UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2002
OR
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _____________ to _____________
Commission file number 1-13100
HIGHWOODS PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
3100 Smoketree Court, Suite 600Raleigh, N.C. 27604(Address of principal executive offices) (Zip Code)
919-872-4924(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common stock, $.01 par value
New York Stock Exchange
85/8% Series A Cumulative Redeemable Preferred Shares
8% Series B Cumulative Redeemable Preferred Shares
Depositary Shares Each Representing a 1/10 Fractional Interest in an 8% Series D Cumulative Redeemable Preferred Share
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. o
Indicate by check mark whether the Registrant is an accelerated filer (as defined in rule 12b-2 of the Securities Exchange Act). Yes x No o
The aggregate market value of the shares of common stock held by non-affiliates (based upon the closing sale price on the New York Stock Exchange) on February 18, 2003 was $1,099,508.63. As of February 18, 2003, there were 53,404,555 shares of common stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held May 19, 2003, are incorporated by reference in Part III, Items 10, 11, 12 and 13, of the Form 10-K.
TABLE OF CONTENTS
Item No.
Page No.
PART I
1.
Business
3
2.
Properties
8
3.
Legal Proceedings
16
4.
Submission of Matters to a Vote of Security Holders
X.
Executive Officers of the Registrant
17
PART II
5.
Market for Registrant’s Common Stock and Related Stockholder Matters
18
6.
Selected Financial Data
19
7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
20
7A.
Quantitative and Qualitative Disclosures About Market Risk
40
8.
Financial Statements and Supplementary Data
9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
10.
Directors and Executive Officers of the Registrant
41
11.
Executive Compensation
12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
13.
Certain Relationships and Related Transactions
14.
Controls and Procedures
PART IV
15.
Exhibits and Reports on Form 8-K
43
2
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.”
ITEM 1.BUSINESS
General
The Company is a self-administered and self-managed equity REIT that began operations through a predecessor in 1978. Since the Company’s initial public offering in 1994, we have evolved into one of the largest owners and operators of suburban office, industrial and retail properties in the southeastern and midwestern United States. At December 31, 2002, we:
• owned 493 in-service office, industrial and retail properties, encompassing approximately 37.1 million rentable square feet and 213 apartment units;
• owned an interest (50.0% or less) in 78 in-service office and industrial properties, encompassing approximately 7.8 million rentable square feet and 418 apartment units;
• owned 1,308 acres of undeveloped land suitable for future development; and
• were developing an additional five properties, which will encompass approximately 616,000 rentable square feet (including one property encompassing 285,000 rentable square feet that we are developing with a 50.0% joint venture partner).
The following summarizes our capital recycling program during the past three years ending December 31, 2002:
2002
2001
2000
Office, Industrial and Retail Properties:
(rentable square feet in thousands)
Dispositions
(2,270
)
(268
(4,743
Contributions to Joint Ventures
—
(118
(2,199
Developments Placed In-Service
2,214
1,351
3,480
Redevelopment
(52
Acquisitions
72
669
Net Change
(108
1,037
(2,793
Apartment Properties:
(in units)
(1,672
In addition to the above capital recycling activity, we repurchased $4.8 million, $148.8 million and $101.8 million of Common Stock and Common Units during 2002, 2001 and 2000, respectively, and $18.5 million of Preferred Stock during 2001. This represents aggregate repurchases of $273.9 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 December 31, 2002, the Company owned 88.4% 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 the Company’s Common Stock or, at the Company’s option, one share of Common Stock.
The Company was incorporated in Maryland in 1994. The Operating Partnership was formed in North Carolina in 1994. Our executive offices are located at 3100 Smoketree Court, Suite 600, Raleigh, North Carolina 27604, and our telephone number is (919) 872-4924. We maintain offices in each of our primary markets.
In addition to this Annual Report, we file quarterly and special reports, proxy statements and other information with the SEC. All documents that we file with the SEC are available free of charge on our corporate website, which is http://www.highwoods.com. You may also read and copy any document that we file at the public reference facilities of the SEC at 450 Fifth Street, N.W., Washington, D.C. 25049. Please call the SEC at (800) SEC-0330 for further information about the public reference facilities. These documents also may be accessed through the SEC’s electronic data gathering, analysis and retrieval system (“EDGAR”) via electronic means, including the SEC’s home page on the Internet (http://www.sec.gov). In addition, since some of our securities are listed on the New York Stock Exchange, you can read our SEC filings at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
Operating Strategy
Geographic Diversification. Since the Company’s initial public offering in 1994, we have significantly reduced our dependence on any particular market. We initially owned only a limited number of office properties in North Carolina, most of which were in the Research Triangle. Today, including our various joint ventures, our portfolio includes primarily office properties throughout the Southeast and retail and office properties in Kansas City, Missouri including one significant mixed retail and office property.
Capital Recycling Program. Our strategy has been to focus our real estate activities in markets where we believe our extensive local knowledge gives us a competitive advantage over other real estate developers and operators. Through our capital recycling program, we generally seek to:
• engage in the development of office and industrial projects in our existing geographic markets, primarily in suburban business parks;
• acquire selective suburban office and industrial properties in our existing geographic markets at prices below replacement cost that offer attractive returns; and
• selectively dispose of non-core properties or other properties the sale of which can generate attractive returns.
Our capital recycling activities benefit from our local market presence and knowledge. Our division officers have significant real estate experience in their respective markets. Based on this experience, we are in a better position to evaluate capital recycling opportunities than many of our competitors. In addition, our relationships with our tenants and those tenants at properties for which we conduct third-party fee-based services may lead to development projects when these tenants seek new space.
Efficient, Customer Service-Oriented Organization. We provide a complete line of real estate services to our tenants and third parties. We believe that our in-house development, acquisition, construction management, leasing and management services allow us to respond to the many demands of our existing and potential tenant base. We provide our tenants cost-effective services such as build-to-suit construction and space modification, including tenant improvements and expansions. In addition, the breadth of our capabilities and resources provides us with market information not generally available. We believe that the operating efficiencies achieved through our fully integrated organization also provide a competitive advantage in setting our lease rates and pricing other services.
Flexible Capital Structure. We are committed to maintaining a flexible capital structure that: (1) allows growth through development and acquisition opportunities; (2) promotes future earnings growth; and (3) provides access to the private and public equity and debt markets on favorable terms. Accordingly, we expect to meet our long-term liquidity requirements through a combination of any one or more of:
• borrowings under our unsecured and secured revolving credit facilities;
• the issuance of unsecured debt;
• the issuance of secured debt;
4
• the issuance of equity securities by both the Company and the Operating Partnership;
• the selective disposition of non-core properties or other properties which can be sold at attractive returns; and
• the sale or contribution of our wholly-owned properties, development projects and development land to strategic joint ventures formed with unrelated investors.
Competition
Our properties compete for tenants with similar properties located in our markets primarily on the basis of location, rent, services provided and the design and condition of the facilities. We also compete with other REITs, financial institutions, pension funds, partnerships, individual investors and others when attempting to acquire and develop properties.
Employees
As of December 31, 2002, the Company employed 560 persons.
Risk Factors
An investment in our securities involves various risks. All investors should carefully consider the following risk factors in conjunction with the other information contained in this Annual Report before purchasing our securities. If any of these risks actually occur, our business, operating results, prospects and financial condition could be harmed.
Adverse conditions in the real estate market may impair our ability to make distributions to you. Events or conditions, which are beyond our control, may adversely affect our ability to generate revenues in excess of operating expenses, including debt service and capital expenditures. Such events or conditions could include:
• general and regional economic conditions, particularly in the southeastern region of the United States;
• changes in interest rate levels and the availability of financing;
• difficulty in leasing or re-leasing space quickly or on favorable terms;
• increases in operating costs, including real estate taxes and insurance premiums, due to inflation and other factors, which may not necessarily be offset by increased rents; and
• inability of a significant number of tenants or certain key tenants to pay rent.
Future acquisitions and development activities may fail to perform in accordance with our expectations and may require development and renovation costs exceeding our estimates. In the normal course of business, we typically evaluate potential acquisitions, enter into non-binding letters of intent, and may, at any time, enter into contracts to acquire additional properties. However, changing market conditions, including competition from others, may diminish our opportunities for making attractive acquisitions. Once made, our investments may fail to perform in accordance with our expectations. In addition, the renovation and improvement costs we incur in bringing an acquired property up to market standards may exceed our estimates. Although we anticipate financing future acquisitions and renovations through a combination of advances under our revolving loans and other forms of secured or unsecured financing, no assurance can be given that we will have the financial resources to make suitable acquisitions or renovations. If new developments are financed through construction loans, there is a risk that, upon completion of construction, permanent financing for newly developed properties may not be available or may be available only on disadvantageous terms.
In addition to acquisitions, we periodically consider developing and constructing properties. Risks associated with development and construction activities include:
• the unavailability of favorable financing;
5
• construction costs exceeding original estimates;
• construction and lease-up delays resulting in increased debt service expense and construction costs; and
• insufficient occupancy rates and rents at a newly completed property causing a property to be unprofitable.
Development activities are also subject to risks relating to our inability to obtain, or delays in obtaining, all necessary zoning, land-use, building, occupancy and other required governmental and utility company authorizations.
Because holders of our Common Units, including some of our officers and directors, may suffer adverse tax consequences upon the sale of some of our properties, it is possible that the Company may sometimes make decisions that are not in your best interest. Holders of Common Units may suffer adverse tax consequences upon the Company’s sale of certain properties. Therefore, holders of Common Units, including certain of our officers and directors, may have different objectives regarding the appropriate pricing and timing of a property’s sale. Although we are the sole general partner of the Operating Partnership and have the exclusive authority to sell all of our individual wholly-owned properties, officers and directors who hold Common Units may influence us not to sell certain properties even if such sale might be financially advantageous to stockholders or to enter into tax deferred exchanges with the proceeds of such sales when such a reinvestment might not otherwise be in the best interests of the Company.
The success of our joint venture activity depends upon our ability to work effectively with financially sound partners. Instead of owning properties directly, we have invested, and may continue to invest, as a partner or a co-venturer. Under certain circumstances, this type of investment may involve risks not otherwise present, including the possibility that a partner or co-venturer might become bankrupt or that a partner or co-venturer might have business interests or goals inconsistent with ours. Also, such a partner or co-venturer may take action contrary to our instructions or requests or contrary to provisions in our joint venture agreements that could harm us, including jeopardize our qualification as a REIT.
Our insurance coverage on our properties may be inadequate. We carry comprehensive insurance on all of our properties, including insurance for liability, fire and flood. Insurance companies currently, however, limit coverage against certain types of losses, such as losses due to terrorist acts, named wind storms and toxic mold. Thus we may not have insurance coverage against certain types of losses and/or there may be decreases in the limits of insurance available. Should an uninsured loss or a loss in excess of our insured limits occur, we could lose all or a portion of the capital we have invested in a property or properties, as well as the anticipated future revenue from the property or properties. If any of our properties were to experience a catastrophic loss, it could disrupt our operations, delay revenue and result in large expenses to repair or rebuild the property. Such events could adversely affect our ability to make distributions to our stockholders. Our existing insurance policies expire on June 30, 2003. We anticipate renewing these existing policies at that time.
Our use of debt to finance our operations could have a material adverse effect on our cash flow and ability to make distributions. We are subject to risks normally associated with debt financing, such as the insufficiency of cash flow to meet required payment obligations, difficulty in complying with financial ratios and other covenants and the inability to refinance existing indebtedness. Approximately $316.0 million of principal payments on our existing long-term debt is due in 2003 (this amount is adjusted for the refinancing of the MOPPRS in February 2003. For a detailed maturity schedule regarding our long-term debt, see “Management’s Discussion and Analysis of Results of Operations – Liquidity and Capital Resources – Capitalization.”). If we fail to comply with the financial ratios and other covenants under our existing debt instruments, including our revolving loans, we would likely not be able to borrow any further amounts under these instruments, which could adversely affect our ability to fund our operations, and our lenders could accelerate any debt outstanding thereunder. If our debt cannot be paid, refinanced or extended at maturity, in addition to our failure to repay our debt, we may not be able to make distributions to stockholders at expected levels or at all. Furthermore, if any refinancing is done at higher interest rates, the increased interest expense could adversely affect our cash flow and ability to make distributions to stockholders. Any such refinancing could also impose tighter financial ratios and other covenants that could restrict our ability to take actions that could otherwise be in our stockholders’ best interest, such as funding new development activity, making opportunistic acquisitions, repurchasing our securities or paying distributions. If we do not meet our mortgage financing obligations, any properties securing such indebtedness could be foreclosed on, which would have a material adverse effect on our cash flow and ability to make distributions.
6
We may be subject to taxation as a regular corporation if we fail to maintain our REIT status. Our failure to qualify as a REIT would have serious adverse consequences to our stockholders. Many of the requirements for taxation as a REIT, however, are highly technical and complex. The determination that we are a REIT requires an analysis of various factual matters and circumstances that may not be totally within our control. For example, to qualify as a REIT, at least 95.0% of our gross income must come from certain sources that are itemized in the REIT tax laws. We are also required to distribute to stockholders at least 90.0% of our REIT taxable income, excluding capital gains. The fact that we hold our assets through the Operating Partnership and its subsidiaries further complicates the application of the REIT requirements. Even a technical or inadvertent mistake could jeopardize our REIT status. Furthermore, Congress and the IRS might change the tax laws and regulations, and the courts might issue new rulings that make it more difficult, or impossible, for us to remain qualified as a REIT.
If we fail to qualify as a REIT, we would be subject to federal income tax at regular corporate rates. Also, unless the IRS granted us relief under certain statutory provisions, we would remain disqualified as a REIT for four years following the year we first failed to qualify. If we failed to qualify as a REIT, we would have to pay significant income taxes and would therefore have less cash available for investments or for distributions to stockholders. This would likely have a significant adverse effect of the value of our securities. In addition, we would no longer be required to make any distributions to stockholders.
Because provisions contained in Maryland law, our charter and our bylaws may have an anti-takeover effect, investors may be prevented from receiving a “control premium” for their shares. Provisions contained in our charter and bylaws, as well as Maryland general corporation law, may have anti-takeover effects that delay, defer or prevent a takeover attempt, and thereby prevent stockholders from receiving a “control premium” for their shares. For example, these provisions may defer or prevent tender offers for our common stock or purchases of large blocks of our common stock, thus limiting the opportunities for our stockholders to receive a premium for their common stock over then-prevailing market prices. These provisions include the following:
• Ownership limit. Our charter prohibits direct or constructive ownership by any person of more than 9.8% of our outstanding capital stock. Any attempt to own or transfer shares of our capital stock in excess of the ownership limit without the consent of our board of directors will be void.
• Preferred stock. Our charter authorizes our board of directors to issue preferred stock in one or more classes and to establish the preferences and rights of any class of preferred stock issued. These actions can be taken without soliciting stockholder approval. The issuance of preferred stock could have the effect of delaying or preventing someone from taking control of us, even if a change in control were in our stockholders’ best interests.
• Staggered board. Our board of directors is divided into three classes. As a result each director generally serves for a three-year term. This staggering of our board may discourage offers for us or make an acquisition of us more difficult, even when an acquisition is in the best interest of our stockholders.
• Maryland control share acquisition statute. Maryland law limits the voting rights of “control shares” of a corporation in the event of a “control share acquisition.”
• Maryland unsolicited takeover statute. Under Maryland law, our board of directors could adopt various anti-takeover provisions without the consent of stockholders. The adoption of such measures could discourage offers for us or make an acquisition of us more difficult, even when an acquisition is in the best interest of our stockholders.
• Anti-Takeover Protections of Operating Partnership Agreement. Upon a change in control of the Company, the limited partnership agreement of the Operating Partnership contains provisions that require certain acquirors to maintain an UPREIT structure with terms at least as favorable to the limited partners as are currently in place. For instance, the acquiror would be required to preserve the limited partner’s right to continue to hold tax-deferred partnership interests that are redeemable for capital stock of the acquiror. These provisions may make a change of control transaction involving the Company more complicated and therefore might limit the possibility of such a transaction occurring, even if such a transaction would be in the best interest of the Company’s stockholders.
7
• Dilutive Effect of Shareholders’ Rights Plan. On October 4, 1997, our board of directors adopted a Shareholders’ Rights Plan and declared a distribution of one preferred share purchase right for each outstanding share of Common Stock. The rights were issued on October 16, 1997 to each stockholder of record on such date. Since the rights would cause substantial dilution to a person or group that attempts to acquire us on terms of which our board of directors does not approve, such rights could discourage offers for us or make an acquisition of us more difficult, even when an acquisition is in the best interest of our stockholders. The rights should not interfere with any merger or other business combination the board of directors approves since we may redeem the rights for $.01 per right, prior to the time that a person or group has acquired beneficial ownership of 15.0% or more of the Common Stock.
ITEM 2. PROPERTIES
As of December 31, 2002, we owned 493 in-service office, industrial and retail properties, encompassing approximately 37.1 million rentable square feet, and 213 apartment units. The following table sets forth information about our wholly-owned in-service properties at December 31, 2002:
Percentage of Annualized Rental Revenue (1)
Market
Rentable Square Feet
Occupancy
Office
Industrial
Retail
Total
Atlanta
6,728,000
83.0
%
11.2
3.2
14.4
Research Triangle
4,340,000
81.9
13.8
0.2
14.0
Kansas City
2,512,000
(2)
94.5
4.3
8.6
12.9
Tampa
4,262,000
67.1
(3)
12.2
Piedmont Triad
8,371,000
88.9
6.6
4.9
11.5
Nashville
2,733,000
87.7
10.1
Richmond
2,764,000
95.0
8.4
0.5
8.9
Charlotte
1,729,000
84.0
4.8
0.3
5.1
Memphis
1,215,000
80.8
Greenville
1,511,000
86.8
4.2
4.4
Columbia
426,000
67.4
1.1
Orlando
340,000
47.6
0.6
Other
181,000
74.7
37,112,000
% (3)
82.1
9.3
100.0
(1) Annualized Rental Revenue is December 2002 rental revenue (base rent plus operating expense pass-throughs) multiplied by 12, and excludes revenue associated with the rejected 816,000 square foot Intermedia (WorldCom) lease on December 31, 2002.
(2) Excludes basement space in the Country Club Plaza property of 527,000 square feet.
(3) The occupancy percentages have been reduced as a result of the rejection of the 816,000 square foot Intermedia (WorldCom) lease on December 31, 2002. The impact on Tampa’s occupancy and Total occupancy was 19.1% and 2.2%, respectively.
The following table sets forth information about our wholly-owned in-service and development properties as of December 31, 2002 and 2001:
December 31, 2002
December 31, 2001
Percent Leased/ Pre-Leased
In-Service
25,342,000
82.3
% (1)
24,945,000
91.9
10,242,000
86.2
10,640,000
Retail (2)
1,528,000
97.0
1,636,000
96.0
37,221,000
Development Completed – Not Stabilized
231,000
61.3
1,490,000
58.4
60,000
50.0
200,000
39.2
20,000
90.0
291,000
59.0
1,710,000
56.5
In-Process
40,000
0.0
739,000
74.9
25,613,000
27,174,000
10,302,000
10,840,000
1,656,000
37,443,000
39,670,000
(1) The occupancy percentages have been reduced as a result of the rejection of the 816,000 square foot Intermedia (WorldCom) lease on December 31, 2002. The impact on Office occupancy and Total occupancy was 3.2 % and 2.2%, respectively.
9
Customers
The following table sets forth information concerning the 20 largest customers of our wholly-owned properties as of December 31, 2002, excluding revenue related to the rejection of the 816,000 square foot Intermedia (WorldCom) lease on December 31, 2002:
Number of Leases
Annualized Rental Revenue (1)
Percent of Total Annualized Rental Revenue (1)
Average Remaining Lease Term in Years
($ in thousands)
Federal Government
62
742,378
$
14,892
3.38
4.6
AT&T
617,477
11,669
2.65
Price Waterhouse Coopers
297,795
6,932
1.57
7.3
US Airways
414,059
6,910
State of Georgia
10
356,993
6,783
1.54
6.0
Capital One Services
361,968
6,329
1.43
5.9
Sara Lee
1,230,534
4,605
1.04
2.4
IBM
216,505
4,453
1.01
2.6
Bell South
11
212,011
4,441
1.3
Northern Telecom
1
246,000
3,235
0.73
5.2
WorldCom and Affiliates
15
166,869
3,206
3.0
Lockton Companies
127,485
3,117
0.71
Bank of America
23
152,017
3,003
0.68
2.3
Volvo
214,783
2,979
Hartford Insurance
134,021
2,900
0.66
3.3
T-Mobile USA
120,561
2,831
0.64
3.5
Business Telecom
147,379
2,795
0.63
Ford Motor Company
126,045
2,609
0.59
7.2
Carlton Fields
95,771
2,475
0.56
1.5
BB&T
157,290
2,431
0.55
7.8
194
6,137,941
98,595
22.36
(1) Annualized Rental Revenue is December 2002 rental revenue (base rent plus operating expense pass-throughs) multiplied by 12.
The following tables set forth information about leasing activities at our wholly-owned in-service properties (excluding apartment units) for the years ended December 31, 2002, 2001 and 2000.
Net Effective Rents Related to Re-Leased Space:
Number of lease transactions (signed leases)
647
137
56
538
107
44
801
174
71
Rentable square footage leased
3,201,341
2,208,742
176,528
2,782,331
1,524,276
125,992
4,166,054
2,373,244
162,866
Average per rentable square foot over the lease term:
Base rent
17.15
4.12
21.22
17.24
4.99
21.06
17.05
4.64
21.99
Tenant improvements
(1.15
(0.36
(1.52
(1.10
(0.27
(1.16
(1.20
(0.24
(1.41
Leasing commissions
(0.68
(0.15
(0.74
(0.70
(0.11
(0.61
(0.50
(0.12
(0.60
Rent concessions
(0.26
(0.04
(0.02
(0.06
(0.03
Effective rent
15.06
3.57
18.94
15.38
4.61
19.23
15.32
4.28
19.98
Expense stop (1)
(5.25
(0.25
(0.30
(3.84
(0.43
(4.76
(0.23
Equivalent effective net rent
9.81
3.32
18.64
11.54
4.18
10.56
4.05
19.95
Average term in years
4.0
6.4
7.5
4.1
7.0
Rental Rate Trends:
Average final rate with expense pass-throughs
17.39
4.34
15.82
15.66
4.76
14.08
15.56
4.16
15.71
Average first year cash rental rate
16.20
4.10
20.67
16.34
4.73
18.06
16.33
4.46
19.89
Percentage (decrease)/increase
(6.84
)%
(5.53
30.69
(0.80
28.26
4.90
7.20
26.60
Capital Expenditures Related to Re-leased Space:
Tenant Improvements:
Total dollars committed under signed leases
17,805,616
4,169,066
2,288,953
17,234,770
1,535,052
1,526,553
24,215,684
2,279,129
2,252,002
Rentable square feet
Per rentable square foot
5.56
1.89
12.97
6.19
12.12
5.81
0.96
13.83
Leasing Commissions:
4,972,806
1,070,939
382,972
7,648,567
468,962
424,192
9,398,696
1,203,586
530,437
1.55
0.48
2.17
2.75
0.31
3.37
2.26
0.51
3.26
Total:
22,778,422
5,240,005
2,671,925
24,883,337
2,004,013
1,950,745
33,614,380
3,482,715
2,782,439
7.11
2.37
15.14
8.94
1.31
15.48
8.07
1.47
17.08
(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.
The following tables on pages 12 and 13 set forth scheduled lease expirations for executed leases at our wholly-owned properties (excluding apartment units) as of December 31, 2002, assuming no tenant exercises renewal options. The following scheduled lease expirations exclude the rejection of the 816,000 square foot Intermedia (WorldCom) lease on December 31, 2002.
Office Properties:
Lease Expiring
Number of Leases Expiring
Rentable Square Feet Subject toExpiring Leases
Percentage of Leased Square Footage Represented By Expiring Leases
Annualized Rental Revenue UnderExpiring Leases (1)
Average Annual Rental RatePer Square Foot for Expirations
Percent of Annualized RentalRevenue Represented By Expiring Leases (1)
2003 (2)
761
4,044,936
19.3
70,361
19.4
2004
498
2,767,455
13.3
49,612
17.93
13.7
2005
535
3,331,798
16.0
59,293
17.80
16.4
2006
324
2,843,860
13.6
51,583
18.14
14.2
2007
246
2,024,252
9.7
33,864
16.73
2008
108
1,998,952
9.6
30,851
15.43
8.5
2009
838,814
14,047
16.75
3.9
2010
38
841,052
17,713
2011
954,988
18,576
19.45
2012
29
685,237
10,378
15.15
2.9
Thereafter
104
536,623
6,186
11.53
1.7
2,723
20,867,967
362,464
17.37
Industrial Properties:
2003 (3)
135
1,711,921
19.5
8,204
4.79
20.3
99
2,508,687
28.7
9,866
3.93
24.4
76
1,099,777
12.5
5,347
4.86
13.2
821,554
9.4
4,505
5.48
11.1
1,630,860
18.6
6,948
4.26
17.1
254,067
1,498
5.90
3.7
318,813
3.6
2,366
7.42
5.8
46,508
349
7.50
0.9
35,475
0.4
178
5.02
44,447
255
5.74
299,619
3.4
1,016
3.39
2.5
429
8,771,728
40,532
4.62
(2) Includes 195,000 square feet of leases that are on a month-to-month basis, or 0.8% of total annualized revenue.
(3) Includes 469,000 square feet of leases that are on a month-to-month basis, or 0.4% of total annualized revenue.
