UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

x

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2008

 

OR

 

o

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from________ to___________

 

HIGHWOODS PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

 

 

Maryland

1-13100

56-1871668

 

 

(State or other jurisdiction
of incorporation or organization)

(Commission
File Number)

(I.R.S. Employer
Identification Number)

 

 

 

HIGHWOODS REALTY LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

 

 

North Carolina

000-21731

56-1869557

 

 

(State or other jurisdiction
of incorporation or organization)

(Commission
File Number)

(I.R.S. Employer
Identification Number)

 

 

3100 Smoketree Court, Suite 600

Raleigh, NC 27604

(Address of principal executive offices) (Zip Code)

919-872-4924

(Registrants’ telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

Name of Each Exchange on Which Registered

Common Stock, $.01 par value, of Highwoods Properties, Inc.

New York Stock Exchange

8 5/8% Series A Cumulative Redeemable Preferred Shares of Highwoods Properties, Inc.

New York Stock Exchange

8% Series B Cumulative Redeemable Preferred Shares of Highwoods Properties, Inc.

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:

 

NONE

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Highwoods Properties, Inc. Yes x

No o

Highwoods Realty Limited Partnership Yes x

No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act.

 

Highwoods Properties, Inc. Yes o

No x

Highwoods Realty Limited Partnership Yes o

No x

 

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.

 

Highwoods Properties, Inc. Yes x

No o

Highwoods Realty Limited Partnership Yes x

No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of such registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of ‘large accelerated filer,’ ‘accelerated filer’ and ‘smaller reporting company’ in Rule 12b-2 of the Securities Exchange Act.

Highwoods Properties, Inc.

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

Highwoods Realty Limited Partnership

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).

 

Highwoods Properties, Inc. Yes o

No x

Highwoods Realty Limited Partnership Yes o

No x

 

The aggregate market value of shares of Common Stock of Highwoods Properties, Inc. held by non-affiliates (based upon the closing sale price on the New York Stock Exchange) on June 30, 2008 was approximately $1.8 billion. As of February 12, 2009, there were 63,572,935 shares of Common Stock outstanding.

 

There is no public trading market for the Common Units of Highwoods Realty Limited Partnership. As a result, an aggregate market value of the Common Units of Highwoods Realty Limited Partnership cannot be determined.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Proxy Statement of Highwoods Properties, Inc. to be filed in connection with its Annual Meeting of Stockholders to be held May 13, 2009 are incorporated by reference in Part II, Item 5 and Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K.

 

HIGHWOODS PROPERTIES, INC.

HIGHWOODS REALTY LIMITED PARTNERSHIP

 

TABLE OF CONTENTS

 

Item No.

 

 

 

Page

 

 

 

PART I

 

 

 

1.

 

Business

 

4

 

1A.

 

Risk Factors

 

7

 

1B.

 

Unresolved Staff Comments

 

11

 

2.

 

Properties

 

12

 

3.

 

Legal Proceedings

 

18

 

4.

 

Submission of Matters to a Vote of Security Holders

 

18

 

X.

 

Executive Officers of the Registrant

 

19

 

 

 

 

 

 

 

 

 

PART II

 

 

 

5.

 

Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer
Purchases of Equity Securities

 

21

 

6.

 

Selected Financial Data

 

24

 

7.

 

Management’s Discussion and Analysis of Financial Condition and Results of
Operations

 

26

 

7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

47

 

8.

 

Financial Statements

 

47

 

9.

 

Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

 

47

 

9A.

 

Controls and Procedures

 

48

 

9B.

 

Other Information

 

51

 

 

 

 

 

 

 

 

 

PART III

 

 

 

10.

 

Directors, Executive Officers and Corporate Governance

 

52

 

11.

 

Executive Compensation

 

52

 

12.

 

Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters

 

52

 

13.

 

Certain Relationships and Related Transactions, and Director Independence

 

52

 

14.

 

Principal Accountant Fees and Services

 

52

 

 

 

 

 

 

 

 

 

PART IV

 

 

 

15.

 

Exhibits

 

53

 

 

 

 

 

 

 

 

 

3

 

 

Table of Contents

 

PART I

 

We refer to Highwoods Properties, Inc. as the “Company,” Highwoods Realty Limited Partnership as the “Operating Partnership,” the Company’s common stock as “Common Stock,” the Company’s preferred stock as “Preferred Stock,” the Operating Partnership’s common partnership interests as “Common Units,” the Operating Partnership’s preferred partnership interests as “Preferred Units” and in-service properties (excluding rental residential units) to which the Company and/or the Operating Partnership have title and 100.0% ownership rights as the “Wholly Owned Properties.” References to “we” and “our” mean the Company and the Operating Partnership, collectively, unless the context indicates otherwise.

 

The Operating Partnership is managed by its sole general partner, the Company, a fully-integrated, self-administered and self-managed equity real estate investment trust (“REIT”) that began operations through a predecessor in 1978. The Company completed its initial public offering in 1994 and its Common Stock is traded on the New York Stock Exchange under the symbol “HIW.” The Company conducts virtually all of its activities through the Operating Partnership. The partnership agreement provides that the Operating Partnership will assume and pay when due, or reimburse the Company for payment of, all costs and expenses relating to the ownership and operations of, or for the benefit of, the Operating Partnership. The partnership agreement further provides that all expenses of the Company are deemed to be incurred for the benefit of the Operating Partnership.

 

ITEM 1. BUSINESS

 

General

 

We are one of the largest owners and operators of suburban office, industrial and retail properties in the southeastern and midwestern United States. At December 31, 2008, we:

 

 

wholly owned 311 in-service office, industrial and retail properties, encompassing approximately 27.4 million rentable square feet, and 96 rental residential units;

 

 

owned an interest (50.0% or less) in 72 in-service office and industrial properties, encompassing approximately 8.0 million rentable square feet, and 418 rental residential units, which includes a 12.5% interest in a 261,000 square foot office property owned directly by the Company and thus is included in the Company’s Consolidated Financial Statements, but not included in the Operating Partnership’s Consolidated Financial Statements. Five of these in-service office properties, encompassing 618,000 rentable square feet, are consolidated as more fully described in Notes 1 and 2 to our Consolidated Financial Statements;

 

 

wholly owned 580 acres of undeveloped land, approximately 490 acres of which are considered core holdings and which are suitable to develop approximately 7.6 million rentable square feet of office and industrial space;

 

 

were developing eight wholly owned properties comprising approximately 1.2 million square feet that were under construction or recently completed but had not achieved 95% stabilized occupancy; and

 

 

owned an interest in 74 for-sale residential condominiums (through a consolidated majority owned joint venture).

 

At December 31, 2008, the Company owned all of the Preferred Units and 63.6 million, or 94.0%, of the Common Units in the Operating Partnership. Limited partners (including certain officers and directors of the Company) own the remaining 4.1 million Common Units. Generally, the Operating Partnership is obligated to redeem each Common Unit at the request of the holder thereof for cash equal to the value of one share of Common Stock based on the average of the market price for the 10 trading days immediately preceding the notice date of such redemption provided that the Company at its option may elect to acquire any such Common Units presented for redemption for cash or one share of Common Stock. The Common Units owned by the Company are not redeemable.

 

The Company was incorporated in Maryland in 1994. The Operating Partnership was formed in North Carolina in 1994. Our executive offices are located at 3100 Smoketree Court, Suite 600, Raleigh, North Carolina 27604, and our telephone number is (919) 872-4924. We maintain offices in each of our primary markets.

 

4

 

 

Table of Contents

 

Our business is the acquisition, development and operation of rental real estate properties. We operate office, industrial, retail and residential properties. There are no material inter-segment transactions. See Note 17 to our Consolidated Financial Statements for a summary of the rental income, net operating income and assets for each reportable segment.

 

In addition to this Annual Report, we file or furnish quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). All documents that the Company files or furnishes with the SEC are made available as soon as reasonably practicable free of charge on our corporate website, which is http://www.highwoods.com. The information on our website is not and should not be considered part of this Annual Report and is not incorporated by reference in this document. Our website is an inactive textual reference. You may also read and copy any document that we file or furnish at the public reference facilities of the SEC at 100 F. Street, N.E., Room 1580, Washington, DC 20549. Please call the SEC at (800) 732-0330 for further information about the public reference facilities. These documents also may be accessed through the SEC’s interactive data electronic applications (“IDEA”) on the SEC’s home page on the Internet (http://www.sec.gov). In addition, you can read similar information about us at the offices of the NYSE at 20 Broad Street, New York, New York 10005.

 

During 2008, the Company filed unqualified Section 303A certifications with the NYSE. We have also filed the CEO and CFO certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 as exhibits to this Annual Report.

 

Customers

 

The following table sets forth information concerning the 20 largest customers of our Wholly Owned Properties as of December 31, 2008:

 

Customer

 

Rental
Square Feet

 

Annualized
Cash Rental
Revenue (1)

 

Percent
of Total
Annualized
Cash Rental
Revenue (1)

 

Weighted
Average
Remaining
Lease Term
in Years

 

 

 

 

 

(in thousands)

 

 

 

 

 

Federal Government

 

1,645,591

 

$

32,524

 

7.50

%

7.9

 

AT&T

 

896,611

 

 

15,062

 

3.47

 

4.4

 

PricewaterhouseCoopers

 

400,178

 

 

11,014

 

2.54

 

3.7

 

State of Georgia

 

367,986

 

 

7,862

 

1.81

 

1.8

 

Healthways

 

282,132

 

 

6,260

 

1.44

 

13.4

 

T-Mobile USA

 

207,517

 

 

5,740

 

1.32

 

5.0

 

Metropolitan Life Insurance

 

267,787

 

 

5,428

 

1.25

 

8.9

 

Lockton Companies

 

160,561

 

 

4,402

 

1.02

 

6.2

 

BB&T

 

258,363

 

 

4,237

 

0.98

 

4.2

 

Syniverse Technologies, Inc.

 

198,750

 

 

4,026

 

0.93

 

7.8

 

RBC Bank

 

171,138

 

 

3,979

 

0.92

 

17.1

 

Fluor Enterprises, Inc.

 

209,474

 

 

3,737

 

0.86

 

3.1

 

SCI Services

 

162,784

 

 

3,668

 

0.85

 

8.6

 

Wells Fargo/Wachovia

 

129,389

 

 

3,039

 

0.70

 

2.2

 

Vanderbilt University

 

144,161

 

 

2,911

 

0.67

 

6.8

 

Jacob’s Engineering Group, Inc.

 

181,794

 

 

2,858

 

0.66

 

6.7

 

Lifepoint Corporate Services

 

139,625

 

 

2,836

 

0.65

 

2.5

 

Icon Clinical Research

 

110,909

 

 

2,580

 

0.59

 

4.7

 

Talecris Biotherapeutics

 

122,870

 

 

2,417

 

0.56

 

3.5

 

Hilton Grand Vacations

 

97,325

 

 

2,112

 

0.49

 

2.7

 

Total

 

6,154,945

 

$

126,692

 

29.21

%

6.3

 

                               

(1)

Annualized Cash Rental Revenue is cash rental revenue (base rent plus additional rent based on the level of operating expenses, excluding straight-line rent) for the month of December 2008 multiplied by 12.

 

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Operating Strategy

 

Efficient, Customer Service-Oriented Organization. We provide a complete line of real estate services to our customers and third parties. We believe that our in-house development, acquisition, construction management, leasing and property management services allow us to respond to the many demands of our existing and potential customer base. We provide our customers with cost-effective services such as build-to-suit construction and space modification, including tenant improvements and expansions. In addition, the breadth of our capabilities and resources provides us with market information not generally available. We believe that operating efficiencies achieved through our fully integrated organization also provide a competitive advantage in setting our lease rates and pricing other services. In addition, our relationships with our customers and those tenants at properties for which we conduct third-party fee-based services may lead to development projects when these tenants seek new space.

 

Capital Recycling Program. Our strategy has been to focus our real estate activities in markets where we believe our extensive local knowledge and conservative and flexible balance sheet give us a competitive advantage over other real estate developers and operators. Through our capital recycling program, we generally seek to:

 

 

selectively dispose of non-core properties in order to use the net proceeds to improve our balance sheet by reducing outstanding debt and preferred equity balances to make new investments or for other purposes;

 

 

engage in the development of office, industrial and other real estate projects in existing or new geographic markets, primarily in suburban in-fill business parks; and

 

 

acquire selective suburban office and industrial properties in existing or new geographic markets at prices that offer attractive long-term returns.

