- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 Commission file number: 001-13100 HIGHWOODS PROPERTIES, INC. (Exact name of registrant as specified in its charter) <TABLE> <CAPTION> MARYLAND 56-1871668 <S> <C> (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) </TABLE> 3100 SMOKETREE COURT, SUITE 600, RALEIGH, N.C. (Address of principal executive office) 27604 (Zip Code) Registrant's telephone number, including area code: (919) 872-4924 ---------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---------------- The Company has only one class of common stock, par value $.01 per share, with 61,661,891 shares outstanding as of May 14, 1999. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
HIGHWOODS PROPERTIES, INC. QUARTERLY REPORT FOR THE PERIOD ENDED MARCH 31, 1999 TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ----- <S> <C> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3 Consolidated balance sheets of Highwoods Properties, Inc. as of March 31, 1999 and December 31, 1998 4 Consolidated statements of income of Highwoods Properties, Inc. for the three month periods ended March 31, 1999 and 1998 5 Consolidated statements of cash flows of Highwoods Properties, Inc. for the three month periods ended March 31, 1999 and 1998 6 Notes to consolidated financial statements of Highwoods Properties, Inc. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Results of Operations 10 Liquidity and Capital Resources 11 Year 2000 13 Funds From Operations and Cash Available for Distributions 16 Disclosure Regarding Forward-Looking Statements 17 Property Information 19 Inflation 28 Item 3. Quantitative and Qualitative Disclosures About Market Risk 29 PART II. OTHER INFORMATION Item 1. Legal Proceedings 31 Item 2. Changes in Securities and Use of Proceeds 31 Item 3. Defaults Upon Senior Securities 31 Item 4. Submission of Matters to a Vote of Security Holders 31 Item 5. Other Information 31 Item 6. Exhibits and Reports on Form 8-K 31 </TABLE> 2
PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS We refer to (1) Highwoods Properties, Inc. as the "Company," (2) Highwoods Realty Limited Partnership as the "Operating Partnership," (3) the Company's common stock as "Common Stock" and (4) the Operating Partnership's common partnership interests as "Common Units." The information furnished in the accompanying balance sheets, statements of income and statements of cash flows reflect all adjustments that are, in our opinion, necessary for a fair presentation of the aforementioned financial statements for the interim period. The aforementioned financial statements should be read in conjunction with the notes to consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations and our 1998 Annual Report on Form 10-K. 3
HIGHWOODS PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> MARCH 31, 1999 DECEMBER 31, 1998 -------------- ------------------ (UNAUDITED) <S> <C> <C> ASSETS Real estate assets, at cost: Land and improvements ................................................ $ 506,078 $ 559,100 Buildings and tenant improvements .................................... 2,950,479 3,186,584 Development in process ............................................... 223,545 189,465 Land held for development ............................................ 154,020 150,622 Furniture, fixtures and equipment .................................... 7,891 7,693 ---------- ---------- 3,842,013 4,093,464 Less -- accumulated depreciation ..................................... (202,246) (169,272) ---------- ---------- Net real estate assets ............................................... 3,639,767 3,924,192 Property held for sale ................................................ 396,160 131,262 Cash and cash equivalents ............................................. 38,325 31,445 Restricted cash ....................................................... 11,668 24,263 Accounts receivable ................................................... 23,039 27,948 Advances to related parties ........................................... 3,166 10,420 Notes receivable ...................................................... 47,054 40,225 Accrued straight line rents receivable ................................ 30,016 27,194 Investment in unconsolidated affiliates ............................... 36,746 21,088 Other assets: Deferred leasing costs ............................................... 51,419 45,785 Deferred financing costs ............................................. 43,409 38,750 Prepaid expenses and other ........................................... 15,331 15,237 ---------- ---------- 110,159 99,772 Less -- accumulated amortization ..................................... (27,006) (23,476) ---------- ---------- 83,153 76,296 ---------- ---------- $4,309,094 $4,314,333 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Mortgages and notes payable ........................................... $2,030,849 $2,008,716 Accounts payable, accrued expenses and other liabilities .............. 111,252 130,575 ---------- ---------- Total liabilities .................................................... 2,142,101 2,139,291 Minority interest ..................................................... 241,105 279,043 Stockholders' equity: Preferred stock, $.01 par value, 50,000,000 authorized shares; 8 5/8% Series A Cumulative Redeemable Preferred Shares (liquidation preference $1,000 per share), 125,000 shares issued and outstanding at March 31, 1999 and December 31, 1998 ............ 125,000 125,000 8% Series B Cumulative Redeemable Preferred Shares (liquidation preference $25 per share), 6,900,000 shares issued and outstanding at March 31, 1999 and December 31, 1998 ................ 172,500 172,500 8% Series D Cumulative Redeemable Preferred Shares (liquidation preference $250 per share), 400,000 shares issued and outstanding at March 31, 1999 and December 31, 1998 ................ 100,000 100,000 Common stock, $.01 par value, authorized 200,000,000 shares; 61,628,377 shares issued and outstanding at March 31, 1999 and 59,865,259 shares issued and outstanding at December 31, 1998 .......................... 616 599 Additional paid-in capital ............................................ 1,581,853 1,546,592 Distributions in excess of net income ................................. (54,081) (48,692) ---------- ---------- Total stockholders' equity ........................................... 1,925,888 1,895,999 ---------- ---------- $4,309,094 $4,314,333 ========== ========== </TABLE> SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 4
HIGHWOODS PROPERTIES, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ------------------------- 1999 1998 ----------- ----------- <S> <C> <C> REVENUE: Rental property .................................................... $146,721 $100,331 Equity in earnings of unconsolidated affiliates .................... 197 -- Gain on disposition of assets ...................................... 569 -- Interest and other income .......................................... 5,287 2,157 -------- -------- 152,774 102,488 OPERATING EXPENSES: Rental property .................................................... 45,345 29,728 Depreciation and amortization ...................................... 28,156 17,161 Interest expense: Contractual ...................................................... 31,842 17,162 Amortization of deferred financing costs ......................... 778 616 -------- -------- 32,620 17,778 General and administrative ......................................... 5,793 3,784 -------- -------- Income before minority interest and extraordinary item .............................................. 40,860 34,037 MINORITY INTEREST ................................................... (5,826) (5,608) -------- -------- Income before extraordinary item ................................... 35,034 28,429 EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF DEBT ............................................. -- (46) -------- -------- Net income ......................................................... 35,034 28,383 Dividends on preferred stock ........................................ (8,145) (6,145) -------- -------- Net income available for common stockholders ....................... $ 26,889 $ 22,238 ======== ======== NET INCOME PER COMMON SHARE -- BASIC: Income before extraordinary item ................................... $ 0.45 $ 0.45 Extraordinary item -- loss on early extinguishment of debt ......... -- -- -------- -------- Net income ......................................................... $ 0.45 $ 0.45 ======== ======== Weighted average shares outstanding -- basic ....................... 60,272 49,051 ======== ======== NET INCOME PER COMMON SHARE -- DILUTED: Income before extraordinary item ................................... $ 0.45 $ 0.45 Extraordinary item loss on early extinguishment of debt ............ -- -- -------- -------- Net income ......................................................... $ 0.45 $ 0.45 ======== ======== Weighted average shares outstanding -- diluted ..................... 60,409 49,688 ======== ======== </TABLE> SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 5
HIGHWOODS PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED AND IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ---------------------------- 1999 1998 ------------ ------------- <S> <C> <C> OPERATING ACTIVITIES: Net income ..................................................... $ 35,034 $ 28,383 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................ 28,156 17,161 Minority interest ............................................ 5,826 5,608 Loss on early extinguishment of debt ......................... -- 46 Gain on disposition of assets ................................ (569) -- Changes in operating assets and liabilities .................. (18,056) 773 ---------- ---------- Net cash provided by operating activities ................... 50,391 51,971 ---------- ---------- INVESTING ACTIVITIES: Additions to real estate assets ................................ (122,860) (311,362) Cash paid in exchange for partnership net assets ............... (1,008) (12,383) Proceeds from disposition ...................................... 124,463 -- Repayment of advances from subsidiaries ........................ 7,254 -- Other .......................................................... (30,467) (2,099) ---------- ---------- Net cash used in investing activities ....................... (22,618) (325,844) ---------- ---------- FINANCING ACTIVITIES: Distributions paid on common stock and common units ............ (38,072) (30,097) Dividends paid on preferred stock .............................. (8,145) (6,145) Payments of prepayment penalties ............................... -- (46) Borrowings on mortgages and notes payable ...................... 4,385 287,188 Repayment of mortgages and notes payable ....................... (3,252) (102,450) Borrowings on revolving loans .................................. 95,000 247,000 Payments on revolving loans .................................... (74,000) (240,500) Net proceeds from the sale of common stock ..................... 7,850 139,167 Net (payment) receipt of deferred financing costs .............. (4,659) 1,860 ---------- ---------- Net cash (used in) provided by financing activities ......... (20,893) 295,977 ---------- ---------- Net increase in cash and cash equivalents ...................... 6,880 22,104 Cash and cash equivalents at beginning of the period ........... 31,445 10,146 ---------- ---------- Cash and cash equivalents at end of the period ................. $ 38,325 $ 32,250 ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest ......................................... $ 30,207 $ 12,324 ========== ========== </TABLE> SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 6
