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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2002
Commission file number: 001-13100
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HIGHWOODS PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Maryland 56-1871668
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
----------
The Company has only one class of common stock, par value $.01 per share,
with 53,387,085 shares outstanding as of October 31, 2002.
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HIGHWOODS PROPERTIES, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements......................................................................... 3
Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001................... 4
Consolidated Statements of Income for the three and nine months ended September 30, 2002
and 2001................................................................................. 5
Consolidated Statements of Stockholders' Equity for the nine months ended
September 30, 2002....................................................................... 6
Consolidated Statements of Cash Flows for the nine months ended September 30, 2002
and 2001................................................................................. 7
Notes to Consolidated Financial Statements................................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................... 15
Disclosure Regarding Forward-Looking Statements.............................................. 15
Overview..................................................................................... 15
Critical Accounting Policies................................................................. 16
Results of Operations........................................................................ 19
Liquidity and Capital Resources.............................................................. 23
Recent Developments.......................................................................... 27
Impact of Recently Issued Accounting Standards............................................... 28
Funds From Operations and Cash Available for Distributions................................... 28
Property Information......................................................................... 30
Inflation.................................................................................... 39
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................... 40
Item 4. Controls and Procedures...................................................................... 40
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................................. 41
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
We refer to (1) Highwoods Properties, Inc. as the "Company," (2) Highwoods
Realty Limited Partnership as the "Operating Partnership," (3) the Company's
common stock as "Common Stock" and (4) the Operating Partnership's common
partnership interests as "Common Units."
The information furnished in the accompanying balance sheets, statements of
income, statements 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 2001 Annual Report on Form 10-K.
3
HIGHWOODS PROPERTIES, INC.
Consolidated Balance Sheets
($ in thousands)
SEPTEMBER 30, DECEMBER 31,
2002 2001
----------- -----------
(Unaudited)
ASSETS
Real estate assets, at cost:
Land and improvements........................................................ $ 428,852 $ 420,922
Buildings and tenant improvements............................................ 2,890,638 2,827,825
Development in process....................................................... 40,018 108,122
Land held for development.................................................... 174,002 153,468
Furniture, fixtures and equipment............................................ 20,479 19,398
----------- -----------
3,553,989 3,529,735
Less - accumulated depreciation.............................................. (448,994) (374,623)
----------- -----------
Net real estate assets....................................................... 3,104,995 3,155,112
Property held for sale.......................................................... 139,972 212,590
Cash and cash equivalents....................................................... 13,998 576
Restricted cash................................................................. 2,702 5,685
Accounts receivable, net........................................................ 18,327 23,659
Advances to related parties..................................................... 971 788
Notes receivable................................................................ 31,914 43,761
Accrued straight-line rents receivable.......................................... 50,191 49,078
Investment in unconsolidated affiliates......................................... 80,825 83,393
Other assets:
Deferred leasing costs....................................................... 106,821 95,761
Deferred financing costs..................................................... 25,964 26,121
Prepaid expenses and other................................................... 13,400 10,461
----------- -----------
146,185 132,343
Less - accumulated amortization.............................................. (71,125) (58,699)
----------- -----------
Other assets, net.......................................................... 75,060 73,644
----------- -----------
Total Assets.................................................................... $ 3,518,955 $ 3,648,286
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable..................................................... $ 1,626,362 $ 1,719,230
Accounts payable, accrued expenses and other liabilities........................ 131,087 120,235
----------- -----------
Total Liabilities............................................................ 1,757,449 1,839,465
Minority interest............................................................... 191,114 203,181
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 50,000,000 authorized shares;
8 5/8% Series A Cumulative Redeemable Preferred Shares (liquidation preference
$1,000 per share), 104,945 shares issued and outstanding at September 30, 2002
and
December 31, 2001............................................................... 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, 2002 and
December 31, 2001............................................................... 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, 2002 and
December 31, 2001............................................................... 100,000 100,000
Common stock, $.01 par value, 200,000,000 authorized shares; 53,387,085 and
52,891,822 shares issued and outstanding at September 30, 2002 and
December 31, 2001, respectively................................................. 534 529
Additional paid-in capital...................................................... 1,389,595 1,376,546
Distributions in excess of net earnings......................................... (182,719) (135,878)
Accumulated other comprehensive loss............................................ (10,418) (9,441)
Deferred compensation--restricted stock......................................... (4,045) (3,561)
----------- -----------
Total Stockholders' Equity................................................... 1,570,392 1,605,640
----------- -----------
Total Liabilities and Stockholders' Equity...................................... $ 3,518,955 $ 3,648,286
=========== ===========
See accompanying notes to consolidated financial statements.
4
HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Income
(Unaudited and $ in thousands except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2001 2002 2001
----------- ----------- ----------- ----------
Rental revenue.............................................. $ 117,369 $ 119,544 $ 351,043 $ 361,745
OPERATING EXPENSES:
Rental property.......................................... 37,051 35,765 109,224 107,038
Depreciation and amortization............................ 31,522 27,879 91,840 83,958
Interest expense:
Contractual............................................ 27,522 26,381 80,673 80,955
Amortization of deferred financing costs............... 347 324 1,027 1,664
---------- ---------- --------- ---------
27,869 26,705 81,700 82,619
General and administrative.................................. 4,147 4,784 14,858 15,447
OTHER INCOME/(EXPENSES):
Interest and other income................................ 2,829 5,070 8,912 20,438
Equity in earnings of unconsolidated affiliates.......... 1,259 3,241 6,298 5,666
Nonrecurring litigation reserve.......................... (2,700) -- (2,700) --
Nonrecurring compensation expense........................ (3,700) -- (3,700) --
---------- ---------- --------- ---------
(2,312) 8,311 8,810 26,104
---------- ---------- --------- ---------
Income before gain on disposition of land and
depreciable assets, minority interest, discontinued
operations and extraordinary item.................... 14,468 32,722 62,231 98,787
Gain on disposition of land and depreciable assets....... 3,599 3,357 12,045 16,098
---------- ---------- --------- ---------
Income before minority interest, discontinued operations
and extraordinary item............................... 18,067 36,079 74,276 114,885
Minority interest........................................... (2,216) (4,476) (8,977) (13,997)
---------- ---------- --------- ---------
Income from continuing operations........................ 15,851 31,603 65,299 100,888
DISCONTINUED OPERATIONS:
Income from discontinued operations, net of minority
interest................................................ 1,741 2,386 5,918 8,157
Loss on sale of discontinued operations, net of
minority interest....................................... (3,280) -- (1,394) --
---------- ---------- --------- ---------
(1,539) 2,386 4,524 8,157
---------- ---------- --------- ---------
Net income before extraordinary item..................... 14,312 33,989 69,823 109,045
Extraordinary item--loss on early extinguishment of debt.... (378) -- (378) (518)
---------- ---------- --------- ---------
Net income............................................... 13,934 33,989 69,445 108,527
Dividends on preferred stock................................ (7,713) (7,713) (23,139) (23,787)
---------- ---------- --------- ---------
Net income available for common shareholders............. $ 6,221 $ 26,276 $ 46,306 $ 84,740
========== ========== ========= =========
NET INCOME PER COMMON SHARE--BASIC:
Income from continuing operations........................ $ 0.16 $ 0.45 $ 0.79 $ 1.41
Income/(loss) from discontinued operations............... $ (0.03) $ 0.04 $ 0.09 $ 0.15
Extraordinary item--loss on early extinguishment of debt. $ (0.01) $ -- $ (0.01) $ (0.01)
---------- ---------- ---------- ---------
Net income............................................... $ 0.12 $ 0.49 $ 0.87 $ 1.55
========== ========== ========= =========
Weighted average shares outstanding--basic............... 53,388 53,748 53,171 54,680
========== ========== ========= =========
NET INCOME PER COMMON SHARE--DILUTED:
Income from continuing operations........................ $ 0.16 $ 0.45 $ 0.79 $ 1.40
Income/(loss) from discontinued operations............... $ (0.03) $ 0.04 $ 0.08 $ 0.15
Extraordinary item--loss on early extinguishment of debt. $ (0.01) $ -- $ (0.01) $ (0.01)
----------- ---------- ---------- ---------
Net income............................................... $ 0.12 $ 0.49 $ 0.86 $ 1.54
========== ========== ========= =========
Weighted average shares outstanding--diluted............. 53,604 54,169 53,544 55,074
========== ========== ========= =========
Distributions declared per common share..................... 0.585 0.585 1.76 1.73
========== ========== ========= =========
See accompanying notes to consolidated financial statements
5
HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Stockholders' Equity
For the Nine Months Ended September 30, 2002
(Unaudited and $ in thousands, except for number of common shares)
ACCUMULATED
OTHER
NUMBER OF ADDITIONAL DEFERRED COMPRE- DISTRIBUTIONS
COMMON COMMON SERIES A SERIES B SERIES D PAID-IN COMPEN- HENSIVE IN EXCESS OF
SHARES STOCK PREFERRED PREFERRED PREFERRED CAPITAL SATION LOSS NET EARNINGS TOTAL
---------- ------- --------- --------- --------- ---------- ------- -------- ------------- ----------
Balance at
December 31, 2001 52,891,822 529 $ 104,945 $172,500 $ 100,000 $1,376,546 $(3,561) $ (9,441) $ (135,878) $1,605,640
Issuance of
Common Stock 235,625 2 - - - 5,324 - - - 5,326
Conversion of Common
Units to Common Stock 257,121 3 - - - 7,471 - - - 7,474
Common Stock
Dividends - - - - - - - - (93,147) (93,147)
Preferred Stock
Dividends - - - - - - - - (23,139) (23,139)
Issuance of restricted
stock 49,124 - - - - 1,428 (1,428) - - -
Amortization of deferred
compensation - - - - - - 944 - - 944
Retirement of
Common Stock (46,607) - - - - (1,174) - - - (1,174)
Net Income - - - - - - - - 69,445 69,445
Other comprehensive
loss - - - - - - - (977) - (977)
---------- ------ --------- -------- --------- ---------- ------- -------- ------------- ----------
Balance at
September 30, 200 53,387,085 534 $ 104,945 $172,500 $ 100,000 $1,389,595 $(4,045) $(10,418) $ (182,719) $1,570,392
========== ====== ========= ======== ========= ========== ======= ======== ============= ==========
See accompanying notes to consolidated financial statements.
6
HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows
(Unaudited and $ in thousands)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2002 2001
--------- ---------
OPERATING ACTIVITIES:
Net income...................................................................... $ 69,445 $ 108,527
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................ 95,761 89,490
Amortization of deferred compensation........................................ 944 755
Minority interest............................................................ 9,593 15,166
Equity in earnings of unconsolidated affiliates.............................. (6,298) (5,666)
Gain on disposition of land and depreciable assets.............................. (10,468) (16,098)
Write off of accrued straight line rent......................................... 3,110 --
Loss on early extinguishment of debt............................................ 378 518
Transition adjustment upon adoption of FASB 133................................. -- 556
Loss on ineffective portion of derivative instruments........................... -- 428
Changes in operating assets and liabilities..................................... 8,708 (17,426)
--------- ---------
Net cash provided by operating activities.................................. 171,173 176,250
--------- ---------
INVESTING ACTIVITIES:
Additions to real estate assets and deferred leasing costs...................... (98,856) (202,879)
Proceeds from disposition of real estate assets................................. 164,403 157,000
Repayment of advances to subsidiaries........................................... -- 27,560
Distributions from unconsolidated affiliates.................................... 7,409 6,866
Investments in notes receivable................................................. 11,847 26,878
Other investing activities...................................................... 476 1,352
--------- ---------
Net cash provided by investing activities.................................. 85,279 16,777
--------- ---------
FINANCING ACTIVITIES:
Distributions paid on common stock and common units............................. (105,825) (107,611)
Dividends paid on preferred stock............................................... (23,139) (23,787)
Payment of prepayment penalties................................................. (378) (518)
Borrowings on mortgages and notes payable....................................... 34,942 12,780
Repayments on mortgages and notes payable....................................... (75,305) (100,187)
Borrowings on revolving loans................................................... 255,500 349,000
Repayments on revolving loans................................................... (332,500) (220,000)
Net proceeds from the sale of common stock...................................... 5,326 817
Net change in deferred financing costs.......................................... 1,725 155
Repurchase of stock and units................................................... (3,376) (155,308)
--------- ---------
Net cash used in financing activities...................................... (243,030) (244,659)
--------- ---------
Net increase/(decrease) in cash and cash equivalents............................ 13,422 (51,632)
Cash and cash equivalents at beginning of the period............................ 576 104,780
--------- ---------
Cash and cash equivalents at end of the period.................................. $ 13,998 $ 53,148
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.......................................................... $ 81,724 $ 83,972
========= =========
See accompanying notes to consolidated financial statements.
7
HIGHWOODS PROPERTIES, INC.
