foot on the expired leases. Interest and other income increased $1.6 million from $4.4 million in 1996 to $6.0 million in 1997. The increase is related to the receipt of $1.6 million in lease termination fees and other miscellaneous property income in the first nine months of 1997 and a full nine months of third-party management fees derived from the management contracts assumed in the merger with Eakin & Smith, Inc. on April 1, 1996. Rental operating expenses increased $26.8 million, or 121%, from $22.2 million in 1996 to $49.0 million in 1997. Rental expenses as a percentage of related rental revenues increased from 26.6% in 1996 to 27.6% in 1997. The increase is a result of an increase in the percentage of office properties in the portfolio, which have fewer triple net lease pass throughs. Depreciation and amortization for the nine months ended September 30, 1997, and 1996 was $31.1 million and $13.4 million, respectively. The increase of $17.7 million, or 132%, is attributable to an increase in depreciable assets over the prior year. The $541 million acquisition of Crocker Realty Trust, which closed at the end of the third quarter of 1996, had very little impact on the depreciation expenses in 1996. Interest expense increased $19.7 million or 130%, from $15.1 million in 1996 to $34.8 million in 1997. The increase is attributable to the large increase in the outstanding debt for the entire nine-month period. The closing of the Crocker acquisition at the end of the third quarter of 1996 had very little impact on the interest expense in the prior year. Interest expense for the nine months ended September 30, 1997, and 1996 included $1.7 million and $1.3 million, respectively, of amortization of non-cash deferred financing costs and of the costs related to the Company's interest rate protection agreement. General and administrative expenses decreased from 4.5% of total rental revenue in 1996 to 3.8% in 1997. This decrease is attributable to the realization of the economies of scale related to the acquisition of the 5.7 million-square foot Crocker portfolio, which was completed in September 1996. Net income before minority interest and extraordinary item equaled $61.7 million and $33.4 million for the nine-month periods ended September 30, 1997, and 1996, respectively. The Operating Partnership's net income allocated to the minority interest totaled $9.9 million and $5.2 for 1997 and 1996, respectively. The Company incurred an extraordinary loss in the first quarter of 1997 of $4.7 million related to the early extinguishment of debt. The Company also recorded $7.0 million in preferred dividends for the nine months ended September 30, 1997. LIQUIDITY AND CAPITAL RESOURCES For the nine months ended September 30, 1997, cash provided by operating activities increased by $48.6 million, or 101%, to $96.5 million, as compared to $47.9 million for the same period in 1996. The increase is primarily due to the increase in net income resulting from the Company's property acquisitions in 1996 and 1997. Cash used for investing activities decreased by $246.9 million, or 59%, to $169.8 million for the first nine months of 1997, as compared to $416.7 million for the same 1996 period. The decrease is attributable to the Company's $547 million acquisition of Crocker Realty Trust in the prior year. Cash provided by financing activities decreased by $143.9, or 38%, to $237.3 million for the first nine months of 1997, as compared to $381.2 million for the same period in 1996. During the first nine months of 1997, cash provided by financing activities consisted, primarily, of $288.9 million in net proceeds from the sale of preferred stock and the sale of $100 million of Exercisable Put Option Securities (see below), which were offset by net payments of $118.4 million to reduce existing indebtedness and $105 million to pay off the assumed indebtedness associated with the acquisition of the Century Center and Anderson Properties portfolios. Additionally, payments of distributions increased by $19.9 million to $57.8 million for the first nine 10 months of 1997, as compared with $37.9 million for the same period in 1996. The increase is due to the greater number of shares outstanding and a 7% increase in the distribution