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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from________to________
Commission file number 1-13100
HIGHWOODS PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Maryland 56-1871668
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3100 Smoketree Court, Suite 600
Raleigh, N.C. 27604
(Address of principal executive offices) (Zip Code)
919-872-4924
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
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Common stock, $.01 par value...................................... New York Stock Exchange
8% Series B Cumulative Redeemable Preferred Shares ............... New York Stock Exchange
Depositary Shares Each Representing a 1/10 Fractional Interest in
an 8% Series D Cumulative Redeemable Preferred Share ............. New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of
this Form 10-K. [ ]
The aggregate market value of the shares of common stock held by
non-affiliates (based upon the closing sale price on the New York Stock
Exchange) on March 20, 2000 was $1,181,083,785. As of March 20, 2000, there
were 59,994,513 shares of common stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement in connection with its Annual
Meeting of Shareholders to be held May 24, 2000 are incorporated by reference
in Part III Items 10, 11, 12 and 13.
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HIGHWOODS PROPERTIES, INC.
TABLE OF CONTENTS
Item No. Page No.
- ---------- ---------
PART I
1. Business .................................................................. 3
2. Properties ................................................................ 10
3. Legal Proceedings ......................................................... 15
4. Submission of Matters to a Vote of Security Holders ....................... 15
X. Executive Officers of the Registrant ...................................... 16
PART II
5. Market for Registrant's Common Stock and Related Stockholder Matters ...... 17
6. Selected Financial Data ................................................... 18
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations ........................................................... 19
7A. Quantitative and Qualitative Disclosures About Market Risk ................ 28
8. Financial Statements and Supplementary Data ............................... 28
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .................................................... 28
PART III
10. Directors and Executive Officers of the Registrant ........................ 29
11. Executive Compensation .................................................... 29
12. Security Ownership of Certain Beneficial Owners and Management ............ 29
13. Certain Relationships and Related Transactions ............................ 29
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ........... 30
2
PART I
WE REFER TO (1) HIGHWOODS PROPERTIES, INC. AS THE "COMPANY," (2) HIGHWOODS
REALTY LIMITED PARTNERSHIP (FORMERLY HIGHWOODS/FORSYTH LIMITED PARTNERSHIP) AS
THE "OPERATING PARTNERSHIP," (3) THE COMPANY'S COMMON STOCK AS "COMMON STOCK"
AND (4) THE OPERATING PARTNERSHIP'S COMMON PARTNERSHIP INTERESTS AS "COMMON
UNITS."
ITEM 1. BUSINESS
General
The Company is a self-administered and self-managed equity REIT that began
operations through a predecessor in 1978. Originally founded to oversee the
development, leasing and management of the 201-acre Highwoods Office Center in
Raleigh, North Carolina, we have since evolved into one of the largest owners
and operators of suburban office, industrial and retail properties in the
southeastern and midwestern United States. At December 31, 1999, we
o owned or had a majority interest in 563 in-service office, industrial and
retail properties, encompassing approximately 39.0 million rentable square
feet and 1,885 apartment units;
o owned an interest (50% or less) in 42 in-service office and industrial
properties, encompassing approximately 3.5 million rentable square feet
and 418 apartment units;
o owned 1,473 acres (and have agreed to purchase an additional 317 acres
over the next three years) of undeveloped land suitable for future
development; and
o were developing an additional 41 properties, which will encompass
approximately 4.8 million rentable square feet.
The Company conducts substantially all of its activities through, and
substantially all of its interests in the properties are held directly or
indirectly by, the Operating Partnership. The Company is the sole general
partner of the Operating Partnership. At December 31, 1999, the Company owned
87% of the Common Units in the Operating Partnership. Limited partners
(including certain officers and directors of the Company) own the remaining
Common Units. Holders of Common Units may redeem them for the cash value of one
share of the Company's Common Stock or, at the Company's option, one share
(subject to certain adjustments) of Common Stock.
We also provide leasing, property management, real estate development,
construction and other services for our properties as well as for third
parties. We conduct our third-party, fee-based services through Highwoods
Services, Inc., a subsidiary of the Operating Partnership, and through
Highwoods/ Tennessee Properties, Inc., a wholly owned subsidiary of the
Company.
The Company was incorporated in Maryland in 1994. The Operating
Partnership was formed in North Carolina in 1994. Our executive offices are
located at 3100 Smoketree Court, Suite 600, Raleigh, North Carolina 27604, and
our telephone number is (919) 872-4924. We maintain offices in each of our
primary markets.
Operating Strategy
Diversification. Since the Company's initial public offering in 1994, we
have significantly reduced our dependence on any particular market, property
type or tenant. Our in-service portfolio has expanded from 41 North Carolina
office properties (40 of which were in the Research Triangle area of North
Carolina) to 605 in-service office, industrial and retail properties and 2,303
apartment units in 17 markets in the Southeast and Midwest.
Development and Acquisition Opportunities. We generally seek to engage in
the development of office and industrial projects in our existing geographic
markets, primarily in suburban business parks. We intend to focus our
development efforts on build-to-suit projects and projects where we have
identified sufficient demand. In build-to-suit development, the building is
significantly pre-leased to one
3
or more tenants prior to construction. Build-to-suit projects often foster
strong long-term relationships with tenants, creating future development
opportunities as the facility needs of tenants increase. We believe our
commercially zoned and unencumbered development land in existing business parks
is an advantage we have over many of our competitors in pursuing development
opportunities.
We also seek to acquire selective suburban office and industrial
properties in our existing geographic markets at prices below replacement cost
that offer attractive returns. These would include acquisitions of
underperforming, high-quality properties in our existing markets that offer us
opportunities to improve such properties' operating performance.
Managed Growth Strategy. Our strategy has been to focus our real estate
activities in markets where we believe our extensive local knowledge gives us a
competitive advantage over other real estate developers and operators. As we
expanded into new markets, we have continued to maintain this localized
approach by combining with local real estate operators with many years of
development and management experience in their respective markets.
Approximately two-thirds of our properties were either developed by us or are
managed on a day-to-day basis by personnel who previously managed, leased
and/or developed those properties before their acquisition by us.
Our development and acquisition activities also benefit from our local
market presence and knowledge. Our property-level officers have on average more
than 20 years of real estate experience in their respective markets. Because of
this experience, we are in a better position to evaluate acquisition and
development opportunities. In addition, our relationships with our tenants and
those tenants at properties for which we conduct third-party, fee-based
services may lead to development projects when these tenants seek new space.
Efficient, Customer Service-Oriented Organization. We provide a complete
line of real estate services to our tenants and third parties. We believe that
our in-house development, acquisition, construction management, leasing and
management services allow us to respond to the many demands of our existing and
potential tenant base. We provide our tenants cost-effective services such as
build-to-suit construction and space modification, including tenant
improvements and expansions. In addition, the breadth of our capabilities and
resources provides us with market information not generally available. We
believe that the operating efficiencies achieved through our fully integrated
organization also provide a competitive advantage in setting our lease rates
and pricing other services.
Flexible and Conservative Capital Structure. We are committed to
maintaining a flexible and conservative capital structure that: (1) allows
growth through development and acquisition opportunities; (2) promotes future
earnings growth; and (3) provides access to the private and public equity and
debt markets on favorable terms. Accordingly, we expect to meet our long-term
liquidity requirements, including funding our existing and future development
activity, through a combination of:
o borrowings under our unsecured revolving credit facility;
o the issuance of unsecured debt securities;
o borrowings of secured debt;
o the issuance of equity securities by both the Company and the Operating
Partnership;
o the selective disposition of non-core assets; and
o the sale or contribution of certain of our wholly-owned properties to
strategic joint ventures formed with selected institutional investors.