HIGHWOODS PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED AND IN THOUSANDS) SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES The following summarizes the net assets contributed by holders of Common Units in the Operating Partnership or acquired subject to mortgage notes payable: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ---------------------- 1999 1998 --------- ---------- <S> <C> <C> ASSETS: Rental property and equipment, net .......... $2,241 $76,125 LIABILITIES: Mortgages and notes payable assumed ......... $ -- $61,303 ------ ------- Net assets ............................... $2,241 $14,822 ====== ======= </TABLE> SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 7
HIGHWOODS PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and the Operating Partnership and its majority controlled affiliates. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. The extraordinary loss represents the write-off of loan origination fees and prepayment penalties paid on the early extinguishment of debt, net of the minority interest. 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. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is required to be adopted in fiscal years beginning after June 15, 1999. The Statement will require 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 derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The fair market value of the Company's derivatives is March 31, 1999 are discussed in Item 2. The "Year 2000" issue is a general term used to describe the various problems that may result from the improper processing of dates and calculations involving years by many computers throughout the world as the Year 2000 is approached and reached. We have reviewed the impact of Year 2000 issues and do not expect Year 2000 issues to be material to our business, operations or financial condition. The Year 2000 issue is discussed more fully in "Management's Discussion and Analysis of Financial Condition and Results of Operations." Minority interest in the Company represents Common Units owned by various individuals and entities and not the Company in the Operating Partnership, the entity that owns substantially all of the Company's properties and through which the Company, as the sole general partner, conducts substantially all of its operations. Per share information is calculated using the weighted average number of shares outstanding (including common share equivalents). In addition, minority interest includes equity of consolidated real estate partnerships which are owned by various individuals and entities and not the Company. The Company acquired greater than 50% of the interest in real estate partnerships as part of its acquisition of J.C. Nichols Company. The accompanying financial information has not been audited, but in the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of our financial position, results of operations and cash flows have been made. For further information, refer to the financial statements and notes thereto included in our 1998 Annual Report on Form 10-K. 2. 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. 8
The accounting policies of the segments are the same as those described in note 1. Further, all operations are within the United States and no tenant comprises more than 10% of consolidated revenues. The following table summarizes the rental income, net operating income and assets for each reportable segment for the quarter ended March 31, 1999 and 1998. <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ------------------------------- 1999 1998 -------------- -------------- (IN THOUSANDS) <S> <C> <C> RENTAL INCOME: Office segment .......................................................... $ 121,208 $ 91,412 Industrial segment ...................................................... 13,054 8,919 Retail segment .......................................................... 7,568 -- Apartment segment ....................................................... 4,891 -- ---------- ---------- $ 146,721 $ 100,331 ========== ========== NET OPERATING INCOME: Office segment net operating income ..................................... $ 82,709 $ 63,225 Industrial segment net operating income ................................. 10,943 7,378 Retail segment net operating income ..................................... 5,069 -- Apartment segment net operating income .................................. 2,655 -- ---------- ---------- $ 101,376 $ 70,603 Reconciliation to income before minority interest and extraordinary item: Equity in income of unconsolidated affiliates ........................... 197 -- Gain on disposition of assets ........................................... 569 -- Interest and other income ............................................... 5,287 2,157 Interest expense ........................................................ (32,620) (17,778) General and administrative expenses ..................................... (5,793) (3,784) Depreciation and amortization ........................................... (28,156) (17,161) ---------- ---------- Income before minority interest and extraordinary item .................. $ 40,860 $ 34,037 ========== ========== TOTAL ASSETS: Office segment .......................................................... $3,229,735 $2,739,906 Industrial segment ...................................................... 490,452 304,175 Retail segment .......................................................... 256,869 -- Apartment segment ....................................................... 136,339 -- Corporate and other ..................................................... 195,699 87,651 ---------- ---------- Total Assets ............................................................ $4,309,094 $3,131,732 ========== ========== </TABLE> 3. JOINT VENTURE ACTIVITY 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 million to a newly created limited partnership (the "Joint Venture"). DLF contributed approximately $55 million for a 77.19% interest in the Joint Venture, and the Joint Venture borrowed approximately $71 million from third-party lenders. The Company retained the remaining 22.81% interest in the Joint Venture, received net cash proceeds of approximately $124 million and are the sole and exclusive manager and leasing agent of the Joint Venture's properties, for which the Company receives customary management fees and leasing commissions. The Company used the cash proceeds received in the transaction to fund existing development activity either through direct payments or repayment of borrowings under the Revolving Loan. 4. CONTINGENCIES LITIGATION. On October 2, 1998, John Flake, a former stockholder of J.C. Nichols Company, filed a putative class action lawsuit on behalf of himself and the other former stockholders of J.C. Nichols in the United States District Court for the District of Kansas against J.C. Nichols, certain of its former officers and directors 9
and the Company. The complaint alleges, among other things, that in connection with the merger of J.C. Nichols and the Company (1) J.C. Nichols and the named directors and officers of J.C. Nichols breached their fiduciary duties to J.C. Nichols' stockholders, (2) J.C. Nichols and the named directors and officers of J.C. Nichols breached their fiduciary duties to members of the J.C. Nichols Company Employee Stock Ownership Trust, (3) all defendants participated in the dissemination of a proxy statement containing materially false and misleading statements and omissions of material facts in violation of Section 14(a) of the Securities and Exchange Act of 1934 and (4) the Company filed a registration statement with the Securities and Exchange Commission containing materially false and misleading statements and omissions of material facts in violation of Sections 11 and 12(2) of the Securities Act of 1933. The plaintiffs seek equitable relief and monetary damages. The Company believes that the defendants have meritorious defenses to the plaintiffs' allegations. The Company intends to vigorously defend this litigation and has filed a motion to dismiss all claims asserted against the defendants. Due to the inherent uncertainties of the litigation process and the judicial system, the Company is not able to predict the outcome of this litigation. If this litigation is not resolved in our favor, it could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company is a party to a variety of legal proceedings arising in the ordinary course of our 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 affect on the Company's business, financial condition and results of operations. 5. SUBSEQUENT EVENTS PENDING DISPOSITION ACTIVITY. The Company recently entered into agreements to sell approximately 3.3 million rentable square feet of non-core office and industrial properties and 49 acres of development land in the South Florida area for gross proceeds of approximately $323.2 million. The South Florida transaction is expected to close by June 1, 1999. The Company recently also entered into agreements to sell approximately 737,000 rentable square feet of non-core office and industrial properties and 10.5 acres of development land in the Baltimore area for gross proceeds of approximately $82.2 million. The Baltimore transaction is expected to close by June 30, 1999. Non-core office and industrial properties generally include single buildings or business parks that do not fit our long-term strategy. The Company can provide no assurance that all or parts of the transactions will be consummated. Both transactions are subject to customary closing conditions, and the Baltimore transaction is also subject to the completion of due diligence. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with all of the financial statements appearing elsewhere in the report. The following discussion is based primarily on the consolidated financial statements of the Company. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1999. Revenues from rental operations increased $46.4 million, or 46%, from $100.3 million for the three months ended March 31, 1998 to $146.7 million for the comparable period in 1999. The increase is primarily a result of our acquisition of 9.6 million square feet of majority owned office, industrial and retail properties and 2,325 apartment units, and the completion of 4.2 million square feet of development activity during the last nine months of 1998 and the first three months of 1999. Our in-service portfolio increased from 33.9 million square feet at March 31, 1998 to 43.6 million square feet at March 31, 1999. Same property revenues, which are the revenues of the 471 in-service properties owned on January 1, 1998, increased 4% for the three months ended March 31, 1999, compared to the same three months of 1998. During the three months ended March 31, 1999, 373 leases representing 2.3 million square feet of office, industrial and retail space commenced at an average rate per square foot which was 5% higher than the average rate per square foot on the expired leases. 10