rate. On February 12, 1997, the Company issued 125,000 shares of 8 5/8% Series A Cumulative Redeemable Preferred Shares (the "Series A Preferred Shares") for net proceeds of $121.8 million. The Series A Preferred Shares have a liquidation preference of $1,000 per share, are not redeemable prior to February 2027, are not subject to any sinking fund or mandatory redemption and are not convertible into any other securities of the Company. Effective May 27, 1997, the Company's syndicate of lenders lowered the interest rate to 100 basis points over LIBOR (from the previous rate of 135 basis points over LIBOR) on the Company's $280 million revolving loan. On June 24, 1997, a trust formed by the Operating Partnership sold $100 million of Exercisable Put Option Securities ("X-POSSM"), which represent fractional undivided beneficial interests in the trust. The assets of the trust consist of, among other things, $100 million of Exercisable Put Option Notes due June 15, 2011 issued by the Operating Partnership (the "Put Option Notes"). The X-POSSM bear a coupon interest rate of 7.19% and mature on June 15, 2004, representing an effective borrowing cost of 7.09%, net of a related put option and certain interest rate protection agreement costs. Under certain circumstances, the Put Option Notes could also become subject to early maturity on June 15, 2004. On August 28, 1997, the Company entered into two transactions with affiliates of Union Bank of Switzerland. In one transaction, the Company sold 1,800,000 shares of Common Stock to UBS Limited for net proceeds of approximately $57 million. In the other transaction, the Company entered into a forward share purchase agreement (the "Forward Contract") with Union Bank of Switzerland, London Branch ("UBS/LB"). The Forward Contract generally provides that if the price of a share of Common Stock is above $32.14 (the "Forward Price") on August 28, 1998, UBS/LB will return the difference (in shares of Common Stock) to the Company. Similarly, if the price of a share of Common Stock on August 28, 1998 is less than the Forward Price, the Company will pay the difference to UBS/LB in cash or shares of Common Stock, at the Company's option. On September 25, 1997 the Company issued 6.9 million shares of 8% Series B Cumulative Redeemable Preferred Shares (the "Series B Preferred Shares") for net proceeds of $167 million. The Series B Preferred Shares have a liquidation preference of $25 per share, are not redeemable prior to September 2002, are not subject to any sinking fund or mandatory redemption and are not convertible into any other securities of the Company. The Company's total indebtedness at September 30, 1997, totaled $649.2 million and was comprised of $258.4 million of secured indebtedness with an average rate of 8.1% and $390.8 million of unsecured indebtedness with an average rate of 6.9%. All of the mortgage and notes payable outstanding at September 30, 1997 were either fixed rate obligations or variable rate obligations covered by interest rate protection agreements. Based on the Company's total market capitalization of $2.5 billion at September 30, 1997, (at the September 30, 1997 stock price of $35.38 and assuming the redemption for shares of Common Stock of the 7,084,000 Common Units of minority interest in the Operating Partnership), the Company's debt represented approximately 26% of its total market capitalization. To protect the Company from increases in interest expense due to changes in the variable rate, the Company: (i) purchased an interest rate collar limiting its exposure to an increase in interest rates (one-month LIBOR plus 100 basis points) to 7.25% with respect to $80 million of the Company's $280 million unsecured revolving loan (the "Revolving Loan"), under which the Company had $59 million outstanding at September 30, 1997, and (ii) entered into interest rate swaps that limit its exposure to an increase in the interest rates to 7.15% in connection with the $22 million of variable rate mortgages. The interest rate on all such variable rate debt is adjusted at monthly intervals, subject to the Company's interest rate protection program. No payments were received from the counterparties under the interest rate protection agreements for