-----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, QlNk3GFw+Zdpd/puqLFEnnwtYElvoh5YWYP8t3op33JWq5dt5djvdCZP/bMyaZX/ 4LdQ8x9kEIid1tIwofvUhA== /in/edgar/work/0000950168-00-002417/0000950168-00-002417.txt : 20001115 0000950168-00-002417.hdr.sgml : 20001115 ACCESSION NUMBER: 0000950168-00-002417 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HIGHWOODS REALTY LTD PARTNERSHIP CENTRAL INDEX KEY: 0000941713 STANDARD INDUSTRIAL CLASSIFICATION: [6519 ] IRS NUMBER: 561869557 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21731 FILM NUMBER: 764879 BUSINESS ADDRESS: STREET 1: 3100 SMOKETREE CT 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 FORMER COMPANY: FORMER CONFORMED NAME: HIGHWOODS FORSYTH L P DATE OF NAME CHANGE: 19960626 10-Q 1 0001.txt FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 Commission file number: 000-21731 Highwoods Realty Limited Partnership (Exact name of registrant as specified in its charter) North Carolina 56-1864557 (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 --- --- ---------------- ================================================================================ HIGHWOODS REALTY LIMITED PARTNERSHIP QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS Page PART I FINANCIAL INFORMATION Item 1. Financial Statements 3 Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 4 Consolidated Statements of Income for the three and nine months ended September 30, 2000 and 1999 5 Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and 1999 6 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Results of Operations 11 Liquidity and Capital Resources 12 Recent Developments 13 Possible Environmental Liabilities 14 Impact of Recently Issued Accounting Standards 15 Compliance with the Americans with Disabilities Act 15 Funds From Operations and Cash Available for Distributions 16 Disclosure Regarding Forward-Looking Statements 18 Property Information 19 Inflation 27 Item 3. Quantitative and Qualitative Disclosures About Market Risk 28 PART II OTHER INFORMATION Item 1. Legal Proceedings 29 Item 2. Changes in Securities and Use of Proceeds 29 Item 3. Defaults Upon Senior Securities 29 Item 4. Submission of Matters to a Vote of Security Holders 29 Item 5. Other Information 29 Item 6. Exhibits and Reports on Form 8-K 29
2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements We refer to (1) Highwoods Properties, Inc. as the "Company," (2) Highwoods Realty Limited Partnership as the "Operating Partnership," (3) the Company's common stock as "Common Stock" and (4) the Operating Partnership's common partnership interests as "Common Units." The information furnished in the accompanying balance sheets, statements of income and statements of cash flows reflect all adjustments (consisting of normal recurring accruals) that are, in our opinion, necessary for a fair presentation of the aforementioned financial statements for the interim period. The aforementioned financial statements should be read in conjunction with the notes to consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included herein and in our 1999 Annual Report on Form 10-K. 3
HIGHWOODS REALTY LIMITED PARTNERSHIP Consolidated Balance Sheets (dollars in thousands) September 30, 2000 December 31, 1999 (Unaudited) Assets Real estate assets, at cost: Land and improvements ........................................... $ 400,502 $ 468,077 Buildings and tenant improvements ............................... 2,750,127 3,055,859 Development in process .......................................... 78,108 186,925 Land held for development ....................................... 152,799 168,396 Furniture, fixtures and equipment ............................... 10,422 7,917 ----------- ----------- 3,391,958 3,887,174 Less - accumulated depreciation ................................. (262,546) (238,115) ----------- ----------- Net real estate assets .......................................... 3,129,412 3,649,059 Property held for sale .............................................. 340,923 48,960 Cash and cash equivalents ........................................... 29,481 33,915 Restricted cash ..................................................... 8,998 1,854 Accounts receivable, net ............................................ 23,630 22,127 Advances to related parties ......................................... 13,164 15,096 Notes receivable .................................................... 38,251 44,892 Accrued straight-line rents receivable .............................. 39,415 35,951 Investment in unconsolidated affiliates ............................. 50,319 33,758 Other assets: Deferred leasing costs .......................................... 76,877 66,783 Deferred financing costs ........................................ 40,229 40,125 Prepaid expenses and other ...................................... 11,087 15,612 ----------- ----------- 128,193 122,520 Less - accumulated amortization ................................. (45,470) (36,053) ----------- ----------- Other assets, net ............................................... 82,723 86,467 ----------- ----------- Total Assets ........................................................ $ 3,756,316 $ 3,972,079 =========== =========== Liabilities and Partners' Capital Mortgages and notes payable ......................................... $ 1,626,529 $ 1,719,117 Accounts payable, accrued expenses and other liabilities ............ 121,044 106,601 ----------- ----------- Total Liabilities ............................................... 1,747,573 1,825,718 Redeemable operating partnership units: Class A Common Units outstanding, 8,461,272 at September 30, 2000 and 8,809,218 at December 31, 1999 ......... 199,898 208,140 Class B Common Units outstanding, 196,492 at September 30, 2000 and December 31, 1999 ...................... 4,642 4,643 Series A Preferred Units outstanding, 125,000 at September 30, 2000 and December 31, 1999 ...................... 121,809 121,809 Series B Preferred Units outstanding, 6,900,000 at September 30, 2000 and December 31, 1999 ...................... 166,346 166,346 Series D Preferred Units outstanding, 400,000 at September 30, 2000 and December 31, 1999 ...................... 96,842 96,842 Partners' Capital Class A Common Units: General partner Common Units outstanding, 694,788 at September 30, 2000 and 703,884 at December 31, 1999 .......... 15,059 15,740 Limited partner Common Units outstanding, 60,322,736 (includes 3,811,086 units in treasury) at September 30, 2000 1,490,938 1,558,316 and 60,875,308 (includes 1,150,000 units in treasury) at December 31, 1999........................................... Less treasury units at cost, 3,811,086 and 1,150,000 at September 30, 2000 and December 31, 1999, respectively ......... (86,791) (25,475) ----------- ----------- Total Partners' Capital ...................................... 1,419,206 1,548,581 ----------- ----------- $ 3,756,316 $ 3,972,079 =========== ===========
See accompanying notes to consolidated financial statements. 4
HIGHWOODS REALTY LIMITED PARTNERSHIP Consolidated Statements of Income (Unaudited and in thousands except per unit amounts) Three Months Ended Nine Months Ended September 30, September 30, -------------------------- ------------------------- 2000 1999 2000 1999 ---------- ---------- --------- ---------- Revenue: Rental property ......................................... $ 130,727 $ 135,886 $ 403,559 $ 423,021 Equity in earnings of unconsolidated affiliates ......... 1,063 413 2,641 870 Interest another income ................................. 5,874 3,548 15,860 12,797 --------- --------- --------- --------- Total Revenue ..................................... 137,664 139,847 422,060 436,688 Operating expenses: Rental property ......................................... 39,331 40,902 119,950 130,276 Depreciation and amortization ........................... 30,104 26,024 87,630 81,753 Interest expense Contractual ........................................... 26,097 24,744 79,143 82,471 Amortization of deferred financing costs .............. 564 696 1,862 2,208 --------- --------- --------- --------- 26,661 25,440 81,005 84,679 General and administrative .................................. 5,453 4,701 15,566 16,256 --------- --------- --------- --------- Income before gain/(loss) on disposition of land and depreciable assets, net of income tax provision and extraordinary item ...................................... 36,115 42,780 117,909 123,724 Gain/(loss) on disposition of land and depreciable assets, net of income tax provision ............................. 10,557 163 (8,559) 2,256 --------- --------- --------- --------- Income before extraordinary item ............................ 46,672 42,943 109,350 125,980 Extraordinary item - loss on early extinguishment of debt ............................................... (3,310) (4,997) (4,344) (5,774) --------- --------- --------- --------- Net income ............................................... 43,362 37,946 105,006 120,206 Distributions on preferred units ............................ (8,145) (8,145) (24,435) (24,435) --------- --------- --------- --------- Net income available for Class A Common Units ............ $ 35,217 $ 29,801 $ 80,571 $ 95,771 ========= ========= ========= ========= Net income per Common Unit - basic: Income before extraordinary item ......................... $ .58 $ .49 $ 1.25 $ 1.45 Extraordinary item - loss on early extinguishment of debt ............................................... (.05) (.07) (.06) (.08) --------- --------- --------- --------- Net income .................................................. $ .53 $ .42 $ 1.19 $ 1.37 ========= ========= ========= ========= Net income per Common Unit - diluted: Income before extraordinary item ......................... $ .58 $ .49 $ 1.25 $ 1.45 Extraordinary item - loss on early extinguishment of debt ............................................... (.05) (.07) (.06) (.08) --------- --------- --------- --------- Net income .................................................. $ .53 $ .42 $ 1.19 $ 1.37 ========= ========= ========= ========= Distributions declared per Common Unit ...................... $ .57 $ .555 $ 1.68 $ 1.635 ========= ========= ========= ========= Weighted average Common Units outstanding - basic: Class A Common Units: General Partner ........................................ 657 703 673 699 Limited Partners ....................................... 65,011 69,599 66,620 69,136 Class B Common Units: Limited Partners ....................................... 196 196 196 196 --------- --------- --------- --------- Total .................................................... 65,864 70,498 67,489 70,031 ========= ========= ========= ========= Weighted average Common Units outstanding - diluted: Class A Common Units: General Partner ........................................ 661 706 675 701 Limited Partners ....................................... 65,428 69,902 66,856 69,394 Class A Common Units: Limited Partners ....................................... 196 196 196 196 --------- --------- --------- --------- Total .................................................... 66,285 70,804 67,727 70,291 ========= ========= ========= =========
