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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended December 31, 2002
OR
[ ] 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 000-21731
HIGHWOODS REALTY LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
North Carolina 56-1869557
(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
- -------------------------------------------------------------------------------
6 3/4% Notes due December 1, 2003................. New York Stock Exchange
7% Notes due December 1, 2006..................... 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 ___
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 value of the Common Units held by nonaffiliates of the
registrant (based on the closing price on the New York Stock Exchange of a share
of Common Stock of Highwoods Properties, Inc., the general partner of the
registrant) on December 31, 2002 was $120,873,342.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Securities Exchange Act). Yes ___ No X
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of Highwoods Properties, Inc. in connection
with its Annual Meeting of Shareholders to be held May 19, 2003, are
incorporated by reference in Part III, Items 10, 11 and 13 of this Form 10-K.
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HIGHWOODS REALTY LIMITED PARTNERSHIP
TABLE OF CONTENTS
ITEM NO. PAGE NO.
- -------- --------
PART I
1. Business............................................................. 3
2. Properties........................................................... 7
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 Equity and Related Security Holder 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........... 38
8. Financial Statements and Supplementary Data.......................... 38
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 38
PART III
10. Directors and Executive Officers of the Registrant................... 39
11. Executive Compensation............................................... 39
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters..................................... 39
13. Certain Relationships and Related Transactions....................... 39
14. Controls and Procedures.............................................. 39
PART IV
15. Exhibits, Financial Statement Schedule and Reports on Form 8-K....... 41
2
PART I
We refer to (1) Highwoods Properties, Inc. as the "Company," (2) Highwoods
Realty Limited Partnership as the "Operating Partnership," (3) the Company's
common stock as "Common Stock" and (4) the Operating Partnership's common
partnership interests as "Common Units."
ITEM 1. BUSINESS
GENERAL
The Operating Partnership is managed by its general partner, the Company, a
self-administered and self-managed equity REIT that began operations through a
predecessor in 1978. Since the Company's initial public offering in 1994, we
have evolved into one of the largest owners and operators of suburban office,
industrial and retail properties in the southeastern and midwestern United
States. At December 31, 2002, we:
. owned 493 in-service office, industrial and retail properties,
encompassing approximately 37.1 million rentable square feet and 213
apartment units;
. owned an interest (50.0% or less) in 77 in-service office and
industrial properties, encompassing approximately 7.5 million
rentable square feet and 418 apartment units;
. owned 1,308 acres of undeveloped land suitable for future
development; and
. were developing an additional five properties, which will encompass
approximately 616,000 rentable square feet (including one property
encompassing 285,000 rentable square feet that we are developing
with a 50.0% joint venture partner).
The following summarizes our capital recycling program during the past
three years ended December 31, 2002:
2002 2001 2000
------- ------- -------
OFFICE, INDUSTRIAL AND RETAIL PROPERTIES
(rentable square feet in thousands)
Dispositions ................................................ (2,270) (268) (4,743)
Contributions to Joint Ventures ............................. -- (118) (2,199)
Developments Placed In-Service............................... 2,214 1,351 3,480
Redevelopment................................................ (52) -- --
Acquisitions................................................. -- 72 669
------- ------- -------
NET CHANGE........................................................ (108) 1,037 (2,793)
======= ======= =======
APARTMENT PROPERTIES
(in units)
Dispositions................................................. -- (1,672) --
======= ======= =======
In addition to the above capital recycling activity, the Company
repurchased $4.8 million, $148.8 million and $101.8 million of Common Stock and
Common Units during 2002, 2001 and 2000, respectively, and $18.5 million of
Preferred Stock during 2001. This represents aggregate purchases of $273.9
million of Common Stock, Common Units and Preferred Stock since January 1, 2000.
The Company conducts substantially all of its activities through, and
substantially all of its interests in the properties are held directly or
indirectly by, the Operating Partnership. The Company is the sole general
partner of the Operating Partnership. At December 31, 2002, the Company owned
88.4% of the Common Units in the Operating Partnership. Limited partners
(including certain officers and directors of the Company) own the remaining
Common Units. Holders of Common Units may redeem them for the cash value of one
share of the Company's Common Stock or, at the Company's option, one share of
Common Stock.
3
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
Geographic Diversification. Since the Company's initial public offering in
1994, we have significantly reduced our dependence on any particular market. We
initially owned only a limited number of office properties in North Carolina,
most of which were in the Research Triangle. Today, including our various joint
ventures, our portfolio includes primarily office properties throughout the
Southeast and retail and office properties in Kansas City, Missouri including
one significant mixed retail and office property.
Capital Recycling Program. Our strategy has been to focus our real estate
activities in markets where we believe our extensive local knowledge gives us a
competitive advantage over other real estate developers and operators. Through
our capital recycling program, we generally seek to:
. engage in the development of office and industrial projects in our
existing geographic markets, primarily in suburban business parks;
. acquire selective suburban office and industrial properties in our
existing geographic markets at prices below replacement cost that
offer attractive returns; and
. selectively dispose of non-core properties or other properties the
sale of which can generate attractive returns.
Our capital recycling activities benefit from our local market presence and
knowledge. Our division officers have significant real estate experience in
their respective markets. Based on this experience, we are in a better position
to evaluate capital recycling opportunities than many of our competitors. In
addition, our relationships with our tenants and those tenants at properties for
which we conduct third-party fee-based services may lead to development projects
when these tenants seek new space.
Efficient, Customer Service-Oriented Organization. We provide a complete
line of real estate services to our tenants and third parties. We believe that
our in-house development, acquisition, construction management, leasing and
management services allow us to respond to the many demands of our existing and
potential tenant base. We provide our tenants cost-effective services such as
build-to-suit construction and space modification, including tenant improvements
and expansions. In addition, the breadth of our capabilities and resources
provides us with market information not generally available. We believe that the
operating efficiencies achieved through our fully integrated organization also
provide a competitive advantage in setting our lease rates and pricing other
services.
Flexible Capital Structure. We are committed to maintaining a flexible
capital structure that: (1) allows growth through development and acquisition
opportunities; (2) promotes future earnings growth; and (3) provides access to
the private and public equity and debt markets on favorable terms. Accordingly,
we expect to meet our long-term liquidity requirements through a combination of
any one or more of:
. borrowings under our unsecured and secured revolving credit facilities;
. the issuance of unsecured debt;
. the issuance of secured debt;
. the issuance of equity securities by both the Company and the Operating
Partnership;
. the selective disposition of non-core properties or other properties
which can be sold at attractive returns; and
4
. the sale or contribution of our wholly-owned properties, development
projects and development land to strategic joint ventures formed with
unrelated investors.
COMPETITION
Our properties compete for tenants with similar properties located in our
markets primarily on the basis of location, rent, services provided and the
design and condition of the facilities. We also compete with other REITs,
financial institutions, pension funds, partnerships, individual investors and
others when attempting to acquire and develop properties.
EMPLOYEES
As of December 31, 2002, the Operating Partnership employed 554 persons.
RISK FACTORS
An investment in our securities involves various risks. All investors
should carefully consider the following risk factors in conjunction with the
other information contained in this Annual Report before purchasing our
securities. If any of these risks actually occur, our business, operating
results, prospects and financial condition could be harmed.
Adverse conditions in the real estate market may adversely affect our cash
flows from operations. Events or conditions, which are beyond our control, may
adversely affect our ability to generate revenues in excess of operating
expenses, including debt service and capital expenditures. Such events or
conditions could include:
. general and regional economic conditions, particularly in the
southeastern region of the United States;
. changes in interest rate levels and the availability of financing;
. difficulty in leasing or re-leasing space quickly or on favorable terms;
. increases in operating costs, including real estate taxes and insurance
premiums, due to inflation and other factors, which may not necessarily
be offset by increased rents; and
. inability of a significant number of tenants or certain key tenants to
pay rent.
Future acquisitions and development activities may fail to perform in
accordance with our expectations and may require development and renovation
costs exceeding our estimates. In the normal course of business, we typically
evaluate potential acquisitions, enter into non-binding letters of intent, and
may, at any time, enter into contracts to acquire additional properties.
However, changing market conditions, including competition from others, may
diminish our opportunities for making attractive acquisitions. Once made, our
investments may fail to perform in accordance with our expectations. In
addition, the renovation and improvement costs we incur in bringing an acquired
property up to market standards may exceed our estimates. Although we anticipate
financing future acquisitions and renovations through a combination of advances
under our revolving loans and other forms of secured or unsecured financing, no
assurance can be given that we will have the financial resources to make
suitable acquisitions or renovations. If new developments are financed through
construction loans, there is a risk that, upon completion of construction,
permanent financing for newly developed properties may not be available or may
be available only on disadvantageous terms.
In addition to acquisitions, we periodically consider developing and
constructing properties. Risks associated with development and construction
activities include:
. the unavailability of favorable financing;
. construction costs exceeding original estimates;
. construction and lease-up delays resulting in increased debt service
expense and construction costs; and
. insufficient occupancy rates and rents at a newly completed property
causing a property to be unprofitable.
5
Development activities are also subject to risks relating to our inability
to obtain, or delays in obtaining, all necessary zoning, land-use, building,
occupancy and other required governmental and utility company authorizations.
The success of our joint venture activity depends upon our ability to work
effectively with financially sound partners. Instead of owning properties
directly, we have invested, and may continue to invest, as a partner or a
co-venturer. Under certain circumstances, this type of investment may involve
risks not otherwise present, including the possibility that a partner or
co-venturer might become bankrupt or that a partner or co-venturer might have
business interests or goals inconsistent with ours. Also, such a partner or
co-venturer may take action contrary to our instructions or requests or contrary
to provisions in our joint venture agreements that could harm us, including
jeopardize our qualification as a REIT.
