-----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, V0oQNEDin5oddgjgXnXx76QeipImqN65IwmKrOcIMvu4mDVOH9kyPVAvvaMYgBN3 kD4JkTNYsqX/N2tL384MjA== 0001021408-02-014164.txt : 20021114 0001021408-02-014164.hdr.sgml : 20021114 20021114160019 ACCESSION NUMBER: 0001021408-02-014164 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HIGHWOODS REALTY LTD PARTNERSHIP CENTRAL INDEX KEY: 0000941713 STANDARD INDUSTRIAL CLASSIFICATION: LESSORS OF REAL PROPERTY, NEC [6519] IRS NUMBER: 561869557 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21731 FILM NUMBER: 02825156 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 d10q.txt FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________ Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 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) (919) 872-4924 (Registrant's telephone number, including area code) ________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] ================================================================================ HIGHWOODS REALTY LIMITED PARTNERSHIP QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2002 TABLE OF CONTENTS
Page ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements ............................................................................. 3 Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 ....................... 4 Consolidated Statements of Income for the three and nine months ended September 30, 2002 and 2001 ........................................................................................ 5 Consolidated Statements of Partners' Capital for the nine months ended September 30, 2002 ........ 6 Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001 ........................................................................................ 7 Notes to Consolidated Financial Statements ....................................................... 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ...................................................................................... 15 Disclosure Regarding Forward-Looking Statements .................................................. 15 Overview ......................................................................................... 15 Critical Accounting Policies ..................................................................... 16 Results of Operations ............................................................................ 19 Liquidity and Capital Resources .................................................................. 23 Recent Developments .............................................................................. 27 Impact of Recently Issued Accounting Standards ................................................... 27 Funds From Operations and Cash Available for Distributions ....................................... 28 Property Information ............................................................................. 30 Inflation ........................................................................................ 39 Item 3. Quantitative and Qualitative Disclosures About Market Risk ....................................... 40 Item 4. Controls and Procedures .......................................................................... 40 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K ................................................................. 41
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 2001 Annual Report on Form 10-K. 3 HIGHWOODS REALTY LIMITED PARTNERSHIP Consolidated Balance Sheets ($ in thousands)
September 30, December 31, 2002 2001 ----------- ----------- (Unaudited) Assets Real estate assets, at cost: Land and improvements ....................................................... $ 406,526 $ 398,596 Buildings and tenant improvements ........................................... 2,889,466 2,826,684 Development in process ...................................................... 40,018 108,122 Land held for development ................................................... 173,131 152,597 Furniture, fixtures and equipment ........................................... 20,474 19,392 ----------- ----------- 3,529,615 3,505,391 Less - accumulated depreciation ............................................. (448,873) (374,525) ----------- ----------- Net real estate assets ...................................................... 3,080,742 3,130,866 Property held for sale ......................................................... 139,972 212,590 Cash and cash equivalents ...................................................... 13,814 794 Restricted cash ................................................................ 2,702 5,685 Accounts receivable, net ....................................................... 18,256 23,302 Advances to related parties .................................................... 971 788 Notes receivable ............................................................... 11,131 13,726 Accrued straight-line rents receivable ......................................... 50,191 49,078 Investment in unconsolidated affiliates ........................................ 76,693 78,084 Other assets: Deferred leasing costs ...................................................... 106,821 95,761 Deferred financing costs .................................................... 25,964 26,121 Prepaid expenses and other .................................................. 13,383 10,441 ----------- ----------- 146,168 132,323 Less - accumulated amortization ............................................. (71,125) (58,681) ----------- ----------- Other assets, net ......................................................... 75,043 73,642 ----------- ----------- Total Assets ................................................................... $ 3,469,515 $ 3,588,555 =========== =========== Liabilities and Partners' Capital Mortgages and notes payable .................................................... $ 1,587,362 $ 1,672,230 Accounts payable, accrued expenses and other liabilities ....................... 125,631 114,920 ----------- ----------- Total Liabilities ........................................................... 1,712,993 1,787,150 Minority interest .............................................................. 102 318 Redeemable operating partnership units: Class A Common Units, 7,042,241 and 7,143,747 outstanding at September 30, 2002 and December 31, 2001, respectively .................................. 164,788 185,380 Class B Common Units, 0 and 196,492 outstanding at September 30, 2002 and December 31, 2001, respectively ........................................... -- 5,099 Series A Preferred Units, 104,945 outstanding at September 30, 2002 and December 31, 2001 ......................................................... 103,308 103,308 Series B Preferred Units, 6,900,000 outstanding at September 30, 2002 and December 31, 2001 ......................................................... 166,346 166,346 Series D Preferred Units, 400,000 outstanding at September 30, 2002 and December 31, 2001 ......................................................... 96,842 96,842 Partners' Capital: Class A Common Units: General partner Common Units, 600,205 and 596,268 outstanding at September 30, 2002 and December 31, 2001, respectively ................................. 12,395 12,569 Limited partner Common Units, 52,378,071 and 51,886,745 outstanding at September 30, 2002 and December 31, 2001, respectively .................... 1,227,204 1,244,545 Accumulated other comprehensive loss ........................................... (10,418) (9,441) Deferred compensation - restricted units ....................................... (4,045) (3,561) ----------- ----------- Total Partners' Capital ..................................................... 1,225,136 1,244,112 ----------- ----------- Total Liabilities and Partners' Capital ........................................ $ 3,469,515 $ 3,588,555 =========== ===========
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, ------------------------ ------------------------ 2002 2001 2002 2001 ----------- ----------- ----------- ---------- Rental revenue ............................................................. $ 116,989 $ 119,155 $ 349,882 $ 360,564 Operating expenses: Rental property ......................................................... 36,723 35,680 108,391 106,901 Depreciation and amortization ........................................... 31,513 27,796 91,817 83,664 Interest expense: Contractual ........................................................... 26,941 25,483 78,885 77,652 Amortization of deferred financing costs .............................. 347 324 1,027 1,664 ---------- ---------- ---------- --------- 27,288 25,807 79,912 79,316 General and administrative ................................................. 6,919 4,239 17,152 14,253 Other Income/(Expense): Interest and other income ............................................... 2,710 4,654 8,500 18,086 Equity in earnings of unconsolidated affiliates ......................... 1,198 3,043 6,072 5,177 Nonrecurring litigation reserve ......................................... (2,700) -- (2,700) -- Nonrecurring compensation expense ....................................... (913) -- (913) -- ---------- ---------- ---------- --------- 295 7,697 10,959 23,263 ---------- ---------- ---------- --------- Income before gain on disposition of land and depreciable assets, discontinued operations and extraordinary item .............. 14,841 33,330 63,569 99,693 Gain on disposition of land and depreciable assets ...................... 3,599 3,357 12,045 16,123 ---------- ---------- ---------- --------- Income from continuing operations ..................................... 18,440 36,687 75,614 115,816 Discontinued operations: Income from discontinued operations ..................................... 1,970 2,730 6,717 9,327 Loss on sale of discontinued operations ................................. (3,712) -- (1,577) -- ---------- ---------- ---------- --------- (1,742) 2,730 5,140 9,327 ---------- ---------- ---------- --------- Net income before extraordinary item .................................... 16,698 39,417 80,754 125,143 Extraordinary item--loss on early extinguishment of debt ................... (378) - (378) (518) ---------- ---------- ---------- --------- Net income .............................................................. 16,320 39,417 80,376 124,625 Distributions on preferred units ........................................... (7,713) (7,713) (23,139) (23,787) ---------- ---------- ---------- --------- Net income available for Class A Common Units .............................. $ 8,607 $ 31,704 $ 57,237 $ 100,838 ========== ========== ========== ========= Net income per common unit--basic: Income from continuing operations ....................................... $ .18 $ .48 $ .87 $ 1.49 Income/(loss) from discontinued operations .............................. (.03) .04 .09 .15 Extraordinary item--loss on early extinguishment of debt ................ (.01) -- (.01) (.01) ---------- ---------- ---------- --------- Net income .............................................................. $ .14 $ .52 $ .95 $ 1.63 ========== ========== ========== Net income per common unit--diluted: Income from continuing operations ....................................... $ .18 $ .47 $ .86 $ 1.48 Income/(loss) from discontinued operations .............................. (.03) .05 .09 .15 Extraordinary item--loss on early extinguishment of debt ................ (.01) -- (.01) (.01) ---------- ---------- ---------- --------- Net income .............................................................. $ .14 $ .52 $ .94 $ 1.62 ========== ========== ========== ========= Distributions declared per common unit ..................................... $ .585 $ .585 $ 1.76 $ 1.725 ========== ========== ========== ========= Weighted average common units outstanding--basic: Class A Common Units: General Partner ....................................................... 603 607 603 616 Limited Partners ...................................................... 59,641 60,070 59,718 61,031 Class B Common Units: Limited Partners ...................................................... -- 196 -- 196 ---------- ---------- ---------- --------- Total ................................................................... 60,244 60,873 60,321 61,843 ========== ========== ========== ========= Weighted average common units outstanding--diluted: Class A Common Units: General Partner ....................................................... 605 611 607 620 Limited Partners ...................................................... 59,856 60,486 60,087 61,422 Class B Common Units: Limited Partners ...................................................... -- 196 -- 196 ---------- ---------- ---------- --------- Total ................................................................... 60,461 61,293 60,694 62,238 ========== ========== ========== =========
See accompanying notes to consolidated financial statements. 5 HIGHWOODS REALTY LIMITED PARTNERSHIP Consolidated Statements of Partners' Capital (Unaudited and $ in thousands) For the Nine Months Ended September 30, 2002
Class A Common Unit ---------------------------- Accumulated General Limited Other Total Partner's Partners' Deferred Comprehensive Partners' Capital Capital Compensation Loss Capital ------------ ------------ ------------ ------------- ----------- Balance at December 31, 2001 ................ $ 12,569 $ 1,244,545 $ (3,561) $ (9,441) $ 1,244,112 Offering proceeds ........................... 53 5,273 -- -- 5,326 Redemption of Common Units .................. (34) (3,342) -- -- (3,376) Distributions paid .......................... (1,058) (104,767) -- -- (105,825) Preferred distributions paid ................ (231) (22,908) -- -- (23,139) Net income .................................. 804 79,572 -- -- 80,376 Adjustments of redeemable Common Units to fair value ............................ 272 26,831 -- -- 27,103 Retirement of Treasury Units ................ (12) (1,162) -- -- (1,174) Other comprehensive income .................. -- -- -- (977) (977) Issuance of units for assets ................ 18 1,748 -- -- 1,766 Issuance of restricted stock ................ 14 1,414 (1,428) -- -- Amortization of deferred compensation ....... -- -- 944 -- 944 ----------- ----------- ----------- ----------- ----------- Balance at September 30, 2002 ............... $ 12,395 $ 1,227,204 $ (4,045) $ (10,418) $ 1,225,136 =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 6 HIGHWOODS REALTY LIMITED PARTNERSHIP Consolidated Statements of Cash Flows (Unaudited and $ in thousands)
Nine Months Ended September 30, ------------------------------- 2002 2001 ----------- ---------- Operating activities: Net income ..................................................................................... $ 80,376 $ 124,625 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................................................ 95,738 89,195 Amortization of deferred compensation ........................................................ 944 755 Equity in earnings of unconsolidated affiliates .............................................. (6,072) (5,177) Gain on disposition of land and depreciable assets ........................................... (10,468) (16,123) Writeoff of accrued straight line rent ....................................................... 3,110 -- Loss on early extinguishment of debt ......................................................... 378 518 Transition adjustment upon adoption of FASB 133 .............................................. -- 556 Loss on ineffective portion of derivative instruments ........................................ -- 428 Changes in operating assets and liabilities .................................................... 8,278 (16,626) --------- --------- Net cash provided by operating activities ................................................. 172,284 178,151 --------- --------- Investing activities: Additions to real estate assets ................................................................ (98,808) (197,539) Proceeds from disposition of real estate assets ................................................ 164,403 157,000 Repayment of advances to subsidiaries .......................................................... -- 27,560 Distributions from unconsolidated affiliates ................................................... 7,126 6,566 Investments in notes receivable ................................................................ 2,595 57,805 Other investing activities ..................................................................... 450 2,534 --------- --------- Net cash provided by investing activities ................................................. 75,766 53,926 --------- --------- Financing activities: Distributions paid on common units ............................................................. (105,825) (107,611) Distributions paid on preferred units .......................................................... (23,139) (23,787) Borrowings on mortgages and notes payable ...................................................... 34,942 12,780 Repayment of mortgages and notes payable ....................................................... (75,305) (100,187) Borrowings on revolving loans .................................................................. 243,000 246,900 Repayment on revolving loans ................................................................... (312,000) (154,900) Loss on early extinguishment of debt ........................................................... (378) (518) Net proceeds of contributed capital ............................................................ 5,326 817 Redemption/Repurchase of common units .......................................................... (3,376) (155,308) Net change in deferred financing costs ......................................................... 1,725 155 --------- --------- Net cash used in financing activities ..................................................... (235,030) (281,659) --------- --------- Net increase/(decrease) in cash and cash equivalents ........................................... 13,020 (49,582) Cash and cash equivalents at beginning of the period ........................................... 794 102,486 --------- --------- Cash and cash equivalents at end of the period ................................................. $ 13,814 $ 52,904 ========= ========= Supplemental disclosure of cash flow information: Cash paid for interest ......................................................................... $ 79,373 $ 80,667 ========= =========