the three months ended September 30, 1997 and 1996. The Company is exposed to certain losses in the event of non-performance by the counterparties under the cap and swap arrangements. The counterparties are major financial institutions and are expected to perform fully under the agreements. However, if they 11 were to default on their obligations under the arrangements, the Company could be required to pay the full rate under the Revolving Loan and the variable rate mortgages, even if such rate were in excess of the rate in the cap and swap agreements. In addition, the Company may incur other variable rate indebtedness in the future. Increases in interest rates on its indebtedness could increase the Company's interest expense and could adversely affect the Company's cash flow. Historically, rental revenue has been the principal source of funds to pay operating expenses, debt service and capital expenditures, excluding non-recurring capital expenditures. In addition, construction management, maintenance, leasing and management fees have provided sources of cash flow. The Company presently has no plans for major capital improvements to the existing properties, other than normal recurring non-revenue enhancing expenditures. The Company expects to meet its short-term liquidity requirements generally through its working capital and net cash provided by operating activities along with the Revolving Loan. The Company expects to meet certain of its financing requirements through long-term secured and unsecured borrowings and the issuance of debt securities or additional equity securities of the Company and Operating Partnership. In addition, the Company anticipates utilizing the Revolving Loan primarily to fund construction and development activities. The Company does not intend to reserve funds to retire existing mortgage indebtedness or indebtedness under the Revolving Loan upon maturity. Instead, the Company will seek to refinance such debt at maturity or retire such debt through the issuance of equity or debt securities. The Company anticipates that its available cash and cash equivalents and cash flows from operating activities, together with cash available from borrowings and other sources, will be adequate to meet the capital and liquidity needs of the Company 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 discussed below may be adversely affected. In order to qualify as a REIT for Federal income tax purposes, the Company is required to make distributions to its stockholders of at least 95% of REIT taxable income. The Company expects to use its cash flow from operating activities for distributions to stockholders and for payment of recurring, non- incremental revenue-generating expenditures. The Company intends to invest amounts accumulated for distribution in short-term investments. The following factors will affect cash flows from operating activities and, accordingly, influence the decisions of the Board of Directors regarding distributions: (i) debt service requirements after taking into account the repayment and restructuring of certain indebtedness; (ii) scheduled increases in base rents of existing leases; (iii) changes in rents attributable to the renewal of existing leases or replacement leases; (iv) changes in occupancy rates at existing properties and procurement of leases for newly acquired or developed properties; and (v) operating expenses and capital replacement needs. RECENT DEVELOPMENTS OCTOBER 1997 OFFERING. On October 1, 1997, the Company sold 7,500,000 shares of Common Stock in an underwritten public offering for net proceeds of approximately $249 million. The underwriters exercised a portion of their over-allotment option for 1,000,000 shares of Common Stock on October 6, 1997, raising additional net proceeds of $33.2 million. ACP TRANSACTION. On October 1 and October 7, 1997, the Company closed substantially all of its previously announced business combination with Associated Capital Properties, Inc. ("ACP") and related portfolio acquistion (the "ACP Transaction"). The ACP Transaction includes the acquisition of a portfolio of 84 office properties encompassing 6.5 million rentable square feet (the "ACP Properties") and approximately 50 acres of land for development