 

Our capital recycling activities benefit from our local market presence and knowledge. Because our division officers and staff have significant real estate experience in their respective markets, we believe that we are in a better position to evaluate capital recycling opportunities than many of our competitors.

 

Conservative and Flexible Balance Sheet. We are committed to maintaining a conservative and flexible balance sheet that allows us to capitalize on favorable development and acquisition opportunities as they arise. We expect to meet our short- and long-term liquidity requirements through a combination of any one or more of:

 

 

cash flow from operating activities;

 

 

borrowings under our credit facilities;

 

 

the issuance of unsecured debt;

 

 

the issuance of secured debt;

 

 

the issuance of equity securities by the Company or the Operating Partnership;

 

 

the disposition of non-core assets; and

 

 

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 would have the net effect of generating additional capital for us.

 

Geographic Diversification. We do not believe that our operations are significantly dependent upon any particular geographic market. Today, including our various joint ventures, our portfolio consists primarily of office and industrial properties throughout the Southeast, retail and office properties in Kansas City, Missouri, and office, retail and residential properties in Des Moines, Iowa.

 

6

 

 

Table of Contents

 

Competition

 

Our properties compete for tenants with similar properties located in our markets primarily on the basis of location, rent, services provided and the design and condition of the facilities. We also compete with other REITs, financial institutions, pension funds, partnerships, individual investors and others when attempting to acquire, develop and operate properties.

 

Employees

 

As of December 31, 2008, the Company had 437 employees, of which 434 were also employees of the Operating Partnership.

 

ITEM 1A. RISK FACTORS

 

An investment in our securities involves various risks. All investors should carefully consider the following risk factors in conjunction with the other information contained in this Annual Report before trading in our securities. If any of these risks actually occur, our business, operating results, prospects and financial condition could be harmed.

 

Our performance is subject to risks associated with real estate investment. We derive most of our income from the ownership and operation of our real estate properties. There are a number of factors that may adversely affect the income that our properties generate, including the following:

 

 

Economic Downturns. Downturns in the national economy and rising unemployment, particularly in the Southeast, generally will negatively impact the demand and rental rates for our properties.

 

 

Oversupply of Space. An oversupply of space in our markets would typically cause rental rates and occupancies to decline, making it more difficult for us to lease space at attractive rental rates, if at all.

 

 

Competitive Properties. If our properties are not as attractive to tenants (in terms of rent, services, condition or location) as properties owned by our competitors, we could lose tenants to those properties or suffer lower rental rates.

 

 

Renovation Costs. In order to maintain the quality of our properties and successfully compete against other properties, we periodically must spend money to maintain, repair and renovate our properties.

 

 

Customer Risk. Our performance depends on our ability to collect rent from our customers. Our financial condition could be adversely affected by financial difficulties experienced by a major customer, or by a number of smaller customers, including bankruptcies, insolvencies or general downturns in business.

 

 

Reletting Costs. As leases expire, we try to either relet the space to the existing customer or attract a new customer to occupy the space. In either case, we may incur significant costs in the process, including potentially substantial tenant improvement expense or lease incentives. In addition, if market rents have declined since the time the expiring lease was executed, the terms of any new lease likely will not be as favorable to us as the terms of the expiring lease, thereby reducing the rental revenue earned from that space.

 

 

Regulatory Costs. There are a number of government regulations, including zoning, tax and accessibility laws, that apply to the ownership and operation of our properties. Compliance with existing and newly adopted regulations may require us to incur significant costs on our properties.

 

 

Rising Operating Costs. Costs of operating our properties, such as real estate taxes, utilities, insurance, maintenance and other costs, can rise faster than our ability to increase rental income. While we do receive some additional rent from our tenants that is based on recovering a portion of operating expenses, increased operating expenses will negatively impact our net operating income. Our revenues and expense recoveries are subject to longer term leases and may not be quickly increased sufficient to recover an increase in operating costs and expenses.

 

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Fixed Nature of Costs. Most of the costs associated with owning and operating a property are not necessarily reduced when circumstances such as market factors and competition cause a reduction in rental revenues from the property. Increases in fixed operating expenses, such as increased real estate taxes or insurance costs, would reduce our net income.

 

 

Environmental Problems. Federal, state and local laws and regulations relating to the protection of the environment may require a current or previous owner or operator of real property to investigate and clean up hazardous or toxic substances or petroleum product releases at the property. The clean up can be costly. The presence of or failure to clean up contamination may adversely affect our ability to sell or lease a property or to borrow funds using a property as collateral.

 

 

Competition. A number of other major real estate investors with significant capital resources compete with us. These competitors include publicly-traded REITs, private REITs, private real estate investors and private institutional investment funds.

 

Recent and future acquisitions and development properties may fail to perform in accordance with our expectations and may require renovation and development costs exceeding our estimates. In the normal course of business, we typically evaluate potential acquisitions, enter into non-binding letters of intent, and may, at any time, enter into contracts to acquire additional properties. Acquired properties may fail to perform in accordance with our expectations due to lease-up risk, renovation cost risks and other factors. In addition, the renovation and improvement costs we incur in bringing an acquired property up to market standards may exceed our estimates. We may not have the financial resources to make suitable acquisitions or renovations on favorable terms or at all.

 

In addition to acquisitions, we periodically consider developing and constructing properties. Risks associated with development and construction activities include:

 

 

the unavailability of favorable financing;

 

 

construction costs exceeding original estimates;

 

 

construction and lease-up delays resulting in increased debt service expense and construction costs; and

 

 

lower than anticipated occupancy rates and rents at a newly completed property causing a property to be unprofitable or less profitable than originally estimated.

 

If new developments are financed through construction loans, there is a risk that, upon completion of construction, permanent financing for newly developed properties will not be available or will be available only on disadvantageous terms. Development activities are also subject to risks relating to our ability to obtain, or delays in obtaining, all necessary zoning, land-use, building, occupancy and other required governmental and utility company authorizations.

 

Illiquidity of real estate investments and the tax effect of dispositions could significantly impede our ability to sell assets or respond to favorable or adverse changes in the performance of our properties. Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties in our portfolio in response to changing economic, financial and investment conditions is limited. In addition, we have a significant amount of mortgage debt under which we would incur significant prepayment penalties if such loans were paid off in connection with the sale of the underlying real estate assets.

 

We intend to continue to sell some of our properties in the future. However, we cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether the price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.

 

Certain of our properties have low tax bases relative to their estimated current fair values, and accordingly, the sale of such assets would generate significant taxable gains unless we sold such properties in a tax-free exchange under Section 1031 of the Internal Revenue Code or another tax-free or tax-deferred transaction. For an exchange to qualify for tax-deferred treatment under Section 1031, the net proceeds from the sale of a property must be held by an escrow agent until applied toward the purchase of real estate qualifying for gain deferral. Given the competition

 

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for properties meeting our investment criteria, there could be a delay in reinvesting such proceeds. Any delay in using the reinvestment proceeds to acquire additional income producing assets would reduce our income from operations.

 

Because holders of our Common Units, including some of our officers and directors, may suffer adverse tax consequences upon the sale of some of our properties, they may seek to influence us not to sell certain properties even if such a sale would otherwise be in our best interest. Holders of Common Units may suffer adverse tax consequences upon the sale of certain properties. Therefore, holders of Common Units, including certain of our officers and directors, may have different objectives than the Company’s stockholders regarding the appropriate pricing and timing of a property’s sale. Although the Company is the sole general partner of the Operating Partnership and has the exclusive authority to sell all of our individual Wholly Owned Properties, officers and directors who hold Common Units may seek to influence the Company not to sell certain properties even if such sale might be financially advantageous to stockholders, creditors, bondholders or our business as a whole or influence the Company to enter into tax deferred exchanges with the proceeds of such sales when such a reinvestment might not otherwise be in our best interest.

 

The success of our joint venture activity depends upon our ability to work effectively with financially sound partners. Instead of owning properties directly, we have in some cases invested, and may continue to invest, as a partner or a co-venturer with one or more third parties. Under certain circumstances, this type of investment may involve risks not otherwise present, including the possibility that a partner or co-venturer might be unable to fund its obligations or that a partner or co-venturer might have business interests or goals inconsistent with ours. Also, such a partner or co-venturer may take action contrary to our requests or contrary to provisions in our joint venture agreements that could harm us. In addition, some of our joint ventures are managed on a day to day basis by our partners, and we have only limited influence on their operating decisions. The success of our investments in those joint ventures is heavily dependent on the operating and financial expertise of our partners. If we want to sell our interests in any of our joint ventures or believe that the properties in the joint venture should be sold, we may not be able to do so in a timely manner or at all, and our partner(s) may not cooperate with our desires, which could harm us.

 

Our insurance coverage on our properties may be inadequate. We carry insurance on all of our properties, including insurance for liability, fire, windstorms, flood, earthquakes and business interruption. Insurance companies, however, limit coverage against certain types of losses, such as losses due to terrorist acts, named windstorms, earthquakes and toxic mold. Thus, we may not have insurance coverage, or sufficient insurance coverage, against certain types of losses and/or there may be decreases in the insurance coverage available. Should an uninsured loss or a loss in excess of our insured limits occur, we could lose all or a portion of the capital we have invested in a property or properties, as well as the anticipated future revenue from the property or properties. If any of our properties were to experience a catastrophic loss, it could disrupt our operations, delay revenue and result in large expenses to repair or rebuild the property. Such events could adversely affect our financial condition.

 

Our use of debt to finance our operations could have a material adverse effect on our cash flow and ability to make distributions. We are subject to risks associated with debt financing, such as the sufficiency of cash flow to meet required payment obligations, ability to comply with financial ratios and other covenants and the availability of capital to refinance existing indebtedness or fund important business initiatives. Increases in interest rates on our variable rate debt would increase our interest expense. If we fail to comply with the financial ratios and other covenants under our credit facilities, we would likely not be able to borrow any further amounts under such facilities, which could adversely affect our ability to fund our operations, and our lenders could accelerate outstanding debt.

 

We generally do not intend to reserve funds to retire existing secured or unsecured debt upon maturity. We may not be able to repay, refinance or extend any or all of our debt at maturity or upon any acceleration. If any refinancing is done at higher interest rates, the increased interest expense could adversely affect our cash flow and ability to pay dividends. Any such refinancing could also impose tighter financial ratios and other covenants that restrict our ability to take actions that could otherwise be in our best interest, such as funding new development activity, making opportunistic acquisitions, repurchasing our securities or paying dividends. If we do not meet our mortgage financing obligations, any properties securing such indebtedness could be foreclosed on, which could have a material adverse effect on our cash flow and ability to pay dividends.

 

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We depend on our unsecured revolving credit facility, which is currently scheduled to expire in May 2009, for working capital purposes and for the short-term funding of our development and acquisition activity and, in certain instances, the repayment of other debt upon maturity. We have submitted our notice to extend the maturity date of the credit facility by one year to May 2010, and upon payment of the extension fee and assuming no default exists at that time, the facility will be extended. Continuing ability to borrow under the revolving credit facility allows us to quickly capitalize on accretive opportunities at short-term interest rates. If our lenders default under their obligations under the revolving credit facility or we become unable to borrow additional funds under the facility for any reason, we would be required to seek alternative equity or debt capital, which could be more costly and adversely impact our financial condition. If such alternative capital were unavailable, we would not be able to make new investments and could have difficulty repaying other debt.

 

The Company may be subject to taxation as a regular corporation if it fails to maintain its REIT status, which could also have a material adverse effect on the Company’s stockholders and on the Operating Partnership. The Company is subject to adverse consequences if it fails to qualify as a REIT for federal income tax purposes. While the Company intends to operate in a manner that will allow it to continue to qualify as a REIT, we cannot provide any assurances that it will remain qualified as such in the future, which would have serious particularly adverse consequences to the Company’s stockholders. Many of the requirements for taxation as a REIT are highly technical and complex and depend upon various factual matters and circumstances that may not be entirely within our control. For example, to qualify as a REIT, at least 95.0% of the Company’s gross income must come from certain sources that are itemized in the REIT tax laws. The fact that the Company holds virtually all of the assets through the Operating Partnership and its subsidiaries further complicates the application of the REIT requirements. Even a technical or inadvertent mistake could jeopardize the Company’s REIT status. Furthermore, Congress and the IRS might change the tax laws and regulations and the courts might issue new rulings that make it more difficult, or impossible, for the Company to remain qualified as a REIT. If the Company fails to qualify as a REIT, it would be subject to federal income tax at regular corporate rates and would, therefore, have less cash available for investments or payment of principal and interest to our creditors or bondholders. This would likely have a significant adverse effect on our financial condition.