Interest and other income increased $3.1 million, or 141%, from $2.2 million for the three months ended March 31, 1998 to $5.3 million for the comparable period in 1999. The increase was a result of higher cash balances in 1999, and additional income generated from management fees, development fees and leasing commissions. The Company generated $313,000 in auxiliary income (vending and parking) as a result of acquiring multifamily communities in the merger with J.C. Nichols. Rental operating expenses increased $15.6 million, or 53%, from $29.7 million for the three months ended March 31, 1998 to $45.3 million for the comparable period in 1999. The increase is a result of our addition of 13.8 million square feet of office, industrial and retail space and 2,325 apartment units through a combination of acquisitions and developments during the last nine months of 1998 and the first three months of 1999. Rental operating expenses as a percentage of related revenues increased from 30% for the three months ended March 31, 1998 to 31% for the comparable period in 1999. Depreciation and amortization for the three months ended March 31, 1999 and 1998 was $28.2 million and $13.8 million, respectively. The increase of $11.0 million, or 64%, is due to an increase in depreciable assets over the prior year. Interest expense increased $14.8 million, or 83%, from $17.8 million for the three months ended March 31, 1998 to $32.6 million for the comparable period in 1999. The increase is attributable to the increase in the outstanding debt for the entire quarter. Interest expense for the three months ended March 31, 1999 and 1998 included $778,000 and $616,000, respectively, of amortization of non-cash deferred financing costs and the costs related to the Company's interest rate hedge contracts. General and administrative expenses increased from 3.8% of rental revenue for the three months ended March 31, 1998 to 3.9% for the comparable period in 1999. Net income before minority interest and extraordinary item equaled $40.9 million and $34.0 million for the three months ended March 31, 1999 and 1998, respectively. The Company's net income allocated to minority interest totaled $5.8 million and $5.6 million for the three months ended March 31, 1999 and 1998, respectively. The Company recorded $8.1 million and $6.1 million in preferred stock dividends for the three months ended March 31, 1999 and 1998, respectively. LIQUIDITY AND CAPITAL RESOURCES STATEMENT OF CASH FLOWS. For the three months ended March 31, 1999, cash provided by operating activities decreased by $1.6 million, or 3%, to $50.4 million, as compared to $52.0 million for the same period in 1998. The decrease is primarily due to the payment of real estate taxes due in the first quarter of 1999 offset by the increase in net income resulting from our property acquisitions in 1998 and 1999. Cash used for investing activities decreased by $303.2 million, to $22.6 million, for the first three months of 1999, as compared to $325.8 million for the same period in 1998. The decrease is due to a decline in acquisition activity during the first three months of 1999 as compared to the same period in 1998 and the sale or contribution of certain office properties to a newly created joint venture as described under " -- Recent Developments," partially offset by an increase in development activity. Cash provided by financing activities decreased by $316.9 million to $(20.9) million for the first three months of 1999, as compared to $296.0 million for the same period in 1998. Payments of distributions increased by $8.0 million to $38.1 million for the first three months of 1999, as compared with $30.1 million for the same period in 1998. The increase is due to the greater number of shares outstanding and a 6% increase in the distribution rate. Preferred stock dividend payments were $8.1 million for the first three months of 1999, as compared to $6.1 million for the same period in 1998. The increase is due to the issuance of Preferred Series D Shares in the first quarter of 1998. CAPITALIZATION. The Company's total indebtedness at March 31, 1999 totaled $2.0 billion and was comprised of $641.9 million of secured indebtedness with a weighted average interest rate of 7.7% and $1.4 billion of unsecured indebtedness with a weighted average interest rate of 7.0%. Except as stated below, all of the mortgage and notes payable outstanding at March 31, 1999 were either fixed rate obligations or variable rate obligations covered by interest rate hedge contracts. A portion of our $600 million unsecured revolving loan (the "Revolving Loan") and approximately $73 million of floating rate notes payable assumed upon consummation of the merger with J.C. Nichols were not covered by interest rate hedge contracts on March 31, 1999. 11
Based on the Company's total market capitalization of $4.1 billion at March 31, 1999, (at the March 31, 1999 stock price of $23.56 and assuming the redemption for shares of Common Stock of the 8,877,978 Common Units of minority interest in the Operating Partnership), the Company's debt represented approximately 50% of its total market capitalization. To meet in part our long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Borrowings under our Revolving Loan bear interest at variable rates. Our long-term debt, which consists of long-term financings and the issuance of debt securities, typically bears interest at fixed rates. In addition, we have assumed fixed rate and variable rate debt in connection with acquiring properties. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not hold or issue these derivative contracts for trading or speculative purposes. The following table sets forth information regarding our interest rate hedge contracts as of March 31, 1999: <TABLE> <CAPTION> NOTIONAL MATURITY FIXED FAIR MARKET TYPE OF HEDGE AMOUNT DATE REFERENCE RATE RATE VALUE - ---------------- ---------- ---------- ----------------------- ------------- ------------ (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> Treasury Lock $100,000 10/1/99 10-Year Treasury 5.725% $ (3,331) Treasury Lock 50,000 6/10/99 10-Year Treasury 5.276 114 Treasury Lock 100,000 7/1/99 10-Year Treasury 5.674 (3,166) Swap 100,000 10/1/99 3-Month LIBOR 4.970 22 Swap 20,970 6/10/02 1-Month LIBOR + 0.75% 7.700 (1,333) Collar 80,000 10/15/01 1-Month LIBOR 5.40 - 6.25 (482) </TABLE> We enter into swaps, collars and caps to limit our exposure to an increase in variable interest rates, particularly with respect to amounts outstanding under our Revolving Loan. The interest rate on all of our variable rate debt is adjusted at one- and three-month intervals, subject to settlements under these contracts. We also enter into treasury lock agreements from time to time in order to limit our exposure to an increase in interest rates with respect to future debt offerings. In addition, we are exposed to certain losses in the event of nonperformance by the counterparties under the interest rate hedge contracts. We expect the counterparties, which are major financial institutions, to perform fully under these contracts. However, if the counterparties were to default on their obligations under the interest rate hedge contracts, we could be required to pay the full rates on our debt, even if such rates were in excess of the rates in the contracts. CURRENT AND FUTURE CASH NEEDS. Historically, rental revenue has been the principal source of funds to pay operating expenses, debt service, stockholder distributions and capital expenditures, excluding nonrecurring capital expenditures. In addition, construction management, maintenance, leasing and management fees have provided sources of cash flow. We presently have no plans for major capital improvements to the existing in-service properties, other than normal recurring building improvements, tenant improvements and lease commissions. We expect to meet our short-term liquidity requirements generally through working capital and net cash provided by operating activities along with the Revolving Loan. Our short-term (within the next 12 months) liquidity needs also include, among other things, the funding of approximately $310 million of our existing development activity. We expect to fund our short-term liquidity needs through a combination of: o additional borrowings under our Revolving Loan (approximately $144 million was available as of March 31, 1999); o the issuance of secured debt; o the selective disposition of non-core assets; and 12
o the sale or contribution of some of our wholly owned properties to strategic joint ventures to be formed with selected partners interested in investing with us, which will have the net effect of generating additional capital through such sale or contributions. Because of certain financial covenants set forth in the Revolving Loan, we intend to finance a significant portion of our short-term development expenses through asset sales and joint ventures. Although we believe that we will be able to fund our short-term development commitments, an inability to sell a sufficient number of non-core assets or to enter into significant joint venture arrangements of the type described above could adversely affect our liquidity. See " -- Recent Developments." Our long-term liquidity needs generally include the funding of existing and future development activity, selective asset acquisitions and the retirement of mortgage debt, amounts outstanding under the Revolving Loan and long-term unsecured debt. We remain committed to maintaining a flexible and conservative capital structure. Accordingly, we expect to meet our long-term liquidity needs through a combination of (1) the issuance by the Operating Partnership of additional unsecured debt securities, (2) the issuance of additional equity securities by the Company and the Operating Partnership as well as (3) the sources described above with respect to our short-term liquidity. We expect to use such sources to meet our long-term liquidity requirements either through direct payments or repayment of borrowings under the Revolving Loan. We do not intend to reserve funds to retire existing secured or unsecured indebtedness upon maturity. Instead, we will seek to refinance such debt at maturity or retire such debt through the issuance of equity or debt securities. We anticipate that our available cash and cash equivalents and cash flows from operating activities, together with cash available from borrowings and other sources, will be adequate to meet our capital and liquidity needs in both the short and long term. However, if these sources of funds are insufficient or unavailable, the Company's ability to make the expected distributions to stockholders discussed below and satisfy other cash requirements may be