4
Recent Developments
The following table summarizes the acquisitions and dispositions completed
during 1999 as well as assets contributed to joint ventures in 1999 ($ in
thousands):
Acquisition Activity
Acquisition
Building Closing Rentable Initial
Property Market Type (1) Date Square Feet Cost
- --------------------------- ----------- ---------- ------------ ------------- ----------
Cypress Commons Tampa O 06/04/99 114,000 $ 12,000
Cypress Center Tampa O 06/30/99 83,000 8,000
5404 Cypress Center Tampa O 07/21/99 153,000 15,700
Century Plaza I & II Atlanta O 09/01/99 206,000 19,500
3322 West End Nashville O 10/08/99 216,000 30,100
Innsbrook Center Richmond O 12/27/99 67,000 7,625
Mercer Plaza Richmond O 12/27/99 121,000 13,875
------- --------
Total 960,000 $106,800
======= ========
DISPOSITION ACTIVITY
Building Date Rentable Sales
Property Market Type (1) Sold Square Feet Price
- -------------------------------- ------------------- ---------- ---------- ------------- -----------
Members Warehouse Piedmont Triad I 04/01/99 80,000 $ 2,200
Comeau Building South Florida O 04/20/99 87,000 4,200
South Florida portfolio South Florida O/I 06/07/99 3,275,000 323,000
Phoenix Building Research Triangle O 06/07/99 26,000 3,000
Baltimore portfolio Baltimore O 06/30/99 737,000 82,200
Grassy Creek Piedmont Triad I 06/30/99 665,000 17,300
Virginia Center Tech Park Richmond O 08/02/99 120,000 8,500
1765 The Exchange Atlanta O 08/12/99 90,000 7,400
4000 Old Court Medical Baltimore O 08/12/99 42,000 5,800
Cotton Building Research Triangle O 08/31/99 40,000 3,600
4000 Aerial Center Research Triangle O 09/02/99 25,000 3,300
Georgetown Market Place Kansas City R 11/10/99 95,000 7,625
Riverside Building Hampton Roads O 12/10/99 87,000 8,250
Central Florida portfolio Orlando/Tampa O/I 12/20/99 2,122,000 165,329
Florida Flex Tampa O/I 12/22/99 751,000 45,700
Clearwater Tower Tampa O 12/29/99 100,000 8,300
Penn Wick, Tama & Cole
Garden Kansas City M 12/31/99 N/A 675
--------- --------
Total 8,342,000 $696,379
========= ========
JOINT VENTURE ACTIVITY
Rentable
Building Date Square
Name Market Type (1) Contributed Feet Proceeds
- ----------------------------- ---------- ---------- ------------- ------------ -----------
Dreilander-Fonds 98/29 Various O 03/15/99 1,198,000 $142,000
--------- --------
Total 1,198,000 $142,000
========= ========
- ----------
(1) O = Office
I = Industrial
R = Retail
M = Multifamily
5
DEVELOPMENT ACTIVITY
The following table summarizes the 24 development projects placed in
service during 1999 ($ in thousands):
Placed In Service
Month
Building Placed Number of Rentable Initial
Name Market Type (1) in Service Properties Square Feet Cost (2)
- ----------------------------- ------------------- ---------- ------------ ------------ ------------- -----------
Newpoint Place III Atlanta O Feb-99 1 84,000 $3,358
Chastain Place II Atlanta O Mar-99 1 64,000 2,773
Chastain Place III Atlanta O Mar-99 1 58,000 2,253
Highwoods Center I at
Tradeport Atlanta O Apr-99 1 46,000 3,603
Airpark South Warehouse VI Piedmont Triad I Apr-99 1 189,000 7,714
Bluegrass Lakes I Atlanta I Jun-99 1 112,000 4,883
Capital One Building 1 Richmond O Jun-99 1 126,000 12,387
Eastshore II Richmond O Jun-99 1 77,000 7,701
Highwoods Common Richmond O Jun-99 1 49,000 4,916
Ridgefield III Asheville O Jul-99 1 57,000 5,642
Tradeport I Atlanta I Jul-99 1 87,000 3,323
Tradeport II Atlanta I Jul-99 1 87,000 4,110
Capital One Building II Richmond O Jul-99 1 44,000 4,569
Patewood VI Greenville O Aug-99 1 107,000 12,675
Air Park South Warehouse II Piedmont Triad I Aug-99 1 136,000 3,315
CNA Maitland III Orlando O Aug-99 1 79,000 9,874
Cool Springs I Nashville O Sep-99 1 153,000 16,361
Highwoods Centre Research Triangle O Sep-99 1 76,000 8,789
Situs II Research Triangle O Sep-99 1 59,000 6,826
Capital One Building 3 Richmond O Oct-99 1 126,000 13,230
Highwoods Centre Hampton Roads O Nov-99 1 103,000 9,501
Overlook Research Triangle O Nov-99 1 97,000 11,257
Concourse Center One Piedmont Triad O Dec-99 1 86,000 9,078
Red Oak Research Triangle O Dec-99 1 65,000 6,740
- ------- ------
Total 24 2,167,000 $174,878
== ========= ========
- ----------
(1) O = Office
I = Industrial
(2) Initial Cost includes estimated amounts required to complete the project,
including tenant improvement costs.
6
We had 33 suburban office properties, six industrial properties and two
retail properties under development totaling 4.8 million rentable square feet
of office and industrial space at December 31, 1999. The following table
summarizes these development projects as of December 31, 1999:
IN-PROCESS
Rentable Estimated Cost at Pre-Leasing Estimated Estimated
Name Market Square Feet Cost 12/31/99 Percentage (1) Completion Stabilization (2)
- ------------------------ ------------------- ------------- ----------- ---------- ---------------- ------------ ------------------
($ in thousands)
Office:
Caterpillar Financial
Center Nashville 313,000 $ 54,000 $ 38,938 100% 1Q00 1Q00
Eastshore I Richmond 68,000 7,535 6,335 100 1Q00 1Q00
Eastshore III Richmond 80,000 8,580 8,613 100 1Q00 1Q00
Intermedia Building 1 Tampa 200,000 27,040 21,170 100 1Q00 1Q00
Intermedia Building 2 Tampa 30,000 4,056 376 100 1Q00 1Q00
Intermedia Building 3 Tampa 170,000 22,984 18,500 100 1Q00 1Q00
Genus Orlando 30,000 3,307 -- 100 3Q00 3Q00
iXL Richmond 57,000 6,875 -- 100 3Q00 3Q00
Intermedia Building 4 Tampa 200,000 29,219 5,158 100 3Q00 3Q00
Valencia Place Kansas City 241,000 34,850 30,734 80 1Q00 4Q00
ECPI Build-to-suit Piedmont Triad 30,000 3,020 843 100 3Q00 4Q00
Intermedia Building 5 Tampa 200,000 29,219 2,562 100 3Q01 3Q01
Capital Plaza Orlando 303,000 53,000 34,027 40 1Q00 4Q01
Highwoods Tower II Research Triangle 167,000 25,134 1,495 72 1Q01 2Q02
------- -------- -------- ---
In-Process
Office Total
or Weighted Average 2,089,000 $308,819 $168,751 87%
========= ======== ======== ===
Industrial:
ALO Piedmont Triad 27,000 $ 1,055 $ 287 100% 2Q00 2Q00
Bluegrass Valley I Atlanta 135,000 5,664 2,829 100 3Q00 4Q00
--------- -------- -------- ---
In-Process Industrial
Total or Weighted
Average 162,000 $ 6,719 $ 3,116 100%
========= ======== ======== ===
Retail:
Valencia Place Kansas City 81,000 $ 16,650 $ 10,245 83% 1Q00 4Q00
--------- -------- -------- ---
In-Process Retail Total
or Weighted Average 81,000 $ 16,650 $ 10,245 83%
========= ======== ======== ===
Total or Weighted
Average of all
In-Process
Development
Projects 2,332,000 $332,188 $182,112 88%
========= ======== ======== ===
- ----------
(1) Includes the effect of letters of intent.
(2) We generally consider a development project to be stabilized upon the
earlier of the first date such project is at least 95% occupied or one
year from the date of completion.
