hiw10k2009.htm





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, 2009

OR

[  ]        Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
  For the transition period from________ to___________

HIW logo

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  S    No £                                                                               Highwoods Realty Limited Partnership  Yes  S    No £

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  £    No S                                                                               Highwoods Realty Limited Partnership  Yes  £    No S

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  S    No £                                                                               Highwoods Realty Limited Partnership  Yes  S    No £

 
 

 



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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.   £

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 S    Accelerated filer £      Non-accelerated filer £      Smaller reporting company £
 
Highwoods Realty Limited Partnership
Large accelerated filer £    Accelerated filer £      Non-accelerated filer S      Smaller reporting company £

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  £    No S                                                                               Highwoods Realty Limited Partnership  Yes  £    No S

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, 2009 was approximately $1.6 billion. At February 3, 2010, there were 71,363,500 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, 2010 are incorporated by reference in Part II, Item 5 and Part III, Items 10, 11, 12, 13 and 14.



 
 

 


HIGHWOODS PROPERTIES, INC.
HIGHWOODS REALTY LIMITED PARTNERSHIP

TABLE OF CONTENTS


Item No.
     
Page
 
   
PART I
     
1.
     
1A.
     
1B.
     
2.
     
3.
     
4.
     
X.
     
           
   
PART II
     
5.
     
6.
     
7.
     
7A.
     
8.
     
9.
     
9A.
     
9B.
     
           
   
PART III
     
10.
     
11.
     
12.
     
13.
     
14.
     
           
   
PART IV
     
15.
     
           



 
3

 

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” or “Common Shares,” the Company’s preferred stock as “Preferred Stock” or “Preferred Shares,” 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 Company is a fully-integrated, self-administered and self-managed equity real estate investment trust (“REIT”). The Common Stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “HIW.” The Company conducts virtually all of its activities through the Operating Partnership and is its sole general partner. 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, 2009, we:

 
·
wholly owned 307 in-service office, industrial and retail properties, encompassing approximately 27.8 million rentable square feet, and 96 rental residential units;

 
·
owned an interest (50.0% or less) in 70 in-service office and industrial properties, encompassing approximately 7.8 million rentable square feet, one office property under development, 53 acres of development land and 418 rental residential units, including 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 3, 7 and 9 to our Consolidated Financial Statements;

 
·
wholly owned 581 acres of undeveloped land, approximately 490 acres of which are considered core holdings, defined as properties expected to be held indefinitely, and which are suitable to develop approximately 7.9 million rentable square feet of office and industrial space;

 
·
were developing three wholly owned properties comprising approximately 0.5 million square feet that were recently completed but had not achieved stabilization; and

 
·
owned 40 for-sale residential condominiums through a consolidated, majority-owned joint venture.

At December 31, 2009, the Company owned all of the Preferred Units and 70.9 million, or 94.8%, of the Common Units. Limited partners (including one officer and two directors of the Company) own the remaining 3.9 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, NC 27604, and our telephone number is (919) 872-4924. We maintain offices in each of our primary markets, except Greenville, SC.

Our business is the operation, acquisition and development of rental real estate properties. We operate office, industrial, retail and residential properties. There are no material inter-segment transactions. See Note 18 to our Consolidated Financial Statements for a summary of the rental and other revenues, net operating income and assets for each reportable segment.

 
4

 



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. 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 on the SEC’s website, which is 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, NY 10005.

During 2009, the Company filed unqualified Section 303A certifications with the NYSE. The Company and the Operating Partnership 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 at December 31, 2009:
 
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                                                                       
 
1,901,654
 
$
38,750
 
8.89
%
8.1
 
AT&T                                                                       
 
768,579
   
14,678
 
3.37
 
4.2
 
PricewaterhouseCoopers                                                                       
 
400,178
   
11,531
 
2.65
 
2.7
 
State of Georgia                                                                       
 
375,105
   
8,222
 
1.89
 
7.5
 
Healthways                                                                       
 
290,689
   
7,490
 
1.72
 
12.5
 
T-Mobile USA                                                                       
 
207,517
   
6,047
 
1.39
 
3.9
 
Metropolitan Life Insurance                                                                       
 
296,595
   
5,953
 
1.37
 
8.0
 
BB&T                                                                       
 
267,463
   
4,541
 
1.04
 
3.6
 
Lockton Companies                                                                       
 
160,561
   
4,424
 
1.02
 
5.2
 
Syniverse Technologies, Inc.                                                                       
 
198,750
   
4,201
 
0.96
 
6.8
 
RBC Bank                                                                       
 
164,271
   
4,084
 
0.94
 
17.0
 
Fluor Enterprises, Inc.                                                                       
 
209,474
   
3,763
 
0.86
 
2.1
 
SCI Services                                                                       
 
162,784
   
3,641
 
0.84
 
7.6
 
HCA Corporation                                                                       
 
180,164
   
3,620
 
0.83
 
4.5
 
Volvo                                                                       
 
249,136
   
3,354
 
0.77
 
4.5
 
Jacob’s Engineering Group, Inc.                                                                       
 
181,794
   
3,078
 
0.71
 
5.7
 
Vanderbilt University                                                                       
 
144,611
   
3,056
 
0.70
 
5.8
 
Wells Fargo/Wachovia                                                                       
 
125,995
   
3,013
 
0.69
 
1.6
 
Lifepoint Corporate Services                                                                       
 
139,625
   
2,894
 
0.66
 
1.6
 
Icon Clinical Research                                                                       
 
102,647
   
2,492
 
0.57
 
2.0
 
Total                                                                       
 
6,527,592
 
$
138,832
 
31.87
%
6.4
 
         
 
(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 2009 multiplied by 12.