12
Retail Properties:
49
136,326
9.2
2,972
21.80
39
207,103
2,775
13.40
37
90,821
6.1
2,687
29.59
33
101,041
6.8
2,621
25.94
6.9
116,915
7.9
23.29
7.1
24
123,459
8.3
4,257
34.48
154,317
10.4
3,555
23.04
89,890
2,573
28.62
6.7
73,392
5.0
2,400
32.70
6.3
53,263
1,908
35.82
335,657
22.6
9,656
28.77
25.4
308
1,482,184
38,127
25.72
945
5,893,183
19.0
81,537
13.84
18.5
636
5,483,245
17.7
62,253
11.35
14.1
648
4,522,396
14.5
67,327
14.89
15.3
397
3,766,455
12.1
58,709
15.59
323
3,772,027
43,535
9.9
143
2,376,478
7.6
36,606
15.40
1,311,944
19,968
15.22
4.5
57
977,450
3.1
20,635
21.11
4.7
60
1,063,855
21,154
19.88
782,947
12,541
16.02
2.8
139
1,171,899
3.8
16,858
14.39
3,460
31,121,879
441,123
14.17
(2) Includes 47,000 square feet of leases that are on a month-to-month basis, or 0.1% of total annualized revenue.
(3) Includes 711,000 square feet of leases that are on a month-to-month basis, or 1.3% of total annualized revenue.
13
Capital Recycling Program
The following table summarizes our capital recycling program during 2002 ($ in thousands):
Disposition Activity
Property
Building Type (1)
Date Sold
Rentable Sqaure Feet
Sales Price
Romac
O
01/10/02
128,000
20,200
Parkway Plaza Building Nine
I
04/04/02
110,000
5,922
Alston & Bird
05/13/02
45,000
8,500
7327 & 7339 West Friendly Avenue
05/21/02
23,000
1,272
International Place III
05/23/02
214,000
38,270
Reo Building
05/30/02
76,000
5,155
Amica and Arrowwood
05/31/02
78,000
7,200
4900 Main Building
182,000
29,000
Twin Lakes Distribution Center
10/10/02
347,000
10,350
Brymar Building
10/18/02
56,000
2,535
Eastshore I, II, III & Cat Financial
Richmond/Nashville
11/26/02
538,000
90,034
Oakridge Office Park
12/18/02
316,000
22,175
Red Bridge Shops
R
141,000
7,000
Brookfield YMCA
12/31/02
16,000
1,050
2,270,000
248,663
(1) O = OfficeI = IndustrialR = Retail
Joint Venture Activity
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 from 50.0% to 100.0%. At that time, we consolidated the assets and liabilities, and recorded income and expenses of the entity on a consolidated basis.
On September 11, 2002, we contributed Harborview Plaza to SF-HIW Harborview Plaza, LP, a newly formed joint venture with a different partner, in exchange for a 20.0% limited partnership interest and $12.1 million of cash.
14
Development Activity
The following wholly-owned development projects were placed in service during 2002 ($ in thousands):
Placed In-Service
Name
Month Placed In-Service
Cost at December 31, 2002
Verizon Wireless
Jan-02
193,000
15,996
380 Park Place
82,000
10,064
Innslake
Feb-02
65,000
7,625
Holden Road
Mar-02
64,000
Centre Green Two
Apr-02
97,000
11,293
Highwoods Tower II
May-02
167,000
25,570
Cool Springs II
205,000
23,931
North Shore Commons A
115,000
14,702
Stony Point III
107,000
11,866
ParkWest One
Jun-02
46,000
4,637
1825 Century Center
Jul-02
101,000
15,894
Hickory Trace
Sep-02
52,000
7,475
Met Life Building at Brookfield
13,486
Newpoint IV
Oct-02
135,000
5,061
Centre Green Four
100,000
9,682
1501 Highwoods Boulevard
Nov-02
98,000
10,313
Shadow Creek II
81,000
7,284
GlenLake I
158,000
20,320
Granada Shops
19,000
4,552
2,000,000
222,372
Placed In-Service and Sold
34,000
2,214,000
256,372
(2) Project was sold on May 23, 2002 for $38.3 million.
As of December 31, 2002, we were developing three suburban office properties and one industrial property, totaling 331,000 rentable square feet. The following table summarizes these development projects. In addition to the properties described in this table, we are developing with a 50.0% joint venture partner (and therefore, is not included in the following table) one additional property totaling 285,000 rentable square feet. At December 31, 2002, this development project had an aggregate budgeted cost of $69.0 million and was 56.5% pre-leased.
Estimated Cost
Cost at 12/31/02
Pre-Leasing Percentage
Estimated Completion
Estimated Stabilization
Office:
Catawba (2)
4,030
2,105
0%
2Q03
2Q04
Seven Springs I (3)
131,000
15,556
13,371
1Q02
3Q03
801 Raleigh Corporate Center (3)
12,016
9,802
42
4Q02
Tradeport V (3)
2,913
2,851
50
4Q03
Total or Weighted Average
331,000
34,515
28,129
52%
(1) O = OfficeI = Industrial
(2) Redevelopment project in process.
(3) Completed but not stabilized properties, which contributed in the aggregate $138,000 in net operating income in the fourth quarter of 2002.
Development Land
We estimate that we can develop approximately 13.8 million square feet of office, industrial and retail space on our wholly-owned development land. All of this development land is zoned and available for office, industrial or retail development, substantially all of which has utility infrastructure already in place. We believe that our commercially zoned and unencumbered land in existing business parks gives us a development advantage over other commercial real estate development companies in many of our markets. Any future development, however, is dependent on the demand for industrial or office space in the area, the availability of favorable financing and other factors, and no assurance can be given that any construction will take place on the development land. In addition, if construction is undertaken on the development land, we will be subject to the risks associated with construction activities, including the risk that occupancy rates and rents at a newly completed property may not be sufficient to make the property profitable, construction costs may exceed original estimates and construction and lease-up may not be completed on schedule, resulting in increased debt service expense and construction expense.
ITEM 3.LEGAL PROCEEDINGS
We are a party to a variety of legal proceedings arising in the ordinary course of our business. We believe that we are adequately covered by insurance and indemnification agreements. Accordingly, none of such proceedings are expected to have a material adverse effect on our business, financial condition and results of operations.
We reserved $2.7 million in September 2002 for the probable and estimated losses related to various legal proceedings from previously completed mergers and acquisitions.
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM X.EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to our executive officers:
Age
Position and Background
Ronald P. Gibson
58
Director, President and Chief Executive Officer. Mr. Gibson is one of our founders and has served as president or managing partner of our predecessor since its formation in 1978.
Edward J. Fritsch
Director, Executive Vice President, Chief Operating Officer and Secretary. Mr. Fritsch joined us in 1982 and was a partner of our predecessor.
Gene H. Anderson
Director and Senior Vice President. Mr. Anderson manages the operations of our Georgia properties and the Piedmont Triad division of North Carolina. Mr. Anderson was the founder and president of Anderson Properties, Inc. prior to its merger with the Company.
Michael F. Beale
Senior Vice President. Mr. Beale is responsible for our operations in Florida. Prior to joining us in 2000, Mr. Beale was vice president of Koger Equity, Inc.
Michael E. Harris
53
Senior Vice President. Mr. Harris is responsible for our operations in Tennessee, Missouri, Kansas and Charlotte. Mr. Harris was executive vice president of Crocker Realty Trust prior to its merger with us. Before joining Crocker Realty Trust, Mr. Harris served as senior vice president, general counsel and chief financial officer of Towermarc Corporation, a privately owned real estate development firm. Mr. Harris is a member of the Advisory Board of Directors at SouthTrust Bank of Memphis, and Allen & Hoshall, Inc.
Carman J. Liuzzo
Vice President, Chief Financial Officer and Treasurer. Prior to joining us in 1994, Mr. Liuzzo was vice president and chief accounting officer for Boddie-Noell Enterprises, Inc. and Boddie-Noell Restaurant Properties, Inc. Mr. Liuzzo is a certified public accountant.
Mack D. Pridgen III
Vice President and General Counsel. Prior to joining us in 1997, Mr. Pridgen was a partner in the law firm of Smith Helms Mulliss & Moore, L.L.P. and prior to that a partner with Arthur Andersen & Co. Mr. Pridgen is an attorney and a certified public accountant.
ITEM 5.MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDERMATTERS
The Common Stock has been traded on the New York Stock Exchange (“NYSE”) under the symbol “HIW” since the Company’s initial public offering. The following table sets forth the quarterly high and low stock prices per share reported on the NYSE for the quarters indicated and the distributions paid per share during such quarter.
Quarter Ended:
High
Low
Distribution
March 31
$ 28.30
$ 25.39
$ .585
$ 25.99
$ 24.00
$ .57
June 30
29.36
26.00
.585
26.65
24.15
.57
September 30
23.00
26.67
23.45
December 31
23.30
18.70
26.42
23.52
On February 18, 2003, the last reported stock price of the Common Stock on the NYSE was $21.00 per share and the Company had 1,690 stockholders of record.
The Company intends to continue to pay quarterly distributions to holders of shares of Common Stock and holders of Common Units. Future distributions by the Company will be at the discretion of the Board of Directors and will depend on the actual funds from operations of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code and such other factors as the Board of Directors deems relevant. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Distributions to Stockholders.”
During 2002, the Company’s Common Stock distributions totaled $124,378,000, $28,430,000 of which represented return of capital for income tax purposes. The minimum distribution per share of Common Stock required to maintain REIT status (excluding any distribution of net capital gains) was approximately $0.90 per share in 2002 and $1.52 per share in 2001.
The Company has a Dividend Reinvestment and Stock Purchase Plan under which holders of Common Stock may elect to automatically reinvest their distributions in additional shares of Common Stock and may make optional cash payments for additional shares of Common Stock. The Company may issue additional shares of Common Stock or repurchase Common Stock in the open market for purposes of satisfying its obligations under the Dividend Reinvestment and Stock Purchase Plan.
The Company has an Employee Stock Purchase Plan for all active employees. At the end of each three-month offering period, each participant’s account balance is applied to acquire shares of Common Stock at a cost that is calculated at 85.0% of the lower of the average closing price on the NYSE on the five consecutive days preceding the first day of the quarter or the five days preceding the last day of the quarter. A participant may contribute up to 25.0% of their pay. During 2002, employees purchased 47,488 shares of Common Stock under the Employee Stock Purchase Plan.
ITEM 6.SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating information for the Company as of and for the years ended December 31, 2002, 2001, 2000, 1999 and 1998 ($ in thousands, except per share amounts):
Year Ended December 31,
1999
1998
Operating Data:
Rental revenue
454,220
469,276
509,815
544,530
483,339
Other income
21,713
33,402
22,895
17,819
12,182
Total revenue
475,933
502,678
532,710
562,349
495,521
Rental property operating expenses
(143,414
(144,685
(150,829
(166,389
(149,941
Depreciation and amortization
(126,638
(113,468
(113,189
(108,302
(88,629
Interest expense
(110,527
(106,782
(111,107
(117,134
(97,011
Cost of unsuccessful transactions
(1,500
General and administrative (includes $3,700 nonrecurring compensation expense in 2002)
(24,576
(21,390
(21,841
(22,339
(20,771
Litigation reserve
(2,700
Gain on disposition of land and depreciable assets
12,247
16,172
4,659
8,679
1,716
Minority interest
(9,653
(16,683
(16,900
(19,360
(22,796
Income from continuing operations
70,672
115,842
123,503
136,004
118,089
Total discontinued operations, net of minority interest
23,167
16,083
14,695
9,430
7,948
Extraordinary item – loss on early extinguishment of debt
(378
(714
(4,711
(7,341
(387
Net income
93,461
131,211
133,487
138,093
125,650
Dividends on preferred shares
(30,852
(31,500
(32,580
(30,092
Net income available for common stockholders
62,609
99,711
100,907
105,513
95,558
Net income per common share – basic:
0.75
1.69
1.60
1.18
1.84
1.70
1.72
1.74
Net income per common share – diluted:
1.68
1.17
1.83
1.71
Distributions declared per common share
2.34
2.31
2.25
2.19
2.10
Balance Sheet Data:
Net real estate assets
3,008,886
3,165,277
2,996,570
3,553,688
3,825,939
Total assets
3,395,369
3,648,286
3,701,602
4,016,197
4,314,333
Total mortgages and notes payable
1,528,720
1,719,230
1,587,019
1,766,177
2,008,716
Redeemable preferred stock
377,445
397,500
Other Data:
Cash flows provided by operating activities
201,485
249,129
256,400
232,617
263,779
Cash flows provided by/(used in) investing activities
195,587
(139,645
286,212
160,363
(1,040,425
Cash flows (used in)/provided by financing activities
(386,631
(213,688
(472,328
(389,929
797,945
Funds from operations (1)
201,788
238,009
251,423
244,232
211,389
Number of in-service properties
493
563
658
Total rentable square feet
36,183,000
38,976,000
44,642,000
(1) We consider funds from operations (“FFO”) to be a useful financial performance measure of the operating performance of an equity REIT because, together with net income and cash flows, FFO provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures. FFO does not represent net income or cash flows from operating, investing or financing activities as defined by Generally Accepted Accounting Principles (“GAAP”). It should not be considered as an alternative to net income as an indicator of our operating performance or to cash flows as a measure of liquidity. FFO does not measure whether cash flow is sufficient to fund all cash needs, including principal amortization, capital improvements and distributions to stockholders. Further, FFO as disclosed by other REITs may not be comparable to our calculation of FFO.
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with the accompanying consolidated financial statements and related notes contained elsewhere in this Annual Report on Form 10-K.
Disclosure Regarding Forward-Looking Statements
Some of the information in this Annual Report on Form 10-K 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;
• 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 release space quickly or on as favorable terms as old leases;
• 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.
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 elsewhere in this Annual Report.
Given these uncertainties, we caution you not to place undue reliance on forward-looking statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances or to reflect the occurrence of unanticipated events.
Overview
We are a self-administered and self-managed equity REIT that began operations through a predecessor in 1978. Since the Company’s initial public offering in 1994, we have evolved into one of the largest owners and operators of suburban office, industrial and retail properties in the southeastern and midwestern United States. At December 31, 2002, we:
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 December 31, 2002, the Company owned 88.4% 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 Annual Report. Our Consolidated Financial Statements include the accounts of the Company and the Operating Partnership and their majority-controlled affiliates. For a discussion of our accounting policies with respect to our investments in unconsolidated affiliates, 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 described in Note 1 to our Consolidated Financial Statements for the year ended December 31, 2002. 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. Management has reviewed our critical accounting policies and estimates with the audit committee of the Company’s board of directors and the Company’s independent auditors.
We consider our critical accounting policies to be those used in the determination of the reported amounts and disclosure related to the following:
• Impairment of long-lived assets;
• Allowance for doubtful accounts;
• Capitalized costs;
• Fair value of derivative instruments;
21
• 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 estimates of the undiscounted future operating cash flows expected to be generated are based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, changes in market rental rates, and costs to operate each property. As these factors are difficult to predict and are subject to future events that may alter our assumptions, the undiscounted future operating cash flows estimated by us in our impairment analyses may not be achieved and we may be required to recognize future impairment losses on our properties.
Allowance for doubtful accounts. Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. Our receivable balance is comprised primarily of rents and operating cost recoveries due from tenants as well as accrued rental rate increases to be received over the life of the existing leases. We regularly evaluate the adequacy of our allowance for doubtful accounts considering such factors as the credit quality of our tenants, delinquent payments, historical trends and current economic conditions. Actual results may differ from these estimates under different assumptions or conditions. If our assumptions regarding the collectibility of accounts receivables prove incorrect, we could experience write-offs of accounts receivable or accrued straight-line rents receivable in excess of our allowance for doubtful accounts.
Capitalized costs. Expenditures directly related to both the development of real estate assets and the leasing of properties are included in net real estate assets and are stated at cost in the consolidated balance sheets. The development expenditures include pre-construction costs essential to the development of properties, development and construction costs, interest costs, real estate taxes, salaries and other costs incurred during the period of development. The leasing expenditures include all general and administrative costs, including salaries incurred in connection with successfully securing leases on the properties. Estimated costs related to unsuccessful leases are expensed as incurred. If our assumptions regarding the successful efforts of development and leasing are incorrect, the resulting adjustments could impact earnings.
Fair value of derivative instruments. In the normal course of business, we are exposed to the effect of interest rate changes. We limit our exposure by following established risk management policies and procedures including the use of derivatives. To mitigate our exposure to unexpected changes in interest rates, derivatives are used primarily to hedge against rate movements on our related debt. We are required to recognize all derivatives as either assets or liabilities in the consolidated balance sheets and to measure those instruments at fair value. Changes in fair value will affect either stockholders’ equity or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes.
To determine the fair value of derivative instruments, we use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the majority of financial instruments, including most derivatives, standard market conventions and techniques such as discounted cash flow analysis, option pricing modes, replacement cost and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.
Rental revenue. Rental revenue is comprised of base rent, recoveries from tenants which represent reimbursements for certain costs as provided in the lease agreements such as real estate taxes, utilities, insurance, common area maintenance and other recoverable costs, parking and other income and termination fees which relate to specific tenants, each of whom has paid a fee to terminate its lease obligation before the end of the contracted term on the lease.
22
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.
Investments in joint ventures. As of December 31, 2002, our investments in unconsolidated affiliates consist of one corporation, nine limited liability companies, five 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 50.0% of the outstanding voting stock. We have a 50.0% 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 50.0% 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, which is 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.
Results of Operations
On January 1, 2002, we adopted Financial Accounting Standards Board Statement No. 144, “Accounting for the Impairment and Disposal of Long-Lived Assets”, (“SFAS 144”). As described in Note 10 to the Consolidated Financial Statements, we reclassified the operations and/or gain/(loss) from disposal of certain properties to discontinued operations if the properties were either sold during 2002 or were held for sale at December 31, 2002 and met certain conditions as stipulated by SFAS 144. Accordingly, the operations and gain/(loss) from those properties disposed of during 2001 and 2000 were not reclassified to discontinued operations.
The following table sets forth information regarding our results of operations for the years ended December 31, 2002, 2001 and 2000 ($ in millions):
2002 to 2001 $ Change
2001 to 2000 $ Change
454.2
469.3
509.8
(15.1
(40.5
Operating expenses:
Rental property
143.4
144.7
150.9
(1.3
(6.2
126.6
113.5
113.2
13.1
Interest expense:
Contractual
109.1
104.8
108.6
(3.8
Amortization of deferred financing costs
1.4
2.0
(0.6
(0.5
110.5
106.8
111.1
(4.3
General and administrative (includes $3.7 nonrecurring compensation expense in 2002)
24.6
21.4
21.8
(0.4
2.7
Total operating expenses
407.8
386.4
397.0
(10.6
Other income:
Interest and other income
24.5
(10.9
5.5
Equity in earnings of unconsolidated affiliates
8.1
(0.8
21.7
33.4
22.9
(11.7
10.5
Income before gain/(loss) on disposition of land and depreciable assets, minority interest, discontinued operations and extraordinary item
68.1
116.3
135.7
(48.2
(19.4
Gain on disposition of land
2.2
(1.7
Gain/(loss) on disposition of depreciable assets
5.3
16.2
(4.0
Income before minority interest, discontinued operations and extraordinary item
80.3
132.5
140.4
(52.2
(7.9
(9.6
(16.7
(16.9
70.7
115.8
123.5
(45.1
(7.7
Discontinued operations:
Income from discontinued operations, net of minority interest
12.3
16.1
14.7
Gain on sale of discontinued operations, net of minority interest
10.8
23.1
Net income before extraordinary item
93.8
131.9
138.2
(38.1
(6.3
(0.7
(4.7
93.4
131.2
133.5
(37.8
(2.3
(30.8
(31.5
(32.6
0.7
62.6
99.7
100.9
(37.1
(1.2
Comparison of 2002 to 2001. Rental revenue from continuing operations decreased $15.1 million, or 3.2%, from $469.3 million for the year ended December 31, 2001 to $454.2 million for the year ended December 31, 2002. The decrease was primarily due to a decrease in average occupancy rates from 91.6% for the year ended December 31, 2001 to 86.0% for the year ended December 31, 2002. The average occupancy decreased mainly due to tenant rollover and early lease terminations at various properties where vacant space was not re-leased due to the lack of demand for office space coupled with an increasing supply of competitive space. During the past twelve months, approximately 2.0 million square feet of development properties were placed in-service which have leased-up slower than expected and as a result, have also adversely affected the occupancy of our overall portfolio. Rental revenue also decreased due to the impact of dispositions during 2002 and 2001 that were not classified as discontinued operations as more fully described in Note 10 of our Consolidated Financial Statements.
In addition, as a result of the bankruptcy of WorldCom and its affiliates, we wrote off approximately $3.1 million of accrued straight-line rent receivable against revenue and since July 1, 2002, we have recorded rental revenue relating to WorldCom and its affiliates on a cash basis rather than on a straight-line basis.
Same property rental revenue, recorded in accordance with GAAP, generated from the 33.6 million square feet of 460 wholly-owned in-service properties on January 1, 2001, decreased $20.2 million for the year ended December 31, 2002 compared to the year ended December 31, 2001. This decrease is primarily a result of lower same store average occupancy, which decreased from 93.0% in 2001 to 88.0% in 2002, and a decrease in straight-line rental income primarily as a result of the bankruptcy of WorldCom and its affiliates.
During the year ended December 31, 2002, 840 second generation leases representing 5.6 million square feet of office, industrial and retail space were executed at an average rate per square foot which was 5.5% lower than the average rate per square foot on the expired leases.
Rental operating expenses from continuing operations (real estate taxes, utilities, insurance, repairs and maintenance and other property-related expenses) decreased $1.3 million, or 0.9%, from $144.7 million for the year ended December 31, 2001 to $143.4 million for the year ended December 31, 2002. Rental operating expenses as a percentage of rental revenue increased from 30.8% for the year ended December 31, 2001 to 31.6% for the year ended December 31, 2002. The increase in these expenses as a percentage of revenue was a result of increases in repairs and maintenance and certain fixed operating expenses that do not vary with net changes in our occupancy average.
Same property rental property expenses, which are the expenses of the 460 in-service properties wholly-owned on January 1, 2001, decreased $204,830, or 0.2%, for the year ended December 31, 2002, compared to the year ended December 31, 2001. Same property rental property expenses as a percentage of related revenue increased 1.4% from 30.4% for the year ended December 31, 2001 to 31.8% for the year ended December 31, 2002. The increase as a percentage of revenue was a result of increases in repairs and maintenance and certain fixed operating expenses that do not vary with net changes in our occupancy average.
Depreciation and amortization from continuing operations for the years ended December 31, 2002 and 2001 was $126.6 million and $113.5 million, respectively. The increase of $13.1 million, or 11.5%, was due to an increase in amortization related to leasing commissions and tenant improvement expenditures for properties placed in-service during 2001 and 2002 and the write-off of $5.8 million of deferred leasing costs primarily related to the leases rejected by WorldCom at December 31, 2002, see –”Known Trends Affecting Results of Operations”. These increases were partially offset by a decrease in depreciation for properties disposed of during 2002 and 2001 that are not classified as discontinued operations in accordance with SFAS 144.
Interest expense from continuing operations increased $3.7 million, or 3.5%, from $106.8 million for the year ended December 31, 2001 to $110.5 million for the year ended December 31, 2002. The increase was primarily attributable to the decrease in capitalized interest for the years ended December 31, 2002 and 2001, which was $7.0 million and $16.9 million, respectively. Partly offsetting this increase was a decrease in weighted average interest rates from 7.2% in 2001 to 7.0% in 2002. The average outstanding debt balance remained relatively consistent for 2002 and 2001. Interest expense for the years ended December 31, 2002 and 2001 included $1.4 million and $2.0 million, respectively, of amortization of deferred financing costs and costs related to our interest rate hedge contracts.
25
General and administrative expenses as a percentage of total rental revenue (which includes rental revenue for discontinued operations), interest and other income, and equity in earnings of unconsolidated affiliates was 4.8% in 2002 and 4.0% in 2001. Included in general and administrative expenses in 2002 was a nonrecurring compensation of $3.7 million which was related to the exercise of options during 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 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. During 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.
We reserved $2.7 million in the year ended December 31, 2002 for probable and estimated losses related to various legal proceedings from previously completed mergers and acquisitions.
Interest and other income from continuing operations decreased $10.9 million, or 44.5%, from $24.5 million for the year ended December 31, 2001 to $13.6 million for the year ended December 31, 2002. The decrease primarily resulted from a decrease in leasing and development fee income in the year ended December 31, 2002 and a decrease in interest income in the year ended December 31, 2002 due to the collection of notes receivable during 2001 and 2002.
Equity in earnings of unconsolidated affiliates decreased $848,662 from $8.9 million for the year ended December 31, 2001 to $8.1 million for the year ended December 31, 2002. The decrease was primarily a result of lower lease termination fees and lower property operating expense reimbursements in 2002. The decrease in earnings was partly offset by lower interest expense incurred during 2002 as a result of lower weighted average borrowing rates and earnings from certain joint ventures formed with unrelated investors during 2002.
Gain on disposition of land and depreciable assets decreased $4.0 million, or 24.7%, to $12.2 million for the year ended December 31, 2002 from $16.2 million for the year ended December 31, 2001. In 2001, the majority of the gain was comprised of a gain related to the disposition of 1,672 apartment units and a gain related to the disposition of 180.3 acres of land. In 2002, the majority of the gain was comprised of a gain related to the disposition of 533,263 square feet of office properties, that did not meet certain conditions to be classified as discontinued operations as described in Note 10 of the Consolidated Financial Statements, and a gain related to the disposition of 112.7 acres of land. The gain is partly offset by an impairment loss of approximately $9.1 million recorded in 2002 related to a property that will be partially demolished and redeveloped into a class A suburban office property.