Consolidated Statements of Cash Flows (Continued)
(Unaudited and $ in thousands)
Supplemental disclosure of non-cash investing and financing activities:
The following table summarizes the net assets contributed by the holders of
Common Units in the Operating Partnership, the net assets acquired subject to
mortgage notes payable and other non-cash equity transactions:
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2002 2001
--------- ---------
Assets:
Notes receivable................................................................ $ -- $ 675
Accounts receivable............................................................. 154 --
Cash and cash equivalents....................................................... 729 6,880
Rental property and equipment, net.............................................. 37,098 58,012
Investment in unconsolidated affiliates......................................... (1,174) --
--------- ---------
36,807 65,567
========= =========
Liabilities:
Mortgages and notes payable..................................................... 24,495 58,545
Accounts payable, accrued expenses and other liabilities........................ 14,163 7,241
--------- ---------
38,658 65,786
========= =========
Equity:......................................................................... (1,851) (219)
========= =========
See accompanying notes to consolidated financial statements.
8
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
1. DESCRIPTION OF THE COMPANY
Highwoods Properties, Inc. (the "Company") is a self-administered and
self-managed real estate investment trust ("REIT") that operates in the
southeastern and midwestern United States. The Company's wholly-owned assets
include: 502 in-service office, industrial and retail properties; 213 apartment
units; 1,251 acres of undeveloped land suitable for future development; and an
additional eight properties under development.
The Company conducts substantially all of its activities through, and
substantially all of its interests in the properties are held directly or
indirectly by, Highwoods Realty Limited Partnership (the "Operating
Partnership"). The Company is the sole general partner of the Operating
Partnership. At September 30, 2002, the Company owned 88.3% of the common
partnership interests ("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, $.01 par value (the "Common
Stock"), or, at the Company's option, one share of Common Stock.
When a Common Unit holder redeems a Common Unit for a share of Common Stock
or cash, the minority interest will be reduced and the Company's share in the
Operating Partnership will be increased. The Common Units owned by the Company
are not redeemable for cash.
2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and the Operating Partnership and their majority-controlled affiliates. All
significant intercompany balances and transactions have been eliminated in the
consolidated financial statements. For a more complete discussion of our
critical accounting policies, see also "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Critical Accounting Policies".
The extraordinary loss represents the write-off of loan origination fees
and prepayment penalties paid on the early extinguishment of debt, net of the
minority interest.
The Company has elected and expects to continue to qualify as a REIT under
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended.
Therefore, no provision has been made for income taxes related to REIT taxable
income to be distributed to stockholders.
Minority interest in the Company represents Common Units in the Operating
Partnership owned by various individuals and entities other than the Company.
Per share information is calculated using the weighted average number of shares
outstanding (including common share equivalents). In addition, minority interest
includes equity of consolidated real estate partnerships, which are owned by
various individuals and entities and not the Company.
Certain amounts in the September 30, 2001 and December 31, 2001 financial
statements have been reclassified to conform to the September 30, 2002
presentation. These reclassifications had no material effect on net income or
stockholders' equity as previously reported.
The accompanying financial information has not been audited, but in the
opinion of management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of our financial position, results of
operations and cash flows have been made. For further information, refer to the
financial statements and notes thereto included in our 2001 Annual Report on
Form 10-K.
9
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
2. BASIS OF PRESENTATION - Continued
Non-recurring litigation reserve was $2.7 million for the three months
ended September 30, 2002, and was a result of an accrual of $2.7 million to
increase our reserves for the probable and estimated losses related to various
legal proceedings arising in the ordinary course of business and from previously
completed mergers and acquisitions.
Non-recurring compensation was $3.7 million for the three months ended
September 30, 2002, and was related to the exercise of options that occurred
during the first and second quarters of 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 previously
recorded as adjustments to stockholders' equity. However, the effect of such
exercises should have been 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 record any compensation expense.
Management believes the impact of this non-recurring charge has had no material
effect on net income or stockholders' equity during the first six months of 2002
as previously reported. In addition, management believes the impact of APB 25
would not have had a material effect on financial statements for prior periods.
Commencing during the third quarter of 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.
10
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
3. SEGMENT INFORMATION
Our sole business is the acquisition, development and operation of rental
real estate properties. We operate office, industrial and retail properties and
apartment units. There are no material inter-segment transactions.
Our chief operating decision maker ("CDM") assesses and measures operating
results based upon property level net operating income. The operating results
for the individual assets within each property type have been aggregated since
the CDM evaluates operating results and allocates resources on a
property-by-property basis within the various property types.
Further, all operations are within the United States and no tenant
comprises more than 10% of consolidated revenues. The following table summarizes
the rental income, net operating income and total assets for each reportable
segment for the three and nine months ended September 30, 2002 and 2001 ($ in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
RENTAL INCOME (A):
Office segment $ 96,409 $ 96,142 $ 287,627 $ 291,021
Industrial segment 10,529 11,623 31,893 35,137
Retail segment 10,083 8,970 30,380 27,325
Apartment segment 348 2,809 1,143 8,262
----------- ----------- ----------- -----------
Total rental income $ 117,369 $ 119,544 $ 351,043 $ 361,745
=========== =========== =========== ===========
NET OPERATING INCOME (A):
Office segment $ 64,308 $ 66,560 $ 193,924 $ 202,748
Industrial segment 8,372 9,612 25,985 29,450
Retail segment 7,494 6,077 21,442 18,252
Apartment segment 144 1,530 468 4,257
----------- ----------- ----------- -----------
Total Net Operating Income $ 80,318 $ 83,779 $ 241,819 $ 254,707
----------- ----------- ----------- -----------
RECONCILIATION TO INCOME BEFORE GAIN ON DISPOSITION
OF LAND AND DEPRECIABLE ASSETS, MINORITY INTEREST,
DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM:
Equity in earnings of unconsolidated affiliates $ 1,259 $ 3,241 $ 6,298 5,666
Interest and other income 2,829 5,070 8,912 20,438
Nonrecurring litigation reserve (2,700) -- (2,700) --
Nonrecurring compensation expense (3,700) -- (3,700) --
Interest expense (27,869) (26,705) (81,700) (82,619)
General and administrative expenses (4,147) (4,784) (14,858) (15,447)
Depreciation and amortization (31,522) (27,879) (91,840) (83,958)
----------- ----------- ----------- -----------
Income before gain on disposition of land and
depreciable assets, minority interest, discontinued
operations and extraordinary item $ 14,468 $ 32,722 $ 62,231 $ 98,787
=========== =========== =========== ===========
TOTAL ASSETS:
Office segment $ 2,725,012 $ 2,781,068 $ 2,725,012 $ 2,781,068
Industrial segment 326,578 334,796 326,578 334,796
Retail segment 285,373 274,581 285,373 274,581
Apartment segment 12,218 11,285 12,218 11,285
Corporate and other 169,774 223,796 169,774 223,796
----------- ----------- ----------- -----------
Total Assets $ 3,518,955 $ 3,625,526 $ 3,518,955 $ 3,625,526
=========== =========== =========== ===========
- ----------
(A) Net of discontinued operations.
11
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
During the past several years, we have formed various joint ventures with
unrelated investors. We have retained minority equity interests ranging from
12.50% to 50.00% in these joint ventures. As required by GAAP, we have accounted
for our joint venture activity using the equity method of accounting, as we do
not control these joint ventures. As a result, the assets and liabilities of our
joint ventures are not included on our balance sheet.
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 to 100.0%. At that time, we consolidated the assets and
liabilities, and recorded income and expenses on a consolidated basis. The net
income related to this joint venture until the date of purchase is included in
`Total net income' in the table below.
On September 11, 2002, we contributed Harborview Plaza to SF-HIW Harborview
Plaza, LP, a newly formed limited partnership, in exchange for a 20.0% limited
partnership interest. The assets, liabilities and net income from the SF-HIW
Harborview Plaza, LP are included in the table below.
As of September 30, 2002, our joint ventures have approximately $593.4
million of outstanding debt. All of the joint venture debt is non-recourse to us
except (1) in the case of customary exceptions pertaining to such matters as
misuse of funds, environmental conditions and material misrepresentations and
(2) with respect to $2.5 million of construction debt related to the MG-HIW
Metrowest II, LLC, which has been guaranteed by us subject to a pro rata
indemnity from our joint venture partner. Our partner in SF-HIW Harborview
Plaza, LP has the right to put its 80% equity interest in the partnership to us
for cash at anytime during the one year period commencing on September 11, 2014.
The value of the equity interest will be determined based upon the then fair
market value of SF-HIW Harborview Plaza, LP's assets and liabilities. Selected
financial data for our unconsolidated affiliates for the nine months ended
September 30, 2002 and 2001 is presented below ($ in thousands):
OWNERSHIP PERCENTAGE
----------------------
2002 2001
------ -------
Board of Trade Investment Company..................................... 49.00% 49.00%
Dallas County Partners I, LP.......................................... 50.00 50.00
Dallas County Partners II, LP......................................... 50.00 50.00
Dallas County Partners III, LP........................................ 50.00 50.00
Fountain Three........................................................ 50.00 50.00
Kessinger/Hunter, LLC................................................. 30.00 30.00
4600 Madison Associates, LP........................................... 12.50 12.50
Highwoods DLF 98/29, LP............................................... 22.81 22.81
Highwoods DLF 97/26 DLF 99/32, LP..................................... 42.93 42.93
RRHWoods, LLC......................................................... 50.00 50.00
Highwoods-Markel Associates, LLC...................................... 50.00 50.00
MG-HIW, LLC........................................................... 20.00 20.00
MG-HIW Peachtree Corners, LLC......................................... 50.00 50.00
MG-HIW Rocky Point, LLC............................................... -- 50.00
MG-HIW Metrowest I, LLC............................................... 50.00 50.00
MG-HIW Metrowest II, LLC.............................................. 50.00 50.00
Concourse Center Associates, LLC...................................... 50.00 --
Plaza Colonnade, LLC.................................................. 50.00 --
SF-HIW Harborview Plaza, LP........................................... 20.00 --
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
---------- -----------
Total assets.......................................................... $ 924,155 $ 903,458
Total debt............................................................ 593,359 568,625
Total liabilities..................................................... 617,781 601,072
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2001 2002 2001
---- ---- ---- ----
Total net income....................... $ 5,055 $ 9,558 $ 22,058 $ 19,392
12
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
5. DERIVATIVE FINANCIAL INSTRUMENTS
On January 1, 2001, we adopted Financial Accounting Standards Board
Statement (SFAS) No. 133/138, "Accounting for Derivative Instruments and Hedging
Activities," as amended. This Statement requires us to recognize all derivatives
on the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of the derivative will
either be offset against the change in fair value of the hedged assets,
liabilities or firm commitments through earnings, or recognized in Accumulated
Other Comprehensive Loss ("AOCL") until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value is
recognized in earnings. In connection with the adoption of SFAS 133/138 in
January 2001, we recorded a net transition adjustment of $555,962 of unrealized
loss in interest and other income and a net transition adjustment of $125,000 in
AOCL. Adoption of the standard also resulted in our recognizing $127,000 of
derivative instrument liabilities and a reclassification of approximately $10.6
million of deferred financing costs from past cashflow hedging relationships
from other assets to AOCL.
Our interest rate risk management objective is to limit the impact of
interest rate changes on earnings and cashflows and to lower overall borrowing
costs. To achieve these objectives, we enter into interest rate hedge contracts
such as collars, swaps, caps and treasury lock agreements in order to mitigate
our interest rate risk with respect to various debt instruments. We do not hold
these derivatives for trading or speculative purposes.
On the date that we enter into a derivative contract, we designate the
derivative as (1) a hedge of the variability of cash flows that are to be
received or paid in connection with a recognized liability (a "cash flow"
hedge), or (2) an instrument that is held as a non-hedge derivative. Changes in
the fair value of highly effective cash flow hedges, to the extent that the
hedge is effective, are recorded in AOCL, until earnings are affected by the
hedged transaction (i.e. until periodic settlements of a variable-rate liability
are recorded in earnings). Any hedge ineffectiveness (which represents the
amount by which the changes in the fair value of the derivative exceed the
variability in the cash flows of the transaction) is recorded in current-period
earnings. Changes in the fair value of non-hedging instruments are reported in
current-period earnings.
We formally document all relationships between hedging instruments and
hedged items, as well as the risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives that are designated as cash flow hedges to (1) specific assets and
liabilities on the balance sheet or (2) forecasted transactions. We also assess
and document, both at the hedging instrument's inception and on an ongoing
basis, whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in cash flows associated with the hedged items.
When we determine that a derivative is not (or has ceased to be) highly
effective as a hedge, we discontinue hedge accounting prospectively.
During the nine months ended September 30, 2002, we had an interest rate
swap and an interest rate collar each mature, resulting in a debit to interest
rate derivative liability and an offsetting credit to AOCL of $411,000.
As of September 30, 2002, we have two $24.0 million treasury lock
agreements related to an anticipated five-year fixed rate financing with two
financial counterparties, which effectively lock the five-year treasury rate at
3.72%. These treasury lock agreements are designated as cashflow hedges and the
effective portion of the cumulative loss on the derivative instruments was $2.5
million at September 30, 2002 and is being reported as a component of AOCL in
stockholders' equity. These costs will be recognized into earnings in the same
period or periods during which the hedged transaction affects earnings (as the
underlying debt is paid down).
Derivative liabilities totaling approximately $2.5 million related to our
treasury lock agreements, with a notional amount of $48.0 million, are recorded
in accounts payable, accrued expenses and other liabilities in the Consolidated
Balance Sheets at September 30, 2002. The fair value of our interest rate swap,
cap and collar agreements was $(2.5) million at September 30, 2002.