 

Cash distributions reduce the amount of cash that would otherwise be available for other business purposes, including funding debt maturities or future growth initiatives. To maintain our qualification as a REIT, we must annually distribute to our stockholders at least 90% of our ordinary taxable income, excluding net capital gains. In addition, although capital gains are not required to be distributed to maintain REIT status, capital gains, if any, that are generated as part of our capital recycling activity are subject to federal and state income tax unless such gains are distributed to stockholders. Cash distributions made to our stockholders to maintain our REIT status or to distribute otherwise taxable capital gains limit our ability to accumulate capital for use for other business purposes, including funding debt maturities or growth initiatives. Under temporary IRS regulations, for 2009, distributions can be paid partially using a REIT’s freely-tradable stock so long as stockholders have the option of receiving at least 10% of the total distribution in cash.

 

Because provisions contained in Maryland law, the Company’s charter and its bylaws may have an anti-takeover effect, the Company’s stockholders may be prevented from receiving a “control premium” for the Common Stock. Provisions contained in the Company’s charter and bylaws as well as Maryland general corporation law may have anti-takeover effects that delay, defer or prevent a takeover attempt, and thereby prevent stockholders of the Company from receiving a “control premium” for their shares. For example, these provisions may defer or prevent tender offers for the Common Stock or purchases of large blocks of the Common Stock, thus limiting the opportunities for the Company’s stockholders to receive a premium for their Common Stock over then-prevailing market prices. These provisions include the following:

 

 

Ownership limit. The Company’s charter prohibits direct, indirect or constructive ownership by any person or entity of more than 9.8% of the Company’s outstanding capital stock. Any attempt to own or transfer shares of the Company’s capital stock in excess of the ownership limit without the consent of the Company’s Board of Directors will be void.

 

 

Preferred Stock. The Company’s charter authorizes its Board of Directors to issue Preferred Stock in one or more classes and to establish the preferences and rights of any class of Preferred Stock issued. These actions can be taken without stockholder approval. The issuance of Preferred Stock could have the effect of delaying or preventing someone from taking control of the Company, even if a change in control were in our best interest.

 

10

 

 

Table of Contents

 

 

Staggered board. Until the Company’s 2011 annual meeting of stockholders, the Company’s directors will continue to serve staggered terms. The staggering of the Company’s Board may discourage offers for the Company or make an acquisition of the Company more difficult, even when an acquisition is in the best interest of its stockholders.

 

 

Maryland control share acquisition statute. Maryland’s control share acquisition statute applies to the Company, which means that persons, entities or related groups that acquire more than 20% of the Common Stock may not be able to vote such excess shares under certain circumstances if such shares were acquired in one or more transactions not approved by at least two-thirds of the outstanding Common Stock held by disinterested stockholders.

 

 

Maryland unsolicited takeover statute. Under Maryland law, the Company’s Board of Directors could adopt various anti-takeover provisions without the consent of stockholders. The adoption of such measures could discourage offers for the Company or make an acquisition of the Company more difficult, even when an acquisition is in the best interest of its stockholders.

 

 

Anti-takeover protections of Operating Partnership agreement. Upon a change in control of the Company, the limited partnership agreement of the Operating Partnership requires certain acquirers to maintain an umbrella partnership real estate investment trust (“UPREIT”) structure with terms at least as favorable to the limited partners as are currently in place. For instance, the acquirer would be required to preserve the limited partner’s right to continue to hold tax-deferred partnership interests that are redeemable for capital stock of the acquirer. Exceptions would require the approval of two-thirds of the limited partners of the Operating Partnership (other than the Company). These provisions may make a change of control transaction involving the Company more complicated and therefore might decrease the likelihood of such a transaction occurring, even if such a transaction would be in the best interest of the Company’s stockholders.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

11

 

 

Table of Contents

 

ITEM 2. PROPERTIES

 

Wholly Owned Properties

 

As of December 31, 2008, we owned all of the ownership interests in 311 in-service office, industrial and retail properties, encompassing approximately 27.4 million rentable square feet, and 96 rental residential units. The following table sets forth information about our Wholly Owned Properties and our development properties:

 

 

 

December 31, 2008

 

December 31, 2007

 

 

 

Rentable
Square Feet

 

Percent
Leased/
Pre-Leased

 

Rentable
Square Feet

 

Percent
Leased/
Pre-Leased

 

In-Service:

 

 

 

 

 

 

 

 

 

Office (1)

 

19,556,000

 

90.2

%

19,260,000

 

91.1

%

Industrial

 

6,467,000

 

92.6

 

6,036,000

 

94.2

 

Retail (2)

 

1,350,000

 

94.6

 

1,317,000

 

94.9

 

Total or Weighted Average (3), (5)

 

27,373,000

 

91.0

%

26,613,000

 

92.0

%

 

 

 

 

 

 

 

 

 

 

Development:

 

 

 

 

 

 

 

 

 

Completed—Not Stabilized (4)

 

 

 

 

 

 

 

 

 

Office (1)

 

665,000

 

64.2

%

607,000

 

75.9

%

Industrial

 

 

 

681,000

 

78.2

 

Total or Weighted Average (6)

 

665,000

 

64.2

%

1,288,000

 

77.1

%

 

 

 

 

 

 

 

 

 

 

In Process

 

 

 

 

 

 

 

 

 

Office (1)

 

358,000

 

65.7

%

887,000

 

59.9

%

Industrial

 

200,000

 

50.0

 

 

 

Retail

 

 

 

30,000

 

100.0

 

Total or Weighted Average (7)

 

558,000

 

60.1

%

917,000

 

61.2

%

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

Office (1)

 

20,579,000

 

 

 

20,754,000

 

 

 

Industrial

 

6,667,000

 

 

 

6,717,000

 

 

 

Retail (2)

 

1,350,000

 

 

 

1,347,000

 

 

 

Total (3), (5), (6), (7)

 

28,596,000

 

 

 

28,818,000

 

 

 

                               

(1)

Substantially all of our office properties are located in suburban markets.

(2)

Excludes 426,000 square feet of basement space in the Country Club Plaza and other Kansas City retail properties.

(3)

Rentable square feet excludes 96 rental residential units.

(4)

We consider a development project to be stabilized upon the earlier of the original projected stabilization date or the date such project is at least 95% occupied.

(5)

Excludes 618,000 square feet of office properties as of December 31, 2008 and 2007 that are held by consolidated affiliates.

(6)

Excludes 74 completed for-sale residential condominiums as of December 31, 2008 that are held by consolidated affiliates.

(7)

Excludes 139 in-process for-sale residential condominiums as of December 31, 2007 that are held by consolidated affiliates.

 

12

 

 

Table of Contents

 

The following table summarizes the changes in square footage in our in-service Wholly Owned Properties during the past three years:

 

 

 

2008

 

2007

 

2006

 

 

 

(rentable square feet in thousands)

 

Office, Industrial and Retail Properties:

 

 

 

 

 

 

 

Dispositions

 

(744

)

(1,172

)

(2,982

)

Developments Placed In-Service (1)

 

1,380

 

930

 

33

 

Redevelopment/Other

 

(11

)

3

 

(74

)

Acquisitions

 

135

 

 

70

 

Net Change of In-Service Wholly Owned Properties

 

760

 

(239

)

(2,953

)

                                  

(1)

We place development projects in service upon the earlier of the original projected stabilization date or the date such project is at least 95% occupied.

 

The following table sets forth geographic and other information about our in-service Wholly Owned Properties at December 31, 2008:

 

 

 

Rentable
Square Feet

 

Occupancy

 

Percentage of Annualized Cash Rental Revenue (1)

 

Market

 

 

 

Office

 

Industrial

 

Retail

 

Total

 

 

Raleigh, NC (2)

 

3,711,000

 

88.6

%

16.4

%

 

 

16.4

%

 

Atlanta, GA

 

5,552,000

 

93.4

 

10.1

 

3.8

%

 

13.9

 

 

Nashville, TN

 

2,988,000

 

95.0

 

13.7

 

 

 

13.7

 

 

Tampa, FL

 

2,627,000

 

91.6

 

13.6

 

 

 

13.6

 

 

Kansas City, MO (3)

 

1,953,000

 

92.3

 

3.4

 

 

9.0

%

12.4

 

 

Piedmont Triad, NC (4)

 

5,526,000

 

86.1

 

6.0

 

3.4

 

0.2

 

9.6

 

 

Richmond, VA

 

2,229,000

 

90.8

 

8.6

 

 

 

8.6

 

 

Memphis, TN

 

1,473,000

 

92.5

 

6.1

 

 

 

6.1

 

 

Greenville, SC

 

897,000

 

94.4

 

3.4

 

 

 

3.4

 

 

Orlando, FL

 

317,000

 

98.4

 

1.7

 

 

 

1.7

 

 

Other

 

100,000

 

84.3

 

0.6

 

 

 

0.6

 

 

Total (5)

 

27,373,000

 

91.0

%

83.6

%

7.2

%

9.2

%

100.0

%

 

                               

(1)

Annualized Cash Rental Revenue is cash rental revenue (base rent plus additional rent based on the level of operating expenses, excluding straight-line rent) for the month of December 2008 multiplied by 12.

(2)

The Raleigh market encompasses the Raleigh, Durham, Cary and Research Triangle metropolitan area.

(3)

Excludes 426,000 square feet of basement space in the Country Club Plaza and other Kansas City retail properties.

(4)

The Piedmont Triad market encompasses the Greensboro and Winston-Salem metropolitan area.

(5)

Excludes 618,000 square feet of office properties held by consolidated affiliates.

 

13

 

 

Table of Contents

 

The following table sets forth operating information about our in-service Wholly Owned Properties for the past five years:

 

 

 

Average
Occupancy

 

 

Annualized
Cash Rent
Per Square
Foot (1)

 

2004

 

 

82.2

%

 

$

14.76

 

2005

 

 

85.0

%

 

$

14.99

 

2006

 

 

88.5

%

 

$

15.89

 

2007

 

 

90.2

%

 

$

16.27

 

2008

 

 

91.2

%

 

$

17.18

 

                               

(1)

Annualized Cash Rent Per Square Foot is cash rental revenue (base rent plus additional rent based on the level of operating expenses, excluding straight-line rent) for the month of December of the respective year multiplied by 12, divided by weighted average total square footage.

 

Land Held for Development

 

We wholly owned 580 acres of development land as of December 31, 2008. We estimate that we can develop approximately 7.6 million square feet of office and industrial space on the approximately 490 acres that we consider core, long-term holdings for our future development needs. Our development land is zoned and available for office and industrial development, and nearly all of the land has utility infrastructure in place. We believe that our commercially zoned and unencumbered land in existing business parks gives us a development advantage over other commercial real estate development companies in many of our markets. Any future development, however, is dependent on the demand for office and industrial space in these areas, the availability of favorable financing and other factors, and no assurance can be given that any construction will take place on the development land. In addition, if construction is undertaken on the development land, we will be subject to the risks associated with construction activities, including the risks that occupancy rates and rents at a newly completed property may not be sufficient to make the property profitable, construction costs may exceed original estimates and construction and lease-up may not be completed on schedule, resulting in increased debt service expense and construction expense. We may also develop properties other than office and industrial on certain parcels with unrelated joint venture partners. We consider approximately 90 acres of our development land at December 31, 2008 to be non-core assets because this land is not necessary for our foreseeable future development needs. We intend to dispose of such non-core development land through sales to other parties or contributions to joint ventures. Approximately four acres with a net book value of $1.2 million are under contract to be sold and are included in real estate and other assets, net, held for sale in our Consolidated Balance Sheet at December 31, 2008.