Our insurance coverage on our properties may be inadequate. We carry
comprehensive insurance on all of our properties, including insurance for
liability, fire and flood. Insurance companies currently, however, limit
coverage against certain types of losses, such as losses due to terrorist acts,
named wind storms and toxic mold. Thus we may not have insurance coverage
against certain types of losses and/or there may be decreases in the limits of
insurance available. Should an uninsured loss or a loss in excess of our insured
limits occur, we could lose all or a portion of the capital we have invested in
a property or properties, as well as the anticipated future revenue from the
property or properties. If any of our properties were to experience a
catastrophic loss, it could disrupt our operations, delay revenue and result in
large expenses to repair or rebuild the property. Such events could adversely
affect our ability to make distributions to our stockholders. Our existing
insurance policies expire on June 30, 2003. We anticipate renewing these
existing policies at that time.
Our use of debt to finance our operations could have a material adverse
effect on our cash flow and ability to make distributions. We are subject to
risks normally associated with debt financing, such as the insufficiency of cash
flow to meet required payment obligations, difficulty in complying with
financial ratios and other covenants and the inability to refinance existing
indebtedness. Approximately $295.3 million of principal payments on our existing
long-term debt is due in 2003 (this amount is adjusted for the refinancing of
the MOPPRS in February 2003. For a detailed maturity schedule regarding our
long-term debt, see "Management's Discussion and Analysis of Results of
Operations - Liquidity and Capital Resources - Capitalization."). If we fail to
comply with the financial ratios and other covenants under our existing debt
instruments, including our revolving loans, we would likely not be able to
borrow any further amounts under these instruments, which could adversely affect
our ability to fund our operations, and our lenders could accelerate any debt
outstanding thereunder. If our debt cannot be paid, refinanced or extended at
maturity, in addition to our failure to repay our debt, we may not be able to
make distributions to stockholders at expected levels or at all. Furthermore, if
any refinancing is done at higher interest rates, the increased interest expense
could adversely affect our cash flow and ability to make distributions to
stockholders. Any such refinancing could also impose tighter financial ratios
and other covenants that could restrict our ability to take actions that could
otherwise be in our stockholders' best interest, such as funding new development
activity, making opportunistic acquisitions, repurchasing our securities or
paying distributions. If we do not meet our mortgage financing obligations, any
properties securing such indebtedness could be foreclosed on, which would have a
material adverse effect on our cash flow and ability to make distributions.
We may need to borrow money or sell assets in order to make required
distributions. In order for the Company to make the distributions required to
maintain its REIT status, we may need to borrow funds. To obtain the favorable
tax treatment associated with REIT qualification, the Company generally will be
required to distribute to stockholders at least 90.0% of its annual REIT taxable
income, excluding net capital gain. The Company intends to make distributions to
stockholders to comply with the distribution provisions of the Internal Revenue
Code and to avoid income and other taxes. Differences in timing between the
receipt of income and the payment of expenses in arriving at taxable income and
the effect of required debt amortization payments could require us to borrow
funds on a short-term basis or liquidate funds on adverse terms to meet the REIT
qualification distribution requirements.
6
ITEM 2. PROPERTIES
GENERAL
As of December 31, 2002, we owned 493 in-service office, industrial and
retail properties, encompassing approximately 37.1 million rentable square feet,
and 213 apartment units. The following table sets forth information about our
wholly-owned in-service properties at December 31, 2002:
PERCENTAGE OF ANNUALIZED RENTAL REVENUE (1)
RENTABLE ------------------------------------------------
MARKET SQUARE FEET OCCUPANCY OFFICE INDUSTRIAL RETAIL TOTAL
- ------ ----------- --------- ------ ---------- ------ --------
Atlanta.................. 6,728,000 83.0% 11.2% 3.2% -- 14.4%
Research Triangle........ 4,340,000 81.9 13.8 0.2 -- 14.0
Kansas City.............. 2,512,000(2) 94.5 4.3 -- 8.6% 12.9
Tampa ................... 4,262,000 67.1(3) 12.2 -- -- 12.2
Piedmont Triad........... 8,371,000 88.9 6.6 4.9 -- 11.5
Nashville................ 2,733,000 87.7 10.1 -- -- 10.1
Richmond................. 2,764,000 95.0 8.4 0.5 -- 8.9
Charlotte................ 1,729,000 84.0 4.8 0.3 -- 5.1
Memphis.................. 1,215,000 80.8 4.3 -- -- 4.3
Greenville............... 1,511,000 86.8 4.2 0.2 -- 4.4
Columbia................. 426,000 67.4 1.1 -- -- 1.1
Orlando.................. 340,000 47.6 0.6 -- -- 0.6
Other.................... 181,000 74.7 0.5 -- -- 0.5
----------- ---- ---- ---- ---- -----
Total.................... 37,112,000 84.0%(3) 82.1% 9.3% 8.6% 100.0%
=========== ==== ==== ==== ==== =====
(1) Annualized Rental Revenue is December 2002 rental revenue (base rent plus
operating expense pass-throughs) multiplied by 12, and excludes revenue
associated with the rejected 816,000 square foot Intermedia (WorldCom)
lease on December 31, 2002.
(2) Excludes basement space in the Country Club Plaza property of 527,000
square feet.
(3) The occupancy percentages have been reduced as a result of the rejection of
the 816,000 square foot Intermedia (WorldCom) lease on December 31, 2002.
The impact on Tampa's occupancy and Total occupancy was 19.1% and 2.2%,
respectively.
7
The following table sets forth information about our wholly-owned
in-service and development properties as of December 31, 2002 and 2001:
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------------------- ----------------------------
RENTABLE PERCENT LEASED/ RENTABLE PERCENT LEASED/
SQUARE FEET PRE-LEASED SQUARE FEET PRE-LEASED
----------- --------------- ----------- ---------------
IN-SERVICE
Office................................... 25,342,000 82.3%(1) 24,945,000 91.9%
Industrial............................... 10,242,000 86.2 10,640,000 91.9
Retail (2)............................... 1,528,000 97.0 1,636,000 96.0
---------- ---- ---------- ----
TOTAL.................................. 37,112,000 84.0%(1) 37,221,000 91.9%
========== ==== ========== ====
DEVELOPMENT COMPLETED - NOT STABILIZED
Office................................... 231,000 61.3% 1,490,000 58.4%
Industrial............................... 60,000 50.0 200,000 39.2
Retail................................... -- -- 20,000 90.0
---------- ---- ---------- ----
TOTAL.................................. 291,000 59.0% 1,710,000 56.5%
========== ==== ========== ====
IN-PROCESS
Office .................................. 40,000 0.0% 739,000 74.9%
---------- ---- ---------- ----
TOTAL.................................. 40,000 0.0% 739,000 74.9%
========== ==== ========== ====
TOTAL
Office................................... 25,613,000 27,174,000
Industrial............................... 10,302,000 10,840,000
Retail (2)............................... 1,528,000 1,656,000
---------- ----------
TOTAL.................................. 37,443,000 39,670,000
========== ==========
(1) The occupancy percentages have been reduced as a result of the rejection of
the 816,000 square foot Intermedia (WorldCom) lease on December 31, 2002.
The impact on Office occupancy and Total occupancy was 3.2 % and 2.2%,
respectively.
(2) Excludes basement space in the Country Club Plaza property of 527,000
square feet.
8
CUSTOMERS
The following table sets forth information concerning the 20 largest
customers of our wholly-owned properties as of December 31, 2002, excluding
revenue related to the rejection of the 816,000 square foot Intermedia
(WorldCom) lease on December 31, 2002:
AVERAGE
REMAINING
PERCENT OF TOTAL LEASE
NUMBER RENTABLE ANNUALIZED ANNUALIZED TERM IN
CUSTOMERS OF LEASES SQUARE FEET RENTAL REVENUE (1) RENTAL REVENUE (1) YEARS
- --------- --------- ----------- ------------------ ----------------- ---------
($ IN THOUSANDS)
Federal Government.............................. 62 742,378 $ 14,892 3.38% 4.6
AT&T............................................ 8 617,477 11,669 2.65 4.9
Price Waterhouse Coopers........................ 6 297,795 6,932 1.57 7.3
US Airways...................................... 6 414,059 6,910 1.57 4.9
State of Georgia................................ 10 356,993 6,783 1.54 6.0
Capital One Services............................ 6 361,968 6,329 1.43 5.9
Sara Lee........................................ 10 1,230,534 4,605 1.04 2.4
IBM............................................. 7 216,505 4,453 1.01 2.6
Bell South...................................... 11 212,011 4,441 1.01 1.3
Northern Telecom................................ 1 246,000 3,235 0.73 5.2
WorldCom and Affiliates ........................ 15 166,869 3,206 0.73 3.0
Lockton Companies............................... 1 127,485 3,117 0.71 12.2
Bank of America................................. 23 152,017 3,003 0.68 2.3
Volvo........................................... 5 214,783 2,979 0.68 6.6
Hartford Insurance.............................. 6 134,021 2,900 0.66 3.3
T-Mobile USA.................................... 3 120,561 2,831 0.64 3.5
Business Telecom................................ 4 147,379 2,795 0.63 2.4
Ford Motor Company.............................. 2 126,045 2,609 0.59 7.2
Carlton Fields.................................. 2 95,771 2,475 0.56 1.5
BB&T............................................ 6 157,290 2,431 0.55 7.8
--- ----------- --------- ----- ---
TOTAL........................................... 194 6,137,941 $ 98,595 22.36% 4.8
=== ========== ========= ===== ===
(1) Annualized Rental Revenue is December 2002 rental revenue (base rent plus
operating expense pass-throughs) multiplied by 12.
9
The following tables set forth information about leasing activities at our
wholly-owned in-service properties (excluding apartment units) for the years
ended December 31, 2002, 2001 and 2000.
