-----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, NNgs6Y3jD9ZWr8TtPAniaU3E8MQbINPgmWeycB15Ba9whUwcf0hNAIi8ZOGzM3PQ Oc9sTvr1uufQWD9Irkpk6g== 0000950168-99-002950.txt : 19991117 0000950168-99-002950.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950168-99-002950 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99753833 BUSINESS ADDRESS: STREET 1: 3100 SMOKETREE CT STREET 2: STE 600 CITY: RALEIGH STATE: NC ZIP: 27604 BUSINESS PHONE: 9198724924 MAIL ADDRESS: STREET 1: 3100 SMOKETREE COURT STREET 2: STE 600 CITY: RALEIGH STATE: NC ZIP: 27604 10-Q 1 HIGHWOODS PROPERTIES INC. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1999 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 62,052,718 shares outstanding as of November 8, 1999. - -------------------------------------------------------------------------------- ================================================================================ HIGHWOODS PROPERTIES, INC. QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 1999 TABLE OF CONTENTS
PAGE ----- PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3 Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 4 Consolidated Statements of Income for the three and nine months ended September 30, 1999 and 1998 5 Consolidated Statements of Stockholders' Equity for the nine months ended September 30, 1999 6 Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998 7 Notes to consolidated financial statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Results of Operations 12 Liquidity and Capital Resources 13 Recent Developments 16 Year 2000 16 Possible Environmental Liabilities 17 Impact of Recently Issued Accounting Standards 18 Compliance with the Americans with Disabilities Act 18 Funds From Operations and Cash Available for Distributions 19 Disclosure Regarding Forward-Looking Statements 21 Property Information 22 Inflation 30 Item 3. Quantitative and Qualitative Disclosures About Market Risk 31 PART II. OTHER INFORMATION Item 1. Legal Proceedings 32 Item 2. Changes in Securities and Use of Proceeds 32 Item 3. Defaults Upon Senior Securities 32 Item 4. Submission of Matters to a Vote of Security Holders 32 Item 5. Other Information 32 Item 6. Exhibits and Reports on Form 8-K 32
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 our 1998 Annual Report on Form 10-K. 3 HIGHWOODS PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, 1999 DECEMBER 31, 1998 -------------- ------------------ (UNAUDITED) ASSETS Real estate assets, at cost: Land and improvements ................................................. $ 485,985 $ 559,100 Buildings and tenant improvements ..................................... 3,009,423 3,186,584 Development in process ................................................ 190,958 189,465 Land held for development ............................................. 161,397 150,622 Furniture, fixtures and equipment ..................................... 7,496 7,693 ---------- ---------- 3,855,259 4,093,464 Less -- accumulated depreciation ...................................... (218,840) (169,272) ---------- ---------- Net real estate assets .................................................. 3,636,419 3,924,192 Property held for sale .................................................. 167,563 131,262 Cash and cash equivalents ............................................... 47,500 31,445 Restricted cash ......................................................... 2,594 24,263 Accounts receivable, net ................................................ 26,874 27,948 Advances to related parties ............................................. 14,425 10,420 Notes receivable ........................................................ 64,587 40,225 Accrued straight line rents receivable .................................. 33,314 27,194 Investment in unconsolidated affiliates ................................. 39,032 21,088 Other assets: Deferred leasing costs ................................................ 61,614 45,785 Deferred financing costs .............................................. 40,691 38,750 Prepaid expenses and other ............................................ 18,637 15,237 ---------- ---------- 120,942 99,772 Less -- accumulated amortization ...................................... (32,643) (23,476) ---------- ---------- 88,299 76,296 ---------- ---------- $4,120,607 $4,314,333 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Mortgages and Notes payable ............................................. $1,827,502 $2,008,716 Accounts payable, accrued expenses and other liabilities ................ 118,685 130,575 ---------- ---------- Total liabilities ..................................................... 1,946,187 2,139,291 Minority interest ....................................................... 248,552 279,043 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, 50,000,000 authorized shares; 8 5/8% Series A Cumulative Redeemable Preferred Shares (liquidation preference $1,000 per share), 125,000 shares issued and outstanding at September 30, 1999 and December 31, 1998 .......... 125,000 125,000 8% Series B Cumulative Redeemable Preferred Shares (liquidation preference $25 per share), 6,900,000 shares issued and outstanding at September 30, 1999 and December 31, 1998 .............. 172,500 172,500 8% Series D Cumulative Redeemable Preferred Shares (liquidation preference $250 per share), 400,000 shares issued and outstanding at September 30, 1999 and December 31, 1998 .............. 100,000 100,000 Common stock, $.01 par value, authorized 200,000,000 shares; 62,052,718 shares issued and outstanding at September 30, 1999 and 59,865,259 shares issued and outstanding at December 31, 1998 .................... 621 599 Additional paid-in capital .............................................. 1,597,304 1,546,592 Distributions in excess of net earnings ................................. (69,557) (48,692) ---------- ---------- Total stockholders' equity ............................................ 1,925,868 1,895,999 ---------- ---------- $4,120,607 $4,314,333 ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 4 HIGHWOODS PROPERTIES, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ---------------------------- 1999 1998 1999 1998 ------------- ------------- ------------- ------------ (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) REVENUE: Rental property ......................................... $136,304 $138,793 $ 425,104 $ 352,203 Equity in earnings of unconsolidated affiliates ......... 702 194 1,389 194 Interest and other income ............................... 3,621 3,953 14,181 8,672 -------- -------- --------- --------- 140,627 142,940 440,674 361,069 OPERATING EXPENSES: Rental property ......................................... 41,002 43,117 130,108 108,672 Depreciation and amortization ........................... 26,116 24,464 81,977 61,965 Interest expense: Contractual ........................................... 25,715 28,452 87,274 62,835 Amortization of deferred financing costs .............. 696 683 2,208 1,915 -------- -------- --------- --------- 26,411 29,135 89,482 64,750 General and administrative .............................. 4,883 5,915 16,888 14,085 -------- -------- --------- --------- Income before gain on disposition of assets, net of income tax provision, minority interest and extraordinary item .................................... 42,215 40,309 122,219 111,597 Gain on disposition of assets, net of income tax provision ............................................. 846 -- 2,939 -- -------- -------- --------- --------- Income before minority interest and extraordinary item .................................... 43,061 40,309 125,158 111,597 MINORITY INTEREST ........................................ (5,065) (6,031) (15,770) (17,905) -------- -------- --------- --------- Income before extraordinary item ........................ 37,996 34,278 109,388 93,692 EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF DEBT .................................. (4,997) (324) (5,774) (370) -------- -------- --------- --------- Net income .............................................. 32,999 33,954 103,614 93,322 Dividends on preferred shares ............................ (8,145) (8,145) (24,435) (21,946) -------- -------- --------- --------- Net income available for common shareholders ............ $ 24,854 $ 25,809 $ 79,179 $ 71,376 ======== ======== ========= ========= NET INCOME/(LOSS) PER COMMON SHARE -- BASIC: Income before extraordinary item ........................ $ 0.48 $ 0.45 $ 1.38 $ 1.35 Extraordinary item -- loss on early extinguishment of debt ................................ ( .08) ( .01) ( .09) ( .01) -------- -------- --------- --------- Net income .............................................. $ 0.40 $ 0.44 $ 1.29 $ 1.34 ======== ======== ========= ========= Weighted average shares outstanding -- basic ............ 61,863 58,059 61,233 53,189 ======== ======== ========= ========= NET INCOME/(LOSS) PER COMMON SHARE -- DILUTED: Income before extraordinary item ........................ $ 0.48 $ 0.45 $ 1.38 $ 1.34 Extraordinary item loss on early extinguishment of debt ............................................... (0.08) ( .01) (0.09) ( .01) -------- -------- --------- --------- Net income .............................................. $ 0.40 $ 0.44 $ 1.29 $ 1.33 ======== ======== ========= ========= Weighted average shares outstanding -- diluted .......... 62,169 58,228 61,493 53,510 ======== ======== ========= ========= Distributions declared per common share .................. $ 0.555 $ 0.54 $ 1.635 $ 1.56 ======== ======== ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 5 HIGHWOODS PROPERTIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) (DOLLARS IN THOUSANDS)
NUMBER OF COMMON COMMON SERIES A SERIES B SHARES STOCK PREFERRED PREFERRED -------------- ---------- ----------- ----------- Balance at December 31, 1998 ..... 59,865,259 $599 $125,000 $172,500 ---------- ---- -------- -------- Issuance of Common Stock ......... 1,177,832 12 Common Stock Dividends ........... Preferred Stock Dividends ........ Net Income ....................... Shares issued upon redemption of Common Units ................. 1,256,051 12 Forward Equity Transaction (see Note 8) .................... Retirement of Common Stock (see Note 8) .................... (246,424) (2) ---------- ------ Balance at September 30, 1999..... 62,052,718 $621 $125,000 $172,500 ========== ===== ======== ======== RETAINED EARNINGS ADDITIONAL (DISTRIBUTIONS SERIES D PAID-IN IN EXCESS OF PREFERRED CAPITAL NET EARNINGS) TOTAL ----------- -------------- --------------- ------------- Balance at December 31, 1998 ..... $100,000 $1,546,592 $ (48,692) $1,895,999 -------- ---------- --------- ---------- Issuance of Common Stock ......... 22,940 22,952 Common Stock Dividends ........... (99,894) (99,894) Preferred Stock Dividends ........ (24,435) (24,435) Net Income ....................... 103,614 103,614 Shares issued upon redemption of Common Units ................. 40,555 40,567 Forward Equity Transaction (see Note 8) .................... (12,783) (12,783) Retirement of Common Stock (see Note 8) .................... (150) (152) --------- ---------- Balance at September 30, 1999..... $100,000 $1,597,304 $ (69,557) $1,925,868 ======== ========== ========= ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 6 HIGHWOODS PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- 1999 1998 ------------- ------------ (UNAUDITED) (UNAUDITED) OPERATING ACTIVITIES: Net income .............................................................. $ 103,614 $ 93,322 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ......................................... 81,977 61,965 Minority interest ..................................................... 15,770 17,905 Loss on early extinguishment of debt .................................. 5,774 370 Gain on disposition of assets, net of income tax provision ............ (2,939) -- Changes in operating assets and liabilities ........................... (29,733) 15,892 ---------- ---------- Net cash provided by operating activities ............................ 174,463 189,454 ---------- ---------- INVESTING ACTIVITIES: Additions to real estate assets ......................................... (414,168) (756,794) Cash paid in exchange for partnership net assets ........................ (991) (108,257) Proceeds from disposition of assets ..................................... 550,039 -- Advances to subsidiaries ................................................ (4,005) -- Other ................................................................... (37,512) (21,000) ---------- ---------- Net cash provided by/(used in) investing activities .................. 93,363 (886,051) ---------- ---------- FINANCING ACTIVITIES: Distributions paid on common stock and common units ..................... (114,724) (99,483) Dividends paid on preferred stock ....................................... (24,435) (21,946) Payments of prepayment penalties ........................................ (5,774) (370) Borrowings on mortgages and notes payable ............................... 4,385 529,941 Repayment of mortgages and notes payable ................................ (172,568) (130,993) Borrowings on revolving loans ........................................... 408,000 792,500 Payments on revolving loans ............................................. (362,500) (648,000) Net proceeds from the sale of common stock .............................. 22,940 196,930 Net proceeds from the sale of 8% Series D Cumulative Redeemable Preferred Shares ................................................................ -- 96,809 Net change in deferred financing costs .................................. (4,494) (6,986) ---------- ---------- Other ................................................................... (2,601) -- Net cash (used in)/provided by financing activities .................. (251,771) 708,402 ---------- ---------- Net increase in cash and cash equivalents ............................... 16,055 11,805 Cash and cash equivalents at beginning of the period .................... 31,445 10,146 ---------- ---------- Cash and cash equivalents at end of the period .......................... $ 47,500 $ 21,951 ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest .................................................. $ 103,603 $ 60,325 ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 7 HIGHWOODS PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES The following summarizes (i) the net assets contributed by the holders of Common Units in the Operating Partnership, (ii) the change in net assets contributed as a result of the reorganization of our Des Moines partnerships (see Note 6) and (iii) the net assets acquired subject to mortgage notes payable.