In accordance with SFAS 144, we classified net income of $12.3 million and $16.1 million, net of minority interest, as discontinued operations for the years ended December 31, 2002 and 2001, respectively, which pertained to 1.9 million square feet of property sold in 2002 and 2.3 million square feet of property held for sale at December 31, 2002. We also classified as discontinued operations in 2002 the gain on the sale of these properties of $11.5 million, net of minority interest, partly offset by an impairment charge of $749,026, net of minority interest, related to one property held for sale at December 31, 2002.In addition, in accordance with SFAS 66, “Accounting for Sales of Real Estate,” we have deferred the recognition of additional gain of $6.9 million, $6.1 million net of minority interest, relating to the disposition of 225,220 square feet to a third party buyer during the fourth quarter of 2002 for which we have guaranteed the buyer up to $20.5 million of rental shortfalls or re-tenanting costs. See Note 13 of the Consolidated Financial Statements.
We recorded $30.8 million and $31.5 million in preferred stock dividends for each of the years ended December 31, 2002 and 2001, respectively. The decrease resulted from the Company’s repurchase of $18.5 million of its preferred stock during 2001.
26
Comparison of 2001 to 2000. Rental revenue from continuing operations decreased $40.5 million, or 7.9%, from $509.8 million for the year ended December 31, 2000 to $469.3 million for the year ended December 31, 2001. The decrease was primarily a result of the net reductions in our property portfolio as a result of our capital recycling program and a decrease in average occupancy rates from 91.9% in 2000 to 91.6% in 2001. The decrease in revenue was partly offset by an increase in rental rates on new leases and rollovers.
Same property rental revenue generated from the 32.1 million square feet of the 449 in-service properties wholly-owned on January 1, 2000, increased $6.7 million, or 1.7%, for the year ended December 31, 2001, compared to the year ended December 31, 2000. This increase was primarily a result of scheduled increases in rental rates on existing leases, an overall increase in rental rates on new leases and rollovers and an increase in recoveries from tenants. Partly offsetting the increase in rental revenue was a decrease in same store average occupancy which declined from 94.2% in 2000 to 93.2% in 2001 and a decrease in termination fees from $4.0 million in 2000 to $2.5 million in 2001.
During the year ended December 31, 2001, 689 second generation leases representing 4.4 million square feet of office, industrial and retail space were executed at an average rate per square foot which was 4.7% higher than the average rate per square foot on the previous leases.
Rental operating expenses from continuing operations (real estate taxes, utilities, insurance, repairs and maintenance and other property-related expenses) decreased $6.2 million, or 4.0%, from $150.9 million for the year ended December 31, 2000 to $144.7 million for the year ended December 31, 2001. Rental operating expenses as a percentage of related revenue increased from 29.6% for the year ended December 31, 2000 to 30.8% for the year ended December 31, 2001. The increase as a percentage of revenue was a result of increases in real estate taxes, utilities and other fixed operating expenses that do not vary with net changes in our occupancy average.
Same property rental property expenses, which are the expenses of the 449 in-service properties wholly-owned on January 1, 2000, increased $5.3 million, or 4.4 %, for the year ended December 31, 2001, compared to the year ended December 31, 2000. Rental operating expenses as a percentage of related revenue increased from 29.8% for the year ended December 31, 2000 to 30.8% for the year ended December 31, 2001. The increase as a percentage of revenue was a result of increases in real estate taxes, utilities and other fixed operating expenses that do not vary with net changes in our occupancy average.
Depreciation and amortization from continuing operations for the years ended December 31, 2001 and 2000 totaled $113.5 million and $113.2 million, respectively. The increase of $279,677, or 0.3%, was due to an increase in the amortization of leasing commissions and tenant improvements, partly offset by a decrease in the depreciation on buildings that were sold as a result of our capital recycling program during 2001 and 2000.
Interest expense from continuing operations decreased $4.3 million, or 3.9 %, from $111.1 million for the year ended December 31, 2000 to $106.8 million for the year ended December 31, 2001. The decrease was primarily attributable to a higher average outstanding debt balance for 2000 and a decrease in the weighted average interest rates from 7.5% in 2000 to 7.2% in 2001. Partly offsetting this decrease was a decrease in capitalized interest for the years ended December 31, 2001 and 2000 which was $16.9 million and $23.7 million, respectively. Interest expense for the years ended December 31, 2001 and 2000 included $2.0 million and $2.5 million, respectively, of amortization of deferred financing costs and costs related to our interest rate hedge contracts.
General and administrative expenses as a percentage of total rental revenue (which includes rental revenues from discontinued operations), interest and other income and equity in earnings of unconsolidated affiliates was 4.0% in 2001 and 3.8% in 2000.
Interest and other income increased $5.5 million, or 28.9%, from $19.0 million for the year ended December 31, 2000 to $24.5 million for the year ended December 31, 2001. The increase resulted from additional interest income earned on notes receivable and leasing and management fees earned from our joint ventures during 2001, partly offset by an adjustment related to the adoption of SFAS 133 (see Note 8 to the Consolidated Financial Statements) along with other income generated from our apartments which were sold during 2001.
27
Equity in earnings of unconsolidated affiliates increased $5.0 million from $3.9 million for the year ended December 31, 2000 to $8.9 million for the year ended December 31, 2001. The increase was primarily a result of the inclusion of a full year of earnings in 2001 for two joint ventures that were formed with unrelated investors during May and December of 2000.
Gain on dispositions of assets increased $11.5 million from $4.7 million for the year ended December 31, 2000 to $16.2 million for the year ended December 31, 2001. During 2001, the primary source of the gain was the disposition of 1,672 apartment units. During 2000, the Jacksonville portfolio was sold at a loss, which was offset by gains recognized on joint venture transactions along with dispositions of land and office, industrial, and retail properties.
In accordance with SFAS 144, we classified $16.1 million and $14.7 million, net of minority interest, as discontinued operations for the years ended December 31, 2001 and 2000, respectively, which pertained to 1.9 million square feet of property sold during 2002 and 2.3 million square feet of property held for sale at December 31, 2002.
We recorded $31.5 million and $32.6 million in preferred stock dividends for each of the years ended December 31, 2001 and 2000, respectively. The decrease resulted from the Company’s $18.5 million repurchase of its preferred stock during 2001.
Known Trends Affecting Results of Operations
We expect our net income and funds from operations to be lower in 2003 than in 2002 due to the following factors:
• lower average occupancy;
• lower than average re-leasing;
• lower than average first year cash rents;
• additional asset sales;
• the bankruptcy of two significant customers in 2002; and
• general economic conditions in each of our primary markets.
In 2003, we expect occupancy to be lower than in 2002 primarily due to the leases rejected by WorldCom and US Airways. During 2003, the leases on approximately 5.9 million rentable square feet of space, or 19.0% of our portfolio, will expire. This square footage represented approximately 18.5% of our annualized revenue in 2002. As of March 1, 2003, approximately 43.0% of this space had been re-leased with existing tenants or leased to new tenants. Historically, we have renewed approximately 60.0%-75.0% of expiring leases with existing tenants. We expect this re-leasing percentage to be lower during 2003. In addition, we expect the average rental rate for expiring leases that have been renewed or released in 2003 to be lower than in 2002.
While employment trends in the majority of our markets have begun to show signs of positive growth in 2003, we do not anticipate that this employment growth will lead to a corresponding increase in demand for office space in 2003. Improving employment in our markets will not necessarily result in positive space absorption because of the significant amount of under-utilized space and space available for sublease in our markets. Customers have indicated that they are, for the most part, unwilling to commit to space expansion plans until they have a better sense of the stability of the economic recovery in the U.S. and abroad.
In 2003, we expect to continue our capital recycling program of selectively disposing of non-core properties or other properties the sale of which can generate attractive returns. See “Liquidity and Capital Resources – Capital Recycling Program.” Although we intend to use the net proceeds from asset dispositions to repay debt, fund stockholder distributions and repurchase Common Stock, any net decrease in our property portfolio generally tends to result in lower net income.
28
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. As of the filing date, we had 17 leases encompassing 986,522 square feet in fifteen locations with WorldCom and its affiliates. These leases represented $17.9 million of annualized revenue and approximately 3.8% of our total annualized revenue. As of December 31, 2002, WorldCom has rejected two leases encompassing 819,653 square feet with annualized revenue of approximately $14.9 million.
We have filed a claim in connection with these rejected leases in the amount of $20.8 million. Actual amounts to be received in satisfaction of this claim will be subject to WorldCom’s final plan of reorganization and the availability of funds to pay creditors.
In addition, there are 12 leases with WorldCom and its affiliates encompassing 38,624 square feet in our Miller Global (“MG-HIW, LLC”) joint venture. WorldCom has not rejected any of these leases.
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. As of the filing date, we had six leases with US Airways encompassing 414,059 square feet in Winston-Salem, North Carolina. These leases represented $6.9 million of annualized revenue and approximately 1.47% of our total annualized revenue. On February 20, 2003, the United States Bankruptcy Court approved the terms of an agreement between us and US Airways whereby US Airways will continue to lease 293,007 square feet of this space. Under this agreement, US Airways has rejected two leases encompassing 119,013 square feet with annualized revenue of approximately $3.1 million. One lease was rejected effective February 1, 2003 and the second was rejected effective April 1, 2003. Additionally, we have agreed to a $600,000 reduction in annual rent on one lease, encompassing 81,220 square feet and expiring on December 31, 2007, for the remaining term of the lease. US Airways has neither accepted nor rejected a 2,039 square foot lease that expires in 2004.
We cannot provide any assurance that WorldCom or US Airways will not reject any additional leases nor that we will be able to re-lease rejected space quickly or on as favorable terms.
Liquidity and Capital Resources
Statement of Cash Flows. The following table sets forth the changes in the Company’s cash flows from 2001 to 2002 ($ in thousands):
Change
Cash Provided By Operating Activities
(47,644
Cash Provided By/(Used In) Investing Activities
335,232
Cash Used in Financing Activities
(172,943
Total Cash Flows
10,441
(104,204
114,645
Cash provided by operating activities was $201.5 million in 2002 and $249.1 million in 2001. The decrease of $47.6 million primarily a result of: (1) a decrease in average occupancy rates for our wholly-owned portfolio; (2) a net decrease in our portfolio as a result of our capital recycling program; and (3) a decrease in interest income and development and leasing income. In addition, the level of net cash provided by operating activities is affected by the timing of receipt of revenue and payment of expenses.
Cash provided by investing activities was $195.6 million in 2002 and cash used in investing activities was $139.6 million in 2001. The increase of $335.2 million was primarily a result of an increase in proceeds from dispositions of real estate assets of approximately $140.8 million in 2002 and a decrease in additions to real estate assets of approximately $221.1 million in 2002, primarily as a result of the decrease in the development activity for that same period.
Cash used in financing activities was $386.6 million in 2002 and $213.7 million in 2001. The increase was primarily a result of an increase of $342.2 million in net repayments on the unsecured revolving loan, mortgages and notes payable in 2002, partly offset by a decrease of $144.0 million related to the repurchase of Common Stock and Common Units and a decrease of $18.5 million related to the repurchase of Preferred Stock during 2001.
Capitalization. Based on our total market capitalization of $3.2 billion at December 31, 2002 (at the December 31, 2002 stock price of $22.10 and assuming the redemption for shares of Common Stock of the 7.0 million Common Units of minority interest in the Operating Partnership), our debt represented approximately 47.2% of our total market capitalization. Our total indebtedness at December 31, 2002 was $1.52 billion and was comprised of approximately $519.7 million of secured indebtedness with a weighted average interest rate of 8.0% and approximately $1.0 billion of unsecured indebtedness with a weighted average interest rate of 6.9%. We do not intend to reserve funds to retire existing secured or unsecured debt upon maturity. For a more complete discussion of our long-term liquidity needs, see “Current and Future Cash Needs.”
The following table sets forth the principal payments due on our long-term debt as of December 31, 2002, as adjusted for the refinancing of the MOPPRS on February 3, 2003 ($ in thousands):
2003
Fixed Rate Debt:
Unsecured:
MOPPRS (1)
Put Option Notes (2)
Notes
706,500
246,500
350,000
Secured:
Mortgages and loans payable
658,220
11,737
14,918
79,684
17,508
77,436
456,937
Total Fixed Rate Debt
1,464,720
258,237
127,508
906,937
Variable Rate Debt:
Term Loan
Revolving Loan
57,500
Mortgage loan payable
4,309
265
279
292
3,227
Total Variable Rate Debt
81,809
57,746
20,279
Total Long Term Debt
1,546,529
315,983
15,183
99,963
127,800
80,663
(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 bore an interest rate of 6.835% from the date of issuance through January 31, 2003. On January 31, 2003, the interest rate was changed to 8.975% pursuant to the interest rate reset provisions of the MOPPRS. On February 3, 2003, the Operating Partnership repurchased 100.0% of the principal amount of the MOPPRS from the sole holder thereof in exchange for a secured note in the principal amount of $142.8 million. The secured note bears interest at a fixed rate of 6.03% and has a maturity date of February 28, 2013.
(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.
Secured Indebtedness
The mortgage and loans payable and the secured revolving loan were secured by real estate assets with an aggregate carrying value of $1.1 billion at December 31, 2002 as adjusted for the refinancing of the MOPPRS on February 3, 2003.
30
Unsecured Indebtedness
The Operating Partnership’s unsecured fixed rate notes of $806.5 million bear interest rates ranging from 6.8% to 8.1%, with interest payable semi-annually in arrears. Any premium and discount related to the issuance of the unsecured notes is being amortized over the life of the respective notes as an adjustment to interest expense. All of the unsecured notes, except for the 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 $57.5 million outstanding at December 31, 2002) that matures in December 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 Baa3 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. In addition, we are currently required to pay an annual facility fee equal to .20% of the total commitment under the unsecured revolving loan.
The terms of each of our revolving loans and the indenture that governs our outstanding notes require us to comply with certain operating and financial covenants and performance ratios. We are currently in compliance with all such requirements. Although we expect to remain in compliance with the covenants and ratios under our revolving loans for at least the next several quarters, depending upon our future operating performance, we cannot assure you that we will continue to be in compliance. We are currently negotiating with our lenders a replacement of our current unsecured revolving loan, which expires in December 2003, with a new unsecured revolving loan that would contain less-restrictive covenants. However, we cannot assure you that we will be able to obtain such new financing on acceptable terms, if at all.
The following table sets forth more detailed information about the Company’s ratio and covenant compliance under the Company’s revolving loan as of December 31, 2002 and 2001. Certain of these definitions may differ from similar terms used in the consolidated financial statements and may, for example, consider our proportionate share of investments in unconsolidated affiliates. For a more detailed discussion of the covenants in our revolving loan, including definitions of certain relevant terms, see the credit agreement governing our revolving loan which is incorporated by reference in this Annual Report as Exhibit 10.13.
Total Liabilities Less Than or Equal to 55% of Total Assets
49.9 %
51.4 %
Unencumbered Assets Greater Than or Equal to 2 times Unsecured Debt
2.16
Secured Debt Less Than or Equal to 30% of Total Assets
19.1 %
18.3 %
Adjusted EBDITA Greater Than 2.25 times Interest Expense
2.55
2.88
Adjusted EBDITA Greater Than 1.75 times Fixed Charges
1.88
Adjusted NOI Unencumbered assets Greater Than 2.25 times Interest on Unsecured Debt
3.05
3.45
Tangible Net Worth Greater Than $1.6 Billion
$ 1.7 billion
$ 1.8 billion
Restricted Payments, including distributions to shareholders, Less Than or Equal to 100% of CAD
92.7 %
83.3 %
The following table sets forth more detailed information about the Operating Partnership’s ratio and covenant compliance under the Operating Partnership’s indenture as of December 31, 2002 and 2001. Certain of these definitions may differ from similar terms used in the consolidated financial statements and may, for example, consider our proportionate share of investments in unconsolidated affiliates. For a more detailed discussion of the covenants in our indenture, including definitions of certain relevant terms, see the indenture governing our unsecured notes which is incorporated by reference in this Annual Report as Exhibit 4.2.
Overall Debt Less Than or Equal to 60% of Adjusted Total Assets
39.3%
42.5%
Secured Debt Less Than or Equal to 40% of Adjusted Total Assets
13.2%
Income Available for debt service Greater Than 1.50 times Annual Service Charge
Total Unencumbered Assets Greater Than 200% of Unsecured Debt
294.2%
262.4%
31
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 $1.8 million renovation of Tampa Bay Park and the $9.1 million non-recurring renovation of 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 and the redevelopment of the Environmental Protection Agency site in Research Triangle.
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 $205.9 million of availability as of March 6, 2003);
• the selective disposition of non-core assets or other assets the sale of which can generate attractive returns;
• 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 March 6, 2003, we had $2.5 billion of unencumbered real estate assets at cost).
Our long-term liquidity needs generally include the funding of existing and future development activity, selective asset acquisitions and the retirement of mortgage debt, amounts outstanding under the two revolving loans and long-term unsecured debt. We remain committed to maintaining a flexible capital structure. Accordingly, we expect to meet our long-term liquidity needs through a combination of (1) the issuance by the Operating Partnership of additional unsecured debt securities, (2) the issuance of additional equity securities by the Company and the Operating Partnership as well as (3) the sources described above with respect to our short-term liquidity. We expect to use such sources to meet our long-term liquidity requirements either through direct payments or repayment of borrowings under the unsecured revolving loan. We do not intend to reserve funds to retire existing secured or unsecured indebtedness upon maturity. Instead, we will seek to refinance such debt at maturity or retire such debt through the issuance of equity or debt securities.
We anticipate that our available cash and cash equivalents and cash flows from operating activities, with cash available from borrowings and other sources, will be adequate to meet our capital and liquidity needs in both the short and long term. However, if these sources of funds are insufficient or unavailable, the Company’s ability to make distributions to stockholders and satisfy other cash payments may be adversely affected.
32
Joint Ventures. During the past several years, in order to generate additional capital, we have formed various joint ventures with unrelated investors. We have retained minority equity interests ranging from 12.50% to 50.00% in these joint ventures. As required by GAAP, we have accounted for our joint venture activity using the equity method of accounting, as we do not control these joint ventures. As a result, the assets and liabilities of our joint ventures are not included on our balance sheet and the results of operations of the ventures are not included on our income statement, other than as equity in earnings of unconsolidated affiliates.
On June 14, 2002, we contributed $1.1 million cash to Plaza Colonnade, LLC, a newly formed limited liability company to construct a 285,000 square foot development property. The total project costs are estimated at $70.6 million. We have retained a 50.0% interest in this joint venture, and have adopted the equity method of accounting for this joint venture. On February 12, 2003, Plaza Colonnade, LLC signed a $61.3 million construction loan to fund the development of this property. The loan requires that the joint venture receive at least $9.3 million of additional equity, $4.6 million of which will be our share. We and our partners in this joint venture have each guaranteed 50.0% of the loan. The loan repayment guarantees are reduced upon the project reaching certain predetermined criteria. In addition, the guarantees are reduced to 25.0% of the loan balance. In addition to the construction loan described above, the partners have provided collectively $12.0 million in letters of credit, $6.0 million by us and $6.0 million by our partner. During construction the joint venture is required to have in place the aforementioned letters of credit.
On June 26, 2002, we acquired our joint venture partner’s interest in MG-HIW Rocky Point, LLC, which owned Harborview Plaza, a 205,000 rentable square foot office property, to bring our ownership interest in that entity from 50.0% to 100.0%. 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 joint venture with a different partner, in exchange for a 20.0% limited partnership interest and $12.1 million in cash. We are the sole and exclusive property manager and leasing agent of this joint venture’s property, for which it received fees of $60,794 in 2002. The assets, liabilities and net income from the SF-HIW Harborview Plaza, LP are included in the table below. In addition, our partner in SF-HIW Harborview, LP has the right to put its 80.0% equity interest in the partnership to us for cash at anytime during the one year period commencing on September 11, 2014. The value of the equity interest will be determined based upon the ten fair market value of SF-HIW Harborview Plaza, LP’s assets and liabilities.
The following tables set forth information regarding our joint venture activity as recorded on the joint venture’s books at December 31, 2002 and 2001 ($ in thousands):
Percent Owned
Total Assets
Debt
Total Liabilities
Board of Trade
Investment Company
49.00
7,778
919
1,071
7,372
1,076
1,258
Dallas County Partners
50.00
44,128
38,904
41,285
44,786
35,495
40,967
Dallas County Partners II
18,900
23,587
24,874
19,891
24,601
25,778
Fountain Three
37,159
30,958
32,581
37,218
26,049
33,200
RRHWoods, LLC
82,646
68,561
71,767
82,740
66,038
69,098
Kessinger/Hunter, LLC
26.50
12,929
888
16,225
802
4600 Madison Associates, LP
12.50
23,254
17,385
17,896
23,972
17,955
18,624
Schweiz-Deutschland-USA
DreilanderBeteiligung Objekt DLF 98/29-Walker Fink-KG
22.81
141,147
68,209
70,482
143,960
69,113
70,979
Dreilander-Fonds 97/26 and 99/32
42.93
119,134
59,688
62,601
122,820
62,422
Highwoods-Markel Associates, LLC
16,026
11,625
12,583
16,436
12,563
MG-HIW, LLC
20.00
355,102
242,240
249,340
353,531
247,950
MG-HIW Peachtree Corners III, LLC
3,809
2,494
2,823
3,503
2,299
2,445
MG-HIW Rocky Point, LLC
28,212
17,322
19,695
MG-HIW Metrowest I, LLC
1,601
1,600
MG-HIW Metrowest II, LLC
9,600
5,372
5,540
8,683
3,763
4,034
Concourse Center Associates, LLC
14,896
9,859
10,193
14,551
10,000
10,016
Plaza Colonnade, LLC
3,591
(4)
SF-HIW Harborview, LP
41,134
22,800
25,225
932,834
602,601
629,155
925,500
587,576
619,831
(1) We decreased our ownership percentage in this entity from 30.00% at December 31, 2001 to 26.50% at December 31, 2002.
(2) Amount represents total draws at December 31, 2002 on a construction loan made to this joint venture by an affiliate of the Company with an interest rate of LIBOR plus 200 basis points due July 2003.
(3) $2.7 million of this debt has been guaranteed by the Company subject to a prorata indemnity from the Company’s joint venture partner.
(4) On February 12, 2003, Plaza Colonnade, LLC signed a $61.3 million construction loan to fund the development of this property. The loan requires that the joint venture invest $9.3 million, $4.6 million of which will be the Company’s share. The Company and its partners in this joint venture have guaranteed 50.0% of the loan.
Year Ended December 31, 2002
Year Ended December 31, 2001
Revenue
Operating Expense
Interest
Depr/ Amort
Net Income/ (Loss)
Operating Expenses
Income Statement Data:
2,670
1,647
83
363
577
2,524
1,666
90
311
457
11,046
5,470
2,663
1,998
915
11,148
4,905
2,715
1,883
1,645
5,948
2,522
2,452
1,062
(88
7,614
2,750
2,550
1,066
1,248
6,884
2,850
2,143
1,516
375
6,747
2,912
2,109
1,676
13,740
7,145
3,397
(1)
3,617
(419
14,632
6,950
3,454
3,298
930
% (2)
6,867
4,927
682
12,897
10,210
469
2,218
5,229
1,954
1,839
4,726
2,084
1,294
1,589
(241
20,337
5,549
4,653
3,391
6,744
20,305
5,474
4,712
3,288
6,831
16,859
4,465
4,635
3,968
3,791
17,691
4,159
4,589
3,239
5,704
3,191
1,642
1,032
562
(45
3,215
1,811
965
668
(229
51,177
18,156
10,741
8,377
13,903
50,457
17,584
15,418
8,701
8,754
55
(99
(37
1,813
555
271
248
739
(26
(21
303
240
(233
52
67
(41
2,113
539
681
302
591
66
SF-HIW Harborview, LLC
1,721
458
432
289
542
149,907
58,200
34,491
28,506
28,710
152,093
60,647
37,937
26,214
27,295
(1) Includes a $617,297 loss on early extinguishment of debt.
(2) We decreased our ownership percentage in this entity from 30.00% at December 31, 2001 to 26.50% at December 31, 2002.
34
As of December 31, 2002, our joint venture had approximately $602.6 million of outstanding debt and the following table sets forth the principal payments due on that outstanding long-term debt as recorded on the joint venture’s books at December 31, 2002 ($ in thousands):
170
184
199
214
152
901
967
1,039
4,420
4,730
26,847
1,122
1,242
1,375
1,522
1,684
16,642
1,029
1,104
1,187
1,275
1,369
24,994
1,254
403
431
4,240
60,961
664
711
762
815
873
13,560
1,035
1,107
1,185
1,268
62,647
661
714
770
831
897
55,815
100
111
120
130
11,102
164
176
189
202
217
8,911
9,488
7,505
12,514
253,255
15,560
304,279
(1) Amount represents total draws at December 31, 2002 on a construction loan made to this joint venture by an affiliate of the Company with an interest rate of LIBOR plus 200 basis points due July 2003.
(2) $2.7 million of this debt has been guaranteed by the Company subject to a prorata indemnity from the Company’s joint venture partner.
(3) On February 12, 2003, Plaza Colonnade, LLC signed a $61.3 million construction loan to fund the development of a property. The loan requires that the joint venture invest $9.3 million, $4.6 million of which will be the Company’s share. The Company and its partners in this joint venture have each guaranteed 50.0% of the loan. As of March 3, 2003, Plaza Colonnade, LLC has borrowed $626,000 under this loan.
(4) All of this joint venture debt is non-recourse to us except in the case of customary exceptions pertaining to such matters as misuse of funds, environmental conditions and material misrepresentations and those guarantees and loans described in the footnotes above.
Interest Rate Hedging Activities. To meet in part our long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Borrowings under our two revolving loans bear interest at variable rates. Our long-term debt, which consists of long-term financings and the unsecured issuance of debt securities, typically bears interest at fixed rates. In addition, we have assumed fixed rate and variable rate debt in connection with acquiring properties. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not hold or issue these derivative contracts for trading or speculative purposes.
The interest rate on all of our variable rate debt is currently adjusted at one to 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 2002 and were recorded as additional interest expense.