2002 2001
---------------------------------------- ----------------------------------------
OFFICE INDUSTRIAL RETAIL OFFICE INDUSTRIAL RETAIL
----------- ----------- ----------- ----------- ----------- -----------
NET EFFECTIVE RENTS RELATED TO RE-LEASED
SPACE:
Number of lease transactions (signed
leases)................................... 647 137 56 538 107 44
Rentable square footage leased............ 3,201,341 2,208,742 176,528 2,782,331 1,524,276 125,992
Average per rentable square foot over the
lease term:...............................
Base rent.............................. $ 17.15 $ 4.12 $ 21.22 $ 17.24 $ 4.99 $ 21.06
Tenant improvements.................... (1.15) (0.36) (1.52) (1.10) (0.27) (1.16
Leasing commissions.................... (0.68) (0.15) (0.74) (0.70) (0.11) (0.61
Rent concessions....................... (0.26) (0.04) (0.02) (0.06) -- (0.06
----------- ----------- ----------- ----------- ----------- -----------
Effective rent......................... $ 15.06 $ 3.57 $ 18.94 $ 15.38 $ 4.61 $ 19.23
Expense stop (1)....................... (5.25) (0.25) (0.30) (3.84) (0.43) --
----------- ----------- ----------- ----------- ----------- -----------
Equivalent effective net rent.......... $ 9.81 $ 3.32 $ 18.64 $ 11.54 $ 4.18 $ 19.23
=========== =========== =========== =========== =========== ===========
Average term in years..................... 4.0 4.4 6.4 4.8 2.6 7.5
=========== =========== =========== =========== =========== ===========
RENTAL RATE TRENDS:
Average final rate with expense
pass-throughs............................. $ 17.39 $ 4.34 $ 15.82 $ 15.66 $ 4.76 $ 14.08
Average first year cash rental rate....... $ 16.20 $ 4.10 $ 20.67 $ 16.34 $ 4.73 $ 18.06
----------- ----------- ----------- ----------- ----------- -----------
Percentage (decrease)/increase............ (6.84)% (5.53)% 30.69% 4.34% (0.80)% 28.26
=========== =========== =========== =========== =========== ===========
CAPITAL EXPENDITURES RELATED TO RE-LEASED
SPACE:
Tenant Improvements:
Total dollars committed under signed
leased................................. $17,805,616 $ 4,169,066 $ 2,288,953 $17,234,770 $ 1,535,052 $ 1,526,553
Rentable square feet................... 3,201,341 2,208,742 176,528 2,782,331 1,524,276 125,992
----------- ----------- ----------- ----------- ----------- -----------
Per rentable square foot............... $ 5.56 $ 1.89 $ 12.97 $ 6.19 $ 1.01 $ 12.12
=========== =========== =========== =========== =========== ===========
Leasing Commissions:
Total dollars committed under signed
leased................................. $ 4,972,806 $ 1,070,939 $ 382,972 $ 7,648,567 $ 468,962 $ 424,192
Rentable square feet................... 3,201,341 2,208,742 176,528 2,782,331 1,524,276 125,992
----------- ----------- ----------- ----------- ----------- -----------
Per rentable square foot............... $ 1.55 $ 0.48 $ 2.17 $ 2.75 $ 0.31 $ 3.37
=========== =========== =========== =========== =========== ===========
Total:
Total dollars committed under signed
leased................................. $22,778,422 $ 5,240,005 $ 2,671,925 $24,883,337 $ 2,004,013 $ 1,950,745
Rentable square feet................... 3,201,341 2,208,742 176,528 2,782,331 1,524,276 125,992
----------- ----------- ----------- ----------- ----------- -----------
Per rentable square foot............... $ 7.11 $ 2.37 $ 15.14 $ 8.94 $ 1.31 $ 15.48
=========== =========== =========== =========== =========== ===========
2000
----------------------------------------
OFFICE INDUSTRIAL RETAIL
----------- ---------- -----------
NET EFFECTIVE RENTS RELATED TO RE-LEASED
SPACE:
Number of lease transactions (signed
leases)................................... 801 174 71
Rentable square footage leased............ 4,166,054 2,373,244 162,866
Average per rentable square foot over the
lease term:...............................
Base rent.............................. $ 17.05 $ 4.64 $ 21.99
Tenant improvements.................... (1.20) (0.24) (1.41)
Leasing commissions.................... (0.50) (0.12) (0.60)
Rent concessions....................... (0.03) -- --
----------- ----------- -----------
Effective rent......................... $ 15.32 $ 4.28 $ 19.98
Expense stop (1)....................... (4.76) (0.23) (0.03)
----------- ----------- -----------
Equivalent effective net rent.......... $ 10.56 $ 4.05 $ 19.95
=========== =========== ===========
Average term in years..................... 4.6 4.1 7.0
=========== =========== ===========
RENTAL RATE TRENDS:
Average final rate with expense
pass-throughs............................. $ 15.56 $ 4.16 $ 15.71
Average first year cash rental rate....... $ 16.33 $ 4.46 $ 19.89
----------- ----------- -----------
Percentage (decrease)/increase............ 4.90% 7.20% 26.60%
=========== =========== ===========
CAPITAL EXPENDITURES RELATED TO RE-LEASED
SPACE:
Tenant Improvements:
Total dollars committed under signed$
leased................................. 24,215,684 $ 2,279,129 $ 2,252,002
Rentable square feet................... 4,166,054 2,373,244 162,866
----------- ----------- -----------
Per rentable square foot............... $ 5.81 $ 0.96 $ 13.83
=========== =========== ===========
Leasing Commissions:
Total dollars committed under signed
leased................................. $ 9,398,696 $ 1,203,586 $ 530,437
Rentable square feet................... 4,166,054 2,373,244 162,866
----------- ----------- -----------
Per rentable square foot............... $ 2.26 $ 0.51 $ 3.26
=========== =========== ===========
Total:
Total dollars committed under signed
leased................................. $33,614,380 $ 3,482,715 $ 2,782,439
Rentable square feet................... 4,166,054 2,373,244 162,866
----------- ----------- -----------
Per rentable square foot............... $ 8.07 $ 1.47 $ 17.08
=========== =========== ===========
(1) "Expense stop" represents operating expenses (generally including taxes,
utilities, routine building expense and common area maintenance) for which
we will not be reimbursed by our tenants.
10
The following tables on pages 11 and 12 set forth scheduled lease
expirations for executed leases at our wholly-owned properties (excluding
apartment units) as of December 31, 2002, assuming no tenant exercises renewal
options. The following scheduled lease expirations exclude the rejection of the
816,000 square foot Intermedia (WorldCom) lease on December 31, 2002.
OFFICE PROPERTIES:
AVERAGE PERCENT OF
ANNUAL ANNUALIZED
RENTABLE PERCENTAGE OF ANNUALIZED RENTAL RATE RENTAL REVENUE
SQUARE FEET LEASED RENTAL REVENUE PER SQUARE REPRESENTED
NUMBER OF SUBJECT TO SQUARE FOOTAGE UNDER FOOT FOR BY
LEASE LEASES EXPIRING REPRESENTED BY EXPIRING EXPIRATIONS EXPIRING
EXPIRING EXPIRING LEASES EXPIRING LEASES LEASES (1) LEASES (1)
- ------------- ----------- ------------ ---------------- ---------------- ------------ -------------
($ in thousands)
2003 (2) 761 4,044,936 19.3% $ 70,361 $ 17.39 19.4%
2004 498 2,767,455 13.3 49,612 17.93 13.7
2005 535 3,331,798 16.0 59,293 17.80 16.4
2006 324 2,843,860 13.6 51,583 18.14 14.2
2007 246 2,024,252 9.7 33,864 16.73 9.3
2008 108 1,998,952 9.6 30,851 15.43 8.5
2009 40 838,814 4.0 14,047 16.75 3.9
2010 38 841,052 4.0 17,713 21.06 4.9
2011 40 954,988 4.6 18,576 19.45 5.1
2012 29 685,237 3.3 10,378 15.15 2.9
Thereafter 104 536,623 2.6 6,186 11.53 1.7
--------- ----------- ---------- ------------- ----------- ------------
2,723 20,867,967 100.0% $ 362,464 $ 17.37 100.0%
========= =========== ========== ============= =========== ============
INDUSTRIAL PROPERTIES:
AVERAGE PERCENT OF
ANNUAL ANNUALIZED
RENTABLE PERCENTAGE OF ANNUALIZED RENTAL RATE RENTAL REVENUE
SQUARE FEET LEASED RENTAL REVENUE PER SQUARE REPRESENTED
NUMBER OF SUBJECT TO SQUARE FOOTAGE UNDER FOOT FOR BY
LEASE LEASES EXPIRING REPRESENTED BY EXPIRING EXPIRATIONS EXPIRING
EXPIRING EXPIRING LEASES EXPIRING LEASES LEASES (1) LEASES (1)
- ------------- ----------- ------------ ---------------- ---------------- ------------ -------------
($ in thousands)
2003 (3) 135 1,711,921 19.5% $ 8,204 $ 4.79 20.3%
2004 99 2,508,687 28.7 9,866 3.93 24.4
2005 76 1,099,777 12.5 5,347 4.86 13.2
2006 40 821,554 9.4 4,505 5.48 11.1
2007 38 1,630,860 18.6 6,948 4.26 17.1
2008 11 254,067 2.9 1,498 5.90 3.7
2009 8 318,813 3.6 2,366 7.42 5.8
2010 3 46,508 0.5 349 7.50 0.9
2011 2 35,475 0.4 178 5.02 0.4
2012 2 44,447 0.5 255 5.74 0.6
Thereafter 15 299,619 3.4 1,016 3.39 2.5
--------- ----------- ---------- ------------- ----------- ------------
429 8,771,728 100.0% $ 40,532 $ 4.62 100.0%
========= =========== ========== ============= =========== ============
(1) Annualized Rental Revenue is December 2002 rental revenue (base rent plus
operating expense pass-throughs) multiplied by 12.
(2) Includes 195,000 square feet of leases that are on a month-to-month
basis, or 0.8% of total annualized revenue.