adversely affected. DISTRIBUTIONS TO STOCKHOLDERS. In order to qualify as a REIT for Federal income tax purposes, the Company is required to make distributions to its stockholders of at least 95% of REIT taxable income. The Company expects to use its cash flow from operating activities for distributions to stockholders and for payment of recurring, non-incremental revenue-generating expenditures. The following factors will affect cash flows from operating activities and, accordingly, influence the decisions of the Board of Directors regarding distributions: (1) debt service requirements after taking into account the repayment and restructuring of certain indebtedness; (2) scheduled increases in base rents of existing leases; (3) changes in rents attributable to the renewal of existing leases or replacement leases; (4) changes in occupancy rates at existing properties and procurement of leases for newly acquired or developed properties; and (5) operating expenses and capital replacement needs. RECENT DEVELOPMENTS JOINT VENTURE ACTIVITY. On March 15, 1999, we closed a transaction with Schweiz-Deutschland-USA Dreilander Beteiligung Objekt-DLF 98/29-Walker Fink-KG ("DLF"), pursuant to which we sold or contributed certain office properties valued at approximately $142 million to a newly created limited partnership (the "Joint Venture"). DLF contributed approximately $55 million for a 77.19% interest in the Joint Venture, and the Joint Venture borrowed approximately $71 million from third-party lenders. We retained the remaining 22.81% interest in the Joint Venture, received net cash proceeds of approximately $124 million and are the sole and exclusive manager and leasing agent of the Joint Venture's properties, for which we receive customary management fees and leasing commissions. We used the cash proceeds received in the transaction to fund existing development activity either through direct payments or repayment of borrowings under the Revolving Loan. PENDING DISPOSITION ACTIVITY. We recently entered into agreements to sell approximately 3.3 million rentable square feet of non-core office and industrial properties and 49 acres of development land in the South Florida area for gross proceeds of approximately $323.2 million. The South Florida transaction is expected to close by June 1, 1999. We recently also entered into agreements to sell approximately 737,000 rentable square feet of non-core office and industrial properties and 10.5 acres of development land in the Baltimore area for gross proceeds of approximately $82.2 million. The Baltimore transaction is expected to close by June 30, 1999. Non-core office and industrial properties generally include single buildings or business parks that do not fit our long-term strategy. We can provide no assurance that all or parts of the transactions will be consummated. Both 13
transactions are subject to customary closing conditions, and the Baltimore transaction is also subject to the completion of due diligence. YEAR 2000 BACKGROUND. The Year 2000 compliance issue refers to the inability of computer systems and computer software to correctly process any date after 1999. The date change to the new millennium may be a problem because some computer hardware and software was designed to use only two digits to represent a year. As a result, some systems may interpret 1/1/00 to be the year 1900. In addition, some systems may not recognize that the Year 2000 is a leap year. Both problems could result in system failure or miscalculations, which may cause disruptions of operations. The Year 2000 issue, if not corrected, could result in the failure of the information technology ("IT") systems that we use in our business operations, such as computer programs related to property management, leasing, financial reporting, employee benefits, asset management and energy management. In addition, computerized systems and microprocessors are embedded in a variety of products used in our operations and properties, such as HVAC controls, lights, power generators, elevators, life safety systems, phones and security systems. APPROACH AND STATUS. Our Year 2000 compliance efforts are divided into two areas -- "operations level" and "property level." Operations level includes those information technology systems used in our corporate and division offices to perform real estate, accounting and human resources functions. Property level includes the non-information technology systems at our individual properties. Our Y2K remediation plan at both the operations and property levels has three phases: o assessment (inventory and testing of computer systems), o renovation (repairing or replacing non-compliant systems) and o validation (testing of repaired or replaced systems). Our Information Technology Department is overseeing our operations level compliance program. With respect to our operations level IT software, we have completed all three phases of our Year 2000 remediation plan. As part of a standardization of our technology infrastructure in 1998, computer software that was not Year 2000 compliant was upgraded or replaced. These software upgrades were off-the-shelf Year 2000 compliant packages. Additionally, we successfully upgraded and tested a Year 2000 compliant version of our corporate accounting and property management software in December 1998. With respect to our operations level IT hardware, we have completed the assessment phase of our remediation plan and are 90% complete (in terms of labor) with the renovation and validation phases of the plan. We expect to complete the renovation and validation phases with respect to our operations level hardware by the third quarter of 1999. Our Chief Operating Officer is overseeing our property level compliance program. We have completed our inventory of all of our properties' non-information technology systems. As part of the inventory process, we requested appropriate vendors and manufacturers to certify that their products are Year 2000 compliant. We are approximately 75% complete (in terms of labor) with the renovation and validation phases of our remediation plan at the property level. We expect to complete both phases in the third quarter. With respect to Year 2000 issues relating to our customer base, we have not sought representations from our tenants with respect to their Year 2000 readiness because no one tenant represents more than 3% of our annualized rental revenue. With respect to suppliers and vendors, our material purchases are generally from those in competitive fields where others will be able to meet any of our needs unmet by suppliers or vendors with Year 2000 difficulties. (Although we have no reason to expect a significant interruption of utility services for our properties, we have not received (nor sought) written assurances from utility providers that Y2K issues will not cause an interruption in service.) COSTS. To date, the costs directly associated with our Year 2000 efforts have not been material, and we estimate our future costs to be immaterial as well. RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE. We do not expect Year 2000 failures to have a material adverse effect on our results of operations or liquidity because: o we do not rely on a small number of tenants for a significant portion of our rental revenue; 14
o we stand ready to switch vendors or suppliers whose Year 2000 failures adversely affect their products or services; and o our remediation plan is expected to be complete prior to the Year 2000. As a result, we do not expect to develop a contingency plan for Year 2000 failures. Our assessment of the likely impact of Year 2000 issues on us, which is a forward-looking statement, depends on numerous factors, such as the continued provision of utility services, and we remain exposed to the risk of Year 2000 failures. See " -- Disclosure Regarding Forward-Looking Statements." Our disclosures and announcements concerning our Year 2000 programs are intended to constitute "Year 2000 Readiness Disclosures" as defined in the recently-enacted Year 2000 Information and Readiness Disclosure Act. The Act provides added protection from liability for certain public and private statements concerning an entity's Year 2000 readiness and the Year 2000 readiness of its products and services. The Act also potentially provides added protection from liability for certain types of Year 2000 disclosures made after January 1, 1996, and before the date of enactment of the Act. POSSIBLE ENVIRONMENTAL LIABILITIES In connection with owning or operating our properties, we may be liable for certain costs due to possible environmental liabilities. Under various laws, ordinances and regulations, such as the Comprehensive Environmental Response Compensation and Liability Act, and common law, an owner or operator of real estate is liable for the costs to remove or remediate certain hazardous or toxic chemicals or substances on or in the property. Owners or operators are also liable for certain other costs, including governmental fines and injuries to persons and property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic chemicals or substances. The presence of such substances, or the failure to remediate such substances properly, may adversely affect the owner's or operator's ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal, treatment or transportation of hazardous or toxic chemicals or substances may also be liable for the same types of costs at a disposal, treatment or storage facility, whether or not that person owns or operates that facility. Certain environmental laws also impose liability for releasing asbestos-containing materials. Third parties may seek recovery from owners or operators of real property for personal injuries associated with asbestos- containing materials. A number of our properties have asbestos-containing materials or material that we presume to be asbestos-containing materials. In connection with owning and operating our properties, we may be liable for such costs. In addition, it is not unusual for property owners to encounter on-site contamination caused by off-site sources. The presence of hazardous or toxic chemicals or substances at a site close to a property could require the property owner to participate in remediation activities or could adversely affect the value of the property. Contamination from adjacent properties has migrated onto at least three of our properties; however, based on current information, we do not believe that any significant remedial action is necessary at these affected sites. As of the date hereof, we have obtained Phase I environmental assessments (and, in certain instances, Phase II environmental assessments) on substantially all of our in-service properties. These assessments have not revealed, nor are we aware of, any environmental liability at our properties that we believe would materially adversely affect our financial position, operations or liquidity taken as a whole. This projection, however, could be incorrect depending on certain factors. For example, material environmental liabilities may have arisen after the assessments were performed or our assessments may not have revealed all environmental liabilities or may have underestimated the scope and severity of environmental conditions observed. There may also be unknown environmental liabilities at properties for which we have not obtained a Phase I environmental assessment or have not yet obtained a Phase II environmental assessment. In addition, we base our assumptions regarding environmental conditions, including groundwater flow and the existence and source of contamination, on readily available sampling data. We cannot guarantee that such data is reliable in all cases. Moreover, we cannot provide any assurances (1) that future laws, ordinances or regulations will not impose a material environmental liability or (2) that tenants, the condition of land or operations in the vicinity of our properties or unrelated third parties will not affect the current environmental condition of our properties. 15