35
Share and Unit Repurchase Program. During 2002, we repurchased a total of 194,790 common partnership units at a weighted average price of $24.79 per unit. Since commencement of our initial share repurchase program in December 1999, we have repurchased 11.6 million shares of common stock and common units at a weighted average price of $24.19 per share/unit for a total purchase price of $280.7 million. 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. At December 31, 2002, we had 3.4 million shares/units remaining under our currently authorized additional 5.0 million share/unit repurchase program.
Capital Recycling Program. In 2003, we expect to continue our capital recycling program of selectively disposing of non-core properties or other properties the sale of which can generate attractive returns. At February 18, 2003, we had 2.3 million square feet of office properties and 301.0 acres of land under letter of intent or contract for sale in various transactions with a carrying value of $126.0 million. These transactions are subject to customary closing conditions, including due diligence and documentation, and are expected to close during 2003. However, we can provide no assurance that all or parts of these transactions will be consummated.
We expect to use substantially all of the net proceeds from our disposition activity for one or all of the following purposes:
• reduce our outstanding debt;
• pay shareholder distributions; or
• repurchase Common Stock subject to the factors discussed above under “—Share and Unit Repurchase Program”.
Distributions to Stockholders. To maintain our qualification as a REIT, we must distribute to stockholders at least 90.0% of REIT taxable income. We generally expect to use our cash flow from operating activities for distributions to shareholders and for payment of recurring, non-incremental revenue-generating expenditures. The following factors will affect cash flows from operating activities and, accordingly, influence the decisions of the board of directors regarding distributions:
• debt service requirements after taking into account debt covenants and the repayment and restructuring of certain indebtedness;
• scheduled increases in base rents of existing leases;
• changes in rents attributable to the renewal of existing leases or replacement leases;
• changes in occupancy rates at existing properties and execution of leases for newly acquired or developed properties; and
• operating expenses and capital replacement needs.
We have paid the following per share annual dividends during the past three years:
Year
Per Share Dividend
36
Based on management’s current expectation of future operating performance, we believe that cash available for distribution will decrease in 2003 as compared to 2002 due to lower funds from operations and higher expected capital expenditures per square foot related to the signing of new leases. Although we declared and paid a per share dividend of $0.585 (annualized rate of $2.34) during the first quarter of 2003, we cannot provide any assurances as to what distributions will be authorized by the board for the remaining quarters in 2003 and future periods. If per share cash available for distribution is less than $0.585 during one or more quarters in 2003, the board may decide to use some of the net proceeds from our anticipated disposition activity to maintain a per share dividend of $0.585. However, all distributions will be made at the discretion of the Company’s board of directors and will depend upon the factors discussed above.
Impact of Recently Issued Accounting Standards
In October 2001, the FASB issued SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 supercedes SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of” and the accounting and reporting provisions for disposals of a segment of business as addressed in APB 30 “Reporting the Results of Operations-Reporting the Effects of the Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” SFAS 144 is effective as of January 1, 2002 and extends the reporting requirements of discontinued operations to include those long-lived assets which:
(1) are classified held for sale at December 31, 2002 as a result of disposal activities that were initiated subsequent to January 1, 2002 or
(2) were sold during 2002 as a result of disposal activities that were initiated subsequent to January 1, 2002.
Per SFAS 144, those long-lived assets which were sold during 2002 and resulted from disposal activities initiated prior to January 1, 2002 should be accounted for in accordance with SFAS 121 and APB 30. We adopted SFAS No. 144 in January of 2002. Income from discontinued operations, net of minority interest and the gain/(loss) on sale of discontinued operations, net of minority interest, for properties meeting the criteria in accordance with SFAS No. 144 are reflected in the consolidated statements of income as discontinued operations for all periods presented. See Note 10 to the Consolidated Financial Statements for further discussion on our discontinued operations.
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 an 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 beginning after May 15, 2002. We will adopt SFAS No. 145 in the first quarter of 2003. We do not anticipate that the adoption of this statement will have a material effect on our results of operations.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which addresses financial accounting and reporting for costs associated with exit or disposal activities. This statement nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring”). The standard is effective for disposal activities initiated after December 31, 2002. We will adopt SFAS No. 146 in the first quarter of 2003. We do not anticipate that the adoption of this statement will have a material effect on our results of operations.
In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which changes the accounting for, and disclosure of certain guarantees. Beginning with transactions entered into after December 31, 2002, certain guarantees are to be recorded at fair value, which is different from prior practice, under which a liability was recorded only when a loss was probable and reasonably estimable. In general, the change applies to contracts or indemnification agreements that contingently require us to make payments to a guaranteed third-party based on changes in underlying asset, liability, or an equity security of guaranteed party.
While the accounting provisions only apply for new transactions entered into after December 31, 2002, the Interpretation requires us to include, and we have included, new disclosures in these financial statements. We are assessing the impact of this interpretation on our accounting for guarantees.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”, which amends FASB No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2002. On January 1, 2003, we will adopt the fair value method of accounting for stock-based compensation provisions of Statement No. 123. In accordance with SFAS 148, we will apply the prospective method of accounting and will expense all future employee stock options (and similar awards) over the vesting period based on the fair value of the award on the date of grant. We do not anticipate that the adoption of this statement will have a material effect on our results of operations.
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities (“FIN 46”),” the primary objective of which is to provide guidance on the identification of entities for which control is achieved through means other than voting rights. (“variable interest entities” or “VIEs”) and to determine when and which business enterprise should consolidate the VIE (the “primary beneficiary”). This new model applies when either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without additional financial support. In addition, FIN 46 requires additional disclosures. We are assessing the impact of this interpretation on our accounting for investments in unconsolidated joint ventures.
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.
Our calculation of FFO, as defined by the National Association of Real Estate Investment Trusts (NAREIT), is as follows:
• Net income (loss) – computed in accordance with GAAP;
• Less gains (or plus losses) from sales of depreciable operating properties and items that are classified as extraordinary items under GAAP;
• Plus depreciation and amortization of assets uniquely significant to the real estate industry; and
• Plus or minus adjustments for unconsolidated partnerships and joint ventures (to reflect funds from operations on the same basis).
In addition, our calculation of FFO includes the add back of the transition adjustment of SFAS 133, as this amount does not impact the comparative measurement of our operating performance.
Cash available for distribution (“CAD”) is defined as funds from operations reduced by non-revenue enhancing capital expenditures for building improvements and tenant improvements and lease commissions related to second generation space. In addition, CAD includes both recurring and nonrecurring operating results. As a result, nonrecurring items that are not defined as “extraordinary” under GAAP are reflected in the calculation of CAD.
FFO and cash available for distribution for the years ended December 31, 2002, 2001 and 2000 are summarized in the following table ($ in thousands):
Funds from Operations:
68,078
116,353
135,744
Add/(Deduct):
Dividends to preferred shareholders
Transition adjustment upon adoption of SFAS 133
556
6,894
4,702
6,449
126,638
113,468
113,189
Unconsolidated affiliates:
Loss on early extinguishment of debt
309
Depreciation
9,619
8,483
5,581
Discontinued operations (1):
7,139
7,599
6,254
Income, net of minority interest
12,312
1,651
2,265
2,091
Funds from operations
Cash Available for Distribution:
Rental income from straight-line rents
(3,672
(11,257
(14,892
Nonrecurring compensation expense
3,700
2,700
1,393
2,005
2,512
Non-incremental revenue generating capital expenditures:
Building improvements paid
(7,947
(8,345
(10,566
Second generation tenant improvements paid
(20,531
(19,704
(22,287
Second generation lease commissions paid
(12,321
(15,697
(13,033
(40,799
(43,746
(45,886
Cash available for distribution
165,110
185,011
193,157
Per common share/common unit-diluted:
3.33
3.83
3.71
2.72
2.98
2.85
Dividends paid
Dividend payout ratios:
70.3
60.3
60.6
86.0
77.6
78.9
Weighted average shares/units outstanding – basic (2)
60,372
61,839
67,544
Weighted average shares/units outstanding – diluted (2)
60,631
62,182
67,715
(1) For further discussion related to discontinued operations, see Note 10 of the Consolidated Financial Statements.
(2) Assumes redemption of Common Units for shares of Common Stock. Minority interest Common Unit holders and the stockholders of the Company share equally on a per Common Unit and per share basis; therefore, the per share information is unaffected by conversion.
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.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The effects of potential changes in interest rates are discussed below. Our market risk discussion includes “forward-looking statements” and represents an estimate of possible changes in fair value or future earnings that would occur assuming hypothetical future movements in interest rates. These disclosures are not precise indicators of expected future losses, but only indicators of reasonably possible losses. As a result, actual future results may differ materially from those presented. See “Management’s Discussion and Analysis of Results of Operations — Liquidity and Capital Resources” and the notes to the consolidated financial statements 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 two revolving loans bear interest at variable rates. Our long-term debt, which consists of secured and unsecured long-term financings and the issuance of unsecured debt securities, typically bears interest at fixed rates. In addition, we have assumed fixed rate and variable rate debt in connection with acquiring properties. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not hold or issue these derivative contracts for trading or speculative purposes.
As of December 31, 2002, we had approximately $81.8 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 December 31, 2003, our interest expense would be increased or decreased approximately $818,000.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See page F-1 of the financial report included herein.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section under the heading “Election of Directors” of the Proxy Statement for the Annual Meeting of Stockholders to be held May 19, 2003 is incorporated herein by reference for information on directors of the Company. See ITEM X in Part I hereof for information regarding executive officers of the Company.
ITEM 11.EXECUTIVE COMPENSATION
The section under the heading “Election of Directors” entitled “Compensation of Directors” of the Proxy Statement and the section titled “Executive Compensation” of the Proxy Statement are incorporated herein by reference.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The section under the heading “Voting Securities and Principal Stockholders” and “Equity Compensation Plan Information” of the Proxy Statement are incorporated herein by reference.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section under the heading “Related Party Transactions” of the Proxy Statement is incorporated herein by reference.
ITEM 14.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. SEC rules require that we disclose the conclusions of our CEO and CFO about the effectiveness of our disclosure controls and procedures.
The CEO/CFO evaluation of our disclosure controls and procedures included a review of the controls’ objectives and design, the controls’ implementation by the company and the effect of the controls on the information generated for use in this Annual Report. In the course of the evaluation, we sought to identify data errors, controls problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. Our disclosure controls and procedures are also evaluated on an ongoing basis by the following:
• employees in our internal audit department;
• other personnel in our finance organization;
• members of our internal disclosure committee;
• members of the audit committee of our Board of Directors; and
• our independent auditors in connection with their audit and review activities.
Among other matters, we sought in our evaluation to determine whether there were any “significant deficiencies” or “material weaknesses” in our disclosure controls and procedures, or whether we had identified any acts of fraud involving personnel who have a significant role in our disclosure controls and procedures. In the professional auditing literature, “significant deficiencies” are referred to as “reportable conditions,” which are control issues that could have a significant adverse effect on the ability to record, process, summarize and report financial data in the financial statements. A “material weakness” is defined in the auditing literature as a particularly serious reportable condition where the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements and not be detected within a timely period by employees in the normal course of performing their assigned functions.
Our management, including the CEO and CFO, does not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Based on the most recent evaluation, which was completed within 90 days prior to the filing of this Annual Report, our CEO and CFO believe that our disclosure controls and procedures are effective to ensure that material information relating to us and our consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared, and that our disclosure controls and procedures are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with GAAP.
Since the date of this most recent evaluation, 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.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents Filed as a Part of this Report
1. Consolidated Financial Statements and Report of Independent AuditorsSee Index on Page F-1
2. Exhibits
Ex.
FN
Description
Amended and Restated Articles of Incorporation of the Company
Amended and Restated Bylaws of the Company
Specimen of certificate representing shares of Common Stock
Indenture among the Operating Partnership, the Company and First Union National Bank of North Carolina dated as of December 1, 1996
Specimen of certificate representing 8 5/8% Series A Cumulative Redeemable Preferred Shares
(5)
Specimen of certificate representing 8% Series B Cumulative Redeemable Preferred Shares
(6)
Specimen of certificate representing 8% Series D Cumulative Redeemable Preferred Shares
Specimen of Depositary Receipt evidencing the Depositary Shares each representing 1/10 of an 8% Series D Cumulative Redeemable Preferred Share
Deposit Agreement, dated April 23, 1998, between the Company and First Union National Bank, as preferred share depositary
(7)
Rights Agreement, dated as of October 6, 1997, between the Company and First Union National Bank, as rights agent
(8)
Agreement to furnish certain instruments defining the rights of long-term debt holders
Amended and Restated Agreement of Limited Partnership of the Operating Partnership
10.2
Amendment to Amended and Restated Agreement of Limited Partnership of the Operating Partnership with respect to Series A Preferred Units
10.3
Amendment to Amended and Restated Agreement of Limited Partnership of the Operating Partnership with respect to Series B Preferred Units
Amendment to Amended and Restated Agreement of Limited Partnership of the Operating Partnership with respect to Series D Preferred Units
(9)
Amendment to Amended and Restated Agreement of Limited Partnership of the Operating Partnership with respect to certain rights of limited partners upon a change of control
10.6
(10)
Form of Registration Rights and Lockup Agreement among the Company and the Holders named therein, which agreement is signed by all Common Unit holders
10.7
(11)
Amended and Restated 1994 Stock Option Plan
1997 Performance Award Plan
10.9
(12)
Form of Executive Supplemental Employment Agreement between the Company and Named Executive Officers
10.10
(13)
Form of warrants to purchase Common Stock of the Company issued to John L. Turner, William T. Wilson III and John E. Reece II
10.11
(14)
Form of warrants to purchase Common Stock of the Company issued to W. Brian Reames, John W. Eakin and Thomas S. Smith
10.12
(15)
1999 Shareholder Value Plan
10.13
(16)
Credit Agreement among Highwoods Realty Limited Partnership, Highwoods Properties, Inc., the Subsidiaries named therein and the Lenders named therein, dated as of December 13, 2000
Schedule of subsidiaries of the Company
Consent of Ernst & Young LLP
99.1
Statement of Chief Executive Officer of Highwoods Properties Inc.
99.2
Statement of Chief Financial Officer of Highwoods Properties Inc.
______________
(1) Filed as part of the Company’s Current Report on Form 8-K dated September 25, 1997 and amended by articles supplementary filed as part of the Company’s Current Report on Form 8-K dated October 4, 1997 and articles supplementary filed as part of the Company’s Current Report on Form 8-K dated April 20, 1998, each of which is incorporated herein by reference.
(2) Filed as part of Registration Statement 33-76952 with the SEC and incorporated herein by reference.
(3) Filed as part of the Operating Partnership’s Current Report on Form 8-K dated December 2, 1996 and incorporated herein by reference.
(4) Filed as part of the Company’s Current Report on Form 8-K dated February 12, 1997 and incorporated herein by reference.
(5) Filed as part of the Company’s Current Report on Form 8-K dated September 25, 1997 and incorporated herein by reference.
(6) Filed as part of the Company’s Current Report on Form 8-K dated April 20, 1998 and incorporated herein by reference.
(7) Filed as part of the Company’s Current Report on Form 8-K dated October 4, 1997 and incorporated herein by reference.
(8) Filed as part of the Company’s Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference.
(9) Filed as part of the Operating Partnership’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference.
(10) Filed as part of the Company’s Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference.
(11) Filed as part of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
(12) Filed as part of the Company’s Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference.
(13) Filed as part of Registration Statement 33-88364 with the SEC and incorporated herein by reference.
(14) Filed as part of the Company’s Current Report on Form 8-K dated April 1, 1996 and incorporated herein by reference.
(15) Filed as part of the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference.
(16) Filed as part of the Company’s Current Report on Form 8-K dated December 14, 2000 and incorporated herein by reference.
The Company will provide copies of any exhibit, upon written request, at a cost of $.05 per page.
(b) Reports on Form 8-K
We filed a Current Report on Form 8-K, dated January 2, 2003, reporting under Items 5 and 7(c) certain matters related to WorldCom’s rejection of its lease at Highwoods Preserve in Tampa, Florida.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Raleigh, State of North Carolina, on March 19, 2003.
By:
/s/ RONALD P. GIBSON
Ronald P. Gibson, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Signature
Title
Date
/s/ O. TEMPLE SLOAN, JR.
Chairman of the Board of Directors
March 19, 2003
O. Temple Sloan, Jr.
President, Chief Executive Officer and Director
/s/ EDWARD J. FRITSCH
Executive Vice President, Chief Operating Officer, Secretary and Director
/s/ JOHN L. TURNER
Vice Chairman of the Board and Director
John L. Turner
/s/ GENE H. ANDERSON
Senior Vice President and Director
/s/ THOMAS W. ADLER
Director
Thomas W. Adler
/s/ KAY N. CALLISON
Kay N. Callison
/s/ WILLIAM E. GRAHAM, JR.
William E. Graham, Jr.
/s/ LAWRENCE S. KAPLAN
Lawrence S. Kaplan
/s/ L. GLENN ORR, JR.
L. Glenn Orr, Jr.
/s/ WILLARD H. SMITH, JR.
Willard H. Smith, Jr.
/s/ F. WILLIAM VANDIVER, JR.
F. William Vandiver, Jr.
/s/ CARMAN J. LIUZZO
Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) and Treasurer
45
CERTIFICATION
I, Ronald P. Gibson, certify that:
1. I have reviewed this annual report on Form 10-K of Highwoods Properties Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 Annual 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 annual 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 annual report (the “Evaluation Date”); and
(c) presented in this annual 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 annual 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: March 19, 2003
Ronald P. Gibson President and Chief Executive Officer
46
I, Carman J. Liuzzo, certify that:
3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;
(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 annual report is being prepared;
(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
Carman J. Liuzzo Vice President and Chief Financial Officer
47
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INDEX TO FINANCIAL STATEMENTS
Page
Highwoods Properties, Inc
Report of Independent Auditors
F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001
F-3
Consolidated Statements of Income for the Years Ended December 31, 2002, 2001 and 2000
F-4
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2002, 2001 and 2000
F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000
F-6
Notes to Consolidated Financial Statements
F-8
Schedule III – Real Estate and Accumulated Depreciation
F-41
All other schedules are omitted because they are not applicable, or because the required information is included in the consolidated financial statements or notes thereto.
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and StockholdersHighwoods Properties, Inc.
We have audited the accompanying consolidated balance sheets of Highwoods Properties, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Highwoods Properties, Inc. at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
In 2002, as discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.
/S/ ERNST & YOUNG LLP
Raleigh, North Carolina February 14, 2003
HIGHWOODS PROPERTIES, INC. Consolidated Balance Sheets ($ in thousands)
December 31,
Assets:
Real estate assets, at cost:
Land and improvements
397,091
405,641
Buildings and tenant improvements
2,870,037
2,858,661
Development in process
6,847
108,273
Land held for development
176,173
147,316
Furniture, fixtures and equipment
20,966
19,398
3,471,114
3,539,289
Less – accumulated depreciation
(462,228
(374,012
Property held for sale
124,058
197,920
Cash and cash equivalents
11,017
576
Restricted cash
8,582
5,685
Accounts receivable, net of allowance of $1,450 and $1,087, respectively
13,578
23,659
Advances to related parties
788
Notes receivable
31,057
43,761
Accrued straight-line rents receivable
48,777
49,078
Investment in unconsolidated affiliates
79,504
83,393
Other assets:
Deferred leasing costs
100,168
100,426
Deferred financing costs
26,120
26,121
Prepaid expenses and other
15,295
10,461
141,583
137,008
Less – accumulated amortization
(71,673
(58,859
Other assets, net
69,910
78,149
Liabilities and Stockholders’ Equity:
Mortgages and notes payable
Accounts payable, accrued expenses and other liabilities
120,614
120,235
1,649,334
1,839,465
188,563
203,181
Stockholders’ Equity:
Preferred stock, $.01 par value, 50,000,000 authorized shares;
8 5/8% Series A Cumulative Redeemable Preferred Shares (liquidation preference $1,000 per share), 104,945 shares issued and outstanding at December 31, 2002 and 2001
104,945
8% Series B Cumulative Redeemable Preferred Shares (liquidation preference $25 per share), 6,900,000 shares issued and outstanding at December 31, 2002 and 2001
172,500
8% Series D Cumulative Redeemable Preferred Shares (liquidation preference $250 per share), 400,000 shares issued and outstanding at December 31, 2002 and 2001
Common stock, $.01 par value, 200,000,000 authorized shares; 53,400,195 and 52,891,822 shares issued and outstanding at December 31, 2002 and 2001, respectively
534
529
Additional paid-in capital
1,390,043
1,376,546
Distributions in excess of net earnings
(197,647
(135,878
Accumulated other comprehensive loss
(9,204
(9,441
Deferred compensation – restricted stock
(3,699
(3,561
Total Stockholders’ Equity
1,557,472
1,605,640
Total Liabilities and Stockholders’ Equity
See accompanying notes to consolidated financial statements.
HIGHWOODS PROPERTIES, INC. Consolidated Statements of Income ($ in thousands, except per share amounts) For the Years Ended December 31, 2002, 2001 and 2000
143,414
144,685
150,829
109,134
104,777
108,595
110,527
106,782
111,107
24,576
21,390
21,841
407,855
386,325
396,966
13,650
24,491
19,032
8,063
3,863
5,353
11,470
(1,790
80,325
132,525
140,403
10,855
93,839
131,925
138,198
Income from discontinued operations
0.44
0.30
0.24
(0.01
(0.08
Weighted average common shares outstanding – basic
53,226
54,228
59,175
0.43
0.29
Weighted average common shares outstanding – diluted
53,485
54,571
59,347
HIGHWOODS PROPERTIES, INC. Consolidated Statements of Stockholders’ Equity ($ in thousands, except for number of common shares) For the Years Ended December 31, 2002, 2001 and 2000
Number of Common Shares
Common Stock
Series A Preferred
Series B Preferred
Series D Preferred
Additional Paid-In Capital
Deferred Compen sation
Accum. Other Compre- hensive Loss
Retained Earnings (Distributionsin Excess of Net Earnings)
Balance at December 31, 1999
60,918,613
609
125,000
1,572,031
(77,670
1,892,470
Issuance of Common Stock
81,733
749
Common Stock dividends
(133,446
Preferred Stock dividends
Issuance of restricted stock
2,557
(3,049
(491
Amortization of deferred compensation
561
Repurchase of Common Stock
(2,981,086
(29
(69,176
(69,205
Net Income
Balance at December 31, 2000
58,124,205
581
1,506,161
(2,488
(110,209
1,791,545
72,256
1,424
(125,380
84,661
(2,109
1,036
(5,389,300
(134,702
(134,754
Repurchase of Preferred Stock
(20,055
1,554
(18,501
Other comprehensive loss
Balance at December 31, 2001
52,891,822
249,297
5,786
5,788
Conversion of Common Units to Common Stock
257,121
7,471
7,474
(124,378
48,562
1,414
(1,414
1,276
(46,607
(1,174
Other comprehensive income
237
Balance at December 31, 2002
53,400,195
HIGHWOODS PROPERTIES, INC. Consolidated Statements of Cash Flows ($ in thousands) For the Years Ended December 31, 2002, 2001 and 2000
Operating activities:
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
108,418
100,455
102,630
Amortization of lease commissions
18,220
13,013
10,559
Amortization of accumulated other comprehensive loss
1,543
1,565
(8,063
(8,911
(3,863
(12,247
(16,172
(4,659
9,653
16,683
16,900
Transition loss upon adoption of SFAS 133
Loss on ineffective portion of derivative instruments
559
Discontinued operations
21,102
25,947
23,040
Changes in operating assets and liabilities:
Accounts receivable
10,088
(454
(1,156
Prepaid expenses and other assets
(7,731
(2,076
3,386
(3,344
(9,495
10,338
(2,121
Net cash provided by operating activities
Investing activities:
Additions to real estate assets
(130,870
(351,983
(423,245
Proceeds from disposition of real estate assets
302,205
161,389
729,945
Repayments from/(advances to) subsidiaries
27,570
(12,464
Distributions from unconsolidated affiliates
11,203
9,722
3,030
Investments in notes receivable
12,704
37,157
(15,557
Other investing activities
(443
(23,500
4,503
Net cash provided by/(used in) investing activities
Financing activities:
Distributions paid on common stock and common units
(141,176
(142,889
(151,890
Dividends paid on preferred stock
Repurchase of preferred stock
Net proceeds from the sale of common stock
Repurchase of common stock and common units
(4,832
(148,787
(101,813
Borrowings on revolving loans
211,500
594,000
546,000
Repayment of revolving loans
(382,500
(365,500
(775,000
Borrowings on mortgages and notes payable
51,737
76,707
218,162
Repayment of mortgages and notes payable
(94,613
(176,918
(168,260
Net change in deferred financing costs
(1,305
(1,010
(2,985
Net cash used in financing activities
Net increase/(decrease) in cash and cash equivalents
70,284
Cash and cash equivalents at beginning of the period
104,780
34,496
Cash and cash equivalents at end of the period
Supplemental disclosure of cash flow information:
Cash paid for interest
116,963
122,046
130,899
HIGHWOODS PROPERTIES, INC.Consolidated Statements of Cash Flows – Continued($ in thousands)For the Years Ended December 31, 2002, 2001 and 2000
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:
6,372
43,148
6,516
(56,055
353
48,054
42,466
6,556
(1,629
Liabilities:
23,366
3,922
18,508
73
41,874
3,995
Equity:
592
2,561
F-7
HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of the Company
Highwoods Properties, Inc. (the “Company”) is a self-administered and self-managed real estate investment trust (“REIT”) that operates in the southeastern and midwestern United States. The Company’s wholly-owned assets include: 493 in-service office, industrial and retail properties; 213 apartment units; 1,308 acres of undeveloped land suitable for future development; and an additional four 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, Highwoods Realty Limited Partnership (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership. At December 31, 2002, the Company owned 88.4% of the common partnership interests (“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 the Company’s Common Stock, $.01 par value (the “Common Stock”), or, at the Company’s option, one share of Common Stock.