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- 1999 1998 ------------- ------------ (UNAUDITED) (UNAUDITED) ASSETS: Rental property and equipment, net .......... $ (18,513) $491,863 LIABILITIES: Mortgages and notes payable assumed ......... $ (52,165) $327,214 --------- -------- Net assets ............................... $ 33,652 $164,649 ========= ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 8 HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and the Operating Partnership and its 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. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is required to be adopted in fiscal years beginning after June 15, 1999. In June 1999, FASB issued Statement No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -- DEFERRAL OF THE FASB STATEMENT NO. 133, which stipulates the required adoption date to be all fiscal years beginning after June 15, 2000. Statement No. 133 requires us to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The fair market value of the Company's derivatives is discussed in Item 2. The "Year 2000" issue is a general term used to describe the various problems that may result from the improper processing of dates and calculations involving years by many computers throughout the world as the Year 2000 is approached and reached. We have reviewed the impact of Year 2000 issues and do not expect Year 2000 issues to be material to our business, operations, or financial condition. The Year 2000 issue is discussed more fully in "Management's Discussion and Analysis of Financial Condition and Results of Operations". Minority interest in the Company represents Common Units owned by various individuals and entities and not the Company in the Operating Partnership, the entity that owns substantially all of the Company's properties and through which the Company, as the sole general partner, conducts substantially all of its operations. Per share information is calculated using the weighted average number of shares outstanding (including common share equivalents). In addition, minority interest includes equity of consolidated real estate partnerships which are owned by various individuals and entities and not the Company. The Company acquired greater than 50% of the interest in certain real estate partnerships as part of its acquisition of J.C. Nichols Company in July 1998. 2. INCOME TAXES 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 shareholders. However, a provision has been made related to a portion of REIT taxable income resultant from the gain on disposition of assets that will not be distributed to shareholders. 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. 9 The accounting policies of the segments are the same as those described in Note 1. Further, all operations are within the United States and no tenant comprises more than 10% of consolidated revenues. The following table summarizes the rental income, net operating income and total assets for each reportable segment for the three and nine months ended September 30, 1999 and 1998.
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ----------------------------- ----------------------------- 1999 1998 1999 1998 -------------- -------------- -------------- -------------- (IN THOUSANDS) (IN THOUSANDS) RENTAL INCOME: Office segment ..................................................... $ 109,581 $ 116,267 $ 348,337 $ 309,817 Industrial segment ................................................. 13,842 12,423 39,753 32,283 Retail segment ..................................................... 8,597 6,411 24,536 6,411 Apartment segment .................................................. 4,284 3,692 12,478 3,692 ---------- ---------- ---------- ---------- $ 136,304 $ 138,793 $ 425,104 $ 352,203 ========== ========== ========== ========== NET OPERATING INCOME: Office segment ..................................................... $ 76,082 $ 79,128 $ 238,944 $ 210,607 Industrial segment ................................................. 11,423 10,363 32,897 26,739 Retail segment ..................................................... 5,454 4,096 16,156 4,096 Apartment segment .................................................. 2,343 2,089 6,999 2,089 ---------- ---------- ---------- ---------- $ 95,302 $ 95,676 $ 294,996 $ 243,531 ---------- ---------- ---------- ---------- RECONCILIATION TO INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY ITEM: Equity in income of unconsolidated affiliates ...................... $ 702 $ 194 $ 1,389 $ 194 Gain on disposition of assets, net of income tax provision ......... 846 -- 2,939 -- Interest and other income .......................................... 3,621 3,953 14,181 8,672 Interest expense ................................................... (26,411) (29,135) (89,482) (64,750) General and administrative expenses ................................ (4,883) (5,915) (16,888) (14,085) Depreciation and amortization ...................................... (26,116) (24,464) (81,977) (61,965) ---------- ---------- ---------- ---------- Income before minority interest and extraordinary item ............. $ 43,061 $ 40,309 $ 125,158 $ 111,597 ========== ========== ========== ========== TOTAL ASSETS: Office segment ..................................................... $3,021,160 $3,174,457 $3,021,161 $3,174,457 Industrial segment ................................................. 496,428 463,801 496,428 463,801 Retail segment ..................................................... 256,197 232,450 256,197 232,450 Apartment segment .................................................. 119,356 122,920 119,356 122,920 Corporate and other ................................................ 227,466 151,310 227,466 151,310 ---------- ---------- ---------- ---------- Total assets ....................................................... $4,120,607 $4,144,938 $4,120,607 $4,144,938 ========== ========== ========== ==========
4. JOINT VENTURE ACTIVITY On March 15, 1999, we closed a transaction with Schweiz-Deutschland-USA Dreilander Beteiligung Objekt-DLF 98/29-Walker Fink-KG ("DLF"), pursuant to which we sold or contributed certain office properties valued at approximately $142 million to a newly created limited partnership (the "Joint Venture"). DLF contributed approximately $55 million for a 77.19% interest in the Joint Venture, and the Joint Venture borrowed approximately $71 million from third-party lenders. We retained the remaining 22.81% interest in the Joint Venture, received net cash proceeds of approximately $124 million and are the sole and exclusive manager and leasing agent of the Joint Venture's properties, for which we receive customary management fees and leasing commissions. We used the cash proceeds received in the transaction to fund existing development activity either through direct payments or repayment of borrowings under our $600 million unsecured revolving loan (the "Revolving Loan"). 5. LEGAL CONTINGENCIES On October 2, 1998, John Flake, a former stockholder of J.C. Nichols, filed a putative class action lawsuit on behalf of himself and the other former stockholders of J.C. Nichols in the United States District Court for the District of Kansas against J.C. Nichols, certain of its former officers and directors and the Company. The complaint alleges, among other things, that in connection with the merger of J.C. Nichols and the Company, (1) J.C. Nichols and the named directors and officers of J.C. Nichols breached their fiduciary duties to J.C. Nichols' stockholders, (2) J.C. Nichols and the named directors and officers of J.C. Nichols breached their fiduciary duties to members of the J.C. Nichols Company Employee Stock Ownership Trust, (3) all defendants participated in the dissemination of a proxy statement containing materially false and misleading statements and omissions of 10 material facts in violation of Section 14(a) of the Exchange Act of 1934 and (4) the Company filed a registration statement with the SEC containing materially false and misleading statements and omissions of material facts in violation of Sections 11 and 12(2) of the Securities Act of 1933. The plaintiff seeks equitable relief and monetary damages. We believe that the defendants have meritorious defenses to the plaintiff's allegations. We intend to vigorously defend this litigation. By order dated June 18, 1999, the court granted in part and denied in part our motions to dismiss. The court has granted the plaintiff's motion seeking certification of the proposed class of plaintiffs with respect to the remaining claims. Discovery in this matter is proceeding. Due to the inherent uncertainties of the litigation process, we are not able to predict the outcome of this litigation. If this litigation is not resolved in our favor, it could have a material adverse effect on our business, financial condition and results of operations. In addition, we are a party to a variety of legal proceedings arising in the ordinary course of our business. We believe that we are adequately covered by insurance and indemnification agreements. Accordingly, none of such proceedings are expected to have a material adverse affect on our business, financial condition and results of operations. 6. DES MOINES PARTNERSHIPS In connection with our merger with J.C. Nichols in July 1998, we succeeded to the interests of J.C. Nichols in a strategic alliance with R&R Investors, Ltd. pursuant to which R&R Investors manages and leases certain co-venture properties located in the Des Moines area. As a result of the merger, we acquired an ownership interest of 50% or more in a series of nine co-ventures with R&R Investors. Certain of these properties were previously included in our consolidated financial statements. On June 2, 1999, we agreed with R&R Investors to reorganize our respective ownership interests in the Des Moines properties such that each would own a 50% interest in the properties in the Des Moines area. Accordingly, we have adopted the equity method of accounting for our investment in each of the Des Moines properties as a result of such reorganization. The impact of the reorganization was immaterial to our consolidated financial statements. 7. DISPOSITION ACTIVITY On June 7, 1999, we sold approximately 3.3 million rentable square feet of non-core office and industrial properties and 49 acres of development land in the South Florida area for gross proceeds of approximately $323.0 million. In addition, during the nine months ended September 30, 1999, we sold approximately 1.9 million rentable square feet of non-core office and industrial properties in the Baltimore area and certain other non-core office and industrial properties for gross proceeds of $137.5 million. We recorded a gain, net of income tax provision, of $2.9 million related to these dispositions. Non-core office and industrial properties generally include single buildings or business parks that do not fit our long-term strategy. In addition, we currently have 2.3 million square feet of non-core office and industrial properties under contract for sale in various transactions totaling $181.9 million (including $165.3 related to the sale of various central Florida properties) and 1.7 million square feet of non-core office and industrial properties under various letters of intent for sale at $128.4 million. These transactions are subject to customary closing conditions, including due diligence and documentation, and are expected to close during the fourth quarter of this year and the first quarter of 2000. However, we can provide no assurance that all or part of these transactions will be consummated. 8. EQUITY SETTLEMENT On August 28, 1997, we entered into a purchase agreement with UBS AG, London Branch ("UB-LB") involving the sale of 1.8 million shares of Common Stock and a related forward contract providing for certain purchase price adjustments. The forward contract (as amended) generally provided that if the market price was less than a certain amount, which we refer to as the "Forward Price," we were required to pay UB-LB the difference times 1.8 million. (Similarly, if the Market Price of a share of Common Stock was above the Forward Price, UB-LB was required to pay us the difference in shares of Common Stock.) On February 28, 1999, the Company and UB-LB amended the forward contract. Pursuant to the amendment, UB-LB applied $12.8 million in Company collateral to "buy down" the Forward Price by approximately $7.10 and we issued 161,924 shares of Common Stock to UB-LB as an interim settlement payment. On June 9, 1999, we settled the transaction. In connection with the settlement, 246,424 shares of Common Stock were returned and canceled. 