Some tenants use or generate hazardous substances in the ordinary course of their respective businesses. In their leases, we require these tenants to comply with all applicable laws and to be responsible to us for any damages resulting from their use of the property. We are not aware of any material environmental problems resulting from tenants' use or generation of hazardous or toxic chemicals or substances. We cannot provide any assurances, however, that all tenants will comply with the terms of their leases or remain solvent. If tenants do not comply or do not remain solvent, we may at some point be responsible for contamination caused by such tenants. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is required to be adopted in fiscal years beginning after June 15, 1999. The Statement will require us to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT Under the Americans with Disabilities Act (the "ADA"), all public accommodations and commercial facilities are required to meet certain federal requirements related to access and use by disabled persons. These requirements became effective in 1992. Compliance with the ADA requirements could require removal of access barriers, and noncompliance could result in imposition of fines by the U.S. government or an award of damages to private litigants. Although we believe that our properties are substantially in compliance with these requirements, we may incur additional costs to comply with the ADA. Although we believe that such costs will not have a material adverse effect on us, if required changes involve a greater expenditure than we currently anticipate, our results of operations, liquidity and capital resources could be materially adversely affected. FUNDS FROM OPERATIONS AND CASH AVAILABLE FOR DISTRIBUTIONS We consider funds from operations ("FFO") to be a useful financial performance measure of the operating performance of an equity REIT because, together with net income and cash flows, FFO provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures. FFO does not represent net income or cash flows from operating, investing or financing activities as defined by Generally Accepted Accounting Principles ("GAAP"). It should not be considered as an alternative to net income as an indicator of our operating performance or to cash flows as a measure of liquidity. FFO does not measure whether cash flow is sufficient to fund all cash needs, including principal amortization, capital improvements and distributions to stockholders. Further, FFO as disclosed by other REITs may not be comparable to our calculation of FFO, as described below. FFO and cash available for distributions should not be considered as alternatives to net income as an indication of our performance or to cash flows as a measure of liquidity. FFO means net income (computed in accordance with generally accepted accounting principles) excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. In March 1995, the National Association of Real Estate Investment Trusts ("NAREIT") issued a clarification of the definition of FFO. The clarification provides that amortization of deferred financing costs and depreciation of non-real estate assets are no longer to be added back to net income in arriving at FFO. Cash available for distribution is defined as funds from operations reduced by non-revenue enhancing capital expenditures for building improvements and tenant improvements and lease commissions related to second generation space. 16
FFO and cash available for distribution for the three month periods ended March 31, 1999 and 1998 are summarized in the following table (in thousands): <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ------------------------ 1999 1998 ----------- ---------- <S> <C> <C> FUNDS FROM OPERATIONS: Income before minority interest and extraordinary item ..................... $ 40,860 $ 34,037 Add (deduct): Dividends to preferred shareholders ....................................... (8,145) (6,145) Gain on disposition of assets ............................................. (569) -- Depreciation and amortization ............................................. 28,156 17,161 Depreciation on unconsolidated affiliates ................................. 477 -- -------- -------- FUNDS FROM OPERATIONS BEFORE MINORITY INTEREST .......................... 60,779 45,053 CASH AVAILABLE FOR DISTRIBUTION: Add (deduct): Rental income from straight-line rents .................................... (3,985) (3,116) Amortization of deferred financing costs .................................. 778 616 Non-incremental revenue generating capital expenditures (1): Building improvements paid .............................................. (1,518) (1,019) Second generation tenant improvements paid .............................. (6,009) (2,436) Second generation lease commissions paid ................................ (3,531) (1,726) -------- -------- CASH AVAILABLE FOR DISTRIBUTION ........................................ $ 46,514 $ 37,372 ======== ======== Weighted average common shares/common units outstanding -- basic (2) ....... 70,114 59,598 ======== ======== Weighted average common shares/common units outstanding -- diluted (2) ..... 70,251 60,235 ======== ======== DIVIDEND PAYOUT RATIO -- DILUTED: Funds from operations ..................................................... 62.4% 68.2% ======== ======== Cash available for distribution ........................................... 81.6% 82.2% ======== ======== </TABLE> - ---------- (1) Amounts represent cash expenditures. (2) Assumes redemption of Common Units for shares of Common Stock. Minority interest Common Unit holders and the stockholders of the Company share equally on a per share and per Common Unit basis; therefore, the resultant per share information is unaffected by the conversion. On April 27, 1999, the Company's Board of Directors declared a dividend of $.54 per share ($2.16 on an annualized basis) payable on May 19, 1999 to stockholders of record on May 7, 1999. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS Some of the information in this Quarterly Report on Form 10-Q may contain forward-looking statements. Such statements include, in particular, statements about our plans, strategies and prospects under "Management's Discussion and Analysis of Financial Condition and Results of Operations." You can identify forward-looking statements by our use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate," "continue" or other similar words. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that our plans, intentions or expectations will be achieved. When considering such forward-looking statements, you should keep in mind the following important factors that could cause our actual results to differ materially from those contained in any forward-looking statement: o our markets could suffer unexpected increases in development of office, industrial and retail properties; o the financial condition of our tenants could deteriorate; o the costs of our development projects could exceed our original estimates; 17
o we may not be able to complete development, acquisition, disposition or joint venture projects as quickly or on as favorable terms as anticipated; o we may not be able to lease or release space quickly or on as favorable terms as old leases; o we may have incorrectly assessed the environmental condition of our properties; o an unexpected increase in interest rates would increase our debt service costs; o we may not be able to continue to meet our long-term liquidity requirements on favorable terms; o we could lose key executive officers; and o our southeastern markets may suffer an unexpected decline in economic growth or increase in unemployment rates. Given these uncertainties, we caution you not to place undue reliance on forward-looking statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances or to reflect the occurrence of unanticipated events. 18
PROPERTY INFORMATION The following table sets forth certain information with respect to our majority owned in-service and development properties (excluding apartment units) as of March 31, 1999 and 1998: <TABLE> <CAPTION> RENTABLE NUMBER OF PERCENT LEASED/ MARCH 31, 1999 SQUARE FEET PROPERTIES PRE-LEASED - ---------------------------- ------------- ------------ ---------------- <S> <C> <C> <C> IN-SERVICE: Office .................... 30,032,000 443 94% Industrial ................ 11,883,000 184 91% Retail .................... 1,661,000 18 91% ---------- --- -- Total .................... 43,576,000 645 93% ========== === == REDEVELOPMENT: Office .................... 207,000 4 49% Industrial ................ 194,000 4 1% ---------- --- -- Total .................... 401,000 8 26% ========== === == DEVELOPMENT: COMPLETED -- NOT STABILIZED Office .................... 1,564,000 15 79% Industrial ................ 777,000 6 87% Retail .................... -- -- -- ---------- --- -- Total .................... 2,341,000 21 82% ========== === == IN PROCESS Office .................... 3,764,000 30 64% Industrial ................ 131,000 1 50% Retail .................... 200,000 2 65% ---------- --- -- Total .................... 4,095,000 33 63% ========== === == TOTAL: Office .................... 35,567,000 492 Industrial ................ 12,985,000 195 Retail .................... 1,861,000 20 ---------- --- Total .................... 50,413,000 707 ========== === MARCH 31, 1998 - ----------------------------- IN-SERVICE: Office .................... 26,501,000 382 94% Industrial ................ 7,429,000 148 90% Retail .................... -- -- -- ---------- --- -- Total .................... 33,930,000 530 93% ========== === == REDEVELOPMENT Office .................... N/A N/A N/A Industrial ................ N/A N/A N/A ---------- --- ---- Total .................... N/A N/A N/A ========== === ==== DEVELOPMENT: COMPLETED -- NOT STABILIZED Office .................... N/A N/A N/A Industrial ................ N/A N/A N/A Retail .................... N/A N/A N/A ---------- --- ---- Total .................... N/A N/A N/A ========== === ==== IN PROCESS Office .................... 3,182,000 27 53% Industrial ................ 396,000 5 25% Retail .................... -- -- -- ---------- --- ---- Total .................... 3,578,000 32 50% ========== === ==== TOTAL: Office .................... 29,683,000 409 Industrial ................ 7,825,000 153 Retail .................... -- -- ---------- --- Total .................... 37,508,000 562 ========== === </TABLE> 19