13
HIGHWOODS PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
5. DERIVATIVE FINANCIAL INSTRUMENTS - Continued
At September 30, 2002, approximately $7.9 million of deferred financing
costs from past cash flow hedging instruments remain in AOCL. These costs will
be recognized into earnings as the underlying debt is repaid. We expect that the
portion of the cumulative loss recorded in AOCL at September 30, 2002 associated
with the derivative instruments, which will be recognized within the next 12
months, will be approximately $1.6 million.
6. OTHER COMPREHENSIVE INCOME/(LOSS)
Other comprehensive income/(loss) represents net income plus the results of
certain non-stockholders' equity changes not reflected in the Consolidated
Statements of Income. The components of other comprehensive income/(loss) are as
follows ($ in thousands):
NINE MONTHS ENDED SEPTEMBER 30,
2002 2001
---------- ----------
Net Income...................................................................... $ 69,445 $ 108,527
Accumulated other comprehensive income/(loss):
Unrealized derivative losses on cashflow hedges.............................. (2,134) (514)
Reclassification of past hedging relationships............................... -- (10,597)
Amortization of past hedging relationships................................... 1,157 1,175
---------- ----------
Total other comprehensive loss ............................................ (977) (9,936)
---------- ----------
Total comprehensive income................................................. $ 68,468 $ 98,591
========== ==========
7. DISCONTINUED OPERATIONS AND THE IMPAIRMENT OF LONG-LIVED ASSETS
As of January 1, 2002, we adopted Financial Accounting Standards Board
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," ("SFAS 144") and the appropriate amounts are disclosed separately under
income from discontinued operations on the consolidated income statement. Below
represents the income statement and net carrying value of the properties sold
and held for sale at September 30, 2002 (which account for 2,148,446 rentable
square feet and 88 units) as a result of our capital recycling program and
included in income from discontinued operations for the three and nine months
ended September 30, 2002 and 2001 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ----------------------
2002 2001 2002 2001
---------- ---------- --------- ---------
Total revenue $ 5,460 $ 6,286 $ 16,669 $ 19,125
Rental operating expenses (1,985) (1,932) (5,831) (5,931)
Depreciation and amortization (1,305) (1,624) (3,921) (3,868)
Interest Expense (200) -- (200) --
---------- ---------- --------- ---------
Income before loss on disposition of depreciable assets
and minority interest 1,970 2,730 6,717 9,326
Loss on disposition of depreciable assets (3,712) -- (1,577) --
---------- ---------- --------- ---------
Income/(loss) before minority interest (1,742) 2,730 5,140 9,326
Minority interest 203 (344) (616) (1,169)
---------- ---------- --------- ---------
Income/(loss) from discontinued operations $ (1,539) $ 2,386 $ 4,524 $ 8,157
========== ========== ========= =========
Net carrying value $ 123,350 $ 153,297 $ 123,350 $ 153,297
========== ========== ========= =========
In addition, in accordance with SFAS 144, we have determined that as of
September 30, 2002, the carrying value of three office properties held will not
be recovered from their projected undiscounted future operating cash flows. We
have recognized a $4.5 million impairment loss, which is included in the gain on
the sale of land and depreciable assets in the consolidated statements of income
for the three and nine months ended September 30, 2002.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with all of the
financial statements appearing elsewhere in the report and is based primarily on
the consolidated financial statements of the Company.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this Quarterly Report on Form 10-Q may contain
forward-looking statements. Such statements include, in particular, statements
about our plans, strategies and prospects under 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;
. the costs of our development projects could exceed our original
estimates;
. 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 re-lease space quickly or on as
favorable terms as old leases;
. we may have incorrectly assessed the environmental condition of our
properties;
. 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 or may not recover as fully or as quickly as
expected.
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 in our 2001 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
We are 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 September 30, 2002, we:
. owned 502 in-service office, industrial and retail properties,
encompassing approximately 38.0 million rentable square feet;
. owned an interest (50.0% or less) in 78 in-service office and
industrial properties, encompassing
15
approximately 7.7 million rentable square feet and 418 apartment
units;
. owned 1,251 acres (and have agreed to purchase an additional eight
acres over the next year) of undeveloped land suitable for future
development;
. owned eight development properties, encompassing approximately 824,000
rentable square feet; and
. owned an interest (50.0% or less) in one development property,
encompassing 285,000 rentable square feet.
The following summarizes our capital recycling program since the beginning
of 2000:
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
September 30, 2002 2001 2000
------------------ ---------- ----------
OFFICE, INDUSTRIAL AND RETAIL PROPERTIES
(rentable square feet in thousands)
Dispositions (1)......................................... (856) (268) (4,743)
Contributions to Joint Ventures (1)...................... (205) (118) (2,199)
Developments Placed In-Service........................... 1,614 1,351 3,480
Acquisitions............................................. 205 72 669
------- ------- -------
Net Change in Wholly-owned
In-Service Properties.................................. 758 1,037 (2,793)
======= ======= =======
APARTMENT PROPERTIES
(in units)
Dispositions............................................. -- (1,672) --
======= ======= =======
- ----------
(1) Excludes wholly-owned development projects sold or contributed to joint
ventures.
In addition to the above property activity, we repurchased $3.4 million,
$147.4 million and $100.2 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 $269.5 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 September 30, 2002, the Company owned
88.3% 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 Quarterly Report. Our Consolidated Financial Statements
include the accounts of the Company and the Operating Partnership and their
majority-controlled affiliates. For a discussion of our accounting policies with
respect to our investments in joint ventures, 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 more fully described in Note (1) to our audited Consolidated
Financial Statements for the year ended December 31, 2001, included in our 2001
Form 10-K. 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 presented for any interim period. Management
has reviewed our critical accounting policies and estimates with the audit
committee of the Company's board of directors.
We consider our critical accounting policies to be those used in the
determination of the reported amounts and
16
disclosure related to the following:
. Impairment of long-lived assets;
. Allowance for doubtful accounts;
. Capitalized costs;
. Fair value of derivative instruments;
. 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 determination of future operating cash flows requires us to
make assumptions related to future rental rates, tenant concessions, operating
expenditures, property taxes and capital improvements. If our assumptions prove
incorrect and our estimates of future operating cash flows are materially
overstated, we could 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, delinquency of payment, 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 stockholders' equity 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.
17
Rental revenue. Rental revenue is comprised of base rent, including
termination fees, recoveries from tenants and parking and other income. 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. Recoveries from tenants represent reimbursements for
certain costs as provided in the lease agreements. These costs generally include
real estate taxes, utilities, insurance, common area maintenance and other
recoverable costs.
Investments in joint ventures. Our investments in unconsolidated affiliates
consist of one corporation, nine 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% of
the outstanding voting stock. We have a 50% 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% 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, 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.
In connection with the MG-HIW, LLC joint venture, we have guaranteed Miller
Global, our partner who has an 80.0% interest in the joint venture, a minimum
internal rate of return on $50.0 million of their equity. If the minimum
internal rate of return is not achieved upon the sale of the assets or winding
up of the joint venture, Miller Global would receive a disproportionately
greater interest of the cash proceeds related to the assets subject to the
internal rate of return guarantee. Based upon the current and forecasted
operating performance of the assets and our estimate of the residual value of
the subject assets, the estimated internal rate of return for Miller Global with
respect to their equity is not less than the minimum required return. As a
result, we do not currently expect that our interest in the joint venture will
be adjusted upon the sale of the subject assets or the winding up of the joint
venture as a result of the internal rate of return guarantee. However, if our
assumptions and estimates prove incorrect, Miller Global could receive a greater
interest of the cash proceeds from any such sale or winding up.
18
RESULTS OF OPERATIONS
The following table sets forth information regarding our results of
operations for the three and nine months ended September 30, 2002 and 2001 ($ in
millions):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 $ Change 2002 2001 $ Change
-------- -------- -------- -------- ------- --------
Rental revenue ...................................... $ 117.4 $ 119.5 $ (2.1) $ 351.0 $ 361.7 $ (10.7)
Operating expenses:
Rental property................................... 37.1 35.8 1.3 109.2 107.0 2.2
Depreciation and amortization..................... 31.5 27.9 3.6 91.8 84.0 7.8
Interest expense:
Contractual..................................... 27.5 26.4 1.1 80.7 80.9 (0.2)
Amortization of deferred financing costs........ 0.4 0.3 0.1 1.0 1.7 (0.7)
-------- -------- ------- -------- ------- -------
27.9 26.7 1.2 81.7 82.6 (0.9)
General and administrative........................ 4.1 4.7 (0.6) 14.9 15.4 (0.5)
Other Income/(Expenses):
Interest and other income......................... 2.8 5.1 (2.3) 8.9 20.4 (11.5)
Equity in earnings of unconsolidated affiliates... 1.3 3.2 (1.9) 6.3 5.7 0.6
Nonrecurring litigation reserve................... (2.7) -- (2.7) (2.7) -- (2.7)
Nonrecurring compensation expense................. (3.7) -- (3.7) (3.7) -- (3.7)
-------- ------- ------- -------- ------- -------
(2.3) 8.3 (10.6) 8.8 26.1 (17.3)
-------- -------- ------- -------- ------- -------
Income before gain on disposition of land and
depreciable assets, minority interest,
discontinued operations and extraordinary item 14.5 32.7 (18.2) 62.2 98.8 (36.6)
Gain on disposition of land and depreciable assets 3.6 3.4 0.2 12.1 16.1 (4.0)
-------- -------- ------- -------- ------- -------
Income before minority interest, discontinued
operations and extraordinary item............. 18.1 36.1 (18.0) 74.3 114.9 (40.6)
Minority interest.................................... (2.2) (4.5) 2.3 (9.0) (14.0) 5.0
-------- -------- ------- -------- ------- -------
Income from continuing operations................. 15.9 31.6 (15.7) 65.3 100.9 (35.6)
Discontinued operations:
Income from discontinued operations, net of
minority interest............................... 1.7 2.4 (0.7) 5.9 8.1 (2.2)
Loss on sale of discontinued operations, net of
minority interest............................... (3.3) -- (3.3) (1.4) -- (1.4)
-------- ------- ------- -------- ------- -------
(1.6) 2.4 (4.0) 4.5 8.1 (3.6)
-------- -------- ------- -------- ------- -------
Net income before extraordinary item.............. 14.3 34.0 (19.7) 69.8 109.0 (39.2)
Extraordinary item -- loss on early extinguishment
of debt........................................... (0.4) -- (0.4) (0.4) (0.5) 0.1
-------- ------- ------- -------- ------- -------
Net income........................................ 13.9 34.0 (20.1) 69.4 108.5 (39.1)
Dividends on preferred stock......................... (7.7) (7.7) -- (23.1) (23.8) 0.7
-------- -------- ------- -------- ------- -------
Net income available for common
shareholders.................................... $ 6.2 $ 26.3 $ (20.1) $ 46.3 $ 84.7 $ (38.4)
======== ======== ======= ======== ======= =======
Three Months Ended September 30, 2002. Revenues from rental operations
decreased $2.1 million, or 1.8%, to $117.4 million for the three months ended
September 30, 2002 from $119.5 million for the three months ended September 30,
2001. The decrease was primarily due to a decrease in the average occupancy
rates from 92.7% in the third quarter of 2001 to 86.3% in the third quarter of
2002. Slightly offsetting the decrease was an increase in rental revenues as a
result of an increase in our property portfolio in 2002 as a result of our
capital recycling program, which included 1.6 million rentable square feet of
properties that were placed in service during 2002. Our in-service wholly-owned
portfolio increased from 36.9 million rentable square feet at September 30, 2001
to 38.0 million rentable square feet at September 30, 2002.
Same property rental revenue, recorded in accordance with GAAP, generated
from the 475 in-service properties wholly-owned on January 1, 2001, decreased
$4.2 million, or 3.6%, for the three months ended September 30, 2002, compared
to the three months ended September 30, 2001. Same store straight-line rent
decreased $1.1 million as a result of lower occupancy with fewer new leases
recording straight-line rent and the impact from straight-lining of
19
rents on existing tenants discussed generally in our critical accounting
policies. Same store rental revenues excluding straight-line rent and
termination fees decreased $4.2 million, or 3.7%. This decrease is a result of
lower same store average occupancy, which declined from 92.5% in the third
quarter of 2001 to 86.8% in the third quarter of 2002.
During the three months ended September 30, 2002, 242 second generation
leases representing 1.5 million square feet of office, industrial and retail
space were executed at an average rate per square foot, which was 9.3% lower
than the average rate per square foot on the previous leases.
Rental operating expenses (real estate taxes, utilities, insurance, repairs
and maintenance and other property-related expenses) increased $1.3 million, or
3.6%, to $37.1 million for the three months ended September 30, 2002 from $35.8
million for the three months ended September 30, 2001. This increase was
primarily a result of increases in real estate taxes, primarily due to higher
property tax assessments, utilities and small increases in various other rental
expenses in the third quarter of 2002, offset by lower occupancy relative to
variable operating expenses. Rental operating expenses as a percentage of
related rental revenues increased to 31.6% for the three months ended September
30, 2002 from 30.0% for the three months ended September 30, 2001. The increase
was primarily due to an increase in rental operating expenses related to the
increase in real estate taxes and a decrease in rental revenues related to lower
average occupancy during the three months ended September 30, 2002.