in six markets in Florida. The ACP Properties were 89% leased as of September 30, 1997. The ACP Properties include 82 office properties (78 of which are suburban) in Florida's four major markets, Orlando, Tampa, Jacksonville and South Florida, one 245,000-square foot suburban office property in Tallahassee and one 51,831-square foot office property in Ft. Myers. The ACP Properties include seven properties that ACP had under contract to purchase. Under the terms of the agreements relating to the ACP Transaction, the Company merged with Associated Capital Properties, Inc. and acquired the ownership interest in the entities that own the ACP Properties for an aggregate purchase price of $617 million. The cost of the ACP Transaction consists of the issuance of 12 2,955,110 Common Units (valued at $32.50 per Common Unit), the assumption of $481 million of mortgage debt ($391 million of which has been paid off by the Company), the issuance of 117,265 shares of Common Stock (valued at $32.50 per share), a captial expenditure reserve of $11 million and a cash payment of $25 million. Also in connection with the ACP Transaction, the Company issued to certain affiliates of ACP warrants to purchase 1,479,290 shares of the Common Stock at $32.50 per share exercisable after October 1, 2002. FUNDS FROM OPERATIONS AND CASH AVAILABLE FOR DISTRIBUTIONS The Company considers Funds from Operations ("FFO") to be a useful financial performance measure of its operating performance because, together with net income and cash flows, FFO provides investors with an additional basis to evaluate its ability to incur and service debt and to fund acquisitions and other capital expenditures. FFO does not represent net income or cash flows from operations as defined by GAAP, and FFO should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. FFO does not measure whether cash flow is sufficient to fund all of the Company's cash needs including principal amortization, capital improvements and distributions to stockholders. FFO does not represent cash flows from operating, investing or financing activities as defined by GAAP. Further, FFO as disclosed by other REITs may not be comparable to the Company's calculation of FFO, as described below. FFO is defined as net income (computed in accordance with generally accepted accounting principles) excluding gains (or losses) from debt restructuring and sales of property, plus depreciation of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. In March 1995, the National Association of Real Estate Investment Trusts ("NAREIT") issued a clarification of the definition of FFO. The clarification provides that amortization of deferred financing costs and depreciation of non-real estate assets are no longer to be added back to net income in arriving at FFO. Cash available for distribution is defined as funds from operations reduced by non-revenue enhancing capital expenditures for building improvements and tenant improvements and lease commissions related to second generation space. 13 Funds from operations and cash available for distribution for the three and nine months ended September 30, 1997 and 1996 are summarized in the following table (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1997 1996 1997 1996 FUNDS FROM OPERATIONS: Income before minority interest and extraordinary item.............. $21,554 $14,223 $61,703 $33,359 Add (deduct): Dividends to preferred shareholders............................... (2,870) -- (6,972) -- Depreciation and amortization..................................... 11,151 5,459 31,051 13,357 Minority interest in Crocker's depreciation....................... -- (117) -- (117) Third-party service company cash flow............................. -- 75 -- 330 FUNDS FROM OPERATIONS BEFORE MINORITY INTEREST................. 29,835 19,640 85,782 46,929 CASH AVAILABLE FOR DISTRIBUTION: Add (deduct): Rental income from straight-line rents............................ (1,347) (837) (3,822) (1,752) Amortization of deferred financing costs.......................... 567 461 1,689 1,288 Non-incremental revenue generating capital expenditures (1): Building improvements paid..................................... (933) (818) (2,941) (2,018) Second generation tenant improvements paid..................... (2,063) (864) (5,510) (2,172) Second generation lease commissions paid....................... (1,201) (477) (3,535) (1,056) CASH AVAILABLE FOR DISTRIBUTION.............................. $24,858 $17,105 $71,663 $41,219 Weighted average shares/Common Units outstanding (2)................ 43,550 35,895 42,686 27,748 DIVIDEND PAYOUT RATIO: Funds from operations............................................. 74.4% 87.7% 73.1% 81.6% Cash available for distribution................................... 89.3% 100.7% 87.6% 92.9%