The following table sets forth certain information with respect to our properties under development as of March 31, 1999 (dollars in thousands): <TABLE> <CAPTION> RENTABLE SQUARE ESTIMATED NAME LOCATION FEET COSTS - ------------------------------- ------------------- ------------ ----------- <S> <C> <C> <C> IN-PROCESS OFFICE: Highwoods Center II @ Tradeport Atlanta 53,000 $ 4,825 Peachtree Corner Atlanta 109,000 9,238 Highwoods I Baltimore 125,000 15,300 Mallard Creek V Charlotte 118,000 12,262 Parkway Plaza 14 Charlotte 90,000 7,690 Lakefront Plaza I Hampton Roads 77,000 7,477 Belfort Park C1 Jacksonville 54,000 4,830 Belfort Park C2 Jacksonville 31,000 2,730 Valencia Place Kansas City 241,000 34,020 Southwind Building D Memphis 64,000 6,800 Caterpillar Financial Center Nashville 313,000 54,000 Lakeview Ridge III Nashville 131,000 13,100 Westwood South Nashville 125,000 13,530 C N A Maitland III Orlando 78,000 9,885 Capital Plaza Orlando 303,000 53,000 Concourse Center One Piedmont Triad 86,000 8,400 3737 Glenwood Ave. Research Triangle 107,000 16,700 4101 Research Commons Research Triangle 73,000 9,311 Capital One Bldg 1 Richmond 126,000 14,795 Capital One Bldg 2 Richmond 44,000 5,125 Capital One Bldg 3 Richmond 126,000 14,380 Highwoods Common Richmond 49,000 4,840 Stony Point II Richmond 136,000 13,881 Sportsline USA South Florida 80,000 10,000 Intermedia Building 1 Tampa 200,000 27,040 Intermedia Building 2 Tampa 30,000 4,056 Intermedia Building 3 Tampa 170,000 22,984 Intermedia Building 4 Tampa 200,000 29,219 Intermedia Building 5 Tampa 200,000 29,219 Lakepoint II Tampa 225,000 34,106 ------- -------- In-Process Office Total or Weighted Average 3,764,000 $492,743 ========= ======== INDUSTRIAL: Newpoint II Atlanta 131,000 5,167 --------- -------- In-Process Industrial Total or Weighted Average 131,000 $ 5,167 ========= ======== RETAIL: Seville Square Kansas City 119,000 32,100 Valencia Place Kansas City 81,000 14,362 --------- -------- In-Process Retail Total or Weighted Average 200,000 $ 46,462 ========= ======== Total or Weighted Average of all In-Process Development Projects 4,095,000 $544,372 ========= ======== <CAPTION> COST AT PRE-LEASING ESTIMATED ESTIMATED NAME 3/31/99 PERCENTAGE(1) COMPLETION STABILIZATION(2) - ------------------------------- ----------- --------------- ------------ ----------------- <S> <C> <C> <C> <C> IN-PROCESS OFFICE: Highwoods Center II @ Tradeport $ 994 57% 3Q 99 4Q 99 Peachtree Corner 3,042 -- 3Q 99 3Q 00 Highwoods I 8,048 -- 2Q 99 4Q 99 Mallard Creek V 5,948 -- 4Q 99 4Q 00 Parkway Plaza 14 3,236 58 2Q 99 1Q 00 Lakefront Plaza I 5,122 31 2Q 99 1Q 00 Belfort Park C1 1,579 -- 3Q 99 2Q 00 Belfort Park C2 1,130 -- 3Q 99 2Q 00 Valencia Place 16,879 41 1Q 00 4Q 00 Southwind Building D 3,869 56 2Q 99 4Q 99 Caterpillar Financial Center 16,743 79 1Q 00 2Q 00 Lakeview Ridge III 8,523 88 2Q 99 2Q 99 Westwood South 8,068 79 3Q 99 1Q 00 C N A Maitland III 5,648 100 3Q 99 3Q 99 Capital Plaza 15,721 30 1Q 00 4Q 01 Concourse Center One 4,817 32 2Q 99 1Q 00 3737 Glenwood Ave. 8,903 56 3Q 99 1Q 00 4101 Research Commons 3,919 35 3Q 99 2Q 00 Capital One Bldg 1 8,647 100 2Q 99 2Q 99 Capital One Bldg 2 3,064 100 3Q 99 3Q 99 Capital One Bldg 3 4,401 100 4Q 99 4Q 99 Highwoods Common 3,902 100 2Q 99 2Q 99 Stony Point II 9,148 52 2Q 99 4Q 99 Sportsline USA 3,153 100 3Q 99 3Q 99 Intermedia Building 1 1,298 100 1Q 00 1Q 00 Intermedia Building 2 123 100 1Q 00 1Q 00 Intermedia Building 3 1,674 100 1Q 00 1Q 00 Intermedia Building 4 -- 100 2Q 00 2Q 00 Intermedia Building 5 -- 100 3Q 01 3Q 01 Lakepoint II 8,334 52 4Q 99 4Q 99 -------- --- In-Process Office Total or Weighted Average $165,933 64% ======== === INDUSTRIAL: Newpoint II 2,964 50% 2Q 99 2Q 00 -------- --- In-Process Industrial Total or Weighted Average $ 2,964 50% ======== === RETAIL: Seville Square 26,913 75% 2Q 99 4Q 99 Valencia Place 3,876 50 1Q 00 4Q 00 -------- --- In-Process Retail Total or Weighted Average $ 30,789 65% ======== === Total or Weighted Average of all In-Process Development Projects $199,686 63% ======== === </TABLE> - ---------- (1) Includes the effect of letters of intent. (2) We generally consider a development project to be stabilized upon the earlier of the first date such project is at least 95% occupied or one year from the date of completion. 20
<TABLE> <CAPTION> RENTABLE SQUARE ESTIMATED NAME LOCATION FEET COSTS - ------------------------------- ------------------- ------------ ----------- <S> <C> <C> <C> COMPLETED -- NOT STABILIZED OFFICE: Ridgefield III Asheville 57,000 $ 5,500 10 Glenlakes Atlanta 254,000 35,100 Highwoods Center I @ Tradeport Atlanta 45,000 3,717 Parkway Plaza 11 Charlotte 32,000 2,600 Parkway Plaza 12 Charlotte 22,000 1,800 Patewood VI Greenville 107,000 11,400 Highwoods Centre Hampton Roads 103,000 9,925 Cool Springs I Nashville 153,000 16,800 Highwoods Centre Research Triangle 76,000 8,300 Overlook Research Triangle 97,000 10,500 Red Oak Research Triangle 65,000 6,000 Situs II Research Triangle 59,000 6,300 Eastshore II Richmond 76,000 7,842 Highwoods Square South Florida 93,000 12,500 Interstate Corporate Center Tampa 325,000 19,100 ------- -------- Completed -- Not Stabilized Office Total or Weighted Average 1,564,000 $157,384 ========= ======== INDUSTRIAL: Bluegrass Lakes I Atlanta 112,000 4,700 Tradeport 1 Atlanta 87,000 3,100 Tradeport 2 Atlanta 87,000 3,100 Air Park South Warehouse II Piedmont Triad 136,000 4,200 Air Park South Warehouse VI Piedmont Triad 189,000 8,000 HIW Distribution Center Richmond 166,000 5,764 --------- -------- Completed -- Not Stabilized Industrial Total or Weighted Average 777,000 $ 28,864 --------- -------- Total or Weighted Average of all Completed -- Not Stabilized Development Projects 2,341,000 $186,248 ========= ======== Total or Weighted Average of all Development Projects 6,436,000 $730,620 ========= ======== <CAPTION> COST AT PRE-LEASING ESTIMATED ESTIMATED NAME 3/31/99 PERCENTAGE(1) COMPLETION STABILIZATION(2) - ------------------------------- ----------- --------------- ------------ ----------------- <S> <C> <C> <C> <C> COMPLETED -- NOT STABILIZED OFFICE: Ridgefield III $ 5,046 44% 3Q 98 4Q 99 10 Glenlakes 27,469 77 1Q 99 4Q 99 Highwoods Center I @ Tradeport 2,776 100 1Q 99 2Q 99 Parkway Plaza 11 2,212 66 1Q 99 3Q 99 Parkway Plaza 12 1,401 61 1Q 99 4Q 99 Patewood VI 11,882 92 3Q 98 2Q 99 Highwoods Centre 8,103 60 4Q 98 4Q 99 Cool Springs I 15,076 66 3Q 98 3Q 99 Highwoods Centre 8,313 100 4Q 98 3Q 99 Overlook 9,509 91 4Q 98 2Q 99 Red Oak 4,767 80 4Q 98 2Q 99 Situs II 5,986 83 3Q 98 2Q 99 Eastshore II 6,275 100 1Q 99 2Q 99 Highwoods Square 8,842 47 1Q 99 4Q 99 Interstate Corporate Center 16,527 90 1Q 99 2Q 99 -------- --- Completed -- Not Stabilized Office Total or Weighted Average $134,184 79% ======== === INDUSTRIAL: Bluegrass Lakes I 3,856 100% 1Q 99 2Q 99 Tradeport 1 2,605 87 3Q 98 2Q 99 Tradeport 2 2,587 96 3Q 98 2Q 99 Air Park South Warehouse II 3,216 100 4Q 98 3Q 99 Air Park South Warehouse VI 6,784 100 1Q 99 2Q 99 HIW Distribution Center 5,831 46 1Q 99 4Q 99 -------- --- Completed -- Not Stabilized Industrial Total or Weighted Average $ 24,879 87% -------- --- Total or Weighted Average of all Completed -- Not Stabilized Development Projects $159,063 82% ======== === Total or Weighted Average of all Development Projects $358,749 70% ======== === </TABLE> - ---------- (1) Includes the effect of letters of intent. (2) We generally consider a development project to be stabilized upon the earlier of the first date such project is at least 95% occupied or one year from the date of completion. 21
<TABLE> <CAPTION> RENTABLE SQUARE ESTIMATED PRE-LEASING FEET COSTS PERCENTAGE(1) DEVELOPMENT ANALYSIS ------------- ----------------------- ---------------- (DOLLARS IN THOUSANDS) ----------------------- <S> <C> <C> <C> SUMMARY BY ESTIMATED STABILIZATION DATE: Second Quarter 1999 .................. 1,555,000 $116,494 93% Third Quarter 1999 ................... 599,000 56,910 89 Fourth Quarter 1999 .................. 1,543,000 191,981 57 First Quarter 2000 ................... 885,000 107,877 75 Second Quarter 2000 .................. 802,000 105,257 67 Third Quarter 2000 ................... 109,000 9,238 -- Fourth Quarter 2000 .................. 440,000 60,644 32 Third Quarter 2001 ................... 200,000 29,219 100 Fourth Quarter 2001 .................. 303,000 53,000 30 --------- -------- --- Total or Weighted Average ........... 6,436,000 $730,620 70% ========= ======== === SUMMARY BY MARKET: Asheville ............................ 57,000 5,500 44% Atlanta .............................. 878,000 68,947 69 Baltimore ............................ 125,000 15,300 0 Charlotte ............................ 262,000 24,352 33 Greenville ........................... 107,000 11,400 92 Hampton Roads ........................ 180,000 17,402 48 Jacksonville ......................... 85,000 7,560 0 Kansas City .......................... 441,000 80,482 52 Memphis .............................. 64,000 6,800 56 Nashville ............................ 722,000 97,430 78 Orlando .............................. 381,000 62,885 44 Piedmont Triad ....................... 411,000 20,600 86 Research Triangle .................... 477,000 57,111 74 Richmond ............................. 723,000 66,627 79 South Florida ........................ 173,000 22,500 72 Tampa ................................ 1,350,000 165,724 90 --------- -------- --- Total or Weighted Average ........... 6,436,000 $730,620 70% ========= ======== === Build-to-Suit ....................... 1,254,000 $166,703 100% Multi-tenant ........................ 5,182,000 563,917 63 --------- -------- --- Total or Weighted Average ........... 6,436,000 $730,620 70% ========= ======== === RENTABLE SQUARE FEET ESTIMATED COSTS PRE-LEASING(1) ------------- ----------------------- ------------- PER PROPERTY TYPE: Office Weighted Average............... 118,400 $ 14,447 68% Industrial Weighted Average .......... 129,714 4,862 81 Retail Weighted Average .............. 100,000 23,231 65 --------- -------- ------------- Total Weighted Average ............... 119,400 $ 13,378 70% ========= ======== ============= </TABLE> - ---------- (1) Includes the effect of letters of intent. 22
The following table sets forth certain information with respect to our properties under redevelopment as of March 31, 1999 (dollars in thousands): <TABLE> <CAPTION> RENTABLE ESTIMATED SQUARE ESTIMATED COST AT PRE-LEASING ESTIMATED STABILIZATION NAME LOCATION FEET COST 3/31/99 (1) COMPLETION (2) - --------------------------- --------------- ---------- ----------- --------- ------------- ------------ -------------- <S> <C> <C> <C> <C> <C> <C> <C> OFFICE: Highwoods Park B South Florida 27,000 $ 2,296 $ 1,834 99% 1Q 00 3Q 00 Highwoods Park C South Florida 77,000 6,667 5,347 47 1Q 00 3Q 00 Highwoods Park E South Florida 78,000 6,782 5,248 50 1Q 00 3Q 00 Highwoods Park F South Florida 25,000 2,394 1,730 -- 1Q 00 3Q 00 ------ ------- ------- -- Total or Weighted Average 207,000 18,139 14,159 49 ======= ======= ======= == INDUSTRIAL: Highwoods Park G South Florida 66,000 4,241 2,578 1% 1Q 00 3Q 00 Highwoods Park H1 South Florida 20,000 1,426 771 -- 1Q 00 3Q 00 Highwoods Park H2 South Florida 36,000 3,022 2,385 -- 1Q 00 3Q 00 Highwoods Park J South Florida 72,000 4,501 2,725 -- 1Q 00 3Q 00 ------- ------- ------- -- Total or Weighted Average 194,000 13,190 8,459 -- ======= ======= ======= == Grand Total 401,000 31,329 22,618 26% ======= ======= ======= == </TABLE> - ---------- (1) Includes the effect of letters of intent. (2) We generally consider a development project to be stabilized upon the earlier of the first date such project is at least 95% occupied or one year from the date of completion. 23