Same property rental property expenses, which are the expenses of the 475
in-service properties wholly-owned on January 1, 2001, increased $456,000, or
1.3%, for the three months ended September 30, 2002, compared to the three
months ended September 30, 2001. This increase was primarily a result of
increases in real estate taxes, primarily due to higher property tax
assessments, utilities and small increases in various other rental expense
accounts in the third quarter of 2002.
Depreciation and amortization for the three months ended September 30, 2002
and 2001 totaled $31.5 million and $27.9 million, respectively. The increase of
$3.6 million, or 12.9%, was due to an increase in the amortization of leasing
commissions and tenant improvements and an increase in depreciation expense
related to buildings placed in service during 2001 and 2002, partly offset by a
decrease in the depreciation expense as a result of dispositions during 2002 and
2001.
Interest expense increased $1.2 million, or 4.5%, to $27.9 million for the
three months ended September 30, 2002 from $26.7 million for the three months
ended September 30, 2001. The increase was attributable to a decrease in
capitalized interest during the three months ended September 30, 2002, offset by
a decrease in weighted average interest rates during the three months ended
September 30, 2002. Interest expense for the three months ended September 30,
2002 and 2001 included $347,000 and $324,000, respectively, of amortization of
deferred financing costs. Capitalized interest for the three months ended
September 30, 2002 and 2001 was $1.7 million and $4.0 million, respectively.
General and administrative expenses as a percentage of rental revenue,
interest and other income, and equity in earnings of unconsolidated affiliates
was 3.4% in the third quarter of 2002 and 3.7% in the third quarter of 2001.
The increase is primarily due to a non-recurring increase in management fee
expense related to 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.
Interest and other income decreased $2.3 million, or 45.1%, to $2.8 million
for the three months ended September 30, 2002 from $5.1 million for the three
months ended September 30, 2001. The decrease primarily resulted from a decrease
in development fee income and a decrease in interest income in the three months
ended September 30, 2002 due to the collection of notes receivable during 2001
and 2002.
Equity in earnings of unconsolidated affiliates decreased $1.9 million, or
59.4%, to $1.3 million for the three months ended September 30, 2002 from $3.2
million for the three months ended September 30, 2001. The decrease was
attributable to an accrual made in 2001 by the Iowa joint ventures to reflect
reimbursements for real estate taxes paid in 2001 and years prior. In 2002,
these payments have been accounted for when they have been received.
Non-recurring litigation reserve was $2.7 million for the three months
ended September 30, 2002, and was a result of an accrual of $2.7 million to
increase our reserves for the probable and estimated losses related to various
legal proceedings arising in the ordinary course of business and from previously
completed mergers and acquisitions.
20
Non-recurring compensation was $3.7 million for the three months ended
September 30, 2002, and was related to the exercise of options that occurred
during the first and second quarters of 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 previously
recorded as adjustments to stockholders' equity. However, the effect of such
exercises should have been 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 record any compensation expense.
Management believes the impact of this non-recurring charge has had no material
effect on net income or stockholders' equity during the first six months of 2002
as previously reported. In addition, management believes the impact of APB 25
would not have had a material effect on financial statements for prior periods.
Commencing during the third quarter of 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.
Income before gain on disposition of land and depreciable assets, minority
interest, discontinued operations and extraordinary item equaled $14.5 million
and $32.7 million for the quarters ended September 30, 2002 and 2001,
respectively. The Company's net income allocated to minority interest totaled
$2.2 million and $4.5 million for the quarters ended September 30, 2002 and
2001, respectively. The Company recorded $7.7 million in preferred stock
dividends for each of the quarters ended September 30, 2002 and 2001,
respectively.
Gain on disposition of land and depreciable assets increased $242,000, or
5.9%, to $3.6 million for the quarter ended September 30, 2002 from $3.4 million
for the quarter ended September 30, 2001. In the third quarter of 2001, the
majority of the gain was comprised of a gain of approximately $4.1 million
related to the disposition of 512 apartment units, partly offset by a loss of
approximately $126,000 related to the disposition of 579,515 rentable square
feet of office properties and by a loss of approximately $538,000 related to the
disposition of 77 acres of land. In the third quarter of 2002, the gain
primarily consisted of $2.7 million of additional gain that resulted from the
sale of a building during the second quarter of 2002 that had not been entirely
recorded during that period due to an error in the consolidation process and a
gain of approximately $741,000 related to the disposition of 25 acres of land.
Income from discontinued operations, net of minority interest, decreased
from $2.4 million for the three months ended September 30, 2001 to $1.7 million
for the three months ended September 30, 2002. The decrease was a result of the
decrease in income from discontinued operations for properties sold during 2002.
Loss on sale of discontinued operations, net of minority interest, was $3.3
million during the three months ended September 30, 2002, which represented an
impairment charge related to two properties held for sale at September 30, 2002.
Nine Months Ended September 30, 2002. Revenues from rental operations
decreased $10.7 million, or 3.0%, to $351.0 million for the nine months ended
September 30, 2002 from $361.7 million for the nine months ended September 30,
2001. The decrease was primarily due to a decrease in the average occupancy
rates from 93.4% for the nine months ended September 30, 2001 to 87.5% for the
nine months ended September 30, 2002. In addition, we wrote off approximately
$3.1 million of accrued straight-line rent receivables from WorldCom and its
affiliates during the second quarter of 2002. Our in-service wholly-owned
portfolio increased from 36.9 million rentable square feet at September 30, 2001
to 38.0 million rentable square feet at September 30, 2002.
Same property rental revenue, recorded in accordance with GAAP, generated
from the 475 wholly-owned in-service properties on January 1, 2001, decreased
$13.9 million for the nine months ended September 30, 2002 compared to the nine
months ended September 30, 2001. Same store straight-line rent decreased $6.3
million as a result of the $3.1 million write-off of bankrupt tenant WorldCom's
accrued straight-line rent receivable, lower occupancy with fewer new leases
recording straight-line rent and the impact from straight lining of rents on
existing tenants discussed generally in our critical accounting policies. Same
store revenues excluding straight-line rent and termination fees decreased $9.5
million, or 2.8%. This decrease is a result of lower same store average
occupancy, which declined from 93.2% in the first nine months of 2001 to 87.7%
in the first nine months of 2002.
21
During the nine months ended September 30, 2002, 586 second generation
leases representing 4.0 million square feet of office, industrial and retail
space were executed at an average rate per square foot which was 4.8% lower than
the average rate per square foot on the previous leases.
Rental operating expenses (real estate taxes, utilities, insurance, repairs
and maintenance and other property-related expenses) increased $2.2 million, or
2.1%, to $109.2 million for the nine months ended September 30, 2002 from $107.0
million for the nine months ended September 30, 2001. The increase was primarily
a result of an increase in real estate taxes in the first nine months of 2002,
primarily due to higher property tax assessments, utilities and small increases
in various other rental expenses in 2002, offset by lower occupancy relative to
variable operating expenses. Rental operating expenses as a percentage of
related rental revenues increased to 31.1% for the nine months ended September
30, 2002 from 29.6% for the nine months ended September 30, 2001. The increase
was primarily due to an increase in rental operating expenses related to the
increase in real estate taxes and a decrease in rental revenues related to lower
average occupancy during the nine months ended September 30, 2002.
Same property rental property expenses, which are the expenses of the 475
in-service properties wholly-owned on January 1, 2001, remained consistent for
the nine months ended September 30, 2002, compared to the nine months ended
September 30, 2001.
Depreciation and amortization for the nine months ended September 30, 2002
and 2001 totaled $91.8 million and $84.0 million, respectively. The increase of
$7.8 million, or 9.3%, was due to an increase in the amortization of leasing
commissions and tenant improvements and an increase in depreciation expense
related to buildings placed in service during 2001 and 2002, partly offset by a
decrease in the depreciation expense as a result of dispositions during 2002 and
2001.
Interest expense decreased $919,000, or 1.1%, to $81.7 million for the nine
months ended September 30, 2002 from $82.6 million for the nine months ended
September 30, 2001. The decrease was primarily attributable to the decrease in
the weighted average interest rates for the nine months ended September 30,
2002, partly offset by an increase in the average outstanding debt for the nine
months ended September 30, 2002 and a decrease in capitalized interest during
the nine months ended September 30, 2002. Interest expense for the nine months
ended September 30, 2002 and 2001 included $1.0 million and $1.7 million,
respectively, of amortization of deferred financing costs. The decrease in
amortization of deferred financing costs from September 30, 2001 to September
30, 2002 was related to loan fees which were amortized fully during 2001.
Capitalized interest for the nine months ended September 30, 2002 and 2001 was
$8.3 million and $11.0 million, respectively.
General and administrative expenses as a percentage of rental revenue,
interest and other income, and equity in earnings of unconsolidated affiliates
was 4.1% and 4.0% in the first nine months of 2002 and 2001, respectively. The
increase is primarily due to a non-recurring increase in management fee expense
related to 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. The increase is partly
offset by a decrease in revenue due to lower average occupancy during the nine
months ended September 30, 2002 and 2001.
Interest and other income decreased $11.5 million, or 56.4%, to $8.9
million for the nine months ended September 30, 2002 from $20.4 million for the
nine months ended September 30, 2001. The decrease primarily resulted from a
decrease in leasing and development fee income in the nine months ended
September 30, 2002 and a decrease in interest income in the nine months ended
September 30, 2002 due to lower average cash balances (during 2001, we had
higher cash balances as a result of proceeds from dispositions related to our
capital recycling program that were ultimately used in our stock repurchase
program) and the collection of notes receivable during 2001 and 2002.
Equity in earnings of unconsolidated affiliates increased $632,000, or
10.5%, to $6.3 million for the nine months ended September 30, 2002 from $5.7
million for the nine months ended September 30, 2001. The increase was primarily
a result of earnings from certain joint ventures formed with unrelated investors
in 2002.
Non-recurring litigation reserve was $2.7 million for the nine months ended
September 30, 2002, and was a result of an accrual of $2.7 million to increase
our reserves for the probable and estimated losses related to various legal
proceedings arising in the ordinary course of business and from previously
completed mergers and acquisitions.
Non-recurring compensation was $3.7 million for the nine months ended
September 30, 2002, and was related to the exercise of options that occurred
during the first and second quarters of 2002. When an option holder elected
22
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 previously
recorded as adjustments to stockholders' equity. However, the effect of such
exercises should have been 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. Management believes the impact of this non-recurring
charge has had no material effect on net income or stockholders' equity during
the first six months of 2002 as previously reported. In addition, management
believes the impact of APB 25 would not have had a material effect on financial
statements for prior periods. Commencing during the third quarter of 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.
Income before gain on disposition of land and depreciable assets, minority
interest, discontinued operations and extraordinary item equaled $62.2 million
and $98.8 million for the nine months ended September 30, 2002 and 2001,
respectively. The Company's net income allocated to minority interest totaled
$9.0 million and $14.0 million for the nine months ended September 30, 2002 and
2001, respectively. The Company recorded $23.1 million and $23.8 million in
preferred stock dividends for each of the nine months ended September 30, 2002
and 2001, respectively. The decrease was a result of the $18.5 million
repurchase by the Company of its preferred stock during 2001.
Gain on disposition of land and depreciable assets decreased $4.0 million,
or 24.8%, to $12.1 million for the nine months ended September 30, 2002 from
$16.1 million for the nine months ended September 30, 2001. In the first nine
months of 2001, the majority of the gain was comprised of a gain of
approximately $15.6 million related to the disposition of 1,672 apartment units
and a gain of approximately $1.0 million related to the disposition of 160 acres
of land, partly offset by a loss of approximately $508,000 related to the
disposition of 795,331 rentable square feet of office properties. In the first
nine months of 2002, the majority of the gain was comprised of a gain of
approximately $14.8 million related to the disposition of 533,263 rentable
square feet of office properties and a gain of approximately $6.5 million
related to the disposition of 78 acres of land and other non-revenue producing
assets, partly offset by an impairment loss of approximately $9.1 million.
Income from discontinued operations, net of minority interest, decreased
from $8.2 million for the nine months ended September 30, 2001 to $5.9 million
for the nine months ended September 30, 2002. The decrease was a result of the
decrease in income from discontinued operations for properties sold during 2002.
Loss on sale of discontinued operations, net of minority interest, was $1.4
million for the nine months ended September 30, 2002. This amount was comprised
of an impairment charge of $4.0 million related to properties held for sale at
September 30, 2002 offset by gains in aggregate of approximately $2.6 million
related to the disposition of 331,747 rentable square feet.
LIQUIDITY AND CAPITAL RESOURCES
Statement of Cash Flows. The following table sets forth the changes in the
Company's cash flows from the first nine months of 2001 as compared to the first
nine months of 2002 ($ in thousands):
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2002 2001 CHANGE
----------- ----------- ----------
Cash Provided By Operating Activities $ 171,173 $ 176,250 $ (5,077)
Cash Provided By Investing Activities 85,279 16,777 68,502
Cash Used in Financing Activities (243,030) (244,659) 1,629
The decrease in cash provided by operating activities was primarily the
result of (1) a decrease in average occupancy rates for our wholly-owned
portfolio; (2) our capital recycling program; and (3) a decrease in interest
income and development and leasing income in the first nine months of 2002. In
addition, the level of net cash provided by operating activities is also
affected by the timing of receipt of revenues and payment of expenses.