 
5

 

Business and Operating Strategy

Our Strategic Plan focuses on:
 
 
·
owning high-quality, differentiated real estate assets in the best submarkets in our primary markets; and

 
·
maintaining a conservative, flexible balance sheet with ample liquidity to meet our funding needs.
 
Execution of our Plan includes (1) growing net operating income at our existing properties through concentrated leasing, asset management and customer service efforts and (2) developing properties in infill locations and acquiring strategic properties that are accretive to long-term earnings and stockholder value. 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. Our portfolio has changed significantly over the past five years and now consists of a higher mix of Class A and B properties, which are generally expected to outperform competitive properties in our core markets. We have repositioned our portfolio primarily by selling non-core properties and developing properties in in-fill locations. Our real estate professionals are seasoned and cycle-tested. Our senior leadership team has significant experience and maintains important relationships with market participants in each of our primary markets. Our focus in 2010 is to lease and operate our existing portfolio as effectively and efficiently as possible and acquire and develop additional real estate assets that improve the overall quality of our portfolio and generate attractive returns over the long-term for our stockholders.

Customer Service-Oriented Organization. We provide a complete line of real estate services to our customers. We believe that our in-house leasing and asset management, development, acquisition, and construction 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 and the strength of our balance sheet also provide a competitive advantage in setting our lease rates and pricing other services. In addition, our relationships with our customers may lead to development projects when these customers 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 no longer considered to be core holdings primarily due to location, age, quality and overall strategic fit;
 
·
engage in the development of office, industrial and other real estate projects in existing or new geographic markets, primarily in suburban in-fill and central business district locations; and

·
acquire selective office and industrial properties in existing markets that enhance our franchise or in new geographic markets at prices that offer attractive long-term returns for our stockholders.
 
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. Our balance sheet also allows us to proactively assure our existing and prospective customers that we are able to fund tenant improvements and maintain our properties at high standards.

 
6

 



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; and
 
·
the disposition of non-core assets.
 
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 Southeastern United States, retail and office properties in Kansas City, MO and office, retail and residential properties in Des Moines, IA.

Competition

Our properties compete for customers with similar properties located in our markets primarily on the basis of location, rent, services provided and the design, quality 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

At December 31, 2009, the Company had 407 employees, of which 405 were also employees of the Operating Partnership.

ITEM 1A. RISK FACTORS

An investment in our securities involves various risks. 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.

Adverse economic conditions in our suburban Southeastern markets that negatively impact the demand for office space, such as rising unemployment, may result in lower occupancy and rental rates for our portfolio, which would result in lower net income. 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 suburban office properties. Economic growth and employment levels in Florida, Georgia, North Carolina and Tennessee are and will continue to be important determinative factors in predicting our future operating results.

Key components affecting our rental and other revenues include average occupancy and rental rates. 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 and decreasing office employment because new vacancies tend to outpace our ability to lease space. In addition, the timing of changes in occupancy levels tends to lag the timing of changes in overall economic activity and employment levels. We expect a slight decline in total occupancy in 2010 primarily related to anticipated declines in occupancy in our industrial portfolio, which would likely reduce rental revenues from our same property portfolio. For additional information regarding our average occupancy and rental rate trends over the past five years, see “Item 2. Properties – Wholly Owned Properties” set forth in this Annual Report. 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 “Item 2. Properties – Lease Expirations” set forth in this Annual Report. 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. Lower rental revenues resulting from lower average occupancy or lower rental rates with respect to our same property portfolio will generally reduce our net income unless offset by the impact of any newly acquired or developed properties or lower variable operating expenses, general and administrative expenses and/or interest expense.

 
7

 



An oversupply of space in our Southeastern 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. Undeveloped land in many of the Southeastern markets in which we operate is generally more readily available and less expensive than in higher barrier-to-entry markets such as New York, Chicago, Boston, San Francisco and Los Angeles. As a result, even during times of positive economic growth, our competitors could construct new buildings that would compete with our properties. Any such oversupply could result in lower occupancy and rental rates in our portfolio, which would have a negative impact on our rental revenues.

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, which reduces our cash flows. If our properties are not as attractive to customers in terms of rent, services, condition or location as properties owned by our competitors, we could lose customers or suffer lower rental rates. As a result, we may from time to time be required to make significant capital expenditures to maintain the competitiveness of our properties. There can be no assurances that any such expenditures would result in higher occupancy or higher rental rates or deter existing customers from relocating to properties owned by our competitors.

Our operating results and 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. The success of our investments and stability of our operations depend on the financial stability of our customers. A default or termination by a significant customer on its lease payments to us would cause us to lose the revenue associated with such lease. In the event of a customer default or bankruptcy, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-leasing the property. If a customer defaults on or terminates a significant lease, we may be unable to lease the property for the rent previously received. These events could reduce our net income.