See accompanying notes to consolidated financial statements. 7 HIGHWOODS REALTY LIMITED PARTNERSHIP Consolidated Statements of Cash Flows - Continued (Unaudited and $ in thousands) Supplemental disclosure of non-cash investing and financing activities: The following table summarizes the net assets contributed by the holders of Common Units in the Operating Partnership, the net assets acquired subject to mortgage notes payable and other non-cash equity transactions:
Nine Months Ended September 30, ------------------------------- 2002 2001 ------------- -------------- Assets: Notes receivable ............................................................... $ -- $ 675 Accounts receivable ............................................................ 154 -- Cash and cash equivalents ...................................................... 729 6,880 Rental property and equipment, net ............................................. 37,098 58,012 ------------- -------------- 37,981 65,567 ============= ============== Liabilities: Mortgages and notes payable .................................................... 24,495 7,241 Accounts payable, accrued expenses and other liabilities ....................... 14,163 58,545 ------------- -------------- 38,658 65,786 ============= ============== Equity: ........................................................................ (677) (219) ============= ==============
See accompanying notes to consolidated financial statements. 8 HIGHWOODS REALTY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2002 (Unaudited) 1. Description of the Operating Partnership The Operating Partnership is managed by its general partner, the Company, a self-administered and self-managed REIT that operates in the southeastern and midwestern United States. The Operating Partnership's wholly-owned assets include: 502 in-service office, industrial and retail properties; 213 apartment units; 1,251 acres of undeveloped land suitable for future development; and an additional eight properties under development. The Company conducts substantially all of its activities through, and substantially all of its interests in the properties are held directly or indirectly by, the Operating Partnership. The Company is the sole general partner of the Operating Partnership. At September 30, 2002, the Company owned 88.3% of the Common Units in the Operating Partnership. Limited partners (including certain officers and directors of the Company) own the remaining Common Units. Holders of Common Units may redeem them for the cash value of one share of Common Stock, or, at the Company's option, one share of Common Stock. When a Common Unit holder redeems a Common Unit for a share of Common Stock or cash, the Company's minority interest in the Operating Partnership will be reduced and its share in the Operating Partnership will be increased. The Common Units owned by the Company are not redeemable for cash. 2. Basis of Presentation The consolidated financial statements include the accounts of the Operating Partnership and its majority-controlled affiliates. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. For a more complete discussion of our critical accounting policies, see also "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies." The Operating Partnership's 104,945 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. 9 HIGHWOODS REALTY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 2. Basis of Presentation - Continued The Operating Partnership is generally 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 held by the Company 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. Minority interest represents the limited partnership interest in a partnership that was formed to develop real estate properties owned by holders other than the Operating Partnership. Certain amounts in the September 30, 2001 and December 31, 2001 financial statements have been reclassified to conform to the September 30, 2002 presentation. These reclassifications had no material effect on net income or partner's capital as previously reported. The accompanying financial information has not been audited, but in the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of our financial position, results of operations and cash flows have been made. For further information, refer to the financial statements and notes thereto included in our 2001 Annual Report on Form 10-K. Non-recurring litigation reserve was $2.7 million for the three months ended September 30, 2002, and was a result of an accrual of $2.7 million to increase our reserves for the probable and estimated losses related to various legal proceedings arising in the ordinary course of business and from previously completed mergers and acquisitions. Non-recurring compensation was $913,000 for the three months ended September 30, 2002, and was related to the exercise of options that occurred during the first and second quarters of 2002. When an option holder elected to exercise options, in lieu of issuing new shares upon exercise of the option and then repurchasing shares on the open market, we settled the option exercise by paying the option holder the net difference in cash between the strike price and the market value of the underlying shares. Such exercises were previously recorded as adjustments to partners' capital. However, the effect of such exercises should have been recorded as compensation expense under FASB Interpretation No. 44 (Accounting For Certain Transactions Involving Stock Options, An Interpretation of APB Opinion No. 25). Had we issued the shares to the option holder, received the cash for the strike price and then repurchased the shares in the market, we would not record any compensation expense. Management believes the impact of this non-recurring charge has had no material effect on net income or partners' capital during the first six months of 2002 as previously reported. In addition, management believes the impact of APB 25 would not have had a material effect on financial statements for prior periods. Commencing during the third quarter of 2002, we discontinued the practice of settling option exercises by paying the option holder the net difference in cash between the strike price and the market value of the underlying shares. In the event we decide to repurchase shares after an option exercise, we will require the option holder to pay the cash for the strike price and then separately repurchase a corresponding number of shares in the market under our stock repurchase program. 10 HIGHWOODS REALTY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 3. Segment Information Our sole business is the acquisition, development and operation of rental real estate properties. We operate office, industrial and retail properties and apartment units. There are no material inter-segment transactions. Our chief operating decision maker ("CDM") assesses and measures operating results based upon property level net operating income. The operating results for the individual assets within each property type have been aggregated since the CDM evaluates operating results and allocates resources on a property-by-property basis within the various property types. Further, all operations are within the United States and no tenant comprises more than 10% of consolidated revenues. The following table summarizes the rental income, net operating income and total assets for each reportable segment for the three and nine months ended September 30, 2002 and 2001 ($ in thousands):
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Rental Income (A): Office segment ...................................................... $ 96,105 $ 95,823 $ 286,678 $ 290,041 Industrial segment .................................................. 10,529 11,623 31,893 35,137 Retail segment ...................................................... 10,083 8,970 30,380 27,325 Apartment segment ................................................... 272 2,739 931 8,061 ----------- ----------- ----------- ----------- Total Rental Property Income ..................................... $ 116,989 $ 119,155 $ 349,882 $ 360,564 =========== =========== =========== =========== Net Operating Income (A): Office segment ...................................................... $ 64,293 $ 65,506 $ 193,443 $ 197,171 Industrial segment .................................................. 8,363 9,796 26,193 30,095 Retail segment ...................................................... 7,494 6,077 21,442 18,252 Apartment segment ................................................... 116 2,096 413 8,145 ----------- ----------- ----------- ----------- Total Net Operating Income ....................................... $ 80,266 $ 83,475 $ 241,491 $ 253,663 ----------- ----------- ----------- ----------- Reconciliation to income before gain on disposition of land and depreciable assets, discontinued operations and extraordinary item: Equity in earnings of unconsolidated affiliates ..................... $ 1,198 $ 3,043 $ 6,072 $ 5,177 Interest and other income ........................................... 2,710 4,654 8,500 18,086 Nonrecurring litigation reserve ..................................... (2,700) -- (2,700) -- Nonrecurring compensation expense ................................... (913) -- (913) -- Interest expense .................................................... (27,288) (25,807) (79,912) (79,316) General and administrative expenses ................................. (6,919) (4,239) (17,152) (14,253) Depreciation and amortization ....................................... (31,513) (27,796) (91,817) (83,664) ----------- ----------- ----------- ----------- Income before gain on disposition of land and depreciable assets, discontinued operations and extraordinary item ......................................... $ 14,841 $ 33,330 $ 63,569 $ 99,693 =========== =========== =========== =========== Total Assets: Office segment ...................................................... $ 2,700,688 $ 2,756,887 $ 2,700,688 $ 2,756,887 Industrial segment .................................................. 326,578 334,796 326,578 334,796 Retail segment ...................................................... 285,373 274,581 285,373 274,581 Apartment segment ................................................... 12,218 11,285 12,218 11,285 Corporate and other ................................................. 144,658 178,355 144,658 178,355 ----------- ----------- ----------- ----------- Total Assets ..................................................... $ 3,469,515 $ 3,555,904 $ 3,469,515 $ 3,555,904 =========== =========== =========== ===========
________________ (A) Net of discontinued operations. 11 HIGHWOODS REALTY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 4. Investments in Unconsolidated Affiliates During the past several years, we have formed various joint ventures with unrelated investors. We have retained minority equity interests ranging from 20.00% to 50.00% in these joint ventures. As required by GAAP, we have accounted for our joint venture activity using the equity method of accounting, as we do not control these joint ventures. As a result, the assets and liabilities of our joint ventures are not included on our balance sheet. On June 26, 2002, we acquired our joint venture partner's interest in MG-HIW Rocky Point, LLC, which owned Harborview Plaza, to bring our ownership interest in that entity to 100.0%. At that time, we consolidated the assets and liabilities, and recorded income and expenses on a consolidated basis. The net income related to this joint venture until the date of purchase is included in `Total net income' in the table below. On September 11, 2002, we contributed Harborview Plaza to SF-HIW Harborview Plaza, LP, a newly formed limited partnership, in exchange for a 20.0% limited partnership interest. The assets, debt, liabilities and net income from the SF-HIW Harborview Plaza, LP are included in the table below. As of September 30, 2002, our joint ventures have approximately $575.8 million of outstanding debt. All of the joint venture debt is non-recourse to us except (1) in the case of customary exceptions pertaining to such matters as misuse of funds, environmental conditions and material misrepresentations and (2) with respect to $2.5 million of construction debt related to the MG-HIW Metrowest II, LLC, which has been guaranteed by us subject to a pro rata indemnity from our joint venture partner. Our partner in SF-HIW Harborview Plaza, LP has the right to put its 80% equity interest in the partnership to us for cash at anytime during the one year period commencing on September 11, 2014. The value of the equity interest will be determined based upon the then fair market value of SF-HIW Harborview Plaza, LP's assets and liabilities. Selected financial data for our unconsolidated affiliates for the nine months ended September 30, 2002 and 2001 is presented below ($ in thousands):
Ownership Percentage ------------------------ 2002 2001 --------- -------- Board of Trade Investment Company ................................ 49.00% 49.00% Dallas County Partners I, LP ..................................... 50.00 50.00 Dallas County Partners II, LP .................................... 50.00 50.00 Dallas County Partners III, LP ................................... 50.00 50.00 Fountain Three ................................................... 50.00 50.00 Highwoods DLF 98/29, LP .......................................... 22.81 22.81 Highwoods DLF 97/26 DLF 99/32, LP ................................ 42.93 42.93 RRHWoods, LLC .................................................... 50.00 50.00 Highwoods-Markel Associates, LLC ................................. 50.00 50.00 MG-HIW, LLC ...................................................... 20.00 20.00 MG-HIW Peachtree Corners, LLC .................................... 50.00 50.00 MG-HIW Rocky Point, LLC (1) ...................................... -- 50.00 MG-HIW Metrowest I, LLC .......................................... 50.00 50.00 MG-HIW Metrowest II, LLC ......................................... 50.00 50.00 Concourse Center Associates, LLC ................................. 50.00 -- Plaza Colonnade, LLC ............................................. 50.00 -- SF-HIW Harborview Plaza, LP ...................................... 20.00 --
September 30, September 30, 2002 2001 ------------- ------------- Total assets ..................................................... $ 889,473 $ 863,163 Total debt ....................................................... 575,815 550,520 Total liabilities ................................................ 599,550 581,769
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- -------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Total net income ............................. $ 4,820 $ 8,873 $ 21,183 $ 17,813