Generally, the Operating Partnership is obligated to redeem each Common Unit at the request of the holder thereof for cash equal to the fair market value of one share of the Company’s Common Stock at the time of such redemption, provided that the Company at its option may elect to acquire any such Common Unit presented for redemption for cash or one share of Common Stock. When a Common Unit holder redeems a Common Unit for a share of Common Stock or cash, the minority interest will be reduced and the Company’s share in the Operating Partnership will be increased. The Common Units owned by the Company are not redeemable for cash.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and the Operating Partnership and its majority-owned affiliates. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
The Company has elected and expects to continue to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. Therefore, no provision has been made for income taxes related to REIT taxable income to be distributed to stockholders.
Minority interest represents Common Units in the Operating Partnership owned by various individuals and entities other than the Company. The Operating Partnership is the entity that owns substantially all of the Company’s properties and through which the Company, as the sole general partner, conducts substantially all of its operations. Per share information is calculated using the weighted average number of shares of Common Stock outstanding (including common share equivalents). In addition, minority interest includes equity of consolidated real estate partnerships which are owned by various individuals and entities other than the Company.
The extraordinary loss represents the payment of prepayment penalties and the write off of loan origination fees related to the early extinguishment of debt and is shown net of the minority interest’s share in the loss.
HIGHWOODS PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES — Continued
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”, the Company records 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, the Company periodically reviews these assets to determine whether its carrying amount will be recovered from their undiscounted future operating cash flows and the Company recognizes an impairment loss to the extent it believes the carrying amount is not recoverable. The Company’s estimates of the undiscounted future operating cash flows expected to be generated are based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, changes in market rental rates, and costs to operate each property. As these factors are difficult to predict and are subject to future events that may alter the Company’s assumptions, the undiscounted future operating cash flows estimated by the Company in its impairment analyses may not be achieved and the Company may be required to recognize future impairment losses on its properties.
Allowance for doubtful accounts. Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The Company’s receivable balance is comprised primarily of rents and operating cost recoveries due from tenants as well as accrued rental rate increases to be received over the life of the existing leases. The Company regularly evaluates the adequacy of our allowance for doubtful accounts considering such factors as the credit quality of its tenants, delinquency of payment, historical trends and current economic conditions. Actual results may differ from these estimates under different assumptions or conditions. If the Company’s assumptions regarding the collectibility of accounts receivables prove incorrect, the Company could experience write-offs of accounts receivable or accrued straight-line rents receivable in excess of its allowance for doubtful accounts.
Capitalized costs. Expenditures directly related to both the development of real estate assets and the leasing of properties are included in net real estate assets and are stated at cost in the consolidated balance sheets. The development expenditures include pre-construction costs essential to the development of properties, development and construction costs, interest costs, real estate taxes, salaries and other costs incurred during the period of development. The leasing expenditures include all general and administrative costs, including salaries incurred in connection with successfully securing leases on the properties. Estimated costs related to unsuccessful leases are expensed as incurred. If the Company’s 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, the Company is exposed to the effect of interest rate changes. The Company limits its exposure by following established risk management policies and procedures including the use of derivatives. To mitigate its exposure to unexpected changes in interest rates, derivatives are used primarily to hedge against rate movements on the Company’s related debt. The Company is required to recognize all derivatives as either assets or liabilities in the consolidated balance sheets and to measure those instruments at fair value. Changes in fair value will affect either stockholders’ equity or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes.
To determine the fair value of derivative instruments, the Company uses 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 models, 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.
F-9
Investments in joint ventures. The Company’s investments in unconsolidated affiliates consist of one corporation, nine limited liability companies, five limited partnerships and two general partnerships. The Company accounts for its investments in unconsolidated affiliates under the equity method of accounting as the Company exercises significant influence, but does not control these entities. The Company’s unconsolidated corporation is controlled by an unrelated third party that owns more than 50.0% of the outstanding voting stock. The Company has a 50.0% or less ownership interest in the unconsolidated limited liability companies and, under the terms of the various operating agreements, does not have any participating rights. The Company has a 50.0% or less ownership interest in the unconsolidated limited partnerships and general partnerships. Although the Company has an interest in two unconsolidated general partnerships and is the general partner in three of the unconsolidated limited partnerships, under the terms of the various partnership agreements, the Company does 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 the Company’s 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, the Company contributes real estate assets to an unconsolidated joint venture in exchange for a combination of cash and an equity interest in the venture. The Company records a partial gain on the contribution of the real estate assets to the extent of the third party investor’s interest and records a deferred gain to the extent of its continuing interest in the unconsolidated joint venture.
Real Estate Assets
All capitalizable costs related to the improvement or replacement of commercial real estate properties are capitalized. Depreciation is computed using the straight-line method over the estimated useful life of 40 years for buildings and improvements and five to seven years for furniture, fixtures and equipment. Tenant improvements are amortized over the life of the respective leases, using the straight-line method. Real estate assets are stated at the lower of cost or fair value, if impaired.
F-10
As of December 31, 2002, the Company had 2.3 million square feet of office properties and 277.6 acres of land under contract for sale in various transactions totaling $143.8 million. These real estate assets have a carrying value of $124.1 million and have been classified as assets held for sale in the accompanying financial statements.
Cash Equivalents
The Company considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Restricted Cash
Restricted cash includes security deposits for the Company’s commercial properties and construction-related escrows. In addition, the Company maintains escrow and reserve funds for debt service, real estate taxes and property insurance established pursuant to certain mortgage financing arrangements.
Income Taxes
The Company is a REIT for federal income tax purposes. A corporate REIT is a legal entity that holds real estate assets, and through distributions to stockholders, is permitted to reduce or avoid the payment of Federal income taxes at the corporate level. As of December 31, 2002, to maintain qualification as a REIT, the Company was required to distribute to stockholders at least 90.0% of REIT taxable income, excluding capital gains.
No provision has been made for federal income taxes because the Company qualified as a REIT, distributed the necessary amount of taxable income and, therefore, incurred no income tax expense during the period.
Concentration of Credit Risk
Management of the Company performs ongoing credit evaluations of its tenants. As of December 31, 2002, the wholly-owned properties (excluding apartment units) were leased to 2,564 tenants in 14 geographic locations. The Company’s tenants engage in a wide variety of businesses. There is no dependence upon any single tenant.
Stock Compensation
The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. As described in Note 12 included herein, the Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations in accounting for its stock options. During 2002, the Financial Accounting Standards Board issued SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”, which provides methods of transition to the fair value based method of accounting for stock-based employee compensation. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2002. The Company will elect the prospective method as defined by SFAS 148 in the first quarter of 2003.
Use of Estimates
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
F-11
Per SFAS 144, those long-lived assets which were sold during 2002 and resulted from disposal activities initiated prior to January 1, 2002 should be accounted for in accordance with SFAS 121 and APB 30. The Company adopted SFAS No. 144 in January of 2002. Income from discontinued operations, net of minority interest and the gain/(loss) on sale of discontinued operations, net of minority interest, for properties meeting the criteria in accordance with SFAS No. 144 are reflected in the consolidated statements of income as discontinued operations for all periods presented. See Note 10 included herein for further discussion on the Company’s discontinued operations.
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 an 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 beginning after May 15, 2002. The Company will adopt SFAS No. 145 in the first quarter of 2003. The Company does not anticipate that the adoption of this statement will have a material effect on its results of operations.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which addresses financial accounting and reporting for costs associated with exit or disposal activities. This statement nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. The standard is effective for disposal activities initiated after December 31, 2002. The Company will adopt SFAS No. 146 in the first quarter of 2003. The Company does not anticipate that the adoption of this statement will have a material effect on its results of operations.
In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which changes the accounting for, and disclosure of certain guarantees. Beginning with transactions entered into after December 31, 2002, certain guarantees are to be recorded at fair value, which is different from prior practice, under which a liability was recorded only when a loss was probable and reasonably estimable. In general, the change applies to contracts or indemnification agreements that contingently require the Company to make payments to a guaranteed third-party based on changes in underlying asset, liability, or an equity security of guaranteed party.
While the accounting provisions only apply for new transactions entered into after December 31, 2002, the Interpretation requires the Company to include, and the Company has included, new disclosures in these financial statements. The Company is assessing the impact of this interpretation on its accounting for guarantees.
F-12
2. INVESTMENTS IN UNCONSOLIDATED AFFILIATES — Continued
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”, which amends FASB No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2002. On January 1, 2003, the Company will adopt the fair value method of accounting for stock-based compensation provisions of Statement No. 123. In accordance with SFAS 148, the Company will apply the prospective method of accounting and will expense all future employee stock options (and similar awards) over the vesting period based on the fair value of the award on the date of grant. The Company does not anticipate that the adoption of this statement will have a material effect on its results of operations.
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities (“FIN 46”),” the primary objective of which is to provide guidance on the identification of entities for which control is achieved through means other than voting rights. (“variable interest entities” or “VIEs”) and to determine when and which business enterprise should consolidate the VIE (the “primary beneficiary”). This new model applies when either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without additional financial support. In addition, FIN 46 requires additional disclosures. The Company is assessing the impact of this interpretation on its accounting for investments in unconsolidated joint ventures.
Reclassifications
Certain amounts in the December 31, 2001 and 2000 Financial Statements have been reclassified to conform to the December 31, 2002 presentation and accounting for discontinued operations (see Note 10 included herein). These reclassifications had no material effect on net income or stockholders’ equity as previously reported.
2. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
During the past several years, the Company has formed various joint ventures with unrelated investors. The Company has retained minority equity interests ranging from 12.50% to 50.00% in these joint ventures. As required by GAAP, the Company has accounted for its joint venture activity using the equity method of accounting, as the Company does not control these joint ventures. As a result, the assets and liabilities of the Company’s joint ventures are not included on its balance sheet.
The following is a summary of the various joint ventures in which the Company has a minority equity interest, including the names of the unrelated investors, the value of the property contributed to the joint venture, the debt obtained by the joint venture, the cash proceeds received by the Company and the ownership percentage of the Company in each joint venture.
In connection with the Company’s merger with J.C. Nichols in July of 1998, the Company acquired a 49.0% interest in Board of Trade Investment Company, a 30.0% interest in Kessinger Hunter, LLC, and a 12.5% interest in 4600 Madison Associates, L.P. The Company is the sole and exclusive property manager of the Board of Trade Investment Company and the 4600 Madison Associates, L.P. joint ventures, for which it received $132,038, $123,202 and $124,396 in fees in 2002, 2001 and 2000, respectively. In addition, Kessinger Hunter, LLC is the sole and exclusive property manager, leasing and sales agent and provides certain construction related services for certain wholly-owned properties of the Company, and received $3.0 million, $5.8 million and $7.1 million for these related services from the Company in 2002, 2001 and 2000, respectively. During 2002, the Company decreased its ownership interest in Kessinger/Hunter, LLC to 26.5%. The Company has adopted the equity method of accounting for these joint ventures.
F-13
In addition, in connection with the Company’s merger with J.C. Nichols Company in July 1998, the Company succeeded to the interests of J.C. Nichols in a strategic alliance with R&R Investors, Ltd. pursuant to which R&R Investors manages and leases certain joint venture properties located in the Des Moines area. As a result of the merger, the Company acquired an ownership interest of 50.0% or more in a series of nine joint ventures with R&R Investors (the “Des Moines Joint Ventures”). Certain of these properties were previously included in the Company’s consolidated financial statements. On June 2, 1999, the Company agreed with R&R Investors to reorganize its respective ownership interests in the Des Moines Joint Ventures such that each would own a 50.0% interest. Accordingly, the Company has adopted the equity method of accounting for its investment in each of the Des Moines Joint Ventures as a result of such reorganization. The impact of the reorganization was immaterial to the consolidated financial statements of the Company.
On March 15, 1999, the Company closed a transaction with Schweiz-Deutschland-USA Dreilander Beteiligung Objekt DLF 98/29-Walker Fink-KG (“DLF”), pursuant to which the Company sold or contributed certain office properties valued at approximately $142.0 million to a newly created limited partnership (the “DLF I Joint Venture”). DLF contributed approximately $56.0 million for a 77.19% interest in the DLF I Joint Venture, and the DLF I Joint Venture borrowed approximately $71.0 million from third-party lenders. The Company retained the remaining 22.81% interest in the DLF I Joint Venture, received net cash proceeds of approximately $124.0 million and is the sole and exclusive property manager and leasing agent of the DLF I Joint Venture’s properties, for which the Company received fees of $862,006, $808,926 and $762,670 in 2002, 2001 and 2000, respectively. The Company has adopted the equity method of accounting for its investment in this joint venture.
On May 9, 2000, the Company closed a transaction with Dreilander-Fonds 97/26 and 99/32 (“DLF II”) pursuant to which the Company contributed five in-service office properties encompassing 570,000 rentable square feet and a 246,000-square-foot development project valued at approximately $110.0 million to a newly created limited partnership (the “DLF II Joint Venture”). DLF II contributed $24.0 million in cash for a 40.0% ownership interest in the DLF II Joint Venture and the DLF II Joint Venture borrowed approximately $50.0 million from a third-party lender. The Company initially retained the remaining 60.0% interest in the DLF II Joint Venture and received net cash proceeds of approximately $73.0 million. During 2001 and 2000, DLF II contributed an additional $10.7 million in cash to the DLF II Joint Venture. As a result, the Company decreased its ownership percentage to 42.93% as of December 31, 2001. The Company is the sole and exclusive property manager and leasing agent of the DLF II Joint Venture’s properties, for which the Company received fees of $530,932, $491,200 and $208,600 in 2002, 2001 and 2000, respectively. The Company has adopted the equity method of accounting for this joint venture.
On December 19, 2000, the Company formed five joint ventures with Denver-based Miller Global Properties, LLC (“Miller Global”). In the first joint venture, the Company sold or contributed 19 in-service office properties encompassing approximately 2.5 million rentable square feet valued at approximately $335.0 million to a newly created limited liability company. As part of the formation of the first joint venture, Miller Global contributed approximately $85.0 million in cash for an 80.0% ownership interest and the joint venture borrowed approximately $238.8 million from a third-party lender. The Company retained a 20.0% ownership interest and received net cash proceeds of approximately $307.0 million. During 2001, the Company contributed a 39,000 square feet development project to the first joint venture for $5.1 million. The joint venture borrowed an additional $3.7 million under its existing debt agreement with a third party and the Company retained a 20.0% ownership interest and received net cash proceeds of approximately $4.8 million. In the remaining four joint ventures, the Company contributed approximately $7.5 million of development land to various newly created limited liability companies and retained a 50.0% ownership interest. Three of these joint ventures have developed three properties encompassing 347,000 rentable square feet that costs approximately $50.4 million. The fourth joint venture is expected to develop one property encompassing 88,000 rentable square feet with a budgeted cost of approximately $10.8 million. The Company is the sole and exclusive developer of these properties, and received $34,997, $553,270 and $263,549 in development fees in 2002, 2001 and 2000, respectively. In addition, the Company is the sole and exclusive property manager and leasing agent for the properties in all of these joint ventures and received fees of $2.9 million, $1.5 million and $73,793 in 2002, 2001 and 2000, respectively. The Company has adopted the equity method of accounting for all of the joint ventures with Miller Global.
F-14
In connection with one of the joint ventures with Miller Global, the Company guaranteed Miller Global, which has an 80.0% interest in the joint venture, a minimum internal rate of return on $50.0 million of Miller Global’s equity. If the minimum internal rate of return is not achieved upon the sale of the assets or winding up of the joint venture, Miller Global would receive a disproportionately greater interest of the cash proceeds related to the assets subject to the internal rate of return guarantee. Based upon the current operating performance of the assets and the Company’s estimate of the residual value of the subject assets, the estimated internal rate of return for Miller Global with respect to those assets exceeds the minimum required return. As a result, the Company does not currently expect that its 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.
Additionally, during 1999 and 2001, the Company closed two transactions with Highwoods-Markel Associates, LLC and Concourse Center Associates, LLC pursuant to which the Company sold or contributed certain office properties to newly created limited partnerships. Unrelated investors contributed cash for a 50.0% ownership interest in the joint ventures. The Company retained the remaining 50.0% interest, received net cash proceeds and is the sole and exclusive property manager and leasing agent of the joint venture’s properties, for which the Company received fees of $109,775, $53,636 and $31,152 in 2002, 2001 and 2000, respectively. The Company has adopted the equity method of accounting for both of these joint ventures.
On June 14, 2002, the Company contributed $1.1 million cash to Plaza Colonnade, LLC, a newly formed limited liability company to construct a 285,000 square foot development property. The total project costs are estimated at $70.6 million. The Company has retained a 50.0% interest in this joint venture, and has adopted the equity method of accounting for this joint venture. On February 12, 2003, Plaza Colonnade, LLC signed a $61.3 million construction loan to fund the development of this property. The loan requires that the joint venture invest $9.3 million, $4.6 million of which will be the Company’s share. The Company and its partners in this joint venture have each guaranteed 50.0% of the loan. The loan repayment guarantees are reduced upon the project reaching certain predetermined criteria. In addition, the guarantees are reduced to 25.0% of the loan balance. In addition to the construction loan described above, the partners have provided collectively $12.0 million in letters of credit, $6.0 million by the Company and $6.0 million by its partner. During construction the joint venture is required to have in place the aforementioned letters of credit.
On June 26, 2002, the Company acquired its joint venture partner’s interest in MG-HIW Rocky Point, LLC, which owned Harborview Plaza, a 205,000 rentable square foot office property, to bring our ownership interest in that entity to 100.0%. At that time, the Company consolidated the assets and liabilities, and recorded income and expenses on a consolidated basis.
On September 11, 2002, the Company contributed Harborview Plaza to SF-HIW Harborview Plaza, LP, a newly formed joint venture with a different partner, in exchange for a 20.0% limited partnership interest and $12.1 million in cash. The Company is the sole and exclusive property manager and leasing agent of this joint venture’s property, for which it received fees of $60,794 in 2002. The assets, liabilities and net income from the SF-HIW Harborview Plaza, LP are included in the table below.
F-15
The following tables set forth information regarding the Company’s joint venture activity as recorded on the joint venture’s books at December 31, 2002 and 2001 ($ in thousands):
Board of Trade Investment Company
Dallas County Partners (1)
Dallas County Partners II (1)
Fountain Three (1)
RRHWoods, LLC (1)
Schweiz-Deutschland-USA DreilanderBeteiligung Objekt DLF 98/29-Walker Fink-KG
0141,147
(1) Des Moines joint ventures.
(2) The Company decreased its ownership percentage from 30.00% at December 31, 2001 to 26.50% at December 31, 2002.
(3) Amount represents total draws at December 31, 2002 on a construction loan made to this joint venture by an affiliate of the Company with an interest rate of LIBOR plus 200 basis points due July 2003.
(4) $2.7 million of this debt has been guaranteed by the Company subject to a prorata indemnity from the Company’s joint venture partner.
(5) On February 12, 2003, Plaza Colonnade, LLC signed a $61.3 million construction loan to fund the development of this property. The loan requires that the joint venture invest $9.3 million, $4.6 million of which will be the Company’s share. The Company and its partners in this joint venture have each guaranteed 50.0% of the loan.
F-16
HIGHWOODS PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2. INVESTMENTS IN UNCONSOLIDATEDAFFILIATES — Continued
DreilanderBeteiligung Objekt DLF 98/29- Walker Fink-KG
(2) Includes $617,297 loss on early extinguishment of debt.
(3) The Company decreased its ownership percentage from 30.00% at December 31, 2001 to 26.50% at December 31, 2002.
F-17
3. MORTGAGES AND NOTES PAYABLE
The Company’s mortgages and notes payable consisted of the following at December 31, 2002 and 2001:
Mortgage and loans payable:
9.0% mortgage loans due 2005
36,089
36,929
8.1% mortgage loans due 2005
28,004
28,693
8.2% mortgage loans due 2007
68,442
69,868
7.8% mortgage loans due 2009
89,946
91,449
7.9% mortgage loans due 2009
90,008
91,491
7.8% mortgage loans due 2010
142,841
134,966
4.5% to 9.4% mortgage loans due between 2002 and 2022
60,081
82,747
Variable rate mortgage loan due 2007
Secured Revolving Loan due 2003
519,720
540,065
Unsecured indebtedness:
6.75% notes due 2003
8.0% notes due 2003
146,500
7.0% notes due 2006
7.125% notes due 2008
8.125% notes due 2009
50,000
MOPPRS due 2013 (1)
Put Option Notes due 2011 (2)
7.5% notes due 2018
Term loan due 2002
19,165
Term loan due 2005
Unsecured Revolving Loan due 2003
228,500
1,009,000
1,179,165
(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, $100.0 million of Exercisable Put Option Notes due June 15, 2011 (the “Put Option Notes”), issued by the Operating Partnership. The Put Option Notes bear an interest rate of 7.19% from the date of issuance through June 15, 2004. After June 15, 2004, the interest rate to maturity on such Put Option Notes will be 6.39% plus the applicable spread determined as of June 15, 2004. In connection with the initial issuance of the Put Option Notes, a counterparty was granted an option to purchase the Put Option Notes from the trust on June 15, 2004 at 100.0% of the principal amount. If the counterparty elects not to exercise this option, the Operating Partnership would be required to repurchase the Put Option Notes from the trust on June 15, 2004 at 100.0% of the principal amount plus accrued and unpaid interest.
F-18
3. MORTGAGES AND NOTES PAYABLE — Continued
The following table sets forth the principal payments due on the Company’s long-term debt as of December 31, 2002 ($ in thousands):
515,411
10,439
13,094
77,747
15,450
75,251
323,430
1,446,911
256,939
125,450
898,430
314,685
13,359
98,026
125,742
78,478
The mortgage and loans payable and the secured revolving loan were secured by real estate assets with an aggregate carrying value of $905.1 million at December 31, 2002.
The Company’s fixed rate unsecured notes of $931.5 million bear interest rates from 6.8% to 8.1% with interest payable semi-annually in arrears. The premium and discount related to the issuance of the unsecured notes is being amortized over the life of the respective notes as an adjustment to interest expense. All of the unsecured notes, except for the MOPRRS, which were retired on February 3, 2003, and Put Option Notes, are redeemable at any time at the option of the Company, subject to certain conditions including the payment of make-whole amounts.
F-19
The Company currently has a $300.0 million unsecured revolving loan (with $57.5 million outstanding at December 31, 2002) that matures in December 2003. The Company’s unsecured revolving loan also includes a $150.0 million competitive sub-facility. Depending upon the corporate credit ratings assigned to the Company from time to time by the various rating agencies, the Company’s unsecured revolving loan bears variable rate interest at a spread above LIBOR ranging from 0.70% to 1.55% and the Company’s secured revolving loan bears variable rate interest at a spread above LIBOR ranging from 0.55% to 1.50%. The Company currently has a credit rating of BBB- assigned by Standard & Poor’s, a credit rating of BBB- assigned by Fitch Inc. and a credit rating of Baa3 assigned by Moody’s Investor Service. As a result, interest currently accrues on borrowings under the Company’s unsecured revolving loan at an average rate of LIBOR plus 95 basis points. In addition, the Company is currently required to pay an annual facility fee equal to .20% of the total commitment on the unsecured revolving loan.
The terms of each of the Company’s revolving loans and the indenture that governs the Operating Partnership’s outstanding unsecured notes require the Company to comply with various operating and financial covenants and performance ratios. The Company is currently in compliance with all such requirements.
Interest Rate Hedge Contracts
To meet in part its long-term liquidity requirements, the Company borrows funds at a combination of fixed and variable rates. Borrowings under the two revolving loans bear interest at variable rates. The Company’s long-term debt, which consists of secured and unsecured long-term financings and the issuance of unsecured debt securities, typically bears interest at fixed rates. In addition, the Company has assumed fixed rate and variable rate debt in connection with acquiring properties. The Company’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower it’s overall borrowing costs. To achieve these objectives, from time to time the Company enters into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate its interest rate risk with respect to various debt instruments. The Company does not hold or issue these derivative contracts for trading or speculative purposes.
The interest rate on all of the Company’s variable rate debt is currently adjusted at one to three month intervals, subject to settlements under these contracts. Net payments/(receipts) made to counterparties under interest rate hedge contracts were $415,051, $1,003,159 and $(206,894) in 2002, 2001 and 2000, respectively, and were recorded as increases/(decreases) to interest expense.
In addition, the Company is exposed to certain losses in the event of non-performance by the counterparty under the interest rate hedge contract. The Company expects the counterparty, which is a major financial institution, to perform fully under the contract. However, if the counterparty was to default on its obligations under the interest rate hedge contract, the Company could be required to pay the full rates on its debt, even if such rates were in excess of the rate in the contract.
Other Information
Total interest capitalized was approximately $7.0 million, $16.9 million and $23.7 million in 2002, 2001 and 2000, respectively.
F-20
HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. EMPLOYEE BENEFIT PLANS
Management Compensation Program
The Company’s executive officers participate in an annual cash incentive bonus program whereby they are eligible for cash bonuses based on a percentage of their annual base salary as of the prior December. Each executive’s target level bonus is determined by competitive analysis and the executive’s ability to influence overall performance of the Company and, assuming certain levels of the Company’s performance, ranges from 40.0% to 85.0% of base salary depending on position in the Company. The eligible bonus percentage for each executive is determined by a weighted average of the Company’s actual performance versus its annual plan using the following measures: return on invested capital; growth in funds from operations (“FFO”) per share; property level cash flow as a percentage of plan; general and administrative expenses as a percentage of revenue; and growth in same store net operating income. To the extent this weighted average is less than or exceeds the Company’s targeted performance level, the bonus percentage paid is proportionally reduced or increased on a predetermined scale. Depending on the Company’s performance, annual incentive bonuses could range from zero to 200.0% of an executive’s target level bonus. Bonuses are accrued in the year earned and are included in accrued expenses in the Consolidated Balance Sheets.