 

14

 

 

Table of Contents

 

Other Properties

 

As of December 31, 2008, we owned an interest (50.0% or less) in 72 in-service rental properties. These properties include primarily office and industrial buildings encompassing approximately 8.0 million rentable square feet and 418 rental residential units. The following table sets forth information about the stabilized in-service joint venture rental properties by segment and by geographic location at December 31, 2008:

 

 

 

Rentable
Square
Feet

 

Occupancy

 

Percentage of Annualized Cash Rental Revenue (1)

 

Market

 

 

 

Office

 

Industrial

 

Retail

 

Multi-
Family

 

Total

 

Des Moines, IA (2)

 

2,505,000

 

87.1

%

27.0

%

4.3

%

0.7

%

3.3

%

35.3

%

Orlando, FL

 

1,852,000

 

89.0

 

27.6

 

 

 

 

27.6

 

Atlanta, GA

 

835,000

 

91.7

 

11.0

 

 

 

 

11.0

 

Kansas City, MO (3)

 

714,000

 

83.1

 

8.5

 

 

 

 

8.5

 

Raleigh, NC (4)

 

814,000

 

90.4

 

7.3

 

 

 

 

7.3

 

Richmond, VA (5)

 

413,000

 

100.0

 

5.1

 

 

 

 

5.1

 

Piedmont Triad, NC (6)

 

364,000

 

43.0

 

2.1

 

 

 

 

2.1

 

Tampa, FL (7)

 

205,000

 

94.2

 

1.9

 

 

 

 

1.9

 

Charlotte, NC

 

148,000

 

100.0

 

0.7

 

 

 

 

0.7

 

Other

 

110,000

 

100.0

 

0.5

 

 

 

 

0.5

 

Total

 

7,960,000

 

87.3

%

91.7

%

4.3

%

0.7

%

3.3

%

100.0

%

                                

(1)

Annualized Cash Rental Revenue is cash rental revenue (base rent plus additional rent based on the level of operating expenses, excluding straight-line rent) for the month of December 2008 multiplied by 12.

(2)

Rentable square feet excludes 418 residential units, which were 96.9% occupied at December 31, 2008.

(3)

Includes a 12.5% interest in a 261,000 square foot building that is included in the Company’s Consolidated Financial Statements, but not included in the Operating Partnership’s Consolidated Financial Statements.

(4)

The Raleigh market encompasses the Raleigh, Durham, Cary and Research Triangle metropolitan area.

(5)

We own a 50.0% interest in this joint venture which is consolidated (see Notes 1 and 2 to our Consolidated Financial Statements).

(6)

The Piedmont Triad market encompasses the Greensboro and Winston-Salem metropolitan area.

(7)

We own a 20.0% interest in this joint venture which is consolidated (see Notes 1 and 2 to our Consolidated Financial Statements).

 

We also owned an approximate 75% economic interest in a consolidated joint venture that owns 74 for-sale residential condominiums as of December 31, 2008 located in Raleigh, NC.

 

Lease Expirations

 

The following tables set forth scheduled lease expirations for existing leases at our in-service and completed – not stabilized Wholly Owned Properties (excluding rental residential units) as of December 31, 2008. The tables include (1) expirations of leases in properties that are completed but not yet stabilized and (2) the effects of any early renewals exercised by tenants as of December 31, 2008.

 

15

 

 

Table of Contents

 

Office Properties (1):

 

Lease Expiring

 

Rentable
Square Feet
Subject to
Expiring
Leases

 

Percentage
of Leased
Square
Footage
Represented
by Expiring
Leases

 

Annualized
Cash Rental
Revenue
Under
Expiring
Leases (2)

 

Average
Annual
Rental Rate
Per Square
Foot for
Expirations

 

Percent of
Annualized
Cash Rental
Revenue
Represented
by Expiring
Leases (2)

 

 

 

 

 

 

($ in thousands)

 

 

 

 

2009 (3)

 

1,905,484

 

10.6

%

$

38,282

 

$

20.09

 

10.6

%

2010

 

2,003,395

 

11.1

 

 

40,951

 

 

20.44

 

11.3

 

2011

 

2,641,415

 

14.6

 

 

51,930

 

 

19.66

 

14.3

 

2012

 

2,445,060

 

13.6

 

 

50,544

 

 

20.67

 

13.9

 

2013

 

2,473,836

 

13.8

 

 

49,458

 

 

19.99

 

13.6

 

2014

 

1,858,582

 

10.3

 

 

37,532

 

 

20.19

 

10.4

 

2015

 

1,166,516

 

6.5

 

 

23,951

 

 

20.53

 

6.6

 

2016

 

785,679

 

4.4

 

 

14,676

 

 

18.68

 

4.1

 

2017

 

982,741

 

5.5

 

 

19,814

 

 

20.16

 

5.5

 

2018

 

519,332

 

2.9

 

 

9,863

 

 

18.99

 

2.7

 

Thereafter

 

1,202,570

 

6.7

 

 

25,352

 

 

21.08

 

7.0

 

 

 

17,984,610

 

100.0

%

$

362,353

 

$

20.15

 

100.0

%

 

Industrial Properties:

 

Lease Expiring

 

Rentable
Square Feet
Subject to
Expiring
Leases

 

Percentage
of Leased
Square
Footage
Represented
by Expiring
Leases

 

Annualized
Cash Rental
Revenue
Under
Expiring
Leases (2)

 

Average
Annual
Rental Rate
Per Square
Foot for
Expirations

 

Percent of
Annualized
Cash Rental
Revenue
Represented
by Expiring
Leases (2)

 

 

 

 

 

 

($ in thousands)

 

 

 

 

2009 (4)

 

1,408,570

 

23.5

%

$

6,696

 

$

4.75

 

21.5

%

2010

 

810,964

 

13.5

 

 

4,323

 

 

5.33

 

13.8

 

2011

 

942,453

 

15.8

 

 

5,357

 

 

5.68

 

17.2

 

2012

 

430,580

 

7.2

 

 

2,632

 

 

6.11

 

8.4

 

2013

 

622,840

 

10.4

 

 

3,836

 

 

6.16

 

12.3

 

2014

 

512,806

 

8.6

 

 

2,757

 

 

5.38

 

8.8

 

2015

 

271,382

 

4.5

 

 

1,198

 

 

4.41

 

3.8

 

2016

 

264,597

 

4.4

 

 

1,055

 

 

3.99

 

3.4

 

2017

 

22,000

 

0.4

 

 

109

 

 

4.95

 

0.3

 

2018

 

71,884

 

1.2

 

 

240

 

 

3.34

 

0.8

 

Thereafter

 

629,440

 

10.5

 

 

3,038

 

 

4.83

 

9.7

 

 

 

5,987,516

 

100.0

%

$

31,241

 

$

5.22

 

100.0

%

                               

(1)

Excludes properties held by consolidated joint ventures.

(2)

Annualized Cash Rental Revenue is cash rental revenue (base rent plus additional rent based on the level of operating expenses, excluding straight-line rent) for the month of December 2008 multiplied by 12.

(3)

Includes 44,000 square feet of leases that are on a month-to-month basis, which represent 0.2% of total annualized cash rental revenue.

(4)

Includes 113,000 square feet of leases that are on a month-to-month basis, which represent 0.1% of total annualized cash rental revenue.

 

16

 

 

Table of Contents

 

Retail Properties:

 

Lease Expiring

 

Rentable
Square Feet
Subject to
Expiring
Leases

 

Percentage
of Leased
Square
Footage
Represented
by Expiring
Leases

 

Annualized
Cash Rental
Revenue
Under
Expiring
Leases (1)

 

Average
Annual
Rental Rate
Per Square
Foot for
Expirations

 

Percent of
Annualized
Cash Rental
Revenue
Represented
by Expiring
Leases (1)

 

 

 

 

 

 

($ in thousands)

 

 

 

 

2009 (2)

 

156,664

 

12.3

%

$

4,243

 

$

27.08

 

10.6

%

2010

 

93,405

 

7.3

 

 

3,552

 

 

38.03

 

8.9

 

2011

 

54,981

 

4.3

 

 

1,892

 

 

34.41

 

4.7

 

2012

 

165,979

 

13.0

 

 

5,223

 

 

31.47

 

13.0

 

2013

 

80,760

 

6.3

 

 

3,039

 

 

37.63

 

7.6

 

2014

 

108,911

 

8.5

 

 

2,838

 

 

26.06

 

7.1

 

2015

 

147,301

 

11.5

 

 

4,750

 

 

32.25

 

11.9

 

2016

 

69,166

 

5.4

 

 

2,773

 

 

40.09

 

6.9

 

2017

 

107,946

 

8.5

 

 

2,733

 

 

25.32

 

6.8

 

2018

 

61,341

 

4.8

 

 

2,022

 

 

32.96

 

5.0

 

Thereafter

 

229,783

 

18.1

 

 

7,019

 

 

30.55

 

17.5

 

 

 

1,276,237

 

100.0

%

$

40,084

 

$

31.41

 

100.0

%

 

Total (3):

 

Lease Expiring

 

Rentable
Square Feet
Subject to
Expiring
Leases

 

Percentage
of Leased
Square
Footage
Represented
by Expiring
Leases

 

Annualized
Cash Rental
Revenue
Under
Expiring
Leases (1)

 

Average
Annual
Rental Rate
Per Square
Foot for
Expirations

 

Percent of
Annualized
Cash Rental
Revenue
Represented
by Expiring
Leases (1)

 

 

 

 

 

 

($ in thousands)

 

 

 

 

2009 (4)

 

3,470,718

 

13.7

%

$

49,221

 

$

14.18

 

11.3

%

2010

 

2,907,764

 

11.5

 

 

48,826

 

 

16.79

 

11.3

 

2011

 

3,638,849

 

14.5

 

 

59,179

 

 

16.26

 

13.6

 

2012

 

3,041,619

 

12.0

 

 

58,399

 

 

19.20

 

13.5

 

2013

 

3,177,436

 

12.6

 

 

56,333

 

 

17.73

 

13.0

 

2014

 

2,480,299

 

9.8

 

 

43,127

 

 

17.39

 

9.9

 

2015

 

1,585,199

 

6.3

 

 

29,899

 

 

18.86

 

6.9

 

2016

 

1,119,442

 

4.4

 

 

18,504

 

 

16.53

 

4.3

 

2017

 

1,112,687

 

4.4

 

 

22,656

 

 

20.36

 

5.2

 

2018

 

652,557

 

2.6

 

 

12,125

 

 

18.58

 

2.8

 

Thereafter

 

2,061,793

 

8.2

 

 

35,409

 

 

17.17

 

8.2

 

 

 

25,248,363

 

100.0

%

$

433,678

 

$

17.18

 

100.0

%

                               

(1)

Annualized Cash Rental Revenue is cash rental revenue (base rent plus additional rent based on the level of operating expenses, excluding straight-line rent) for the month of December 2008 multiplied by 12.

(2)

Includes 17,000 square feet of leases that are on a month-to-month basis, which represent 0.1% of total annualized cash rental revenue.

(3)

Excludes properties held by consolidated joint ventures.

(4)

Includes 174,000 square feet of leases that are on a month-to-month basis, which represent 0.4% of total annualized cash rental revenue.

 

17

 

 

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ITEM 3. LEGAL PROCEEDINGS

 

We are from time to time a party to a variety of legal proceedings, claims and assessments arising in the ordinary course of our business. We regularly assess the liabilities and contingencies in connection with these matters based on the latest information available. For those matters where it is probable that we have incurred or will incur a loss and the loss or range of loss can be reasonably estimated, the estimated loss is accrued and charged to income in our Consolidated Financial Statements. In other instances, because of the uncertainties related to both the probable outcome and amount or range of loss, a reasonable estimate of liability, if any, cannot be made. Based on the current expected outcome of such matters, none of these proceedings, claims or assessments is expected to have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

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ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT

 

The Company is the sole general partner of the Operating Partnership. The following table sets forth information with respect to the Company’s executive officers:

 

Name

Age

Position and Background

Edward J. Fritsch

50

Director, President and Chief Executive Officer.

Mr. Fritsch became our chief executive officer and chair of the investment committee of our board of directors on July 1, 2004 and our president in December 2003. Prior to that, Mr. Fritsch was our chief operating officer from January 1998 to July 2004 and was a vice president and secretary from June 1994 to January 1998. Mr. Fritsch joined our predecessor in 1982 and was a partner of that entity at the time of our initial public offering in June 1994. Mr. Fritsch is a member of the NAREIT Board of Governors, immediate past chairperson of the University of North Carolina Board of Visitors, trustee of the North Carolina Symphony, member of Wachovia Bank’s Central Regional Advisory Board and director of the YMCA of the Triangle.

Michael E. Harris

59

Executive Vice President and Chief Operating Officer.

Mr. Harris became chief operating officer in July 2004. Prior to that, Mr. Harris was a senior vice president and was responsible for our operations in Memphis, Nashville, Kansas City and Charlotte. Mr. Harris was executive vice president of Crocker Realty Trust prior to its merger with us in 1996. Before joining Crocker Realty Trust, Mr. Harris served as senior vice president, general counsel and chief financial officer of Towermarc Corporation, a privately owned real estate development firm. Mr. Harris is a member of the Advisory Board of Directors of SouthTrust Bank of Memphis and Allen & Hoshall, Inc.