To relet space to an existing customer or attract a new customer to occupy space, we may incur significant costs in the process, including potentially substantial tenant improvements, broker commissions and lease incentives. Approximately 10-15% of our revenues at the beginning of any particular year are subject to leases that expire by the end of that year. 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. To entice customers to renew existing leases or sign new leases, we may be required to make substantial leasing capital expenditures. 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.

Costs of complying with governmental laws and regulations may reduce our net income. All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. Some of these laws and regulations may impose joint and several liability on customers, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may hinder our ability to sell, rent or pledge such property as collateral for future borrowings.

Compliance with new laws or regulations or stricter interpretation of existing laws may require us to incur significant expenditures. Future laws or regulations may impose significant environmental liability. Additionally, our customers’ operations, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties may affect our properties. In addition, there are various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply and which may subject us to liability in the form of fines or damages for noncompliance. Any expenditures, fines or damages we must pay would reduce our net income. Proposed legislation to address climate change could increase utility and other costs of operating our properties which, if not offset by rising rental income, would reduce our net income.

 
8

 



Discovery of previously undetected environmentally hazardous conditions may decrease our revenues and limit our ability to make distributions. Under various federal, state and local environmental laws and regulations, a current or previous property owner or operator may be liable for the cost to remove or remediate hazardous or toxic substances on such property. These costs could be significant. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require significant expenditures or prevent us from entering into leases with prospective customers that may be impacted by such laws. Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials. Third parties may seek recovery from real property owners or operators for personal injury or property damage associated with exposure to released hazardous substances. The cost of defending against claims of liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could reduce our net income.

Our operating results may suffer if costs of operating our properties, such as real estate taxes, utilities, insurance, maintenance and other costs, rise faster than our ability to increase rental revenues. While we receive additional rent from our customers 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. Furthermore, 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 same property operating expenses would reduce our net income unless offset by the impact of any newly acquired or developed properties or lower general and administrative expenses and/or interest expense.

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 construction and/or permanent 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.

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.

 
9

 



We intend to continue to sell some of our properties in the future as part of our capital recycling program. 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 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-deferred 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 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 net income.

Because holders of our Common Units, including one of our officers and two of our 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 one of our officers and two of our 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 any of our 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 value of our joint venture investments could be adversely affected if we are unable to work effectively with our partners or our partners become unable to satisfy their financial obligations. 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 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 the 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, floods, 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 operating results and 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 cost. 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.

 
10

 



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 distributions. 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 distributions. 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 distributions.

From time to time, we depend on our unsecured 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. Our ability to borrow under the revolving credit facility also 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 may 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, whichcould 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 continue 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 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. Such events would likely have a significant adverse effect on our operating results and 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. For the Company to maintain its qualification as a REIT, it must annually distribute to its stockholders at least 90% of ordinary taxable income, excluding net capital gains. Under temporary IRS regulations, for 2010 and 2011, 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. 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 program are subject to federal and state income tax unless such gains are distributed to the Company’s stockholders. Cash distributions made to stockholders to maintain REIT status or to distribute otherwise taxable capital gains limit our ability to accumulate capital for other business purposes, including funding debt maturities or growth initiatives.

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:

 
11

 



 
·
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.

 
·
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 would be in the best interest of its stockholders.

 
·
Anti-takeover protections of Operating Partnership agreement. Upon a change in control of the Company, the 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.

 
12

 

ITEM 2. PROPERTIES

Wholly Owned Properties

The following table sets forth information about our Wholly Owned Properties:
 
   
December 31, 2009
 
December 31, 2008
 
   
Rentable Square Feet
 
Percent Leased/ Pre-Leased
 
Rentable Square Feet
 
Percent Leased/ Pre-Leased
 
In-Service:
                 
Office                                                                    
 
20,445,000
 
88.8
%
19,556,000
 
90.2
%
Industrial                                                                    
 
6,463,000
 
87.4
 
6,467,000
 
92.6
 
Retail                                                                    
 
869,000
 
98.0
 
1,350,000
 
94.6
 
Total or Weighted Average (1), (3)
 
27,777,000
 
88.8
%
27,373,000
 
91.0
%
                   
Development:
                 
Completed—Not Stabilized (2)
                 
Office                                                                    
 
301,000
 
46.0
%
665,000
 
64.2
%
Industrial                                                                    
 
200,000
 
50.0
 
 
 
Total or Weighted Average (4)
 
501,000
 
47.6
%
665,000
 
64.2
%
                   
In Process
                 
Office                                                                    
 
 
 
358,000
 
65.7
%
Industrial                                                                    
 
 
 
200,000
 
50.0
 
Total or Weighted Average
 
 
 
558,000
 
60.1
%
                   
Total:
                 
Office                                                                    
 
20,746,000
     
20,579,000
     
Industrial                                                                    
 
6,663,000
     
6,667,000
     
Retail                                                                    
 
869,000
     
1,350,000
     
Total (1), (3), (4)
 
28,278,000
     
28,596,000
     
         
 
(1)
Excludes 96 rental residential units.
 
(2)
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. All of these properties were placed in service at December 31, 2009 as reflected in our Consolidated Financial Statements.
 
(3)
Excludes 618,000 square feet of office properties at December 31, 2009 and 2008 that are owned by consolidated joint ventures.
 