On January 1, 1999, the Company established an executive compensation program which allows executive officers to participate in a long term incentive plan which includes annual grants of stock options, restricted shares and grants of units in the Shareholder Value Plan. The stock options vest ratably over four years.
The restricted shares vest 50.0% after three years and 50.0% after five years. The restricted share awards are recorded at market value on the date of grant as unearned compensation expense and amortized over the restriction periods. Generally, recipients are eligible to receive dividends on restricted stock issued. Restricted stock and annual expense information is as follows:
Restricted shares outstanding at January 1, 2002
189,606
Number of restricted shares awarded
78,969
Restricted shares repurchased or cancelled
(30,407
Restricted shares outstanding at December 31, 2002
238,168
Annual expense, net
1,276,000
Average fair value per share at date of grant
24.90
The Shareholder Value Plan rewards the executive officers of the Company when the total shareholder returns measured by increases in the market value of the Common Stock plus the dividends on those shares exceed a comparable index of the Company’s peers over a three year period. The payout for this program is determined by the Company’s percent change in shareholder return compared to the composite index of its peer group. If the Company’s performance is not at least 100.0% of the peer group index, no payout is made. To the extent performance exceeds the peer group, the payout increases. A new three year plan cycle begins each year under this program.
The Company established a deferred compensation plan pursuant to which various executive officers could elect to defer a portion of the compensation that would otherwise be paid to the executive officer for investment in units of phantom stock or other investments unrelated to the Company’s securities. At the end of each calendar quarter, any executive officer that elects to defer compensation in phantom stock is credited with units of phantom stock at a 15.0% discount. The units of phantom stock accrue dividends in an amount equal to the dividends paid on the Company’s common stock. If the executive officer leaves Highwoods employ for any reason (other than death, disability, normal retirement or voluntary termination by Highwoods) within two years after the end of the year in which such officer has deferred compensation, such officer will incur a penalty. Over the two-year vesting period, the Company records compensation expense equal to the 15.0% discount, the accrued dividends and any changes (increase or decrease) in the market value of the Company’s common stock from the date of the deferral.
F-21
4. EMPLOYEE BENEFIT PLANS — Continued
401(k) Savings Plan
The Company has a 401(k) savings plan covering substantially all employees who meet certain age and employment criteria. The Company matches the first 6.0% of compensation deferred at the rate of 75.0% of employee contributions. During 2002, 2001 and 2000, the Company contributed $942,111, $648,509 and $955,303, respectively, to the 401(k) savings plan. Administrative expenses of the plan are paid by the Company.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan for all active employees. At the end of each three-month offering period, each participant’s account balance is applied to acquire shares of Common Stock at a cost that is calculated at 85.0% of the lower of the average closing price on the New York Stock Exchange on the five consecutive days preceding the first day of the quarter or the five days preceding the last day of the quarter. A participant may contribute up to 25.0% of their pay. Employees purchased 47,488 and 40,935 shares of Common Stock under the Employee Stock Purchase Plan during the years ended December 31, 2002 and 2001, respectively.
5. RENTAL INCOME
The Company’s real estate assets are leased to tenants under operating leases, substantially all of which expire over the next 10 years. The minimum rental amounts under the leases are generally either subject to scheduled fixed increases or adjustments based on the Consumer Price Index. Generally, the leases also require that the tenants reimburse the Company for increases in certain costs above the base year costs.
Expected future minimum rents to be received over the next five years and thereafter from tenants for leases in effect at December 31, 2002, are as follows ($ in thousands):
384,588
335,923
278,308
219,865
172,690
464,051
1,855,425
Expected future minimum rents have been reduced as a result of the rejection by WorldCom of two leases encompassing 819,653 square feet and the rejection by USAirways of two leases encompassing 119,013 square feet.
6. RELATED PARTY TRANSACTIONS
On December 8, 1998, the Company purchased a portion of the Bluegrass Valley office development project from a limited liability company controlled by an executive officer and director of the Company for approximately $2.5 million. On July 16, 1999, the Company purchased development land and an option to purchase other development land in the Bluegrass Valley office development project from the same limited liability company controlled by the same executive officer and director of the Company for approximately $4.6 million in Common Units. On October 31, 2002, the Company exercised its option to purchase the additional development land in a staged takedown, and acquired 30.6 acres of the optioned property from the same limited liability company for $4.6 million. As part of this transaction, the Company also acquired 23.5 acres of other development land in the Bluegrass Valley office development project for $2.6 million. On January 17, 2003, the Company acquired 23.46 acres of the formerly optioned development land from the same limited liability company for $2.3 million. The Company believes that each purchase price did not exceed market value.
F-22
During 2000, the Company sold certain properties encompassing 2.0 million square feet to an entity controlled by a former executive officer and director for approximately $169.0 million, consisting of cash, shares of Common Stock, Common Units and the waiver and/or termination of certain outstanding obligations existing under various agreements between the Company and such former executive officer and director.
The Company advanced $787,746 to an officer and director related to certain expenses paid by the Company on behalf of the officer and director. During 2002, this advance, along with accrued interest, was repaid by the officer and director.
During 2000, in connection with the formation of the MG-HIW Peachtree Corners III, LLC, a construction loan was made by an affiliate of the Company to this joint venture. Interest accrues at a rate of LIBOR plus 200 basis points and the loan is due July 2003. At December 31, 2002, $2.5 million was outstanding on this loan.
7. STOCKHOLDERS’ EQUITY
Common Stock Distributions
Distributions paid on Common Stock were $2.34, $2.31 and $2.25 per share for the years ended December 31, 2002, 2001 and 2000, respectively.
For federal income tax purposes, the following table summarizes the estimated taxability of distributions paid:
Per share:
Ordinary income
1.26
1.81
1.67
Capital gains
.33
.58
Return of capital
0.53
.17
The Company’s tax returns for the year ended December 31, 2002 have not been filed, and the taxability information for 2002 is based upon the best available data. The Company’s tax returns have not been examined by the IRS, and therefore the taxability of distributions is subject to change.
As of December 31, 2002, the tax basis of the Company’s assets was $2.6 billion.
On January 28, 2003, the Board of Directors declared a Common Stock distribution of $0.585 per share payable on February 24, 2003, to stockholders of record on February 17, 2003.
F-23
7. STOCKHOLDERS’ EQUITY — Continued
Preferred Stock
On February 12, 1997, the Company issued 125,000 8 5/8% Series A Cumulative Redeemable Preferred Shares (the “Series A Preferred Shares”). The Series A Preferred Shares are non-voting and have a liquidation preference of $1,000 per share for an aggregate liquidation preference of $125.0 million plus accrued and unpaid dividends. The net proceeds (after underwriting commission and other offering costs) of the Series A Preferred Shares issued were $121.8 million. Holders of the Series A Preferred Shares are entitled to receive, when, as and if declared by the Company’s Board of Directors, out of funds legally available for payment of distributions, cumulative preferential cash distributions at a rate of 8 5/8% of the liquidation preference per annum (equivalent to $86.25 per share). On or after February 12, 2027, the Series A Preferred Shares may be redeemed for cash at the option of the Company. The redemption price (other than the portion thereof consisting of accrued and unpaid distributions) is payable solely out of the sale proceeds of other capital shares of the Company, which may include shares of other series of preferred stock. Of the $86.25 distribution paid per Series A Preferred Share in 2002, $60.02 will be taxed as ordinary income and $26.23 will be taxed as capital gain. On June 19, 2001, the Company repurchased in a privately negotiated transaction 20,055 of these shares at $922.50 per share, for a total purchase price of $18.5 million. For each Series A Preferred Share repurchased by the Company, one equivalent Series A Preferred Unit was retired.
On September 25, 1997, the Company issued 6,900,000 8% Series B Cumulative Redeemable Preferred Shares (the “Series B Preferred Shares”). The Series B Preferred Shares are non-voting and have a liquidation preference of $25 per share for an aggregate liquidation preference of $172.5 million plus accrued and unpaid dividends. The net proceeds (after underwriting commission and other offering costs) of the Series B Preferred Shares issued were $166.3 million. Holders of the Series B Preferred Shares are entitled to receive, when, as and if declared by the Company’s Board of Directors, out of funds legally available for payment of distributions, cumulative preferential cash distributions at a rate of 8.0% of the liquidation preference per annum (equivalent to $2.00 per share). On or after September 25, 2002, the Series B Preferred Shares may be redeemed for cash at the option of the Company. The redemption price (other than the portion thereof consisting of accrued and unpaid distributions) is payable solely out of the sale proceeds of other capital shares of the Company, which may include shares of other series of preferred stock. Of the $2.00 distribution paid per Series B Preferred Share in 2002, $1.39 will be taxed as ordinary income and $0.61 will be taxed as capital gain.
On April 23, 1998, the Company issued 4,000,000 depositary shares (the “Series D Depositary Shares”), each representing a 1/10 fractional interest in an 8% Series D Cumulative Redeemable Preferred Share (the “Series D Preferred Shares”). The Series D Preferred Shares are non-voting and have a liquidation preference of $250 per share for an aggregate liquidation preference of $100 million plus accrued and unpaid dividends. The net proceeds (after underwriting commission and other offering costs) of the Series D Preferred Shares issued were $96.8 million. Holders of Series D Preferred Shares are entitled to receive, when, as and if declared by the Company’s Board of Directors, out of funds legally available for payment of distributions, cumulative preferential cash distributions at a rate of 8.0% of the liquidation preference per annum (equivalent to $20.00 per share). On or after April 23, 2003, the Series D Preferred Shares may be redeemed for cash at the option of the Company. The redemption price (other than the portion thereof consisting of accrued and unpaid distributions) is payable solely out of the sale proceeds of other capital shares of the Company, which may include shares of other series of preferred stock. Of the $20.00 distribution paid per Series D Preferred Share in 2002, $13.91 will be taxed as ordinary income and $6.09 will be taxed as capital gain.
F-24
Shareholder Rights Plan
On October 4, 1997, the Board declared a dividend on one preferred share purchase right (“Right”) for each outstanding share of Common Stock to be distributed to all holders of record of the Common Stock on October 16, 1997. The Rights attach to shares of Common Stock subsequently issued. Each Right entitles the registered holder to purchase one-hundredth of a participating preferred share for an exercise price of $140.00 per one-hundredth of a participating preferred share, subject to adjustment as provided in the rights agreement. The Rights will generally be exercisable only if a person or group acquires 15% or more of the Common Stock or announces a tender offer for 15% or more of the Common Stock. The Rights will expire on October 6, 2007, unless the expiration date of the Rights is extended, and the Rights are subject to redemption at a price of $0.01 per Right under certain circumstances.
Dividend Reinvestment Plan
The Company has instituted a Dividend Reinvestment and Stock Purchase Plan under which holders of Common Stock may elect to automatically reinvest their distributions in additional shares of Common Stock and may make optional cash payments for additional shares of Common Stock. The Company may issue additional shares of Common Stock or repurchase Common Stock in the open market for purposes of financing its obligations under the Dividend Reinvestment and Stock Purchase Plan.
Stock Repurchases
During 2002, the Company repurchased a total of 194,790 common partnership units at a weighted average price of $24.79 per unit. Since commencement of its initial share repurchase program in December 1999, the Company has repurchased 11.6 million share of common stock and common units at a weighted average price of $24.19 per share/unit for a total purchase price of $280.7 million. On April 25, 2001, the Company 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. At December 31, 2002, the Company had 3.4 million shares/units remaining under our currently authorized additional 5.0 million share/unit repurchase program.
8. DERIVATIVE FINANCIAL INSTRUMENTS
SFAS 133 requires the Company 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.
The Company’s 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, the Company enters into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate its interest rate risk with respect to various debt instruments. The Company does not hold these derivatives for trading or speculative purposes.
F-25
8. DERIVATIVE FINANCIAL INSTRUMENTS — Continued
On the date that the Company enters into a derivative contract, the Company designates 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), (2) a hedge of changes in the fair value of an asset or a liability attributable to a particular risk (a “fair value” hedge), or (3) 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. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. Changes in the fair value of non-hedging instruments are reported in current-period earnings.
The Company formally documents all relationships between hedging instruments and hedged items, as well as its 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. The Company also assesses and documents, 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 the Company determines that a derivative is not (or has ceased to be) highly effective as a hedge, the Company discontinues hedge accounting prospectively.
During 2002, the Company had an interest rate swap mature, resulting in a debit to interest rate derivative liability and an offsetting credit to AOCL of $411,000. In addition, during 2002, the Company entered into and terminated two $24.0 million treasury lock agreements related to an anticipated fixed rate financing with two financial counterparties, which effectively lock the treasury rate at 3.8%. These treasury lock agreements are designated as cashflow hedges and the effective portion of the cumulative loss on these derivative instruments was $1.7 million at December 31, 2002 and is being reported as a component of AOCL in stockholders’ equity. 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). The Company expects that the portion of the cumulative loss recorded in AOCL at December 31, 2002 associated with these derivative instruments which will be recognized within the next 12 months will be approximately $277,867.
At December 31, 2002, approximately $7.5 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. The Company expects that the portion of the cumulative loss recorded in AOCL at December 31, 2002 associated with these derivative instruments, which will be recognized within the next 12 months, will be approximately $1.6 million.
9. ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
Other comprehensive income/(loss) represents net income plus the results of certain non-stockholders’ equity changes not reflected in the Consolidated Statements of Income. The components of other comprehensive income/(loss) are as follows ($ in thousands):
Accumulated other comprehensive income/(loss):
Unrealized derivative losses on cashflow hedges
(1,306
(411
Reclassification of past hedging relationships
(10,597
Amortization of past hedging relationships
1,567
Total other comprehensive income/(loss)
Total comprehensive income
93,698
121,770
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10. DISCONTINUED OPERATIONS AND THE IMPAIRMENT OF LONG-LIVED ASSETS
Per SFAS 144, those long-lived assets which were sold during 2002 and resulted from disposal activities initiated prior to January 1, 2002 should be accounted for in accordance with SFAS 121 and APB 30. During 2002, the Company sold one property which resulted from disposal activities initiated prior to January 1, 2002, and the gain realized on the sale is appropriately included in the gain/(loss) on disposition of depreciable assets in the Company’s consolidated statements of income.
Below represents the net operating results and net carrying value of 1.9 million square feet of property sold during 2002 and 2.3 million square feet of property, 92 apartment units and 115.0 acres of revenue-producing land held for sale at December 31, 2002. These were a result of disposal activities that were initiated subsequent to the effective date of SFAS 144 and are classified as discontinued operations in the Company’s consolidated statements of income ($ in thousands):
32,428
33,721
Rental operating expenses
9,407
10,271
8,961
1,919
1,719
1,720
Income before gain on sale of discontinued operations and minority interest
13,963
18,348
16,786
Minority interest - income from discontinued operations
(1,651
(2,265
(2,091
Gain on sale of discontinued operations
12,271
Minority interest - gain on sale of discontinued operations
(1,416
Total discontinued operations
Net carrying value
106,953
246,847
250,739
In addition, SFAS 144 requires that a long-lived asset classified as held for sale be measured at the lower of the carrying value or fair value less cost to sell. At December 31, 2002, the Company has determined that the carrying value of one office property held for sale is less than its fair value less cost to sell and has recognized a $851,166 impairment loss, which is included in gain on sale of discontinued operations in the consolidated statements of income for the year ended December 31, 2002.
F-27
10. DISCONTINUED OPERATIONS AND THE IMPAIRMENT OF LONG-LIVED ASSETS — Continued
SFAS 144 also requires that the carrying value of a long-lived asset classified as held and used be compared to the sum of its estimated future undiscounted cash flows. If the carrying value is greater than the sum of its undiscounted future cash flows, an impairment loss should be recognized. At December 31, 2002, the Company has recognized a $9.1 million impairment loss related to one office property that will be partially demolished and redeveloped into a class A suburban office property and whereby the carrying value exceeded the sum of the property’s undiscounted future cash flows. This impairment loss is included in gain/(loss) on disposition of depreciable assets in the consolidated statements of income for the year ended December 31, 2002.
11. EARNINGS PER SHARE
FASB Statement No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is computed using the weighted average number of shares of Common Stock and the dilutive effect of options, warrants and convertible securities outstanding, using the “treasury stock” method. Earnings per share data is required for all periods for which an income statement or summary of earnings is presented, including summaries outside the basic financial statements. All earnings per share amounts for all periods presented have, where appropriate, been restated to conform to the FASB Statement 128 requirements.
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11. EARNINGS PER SHARE — Continued
The following table sets forth the computation of basic and diluted earnings per share:
($ in thousands, except per unit amounts)
Numerator:
Non-convertible preferred stock dividends (1)
General partner’s portion of extraordinary item
Numerator for basic earnings per share — income available to common stockholders
Effect of dilutive securities:
Minority interest portion of extraordinary item
Numerator for diluted earnings per share – net income available to common stockholders – after assumed conversions
Denominator:
Denominator for basic earnings per share — weighted-average shares
Employee stock options (1)
254
337
162
Warrants (1)
Common Units converted
Dilutive potential common shares
259
343
172
Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversions
Basic earnings per share
Diluted earnings per share
(1) For additional disclosures regarding outstanding preferred stock, the employee stock options and the warrants, see Notes 4, 7 and 12 included herein.
(2) 7.1 million Common Units and the related $12.7 million in minority interest, net of $45,000 of the minority interest’s portion of the extraordinary item, were excluded from the dilutive earnings per share calculation due to the anti-dilutive effect.
(3) 7.6 million Common Units and the related $18.9 million in minority interest, net of $88,000 of the minority interest’s portion of the extraordinary item, were excluded from the dilutive earnings per share calculation due to the anti-dilutive effect.
(4) 8.4 million Common Units and the related $19.0 million in minority interest, net of $584,000 of the minority interest’s portion of the extraordinary item, were excluded from the dilutive earnings per share calculation due to the anti-dilutive effect.
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The number of potentially convertible shares of common stock related to warrants and stock options are as follows:
Outstanding warrants
843,035
Outstanding stock options
3,672,245
3,854,624
Possible future issuance under stock option plan
1,410,988
1,776,587
5,926,268
6,474,246
As of December 31, 2002, the Company had 146,599,805 common shares available to be issued.
12. STOCK OPTIONS AND WARRANTS
As of December 31, 2002, 6.0 million shares of the Company’s authorized Common Stock were reserved for issuance under the Amended and Restated 1994 Stock Option Plan. Stock options granted under this plan generally vest over a four- or five-year period beginning with the date of grant.
In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, (“SFAS 123”). SFAS 123 recommends the use of a fair value based method of accounting for an employee stock option whereby compensation cost is measured at the grant date on the fair value of the award and is recognized over the service period (generally the vesting period of the award). However, SFAS 123 specifically allows an entity to continue to measure compensation cost under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) so long as pro forma disclosures of net income and earnings per share are made as if SFAS 123 had been adopted. The Company has elected to follow APB 25 and related interpretations in accounting for its employee stock options.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”, which amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2002. On January 1, 2003, the Company will adopt the fair value method of accounting for stock-based compensation provisions of Statement No. 123. The Company will apply the prospective method of accounting and will expense all future employee stock options (and similar awards) over the vesting period based on the fair value of the award on the date of grant. The Company does not anticipate that the adoption of this statement will have a material impact on its results of operations.
Under SFAS 123, a public entity must estimate the fair value of a stock option by using an option-pricing model that takes into account as of the grant date the exercise price and expected life of the options, the current price of the underlying stock and its expected volatility, expected dividends on the stock, and the risk-free interest rate for the expected term of the option. SFAS 123 provides examples of possible pricing models and includes the Black-Scholes pricing model, which the Company used to develop its pro forma disclosures. However, as previously noted, the Company does not believe that such models provide a reliable single measure of the fair value of employee stock options. Furthermore, the Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, rather than for use in estimating the fair value of employee stock options subject to vesting and transferability restrictions.
F-30
12. STOCK OPTIONS AND WARRANTS — Continued
Because SFAS 123 is applicable only to options granted subsequent to December 31, 1994, only options granted subsequent to that date were valued using this Black-Scholes model. The fair value of the options granted in 2002 was estimated at the dates of the grant using the following weighted average assumptions: risk-free interest rates ranging between 3.64% and 4.06%, dividend yield of 8.70%, expected volatility of 22.72% and a weighted average expected life of the options of four years. The fair value of the options granted in 2001 was estimated at the dates of the grant using the following weighted average assumptions: risk-free interest rates ranging between 5.76% and 6.11%, dividend yield of 9.00%, expected volatility of 17.20% and a weighted average expected life of the options of four years. The fair value of the options granted in 2000 was estimated at the dates of grant using the following weighted average assumptions: risk-free interest rates ranging between 5.78% and 6.67%, dividend yield of 10.91%, expected volatility of 21.50% and a weighted average expected life of the options of four years. Had the compensation cost for the Company’s stock option plans been determined based on the fair value at the dates of grant for awards in 2002, 2001 and 2000 consistent with the provisions of SFAS 123, the Company’s net income and net income per share would have decreased to the pro forma amounts as indicated:
($ in thousands, except per share amounts)
Net income available for common shareholders — as reported
Net income available for common shareholders — pro forma
61,744
97,396
98,468
Net income per share — basic (as reported)
Net income per share — diluted (as reported)
Net income per share — basic (pro forma)
1.16
1.80
1.66
Net income per share — diluted (pro forma)
1.15
1.79
F-31
HIGHWOODS PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes information about employees’ and Board of Directors’ stock options outstanding at December 31, 2002, 2001 and 2000:
Options Outstanding
Number of Shares
Weighted Average ExercisePrice
Balances at December 31, 1999
4,399,434
28.01
Options granted
1,050,204
20.96
Options canceled
(2,072,453
32.17
Options exercised
(103,527
16.87
Balances at December 31, 2000
3,273,658
23.06
741,883
25.02
(119,123
26.98
(41,794
18.27
Balances at December 31, 2001
23.38
570,338
26.96
(204,739
25.68
(547,978
21.71
Balances at December 31, 2002
24.14
Options Exercisable
December 31, 2000
1,242,629
24.45
1,712,626
23.76
1,729,325
24.04
Exercise prices for options outstanding as of December 31, 2002 ranged from $17.03 to $31.18. The weighted average remaining contractual life of those options is 6.7 years. Using the Black-Scholes options valuation model, the weighted average fair value of options granted during 2002, 2001 and 2000 was $0.72, $1.11 and $0.90, respectively.
Warrants
In connection with various acquisitions in 1995, 1996 and 1997, the Company issued warrants to purchase shares of Common Stock.
The following table sets forth information regarding warrants outstanding as of December 31, 2002:
Date of Issuance
Number ofWarrants
ExercisePrice
February 1995
35,000
21.00
April 1996
150,000
28.00
October 1997
538,035
32.50
December 1997
120,000
34.13
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The warrants granted in February 1995, April 1996 and December 1997 expire 10 years from the respective dates of issuance. All warrants are exercisable from the dates of issuance. The warrants granted in October 1997 do not have an expiration date.
13. COMMITMENTS AND CONTINGENCIES
The Company maintains its cash and cash equivalents at financial institutions. The combined account balances at each institution typically exceed the FDIC insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. Management of the Company believes that the risk is not significant.
Land Leases
Certain properties in the Company’s wholly-owned portfolio are subject to land leases expiring through 2082. Rental payments on these leases are adjusted annually based on either the consumer price index or on a predetermined schedule.
For three properties, the Company has the option to purchase the leased land during the lease term at the greater of 85.0% of appraised value or $35,000 per acre.
For two properties, the Company has the option to purchase the leased land at any time during the lease term. The purchase price ranges from $2.3 million to $3.8 million.
The obligation for future minimum lease payments is as follows ($ in thousands):
1,257
1,197
1,179
48,607
Litigation
The Company is a party to a variety of legal proceedings arising in the ordinary course of its business. The Company believes that it is adequately covered by insurance and indemnification agreements. Accordingly, none of such proceedings are expected to have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company reserved $2.7 million in September 2002 for the probable and estimated losses related to various legal proceedings from previously completed mergers and acquisitions.
F-33
13. COMMITMENTS AND CONTINGENCIES — Continued
Contracts
The Company has entered into construction contracts totaling $52.1 million as of December 31, 2002. The amounts remaining to be paid under these contracts as of December 31, 2002 totaled $6.9 million.
Capital Expenditures
The Company presently has no plans for major capital improvements to the existing properties except for the $1.8 million renovation of Tampa Bay Park, the $9.1 million renovations at Country Club Plaza in Kansas City, and the $4.0 million redevelopment of the property vacated by the Environmental Protection Agency in Research Triangle. The Company could incur tenant improvements and lease commissions related to releasing of space vacated by WorldCom and US Airways.
Environmental Matters
Substantially all of the Company’s in-service properties have been subjected to Phase I environmental assessments (and, in certain instances, Phase II environmental assessments). Such assessments and/or updates have not revealed, nor is management aware of, any environmental liability that management believes would have a material adverse effect on the accompanying consolidated financial statements.
Joint Ventures
Certain properties owned in joint ventures with unaffiliated parties have buy/sell options that may be exercised to acquire the other partner’s interest by either the Company or its joint venture partner if certain conditions are met as set forth in the respective joint venture agreement. The Company’s partner in SF-HIW Harborview, LP has the right to put its 80.0% equity interest in the partnership to the Company 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 SF-Harborview, LP assets and liabilities.
In connection with several of its joint ventures with unaffiliated parties, the Company has agreed to guarantee the rental revenue and re-tenanting costs of certain properties contributed or sold to the joint ventures during 1999, 2000 and 2002. The agreements, which vary in term, relate to vacant space in several properties owned by three of the Company’s unconsolidated joint ventures. The Company makes monthly payments to the joint ventures for any rent shortfalls, which may be incurred over the term of the agreements. Any new leases signed during the guarantee period will reduce the amount of the shortfall payments owed by the Company. In addition, the Company is liable for tenant improvements and lease commissions for certain vacant spaces to be leased. During 1999 and 2000, the Company accrued estimated losses for each of the joint venture guarantee agreements. As of December 31, 2002, the Company has $20.0 million accrued for obligations related to the these agreements. The Company believes that its estimates of future obligations related to the rent guarantees are adequate. However, if the Company’s assumptions and estimates are incorrect future losses may occur.