9. FINANCING ACTIVITY On July 1, 1999, we retired a $133.0 million 7.88% mortgage note that was secured by 44 of our properties held by AP Southeast Portfolio Partners, L.P., one of our subsidiaries, by using $138.0 million of availability under our Revolving Loan to repay the principal amount of the mortgage note plus the required yield maintenance premium for early maturity. On October 21, 1999, we borrowed $188.4 million from Monumental Life 11 Insurance Company, an affiliate of AEGON USA Realty Advisors, Inc., pursuant to one $94.2 million 7.77% mortgage note due 2009 and one $94.2 million 7.87% mortgage note due 2009, which notes are secured by 28 of our properties. We used the net proceeds from these mortgage loans, together with $2.1 million that we received from counterparties to settle two treasury lock agreements in September 1999, to repay amounts outstanding under our Revolving Loan. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with all of the financial statements appearing elsewhere in the report and is based primarily on the consolidated financial statements of the Company. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999. Revenues from rental operations decreased $2.5 million, or 1.8%, from $138.8 million for the three months ended September 30, 1998 to $136.3 million for the comparable period in 1999. The decrease is primarily a result of the disposition of 6.4 million square feet of majority owned office, industrial and retail properties and 418 apartment units (including the removal of certain properties from our consolidated financial statements as a result of the reorganization of the Des Moines partnerships), offset in part by the acquisition of 600,000 square feet of majority owned office, industrial and retail properties and the completion of 1.9 million square feet of development activity during the last three months of 1998 and the first nine months of 1999. Our in-service portfolio decreased from 44.7 million square feet at September 30, 1998 to 40.8 million square feet at September 30, 1999. Same property revenues, which are the revenues of the 582 in-service properties and 1,906 apartment units owned on July 1, 1998, increased 4.0% for the three months ended September 30, 1999, compared to the same three months of 1998. During the three months ended September 30, 1999, 303 leases representing 1.8 million square feet of office, industrial and retail space commenced at an average rate per square foot which was 6.1% higher than the average rate per square foot on the expired leases. Interest and other income decreased $400,000, or 10%, from $4.0 million for the three months ended September 30, 1998 to $3.6 million for the comparable period in 1999. The decrease was a result of lower lease termination fees during the quarter, offset in part by additional income generated from management fees, development fees and leasing commissions. The Company generated $241,000 in auxiliary income (vending and parking) as a result of acquiring multifamily communities in the merger with J.C. Nichols. Rental operating expenses decreased $2.1 million, or 4.9%, from $43.1 million for the three months ended September 30, 1998 to $41.0 million for the comparable period in 1999. The decrease is primarily a result of the disposition of 6.4 million square feet of majority owned office, industrial and retail properties and 418 apartment units (including the removal of certain properties from our consolidated financial statements as a result of the reorganization of the Des Moines partnerships), offset in part by the acquisition of 600,000 square feet of majority owned office, industrial and retail properties and the completion of 1.9 million square feet of development activity during the last three months of 1998 and the first nine months of 1999. Rental operating expenses as a percentage of related revenues decreased from 31.1% for the three months ended September 30, 1998 to 30.1% for the comparable period in 1999. Depreciation and amortization for the three months ended September 30, 1999 and 1998 was $26.1 million and $24.5 million, respectively. The increase of $1.6 million, or 6.5%, is due to an increase in depreciable assets over the prior year. Interest expense decreased $2.7 million, or 9.3%, from $29.1 million for the three months ended September 30, 1998 to $26.4 million for the comparable period in 1999. The decrease is attributable to a decrease in the outstanding debt for the entire quarter. Interest expense for the three months ended September 30, 1999 and 1998 included $696,000 and $683,000, respectively, of amortization of deferred financing costs and the costs related to our interest rate hedge contracts. General and administrative expenses decreased from 4.3% of rental revenue for the three months ended September 30, 1998 to 3.6% for the comparable period in 1999. Net income before minority interest and extraordinary item equaled $43.1 million and $40.3 million for the three months ended September 30, 1999 and 1998, respectively. The Company's net income allocated to minority interest totaled $5.1 million and $6.0 million for the three months ended September 30, 1999 and 1998, 12 respectively. The Company recorded $8.1 million in preferred stock dividends for the three months ended September 30, 1999 and 1998. NINE MONTHS ENDED SEPTEMBER 30, 1999. Revenues from rental operations increased $72.9 million, or 20.7%, from $352.2 million for the nine months ended September 30, 1998 to $425.1 million for the comparable period in 1999. The increase is primarily a result of the acquisition of 4.1 million square feet of majority owned office, industrial and retail properties and 2,325 apartment units in the J.C. Nichols merger that occurred in the third quarter of 1998, as well as an addition of 2.5 million square feet of majority owned office, industrial and retail properties related to acquisitions and the completion of development activity during the last three months of 1998 and the first nine months of 1999. These were offset by the disposition of 6.4 million square feet of majority owned office, industrial and retail properties and 418 apartment units (including the removal of certain properties from our consolidated financial statements as a result of the reorganization of the Des Moines partnerships). Our in-service portfolio decreased from 44.7 million square feet at September 30, 1998 to 40.8 million square feet at September 30, 1999. Same property revenues, which are the revenues of the 437 in-service properties owned on January 1, 1998, increased 3% for the nine months ended September 30, 1999, compared to the same nine months of 1998. During the nine months ended September 30, 1999, 1,058 leases representing 5.8 million square feet of office, industrial and retail space commenced at an average rate per square foot which was 5.9% higher than the average rate per square foot on the expired leases. Interest and other income increased $5.5 million, or 63.2%, from $8.7 million for the nine months ended September 30, 1998 to $14.2 million for the comparable period in 1999. The increase was a result of higher cash balances during the nine months ended September 30, 1999 and additional income generated from management fees, development fees and leasing commissions. The Company generated $828,000 in auxiliary income (vending and parking) as a result of acquiring multifamily communities in the merger with J.C. Nichols. Rental operating expenses increased $21.4 million, or 19.7%, from $108.7 million for the nine months ended September 30, 1998 to $130.1 million for the comparable period in 1999. The increase is primarily a result of the acquisition of 4.1 million square feet of majority owned office, industrial and retail properties and 2,325 apartment units in the merger with J.C. Nichols, as well as an addition of 2.5 million square feet of majority owned office, industrial and retail properties related to acquisitions and the completion of development activity during the last three months of 1998 and the first nine months of 1999. These were offset by the disposition of 6.4 million square feet of majority owned office, industrial and retail properties and 418 apartment units (including the removal of certain properties from our consolidated financial statements as a result of the reorganization of the Des Moines partnerships). Rental operating expenses as a percentage of related revenues decreased from 30.9% for the nine months ended September 30, 1998 to 30.6% for the comparable period in 1999. Depreciation and amortization for the nine months ended September 30, 1999 and 1998 was $82.0 million and $62.0 million, respectively. The increase of $20.0 million, or 32.3%, is due to an increase in depreciable assets over the prior year. Interest expense increased $24.7 million, or 38.1%, from $64.8 million for the nine months ended September 30, 1998 to $89.5 million for the comparable period in 1999. The increase is attributable to the increase in the outstanding debt for the entire nine months. Interest expense for the nine months ended June 30, 1999 and 1998 included $2.2 million and $1.9 million, respectively, of amortization of deferred financing costs and the costs related to our interest rate hedge contracts. General and administrative expenses as a percentage of rental revenues were 4.0% for the nine months ended September 30, 1999 and 1998. Net income before minority interest and extraordinary item equaled $125.2 million and $111.6 million for the nine months ended September 30, 1999 and 1998, respectively. The Company's net income allocated to minority interest totaled $15.8 million and $17.9 million for the nine months ended September 30, 1999 and 1998, respectively. The Company recorded $24.4 million and $21.9 million in preferred stock dividends for the nine months ended September 30, 1999 and 1998, respectively. LIQUIDITY AND CAPITAL RESOURCES STATEMENT OF CASH FLOWS. For the nine months ended September 30, 1999, cash provided by operating activities decreased by $15.0 million, or 7.9%, to $174.5 million, as compared to $189.5 million for the same period in 1998. The decrease is due to a decrease in operating assets and liabilities, primarily as a result of the 13 payment of real estate taxes in the first quarter of 1999, offset in part by an increase in net income due to property acquisitions in 1998 and 1999. Cash provided by investing activities was $93.4 million for the first nine months of 1999, as compared to $886.1 million used in investing activities for the same period in 1998. The increase is primarily due to the disposition of certain properties and the decline in acquisition activity during the nine months ended September 30, 1999, as compared to the same period in 1998. Cash used in financing activities was $251.8 million for the nine months ended September 30, 1999, as compared to $708.4 million provided by financing activities for the same period in 1998. The decrease is primarily due to the decrease in borrowings, an increase in payments on mortgages, notes payable and revolving loans as well as a decrease in equity offerings in the nine months ended September 30, 1999, as compared to the same period in 1998. Payments of distributions increased by $15.2 million to $114.7 million for the first nine months of 1999, from $99.5 million for the same period in 1998. The increase is due to the greater number of shares of Common Stock outstanding and a 4.8% increase in the distribution rate. Preferred stock dividend payments were $24.4 million for the nine months ended September 30, 1999, as compared to $21.9 million for the same period in 1998. The increase is due to the issuance of 8% Series D Cumulative Redeemable Preferred Shares in the first quarter of 1998. CAPITALIZATION. The Company's total indebtedness at September 30, 1999 totaled $1.8 billion and was comprised of $421.0 million of secured indebtedness with a weighted average interest rate of 7.8% and $1.4 billion of unsecured indebtedness with a weighted average interest rate of 6.8%. Except as stated below, all of the mortgage and notes payable outstanding at September 30, 1999 were either fixed rate obligations or variable rate obligations covered by interest rate hedge contracts. A portion of our Revolving Loan and approximately $43.7 million of floating rate notes payable assumed upon consummation of the merger with J.C. Nichols were not covered by interest rate hedge contracts on September 30, 1999. On July 1, 1999, we retired a $133.0 million 7.88% mortgage note that was secured by 44 of our properties held by AP Southeast Portfolio Partners, L.P., one of our subsidiaries, by using $138.0 million of availability under our Revolving Loan to repay the principal amount of the mortgage note plus the required yield maintenance premium for early maturity. On October 21, 1999, we borrowed $188.4 million from Monumental Life Insurance Company, an affiliate of AEGON USA Realty Advisors, Inc., pursuant to one $94.2 million 7.77% mortgage note due 2009 and one $94.2 million 7.87% mortgage note due 2009, which notes are secured by 28 of our properties. We used the net proceeds from these mortgage loans, together with $2.1 million that we received from counterparties to settle two treasury lock agreements in September 1999, to repay amounts outstanding under our Revolving Loan. Based on the Company's total market capitalization of $4.1 billion at September 30, 1999 (at the September 30, 1999 stock price of $25.88 and assuming the redemption for shares of Common Stock of the 9.1 million Common Units of minority interest in the Operating Partnership), the Company's debt represented approximately 44% of its total market capitalization. To meet in part our long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Borrowings under our Revolving Loan bear interest at variable rates. Our long-term debt, which consists of long-term financings and the issuance of debt securities, typically bears interest at fixed rates. In addition, we have assumed fixed rate and variable rate debt in connection with acquiring properties. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not hold or issue these derivative contracts for trading or speculative purposes. The following table sets forth information regarding our interest rate hedge contracts as of September 30, 1999:
NOTIONAL MATURITY FIXED FAIR MARKET TYPE OF HEDGE AMOUNT DATE REFERENCE RATE RATE VALUE - --------------- ---------- ---------- ----------------------- ------------- ------------ (DOLLARS IN THOUSANDS) Swap $100,000 10/1/99 3-Month LIBOR 4.970% $ 97 Swap 20,828 6/10/02 1-Month LIBOR + 0.75% 7.700 (800) Collar 80,000 10/15/01 1-Month LIBOR 5.60 - 6.25 141
14 We enter into swaps, collars and caps to limit our exposure to an increase in variable interest rates, particularly with respect to amounts outstanding under our Revolving Loan. 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. In addition, we are exposed to certain losses in the event of nonperformance by the counterparties under the interest rate hedge contracts. We expect the counterparties, which are major financial institutions, to perform fully under these contracts. However, if the counterparties were to default on their obligations under the interest rate hedge contracts, we could be required to pay the full rates on our debt, even if such rates were in excess of the rates in the contracts. CURRENT AND FUTURE CASH NEEDS. Historically, rental revenue has been the principal source of funds to pay operating expenses, debt service, stockholder distributions and capital expenditures, excluding nonrecurring capital expenditures. In addition, construction management, maintenance, leasing and management fees have provided sources of cash flow. We presently have no plans for major capital improvements to the existing in-service properties, other than normal recurring building improvements, tenant improvements and lease commissions. We expect to meet our short-term liquidity requirements generally through working capital and net cash provided by operating activities along with the Revolving Loan. Our short-term (within the next 12 months) liquidity needs also include, among other things, the funding of approximately $180.0 million of our existing development activity. We expect to fund our short-term liquidity needs through a combination of: o additional borrowings under our Revolving Loan (approximately $141.0 million was available as of September 30, 1999); o the issuance of secured debt; o the selective disposition of non-core assets; and o the sale or contribution of some of our wholly owned properties to strategic joint ventures to be formed with selected partners interested in investing with us, which will have the net effect of generating additional capital through such sale or contributions. Our long-term liquidity needs generally include the funding of existing and future development activity, selective asset acquisitions and the retirement of mortgage debt, amounts outstanding under the Revolving Loan and long-term unsecured debt. We remain committed to maintaining a flexible and conservative capital structure. Accordingly, we expect to meet our long-term liquidity needs through a combination of (1) the issuance by the Operating Partnership of additional unsecured debt securities, (2) the issuance of additional equity securities by the Company and the Operating Partnership as well as (3) the sources described above with respect to our short-term liquidity. We expect to use such sources to meet our long-term liquidity requirements either through direct payments or repayment of borrowings under the Revolving Loan. We do not intend to reserve funds to retire existing secured or unsecured indebtedness upon maturity. Instead, we will seek to refinance such debt at maturity or retire such debt through the issuance of equity or debt securities. We anticipate that our available cash and cash equivalents and cash flows from operating activities, together with cash available from borrowings and other sources, will be adequate to meet our capital and liquidity needs in both the short and long term. However, if these sources of funds are insufficient or unavailable, the Company's ability to make the expected distributions to stockholders discussed below and satisfy other cash requirements may be adversely affected. DISTRIBUTIONS TO STOCKHOLDERS. In order to qualify as a REIT for Federal income tax purposes, the Company is required to make distributions to its stockholders of at least 95% of REIT taxable income. The Company expects to use its cash flow from operating activities for distributions to stockholders and for payment of recurring, non-incremental revenue-generating expenditures. The following factors will affect cash flows from operating activities and, accordingly, influence the decisions of the Board of Directors regarding distributions: (1) debt service requirements after taking into account the repayment and restructuring of certain indebtedness; 15 (2) scheduled increases in base rents of existing leases; (3) changes in rents attributable to the renewal of existing leases or replacement leases; (4) changes in occupancy rates at existing properties and procurement of leases for newly acquired or developed properties; and (5) operating expenses and capital replacement needs. RECENT DEVELOPMENTS On June 7, 1999, we sold approximately 3.3 million rentable square feet of non-core office and industrial properties and 49 acres of development land in the South Florida area for gross proceeds of approximately $323.0 million. In addition, during the nine months ended September 30, 1999, we sold approximately 1.9 million rentable square feet of non-core office and industrial properties in the Baltimore area and certain other non-core office and industrial properties for gross proceeds of approximately $137.5 million. The Company recorded a gain, net of income tax provision, of $2.9 million related to these dispositions. Non-core office and industrial properties generally include single buildings or business parks that do not fit our long-term strategy. In addition, we currently have 2.3 million square feet of non-core office and industrial properties under contract for sale in various transactions totaling $181.9 million (including $165.3 related to the sale of various central Florida properties) and 1.7 million square feet of non-core office and industrial properties under various letters of intent for sale at $128.4 million. These transactions are subject to customary closing conditions, including due diligence and documentation, and are expected to close during the fourth quarter of this year and the first quarter of 2000. However, we can provide no assurance that all or part of these transactions will be consummated. We expect to use a portion of the net proceeds from our recent and pending disposition activity to reinvest in tax-deferred exchange transactions under Section 1031 of the Internal Revenue Code. We expect to reinvest up to $32.7 million of the net proceeds from recent disposition activity and up to $53.0 million of the net proceeds from pending disposition activity to acquire in tax-deferred exchange transactions in-service properties, development land and development projects located in core markets and in sub-markets where we have a strong presence. For an exchange to qualify for tax-deferred treatment under Section 1031, the net proceeds from the sale of a property must be held by an escrow agent until applied toward the purchase of real estate qualifying for gain deferral. Given the competition for properties meeting our investment criteria, there may be some delay in reinvesting such proceeds. Delays in reinvesting such proceeds will reduce our income from operations. In addition, the use of net proceeds from dispositions to fund development activity, either through direct payments or repayment of borrowings under our Revolving Loan, will reduce our income from operations until such development projects are placed in service. YEAR 2000 BACKGROUND. The Year 2000 compliance issue refers to the inability of computer systems and computer software to correctly process any date after 1999. The date change to the new millennium may be a problem because some computer hardware and software was designed to use only two digits to represent a year. As a result, some systems may interpret 1/1/00 to be the year 1900. In addition, some systems may not recognize that the Year 2000 is a leap year. Both problems could result in system failure or miscalculations, which may cause disruptions of operations. The Year 2000 issue, if not corrected, could result in the failure of the information technology ("IT") systems that we use in our business operations, such as computer programs related to property management, leasing, financial reporting, employee benefits, asset management and energy management. In addition, computerized systems and microprocessors are embedded in a variety of products used in our operations and properties, such as HVAC controls, lights, power generators, elevators, life safety systems, phones and security systems. APPROACH AND STATUS. Our Year 2000 compliance efforts are divided into two areas -- "operations level" and "property level." Operations level includes those information technology systems used in our corporate and division offices to perform real estate, accounting and human resources functions. Property level includes the non-information technology systems at our individual properties. Year 2000 remediation plan at both the operations and property levels has three phases: o assessment (inventory and testing of computer systems), o renovation (repairing or replacing non-compliant systems) and 16 o validation (testing of repaired or replaced systems). Our Information Technology Department is overseeing our operations level compliance program. With respect to our operations level IT software, we have completed all three phases of our Year 2000 remediation plan. As part of a standardization of our technology infrastructure in 1998, computer software that was not Year 2000 compliant was upgraded or replaced. These software upgrades were off-the-shelf Year 2000 compliant packages. Additionally, we successfully upgraded and tested a Year 2000 compliant version of our corporate accounting and property management software in December 1998. With respect to our operations level IT hardware, we have completed the assessment and validation phases of the remediation plan. Our Chief Operating Officer is overseeing our property level compliance program. We have completed our inventory of all of our properties' non-information technology systems. As