(4)
Excludes 40 completed for-sale residential condominiums at December 31, 2009 that are owned by a consolidated, majority owned joint venture.

 
13

 


The following table summarizes the net changes in square footage in our in-service Wholly Owned Properties during the past three years:
 
   
Years Ended December 31,
 
   
2009
 
2008
 
2007
 
   
(rentable square feet in thousands)
 
Office, Industrial and Retail Properties:
             
Dispositions                                                                                            
 
(550
)
(744
)
(1,172
)
Developments Placed In-Service                                                                                            
 
751
 
1,380
 
930
 
Redevelopment/Other                                                                                            
 
(17
)
(11
)
3
 
Acquisitions                                                                                            
 
220
 
135
 
 
Net Change in Square Footage of In-Service Wholly Owned Properties
 
404
 
760
 
(239
)

The following table sets forth information about our in-service Wholly Owned Properties by segment and by geographic location at December 31, 2009:

   
Rentable Square Feet
 
Occupancy
 
Percentage of Annualized Cash Rental Revenue (1)
 
Market
     
Office
 
Industrial
 
Retail
 
Total
   
Raleigh, NC                                                
 
4,194,000
 
83.8
%
15.9
%
 
 
15.9
%
 
Tampa, FL                                                
 
2,878,000
 
90.9
 
15.3
 
 
 
15.3
   
Atlanta, GA                                                
 
5,653,000
 
90.4
 
11.2
 
3.9
%
 
15.1
   
Nashville, TN                                                
 
2,938,000
 
95.1
 
13.1
 
 
 
13.1
   
Kansas City, MO                                                
 
1,508,000
 
92.9
 
3.4
 
 
6.8
%
10.2
   
Piedmont Triad, NC                                                
 
5,482,000
 
82.2
 
6.0
 
2.9
 
 
8.9
   
Richmond, VA                                                
 
2,229,000
 
93.2
 
8.9
 
 
 
8.9
   
Memphis, TN                                                
 
1,582,000
 
91.5
 
7.0
 
 
 
7.0
   
Greenville, SC                                                
 
897,000
 
88.5
 
3.3
 
 
 
3.3
   
Orlando, FL                                                
 
416,000
 
94.4
 
2.3
 
 
 
2.3
   
Total (2)                                                
 
27,777,000
 
88.8
%
86.4
%
6.8
%
6.8
%
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 2009 multiplied by 12.
 
(2)
Excludes 618,000 square feet of office properties owned by consolidated joint ventures.

 
14

 


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)
 
 
2005                                                                                             
   
85.0
%
 
$
14.99
 
 
2006                                                                                             
   
88.5
%
 
$
15.89
 
 
2007                                                                                             
   
90.2
%
 
$
16.27
 
 
2008                                                                                             
   
91.2
%
 
$
17.18
 
 
2009                                                                                             
   
88.2
%
 
$
17.53
 
         
 
(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 total occupied square footage.

Land Held for Development

We wholly owned 581 acres of development land at December 31, 2009. We estimate that we can develop approximately 7.9 million square feet of office and industrial space on the 490 acres that we consider core, long-term holdings for our future development needs. Our joint ventures owned 53 acres of development land at December 31, 2009. We are currently developing 172,000 square feet of build-to-suit office space on 11.6 acres of land in one of our joint ventures. 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.

We consider 91 acres of our wholly owned development land at December 31, 2009 to be non-core assets that are not necessary for our foreseeable future development needs. We intend to dispose of such non-core development land through sales to third parties or contributions to joint ventures. Approximately 4.4 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, 2009 and 2008.

 
15

 



Other Properties

The following table sets forth information about our stabilized in-service properties in which we own an interest (50.0% or less) by segment and by geographic location at December 31, 2009:
 
   
Rentable Square Feet
 
Occupancy
 
Percentage of Annualized Cash Rental Revenue (1)
 
Market
     
Office
 
Industrial
 
Retail
 
Multi-Family
 
Total
 
Des Moines, IA (2)                                        
 
2,506,000
 
87.3
%
26.8
%
4.1
%
0.7
%
3.3
%
34.9
%
Orlando, FL                                        
 
1,853,000
 
87.2
 
28.6
 
 
 
 
28.6
 
Atlanta, GA                                        
 
835,000
 
73.2
 
9.1
 
 
 
 
9.1
 
Kansas City, MO (3)
 
719,000
 
82.0
 
10.2
 
 
 
 
10.2
 
Raleigh, NC                                        
 
814,000
 
91.9
 
7.6
 
 
 
 
7.6
 
Richmond, VA (4)                                        
 
413,000
 
100.0
 
4.8
 
 
 
 
4.8
 
Piedmont Triad, NC
 
258,000
 
60.7
 
2.1
 
 
 
 
2.1
 
Tampa, FL (5)                                        
 
205,000
 
94.2
 
2.0
 
 
 
 
2.0
 
Charlotte, NC                                        
 
148,000
 
100.0
 
0.7
 
 
 
 
0.7
 
Total                                        
 
7,751,000
 
86.0
%
91.9
%
4.1
%
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 2009 multiplied by 12.
 
(2)
Rentable square feet and occupancy excludes 418 residential units, which were 91.9% occupied at December 31, 2009.
 