12 HIGHWOODS REALTY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 5. Derivative Financial Instruments On January 1, 2001, we adopted Financial Accounting Standards Board Statement (SFAS) No. 133/138, "Accounting for Derivative Instruments and Hedging Activities," as amended. This Statement requires us to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings, or recognized in Accumulated Other Comprehensive Loss ("AOCL") until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value is recognized in earnings. In connection with the adoption of SFAS 133/138 in January 2001, we recorded a net transition adjustment of $555,962 of unrealized loss in interest and other income and a net transition adjustment of $125,000 in AOCL. Adoption of the standard also resulted in our recognizing $127,000 of derivative instrument liabilities and a reclassification of approximately $10.6 million of deferred financing costs from past cashflow hedging relationships from other assets to AOCL. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cashflows and to lower overall borrowing costs. To achieve these objectives, we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not hold these derivatives for trading or speculative purposes. On the date that we enter into a derivative contract, we designate the derivative as (1) a hedge of the variability of cash flows that are to be received or paid in connection with a recognized liability (a "cash flow" hedge), or (2) an instrument that is held as a non-hedge derivative. Changes in the fair value of highly effective cash flow hedges, to the extent that the hedge is effective, are recorded in AOCL, until earnings are affected by the hedged transaction (i.e. until periodic settlements of a variable-rate liability are recorded in earnings). Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative exceed the variability in the cash flows of the transaction) is recorded in current-period earnings. Changes in the fair value of non-hedging instruments are reported in current-period earnings. We formally document all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to (1) specific assets and liabilities on the balance sheet or (2) forecasted transactions. We also assess and document, both at the hedging instrument's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows associated with the hedged items. When we determine that a derivative is not (or has ceased to be) highly effective as a hedge, we discontinue hedge accounting prospectively. During the nine months ended September 30, 2002, we had an interest rate swap and an interest rate collar each mature, resulting in a debit to interest rate derivative liability and an offsetting credit to AOCL of $411,000. As of September 30, 2002, we have two $24.0 million treasury lock agreements related to an anticipated five-year fixed rate financing with two financial counterparties, which effectively lock the five-year treasury rate at 3.72%. These treasury lock agreements are designated as cashflow hedges and the effective portion of the cumulative loss on the derivative instruments was $2.5 million at September 30, 2002 and is being reported as a component of AOCL in partners' capital. These costs will be recognized into earnings in the same period or periods during which the hedged transaction affects earnings (as the underlying debt is paid down). Derivative liabilities totaling approximately $2.5 million related to our treasury lock agreements, with a notional amount of $48.0 million, are recorded in accounts payable, accrued expenses and other liabilities in the Consolidated Balance Sheets at September 30, 2002. The fair value of our interest rate swap, cap and collar agreements was ($2.5) million at September 30, 2002. 13 HIGHWOODS REALTY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 5. Derivative Financial Instruments - Continued At September 30, 2002, approximately $7.9 million of deferred financing costs from past cash flow hedging instruments remain in AOCL. These costs will be recognized into earnings as the underlying debt is repaid. We expect that the portion of the cumulative loss recorded in AOCL at September 30, 2002 associated with the derivative instruments, which will be recognized within the next 12 months, will be approximately $1.6 million. 6. Other Comprehensive Income/(Loss) Other comprehensive income/(loss) represents net income plus the results of certain non-partners' capital changes not reflected in the Consolidated Statements of Income. The components of other comprehensive income/(loss) are as follows ($ in thousands):
Nine Months Ended September 30, -------------------------------- 2002 2001 ---------- ---------- Net Income .................................................................. $ 80,376 $ 124,625 Accumulated other comprehensive income/(loss): Unrealized derivative losses on cashflow hedges .......................... (2,134) (514) Reclassification of past hedging relationships ........................... -- (10,597) Amortization of past hedging relationships ............................... 1,157 1,175 --------- --------- Total other comprehensive loss ......................................... (977) (9,936) --------- --------- Total comprehensive income ............................................. $ 79,399 $ 114,689 ========= =========
7. Discontinued Operations and the Impairment of Long-Lived Assets As of January 1, 2002, we adopted Financial Accounting Standards Board Statement (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," and the appropriate amounts are disclosed separately under income from discontinued operations on the consolidated income statement. Below represents the total revenues, rental operating expenses, depreciation and amortization, income from discontinued operations, gain on sale of discontinued operations and net carrying value of the properties sold and held for sale at September 30, 2002 (which account for 834,128 rentable square feet) as a result of our capital recycling program and included in income from discontinued operations for the three and nine months ended September 30, 2002 and 2001 ($ in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 2002 2001 2002 2001 ----------- ----------- ----------- ---------- Total revenue $ 5,460 $ 6,286 $ 16,669 $ 19,125 Rental operating expenses (1,985) (1,932) (5,831) (5,931) Depreciation and amortization (1,305) (1,624) (3,921) (3,868) Interest expense (200) -- (200) -- ---------- ---------- ---------- --------- Income before loss on disposition of depreciable assets 1,970 2,730 6,717 9,326 Loss on disposition of depreciable assets (3,712) -- (1,577) -- ---------- ---------- --------- --------- Income/(loss) from discontinued operations (1,742) 2,730 5,140 9,326 ========== ========== ========= ========= Net carrying value $ 123,350 $ 153,297 $ 123,350 $ 153,297 ========== ========== ========= =========
In addition, in accordance with SFAS 144, we have determined that as of September 30, 2002, the carrying value of three office properties held will not be recovered from their projected undiscounted future operating cash flows. We have recognized a $4.5 million impairment loss, which is included in the gain on the sale of land and depreciable assets in the consolidated statements of income for the three and nine months ended September 30, 2002. 14 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. Disclosure Regarding Forward-looking Statements Some of the information in this Quarterly Report on Form 10-Q may contain forward-looking statements. Such statements include, in particular, statements about our plans, strategies and prospects under this section and under the heading "Business". You can identify forward-looking statements by our use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate," "continue" or other similar words. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that our plans, intentions or expectations will be achieved. When considering such forward-looking statements, you should keep in mind the following important factors that could cause our actual results to differ materially from those contained in any forward-looking statement: . speculative development activity by our competitors in our existing markets could result in an excessive supply of office, industrial and retail properties relative to tenant demand; . the financial condition of our tenants could deteriorate; . the costs of our development projects could exceed our original estimates; . we may not be able to complete development, acquisition, reinvestment, disposition or joint venture projects as quickly or on as favorable terms as anticipated; . we may not be able to lease or re-lease space quickly or on as favorable terms as old leases; . we may have incorrectly assessed the environmental condition of our properties; . an unexpected increase in interest rates would increase our debt service costs; . we may not be able to continue to meet our long-term liquidity requirements on favorable terms; . we could lose key executive officers; and . our southeastern and midwestern markets may suffer additional declines in economic growth or may not recover as fully or as quickly as expected. This list of risks and uncertainties, however, is not intended to be exhaustive. You should also review the other cautionary statements we make in "Business - Risk Factors" set forth in our 2001 Annual Report. Given these uncertainties, we caution you not to place undue reliance on forward-looking statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances or to reflect the occurrence of unanticipated events. Overview The Operating Partnership is managed by its general partner, the Company, a self-administered and self-managed equity REIT that began operations through a predecessor in 1978. Since our formation in 1994, we have evolved into one of the largest owners and operators of suburban office, industrial and retail properties in the southeastern and midwestern United States. At September 30, 2002, we: . owned 502 in-service office, industrial and retail properties, encompassing approximately 38.0 million rentable square feet; . owned an interest (50.0% or less) in 78 in-service office and industrial properties, encompassing approximately 7.7 million rentable square feet and 418 apartment units; 15 . owned 1,251 acres (and have agreed to purchase an additional eight acres over the next year) of undeveloped land suitable for future development; . owned eight development properties, encompassing approximately 824,000 rentable square feet; and . owned an interest (50.0% or less) in one development property, encompassing 285,000 rentable square feet. The following summarizes our capital recycling program since the beginning of 2000:
Nine Months Ended Year Ended Year Ended September 30, 2002 2001 2000 ------------------ ---------- ---------- Office, Industrial and Retail Properties (rentable square feet in thousands) Dispositions (1) ....................................... (856) (268) (4,743) Contributions to Joint Ventures (1) .................... (205) (118) (2,199) Developments Placed In-Service ......................... 1,614 1,351 3,480 Acquisitions ........................................... 205 72 669 ------ ------ ------ Net Change in Wholly-owned In-Service Properties ................................ 758 1,037 (2,793) ====== ====== ====== Apartment Properties (in units) Dispositions ........................................... -- (1,672) -- ====== ====== ======
_______________ (1) Excludes wholly-owned development properties sold or contributed to joint ventures. In addition to the above property activity, the Company repurchased $3.4 million, $147.4 million and $100.2 million of Common Stock and Common Units during 2002, 2001 and 2000, respectively, and $18.5 million of Preferred Units during 2001. This represents aggregate repurchases of $269.5 million of Common Stock, Common Units and Preferred Stock since January 1, 2000. The Company conducts substantially all of its activities through, and substantially all of its interests in the properties are held directly or indirectly by, the Operating Partnership. The Company is the sole general partner of the Operating Partnership. At September 30, 2002, the Company owned 88.3% of the Common Units in the Operating Partnership. Critical Accounting Policies Our discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements contained elsewhere in this Quarterly Report. Our Consolidated Financial Statements include the accounts of the Operating Partnership and its majority-controlled affiliates. For a discussion of our accounting policies with respect to our investments in joint ventures, see "Investments in Joint Ventures." The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from our estimates. The estimates used in the preparation of our Consolidated Financial Statements are more fully described in Note (1) to our audited Consolidated Financial Statements for the year ended December 31, 2001, included in our 2001 Form 10-K. However, certain of our significant accounting policies are considered critical accounting policies due to the increased level of assumptions used or estimates made in determining their impact on our Consolidated Financial Statements presented for any interim period. Management has reviewed our critical accounting policies and estimates with the audit committee of the Company's board of directors. We consider our critical accounting policies to be those used in the determination of the reported amounts and disclosure related to the following: 16 . Impairment of long-lived assets; . Allowance for doubtful accounts; . Capitalized costs; . Fair value of derivative instruments; . Rental revenue; and . Investments in joint ventures. Impairment of long-lived assets. Real estate and leasehold improvements are classified as long-lived assets held for sale or as long-lived assets to be held and used. In accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," we record assets held for sale at the lower of the carrying amount or fair value less cost to sell. The impairment loss is the amount by which the carrying amount exceeds the fair value less cost to sell. With respect to assets classified as held and used, we periodically review these assets to determine whether our carrying amount will be recovered from their undiscounted future operating cash flows and we recognize an impairment loss to the extent we believe the carrying amount is not recoverable. Our determination of future operating cash flows requires us to make assumptions related to future rental rates, tenant concessions, operating expenditures, property taxes and capital improvements. If our assumptions prove incorrect and our estimates of future operating cash flows are materially overstated, we could be required to recognize future impairment losses on our properties. Allowance for doubtful accounts. Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. Our receivable balance is comprised primarily of rents and operating cost recoveries due from tenants as well as accrued rental rate increases to be received over the life of the in-place leases. We regularly evaluate the adequacy of our allowance for doubtful accounts considering such factors as credit quality of our tenants, delinquency of payment, historical trends and current economic conditions. Actual results may differ from these estimates under different assumptions or conditions. If our assumptions regarding the collectibility of accounts receivables prove incorrect, we could experience write-offs of accounts receivable or accrued straight-line rents receivable in excess of our allowance for doubtful accounts. Capitalized costs. Expenditures directly related to both the development of real estate assets and the leasing of properties are included in net real estate assets and are stated at cost on the consolidated balance sheets. The development expenditures include pre-construction costs essential to the development of properties, development and construction costs, interest costs, real estate taxes, salaries and other costs incurred during the period of development. The leasing expenditures include all general and administrative costs, including salaries incurred in connection with successfully securing leases on the properties. Estimated costs related to unsuccessful leases are expensed as incurred. If our assumptions regarding the successful efforts of development and leasing are incorrect, the resulting adjustments could impact earnings. Fair value of derivative instruments. In the normal course of business, we are exposed to the effect of interest rate changes. We limit our exposure by following established risk management policies and procedures including the use of derivatives. To mitigate our exposure to unexpected changes in interest rates, derivatives are used primarily to hedge against rate movements on our related debt. We are required to recognize all derivatives as either assets or liabilities in the consolidated balance sheets and to measure those instruments at fair value. Changes in fair value will affect either partners' capital or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes. To determine the fair value of derivative instruments, we use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the majority of financial instruments including most derivatives, standard market conventions and techniques such as discounted cash flow analysis, option pricing modes, replacement cost and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized. Rental revenue. Rental revenue is comprised of base rent, including termination fees, recoveries from tenants 17 and parking and other income. In accordance with GAAP, base rental revenue is recognized on a straight-line basis over the terms of the respective leases. This means that, with respect to a particular lease, actual amounts billed in accordance with the lease during any given period may be higher or lower than the amount of rental revenue recognized for the period. Accrued straight-line rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements. Recoveries from tenants represent reimbursements for certain costs as provided in the lease agreements. These costs generally include real estate taxes, utilities, insurance, common area maintenance and other recoverable costs. Investments in joint ventures. Our investments in unconsolidated affiliates consist of one corporation, nine limited liability companies, four limited partnerships and two general partnerships. We account for our investments in unconsolidated affiliates under the equity method of accounting as we exercise significant influence, but do not control these entities. Our unconsolidated corporation is controlled by an unrelated third party that owns more than 50% of the outstanding voting stock. We have a 50% or less ownership interest in the unconsolidated limited liability companies and, under the terms of the various operating agreements, do not have any participating rights. We have a 50% or less ownership interest in the unconsolidated limited partnerships and general partnerships. Although we have an interest in two unconsolidated general partnerships and are the general partner in three of the unconsolidated limited partnerships, under the terms of the various partnership agreements, we do not have control of the major operating and financial policies of these unconsolidated partnerships. These investments are initially recorded at cost, as investments in unconsolidated affiliates, and are subsequently adjusted for equity in earnings and cash contributions and distributions. Any difference between the carrying amount of these investments on our balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in earnings of unconsolidated affiliates over the life of the property, generally 40 years. From time to time, we contribute real estate assets to an unconsolidated joint venture in exchange for a combination of cash and an equity interest in the venture. We record a partial gain on the contribution of the real estate assets to the extent of the third party investor's interest and record a deferred gain to the extent of our continuing interest in the unconsolidated joint venture. In connection with the MG-HIW, LLC joint venture, we have guaranteed Miller Global, our partner who has an 80.0% interest in the joint venture, a minimum internal rate of return on $50.0 million of their equity. If the minimum internal rate of return is not achieved upon the sale of the assets or winding up of the joint venture, Miller Global would receive a disproportionately greater interest of the cash proceeds related to the assets subject to the internal rate of return guarantee. Based upon the current and forecasted operating performance of the assets and our estimate of the residual value of the subject assets, the estimated internal rate of return for Miller Global with respect to their equity is not less than the minimum required return. As a result, we do not currently expect that our interest in the joint venture will be adjusted upon the sale of the subject assets or the winding up of the joint venture as a result of the internal rate of return guarantee. However, if our assumptions and estimates prove incorrect, Miller Global could receive a greater interest of the cash proceeds from any such sale or winding up. 18 Results of Operations The following table sets forth information regarding our results of operations for the three and nine months ended September 30, 2002 and 2001 ($ in millions):
Three Months Ended Nine Months Ended September 30, September 30, -------------------------------- ----------------------------- 2002 2001 $ Change 2002 2001 $ Change --------- --------- --------- --------- --------- -------- Rental revenue ............................................... $ 117.0 $ 119.2 $ (2.2) $ 349.9 $ 360.6 $ (10.7) Operating expenses: Rental property ........................................... 36.7 35.7 1.0 108.4 106.9 1.5 Depreciation and amortization ............................. 31.5 27.8 3.7 91.8 83.7 8.1 Interest expense: Contractual ............................................. 27.0 25.5 1.5 78.9 77.6 1.3 Amortization of deferred financing costs ................ 0.4 0.3 0.1 1.0 1.7 (0.7) --------- --------- -------- -------- -------- -------- 27.4 25.8 1.6 79.9 79.3 0.6 General and administrative ................................ 6.9 4.3 (2.6) 17.2 14.3 2.9 Other Income/(Expenses): Interest and other income ................................. 2.7 4.7 (2.0) 8.5 18.1 (9.6) Equity in earnings of unconsolidated affiliates ........... 1.2 3.0 (1.8) 6.1 5.2 0.9 Nonrecurring litigation reserve ........................... (2.7) -- (2.7) (2.7) -- (2.7) Nonrecurring compensation expense ......................... (0.9) -- (0.9) (0.9) -- (0.9) --------- --------- -------- -------- -------- -------- 0.3 7.7 (7.4) 11.0 23.3 (12.3) --------- --------- -------- -------- -------- -------- Income/(loss) before gain on disposition of land and depreciable assets, discontinued operations and extraordinary item ................................ 14.8 33.3 (18.5) 63.6 99.7 (36.1) Loss on disposition of land and depreciable assets ........ 3.6 3.4 0.2 12.0 16.1 (4.1) --------- --------- -------- -------- -------- -------- Income from continuing operations ....................... 18.4 36.7 (18.3) 75.6 115.8 (40.2) Discontinued operations Income from discontinued operations ....................... 2.0 2.7 (0.7) 6.7 9.3 (2.6) Loss on sale of discontinued operations ................... (3.7) -- (3.7) (1.6) -- (1.6) --------- --------- -------- -------- -------- -------- (1.7) 2.7 (4.4) 5.1 9.3 (4.2) --------- --------- -------- -------- -------- -------- Net income before extraordinary item ...................... 16.7 39.4 (22.7) 80.7 125.1 (44.4) Extraordinary item -- loss on early extinguishment of debt ................................................... (0.4) -- (0.4) (0.4) (0.5) 0.1 --------- --------- -------- -------- -------- -------- Net income ................................................ 16.3 39.4 (23.1) 80.3 124.6 (44.3) Dividends on preferred units ................................. (7.7) (7.7) -- (23.1) (23.8) 0.7 --------- --------- -------- -------- -------- -------- Net income available for Class A common units ............................................ $ 8.6 $ 31.7 $ (23.1) $ 57.2 $ 100.8 $ (43.6) ========= ========= ========= ======== ======== ========
Three Months Ended September 30, 2002. Revenues from rental operations decreased $2.2 million, or 1.8%, to $117.0 million for the quarter ended September 30, 2002 from $119.2 million for the quarter ended September 30, 2001. The decrease was primarily a result of a decrease in the average occupancy rates from 92.7% in the third quarter of 2001 to 86.3% in the third quarter of 2002. Slightly offsetting the decrease was an increase in rental revenues as a result of an increase in our property portfolio in 2002 as a result of our capital recycling program, which included 1.6 million rentable square feet of properties that were placed in service during 2002. Our in-service wholly-owned portfolio increased from 36.9 million square feet at September 30, 2001 to 38.0 million square feet at September 30, 2002. Same property rental revenue, recorded in accordance with GAAP, generated from the 475 in-service properties wholly-owned on January 1, 2001, decreased $4.2 million, or 3.6%, for the three months ended September 30, 2002, compared to the three months ended September 30, 2001. Same store straight-line rent decreased $1.1 million as a result of lower occupancy with fewer new leases recording straight-line rent and the impact from straight-lining of rents on existing tenants discussed generally in our critical accounting policies. Same store rental revenues excluding straight-line rent and termination fees decreased $4.2 million, or 3.7%. This decrease is a result of lower same store average occupancy, which declined from 92.5% in the third quarter of 2001 to 86.8% in the third quarter of 2002. During the three months ended September 30, 2002, 242 second generation leases representing 1.5 million 19 square feet of office, industrial and retail space were executed at an average rate per square foot, which was 9.3% lower than the average rate per square foot on the previous leases. Rental operating expenses (real estate taxes, utilities, insurance, repairs and maintenance and other property-related expenses) increased $1.0 million, or 2.8%, to $36.7 million for the three months ended September 30, 2002 from $35.7 million for the three months ended September 30, 2001. This increase was primarily a result of increases in real estate taxes, primarily due to higher property tax assessments, utilities and small increases in various other rental expenses in the third quarter of 2002, offset by lower occupancy relative to variable operating expenses. Rental operating expenses as a percentage of related rental revenues increased to 31.4% for the three months ended September 30, 2002 from 29.9% for the three months ended September 30, 2001. The increase was primarily due to an increase in rental operating expenses related to the increase in real estate taxes and a decrease in rental revenues related to lower average occupancy during the three months ended September 30, 2002. Same property rental property expenses, which are the expenses of the 475 in-service properties wholly-owned on January 1, 2001, increased $456,000, or 1.3%, for the three months ended September 30, 2002, compared to the three months ended September 30, 2001. This increase was primarily a result of increases in real estate taxes, primarily due to higher property tax assessments, utilities and small increases in various other rental expense accounts in the third quarter of 2002. Depreciation and amortization for the three months ended September 30, 2002 and 2001 totaled $31.5 million and $27.8 million, respectively. The increase of $3.7 million, or 13.3%, was due to an increase in the amortization of leasing commissions and tenant improvements and an increase in depreciation expense related to buildings placed in service during 2001 and 2002, partly offset by a decrease in the depreciation expense as a result of dispositions in 2002 and 2001. Interest expense increased $1.6 million, or 6.2%, to $27.4 million for the three months ended September 30, 2002 from $25.8 million for the three months ended September 30, 2001. The increase was attributable to a decrease in capitalized interest during the three months ended September 30, 2002 and a decrease in weighted average interest rates during the three months ended September 30, 2002. Interest expense for the three months ended September 30, 2002 and 2001 included $347,000 and $324,000, respectively, of amortization of deferred financing costs. Capitalized interest for the three months ended September 30, 2002 and 2001 was $1.7 million and $4.0 million, respectively. General and administrative expenses as a percentage of rental revenues, interest and other income and equity in earnings of unconsolidated affiliates was 5.7% in the third quarter of 2002 and 3.4% in the third quarter of 2001. The increase is primarily due to a non-recurring increase in management fee expense related to certain executives that provide management services to the Operating Partnership. These executives are employees of the Company, which is the managing general partner of the Operating Partnership. Interest and other income decreased $2.0 million, or 42.6%, to $2.7 million for the three months ended September 30, 2002 from $4.7 million for the three months ended September 30, 2001. The decrease primarily resulted from a decrease in development fee income and a decrease in interest income in the three months ended September 30, 2002 due to the collection of notes receivable during 2001 and 2002. Equity in earnings of unconsolidated affiliates decreased $1.8 million, or 60.0%, to $1.2 million for the three months ended September 30, 2002 from $3.0 million for the three months ended September 30, 2001. The decrease was attributable to an accrual made in 2001 by the Iowa joint ventures to reflect reimbursements for real estate taxes paid in 2001 and years prior. In 2002, these payments have been accounted for when they have been received. Non-recurring litigation reserve was $2.7 million for the three months ended September 30, 2002, and was a result of an accrual of $2.7 million to increase our reserves for the probable and estimated losses related to various legal proceedings arising in the ordinary course of business and from previously completed mergers and acquisitions. Non-recurring compensation was $913,000 for the three months ended September 30, 2002, and was related to the exercise of options that occurred during the first and second quarters of 2002. When an option holder elected to exercise options, in lieu of issuing new shares upon exercise of the option and then repurchasing shares on the open market, we settled the option exercise by paying the option holder the net difference in cash between the strike price and the market value of the underlying shares. Such exercises were previously recorded as adjustments to partners' capital. However, the effect of such exercises should have been recorded as compensation expense 20 under FASB Interpretation No. 44 (Accounting For Certain Transactions Involving Stock Options, An Interpretation of APB Opinion No. 25). Had we issued the shares to the option holder, received the cash for the strike price and then repurchased the shares in the market, we would not record any compensation expense. Management believes the impact of this non-recurring charge has had no material effect on net income or partners' capital during the first six months of 2002 as previously reported. In addition, management believes the impact of APB 25 would not have had a material effect on financial statements for prior periods. Commencing during the third quarter of 2002, we discontinued the practice of settling option exercises by paying the option holder the net difference in cash between the strike price and the market value of the underlying shares. In the event we decide to repurchase shares after an option exercise, we will require the option holder to pay the cash for the strike price and then separately repurchase a corresponding number of shares in the market under our stock repurchase program. Income before gain on disposition of land and depreciable assets, discontinued operations and extraordinary item equaled $14.8 million and $33.3 million for the quarters ended September 30, 2002 and 2001, respectively. The Operating Partnership recorded $7.7 million in preferred unit distributions for each of the quarters ended September 30, 2002 and 2001, respectively. Gain on disposition of land and depreciable assets increased $242,000, or 5.9%, to $3.6 million for the quarter ended September 30, 2002 from $3.4 million for the quarter ended September 30, 2001. In the third quarter of 2001, the majority of the gain was comprised of a gain of approximately $4.1 million related to the disposition of 512 apartment units, partly offset by a loss of approximately $126,000 related to the disposition of 579,515 rentable square feet of office properties and by a loss of approximately $538,000 related to the disposition of 77 acres of land. In the third quarter of 2002, the gain primarily consisted of $2.7 million of additional gain that resulted from the sale