7
COMPLETED-NOT STABILIZED
Rentable Estimated Cost at
Name Market Square Feet Cost 12/31/99
- ------------------------- ------------------- ------------- ----------- ----------
($ in thousands)
Office:
Deerfield I Atlanta 50,000 $ 4,382 $ 3,895
Parkway Plaza 12 Charlotte 22,000 1,800 1,652
Lakefront Plaza I Hampton Roads 77,000 7,477 7,718
Southwind Building D Memphis 64,000 6,800 7,122
Westwood South Nashville 125,000 13,530 13,329
3737 Glenwood Ave. Research Triangle 108,000 16,700 16,529
10 Glenlake South Atlanta 259,000 35,100 36,732
Deerfield II Atlanta 67,000 6,994 4,578
Highwoods Center II @
Tradeport Atlanta 54,000 4,825 4,316
Parkway Plaza 11 Charlotte 32,000 2,600 2,511
Parkway Plaza 14 Charlotte 90,000 7,690 6,829
Belfort Park C1 Jacksonville 50,000 4,830 1,996
Belfort Park C2 Jacksonville 36,000 2,730 2,434
4101 Research Commons Research Triangle 73,000 9,311 8,437
Stony Point II Richmond 136,000 13,881 12,794
HIW Center @ Peachtree
Corners Atlanta 109,000 9,238 5,881
Mallard Creek V Charlotte 118,000 12,262 10,488
Lakeview Ridge III Nashville 131,000 13,100 10,989
Lakpoint II Tampa 225,000 34,106 22,960
------- -------- --------
Completed-Not Stabilized
Office Total or
Weighted Average 1,826,000 $207,356 $181,190
========= ======== ========
Industrial:
Air Park South
Warehouse III Piedmont Triad 120,000 $ 3,626 $ 2,894
Air Park South
Warehouse IV Piedmont Triad 86,000 2,750 2,679
HIW Distribution Center Richmond 166,000 6,487 6,328
Newpoint II Atlanta 131,000 5,167 4,825
--------- -------- --------
Completed-Not Stabilized
Industrial Total or
Weighted Average 503,000 $ 18,030 $ 16,726
========= ======== ========
Retail:
Seville Square Kansas City 99,000 $ 21,000 $ 20,791
--------- -------- --------
Completed-Not Stabilized
Retail Total or
Weighted Average 99,000 $ 21,000 $ 20,791
========= ======== ========
Total or Weighted
Average of all
Completed-Not
Stabilized
Development Projects 2,428,000 $246,386 $218,707
========= ======== ========
Total or Weighted
Average of all
Development Projects 4,760,000 $578,574 $400,819
========= ======== ========
Percent
leased/ Estimated Estimated
Name Pre-leased (1) Completion Stabilization (2)
- ------------------------- ---------------- ------------ ------------------
Office:
Deerfield I 100% 3Q99 1Q00
Parkway Plaza 12 95 1Q99 1Q00
Lakefront Plaza I 96 2Q99 1Q00
Southwind Building D 97 2Q99 1Q00
Westwood South 94 3Q99 1Q00
3737 Glenwood Ave. 92 3Q99 1Q00
10 Glenlake South 90 1Q99 2Q00
Deerfield II -- 3Q99 2Q00
Highwoods Center II @
Tradeport 56 3Q99 2Q00
Parkway Plaza 11 64 1Q99 2Q00
Parkway Plaza 14 57 2Q99 2Q00
Belfort Park C1 28 3Q99 2Q00
Belfort Park C2 38 3Q99 2Q00
4101 Research Commons 66 3Q99 2Q00
Stony Point II 78 2Q99 2Q00
HIW Center @ Peachtree
Corners 59 3Q99 3Q00
Mallard Creek V 49 4Q99 4Q00
Lakeview Ridge III 60 2Q99 4Q00
Lakpoint II 75 4Q99 4Q00
---
Completed-Not Stabilized
Office Total or
Weighted Average 72%
===
Industrial:
Air Park South
Warehouse III 100% 4Q99 1Q00
Air Park South
Warehouse IV 100 4Q99 1Q00
HIW Distribution Center 82 1Q99 2Q00
Newpoint II 33 3Q99 2Q00
---
Completed-Not Stabilized
Industrial Total or
Weighted Average 77%
===
Retail:
Seville Square 97% 2Q99 3Q00
---
Completed-Not Stabilized
Retail Total or
Weighted Average 97%
===
Total or Weighted
Average of all
Completed-Not
Stabilized
Development Projects 74%
===
Total or Weighted
Average of all
Development Projects 81%
===
- ----------
(1) Includes the effect of letters of intent.
(2) We generally consider a development project to be stabilized upon the
earlier of the first date such project is at least 95% occupied or one
year from the date of completion.
8
DEVELOPMENT ANALYSIS
Rentable Estimated Pre-Leasing
Square Feet Cost Percentage (1)
------------- ----------------- ---------------
($ in thousands)
SUMMARY BY ESTIMATED STABILIZATION DATE
First Quarter 2000 1,436,000 $173,783 99%
Second Quarter 2000 1,121,000 100,670 65
Third Quarter 2000 495,000 69,639 90
Fourth Quarter 2000 961,000 119,652 76
Third Quarter 2001 200,000 29,219 100
Fourth Quarter 2001 303,000 53,000 40
Second Quarter 2002 167,000 25,134 72
Held for Sale 77,000 7,477 96
--------- -------- ---
Total or Weighted Average 4,760,000 $578,574 81%
========= ======== ===
SUMMARY BY MARKET:
Atlanta 805,000 $ 71,370 69%
Charlotte 262,000 24,352 57
Jacksonville 86,000 7,560 32
Kansas City 421,000 72,500 85
Memphis 64,000 6,800 97
Nashville 569,000 80,630 89
Orlando 333,000 56,307 45
Piedmont Triad 263,000 10,451 100
Research Triangle 348,000 51,145 77
Richmond 507,000 43,358 88
Tampa 1,025,000 146,624 95
Held for Sale 77,000 7,477 96
--------- -------- ---
Total or Weighted Average 4,760,000 $578,574 81%
========= ======== ===
Build-to-Suit 1,092,000 $142,890 100%
Multi-tenant 3,591,000 428,207 74
Held for Sale 77,000 7,477 96
--------- -------- ---
Total or Weighted Average 4,760,000 $578,574 81%
========= ======== ===
Average
Rentable Average
Square Estimated Average
Feet Cost Pre-Leasing (1)
---------- ----------------- ----------------
($ in thousands)
AVERAGE PER PROPERTY TYPE:
Office 119,938 $15,897 79%
Industrial 110,833 4,125 82
Retail 90,000 18,825 91
Held for Sale 77,000 7,477 96
------- ------- --
Weighted Average 116,098 $14,112 81%
======= ======= ==
- ----------
(1) Includes the effect of letters of intent.
COMPETITION
Our properties compete for tenants with similar properties located in our
markets primarily on the basis of location, rent charged, services provided and
the design and condition of the facilities. We also compete with other REITs,
financial institutions, pension funds, partnerships, individual investors and
others when attempting to acquire and develop properties.
EMPLOYEES
As of December 31, 1999, the Company employed 536 persons, as compared to
691 at December 31, 1998.
9
ITEM 2. PROPERTIES
General
As of December 31, 1999, we owned or had a majority interest in 563
in-service office, industrial and retail properties, encompassing approximately
39.0 million rentable square feet and 1,885 apartment units. The following
table sets forth certain information about our majority-owned in-service
properties at December 31, 1999 in each of our 17 markets:
Percentage of December 1999 Rental Revenue
Rentable --------------------------------------------------------
Square Feet (1) Occupancy (2) Office Industrial Retail Multi-Family Total
---------------- --------------- -------- ------------ -------- -------------- ----------
Piedmont Triad ............ 8,691,000 93% 6.4% 4.7% -- -- 11.1%
Atlanta ................... 6,003,000 94 9.4 2.9 -- -- 12.3
Research Triangle ......... 4,871,000 94 14.4 0.4 -- -- 14.8
Tampa ..................... 3,360,000 97 11.1 0.3 -- -- 11.4
Kansas City ............... 3,014,000 94 3.6 0.4 5.7% 3.6% 13.3
Nashville ................. 2,419,000 90 7.0 0.7 -- -- 7.7
Richmond .................. 2,127,000 98 5.6 0.2 -- -- 5.8
Charlotte ................. 1,893,000 92 3.6 0.6 -- -- 4.2
Orlando ................... 1,713,000 95 5.4 -- -- -- 5.4
Jacksonville .............. 1,488,000 87 3.7 -- -- -- 3.7
Greenville ................ 1,220,000 94 3.1 0.2 -- -- 3.3
Memphis ................... 779,000 99 3.1 -- -- -- 3.1
Columbia .................. 426,000 81 1.1 -- -- -- 1.1
Tallahassee ............... 413,000 98 1.4 -- -- -- 1.4
Hampton Roads ............. 279,000 84 0.4 0.2 -- -- 0.6
Asheville ................. 180,000 88 0.3 0.1 -- -- 0.4
Other ..................... 100,000 93 0.4 -- -- -- 0.4
--------- -- ---- ---- --- --- -----
Total ..................... 38,976,000 94% 80.0% 10.7% 5.7% 3.6% 100.0%
========== == ==== ==== === === =====
- ----------
(1) Excludes Kansas City's basement space and apartment units.
(2) Excludes Kansas City's apartment occupancy percentage of 96%.