(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)
We own a 50.0% interest in this joint venture which is consolidated (see Notes 3 and 9 to our Consolidated Financial Statements).
 
(5)
We own a 20.0% interest in this joint venture which is consolidated (see Notes 3 and 7 to our Consolidated Financial Statements).

We also owned an approximate 86.0% economic interest in a consolidated affiliate that owns 40 for-sale residential condominiums located in Raleigh, NC at December 31, 2009.

 
Lease Expirations

The following tables set forth scheduled lease expirations for existing leases at our in-service and completed – not stabilized Wholly Owned Properties at December 31, 2009:

 
16

 



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 Cash Rental Rate Per Square Foot for Expirations
 
Percent of Annualized Cash Rental Revenue Represented by Expiring Leases (2)
 
         
($ in thousands)
       
2010 (3)                                               
 
2,251,739
 
12.3
%
$
44,893
 
$
19.94
 
11.9
%
2011                                               
 
2,465,343
 
13.5
   
49,966
   
20.27
 
13.3
 
2012                                               
 
2,480,324
 
13.6
   
53,456
   
21.55
 
14.3
 
2013                                               
 
2,404,558
 
13.2
   
52,537
   
21.85
 
14.0
 
2014                                               
 
2,369,355
 
13.0
   
49,471
   
20.88
 
13.1
 
2015                                               
 
1,591,620
 
8.7
   
29,792
   
18.72
 
7.9
 
2016                                               
 
1,023,767
 
5.6
   
19,264
   
18.82
 
5.1
 
2017                                               
 
1,078,540
 
5.9
   
20,693
   
19.19
 
5.5
 
2018                                               
 
637,843
 
3.5
   
14,331
   
22.47
 
3.8
 
2019                                               
 
439,924
 
2.4
   
8,456
   
19.22
 
2.2
 
Thereafter                                               
 
1,511,552
 
8.3
   
33,418
   
22.11
 
8.9
 
   
18,254,565
 
100.0
%
$
376,277
 
$
20.61
 
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 Cash Rental Rate Per Square Foot for Expirations
 
Percent of
Annualized
Cash Rental
Revenue
Represented
by Expiring
Leases (2)
 
         
($ in thousands)
       
2010 (4)                                               
 
928,972
 
16.2
%
$
3,740
 
$
4.03
 
12.5
%
2011                                               
 
903,344
 
15.7
   
5,241
   
5.80
 
17.6
 
2012                                               
 
778,952
 
13.5
   
3,853
   
4.95
 
12.9
 
2013                                               
 
625,039
 
10.9
   
3,829
   
6.13
 
12.8
 
2014                                               
 
851,483
 
14.8
   
4,472
   
5.25
 
15.0
 
2015                                               
 
421,149
 
7.3
   
1,677
   
3.98
 
5.6
 
2016                                               
 
264,597
 
4.6
   
1,086
   
4.10
 
3.6
 
2017                                               
 
61,600
 
1.1
   
584
   
9.48
 
2.0
 
2018                                               
 
71,884
 
1.2
   
251
   
3.49
 
0.8
 
2019                                               
 
121,470
 
2.1
   
257
   
2.12
 
0.9
 
Thereafter                                               
 
722,625
 
12.6
   
4,879
   
6.75
 
16.3
 
   
5,751,115
 
100.0
%
$
29,869
 
$
5.19
 
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 2009 multiplied by 12.
 
(3)
Includes 61,000 square feet of leases that are on a month-to-month basis, which represent 0.3% of total annualized cash rental revenue.
 
(4)
Includes 50,000 square feet of leases that are on a month-to-month basis, which represent less than 0.1% of total annualized cash rental revenue.


 
17

 

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 Cash Rental Rate Per Square Foot for Expirations
 
Percent of
Annualized
Cash Rental
Revenue
Represented
by Expiring
Leases (1)
 
         
($ in thousands)
       
2010 (2)                                               
 
79,635
 
9.4
%
$
2,202
 
$
27.65
 
7.5
%
2011                                               
 
74,457
 
8.7
   
1,723
   
23.14
 
5.8
 
2012                                               
 
90,754
 
10.7
   
3,657
   
40.30
 
12.4
 
2013                                               
 
47,027
 
5.5
   
2,190
   
46.57
 
7.4
 
2014                                               
 
41,014
 
4.8
   
2,061
   
50.25
 
7.0
 
2015                                               
 
69,331
 
8.1
   
3,356
   
48.41
 
11.4
 
2016                                               
 
59,889
 
7.0
   
2,539
   
42.40
 
8.6
 
2017                                               
 
110,803
 
13.0
   
2,554
   
23.05
 
8.6
 
2018                                               
 
45,975
 
5.4
   
2,010
   
43.72
 
6.8
 
2019                                               
 
87,530
 
10.3
   
2,547
   
29.10
 
8.6
 
Thereafter                                               
 
144,800
 
17.1
   
4,691
   
32.40
 
15.9
 
   
851,215
 
100.0
%
$
29,530
 
$
34.69
 
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 Cash Rental Rate Per Square Foot for Expirations
 
Percent of
Annualized
Cash Rental
Revenue
Represented
by Expiring
Leases (1)
 
         
($ in thousands)
       