of a building during the second quarter of 2002 that had not been entirely recorded during that period due to an error in the consolidation process and a gain of approximately $741,000 related to the disposition of 25 acres of land. Income from discontinued operations decreased from $2.7 million for the three months ended September 30, 2001 to $2.0 million for the three months ended September 30, 2002. The decrease was a result of the decrease in income from discontinued operations for properties sold during 2002. Loss on sale of discontinued operations was $3.7 million during the three months ended September 30, 2002, which represented an impairment charge related to two properties held for sale at September 30, 2002. Nine Months Ended September 30, 2002. Revenues from rental operations decreased $10.7 million, or 3.0%, to $349.9 million for the nine months ended September 30, 2002 from $360.6 million for the nine months ended September 30, 2001. The decrease was primarily due to a decrease in the average occupancy rates from 93.4% for the nine months ended September 30, 2001 to 87.5% for the nine months ended September 30, 2002. In addition, we wrote off approximately $3.1 million of accrued straight-line rent receivables from WorldCom and its affiliates during the second quarter of 2002. Our in-service wholly-owned portfolio increased from 36.9 million square feet at September 30, 2001 to 38.0 million square feet at September 30, 2002. Same property rental revenue, recorded in accordance with GAAP, generated from the 475 wholly-owned in-service properties on January 1, 2001, decreased $13.9 million for the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001. Same store straight-line rent decreased $6.3 million as a result of the $3.1 million write-off of bankrupt tenant WorldCom's accrued straight-line rent receivable, lower occupancy with fewer new leases recording straight-line rent and the impact from straight lining of rents on existing tenants discussed generally in our critical accounting policies. Same store revenues excluding straight-line rent and termination fees decreased $9.5 million, or 2.8%. This decrease is a result of lower same store average occupancy, which declined from 93.2% in the first nine months of 2001 to 87.7% in the first nine months of 2002. During the nine months ended September 30, 2002, 586 second generation leases representing 4.0 million square feet of office, industrial and retail space were executed at an average rate per square foot which was 4.8% lower than the average rate per square foot on the previous leases. Rental operating expenses (real estate taxes, utilities, insurance, repairs and maintenance and other property-related expenses) increased $1.5 million, or 1.4%, to $108.4 million for the nine months ended September 30, 2002 from $106.9 million for the nine months ended September 30, 2001. The increase was primarily a result of an 21 increase in real estate taxes in the first nine months of 2002, primarily due to higher property tax assessments, utilities and small increases in various other rental expenses in 2002, offset by lower occupancy relative to variable operating expenses. Rental operating expenses as a percentage of related rental revenues increased to 31.0% for the nine months ended September 30, 2002 from 29.6% for the nine months ended September 30, 2001. The increase was primarily due to an increase in rental operating expenses related to the increase in real estate taxes and a decrease in rental revenues related to lower average occupancy during the nine months ended September 30, 2002. Same property rental property expenses, which are the expenses of the 475 in-service properties wholly-owned on January 1, 2001, remained consistent for the nine months ended September 30, 2002, compared to the nine months ended September 30, 2001. Depreciation and amortization for the nine months ended September 30, 2002 and 2001 totaled $91.8 million and $83.7 million, respectively. The increase of $8.1 million, or 9.7%, was due to an increase in the amortization of leasing commissions and tenant improvements and an increase in depreciation expense related to buildings placed in service during 2001 and 2002, partly offset by a decrease in the depreciation expense as a result of dispositions during 2002 and 2001. Interest expense increased approximately $596,000, or 0.8%, to $79.9 million for the nine months ended September 30, 2002 from $79.3 million for the nine months ended September 30, 2001. The increase was primarily attributable to the decrease in capitalized interest during 2002 and an increase in the average outstanding debt for the nine months ended September 30, 2002, partly offset by the decrease in the weighted average interest rates for the nine months ended September 30, 2002. Interest expense for the nine months ended September 30, 2002 and 2001 included $1.0 million and $1.7 million, respectively, of amortization of deferred financing costs. The decrease in amortization of deferred financing costs from September 30, 2001 to September 30, 2002 was related to loan fees which were amortized fully during 2001. Capitalized interest for the nine months ended September 30, 2002 and 2001 was $8.3 million and $11.0 million, respectively. General and administrative expenses as a percentage of rental revenues, interest and other income and equity in earnings of unconsolidated affiliates was 4.7% and 3.7% in the first nine months of 2002 and 2001, respectively. The increase is primarily due to a non-recurring increase in management fee expense related to certain executives that provide management services to the Operating Partnership. These executives are employees of the Company, which is the managing general partner of the Operating Partnership. The increase is partly offset by a decrease in revenue due to lower average occupancy during the nine months ended September 30, 2002 and 2001. Interest and other income decreased $9.6 million, or 53.0%, to $8.5 million for the nine months ended September 30, 2002 from $18.1 million for the nine months ended September 30, 2001. The decrease primarily resulted from a decrease in leasing and development fee income in the nine months ended September 30, 2002 and a decrease in interest income in the nine months ended September 30, 2002 due to lower average cash balances (during 2001, we had higher cash balances as a result of proceeds from dispositions related to our capital recycling program that were ultimately used in our stock repurchase program) and the collection of notes receivable during 2001 and 2002. Equity in earnings of unconsolidated affiliates increased $895,000, or 17.3%, to $6.1 million for the nine months ended September 30, 2002 from $5.2 million for the nine months ended September 30, 2001. The increase was primarily a result of earnings from certain development joint ventures formed with unrelated investors in 2002. Non-recurring litigation reserve was $2.7 million for the nine months ended September 30, 2002, and was a result of an accrual of $2.7 million to increase our reserves for the probable and estimated losses related to various legal proceedings arising in the ordinary course of business and from previously completed mergers and acquisitions. Non-recurring compensation was $913,000 for the nine months ended September 30, 2002, and was related to the exercise of options that occurred during the first and second quarters of 2002. When an option holder elected to exercise options, in lieu of issuing new shares upon exercise of the option and then repurchasing shares on the open market, we settled the option exercise by paying the option holder the net difference in cash between the strike price and the market value of the underlying shares. Such exercises were previously recorded as adjustments to partners' capital. However, the effect of such exercises should have been recorded as compensation expense under FASB Interpretation No. 44 (Accounting For Certain Transactions Involving Stock Options, An Interpretation of APB Opinion No. 25). Had we issued the shares to the option holder, received the cash for the strike price and then repurchased the shares in the market, we would not have been required to record any compensation expense. Management believes the impact of this non-recurring charge has had no material effect on net income or 22 partners' capital during the first six months of 2002 as previously reported. In addition, management believes the impact of APB 25 would not have had a material effect on financial statements for prior periods. Commencing during the third quarter of 2002, we discontinued the practice of settling option exercises by paying the option holder the net difference in cash between the strike price and the market value of the underlying shares. In the event we decide to repurchase shares after an option exercise, we will require the option holder to pay the cash for the strike price and then separately repurchase a corresponding number of shares in the market under our stock repurchase program. Income before gain on disposition of land and depreciable assets, discontinued operations and extraordinary item equaled $63.5 million and $99.7 million for the nine months ended September 30, 2002 and 2001, respectively. The Operating Partnership recorded $23.1 million and $23.8 million in preferred unit distributions for each of the nine months ended September 30, 2002 and 2001, respectively. The decrease was a result of the $18.5 million repurchase by the Company of its preferred units during 2001. Gain on disposition of land and depreciable assets decreased $4.0 million, or 24.8%, to $12.1 million for the nine months ended September 30, 2002 from $16.1 million for the nine months ended September 30, 2001. In the first nine months of 2001, the majority of the gain was comprised of a gain of approximately $15.6 million related to the disposition of 1,672 apartment units and a gain of approximately $1.0 million related to the disposition of 160 acres of land, partly offset by a loss of approximately $508,000 related to the disposition of 795,331 rentable square feet of office properties. In the first nine months of 2002, the majority of the gain was comprised of a gain of approximately $14.8 million related to the disposition of 533,263 rentable square feet of office properties and a gain of approximately $6.5 million related to the disposition of 78 acres of land and other non-revenue producing assets, partly offset by an impairment loss of approximately $9.1 million. Income from discontinued operations decreased from $9.3 million for the nine months ended September 30, 2001 to $6.7 million for the nine months ended September 30, 2002. The decrease was a result of the decrease in income from discontinued operations for properties sold during 2002. Loss on sale of discontinued operations was $1.6 million for the nine months ended September 30, 2002. This amount was comprised of an impairment charge of $4.5 million related to properties held for sale at September 30, 2002 offset by gains in aggregate of approximately $2.9 million related to the disposition of 331,747 rentable square feet. Liquidity and Capital Resources Statement of Cash Flows. The following table sets forth the changes in the Operating Partnership's cash flows from the first nine months of 2001 to the first nine months of 2002 ($ in thousands):
Nine Months Ended September 30, ---------------------------------- 2002 2001 Change ---------- ---------- ---------- Cash Provided By Operating Activities $ 172,284 $ 178,151 $ (5,867) Cash Provided By Investing Activities 75,766 53,926 21,840 Cash Used in Financing Activities (235,030) (281,659) 46,629
The decrease in cash provided by operating activities was primarily the result of (1) a decrease in average occupancy rates for our wholly-owned portfolio; (2) our capital recycling program; and (3) a decrease in interest income and development and leasing income in the first nine months of 2002. In addition, the level of net cash provided by operating activities is also affected by the timing of receipt of revenues and payment of expenses. The increase in cash provided by investing activities was primarily a result of a decrease of $98.7 million in additions to real estate assets in the first nine months of 2002, partly offset by a decrease in the investments in notes receivable of $55.2 million from the first nine months of 2001 to the first nine months of 2002 and a decrease in the collection of advances from subsidiaries of $27.6 million from the first nine months of 2001 to the first nine months of 2002. The decrease in cash used in financing activities was primarily a result of a decrease of $151.9 million in the repurchase of Common Units from the first nine months of 2001 to the first nine months of 2002, a decrease of $2.4 million in distributions paid on Common Units and Preferred Units during 23 2002, an increase in net proceeds from the sale of Common Stock of $4.5 million during 2002 and an increase in borrowing of $18.3 million on unsecured ready loan, mortgages and notes payable during 2002. These decreases were partially offset by an increase in repayments of $132.2 million on the unsecured revolving loan, mortgages and notes payable during 2002. Capitalization. Our total indebtedness at September 30, 2002 was $1.6 billion and was comprised of $504.3 million of secured indebtedness with a weighted average interest rate of 7.9% and $1.1 billion of unsecured indebtedness with a weighted average interest rate of 6.7%. We do not intend to reserve funds to retire existing secured or unsecured debt upon maturity. For a more complete discussion of our long-term liquidity needs, see "Current and Future Cash Needs." The following table sets forth the maturity schedule of our mortgages and notes payable as of September 30, 2002 ($ in thousands):
---------------------------------------------------------------- Within Within Within Within 2-3 4-5 6 or more Total 1 Year Years Years Years ----------- ----------- ----------- ----------- ----------- Fixed Rate Debt: Unsecured: MOPPRS (1) ........................... $ 125,000 $ -- $ -- $ -- $ 125,000 Put Option Notes (2) ................. 100,000 -- -- -- 100,000 Notes ................................ 706,500 -- 246,500 110,000 350,000 Secured: Mortgages and loans payable .......... 498,859 10,044 90,467 90,461 307,887 ----------- ----------- ----------- ----------- ----------- Total Fixed Rate Debt .................... 1,430,359 10,044 336,967 200,461 882,887 ----------- ----------- ----------- ----------- ----------- Variable Rate Debt: Unsecured: Term Loan ............................ 20,000 -- 20,000 -- -- Revolving Loan ....................... 131,500 -- 131,500 -- -- Secured: Revolving Loan ....................... 1,129 1,129 -- -- -- Mortgage loan payable ................ 4,374 247 538 3,589 -- ----------- ----------- ----------- ----------- ----------- Total Variable Rate Debt ................. 157,003 1,376 152,038 3,589 -- ----------- ----------- ----------- ----------- ----------- Total Mortgages and Notes Payable ............. $ 1,587,362 $ 11,420 $ 489,005 $ 204,050 $ 882,887 =========== =========== =========== =========== ===========
