HIGHWOODS PROPERTIES INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

Commission file number: 001-13100

HIGHWOODS PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

Maryland

56-1871668

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

3100 Smoketree Court, Suite 600, Raleigh, N.C.

(Address of principal executive office)

27604

(Zip Code)

(919) 872-4924

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in rule 12b-2 of the Securities Exchange Act). Yes x No ¨

The Company has only one class of common stock, par value $0.01 per share, with 53,071,512 shares outstanding as of July 31, 2003.

HIGHWOODS PROPERTIES, INC.

QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 2003

TABLE OF CONTENTS

		Page

PART I FINANCIAL INFORMATION

Item 1.	Financial Statements	2

	Consolidated Balance Sheets as of June 30, 2003 (unaudited) and December 31, 2002	3

	Consolidated Statements of Income for the three and six months ended June 30, 2003 and 2002 (unaudited)	4

	Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2003 (unaudited)	5

	Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 (unaudited)	6

	Notes to Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

	Disclosure Regarding Forward-Looking Statements	19

	Overview	19

	Property Information	20

	Customer Diversification	21

	Critical Accounting Policies	21

	Results of Operations	23

	Liquidity and Capital Resources	29

	Impact of Recently Issued Accounting Standards	38

	Funds From Operations and Cash Available for Distribution	39

	Inflation	42

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43

Item 4.	Controls and Procedures	43

PART II OTHER INFORMATION

Item 5.	Submission of Matters to a Vote of Security Holders	45

Item 6.	Exhibits and Reports on Form 8-K	45

	Certifications	47

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

We refer to (1) Highwoods Properties, Inc. as the “Company,” (2) Highwoods Realty Limited Partnership as the “Operating Partnership,” (3) the Company’s common stock as “Common Stock” and (4) the Operating Partnership’s common partnership interests as “Common Units.”

The information furnished in the accompanying balance sheets, statements of income, statement of stockholders’ equity and statements of cash flows reflect all adjustments (consisting of normal recurring accruals) that are, in our opinion, necessary for a fair presentation of the aforementioned financial statements for the interim period.

The aforementioned financial statements should be read in conjunction with the notes to consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein and in our 2002 Annual Report on Form 10-K.

HIGHWOODS PROPERTIES, INC.

Consolidated Balance Sheets

($ in thousands)

	June 30, 2003			December 31, 2002
	(Unaudited)
Assets:
Real estate assets, at cost:
Land and improvements	$	383,520		$	386,051
Buildings and tenant improvements		2,808,274			2,792,306
Development in process		9,499			6,729
Land held for development		172,153			162,762
Furniture, fixtures and equipment		21,223			20,966

		3,394,669			3,368,814
Less—accumulated depreciation		(503,077	)		(455,337	)

Net real estate assets		2,891,592			2,913,477
Property held for sale		201,143			221,720
Cash and cash equivalents		13,025			11,017
Restricted cash		3,163			8,582
Accounts receivable, net of allowance		13,902			13,578
Notes receivable		27,617			31,057
Accrued straight-line rents receivable		51,703			48,777
Investment in unconsolidated affiliates		76,499			79,504
Other assets:
Deferred leasing costs		100,462			97,143
Deferred financing costs		42,544			26,120
Prepaid expenses and other		16,882			15,295

		159,888			138,558
Less—accumulated amortization		(76,499	)		(70,901	)

Other assets, net		83,389			67,657

Total Assets	$	3,362,033		$	3,395,369

Liabilities and Stockholders’ Equity:
Mortgages and notes payable	$	1,579,265		$	1,528,720
Accounts payable, accrued expenses and other liabilities		102,949			120,614

Total Liabilities		1,682,214			1,649,334
Minority interest		177,104			188,563

Stockholders’ Equity:
Preferred stock, $.01 par value, 50,000,000 authorized shares;
8⁵/8% Series A Cumulative Redeemable Preferred Shares (liquidation preference $1,000 per share), 104,945 shares issued and outstanding at June 30, 2003 and December 31, 2002		104,945			104,945
8% Series B Cumulative Redeemable Preferred Shares (liquidation preference $25 per share), 6,900,000 shares issued and outstanding at June 30, 2003 and December 31, 2002		172,500			172,500
8% Series D Cumulative Redeemable Preferred Shares (liquidation preference $250 per share), 400,000 shares issued and outstanding at June 30, 2003 and December 31, 2002		100,000			100,000
Common stock, $.01 par value, 200,000,000 authorized shares; 53,071,768 and 53,400,195 shares issued and outstanding at June 30, 2003 and December 31, 2002, respectively		531			534
Additional paid-in capital		1,383,568			1,390,043
Distributions in excess of net earnings		(245,751	)		(197,647	)
Accumulated other comprehensive loss		(7,831	)		(9,204	)
Deferred compensation		(5,247	)		(3,699	)

Total Stockholders’ Equity		1,502,715			1,557,472

Total Liabilities and Stockholders’ Equity	$	3,362,033		$	3,395,369

See accompanying notes to consolidated financial statements.

HIGHWOODS PROPERTIES, INC.

Consolidated Statements of Income

(Unaudited and $ in thousands, except per share amounts)

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
Rental revenue	$	105,659		$	107,863		$	211,629		$	221,108
Operating expenses:
Rental property		36,870			34,248			73,524			69,733
Depreciation and amortization		32,412			28,955			64,856			57,666
Interest expense:
Contractual		27,822			26,687			55,496			52,291
Amortization of deferred financing costs		757			341			1,383			680

		28,579			27,028			56,879			52,971
General and administrative includes $3,514 and $3,700 of nonrecurring compensation expense in the three and six months ended June 30, 2002, respectively		6,524			9,047			11,868			14,403

Total operating expenses		104,385			99,278			207,127			194,773

Other income:
Interest and other income		3,229			2,695			6,116			6,033
Equity in (loss)/earnings of unconsolidated affiliates		(485	)		2,475			1,276			5,039

		2,744			5,170			7,392			11,072

Income before gain on disposition of land and depreciable assets, minority interest and discontinued operations		4,018			13,755			11,894			37,407
Gain on disposition of land		1,412			5,989			2,275			5,757
Gain on disposition of depreciable assets		220			4,203			240			5,379

Income before minority interest and discontinued operations		5,650			23,947			14,409			48,543
Minority interest		(656	)		(2,851	)		(1,702	)		(5,845	)

Income from continuing operations		4,994			21,096			12,707			42,698
Discontinued operations:
Income from discontinued operations, net of minority interest		3,781			4,768			7,410			10,038
Gain on sale of discontinued operations, net of minority interest		1,345			1,886			1,175			1,886

		5,126			6,654			8,585			11,924

Net income		10,120			27,750			21,292			54,622
Dividends on preferred shares		(7,713	)		(7,713	)		(15,426	)		(15,426	)

Net income available for common stockholders	$	2,407		$	20,037		$	5,866		$	39,196

Net income per common share—basic:

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