(1) Amounts represent cash expenditures. (2) Assumes redemption of Common Units for shares of Common Stock. Minority interest Common Unit holders and the stockholders of the Company share equally on a per share and per Common Unit basis; therefore, the resultant per share information is unaffected by the conversion. On November 4, 1997, the Company's Board of Directors declared a dividend of $.51 per share ($2.04 on an annualized basis) payable on November 21, 1997 to stockholders of record on November 14, 1997. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are identified by words such as "expect," "anticipate," "should" and words of similar import. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 14 PROPERTY INFORMATION The following table sets forth certain information with respect to the Company's properties as of September 30, 1997:
RENTABLE NUMBER OF PERCENT LEASED/ SQUARE FEET PROPERTIES PRE-LEASED IN-SERVICE: Office............................................................. 15,022,000 230 94% Industrial......................................................... 6,882,000 139 92% Total........................................................... 21,904,000 369 94% UNDER DEVELOPMENT: Office............................................................. 2,259,000 24 39% Industrial......................................................... 585,000 7 7% Total........................................................... 2,844,000 31 33% TOTAL: Office............................................................. 17,281,000 254 Industrial......................................................... 7,467,000 146 Total........................................................... 24,748,000 400
15 The following table sets forth certain information with respect to the Company's properties under development as of September 30, 1997:
COST AT PRE-LEASING ESTIMATED NAME LOCATION SQUARE FOOTAGE BUDGETED COST 9/30/97 PERCENTAGE* COMPLETION OFFICE: Ridgefield III Asheville 57,000 $ 5,485 $ 876 0% 2Q98 2400 Century Center Atlanta 135,000 16,180 1,239 0 2Q98 10 Glenlake Atlanta 254,000 35,135 2,589 0 4Q98 Patewood VI Greenville 107,000 11,360 2,716 0 2Q98 Colonnade Memphis 89,000 9,400 3,213 63 2Q98 Southwind III Memphis 69,000 6,970 3,888 100 4Q97 Southwind C Memphis 74,000 7,657 1,354 34 4Q98 Harpeth V Nashville 65,000 6,900 1,712 27 1Q98 Lakeview Ridge II Nashville 61,000 6,000 1,573 35 1Q98 Southpointe Nashville 104,000 10,878 2,381 0 2Q98 Air Park Center One Piedmont Triad 95,000 9,450 -- 0 3Q98 R F Micro Devices Piedmont Triad 49,000 8,420 6,658 100 4Q97 RMIC Piedmont Triad 90,000 7,650 2,281 100 2Q98 Clintrials Research Triangle 178,000 21,490 7,214 100 2Q98 Situs II Research Triangle 59,000 5,857 860 0 2Q98 Highwoods Centre Research Triangle 76,000 8,327 189 0 3Q98 Overlook Research Triangle 97,000 10,307 522 0 4Q98 Red Oak Research Triangle 65,000 6,394 513 0 3Q98 Rexwoods V Research Triangle 60,000 7,444 3,281 30 4Q97 Markel-American Richmond 106,000 10,650 1,732 48 2Q98 Highwoods V Richmond 67,000 6,620 1,096 100 2Q98 Grove Park Richmond 61,000 5,930 3,445 10 4Q97 Intermedia (Sabal) Phase I Tampa 121,000 12,500 532 100 4Q98 Intermedia (Sabal) Phase II Tampa 120,000 13,000 532 100 1Q00 TOTAL OR WEIGHTED AVERAGE 2,259,000 $ 250,004 $50,396 39% INDUSTRIAL: Chastain II & III Atlanta 122,000 $ 4,360 $ 1,179 0% 3Q98 Newpoint Atlanta 119,000 4,660 3,038 0 4Q97 Tradeport 1 Atlanta 87,000 3,070 785 0 1Q98 Tradeport 2 Atlanta 87,000 3,070 785 0 1Q98 Airport Center II Richmond 70,000 3,197 997 0 4Q97 Air Park South Piedmont Triad 100,000 2,929 273 40 1Q98 TOTAL OR WEIGHTED AVERAGE 585,00 $ 21,286 $ 7,057 7% Total or Weighted Average 2,844,000 $ 271,290 $57,453 33% TOTALS BY ESTIMATED COMPLETION DATE Fourth Quarter 1997 428,000 $ 36,621 $21,307 33% First Quarter 1998 400,000 21,969 5,128 20 Second Quarter 1998 992,000 105,570 23,608 45 Third Quarter 1998 358,000 28,531 1,881 0 Fourth Quarter 1998 546,000 65,599 4,997 27 First Quarter 2000 120,000 13,000 532 100 Total or Weighted Average 2,844,000 $ 271,290 $57,453 33%