23
The increase in cash provided by investing activities was primarily a
result of a decrease of $104.0 million in additions to real estate assets in the
first nine months of 2002, partly offset by a decrease of $15.0 million in the
investments in notes receivable from the first nine months of 2001 to the first
nine months of 2002 and a decrease in the collection of advances from
subsidiaries of $27.6 million from the first nine months of 2001 to the first
nine months of 2002.
The decrease in cash used in financing activities was primarily a result of
a decrease of $151.9 million in the repurchase of Common Stock and Common Units
from the first nine months of 2001 to the first nine months of 2002, a decrease
of $2.4 million in distributions paid on Common Stock, Common Units and
Preferred Stock during 2002 and an increase in net proceeds from the sale of
Common Stock of $4.5 million during 2002. These decreases were partially offset
by an increase in repayments of $87.6 million and a decrease in borrowings of
$71.3 million on the unsecured revolving loan, mortgages and notes payable
during 2002.
Capitalization. Based on our total market capitalization of $3.42 billion
at September 30, 2002 (at the September 30, 2002 stock price of $23.40 and
assuming the redemption for shares of Common Stock of the 7.0 million Common
Units of minority interest in the Operating Partnership), our debt represented
approximately 47.6% of our total market capitalization. Our total indebtedness
at September 30, 2002 was $1.62 billion and was comprised of $523.4 million of
secured indebtedness with a weighted average interest rate of 7.9% and $1.1
billion of unsecured indebtedness with a weighted average interest rate of 6.5%.
We do not intend to reserve funds to retire existing secured or unsecured debt
upon maturity. For a more complete discussion of our long-term liquidity needs,
see "Current and Future Cash Needs."
The following table sets forth the maturity schedule of our mortgages and
notes payable as of September 30, 2002 ($ in thousands):
----------------------------------------------------------------
WITHIN WITHIN WITHIN
WITHIN 2-3 4-5 6 OR MORE
TOTAL 1 YEAR YEARS YEARS YEARS
----------- ----------- ----------- ----------- -----------
Fixed Rate Debt:
Unsecured:
MOPPRS (1)............................ $ 125,000 $ - $ - $ - $ 125,000
Put Option Notes (2).................. 100,000 - - - 100,000
Notes................................. 706,500 - 246,500 110,000 350,000
Secured:
Mortgages and loans payable........... 517,859 10,044 90,467 90,461 326,887
----------- ----------- ----------- ----------- -----------
Total Fixed Rate Debt..................... 1,449,359 10,044 336,967 200,461 901,887
----------- ----------- ----------- ----------- -----------
Variable Rate Debt:
Unsecured:
Term Loan............................. 20,000 - 20,000 - -
Revolving Loan........................ 151,500 - 151,500 - -
Secured:
Revolving Loan........................ 1,129 1,129 - - -
Mortgage loan payable................. 4,374 247 538 3,589 -
----------- ----------- ----------- ----------- -----------
Total Variable Rate Debt.................. 177,003 1,376 172,038 3,589 -
----------- ----------- ----------- ----------- -----------
Total Mortgages and Notes payable.............. $ 1,626,362 $ 11,420 $ 509,005 $ 204,050 $ 901,887
=========== =========== =========== =========== ===========
- ----------
(1) On February 2, 1998, the Operating Partnership sold $125.0 million of
MandatOry Par Put Remarketed Securities ("MOPPRS") due February 1, 2013.
The MOPPRS bear an interest rate of 6.835% from the date of issuance
through January 31, 2003. After January 31, 2003, the interest rate to
maturity on the MOPPRS will be 5.715% plus the applicable spread determined
as of January 31, 2003. In connection with the initial issuance of the
MOPPRS, a counter party was granted a remarketing option to purchase the
MOPPRS from the holders thereof on January 31, 2003 at 100.0% of the
principal amount. If the counter party elects not to exercise this option,
the Operating Partnership would be required to repurchase the MOPPRS from
the holders on January 31, 2003 at 100.0% of the principal amount plus
accrued and unpaid interest.
(2) On June 24, 1997, a trust formed by the Operating Partnership sold $100.0
million of Exercisable Put Option Securities due June 15, 2004 ("X-POS"),
which represent fractional undivided beneficial interests in the trust. The
assets of the trust consist
24
of, among other things, $100.0 million of Exercisable Put Option Notes due
June 15, 2011 (the "Put Option Notes"), issued by the Operating
Partnership. The Put Option Notes bear an interest rate of 7.19% from the
date of issuance through June 15, 2004. After June 15, 2004, the interest
rate to maturity on the Put Option Notes will be 6.39% plus the applicable
spread determined as of June 15, 2004. In connection with the initial
issuance of the Put Option Notes, a counter party was granted an option to
purchase the Put Option Notes from the trust on June 15, 2004 at 100.0% of
the principal amount. If the counter party elects not to exercise this
option, the Operating Partnership would be required to repurchase the Put
Option Notes from the Trust on June 15, 2004 at 100.0% of the principal
amount plus accrued and unpaid interest.
The mortgage and loans payable and the secured revolving loan were secured
by real estate assets with an aggregate carrying value of $907.3 million at
September 30, 2002.
The Operating Partnership's unsecured notes of $931.5 million bear interest
rates ranging from 6.8% to 8.1%, with interest payable semi-annually in arrears.
The premium and discount related to the issuance of the unsecured notes is being
amortized over the life of the respective notes as an adjustment to interest
expense. All of the unsecured notes, except for the MOPPRS and Put Option Notes,
are redeemable at any time prior to maturity at our option, subject to certain
conditions including the payment of make-whole amounts.
We currently have a $300.0 million unsecured revolving loan (with $151.5
million outstanding at September 30, 2002) that matures in December 2003 and a
$55.2 million secured revolving loan (with $1.1 million outstanding at September
30, 2002) that matures in March 2003. Our unsecured revolving loan also includes
a $150.0 million competitive sub-facility. Depending upon the corporate credit
ratings assigned to us from time to time by the various rating agencies, our
unsecured revolving loan bears variable rate interest at a spread above LIBOR
ranging from 0.70% to 1.55% and our secured revolving loan bears variable rate
interest at a spread above LIBOR ranging from 0.55% to 1.50%. We currently have
a credit rating of BBB- assigned by Standard & Poor's, a credit rating of BBB-
assigned by Fitch Inc. and a credit rating of Baa2 assigned by Moody's Investor
Service. As a result, interest currently accrues on borrowings under our
unsecured revolving loan at an average rate of LIBOR plus 95 basis points and
under our secured revolving loan at an average rate of LIBOR plus 85 basis
points. In addition, we are currently required to pay an annual facility fee
equal to .20% of the total commitment under the unsecured revolving loan.
The terms of each of our revolving loans and indenture that governs our
outstanding notes require us to comply with various operating and financial
covenants and performance ratios. We are currently in compliance with all such
requirements.
Joint Ventures. During the past several years, we have formed various joint
ventures with unrelated investors. We have retained minority equity interests
ranging from 12.5% to 50.0% in these joint ventures. As required by GAAP, we
have accounted for our joint venture activity using the equity method of
accounting, as we do not control these joint ventures. As a result, the assets
and liabilities of our joint ventures are not included on our balance sheet. As
of September 30, 2002, our joint ventures have approximately $593.4 million of
outstanding debt. All of the joint venture debt is non-recourse to us except (1)
in the case of customary exceptions pertaining to such matters as misuse of
funds, environmental conditions and material misrepresentations and (2) with
respect to $2.5 million of construction debt related to the MG-HIW Metrowest II,
LLC, which has been guaranteed by us subject to a pro rata indemnity from our
joint venture partner. Our partner in SF-HIW Harborview Plaza, LP has the right
to put its 80% equity interest in the partnership to us in cash at anytime
during the one year period commencing on September 11, 2014. The value of the
equity interest will be determined based upon the then fair market value of
SF-HIW Harborview Plaza, LP's assets and liabilities.
Interest Rate Hedging Activities. To meet in part our long-term liquidity
requirements, we borrow funds at a combination of fixed and variable rates.
Borrowings under our two revolving loans bear interest at variable rates. Our
long-term debt, which consists of long-term financings and the unsecured
issuance of debt securities, typically bears interest at fixed rates. In
addition, we have assumed fixed rate and variable rate debt in connection with
acquiring properties. Our interest rate risk management objective is to limit
the impact of interest rate changes on earnings and cash flows and to lower our
overall borrowing costs. To achieve these objectives, from time to time we enter
into interest rate hedge contracts such as collars, swaps, caps and treasury
lock agreements in order to mitigate our interest rate risk with respect to
various debt instruments. As of September 30, 2002, we have two $24.0 million
treasury lock agreements related to an anticipated five-year fixed rate
financing with two financial counterparties, which effectively lock the
five-year treasury rate at 3.72%. We do not hold or issue these derivative
contracts for trading or speculative purposes.
25
The interest rate on all of our variable rate debt is adjusted at one- and
three-month intervals, subject to settlements under these contracts. We also
enter into treasury lock agreements from time to time in order to limit our
exposure to an increase in interest rates with respect to future debt offerings.
Net payments made to counterparties under interest rate hedge contracts were
$415,051 during the nine months ended September 30, 2002 and were recorded as
additional interest expense.
Current and Future Cash Needs. Historically, rental revenue has been the
principal source of funds to meet our short-term liquidity requirements, which
primarily consist of operating expenses, debt service, stockholder distributions
and ordinary course capital expenditures. In addition, construction management,
maintenance, leasing and management fees have provided sources of cash flow. We
presently have no plans for major capital improvements to the existing
properties except for the $3.2 million renovation of Tampa Bay Park and the $7.9
million general and non-recurring renovations at Country Club Plaza. In
addition, we could incur tenant improvements and lease commissions related to
any releasing of space currently leased by WorldCom and US Air (see "Recent
Developments") and the redevelopment of the EPA site in Research Commons.
In addition to the requirements discussed above, our short-term (within the
next 12 months) liquidity requirements also include the funding of approximately
$15.2 million of our existing development activity and first generation tenant
improvements and lease commissions on properties placed in service that are not
fully leased. See "Business - Development Activity." We expect to fund our
short-term liquidity requirements through a combination of working capital, cash
flows from operations and the following:
. borrowings under our unsecured revolving loan (up to $149.0
million of availability as of November 8, 2002);
. borrowings under our secured revolving loan (up to $55.2 million
of availability as of November 8, 2002);
. the selective disposition of non-core assets;
. the sale or contribution of some of our wholly-owned properties,
development projects and development land to strategic joint
ventures to be formed with unrelated investors, which will have
the net effect of generating additional capital through such sale
or contributions; and
. the issuance of secured debt (at September 30, 2002, we had $2.8
billion of unencumbered real estate assets at cost).
Our long-term liquidity needs generally include the funding of existing and
future development activity, selective asset acquisitions and the retirement of
mortgage debt, amounts outstanding under the two revolving loans and long-term
unsecured debt. We remain committed to maintaining a flexible capital structure.
Accordingly, we expect to meet our long-term liquidity needs through a
combination of (1) the issuance by the Operating Partnership of additional
unsecured debt securities, (2) the issuance of additional equity securities by
the Company and the Operating Partnership as well as (3) the sources described
above with respect to our short-term liquidity. We expect to use such sources to
meet our long-term liquidity requirements either through direct payments or
repayment of borrowings under the unsecured revolving loan. We do not intend to
reserve funds to retire existing secured or unsecured indebtedness upon
maturity. Instead, we will seek to refinance such debt at maturity or retire
such debt through the issuance of equity or debt securities.
We anticipate that our available cash and cash equivalents and cash flows
from operating activities, with cash available from borrowings and other
sources, will be adequate to meet our capital and liquidity needs in both the
short and long term. However, if these sources of funds are insufficient or
unavailable, the Company's ability to make the expected distributions to
stockholders discussed below and satisfy other cash payments may be adversely
affected.
Distributions to Stockholders. To maintain its qualification as a REIT, the
Company must distribute to stockholders at least 90.0% of REIT taxable income.
The Company expects to use its cash flow from operating activities for
distributions to stockholders and for payment of recurring, non-incremental
revenue-generating
26
expenditures. The following factors will affect cash flows from operating
activities and, accordingly, influence the decisions of the board of directors
regarding distributions: (1) debt service requirements after taking into account
the repayment and restructuring of certain indebtedness; (2) scheduled increases
in base rents of existing leases; (3) changes in rents attributable to the
renewal of existing leases or replacement leases; (4) changes in occupancy rates
at existing properties and procurement of leases for newly acquired or developed
properties; and (5) operating expenses and capital replacement needs.
Share and Unit Repurchase Program. On April 25, 2001, we announced that the
Company's Board of Directors authorized the repurchase of up to an additional
5.0 million shares of Common Stock and Common Units. As of October 29, 2002,
under the new repurchase program, the Company had repurchased 1.4 million shares
of Common Stock and Common Units at a weighted average purchase price of $24.59
per share and a total purchase price of $34.6 million. In determining whether or
not to repurchase additional capital stock, we will consider, among other
factors, the effect of repurchases on our liquidity and the price of our Common
Stock.