Terry L. Stevens

60

Senior Vice President and Chief Financial Officer.

Prior to joining us in December 2003, Mr. Stevens was executive vice president, chief financial officer and trustee for Crown American Realty Trust, a public REIT. Before joining Crown American Realty Trust, Mr. Stevens was director of financial systems development at AlliedSignal, Inc., a large multi-national manufacturer. Mr. Stevens was also an audit partner with Price Waterhouse for approximately seven years. Mr. Stevens currently serves as trustee, chairman of the Audit Committee and member of the Investment and Finance Committee of First Potomac Realty Trust, a public REIT. Mr. Stevens is a member of the American and the Pennsylvania Institutes of Certified Public Accountants.

Gene H. Anderson

63

Director, Senior Vice President and Regional Manager.

Mr. Anderson has been a senior vice president since our combination with Anderson Properties, Inc. in February 1997. Mr. Anderson oversees our Atlanta and Triad operations. Mr. Anderson served as president of Anderson Properties, Inc. from 1978 to February 1997. Mr. Anderson was past president of the Georgia chapter of the National Association of Industrial and Office Properties and is a national board member of the National Association of Industrial and Office Properties.

 

 

19

 

 

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Name

Age

Position and Background

Jeffrey D. Miller

38

Vice President, General Counsel and Secretary.

Prior to joining us in March 2007, Mr. Miller was a partner with DLA Piper US, LLP, where he practiced since 2005. Previously, he was a partner with Alston & Bird LLP, where he practiced from 1997. He is admitted to practice in North Carolina. Mr. Miller currently serves as director, chairman of the compensation and governance committee and member of the audit committee of Hatteras Financial Corp., a mortgage REIT.

W. Brian Reames

45

Senior Vice President and Regional Manager.

Mr. Reames became senior vice president and regional manager in August 2004. Mr. Reames manages our Nashville and oversees our Memphis and Greenville operations. Prior to that, Mr. Reames was vice president responsible for the Nashville division, a position he held since 1999. Mr. Reames was a partner at Eakin & Smith, Inc., a Nashville-based office real estate firm, from 1989 until its merger with us in 1996. Mr. Reames is a past Nashville chapter President of the National Association of Industrial and Office Properties. He is currently serving on the Board of Directors of H.G. Hill Realty and as President of the Board of Trustees at Harding Academy in Nashville.

 

 

20

 

 

Table of Contents

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The Common Stock is traded on the NYSE under the symbol “HIW.” The following table sets forth the quarterly high and low stock prices per share reported on the NYSE for the quarters indicated and the dividends paid per share during such quarter.

 

 

 

2008

 

2007

 

Quarter Ended

 

High

 

Low

 

Dividend

 

High

 

Low

 

Dividend

 

March 31

 

$

32.34

 

$

26.67

 

$

0.425

 

$

46.95

 

$

37.99

 

$

0.425

 

June 30

 

 

37.38

 

 

31.42

 

 

0.425

 

 

43.84

 

 

37.50

 

 

0.425

 

September 30

 

 

37.94

 

 

29.88

 

 

0.425

 

 

39.01

 

 

32.09

 

 

0.425

 

December 31

 

 

34.29

 

 

15.59

 

 

0.425

 

 

38.26

 

 

28.89

 

 

0.425

 

 

On December 31, 2008, the last reported stock price of the Common Stock on the NYSE was $27.36 per share and the Company had 1,122 common stockholders of record. There is no public trading market for the Common Units. On December 31, 2008, the Operating Partnership had 125 holders of record of Common Units (other than the Company). As of December 31, 2008, there were 63.6 million shares of Common Stock and 4.1 million Common Units outstanding not owned by the Company.

 

Because the Company is a REIT, the partnership agreement requires the Operating Partnership to distribute at least enough cash for the Company to be able to distribute to its stockholders at least 90.0% of its REIT taxable income, excluding capital gains. See “Item 1A. Risk Factors – Cash distributions reduce the amount of cash that would otherwise be available for other business purposes, including funding debt maturities or future growth initiatives.”

 

We generally expect to use cash flows from operating activities to fund distributions. The following factors will affect cash flows from operating activities and, accordingly, influence the decisions of the Company’s Board of Directors regarding distributions:

 

 

debt service requirements after taking into account debt covenants and the repayment and restructuring of certain indebtedness and the availability of alternative sources of debt and equity capital and their impact on our ability to refinance existing debt and grow our business;

 

 

scheduled increases in base rents of existing leases;

 

 

changes in rents attributable to the renewal of existing leases or replacement leases;

 

 

changes in occupancy rates at existing properties and execution of leases for newly acquired or developed properties;

 

 

operating expenses and capital replacement needs; and

 

 

expected cash flows from financing and investing activities.

 

The following stock price performance graph compares the performance of our Common Stock to the S&P 500, the Russell 2000 and the FTSE NAREIT Equity REIT Index. The stock price performance graph assumes an investment of $100 in our Common Stock and the three indices on December 31, 2003 and further assumes the reinvestment of all dividends. Equity REITs are defined as those that derive more than 75.0% of their income from equity investments in real estate assets. The FTSE NAREIT Equity REIT Index includes all REITs listed on the NYSE, the American Stock Exchange or the NASDAQ National Market System. Stock price performance is not necessarily indicative of future results.

 

21

 

 

Table of Contents

 


 

 

 

Period Ending

 

Index

 

12/31/04

 

12/31/05

 

12/31/06

 

12/31/07

 

12/31/08

 

Highwoods Properties, Inc.

 

116.9

 

127.6

 

192.1

 

144.7

 

142.6

 

S&P 500

 

110.9

 

116.3

 

134.7

 

142.1

 

89.5

 

Russell 2000

 

118.3

 

123.7

 

146.4

 

144.2

 

95.4

 

FTSE NAREIT Equity REIT Index

 

131.6

 

147.6

 

199.3

 

168.1

 

104.7

 

 

The performance graph above is being furnished as part of this Annual Report solely in accordance with the requirement under Rule 14a-3(b)(9) to furnish the Company’s stockholders with such information and, therefore, is not deemed to be filed, or incorporated by reference in any filing, by the Company or the Operating Partnership under the Securities Act of 1933 or the Securities Exchange Act of 1934.

 

During 2008, cash dividends on Common Stock totaled $1.70 per share, $0.53 of which represented return of capital and $0.20 represented capital gains for income tax purposes. The minimum dividend per share of Common Stock required for the Company to maintain its REIT status (excluding any net capital gains) was $0.76 per share in 2008.

 

During the fourth quarter of 2008, the Company issued an aggregate of 22,000 shares of Common Stock to holders of Common Units in the Operating Partnership upon the redemption of a like number of Common Units in private offerings exempt from the registration requirements pursuant to Section 4(2) of the Securities Act. Each of the holders of Common Units was an accredited investor under Rule 501 of the Securities Act. The resale of such shares was registered by the Company under the Securities Act.

 

During the fourth quarter of 2008, the Operating Partnership issued 183,587 Common Units as part of the acquisition of an office building in Memphis, Tennessee. The Common Units were issued in a private offering exempt from registration requirements pursuant to Section 4(2) of the Securities Act to an accredited investor under Rule 501 of the Securities Act.

 

22

 

 

Table of Contents

 

The Company has a Dividend Reinvestment and Stock Purchase Plan under which holders of Common Stock may elect to automatically reinvest their dividends in additional shares of Common Stock and may make optional cash payments for additional shares of Common Stock. The administrator of the Dividend Reinvestment and Stock Purchase Plan has been instructed by the Company to purchase Common Stock in the open market for purposes of satisfying its obligations thereunder. However, the Company may in the future elect to satisfy such obligations by issuing additional shares of Common Stock.

 

The Company has an Employee Stock Purchase Plan for all active employees, under which participants generally may contribute up to 25.0% of their compensation for the purchase of Common Stock. At the end of each three-month offering period, each participant’s account balance is applied to acquire newly issued shares of Common Stock at a cost that is calculated at 85.0% of the lower of the average closing price on the NYSE on the five consecutive days preceding the first day of the quarter or the five days preceding the last day of the quarter.

 

Information about the Company’s equity compensation plans and other related stockholder matters is incorporated herein by reference to the Company’s Proxy Statement to be filed in connection with its annual meeting of stockholders to be held on May 13, 2009.

 

23

 

 

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ITEM 6. SELECTED FINANCIAL DATA

 

The following selected financial data of the Company as of December 31, 2008 and 2007 and for each of the three years in the period ended December 31, 2008 is derived from our audited Consolidated Financial Statements included elsewhere herein. The selected financial data as of December 31, 2006, 2005 and 2004 and for each of the two years in the period ended December 31, 2005 is derived from previously issued financial statements. Operations for the years ended December 31, 2007, 2006, 2005 and 2004 have been reclassified from previously reported amounts to reflect in discontinued operations the operations for those properties sold or held for sale in 2008 which qualified for discontinued operations presentation. The information in the following table should be read in conjunction with the Company’s audited Consolidated Financial Statements and related notes included herein ($ in thousands, except per share data):

 

 

 

Years Ended December 31,

 

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

Rental and other revenues

 

$

461,003

 

$

428,446

 

$

401,304

 

$

379,577

 

$

373,336

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

12,896

 

$

52,735

 

$

34,603

 

$

27,252

 

$

15,731

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income/(loss) from continuing operations
available for common stockholders

 

$

2,984

 

$

36,973

 

$

15,737

 

$

(4,258

)

$

(15,121

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

31,992

 

$

90,745

 

$

53,744

 

$

62,458

 

$

41,577

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available for common stockholders

 

$

22,080

 

$

74,983

 

$

34,878

 

$

30,948

 

$

10,725

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share – basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income/(loss) from continuing operations

 

$

0.05

 

$

0.66

 

$

0.29

 

$

(0.08

)

$

(0.28

)

Net income

 

$

0.38

 

$

1.33

 

$

0.64

 

$

0.58

 

$

0.20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share – diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income/(loss) from continuing operations

 

$

0.05

 

$

0.65

 

$

0.28

 

$

(0.08

)

$

(0.28

)

Net income

 

$

0.37

 

$

1.31

 

$

0.62

 

$

0.58

 

$

0.20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

1.70

 

$

1.70

 

$

1.70

 

$

1.70

 

$

1.70

 

 

 

 

 

December 31,

 

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,946,170

 

$

2,926,955

 

$

2,844,853

 

$

2,908,978

 

$

3,239,658

 

Mortgages and notes payable

 

$

1,604,685

 

$

1,641,987

 

$

1,465,129

 

$

1,471,616

 

$

1,572,574

 

Financing obligations

 

$

34,174

 

$

35,071

 

$

35,530

 

$

34,154

 

$

65,309

 

 

 

24

 

 

Table of Contents

 

The following selected financial data of the Operating Partnership as of December 31, 2008 and 2007 and for each of the three years in the period ended December 31, 2008 is derived from our audited Consolidated Financial Statements included elsewhere herein. The selected financial data as of December 31, 2006, 2005 and 2004 and for each of the two years in the period ended December 31, 2005 is derived from previously issued financial statements. Operations for the years ended December 31, 2007, 2006, 2005 and 2004 have been reclassified from previously reported amounts to reflect in discontinued operations the operations for those properties sold or held for sale in 2008 which qualified for discontinued operations presentation. The information in the following table should be read in conjunction with the Operating Partnership’s audited Consolidated Financial Statements and related notes included herein ($ in thousands, except per unit data):

 

 

 

Years Ended December 31,

 

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

Rental and other revenues

 

$

461,003

 

$

428,446

 

$

401,304

 

$

379,791

 

$

373,530

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

13,062

 

$

54,862

 

$

35,859

 

$

26,391

 

$

14,145

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income/(loss) from continuing operations
available for common unitholders

 

$

3,150

 

$

39,100

 

$

16,993

 

$

(5,119

)

$

(16,707

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

33,442

 

$

94,216

 

$

56,307

 

$

65,252

 

$

42,964

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available for common unitholders

 

$

23,530

 

$

78,454

 

$

37,441

 

$

33,742

 

$

12,112

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common unit – basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income/(loss) from continuing operations

 

$

0.05

 

$

0.65

 

$

0.29

 

$

(0.09

)

$

(0.28

)

Net income

 

$

0.38

 

$

1.30

 

$

0.63

 

$

0.57

 

$

0.21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common unit – diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income/(loss) from continuing operations

 

$

0.05

 

$

0.64

 

$

0.27

 

$

(0.09

)

$

(0.28

)

Net income

 

$

0.37

 

$

1.28

 

$

0.61

 

$

0.57

 

$

0.21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions declared per common unit

 

$

1.70

 

$

1.70

 

$

1.70

 

$

1.70

 

$

1.70

 

 

 

 

 

December 31,

 

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,944,856

 

$

2,925,804

 

$

2,837,649

 

$

2,901,858

 

$

3,232,062

 

Mortgages and notes payable

 

$

1,604,685

 

$

1,641,987

 

$

1,464,266

 

$

1,471,616

 

$

1,572,574

 

Financing obligations

 

$

34,174

 

$

35,071

 

$

35,530

 

$

34,154

 

$

65,309

 

 

 

25

 

 

Table of Contents

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The Operating Partnership is managed by its sole general partner, the Company, a fully integrated, self-administered and self-managed equity REIT that provides leasing, management, development, construction and other customer-related services for our properties and for third parties. The Company conducts virtually all of its activities through the Operating Partnership. As of December 31, 2008, we owned or had an interest in 383 in-service office, industrial and retail properties, encompassing approximately 35.3 million square feet and 514 rental residential units, which includes a 12.5% interest in a 261,000 square foot office property directly owned by the Company and thus is included in the Company’s Consolidated Financial Statements, but not included in the Operating Partnership’s Consolidated Financial Statements. As of that date, we also owned development land and other properties under development as described under “Business” and “Properties” above. We are based in Raleigh, North Carolina, and our properties and development land are located in Florida, Georgia, Iowa, Kansas, Maryland, Mississippi, Missouri, North Carolina, South Carolina, Tennessee and Virginia.