part of the inventory process, we requested appropriate vendors and manufacturers to certify that their products are Year 2000 compliant. We have completed the renovation and validation phases of our remediation plan at the property level. With respect to Year 2000 issues relating to our customer base, we have not sought representations from our tenants with respect to their Year 2000 readiness because no one tenant represents more than 3% of our annualized rental revenue. With respect to suppliers and vendors, our material purchases are generally from those in competitive fields where others will be able to meet any of our needs unmet by suppliers or vendors with Year 2000 difficulties. Although we have no reason to expect a significant interruption of utility services for our properties, we have not received (nor sought) written assurances from utility providers that Year 2000 issues will not cause an interruption in service. COSTS. To date, the costs directly associated with our Year 2000 efforts have not been material, and we estimate our future costs to be immaterial as well. RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE. We do not expect Year 2000 failures to have a material adverse effect on our results of operations or liquidity because: o we do not rely on a small number of tenants for a significant portion of our rental revenue; o we stand ready to switch vendors or suppliers whose Year 2000 failures adversely affect their products or services; and o our remediation plan is complete. As a result, we do not expect to develop a contingency plan for Year 2000 failures. Our assessment of the likely impact of Year 2000 issues on us, which is a forward-looking statement, depends on numerous factors, such as the continued provision of utility services, and we remain exposed to the risk of Year 2000 failures. See " -- Disclosure Regarding Forward-Looking Statements." Our disclosures and announcements concerning our Year 2000 programs are intended to constitute "Year 2000 Readiness Disclosures" as defined in the recently-enacted Year 2000 Information and Readiness Disclosure Act. The Act provides added protection from liability for certain public and private statements concerning an entity's Year 2000 readiness and the Year 2000 readiness of its products and services. The Act also potentially provides added protection from liability for certain types of Year 2000 disclosures made after January 1, 1996, and before the date of enactment of the Act. POSSIBLE ENVIRONMENTAL LIABILITIES In connection with owning or operating our properties, we may be liable for certain costs due to possible environmental liabilities. Under various laws, ordinances and regulations, such as the Comprehensive Environmental Response Compensation and Liability Act, and common law, an owner or operator of real estate is liable for the costs to remove or remediate certain hazardous or toxic chemicals or substances on or in the property. Owners or operators are also liable for certain other costs, including governmental fines and injuries to persons and property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic chemicals or substances. The presence of such substances, or the failure to remediate such substances properly, may adversely affect the owner's or operator's ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal, 17 treatment or transportation of hazardous or toxic chemicals or substances may also be liable for the same types of costs at a disposal, treatment or storage facility, whether or not that person owns or operates that facility. Certain environmental laws also impose liability for releasing asbestos-containing materials. Third parties may seek recovery from owners or operators of real property for personal injuries associated with asbestos-containing materials. A number of our properties have asbestos-containing materials or material that we presume to be asbestos-containing materials. In connection with owning and operating our properties, we may be liable for such costs. In addition, it is not unusual for property owners to encounter on-site contamination caused by off-site sources. The presence of hazardous or toxic chemicals or substances at a site close to a property could require the property owner to participate in remediation activities or could adversely affect the value of the property. Contamination from adjacent properties has migrated onto at least three of our properties; however, based on current information, we do not believe that any significant remedial action is necessary at these affected sites. As of the date hereof, we have obtained Phase I environmental assessments (and, in certain instances, Phase II environmental assessments) on substantially all of our in-service properties. These assessments have not revealed, nor are we aware of, any environmental liability at our properties that we believe would materially adversely affect our financial position, operations or liquidity taken as a whole. This projection, however, could be incorrect depending on certain factors. For example, material environmental liabilities may have arisen after the assessments were performed or our assessments may not have revealed all environmental liabilities or may have underestimated the scope and severity of environmental conditions observed. There may also be unknown environmental liabilities at properties for which we have not obtained a Phase I environmental assessment or have not yet obtained a Phase II environmental assessment. In addition, we base our assumptions regarding environmental conditions, including groundwater flow and the existence and source of contamination, on readily available sampling data. We cannot guarantee that such data is reliable in all cases. Moreover, we cannot provide any assurances (1) that future laws, ordinances or regulations will not impose a material environmental liability or (2) that tenants, the condition of land or operations in the vicinity of our properties or unrelated third parties will not affect the current environmental condition of our properties. Some tenants use or generate hazardous substances in the ordinary course of their respective businesses. In their leases, we require these tenants to comply with all applicable laws and to be responsible to us for any damages resulting from their use of the property. We are not aware of any material environmental problems resulting from tenants' use or generation of hazardous or toxic chemicals or substances. We cannot provide any assurances, however, that all tenants will comply with the terms of their leases or remain solvent. If tenants do not comply or do not remain solvent, we may at some point be responsible for contamination caused by such tenants. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is required to be adopted in fiscal years beginning after June 15, 1999. In June 1999, FASB issued Statement No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -- DEFERRAL OF THE FASB STATEMENT NO. 133, which stipulates the required adoption date to be all fiscal years beginning after June 15, 2000. Statement No. 133 requires us to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The fair market value of the Company's derivatives is discussed in Item 2. COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT Under the Americans with Disabilities Act (the "ADA"), all public accommodations and commercial facilities are required to meet certain federal requirements related to access and use by disabled persons. These requirements became effective in 1992. Compliance with the ADA requirements could require removal of access barriers, and noncompliance could result in imposition of fines by the U.S. government or an award of damages 18 to private litigants. Although we believe that our properties are substantially in compliance with these requirements, we may incur additional costs to comply with the ADA. Although we believe that such costs will not have a material adverse effect on us, if required changes involve a greater expenditure than we currently anticipate, our results of operations, liquidity and capital resources could be materially adversely affected. FUNDS FROM OPERATIONS AND CASH AVAILABLE FOR DISTRIBUTIONS We consider funds from operations ("FFO") to be a useful financial performance measure of the operating performance of an equity REIT because, together with net income and cash flows, FFO provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures. FFO does not represent net income or cash flows from operating, investing or financing activities as defined by Generally Accepted Accounting Principles ("GAAP"). It should not be considered as an alternative to net income as an indicator of our operating performance or to cash flows as a measure of liquidity. FFO does not measure whether cash flow is sufficient to fund all cash needs, including principal amortization, capital improvements and distributions to stockholders. Further, FFO as disclosed by other REITs may not be comparable to our calculation of FFO, as described below. FFO and cash available for distributions should not be considered as alternatives to net income as an indication of our performance or to cash flows as a measure of liquidity. FFO means net income (computed in accordance with generally accepted accounting principles) excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. In March 1995, the National Association of Real Estate Investment Trusts ("NAREIT") issued a clarification of the definition of FFO. 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. 19 FFO and cash available for distribution for the three and nine month periods ended September 30, 1999 and 1998 are summarized in the following table (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ------------ ----------- FUNDS FROM OPERATIONS: Income before minority interest and extraordinary item ............... $ 43,061 $ 40,309 $ 125,158 $ 111,597 Add (deduct): Dividends to preferred shareholders ................................ (8,145) (8,145) (24,435) (21,946) Cost of unsuccessful transactions .................................. -- 146 -- 146 Severance costs and other division closing expenses ................ -- -- 1,233 -- Gain on disposition of assets, net of income tax provision ......... (846) -- (2,939) -- Depreciation and amortization ...................................... 26,116 24,464 81,977 61,695 Depreciation on unconsolidated subsidiaries ........................ 892 311 2,114 311 -------- -------- --------- --------- FUNDS FROM OPERATIONS BEFORE MINORITY INTEREST .................... 61,078 57,085 183,108 152,073 CASH AVAILABLE FOR DISTRIBUTION: Add (deduct): Rental income from straight-line rents ............................. (3,436) (3,200) (10,945) (9,292) Amortization of deferred financing costs ........................... 696 683 2,208 1,915 Non-incremental revenue generating capital expenditures (1): Building improvements paid ........................................ (2,114) (1,986) (6,589) (4,683) Second generation tenant improvements paid ........................ (7,194) (3,988) (17,315) (11,292) Second generation lease commissions paid .......................... (3,000) (5,530) (10,613) (9,041) -------- -------- --------- --------- CASH AVAILABLE FOR DISTRIBUTION ................................. $ 46,030 $ 43,064 $ 139,854 $ 119,680 ======== ======== ========= ========= Weighted average common shares/common units outstanding -- basic (2) ........................................... 70,959 68,711 70,521 63,845 ======== ======== ========= ========= Weighted average common shares/common units outstanding -- diluted (2) ......................................... 71,294 68,880 70,535 64,166 ======== ======== ========= ========= DIVIDEND PAYOUT RATIO -- DILUTED: Funds from operations .............................................. 64.8% 65.2% 63.0% 65.8% ======== ======== ========= ========= Cash available for distribution .................................... 86.0% 86.4% 82.5% 83.6% ======== ======== ========= =========