(3) Includes 469,000 square feet of leases that are on a month-to-month basis,
or 0.4% of total annualized revenue.
11
RETAIL PROPERTIES:
AVERAGE PERCENT OF
ANNUAL ANNUALIZED
RENTABLE PERCENTAGE OF ANNUALIZED RENTAL RATE RENTAL REVENUE
SQUARE FEET LEASED RENTAL REVENUE PER SQUARE REPRESENTED
NUMBER OF SUBJECT TO SQUARE FOOTAGE UNDER FOOT FOR BY
LEASE LEASES EXPIRING REPRESENTED BY EXPIRING EXPIRATIONS EXPIRING
EXPIRING EXPIRING LEASES EXPIRING LEASES LEASES (1) LEASES (1)
- ------------- ----------- ------------ ---------------- ---------------- ------------ -------------
($ in thousands)
2003 (2) 49 136,326 9.2% $ 2,972 $ 21.80 7.8%
2004 39 207,103 14.0 2,775 13.40 7.3
2005 37 90,821 6.1 2,687 29.59 7.0
2006 33 101,041 6.8 2,621 25.94 6.9
2007 39 116,915 7.9 2,723 23.29 7.1
2008 24 123,459 8.3 4,257 34.48 11.2
2009 23 154,317 10.4 3,555 23.04 9.3
2010 16 89,890 6.1 2,573 28.62 6.7
2011 18 73,392 5.0 2,400 32.70 6.3
2012 10 53,263 3.6 1,908 35.82 5.0
Thereafter 20 335,657 22.6 9,656 28.77 25.4
--------- ----------- ---------- ------------- ----------- ------------
308 1,482,184 100.0% $ 38,127 $ 25.72 100.0%
========= =========== ========== ============= =========== ============
TOTAL:
AVERAGE PERCENT OF
ANNUAL ANNUALIZED
RENTABLE PERCENTAGE OF ANNUALIZED RENTAL RATE RENTAL REVENUE
SQUARE FEET LEASED RENTAL REVENUE PER SQUARE REPRESENTED
NUMBER OF SUBJECT TO SQUARE FOOTAGE UNDER FOOT FOR BY
LEASE LEASES EXPIRING REPRESENTED BY EXPIRING EXPIRATIONS EXPIRING
EXPIRING EXPIRING LEASES EXPIRING LEASES LEASES (1) LEASES (1)
- ------------- ----------- ------------ ---------------- ---------------- ------------ -------------
($ in thousands)
2003 (3) 945 5,893,183 19.0% $ 81,537 $ 13.84 18.5%
2004 636 5,483,245 17.7 62,253 11.35 14.1
2005 648 4,522,396 14.5 67,327 14.89 15.3
2006 397 3,766,455 12.1 58,709 15.59 13.3
2007 323 3,772,027 12.1 43,535 11.54 9.9
2008 143 2,376,478 7.6 36,606 15.40 8.3
2009 71 1,311,944 4.2 19,968 15.22 4.5
2010 57 977,450 3.1 20,635 21.11 4.7
2011 60 1,063,855 3.4 21,154 19.88 4.8
2012 41 782,947 2.5 12,541 16.02 2.8
Thereafter 139 1,171,899 3.8 16,858 14.39 3.8
--------- ----------- ---------- ------------- ----------- ------------
3,460 31,121,879 100.0% $ 441,123 $ 14.17 100.0%
========= =========== ========== ============= =========== ============
(1) Annualized Rental Revenue is December 2002 rental revenue (base rent plus
operating expense pass-throughs) multiplied by 12.
(2) Includes 47,000 square feet of leases that are on a month-to-month basis,
or 0.1% of total annualized revenue.
(3) Includes 711,000 square feet of leases that are on a month-to-month basis,
or 1.3% of total annualized revenue.
12
CAPITAL RECYCLING PROGRAM
The following table summarizes our capital recycling program during 2002 ($
in thousands):
DISPOSITION ACTIVITY
BUILDING DATE RENTABLE SALES
PROPERTY MARKET TYPE (1) SOLD SQUARE FEET PRICE
- -------- ------------------ -------- -------- ----------- ------------
Romac Tampa O 01/10/02 128,000 $ 20,200
Parkway Plaza Building Nine Charlotte I 04/04/02 110,000 5,922
Alston & Bird Charlotte O 05/13/02 45,000 8,500
7327 & 7339 West Friendly Avenue Piedmont Triad I 05/21/02 23,000 1,272
International Place III Memphis O 05/23/02 214,000 38,270
Reo Building Tampa O 05/30/02 76,000 5,155
Amica and Arrowwood Research Triangle O 05/31/02 78,000 7,200
4900 Main Building Kansas City O 05/31/02 182,000 29,000
Twin Lakes Distribution Center Charlotte I 10/10/02 347,000 10,350
Brymar Building Kansas City O 10/18/02 56,000 2,535
Eastshore I, II, III & Cat Financial Richmond/Nashville O 11/26/02 538,000 90,034
Oakridge Office Park Orlando O 12/18/02 316,000 22,175
Red Bridge Shops Kansas City R 12/18/02 141,000 7,000
Brookfield YMCA Greenville I 12/31/02 16,000 1,050
----------- -----------
TOTAL 2,270,000 $ 248,663
=========== ===========
(1) O = Office
I = Industrial
R = Retail
JOINT VENTURE ACTIVITY
On June 26, 2002, we acquired our joint venture partner's interest in
MG-HIW Rocky Point, LLC, which owned Harborview Plaza, to bring our ownership
interest in that entity from 50.0% to 100.0%. At that time, we consolidated the
assets and liabilities, and recorded income and expenses of the entity on a
consolidated basis.
On September 11, 2002, we contributed Harborview Plaza to SF-HIW Harborview
Plaza, LP, a newly formed joint venture with a different partner, in exchange
for a 20.0% limited partnership interest and $12.1 million of cash.
13
DEVELOPMENT ACTIVITY
The following wholly-owned development projects were placed in service
during 2002 ($ in thousands):
PLACED IN-SERVICE
MONTH COST A
BUILDING PLACED RENTABLE DECEMBER 31
NAME MARKET TYPE (1) IN-SERVICE SQUARE FEET 2002
- ------------------------------- ----------------- -------- ---------- ----------- -----------
Verizon Wireless Greenville O Jan-02 193,000 $ 15,996
380 Park Place Tampa O Jan-02 82,000 10,064
Innslake Richmond O Feb-02 65,000 7,625
Holden Road Piedmont Triad I Mar-02 64,000 2,621
Centre Green Two Research Triangle O Apr-02 97,000 11,293
Highwoods Tower II Research Triangle O May-02 167,000 25,570
Cool Springs II Nashville O May-02 205,000 23,931
North Shore Commons A Richmond O May-02 115,000 14,702
Stony Point III Richmond O May-02 107,000 11,866
ParkWest One Research Triangle O Jun-02 46,000 4,637
1825 Century Center Atlanta O Jul-02 101,000 15,894
Hickory Trace Nashville O Sep-02 52,000 7,475
Met Life Building at Brookfield Greenville O Sep-02 115,000 13,486
Newpoint IV Atlanta I Oct-02 135,000 5,061
Centre Green Four Research Triangle O Oct-02 100,000 9,682
1501 Highwoods Boulevard Piedmont Triad O Nov-02 98,000 10,313
Shadow Creek II Memphis O Nov-02 81,000 7,284
GlenLake I Research Triangle O Nov-02 158,000 20,320
Granada Shops Kansas City R Nov-02 19,000 4,552
----------- -----------
2,000,000 222,372
=========== ===========
PLACED IN-SERVICE AND SOLD
International Place III Memphis O May-02 214,000 34,000 (2)
----------- -----------
TOTAL 2,214,000 $ 256,372
=========== ===========
(1) O = Office
I = Industrial
R = Retail
(2) Project was sold on May 23, 2002 for $38.3 million.
14
IN-PROCESS
As of December 31, 2002, we were developing three suburban office
properties and one industrial property, totaling 331,000 rentable square feet.
The following table summarizes these development projects. In addition to the
properties described in this table, we are developing with a 50.0% joint venture
partner (and therefore, is not included in the following table) one additional
property totaling 285,000 rentable square feet. At December 31, 2002, this
development project had an aggregate budgeted cost of $69.0 million and was
56.5% pre-leased.
RENTABLE
BUILDING SQUARE ESTIMATED COST AT PRE-LEASING ESTIMATED ESTIMATED
NAME MARKET TYPE (1) FEET COST 12/31/02 PERCENTAGE COMPLETION STABILIZATION
- ---- ----------- -------- ------- --------- -------- ----------- ---------- -------------
($ in thousands)
OFFICE:
Catawba (2) Research
Triangle O 40,000 $ 4,030 $ 2,105 0% 2Q03 2Q04
Seven Springs I (3) Nashville O 131,000 15,556 13,371 76 1Q02 3Q03
801 Raleigh Corporate Research
Center (3) Triangle O 100,000 12,016 9,802 42 4Q02 2Q04
Tradeport V (3) Atlanta I 60,000 2,913 2,851 50 4Q02 4Q03
------- --------- -------- -----------
TOTAL OR WEIGHTED AVERAGE 331,000 $ 34,515 $ 28,129 52%
======= ========= ======== ===========
(1) O = Office
I = Industrial
(2) Redevelopment project in process.
(3) Completed but not stabilized properties, which contributed in the aggregate
$138,000 in net operating income in the fourth quarter of 2002.
DEVELOPMENT LAND
We estimate that we can develop approximately 13.8 million square feet of
office, industrial and retail space on our wholly-owned development land. All of
this development land is zoned and available for office, industrial or retail
development, substantially all of which has utility infrastructure already in
place. We believe that our commercially zoned and unencumbered land in existing
business parks gives us a development advantage over other commercial real
estate development companies in many of our markets. Any future development,
however, is dependent on the demand for industrial or office space in the area,
the availability of favorable financing and other factors, and no assurance can
be given that any construction will take place on the development land. In
addition, if construction is undertaken on the development land, we will be
subject to the risks associated with construction activities, including the risk
that occupancy rates and rents at a newly completed property may not be
sufficient to make the property profitable, construction costs may exceed
original estimates and construction and lease-up may not be completed on
schedule, resulting in increased debt service expense and construction expense.