See accompanying notes to consolidated financial statements. 5
HIGHWOODS REALTY LIMITED PARTNERSHIP Consolidated Statements of Cash Flows (Unaudited and in thousands) Nine Months Ended September 30, ---------------------- 2000 1999 ---------- --------- Operating activities: Net income .................................................................................... $ 105,006 $ 120,206 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............................................................. 87,630 81,753 Loss/(Gain) on disposition of land and depreciable assets, net of income tax provision ................................................................................. 8,559 (2,256) Changes in operating assets and liabilities ............................................... 5,926 (24,043) --------- --------- Net cash provided by operating activities .............................................. 207,121 175,660 --------- --------- Investing activities: Additions to real estate assets ............................................................... (223,343) (428,423) Proceeds from disposition of assets ........................................................... 339,600 549,337 Repayment of advances from subsidiaries/(advances to subsidiaries) ............................ 1,932 (4,005) Cash paid in exchange for partnership net assets .............................................. -- (841) Other ......................................................................................... (10,902) (29,584) --------- --------- Net cash provided by investing activities .............................................. 107,287 86,484 --------- --------- Financing activities: Distributions paid on Common Units ............................................................ (114,187) (114,724) Distributions paid on Preferred Units ......................................................... (24,435) (24,435) Borrowings on mortgages and notes payable ..................................................... 73,198 4,385 Repayment of mortgages and notes payable ...................................................... (147,286) (172,568) Borrowings on revolving loans ................................................................. 210,500 279,500 Repayment on revolving loans .................................................................. (298,000) (165,000) Net proceeds from contributed capital ......................................................... 836 22,940 Purchase of treasury stock and units .......................................................... (90,342) -- Net change in deferred financing costs ........................................................ (104) (2,280) Other ......................................................................................... 1,978 (5,774) --------- --------- Net cash used in financing activities .................................................. (318,842) (246,956) --------- --------- Net (decrease)/increase in cash and cash equivalents .......................................... (4,434) 15,188 Cash and cash equivalents at beginning of the period .......................................... 33,915 30,696 --------- --------- Cash and cash equivalents at end of the period ................................................ $ 29,481 $ 45,884 ========= ========= Supplemental disclosure of cash flow information: Cash paid for interest ........................................................................ $ 93,047 $ 90,289 ========= =========
See accompanying notes to consolidated financial statements. 6 HIGHWOODS REALTY LIMITED PARTNERSHIP Consolidated Statements of Cash Flows (Unaudited and in thousands) Supplemental disclosure of non-cash investing and financing activities The following summarizes (1) the net assets contributed by the holders of Common Units in the Operating Partnership, (2) the change in the net assets as a result of the reorganization of our Des Moines partnerships and (3) the net assets acquired subject to mortgage notes payable.
Nine Months Ended September 30, ------------------------ 2000 1999 ------------- --------- Assets: Rental property and equipment, net .............. $(24,656) $(18,513) Notes receivable ................................ 23,775 -- Liabilities: Mortgages and notes payable ..................... -- (52,165) -------- -------- Net assets ...................................... $ (881) $ 33,652 ======== ========
See accompanying notes to consolidated financial statements. 7 HIGHWOODS REALTY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 (Unaudited) 1. BASIS OF PRESENTATION The Operating Partnership is a subsidiary of the Company. At September 30, 2000, the Company owned 88.0% of the Common Units in the Operating Partnership. The consolidated financial statements include the accounts of the Operating Partnership and its majority- controlled affiliates. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. The Operating Partnership's 125,000 Series A Preferred Units are senior to the Class A and B Common Units and rank pari passu with the Series B and D Preferred Units. The Series A Preferred Units have a liquidation preference of $1,000 per unit. Distributions are payable on the Series A Preferred Units at the rate of $86.25 per annum per unit. The Operating Partnership's 6,900,000 Series B Preferred Units are senior to the Class A and B Common Units and rank pari passu with the Series A and D Preferred Units. The Series B Preferred Units have a liquidation preference of $25 per unit. Distributions are payable on the Series B Preferred Units at the rate of $2.00 per annum per unit. The Operating Partnership's 400,000 Series D Preferred Units are senior to the Class A and B Common Units and rank pari passu with the Series A and B Preferred Units. The Series D Preferred Units have a liquidation preference of $250 per unit. Distributions are payable on Series D Preferred Units at a rate of $20.00 per annum per unit. The Class A Common Units are owned by the Company and by certain limited partners of the Operating Partnership. The Class A Common Units owned by the Company are classified as general partners' capital and limited partners' capital. The Class B Common Units are owned by certain limited partners (not the Company) and only differ from the Class A Common Units in that they are not eligible for allocation of income and distributions. The Class B Common Units will convert to Class A Common Units in 25% annual installments commencing one year from the date of issuance. Prior to such conversion, such Class B Common Units will not be redeemable for cash or shares of the Company's Common Stock. Generally one year after issuance, the Operating Partnership is obligated to redeem each of the Class A Common Units not owned by the Company (the "Redeemable Operating Partnership Units") at the request of the holder thereof for cash, provided that the Company at its option may elect to acquire such unit for one share of Common Stock or the cash value thereof. The Company's Class A Common Units are not redeemable for cash. The Redeemable Operating Partnership Units are classified outside of the permanent partners' capital in the accompanying balance sheet at their fair market value (equal to the fair market value of a share of Common Stock) at the balance sheet date. The extraordinary loss represents the write-off of loan origination fees and prepayment penalties paid on the early extinguishment of debt. 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 Effective Date of FASB Statement No. 133, which stipulates the required adoption date to be all fiscal years beginning after June 15, 2000. In June, 2000, FASB issued Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133. Statement No. 133, as amended by Statement No. 138, 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 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 8 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 our derivatives is discussed in Item 2. 2. SEGMENT INFORMATION Our sole business is the acquisition, development and operation of rental real estate properties. We operate office, industrial and retail properties and apartment units. There are no material inter-segment transactions. Our chief operating decision maker ("CDM") assesses and measures operating results based upon property level net operating income. The operating results for the individual assets within each property type have been aggregated since the CDM evaluates operating results and allocates resources on a property-by-property basis within the various property types. The accounting policies of the segments are the same as those described in Note 1. Further, all operations are within the United States and no tenant comprises more than 10% of consolidated revenues. The following table summarizes the rental income, net operating income and total assets for each reportable segment for the three and nine months ended September 30, 2000 and 1999.
Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ------------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Rental Income: Office segment .............................................. $ 106,202 $ 109,163 $ 331,944 $ 346,254 Industrial segment .......................................... 11,523 13,842 33,288 39,753 Retail segment .............................................. 8,631 8,597 25,285 24,536 Apartment segment ........................................... 4,371 4,284 13,042 12,478 ----------- ----------- ----------- ----------- Total Rental Income ...................................... $ 130,727 $ 135,886 $ 403,559 $ 423,021 =========== =========== =========== =========== Net Operating Income: Office segment .............................................. $ 74,132 $ 75,764 $ 230,555 $ 236,693 Industrial segment .......................................... 9,793 11,423 28,026 32,897 Retail segment .............................................. 5,163 5,454 17,464 16,156 Apartment segment ........................................... 2,308 2,343 7,564 6,999 ----------- ----------- ----------- ----------- Total Net Operating Income ............................... $ 91,396 $ 94,984 $ 283,609 $ 292,745 =========== =========== =========== =========== Reconciliation to income before extraordinary items: Equity in income of unconsolidated affiliates ............... $ 1,063 $ 413 $ 2,641 $ 870 Gain on disposition of land and depreciable assets, net of income tax provision .................................... 10,557 163 (8,559) 2,256 Interest and other income ................................... 5,874 3,548 15,860 12,797 Interest expense ............................................ (26,661) (25,440) (81,005) (84,679) General and administrative expense .......................... (5,453) (4,701) (15,566) (16,256) Depreciation and amortization ............................... (30,104) (26,024) (87,630) (81,753) ----------- ----------- ----------- ----------- Income before extraordinary item ............................ $ 46,672 $ 42,943 $ 109,350 $ 125,980 =========== =========== =========== =========== Total Assets: Office segment .............................................. $ 2,813,007 $ 2,997,488 $ 2,813,007 $ 2,997,488 Industrial segment .......................................... 365,217 496,428 365,217 496,428 Retail segment .............................................. 269,865 256,197 269,865 256,197 Apartment segment ........................................... 116,163 119,356 116,163 119,356 Corporate and other ......................................... 192,064 210,049 192,064 210,049 ----------- ----------- ----------- ----------- Total Assets ............................................. $ 3,756,316 $ 4,079,518 $ 3,756,316 $ 4,079,518 =========== =========== =========== ===========
3. DISPOSITION AND JOINT VENTURE ACTIVITY On May 9, 2000, we closed a transaction with Dreilander-Fonds 97/26 and 99/32 ("DLF II") pursuant to which we sold or contributed five in-service office properties encompassing 570,000 rentable square feet and a 246,000-square-foot development project valued at approximately $117.0 million to a newly created limited partnership (the "DLF II Joint Venture"). DLF II contributed $24.0 million in cash for a 40.0% ownership interest in the DLF II Joint Venture and the DLF II Joint Venture borrowed approximately $60.0 million from third-party lenders. We initially retained the remaining 60.0% interest in the DLF II Joint Venture, received net cash proceeds of approximately $74.0 million and are the sole and exclusive manager and leasing agent of the DLF II Joint Venture's properties, for which we receive customary management fees and leasing commissions. On August 31, 2000, DLF II contributed an additional $7.1 million in cash to the DLF II Joint Venture, which increased its 9 ownership percentage to 51.0%. It is anticipated that DLF II will exercise its option to contribute up to an additional $17.0 million in cash to the DLF II Joint Venture before March 31, 2001 to increase its ownership percentage to 80.0%. We have adopted the equity method of accounting for this joint venture. In addition to the properties sold or contributed to the DLF II Joint Venture, during the nine months ended September 30, 2000, we sold approximately 4.6 million rentable square feet of non-core office and industrial properties and 192.0 acres of development land for gross proceeds of $339.6 million. We recorded a loss of $8.6 million related to these dispositions. Included in these sales were certain properties encompassing 2.0 million square feet sold to an entity majority-owned by a related party for a selling price of $169.0 million. Non-core office and industrial properties generally include single buildings or business parks that do not fit our long-term strategy. Since September 30, 2000, an additional 55,000 square feet of non-core office and industrial properties, which are included in property held for sale in the Consolidated Balance Sheet at September 30, 2000, have been sold for gross proceeds of $6.4 million. On August 9, 2000, we agreed to form two joint ventures with an institutional investor. In the first joint venture, we expect to sell or contribute 21 in-service office properties encompassing approximately 3.0 million rentable square feet valued at approximately $345.3 million (including approximately $4.5 million of development land) to a newly created limited liability company. As part of the formation of the first joint venture, the institutional investor will contribute approximately $85.0 million in cash for an 80.0% ownership interest and the joint venture will borrow approximately $245.0 million from third-party lenders. We will retain the remaining 20.0% ownership interest and receive net cash proceeds of approximately $311.0 million. In the second joint venture, we will contribute approximately $7.2 million of development land we currently own to a second newly created limited liability company. The second joint venture expects to develop four properties encompassing 435,000 rentable square feet with a budgeted cost of approximately $61.0 million. We will each own 50.0% of the second joint venture. In addition, we will be the sole and exclusive manager and leasing agent for the properties in both joint ventures and will receive customary management fees and leasing commissions. We will be adopting the equity method of accounting for these joint ventures. These transactions are subject to customary closing conditions, including the completion of due diligence, the execution of other definitive agreements and the ability to obtain satisfactory financing, and are expected to close before the end of 2000. However, we cannot assure you that these transactions will be consummated or that they will be consummated on the terms described in this quarterly report. 4. 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 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 Securities 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 and intend to vigorously defend this litigation. By order dated June 18, 1999, the court granted in part and denied in part our motion 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 has now been completed. Plaintiff John Flake passed away on or about April 2, 2000, and plaintiff's counsel has substituted his estate as the representative plaintiff in this action. Defendants filed a summary judgment motion as to all claims asserted by the plaintiff, who opposed defendants' motion. By order dated August 28, 2000, the court granted defendants' motion as to plaintiff's claims that J.C. Nichols and the named directors and officers of J.C. Nichols breached fiduciary duties to members of the J.C. Nichols Company Employee Stock Ownership Trust. The court also granted in part and denied in part defendants' summary judgment motion as to the remaining claims asserted by the plaintiff. Defendants have sought reconsideration of the court's ruling as to certain of the securities claims as to which the court denied their summary judgment motion. Due to the inherent uncertainties of the litigation process and the judicial system, we are not able to predict the outcome of this litigation. However, at this time, we do not expect the result of this litigation to have a material adverse effect on our business, financial condition and results of operations. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with all of the financial statements appearing elsewhere in the report and is based primarily on the consolidated financial statements of the Operating Partnership. Results of Operations Three Months Ended September 30, 2000. Revenues from rental operations decreased $5.2 million, or 3.8%, from $135.9 million for the three months ended September 30, 1999 to $130.7 million for the comparable period in 2000. The decrease is primarily a result of the disposition and contribution of 7.9 million square feet of majority-owned office, industrial and retail properties offset in part by the acquisition of 700,000 square feet of majority-owned office, industrial and retail properties and the completion of 4.2 million square feet of development activity during the last three months of 1999 and the first nine months of 2000. Our in-service portfolio decreased from 40.8 million square feet at September 30, 1999 to 37.8 million square feet at September 30, 2000. Same property revenues, which are the revenues of the 461 in-service properties and 1,885 apartment units owned on July 1, 1999, increased 2.4% for the three months ended September 30, 2000, compared to the same three months of 1999. During the three months ended September 30, 2000, 226 leases representing 1.5 million square feet of office, industrial and retail space were executed at an average rate per square foot which was 6.5% higher than the average rate per square foot on the expired leases. Interest and other income increased $2.4 million, or 68.6%, from $3.5 million for the three months ended September 30, 1999 to $5.9 million for the comparable period in 2000. The increase was a result of an increase in development fee income in 2000 related to the DLF II Joint Venture. Rental operating expenses