 

You should read the following discussion and analysis in conjunction with the accompanying Consolidated Financial Statements and related notes contained elsewhere herein.

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

Some of the information in this Annual Report 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:

 

 

development activity by our competitors in our existing markets could result in an excessive supply of office, industrial and retail properties relative to tenant demand;

 

 

the financial condition of our tenants could deteriorate;

 

 

we may not be able to complete development, acquisition, reinvestment, disposition or joint venture projects as quickly or on as favorable terms as anticipated;

 

 

we may not be able to lease or release second generation space quickly or on as favorable terms as old leases;

 

 

we may not be able to lease our newly constructed buildings as quickly or on a favorable terms as originally anticipated;

 

 

difficulties in obtaining additional capital to satisfy our future cash needs or increases in interest rates could adversely impact our ability to fund important business initiatives and increase our debt service costs;

 

 

we may not be able to meet our liquidity requirements or obtain capital on favorable terms to fund our working capital needs and growth initiatives or to repay or refinance outstanding debt upon maturity;

 

 

in light of the current dislocations in the credit markets, one or more of our banking partners could suffer unexpected financial difficulties that cause them to default on their obligations under our existing revolving credit facility and/or revolving construction facility, which would make it difficult for us to meet our short- and long-term liquidity needs;

 

 

the Company could lose key executive officers; and

 

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Table of Contents

 

 

our southeastern and midwestern markets may suffer declines in economic growth.

 

This list of risks and uncertainties, however, is not intended to be exhaustive. You should also review the other cautionary statements we make in “Business – Risk Factors” set forth in this Annual Report.

 

Given these uncertainties, you should not place undue reliance on forward-looking statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements to reflect any future events or circumstances or to reflect the occurrence of unanticipated events.

 

RESULTS OF OPERATIONS

 

Comparison of 2008 to 2007

 

As noted above, results for 2007 were reclassified from previously reported amounts to reflect in discontinued operations the operations for those properties sold or held for sale in 2008 which qualified for discontinued operations presentation.

 

Rental and Other Revenues

 

While we own and operate a limited number of industrial, retail and residential properties, our operating results depend heavily on successfully leasing and operating our office properties. Economic growth in Florida, Georgia, North Carolina and Tennessee is and will continue to be an important determinative factor in predicting our future operating results.

 

The key components affecting our rental and other revenues are average occupancy, rental rates, new developments placed in service, acquisitions and dispositions. Average occupancy generally increases during times of improving economic growth, as our ability to lease space outpaces vacancies that occur upon the expirations of existing leases. Average occupancy generally declines during times of slower economic growth, when new vacancies tend to outpace our ability to lease space. Asset acquisitions, dispositions and new developments placed in service directly impact our rental revenues and could impact our average occupancy, depending upon the occupancy rate of the properties that are acquired, sold or placed in service. A further indicator of the predictability of future revenues is the expected lease expirations of our portfolio. As a result, in addition to seeking to increase our average occupancy by leasing current vacant space, we also must concentrate our leasing efforts on renewing leases on expiring space. For more information regarding our lease expirations, see “Properties – Lease Expirations.”

 

Whether or not our rental revenue tracks average occupancy proportionally depends upon whether rents under new leases signed are higher or lower than the rents under the previous leases. The average rental rate per square foot on second generation renewal and relet leases signed in our Wholly Owned Properties compared to the rent under the previous leases (based on straight line rental rates) was 9.1% higher in 2008 than in 2007. The annualized rental revenues from second generation leases signed during any particular year is generally less than 15% of our total annual rental revenues.

 

Rental and other revenues from continuing operations were 7.6% higher in 2008 as compared to 2007 primarily due to the contribution from development properties placed in service in 2007 and 2008, higher average occupancy and higher average rental rates. We expect a slight decline in total occupancy in 2009 primarily related to anticipated declines in occupancy at our industrial properties. We expect to sell additional non-core properties in 2009 that will likely be classified as discontinued operations. We expect 2009 rental and other revenues to increase slightly over 2008, adjusted for any discontinued operations in 2009, due to the effect of new developments placed in service in 2008 and 2009 as discussed below, partly offset by the slight projected decline in occupancy.

 

We expect to deliver approximately $92.6 million of new office and industrial development properties by the end of 2009, which currently are 68.2% pre-leased.

 

Operating Expenses

 

Our expenses primarily consist of rental property expenses, depreciation and amortization, general and administrative expenses and interest expense. For 2008 and 2007, expenses also included impairments of assets held for use. Rental property expenses are expenses associated with our ownership and operation of rental properties and

 

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include expenses that vary somewhat proportionately to occupancy levels, such as common area maintenance and utilities, and expenses that do not vary based on occupancy, such as property taxes and insurance. Depreciation and amortization is a non-cash expense associated with the ownership of real property and generally remains relatively consistent each year, unless we buy, place in service or sell assets, since we depreciate our properties and related building and tenant improvement assets on a straight-line basis over a fixed life. General and administrative expenses, net of amounts capitalized, consist primarily of management and employee salaries and other personnel costs, corporate overhead and long-term incentive compensation.

 

Rental and other operating expenses were approximately 8.0% higher in 2008 as compared to 2007 primarily due to general inflationary increases in certain operating expenses, which include utility costs, insurance, real estate taxes, salaries, and benefits, and from expenses of development properties placed in service in 2007 and 2008. We expect rental and other operating expenses to increase in 2009 as compared to 2008 from utility and property tax increases and from development properties placed in service during the latter part of 2008 and in 2009, partially offset by planned dispositions.

 

Operating margin, defined as rental and other revenues less rental property and other expenses expressed as a percentage of rental and other revenues, was relatively unchanged at 64.1% in 2008 as compared to 2007.

 

The increase in depreciation and amortization of 5.4% results primarily from development properties placed in service in the latter part of 2007 and in 2008.

 

In 2008, 11 buildings in two business parks and one land parcel in Winston-Salem, NC became impaired and an expense charge aggregating $32.8 million was recorded, of which $32.4 million related to the 11 buildings and $0.4 million to the land parcel. In 2007, one land parcel became impaired and an expense charge of $0.8 million was recorded.

 

General and administrative expenses were approximately 8.5% lower in 2008 as compared to 2007 primarily due to lower audit and legal fees and lower deferred compensation expense, partially offset by higher compensation costs including short and long-term incentive compensation.

 

Interest Expense

 

Interest expense depends upon the amount of our borrowings, the weighted average interest rates on our debt and the amount of interest capitalized on development projects.

 

Contractual interest expense is shown net of amounts capitalized to development projects. The net decrease in contractual interest was primarily due to a decrease in weighted average interest rates on outstanding debt from 6.74% in the year ended December 31, 2007 to 6.08% in the year ended December 31, 2008, partly offset by an increase in average borrowings from $1,540 million in the year ended December 31, 2007 to $1,664 million in the year ended December 31, 2008. In addition, capitalized interest in 2008 was approximately $1.4 million lower compared to 2007 due to decreased development activity and lower average construction and development costs.

 

Total interest expense is expected to decrease in 2009 due to expected lower average outstanding debt balances resulting from the September 2008 equity offering and expected asset sales, offset by expected higher average interest rates resulting from projected new debt financings and lower capitalized interest.

 

Gains on Disposition of Properties; Gains on For-Sale Residential Condominiums; Gain from Property Insurance Settlement; Minority Interest; Equity in Earnings of Unconsolidated Affiliates

 

Net gains on dispositions of properties not classified as discontinued operations were $0.8 million in 2008 compared to $20.6 in 2007. Gains are dependent on the specific assets sold, historical cost basis and other factors, and can vary significantly from period to period.

 

In 2008, gains on for-sale residential condominiums aggregating $5.6 million resulted from sales of such condominiums and forfeitures of earnest money deposits by defaulting contractual counterparties. Our partner’s interest in these gains was $1.3 million and was recorded as minority interest.

 

In 2007, we recorded a $4.1 million gain from finalization of a prior year insurance claim.

 

Minority interest in the Company’s Consolidated Statements of Income decreased $1.2 million in 2008 compared to 2007 primarily due to lower income from continuing operations, after preferred equity distributions, of

 

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the Operating Partnership as a result of the various charges discussed above, partially offset by the minority interest in gains on for-sale residential condominiums. Minority interest in the Operating Partnership’s Consolidated Statements of Income increased $1.4 million compared to 2007 due primarily to the minority interest in the gains on for-sale residential condominiums.

 

Equity in earnings of unconsolidated affiliates in the Company decreased $7.2 million from 2007 to 2008. In 2007, our Weston Lakeside joint venture sold 332 rental residential units, recognizing a gain of approximately $11.3 million, which resulted in an increase of approximately $5.0 million in equity in earnings of unconsolidated affiliates. Additionally in 2007, our DLF I joint venture sold five properties and the joint venture recognized a gain of approximately $9.3 million, resulting in an increase of approximately $2.1 million in equity in earnings of unconsolidated affiliates. Equity in earnings of unconsolidated affiliates in the Operating Partnership does not include the Company’s 12.5% interest in a 261,000 square foot office property owned directly by the Company.

 

Discontinued Operations

 

The Company classified income of $19.1 million and $38.0 million as discontinued operations, net of minority interest in 2008 and 2007, respectively. These amounts relate to 2.0 million square feet of office and industrial properties and 13 rental residential units sold during 2007 and 2008 and include net gains on the sale of these properties of $17.3 million and $32.0 million in 2008 and 2007, respectively. The minority interest included in these amounts in the Company’s Consolidated Statements of Income relates to minority interest in the Operating Partnership.

 

During 2007, the Company recorded $1.5 million in income from the release of a FIN 48 liability; this item did not relate to the Operating Partnership’s operations and is thus not recorded in the Operating Partnership’s Consolidated Financial Statements.

 

Dividends on Preferred Equity and Excess of Preferred Equity Redemption/Repurchase Cost Over Carrying Value

 

The decrease in preferred equity dividends and excess of preferred equity redemption/repurchase costs over carrying value were due to the redemption/repurchase of $52.5 million and $62.3 million of preferred equity in 2008 and 2007, respectively.

 

Comparison of 2007 to 2006

 

As noted above, previously reported results for 2007 and 2006 were reclassified to reflect in discontinued operations the operations for those properties sold or held for sale in 2008 which qualified for discontinued operations presentation.

 

Rental and Other Revenues

 

Rental and other revenues from continuing operations were 6.8% higher in 2007 as compared to 2006 primarily due to the contribution from development properties placed in service in 2006 and in 2007, higher average occupancy and higher average rental rates.

 

Operating Expenses

 

Rental and other operating expenses were 4.6% higher in 2007 as compared to 2006 primarily due to general inflationary increases in certain operating expenses, which include utility costs, insurance, real estate taxes, salaries, and benefits, and from expenses of development properties placed in service in 2006 and 2007.

 

Operating margin, defined as rental and other revenues less rental property and other expenses expressed as a percentage of rental and other revenues, increased to approximately 64.2% in 2007 from approximately 63.5% in 2006. This increase in margin was primarily attributed to higher average occupancy combined with certain operating expenses, such as taxes and insurance, being relatively fixed in the short term.