10
The following table sets forth certain information about the portfolio of
our majority-owned in-service and development properties as of December 31,
1999 and 1998:
December 31, 1999 December 31, 1998
---------------------------- ---------------------------
Percent Percent
Rentable Leased/ Rentable Leased/
Square Feet Pre-Leased Square Feet Pre-leased
------------- ------------ ------------- -----------
In-Service
Office .............................. 26,072,000 94% 31,110,000 94%
Industrial .......................... 11,325,000 94 11,871,000 93
Retail .............................. 1,579,000 94 1,661,000 92
---------- -- ---------- --
Total or Weighted Average ......... 38,976,000 94% 44,642,000 94%
========== == ========== ==
Development
Completed -- Not Stabilized
Office .............................. 1,826,000 72% 1,196,000 77%
Industrial .......................... 503,000 77 461,000 89
Retail .............................. 99,000 97 -- --
---------- -- ---------- --
Total or Weighted Average ......... 2,428,000 74% 1,657,000 80%
========== == ========== ==
In Process
Office .............................. 2,089,000 87% 4,389,000 63%
Industrial .......................... 162,000 100 652,000 66
Retail .............................. 81,000 83 200,000 65
---------- --- ---------- --
Total or Weighted Average ......... 2,332,000 88% 5,241,000 64%
========== === ========== ==
Total
Office .............................. 29,987,000 36,695,000
Industrial .......................... 11,990,000 12,984,000
Retail .............................. 1,759,000 1,861,000
---------- ----------
Total ............................. 43,736,000 51,540,000
========== ==========
TENANTS
The following table sets forth information concerning the 20 largest
tenants of our majority-owned in-service properties as of December 31, 1999:
Percent of Total
Number Annualized Annualized
Tenant of Leases Rental Revenue (1) Rental Revenue
- ----------------------------------- ----------- -------------------- -----------------
($ in thousands)
AT&T .............................. 9 $ 13,323 2.7%
Federal Government ................ 63 13,249 2.7
Bell South ........................ 52 10,261 2.1
IBM ............................... 11 8,757 1.8
Capital One Services .............. 5 7,009 1.4
US Airways ........................ 8 6,518 1.3
PricewaterhouseCoopers ............ 8 5,719 1.2
Nortel Networks ................... 3 5,192 1.1
Sara Lee .......................... 9 4,584 0.9
Sprint ............................ 13 4,212 0.9
Intermedia Communications ......... 17 4,198 0.9
State of Florida .................. 7 4,150 0.9
Lockheed Martin ................... 4 3,482 0.7
Prudential ........................ 14 3,115 0.6
International Paper ............... 9 2,704 0.6
MCI Worldcom ...................... 22 2,674 0.5
Bank of America ................... 16 2,378 0.5
IKON Office Solutions ............. 8 2,328 0.5
GTE ............................... 7 2,313 0.5
General Electric .................. 12 2,301 0.5
-- -------- ----
Total ......................... 297 $108,467 22.3%
=== ======== ====
- ----------
(1) Annualized Rental Revenue is December 1999 rental revenue (base rent plus
operating expense pass-throughs) multiplied by 12.
11
The following tables set forth certain information about leasing
activities at our majority-owned in-service properties (excluding apartment
units) for the years ended December 31, 1999, 1998 and 1997.
1999
--------------------------------------------
Office Industrial Retail
-------------- -------------- --------------
Net Effective Rents
Related to Re-Leased
Space:
Number of lease
transactions (signed
leases) ...................... 1,051 249 101
Rentable square footage
leased ....................... 5,086,408 2,786,017 378,304
Average per rentable square
foot over the lease term:
Base rent .................... $ 15.58 $ 5.35 $ 17.24
Tenant improvements .......... ( .82) ( .28) ( 1.02)
Leasing commissions .......... ( .39) ( .13) ( .44)
Rent concessions ............. ( .03) ( .01) ( .01)
----------- ---------- ----------
Effective rent ............... $ 14.34 $ 4.93 $ 15.77
Expense stop (1) ............. ( 4.19) ( .28) ( .07)
----------- ---------- ----------
Equivalent effective net
rent ........................ $ 10.15 $ 4.65 $ 15.70
=========== ========== ==========
Average term in years ......... 5 4 6
=========== ========== ==========
Rental Rate Trends:
Average final rate with
expense pass-throughs ........ $ 15.13 $ 5.05 $ 12.21
Average first year cash
rental rate .................. $ 15.68 $ 5.24 $ 16.28
----------- ---------- ----------
Percentage increase ........... 3.64% 3.76% 33.33%
=========== ========== ==========
Capital Expenditures
Related to Re-leased
Space:
Tenant Improvements:
Total dollars committed
under signed leases ......... $21,748,441 $3,621,621 $4,589,543
Rentable square feet ......... 5,086,408 2,786,017 378,304
----------- ---------- ----------
Per rentable square foot ..... $ 4.28 $ 1.30 $ 12.13
=========== ========== ==========
Leasing Commissions:
Total dollars committed
under signed leases ......... $ 8,990,333 $1,336,828 $1,069,227
Rentable square feet ......... 5,086,408 2,786,017 378,304
----------- ---------- ----------
Per rentable square foot ..... $ 1.77 $ .48 $ 2.83
=========== ========== ==========
Total:
Total dollars committed
under signed leases ......... $30,738,774 $4,958,449 $5,658,770
Rentable square feet ......... 5,086,408 2,786,017 378,304
----------- ---------- ----------
Per rentable square foot ..... $ 6.04 $ 1.78 $ 14.96
=========== ========== ==========
1998 1997
------------------------------------------- -----------------------------
Office Industrial Retail Office Industrial
-------------- -------------- ------------- -------------- --------------
Net Effective Rents
Related to Re-Leased
Space:
Number of lease
transactions (signed
leases) ...................... 1,042 207 26 520 241
Rentable square footage
leased ....................... 5,004,005 1,400,108 66,964 2,531,393 1,958,539
Average per rentable square
foot over the lease term:
Base rent .................... $ 16.00 $ 5.81 $ 14.81 $ 16.04 $ 5.37
Tenant improvements .......... ( 0.81) (0.26) ( 0.82) ( 1.06) (0.22)
Leasing commissions .......... ( 0.35) (0.12) ( 0.58) ( 0.39) (0.13)
Rent concessions ............. ( 0.03) -- ( 0.26) ( 0.01) (0.01)
----------- ---------- ------- ----------- ----------
Effective rent ............... $ 14.81 $ 5.43 $ 13.15 $ 14.58 $ 5.01
Expense stop (1) ............. ( 4.25) (0.37) ( 0.84) ( 3.53) (0.23)
----------- ---------- ------- ----------- ----------
Equivalent effective net
rent ........................ $ 10.56 $ 5.06 $ 12.31 $ 11.05 $ 4.78
=========== ========== ======= =========== ==========
Average term in years ......... 5 3 6 4 3
=========== ========== ======= =========== ==========
Rental Rate Trends:
Average final rate with
expense pass-throughs ........ $ 14.12 $ 5.39 $ 10.35 $ 13.78 $ 5.08
Average first year cash
rental rate .................. $ 15.12 $ 5.58 $ 12.41 $ 14.76 $ 5.37
----------- ---------- ------- ----------- ----------
Percentage increase ........... 7.08% 3.53% 19.9 % 7.11% 5.71%
=========== ========== ======= =========== ==========
Capital Expenditures
Related to Re-leased
Space:
Tenant Improvements:
Total dollars committed
under signed leases ......... $19,144,349 $1,226,526 $340,620 $11,443,099 $1,421,203
Rentable square feet ......... 5,004,005 1,400,108 66,964 2,531,393 1,958,539
----------- ---------- -------- ----------- ----------
Per rentable square foot ..... $ 3.83 $ 0.88 $ 5.09 $ 4.52 $ 0.73
=========== ========== ======== =========== ==========
Leasing Commissions:
Total dollars committed
under signed leases ......... $ 8,348,495 $ 558,840 $222,315 $ 4,247,280 $ 890,280
Rentable square feet ......... 5,004,005 1,400,108 66,964 2,531,393 1,958,539
----------- ---------- -------- ----------- ----------
Per rentable square foot ..... $ 1.67 $ 0.40 $ 3.32 $ 1.68 $ 0.45
=========== ========== ======== =========== ==========
Total:
Total dollars committed
under signed leases ......... $27,492,844 $1,785,367 $562,935 $15,690,379 $2,311,483
Rentable square feet ......... 5,004,005 1,400,108 66,964 2,531,393 1,958,539
----------- ---------- -------- ----------- ----------
Per rentable square foot ..... $ 5.49 $ 1.28 $ 8.41 $ 6.20 $ 1.18
=========== ========== ======== =========== ==========
- ----------
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintenance) for which
we will not be reimbursed by our tenants.
12
The following tables set forth scheduled lease expirations for executed
leases at our majority-owned in-service properties (excluding apartment units)
as of December 31, 1999, assuming no tenant exercises renewal options.