decreased $1.6 million, or 3.9%, from $40.9 million for the three months ended September 30, 1999 to $39.3 million for the comparable period in 2000. The decrease is primarily a result of the disposition and contribution of 7.9 million square feet of majority-owned office, industrial and retail properties offset in part by the acquisition of 700,000 square feet of majority-owned office, industrial and retail properties and the completion of 4.2 million square feet of development activity during the last three months of 1999 and the first nine months of 2000. Rental operating expenses as a percentage of related revenues remained constant at 30.1% for the three months ended September 30, 1999 and 2000. Depreciation and amortization for the three months ended September 30, 2000 and 1999 was $30.1 million and $26.0 million, respectively. The increase of $4.1 million, or 15.8%, is due to an increase in depreciation on leasing commissions and tenant improvements, partly offset by a decrease in depreciation on buildings, due to disposition activity in 1999 and 2000. Interest expense increased $1.3 million, or 5.1%, from $25.4 million for the three months ended September 30, 1999 to $26.7 million for the comparable period in 2000. The increase is attributable to an increase in the weighted average interest rates from 1999 to 2000. Interest expense for the three months ended September 30, 2000 and 1999 included $564,000 and $696,000, respectively, of amortization of deferred financing costs and the costs related to our interest rate hedge contracts. General and administrative expenses increased from 3.4% of total revenue for the three months ended September 30, 1999 to 4.0 % for the comparable period in 2000. Income before extraordinary item was $46.7 million and $43.0 million for the three months ended September 30, 2000 and 1999, respectively. The Operating Partnership recorded $8.1 million in preferred unit distributions for the three months ended September 30, 2000 and 1999. Nine Months Ended September 30, 2000. Revenues from rental operations decreased $19.4 million, or 4.6%, from $423.0 million for the nine months ended September 30, 1999 to $403.6 million for the comparable period in 2000. The decrease is primarily a result of the disposition and contribution of 7.9 million square feet of majority-owned office, industrial and retail properties, offset in part by the acquisition of 700,000 square feet of majority-owned office, industrial and retail properties the completion of 4.2 million square feet of development activity during the last three months of 1999 and the first nine months of 2000. Our in-service portfolio decreased from 40.8 million square feet at September 30, 1999 to 37.8 million square feet at September 30, 2000. Same property revenues, which are the revenues of the 445 in-service properties and 1,885 apartment units owned on January 1, 1999, increased 3.1% for the nine months ended September 30, 2000, compared to the same nine months of 1999. 11 During the nine months ended September 30, 2000, 743 leases representing 4.8 million square feet of office, industrial and retail space commenced at an average rate per square foot which was 6.6% higher than the average rate per square foot on the expired leases. Interest and other income increased $3.1 million, or 24.2%, from $12.8 million for the nine months ended September 30, 1999 to $15.9 million for the comparable period in 2000. The increase was a result of an increase in interest income related to a $30.0 million note receivable that was recorded as a result of certain property dispositions in June 1999, an increase in termination fees from 1999 to 2000 and an increase in development fee income in 2000 related to the DLF II Joint Venture. Rental operating expenses decreased $10.3 million, or 7.9%, from $130.3 million for the nine months ended September 30 1999 to $120.0 million for the comparable period in 2000. The decrease is primarily a result of the disposition and contribution of 7.9 million square feet of majority-owned office, industrial and retail properties, offset in part by the acquisition of 700,000 square feet of majority-owned office, industrial and retail properties and the completion of 4.2 million square feet of development activity during the last three months of 1999 and the first nine months of 2000. Rental operating expenses as a percentage of related revenues decreased from 30.8% for the nine months ended September 30, 1999 to 29.7% for the comparable period in 2000. Depreciation and amortization for the nine months ended September 30, 2000 and 1999 was $87.6 million and $81.8 million, respectively. The increase of $5.8 million, or 7.1%, is due to an increase in depreciation on leasing commissions and tenant improvements, partly offset by a decrease in depreciation on buildings, due to disposition activity in 1999 and 2000. Interest expense decreased $3.7 million, or 4.5%, from $84.7 million for the nine months ended September 30, 1999 to $81.0 million for the comparable period in 2000. The decrease is attributable to the decrease in the outstanding debt for the entire nine months in 2000. Interest expense for the nine months ended September 30, 2000 and 1999 included $1.9 million and $2.2 million, respectively, of amortization or deferred financing costs and the costs related to our interest rate hedge contracts. General and administrative expenses was 3.8% of rental revenue for the nine months ended September 30, 1999 and 2000. Income before extraordinary item was $109.4 million and $126.0 million for the nine months ended September 30, 2000 and 1999, respectively. The Operating Partnership recorded $24.4 million in preferred unit distributions for the nine months ended September 30, 2000 and 1999. Liquidity and Capital Resources Statement of Cash Flows. For the nine months ended September 30, 2000, cash provided by operating activities increased by $31.4 million, or 17.9%, to $207.1 million, as compared to $175.7 million for the same period in 1999. The increase is due to the collection of a $30.0 million note receivable and the accrual of an $18.0 million liability related to the DLF II Joint Venture during the nine months ended September 30, 2000. Cash provided by investing activities was $107.3 million for the first nine months of 2000, as compared to $86.5 million for the same period in 1999. The increase is primarily due to the decline in acquisition and development activity, offset in part by the decline in disposition activity during the first nine months of 2000, as compared to the same period in 1999. Cash used in financing activities was $318.8 million for the first nine months of 2000, as compared to $247.0 million for the same period in 1999. The increase is primarily due to the increase in the payments on mortgages and notes payable and under the revolving loan from 1999 to 2000, offset in part by the decrease in net proceeds from the sale of Common Stock and the repurchase of treasury stock and units in 2000. Payments of distributions decreased by $535,000 to $114.2 million for the first nine months of 2000, as compared with $114.7 million for the same period in 1999. Preferred unit distributions were $24.4 million for the first nine months of 2000 and 1999. Capitalization. The Operating Partnership's total indebtedness at September 30, 2000 totaled $1.6 billion and was comprised of approximately $500.0 million of secured indebtedness with a weighted average interest rate of 7.9% and $1.1 billion of unsecured indebtedness with a weighted average interest rate of 7.4%. Except as stated below, all of the mortgage and notes payable outstanding at September 30, 2000 were either fixed rate obligations or variable rate obligations covered by interest rate hedge contracts. A portion of our $450.0 million unsecured revolving loan the ("Revolving Loan") and approximately $37.0 million in floating rate notes payable assumed upon consummation of the merger with J.C. Nichols in 1998 were not covered by interest rate hedge contracts on September 30, 2000. 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 12 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, 2000:
Notional Maturity Fixed Fair Market Type of Hedge Amount Date Reference Rate Rate Value ------------- ------ ---- -------------- ---- ----- Swap $20,006 6/10/02 1-Month LIBOR + 0.75% 6.95% $ 98 Collar 80,000 10/15/01 1-Month LIBOR 5.60 - 6.25% 298 Cap 5,434 6/15/01 1-Month LIBOR 7.75% ---
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 $125.0 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 $214.0 million was available as of September 30, 2000); 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. 