 

The increase in depreciation and amortization of 8.4% primarily results from development properties placed in service in 2006 and in 2007.

 

In 2007, one land parcel became impaired and an expense charge of $0.8 million was recorded.

 

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General and administrative expenses were approximately 11.4% higher in 2007 as compared to 2006 primarily due to higher write-offs of deferred development costs on projects that did not proceed or were deemed unlikely to occur in the future, higher annual and long-term incentive compensation costs, higher salary and fringe benefit costs from annual employee wage and salary increases and inflationary effects on other general and administrative expenses.

 

Interest Expense

 

Contractual interest expense is shown net of amounts capitalized to development projects. The net decrease in contractual interest was primarily due to a decrease in weighted average interest rates on outstanding debt of 6.74% in 2007 compared to 6.92% in 2006, partly offset by an increase in average borrowings of $1,540 million in 2007 compared $1,441 million in 2006. In addition, capitalized interest in 2007 was approximately $4.7 million higher compared to 2006 due to increased development activity and higher average construction and development costs.

 

Settlement of Tenant Bankruptcy Claim

 

In 2006, we received a settlement of a bankruptcy claim in the amount of $1.6 million related to leases with a former tenant that were terminated in 2003.

 

Gains on Disposition of Properties; Gain from Property Insurance Settlement; Minority Interest; Equity in Earnings of Unconsolidated Affiliates

 

The Company recorded net gains on dispositions of properties not classified as discontinued operations of $20.6 million in 2007 compared to $16.2 million in 2006. Gains are dependent on the specific assets sold, historical cost basis and other factors, and can vary significantly from period to period.

 

In 2007, we recorded a $4.1 million gain from finalization of a prior year insurance claim.

 

Minority interest in the Company’s Consolidated Statements of Income increased $1.5 million in 2007 compared to 2006 primarily due to higher income from continuing operations, after preferred equity distributions, in 2007 of the Operating Partnership compared to 2006. Minority interest in the Operating Partnership’s Consolidated Statements of Income remained unchanged at approximately $0.6 million for both years.

 

Equity in earnings of unconsolidated affiliates in the Company increased $6.3 million from 2006 to 2007. In 2007, our Weston Lakeside joint venture sold 332 rental residential units, recognizing a gain of approximately $11.3 million, which resulted in an increase of approximately $5.0 million in equity in earnings of unconsolidated affiliates. Additionally in 2007, our DLF I joint venture sold five properties and the joint venture recognized a gain of approximately $9.3 million, resulting in an increase of approximately $2.1 million in equity in earnings of unconsolidated affiliates. Equity in earnings of unconsolidated affiliates in the Operating Partnership does not include the Company’s 12.5% interest in a 261,000 square foot office property owned directly by the Company.

 

Discontinued Operations

 

The Company classified income of $38.0 million and $19.1 million as discontinued operations, net of minority interest in 2007 and 2006, respectively. These discontinued operations relate to 5.0 million square feet of office and industrial properties and 186 rental residential units sold during 2008, 2007 and 2006 and include net gains on the sale of these properties of $32.0 million and $13.9 million in 2007 and 2006, respectively. The minority interest included in these amounts in the Company’s Consolidated Statements of Income relates to minority interest in the Operating Partnership.

 

During 2007, the Company recorded $1.5 million in income from the release of a FIN 48 liability; this item did not relate to the Operating Partnership’s operations and is thus not recorded in the Operating Partnership’s Consolidated Financial Statements. See Note 16 to our Consolidated Financial Statements for further discussion.

 

Dividends on Preferred Equity and Excess of Preferred Equity Redemption/Repurchase Cost Over Carrying Value

 

The decrease in preferred equity dividends and increase in excess of preferred equity redemption/repurchase costs over carrying value were due to the redemption/repurchase of $62.3 million and $50.0 million of preferred equity in 2007 and 2006, respectively.

 

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LIQUIDITY AND CAPITAL RESOURCES

 

Overview

 

We generally use rents received from customers to fund our operating expenses, recurring capital expenditures and distributions. To fund property acquisitions, development activity or building renovations and repay debt upon maturity, we may sell assets and/or obtain new debt. Our debt generally consists of mortgage debt, unsecured debt securities and borrowings under our secured and unsecured credit facilities. We also may sell or issue common or preferred equity to fund additional growth or to reduce our debt. To generate additional capital to fund our growth and other strategic initiatives and to lessen the ownership risks typically associated with owning 100.0% of a property, we may also sell some of our properties or contribute them to joint ventures.

 

Our goal is to maintain a conservative and flexible balance sheet. Our $450.0 million unsecured revolving credit facility is currently scheduled to mature on May 1, 2009. As permitted under the terms of the revolving credit facility, we have submitted our notice to extend the maturity date of the credit facility by one year. Upon payment of the extension fee and assuming no default exists at May 1, 2009, the facility will be extended until May 1, 2010. As a result of this extension, we will have sufficient borrowing availability under our revolving credit facility to retire the approximate $123.0 million of debt, as measured at February 12, 2009, that will mature (including approximately $7.3 million of required principal amortization payments relating to debt that matures in future years) during the remainder of 2009 and fund the remaining costs of our current development pipeline. In January 2009, we paid off at maturity $50.0 million of 8.125% unsecured notes using borrowings under our revolving credit facility. Because the cost and availability of credit, however, has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads, we expect to use less cash for investing activities in 2009 than in prior years. Based on management’s view of current and future market conditions, we expect to generate a positive amount of cash from operating activities during 2009. We currently intend to use any such positive net cash flows from operating activities after payment of distributions and recurring capital expenditures, together with the proceeds from projected non-core property dispositions and projected new debt financings, to reduce outstanding debt balances in 2009. These forward-looking statements are subject to risks and uncertainties. See “—Disclosure Regarding Forward-Looking Statements.”

 

Statements of Cash Flows

 

As required by GAAP, we report and analyze our cash flows based on operating activities, investing activities and financing activities. The following table sets forth the changes in the Company’s cash flows from 2007 to 2008 ($ in thousands):

 

 

 

Year Ended December 31,

 

 

 

 

 

2008

 

2007

 

Change

 

Cash Provided By Operating Activities

 

$

157,822

 

$

161,663

 

$

(3,841

)

Cash Used In Investing Activities

 

 

(134,343

)

 

(150,704

)

 

16,361

 

Cash Used In Financing Activities

 

 

(12,862

)

 

(24,509

)

 

11,647

 

Total Cash Flows

 

$

10,617

 

$

(13,550

)

$

24,167

 

 

The following table sets forth the changes in the Operating Partnership’s cash flows from 2007 to 2008 ($ in thousands):

 

 

 

Year Ended December 31,

 

 

 

 

 

2008

 

2007

 

Change

 

Cash Provided By Operating Activities

 

$

157,782

 

$

161,526

 

$

(3,744

)

Cash Used In Investing Activities

 

 

(134,343

)

 

(151,858

)

 

17,515

 

Cash Used In Financing Activities

 

 

(12,934

)

 

(22,362

)

 

9,428

 

Total Cash Flows

 

$

10,505

 

$

(12,694

)

$

23,199

 

 

In calculating cash flow from operating activities, depreciation and amortization, which are non-cash expenses, are added back to net income. As a result, we have historically generated a positive amount of cash from operating activities. From period to period, cash flow from operations depends primarily upon changes in our net income, as

 

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discussed more fully above under “Results of Operations,” changes in receivables and payables, and net additions or decreases in our overall portfolio, which affect the amount of depreciation and amortization expense.

 

Cash provided by or used in investing activities generally relates to capitalized costs incurred for leasing and major building improvements and our acquisition, development, disposition and joint venture activity. During periods of significant net acquisition and/or development activity, our cash used in such investing activities will generally exceed cash provided by investing activities, which typically consists of cash received upon the sale of properties and distributions of capital from our joint ventures.

 

Cash used in financing activities generally relates to distributions, incurrence and repayment of debt and sales, repurchases or redemptions of Common Stock, Common Units and Preferred Stock. As discussed previously, we use a significant amount of our cash to fund distributions. Whether or not we have increases in the outstanding balances of debt during a period depends generally upon the net effect of our acquisition, disposition, development and joint venture activity. We use our revolving credit facility for working capital purposes, which means that during any given period, in order to minimize interest expense, we will likely record significant repayments and borrowings under our revolving credit facility.

 

The decrease of $3.8 million in cash provided by operating activities of the Company in 2008 compared to 2007 was primarily the result of the net decrease in the change in operating assets and liabilities partially offset by cash flows from net income as adjusted for changes in depreciation and amortization, gains on disposition of properties, impairments of assets held for use, gains from for-sale residential condominiums, gain from a property insurance settlement, minority interest, and equity in earnings of unconsolidated affiliates. Cash provided by operating activities of the Operating Partnership differs from cash provided by operating activities of the Company primarily due to minority interest in the Operating Partnership included in the Company’s Consolidated Financial Statements but not included in the Operating Partnership’s Consolidated Financial Statements.

 

The decrease of $16.4 million in cash used in investing activities in 2008 compared to 2007 was primarily the result of lower capital expenditure spending, higher proceeds from the dispositions of for-sale residential condominiums and positive changes in restricted cash and other investment activities, partially offset by lower proceeds from disposition of real estate assets, lower returns of capital from unconsolidated affiliates, and higher contributions to unconsolidated affiliates, primarily for the formation of a new joint venture.

 

The decrease of $11.6 million in cash used in financing activities in 2008 compared to the same period in 2007 was primarily the result of fewer retirements of Preferred Stock and Preferred Units, lower distributions on Preferred Stock and Preferred Distributions, substantially higher proceeds from the sale of Common Stock, higher net borrowings from mortgages and notes payable and our revolving credit facility, and lower repurchases of Common Units, partially offset by higher distributions resulting from an increase in the number of shares of Common Stock outstanding and lower contributions from minority interest partners. Cash used in financing activities of the Operating Partnership differs from cash used in financing activities of the Company primarily due to cash used to repurchase Common Units included in the cash flows of the Company but not included in the cash flows of the Operating Partnership.

 

Capitalization

 

The following table sets forth the Company’s capitalization (in thousands, except per share amounts):

 

 

 

December 31,
2008

 

December 31,
2007

 

Mortgages and notes payable, at recorded book value

 

$

1,604,685

 

$

1,641,987

 

Financing obligations

 

$

34,174

 

$

35,071

 

Preferred Stock, at liquidation value

 

$

81,592

 

$

135,437

 

 

 

 

 

 

 

 

 

Common Stock outstanding

 

 

63,572

 

 

57,167

 

Minority interest partnership units

 

 

4,067

 

 

4,057

 

 

 

 

 

 

 

 

 

Per share stock price at year end

 

$

27.36

 

$

29.38

 

Market value of Common Stock and Common Units

 

$

1,850,603

 

$

1,798,761

 

Total market capitalization with debt and obligations

 

$

3,571,054

 

$

3,611,256

 

 

 

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Based on our total market capitalization of approximately $3.6 billion at December 31, 2008 (at the December 31, 2008 per share stock price of $27.36 and assuming the redemption for shares of Common Stock of the approximate 4.1 million Common Units not owned by the Company), our mortgages and notes payable represented 44.9% of our total market capitalization. Mortgages and notes payable at December 31, 2008 was comprised of $655.2 million of secured indebtedness with a weighted average interest rate of 6.45% and $949.5 million of unsecured indebtedness with a weighted average interest rate of 5.26%. As of December 31, 2008, our outstanding mortgages and notes payable and financing obligations were secured by real estate assets with an aggregate undepreciated book value of approximately $1.1 billion.

 

Current and Future Cash Needs

 

Rental and other revenues are our principal source of funds to meet our short-term liquidity requirements. Other sources of funds for short-term liquidity needs include available working capital and borrowings under our revolving credit facility and revolving construction credit facility (which had $262.7 million and $42.4 million of availability, respectively, as of February 12, 2009). Our short-term liquidity requirements primarily consist of operating expenses, interest and principal amortization on our debt, distributions, any payments under guarantee obligations and recurring capital expenditures, including building improvement costs, tenant improvement costs and lease commissions. Building improvements are recurring capital costs not related to a specific customer to maintain existing buildings. Recurring tenant improvements are the costs required to customize space for the specific needs of customers in spaces other than in new development projects.