- ---------- (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 October 20, 1999, the Company's Board of Directors declared a dividend of $.555 per share ($2.22 on an annualized basis) payable on November 19, 1999 to stockholders of record on November 10, 1998. 20 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS Some of the information in this Quarterly Report on Form 10-Q may contain forward-looking statements. Such statements include, in particular, statements about our plans, strategies and prospects under "Management's Discussion and Analysis of Financial Condition and Results of Operations." You can identify forward-looking statements by our use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate," "continue" or other similar words. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that our plans, intentions or expectations will be achieved. When considering such forward-looking statements, you should keep in mind the following important factors that could cause our actual results to differ materially from those contained in any forward-looking statement: o our markets could suffer unexpected increases in development of office, industrial and retail properties; o the financial condition of our tenants could deteriorate; o the costs of our development projects could exceed our original estimates; o we may not be able to complete development, acquisition, reinvestment, disposition or joint venture projects as quickly or on as favorable terms as anticipated; o we may not be able to lease or release space quickly or on as favorable terms as old leases; o we may have incorrectly assessed the environmental condition of our properties; o an unexpected increase in interest rates would increase our debt service costs; o we may not be able to continue to meet our long-term liquidity requirements on favorable terms; o we could lose key executive officers; and o our southeastern markets may suffer an unexpected decline in economic growth or increase in unemployment rates. Given these uncertainties, we caution you not to place undue reliance on forward-looking statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances or to reflect the occurrence of unanticipated events. 21 PROPERTY INFORMATION The following table sets forth certain information with respect to our majority owned in-service and development properties (excluding apartment units) as of September 30, 1999 and 1998:
RENTABLE NUMBER OF PERCENT LEASED/ SEPTEMBER 30, 1999 SQUARE FEET PROPERTIES PRE-LEASED - ---------------------------- ------------- ------------ ---------------- IN-SERVICE: Office .................... 27,293,000 403 94% Industrial ................ 11,805,000 195 91% Retail(1) ................. 1,676,000 19 91% ---------- --- -- Total .................... 40,774,000 617 93% ========== === == DEVELOPMENT: COMPLETED -- NOT STABILIZED Office .................... 2,174,000 22 74% Industrial ................ 383,000 3 55% Retail(1) ................. 119,000 1 97% ---------- --- -- Total .................... 2,676,000 26 72% ========== === == IN PROCESS Office .................... 2,350,000 13 78% Industrial ................ 282,000 3 10% Retail(1) ................. 81,000 1 82% ---------- --- -- Total .................... 2,713,000 17 71% ========== === == TOTAL: Office .................... 31,817,000 438 Industrial ................ 12,470,000 201 Retail(1) ................. 1,876,000 21 ---------- --- Total .................... 46,163,000 660 ========== === SEPTEMBER 30, 1998 - ----------------------------- IN-SERVICE: Office .................... 30,857,000 453 94% Industrial ................ 12,228,000 194 92% Retail(1) ................. 1,662,000 18 96% ---------- --- -- Total .................... 44,747,000 665 93% ========== === == DEVELOPMENT: COMPLETED -- NOT STABILIZED Office .................... 426,000 5 63% Industrial ................ 241,000 3 28% Retail(1) ................. -- N/A 0% ---------- --- -- Total .................... 667,000 8 50% ========== === == IN PROCESS Office .................... 4,637,000 37 64% Industrial ................ 629,000 5 55% Retail(1) ................. 200,000 2 36% ---------- --- -- Total .................... 5,466,000 44 62% ========== === == TOTAL: Office .................... 35,920,000 495 Industrial ................ 13,098,000 202 Retail(1) ................. 1,862,000 20 ---------- --- Total .................... 50,880,000 717 ========== ===
(1) Excludes basement space 22 The following table sets forth certain information with respect to our properties under development as of September 30, 1999 (dollars in thousands):
RENTABLE SQUARE ESTIMATED COST AT PRE-LEASING ESTIMATED ESTIMATED NAME LOCATION FEET COST 9/30/99 PERCENTAGE (1) COMPLETION STABILIZATION (2) - ------------------------ ------------------- ------------ ----------- ----------- ---------------- ------------ ------------------ IN-PROCESS OFFICE: Capital One Bldg 3 Richmond 126,000 $ 15,046 $ 14,927 100% 4Q99 4Q99 Intermedia Building 1 Tampa 200,000 27,040 15,063 100% 1Q00 1Q00 Intermedia Building 2 Tampa 30,000 4,056 722 100% 1Q00 1Q00 Intermedia Building 3 Tampa 170,000 22,984 14,619 100% 1Q00 1Q00 Caterpillar Financial Center Nashville 313,000 54,000 32,671 97% 1Q00 2Q00 IXL Richmond 57,000 6,875 -- 100% 3Q00 3Q00 Intermedia Building 4 Tampa 200,000 29,219 3,337 100% 3Q00 3Q00 Mallard Creek V Charlotte 118,000 12,262 9,199 39% 4Q99 4Q00 Valencia Place Kansas City 241,000 34,020 28,847 47% 1Q00 4Q00 Lakepoint II Tampa 225,000 34,106 20,546 81% 4Q99 4Q00 Intermedia Building 5 Tampa 200,000 29,219 2,399 100% 3Q01 3Q01 Capital Plaza Orlando 303,000 53,000 33,144 30% 1Q00 4Q01 Highwoods Tower II Research Triangle 167,000 25,134 -- 72% 1Q01 2Q02 ------- -------- -------- --- In-Process Office Total or Weighted Average 2,350,000 $346,961 $175,474 78% --------- -------- -------- --- INDUSTRIAL: ALO Piedmont Triad 27,000 $ 1,055 $ -- 100% 2Q00 2Q00 Air Park South Warehouse III Piedmont Triad 120,000 3,626 1,693 0% 4Q99 3Q00 Bluegrass Valley I Atlanta 135,000 5,664 1,320 0% 3Q00 4Q00 --------- -------- -------- --- In-Process Industrial Total or Weighted Average 282,000 $ 10,345 $ 3,013 10% --------- -------- -------- --- RETAIL: Valencia Place Kansas City 81,000 $ 14,712 $ 9,616 82% 1Q00 4Q00 --------- -------- -------- --- In-Process Retail Total or Weighted Average 81,000 $ 14,712 $ 9,616 82% --------- -------- -------- --- Total or Weighted Average of all In-Process Development Projects 2,713,000 $372,018 $188,103 71% ========= ======== ======== ===
- ---------- (1) Includes the effect of letters of intent. (2) We generally consider a development project to be stabilized upon the earlier of the first date such project is at least 95% occupied or one year from the date of completion. 23
RENTABLE SQUARE ESTIMATED COST AT PRE-LEASING ESTIMATED ESTIMATED NAME LOCATION FEET COST 9/30/99 PERCENTAGE (1) COMPLETION STABILIZATION (2) - ---------------------------- ---------------- ------------ ----------- ----------- ---------------- ------------ ----------------- COMPLETED -- NOT STABILIZED OFFICE: 10 Glenlakes Atlanta 259,000 $ 35,100 $ 35,009 92% 1Q99 4Q99 Highwoods Center II @ Tradepor Atlanta 54,000 4,825 4,199 56% 3Q99 4Q99 Parkway Plaza 11 Charlotte 32,000 2,600 2,414 66% 1Q99 4Q99 Highwoods Centre** Hampton Roads 103,000 9,925 9,118 65% 4Q98 4Q99 Southwind Building D Memphis 64,000 6,800 5,947 85% 2Q99 4Q99 Lakeview Ridge III Nashville 131,000 13,100 10,453 97% 2Q99 4Q99 Overlook Research Triangle 97,000 11,203 10,644 100% 4Q98 4Q99 Red Oak Research Triangle 65,000 6,295 6,331 90% 4Q98 4Q99 Stony Point II Richmond 136,000 13,881 12,384 53% 2Q99 4Q99 Interstate Corporate Center** Tampa 342,000 19,100 17,676 99% 1Q99 4Q99 Deerfield I Atlanta 50,000 4,382 3,286 62% 3Q99 1Q00 Parkway Plaza 12 Charlotte 22,000 1,800 1,521 90% 1Q99 1Q00 Parkway Plaza 14 Charlotte 90,000 7,690 6,454 58% 2Q99 1Q00 Lakefront Plaza I Hampton Roads 77,000 7,477 7,394 30% 2Q99 1Q00 Westwood South Nashville 125,000 13,530 12,387 94% 3Q99 1Q00 Concourse Center One Piedmont Triad 86,000 8,400 7,355 100% 2Q99 1Q00 3737 Glenwood Ave. Research Triangle 107,000 16,700 14,327 80% 3Q99 1Q00 Deerfield II Atlanta 67,000 6,994 4,232 0% 3Q99 2Q00 Belfort Park C1 Jacksonville 54,000 4,830 2,326 39% 3Q99 2Q00 Belfort Park C2 Jacksonville 31,000 2,730 2,554 0% 3Q99 2Q00 4101 Research Commons Research Triangle 73,000 9,311 7,346 35% 3Q99 2Q00 Peachtree Corner Atlanta 109,000 9,238 4,809 33% 3Q99 3Q00 ------- -------- -------- --- Completed -- Not Stabilized Office Total or Weighted Average 2,174,000 $215,911 $188,166 74% --------- -------- -------- --- INDUSTRIAL: Air Park South Warehouse IV Piedmont Triad 86,000 $ 2,750 $ 2,379 65% 4Q99 3Q00 HIW Distribution Center Richmond 166,000 6,487 5,886 67% 1Q99 4Q99 Newpoint II Atlanta 131,000 5,167 4,425 33% 3Q99 2Q00 --------- -------- -------- --- Completed -- Not Stabilized Industrial Total or Weighted Average 383,000 $ 14,404 $ 12,690 55% --------- -------- -------- --- RETAIL: Seville Square Kansas City 119,000 $ 32,100 $ 31,946 97% 2Q99 1Q00 --------- -------- -------- --- Completed -- Not Stabilized Retail Total or Weighted Average 119,000 $ 32,100 $ 31,946 97% --------- -------- -------- --- Total or Weighted Average of all Completed -- Not Stabilized Development Projects 2,676,000 $262,415 $232,802 72% --------- -------- -------- --- Total or Weighted Average of all Development Projects 5,389,000 $634,433 $420,904 72% ========= ======== ======== ===
- ---------- (1) Includes the effect of letters of intent. (2) We generally consider a development project to be stabilized upon the earlier of the first date such project is at least 95% occupied or one year from the date of completion. 24
RENTABLE SQUARE ESTIMATED PRE-LEASING FEET COSTS PERCENTAGE (1) DEVELOPMENT ANALYSIS ------------- --------------- ----------------- (DOLLARS IN THOUSANDS) SUMMARY BY ESTIMATED STABILIZATION DATE: Fourth Quarter 1999 ............................. 1,130,000 $ 115,337 83% First Quarter 2000 .............................. 1,076,000 146,159 86% Second Quarter 2000 ............................. 696,000 84,087 60% Third Quarter 2000 .............................. 572,000 51,708 61% Fourth Quarter 2000 ............................. 800,000 100,764 51% Third Quarter 2001 .............................. 200,000 29,219 100% Fourth Quarter 2001 ............................. 303,000 53,000 30% Second Quarter 2002 ............................. 167,000 25,134 72% Held for Sale ................................... 445,000 29,025 91% --------- ---------- ---- Total or Weighted Average ...................... 5,389,000 $ 634,433 72% ========= ========== ==== SUMMARY BY MARKET: Atlanta ......................................... 805,000 71,370 47% Charlotte ....................................... 262,000 24,352 53% Hampton Roads ................................... 77,000 7,477 30% Jacksonville .................................... 85,000 7,560 25% Kansas City ..................................... 441,000 80,832 67% Memphis ......................................... 64,000 6,800 85% Nashville ....................................... 569,000 80,630 96% Orlando ......................................... 303,000 53,000 30% Piedmont Triad .................................. 319,000 15,831 53% Research Triangle ............................... 509,000 68,643 76% Richmond ........................................ 485,000 42,289 76% Tampa ........................................... 1,025,000 146,624 96% Held for Sale ................................... 445,000 29,025 91% --------- ---------- ---- Total or Weighted Average ...................... 5,389,000 $ 634,433 72% ========= ========== ==== Build-to-Suit .................................. 1,010,000 $ 135,494 100% Multi-Tenant ................................... 3,934,000 469,914 62% Held for Sale .................................. 445,000 29,025 91% --------- ---------- ---- Total or Weighted Average ...................... 5,389,000 $ 634,433 72% ========= ========== ==== RENTABLE SQUARE ESTIMATED PRE-LEASING FEET COSTS PERCENTAGE (1) --------- ---------- ----------------- (DOLLARS IN THOUSANDS) PER PROPERTY TYPE: Office Total or Weighted Average ................ 123,606 $ 16,177 74% Industrial Total or Weighted Average ............ 110,833 4,125 36% Retail Total or Weighted Average ................ 100,000 23,406 91% Held for Sale Total or Weighted Average ......... 222,500 14,513 91% ----------- ---------- ---- Total or Weighted Average ....................... 125,326 $ 14,754 72% =========== ========== ====
- ---------- (1) Includes the effect of letters of intent. 25 The following tables set forth certain information about our leasing activities at our majority-owned in service properties (excluding apartment units) for the three months ended September 30, June 30 and March 31, 1999 and December 31, 1998.