13 Recent Developments Stock Repurchase. From January 1, 2000 to November 10, 2000, the Company repurchased 3.9 million shares of Common stock and Common Units at a weighted average price of $23.61 per share/unit, for a total purchase price of $92.7 million. Disposition and Joint Venture Activity. On May 9, 2000, we closed a transaction with Dreilander-Fonds 97/26 and 99/32 ("DLF II") pursuant to which we sold or contributed five in-service office properties encompassing 570,000 rentable square feet and a 246,000-square-foot development project valued at approximately $117.0 million to a newly created limited partnership (the "DLF II Joint Venture"). DLF II contributed $24.0 million in cash for a 40.0% ownership interest in the DLF II Joint Venture and the DLF II Joint Venture borrowed approximately $60.0 million from third-party lenders. We initially retained the remaining 60.0% interest in the DLF II Joint Venture, received net cash proceeds of approximately $74.0 million and are the sole and exclusive manager and leasing agent of the DLF II Joint Venture's properties, for which we receive customary management fees and leasing commissions. On August 31, 2000, DLF II contributed an additional $7.1 million in cash to the DLF II Joint Venture, which increased its ownership percentage to 51.0%. It is anticipated that DLF II will exercise its option to contribute up to an additional $17.0 million in cash to the DLF II Joint Venture before March 31, 2001 to increase its ownership percentage to 80.0%. In addition to the properties sold or contributed to the DLF II Joint Venture, during the nine months ended September 30, 2000, we sold approximately 4.6 million rentable square feet of non-core office and industrial properties and 192.0 acres of development land for gross proceeds of $339.6 million. Non-core office and industrial properties generally include single buildings or business parks that do not fit our long-term strategy. Since September 30, 2000, we have sold an additional 55,000 square feet of non-core office and industrial properties for gross proceeds of $6.4 million. On August 9, 2000, we agreed to form two joint ventures with an institutional investor. In the first joint venture, we expect to sell or contribute 21 in-service office properties encompassing approximately 3.0 million rentable square feet valued at approximately $345.3 million (including approximately $4.5 million of development land) to a newly created limited liability company. As part of the formation of the first joint venture, the institutional investor will contribute approximately $85.0 million in cash for an 80.0% ownership interest and the joint venture will borrow approximately $245.0 million from third-party lenders. We will retain the remaining 20.0% ownership interest and receive net cash proceeds of approximately $311.0 million. In the second joint venture, we will contribute approximately $7.2 million of development land we currently own to a second newly created limited liability company. The second joint venture expects to develop four properties encompassing 435,000 rentable square feet with a budgeted cost of approximately $1.0 million. We will each own 50.0% of this second joint venture. In addition, we will be the sole and exclusive manager and leasing agent for the properties in both joint ventures and receive customary management fees and leasing commissions. These transactions are subject to customary closing conditions, including the completion of due diligence, the execution of other definitive agreements and the ability to obtain satisfactory financing, and are expected to close before the end of 2000. However, we cannot assure you that these transactions will be consummated or that they will be consummated on the terms described in this quarterly report. 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. As of November 19, 2000, we expect to reinvest up to $25.0 million of the net proceeds from recent disposition activity to acquire in tax-deferred exchange transactions in-service properties, development land and development projects located in core markets and in sub-markets where we have a strong presence. For an exchange to qualify for tax-deferred treatment under Section 1031, the net proceeds from the sale of a property must be held by an escrow agent until applied toward the purchase of real estate qualifying for gain deferral. Given the competition for properties meeting our investment criteria, there may be some delay in reinvesting such proceeds. Delays in reinvesting such proceeds will reduce our income from operations. In addition, the use of net proceeds from dispositions to fund development activity, either through direct payments or repayment of borrowings under our revolving loan, will reduce our income from operations until such development projects are placed in service. Possible Environmental Liabilities In connection with owning or operating our properties, we may be liable for certain costs due to possible environmental liabilities. Under various laws, ordinances and regulations, such as the Comprehensive Environmental Response Compensation and Liability Act, and common law, an owner or operator of real estate is liable for the costs to remove or remediate certain hazardous or toxic chemicals or substances on or in the property. 14 Owners or operators are also liable for certain other costs, including governmental fines and injuries to persons and property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic chemicals or substances. The presence of such substances, or the failure to remediate such substances properly, may adversely affect the owner's or operator's ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal, treatment or transportation of hazardous or toxic chemicals or substances may also be liable for the same types of costs at a disposal, treatment or storage facility, whether or not that person owns or operates that facility. Certain environmental laws also impose liability for releasing asbestos-containing materials. Third parties may seek recovery from owners or operators of real property for personal injuries associated with asbestos-containing materials. A number of our properties have asbestos-containing materials or material that we presume to be asbestos-containing materials. In connection with owning and operating our properties, we may be liable for such costs. In addition, it is not unusual for property owners to encounter on-site contamination caused by off-site sources. The presence of hazardous or toxic chemicals or substances at a site close to a property could require the property owner to participate in remediation activities or could adversely affect the value of the property. Contamination from adjacent properties has migrated onto at least three of our properties; however, based on current information, we do not believe that any significant remedial action is necessary at these affected sites. 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, the 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. In June, 2000, FASB issued Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133. Statement No. 133, as amended by Statement No. 138, 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 our derivatives is discussed under "Liquidity and Capital Resources." 15 Compliance with the Americans with Disabilities Act Under the Americans with Disabilities Act (the "ADA"), all public accommodations and commercial facilities are required to meet certain federal requirements related to access and use by disabled persons. These requirements became effective in 1992. Compliance with the ADA requirements could require removal of access barriers, and noncompliance could result in imposition of fines by the U.S. government or an award of damages to private litigants. Although we believe that our properties are substantially in compliance with these requirements, we may incur additional costs to comply with the ADA. Although we believe that such costs will not have a material adverse effect on us, if required changes involve a greater expenditure than we currently anticipate, our results of operations, liquidity and capital resources could be materially adversely affected. Funds From Operations and Cash Available for Distributions We consider funds from operations ("FFO") to be a useful financial performance measure of the operating performance of an equity REIT because, together with net income and cash flows, FFO provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures. FFO does not represent net income or cash flows from operating, investing or financing activities as defined by Generally Accepted Accounting Principles ("GAAP"). It should not be considered as an alternative to net income as an indicator of our operating performance or to cash flows as a measure of liquidity. FFO does not measure whether cash flow is sufficient to fund all cash needs, including principal amortization, capital improvements and distributions to stockholders. Further, FFO as disclosed by other REITs may not be comparable to our calculation of FFO, as described below. FFO and cash available for distributions should not be considered as alternatives to net income as an indication of our performance or to cash flows as a measure of liquidity. FFO equals net income (computed in accordance with GAAP) excluding gains (or losses) from debt restructuring and sales of depreciable assets, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. In March 1995, the National Association of Real Estate Investment Trusts ("NAREIT") issued a clarification of the definition of FFO. This clarification provides that amortization of deferred financing costs and depreciation of non-real estate assets are no longer to be added back to net income in arriving at FFO. In October 1999, NAREIT issued an additional clarification effective as of January 1, 2000 stipulating that FFO should include both recurring and non-recurring operating results. Consistent with this clarification, non-recurring items that are not defined as "extraordinary" under GAAP will be reflected in the calculation of FFO. Gains and losses from the sale of depreciable operating property will continue to be excluded from the calculation of FFO. Cash available for distribution is defined as FFO reduced by non-revenue enhancing capital expenditures for building improvements and tenant improvements and lease commissions related to second generation space. 16 FFO and cash available for distribution for the three and nine month periods ended September 30, 2000 and 1999 are summarized in the following table (unaudited and in thousands):