Disposition and Joint Venture Activity. As part of our ongoing capital
recycling program, during the nine months ended September 30, 2002, we sold
856,000 rentable square feet of office properties and 101.7 acres of development
land for gross proceeds of $164.4 million. At September 30, 2002, we had
1,610,575 square feet of office properties and 112.8 acres of land under letter
of intent or contract for sale in various transactions with a carrying value of
$140.0 million. These transactions are subject to customary closing conditions,
including due diligence and documentation, and are expected to close during the
fourth quarter of 2002. However, we can provide no assurance that all or parts
of these transactions will be consummated. During the third quarter, we recorded
a $3.8 million impairment reserve related to two properties and two land parcels
that we expect to sell.
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 to 100.0%. At that time, we consolidated the assets and
liabilities, and recorded income and expenses on a consolidated basis.
On September 11, 2002, we contributed Harborview Plaza to SF-HIW Harborview
Plaza, LP, a newly formed limited partnership, in exchange for a 20.0% limited
partnership interest.
RECENT DEVELOPMENTS
WorldCom Bankruptcy. 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. We currently have 13 leases encompassing 982,921
square feet in eight locations with WorldCom and its affiliates, including four
leases encompassing 828,467 square feet in four locations with Intermedia
Communications, with an average remaining lease term of 7.8 years. Based on
September 2002 rental revenue, our annualized rental revenue from these leases
is $17.4 million, or approximately 3.7% of our total annualized rental revenue.
Approximately 185,000 square feet of the space leased by Intermedia has not yet
been upfitted or occupied and we estimate that a substantial portion of the
remaining Intermedia space currently appears to be significantly under-utilized.
During the third quarter of 2002, WorldCom rejected one lease encompassing 3,601
square feet that was due to expire in July 2003. As a result of this rejection,
we will file a proof of claim totaling approximately $65,000, which represents
the total amount of future rental payments remaining on the lease term.
In addition, our joint venture with Miller Global ("MG-HIW, LLC") has 11
leases encompassing 38,624 square feet in four locations with WorldCom and its
affiliates, including three leases encompassing 4,703 square feet in two
locations with Intermedia Communications, with lease expirations ranging from
2002 to 2007. We have a 20.0% ownership in this joint venture and, based on
September 2002 rental revenue, our proportionate share of the annualized rental
revenue generated from these leases is $197,165.
Approximately 81.5% of the annualized rental revenue related to our leases
with WorldCom and its affiliates, including our pro rata share of the annualized
rental revenue related to MG-HIW, LLC, is derived from properties in Tampa. The
remainder of this revenue is derived from properties in Greenville, South
Carolina, Richmond, Raleigh, Orlando and Nashville. WorldCom and its affiliates
are current on base rental payments through November 30, 2002. Since June 30,
2002, we have recorded rental revenue from WorldCom and its affiliates on a cash
basis, rather than on a straight-line basis.
Due to the inherent uncertainties of the bankruptcy process, we are not
able to predict the impact of WorldCom's bankruptcy on its leasing and occupancy
of our properties or on our financial condition and results of operations.
U.S. Airways Bankruptcy. 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. We currently have seven leases
encompassing 414,059 square feet with US Airways and its affiliates with an
average
27
remaining lease term of 5.1 years as of September 30, 2002. Based on September
2002 rental revenue, our annualized rental revenue from these leases is $6.9
million, or approximately 1.5% of our total annualized rental revenue.
Approximately 55,000 square feet of space is currently being sub-leased by US
Airways to a third party and we estimate that the balance of the space is
approximately 75 percent utilized by US Airways as a reservation call center and
for certain revenue accounting and information technology functions. All of the
414,059 square feet of space is located in Winston-Salem, North Carolina.
US Airways is current on base rental payments through November 30, 2002,
except for pre-petition rent in the amount of $185,428 from August 1, 2002 up to
the date of the US Airways bankruptcy filing, which was August 11, 2002. We have
an accrued straight line rent receivable from US Airways in the amount of
$500,508 as of September 30, 2002.
Due to the inherent uncertainties of the bankruptcy process, we are not
able to predict the impact of US Airways' bankruptcy on its leasing and
occupancy of our properties or on our financial condition and results of
operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment of disposal of long-lived assets.
This standard harmonizes the accounting for impaired assets and resolves some of
the implementation issues as originally described in SFAS No. 121. We adopted
SFAS No. 144 in the first quarter of 2002. Income from discontinued operations,
net of minority interest and the gain/(loss) on sale of discontinued operations,
net of minority interest, for properties meeting the criteria in accordance with
SFAS No. 144 are reflected in the consolidated statements of income as
discontinued operations for all periods presented.
In April, 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections", which rescinds Statement No. 4, which required all gains and
losses from extinguishment of debt to be aggregated, and if material, classified
as an extraordinary item, net of related income tax effect. The provisions of
SFAS No. 145 related to the rescission of Statement No. 4 are effective for
financial statements issued for fiscal years after May 15, 2002. We will adopt
SFAS No. 145 in the fourth quarter of 2002. We do not anticipate that the
adoption of this statement will have a material effect on our results of
operations.
FUNDS FROM OPERATIONS AND CASH AVAILABLE FOR DISTRIBUTIONS
We consider funds from operations ("FFO") to be a useful financial
performance measure of the operating performance of an equity REIT because,
together with net income and cash flows, FFO provides investors with an
additional basis to evaluate the ability of a REIT to incur and service debt and
to fund acquisitions and other capital expenditures. FFO does not represent net
income or cash flows from operating, investing or financing activities as
defined by GAAP. It should not be considered as an alternative to net income as
an indicator of our operating performance or to cash flows as a measure of
liquidity. FFO does not measure whether cash flow is sufficient to fund all cash
needs, including principal amortization, capital improvements and distributions
to stockholders. Further, FFO as disclosed by other REITs may not be comparable
to our calculation of FFO, as described below. FFO and cash available for
distributions should not be considered as alternatives to net income as an
indication of our performance or to cash flows as a measure of liquidity.
FFO equals income from continuing operations before minority interest
(computed in accordance with GAAP) excluding gains (or losses) from debt
restructuring and sales of depreciable property and dividends paid to preferred
shareholders, plus depreciation and amortization. In addition, FFO includes both
recurring and non-recurring operating results and income/(loss) from
discontinued operations. As a result, non-recurring items that are not defined
as "extraordinary" under GAAP are reflected in the calculation of FFO.
Cash available for distribution is defined as funds from operations
increased by the amortization of deferred financing activities and reduced by
rental income from straight-line rents and non-revenue enhancing capital
expenditures for building improvements and tenant improvements and lease
commissions related to second generation space.
28
FFO and cash available for distribution for the three and nine month
periods ended September 30, 2002 and 2001 are summarized in the following table
(in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -------------------------
2002 2001 2002 2001
--------- --------- -------- ---------
FUNDS FROM OPERATIONS:
Income before gain on disposition of land and depreciable
assets, minority interest, discontinued operations and
extraordinary item..................................... $ 14,468 $ 32,722 $ 62,231 $ 98,787
Add/(Deduct):
Dividends to preferred shareholders.................. (7,713) (7,713) (23,139) (23,787)
Prepayment penalties - unconsolidated sub............ 325 -- 325 --
Transition adjustment upon adoption of FAS 133....... -- -- -- 556
Income from discontinued operations.................. 1,970 2,730 6,715 9,326
(Loss)/gain on disposition of land................... 741 (538) 6,498 1,025
Depreciation and amortization........................ 32,827 29,503 95,761 87,826
Depreciation on unconsolidated affiliates............ 2,432 1,911 7,065 5,815
--------- --------- -------- ---------
Funds from operations.............................. 45,050 58,615 155,456 179,548
CASH AVAILABLE FOR DISTRIBUTION:
Add/(Deduct):
Rental income from straight-line rents............... (1,222) (2,701) (2,540) (8,947)
Non-recurring compensation expense................... 3,700 -- 3,700 --
Non-recurring litigation reserve..................... 2,700 -- 2,700 --
Amortization of deferred financing costs............. 347 324 1,027 1,664
Non-incremental revenue generating capital
expenditures (1):
Building improvements paid......................... (1,740) (2,872) (4,861) (5,959)
Second generation tenant improvements paid......... (5,824) (4,834) (12,735) (12,610)
Second generation lease commissions paid........... (3,694) (2,867) (9,353) (11,195)
--------- --------- -------- ---------
Cash available for distribution.................. $ 39,317 $ 45,665 $133,394 $ 142,501
========= ========= ======== =========
Weighted average shares/units outstanding - basic (2)..... 60,436 61,363 60,357 62,333
========= ========= ======== =========
Weighted average shares/units outstanding - diluted (2)... 60,653 61,783 60,730 62,727
========= ========= ======== =========
DIVIDEND PAYOUT RATIOS:
Funds from operations................................ 78.8% 61.7% 68.6% 60.3%
========= ========= ======== =========
Cash available for distribution...................... 90.2% 79.1% 79.9% 75.9%
========= ========= ======== =========
- ----------
(1) Amounts represent cash expenditures.
(2) Assumes redemption of Common Units for shares of Common Stock. Minority
interest Common Unit holders and the stockholders of the Company share
equally on a per Common Unit and per share basis; therefore, the per share
information is unaffected by conversion.
29
PROPERTY INFORMATION
The following table sets forth certain information with respect to our
wholly owned in-service and development properties (excluding apartment units)
as of September 30, 2002 and 2001:
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
-------------------------- ----------------------------
PERCENT PERCENT
RENTABLE LEASED/ RENTABLE LEASED/
SQUARE FEET PRE-LEASED SQUARE FEET PRE-LEASED
----------- ---------- ----------- ----------
IN-SERVICE:
Office 25,861,000 86.3% 24,829,000 92.9%
Industrial 10,468,000 86.2% 10,396,000 92.3%
Retail (1) 1,650,000 95.4% 1,628,000 95.1%
---------- ----- ---------- -----
Total or Weighted Average 37,979,000 86.7% 36,853,000 92.7%
========== ===== ========== =====
DEVELOPMENT:
Completed--Not Stabilized
Office 568,000 17.3% 1,188,000 62.1%
Industrial 136,000 29.0% 184,000 37.2%
Retail 20,000 90.0% -- --
---------- ----- ---------- -----
Total or Weighted Average 724,000 21.5% 1,372,000 58.8%
========== ===== ========== =====
In Process
Office (2) 100,000 42.0% 1,285,000 52.5%
Industrial (2) 60,000 20.0% 258,000 47.3%
Retail -- -- 20,000 90.0%
---------- ----- ---------- -----
Total or Weighted Average 160,000 33.8% 1,563,000 52.1%
========== ===== ========== =====
TOTAL:
Office 26,529,000 27,302,000
Industrial 10,664,000 10,838,000
Retail (1) 1,670,000 1,648,000
---------- ----------
Total or Weighted Average 38,863,000 39,788,000
========== ==========
SAME STORE:
Office 23,408,000 87.7% 21,076,000 92.7%
Industrial 10,041,000 86.3% 9,694,000 91.7%
Retail (1) 1,650,000 95.4% 1,450,000 95.0%
---------- ----- ---------- -----
Total or Weighted Average 35,099,000 87.2% 32,220,000 92.5%
========== ===== ========== =====
- ----------
(1) Excludes Kansas City's basement space.
(2) Includes projects that we have an option to purchase.
30
The following table sets forth information concerning the 20 largest
customers of our wholly-owned properties as of September 30, 2002 ($ in
thousands):
PERCENT OF TOTAL AVERAGE
NUMBER RENTAL ANNUALIZED ANNUALIZED REMAINING LEASE
TENANT OF LEASES SQUARE FEET RENTAL REVENUE(1) RENTAL REVENUE(1) TERM IN YEARS
- ------ --------- ----------- ----------------------------------- -------------
Intermedia Communications/
WorldCom (2)..................... 13 982,921 $ 17,396 3.70% 7.8
AT&T................................ 10 854,992 14,046 2.99 5.4
Federal Government.................. 59 688,320 13,664 2.91 5.0
Capital One Services................ 6 587,188 10,208 2.17 5.9
Caterpillar Financial Services...... 1 300,901 7,899 1.68 12.4
PricewaterhouseCoopers.............. 7 307,158 7,038 1.50 7.4
US Air.............................. 7 414,059 6,909 1.47 5.1
State of Georgia.................... 10 356,993 6,783 1.44 6.3
Sara Lee............................ 9 1,198,534 4,523 0.96 2.7
Bell South.......................... 11 212,011 4,396 0.93 1.6
IBM................................. 5 203,802 4,260 0.91 3.0
Northern Telecom, Inc............... 1 246,000 3,235 0.69 5.4
Lockton Companies, Inc.............. 1 127,485 3,117 0.66 12.4
Bank of America..................... 23 152,017 2,998 0.64 2.6
Volvo............................... 5 214,783 2,979 0.63 6.8
International Paper Co.............. 10 121,174 2,887 0.61 0.3
Hartford Insurance.................. 6 134,021 2,886 0.61 3.5
Business Telecom, Inc............... 4 145,497 2,832 0.60 2.5
T-Mobile USA, Inc................... 3 120,561 2,808 0.60 3.7
Ford Motor Company.................. 2 129,158 2,661 0.57 7.2
--- --------- -------- ----- ----
Total............................... 193 7,497,575 $123,525 26.27% 5.9
=== ========= ======== ===== ====
(1) Annualized Rental Revenue is September 2002 rental revenue (base rent plus
operating expense pass throughs) multiplied by 12.