Office Properties:
Average Percentage of
Percentage of Annual Leased Rents
Rentable Leased Annual Rents Rental Rate Represented
Number of Square Feet Square Footage Under Per Square by
Lease Leases Subject to Represented by Expiring Foot for Expiring
Expiring Expiring Expiring Leases Expiring Leases Leases (1) Expirations (1) Leases
- -------------- ----------- ----------------- ----------------- --------------- ----------------- --------------
(in thousands)
2000 898 3,439,598 13.8% $ 56,400 $ 16.40 14.1%
2001 598 3,665,100 14.8 59,636 16.27 14.9
2002 657 3,834,351 15.5 62,252 16.24 15.6
2003 456 3,775,629 15.2 61,296 16.23 15.3
2004 374 2,726,830 11.0 44,668 16.38 11.2
2005 113 1,456,658 5.9 23,138 15.88 5.8
2006 64 1,647,918 6.6 27,106 16.45 6.8
2007 29 773,551 3.1 12,624 16.32 3.2
2008 53 1,540,816 6.2 21,702 14.08 5.4
2009 22 976,289 3.9 15,750 16.13 3.9
Thereafter 88 1,000,782 4.0 15,274 15,26 3.8
--- --------- ----- -------- -------- -----
3,352 24,837,522 100.0% $399,846 $ 16.10 100.0%
===== ========== ===== ======== ======== =====
Industrial Properties:
Average Percentage of
Percentage of Annual Leased Rents
Rentable Leased Annual Rents Rental Rate Represented
Number of Square Feet Square Footage Under Per Square by
Lease Leases Subject to Represented by Expiring Foot for Expiring
Expiring Expiring Expiring Leases Expiring Leases Leases (1) Expirations (1) Leases
- -------------- ----------- ----------------- ----------------- --------------- ----------------- --------------
(in thousands)
2000 228 2,537,554 23.1% $11,734 $ 4.62 20.2%
2001 149 1,771,632 16.1 8,643 4.88 14.9
2002 138 1,778,493 16.2 8,035 4.52 13.8
2003 58 787,214 7.2 4,429 5.63 7.6
2004 75 2,310,262 21.0 12,116 5.24 20.8
2005 17 323,313 2.9 2,402 7.43 4.1
2006 14 459,385 4.2 3,291 7.16 5.7
2007 7 189,148 1.7 1,264 6.68 2.2
2008 6 247,737 2.3 2,006 8.10 3.5
2009 12 422,377 3.8 3,638 8.61 6.3
Thereafter 10 159,727 1.5 540 3.38 0.9
--- --------- ----- ------- ------- -----
714 10,986,842 100.0% $58,098 $ 5.29 100.0%
=== ========== ===== ======= ======= =====
- ----------
(1) Annual Rents Under Expiring Leases are December 1999 rental revenue (base
rent plus operating expense pass-throughs) multiplied by 12.
13
Retail Properties:
Average Percentage of
Percentage of Annual Leased Rents
Rentable Leased Annual Rents Rental Rate Represented
Number of Square Feet Square Footage Under Per Square by
Lease Leases Subject to Represented by Expiring Foot for Expiring
Expiring Expiring Expiring Leases Expiring Leases Leases (1) Expirations (1) Leases
- ---------------- ----------- ----------------- ----------------- --------------- ----------------- --------------
(in thousands)
2000 97 228,767 14.5% $ 3,757 $ 16.42 12.6%
2001 53 130,267 8.3 3,175 24.37 10.7
2002 50 145,077 9.2 2,459 16.95 8.3
2003 46 118,582 7.5 2,531 21.34 8.5
2004 33 209,764 13.3 2,315 11.04 7.8
2005 16 52,135 3.3 1,496 28.69 5.0
2006 21 71,533 4.5 1,628 22.76 5.5
2007 10 52,542 3.3 949 18.06 3.2
2008 15 107,595 6.8 3,413 31.72 11.5
2009 21 141,808 9.0 2,713 19.13 9.1
Thereafter 17 318,489 20.3 5,302 16.65 17.8
-- ------- ----- ------- -------- -----
379 1,576,559 100.0% $29,738 $ 18.86 100.0%
=== ========= ===== ======= ======== =====
Total:
Average Percentage of
Percentage of Annual Leased Rents
Rentable Leased Annual Rents Rental Rate Represented
Number of Square Feet Square Footage Under Per Square by
Lease Leases Subject to Represented by Expiring Foot for Expiring
Expiring Expiring Expiring Leases Expiring Leases Leases (1) Expirations(1) Leases
- ---------------- ----------- ----------------- ----------------- --------------- ---------------- --------------
(in thousands)
2000 1,223 6,205,919 16.6% $ 71,891 $ 11.58 14.7%
2001 800 5,566,999 14.9 71,454 12.84 14.7
2002 845 5,757,921 15.4 72,746 12.63 15.0
2003 560 4,681,425 12.5 68,256 14.58 14.0
2004 482 5,246,856 14.0 59,099 11.26 12.1
2005 146 1,832,106 4.9 27,036 14.76 5.5
2006 99 2,178,836 5.8 32,025 14.70 6.6
2007 46 1,015,241 2.7 14,837 14.61 3.0
2008 74 1,896,148 5.1 27,121 14.30 5.6
2009 55 1,540,474 4.1 22,101 14.35 4.5
Thereafter 115 1,478,998 4.0 21,116 14.28 4.3
----- --------- ----- -------- -------- -----
4,445 37,400,923 100.0% $487,682 $ 13.04 100.0%
===== ========== ===== ======== ======== =====
- ----------
(1) Annual Rents Under Expiring Leases are December 1999 rental revenue (base
rent plus operating expense pass-throughs) multiplied by 12.
14
DEVELOPMENT LAND
As of December 31, 1999, we owned 1,473 acres and had committed to
purchase over the next three years an additional 317 acres of land for
development. We estimate that we can develop approximately 12.6 million square
feet of office, industrial and retail space on the development land.
All of the development land is zoned and available for office, industrial
or retail development, substantially all of which has utility infrastructure
already in place. We believe that our commercially zoned and unencumbered land
in existing business parks gives us an advantage in our future development
activities over other commercial real estate development companies in many of
our markets. Any future development, however, is dependent on the demand for
industrial or office space in the area, the availability of favorable financing
and other factors, and no assurance can be given that any construction will
take place on the development land. In addition, if construction is undertaken
on the development land, we will be subject to the risks associated with
construction activities, including the risk that occupancy rates and rents at a
newly completed property may not be sufficient to make the property profitable,
construction costs may exceed original estimates and construction and lease-up
may not be completed on schedule, resulting in increased debt service expense
and construction expense.
ITEM 3. LEGAL PROCEEDINGS
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 Securities Exchange Act of 1934 and (4) the Company filed
a registration statement with the SEC containing materially false and
misleading statements and omissions of material facts in violation of Sections
11 and 12(2) of the Securities Act of 1933. The plaintiff seeks equitable
relief and monetary damages. We believe that the defendants have meritorious
defenses to the plaintiffs' allegations and intend to vigorously defend this
litigation. By order dated June 18, 1999, the court granted in part and denied
in part our motion to dismiss. The court has granted the plaintiff's motion
seeking certification of the proposed class of plaintiffs with respect to the
remaining claims. Discovery in the matter is proceeding. 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.
In addition, we are a party to a variety of legal proceedings arising in
the ordinary course of our business. We believe that we are adequately covered
by insurance and indemnification agreements. Accordingly, none of such
proceedings are expected to have a material adverse effect on our business,
financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to our
executive officers:
Name Age Position and Background
- ---------------------- ----- ---------------------------------------------------------------------------
Ronald P. Gibson 55 Director, President and Chief Executive Officer. Mr. Gibson is one of our
founders and has served as President or managing partner of our
predecessor since its formation in 1978.
John L. Turner 53 Director, Vice Chairman of the Board of Directors and Chief Investment
Officer. Mr. Turner co-founded the predecessor of Forsyth Properties in
1975.
Edward J. Fritsch 41 Executive Vice President, Chief Operating Officer and Secretary.
Mr. Fritsch joined us in 1982.
Gene H. Anderson 54 Director and Senior Vice President. Mr. Anderson manages the operations
of our Georgia properties. Mr. Anderson was the founder and president
of Anderson Properties, Inc. prior to its merger with the Company.
Michael E. Harris 50 Senior Vice President. Mr. Harris is responsible for our operations in
Tennessee, Missouri, Kansas and Maryland. Mr. Harris was executive vice
president of Crocker Realty Trust prior to its merger with the Company.
Before joining Crocker Realty Trust, Mr. Harris served as senior vice
president, general counsel and chief financial officer of Towermarc
Corporation, a privately owned real estate development firm.
Marcus H. Jackson 43 Senior Vice President. Mr. Jackson is responsible for our operations in
Virginia and the Research Triangle, Greensboro and Winston Salem
divisions of North Carolina. Prior to joining us in 1998, Mr. Jackson was
senior vice president of Compass Development and Construction
Services.
Dale R. Johannes 49 Senior Vice President. Mr. Johannes is responsible for our operations in
Florida. From 1990 to 1997, Mr. Johannes served as chief operating
officer of Associated Capital Properties, Inc.
Carman J. Liuzzo 39 Vice President, Chief Financial Officer and Treasurer. Prior to joining us
in 1994, Mr. Liuzzo was vice president and chief accounting officer for
Boddie-Noell Enterprises, Inc. and Boddie-Noell Restaurant Properties,
Inc. Mr. Liuzzo is a certified public accountant.
Mack D. Pridgen III 50 Vice President and General Counsel. Prior to joining us in 1997,
Mr. Pridgen was a partner with Smith Helms Mulliss & Moore, L.L.P.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market Information and Dividends
The Common Stock has been traded on the New York Stock Exchange ("NYSE")
under the symbol "HIW" since the Company's initial public offering. The
following table sets forth the quarterly high and low sales prices per share
reported on the NYSE for the quarters indicated and the distributions paid per
share during such quarter.