ITEM 3. LEGAL PROCEEDINGS
We are a party to a variety of legal proceedings arising in the ordinary
course of our business. We believe that we are adequately covered by insurance
and indemnification agreements. Accordingly, none of such proceedings are
expected to have a material adverse effect on our business, financial condition
and results of operations.
We reserved $2.7 million in September 2002 for the probable and estimated
losses related to various legal proceedings from previously completed mergers
and acquisitions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
The Company is the sole general partner of the Operating Partnership. The
following table sets forth information with respect to the Company's executive
officers:
NAME AGE POSITION AND BACKGROUND
- --------------------- ------- ---------------------------------------------------------------------------------
Ronald P. Gibson 58 Director, President and Chief Executive Officer.
Mr. Gibson is one of our founders and has served as president or managing
partner of our predecessor since its formation in 1978.
Edward J. Fritsch 44 Director, Executive Vice President, Chief Operating Officer and Secretary.
Mr. Fritsch joined us in 1982 and was a partner of our predecessor.
Gene H. Anderson 57 Director and Senior Vice President.
Mr. Anderson manages the operations of our Georgia properties and the
Piedmont Triad division of North Carolina. Mr. Anderson was the founder
and president of Anderson Properties, Inc. prior to its merger with the Company.
Michael F. Beale 49 Senior Vice President.
Mr. Beale is responsible for our operations in Florida. Prior to joining us in
2000, Mr. Beale was vice president of Koger Equity, Inc.
Michael E. Harris 53 Senior Vice President.
Mr. Harris is responsible for our operations in Tennessee, Missouri, Kansas
and Charlotte. Mr. Harris was executive vice president of Crocker Realty
Trust prior to its merger with us. Before joining Crocker Realty Trust, Mr.
Harris served as senior vice president, general counsel and chief financial
officer of Towermarc Corporation, a privately owned real estate development
firm. Mr. Harris is a member of the Advisory Board of Directors at
SouthTrust Bank of Memphis, and Allen & Hoshall, Inc.
Carman J. Liuzzo 42 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 53 Vice President and General Counsel.
Prior to joining us in 1997, Mr. Pridgen was a partner in the law firm of Smith
Helms Mulliss & Moore, L.L.P. and prior to that a partner with Arthur
Andersen & Co. Mr. Pridgen is an attorney and a certified public accountant.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION AND DISTRIBUTIONS
There is no established public trading market for the Common Units. The
following table sets forth the cash distributions paid per Common Unit during
each quarter.
QUARTER 2002 2001
ENDED: DISTRIBUTIONS DISTRIBUTIONS
- --------- ------------- -------------
March 31.................................. $ .585 $ .57
June 30................................... .585 .57
September 30.............................. .585 .585
December 31............................... .585 .585
To maintain its qualification as a REIT, the Company must distribute to its
stockholders at least 90.0% of REIT taxable income. The following factors will
affect cash flows from operating activities and, accordingly, influence the
decisions of the Company's board of directors regarding distributions by the
Operating Partnership:
. debt service requirements after taking into account debt
covenants and the repayment and restructuring of certain
indebtedness;
. scheduled increases in base rents of existing leases;
. changes in rents attributable to the renewal of existing leases
or replacement leases;
. changes in occupancy rates at existing properties and execution
of leases for newly acquired or developed properties; and
. operating expenses and capital replacement needs.
As of March 7, 2003, there were 168 holders of record of Common Units
(other than the Company).
17
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating information
for the Operating Partnership as of and for the years ended December 31, 2002,
2001, 2000, 1999, and 1998 ($ in thousands, except per unit amounts):
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Operating Data:
Rental revenue................................. $ 454,122 $ 469,134 $ 509,669 $ 542,012 $ 479,856
Other income................................... 20,839 30,230 19,959 16,686 12,956
----------- ----------- ----------- ----------- -----------
Total revenue.................................. 474,961 499,364 529,628 558,698 492,812
Rental property operating expenses............. (142,686) (144,443) (148,407) (167,903) (149,829)
Depreciation and amortization.................. (126,636) (113,415) (112,876) (108,000) (88,321)
Interest expense............................... (109,897) (104,473) (108,795) (111,385) (93,959)
Cost of unsuccessful transactions.............. -- -- -- (1,500) (146)
General and administrative (includes $913
nonrecurring compensation expense in 2002).... (23,644) (21,086) (23,069) (22,338) (20,625)
Litigation reserve............................. (2,700) -- -- -- --
Gain on disposition of land and depreciable
assets......................................... 12,250 16,197 4,657 7,997 1,716
----------- ---------- ----------- ----------- -----------
Income from continuing operations.............. 81,648 132,144 141,138 155,569 141,648
Total discontinued operations.................. 26,694 18,823 17,299 11,357 9,487
Extraordinary item - loss on early
extinguishment of debt......................... (378) (714) (4,732) (7,341) (387)
----------- ---------- ----------- ----------- -----------
Net income..................................... 107,964 150,253 153,705 159,585 150,748
Distributions on preferred units............... (30,852) (31,500) (32,580) (32,580) (30,092)
----------- ----------- ----------- ----------- -----------
Net income available for common unitholders.... $ 77,112 $ 118,753 $ 121,125 $ 127,005 $ 120,656
=========== =========== =========== =========== ===========
NET INCOME PER COMMON UNIT - BASIC:
Income from continuing operations............. $ 0.85 $ 1.64 $ 1.62 $ 1.75 $ 1.72
============ ============ ============ ============ ============
Net income..................................... $ 1.29 $ 1.93 $ 1.81 $ 1.81 $ 1.86
============ ============ ============ ============ ============
NET INCOME PER COMMON UNIT - DILUTED:
Income from continuing operations............ $ 0.84 $ 1.63 $ 1.61 $ 1.75 $ 1.71
=========== =========== =========== =========== ===========
Net income................................... $ 1.28 $ 1.92 $ 1.80 $ 1.81 $ 1.85
=========== =========== =========== =========== ===========
Distributions declared per common unit......... $ 2.34 $ 2.31 $ 2.25 $ 2.19 $ 2.10
============ =========== =========== =========== ===========
BALANCE SHEET DATA:
Net real estate assets......................... $ 3,003,919 $ 3,160,308 $ 2,992,084 $ 3,548,688 $ 3,793,630
Total assets................................... 3,345,054 3,588,555 3,661,037 3,972,079 4,247,700
Total mortgages and notes payable.............. 1,489,220 1,672,230 1,568,019 1,719,117 1,906,216
Redeemable operating partnership units......... 520,633 556,975 579,683 597,780 652,893
OTHER DATA:
Cash flows provided by operating activities.... $ 203,008 $ 249,080 $ 257,979 $ 234,443 $ 261,479
Cash flows provided by/(used in) investing
activities..................................... 186,353 (110,801) 251,599 153,986 (953,381)
Cash flows (used in)/provided by financing
activities..................................... (379,425) (239,971) (441,007) (385,210) 713,782
Funds from operations (1)...................... 203,110 237,661 251,929 244,916 211,844
Number of in-service properties................ 493 498 493 563 658
Total rentable square feet..................... 37,112,000 37,221,000 36,183,000 38,976,000 44,642,000
(1) We consider funds from operations ("FFO") to be a useful financial
performance measure of the operating performance of an equity REIT because,
together with net income and cash flows, FFO provides investors with an
additional basis to evaluate the ability of a REIT to incur and service
debt and to fund acquisitions and other capital expenditures. FFO does not
represent net income or cash flows from operating, investing or financing
activities as defined by Generally Accepted Accounting Principles ("GAAP").
It should not be considered as an alternative to net income as an indicator
of our operating performance or to cash flows as a measure of liquidity.
FFO does not measure whether cash flow is sufficient to fund all cash
needs, including principal amortization, capital improvements and
distributions to stockholders. Further, FFO as disclosed by other REITs may
not be comparable to our calculation of FFO.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
the accompanying consolidated financial statements and related notes contained
elsewhere in this Annual Report on Form 10-K.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this Annual Report on Form 10-K may contain
forward-looking statements. Such statements include, in particular, statements
about our plans, strategies and prospects under this section and under the
heading "Business". You can identify forward-looking statements by our use of
forward-looking terminology such as "may", "will", "expect", "anticipate",
"estimate", "continue" or other similar words. Although we believe that our
plans, intentions and expectations reflected in or suggested by such
forward-looking statements are reasonable, we cannot assure you that our plans,
intentions or expectations will be achieved. When considering such
forward-looking statements, you should keep in mind the following important
factors that could cause our actual results to differ materially from those
contained in any forward-looking statement:
. speculative development activity by our competitors in our
existing markets could result in an excessive supply of office,
industrial and retail properties relative to tenant demand;
. the financial condition of our tenants could deteriorate;
. we may not be able to complete development, acquisition,
reinvestment, disposition or joint venture projects as quickly or
on as favorable terms as anticipated;
. we may not be able to lease or release space quickly or on as
favorable terms as old leases;
. an unexpected increase in interest rates would increase our debt
service costs;
. we may not be able to continue to meet our long-term liquidity
requirements on favorable terms;
. we could lose key executive officers; and
. our southeastern and midwestern markets may suffer additional
declines in economic growth.
This list of risks and uncertainties, however, is not intended to be
exhaustive. You should also review the other cautionary statements we make in
"Business - Risk Factors" set forth elsewhere in this Annual Report.