(2) Since June 30, 2002, we have recorded rental revenue from WorldCom and its
affiliates on a cash basis, rather than on a straight-line basis.
31
As of September 30, 2002, we were developing six suburban office
properties, two industrial properties and one retail property totaling 884,000
rentable square feet of office and industrial space. The following table
summarizes these development projects. In addition to the properties described
in this table, we are developing with a joint venture partner one additional
property totaling 285,000 rentable square feet. At September 30, 2002, this one
development project had an aggregate anticipated total investment of $69.0
million and was 59.0% pre-leased.
IN-PROCESS
ANTICIPATED
RENTABLE TOTAL INVESTMENT PRE-LEASING ESTIMATED ESTIMATED
PROPERTY MARKET SQUARE FEET INVESTMENT AT 09/30/02 PERCENTAGE(1) COMPLETION STABILIZATION(2)
- -------- ------ ----------- ----------- ----------- ------------- ---------- ----------------
($ in thousands)
OFFICE:
801 Raleigh Corporate
Center Research Triangle 100,000 $ 12,016 $ 9,050 42% 4Q02 2Q04
--------- --------- ------- ----
In-Process Office
Total or Weighted
Average 100,000 $ 12,016 $ 9,050 42%
========= ========= ======= ====
INDUSTRIAL:
Tradeport V (3) Atlanta 60,000 $ 2,913 $ 1,420 20% 4Q02 4Q03
--------- --------- ------- ----
In-Process Industrial
Total or Weighted
Average 60,000 $ 2,913 $ 1,420 20%
========= ========= ======= ====
Total or Weighted
Average of all
In-Process
Development Projects 160,000 $ 14,929 $10,470 34%
========= ========= ======= ====
- ----------
(1) Letters of intent comprise 4.5% of the total pre-leasing percentage.
(2) We generally consider a development project to be stabilized upon the
earlier of the first date such project is at least 95% occupied or one year
from the date of completion.
(3) We are developing this property for a third party and own an option to
purchase.
32
COMPLETED--NOT STABILIZED (3)
ANTICIPATED
RENTABLE TOTAL INVESTMENT PRE-LEASING ESTIMATED ESTIMATED
PROPERTY MARKET SQUARE FEET INVESTMENT AT 09/30/02 PERCENTAGE(1) COMPLETION STABILIZATION(2)
- -------- ------ ----------- ---------- ----------- ------------- ---------- ----------------
($ in thousands)
OFFICE:
Seven Springs I Nashville 131,000 $ 15,556 $ 13,048 12% 1Q02 1Q03
1501 Highwoods
Boulevard Piedmont Triad 98,000 11,290 10,156 4 4Q01 1Q03
Centre Green Four Research Triangle 100,000 11,764 9,613 0 4Q01 2Q03
GlenLake I Research Triangle 158,000 22,417 19,457 40 4Q01 2Q03
Shadow Creek II Memphis 81,000 8,750 7,110 19 4Q01 4Q03
--------- --------- -------- ----
Completed-Not
Stabilized Office
Total or Weighted
Average 568,000 $ 69,777 $ 59,384 17%
========= ========= ======== ====
Industrial:
Newpoint IV Atlanta 136,000 $ 5,288 $ 4,875 29% 4Q01 1Q03
--------- --------- -------- ----
Completed-Not
Stabilized
Industrial
Total or
Weighted Average 136,000 $ 5,288 $ 4,875 29%
========= ========= ======== ====
Retail:
Granada Shops Kansas City 20,000 $ 5,020 $ 4,120 90% 4Q01 2Q03
--------- --------- -------- ----
Completed-Not
Stabilized Retail
Total or Weighted
Average 20,000 $ 5,020 $ 4,120 90%
========= ========= ======== ====
Total or Weighted
Average of all
Completed-
Not Stabilized
Development
Projects 724,000 $ 80,085 $ 68,379 22%
========= ========= ======== ====
Total or Weighted
Average of all
Development Projects 884,000 $ 95,014 $ 78,849 24%
========= ========= ======== ====
- ----------
(1) Letters of intent comprise 4.5% of the total pre-leasing percentage.
(2) We generally consider a development project to be stabilized upon the
earlier of the first date such project is at least 95% occupied or one year
from the date of completion.
(3) These properties contributed an aggregate of $61,000 in Net Operating
Income (Property Revenue - Property Expense) in the third quarter of 2002.
33
DEVELOPMENT ANALYSIS
ANTICIPATED
RENTABLE TOTAL PRE-LEASING
SQUARE FEET INVESTMENT PERCENTAGE(1)
----------- ---------- -------------
($ in thousands)
Summary by Estimated Stabilization Date:
First Quarter 2003........................................... 365,000 $ 32,134 15%
Second Quarter 2003.......................................... 278,000 39,201 29%
Fourth Quarter 2003.......................................... 141,000 11,663 19%
Second Quarter 2004.......................................... 100,000 12,016 42%
--------- --------- ---
Total or Weighted Average.................................... 884,000 $ 95,014 24%
========= ========= ===
Summary by Market:
Atlanta...................................................... 196,000 $ 8,201 26%
Kansas City.................................................. 20,000 5,020 90%
Memphis...................................................... 81,000 8,750 19%
Nashville.................................................... 131,000 15,556 12%
Piedmont Triad............................................... 98,000 11,290 4%
Research Triangle............................................ 358,000 46,197 29%
--------- --------- ---
Total or Weighted Average.................................... 884,000 $ 95,014 24%
========= ========= ===
Build-to-Suit................................................ -- $ -- --%
Multi-Tenant................................................. 884,000 95,014 24%
--------- --------- ---
Total or Weighted Average.................................... 884,000 $ 95,014 24%
========= ========= ===
AVERAGE AVERAGE
RENTABLE ANTICIPATED
SQUARE TOTAL AVERAGE
FEET INVESTMENT PRE-LEASING(1)
-------- -------- --------------
($ in thousands)
Average Per Property By Type:
Office....................................................... 111,333 $ 13,632 21%
Industrial................................................... 98,000 4,101 26%
Retail....................................................... 20,000 5,020 90%
-------- -------- ---
Weighted Average............................................. 98,222 $ 10,557 24%
======== ======== ===
- ----------
(1) Letters of intent comprise 4.5% of the total pre-leasing percentage.
34
The following table sets forth certain information about leasing activities
at our wholly owned in-service properties (excluding apartment units) for the
three months ended September 30, June 30 and March 31, 2002 and December 31,
2001.
OFFICE LEASING STATISTICS THREE MONTHS ENDED
----------------------------------------------------------------
9/30/02 6/30/02 3/31/02 12/31/01 AVERAGE
----------- ----------- ----------- ----------- -----------
NET EFFECTIVE RENTS RELATED TO RE-LEASED SPACE:
Number of lease transactions (signed leases)... 184 162 110 116 143
Rentable square footage leased................. 882,115 874,467 417,102 437,454 652,785
Average per rentable square foot over the
lease term:
Base rent................................... $ 17.26 $ 16.86 $ 16.83 $ 17.85 $ 17.20
Tenant improvements......................... (1.06) (0.86) (0.98) (1.19) (1.02)
Leasing commissions......................... (0.60) (0.56) (0.78) (0.97) (0.73)
Rent concessions............................ (0.22) (0.14) (0.15) (0.11) (0.16)
----------- ----------- ----------- ----------- -----------
Effective rent.............................. $ 15.38 $ 15.30 $ 14.92 $ 15.58 $ 15.29
Expense stop(1)............................. (5.54) (5.17) (5.17) (4.50) (5.10)
----------- ----------- ----------- ----------- -----------
Equivalent effective net rent............... $ 9.84 $ 10.13 $ 9.75 $ 11.08 $ 10.20
=========== =========== =========== =========== ===========
Average term in years.......................... 3.6 4.1 4.1 4.6 4.1
=========== =========== =========== =========== ===========
CAPITAL EXPENDITURES RELATED TO RE-LEASED SPACE:
Tenant Improvements:
Total dollars committed under
signed leases............................... $ 4,396,259 $ 3,481,988 $ 2,031,231 $ 2,647,115 $ 3,139,148
Rentable square feet........................ 882,115 874,467 417,102 437,454 652,785
----------- ----------- ----------- ----------- -----------
Per rentable square foot.................... $ 4.98 $ 3.98 $ 4.87 $ 6.05 $ 4.81
=========== =========== =========== =========== ===========
Leasing Commissions:
Total dollars committed under
signed leases............................... $ 1,352,691 $ 1,272,854 $ 984,220 $ 1,277,523 $ 1,221,822
Rentable square feet........................ 882,115 874,467 417,102 437,454 652,785
----------- ----------- ----------- ----------- -----------
Per rentable square foot.................... $ 1.53 $ 1.46 $ 2.36 $ 2.92 $ 1.87
=========== =========== =========== =========== ===========
Total:
Total dollars committed under
signed leases............................... $ 5,748,950 $ 4,754,842 $ 3,015,450 $ 3,924,637 $ 4,360,970
Rentable square feet........................ 882,115 874,467 417,102 437,454 652,785
----------- ----------- ----------- ----------- -----------
Per rentable square foot.................... $ 6.52 $ 5.44 $ 7.23 $ 8.97 $ 6.68
=========== =========== =========== =========== ===========
- ----------
(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.
35
INDUSTRIAL LEASING STATISTICS THREE MONTHS ENDED
----------------------------------------------------------------
9/30/02 6/30/02 3/31/02 12/31/01 Average
----------- ----------- ----------- ----------- -----------
NET EFFECTIVE RENTS RELATED TO RE-LEASED SPACE:
Number of lease transactions (signed leases)... 45 32 15 31 31
Rentable square footage leased................. 593,188 1,005,765 78,844 894,865 643,166
Average per rentable square foot over the
lease term:
Base rent................................... $ 4.37 $ 3.58 $ 6.95 $ 3.52 $ 4.61
Tenant improvements......................... (0.23) (0.29) (1.10) (0.24) (0.47)
Leasing commissions......................... (0.14) (0.14) (0.21) (0.10) (0.15)
Rent concessions............................ (0.02) (0.03) -- -- (0.01)
----------- ----------- ----------- ----------- -----------
Effective rent.............................. $ 3.98 $ 3.12 $ 5.64 $ 3.18 $ 3.98
Expense stop (1)............................ (0.39) (0.09) (0.72) (0.18) (0.35)
----------- ----------- ----------- ----------- -----------
Equivalent effective net rent............... $ 3.59 $ 3.03 $ 4.92 $ 3.00 $ 3.63
=========== =========== =========== =========== ===========
Average term in years.......................... 1.6 6.3 4.1 2.2 3.6
=========== =========== =========== =========== ===========
CAPITAL EXPENDITURES RELATED TO RE-LEASED SPACE:
Tenant Improvements:
Total dollars committed under
signed leases .............................. $ 522,115 $ 2,088,547 $ 386,263 $ 661,591 $ 914,629
Rentable square feet........................ 593,188 1,005,765 78,844 894,865 643,166
----------- ----------- ----------- ----------- -----------
Per rentable square foot.................... $ 0.88 $ 2.08 $ 4.90 $ 0.74 $ 1.42
=========== =========== =========== =========== ===========
Leasing Commissions:
Total dollars committed under
signed leases .............................. $ 141,694 $ 797,939 $ 44,100 $ 257,010 $ 310,186
Rentable square feet........................ 593,188 1,005,765 78,844 894,865 643,166
----------- ----------- ----------- ----------- -----------
Per rentable square foot.................... $ 0.24 $ 0.79 $ 0.56 $ 0.29 $ 0.48
=========== =========== =========== =========== ===========
Total:
Total dollars committed under
signed leases .............................. $ 663,809 $ 2,886,486 $ 430,363 $ 918,601 $ 1,224,815
Rentable square feet........................ 593,188 1,005,765 78,844 894,865 643,166
----------- ----------- ----------- ----------- -----------
Per rentable square foot.................... $ 1.12 $ 2.87 $ 5.46 $ 1.03 $ 1.90
=========== =========== =========== =========== ===========
- ----------
(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.