1999 1998
-------------------------------------- -------------------------------------
Quarter
Ended: High Low Distribution High Low Distribution
- ------------------------ ----------- ----------- -------------- ----------- ----------- -------------
March 31 ............. $25.69 $ 22.25 $ .54 $ 37.44 $ 32.25 $ 0.51
June 30 .............. 27.69 22.75 .54 35.31 30.69 0.51
September 30 ......... 26.88 22.25 .555 32.93 23.00 0.54
December 31 .......... 25.63 20.25 .555 28.81 24.06 0.54
- ----------
On March 20, 2000, the last reported sale price of the Common Stock on the
NYSE was $21.00 per share and the Company had 1,359 stockholders of record.
The Company intends to continue to pay regular quarterly distributions to
holders of shares of Common Stock and holders of Common Units. Although the
Company intends to maintain its current distribution rate, future distributions
by the Company will be at the discretion of the Board of Directors and will
depend on the actual funds from operations of the Company, its financial
condition, capital requirements, the annual distribution requirements under the
REIT provisions of the Internal Revenue Code of 1986 and such other factors as
the Board of Directors deems relevant.
During 1999, the Company's distributions totaled $134,341,000, none of
which represented return of capital for financial statement purposes. The
minimum distribution per share of Common Stock required to maintain REIT status
was approximately $2.46 per share in 1999, $1.62 per share in 1998, $1.56 per
share in 1997 and $1.44 per share in 1996.
The Company has instituted a Dividend Reinvestment and Stock Purchase Plan
under which holders of Common Stock may elect to automatically reinvest their
distributions in additional shares of Common Stock and may make optional cash
payments for additional shares of Common Stock. The Company may issue
additional shares of Common Stock or repurchase Common Stock in the open market
for purposes of financing its obligations under the Dividend Reinvestment and
Stock Purchase Plan.
In August 1997, the Company instituted an Employee Stock Purchase Plan for
all active employees. At the end of each three-month offering period, each
participant's account balance is applied to acquire shares of Common Stock at
90% of the market value of the Common Stock, calculated as the lower of the
average closing price on the NYSE on the five consecutive days preceding the
first day of the quarter or the five days preceding the last day of the
quarter. A participant may not invest more than $7,500 per quarter. During
1999, employees purchased 29,214 shares of Common Stock under the Employee
Stock Purchase Plan.
SALES OF UNREGISTERED SECURITIES
During 1999, the Company issued an aggregate of 1,192,617 shares of Common
Stock in private offerings exempt from the registration requirements pursuant
to Section 4(2) of the Securities Act. Substantially all of these shares were
issued to holders of Common Units upon the redemption of such Common Units.
Each of these purchasers is an accredited investor under Rule 501 of the
Securities Act. The Company has registered the resale of such shares under the
Securities Act.
17
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating
information for the Company as of December 31, 1999, 1998, 1997, 1996 and 1995
and for the years ended December 31, 1999, 1998, 1997, 1996 and 1995 ($ in
thousands, except per share amounts):
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
1999 1998 1997 1996 1995
-------------- -------------- -------------- -------------- -------------
Operating Data:
Total revenue ...................... $ 584,935 $ 512,471 $ 274,470 $ 137,926 $ 73,522
Rental property operating
expenses (1) ..................... 174,075 154,323 76,743 35,313 17,049
General and administrative ......... 22,345 20,776 10,216 5,666 2,737
Interest expense ................... 117,134 97,011 47,394 26,610 13,720
Depreciation and
amortization ..................... 112,347 91,705 47,533 22,095 11,082
----------- ----------- ----------- ----------- ----------
Income before cost of
unsuccessful transactions,
gain on disposition of
assets, minority interest
and extraordinary item ........... 159,034 148,656 92,584 48,242 28,934
Cost of unsuccessful
transactions ..................... (1,500) -- -- -- --
Gain on disposition of
assets ........................... 8,679 1,716 -- -- --
----------- ----------- ----------- ----------- ----------
Income before minority
interest and extraordinary
item ............................. 166,213 150,372 92,584 48,242 28,934
Minority interest .................. (20,779) (24,335) (15,106) (6,782) (4,937)
----------- ----------- ----------- ----------- ----------
Income before
extraordinary item ............... 145,434 126,037 77,478 41,460 23,997
Extraordinary item-loss on
early extinguishment of
debt ............................. (7,341) (387) (5,799) (2,140) (875)
----------- ----------- ----------- ----------- ----------
Net income ......................... 138,093 125,650 71,679 39,320 23,122
Dividends on preferred
stock ............................ (32,580) (30,092) (13,117) -- --
----------- ----------- ----------- ----------- ----------
Net income available for
common shareholders .............. $ 105,513 $ 95,558 $ 58,562 $ 39,320 $ 23,122
=========== =========== =========== =========== ==========
Net income per common
share -- basic ................... $ 1.72 $ 1.74 $ 1.51 $ 1.51 $ 1.49
=========== =========== =========== =========== ==========
Net income per common
share -- diluted ................. $ 1.71 $ 1.74 $ 1.50 $ 1.50 $ 1.48
=========== =========== =========== =========== ==========
Balance Sheet Data
(at end of period):
Net real estate assets ............. $3,673,338 $3,924,192 $2,614,654 $1,377,874 $ 593,066
Total assets ....................... 4,016,197 4,314,333 2,722,306 1,443,440 621,134
Total mortgages and notes
payable .......................... 1,766,177 2,008,716 978,558 555,876 182,736
Other Data:
Number of in-service
properties ....................... 563 658 481 292 191
Total rentable square feet ......... 38,976,000 44,642,000 30,721,000 17,455,000 9,215,000
- ----------
(1) Rental property operating expenses include salaries, real estate taxes,
insurance, repairs and maintenance, property management, security and
utilities.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview and Background
The Highwoods Group (the predecessor to the Company) was comprised of 13
office properties and one warehouse facility (the "Highwoods-Owned
Properties"), 94 acres of development land and the management, development and
leasing business of Highwoods Properties Company ("HPC"). On June 14, 1994,
following completion of the Company's initial public offering, the Company,
through a business combination involving entities under varying common
ownership, succeeded to the Highwoods-Owned Properties, HPC's real estate
business and 27 additional office properties owned by unaffiliated parties
(such combination being referred to as the "Formation Transaction"). Minority
interest in the Company represents the common partnership interests owned by
various individuals and entities and not the Company in the Operating
Partnership, the entity that owns substantially all of the Company's interests
in the properties and through which the Company, as the sole general partner,
conducts substantially all of its operations. We acquired three additional
properties in 1994 after the Formation Transaction.
In February 1995, we expanded into other North Carolina markets and
diversified our portfolio to include industrial and service center properties
with our $170.0 million, 57-property business combination with Forsyth
Partners. During 1995, we acquired an aggregate of 144 properties, encompassing
6.4 million rentable square feet, at an initial cost of $369.9 million.
In September 1996, we acquired 5.7 million rentable square feet of office
and service center space through our $566.0 million merger with Crocker Realty
Trust, Inc. During 1996, we acquired an aggregate of 91 properties,
encompassing 7.3 million square feet, at an initial cost of $704.0 million.
In October 1997, we acquired 6.4 million rentable square feet of office
space through our $617.0 million merger with Associated Capital Properties,
Inc. During 1997, we acquired an aggregate of 176 properties, encompassing 12.8
million rentable square feet, at an initial cost of $1.1 billion.
In July 1998, we acquired 5.7 million rentable square feet of office,
industrial and retail space as well as multi-family communities through our
$544.0 million merger with J.C. Nichols Company. During 1998, we acquired an
aggregate of 186 properties, encompassing 14.9 million rentable square feet and
2,325 apartment units, at an initial cost of $1.2 billion.
During 1999, in an effort to increase portfolio quality and return on
invested capital, we sold 123 properties, encompassing 8.3 million rentable
square feet for an aggregate sales price of $696.4 million and contributed or
sold to joint ventures 13 properties, encompassing 1.2 million rentable square
feet for a sales price of $142.0 million. In addition, we acquired seven
properties, encompassing 960,000 rentable square feet at an initial cost of
$106.8 million.
This information should be read in conjunction with the accompanying
consolidated financial statements and the related notes thereto.
RESULTS OF OPERATIONS
Comparison of 1999 to 1998. Revenues from rental operations increased
$66.5 million, or 13.4%, from $498.0 million for the year ended December 31,
1998 to $564.5 million for the year ended December 31, 1999. The increase is
primarily a result of our acquisition and development activity in 1998 and
1999. In total, we acquired or completed the development of 3.1 million
rentable square feet of majority-owned office, industrial and retail properties
during 1999. These additions to our portfolio were offset by the disposition of
8.8 million rentable square feet of majority-owned office, industrial and
retail properties and 418 apartment units (including the removal of certain
properties from our consolidated financial statements as a result of the
reorganization of the Des Moines partnerships) in 1999. Same property revenues,
which are the revenues of the 403 in-service properties owned on January 1,
1998, increased 3% for the year ended December 31, 1999 compared to the year
ended December 31, 1998.