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- --------------------------- 2000 1999 2000 1999 --------- --------- --------- --------- Funds from Operations: Income before extraordinary item ................................. $ 46,672 $ 42,943 $ 109,350 $ 125,980 Add/(Deduct): Distributions to preferred unit-holders ....................... (8,145) (8,145) (24,435) (24,435) Severance costs and other division Closing costs .............. -- -- -- 1,233 (Gain)/loss on disposition of land and depreciable assets ....................................................... (10,557) (163) 8,559 (2,256) Gain on disposition of land ................................... 3,288 -- 3,288 -- Depreciation and amortization ................................. 30,104 26,024 87,630 81,753 Depreciation of unconsolidated affiliates ..................... 1,657 892 3,444 2,114 --------- --------- --------- --------- Funds from operations before minority interest ................ 63,019 61,551 187,836 184,389 Cash Available for Distribution: Add/(Deduct): Rental income from straight-line rents ........................... (3,657) (3,436) (11,452) (10,945) Amortization of deferred financing costs ......................... 564 696 1,862 2,208 Non-incremental revenue generating capital Expenditures (1): Building improvements paid ................................ (2,248) (2,114) (5,913) (6,589) Second generation tenant improvements paid ................ (7,900) (7,194) (17,730) (17,315) Second generation lease commissions paid .................. (1,859) (3,000) (8,668) (10,613) --------- --------- --------- --------- Cash available for distribution .................................. $ 47,919 $ 46,503 $ 145,935 $ 141,135 ========= ========= ========= ========= Weighted average Common Units Outstanding - Basic ................ 65,864 70,498 67,489 70,031 ========= ========= ========= ========= Weighted average Common Units Outstanding - Diluted . ............ 66,285 70,804 67,727 70,291 ========= ========= ========= ========= Dividend payout ratio - Diluted: Funds from operations ............................................ 60.0% 63.8% 60.6% 62.3% ========= ========= ========= ========= Cash available for distribution .................................. 78.8% 84.5% 78.0% 81.4% ========= ========= ========= =========
- ---------- (1) Amounts represent cash expenditures. 17 Disclosure Regarding Forward-Looking Statements Some of the information in this Quarterly Report on Form 10-Q may contain forward-looking statements. Such statements include, in particular, statements about our plans, strategies and prospects under "Management's Discussion and Analysis of Financial Condition and Results of Operations." You can identify forward-looking statements by our use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate," "continue" or other similar words. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that our plans, intentions or expectations will be achieved. When considering such forward-looking statements, you should keep in mind the following important factors that could cause our actual results to differ materially from those contained in any forward-looking statement: 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. 18 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, 2000 and 1999:
Rentable Percent Leased/ September 30, 2000 Square Feet Pre-Leased - ------------------ ----------- -------------- In-Service: Office............................................. 25,984,000 94% Industrial......................................... 10,204,000 95% Retail............................................. 1,569,000 94% ---------- ------ Total or Weighted Average........................ 37,757,000 94% ========== ====== Development: Completed - Not Stabilized Office............................................. 759,000 79% Industrial......................................... -- --% Retail............................................. 81,000 90% ---------- ------ Total or Weighted Average........................ 840,000 80% ========== ====== In Process Office............................................. 1,709,000 55% Industrial......................................... 395,000 87% Retail............................................. -- -- ---------- ------ Total or Weighted Average........................ 2,104,000 61% ========== ====== Total: Office............................................. 28,452,000 Industrial......................................... 10,599,000 Retail............................................. 1,650,000 ---------- Total or Weighted Average........................ 40,701,000 ========== September 30, 1999 - ------------------ In-Service: Office............................................. 27,293,000 94% Industrial......................................... 11,805,000 91% Retail............................................. 1,676,000 91% ---------- ------ Total or Weighted Average........................ 40,774,000 93% ========== ====== Development: Completed - Not Stabilized Office............................................. 2,174,000 74% Industrial......................................... 383,000 55% Retail............................................. 119,000 97% ---------- ------ Total or Weighted Average.......................... 2,676,000 72% ========== ====== In Process Office............................................. 2,350,000 78% Industrial......................................... 282,000 10% Retail............................................. 81,000 82% ---------- ------ Total or Weighted Average........................ 2,713,000 71% ========== ====== Total: Office............................................. 31,817,000 Industrial......................................... 12,470,000 Retail............................................. 1,876,000 ---------- Total or Weighted Average.......................... 46,163,000 ==========
19 The following table sets forth certain information with respect to our properties under development as of September 30, 2000 ($ in thousands): In-Process
Rentable Pre-Leasing Estimated Square Estimated Cost at Percentage Estimated Stabilization Name Market Feet Cost 9/30/00 (1) Completion (2) ---- ------ -------- --------- ------- ----------- ---------- ------------- Office: ECPI Build-to-suit Piedmont Triad 30,000 $ 3,020 $ 2,998 100% 4Q00 4Q00 Deerfield III Atlanta 54,000 5,276 2,356 100% 4Q00 3Q01 Highwoods Plaza Tampa 66,000 7,505 5,183 20% 4Q00 3Q01 Intermedia Building 5 Tampa 185,000 27,633 6,298 100% 3Q01 3Q01 Met Life Building at Brookfield Greenville 118,000 13,220 21 67% 3Q01 4Q01 Shadow Creek Memphis 80,000 8,989 4,472 86% 4Q00 4Q01 380 Park Place Tampa 82,000 9,675 2,590 47% 1Q01 4Q01 kforce.com Tampa 128,000 18,582 284 100% 4Q01 4Q01 Maplewood Research Triangle 36,000 3,901 1,703 100% 1Q01 1Q02 Situs III Research Triangle 39,000 4,543 782 94% 1Q01 1Q02 Highwoods Centre @ Peachtree Corners III Atlanta 54,000 5,140 1,333 0% 2Q01 2Q02 Cool Springs II Nashville 205,000 22,718 8,950 19% 2Q01 2Q02 Highwoods Tower II Research Triangle 167,000 25,134 12,722 72% 1Q01 2Q02 ParkWest One Research Triangle 46,000 4,364 127 0% 1Q01 1Q02 ParkWest Two Research 4,544 Triangle 48,000 137 0% 1Q01 1Q02 Centre Green Two Research Triangle 97,000 11,596 1,055 0% 2Q01 2Q02 Hickory Trace Nashville 52,000 5,933 1,511 0% 3Q01 3Q02 Stony Point III Richmond 106,000 11,425 2,546 43% 2Q01 3Q02 North Shore Commons Richmond 116,000 13,084 2,030 53% 2Q01 3Q02 ---------- --------- ------------ ----- In-Process Office Total or Weighted Average 1,709,000 $206,282 $ 57,098 55% --------- -------- ---------- ----- Industrial: Jones Apparel Expansion Piedmont Triad 209,000 $ 6,071 $ 4,241 100% 4Q00 4Q00 Holden Road Piedmont Triad 64,000 2,014 1,032 40% 1Q01 3Q01 Tradeport Place III Atlanta 122,000 4,780 2,659 90% 4Q00 4Q01 ---------- --------- ------------- ----- In-Process Industrial Total or Weighted Average 395,000 $ 12,865 $ 7,932 87% ---------- --------- ---------- ----- Total or Weighted Average of all In-Process Development Projects 2,104,000 $219,147 $ 65,030 61% ========= ======== ======== =====
- ------------------- (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 95.0% occupied or one year from the date of completion. 20
Completed - Not Stabilized Rentable Pre-Leasing Estimated Square Estimated Cost at Percentage Estimated Stabilization Name Market Feet Cost 9/30/00 (1) Completion (2) ------------- ------ --------- ---------- -------- ------------ ------------ ------------- Office: Mallard Creek V Charlotte 118,000 12,262 11,294 70% 4Q99 4Q00 Valencia Place Kansas City 241,000 34,850 35,237 90% 1Q00 4Q00 Centre Green One Research Triangle 97,000 11,246 6,856 92% 3Q00 3Q01 Capital Plaza Orlando 303,000 53,000 44,740 69% 1Q00 4Q01 --------- ---------- -------- ------ ---- ---- Completed-Not Stabilized Office Total or Weighted Average 759,000 $111,358 $ 98,127 79% --------- ---------- -------- ------ Retail: Valencia Place Kansas City 81,000 $ 16,650 $ 14,842 90% 1Q00 4Q00 --------- ---------- -------- ------ Completed-Not Stabilized Retail Total or Weighted Average 81,000 $ 16,650 $ 14,842 90% --------- ---------- -------- ------ Total or Weighted Average of all Completed-Not Stabilized Development Projects 840,000 $128,008 $112,969 80% --------- ---------- -------- ------ Total or Weighted Average of all Development Projects 2,944,000 $347,155 $177,999 66% ========= ========== ======== ======
- --------------- (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 95.0% occupied or one year from the date of completion. 21
Rentable Square Estimated Pre-Leasing Development Analysis Feet Costs Percentage (1) -------------- ------------- ------------------- (in thousands) Summary by Estimated Stabilization Date: Fourth Quarter 2000................................. 679,000 $ 72,853 90% First Quarter 2001.................................. -- -- -- Second Quarter 2001................................. -- -- -- Third Quarter 2001.................................. 466,000 53,674 79% Fourth Quarter 2001................................. 833,000 108,246 76% First Quarter 2002.................................. 169,000 17,352 43% Second Quarter 2002................................. 523,000 64,588 30% Third Quarter 2002.................................. 274,000 30,442 39% ---------- ---------- ---- Total or Weighted Average......................... 2,944,000 $ 347,155 66% ========= ========== ==== Summary by Market: Atlanta............................................. 230,000 $ 15,196 71% Charlotte........................................... 118,000 12,262 70% Greenville.......................................... 118,000 13,220 67% Kansas City......................................... 322,000 51,500 90% Memphis............................................. 80,000 8,989 86% Nashville........................................... 257,000 28,651 15% Orlando............................................. 303,000 53,000 69% Piedmont Triad...................................... 303,000 11,105 87% Research Triangle................................... 530,000 65,328 53% Richmond............................................ 222,000 24,509 48% Tampa............................................... 461,000 63,395 79% ---------- ---------- ---- Total or Weighted Average......................... 2,944,000 $ 347,155 66% ========= ========== ==== Build-to-Suit..................................... 552,000 $ 55,306 100% Multi-Tenant...................................... 2,392,000 291,849 58% --------- ---------- ----- Total or Weighted Average......................... 2,944,000 $ 347,155 66% ========= ========== ===== Average Rentable Average Square Estimated Pre-Leasing Feet Costs Percentage (1) -------------- ------------- ------------------- (in thousands) Per Property Type: Office.............................................. 107,304 $ 13,810 62% Industrial.......................................... 131,667 4,288 87% Retail.............................................. 81,000 16,650 90% ----------- ----------- ----- All................................................. 109,037 $ 12,858 66% ========== ========== =====