Given these uncertainties, we caution you not to place undue reliance on
forward-looking statements. We undertake no obligation to publicly release the
results of any revisions to these forward-looking statements that may be made to
reflect any future events or circumstances or to reflect the occurrence of
unanticipated events.
OVERVIEW
The Operating Partnership is managed by its general partner, the Company, a
self-administered and self-managed equity REIT that began operations through a
predecessor in 1978. Since our formation in 1994, we have evolved into one of
the largest owners and operators of suburban office, industrial and retail
properties in the southeastern and midwestern United States. 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. At December 31, 2002, we:
. owned 493 in-service office, industrial and retail properties,
encompassing approximately 37.1 million rentable square feet and
213 apartment units;
. owned an interest (50.0% or less) in 77 in-service office and
industrial properties, encompassing approximately 7.5 million
rentable square feet and 418 apartment units;
. owned 1,308 acres of undeveloped land suitable for future
development; and
19
. were developing an additional five properties, which will
encompass approximately 616,000 rentable square feet (including
one property encompassing 285,000 rentable square feet that we
are developing with a 50.0% joint venture partner).
The following summarizes our capital recycling program during the past
three years ending December 31, 2002:
2002 2001 2000
----------- ----------- -----------
OFFICE, INDUSTRIAL AND RETAIL PROPERTIES:
(rentable square feet in thousands)
Dispositions............................. (2,270) (268) (4,743)
Contributions to Joint Ventures.......... -- (118) (2,199)
Developments Placed In-Service........... 2,214 1,351 3,480
Redevelopment............................ (52) -- --
Acquisitions............................. -- 72 669
----------- ----------- -----------
Net Change............................... (108) 1,037 (2,793)
=========== =========== ===========
APARTMENT PROPERTIES:
(in units)
Dispositions............................. -- (1,672) --
=========== =========== ===========
In addition to the above capital recycling activity, the Company
repurchased $4.8 million, $148.8 million and $101.8 million of Common Stock and
Common Units during 2002, 2001 and 2000, respectively, and $18.5 million of
Preferred Stock during 2001. This represents aggregate repurchases of $273.9
million of Common Stock, Common Units and Preferred Stock since January 1, 2000.
The Company conducts substantially all of its activities through, and
substantially all of its interests in the properties are held directly or
indirectly by, the Operating Partnership. The Company is the sole general
partner of the Operating Partnership. At December 31, 2002, the Company owned
88.4% of the Common Units in the Operating Partnership.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of financial condition and results of
operations is based upon our Consolidated Financial Statements contained
elsewhere in this Annual Report. Our Consolidated Financial Statements include
the accounts of the Operating Partnership and its majority-controlled
affiliates. For a discussion of our accounting policies with respect to our
investments in unconsolidated affiliates, see "-Investments in Joint Ventures."
The preparation of financial statements in conformity with GAAP requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
for the reporting period. Actual results could differ from our estimates.
The estimates used in the preparation of our Consolidated Financial
Statements are described in Note 1 to our Consolidated Financial Statements for
the year ended December 31, 2002. However, certain of our significant accounting
policies are considered critical accounting policies due to the increased level
of assumptions used or estimates made in determining their impact on our
Consolidated Financial Statements. Management has reviewed our critical
accounting policies and estimates with the audit committee of the Company's
board of directors and the Company's independent auditors.
We consider our critical accounting policies to be those used in the
determination of the reported amounts and disclosure related to the following:
. Impairment of long-lived assets;
. Allowance for doubtful accounts;
. Capitalized costs;
. Fair value of derivative instruments;
20
. Rental revenue; and
. Investments in joint ventures.
Impairment of long-lived assets. Real estate and leasehold improvements are
classified as long-lived assets held for sale or as long-lived assets to be held
and used. In accordance with Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets", we record
assets held for sale at the lower of the carrying amount or fair value less cost
to sell. The impairment loss is the amount by which the carrying amount exceeds
the fair value less cost to sell. With respect to assets classified as held and
used, we periodically review these assets to determine whether our carrying
amount will be recovered from their undiscounted future operating cash flows and
we recognize an impairment loss to the extent we believe the carrying amount is
not recoverable. Our estimates of the undiscounted future operating cash flows
expected to be generated are based on a number of assumptions that are subject
to economic and market uncertainties including, among others, demand for space,
competition for tenants, changes in market rental rates, and costs to operate
each property. As these factors are difficult to predict and are subject to
future events that may alter our assumptions, the undiscounted future operating
cash flows estimated by us in our impairment analyses may not be achieved and we
may be required to recognize future impairment losses on our properties.
Allowance for doubtful accounts. Accounts receivable are reduced by an
allowance for amounts that may become uncollectible in the future. Our
receivable balance is comprised primarily of rents and operating cost recoveries
due from tenants as well as accrued rental rate increases to be received over
the life of the existing leases. We regularly evaluate the adequacy of our
allowance for doubtful accounts considering such factors as the credit quality
of our tenants, delinquent payments, historical trends and current economic
conditions. Actual results may differ from these estimates under different
assumptions or conditions. If our assumptions regarding the collectibility of
accounts receivables prove incorrect, we could experience write-offs of accounts
receivable or accrued straight-line rents receivable in excess of our allowance
for doubtful accounts.
Capitalized costs. Expenditures directly related to both the development of
real estate assets and the leasing of properties are included in net real estate
assets and are stated at cost in the consolidated balance sheets. The
development expenditures include pre-construction costs essential to the
development of properties, development and construction costs, interest costs,
real estate taxes, salaries and other costs incurred during the period of
development. The leasing expenditures include all general and administrative
costs, including salaries incurred in connection with successfully securing
leases on the properties. Estimated costs related to unsuccessful leases are
expensed as incurred. If our assumptions regarding the successful efforts of
development and leasing are incorrect, the resulting adjustments could impact
earnings.
Fair value of derivative instruments. In the normal course of business, we
are exposed to the effect of interest rate changes. We limit our exposure by
following established risk management policies and procedures including the use
of derivatives. To mitigate our exposure to unexpected changes in interest
rates, derivatives are used primarily to hedge against rate movements on our
related debt. We are required to recognize all derivatives as either assets or
liabilities in the consolidated balance sheets and to measure those instruments
at fair value. Changes in fair value will affect either partners' capital or net
income depending on whether the derivative instrument qualifies as a hedge for
accounting purposes.
To determine the fair value of derivative instruments, we use a variety of
methods and assumptions that are based on market conditions and risks existing
at each balance sheet date. For the majority of financial instruments, including
most derivatives, standard market conventions and techniques such as discounted
cash flow analysis, option pricing modes, replacement cost and termination cost
are used to determine fair value. All methods of assessing fair value result in
a general approximation of value, and such value may never actually be realized.
Rental revenue. Rental revenue is comprised of base rent; recoveries from
tenants which represent reimbursements for certain costs as provided in the
lease agreements such as real estate taxes, utilities, insurance, common area
maintenance and other recoverable costs, parking and other income and
termination fees which relate to specific tenants, each of whom has paid a fee
to terminate its lease obligation before the end of the contracted term on the
lease.
21
In accordance with GAAP, base rental revenue is recognized on a
straight-line basis over the terms of the respective leases. This means that,
with respect to a particular lease, actual amounts billed in accordance with the
lease during any given period may be higher or lower than the amount of rental
revenue recognized for the period. Accrued straight-line rents receivable
represents the amount by which straight-line rental revenue exceeds rents
currently billed in accordance with lease agreements.
Investments in joint ventures. As of December 31, 2002, our investments in
unconsolidated affiliates consist of one corporation, eight limited liability
companies, four limited partnerships and two general partnerships. We account
for our investments in unconsolidated affiliates under the equity method of
accounting as we exercise significant influence, but do not control these
entities. Our unconsolidated corporation is controlled by an unrelated third
party that owns more than 50.0% of the outstanding voting stock. We have a 50.0%
or less ownership interest in the unconsolidated limited liability companies
and, under the terms of the various operating agreements, do not have any
participating rights. We have a 50.0% or less ownership interest in the
unconsolidated limited partnerships and general partnerships. Although we have
an interest in two unconsolidated general partnerships and are the general
partner in three of the unconsolidated limited partnerships, under the terms of
the various partnership agreements, we do not have control of the major
operating and financial policies of these unconsolidated partnerships.
These investments are initially recorded at cost, as investments in
unconsolidated affiliates, and are subsequently adjusted for equity in earnings
and cash contributions and distributions. Any difference between the carrying
amount of these investments on our balance sheet and the underlying equity in
net assets is amortized as an adjustment to equity in earnings of unconsolidated
affiliates over the life of the property, which is generally 40 years.
From time to time, we contribute real estate assets to an unconsolidated
joint venture in exchange for a combination of cash and an equity interest in
the venture. We record a partial gain on the contribution of the real estate
assets to the extent of the third party investor's interest and record a
deferred gain to the extent of our continuing interest in the unconsolidated
joint venture.
22
RESULTS OF OPERATIONS
On January 1, 2002, we adopted Financial Accounting Standards Board
Statement No. 144, "Accounting for the Impairment and Disposal of Long-Lived
Assets", ("SFAS 144"). As described in Note 10 to the Consolidated Financial
Statements, we reclassified the operations and/or gain/(loss) from disposal of
certain properties to discontinued operations if the properties were either sold
during 2002 or were held for sale at December 31, 2002 and met certain
conditions as stipulated by SFAS 144. Accordingly, the operations and
gain/(loss) from those properties disposed of during 2001 and 2000 were not
reclassified to discontinued operations.