F-34
In connection with the MG-HIW, LLC joint venture, the Company has guaranteed Miller Global, its partner who has an 80.0% interest in the joint venture, a minimum internal rate of return on $50.0 million of their equity investment in the joint venture’s Orlando assets. If the minimum internal rate of return is not achieved upon the sale of these assets or winding up of the joint venture, Miller Global would receive a disproportionate share of the cash proceeds related to the Orlando assets. Based upon the current and forecasted operating performance of these assets and the Company’s estimate of their residual value, the estimated internal rate of return for Miller Global with respect to their Orlando equity is not less than the minimum required return. As a result, the Company does not currently expect that its 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 the operating performance of the assets and/or the residual value were to be lower than the Company’s estimates, Miller Global could receive a disproportionately greater share of the cash proceeds from any such sale or winding up and the Company’s share would be correspondingly lower.
In connection with the Metrowest II, LLC joint venture, the Company has guaranteed $2.7 million of construction debt. The debt has been guaranteed by the Company subject to a pro rata indemnity from its joint venture partner.
In connection with the Plaza Colonnade, LLC joint venture, the Company and its joint venture partner have each guaranteed 50.0% of a $61.3 million construction loan. The loan repayment guarantees are reduced upon the project reaching certain predetermined criteria. In addition, the guarantees are reduced to 25.0% of the loan balance. In addition to the construction loan described above, the partners have provided collectively $12.0 million in letters of credit, $6.0 million by the Company and $6.0 million by its partner. During construction the joint venture is required to have in place the aforementioned letters of credit.
In connection with the November 26, 2002 disposition of 225,220 square feet of properties, fully leased to Capital One Services, Inc., a subsidiary of Capital One Financial Services, Inc., the Company has agreed to guarantee for the benefit of the owner any rent shortfalls which may be incurred for the payment of rent, and re-tenanting costs for a five year period of time from the date of sale. Two of the properties comprising 148,175 square feet have leases that expire in March 2010. In the event the tenant defaults under these leases, the Company’s contingent liability as of December 31, 2002 is $13.3 million. The other property is subject to a 77,045 square feet lease that expires in May 2004. In the event the tenant defaults or does not renew this lease in May 2004, the Company’s associated contingent liability as of December 31, 2002 is $7.2 million. Any new leases signed during the guarantee period will reduce the amount of the rent shortfall guarantee to the owner. In addition, the Company is liable for a prorated portion of the re-tenanting costs of new leases. Given this guarantee, the Company has not recorded any gain on the disposition of these properties. The deferred gain of approximately $6.9 million will be recognized when the contingency period is concluded.
F-35
14. DISCLOSURE ABOUT FAIR VALUE OFFINANCIAL INSTRUMENTS
The following disclosures of estimated fair value were determined by management using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize upon disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair values. The carrying amounts and estimated fair values of the Company’s financial instruments at December 31, 2002 were as follows:
Carrying Amount
Fair Value
Accounts and notes receivable
44,635
(1,528,720
(1,612,880
The fair values for the Company’s fixed rate mortgages and notes payable were estimated using discounted cash flow analysis, based on the Company’s estimated incremental borrowing rate at December 31, 2002, for similar types of borrowing arrangements. The carrying amounts of the Company’s variable rate borrowings approximate fair value.
Disclosures about the fair value of financial instruments are based on relevant information available to the Company at December 31, 2002. Although management is not aware of any factors that would have a material effect on the fair value amounts reported herein, such amounts have not been revalued since that date and current estimates of fair value may significantly differ from the amounts presented herein.
15. DISPOSITIONS
During 2002, the Company contributed to joint ventures or sold approximately 2.5 million rentable square feet of office and industrial properties and 137.7 acres of development land for gross proceeds of $302.2 million. The Company recorded a gain of $24.5 million related to these dispositions.
During 2001, the Company contributed to joint ventures or sold approximately 425,000 rentable square feet of office and industrial properties, 215.7 acres of development land and 1,672 apartment units for gross proceeds of $180.3 million. The Company recorded a gain of $16.2 million related to these dispositions.
During 2000, the Company contributed to joint ventures or sold approximately 8.2 million rentable square feet of office, industrial and retail properties and 272 acres of development land for gross proceeds of $801.1 million. The Company recorded a gain of $4.7 million related to these dispositions.
16. SUBSEQUENT EVENT
On February 2, 1998, the Operating Partnership sold $125.0 million of MandatOry Par Put Remarketed Securities (“MOPPRS”) due February 1, 2013. The MOPPRS bore an interest rate of 6.835% from the date of issuance through January 31, 2003. On January 31, 2003, the interest rate was changed to 8.975% pursuant to the interest rate reset provisions of the MOPPRS. On February 3, 2003, the Operating Partnership repurchased 100.0% of the principal amount of the MOPPRS from the sole holder thereof in exchange for a secured note in the principal amount of $142.8 million. The secured note bears interest at a fixed rate of 6.03% and has a maturity date of February 28, 2013.
F-36
16. SUBSEQUENT EVENT — Continued
MOPPRS
Put Option Notes
17. SEGMENT INFORMATION
The sole business of the Company is the acquisition, development and operation of rental real estate properties. The Company operates office, industrial and retail properties and apartment units. There are no material inter-segment transactions.
The Company’s chief operating decision maker (“CDM”) assesses and measures operating results based upon property level net operating income. The operating results for the individual assets within each property type have been aggregated since the CDM evaluates operating results and allocates resources on a property-by-property basis within the various property types.
F-37
17. SEGMENT INFORMATION — Continued
The accounting policies of the segments are the same as those described in Note 1 included herein. Further, all operations are within the United States and no tenant comprises more than 10% of consolidated revenues. The following table summarizes the rental income, net operating income and assets for each reportable segment for the years ended December 31, 2002, 2001 and 2000 ($ in thousands):
Rental Revenue (A):
Office segment
379,811
388,034
417,102
Industrial segment
34,418
36,148
40,083
Retail segment
38,828
37,133
35,624
Apartment segment
1,163
7,961
17,006
Total Rental Revenue
Net Operating Income (A):
256,369
266,131
291,303
27,084
29,437
33,109
26,886
25,096
24,725
467
3,927
9,849
Total Net Operating Income
310,806
324,591
358,986
Reconciliation to income before gain/(loss) on disposition of land and depreciable assets, minority interest, discontinued operations and extraordinary item:
General and administrative expenses
Total Assets:
2,608,947
2,859,876
2,661,914
354,618
343,606
299,660
258,799
263,622
273,023
15,193
10,397
118,144
Corporate and other
157,812
170,785
348,861
(A) Net of discontinued operations.
F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
18. RESTATED QUARTERLY FINANCIAL DATA (Unaudited):
The Company has set forth selected quarterly financial data for the years ended December 31, 2002 and 2001. Because certain of the data set forth in the following tables varies from amounts previously reported on the Form 10-Q for the applicable period, the following tables and the accompanying footnotes reconcile the amounts given with those previously reported and describe the reason for the differences.
The following table sets forth quarterly financial information for the Company’s fiscal year ended December 31, 2002 ($ in thousands except per share amounts):
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Previously Reported Amounts
Discontinued Operations (1)
Adjustment
Restated Amounts
124,971
(8,548
116,423
118,613
(7,430
111,183
117,369
(3,109
114,260
112,354
Operating expenses (3)
96,165
(4,700
91,465
95,696
(4,066
91,630
99,142
(1,631
97,511
102,673
383,279
General and administrative
5,174
(4
186
5,356
5,537
3,514
9,047
7,847
(3,700
)(2)
4,147
6,026
Total other income
5,979
(70
5,909
5,239
(65
4,088
(20
4,068
6,562
29,611
(3,914
(186
25,511
22,619
(3,425
(3,514
15,680
14,468
(1,498
16,670
10,217
944
6,673
828
2,691
10,192
3,599
(2,691
)(4)
912
30,555
26,455
29,292
(2,597
(823
25,872
18,067
(1,494
1,009
17,582
10,416
(3,722
478
(3,221
(3,471
297
98
(3,076
(2,216
(121
(2,163
(1,193
26,833
(3,436
(163
23,234
25,821
(2,300
(725
22,796
15,851
(1,320
15,419
9,223
3,436
3,638
2,654
2,300
4,954
(1,539
1,320
(219
14,794
27,035
26,872
28,475
27,750
14,312
15,200
24,017
Extraordinary item
13,934
14,822
Net income per share-basic:
Income from cont. operations
0.36
(0.07
0.34
0.28
0.16
0.02
0.15
0.03
0.07
0.05
0.04
0.09
Net income (5)
0.39
0.37
0.12
0.14
Net income per share-diluted:
0.27
(1) On January 1, 2002, the Company adopted SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. In accordance with SFAS 144, certain amounts from the first three quarters have been reclassified to discontinued operations to reflect the results of operations for those properties qualifying as discontinued operations as of December 31 2002. See Note 10 included herein for a more detailed discussion of the Company’s discontinued operations. The column titled “Discontinued Operations” reflects the amounts that have been reclassified
(2) As reported in the Company’s Form 10-Q for the three months ended September 30, 2002 , in the third quarter of 2002, the Company recorded nonrecurring compensation expense of $3.7 million ($3.3 million net of minority interest) related to the exercise of options, of which $186,000 ($163,000 net of minority interest) and $3.5 million ($3.1 million net of minority interest) occurred in the first and second quarters of 2002, respectively. In the above table, the first three quarters have been adjusted to reflect the nonrecurring compensation expense in the first and second quarters, rather than in the third quarter as previously reported. The column titled “Adjustment” reflects the adjusted amounts.
(3) Operating expenses include rental property operating expenses, depreciation and amortization, interest expense and litigation reserve.
(4) As reported in the Company’s Form 10-Q for the three months ended September 30, 2002 , in the third quarter of 2002, the Company recorded $2.7 million of additional gain ($2.4 million net of minority interest) that resulted from the sale of a building during the second quarter of 2002 that had not been recorded during that period due to an error in the consolidation process. In the above table, the second and third quarters have been adjusted to reflect the additional gain in the second quarter, rather than in the third quarter as previously reported. The column titled “Adjustment” reflects the adjusted amounts.
(5) Amounts represent net income available to Common Stockholders per share, which exclude preferred dividends.
F-39
18. RESTATED QUARTERLY FINANCIAL DATA (Unaudited): — Continued
The following table sets forth quarterly financial information for the Company’s fiscal year ended December 31, 2001 ($ in thousands except per share amounts):
Dis- continued Operations(1)
128,621
(9,329
119,292
126,194
(9,081
117,113
125,794
(9,164
116,630
126,241
(10,000
116,241
506,850
(37,574
Operating expenses (2)
95,101
(4,674
90,427
94,408
(4,533
89,875
93,905
(5,151
88,754
101,096
(5,217
95,879
384,510
(19,575
364,935
5,212
5,208
5,451
(3
5,448
4,784
4,781
5,957
5,953
21,404
(14
8,646
(38
8,608
9,372
(230
9,142
8,347
8,302
7,400
(50
7,350
33,765
(363
36,954
(4,689
32,265
35,707
(4,775
30,932
35,452
(4,055
31,397
26,588
(4,829
21,759
134,701
(18,348
7,071
5,670
3,357
74
44,025
39,336
41,377
36,602
38,809
34,754
26,662
21,833
150,873
(5,251
(4,688
(5,095
597
(4,498
(4,820
511
(4,309
(3,782
594
(3,188
(18,948
38,774
(4,126
34,648
36,282
(4,178
32,104
33,989
(3,544
30,445
22,880
(4,235
18,645
(16,083
4,126
4,178
3,544
4,235
(193
(325
(196
38,581
35,957
22,684
0.54
0.47
0.45
0.49
0.42
0.21
1.85
0.08
Net income (3)
0.52
(0.29
(1) On January 1, 2002, the Company adopted SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. In accordance with SFAS 144, certain amounts from the first three quarters have been reclassified to discontinued operations to reflect the results of operations for those properties qualifying as discontinued operations as of December 31 2002. See Note 10 included herein for a more detailed discussion of the Company’s discontinued operations. The column titled “Discontinued Operations” reflects the amounts that have been reclassified.
(2) Operating expenses include rental property operating expenses, depreciation and amortization, interest expense and litigation reserve.
(3) Amounts represent net income available to Common Stockholders per share, which exclude preferred dividends.
F-40
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION
12/31/2002(In Thousands)
Initial Cost
Cost Capitalized subsequent to Acquistion
Gross Amount at Which Carried at Close of Period
Life on Which Depreciation is Computed
JDE
City
2002 Encumberance
Land
Building & Improvements
Accumulated Depreciation
Date of Construction
Atlanta, GA
Two Point Royal
20060
1,793
14,951
382
15,333
17,126
2,074
1997
5-40 yrs.
400 North Business Park
20070
979
6,112
504
6,616
7,595
978
1985
50 Glenlake
20080
2,500
20,289
22,789
2,725
6348 Northeast Expressway
20090
277
1,629
112
1,741
2,018
264
1978
6438 Northeast Expressway
20100
181
2,225
123
2,348
2,529
368
1981
Bluegrass Lakes I
20110
816
3,775
3,772
4,588
655
Bluegrass Place I
20130
491
2,016
54
2,070
294
1995
Bluegrass Place II
20140
412
2,587
2,999
359
1996
Bluegrass Valley
20150
1,500
4,253
5,753
388
Bluegrass Land Site V10
20160
1,824
Bluegrass Land Site V14
20170
2,365
Bluegrass Phase 2
60300
6,977
N/A
1700 Century Circle
28330
2,456
2,949
131
1983
1700 Century Center
20180
1,115
3,148
667
3,815
4,930
910
1972
1800 Century Boulevard
20190
1,441
28,939
9,288
38,227
39,668
1975
1825 Century Center (CDC)
28610
864
11,539
4,916
16,455
17,319
173
1875 Century Boulevard
20200
8,790
598
9,388
1,507
1976
1900 Century Boulevard
20210
4,721
5,640
1,167
1971
2200 Century Parkway
20220
14,274
2,026
16,300
2,989
2400 Century Center
20230
14,970
69
15,039
3,429
2600 Century Parkway
20240
10,254
11,451
1,875
1973
2635 Century Parkway
20250
21,083
1,513
22,596
3,758
1980
2800 Century Parkway
20260
19,963
20,733
3,164
Chattahoochee Avenue
20270
1,817
306
2,123
2,371
502
1970
Chastain Place I
20280
472
3,011
960
3,971
4,443
1,202
Chastain Place II
20290
607
2,097
2,114
2,721
579
Chastain Place III
20300
1,662
2,201
387
Corporate Lakes
20320
7,227
653
7,880
9,155
1,460
1988
Cosmopolitan North
20330
2,855
4,155
1,536
5,691
8,546
1,329
Century Plaza I
20340
1,290
8,425
1,423
9,848
11,138
952
Century Plaza II
20350
1,380
7,589
1,092
8,681
10,061
758
1984
Deerfield III
28070
1,010
3,341
4,351
EKA Chemical
20400
9,883
9,886
10,495
1,184
1035 Fred Drive
20410
270
1,239
284
1,523
196
5125 Fulton Industrial Drive
20430
578
3,116
141
3,257
3,835
Gwinnett Distribution Center
20470
1,128
5,943
752
6,695
7,823
1,106
1991
Kennestone Corporate Center
20480
518
4,874
339
5,213
5,731
818
La Vista Business Park
20490
821
5,244
902
6,146
6,967
1,103
Norcross I & II
20500
326
1,979
103
2,082
2,408
321
Nortel
20510
3,342
32,109
32,123
35,465
3,849
Newpoint Place I
20520
825
3,799
4,107
4,932
Newpoint Place II
20530
1,436
3,321
1,575
1,483
4,896
6,379
721
Newpoint Place III
20540
1,866
710
2,576
3,237
610
Newpoint Place IV
28210
1,012
5,308
6,320
Newpoint Place Land
20550
1,933
2,129
2,139
Oakbrook I
20570
4,948
5,483
6,356
957
Oakbrook II
20580
1,579
8,388
1,795
10,183
11,762
Oakbrook III
20590
1,480
544
8,932
10,412
1,577
Oakbrook IV
20600
953
5,400
464
5,864
6,817
1,054
Oakbrook V
20610
2,206
12,501
971
13,472
15,678
2,614
Oakbrook Summit
20620
950
6,572
790
7,362
8,312
Oxford Lake Business Center
20630
855
7,014
8,326
1,138
Peachtree Corners Land
20650
Southside Distribution Center
20690
810
1,219
3,481
4,700
5,510
740
Highwoods Center I at Tradeport
20720
305
3,299
119
3,418
3,723
756
Initial cost
Cost Capitalized subsequent to Acquisition
Gross Amount at which Carried atClose of Period
Highwoods Center II at Tradeport
20710
635
3,474
757
4,231
4,866
Highwoods Center III at Tradeport
28590
402
2,121
1,132
405
3,253
3,658
650
Tradeport Land
20730
5,314
5,349
5,407
Tradeport Place I
20740
557
2,669
185
2,854
3,411
Tradeport II
20750
3,456
59
3,515
4,072
829
Tradeport III
20760
3,942
4,610
575
Tradeport IV
28260
3,182
3,818
4,479
163
Tradeport V
28740
459
1,815
489
2,304
2,763
Baltimore, MD
Sportsman Club Land
20770
Baltimore
24,702
Charlotte, NC
Ridgefield
20030
791
4101 Stuart Andrew Boulevard
20800
70
510
794
4105 Stuart Andrew Boulevard
20810
222
4109 Stuart Andrew Boulevard
20820
87
75
798
4201 Stuart Andrew Boulevard
20830
110
809
88
1,007
1982
4205 Stuart Andrew Boulevard
20840
134
86
1,065
1,199
4209 Stuart Andrew Boulevard
20850
91
665
116
781
872
208
4215 Stuart Andrew Boulevard
20860
133
94
1,072
1,205
245
4301 Stuart Andrew Boulevard
20870
232
1,702
175
1,877
436
4321 Stuart Andrew Boulevard
20880
649
128
4601 Park Square
20890
2,601
7,802
341
8,143
10,744
1,021
20900
2,362
5,379
(2,362
(5,379
1965
First Citizens Building
20910
5,528
719
6,247
1,635
1989
20920
2,816
6,570
(2,816
(6,570
Mallard Creek I
20930
4,142
4,752
6,000
690
1986
Mallard Creek III
20940
845
4,762
4,964
5,809
638
1990
Mallard Creek IV
20950
348
1,152
1,164
1,512
1993
Mallard Creek V
20960
1,665
8,738
2,697
11,435
13,100
1,657
Mallard Creek VI
20970
834
Oakhill Land
20990
2,797
Oakhill Business Park English Oak
21000
750
4,248
312
4,560
5,310
796
Oakhill Business Park Laurel Oak
21010
471
2,671
3,076
3,547
672
Oakhill Business Park Live Oak
21020
1,403
5,611
1,193
6,804
8,207
1,529
Oakhill Business Park Scarlet Oak
21030
1,073
6,078
545
6,623
7,696
1,295
Oakhill Business Park Twin Oak
21040
1,243
7,044
713
7,757
9,000
1,482
Oakhill Business Park Willow Oak
21050
442
2,505
3,415
3,857
1,000
Oakhill Business Park Water Oak
21060
1,623
9,196
10,161
11,784
2,126
Pinebrook
21070
846
4,607
409
5,016
5,862
837
One Parkway Plaza Building
21080
1,110
4,741
884
5,625
6,735
1,236
Two Parkway Plaza Building
21090
1,694
6,777
1,675
8,452
10,146
2,383
Three Parkway Plaza Building
21100
1,570
6,282
881
7,163
8,733
1,640
Six Parkway Plaza Building
21110
2,438
531
2,969
858
Seven Parkway Plaza Building
21120
4,648
253
4,901
894
Eight Parkway Plaza Building
21130
4,698
4,900
878
Nine Parkway Plaza Building
21140
6,008
(6,008
Eleven Parkway Plaza
21150
2,328
160
220
2,548
2,708
Twelve Parkway Plaza
21160
1,489
1,791
1,903
316
Fourteen Parkway Plaza Building
21170
483
6,077
994
7,554
1,142
University Center
28400
1,296
216
University Center — Land
28410
7,959
28700
1,157
Columbia, SC
Centerpoint I
21270
1,313
7,441
444
7,885
9,198
1,416
Centerpoint II
21280
1,183
8,724
8,737
9,920
1,869
Centerpoint V
21290
1,279
1,627
1,892
451
Centerpoint VI
21300
273
Fontaine I
21310
6,907
1,446
8,353
9,572
1,442
Fontaine II
21320
941
5,335
836
6,171
7,112
1,572
1987
Fontaine III
21330
853
4,333
5,306
841
Fontaine V
21340
395
2,237
2,256
2,651
355
Piedmont Triad, NC
6348 Burnt Poplar
21390
2,883
2,925
3,646
574
6350 Burnt Poplar
21400
1,365
64
1,429
1,768
295
1992
Chinney Rock A/B
21410
1,610
3,757
514
1,611
4,271
5,882
Chinney Rock C
21420
604
1,408
2,120
F-42
Chimney Rock D
21430
236
550
93
643
879
113
Chimney Rock E
21440
1,692
3,948
365
1,693
4,313
6,006
494
Chimney Rock F
21450
1,431
3,338
267
1,432
3,605
5,037
Chimney Rock G
21460
1,044
2,435
1,045
2,619
3,664
298
Deep River Corporate Center
21470
1,033
5,855
434
6,289
7,322
1,190
Airpark East-Copier Consultants
21480
252
1,008
124
223
1,355
250
Airpark East-Building 1
21490
377
1,510
1,670
2,047
393
Airpark East-Building 2
21500
461
1,842
2,477
373
Airpark East-Building 3
21510
1,283
1,497
1,818
340
Airpark East-HewlettPackard
21520
465
727
336
1,024
1,063
2,087
325
Airpark East-Inacom Building
21530
396
772
1,433
300
Airpark East-Simplex
21540
526
263
620
789
1,409
Airpark East-Building A
21550
541
(33
844
508
4,265
983
Airpark East-Building B
21560
779
3,200
(43
753
736
3,953
4,689
943
Airpark East-Building C
21570
2,384
9,535
2,229
11,764
14,148
2,517
Airpark East-Building D
21580
850
3,213
1,025
1,472
4,685
6,560
Airpark East-Service Center 1
21610
275
1,099
(39
1,273
1,509
329
Airpark East-Service Center 2
21620
889
(31
191
234
Airpark East-Service Center 3
21630
304
1,214
1,377
1,681
Airpark East-Service Center 4
21640
224
898
187
1,085
1,309
Airpark East-Service Court
21650
774
(24
840
Airpark East-Warehouse 1
21660
384
1,535
1,634
1,989
357
Airpark East-Warehouse 2
21670
372
1,488
2,001
389
Airpark East-Warehouse 3
21680
370
(30
319
Airpark East-Warehouse 4
21690
657
2,628
182
2,810
3,467
Airpark East-Highland
21700
699
390
145
1,089
1,234
Inman Road Land
21830
7906 Industrial Village Road
21840
455
540
7908 Industrial Village Road
21850
551
114
7910 Industrial Village Road
21860
505
567
Jefferson Pilot Land
21870
17,696
Airpark North -DC1
21880
723
2,891
243
857
3,134
3,991
Airpark North -DC2
21890
1,094
4,375
203
1,297
4,621
5,918
936
Airpark North -DC3
21900
378
1,511
215
448
1,726
2,174
474
Airpark North -DC4
21910
1,508
447
1,649
2,096
398
Airpark North Land
21920
804
(804
2606 Phoenix Drive-100 Series
21940
63
466
479
2606 Phoenix Drive-200 Series
21950
2606 Phoenix Drive-300 Series
21960
229
125
354
385
2606 Phoenix Drive-400 Series
21970
416
468
85
2606 Phoenix Drive-500 Series
21980
503
109
2606 Phoenix Drive-600 Series
21990
78
606
684
2606 Phoenix Drive-700 Series
22000
533
171
2606 Phoenix Drive-800 Series
22010
2,308
2,611
156
Highwoods Park Building I
28670
1,980
7,273
1,992
8,308
10,300
61
500 Radar Road
22110
1,484
168
1,652
1,854
361
502 Radar Road
22120
285
504 Radar Road
22130
320
65
506 Radar Road
22140
Regency One-Piedmont Center
22150
515
2,347
583
2,930
3,445
755
Regency Two-Piedmont Center
22160
435
1,859
536
2,395
2,830
799
Sears Cenfact
22170
861
3,446
830
3,794
4,624
Airpark South Warehouse I
22210
537
2,934
(422
3,057
501
Airpark South Warehouse 2
22220
733
(36
744
3,256
Airpark South Warehouse 3
22230
599
2,964
Airpark South Warehouse 4
22240
2,175
496
2,421
2,917
423
Airpark South Warehouse 6
22250
1,690
3,915
5,638
Airpark West 1
22270
954
3,817
895
5,666
1,252
Airpark West 2
22280
887
3,536
605
4,141
5,025
1,126
Airpark West 4
22290
226
903
213
1,116
1,342
301
Airpark West 5
22300
242
966
179
1,145
1,387
Airpark West 6
22310
1,308
379
7327 West Friendly Avenue
22320
441
(60
(441
7339 West Friendly Avenue
22330
(63
(465
7341 West Friendly Avenue
22340
968
1,081
7343 West Friendly Avenue
22350
48
651
121
7345 West Friendly Avenue
22360
485
101
7347 West Friendly Avenue
22370
97
709
891
7349 West Friendly Avenue
22380
411
84
7351 West Friendly Avenue
22390
106
778
808
914
F-43
7353 West Friendly Avenue
22400
951
1,074
7355 West Friendly Avenue
22410
525
572
644
150 Stratford
26180
2,777
11,459
564
12,023
14,800
2,536
ALO
26190
177
986
1,171
Chesapeake
26200
4,944
4,951
6,187
977
Forsyth Corporate Center
26210
1,850
707
706
The Knollwood-370
26230
1,819
7,451
7,966
9,785
1,759
1994
The Knollwood-380
26240
2,977
11,912
1,303
13,215
16,192
2,924
The Knollwood -380 Retail
26260
188
101 Stratford
26290
6,810
7,257
8,462
1,040
160 Stratford - Land
28370
Consolidated Center/ Building I
26300
625
89
2,215
2,840
Consolidated Center/ Building II
26310
4,376
151
4,527
5,152
623
Consolidated Center/ Building III
26320
680
3,522
3,579
4,259
460
Consolidated Center/ Building IV
26330
376
1,624
269
1,893
2,269
369
Madison Park - Building 5610
26460
211
729
Madison Park - Building 5620
26470
2,196
2,222
3,163
276
Madison Park - Building 5630
26480
1,486
3,468
3,507
4,993
410
Madison Park - Building 5635
26490
893
2,083
2,549
3,442
632
Madison Park - Building 5640
26500
3,632
8,476
8,564
12,196
Madison Park - Building 5650
26510
2,551
317
Madison Park - Building 5660
26520
1,910
4,456
4,504
6,414
548
Madison Park - Building 5655
26530
5,891
13,753
13,894
19,785
1,717
500 Northridge
26570
1,789
4,174
206
4,380
6,169
711 Almondridge
280
694
974
710 Almondridge
2,180
8,730
10,910
520 Northridge
1,541
3,777
5,318
531 Northridge Warehouse
4,596
10,967
15,563
531 Northridge Office
1,683
2,389
540 Northridge
1,952
4,681
6,633
550 Northridge
1,528
26630
2,625
14,824
15,069
17,694
1,966
1970-1987
University Commercial Center-Landmark 3
26660
1,771
2,092
2,521
University Commercial Center-Archer 4
26670
2,058
2,261
University Commercial Center-Service Center 1
26680
1,155
140
1,571
University Commercial Center-Service Center 2
26690
859
126
985
1,200
University Commercial Center-Service Center 3
26700
167
918
190
University Commercial Center-Warehouse 1
26710
812
University Commercial Center-Warehouse 2
26720
786
998
159
Westpoint Business Park-BMF
26730
795
3,181
3,185
3,980
627
Westpoint Business Park-Luwabahnson
26740
346
1,384
1,385
1,731
Westpoint Business Park-3 & 4
445
Westpoint Business Park Land
26760
Westpoint Business Park-Wp 11
26780
1,656
2,049
Westpoint Business Park-Wp 12
1,337
Westpoint Business Park-Wp 13
26800
1,192
1,713
Westpoint Business Park-Fairchild
26810
640
2,577
2,602
3,242
512
Westpoint Business Park-Warehouse5
157
671
Enterprise Warehouse I
28420
487
2,960
745
3,705
4,192
96
Brigham Road - Land
28710
7,299
Greenville, SC
385 Land
22420
1,800
Bank of America Plaza
22430
642
9,349
2,519
11,868
12,510
MetLife @ Brookfield
28490
1,023
8,336
2,905
11,241
12,273
490
Brookfield Plaza
22440
8,437
9,491
10,980
1,965
Brookfield-Jacobs-Sirrine
22450
3,022
17,125
17,149
20,171
2,707
22460
(189
385 Building 1
22470
1,413
1,401
2,799
4,200
5,613
1,060
Patewood I
22480
942
5,553
6,495
783
Patewood II
22490
5,018
5,521
6,463
927
Patewood III
22500
835
4,733
4,955
5,790
Patewood IV
22510
1,210
6,856
192
7,048
8,258
1,097
Patewood V
22520
1,677
9,503
9,613
11,290
1,592
Patewood VI
22530
2,360
9,643
(7
9,636
11,996
2,132
770 Pelham Road
22540
705
2,778
3,101
3,806
Patewood Business Center
22550
1,312
7,436
7,773
9,085
1,378
28640
1,790
12,701
12,717
14,507
Jacksonville, FL
F-44
Cost Capitalized subsequent toAcquistion
Gross Amount at Which Carried atClose of Period
9A Land
22640
Jacksonville
4,446
(4,446
Belfort Park VI - Land
22700
480
(355
Belfort Park VII - Land
22710
1,858
Shawnee Mission, KS
Corinth Square North Shops
26900
Shawnee Mission
2,693
10,772
11,533
14,226
1,326
1962
Corinth Shops South
26910
1,043
4,172
293
5,508
499
1953
Fairway Shops
26930
2,429
673
2,694
565
3,259
3,932
1940
Prairie Village Rest & Bank
27050
1,372
1948
Prairie Village Shops
27060
3,289
13,157
3,180
16,337
19,626
1,987
Shannon Valley Shopping Center
27120
5,893
1,669
6,678
2,107
8,785
10,454
1,196
27470
1,317
(329
(1,317
1968
Corinth Executive Building
27490
2,054
697
2,751
3,265
430
Corinth Office Building
27510
2,116
374
2,490
3,019
307
1960
Fairway North
27540
3,013
3,686
4,439
571
Fairway West
27550
1,775
851
3,402
495
3,897
4,748
Land - Kansas
27630
11,853
Nichols Building
27670
1,959
2,212
2,702
Prairie Village Office Center
27760
2,997
589
3,586
4,335
482
Kansas City, MO
Country Club Plaza - 48th & Penn
26830
418
3,736
5,850
6,268
Country Club Plaza - Balcony Retail
26840
8,002
4,831
12,833
13,722
1925
Country Club Plaza - Retail
26860
433
Country Club Plaza - Court of the Penguins
26870
566
5,091
2,641
7,732
8,298
939
1945
Country Club Plaza - Esplanade Retail
26920
748
6,734
3,755
10,489
11,237
1,261
1928
Country Club Plaza - Halls Block
26970
2,478
822
3,300
3,575
1964
Country Club Plaza - Macy Block
26990
4,536
1,617
6,153
6,657
1926
Country Club Plaza - Millcreek Retail
27000
602
5,422
2,759
8,181
8,783
1920
Country Club Plaza - Nichols Retail
27010
600
5,402
1,802
7,204
7,804
800
1930
Country Club Plaza - Plaza Central
27030
3,649
2,020
5,669
6,074
856
1958
Country Club Plaza - Savings South
27040
3,211
3,124
6,335
6,692
Country Club Plaza - Granada Shops
28380
4,045
513
4,558
Country Club Plaza - Seville Shops West
27100
2,696
12,607
15,303
15,603
Country Club Plaza - Seville Square
27110
20,973
1,879
22,852
1,911
Country Club Plaza - Swanson Block
27130
949
8,537
3,054
11,591
12,540
1,278
1967
Country Club Plaza - Theatre Retail
27150
10,769
6,524
17,293
18,490
2,130
Country Club Plaza - Time Retail
27160
1,292
11,627
8,101
19,728
21,020
1,909
1929
Country Club Plaza - Triangle Block
27170
2,771
1,374
4,145
Country Club Plaza - Valencia Place Retail
27190
2,245
15,300
17,545
17,986
1,301
Country Club Plaza - Balcony Office
27440
585
905
Country Club Plaza - Esplanade Office
27530
3,374
3,483
3,858
Country Club Plaza - Millcreek Office
27650
79
717
932
1,011
5-40yrs.