______________________ (1) On February 2, 1998, the Operating Partnership sold $125.0 million of MandatOry Par Put Remarketed Securities ("MOPPRS") due February 1, 2013. The MOPPRS bear an interest rate of 6.835% from the date of issuance through January 31, 2003. After January 31, 2003, the interest rate to maturity on such MOPPRS will be 5.715% plus the applicable spread determined as of January 31, 2003. In connection with the initial issuance of the MOPPRS, a counter party was granted a remarketing option to purchase the MOPPRS from the holders thereof on January 31, 2003 at 100.0% of the principal amount. If the counter party elects not to exercise this option, the Operating Partnership would be required to repurchase the MOPPRS from the holders on January 31, 2003 at 100.0% of the principal amount plus accrued and unpaid interest. (2) On June 24, 1997, a trust formed by the Operating Partnership sold $100.0 million of Exercisable Put Option Securities due June 15, 2004 ("X-POS"), which represent fractional undivided beneficial interest in the trust. The assets of the trust consist of, among other things, $100.0 million of Exercisable Put Option Notes due June 15, 2011 (the "Put Option Notes"), issued by the Operating Partnership. The Put Option Notes bear an interest rate of 7.19% from the date of issuance through June 15, 2004. After June 15, 2004, the interest rate to maturity on such Put Option Notes will be 6.39% plus the applicable spread determined as of June 15, 2004. In connection with the initial issuance of the Put Option Notes, a counter party was granted an option to purchase the Put Option Notes from the trust on June 15, 2004 at 100.0% of the principal amount. If the counter party elects not to exercise this option, the Operating Partnership would be required to repurchase the Put Option Notes from the Trust on June 15, 2004 at 100.0% of the principal amount plus accrued and unpaid interest. The mortgage and loans payable and the secured revolving loan were secured by real estate assets with an aggregate carrying value of $888.0 million at September 30, 2002. The Operating Partnership's unsecured notes of $931.5 million bear interest rates ranging from 6.8% to 8.1%, with interest payable semi-annually in arrears. The premium and discount related to the issuance of the unsecured 24 notes is being amortized over the life of the respective notes as an adjustment to interest expense. All of the unsecured notes, except for the MOPPRS and Put Option Notes, are redeemable at any time prior to maturity at our option, subject to certain conditions including the payment of make-whole amounts. We currently have a $300.0 million unsecured revolving loan (with $131.5 million outstanding at September 30, 2002) that matures in December 2003 and a $55.2 million secured revolving loan (with $1.1 million outstanding at September 30, 2002) that matures in March 2003. Our unsecured revolving loan also includes a $150.0 million competitive sub-facility. Depending upon the corporate credit ratings assigned to us from time to time by the various rating agencies, our unsecured revolving loan bears variable rate interest at a spread above LIBOR ranging from 0.70% to 1.55% and our secured revolving loan bears variable rate interest at a spread above LIBOR ranging from 0.55% to 1.50%. We currently have a credit rating of BBB- assigned by Standard & Poor's, a credit rating of BBB assigned by Fitch Inc. and a credit rating of Baa2 assigned by Moody's Investor Service. As a result, interest currently accrues on borrowings under our unsecured revolving loan at an average rate of LIBOR plus 95 basis points and under our secured revolving loan at an average rate of LIBOR plus 85 basis points. In addition, we are currently required to pay an annual facility fee equal to .20% of the total commitment under the unsecured revolving loan. The terms of each of our revolving loans and indenture that governs our outstanding notes require us to comply with various operating and financial covenants and performance ratios. We are currently in compliance with all such requirements. Joint Ventures. During the past several years, we have formed various joint ventures with unrelated investors. We have retained minority equity interests ranging from 20.00% to 50.00% in these joint ventures. As required by GAAP, we have accounted for our joint venture activity using the equity method of accounting, as we do not control these joint ventures. As a result, the assets and liabilities of our joint ventures are not included on our balance sheet. As of September 30, 2002, our joint ventures have approximately $575.8 million of outstanding debt. All of the joint venture debt is non-recourse to us except (1) in the case of customary exceptions pertaining to such matters as misuse of funds, environmental conditions and material misrepresentations and (2) with respect to $2.5 million of construction debt related to the MG-HIW Metrowest II, LLC, which has been guaranteed by us subject to a pro rata indemnity from our joint venture partner. Our partner in SF-HIW Harborview Plaza, LP has the right to put its 80% equity interest in the partnership to us in cash at anytime during the one year period commencing on September 11, 2014. The value of the equity interest will be determined based upon the then fair market value of the partnership's assets and liabilities. Interest Rate Hedging Activities. To meet in part our long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Borrowings under our two revolving loans bear interest at variable rates. Our long-term debt, which consists of long-term financings and the unsecured issuance of debt securities, typically bears interest at fixed rates. In addition, we have assumed fixed rate and variable rate debt in connection with acquiring properties. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. As of September 30, 2002, we have two $24.0 million treasury lock agreements related to an anticipated five-year fixed rate financing with two financial conterparties, which effectively lock the five-year treasury rate at 3.72%. We do not hold or issue these derivative contracts for trading or speculative purposes. The interest rate on all of our variable rate debt is adjusted at one- and three-month intervals, subject to settlements under these contracts. We also enter into treasury lock agreements from time to time in order to limit our exposure to an increase in interest rates with respect to future debt offerings. Net payments to counterparties under interest rate hedge contracts were $415,051 during the nine months ended September 30, 2002 and were recorded as additional interest expense. Current and Future Cash Needs. Historically, rental revenue has been the principal source of funds to meet our short-term liquidity requirements, which primarily consist of operating expenses, debt service, stockholder distributions and ordinary course capital expenditures. In addition, construction management, maintenance, leasing and management fees have provided sources of cash flow. We presently have no plans for major capital improvements to the existing properties except for the $3.2 million renovations at Tampa Bay Park and the $7.9 25 million general and non-recurring renovations at Country Club Plaza. In addition, we could incur tenant improvements and lease commissions related to any releasing of space currently leased by WorldCom and US Air (see "Recent Developments") and the redevelopment of the EPA site in Research Commons. In addition to the requirements discussed above, our short-term (within the next 12 months) liquidity requirements also include the funding of approximately $15.2 million of our existing development activity and first generation tenant improvements and lease commissions on properties placed in service that are not fully leased. See "Business -- Development Activity." We expect to fund our short-term liquidity requirements through a combination of working capital, cash flows from operations and the following: . borrowings under our unsecured revolving loan (up to $149.0 million of availability as of November 8 2002); . borrowings under our secured revolving loan (up to $55.2 million of availability as of November 8, 2002); . the selective disposition of non-core assets; . the sale or contribution of some of our wholly-owned properties, development projects and development land to strategic joint ventures to be formed with unrelated investors, which will have the net effect of generating additional capital through such sale or contributions; and . the issuance of secured debt (at September 30, 2002, we had $2.8 billion of unencumbered real estate assets at cost). Our long-term liquidity needs generally include the funding of existing and future development activity, selective asset acquisitions and the retirement of mortgage debt, amounts outstanding under the two revolving loans and long-term unsecured debt. We remain committed to maintaining a flexible capital structure. Accordingly, we expect to meet our long-term liquidity needs through a combination of (1) the issuance by the Operating Partnership of additional unsecured debt securities, (2) the issuance of additional equity securities by the Company and the Operating Partnership as well as (3) the sources described above with respect to our short-term liquidity. We expect to use such sources to meet our long-term liquidity requirements either through direct payments or repayment of borrowings under the unsecured revolving loan. We do not intend to reserve funds to retire existing secured or unsecured indebtedness upon maturity. Instead, we will seek to refinance such debt at maturity or retire such debt through the issuance of equity or debt securities. We anticipate that our available cash and cash equivalents and cash flows from operating activities, with cash available from borrowings and other sources, will be adequate to meet our capital and liquidity needs in both the short and long term. However, if these sources of funds are insufficient or unavailable, the Operating Partnership's ability to make distributions and make other cash payments may be adversely affected. Common Unit Repurchase Program. On April 25, 2001, we announced that the Company's Board of Directors authorized the repurchase of up to an additional 5.0 million shares of Common Stock and Common Units. As of October 29, 2002, under the new repurchase program, the Company had repurchased 1.4 million Common Units at a weighted average purchase price of $24.59 per unit and a total purchase price of $34.6 million. In determining whether or not to repurchase additional capital stock, the Company will consider, among other factors, the effect of repurchases on our liquidity and the price of the Company's Common Stock. Disposition and Joint Venture Activity. As part of our ongoing capital recycling program, during the nine months ended September 30, 2002, we sold 856,000 rentable square feet of office properties and 102.7 acres of development land for gross proceeds of $164.4 million. At September 30, 2002, we had 1,610,575 square feet of office properties and 112.8 acres of land under letter of intent or contract for sale in various transactions totaling $140.0 million. These transactions are subject to customary closing conditions, including due diligence and documentation, and are expected to close during the fourth quarter of 2002. However, we can provide no assurance that all or parts of these transactions will be consummated. During the third quarter, we recorded a $3.8 million impairment loss related to two properties and two land parcels that we expect to sell. On June 26, 2002, we acquired our joint venture partner's interest in MG-HIW Rocky Point, LLC, which owned Harborview Plaza, to bring our ownership interest in that entity to 100%. At that time, we consolidated the assets and liabilities, and recorded income and expenses on a consolidated basis. On September 11, 2002, we contributed Harborview Plaza to SF-HIW Harborview Plaza, LP, a newly formed limited partnership, in exchange for a 20% limited partnership interest. 26 Recent Developments WorldCom Bankruptcy. On July 21, 2002, WorldCom filed a voluntary petition with the United States Bankruptcy Court seeking relief under Chapter 11 of the United States Bankruptcy Code. We currently have 13 leases encompassing 982,921 square feet in eight locations with WorldCom and its affiliates, including four leases encompassing 828,467 square feet in four locations with Intermedia Communications, with an average remaining lease term of 7.8 years. Based on September 2002 rental revenue, our annualized rental revenue from these leases is $17.4 million, or approximately 3.7% of our total annualized rental revenue. Approximately 185,000 square feet of the space leased by Intermedia has not yet been upfitted or occupied and we estimate that a substantial portion of the remaining Intermedia space currently appears to be significantly under-utilized. During the third quarter of 2002, WorldCom rejected one lease encompassing 3,601 square feet that was due to expire in July 2003. As a result of this rejection, we will file a proof of claim totaling approximately $65,000, which represents the total amount of future rental payments remaining on the lease term. In addition, our joint venture with Miller Global ("MG-HIW, LLC") has 11 leases encompassing 38,624 square feet in four locations with WorldCom and its affiliates, including three leases encompassing 4,703 square feet in two locations with Intermedia Communications, with lease expirations ranging from 2002 to 2007. We have a 20.0% ownership in this joint venture and, based on September 2002 rental revenue, our proportionate share of the annualized rental revenue generated from these leases is $197,165. Approximately 81.5% of the annualized rental revenue related to our leases with WorldCom and its affiliates, including our pro rata share of the annualized rental revenue related to MG-HIW, LLC, is derived from properties in Tampa. The remainder of this revenue is derived from properties in Greenville, South Carolina, Richmond, Raleigh, Orlando and Nashville. WorldCom and its affiliates are current on base rental payments through November 30, 2002. Since June 30, 2002, we have recorded rental revenue from WorldCom and its affiliates on a cash basis, rather than on a straight-line basis. Due to the inherent uncertainties of the bankruptcy process, we are not able to predict the impact of WorldCom's bankruptcy on its leasing and occupancy of our properties or on our financial condition and results of operations. U.S. Airways Bankruptcy. On August 11, 2002, US Airways Group Inc. filed a voluntary petition with the United States Bankruptcy Court seeking relief under Chapter 11 of the United States Bankruptcy Code. We currently have seven leases encompassing 414,059 square feet with US Airways and its affiliates with an average remaining lease term of 5.1 years as of September 30, 2002. Based on September 2002 rental revenue, our annualized rental revenue from these leases is $6.9 million, or approximately 1.5% of our total annualized rental revenue. Approximately 55,000 square feet of space is currently being sub-leased by US Airways to a third party and we estimate that the balance of the space is approximately 75 percent utilized by US Airways as a reservation call center and for certain revenue accounting and information technology functions. All of the 414,059 square feet of space is located in Winston-Salem, North Carolina. US Airways is current on base rental payments through November 30, 2002, except for pre-petition rent in the amount of $185,428 from August 1, 2002 up to the date of the US Airways bankruptcy filing, which was August 11, 2002. We have an accrued straight line rent receivable from US Airways in the amount of $500,508 as of September 30, 2002. Due to the inherent uncertainties of the bankruptcy process, we are not able to predict the impact of US Airways' bankruptcy on its leasing and occupancy of our properties or on our financial condition and results of operations. Impact of Recently Issued Accounting Standards In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment of disposal of long-lived assets. This standard harmonizes the accounting for impaired assets and resolves some of the implementation issues as originally described in SFAS No. 121. We adopted SFAS No. 144 in the first quarter of 2002. Income from discontinued 27 operations and the gain/(loss) on sale of discontinued operations for properties meeting the criteria in accordance with SFAS No. 144 are reflected in the consolidated statements of income as discontinued operations for all periods presented. In April, 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections", which rescinds Statement No. 4, which required all gains and losses from extinguishment of debt to be aggregated, and if material, classified as extraordinary item, net of related income tax effect. The provisions of SFAS No. 145 related to the rescission of Statement No. 4 are effective for financial statements issued for fiscal years after May 15, 2002. We will adopt SFAS No. 145 in the fourth quarter of 2002. We do not anticipate that the adoption of this statement will have a material effect on our results of operations. Funds From Operations and Cash Available for Distributions We consider funds from operations ("FFO") to be a useful financial performance measure of the operating performance of an equity REIT because, together with net income and cash flows, FFO provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures. FFO does not represent net income or cash flows from operating, investing or financing activities as defined by GAAP. It should not be considered as an alternative to net income as an indicator of our operating performance or to cash flows as a measure of liquidity. FFO does not measure whether cash flow is sufficient to fund all cash needs, including principal amortization, capital improvements and distributions to stockholders. Further, FFO as disclosed by other REITs may not be comparable to our calculation of FFO, as described below. FFO and cash available for distributions should not be considered as alternatives to net income as an indication of our performance or to cash flows as a measure of liquidity. FFO equals net income (computed in accordance with GAAP) excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Amortization of deferred financing costs and depreciation of non-real estate assets are not added back to net income in arriving at FFO. In addition, FFO includes both recurring and non-recurring operating results and income/(loss) from discontinued operations. As a result, non-recurring items that are not defined as "extraordinary" under GAAP are reflected in the calculation of FFO. Cash available for distribution is defined as funds from operations increased by the amortization of deferred financing activities and reduced by rental income from straight-line rents and non-revenue enhancing capital expenditures for building improvements and tenant improvements and lease commissions related to second generation space. 