OFFICE LEASING STATISTICS THREE MONTHS ENDED ---------------------------------------------------------------------------------- 9/30/99 6/30/99 3/31/99 12/31/98 AVERAGE -------------- -------------- -------------- -------------- -------------- NET EFFECTIVE RENTS RELATED TO RE-LEASED SPACE: Number of lease transactions (signed leases) 234 290 276 308 277 Rentable square footage leased 1,015,789 1,326,838 1,406,170 1,291,297 1,260,024 Average per rentable square foot over the lease term: Base rent $ 14.61 $ 15.60 $ 14.84 $ 16.54 $ 15.40 Tenant improvements ( 0.70) ( 0.84) ( 0.84) ( 0.85) ( 0.81) Leasing commissions ( 0.38) ( 0.38) ( 0.42) ( 0.38) ( 0.39) Rent concessions ( 0.03) ( 0.03) ( 0.02) ( 0.03) ( 0.03) ---------- ---------- ---------- ---------- ---------- Effective rent 13.50 14.35 13.56 15.28 14.17 Expense stop (1) ( 3.92) ( 4.21) ( 3.55) ( 3.96) ( 3.91) ---------- ---------- ---------- ---------- ---------- Equivalent effective net rent $ 9.58 $ 10.14 $ 10.01 $ 11.32 $ 10.26 ========== ========== ========== ========== ========== Average term in years 4 4 5 4 4 ========== ========== ========== ========== ========== CAPITAL EXPENDITURES RELATED TO RE-LEASED SPACE: Tenant Improvements: Total dollars committed under signed leases $3,602,102 $5,073,153 $6,848,279 $4,886,517 $5,102,513 Rentable square feet 1,015,789 1,326,838 1,406,170 1,291,297 1,260,024 ---------- ---------- ---------- ---------- ---------- Per rentable square foot $ 3.55 $ 3.82 $ 4.87 $ 3.78 $ 4.05 ========== ========== ========== ========== ========== Leasing Commissions: Total dollars committed under signed leases $1,560,041 $2,230,915 $3,047,978 $2,005,094 $2,211,007 Rentable square feet 1,015,789 1,326,838 1,406,170 1,291,297 1,260,024 ---------- ---------- ---------- ---------- ---------- Per rentable square foot $ 1.54 $ 1.68 $ 2.17 $ 1.55 $ 1.75 ========== ========== ========== ========== ========== Total: Total dollars committed under signed leases $5,162,143 $7,304,068 $9,896,257 $6,891,611 $7,313,520 Rentable square feet 1,015,789 1,326,838 1,406,170 1,291,297 1,260,024 ---------- ---------- ---------- ---------- ---------- Per rentable square foot $ 5.08 $ 5.50 $ 7.04 $ 5.34 $ 5.80 ========== ========== ========== ========== ========== RENTAL RATE TRENDS: Average final rate with expense pass throughs $ 14.09 $ 15.20 $ 14.28 $ 13.57 $ 14.29 Average first year cash rental rate $ 14.93 $ 15.61 $ 15.01 $ 14.47 $ 15.01 ---------- ---------- ---------- ---------- ---------- Percentage increase 5.96% 2.70% 5.11% 6.63% 5.04% ========== ========== ========== ========== ==========
- ---------- (1) "Expense stop" represents operating expenses (generally including taxes, utilities, routine building expense and common area maintainance) which we will not be reimbursed by our tenants. 26
INDUSTRIAL LEASING STATISTICS THREE MONTHS ENDED ---------------------------------------------------------------------- 9/30/99 6/30/99 3/31/99 12/31/98 AVERAGE ------------ -------------- -------------- ------------ -------------- NET EFFECTIVE RENTS RELATED TO RE-LEASED SPACE: Number of lease transactions (signed leases) 50 63 72 44 57 Rentable square footage leased 815,044 589,835 837,616 582,758 706,313 Average per rentable square foot over the lease term: Base rent $ 4.86 $ 5.55 $ 5.12 $ 4.71 $ 5.06 Tenant improvements (0.14) (0.37) (0.22) (0.20) (0.23) Leasing commissions (0.10) (0.22) (0.10) (0.09) (0.13) Rent concessions 0.00 (0.01) 0.00 0.00 (0.00) -------- ---------- ---------- -------- ---------- Effective rent 4.62 4.95 4.80 4.42 4.70 Expense stop (1) (0.18) (0.28) (0.28) (0.25) (0.25) -------- ---------- ---------- -------- ---------- Equivalent effective net rent $ 4.44 $ 4.67 $ 4.52 $ 4.17 $ 4.45 ======== ========== ========== ======== ========== Average term in years 3 4 4 3 4 ======== ========== ========== ======== ========== CAPITAL EXPENDITURES RELATED TO RE-LEASED SPACE: TENANT IMPROVEMENTS: Total dollars committed under signed leases $692,497 $1,064,618 $ 821,654 $712,108 $ 822,719 Rentable square feet 815,044 589,835 837,616 582,758 706,313 -------- ---------- ---------- -------- ---------- Per rentable square foot $ 0.85 $ 1.80 $ 0.98 $ 1.22 $ 1.16 ======== ========== ========== ======== ========== LEASING COMMISSIONS: Total dollars committed under signed leases $271,184 $ 527,815 $ 315,101 $173,017 $ 321,779 Rentable square feet 815,044 589,835 837,616 582,758 706,313 -------- ---------- ---------- -------- ---------- Per rentable square foot $ 0.33 $ 0.89 $ 0.38 $ 0.30 $ 0.46 ======== ========== ========== ======== ========== TOTAL: Total dollars committed under signed leases $963,681 $1,592,433 $1,136,755 $885,125 $1,144,498 Rentable square feet 815,044 589,835 837,616 582,758 706,313 -------- ---------- ---------- -------- ---------- Per rentable square foot $ 1.18 $ 2.70 $ 1.36 $ 1.52 $ 1.62 ======== ========== ========== ======== ========== RENTAL RATE TRENDS: Average final rate with expense pass throughs $ 4.63 $ 5.17 $ 4.91 $ 4.62 $ 4.83 Average first year cash rental rate $ 4.78 $ 5.62 $ 4.91 $ 4.72 $ 5.01 -------- ---------- ---------- -------- ---------- Percentage increase 3.24% 8.70% 0.00% 2.16% 3.73% ======== ========== ========== ======== ==========
- ---------- (1) "Expense stop" represents operating expenses (generally including taxes, utilities, routine building expense and common area maintainance) which we will not be reimbursed by our tenants. 27
RETAIL LEASING STATISTICS THREE MONTHS ENDED ---------------------------------------------------------------------------- 9/30/99 6/30/99 3/31/99 12/31/98 AVERAGE ------------ -------------- ------------ ------------ -------------- NET EFFECTIVE RENTS RELATED TO RE-LEASED SPACE: Number of lease transactions (signed leases) 19 29 25 15 22 Rentable square footage leased 70,706 159,484 62,638 29,706 80,634 Average per rentable square foot over the lease term: Base rent $ 24.58 $ 14.48 $ 15.37 $ 16.34 $ 17.69 Tenant improvements ( 0.66) ( 1.46) ( 0.45) ( 1.66) ( 1.06) Leasing commissions ( 0.37) ( 0.39) ( 0.39) ( 0.76) ( 0.48) Rent concessions 0.00 ( 0.02) ( 0.02) ( 0.56) ( 0.15) -------- ---------- -------- -------- ---------- Effective rent 23.55 12.61 14.51 13.36 16.00 Expense stop (1) 0.00 0.00 ( 0.27) ( 1.79) ( 0.52) -------- ---------- -------- -------- ---------- Equivalent effective net rent $ 23.55 $ 12.61 $ 14.24 $ 11.57 $ 15.48 ======== ========== ======== ======== ========== Average term in years 5 6 6 5 6 ======== ========== ======== ======== ========== CAPITAL EXPENDITURES RELATED TO RE-LEASED SPACE: TENANT IMPROVEMENTS: Total dollars committed under signed leases $437,735 $2,784,277 $248,531 $319,620 $ 947,541 Rentable square feet 70,706 159,484 62,638 29,706 80,634 -------- ---------- -------- -------- ---------- Per rentable square foot $ 6.19 $ 17.46 $ 3.97 $ 10.76 $ 11.75 ======== ========== ======== ======== ========== LEASING COMMISSIONS: Total dollars committed under signed leases $124,241 $ 393,991 $153,872 $123,047 $ 198,788 Rentable square feet 70,706 159,484 62,638 29,706 80,634 -------- ---------- -------- -------- ---------- Per rentable square foot $ 1.76 $ 2.47 $ 2.46 $ 4.14 $ 2.47 ======== ========== ======== ======== ========== TOTAL: Total dollars committed under signed leases $561,976 $3,178,268 $402,403 $442,667 $1,146,328 Rentable square feet 70,706 159,484 62,638 29,706 80,634 -------- ---------- -------- -------- ---------- Per rentable square foot $ 7.95 $ 19.93 $ 6.42 $ 14.90 $ 14.22 ======== ========== ======== ======== ========== RENTAL RATE TRENDS: Average final rate with expense pass throughs $ 19.12 $ 9.91 $ 10.92 $ 15.91 $ 13.97 Average first year cash rental rate $ 22.30 $ 14.20 $ 16.22 $ 18.16 $ 17.72 -------- ---------- -------- -------- ---------- Percentage increase 16.63% 43.29% 48.53% 14.14% 26.89% ======== ========== ======== ======== ==========
- ---------- (1) "Expense stop" represents operating expenses (generally including taxes, utilities, routine building expense and common area maintainance) which we will not be reimbursed by our tenants. 28 The following tables set forth scheduled lease expirations for executed leases at our majority-owned in-service properties (excluding apartment units) as of September 30, 1999 assuming no tenant exercises renewal options. OFFICE PROPERTIES:
AVERAGE ANNUAL RENTS ANNUAL PERCENTAGE OF TOTAL PERCENTAGE OF UNDER RENTAL RATE LEASED RENTS YEAR OF RENTABLE LEASED SQUARE FOOTAGE EXPIRING PER SQUARE REPRESENTED LEASE NUMBER OF SQUARE FEET REPRESENTED BY LEASES (1) FOOT FOR BY EXPIRING EXPIRATION LEASES EXPIRING EXPIRING LEASES (IN THOUSANDS) EXPIRATIONS (1) LEASES - ---------------------- ----------- ------------- ----------------------- ---------------- ----------------- -------------- Remainder of 1999 421 1,289,750 4.9% $ 19,490 $ 15.11 4.7% 2000 764 3,136,893 11.8% 50,305 16.04 12.1% 2001 696 4,021,362 15.1% 65,274 16.23 15.7% 2002 673 4,033,692 15.2% 64,251 15.93 15.5% 2003 506 4,032,148 15.2% 62,928 15.61 15.2% 2004 358 2,960,736 11.1% 46,378 15.66 11.2% 2005 111 1,534,115 5.8% 23,393 15.25 5.6% 2006 60 1,479,873 5.6% 23,226 15.69 5.6% 2007 29 765,428 2.9% 12,490 16.32 3.0% 2008 54 1,732,631 6.5% 24,903 14.37 6.0% 2009 and thereafter 107 1,569,677 5.9% 22,387 14.26 5.4% --- --------- ----- -------- -------- ----- 3,779 26,556,305 100.0% $415,025 $ 15.63 100.0% ===== ========== ===== ======== ======== ===== INDUSTRIAL PROPERTIES: AVERAGE ANNUAL PERCENTAGE OF TOTAL PERCENTAGE OF ANNUAL RENTS RENTAL RATE LEASED RENTS RENTABLE LEASED SQUARE FOOTAGE UNDER EXPIRING PER SQUARE REPRESENTED YEAR OF LEASE NUMBER OF SQUARE FEET REPRESENTED BY LEASES (1) FOOT FOR BY EXPIRING EXPIRATION LEASES EXPIRING EXPIRING LEASES (IN THOUSANDS) EXPIRATIONS (1) LEASES - --------------------- ----------- ------------- ----------------------- ---------------- ----------------- -------------- Remainder of 1999 113 887,124 8.0% $ 4,804 $ 5.42 8.1% 2000 193 2,231,642 20.3% 11,238 5.04 19.1% 2001 158 1,684,079 15.2% 8,521 5.06 14.4% 2002 134 1,805,174 16.3% 8,237 4.56 13.9% 2003 62 788,147 7.1% 4,446 5.64 7.5% 2004 62 2,128,104 19.3% 10,663 5.01 18.0% 2005 15 244,501 2.2% 1,741 7.12 2.9% 2006 10 398,105 3.6% 2,902 7.29 4.9% 2007 3 128,125 1.2% 943 7.36 1.6% 2008 6 247,737 2.2% 1,988 8.02 3.4% 2009 and thereafter 18 503,526 4.6% 3,662 7.27 6.2% --- --------- ----- ------- ------- ----- 774 11,046,264 100.0% $59,145 $ 5.35 100.0% === ========== ===== ======= ======= =====