2010 (4)                                               
 
3,260,346
 
13.1
%
$
50,835
 
$
15.59
 
11.7
%
2011                                               
 
3,443,144
 
13.9
   
56,930
   
16.53
 
13.1
 
2012                                               
 
3,350,030
 
13.5
   
60,966
   
18.20
 
13.9
 
2013                                               
 
3,076,624
 
12.4
   
58,556
   
19.03
 
13.3
 
2014                                               
 
3,261,852
 
13.1
   
56,004
   
17.17
 
12.9
 
2015                                               
 
2,082,100
 
8.4
   
34,825
   
16.73
 
8.0
 
2016                                               
 
1,348,253
 
5.4
   
22,889
   
16.98
 
5.3
 
2017                                               
 
1,250,943
 
5.0
   
23,831
   
19.05
 
5.5
 
2018                                               
 
755,702
 
3.0
   
16,592
   
21.96
 
3.8
 
2019                                               
 
648,924
 
2.6
   
11,260
   
17.35
 
2.6
 
Thereafter                                               
 
2,378,977
 
9.6
   
42,988
   
18.07
 
9.9
 
   
24,856,895
 
100.0
%
$
435,676
 
$
17.53
 
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 2009 multiplied by 12.
 
(2)
Includes 11,000 square feet of leases that are on a month-to-month basis, which represent less than 0.1% of total annualized cash rental revenue.
 
(3)
Excludes properties held by consolidated joint ventures.
 
(4)
Includes 122,000 square feet of leases that are on a month-to-month basis, which represent 0.3% of total annualized cash rental revenue.

 
18

 



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.

 
19

 


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
51
Director, President and Chief Executive Officer.
Mr. Fritsch has been a director since January 2001.  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 National Association of Real Estate Investment Trusts (“NAREIT”) Board of Governors and audit committee member, past chair of the University of North Carolina Board of Visitors, trustee of the North Carolina Symphony, director and president of the YMCA of the Triangle, director of Capital Associated Industries, Inc. and member of Wachovia’s Central Regional Advisory Board.
 
Michael E. Harris
60
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 executive committee of the Urban Land Institute – Triangle Chapter and is past president of the Lambda Alpha International Land Economics Society.
 
Terry L. Stevens
61
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.
 
Jeffrey D. Miller
39
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 lead independent director of Hatteras Financial Corp., a publicly-traded mortgage REIT.


 
20

 



Name
Age
Position and Background
W. Brian Reames
46
Senior Vice President and Regional Manager.
Mr. Reames became senior vice president and regional manager in August 2004. Mr. Reames manages our Nashville division and oversees the operations of our Memphis and Greenville divisions. 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.


 
21

 

PART II

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

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:
 
   
2009
 
2008
 
Quarter Ended
 
High
 
Low
 
Dividend
 
High
 
Low
 
Dividend
 
March 31
 
$
27.47
 
$
15.53
 
$
0.425
 
$
32.34
 
$
26.67
 
$
0.425
 
June 30
   
26.84
   
19.79
   
0.425
   
37.38
   
31.42
   
0.425
 
September 30
   
34.09
   
19.35
   
0.425
   
37.94
   
29.88
   
0.425
 
December 31
   
35.24
   
26.60
   
0.425
   
34.29
   
15.59
   
0.425
 

On December 31, 2009, the last reported stock price of the Common Stock on the NYSE was $33.35 per share and the Company had 1,056 common stockholders of record. There is no public trading market for the Common Units. On December 31, 2009, the Operating Partnership had 120 holders of record of Common Units (other than the Company). At December 31, 2009, there were 71.3 million shares of Common Stock outstanding and 3.9 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. Under temporary IRS regulations, for 2010 and 2011, 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. 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 such cash flows 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, 2004 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.

 
22

 




   
Period Ended
 
Index
 
12/31/05
 
12/31/06
 
12/31/07
 
12/31/08
 
12/31/09
 
Highwoods Properties, Inc.
 
109.17
 
164.36
 
123.82
 
122.04
 
159.15
 
S&P 500                                                    
 
104.91
 
121.48
 
128.16
 
80.74
 
102.11
 
Russell 2000                                                    
 
104.55
 
123.76
 
121.82
 
80.66
 
102.58
 
FTSE NAREIT Equity REIT Index
 
112.16
 
151.49
 
127.72
 
79.53
 
101.79
 

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 2009, cash dividends on Common Stock totaled $1.70 per share, $0.01 of which represented return of capital and $0.60 represented capital gains for income tax purposes. The minimum dividend per share of Common Stock required for the Company to maintain its REIT status was $0.89 per share in 2009.

During the fourth quarter of 2009, the Company issued an aggregate of 74,107 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.

The Company has a Dividend Reinvestment and Stock Purchase Plan (“DRIP”) under which holders of Common Stock may elect to automatically reinvest their dividends in additional shares of Common Stock and make optional cash payments for additional shares of Common Stock. The Company may elect to satisfy its DRIP obligations by issuing additional shares of Common Stock or causing the DRIP administrator to purchase Common Stock in the open market.

 
23

 



The Company has an Employee Stock Purchase Plan pursuant to which employees generally may contribute up to 25.0% of their cash compensation for the purchase of Common Stock. At the end of each three-month offering period, each participant’s account balance, which includes accrued dividends, is applied to acquire 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, 2010.