28 FFO and cash available for distribution for the three and nine month periods ended September 30, 2002 and 2001 are summarized in the following table ($ in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Funds from Operations: Income before gain on disposition of land and depreciable assets, discontinued operations and extraordinary item ................. $ 14,841 $ 33,330 $ 63,569 $ 99,693 Add/(Deduct): Distributions to preferred unit holders ...................... (7,713) (7,713) (23,139) (23,787) Prepayment penalties - unconsolidated sub .................... 325 -- 325 -- Transition adjustment upon adoption of FAS 133 ............... -- -- -- 556 Income from discontinued operations .......................... 1,970 2,730 6,717 9,327 Gain on disposition of land .................................. 741 (538) 6,498 1,025 Depreciation and amortization ................................ 32,817 29,420 95,738 87,531 Depreciation on unconsolidated affiliates .................... 2,317 1,826 6,746 5,560 --------- --------- --------- ---------- Funds from operations .................................... 45,298 59,055 156,454 179,905 Cash available for distribution: Add/(Deduct): Rental income from straight-line rents ....................... (1,222) (2,701) (2,540) (8,947) Non-recurring compensation expense ........................... 913 -- 913 -- Non-recurring litigation reserve ............................. 2,700 -- 2,700 -- Amortization of deferred financing costs ..................... 347 324 1,027 1,664 Non-incremental revenue generating capital expenditures (1): Building improvements paid ................................. (1,740) (2,872) (4,860) (5,959) Second generation tenant improvements paid ................. (5,824) (4,834) (12,735) (12,610) Second generation lease commissions paid ................... (3,694) (2,867) (9,353) (11,195) --------- --------- --------- ---------- Cash available for distribution .......................... $ 36,778 $ 46,105 $ 131,606 $ 142,858 ========= ========= ========= ========== Weighted average common units outstanding - basic ........................................... 60,244 60,873 60,321 61,843 ========= ========= ========= ========== Weighted average common units outstanding - diluted ......................................... 60,461 61,293 60,694 62,238 ========= ========= ========= ========== Dividend payout ratios: Funds from operations .......................................... 78.1% 60.7% 68.1% 59.7% ========= ========= ========= ========== Cash available for distribution ................................ 96.2% 77.8% 80.9% 75.2% ========= ========= ========= ==========
___________ (1) Amounts represent cash expenditures. 29 Property Information The following table sets forth certain information with respect to our wholly owned in-service and development properties (excluding apartment units) as of September 30, 2002 and 2001:
September 30, 2002 September 30, 2001 -------------------------- ---------------------------- Percent Percent Rentable Leased/ Rentable Leased/ Square Feet Pre-Leased Square Feet Pre-Leased ----------- ---------- ----------- ---------- In-Service: Office 25,861,000 86.3% 24,829,000 92.9% Industrial 10,468,000 86.2% 10,396,000 92.3% Retail (1) 1,650,000 95.4% 1,628,000 95.1% ---------- ----- ---------- ----- Total or Weighted Average 37,979,000 86.7% 36,853,000 92.7% ========== ===== ========== ===== Development: Completed--Not Stabilized Office 568,000 17.3% 1,188,000 62.1% Industrial 136,000 29.0% 184,000 37.2% Retail 20,000 90.0% -- -- ---------- ----- ---------- ----- Total or Weighted Average 724,000 21.5% 1,372,000 58.8% ========== ===== ========== ===== In Process Office (2) 100,000 42.0% 1,285,000 52.5% Industrial (2) 60,000 20.0% 258,000 47.3% Retail -- -- 20,000 90.0% ---------- ----- ---------- ----- Total or Weighted Average 160,000 33.8% 1,563,000 52.1% ========== ===== ========== ===== Total: Office 26,529,000 27,302,000 Industrial 10,664,000 10,838,000 Retail (1) 1,670,000 1,648,000 ---------- ---------- Total or Weighted Average 38,863,000 39,788,000 ========== ========== Same Store: Office 23,408,000 87.7% 21,076,000 92.7% Industrial 10,041,000 86.3% 9,694,000 91.7% Retail (1) 1,650,000 95.4% 1,450,000 95.0% ---------- ----- ---------- ----- Total or Weighted Average 35,099,000 87.2% 32,220,000 92.5% ========== ===== ========== =====
__________ (1) Excludes Kansas City's basement space. (2) Includes projects that we have an option to purchase. 30 The following table sets forth information concerning the 20 largest customers of our wholly-owned properties as of September 30, 2002 ($ in thousands):
Percent of Total Average Number Rental Annualized Annualized Remaining Lease Tenant of Leases Square Feet Rental Revenue (1) Rental Revenue(1) Term in Years - ------ --------- ----------- ------------------ ----------------- ------------- Intermedia Communications/ WorldCom (2) .................... 13 982,921 $ 17,396 3.70% 7.8 AT&T ............................... 10 854,992 14,046 2.99 5.4 Federal Government ................. 59 688,320 13,664 2.91 5.0 Capital One Services ............... 6 587,188 10,208 2.17 5.9 Caterpillar Financial Services ..... 1 300,901 7,899 1.68 12.4 PricewaterhouseCoopers ............. 7 307,158 7,038 1.50 7.4 US Air ............................. 7 414,059 6,909 1.47 5.1 State of Georgia ................... 10 356,993 6,783 1.44 6.3 Sara Lee ........................... 9 1,198,534 4,523 0.96 2.7 Bell South ......................... 11 212,011 4,396 0.93 1.6 IBM ................................ 5 203,802 4,260 0.91 3.0 Northern Telecom, Inc. ............. 1 246,000 3,235 0.69 5.4 Lockton Companies, Inc. ............ 1 127,485 3,117 0.66 12.4 Bank of America .................... 23 152,017 2,998 0.64 2.6 Volvo .............................. 5 214,783 2,979 0.63 6.8 International Paper Co. ............ 10 121,174 2,887 0.61 0.3 Hartford Insurance ................. 6 134,021 2,886 0.61 3.5 Business Telecom, Inc. ............. 4 145,497 2,832 0.60 2.5 T-Mobile USA, Inc. ................. 3 120,561 2,808 0.60 3.7 Ford Motor Company ................. 2 129,158 2,661 0.57 7.2 --- --------- -------- ----- ---- Total .............................. 193 7,497,575 $123,525 26.27% 5.9 === ========= ======== ===== ====
_________________ (1) Annualized Rental Revenue is September 2002 rental revenue (base rent plus operating expense pass throughs) multiplied by 12. (2) Since June 30, 2002, we have recorded rental revenue from WorldCom and its affiliates on a cash basis, rather than on a straight-line basis. 31 As of September 30, 2002, we were developing six suburban office properties, two industrial properties and one retail property totaling 884,000 rentable square feet of office and industrial space. The following table summarizes these development projects. In addition to the properties described in this table, we are developing with a joint venture partner one additional property totaling 285,000 rentable square feet. At September 30, 2002, this one development project had an aggregate anticipated total investment of $69.0 million and was 59.0% pre-leased. In-Process
Anticipated Rentable Total Investment Pre-Leasing Estimated Estimated Property Market Square Feet Investment at 09/30/02 Percentage (1) Completion Stabilization (2) - -------- ------ ----------- ------------- ----------- -------------- ---------- ----------------- ($ in thousands) Office: 801 Raleigh Corporate Center Research Triangle 100,000 $ 12,016 $ 9,050 42% 4Q02 2Q04 --------- --------- ------- ---- In-Process Office Total or Weighted Average 100,000 $ 12,016 $ 9,050 42% ========= ========= ======= ==== Industrial: Tradeport V (3) Atlanta 60,000 $ 2,913 $ 1,420 20% 4Q02 4Q03 --------- --------- ------- ---- In-Process Industrial Total or Weighted Average 60,000 $ 2,913 $ 1,420 20% ========= ========= ======= ==== Total or Weighted Average of all In-Process Development Projects 160,000 $ 14,929 $10,470 34% ========= ========= ======= ====
_____________ (1) Letters of intent comprise 4.5% of the total pre-leasing percentage. (2) We generally consider a development project to be stabilized upon the earlier of the first date such project is at least 95% occupied or one year from the date of completion. (3) We are developing this property for a third party and own an option to purchase. 32 Completed--Not Stabilized (3)
Anticipated Rentable Total Investment Pre-Leasing Estimated Estimated Property Market Square Feet Investment at 09/30/02 Percentage (1) Completion Stabilization (2) - -------- ------ ----------- ---------- ----------- -------------- ---------- ----------------- ($ in thousands) Office: Seven Springs I Nashville 131,000 $ 15,556 $ 13,048 12% 1Q02 1Q03 1501 Highwoods Boulevard Piedmont Triad 98,000 11,290 10,156 4 4Q01 1Q03 Centre Green Four Research Triangle 100,000 11,764 9,613 0 4Q01 2Q03 GlenLake I Research Triangle 158,000 22,417 19,457 40 4Q01 2Q03 Shadow Creek II Memphis 81,000 8,750 7,110 19 4Q01 4Q03 --------- --------- -------- ---- Completed-Not Stabilized Office Total or Weighted Average 568,000 $ 69,777 $ 59,384 17% ========= ========= ======== ==== Industrial: Newpoint IV Atlanta 136,000 $ 5,288 $ 4,875 29% 4Q01 1Q03 --------- --------- -------- ---- Completed-Not Stabilized Industrial Total or Weighted Average 136,000 $ 5,288 $ 4,875 29% ========= ========= ======== ==== Retail: Granada Shops Kansas City 20,000 $ 5,020 $ 4,120 90% 4Q01 2Q03 --------- --------- -------- ---- Completed-Not Stabilized Retail Total or Weighted Average 20,000 $ 5,020 $ 4,120 90% ========= ========= ======== ==== Total or Weighted Average of all Completed- Not Stabilized Development Projects 724,000 $ 80,085 $ 68,379 22% ========= ========= ======== ==== Total or Weighted Average of all Development Projects 884,000 $ 95,014 $ 78,849 24% ========= ========= ======== ====
_____________ (1) Letters of intent comprise 4.5% of the total pre-leasing percentage. (2) We generally consider a development project to be stabilized upon the earlier of the first date such project is at least 95% occupied or one year from the date of completion. (3) These properties contributed an aggregate of $61,000 in Net Operating Income (Property Revenue - Property Expense) in the third quarter of 2002. 33 Development Analysis
Anticipated Rentable Total Pre-Leasing Square Feet Investment Percentage (1) ----------- ---------- -------------- ($ in thousands) Summary by Estimated Stabilization Date: First Quarter 2003 ........................................... 365,000 $ 32,134 15% Second Quarter 2003 .......................................... 278,000 39,201 29% Fourth Quarter 2003 .......................................... 141,000 11,663 19% Second Quarter 2004 .......................................... 100,000 12,016 42% --------- --------- --- Total or Weighted Average .................................... 884,000 $ 95,014 24% ========= ========= === Summary by Market: Atlanta ...................................................... 196,000 $ 8,201 26% Kansas City .................................................. 20,000 5,020 90% Memphis ...................................................... 81,000 8,750 19% Nashville .................................................... 131,000 15,556 12% Piedmont Triad ............................................... 98,000 11,290 4% Research Triangle ............................................ 358,000 46,197 29% --------- --------- --- Total or Weighted Average .................................... 884,000 $ 95,014 24% ========= ========= === Build-to-Suit ................................................ -- $ -- --% Multi-Tenant ................................................. 884,000 95,014 24% --------- --------- --- Total or Weighted Average .................................... 884,000 $ 95,014 24% ========= ========= ===
Average Average Rentable Anticipated Square Total Average Feet Investment Pre-Leasing (1) -------- ------------ -------------- ($ in thousands) Average Per Property By Type: Office ....................................................... 111,333 $ 13,632 21% Industrial ................................................... 98,000 4,101 26% Retail ....................................................... 20,000 5,020 90% -------- -------- --- Weighted Average ............................................. 98,222 $ 10,557 24% ======== ======== ===
____________ (1) Letters of intent comprise 4.5% of the total pre-leasing percentage. 34 The following table sets forth certain information about leasing activities at our wholly owned in-service properties (excluding apartment units) for the three months ended September 30, June 30 and March 31, 2002 and December 31, 2001.
Office Leasing Statistics Three Months Ended ---------------------------------------------------------------- 9/30/02 6/30/02 3/31/02 12/31/01 Average ----------- ------------ ----------- ------------ ---------- Net Effective Rents Related to Re-Leased Space: Number of lease transactions (signed leases) ............... 184 162 110 116 143 Rentable square footage leased ............................. 882,115 874,467 417,102 437,454 652,785 Average per rentable square foot over the lease term: Base rent ............................................... $ 17.26 $ 16.86 $ 16.83 $ 17.85 $ 17.20 Tenant improvements ..................................... (1.06) (0.86) (0.98) (1.19) (1.02) Leasing commissions ..................................... (0.60) (0.56) (0.78) (0.97) (0.73) Rent concessions ........................................ (0.22) (0.14) (0.15) (0.11) (0.16) ----------- ----------- ----------- ----------- ----------- Effective rent .......................................... $ 15.38 $ 15.30 $ 14.92 $ 15.58 $ 15.29 Expense stop(1) ......................................... (5.54) (5.17) (5.17) (4.50) (5.10) ----------- ----------- ----------- ----------- ----------- Equivalent effective net rent ........................... $ 9.84 $ 10.13 $ 9.75 $ 11.08 $ 10.20 =========== =========== =========== =========== =========== Average term in years ...................................... 3.6 4.1 4.1 4.6 4.1 =========== =========== =========== =========== =========== Capital Expenditures Related to Re-Leased Space: Tenant Improvements: Total dollars committed under signed leases ............. $ 4,396,259 $ 3,481,988 $ 2,031,231 $ 2,647,115 $ 3,139,148 Rentable square feet .................................... 882,115 874,467 417,102 437,454 652,785 ----------- ----------- ----------- ----------- ----------- Per rentable square foot ................................ $ 4.98 $ 3.98 $ 4.87 $ 6.05 $ 4.81 =========== =========== =========== =========== =========== Leasing Commissions: Total dollars committed under signed leases ............. $ 1,352,691 $ 1,272,854 $ 984,220 $ 1,277,523 $ 1,221,822 Rentable square feet .................................... 882,115 874,467 417,102 437,454 652,785 ----------- ----------- ----------- ----------- ----------- Per rentable square foot ................................ $ 1.53 $ 1.46 $ 2.36 $ 2.92 $ 1.87 =========== =========== =========== =========== =========== Total: Total dollars committed under signed leases ............. $ 5,748,950 $ 4,754,842 $ 3,015,450 $ 3,924,637 $ 4,360,970 Rentable square feet .................................... 882,115 874,467 417,102 437,454 652,785 ----------- ----------- ----------- ----------- ----------- Per rentable square foot ................................ $ 6.52 $ 5.44 $ 7.23 $ 8.97 $ 6.68 =========== =========== =========== =========== ===========