- ---------- (1) Includes operating expense pass throughs and excludes the effect of future contractual rent increases. 29 RETAIL PROPERTIES:
AVERAGE ANNUAL RENTS ANNUAL PERCENTAGE OF TOTAL PERCENTAGE OF UNDER RENTAL RATE LEASED RENTS YEAR OF RENTABLE LEASED SQUARE FOOTAGE EXPIRING PER SQUARE REPRESENTED LEASE NUMBER OF SQUARE FEET REPRESENTED BY LEASES (1) FOOT FOR BY EXPIRING EXPIRATION LEASES EXPIRING EXPIRING LEASES (IN THOUSANDS) EXPIRATIONS (1) LEASES - ---------------------- ----------- ------------- ----------------------- ---------------- ----------------- -------------- Remainder of 1999 44 145,060 9.0% $ 1,678 $ 11.57 5.9% 2000 72 198,827 12.3% 3,051 15.34 10.6% 2001 60 147,044 9.2% 3,430 23.33 12.0% 2002 52 167,333 10.3% 2,730 16.31 9.5% 2003 49 151,124 9.3% 3,353 22.19 11.7% 2004 28 157,033 9.7% 1,766 11.25 6.2% 2005 14 45,724 2.8% 1,342 29.35 4.7% 2006 17 64,946 4.0% 1,486 22.88 5.2% 2007 10 54,637 3.4% 1,060 19.40 3.7% 2008 14 81,075 5.0% 2,465 30.40 8.6% 2009 and thereafter 28 404,783 25.0% 6,316 15.60 21.9% -- ------- ----- ------- -------- ----- 388 1,617,586 100.0% $28,677 $ 17.73 100.0% === ========= ===== ======= ======== ===== TOTAL: AVERAGE ANNUAL RENTS ANNUAL PERCENTAGE OF TOTAL PERCENTAGE OF UNDER RENTAL RATE LEASED RENTS YEAR OF RENTABLE LEASED SQUARE FOOTAGE EXPIRING PER SQUARE REPRESENTED LEASE NUMBER OF SQUARE FEET REPRESENTED BY LEASES (1) FOOT FOR BY EXPIRING EXPIRATION LEASES EXPIRING EXPIRING LEASES (IN THOUSANDS) EXPIRATIONS (1) LEASES - ---------------------- ----------- ------------- ----------------------- ---------------- ----------------- -------------- Remainder of 1999 578 2,321,934 5.9% $ 25,972 $ 11.19 5.2% 2000 1,029 5,567,362 14.2% 64,594 11.60 12.8% 2001 914 5,852,485 14.9% 77,225 13.20 15.3% 2002 859 6,006,199 15.2% 75,218 12.52 15.0% 2003 617 4,971,419 12.7% 70,727 14.23 14.1% 2004 448 5,245,873 13.4% 58,807 11.21 11.7% 2005 140 1,824,340 4.7% 26,476 14.51 5.3% 2006 87 1,942,924 5.0% 27,614 14.21 5.5% 2007 42 948,190 2.4% 14,493 15.28 2.9% 2008 74 2,061,443 5.3% 29,356 14.24 5.8% 2009 and thereafter 153 2,477,986 6.3% 32,365 13.06 6.4% ----- --------- ----- -------- -------- ----- 4,941 39,220,155 100.0% $502,847 $ 12.82 100.0% ===== ========== ===== ======== ======== =====
- ---------- (1) Includes operating expenses pass throughs and excludes the effect of future contractual rent increases. INFLATION Historically inflation has not had a significant impact on our operations because of the relatively low inflation rate in our geographic areas of operation. Most of the leases require the tenants to pay their pro rata share of increased incremental operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing our exposure to increases in operating expenses resulting from inflation. In addition, many of the leases are for terms of less than seven years, which may enable us to replace existing leases with new leases at a higher base rent if rents on the existing leases are below the market rate. 30 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 RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES" FOR A DESCRIPTION OF OUR ACCOUNTING POLICIES AND OTHER INFORMATION RELATED TO THESE FINANCIAL INSTRUMENTS. To meet in part our long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Borrowings under the Revolving Loan bear interest at variable rates. Our long-term debt, which consists of long-term financings and the issuance of debt securities, typically bears interest at fixed rates. In addition, we have assumed fixed rate and variable rate debt in connection with acquiring properties. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not hold or issue these derivative contracts for trading or speculative purposes. CERTAIN VARIABLE RATE DEBT. As of September 30, 1999, the Company had approximately $314.7 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 September 30, 2000, our interest expense would be increased or decreased approximately $3.1 million. In addition, as of September 30, 1999, we had $80 million of additional variable rate debt outstanding that was protected by an interest rate collar that effectively keeps the interest rate within a range of 65 basis points. We do not believe that a 100 basis point increase or decrease in interest rates would materially affect our interest expense with respect to this $80 million of debt. INTEREST RATE HEDGE CONTRACTS. For a discussion of our interest rate hedge contracts in effect at September 30, 1999, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- CAPITALIZATION." If interest rates increase by 100 basis points, the aggregate fair market value of these interest rate hedge contracts as of September 30, 1999 would increase by approximately $2.0 million. If interest rates decrease by 100 basis points, the aggregate fair market value of these interest rate hedge contracts as of September 30, 1999 would decrease by approximately $2.0 million. In addition, we are exposed to certain losses in the event of nonperformance by the counterparties under the hedge contracts. We expect the counterparties, which are major financial institutions, to perform fully under these contracts. However, if the counterparties were to default on their obligations under the interest rate hedge contracts, we could be required to pay the full rates on our debt, even if such rates were in excess of the rates in the contracts. 31 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On October 2, 1998, John Flake, a former stockholder of J.C. Nichols, filed a putative class action lawsuit on behalf of himself and the other former stockholders of J.C. Nichols in the United States District Court for the District of Kansas against J.C. Nichols, certain of its former officers and directors and the Company. The complaint alleges, among other things, that in connection with the merger of J.C. Nichols and the Company, (1) J.C. Nichols and the named directors and officers of J.C. Nichols breached their fiduciary duties to J.C. Nichols' stockholders, (2) J.C. Nichols and the named directors and officers of J.C. Nichols breached their fiduciary duties to members of the J.C. Nichols Company Employee Stock Ownership Trust, (3) all defendants participated in the dissemination of a proxy statement containing materially false and misleading statements and omissions of material facts in violation of Section 14(a) of the Exchange Act of 1934 and (4) the Company filed a registration statement with the SEC containing materially false and misleading statements and omissions of material facts in violation of Sections 11 and 12(2) of the Securities Act of 1933. The plaintiff seeks equitable relief and monetary damages. We believe that the defendants have meritorious defenses to the plaintiff's allegations. We intend to vigorously defend this litigation. By order dated June 18, 1999, the court granted in part and denied in part our motions to dismiss. The court has granted the plaintiff's motion seeking certification of the proposed class of plaintiffs with respect to the remaining claims. Discovery in this matter is proceeding. Due to the inherent uncertainties of the litigation process, we are not able to predict the outcome of this litigation. If this litigation is not resolved in our favor, it could have a material adverse effect on our business, financial condition and results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS -- NA ITEM 3. DEFAULTS UPON SENIOR SECURITIES -- NA ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -- NA ITEM 5. OTHER INFORMATION -- NA ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
EXHIBIT NO. DESCRIPTION - ------------- ------------------------ 27 Financial Data Schedule
(b) Reports on Form 8-K -- None 32 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 15, 1999 33 EX-27 2 EXHIBIT 27
5 1000 3-MOS 9-MOS DEC-31-1999 DEC-31-1999 JUL-01-1999 JAN-01-1999 SEP-30-1999 SEP-30-1999 50,094 50,094 0 0 106,584 106,584 698 698 0 0 110,030 110,030 3,855,259 3,855,259 218,840 218,840 4,120,607 4,120,607 118,685 118,685 1,827,502 1,827,502 0 0 397,500 397,500 0 0 1,776,299 1,776,299 4,120,607 4,120,607 136,304 425,104 140,627 440,674 41,002 130,108 67,118 212,085 4,883 16,888 0 0 26,411 89,482 37,996 109,388 0 0 37,996 109,388 0 0 (4,997) (5,774) 0 0 24,854 79,179 0.40 1.29 0.40 1.29
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