*Includes letters of intent 16 The following tables set forth certain information about the Company's leasing activities for the three and nine months ended September 30, 1997.
OFFICE INDUSTRIAL THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1997 1997 1997 1997 NET EFFECTIVE RENTS RELATED TO RE-LEASED SPACE: Number of lease transactions (signed leases) 111 362 64 185 Rentable square footage leased 374,084 1,759,244 363,408 1,493,806 Average per rentable square foot over the lease term: Base rent $ 16.20 $ 16.10 $ 7.13 $ 5.69 Tenant improvements (1.21) (1.02) (0.35) (0.24) Leasing commissions (0.35) (0.43) (0.17) (0.15) Rent concessions (0.01) (0.01) (0.02) (0.01) EFFECTIVE RENT $ 14.63 $ 14.64 $ 6.59 $ 5.29 Expense stop (3.87) (3.88) (0.25) (0.25) EQUIVALENT EFFECTIVE NET RENT $ 10.76 $ 10.76 $ 6.34 $ 5.04 Average term in years 4 4 4 4 CAPITAL EXPENDITURES RELATED TO RE-LEASED SPACE: TENANT IMPROVEMENTS: Total dollars committed under signed leases $ 1,779,700 $ 7,656,511 $ 454,630 $ 1,297,867 Rentable square feet 374,084 1,759,244 363,408 1,493,806 Per rentable square foot $ 4.76 $ 4.35 $ 1.25 $ 0.87 LEASING COMMISSIONS: Total dollars committed under signed leases $ 514,998 $ 3,207,468 $ 218,614 $ 799,637 Rentable square feet 374,084 1,759,244 363,408 1,493,806 Per rentable square foot $ 1.38 $ 1.82 $ 0.60 $ 0.54 TOTAL: Total dollars committed under signed leases $ 2,294,698 $10,863,979 $ 673,244 $ 2,097,504 Rentable square feet 374,084 1,759,244 363,408 1,493,806 Per rentable square foot $ 6.13 $ 6.18 $ 1.85 $ 1.40 RENTAL RATE TRENDS: Average final rate with expense pass throughs $ 14.59 $ 14.02 $ 6.40 $ 5.32 Average first year cash rental rate $ 15.60 $ 15.08 $ 7.12 $ 5.70 Percentage increase 6.92% 7.56% 11.25% 7.14%
17 The following tables set forth scheduled lease expirations for executed leases as of September 30, 1997 assuming no tenant exercises renewal options. OFFICE PROPERTIES:
PERCENTAGE OF TOTAL PERCENTAGE OF ANNUAL RENTS AVERAGE ANNUAL LEASED RENTS YEAR OF RENTABLE LEASED SQUARE FOOTAGE UNDER RENTAL RATE REPRESENTED LEASE NUMBER OF SQUARE FEET REPRESENTED BY EXPIRING FOR EXPIRATIONS BY EXPIRING EXPIRATION LEASES EXPIRING EXPIRING LEASES LEASES (1) (1) LEASES Remainder of 1997 186 708,310 5.1% $ 10,500,474 $ 14.82 5.0% 1998 394 2,305,849 16.5 33,293,265 14.44 15.9 1999 349 1,797,217 12.9 26,288,671 14.63 12.5 2000 390 2,386,722 17.1 35,864,233 15.03 17.1 2001 249 1,979,914 14.2 32,126,909 16.23 15.3 2002 231 1,950,155 14.0 29,435,111 15.09 14.1 2003 50 865,786 6.2 13,133,524 15.17 6.3 2004 29 427,591 3.1 7,060,436 16.51 3.4 2005 15 443,083 3.2 4,919,220 11.10 2.3 2006 13 550,512 3.9 7,523,576 13.67 3.6 2007+ 21 527,438 3.8 9,341,217 17.71 4.5 Total or average 1,927 13,942,577 100.0% $209,486,636 $ 15.02 100.0%
INDUSTRIAL PROPERTIES:
PERCENTAGE OF TOTAL PERCENTAGE OF AVERAGE ANNUAL LEASED RENTS RENTABLE LEASED SQUARE FOOTAGE ANNUAL RENTS RENTAL RATE REPRESENTED YEAR OF LEASE NUMBER OF SQUARE FEET REPRESENTED BY UNDER EXPIRING FOR EXPIRATIONS BY EXPIRING EXPIRATION LEASES EXPIRING EXPIRING LEASES LEASES (1) (1) LEASES Remainder of 1997 98 769,178 12.2% $ 4,011,513 $5.22 11.9% 1998 159 1,109,965 17.6 6,514,773 5.87 19.3 1999 139 1,370,792 21.6 7,022,542 5.12 21.0 2000 112 1,130,115 17.9 6,739,991 5.96 20.0 2001 55 579,958 9.2 3,434,202 5.92 10.2 2002 37 853,426 13.5 3,587,685 4.20 10.7 2003 5 72,526 1.1 595,661 8.21 1.8 2004 5 104,369 1.7 520,335 4.99 1.5 2005 5 38,532 0.6 319,660 8.30 0.9 2006 2 196,600 3.1 882,636 4.49 2.6 2007+ 1 95,545 1.5 44,428 0.00 0.1 Total or average 618 6,321,006 100.0% $ 33,673,426 $5.33 100.0%