 
24

 


ITEM 6. SELECTED FINANCIAL DATA

The operating results of the Company for the years ended December 31, 2008, 2007, 2006 and 2005 have been revised from previously reported amounts to reflect in discontinued operations the operations for those properties sold or held for sale in 2009 which qualified for discontinued operations presentation and the retroactive accounting modifications described in Note 1 to the Company’s Consolidated Financial Statements. The information in the following table should be read in conjunction with the Company’s audited Consolidated Financial Statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein ($ in thousands, except per share data):
 
   
Years Ended December 31,
 
   
2009
 
2008
 
2007
 
2006
 
2005
 
Rental and other revenues
 
$
454,026
 
$
450,291
 
$
418,409
 
$
391,555
 
$
370,168
 
                                 
Income from continuing operations
 
$
37,810
 
$
10,486
 
$
52,055
 
$
32,670
 
$
23,028
 
                                 
Income/(loss) from continuing operations available for common stockholders
 
$
29,282
 
$
(1,459
)
$
33,051
 
$
12,077
 
$
(7,594
)
                                 
Net income
 
$
61,694
 
$
35,610
 
$
97,095
 
$
57,527
 
$
65,739
 
                                 
Net income available for common stockholders
 
$
51,778
 
$
22,080
 
$
74,983
 
$
34,878
 
$
30,948
 
                                 
Earnings per common share – basic:
                               
Income/(loss) from continuing operations available for common stockholders
 
$
0.43
 
$
(0.03
)
$
0.58
 
$
0.22
 
$
(0.14
)
Net income
 
$
0.76
 
$
0.37
 
$
1.32
 
$
0.64
 
$
0.57
 
                                 
Earnings per common share – diluted:
                               
Income/(loss) from continuing operations available for common stockholders
 
$
0.43
 
$
(0.03
)
$
0.58
 
$
0.22
 
$
(0.14
)
Net income
 
$
0.76
 
$
0.37
 
$
1.31
 
$
0.62
 
$
0.57
 
                                 
Dividends declared and paid per common share
 
$
1.70
 
$
1.70
 
$
1.70
 
$
1.70
 
$
1.70
 


   
December 31,
 
   
2009
 
2008
 
2007
 
2006
 
2005
 
Total assets                                                  
 
$
2,887,101
 
$
2,946,170
 
$
2,926,955
 
$
2,844,853
 
$
2,908,978
 
Mortgages and notes payable
 
$
1,469,155
 
$
1,604,685
 
$
1,641,987
 
$
1,465,129
 
$
1,471,616
 
Financing obligations                                                  
 
$
37,706
 
$
34,174
 
$
35,071
 
$
35,530
 
$
34,154
 


 
25

 



The operating results of the Operating Partnership for the years ended December 31, 2008, 2007, 2006 and 2005 have been revised from previously reported amounts to reflect in discontinued operations the operations for those properties sold or held for sale in 2009 which qualified for discontinued operations presentation and the retroactive accounting modifications described in Note 1 to the Operating Partnership’s Consolidated Financial Statements. The information in the following table should be read in conjunction with the Operating Partnership’s audited Consolidated Financial Statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein ($ in thousands, except per share data):
 
   
Years Ended December 31,
 
   
2009
 
2008
 
2007
 
2006
 
2005
 
Rental and other revenues
 
$
454,026
 
$
450,291
 
$
418,409
 
$
391,555
 
$
370,382
 
                                 
Income from continuing operations
 
$
37,756
 
$
10,359
 
$
51,314
 
$
32,473
 
$
22,693
 
                                 
Income/(loss) from continuing operations available for common unitholders
 
$
31,037
 
$
(1,594
)
$
34,873
 
$
13,002
 
$
(8,817
)
                                 
Net income
 
$
61,640
 
$
35,483
 
$
94,895
 
$
56,912
 
$
65,252
 
                                 
Net income available for common unitholders
 
$
54,921
 
$
23,530
 
$
78,454
 
$
37,441
 
$
33,742
 
                                 
Earnings per common unit – basic:
                               
Income/(loss) from continuing operations available for common unitholders
 
$
0.43
 
$
(0.03
)
$
0.57
 
$
0.22
 
$
(0.15
)
Net income
 
$
0.77
 
$
0.37
 
$
1.29
 
$
0.63
 
$
0.57
 
                                 
Earnings per common unit – diluted:
                               
Income/(loss) from continuing operations available for common unitholders
 
$
0.43
 
$
(0.03
)
$
0.57
 
$
0.21
 
$
(0.15
)
Net income
 
$
0.77
 
$
0.37
 
$
1.28
 
$
0.61
 
$
0.57
 
                                 
Distributions declared and paid per common unit
 
$
1.70
 
$
1.70
 
$
1.70
 
$
1.70
 
$
1.70
 


   
December 31,
 
   
2009
 
2008
 
2007
 
2006
 
2005
 
Total assets                                                  
 
$
2,885,738
 
$
2,944,856
 
$
2,925,804
 
$
2,837,649
 
$
2,901,858
 
Mortgages and notes payable
 
$
1,469,155
 
$
1,604,685
 
$
1,641,987
 
$
1,464,266
 
$
1,471,616
 
Financing obligations                                                  
 
$
37,706
 
$
34,174
 
$
35,071
 
$
35,530
 
$
34,154
 


 
26

 


