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 September 30, 2004

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 53,715,681 shares outstanding as of December 2, 2004.

HIGHWOODS PROPERTIES, INC.

QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2004

TABLE OF CONTENTS


		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	2

	Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003	3

	Consolidated Income Statements for the three and nine months ended September 30, 2004 and 2003	4

	Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2004	5

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003	6

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

	Disclosure Regarding Forward-Looking Statements	23

	Overview	23

	Results of Operations	31

	Liquidity and Capital Resources	39

	Critical Accounting Estimates	49

	Funds From Operations	49

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52

Item 4.	Controls and Procedures	52

PART II	OTHER INFORMATION

Item 6.	Exhibits and Reports on Form 8-K	55

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,” (4) the Company’s preferred stock as “Preferred Stock,” (5) the Operating Partnership’s common partnership interests as “Common Units,” (6) the Operating Partnership’s preferred partnership interests as “Preferred Units” and (7) in-service properties (excluding apartment units) to which the Company has title and 100.0% ownership rights as the “Wholly Owned Properties.”

The information furnished in the accompanying Consolidated Financial Statements 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 2003 amended Annual Report on Form 10-K.

HIGHWOODS PROPERTIES, INC.

Consolidated Balance Sheets

(Unaudited and in thousands, except per share amounts)


	September 30, 2004			December 31, 2003
	(Unaudited)
Assets:
Real estate assets, at cost:
Land and improvements	$	402,475		$	424,701
Buildings and tenant improvements		2,938,899			3,085,061
Development in process		14,431			7,485
Land held for development		189,214			189,841
Furniture, fixtures and equipment		22,140			21,818

		3,567,159			3,728,906
Less – accumulated depreciation		(584,348	)		(539,700	)

Net real estate assets		2,982,811			3,189,206
Property held for sale		69,011			101,002
Cash and cash equivalents		20,468			21,551
Restricted cash		4,927			4,602
Accounts receivable, net		14,896			18,176
Notes receivable		9,802			10,066
Accrued straight-line rents receivable		60,873			58,912
Investments in unconsolidated affiliates		78,709			62,417
Other assets:
Deferred leasing costs		108,986			102,661
Deferred financing costs		16,972			19,286
Prepaid expenses and other		12,174			10,443

		138,132			132,390
Less – accumulated amortization		(63,484	)		(55,299	)

Other assets, net		74,648			77,091

Total Assets	$	3,316,145		$	3,543,023

Liabilities and Stockholders’ Equity:
Mortgages and notes payable	$	1,600,627		$	1,717,765
Accounts payable, accrued expenses and other liabilities		113,617			101,608
Financing obligations		62,992			124,063

Total Liabilities		1,777,236			1,943,436
Minority interest in the Operating Partnership		119,775			127,776
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 September 30, 2004 and December 31, 2003		104,945			104,945
8% Series B Cumulative Redeemable Preferred Shares (liquidation preference $25 per share), 6,900,000 shares issued and outstanding at September 30, 2004 and December 31, 2003		172,500			172,500
8% Series D Cumulative Redeemable Preferred Shares (liquidation preference $250 per share), 400,000 shares issued and outstanding at September 30, 2004 and December 31, 2003		100,000			100,000
Common stock, $.01 par value, 200,000,000 authorized shares; 53,713,181 shares issued and outstanding at September 30, 2004 and 53,474,403 at December 31, 2003, respectively		537			535
Additional paid-in capital		1,415,459			1,408,888
Distributions in excess of net earnings		(366,543	)		(306,938	)
Accumulated other comprehensive loss		(3,003	)		(3,650	)
Deferred compensation		(4,761	)		(4,469	)

Total Stockholders’ Equity		1,419,134			1,471,811

Total Liabilities and Stockholders’ Equity	$	3,316,145		$	3,543,023

See accompanying notes to consolidated financial statements.

HIGHWOODS PROPERTIES, INC.

Consolidated Income Statements

(Unaudited and in thousands, except per share amounts)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Rental and other revenues	$	114,260		$	121,755		$	351,088		$	372,968

Operating expenses:
Rental property and other expenses		41,693			42,974			127,438			129,157
Depreciation and amortization		33,419			34,050			103,109			105,394
Impairment of assets held for use		500			—			500			—
General and administrative		10,089			6,750			28,625			18,382

Total operating expenses		85,701			83,774			259,672			252,933

Interest expense:
Contractual		25,636			29,955			80,222			90,407
Amortization of deferred financing costs		782			1,690			2,851			3,490
Financing obligations		1,378			4,478			7,497			13,516

		27,796			36,123			90,570			107,413
Other income/(expense):
Interest and other income		1,735			1,425			4,970			4,470
Settlement of bankruptcy claim		14,435			—			14,435			—
Loss on debt extinguishment		—			—			(12,457	)		(14,653	)
Gain on extinguishment of co-venture obligation		—			16,301			—			16,301

		16,170			17,726			6,948			6,118

Income before disposition of property, co-venture expense, minority interest and equity in earnings of unconsolidated affiliates		16,933			19,584			7,794			18,740

Gains on disposition of property, net		2,308			5,556			17,783			7,970
Co-venture expense		—			(333	)		—			(4,588	)
Minority interest in the Operating Partnership		(1,491	)		(1,965	)		(914	)		(261	)
Equity in earnings of unconsolidated affiliates		2,631			1,081			5,464			3,607

Income from continuing operations		20,381			23,923			30,127			25,468
Discontinued operations:
Income from discontinued operations, net of minority interest		548			730			1,167			2,878
Gain on sale of discontinued operations, net of minority interest		630			7,431			609			8,331

		1,178			8,161			1,776			11,209

Net income		21,559			32,084			31,903			36,677
Dividends on preferred stock		(7,713	)		(7,713	)		(23,139	)		(23,139	)

Net income available for common stockholders	$	13,846		$	24,371		$	8,764		$	13,538

Net income per common share—basic:
Income from continuing operations	$	0.24		$	0.31		$	0.13		$	0.05
Income from discontinued operations		0.02			0.15			0.03			0.21

Net income	$	0.26		$	0.46		$	0.16		$	0.26

Weighted average common shares outstanding—basic

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