(1) Includes operating expense pass throughs and excludes the effect of future contractual rent increases. INFLATION Historically inflation has not had a significant impact on the Company's operations because of the relatively low inflation rate in the Company's geographic areas of operation. Most of the leases require the tenants to pay their pro rata share of increased incremental operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing the Company's exposure to increases in operating expenses resulting from inflation. In addition, many of the leases are for terms of less than seven years, which may enable the Company to replace existing leases with new leases at a higher base rent if rents on the existing leases are below the market rate. 18 PART II -- OTHER INFORMATION Item 1. Legal Proceedings -- None Item 2. Changes in Securities and Use of Proceeds --
On August 17, 1997, the Company sold 1.8 million shares of Common Stock to UBS Limited for net proceeds of approximately $57 million. A placement fee of 2% of the gross proceeds of the offering was paid to UBS-Securities. The shares were issued in reliance on exemptions from registration, including the exemption under Rule 506 of the Securities Act of 1933, as amended (the "Securities Act"). The offering was conducted privately and involved only one buyer, which was an "accredited investor" as defined under Rule 501 under the Securities Act. In addition, the Company exercised reasonable care to assure that the purchaser of the shares was not an underwriter under the Securites Act. Item 3. Defaults Upon Senior Securities -- None Item 4. Submission of Matters to a Vote of Security Holders -- None Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION 2 Master Agreement of Merger and Acquisition by and among the Company, the Operating Partnership, Associated Capital Properties, Inc. and its shareholders dated August 27, 1997 (incorporated by reference to the Company's Current Report on Form 8-K dated August 27, 1997) 3 Amended and Restated Articles of Incorporation (incorporated by reference to the Company's Current Report on Form 8-K dated September 25, 1997) 27 Financial Data Schedule
(b) Reports on Form 8-K The Company filed a report on Form 8-K, dated August 27, 1997, reporting under item 5 of the Form that it had entered into an agreement to merge with Associated Capital Properties, Inc. and acquire a related property portfolio. The report included audited financial statements of Associated Capital Properties, Inc. for the year ended December 31, 1996 and of the 1997 Pending Acquisitions for the year ended December 31, 1996. The Company filed a report on Form 8-K dated September 18, 1997, reporting under item 5 of the Form that it had retained Alston & Bird LLP as its securites counsel and filing certain legal opinions in connection with its shelf registration statement on Form S-3, file no. 333-31183. The Company filed a report on Form 8-K, dated September 25, 1997, reporting under Item 5 of the Form the closing of its offering of the 8% Series B Cumulative Redeemable Preferred Shares. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HIGHWOODS PROPERTIES, INC. /s/ RONALD P. GIBSON RONALD P. GIBSON PRESIDENT AND CHIEF EXECUTIVE OFFICER /s/ CARMAN J. LIUZZO CARMAN J. LIUZZO CHIEF FINANCIAL OFFICER (PRINCIPAL ACCOUNTING OFFICER) Date: November 14, 1997 20 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION 2 Master Agreement of Merger and Acquisition by and among the Company, the Operating Partnership, Associated Capital Properties, Inc. and its shareholders dated August 27, 1997 (incorporated by reference to the Company's Current Report on Form 8-K dated August 27, 1997) 3 Amended and Restated Articles of Incorporation (incorporated by reference to the Company's Current Report on Form 8-K dated September 25, 1997) 27 Financial Data Schedule
21 EX-27 2 EXHIBIT 27
5 3-MOS 9-MOS DEC-31-1997 DEC-31-1997 JUL-01-1997 JAN-01-1997 SEP-30-1997 SEP-30-1997 184,230,000 184,230,000 0 0 16,798,000 16,798,000 0 0 0 0 212,057,000 212,057,000 1,803,225,000 1,803,225,000 72,319,000 72,319,000 1,980,178,000 1,980,178,000 41,565,000 41,565,000 649,188,000 649,188,000 0 0 297,500,000 297,500,000 379,000 379,000 991,546,000 991,546,000 1,980,178,000 1,980,178,000 61,768,000 177,246,000 63,655,000 183,214,000 17,407,000 48,995,000 28,558,000 80,046,000 2,410,000 6,694,000 0 0 11,133,000 34,771,000 0 0 0 0 18,106,000 51,831,000 0 0 1,328,000 4,665,000 0 0 13,908,000 40,194,000 .38 1.12 .38 1.12
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