The following table sets forth information regarding our results of
operations for the years ended December 31, 2002, 2001 and 2000 ($ in millions):
YEAR ENDED DECEMBER 31, 2002 2001
------------------------------------ TO 2001 TO 2000
2002 2001 2000 $ CHANGE $ CHANGE
----------- ----------- ----------- ----------- ------------
RENTAL REVENUE................................... $ 454.1 $ 469.1 $ 509.7 $ (15.0) $ (40.6)
OPERATING EXPENSES:
Rental property............................... 142.7 144.4 148.4 (1.7) (4.0)
Depreciation and amortization................. 126.6 113.4 112.9 13.2 0.5
Interest expense:
Contractual................................. 108.5 102.5 106.3 6.0 (3.8)
Amortization of deferred financing costs.... 1.4 2.0 2.5 (0.6) (0.5)
----------- ----------- ----------- ----------- ------------
109.9 104.5 108.8 5.4 (4.3)
General and administrative (includes $913
nonrecurring compensation expense in 2002)... 23.6 21.1 23.1 2.5 (2.0)
Litigation reserve............................ 2.7 -- -- 2.7 --
----------- ----------- ----------- ----------- ------------
Total operating expenses.................... 405.5 383.4 393.2 22.1 (9.8)
----------- ----------- ----------- ----------- ------------
OTHER INCOME:
Interest and other income..................... 13.1 22.0 16.8 (8.9) 5.2
Equity in earnings of unconsolidated
affiliates................................... 7.7 8.3 3.1 (0.6) 5.2
----------- ----------- ----------- ----------- ------------
20.8 30.3 19.9 (9.5) 10.4
----------- ----------- ----------- ----------- ------------
Income before gain/(loss) on disposition of
land and depreciable assets, discontinued
operations and extraordinary item............ 69.4 116.0 136.4 (46.6) (20.4)
Gain on disposition of land................... 6.9 4.7 6.4 2.2 (1.7)
Gain/(loss) on disposition of depreciable
assets...................................... 5.3 11.5 (1.7) (6.2) 13.2
----------- ----------- ----------- ----------- ------------
12.2 16.2 4.7 (4.0) 11.5
Income from continuing operations............. 81.6 132.2 141.1 (50.6) (8.9)
DISCONTINUED OPERATIONS:
Income from discontinued operations........... 14.4 18.8 17.3 (4.4) 1.5
Gain on sale of discontinued operations....... 12.3 -- -- 12.3 --
----------- ----------- ----------- ----------- ------------
26.7 18.8 17.3 7.9 1.5
----------- ----------- ----------- ----------- ------------
Net income before extraordinary item.......... 108.3 151.0 158.4 (42.7) (7.4)
EXTRAORDINARY ITEM - LOSS ON EARLY
EXTINGUISHMENT OF DEBT.......................... (0.4) (0.7) (4.7) 0.3 4.0
----------- ----------- ----------- ----------- ------------
Net income.................................... 107.9 150.3 153.7 (42.4) (3.4)
Distributions on preferred units: (30.8) (31.5) (32.6) 0.7 1.1
----------- ----------- ----------- ----------- ------------
NET INCOME AVAILABLE FOR CLASS A COMMON UNITS. $ 77.1 $ 118.8 $ 121.1 $ (41.7) $ (2.3)
=========== =========== =========== =========== ============
23
Comparison of 2002 to 2001. Rental revenue from continuing operations
decreased $15.0 million, or 3.2%, from $469.1 million for the year ended
December 31, 2001 to $454.1 million for the year ended December 31, 2002. The
decrease was primarily due to a decrease in average occupancy rates from 91.6%
for the year ended December 31, 2001 to 86.0% for the year ended December 31,
2002. The average occupancy decreased mainly due to tenant rollover and early
lease terminations at various properties where vacant space was not re-leased
due to the lack of demand for office space coupled with an increasing supply of
competitive space. During the past twelve months, approximately 2.0 million
square feet of development properties were placed in-service which have
leased-up slower than expected and as a result, have also adversely affected the
occupancy of our overall portfolio. Rental revenue also decreased due to the
impact of dispositions during 2002 and 2001 that were not classified as
discontinued operations as more fully described in Note 10 of our Consolidated
Financial Statements.
In addition, as a result of the bankruptcy of WorldCom and its affiliates,
we wrote off approximately $3.1 million of accrued straight-line rent receivable
against revenue and since July 1, 2002, we have recorded rental revenue relating
to WorldCom and its affiliates on a cash basis rather than on a straight-line
basis.
Same property rental revenue generated from the 33.6 million square feet of
460 wholly-owned in-service properties on January 1, 2001, decreased $20.2
million for the year ended December 31, 2002 compared to the year ended December
31, 2001. This decrease is primarily a result of lower same store average
occupancy, which decreased from 93.0% in 2001 to 88.0% in 2002, and a decrease
in straight-line rental income primarily as a result of the bankruptcy of
WorldCom and its affiliates.
During the year ended December 31, 2002, 840 second generation leases
representing 5.6 million square feet of office, industrial and retail space were
executed at an average rate per square foot which was 5.5% lower than the
average rate per square foot on the expired leases.
Rental operating expenses from continuing operations (real estate taxes,
utilities, insurance, repairs and maintenance and other property-related
expenses) decreased $1.7 million, or 1.2%, from $144.4 million for the year
ended December 31, 2001 to $142.7 million for the year ended December 31, 2002.
Rental operating expenses as a percentage of rental revenue increased from 30.8%
for the year ended December 31, 2001 to 31.4% for the year ended December 31,
2002. The increase in these expenses as a percentage of revenue was a result of
increases in repairs and maintenance and certain fixed operating expenses that
do not vary with net changes in our occupancy average.
Same property rental property expenses, which are the expenses of the 460
in-service properties wholly-owned on January 1, 2001, decreased $204,830, or
0.2%, for the year ended December 31, 2002, compared to the year ended December
31, 2001. Same property rental property expenses as a percentage of related
revenue increased 1.4% from 30.4% for the year ended December 31, 2001 to 31.8%
for the year ended December 31, 2002. The increase as a percentage of revenue
was a result of increases in repairs and maintenance and certain fixed operating
expenses that do not vary with net changes in our occupancy average.
Depreciation and amortization from continuing operations for the years
ended December 31, 2002 and 2001 was $126.6 million and $113.4 million,
respectively. The increase of $13.2 million, or 11.6%, was due to an increase in
amortization related to leasing commissions and tenant improvement expenditures
for properties placed in-service during 2001 and 2002 and the write-off of $5.8
million of deferred leasing costs primarily related to the leases rejected by
WorldCom at December 31, 2002, see -"Known Trends Affecting Results of
Operations". These increases were partially offset by a decrease in depreciation
for properties disposed of during 2002 and 2001 that are not classified as
discontinued operations in accordance with SFAS 144.
Interest expense from continuing operations increased $5.4 million, or
5.2%, from $104.5 million for the year ended December 31, 2001 to $109.9 million
for the year ended December 31, 2002. The increase was primarily attributable to
the decrease in capitalized interest for the years ended December 31, 2002 and
2001, which was $7.0 million and $16.9 million, respectively. Partly offsetting
this increase was a decrease in weighted average interest rates from 7.2% in
2001 to 7.0% in 2002. The average outstanding debt balance remained relatively
consistent for 2002 and 2001. Interest expense for the years ended December 31,
2002 and 2001 included $1.4 million and $2.0 million, respectively, of
amortization of deferred financing costs and costs related to our interest rate
hedge contracts.
24
General and administrative expenses as a percentage of total rental
revenue, which includes rental revenue from discontinued operations, interest
and other income, and equity in earnings of unconsolidated affiliates was 4.7%
in 2002 and 3.9% in 2001. General and administrative expenses include $2.8
million in nonrecurring management fee expense related to options exercised by
certain executives that provide management services to the Operating
Partnership. These executives are employees of the Company, which is the
managing general partner of the Operating Partnership. In addition, general and
administrative expenses in 2002 included a nonrecurring compensation expense of
$913,000, which was related to the exercise of options during 2002. When an
option holder elected to exercise options, in lieu of issuing new shares upon
exercise of the option and then repurchasing shares on the open market, we
settled the option exercise by paying the option holder the net difference in
cash between the strike price and the market value of the underlying shares.
Such exercises were recorded as compensation expense under FASB Interpretation
No. 44 (Accounting For Certain Transactions Involving Stock Options, An
Interpretation of APB Opinion No. 25). Had we issued the shares to the option
holder, received the cash for the strike price and then repurchased the shares
in the market, we would not have been required to record any compensation
expense. During 2002, we discontinued the practice of settling option exercises
by paying the option holder the net difference in cash between the strike price
and the market value of the underlying shares. In the event we decide to
repurchase shares after an option exercise, we will require the option holder to
pay the cash for the strike price and then separately repurchase a corresponding
number of shares in the market under our stock repurchase program
We reserved $2.7 million in the year ended December 31, 2002 for probable
and estimated losses related to various legal proceedings from previously
completed mergers and acquisitions.
Interest and other income from continuing operations decreased $8.9
million, or 40.5%, from $22.0 million for the year ended December 31, 2001 to
$13.1 million for the year ended December 31, 2002. The decrease primarily
resulted from a decrease in leasing and development fee income in the year ended
December 31, 2002 and a decrease in interest income in the year ended December
31, 2002 due to the collection of notes receivable during 2001 and 2002.
Equity in earnings of unconsolidated affiliates decreased $601,845 from
$8.3 million for the year ended December 31, 2001 to $7.7 million for the year
ended December 31, 2002. The decrease was primarily a result of lower lease
termination fees and lower property operating expense reimbursements in 2002.
The decrease in earnings was partly offset by lower interest expense incurred
during 2002 as a result of lower weighted average borrowing rates and earnings
from certain joint ventures formed with unrelated investors during 2002.
Gain on disposition of land and depreciable assets decreased $4.0 million,
or 24.7%, to $12.2 million for the year ended December 31, 2002 from $16.2
million for the year ended December 31, 2001. In 2001, the majority of the gain
was comprised of a gain related to the disposition of 1,672 apartment units and
a gain related to the disposition of 180.3 acres of land. In 2002, the majority
of the gain was comprised of a gain related to the disposition of 533,263 square
feet of office properties, that did not meet certain conditions to be classified
as discontinued operations as described in Note 10 of the Consolidated Financial
Statements, and a gain related to the disposition of 112.7 acres of land. The
gain is partly offset by an impairment loss of approximately $9.1 million
recorded in 2002 related to a property that will be partially demolished and
redeveloped into a class A suburban office property.