- ------------------ (1) Includes the effect of letters of intent. 22 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, 2000 and December 31, 1999.
Office Leasing Statistics Three Months Ended --------------------------------------------------------------------------------------------- 9/30/00 6/30/00 3/31/00 12/31/99 Average ------- ------- ------- -------- ------- Net Effective Rents Related to Re-Leased Space: Number of lease transactions (signed leases) 174 221 207 251 213 Rentable square footage leased 1,056,239 990,663 931,686 1,337,611 1,079,050 Average per rentable square foot over the lease term: Base rent $ 15.23 $ 18.43 $ 17.04 $ 17.28 $ 17.00 Tenant improvements (1.21) (1.39) (1.07) (0.90) (1.14) Leasing commissions (0.40) (0.57) (0.40) (0.36) (0.43) Rent concessions (0.03) (0.05) (0.04) (0.04) (0.04) ------------ ----------- ------------ ------------ ----------- Effective rent 13.59 16.42 15.53 15.98 15.39 Expense stop (1) (4.03) (5.37) (5.00) (5.09) (4.87) ------------ ----------- ------------ ------------ ----------- Equivalent effective net rent $ 9.56 $ 11.05 $ 10.53 $ 10.89 $ 10.52 ============ =========== ============ ============ =========== Average term in years 5 5 4 5 5 ============ =========== ============ ============ =========== Capital Expenditures Related to Released Space: Tenant Improvements: Total dollars committed under signed leases $ 6,676,576 $ 5,510,054 $ 4,756,023 $ 6,224,907 $ 5,791,890 Rentable square feet 1,056,239 930,663 931,686 1,337,611 1,079,050 ------------ ----------- ------------ ------------ ----------- Per rentable square foot $ 6.32 $ 5.92 $ 5.10 $ 4.65 $ 5.37 ============ =========== ============ ============ =========== Leasing Commissions: Total dollars committed under signed leases $ 1,910,278 $ 2,392,441 $ 1,505,559 $ 2,151,399 $ 1,989,919 Rentable square feet 1,056,239 990,663 931,686 1,337,611 1,079,050 ------------ ----------- ------------ ------------ ----------- Per rentable square foot $ 1.81 $ 2.41 $ 1.62 $ 1.61 $ 1.84 ============ =========== ============ ============ =========== Total: Total dollars committed under signed leases $ 8,586,853 $ 7,902,495 $ 6,261,582 $ 8,376,306 $ 7,781,809 Rentable square feet 1,056,239 990,663 931,686 1,337,611 1,079,050 ------------ ----------- ------------ ------------ ----------- Per rentable square foot $ 8.13 $ 7.98 $ 6.72 $ 6.26 $ 7.21 ============ =========== ============ ============ =========== Rental Rate Trends: Average final rate with expense pass throughs $ 14.30 $ 16.59 $ 15.79 $ 16.96 $ 15.91 Average first year cash rental rate $ 14.96 $ 17.58 $ 16.76 $ 17.16 $ 16.62 ------------ ----------- ------------ ------------ ----------- Percentage increase 4.61% 6.02% 6.11% 1.16% 4.43% ============ =========== ============ ============ ===========
- ------------ (1) "Expense stop" represents operating expenses (generally including taxes, utilities, routine building expense and common area maintenance) which we will not be reimbursed by our tenants. 23
Industrial Leasing Statistics Three Months Ended ---------------------------------------------------------------------------------------------- 9/30/00 6/30/00 03/31/00 12/31/99 Average ------- ------- -------- -------- ------- Net Effective Rents Related to Re-Leased Space: Number of lease transactions (signed leases) 31 46 66 64 52 Rentable square footage leased 349,079 362,521 1,305,697 543,522 640,205 Average per rentable square foot over the lease term: Base rent $ 4.54 $ 5.14 $ 4.34 $ 5.85 $ 4.97 Tenant improvements (0.32) (0.28) (0.19) (0.38) (0.29) Leasing commissions (0.15) (0.12) (0.11) (0.11) (0.12) Rent concessions 0.00 (0.01) 0.00 (0.01) (0.01) ----------- ---------- ------------ ------------ ----------- Effective rent 4.07 4.73 4.04 5.35 4.55 Expense stop (1) (0.23) (0.48) (0.14) (0.39) (0.31) ----------- ---------- ------------ ------------ ----------- Equivalent effective net rent $ 3.84 $ 4.25 $ 3.90 $ 4.96 $ 4.24 =========== ========== ============ ============ =========== Average term in years 4 4 5 4 4 =========== ========== ============ ============ =========== Capital Expenditures Related to Re-leased Space: Tenant Improvements: Total dollars committed under signed leases $ 510,520 $ 389,592 $ 966,338 $ 1,042,852 $ 727,325 Rentable square feet 349,079 362,521 1,305,697 543,522 640,205 ----------- ---------- ------------ ------------ ----------- Per rentable square foot $ 1.46 $ 1.07 $ 0.74 $ 1.92 $ 1.14 =========== ========== ============ ============ =========== Leasing Commissions: Total dollars committed under signed leases $ 167,772 $ 185,028 $ 671,182 $ 222,728 $ 311,678 Rentable square feet 349,079 362,521 1,305,697 543,522 640,205 ----------- ---------- ------------ ------------ ----------- Per rentable square foot $ 0.48 $ 0.51 $ 0.51 $ 0.41 $ 0.49 =========== ========== ============ ============ =========== Total: Total dollars committed under signed leases $ 678,292 $ 574,620 $ 1,637,520 $ 1,265,580 $ 1,039,003 Rentable square feet 349,079 362,521 1,305,697 543,522 640,205 ----------- ---------- ------------ ------------ ----------- Per rentable square foot $ 1.94 $ 1.59 $ 1.25 $ 2.33 $ 1.62 =========== ========== ============ ============ =========== Rental Rate Trends: Average final rate with expense pass throughs $ 4.11 $ 4.44 $ 3.91 $ 5.50 $ 4.49 Average first year cash rental rate $ 4.51 $ 4.72 $ 4.19 $ 5.66 $ 4.77 ----------- ---------- ------------ ------------ ----------- Percentage increase 9.55% 6.35% 6.98% 2.84% 6.15% =========== ========== ============ ============ ===========
- ---------------- (1) "Expense stop" represents operating expenses (generally including taxes, utilities, routine building expense and common area maintenance) which we will not be reimbursed by our tenants. 24
Retail Leasing Statistics Three Months Ended ------------------------------------------------------------------------------------ 9/30/00 6/30/00 3/31/00 12/31/99 Average --------- ------------ --------- ------------ ---------- Net Effective Rents Related to Re-Leased Space: Number of lease transactions (signed leases) 21 15 20 28 21 Rentable square footage leased 53,217 37,036 37,556 85,476 53,321 Average per rentable square foot over the lease term: Base rent $ 22.26 $ 21.84 $ 19.81 $ 14.54 $ 19.61 Tenant improvements (1.26) (1.97) (0.60) (1.51) (1.34) Leasing commissions (0.58) (0.57) (0.76) (0.59) (0.63) Rent concessions (0.03) 0.00 0.00 0.00 0.01 --------- ------------ --------- ------------ ---------- Effective rent 20.39 19.30 18.45 12.44 17.65 Expense stop (1) 0.00 (0.12) 0.00 0.00 (0.03) --------- ------------ --------- ------------ ---------- Equivalent effective net rent $ 20.39 $ 19.18 $ 18.45 $ 12.44 $ 17.62 ========= ============ ========= ============ ========== Average term in years 8 8 5 8 7 ========= ============ ========= ============ ========== Capital Expenditures Related to Re-leased Space: Tenant Improvements: Total dollars committed under signed leases $600,136 $ 914,200 $ 82,365 $ 1,119,000 $ 678,925 Rentable square feet 53,217 37,036 37,556 85,476 53,321 --------- ------------ --------- ------------ ---------- Per rentable square foot $ 11.28 $ 24.68 $ 2.19 $ 13.09 $ 12.73 ========= ============ ========= ============ ========== Leasing Commissions: Total dollars committed under signed leases $143,269 $ 175,122 $145,060 $ 397,123 $ 215,144 Rentable square feet 53,217 37,036 37,556 85,476 53,321 --------- ------------ --------- ------------ ---------- Per rentable square foot $ 2.69 $ 4.73 $ 3.86 $ 4.65 $ 4.03 ========= ============ ========= ============ ========== Total: Total dollars committed under signed leases $743,406 $ 1,089,322 $227,425 $ 1,516,123 $ 894,069 Rentable square feet 53,217 37,036 37,556 85,476 53,321 --------- ------------ --------- ------------ ---------- Per rentable square foot $ 13.97 $ 29.41 $ 6.06 $ 17.74 $ 16.77 ========= ============ ========= ============ ========== Rental Rate Trends: Average final rate with expense pass throughs $ 13.85 $ 16.60 $ 15.20 $ 8.87 $ 13.63 Average first year cash rental rate $ 19.40 $ 19.06 $ 18.68 $ 12.41 $ 17.39 --------- ------------ --------- ------------ ---------- Percentage increase 40.08% 14.82% 22.83% 39.86% 27.54% ========= ============ ========= ============ ==========
- ------------------ (1) "Expense stop" represents operating expenses (generally including taxes, utilities, routine building expense and common area maintenance) which we will not be reimbursed by our tenants. 25 The following tables set forth scheduled lease expirations for executed leases at our majority-owned in-service properties (excluding apartment units) as of September 30, 2000 assuming no tenant exercises renewal options. Office Properties:
Percentage of Percentage of Leased Square Annual Rents Average Annual Leased Rents Total Rentable Footage Under Expiring Rental Rate Per Represented Year of Lease Number of Square Feet Represented by Leases (1) Square Foot for by Expiring Expiration Leases Expiring Expiring Leases (in thousands) Expirations (1) Leases ----------------- --------- -------------- --------------- --------------- --------------- ----------- Remainder of 2000 353 1,289,187 5.2% $ 21,133 $ 16.39 5.1% 2001 560 3,016,085 12.2% 52,317 17.35 12.7% 2002 584 3,152,157 12.8% 52,861 16.77 12.8% 2003 531 3,716,010 15.1% 63,796 17.17 15.4% 2004 386 2,853,841 11.6% 50,191 17.59 12.1% 2005 348 2,916,045 11.8% 48,548 16.65 11.7% 2006 75 1,766,871 7.2% 29,222 16.54 7.1% 2007 46 1,074,372 4.4% 16,590 15.44 4.0% 2008 48 1,341,127 5.4% 20,352 15.18 4.9% 2009 21 724,305 2.9% 11,480 15.85 2.8% 2010 and thereafter 106 2,815,087 11.4% 46,996 16.69 11.4% -------- ---------- --------- --------- --------- -------- 3,058 24,665,087 100.0% $ 413,486 $ 16.76 100.0% ======== ========== ========= ========= ========= ======== Industrial Properties: Percentage of Percentage of Leased Square Annual Rents Average Annual Leased Rents Total Rentable Footage Under Expiring Rental Rate Per Represented Year of Lease Number of Square Feet Represented by Leases (1) Square Foot for by Expiring Expiration Leases Expiring Expiring Leases (in thousands) Expirations (1) Leases - ---------------- --------- -------------- --------------- -------------- --------------- ------------- Remainder of 2000 48 660,609 6.9% $ 3,093 $ 4.68 6.9% 2001 101 1,598,748 16.6% 7,227 4.52 16.1% 2002 101 1,637,433 17.0% 7,180 4.38 16.0% 2003 77 1,293,892 13.4% 6,211 4.80 13.8% 2004 58 2,110,324 21.9% 8,583 4.07 19.0% 2005 35 513,612 5.3% 2,812 5.47 6.3% 2006 11 356,062 3.7% 2,278 6.40 5.1% 2007 12 526,748 5.5% 2,946 5.59 6.6% 2008 4 196,045 2.0% 1,301 6.64 2.9% 2009 6 268,813 2.8% 1,806 6.72 4.0% 2010 and thereafter 13 468,199 4.9% 1,492 3.19 3.3% ---- ---------- -------- ------- --------- ------- 466 9,630,485 100.0% $44,929 $ 4.67 100.0% ==== ========== ======== ======= ========= =======
- ------------------- (1) Includes operating expense pass throughs and excludes the effect of future contractual rent increases. 26
Retail Properties: Percentage of Leased Square Annual Rents Average Annual Percentage of Total Footage Under Rental Leased Rents Year of Rentable Represented Expiring Rate Per Represented by Lease Number of Square Feet by Expiring Leases (1) Square Foot for Expiring Expiration Leases Expiring Leases (in thousands) Expirations (1) Leases ---------- --------- ----------- -------------- -------------- --------------- -------------- Remainder of 2000 26 111,244 7.3% $ 1,223 $10.99 4.0% 2001 43 97,113 6.4% 2,748 28.30 8.9% 2002 35 85,947 5.7% 1,826 21.25 5.9% 2003 41 104,379 6.9% 2,282 21.86 7.4% 2004 36 213,861 14.1% 2,657 12.42 8.6% 2005 34 82,735 5.5% 2,284 27.61 7.4% 2006 23 80,498 5.3% 1,902 23.63 6.2% 2007 15 65,683 4.3% 1,181 17.98 3.8% 2008 16 108,901 7.2% 3,613 33.18 11.7% 2009 21 169,286 11.2% 3,177 18.77 10.3% 2010 and thereafter 29 397,014 26.1% 7,908 19.92 25.8% ------- ----------- ------- --------- ------- ------- 319 1,516,661 100.0% $30,801 $20.31 100.0% ====== ========== ====== ======= ====== ====== Total: Percentage of Leased Square Annual Rents Average Annual Percentage of Total Footage Under Rental Leased Rents Year of Rentable Represented Expiring Rate Per Represented by Lease Number of Square Feet by Expiring Leases (1) Square Foot for Expiring Expiration Leases Expiring Leases (in thousands) Expirations (1) Leases ---------- --------- ----------- -------------- -------------- --------------- -------------- Remainder of 2000 427 2,061,040 5.8% $ 25,449 $12.35 5.2% 2001 704 4,711,946 13.2% 62,292 13.22 12.7% 2002 720 4,875,537 13.6% 61,867 12.69 12.6% 2003 649 5,114,281 14.2% 72,289 14.13 14.8% 2004 480 5,178,026 14.4% 61,431 11.86 12.6% 2005 417 3,512,392 9.8% 53,644 15.27 11.0% 2006 109 2,203,431 6.2% 33,402 15.16 6.8% 2007 73 1,666,803 4.7% 20,717 12.43 4.2% 2008 68 1,646,073 4.6% 25,266 15.35 5.2% 2009 48 1,162,404 3.2% 16,463 14.16 3.4% 2010 and thereafter 148 3,680,300 10.3% 56,396 15.32 11.5% ------ ----------- ------- ---------- ------- -------- 3,843 35,812,233 100.0% $489,216 $13.66 100.0% ===== ========== ====== ======== ====== ======
- ------------- (1) Includes operating expenses pass throughs and excludes the effect of future contractual rent increases. Inflation Historically inflation has not had a significant impact on our operations because of the relatively low inflation rate in our geographic areas of operation. Most of the leases require the tenants to pay their pro rata share of increased incremental operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing our exposure to increases in operating expenses resulting from inflation. In addition, many of the leases are for terms of less than seven years, which may enable us to replace existing leases with new leases at a higher base rent if rents on the existing leases are below the market rate. 27 Item 3. Quantitative and Qualitative Disclosures About Market Risk The effects of potential changes in interest rates are discussed below. Our market risk discussion includes `forward-looking statements" and represents an estimate of possible changes in fair value or future earnings that would occur assuming hypothetical future movements in interest rates or These disclosures are not precise indicators of expected future losses, but only indicators of reasonably possible losses. As a result, actual future results may differ materially from those presented. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for a description of our accounting policies and other information related to these financial instruments. To meet in part our long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Borrowings under the Revolving Loan bear interest at variable rates. Our long-term debt, which consists of long-term financings and the issuance of debt securities, typically bears interest at fixed rates. In addition, we have assumed fixed rate and variable rate debt in connection with acquiring properties. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not hold or issue these derivative contracts for trading or speculative purposes. Certain Variable Rate Debt. As of September 30, 2000, the Operating Partnership had approximately $155.5 million of variable rate debt outstanding that was not protected by interest rate hedge contracts. If the weighted average interest rate on this variable rate debt is 100 basis points higher or lower during the 12 months ended September 30, 2001, our interest expense would be increased or decreased approximately $1.6 million. In addition, as of September 30, 2000, we had $80.0 million of additional variable rate debt outstanding that was protected by an interest rate collar that effectively keeps the interest rate within a range of 65 basis points. We do not believe that a 100 basis point increase or decrease in interest rates would materially affect our interest expense with respect to this $80.0 million of debt. Interest Rate Hedge Contracts. For a discussion of our interest rate hedge contracts in effect at September 30, 2000, 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, 2000 would increase by approximately $1.0 million. If interest rates decrease by 100 basis points, the aggregate fair market value of these interest rate hedge contracts as of September, 2000 would decrease by approximately $667,000. In addition, we are exposed to certain losses in the event of nonperformance by the counterparties under the hedge contracts. We expect the counterparties, which are major financial institutions, to perform fully under these contracts. However, if the counterparties were to default on their obligations under the interest rate hedge contracts, we could be required to pay the full rates on our debt, even if such rates were in excess of the rates in the contracts. 28 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 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 Securities 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 and intend to vigorously defend this litigation. By order dated June 18, 1999, the court granted in part and denied in part our motion 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 has now been completed. Plaintiff John Flake passed away on or about April 2, 2000, and plaintiff's counsel has substituted his estate as the representative plaintiff in this action. Defendants filed a summary judgment motion as to all claims asserted by the plaintiff, who opposed defendants' motion. By order dated August 28, 2000, the court granted defendants' motion as to plaintiff's claims that J.C. Nichols and the named directors and officers of J.C. Nichols breached fiduciary duties to members of the J.C. Nichols Company Employee Stock Ownership Trust. The court also granted in part and denied in part defendants' summary judgment motion as to the remaining claims asserted by the plaintiff. Defendants have sought reconsideration of the court's ruling as to certain of the securities claims as to which the court denied their summary judgment motion. Due to the inherent uncertainties of the litigation process and the judicial system, we are not able to predict the outcome of this litigation. However, at this time, we do not expect the result of this litigation to 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 2 (1) Agreement to Form Limited Liability Companies, entered into as of August 9, 2000, by and among Miller Global Fund III, L.P., MGA Development Associates, L.P., Highwoods Realty Limited Partnership and Highwoods/Florida Holdings, L.P. 27 Financial Data Schedule - ---------- (1) Filed as part of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 and incorporated by reference herein. (b) Reports on Form 8-K- None 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HIGHWOODS REALTY LIMITED PARTNERSHIP By: Highwoods Properties, Inc., its general partner By: /s/ RONALD P. GIBSON -------------------------------------------- Ronald P. Gibson President and Chief Executive Officer /s/ CARMAN J. LIUZZO -------------------------------------------- Carman J. Liuzzo Chief Financial Officer (Principal Accounting Officer) Date: November 14, 2000 30 EX-27 2 0002.txt EXHIBIT 27
5 1,000 3-MOS 9-MOS DEC-31-2000 DEC-31-2000 JUL-01-2000 JAN-01-2000 SEP-30-2000 SEP-30-2000 38,479 38,479 0 0 23,630 23,630 0 0 0 0 75,723 75,723 3,391,958 3,391,958 (262,546) (262,546) 3,756,316 3,756,316 121,044 121,044 1,626,529 1,626,529 0 0 384,997 384,997 1,623,746 1,623,746 0 0 3,756,316 3,756,316 130,727 403,559 137,664 422,060 39,331 119,950 39,331 119,950 35,557 98,009 0 0 26,661 81,005 46,672 109,350 0 0 46,672 109,350 0 0 3,310 4,344 0 0 43,362 105,006 .53 1.19 .53 1.19
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