19
During the year ended December 31, 1999, 1,401 leases representing 8.3
million square feet of office, industrial and retail space were executed at an
average rate per square foot which was 4.9% higher than the average rate per
square foot on the expired leases.
Interest and other income increased $5.3 million, or 38%, from $14.0
million for the year ended December 31, 1998 to $19.3 million for the year
ended December 31, 1999. The increase was a result of higher cash balances
during the year ended December 31, 1999 and additional income generated from
management fees, development fees and leasing commissions. The Company
generated $914,425 in auxiliary income (vending and parking) as a result of
acquiring multifamily communities in the merger with J.C. Nichols.
Rental operating expenses increased $19.8 million, or 12.8%, from $154.3
million for the year ended December 31, 1998 to $174.1 million for the year
ended December 31, 1999. The increase is primarily a result of our acquisition
and development activity in 1998 and 1999. In total, we acquired or completed
the development of 3.1 million rentable square feet of majority-owned office,
industrial and retail properties during 1999. These additions to our portfolio
were offset by the disposition of 8.8 million rentable square feet of
majority-owned office, industrial and retail properties and 418 apartment units
(including the removal of certain properties from our consolidated financial
statements as a result of the reorganization of the Des Moines partnerships) in
1999. Rental operating expenses as a percentage of related revenues remained
consistent at 31.0% in 1998 and 1999.
Depreciation and amortization for the years ended December 31, 1999 and
1998 was $112.3 million and $91.7 million, respectively. The increase of $20.6
million, or 22.5%, is due to an average increase in depreciable assets and
deferred leasing costs. Interest expense increased $20.1 million, or 20.7%,
from $97.0 million in 1998 to $117.1 million in 1999. The increase is
attributable to an average increase in outstanding debt related to our
acquisition and development activities. The weighted average interest rates on
outstanding debt remained consistent in 1998 and 1999. Interest expense for the
years ended December 31, 1999 and 1998 included $2.8 million and $2.6 million,
respectively, of amortization of deferred financing costs and of the costs
related to our interest rate hedge contracts. General and administrative
expenses decreased from 4.1% of total revenue in 1998 to 3.8% in 1999.
Net income before minority interest and extraordinary item equaled $166.2
million and $150.4 million for the years ended December 31, 1999 and 1998,
respectively. The Company's net income allocated to the minority interest
totaled $20.8 million and $24.3 million for 1999 and 1998, respectively. The
Company incurred extraordinary losses in 1999 and 1998 of $7.3 million and
$387,000, respectively, related to the early extinguishing of debt. The Company
recorded $32.6 million and $30.1 million in preferred stock dividends for the
years ended December 31, 1999 and 1998, respectively.
Comparison of 1998 to 1997. Revenue from rental operations increased
$231.1 million, or 87%, from $266.9 million for the year ended December 31,
1997 to $498.0 million for the year ended December 31, 1998. The increase is a
result of our acquisition and development activity in 1997 and 1998. In total,
we acquired 186 office, industrial and retail properties, encompassing 14.9
million square feet and 2,325 apartment units during 1998. Same property
revenues, which are the revenues of the 282 in-service properties (encompassing
16.7 million square feet) owned on January 1, 1997 and December 31, 1998,
increased 4.7% for the year ended December 31, 1998, compared to the year ended
December 31, 1997.
During 1998, 1,312 leases, representing 6.4 million square feet of office,
industrial and retail space, were executed at an average rate per square foot
which was 6.8% higher than the average rate per square foot on the expired
leases.
Interest and other income increased $6.5 million from $7.5 million in 1997
to $14.0 million in 1998. The increase is primarily related to an increase in
interest income as we maintained a higher cash position. We also generated
additional management fees, development fees and leasing commissions in 1998.
The Company generated $650,000 in auxiliary income (vending and parking) as a
result of acquiring multifamily communities in the merger with J.C. Nichols.
20
Rental operating expenses increased $77.6 million, or 101.2%, from $76.7
million in 1997 to $154.3 million in 1998. Rental expenses as a percentage of
related rental revenues increased from 28.7% in 1997 to 31.0% in 1998. The
increase is a result of an increase in the percentage of office properties in
the portfolio, which have fewer triple net lease pass-throughs.
Depreciation and amortization for the years ended December 31, 1998 and
1997 were $91.7 million and $47.5 million, respectively. The increase of $44.2
million, or 93.1%, is due to an average increase in depreciable assets and
deferred leasing costs. Interest expense increased $49.6 million, or 104.6%,
from $47.4 million in 1997 to $97.0 million in 1998. The increase is
attributable to an average increase in outstanding debt related to our
acquisition and development activities. Interest expense for the years ended
December 31, 1998 and 1997 included $2.6 million and $2.3 million,
respectively, of amortization of deferred financing costs and of the costs
related to our interest rate hedge contracts. General and administrative
expenses increased from 3.7% of total revenue in 1997 to 4.1% in 1998.
Net income before minority interest and extraordinary item equaled $150.4
million and $92.6 million for the years ended December 31, 1998 and 1997,
respectively. The Company's net income allocated to the minority interest
totaled $24.3 million and $15.1 million for 1998 and 1997, respectively. The
Company incurred an extraordinary loss in the first quarter of 1997 of $3.3
million related to the early extinguishing of debt assumed in the acquisition
of the Anderson Properties and Century Center portfolios. The Company recorded
$30.1 million and $13.1 million in preferred stock dividends for the years
ended December 31, 1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
STATEMENT OF CASH FLOWS. For the year ended December 31, 1999, the Company
generated $233.0 million in cash flows from operating activities and $160.0
million from investing activities (primarily as a result of the dispositions of
assets, offset in part by additions to real estate assets). These combined cash
flows of $393.0 million were used to fund financing activities of $390.0
million, primarily consisting of repayments on our $450 million unsecured
revolving loan (the "Revolving Loan") and mortgages and notes payable as well
as the payment of distributions during 1999.
CAPITALIZATION. The Company's total indebtedness at December 31, 1999
totaled $1.8 billion and was comprised of $582.0 million of secured
indebtedness with a weighted average interest rate of 7.8% and $1.2 billion of
unsecured indebtedness with a weighted average interest rate of 7.3%. Except as
stated below, all of the mortgage and notes payable outstanding at December 31,
1999 were either fixed rate obligations or variable rate obligations covered by
interest rate hedge contracts. A portion of our Revolving Loan and
approximately $39.0 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 December 31, 1999.
Based on the Company's total market capitalization of $3.8 billion at
December 31, 1999 (at the December 31, 1999 stock price of $23.63 and assuming
the redemption for shares of Common Stock of the 9.0 million Common Units of
minority interest in the Operating Partnership), the Company's debt represented
approximately 46% of its total market capitalization.
We completed the following financing activities during 1999:
o JUNE 1999 EQUITY SETTLEMENT. On June 9, 1999, we settled our August 1997
forward equity transaction with UBS AG, London Branch through a combination
of cash and shares of Common Stock. In connection with the settlement,
246,424 shares of the Company's common stock were returned and retired.
o JULY 1999 DEBT RETIREMENT. On July 1, 1999, we retired a $133.0 million 7.88%
mortgage note that was secured by 44 of our properties held by AP Southeast
Portfolio Partners, L.P., one of our subsidiaries, by using $138.0 million
of availability under our Revolving Loan to repay the principal amount of
the mortgage note plus the required yield maintenance premium for early
maturity.
21
o OCTOBER DEBT BORROWING. On October 21, 1999, we borrowed $188.4 million from
Monumental Life Insurance Company, an affiliate of AEGON USA Realty
Advisors, Inc., pursuant to one $94.2 million 7.77% mortgage note due 2009
and one $94.2 million 7.87% mortgage note due 2009, which notes are secured
by 28 of our properties. We used the net proceeds from these mortgage loans,
together with $2.1 million that we received from counterparties to settle
two treasury lock agreements in September 1999, to repay amounts outstanding
under our Revolving Loan.
o DECEMBER CREDIT FACILITY AMENDMENT. On December 10, 1999, we and our lenders
amended our Revolving Loan to, among other things, reduce the overall
borrowing committment thereunder from $600 million to $450 million.
o DECEMBER SHARE REPURCHASES. On December 14, 1999, we announced that our board
of directors had authorized a share repurchase plan pursuant to which the
Company may, at its sole and absolute discretion, repurchase up to 10.0
million shares of Common Stock and Common Units. In December 1999, we used
$25.5 million of net proceeds from our recent disposition activity, either
through direct payments or repayment of borrowings under the Revolving Loan,
to repurchase 1.2 million shares of Common Stock through periodic open market
or privately negotiated transactions at a weighted average price of $22.15 per
share.