In accordance with SFAS 144, we classified net income of $14.4 million and
$18.8 million, as discontinued operations for the years ended December 31, 2002
and 2001, respectively, which pertained to 1.9 million square feet of property
sold in 2002 and 2.3 million square feet of property held for sale at December
31, 2002. We also classified as discontinued operations in 2002 the gain on the
sale of these properties of $13.1 million, partly offset by an impairment charge
of $851,166, related to one property held for sale at December 31, 2002. In
addition, in accordance with SFAS 66, "Accounting for Sales of Real Estate," we
have deferred the recordation of additional gain of $6.9 million, relating to
the disposition to a third party buyer of 225,220 square feet during the fourth
quarter of 2002 for which we have guaranteed the buyer up to $20.5 million of
rental shortfalls or re-tenanting costs. See Note 13 of the Consolidated
Financial Statements.
We recorded $30.8 million and $31.5 million in preferred unit distributions
for each of the years ended December 31, 2002 and 2001, respectively. The
decrease resulted from our repurchase of $18.5 million preferred units during
2001.
25
Comparison of 2001 to 2000. Rental revenue from continuing operations
decreased $40.6 million, or 8.0%, from $509.7 million for the year ended
December 31, 2000 to $469.1 million for the year ended December 31, 2001. The
decrease was primarily a result of the net reductions in our property portfolio
as a result of our capital recycling program and a decrease in average occupancy
rates from 91.9% in 2000 to 91.6% in 2001. The decrease in revenue was partly
offset by an increase in rental rates on new leases and rollovers.
Same property rental revenue generated from the 32.1 million square feet of
the 449 in-service properties wholly-owned on January 1, 2000, increased $6.7
million, or 1.7%, for the year ended December 31, 2001, compared to the year
ended December 31, 2000. This increase was primarily a result of scheduled
increases in rental rates on existing leases, an overall increase in rental
rates on new leases and rollovers and an increase in recoveries from tenants.
Partly offsetting the increase in rental revenue was a decrease in same store
average occupancy which declined from 94.2% in 2000 to 93.2% in 2001 and a
decrease in termination fees from $4.0 million in 2000 to $2.5 million in 2001.
During the year ended December 31, 2001, 689 second generation leases
representing 4.4 million square feet of office, industrial and retail space were
executed at an average rate per square foot which was 4.7% higher than the
average rate per square foot on the previous leases.
Rental operating expenses from continuing operations (real estate taxes,
utilities, insurance, repairs and maintenance and other property-related
expenses) decreased $4.0 million, or 2.7%, from $148.4 million for the year
ended December 31, 2000 to $144.4 million for the year ended December 31, 2001.
Rental operating expenses as a percentage of related revenue increased from
29.1% for the year ended December 31, 2000 to 30.8% for the year ended December
31, 2001. The increase as a percentage of revenue was a result of increases in
real estate taxes, utilities and other fixed operating expenses that do not vary
with net changes in our occupancy average.
Same property rental property expenses, which are the expenses of the 449
in-service properties wholly-owned on January 1, 2000, increased $5.3 million,
or 4.4 %, for the year ended December 31, 2001, compared to the year ended
December 31, 2000. Rental operating expenses as a percentage of related revenue
increased from 29.8% for the year ended December 31, 2000 to 30.8% for the year
ended December 31, 2001. The increase as a percentage of revenue was a result of
increases in real estate taxes, utilities and other fixed operating expenses
that do not vary with net changes in our occupancy average.
Depreciation and amortization from continuing operations for the years
ended December 31, 2001 and 2000 totaled $113.4 million and $112.9 million,
respectively. The increase of $538,929, or 0.5%, was due to an increase in the
amortization of leasing commissions and tenant improvements, partly offset by a
decrease in the depreciation on buildings that were sold as a result of our
capital recycling program during 2001 and 2000.
Interest expense from continuing operations decreased $4.3 million, or
4.0%, from $108.8 million for the year ended December 31, 2000 to $104.5 million
for the year ended December 31, 2001. The decrease was primarily attributable to
a higher average outstanding debt balance for 2001 and a decrease in the
weighted average interest rates from 7.5% in 2000 to 7.2% in 2001. Partly
offsetting this decrease was a decrease in capitalized interest for the years
ended December 31, 2001 and 2000 which was $16.9 million and $23.7 million,
respectively. Interest expense for the years ended December 31, 2001 and 2000
included $2.0 million and $2.5 million, respectively, of amortization of
deferred financing costs and costs related to our interest rate hedge contracts.
General and administrative expenses as a percentage of total rental
revenue, which includes rental revenue from discontinued operations, interest
and other income and equity in earnings of unconsolidated affiliates was 3.9% in
2001 and 4.1% in 2000.
Interest and other income increased $5.2 million, or 31.0%, from $16.8
million for the year ended December 31, 2000 to $22.0 million for the year ended
December 31, 2001. The increase resulted from additional interest income earned
on notes receivable and leasing and management fees earned from our joint
ventures during 2001, partly offset by an adjustment related to the adoption of
SFAS 133 (see Note 8 to the Consolidated Financial Statements) along with other
income generated from our apartments which were sold during 2001.
26
Equity in earnings of unconsolidated affiliates increased $5.2 million from
$3.1 million for the year ended December 31, 2000 to $8.3 million for the year
ended December 31, 2001. The increase was primarily a result of the inclusion of
a full year of earnings in 2001 for two joint ventures that were formed with
unrelated investors during May and December of 2000
Gain on dispositions of assets increased $11.5 million from $4.7 million
for the year ended December 31, 2000 to $16.2 million for the year ended
December 31, 2001. During 2001, the primary source of the gain was the
disposition of 1,672 apartment units. During 2000, the Jacksonville portfolio
was sold at a loss, which was offset by gains recognized on joint venture
transactions along with dispositions of land and office, industrial, and retail
properties.
In accordance with SFAS 144, we classified $18.8 million and $17.3 million
as discontinued operations for the years ended December 31, 2001 and 2000,
respectively, which pertained to 1.9 million square feet of property sold during
2002 and 2.3 million square feet of property held for sale at December 31, 2002.
We recorded $31.5 million and $32.6 million in preferred unit distributions
for each of the years ended December 31, 2001 and 2000, respectively. The
decrease resulted from the $18.5 million repurchase of preferred units during
2001.
KNOWN TRENDS AFFECTING RESULTS OF OPERATIONS
We expect our net income and funds from operations to be lower in 2003 than
in 2002 due to the following factors:
. lower average occupancy;
. lower than average re-leasing;
. lower than average first year cash rents;
. additional asset sales;
. the bankruptcy of two significant customers in 2002; and
. general economic conditions in each of our primary markets.
In 2003, we expect occupancy to be lower than in 2002 primarily due to the
leases rejected by WorldCom and US Airways. During 2003, the leases on
approximately 5.9 million rentable square feet of space, or 19.0% of our
portfolio, will expire. This square footage represented approximately 18.5% of
our annualized revenue in 2002. As of March 1, 2003, approximately 43.0% of this
space had been re-leased with existing tenants or leased to new tenants.
Historically, we have renewed approximately 60.0%-75.0% of expiring leases with
existing tenants. We expect this re-leasing percentage to be lower during 2003.
In addition, we expect the average rental rate for expiring leases that have
been renewed or released in 2003 to be lower than in 2002.
While employment trends in the majority of our markets have begun to show
signs of positive growth in 2003, we do not anticipate that this employment
growth will lead to a corresponding increase in demand for office space in 2003.
Improving employment in our markets will not necessarily result in positive
space absorption because of the significant amount of under-utilized space and
space available for sublease in our markets. Customers have indicated that they
are, for the most part, unwilling to commit to space expansion plans until they
have a better sense of the stability of the economic recovery in the U.S. and
abroad.
In 2003, we expect to continue our capital recycling program of selectively
disposing of non-core properties or other properties the sale of which can
generate attractive returns. See "Liquidity and Capital Resources - Capital
Recycling Program." Although we intend to use the net proceeds from asset
dispositions to repay debt, fund unitholder distributions and repurchase Common
Units, any net decrease in our property portfolio generally tends to result in
lower net income.
27
On July 21, 2002, WorldCom filed a voluntary petition with the United
States Bankruptcy Court seeking relief under Chapter 11 of the United States
Bankruptcy Code. As of the filing date, we had 17 leases encompassing 986,522
square feet in fifteen locations with WorldCom and its affiliates. These leases
represented $17.9 million of annualized revenue and approximately 3.8% of our
total annualized revenue. As of December 31, 2002, WorldCom has rejected two
leases encompassing 819,653 square feet with annualized revenue of approximately
$14.9 million.
We have filed a claim in connection with these rejected leases in the
amount of $20.8 million. Actual amounts to be received in satisfaction of this
claim will be subject to WorldCom's final plan of reorganization and the
availability of funds to pay creditors.
In addition, there are 12 leases with WorldCom and its affiliates
encompassing 38,624 square feet in our Miller Global ("MG-HIW, LLC") joint
venture. WorldCom has not rejected any of these leases.
On August 11, 2002, US Airways Group Inc. filed a voluntary petition with
the United States Bankruptcy Court seeking relief under Chapter 11 of the United
States Bankruptcy Code. As of the filing date, we had six leases with US Airways
encompassing 414,059 square feet in Winston-Salem, North Carolina. These leases
represented $6.9 million of annualized revenue and approximately 1.47% of our
total annualized revenue. On February 20, 2003, the United States Bankruptcy
Court approved the terms of an agreement between us and US Airways whereby US
Airways will continue to lease 293,007 square feet of this space. Under this
agreement, US Airways has rejected