 

Notwithstanding the ongoing turbulence and uncertainty in the global capital markets, such as widening credit spreads and tightening underwriting standards which have negatively impacted the availability of capital across many industries, we anticipate that our available cash and cash equivalents and cash flows from operating activities, with cash available from borrowings under our credit facilities, will be adequate to meet our short-term liquidity requirements. As a result of the expected one-year extension of our revolving credit facility, we will have sufficient borrowing availability under our revolving credit facility to retire the approximate $123.0 million of debt, as measured at February 12, 2009, that will mature (including approximately $7.3 million of required principal amortization payments relating to debt that matures in future years) during the remainder of 2009 and fund the remaining costs of our current development pipeline. If these sources of funds are insufficient or unavailable, our ability to pay distributions and satisfy other cash payments may be adversely affected. See “Item 1A. Risk Factors – Our use of debt to finance our operations could have a material adverse effect on our cash flow and ability to make distributions.”

 

Our long-term liquidity uses generally consist of the retirement or refinancing of debt upon maturity (including mortgage debt, our revolving and construction credit facilities, term loans and other unsecured debt), funding of existing and new building development or land infrastructure projects and funding acquisitions of buildings and development land. Excluding recurring capital expenditures for leasing costs and tenant improvements and for normal building improvements, our expected future capital expenditures for started and/or committed new development projects were approximately $58 million at December 31, 2008. A significant portion of these future expenditures are currently subject to binding contractual arrangements. Additionally, we may from time to time retire some or all of our remaining outstanding Preferred Stock through redemptions, open market repurchases, privately negotiated acquisitions or otherwise.

 

We expect to meet our long-term liquidity needs through a combination of:

 

 

positive net cash flows from operating activities after payment of distributions and recurring capital expenditures;

 

 

unsecured borrowings under our existing revolving credit facility or new financing arrangements that we may obtain;

 

 

secured borrowings under existing construction facilities or new financing arrangements that we may obtain (at December 31, 2008, we had approximately $2.3 billion of unencumbered real estate assets at undepreciated cost);

 

 

the disposition of non-core assets;

 

 

the issuance by the Operating Partnership of unsecured debt securities;

 

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the issuance of equity securities by the Company and the Operating Partnership; and

 

 

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 would have the net effect of generating additional capital through such sale or contributions.

 

Distributions

 

To maintain its qualification as a REIT, the Company must pay dividends to stockholders that are at least 90.0% of its annual REIT taxable income, excluding net capital gains. The Company’s REIT taxable income, as determined by the federal tax laws, does not equal its net income under GAAP. In addition, although capital gains are not required to be distributed to maintain REIT status, capital gains, if any, that are generated as part of our capital recycling activity are subject to federal and state income tax unless such gains are distributed to stockholders. The partnership agreement requires the Operating Partnership to distribute at least enough cash for the Company to be able to pay such dividends. Although the minimum Common Stock dividend per share required for the Company to maintain its REIT status (excluding any net capital gains) was $0.76 and $0.54 in 2008 and 2007, respectively, our per share and per unit distributions during both years was $1.70.

 

Cash distributions reduce the amount of cash that would otherwise be available for other business purposes, including funding debt maturities or future growth initiatives. Under temporary IRS regulations, for 2009, distributions can be paid partially using a REIT’s freely tradable common stock, provided that stockholders have the option of receiving at least 10% of the total distribution in cash. The amount and composition of future distributions will be made at the discretion of the Company’s Board of Directors. For a discussion of the factors that will influence decisions of the Board of Directors regarding distributions, see “Item 5. Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities.”

 

Financing Structure and Activity

 

In September 2008, the Company sold 5.5 million shares of Common Stock for net proceeds of $195.0 million. As required by the terms of the partnership agreement of the Operating Partnership, the net proceeds from the offering were contributed by the Company to the Operating Partnership in exchange for 5.5 million additional Common Units. A portion of the net proceeds of the offering were subsequently used to repurchase 53,845 8.625% Series A Cumulative Redeemable Preferred Shares for an aggregate purchase price of $52.5 million. The remaining net proceeds from the offering were used to reduce the borrowings then outstanding under our revolving credit facility.

 

In January 2009, we paid off at maturity $50.0 million of 8.125% unsecured notes using borrowings under our revolving credit facility.

 

Our $70.0 million secured construction facility, which bears interest at LIBOR plus 85 basis points, is initially scheduled to mature on December 20, 2010. Assuming no defaults have occurred, we have options to extend the maturity date for two successive one-year periods. As of December 31, 2008, $16.6 million of borrowings were outstanding under the construction facility.

 

Our $450.0 million unsecured revolving credit facility is currently scheduled to mature on May 1, 2009. As permitted under the terms of the revolving credit facility, we have submitted our notice to extend the maturity date of the credit facility by one year. Upon payment of the extension fee and assuming no default exists at May 1, 2009, the facility will be extended until May 1, 2010. We depend on our revolving credit facility for working capital purposes and for the short-term funding of our development and acquisition activity and, in certain instances, the repayment of other debt upon maturity. Continuing ability to borrow under the revolving credit facility allows us to quickly capitalize on accretive opportunities at short-term interest rates. If our lenders default under their obligations under the revolving credit facility or we become unable to borrow additional funds under the facility for any reason, we would be required to sell additional assets or seek alternative equity or debt capital, which could be more costly and adversely impact our financial condition. If such alternative capital were unavailable, we would not be able to make new investments and could have difficulty repaying other debt.

 

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The interest rate under our revolving credit facility is LIBOR plus 80 basis points and the annual base facility fee is 20 basis points. The interest rate would increase to LIBOR plus 140 or 155 basis points if our credit rating were to fall below investment grade according to two of three credit rating agencies. Our revolving credit facility, term loan and revolving construction facilities are syndicated as follows (in thousands):

 

Name of Lender

 

Total
Revolving
Credit
Commitment

(1)

Revolving
Credit
Facility
Outstanding
at
December 31,
2008

 

Term Loan
Participation
at
December 31,
2008

(2)

Total
Construction
Loan
Commitment

(3)

Construction
Loan
Participation
at
December 31
2008

 

Bank of America, N.A.

 

$

50,000

 

$

18,111

 

$

25,000

 

$

 

$

 

Branch Banking and Trust Co.

 

 

50,000

 

 

18,111

 

 

10,000

 

 

 

 

 

Wells Fargo/Wachovia Bank, N.A.

 

 

100,000

 

 

36,222

 

 

45,000

 

 

 

 

 

Emigrant Bank

 

 

35,000

 

 

12,678

 

 

 

 

 

 

 

Eurohypo AG, New York Branch

 

 

35,000

 

 

12,678

 

 

 

 

 

 

 

PNC Bank, N.A.

 

 

30,000

 

 

10,867

 

 

 

 

20,000

 

 

4,745

 

Regions Bank

 

 

30,000

 

 

10,867

 

 

25,000

 

 

20,000

 

 

4,744

 

Comerica Bank

 

 

25,000

 

 

9,056

 

 

 

 

 

 

 

RBC Bank

 

 

25,000

 

 

9,056

 

 

 

 

 

 

 

Union Bank of California, N.A.

 

 

25,000

 

 

9,056

 

 

10,000

 

 

15,000

 

 

3,558

 

US Bank

 

 

20,000

 

 

7,243

 

 

15,000

 

 

15,000

 

 

3,558

 

First Horizon Bank

 

 

15,000

 

 

5,433

 

 

7,500

 

 

 

 

 

Chevy Chase Bank

 

 

10,000

 

 

3,622

 

 

 

 

 

 

 

Total

 

$

450,000

 

$

163,000

 

$

137,500

 

$

70,000

 

$

16,605

 

                               

(1)

Our $450.0 million unsecured revolving credit facility is currently scheduled to mature on May 1, 2009. We have submitted our notice to extend the maturity date of the credit facility by one year to May 2010, and upon payment of the extension fee and assuming no default exists at that time, the facility will be extended.

(2)

Our $137.5 million three-year term loan is currently scheduled to mature on February 26, 2011.

(3)

Our $70.0 million secured construction facility is currently scheduled to mature on December 20, 2010. Assuming no defaults have occurred, we have options to extend the maturity date for two successive one-year periods.

 

We have $1.6 million of outstanding letters of credit as of December 31, 2008, which reduce the availability on our revolving credit facility. As a result, the unused capacity of our revolving credit facility at December 31, 2008 was $285.4 million.

 

We regularly evaluate the financial condition of the lenders that participate in our credit facilities using publicly available information, particularly in light of the current dislocations in the credit markets. Based on this review, we currently expect our lenders, which are major financial institutions, to perform their obligations under our existing facilities.

 

Covenant Compliance

 

The Operating Partnership has $400 million principal amount of 2017 bonds outstanding and $200 million principal amount of 2018 bonds outstanding. The indenture that governs these outstanding notes requires us to comply with customary operating covenants and various financial ratios, including a requirement that we maintain unencumbered assets of at least 200% of all outstanding unsecured debt. The trustee or the holders of at least 25% in principal amount of either series of bonds can accelerate the principal amount of such series upon written notice of a default that remains uncured after 60 days.

 

Our revolving credit facility and our $137.5 million bank term loan due in February 2011 also require us to comply with customary operating covenants and various financial requirements, including a requirement that we maintain a ratio of total liabilities to total asset value of no more than 60%. For purposes of the revolving credit facility, total asset value depends upon the effective economic capitalization rate (after deducting capital expenditures) used to determine the value of our buildings. Depending upon general economic conditions, the lenders have the good faith right to unilaterally increase the capitalization rate by up to 25 basis points once each calendar year. Any such increase in capitalization rates, without a corresponding reduction in total liabilities, could

 

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make it more difficult for us to maintain a ratio of total liabilities to total asset value of no more than 60%, which could have an adverse effect on our ability to borrow additional funds under the revolving credit facility. Upon an event of default, lenders having at least 66.7% of the total commitments under the revolving credit facility can accelerate all borrowings then outstanding and prohibit us from borrowing any further amounts under our revolving credit facility, which would adversely affect our ability to fund our operations.

 

We are currently in compliance with all such covenants and requirements. Although we expect to remain in compliance with these covenants and ratios for at least the next year, depending upon our future operating performance, property and financing transactions and general economic conditions, we cannot assure you that we will continue to be in compliance.

 

We may not be able to repay, refinance or extend any or all of our debt at maturity or upon any acceleration. If any refinancing is done at higher interest rates, the increased interest expense could adversely affect our cash flow and ability to pay dividends. Any such refinancing could also impose tighter financial ratios and other covenants that restrict our ability to take actions that could otherwise be in our best interest, such as funding new development activity, making opportunistic acquisitions, repurchasing our securities or paying dividends.

 

Contractual Obligations

 

The following table sets forth a summary regarding our known contractual obligations, including required interest payments for those items that are interest bearing, at December 31, 2008 ($ in thousands):

 

 

 

 

 

Amounts due during years ending December 31,

 

 

 

 

 

Total

 

2009

 

2010

 

2011

 

2012

 

2013

 

Thereafter

 

Mortgages and Notes Payable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal payments (1)

 

$

1,604,685

 

$

340,053

 

$

25,845

 

$

147,337

 

$

212,515

 

$

240,607

 

$

638,328

 

Interest payments

 

 

474,874

 

 

83,599

 

 

74,450

 

 

70,495

 

 

56,064

 

 

48,016

 

 

142,250

 

Financing Obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SF-HIW Harborview Plaza, LP
financing obligation

 

 

16,604

 

 

 

 

 

 

 

 

 

 

 

 

16,604

 

Tax increment financing bond

 

 

16,418

 

 

1,044

 

 

1,116

 

 

1,193

 

 

1,277

 

 

1,365

 

 

10,423

 

Capitalized ground lease
obligation

 

 

1,152

 

 

 

 

 

 

 

 

 

 

 

 

1,152

 

Interest on financing obligations (2)

 

 

7,882

 

 

1,172

 

 

1,101

 

 

1,027

 

 

947

 

 

862

 

 

2,773

 

Capitalized Lease Obligations

 

 

134

 

 

97

 

 

30

 

 

7

 

 

 

 

 

 

 

Purchase Obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Completion contracts

 

 

41,459

 

 

41,459

 

 

 

 

 

 

 

 

 

 

 

Operating Lease Obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating ground leases

 

 

48,469

 

 

1,142

 

 

1,125

 

 

1,145

 

 

1,165

 

 

1,186

 

 

42,706

 

Other Long Term Obligations (in
accounts payable, accrued
expenses and other liabilities):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Plaza Colonnade lease guarantee

 

 

4

 

 

4