__________ (1) "Expense stop" represents operating expenses (generally including taxes, utilities, routine building expense and common area maintenance) for which we will not be reimbursed by our tenants. 35
Industrial Leasing Statistics Three Months Ended --------------------------------------------------------------------- 9/30/02 6/30/02 3/31/02 12/31/01 Average ----------- ----------- ----------- ----------- ----------- Net Effective Rents Related to Re-Leased Space: Number of lease transactions (signed leases) ........... 45 32 15 31 31 Rentable square footage leased ......................... 593,188 1,005,765 78,844 894,865 643,166 Average per rentable square foot over the lease term: Base rent ........................................... $ 4.37 $ 3.58 $ 6.95 $ 3.52 $ 4.61 Tenant improvements ................................. (0.23) (0.29) (1.10) (0.24) (0.47) Leasing commissions ................................. (0.14) (0.14) (0.21) (0.10) (0.15) Rent concessions .................................... (0.02) (0.03) -- -- (0.01) ----------- ----------- ---------- ----------- ----------- Effective rent ...................................... $ 3.98 $ 3.12 $ 5.64 $ 3.18 $ 3.98 Expense stop (1) .................................... (0.39) (0.09) (0.72) (0.18) (0.35) ----------- ----------- --------- ----------- ----------- Equivalent effective net rent ....................... $ 3.59 $ 3.03 $ 4.92 $ 3.00 $ 3.63 =========== =========== ========== =========== =========== Average term in years .................................. 1.6 6.3 4.1 2.2 3.6 =========== =========== ========== =========== =========== Capital Expenditures Related to Re-leased Space: Tenant Improvements: Total dollars committed under signed leases ......... $ 522,115 $ 2,088,547 $ 386,263 $ 661,591 $ 914,629 Rentable square feet ................................ 593,188 1,005,765 78,844 894,865 643,166 ----------- ----------- ---------- ----------- ----------- Per rentable square foot ............................ $ 0.88 $ 2.08 $ 4.90 $ 0.74 $ 1.42 =========== =========== ========== =========== =========== Leasing Commissions: Total dollars committed under signed leases ......... $ 141,694 $ 797,939 $ 44,100 $ 257,010 $ 310,186 Rentable square feet ................................ 593,188 1,005,765 78,844 894,865 643,166 ----------- ----------- ---------- ----------- ----------- Per rentable square foot ............................ $ 0.24 $ 0.79 $ 0.56 $ 0.29 $ 0.48 =========== =========== ========== =========== =========== Total: Total dollars committed under signed leases ......... $ 663,809 $ 2,886,486 $ 430,363 $ 918,601 $ 1,224,815 Rentable square feet ................................ 593,188 1,005,765 78,844 894,865 643,166 ----------- ----------- ---------- ----------- ----------- Per rentable square foot ............................ $ 1.12 $ 2.87 $ 5.46 $ 1.03 $ 1.90 =========== =========== ========== =========== ===========
___________ (1) "Expense stop" represents operating expenses (generally including taxes, utilities, routine building expense and common area maintenance) for which we will not be reimbursed by our tenants. 36
Retail Leasing Statistics Three Months Ended -------------------------------------------------------------------- 9/30/02 6/30/02 3/31/02 12/31/01 Average ----------- ----------- ---------- ----------- ----------- Net Effective Rents Related to Re-Leased Space: Number of lease transactions (signed leases) ........... 13 13 12 12 13 Rentable square footage leased ......................... 28,267 52,527 59,649 26,019 41,616 Average per rentable square foot over the lease term: Base rent ........................................... $ 20.14 $ 18.15 $ 25.66 $ 15.75 $ 19.93 Tenant improvements ................................. (0.60) (1.83) (1.87) (0.63) (1.23) Leasing commissions ................................. (0.88) (0.65) (0.35) (0.82) (0.68) Rent concessions .................................... -- (0.03) (0.02) -- (0.01) ----------- ----------- ---------- ----------- ----------- Effective rent ...................................... $ 18.66 $ 15.64 $ 23.42 $ 14.30 $ 18.01 Expense stop (1) .................................... -- (1.02) -- -- (0.26) ----------- ----------- ---------- ----------- ----------- Equivalent effective net rent ....................... $ 18.66 $ 14.62 $ 23.42 $ 14.30 $ 17.75 =========== =========== ========== =========== =========== Average term in years .................................. 5.6 7.0 6.5 6.7 6.4 =========== =========== ========== =========== =========== Capital Expenditures Related to Re-leased Space: Tenant Improvements: Total dollars committed under signed leases ......... $ 121,500 $ 1,077,825 $ 738,605 $ 148,860 $ 521,698 Rentable square feet ................................ 28,267 52,527 59,649 26,019 41,616 ----------- ----------- ---------- ----------- ----------- Per rentable square foot ............................ $ 4.30 $ 20.52 $ 12.38 $ 5.72 $ 12.54 =========== =========== ========== =========== =========== Leasing Commissions: Total dollars committed under signed leases ......... $ 91,405 $ 151,268 $ 61,981 $ 73,314 $ 94,492 Rentable square feet ................................ 28,267 52,527 59,649 26,019 41,616 ----------- ----------- ---------- ----------- ----------- Per rentable square foot ............................ $ 3.23 $ 2.88 $ 1.04 $ 2.82 $ 2.27 =========== =========== ========== =========== =========== Total: Total dollars committed under signed leases ......... $ 212,905 $ 1,229,093 $ 800,586 $ 222,174 $ 616,189 Rentable square feet ................................ 28,267 52,527 59,649 26,019 41,616 ----------- ----------- ---------- ----------- ----------- Per rentable square foot ............................ $ 7.53 $ 23.40 $ 13.42 $ 8.54 $ 14.81 =========== =========== ========== =========== ===========
___________ (1) "Expense stop" represents operating expenses (generally including taxes, utilities, routine building expense and common area maintenance) for which we will not be reimbursed by our tenants. 37 The following tables set forth scheduled lease expirations at our wholly owned in-service properties (excluding apartment units) as of September 30, 2002, assuming no tenant exercises renewal options. Office Properties:
Average Percentage of Percentage of Annual Leased Rents Rentable Leased Annual Rents Rental Rate Represented Number of Square Feet Square Footage Under Per Square by Lease Leases Subject to Represented by Expiring Foot for Expiring Expiring Expiring Expiring Leases Expiring Leases Leases (1) Expirations Leases -------- -------- --------------- --------------- -------------- ----------- ----------- ($ in thousands) 2002 (2) 319 1,173,528 5.2% $ 20,902 $17.81 5.4% 2003 569 3,385,788 15.1% 58,098 17.16 14.8% 2004 502 2,896,061 12.9% 52,267 18.05 13.4% 2005 502 3,285,499 14.8% 56,914 17.32 14.6% 2006 308 2,793,578 12.5% 50,559 18.10 13.0% 2007 191 1,825,640 8.2% 29,390 16.10 7.5% 2008 94 1,919,826 8.6% 30,470 15.87 7.8% 2009 30 768,022 3.4% 13,288 17.30 3.4% 2010 41 1,418,672 6.3% 26,152 18.43 6.7% 2011 38 1,155,693 5.2% 22,322 19.31 5.7% Thereafter 126 1,751,987 7.8% 29,993 17.12 7.7% ----- ---------- ----- -------- ------ ----- 2,720 22,374,294 100.0% $390,355 $17.45 100.0% ===== ========== ===== ======== ====== =====
Industrial Properties:
Average Percentage of Percentage of Annual Leased Rents Rentable Leased Annual Rents Rental Rate Represented Number of Square Feet Square Footage Under Per Square by Lease Leases Subject to Represented by Expiring Foot for Expiring Expiring Expiring Expiring Leases Expiring Leases Leases (1) Expirations Leases - -------- -------- --------------- --------------- -------------- ----------- ----------- ($ in thousands) 2002 (3) 70 955,002 10.5% $ 4,047 $ 4.24 9.8% 2003 95 1,135,693 12.5% 5,922 5.21 14.3% 2004 97 2,522,192 27.8% 9,687 3.84 23.5% 2005 66 1,109,012 12.2% 5,622 5.07 13.6% 2006 35 744,758 8.2% 4,160 5.59 10.1% 2007 27 1,311,658 14.4% 5,542 4.23 13.4% 2008 7 214,340 2.4% 1,441 6.72 3.5% 2009 8 318,813 3.5% 2,361 7.41 5.7% 2010 3 46,508 0.5% 348 7.48 0.8% 2011 2 35,475 0.4% 178 5.02 0.4% Thereafter 20 691,120 7.6% 2,031 2.94 4.9% ---- ---------- ----- -------- ------ ----- 430 9,084,571 100.0% $ 41,339 $ 4.55 100.0% ==== ========== ===== ======== ====== =====
______________ (1) Annual Rents Under Expiring Leases are September 2002 rental revenue (base rent plus operating expense pass-throughs) multiplied by 12. (2) Includes 137,000 square feet of leases that are a month-to-month basis, or 0.5% of total annualized revenue. (3) Includes 160,000 square feet of leases that are a month-to-month basis, or 0.2% of total annualized revenue. 38 Retail Properties:
Average Percentage of Percentage of Annual Leased Rents Rentable Leased Annual Rents Rental Rate Represented Number of Square Feet Square Footage Under Per Square by Lease Leases Subject to Represented by Expiring Foot for Expiring Expiring Expiring Expiring Leases Expiring Leases Leases (1) Expirations Leases - -------- -------- --------------- --------------- -------------- ----------- ----------- ($ in thousands) 2002 (2) 26 79,423 5.0% $ 1,427 $17.97 3.7% 2003 35 87,076 5.5% 2,094 24.05 5.4% 2004 42 211,027 13.4% 2,824 13.38 7.3% 2005 40 93,849 5.9% 2,748 29.28 7.1% 2006 38 111,064 7.0% 2,784 25.07 7.2% 2007 35 128,631 8.1% 2,451 19.05 6.3% 2008 25 124,318 7.8% 4,309 34.66 11.2% 2009 21 168,355 10.6% 3,304 19.63 8.6% 2010 18 97,372 6.1% 2,872 29.50 7.4% 2011 19 108,418 6.8% 2,584 23.83 6.7% Thereafter 28 378,565 23.8% 11,241 29.69 29.1% ---- ---------- ----- -------- ------ ----- 327 1,588,098 100.0% $ 38,638 $24.33 100.0% ==== ========== ===== ======== ====== =====
Total:
Average Percentage of Percentage of Annual Leased Rents Rentable Leased Annual Rents Rental Rate Represented Number of Square Feet Square Footage Under Per Square by Lease Leases Subject to Represented by Expiring Foot for Expiring Expiring Expiring Expiring Leases Expiring Leases Leases (1) Expirations Leases - -------- -------- --------------- --------------- -------------- ----------- ----------- ($ in thousands) 2002 (3) 415 2,207,953 6.7% $ 26,376 $11.95 5.6% 2003 699 4,608,557 14.0% 66,114 14.35 14.2% 2004 641 5,629,280 17.1% 64,778 11.51 13.8% 2005 608 4,488,360 13.6% 65,284 14.55 13.9% 2006 381 3,649,400 11.0% 57,503 15.76 12.2% 2007 253 3,265,929 9.9% 37,383 11.45 7.9% 2008 126 2,258,484 6.8% 36,220 16.04 7.7% 2009 59 1,255,190 3.8% 18,953 15.10 4.0% 2010 62 1,562,552 4.7% 29,372 18.80 6.2% 2011 59 1,299,586 3.9% 25,084 19.30 5.3% Thereafter 174 2,821,672 8.5% 43,265 15.33 9.2% ----- ---------- ----- -------- ------ ----- 3,477 33,046,963 100.0% $470,332 $14.23 100.0% ===== ========== ===== ======== ====== =====
_____________ (1) Annual Rents Under Expiring Leases are September 2002 rental revenue (base rent plus operating expense pass-throughs) multiplied by 12. (2) Includes 36,000 square feet of leases that are a month-to-month basis, or 0.1% of total annualized revenue. (3) Includes 333,000 square feet of leases that are a month-to-month basis, or 0.7% of total annualized revenue. Inflation In the last five years, inflation has not had a significant impact on us because of the relatively low inflation rate in our geographic areas of operation. Most of the leases require the tenants to pay their share of increases in operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing our exposure to inflation. 39 Item 3. Quantitative and Qualitative Disclosures About Market Risk The effects of potential changes in interest rates are discussed below. Our market risk discussion includes `forward-looking statements" and represents an estimate of possible changes in fair value or future earnings that would occur assuming hypothetical future movements in interest rates. These disclosures are not precise indicators of expected future losses, but only indicators of reasonably possible losses. As a result, actual future results may differ materially from those presented. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" for a description of our accounting policies and other information related to these financial instruments. To meet in part our long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Borrowings under our revolving loans bear interest at variable rates. Our long-term debt, which consists of long-term financings and the issuance of debt securities, typically bears interest at fixed rates. In addition, we have assumed fixed rate and variable rate debt in connection with acquiring properties. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. As of September 30, 2002, we have two $24.0 million treasury lock agreements related to an anticipated five-year fixed rate financing with two financial counterparties, which effectively lock the five-year treasury rate at 3.72%. If interest rates increase by 100 basis points, the aggregate fair market value of these interest rate hedge contracts as of September 30, 2002 would increase by approximately $2.3 million. If interest rates decrease by 100 basis points, the aggregate fair market value of these interest rate hedge contracts as of September 30, 2002 would decrease by approximately $2.4 million. We do not hold or issue these derivative contracts for trading or speculative purposes. As of September 30, 2002, we had approximately $157.0 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, 2003, our interest expense would be increased or decreased approximately $1.6 million. In addition, as of September 30, 2002, our share of the joint venture variable rate debt is $69.6 million, and is 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, 2003, equity in earnings of unconsolidated affiliates would be increased or decreased by approximately $697,000. Item 4. Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our annual and periodic reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. These disclosure controls and procedures are further designed to ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. Based on the most recent evaluation, which was completed as of September 30, 2002, our chief executive officer and chief financial officer believe that our disclosure controls and procedures are effective. There have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the date we completed our evaluation. 40 PART II--OTHER INFORMATION Item 6. Exhibits and Reports On Form 8-K (a) Exhibits Exhibit No. Description ----------- ----------- 99.1 Statement of Chief Executive Officer of Highwoods Properties Inc., general partner of the Operating Partnership 99.2 Statement of Chief Financial Officer of Highwoods Properties Inc., general partner of the Operating Partnership 41 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 By: /s/ Carman J. Liuzzo ----------------------------------------- Carman J. Liuzzo Chief Financial Officer (Principal Accounting Officer) Date: November 14, 2002 42 CERTIFICATION I, Ronald P. Gibson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Highwoods Realty Limited Partnership; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Ronald P. Gibson - ------------------------------------ Ronald P. Gibson President and Chief Executive Officer of the General Partner 43 CERTIFICATION I, Carman J. Liuzzo, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Highwoods Realty Limited Partnership; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Carman J. Liuzzo - ------------------------------------ Carman J. Liuzzo Vice President and Chief Financial Officer of the General Partner 44 EX-99.1 3 dex991.txt STATEMENT OF CEO/RONALD GIBSON Exhibit 99.1 STATEMENT OF CHIEF EXECUTIVE OFFICER OF HIGHWOODS PROPERTIES, INC., GENERAL PARTNER OF HIGHWOODS REALTY LIMITED PARTNERSHIP In connection with the Quarterly Report of Highwoods Realty Limited Partnership (the "Operating Partnership") on Form 10-Q for the period ended September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ronald P. Gibson, President and Chief Executive Officer of Highwoods Properties, Inc., general partner of the Operating Partnership, certify, pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Operating Partnership. /s/ Ronald P. Gibson - -------------------------------------------- Ronald P. Gibson President and Chief Executive Officer of the General Partner November 14, 2002 EX-99 4 dex99.txt STATEMENT OF CFO/CARMAN LIUZZO Exhibit 99.2 STATEMENT OF CHIEF FINANCIAL OFFICER OF HIGHWOODS PROPERTIES, INC., GENERAL PARTNER OF HIGHWOODS REALTY LIMTED PARTNERSHIP In connection with the Quarterly Report of Highwoods Realty Limited Partnership (the "Operating Partnership") on Form 10-Q for the period ended September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Carman J. Liuzzo, Vice President and Chief Financial Officer of Highwoods Properties, Inc., general partner of the Operating Partnership, certify, pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Operating Partnership. /s/ CARMAN J. LIUZZO - ------------------------------------- Carman J. Liuzzo Vice President and Chief Financial Officer of the General Partner November 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----