Country Club Plaza - Theatre Office
27950
2,179
654
2,833
3,075
380
Country Club Plaza - Time Office
27960
1,792
528
2,320
313
Brookside Shopping Center
26850
2,002
8,602
154
1,223
2,156
9,825
11,981
1,293
1919
Colonial Shops
26880
138
726
155
1907
Retail Ground Leases
26950/40
1,061
27080
1,091
4,364
(1,091
(4,364
1959
Neptune Apartments
27320
4,212
6,079
6,459
7,532
803
Parklane
27330
1,548
169
1,990
1924
Wornall Road Apartments
27400
1918
4900 Main
27410
12,809
(12,809
63rd & Brookside
27420
283
331
Land - Missouri
27660
6,507
(1,343
5,164
5,354
Nichols Block Office
27680
1938
One Ward Parkway
27720
666
2,136
4,799
5,465
639
Park Plaza
27740
1,352
5,409
8,579
Parkway Building
27770
1,578
724
2,302
1906-1910
Somerset
27920
122
Two Brush Creek
27940
961
3,845
877
4,722
5,683
Valencia Place Office
27970
1,530
27,548
9,011
36,559
38,089
3,195
Alameda Towers
60220
231
KC Residential
60270
553
Rental Houses
27980
940
St. Charles Apartments
27990
1922
Oak Park Mall Ground Lease
28030
19,095
JCN Land
28040
871
Memphis, TN
F-45
Atrium I & II
22810
6,121
660
6,781
8,351
1,129
Centrum
22820
1,013
5,488
391
5,879
6,892
1979
The Colonnade
22830
1,300
7,994
8,014
9,314
1,685
Hickory Hill Medical Plaza
22840
2,387
2,785
407
3400 Players Club Parkway
22850
1,005
5,515
6,533
1,494
International Place II
22860
4,847
27,469
28,782
33,629
5,279
International Place 3
25,761
(25,761
6000 Poplar Ave
28290
2,340
11,385
11,767
14,107
6060 Poplar Ave
28300
8,677
9,034
11,014
484
Shadow Creek I
28310
973
5,493
7,385
8,358
674
28650
6,041
734
6,486
7,220
Southwind Office Center A
22890
996
5,643
6,012
7,008
1,080
Southwind Office Center B
22900
1,356
7,684
449
8,133
9,489
1,503
Southwind Office Center C
22920
1,070
5,924
6,994
958
Southwind Office Center D
22910
6,232
(35
6,197
6,941
1,101
Norfolk, VA
Greenbrier Business Center
22570
Norfolk
5,305
5,482
6,418
904
Nashville, TN
Eakin & Smith
11140
2,692
11,914
14,606
2,086
3322 West End
22930
3,021
27,266
1,851
3,025
29,117
32,142
2,325
3401 Westend
22940
6,103
23,343
(1,224
(260
4,879
23,083
27,962
4,739
5310 Maryland Way
22950
1,923
7,360
(368
(1,036
1,555
6,324
7,879
1,059
22960
4,321
6,062
7,226
241
SouthPointe
22970
1,655
9,059
9,262
10,917
2,423
BNA Corporate Center
22980
22,588
21,497
4,010
Caterpillar Financial Center
22990
5,120
31,553
(5,120
(31,553
Century City Plaza I
23000
3,612
732
4,344
5,247
962
23020
2,285
15,535
5,273
20,808
23,093
981
Cool Springs I
23030
1,983
13,854
1,345
15,199
17,182
2,994
Eastpark I, II, & III
23040
3,137
11,842
(766
(10
11,832
14,203
2,425
Highwoods Plaza I
23090
1,772
9,029
9,275
11,047
2,583
Highwoods Plaza II
23100
1,448
1,674
8,622
10,070
Harpeth on the Green II
23110
1,419
5,677
868
1,420
6,545
7,965
1,226
Harpeth on the Green III
23120
1,658
1,660
7,272
Harpeth on the Green IV
23130
1,709
6,835
975
1,714
7,810
9,524
1,594
Harpeth on The Green V
23140
662
5,771
5,810
6,472
Lakeview Ridge I
23150
7,545
(1,012
8,301
1,096
Lakeview Ridge II
23160
5,883
5,859
6,464
1,711
Lakeview Ridge III
23170
9,708
2,100
11,808
12,881
1,796
The Ramparts at Brentwood
28320
2,394
12,806
13,293
15,687
Seven Springs - Land I
28500
3,115
Seven Springs - Land II
28620
3,216
Seven Springs I
28630
2,076
10,667
569
11,236
13,312
Sparrow Building
23190
1,262
5,047
5,378
6,640
Winners Circle
23210
1,495
7,072
701
9,270
1,131
Westwood South
23220
2,106
10,517
11,218
13,324
1,931
Orlando, FL
Sunport Center
23230
1,505
9,777
205
9,982
11,487
1,397
23240
18,761
(18,761
1966-1992
Lake Mary Land
6,365
In Charge Institute
23380
2,085
3,296
Metrowest Center
23390
1,344
7,618
999
8,617
9,961
1,410
MetroWest Land
23470
3,112
Capital Plaza III
23520
Interlachen Village
23560
900
2,689
(306
3,283
Research Triangle, NC
Blue Ridge II
23600
462
1,485
221
1,706
2,168
Blue Ridge I
23610
722
4,538
1,251
5,789
6,511
1,646
3600 Glenwood Avenue
23640
10,994
1,591
3645 Trust Drive - One North Commerce Center
23650
520
268
842
4,579
601
3737 Glenwood Avenue
23660
15,889
18,312
2,008
4401 Research Commons
23720
1,249
8,929
6,607
15,536
16,785
4800 North Park
23740
2,678
17,673
1,443
19,116
21,794
4,371
4900 North Park
23750
1,207
2,563
3,333
F-46
5000 North Park
23760
4,697
7,388
8,398
5200 Greens Dairy-One North Commerce Center
23770
959
1,298
227
5220 Greens Dairy-One North Commerce Center
23780
2,165
318
2,483
2,865
801 Corporate Center
28520
7,672
955
8,627
9,455
Amica
23810
1,517
(289
(1,517
Arrowwood
23820
3,406
(955
(3,406
Aspen Building
23830
560
2,088
2,867
3,427
4300 Six Forks Road
23850
15,504
19,825
2,442
Cedar East
23880
2,491
3,069
Cedar West
23890
3,319
3,882
CentreGreen One - Weston
28200
1,648
7,133
2,268
9,401
11,049
CentreGreen Two - Weston
28440
1,667
7,478
1,957
9,435
CentreGreen Three Land - Weston
28690
1,955
CentreGreen Four
28510
7,984
7,988
CentreGreen Five Land - Weston
28680
3,133
Inveresk Land Parcel 2
23900
Inveresk Land Parcel 3
23910
Cape Fear
23950
3,014
1,994
Creekstone Crossings
23960
728
3,841
4,211
4,939
Catawba
23980
2,582
4,217
4,342
1,411
Cottonwood
23990
68
3,930
730
Cypress
24000
1,729
2,203
2,770
656
Dogwood
24010
766
3,409
4,175
EPA Annex
24020
10,920
(10,920
1966
Global Software
24040
7,634
8,099
2,393
GlenLake Bldg I
28660
18,288
18,849
20,054
136
Hawthorn
24050
3,782
4,492
5,396
Pulse Athletic Club at Highwoods
24060
142
524
2,516
3,040
Holiday Inn Reservations Center
24070
867
2,735
2,870
3,737
646
Healthsource
24090
10,593
1,696
1,304
12,289
13,593
2,471
Highwoods Tower One
24100
16,914
1,056
17,970
18,173
5,579
Highwoods Tower Two
24110
20,164
4,139
24,303
24,668
1,274
Highwoods Centre-Weston
24120
532
7,902
(124
8,310
1,573
Ironwood
24130
481
1,757
Kaiser
24140
3,625
935
4,693
Laurel
24150
956
876
Highwoods Office Center North Land
24170
Highwoods Office Center South Land
24180
2,409
Leatherwood
24190
633
1,697
Maplewood
24210
149
2,928
3,774
Northpark - Wake Forest
24240
4,032
4,530
Northpark Land - Wake Forest
24250
1,596
ParkWest One - Weston
28450
2,938
4,102
4,480
ParkWest Two - Weston
28460
488
2,642
743
492
3,385
3,877
ParkWest Three - Land - Weston
28470
Phase I - One North Commerce Center
24260
768
4,353
6,004
6,772
W Building - One North Commerce Center
24270
6,592
2,062
8,654
9,817
Overlook
24280
10,401
670
11,071
11,469
Other Property
11180
10,387
1,977
Pamlico
24290
11,087
11,376
4,348
Raleigh Corp Center Lot D
24320
1,211
Red Oak
24330
6,086
6,718
7,107
1,191
Rexwoods Center I
24350
775
4,123
5,001
Rexwoods Center II
24360
1,904
362
2,266
Rexwoods Center III
24370
886
920
Rexwoods Center IV
24380
586
4,360
1,269
Rexwoods Center V
24390
166
6,145
7,446
1,452
Riverbirch
24400
4,611
5,080
Six Forks Center I
24430
677
3,340
4,006
Six Forks Center II
24440
1,086
4,345
1,240
5,585
6,671
1,173
Six Forks Center III
24450
862
4,411
5,079
5,941
Smoketree Tower
24460
2,353
11,802
2,355
14,157
16,510
3,855
South Square I
24470
3,785
5,063
1,230
South Square II
24480
4,710
5,241
5,766
1,263
Sycamore
24490
5,830
6,005
6,260
1,672
WESPEC - Tract 3
60030
Weston Tract 5C
60040
2,789
Weston Oaks Court
60050
2,257
Weston Commons Tract 2B
60060
928
Weston Commons Tract 5A
60070
1,148
F-47
Weston Commons Tract 6C
60080
Day Tract Residential
60200
7,575
Weston - Land
24540
Weston Tract - 6B
28530
Weston Tract - 6A
28540
1,521
Weston Tract - 8A
28550
2,415
Weston Tract - 6A2
28570
28790
2,681
Weston Tract - 5B
28800
2,424
WESPEC Tract 1
28810
WESPEC Tract 2E
28830
663
Willow Oak
24550
7,018
2,334
Richmond, VA
HDC Land Site - Parcel 6
24560
Airport Center I
693
4,422
5,115
Airport Center II
2,772
3,108
Capital One Building I
24590
10,690
322
11,012
12,290
1,417
Capital One Building II
24600
477
3,946
4,194
4,671
506
Capital One Building III
24610
11,515
(169
11,346
12,624
1,343
Capital One Parking Deck
24620
2,288
200
1309 E. Cary Street
24630
685
785
161
4900 Cox Road
24640
1,324
686
5,991
7,315
1,135
Technology Park 1
24650
2,166
2,664
3,205
618
Dominion Place – Pitts Parcel
28720
1,084
East Shore I
24660
(1,254
East Shore II
24670
907
6,662
(907
(6,662
East Shore III
24680
2,220
(2,220
East Shore IV
28390
1,445
Grove Park I
24690
2,685
364
3,189
5,874
6,587
1,421
Grove Park II
24700
(983
Grove Park Square
60310
Highwoods Distribution Center
523
5,699
6,222
HDC Land Site E – Parcel 3
28760
1,804
HDC Land Site D – Parcel 4
28770
HDC Land Site C – Parcel 5
28780
Highwoods One
24720
1,846
8,613
10,881
12,727
Highwoods Two
24730
5,170
1,287
6,457
7,242
1,526
Highwoods Five
24760
806
6,699
1,232
Sadler & Cox Land
24770
1,755
Highwoods Plaza
24790
909
4,937
1,228
6,165
7,074
Highwoods Commons
24800
547
(42
521
4,300
4,821
Innsbrook Centre
24810
6,768
7,052
Innslake Center
28560
6,532
7,376
Liberty Mutual
24820
2,956
4,819
991
7,015
Mercer Plaza
24830
1,556
12,350
12,474
14,030
Markel American
24840
8,667
9,652
11,024
1,476
North Park
24850
2,163
8,659
9,360
11,523
1,776
24860
10,447
2,440
12,887
14,231
North Shore Commons B - Land
24870
North Shore Commons C - Land
24880
1,698
North Shore Commons D - Land
28240
Hamilton Beach
24890
4,827
5,913
926
One Shockoe Plaza
24910
19,324
(3,885
15,439
2,727
Stony Point I
24930
11,445
1,584
13,029
14,413
2,252
Stony Point II
24940
2,224
10,949
12,872
15,096
28430
8,131
2,221
10,352
11,542
619
Stony Point F Land
24950
Technology Park 2
24960
1,058
256
Vantage Place A
24980
811
1,216
Vantage Place B
24990
233
931
1,139
Vantage Place C
25000
235
1,398
310
Vantage Place D
25010
218
219
1,310
Vantage Pointe
25020
4,354
5,109
6,198
1,174
Waterfront Plaza
25030
3,130
3,715
West Shore I
25040
358
1,514
1,872
278
West Shore II
25050
2,181
144
401
West Shore III
25060
3,601
5,176
6,137
Virginia Mutual
28250
6,034
6,072
7,373
F-48
Cost Capitalized Subsequent to Acquisition
South Florida
The 1800 Eller Drive Building
25080
9,724
10,423
1,743
Tampa, FL
Atrium
25120
1,639
9,286
(287
11,588
12,940
1,809
Bay View Office Centre
25210
5,964
613
6,577
7,881
922
Bay Vista Gardens
25220
4,777
4,851
5,298
Bay Vista Gardens II
25230
1,328
6,981
500
1,462
7,481
8,943
1,305
Bay Vista Office Building
25250
584
5,064
5,999
Bay Vista Retail
25260
1,299
1,582
Countryside Place
25270
843
3,731
4,767
5,610
Cypress Commons
25330
11,488
207
11,695
12,906
2,748
Cypress Center I
25340
3,171
12,635
12,770
15,941
3,553
Cypress Center III
25350
7,690
8,963
Cypress IV Land
28730
3,074
Cypress West
25360
615
4,988
5,831
6,446
Brookwood Day Care Center
25370
347
Feathersound Corporate Center II
25400
2,152
7,282
7,939
8,739
1,331
Firemans Fund Building
25410
4,277
Horizon
25460
6,114
6,943
964
Highwoods Preserve I
25470
1,618
23,436
25,704
27,322
2,406
Highwoods Preserve II
25480
274
1,915
Highwoods Preserve III
25490
1,383
1,524
21,300
22,824
24,207
1,788
Highwoods Preserve IV
25500
16,355
8,702
25,057
26,696
1,587
Highwoods Preserve V
25510
1,440
21,189
(195
20,994
22,434
826
Highwoods Preserve VI
25520
25530
4,650
1,939
6,589
7,134
Highwoods Preserve Land
25540
2,032
Highwoods Preserve Energy Plant
28360
LakePointe I
25640
2,000
20,376
7,717
28,093
30,093
3,037
Lakeside
25650
146
7,418
LakePointe II
25660
31,390
1,136
32,526
34,626
4,391
Northside Square Office
25720
3,879
590
Northside Square Office/Retail
25730
2,808
2,932
3,732
One Harbour Place
28180
2,015
25,252
866
26,118
28,133
Parkside
25740
9,193
9,598
Pavilion
25750
16,022
700
16,722
2,327
Pavilion Parking Garage
25760
5,618
25770
6,782
1,346
8,128
REO Building
25790
4,484
(795
(4,484
Registry I
25800
4,216
4,862
5,606
908
Registry II
25810
5,147
5,679
Registry Square
25820
344
1,951
2,137
2,481
1,256
17,950
(1,256
(17,950
Sabal Business Center I
25840
2,127
2,758
Sabal Business Center II
25850
342
1,935
2,077
2,419
422
Sabal Business Center III
25860
290
1,691
1,981
Sabal Business Center IV
25870
819
4,638
4,845
5,664
Sabal Business Center V
25880
1,026
5,813
1,003
Sabal Business Center VI
25890
1,609
9,116
102
9,218
10,827
1,459
Sabal Business Center VII
25900
1,519
8,605
81
8,686
10,205
1,373
Sabal Lake Building
25910
3,241
3,401
3,973
637
Sabal Industrial Park Land
25920
Sabal Park Plaza
25930
611
3,876
4,487
Sabal Tech Center
25940
3,107
3,204
3,752
Summit Office Building
25950
2,749
3,356
Spectrum
25960
1,450
14,173
16,342
Sabal Pavilion I
25970
8,633
11,567
12,531
1,412
Sabal Pavilion II
25980
USF&G
26130
1,366
7,742
1,619
9,361
10,727
2,204
Westshore Square
26140
2,624
1,130
386
5,541
769
46,330
648,876
2,649,149
(22,719
301,005
626,157
2,950,154
3,576,311
461,972
(1) These assets are pledged as collateral for a $69,442,000 first mortgage loan.
(2) These assets are pledged as collateral for an $43,480,000 first mortgage loan.
(3) These assets are pledged as collateral for a $28,004,000 first mortgage loan.
(4) These assets are pledged as collateral for a $142,841,000 first mortgage loan.
(5) These assets are pledged as collateral for a $179,954,000 first mortgage loan.
(6) These assets are pledged as collateral for a $10,667,000 first mortgage loan.
F-49
HIGHWOODS PROPERTIES INC.
NOTE TO SCHEDULE III(In Thousands)
As of December 31, 2002, 2001, and 2000
A summary of activity for Real estate and accumulated depreciation is as follows
Real Estate:
Balance at beginning of year
3,621,520
3,443,117
3,768,234
Additions
Acquisitions, Development and Improvments
210,786
336,678
403,012
Cost of real estate sold
(255,995
(158,275
(728,129
Balance at close of year (a)
Accumulated Depreciaition
377,201
280,772
237,979
Depreciation expense
109,958
104,789
103,435
Real estate sold
(25,187
(8,360
(60,642
Balance at close of year (b)
(a) Reconciliation of total cost to balance sheet caption at December 31, 2002, 2001, and 2000 (in Thousands)
Total per schedule III
Construction in progress exclusive
of land included in schedule III
86,576
11,433
(133,010
(210,758
(274,880
Reclassification adjustment for discontinued operations
2,205
Total real estate assets at cost
3,268,451
(b) Reconciliation of total Accumulated Depreciation to balance sheet caption at December 31, 2002, 2001, and 2000 (in Thousands)
Total per Schedule III
Accumulated Depreciation - furniture, fixtures and equipment
9,208
9,649
5,317
(8,952
(12,838
(14,208
Total accumulated depreciation
462,228
374,012
271,881
F-50