36
RETAIL LEASING STATISTICS THREE MONTHS ENDED
----------------------------------------------------------------
9/30/02 6/30/02 3/31/02 12/31/01 AVERAGE
----------- ----------- ----------- ----------- -----------
Net Effective Rents Related to Re-Leased Space:
Number of lease transactions (signed leases)... 13 13 12 12 13
Rentable square footage leased................. 28,267 52,527 59,649 26,019 41,616
Average per rentable square foot over the
lease term:
Base rent................................... $ 20.14 $ 18.15 $ 25.66 $ 15.75 $ 19.93
Tenant improvements......................... (0.60) (1.83) (1.87) (0.63) (1.23)
Leasing commissions......................... (0.88) (0.65) (0.35) (0.82) (0.68)
Rent concessions............................ -- (0.03) (0.02) -- (0.01)
----------- ----------- ----------- ----------- -----------
Effective rent.............................. $ 18.66 $ 15.64 $ 23.42 $ 14.30 $ 18.01
Expense stop (1)............................ -- (1.02) -- -- (0.26)
----------- ----------- ----------- ----------- -----------
Equivalent effective net rent............... $ 18.66 $ 14.62 $ 23.42 $ 14.30 $ 17.75
=========== =========== =========== =========== ===========
Average term in years.......................... 5.6 7.0 6.5 6.7 6.4
=========== =========== =========== =========== ===========
Capital Expenditures Related to Re-leased Space:
Tenant Improvements:
Total dollars committed under
signed leases .............................. $ 121,500 $ 1,077,825 $ 738,605 $ 148,860 $ 521,698
Rentable square feet........................ 28,267 52,527 59,649 26,019 41,616
----------- ----------- ----------- ----------- -----------
Per rentable square foot.................... $ 4.30 $ 20.52 $ 12.38 $ 5.72 $ 12.54
=========== =========== =========== =========== ===========
Leasing Commissions:
Total dollars committed under
signed leases .............................. $ 91,405 $ 151,268 $ 61,981 $ 73,314 $ 94,492
Rentable square feet........................ 28,267 52,527 59,649 26,019 41,616
----------- ----------- ----------- ----------- -----------
Per rentable square foot.................... $ 3.23 $ 2.88 $ 1.04 $ 2.82 $ 2.27
=========== =========== =========== =========== ===========
Total:
Total dollars committed under
signed leases .............................. $ 212,905 $ 1,229,093 $ 800,586 $ 222,174 $ 616,189
Rentable square feet........................ 28,267 52,527 59,649 26,019 41,616
----------- ----------- ----------- ----------- -----------
Per rentable square foot.................... $ 7.53 $ 23.40 $ 13.42 $ 8.54 $ 14.81
=========== =========== =========== =========== ===========
- ------------------
(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.
37
The following tables set forth scheduled lease expirations at our wholly
owned in-service properties (excluding apartment units) as of September 30,
2002, assuming no tenant exercises renewal options.
OFFICE PROPERTIES:
AVERAGE PERCENTAGE OF
PERCENTAGE OF ANNUAL LEASED RENTS
RENTABLE LEASED ANNUAL RENTS RENTAL RATE REPRESENTED
NUMBER OF SQUARE FEET SQUARE FOOTAGE UNDER PER SQUARE BY
LEASE LEASES SUBJECT TO REPRESENTED BY EXPIRING FOOT FOR EXPIRING
EXPIRING EXPIRING EXPIRING LEASES EXPIRING LEASES LEASES (1) EXPIRATIONS LEASES
- -------- -------- --------------- --------------- -------------- ----------- -------------
($ in thousands)
2002 (2) 319 1,173,528 5.2% $ 20,902 $17.81 5.4%
2003 569 3,385,788 15.1% 58,098 17.16 14.8%
2004 502 2,896,061 12.9% 52,267 18.05 13.4%
2005 502 3,285,499 14.8% 56,914 17.32 14.6%
2006 308 2,793,578 12.5% 50,559 18.10 13.0%
2007 191 1,825,640 8.2% 29,390 16.10 7.5%
2008 94 1,919,826 8.6% 30,470 15.87 7.8%
2009 30 768,022 3.4% 13,288 17.30 3.4%
2010 41 1,418,672 6.3% 26,152 18.43 6.7%
2011 38 1,155,693 5.2% 22,322 19.31 5.7%
Thereafter 126 1,751,987 7.8% 29,993 17.12 7.7%
----- ---------- ----- -------- ------ -----
2,720 22,374,294 100.0% $390,355 $17.45 100.0%
===== ========== ===== ======== ====== =====
INDUSTRIAL PROPERTIES:
AVERAGE PERCENTAGE OF
PERCENTAGE OF ANNUAL LEASED RENTS
RENTABLE LEASED ANNUAL RENTS RENTAL RATE REPRESENTED
NUMBER OF SQUARE FEET SQUARE FOOTAGE UNDER PER SQUARE BY
LEASE LEASES SUBJECT TO REPRESENTED BY EXPIRING FOOT FOR EXPIRING
EXPIRING EXPIRING EXPIRING LEASES EXPIRING LEASES LEASES (1) EXPIRATIONS LEASES
- -------- -------- --------------- --------------- -------------- ----------- -------------
($ in thousands)
2002 (3) 70 955,002 10.5% $ 4,047 $ 4.24 9.8%
2003 95 1,135,693 12.5% 5,922 5.21 14.3%
2004 97 2,522,192 27.8% 9,687 3.84 23.5%
2005 66 1,109,012 12.2% 5,622 5.07 13.6%
2006 35 744,758 8.2% 4,160 5.59 10.1%
2007 27 1,311,658 14.4% 5,542 4.23 13.4%
2008 7 214,340 2.4% 1,441 6.72 3.5%
2009 8 318,813 3.5% 2,361 7.41 5.7%
2010 3 46,508 0.5% 348 7.48 0.8%
2011 2 35,475 0.4% 178 5.02 0.4%
Thereafter 20 691,120 7.6% 2,031 2.94 4.9%
---- ---------- ----- -------- ------ -----
430 9,084,571 100.0% $ 41,339 $ 4.55 100.0%
==== ========== ===== ======== ====== =====
- ----------
(1) Annual Rents Under Expiring Leases are September 2002 rental revenue (base
rent plus operating expense pass-throughs) multiplied by 12.
(2) Includes 137,000 square feet of leases that are a month-to-month basis, or
0.5% of total annualized revenue. (3) Includes 160,000 square feet of
leases that are a month-to-month basis, or 0.2% of total annualized
revenue.
38
RETAIL PROPERTIES:
AVERAGE PERCENTAGE OF
PERCENTAGE OF ANNUAL LEASED RENTS
RENTABLE LEASED ANNUAL RENTS RENTAL RATE REPRESENTED
NUMBER OF SQUARE FEET SQUARE FOOTAGE UNDER PER SQUARE BY
LEASE LEASES SUBJECT TO REPRESENTED BY EXPIRING FOOT FOR EXPIRING
EXPIRING EXPIRING EXPIRING LEASES EXPIRING LEASES LEASES (1) EXPIRATIONS LEASES
- -------- -------- --------------- --------------- -------------- ----------- -------------
($ in thousands)
2002 (2) 26 79,423 5.0% $ 1,427 $17.97 3.7%
2003 35 87,076 5.5% 2,094 24.05 5.4%
2004 42 211,027 13.4% 2,824 13.38 7.3%
2005 40 93,849 5.9% 2,748 29.28 7.1%
2006 38 111,064 7.0% 2,784 25.07 7.2%
2007 35 128,631 8.1% 2,451 19.05 6.3%
2008 25 124,318 7.8% 4,309 34.66 11.2%
2009 21 168,355 10.6% 3,304 19.63 8.6%
2010 18 97,372 6.1% 2,872 29.50 7.4%
2011 19 108,418 6.8% 2,584 23.83 6.7%
Thereafter 28 378,565 23.8% 11,241 29.69 29.1%
---- ---------- ----- -------- ------ -----
327 1,588,098 100.0% $ 38,638 $24.33 100.0%
==== ========== ===== ======== ====== =====
TOTAL:
AVERAGE PERCENTAGE OF
PERCENTAGE OF ANNUAL LEASED RENTS
RENTABLE LEASED ANNUAL RENTS RENTAL RATE REPRESENTED
NUMBER OF SQUARE FEET SQUARE FOOTAGE UNDER PER SQUARE BY
LEASE LEASES SUBJECT TO REPRESENTED BY EXPIRING FOOT FOR EXPIRING
EXPIRING EXPIRING EXPIRING LEASES EXPIRING LEASES LEASES (1) EXPIRATIONS LEASES
- -------- -------- --------------- --------------- -------------- ----------- -------------
($ in thousands)
2002 (3) 415 2,207,953 6.7% $ 26,376 $11.95 5.6%
2003 699 4,608,557 14.0% 66,114 14.35 14.2%
2004 641 5,629,280 17.1% 64,778 11.51 13.8%
2005 608 4,488,360 13.6% 65,284 14.55 13.9%
2006 381 3,649,400 11.0% 57,503 15.76 12.2%
2007 253 3,265,929 9.9% 37,383 11.45 7.9%
2008 126 2,258,484 6.8% 36,220 16.04 7.7%
2009 59 1,255,190 3.8% 18,953 15.10 4.0%
2010 62 1,562,552 4.7% 29,372 18.80 6.2%
2011 59 1,299,586 3.9% 25,084 19.30 5.3%
Thereafter 174 2,821,672 8.5% 43,265 15.33 9.2%
----- ---------- ----- -------- ------ -----
3,477 33,046,963 100.0% $470,332 $14.23 100.0%
===== ========== ===== ======== ====== =====
- ----------
(1) Annual Rents Under Expiring Leases are September 2002 rental revenue (base
rent plus operating expense pass-throughs) multiplied by 12.
(2) Includes 36,000 square feet of leases that are a month-to-month basis, or
0.1% of total annualized revenue. (3) Includes 333,000 square feet of
leases that are a month-to-month basis, or 0.7% of total annualized
revenue.
INFLATION
In the last five years, inflation has not had a significant impact on us
because of the relatively low inflation rate in our geographic areas of
operation. Most of the leases require the tenants to pay their share of
increases in operating expenses, including common area maintenance, real estate
taxes and insurance, thereby reducing our exposure to inflation.
39
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The effects of potential changes in interest rates are discussed below. Our
market risk discussion includes "forward-looking statements" and represents an
estimate of possible changes in fair value or future earnings that would occur
assuming hypothetical future movements in interest rates. These disclosures are
not precise indicators of expected future losses, but only indicators of
reasonably possible losses. As a result, actual future results may differ
materially from those presented. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
for a description of our accounting policies and other information related to
these financial instruments.
To meet in part our long-term liquidity requirements, we borrow funds at a
combination of fixed and variable rates. Borrowings under our revolving loans
bear interest at variable rates. Our long-term debt, which consists of long-term
financings and the issuance of debt securities, typically bears interest at
fixed rates. In addition, we have assumed fixed rate and variable rate debt in
connection with acquiring properties. Our interest rate risk management
objective is to limit the impact of interest rate changes on earnings and cash
flows and to lower our overall borrowing costs. To achieve these objectives,
from time to time we enter into interest rate hedge contracts such as collars,
swaps, caps and treasury lock agreements in order to mitigate our interest rate
risk with respect to various debt instruments. As of September 30, 2002, we have
two $24.0 million treasury lock agreements related to an anticipated five-year
fixed rate financing with two financial counterparties, which effectively lock
the five-year treasury rate at 3.72%. If interest rates increase by 100 basis
points, the aggregate fair market value of these interest rate hedge contracts
as of September 30, 2002 would increase by approximately $2.3 million. If
interest rates decrease by 100 basis points, the aggregate fair market value of
these interest rate hedge contracts as of September 30, 2002 would decrease by
approximately $2.4 million. We do not hold or issue these derivative contracts
for trading or speculative purposes.
As of September 30, 2002, we had approximately $177.0 million of variable
rate debt outstanding that was not protected by interest rate hedge contracts.
If the weighted average interest rate on this variable rate debt is 100 basis
points higher or lower during the 12 months ended September 30, 2003, our
interest expense would be increased or decreased approximately $1.8 million. In
addition, as of September 30, 2002, our share of the joint venture variable rate
debt is $69.6 million, and is not protected by interest rate hedge contracts. If
the weighted average interest rate on this variable rate debt is 100 basis
points higher or lower during the 12 months ended September 30, 2003, equity in
earnings of unconsolidated affiliates would be increased or decreased by
approximately $697,000.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our annual and periodic reports
filed with the SEC is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms. These disclosure controls
and procedures are further designed to ensure that such information is
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, to allow timely decisions regarding
required disclosure.
Based on the most recent evaluation, which was completed at September 30,
2002, our chief executive officer and chief financial officer believe that our
disclosure controls and procedures are effective. There have been no significant
changes in our internal controls or in other factors that could significantly
affect the internal controls subsequent to the date we completed our evaluation.
40
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
---------- -----------
99.1 Statement of Chief Executive Officer of Highwoods Properties
Inc.
99.2 Statement of Chief Financial Officer of Highwoods Properties
Inc.
(b) Reports on Form 8-K
We filed a Current Report on Form 8-K, dated August 15, 2002, reporting
under Item 5 certain matters related to the bankruptcy of US Airways
Group, Inc.
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HIGHWOODS PROPERTIES, INC.
By: /s/ RONALD P. GIBSON
----------------------------------------
Ronald P. Gibson
President and Chief Executive Officer
By: /s/ CARMAN J. LIUZZO
----------------------------------------
Carman J. Liuzzo
Chief Financial Officer
(Principal Accounting Officer)
Date: November 14, 2002
42
CERTIFICATION
I, Ronald P. Gibson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Highwoods
Properties Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
/s/ RONALD P. GIBSON
- -------------------------------------
Ronald P. Gibson
President and Chief Executive Officer
43
CERTIFICATION
I, Carman J. Liuzzo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Highwoods
Properties Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
/s/ CARMAN J. LIUZZO
- --------------------------------------
Carman J. Liuzzo
Vice President and Chief Financial Officer
44