The following tables set forth certain information about our leasing activities at our majority-owned in service properties (excluding apartment units) for the three months ended March 31, 1999 and December 31, September 30 and June 30, 1998. <TABLE> <CAPTION> OFFICE LEASING STATISTICS THREE MONTHS ENDED ----------------------------------------------------------------------------------- 3/31/99 12/31/98 9/30/98 6/30/98 AVERAGE -------------- -------------- --------------- -------------- -------------- <S> <C> <C> <C> <C> <C> NET EFFECTIVE RENTS RELATED TO RE-LEASED SPACE: Number of lease transactions (signed leases) 276 308 326 285 299 Rentable square footage leased 1,406,170 1,291,297 1,645,913 1,099,805 1,360,796 Average per rentable square foot over the lease term: Base rent $ 14.84 $ 16.54 $ 16.18 $ 15.53 $ 15.77 Tenant improvements (0.84) ( 0.85) ( 0.71) ( 1.00) ( 0.85) Leasing commissions (0.42) ( 0.38) ( 0.42) ( 0.27) ( 0.37) Rent concessions 0.00 0.00 0.00 ( 0.03) ( 0.01) ---------- ---------- ----------- ---------- ---------- Effective rent 13.58 15.31 15.05 14.23 14.54 Expense stop(1) ( 3.55) ( 3.96) ( 4.45) ( 4.22) ( 4.05) ---------- ---------- ----------- ---------- ---------- Equivalent effective net rent $ 10.03 $ 11.35 $ 10.60 $ 10.01 $ 10.49 ========== ========== =========== ========== ========== Average term in years 5 4 5 5 5 ========== ========== =========== ========== ========== CAPITAL EXPENDITURES RELATED TO RE-LEASED SPACE: Tenant Improvements: Total dollars committed under signed leases $6,848,279 $4,886,517 $ 6,754,100 $5,849,409 $6,084,576 Rentable square feet 1,406,170 1,291,297 1,645,913 1,099,805 1,360,796 ---------- ---------- ----------- ---------- ---------- Per rentable square foot $ 4.87 $ 3.78 $ 4.10 $ 5.32 $ 4.47 ========== ========== =========== ========== ========== Leasing Commissions: Total dollars committed under signed leases $3,047,978 $2,005,094 $ 3,694,473 $1,356,002 $2,525,887 Rentable square feet 1,406,170 1,291,297 1,645,913 1,099,805 1,360,796 ---------- ---------- ----------- ---------- ---------- Per rentable square foot $ 2.17 $ 1.55 $ 2.24 $ 1.23 $ 1.86 ========== ========== =========== ========== ========== Total: Total dollars committed under signed leases $9,896,257 $6,891,611 $10,448,573 $7,205,411 $8,610,463 Rentable square feet 1,406,170 1,291,297 1,645,913 1,099,805 1,360,796 ---------- ---------- ----------- ---------- ---------- Per rentable square foot $ 7.04 $ 5.34 $ 6.35 $ 6.55 $ 6.33 ========== ========== =========== ========== ========== RENTAL RATE TRENDS: Average final rate with expense pass throughs $ 14.28 $ 13.57 $ 14.51 $ 13.91 $ 14.07 Average first year cash rental rate $ 15.01 $ 14.47 $ 15.43 $ 14.87 $ 14.95 ---------- ---------- ----------- ---------- ---------- Percentage increase 5.11% 6.63% 6.34% 6.90% 6.24% ========== ========== =========== ========== ========== </TABLE> - ---------- (1) "Expense stop" represents operating expenses (generally including taxes, utilities, routine building expense and common area maintainance) for which we will not be reimbursed by our tenants. 24
<TABLE> <CAPTION> INDUSTRIAL LEASING STATISTICS THREE MONTHS ENDED -------------------------------------------------------------------------- 3/31/99 12/31/98 9/30/98 6/30/98 AVERAGE -------------- ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> NET EFFECTIVE RENTS RELATED TO RE-LEASED SPACE: Number of lease transactions (signed leases) 72 44 56 41 53 Rentable square footage leased 837,616 582,758 314,549 194,014 482,234 Average per rentable square foot over the lease term: Base rent $ 5.12 $ 4.71 $ 6.59 $ 6.99 $ 5.85 Tenant improvements (0.22) (0.20) (0.23) (0.29) (0.24) Leasing commissions (0.10) (0.09) (0.09) (0.19) (0.12) Rent concessions 0.00 0.00 0.00 0.00 0.00 ---------- -------- -------- -------- -------- Effective rent 4.80 4.42 6.27 6.51 5.50 Expense stop(1) (0.28) (0.25) (0.44) (0.52) (0.37) ---------- -------- -------- -------- -------- Equivalent effective net rent $ 4.52 $ 4.17 $ 5.83 $ 5.99 $ 5.13 ========== ======== ======== ======== ======== Average term in years 4 3 4 3 3 ========== ======== ======== ======== ======== CAPITAL EXPENDITURES RELATED TO RE-LEASED SPACE: TENANT IMPROVEMENTS: Total dollars committed under signed leases $ 821,654 $712,108 $248,359 $239,348 $505,367 Rentable square feet 837,616 582,758 314,549 194,014 482,234 ---------- -------- -------- -------- -------- Per rentable square foot $ 0.98 $ 1.22 $ 0.79 $ 1.23 $ 1.05 ========== ======== ======== ======== ======== LEASING COMMISSIONS: Total dollars committed under signed leases $ 315,101 $173,017 $ 99,574 $130,243 $179,484 Rentable square feet 837,616 582,758 314,549 194,014 482,234 ---------- -------- -------- -------- -------- Per rentable square foot $ 0.38 $ 0.30 $ 0.32 $ 0.67 $ 0.37 ========== ======== ======== ======== ======== Total: Total dollars committed under signed leases $1,136,755 $885,125 $347,933 $369,591 $684,851 Rentable square feet 837,616 582,758 314,549 194,014 482,234 ---------- -------- -------- -------- -------- Per rentable square foot $ 1.36 $ 1.52 $ 1.11 $ 1.90 $ 1.42 ========== ======== ======== ======== ======== RENTAL RATE TRENDS: Average final rate with expense pass throughs $ 4.91 $ 4.62 $ 5.40 $ 6.09 $ 5.26 Average first year cash rental rate $ 4.91 $ 4.72 $ 5.54 $ 6.50 $ 5.42 ---------- -------- -------- -------- -------- Percentage increase 0.00% 2.16% 2.59% 6.73% 3.04% ========== ======== ======== ======== ======== </TABLE> - ---------- (1) "Expense stop" represents operating expenses (generally including taxes, utilities, routine building expense and common area maintainance) for which we will not be reimbursed by our tenants. 25
<TABLE> <CAPTION> RETAIL LEASING STATISTICS THREE MONTHS ENDED -------------------------------------------------------- 3/31/99 12/31/98 9/30/98 AVERAGE ------------ ------------ ------------ ----------- <S> <C> <C> <C> <C> NET EFFECTIVE RENTS RELATED TO RE-LEASED SPACE: Number of lease transactions (signed leases) 25 15 11 17 Rentable square footage leased 62,638 29,706 37,258 43,201 Average per rentable square foot over the lease term: Base rent $ 15.37 $ 16.34 $ 13.59 $ 15.10 Tenant improvements ( 0.45) ( 1.66) ( 0.14) ( 0.75) Leasing commissions ( 0.39) ( 0.76) ( 0.44) ( 0.53) Rent concessions 0.00 0.00 0.00 0.00 -------- -------- -------- -------- Effective rent 14.53 13.92 13.01 13.82 Expense stop ( 0.27) ( 1.79) ( 0.09) ( 0.72) -------- -------- -------- -------- Equivalent effective net rent $ 14.26 $ 12.13 $ 12.92 $ 13.10 -------- -------- -------- -------- Average term in years 6 5 6 6 ======== ======== ======== ======== CAPITAL EXPENDITURES RELATED TO RE-LEASED SPACE: TENANT IMPROVEMENTS: Total dollars committed under signed leases $248,531 $319,620 $ 21,000 $196,384 Rentable square feet 62,638 29,706 37,258 43,201 -------- -------- -------- -------- Per rentable square foot $ 3.97 $ 10.76 $ 0.56 $ 4.55 ======== ======== ======== ======== LEASING COMMISSIONS: Total dollars committed under signed leases $153,872 $123,047 $ 99,268 $125,396 Rentable square feet 62,638 29,706 37,258 43,201 -------- -------- -------- -------- Per rentable square foot $ 2.46 $ 4.14 $ 2.66 $ 2.90 ======== ======== ======== ======== TOTAL: Total dollars committed under signed leases $402,403 $442,667 $120,268 $321,779 Rentable square feet 62,638 29,706 37,258 43,201 -------- -------- -------- -------- Per rentable square foot $ 6.42 $ 14.90 $ 3.23 $ 7.45 ======== ======== ======== ======== RENTAL RATE TRENDS: Average final rate with expense pass throughs $ 10.92 $ 15.91 $ 8.55 $ 11.79 Average first year cash rental rate $ 16.22 $ 18.16 $ 10.53 $ 14.97 -------- -------- -------- -------- Percentage increase 48.53% 14.14% 23.16% 26.94% ======== ======== ======== ======== </TABLE> - ---------- (1) "Expense stop" represents operating expenses (generally including taxes, utilities, routine building expense and common area maintainance) for which we will not be reimbursed by our tenants. (2) Note: The company did not own any retail property during the quarter ended 6/30/98. 26
The following tables set forth scheduled lease expirations for executed leases at our majority-owned in-service properties (excluding apartment units) as of March 31, 1999 assuming no tenant exercises renewal options. OFFICE PROPERTIES: <TABLE> <CAPTION> AVERAGE ANNUAL RENTS ANNUAL PERCENTAGE OF TOTAL PERCENTAGE OF UNDER RENTAL RATE LEASED RENTS YEAR OF RENTABLE LEASED SQUARE FOOTAGE EXPIRING PER SQUARE REPRESENTED LEASE NUMBER OF SQUARE FEET REPRESENTED BY LEASES (1) FOOT FOR BY EXPIRING EXPIRATION LEASES EXPIRING EXPIRING LEASES (IN THOUSANDS) EXPIRATIONS (1) LEASES - -------------------- ----------- ------------- ----------------------- ---------------- ----------------- -------------- <S> <C> <C> <C> <C> <C> <C> Remainder of 1999 955 3,288,450 11.6% $ 51,652 $ 15.71 11.4% 2000 897 4,098,481 14.4 65,965 16.09 14.6 2001 850 4,463,076 15.7 71,864 16.10 15.8 2002 671 4,159,527 14.6 67,013 16.11 14.8 2003 587 3,978,439 14.0 64,482 16.21 14.3 2004 209 2,145,807 7.5 33,410 15.57 7.4 2005 92 1,349,324 4.7 20,673 15.32 4.6 2006 49 1,267,839 4.5 19,872 15.67 4.4 2007 31 870,058 3.1 14,321 16.46 3.2 2008 54 1,707,657 6.0 24,240 14.19 5.4 Thereafter 55 1,103,252 3.9 18,311 16.60 4.1 --- --------- ----- -------- -------- ----- Total of average 4,450 28,431,910 100.0% $451,803 $ 15.89 100.0% ===== ========== ===== ======== ======== ===== </TABLE> INDUSTRIAL PROPERTIES: <TABLE> <CAPTION> AVERAGE ANNUAL PERCENTAGE OF TOTAL PERCENTAGE OF ANNUAL RENTS RENTAL RATE LEASED RENTS RENTABLE LEASED SQUARE FOOTAGE UNDER EXPIRING PER SQUARE REPRESENTED YEAR OF LEASE NUMBER OF SQUARE FEET REPRESENTED BY LEASES (1) FOOT FOR BY EXPIRING EXPIRATION LEASES EXPIRING EXPIRING LEASES (IN THOUSANDS) EXPIRATIONS (1) LEASES - ------------------- ----------- ------------- ----------------------- ---------------- ----------------- -------------- <S> <C> <C> <C> <C> <C> <C> Remainder of 1999 203 1,820,161 17.0% $ 9,150 $ 5.03 17.7% 2000 172 2,157,591 20.1 10,681 4.95 20.6 2001 159 1,998,739 18.6 8,986 4.50 17.4 2002 83 1,267,253 11.8 5,929 4.68 11.5 2003 57 772,642 7.2 4,124 5.34 8.0 2004 23 1,369,816 12.8 5,275 3.85 10.2 2005 11 187,833 1.8 1,210 6.44 2.3 2006 5 224,099 2.1 1,110 4.95 2.1 2007 4 489,125 4.6 1,726 3.53 3.3 2008 8 376,536 3.5 3,245 8.62 6.3 Thereafter 3 58,876 0.5 335 5.69 0.6 --- --------- ----- ------- ------- ----- Total or average 728 10,722,671 100.0% $51,771 $ 4.83 100.0% === ========== ===== ======= ======= ===== </TABLE> - ---------- (1) Includes operating expense pass throughs and excludes the effect of future contractual rent increases. 27