To meet in part our long-term liquidity requirements, we borrow funds at a
combination of fixed and variable rates. Borrowings under the Revolving Loan
bear interest at variable rates. Our long-term debt, which consists of
long-term financings and the issuance of debt securities, typically bears
interest at fixed rates. In addition, we have assumed fixed rate and variable
rate debt in connection with acquiring properties. Our interest rate risk
management objective is to limit the impact of interest rate changes on
earnings and cash flows and to lower our overall borrowing costs. To achieve
these objectives, from time to time we enter into interest rate hedge contracts
such as collars, swaps, caps and treasury lock agreements in order to mitigate
our interest rate risk with respect to various debt instruments. We do not hold
or issue these derivative contracts for trading or speculative purposes.
The following table sets forth information regarding our interest rate
hedge contracts as of December 31, 1999 ($ in thousands):
Notional Maturity Fixed Fair Market
Type of Hedge Amount Date Reference Rate Rate Value
- ---------------- ------ ------- ----------------------- ------------- -----------
Swap $ 20,505 6/10/02 1-Month LIBOR + 0.75% 7.700% $(493)
Collar 80,000 10/15/01 1-Month LIBOR 5.60 - 6.25% 525
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. Net payments made to counterparties under interest rate
hedge contracts were $305,000 during 1999 and were recorded as increases to
interest expense.
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
22
and management fees have provided sources of cash flow. We presently have no
plans for major capital improvements to the existing 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 $153.4 million of our existing
development activity. See "Business -- Development Activity." We expect to fund
our short-term liquidity needs through a combination of:
o additional borrowings under our Revolving Loan (approximately $175.0
million was available as of March 20, 2000);
o the issuance of secured debt;
o the selective disposition of non-core assets; and
o the sale or contribution of some of our wholly owned properties to
strategic joint ventures to be formed with selected partners interested in
investing with us, which will have the net effect of generating additional
capital through such sale or contributions.
Our long-term liquidity needs generally include the funding of existing
and future development activity, selective asset acquisitions and the
retirement of mortgage debt, amounts outstanding under the Revolving Loan and
long-term unsecured debt. We remain committed to maintaining a flexible and
conservative capital structure. Accordingly, we expect to meet our long-term
liquidity needs through a combination of (1) the issuance by the Operating
Partnership of additional unsecured debt securities, (2) the issuance of
additional equity securities by the Company and the Operating Partnership as
well as (3) the sources described above with respect to our short-term
liquidity. We expect to use such sources to meet our long-term liquidity
requirements either through direct payments or repayment of borrowings under
the Revolving Loan. We do not intend to reserve funds to retire existing
secured or unsecured indebtedness upon maturity. Instead, we will seek to
refinance such debt at maturity or retire such debt through the issuance of
equity or debt securities.
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
STOCK REPURCHASE. From January 1, 2000 to March 20, 2000, the Company
repurchased 1.2 million shares of Common Stock at a weighted average price of
$21.65 per share unit for an aggregate purchase price of approximately $25.9
million.
DISPOSITION ACTIVITY. We currently have 786,000 rentable square feet of
properties under contract for sale in various transactions totaling $57.8
million. Additionally, 3.2 million rentable square feet
23
of properties are under various letters of intent for sale at $293.5 million.
These transactions are subject to customary closing conditions, including due
diligence and documentation, and are expected to close during the first and
second quarters of 2000. However, we can provide no assurance that all or parts
of these transactions will be consummated.
We expect to use a portion of the net proceeds from our recent and pending
disposition activity to reinvest in tax-deferred exchange transactions under
Section 1031 of the Internal Revenue Code. We expect to reinvest up to $27.1
million of the remaining net proceeds from disposition activity as of December
31, 1999 and up to $75.0 million of the net proceeds from pending disposition
activity to acquire in tax-deferred exchange transactions in-service
properties, development land and development projects located in core markets
and in sub-markets where we have a strong presence. For an exchange to qualify
for tax-deferred treatment under Section 1031, the net proceeds from the sale
of a property must be held by an escrow agent until applied toward the purchase
of real estate qualifying for gain deferral. Given the competition for
properties meeting our investment criteria, there may be some delay in
reinvesting such proceeds. Delays in reinvesting such proceeds will reduce our
income from operations. In addition, the use of net proceeds from dispositions
to fund development activity, either through direct payments or repayment of
borrowings under our Revolving Loan, will reduce our income from operations
until such development projects are placed in service.
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
24
which we have not obtained a Phase I environmental assessment or have not yet
obtained a Phase II environmental assessment. In addition, we base our
assumptions regarding environmental conditions, including groundwater flow and
the existence and source of contamination, on readily available sampling data.
We cannot guarantee that such data is reliable in all cases. Moreover, we
cannot provide any assurances (1) that future laws, ordinances or regulations
will not impose a material environmental liability or (2) that tenants, the
condition of land or operations in the vicinity of our properties or unrelated
third parties will not affect the current environmental condition of our
properties.
Some tenants use or generate hazardous substances in the ordinary course
of their respective businesses. In their leases, we require these tenants to
comply with all applicable laws and to be responsible to us for any damages
resulting from their use of the property. We are not aware of any material
environmental problems resulting from tenants' use or generation of hazardous
or toxic chemicals or substances. We cannot provide any assurances, however,
that all tenants will comply with the terms of their leases or remain solvent.
If tenants do not comply or do not remain solvent, we may at some point be
responsible for contamination caused by such tenants.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, which is required to be adopted in fiscal years beginning after
June 15, 1999. In June 1999, FASB issued Statement No. 137, Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the FASB Statement
No. 133, which stipulates the required adoption date to be all fiscal years
beginning after June 15, 2000. Statement No. 133 requires us to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The fair market value of our derivatives is discussed
in Item 7A.
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
25
described below. FFO and cash available for distributions should not be
considered as alternatives to net income as an indication of our performance or
to cash flows as a measure of liquidity.
FFO equals net income (computed in accordance with generally accepted
accounting principles ("GAAP")) excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation and amortization, and
after adjustments for unconsolidated partnerships and joint ventures. 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.
In October 1999, NAREIT issued an additional clarification effective as of
January 1, 2000 stipulating that FFO should include both recurring and
non-recurring operating results. Consistent with this clarification,
non-recurring items that are not defined as "extraordinary" under GAAP will be
reflected in the calculation of FFO. Gains and losses from the sale of
depreciable operating property will continue to be excluded from the
calculation of FFO.
Cash available for distribution is defined as funds from operations
reduced by non-revenue enhancing capital expenditures for building improvements
and tenant improvements and lease commissions related to second generation
space.
FFO and Cash available for distribution for the years ended December 31,
1999, 1998 and 1997 are summarized in the following table (in thousands):
Year Ended
December 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
FFO:
Income before minority interest and extraordinary item ........... $ 166,213 $ 150,372 $ 92,584
Add/(Deduct):
Dividends on preferred stock ................................... (32,580) (30,092) (13,117)
Cost of unsuccessful transactions .............................. 1,500 146 --
Severance costs and other division closing expenses ............ 1,813 -- --
Gain on disposition of assets .................................. (8,679) (1,716) --
Depreciation and amortization .................................. 112,347 91,705 47,533
Depreciation on unconsolidated subsidiaries .................... 3,618 974 --
FFO before minority interest .................................. 244,232 211,389 127,000
Cash Available for Distribution:
Add/(Deduct):
Rental income from straight-line rents ......................... (14,983) (13,385) (7,035)
Amortization of deferred financing costs ....................... 2,823 2,598 2,256
Non-incremental revenue generating capital expenditures:
Building improvements paid .................................... (10,056) (9,029) (4,401)
Second generation tenant improvements paid .................... (25,043) (20,115) (9,889)
Second generation lease commissions paid ...................... (13,653) (13,055) (5,535)
--------- --------- ---------
Cash available for distribution ............................. $ 183,320 $ 158,403 $ 102,396
========= ========= =========
Weighted average shares/units outstanding (1) -- diluted ......... 70,757 65,621 46,813
========= ========= =========
Dividend payout ratio:
FFO ............................................................ 64.3% 65.2% 73.0%
========= ========= =========
Cash available for distribution ................................ 85.7% 87.0% 90.5%
========= ========= =========
26
- ----------
(1) Assumes redemption of Common Units for shares of Common Stock. Minority
interest Common Unit holders and the stockholders of the Company share
equally on a per Common Unit and per share basis; therefore, the per share
information is unaffected by conversion.
INFLATION
In the last five years, inflation has not had a significant impact on us
because of the relatively low inflation rate in our geographic areas of
operatio