RETAIL PROPERTIES: <TABLE> <CAPTION> AVERAGE ANNUAL RENTS ANNUAL PERCENTAGE OF TOTAL PERCENTAGE OF UNDER RENTAL RATE LEASED RENTS YEAR OF RENTABLE LEASED SQUARE FOOTAGE EXPIRING PER SQUARE REPRESENTED LEASE NUMBER OF SQUARE FEET REPRESENTED BY LEASES (1) FOOT FOR BY EXPIRING EXPIRATION LEASES EXPIRING EXPIRING LEASES (IN THOUSANDS) EXPIRATIONS (1) LEASES - -------------------- ----------- ------------- ----------------------- ---------------- ----------------- -------------- <S> <C> <C> <C> <C> <C> <C> Remainder of 1999 87 320,973 15.7% $ 3,060 $ 9.53 12.0% 2000 72 238,381 11.7 2,940 12.33 11.5 2001 61 235,825 11.5 3,209 13.61 12.5 2002 41 162,767 8.0 2,161 13.28 8.4 2003 47 210,935 10.3 3,214 15.24 12.6 2004 19 168,129 8.2 1,260 7.49 4.9 2005 13 64,999 3.2 1,294 19.91 5.1 2006 12 109,066 5.3 1,172 10.75 4.6 2007 8 63,125 3.1 946 14.99 3.7 2008 14 105,765 5.2 2,223 21.02 8.7 Thereafter 23 366,156 17.8 4,118 11.25 16.0 -- ------- ----- ------- ------- ----- Total or average 397 2,046,121 100.0% $25,597 $ 12.51 100.0% === ========= ===== ======= ======= ===== </TABLE> TOTAL: <TABLE> <CAPTION> PERCENTAGE OF TOTAL PERCENTAGE OF ANNUAL RENTS LEASED RENTS RENTABLE LEASED SQUARE FOOTAGE UNDER EXPIRING REPRESENTED YEAR OF LEASE NUMBER OF SQUARE FEET REPRESENTED BY LEASES (1) BY EXPIRING EXPIRATION LEASES EXPIRING EXPIRING LEASES (IN THOUSANDS) LEASES - --------------------- ----------- ------------- ----------------------- ---------------- -------------- <S> <C> <C> <C> <C> <C> Remainder of 1999 1,245 5,429,584 13.2% $ 63,862 12.1% 2000 1,141 6,494,453 15.8 79,586 15.0 2001 1,070 6,697,640 16.2 84,059 15.9 2002 795 5,589,547 13.6 75,103 14.2 2003 691 4,962,016 12.0 71,820 13.6 2004 251 3,683,752 8.9 39,945 7.5 2005 116 1,602,156 3.9 23,177 4.4 2006 66 1,601,004 3.9 22,154 4.2 2007 43 1,422,308 3.5 16,993 3.2 2008 76 2,189,958 5.3 29,708 5.6 Thereafter 81 1,528,284 3.7 22,764 4.3 ----- --------- ----- -------- ----- Total or average 5,575 41,200,702 100.0% $529,171 100.0% ===== ========== ===== ======== ===== </TABLE> - ---------- (1) Includes operating expense pass throughs and excludes the effect of future contractual rent increases. INFLATION Historically inflation has not had a significant impact on our operations because of the relatively low inflation rate in our geographic areas of operation. Most of the leases require the tenants to pay their pro rata share of increased incremental operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing our exposure to increases in operating expenses resulting from inflation. In addition, many of the leases are for terms of less than seven years, which may enable us to replace existing leases with new leases at a higher base rent if rents on the existing leases are below the market rate. 28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK THE EFFECTS OF POTENTIAL CHANGES IN INTEREST RATES AND EQUITY PRICES ARE DISCUSSED BELOW. OUR MARKET RISK DISCUSSION INCLUDES "FORWARD-LOOKING STATEMENTS" AND REPRESENTS AN ESTIMATE OF POSSIBLE CHANGES IN FAIR VALUE OR FUTURE EARNINGS THAT WOULD OCCUR ASSUMING HYPOTHETICAL FUTURE MOVEMENTS IN INTEREST RATES OR EQUITY MARKETS. THESE DISCLOSURES ARE NOT PRECISE INDICATORS OF EXPECTED FUTURE LOSSES, BUT ONLY INDICATORS OF REASONABLY POSSIBLE LOSSES. AS A RESULT, ACTUAL FUTURE RESULTS MAY DIFFER MATERIALLY FROM THOSE PRESENTED. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES" FOR A DESCRIPTION OF OUR ACCOUNTING POLICIES AND OTHER INFORMATION RELATED TO THESE FINANCIAL INSTRUMENTS. INTEREST RATE RISK To meet in part our long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Borrowings under the Revolving Loan bear interest at variable rates. Our long-term debt, which consists of long-term financings and the issuance of debt securities, typically bears interest at fixed rates. In addition, we have assumed fixed rate and variable rate debt in connection with acquiring properties. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not hold or issue these derivative contracts for trading or speculative purposes. CERTAIN VARIABLE RATE DEBT. As of March 31, 1999, the Company had approximately $325.8 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 March 31, 2000, our interest expense would be increased or decreased approximately $3.3 million. In addition, as of March 31, 1999, we had $80 million of additional variable rate debt outstanding that was protected by an interest rate collar that effectively keeps the interest rate within a range of 85 basis points. We do not believe that a 100 basis point increase or decrease in interest rates would materially affect our interest expense with respect to this $80 million of debt. INTEREST RATE HEDGE CONTRACTS. For a discussion of our interest rate hedge contracts in effect at March 31, 1999, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- CAPITALIZATION." If interest rates increase by 100 basis points, the aggregate fair market value of these interest rate hedge contracts as of March 31, 1999 would increase by approximately $21.1 million. If interest rates decrease by 100 basis points, the aggregate fair market value of these interest rate hedge contracts as of March 31, 1999 would decrease by approximately $23.1 million. In addition, we are exposed to certain losses in the event of nonperformance by the counterparties under the hedge contracts. We expect the counterparties, which are major financial institutions, to perform fully under these contracts. However, if the counterparties were to default on their obligations under the interest rate hedge contracts, we could be required to pay the full rates on our debt, even if such rates were in excess of the rates in the contracts. EQUITY PRICE RISK On August 28, 1997, we entered into a purchase agreement with UBS AG, London Branch ("UB-LB") involving the sale of 1.8 million shares of Common Stock and a related forward contract providing for certain purchase price adjustments. The forward contract (as amended) generally provides that if the market price (defined as the weighted average closing price of the Common Stock for the period beginning March 31, 1999 and ending when UB-LB has sold all of the shares issued under the forward contract) is less than a certain amount, which we refer to as the "Forward Price," we must pay UB-LB the difference times 1.8 million. (Similarly, if the Market Price of a share of Common Stock is above the Forward Price, UB-LB must pay us the difference in shares of Common Stock.) 29
On February 28, 1999, the Company and UB-LB amended the forward contract. Pursuant to the amendment: o UB-LB applied $12.8 million in Company collateral to "buy down" the Forward Price by approximately $7.10 (at March 31, 1999, the forward price was approximately $25.12); o We issued 161,924 shares of Common Stock to UB-LB as an interim settlement payment; and o UB-LB agreed not to sell any of the shares that we had issued to it until not later than March 31, 1999. If the weighted average closing price of one share of Common Stock during the period during which UB-LB sells the shares is 10% lower or higher than on March 31, 1999, our cost of settling the forward contract would increase or decrease by approximately $5 million, payable in cash or shares of Common Stock. The Company has retained the option of repurchasing any of UB-LB's remaining shares for cash prior to their distribution by UB-LB. 30
PART II -- OTHER INFORMATION Item 1. Legal Proceedings On October 2, 1998, John Flake, a former stockholder of J.C. Nichols, filed a putative class action lawsuit on behalf of himself and the other former stockholders of J.C. Nichols in the United States District Court for the District of Kansas against J.C. Nichols, certain of its former officers and directors and the Company. The complaint alleges, among other things, that in connection with the merger of J.C. Nichols and the Company, (1) J.C. Nichols and the named directors and officers of J.C. Nichols breached their fiduciary duties to J.C. Nichols' stockholders, (2) J.C. Nichols and the named directors and officers of J.C. Nichols breached their fiduciary duties to members of the J.C. Nichols Company Employee Stock Ownership Trust, (3) all defendants participated in the dissemination of a proxy statement containing materially false and misleading statements and omissions of material facts in violation of Section 14(a) of the Exchange Act of 1934 and (4) the Company filed a registration statement with the SEC containing materially false and misleading statements and omissions of material facts in violation of Sections 11 and 12(2) of the Securities Act of 1933. The plaintiffs seek equitable relief and monetary damages. We believe that the defendants have meritorious defenses to the plaintiffs' allegations. We intend to vigorously defend this litigation and have filed a motion to dismiss all claims asserted against the defendants. Due to the inherent uncertainties of the litigation process and the judicial system, we are not able to predict the outcome of this litigation. If this litigation is not resolved in our favor, it could have a material adverse effect on our business, financial condition and results of operations. Item 2. Changes in Securities and Use of Proceeds (c) During the three months ended March 31, 1999, the Company issued an aggregate of 1,179,103 shares of Common Stock to holders of Common Units in the Operating Partnership upon the redemption of such Common Units in private offerings exempt from the registration requirements pursuant to Section 4(2) or Rule 505 of Regulation D of the Securities Act. Each of the holders of Common Units were accredited investors under Rule 501 of the Securities Act, except for several holders who received their Common Stock pursuant to a single offering made under Rule 505 of Regulation D, and none of the offerings involved a general solicitation by the Company. The Company has registered the resale of such shares under the Securities Act. Item 3. Defaults Upon Senior Securities -- NA Item 4. Submission of Matters to a Vote of Security Holders -- NA Item 5. Other Information -- NA Item 6. Exhibits and Reports on Form 8-K (a) Exhibits <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION - ------------- ------------------------------------------------------------------------------------- <S> <C> 10.1 Purchase and Sale Agreement dated March 22, 1999, by and among Highwoods/Florida Holdings, L.P. and America's Capital Partners, LLC, as amended by First Amendment to Purchase and Sale Agreement dated April 21, 1999. 10.2 Purchase and Sale Agreement dated March 22, 1999, by and among Highwoods/Florida Holdings, L.P. and America's Capital Partners, LLC, as amended by First Amendment to Purchase and Sale Agreement dated April 21, 1999. 27 Financial Data Schedule </TABLE> (b) Reports on Form 8-K -- None 31
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HIGHWOODS PROPERTIES, INC. /S/ RONALD P. GIBSON ---------------------------------------- RONALD P. GIBSON PRESIDENT AND CHIEF EXECUTIVE OFFICER /s/ CARMAN J. LIUZZO ---------------------------------------- CARMAN J. LIUZZO CHIEF FINANCIAL OFFICER (PRINCIPAL ACCOUNTING OFFICER) Date: May 17, 1999 32