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

The Company is 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. The Operating Partnership is managed by the Company, its sole general partner. At December 31, 2009, we owned or had an interest in 377 in-service office, industrial and retail properties, encompassing approximately 35.5 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 or had an interest in development land and other properties under development as described under “Item 1. Business” and “Item 2. Properties.” We are based in Raleigh, NC, and our properties and development land are located in Florida, Georgia, Iowa, 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 “Item 1. 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:

 
·
the financial condition of our customers could deteriorate;

 
·
we may not be able to lease or release second generation space, defined as previously occupied space that becomes available for lease, quickly or on as favorable terms as old leases;

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

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

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

 
·
our Southeastern and Midwestern United States markets may suffer declines in economic growth;

 
·
unanticipated increases in interest rates could 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; and

 
·
the Company could lose key executive officers.

This list of risks and uncertainties, however, is not intended to be exhaustive. You should also review the other cautionary statements we make in “Item 1A. 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.

 
27

 



Executive Summary

Our Strategic Plan focuses on:

·  
owning high-quality, differentiated real estate assets in the best submarkets in our primary markets; and

·  
maintaining a conservative, flexible balance sheet with ample liquidity to meet our funding needs.

Execution of our Plan includes (1) growing net operating income at our existing properties through concentrated leasing, asset management and customer service efforts and (2) developing properties in infill locations and acquiring strategic properties that are accretive to long-term earnings and stockholder value. 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. Our portfolio has changed significantly over the past five years and now consists of a higher mix of Class A and B properties, which are generally expected to outperform competitive properties in our core markets. We have repositioned our portfolio primarily by selling non-core properties and developing properties in in-fill locations. Our real estate professionals are seasoned and cycle-tested. Our senior leadership team has significant experience and maintains important relationships with market participants in each of our primary markets. Our focus in 2010 is to lease and operate our existing portfolio as effectively and efficiently as possible and acquire and develop additional real estate assets that improve the overall quality of our portfolio and generate attractive returns over the long-term for our stockholders.

Results of Operations

Comparison of 2009 to 2008

Rental and Other Revenues

Rental and other revenues from continuing operations were modestly higher in 2009 as compared to 2008 primarily due to the contribution of development properties placed in service in 2008 and 2009, the acquisitions of the PennMarc building in Memphis, TN and the 4200 Cypress building in Tampa, FL and higher average rental rates, partly offset by lower revenues in our same property portfolio caused by lower average occupancy in 2009.

Average occupancy of our portfolio, particularly industrial assets, declined in 2009. We expect average occupancy to continue to decline in the first several quarters of 2010 as a result of continued high unemployment levels. Approximately 10-15% of our revenues at the beginning of any particular year are subject to leases that expire by the end of that year. The federal government’s contribution to our revenues has increased significantly over the past five years from long-term leases with high renewal probabilities. Overall, we expect 2010 rental and other revenues, adjusted for any discontinued operations in 2010, to increase over 2009 due to higher average rental rates in the portfolio, the full year contribution of acquisitions made and development projects delivered during 2009, partly offset by lower occupancy levels.

Operating Expenses

Rental property and other expenses were modestly higher in 2009 as compared to 2008 primarily due to higher expenses from the contribution of development properties placed in service in 2008 and 2009, the acquisitions of the PennMarc building in Memphis, TN and the 4200 Cypress building in Tampa, FL, partly offset by lower expenses in our same property portfolio. The reduction in our same property operating expenses reflects management’s efforts to reduce operating expenses. The overall reduction in same property operating expenses was partly offset by higher real estate taxes and utility rate increases. We expect real estate taxes and utility rates to continue to increase in 2010.

Operating margin, defined as rental and other revenues less rental property and other expenses expressed as a percentage of rental and other revenues, was slightly lower at 63.8% in 2009 as compared to 64.1% in 2008.

 
28

 



Depreciation and amortization was 5.1% higher in 2009 as compared to 2008 primarily due to higher depreciation and amortization from development properties placed in service in 2008 and 2009 and the acquisitions of the PennMarc building in Memphis, TN and the 4200 Cypress building in Tampa, FL.

We recorded impairments of $13.5 million in 2009 and $32.8 million in 2008 on assets located in Winston-Salem and Greensboro, NC. The 2009 impairment related to 12 office properties, 11 of which were previously impaired in 2008, six industrial properties and two retail properties. Impairments can arise from a number of factors which are subject to change; accordingly, we may be required to take additional impairment charges in the future.

General and administrative expenses were 3.6% lower in 2009 as compared to 2008, primarily due to lower salaries, benefits and incentive compensation mostly from reduced headcount and lower expenses from unsuccessful development projects. Partly offsetting this decrease was an increase from the year-over-year change in the valuation adjustment of deferred compensation liabilities under our non-qualified deferred compensation plan and lower capitalization of development and leasing costs. We anticipate continued reductions in general and administrative expenses in 2010 due to full year effects of headcount reductions implemented in 2008 and 2009 and lower incentive compensation costs.

Other Income

Other income was $5.7 million higher in 2009 as compared to 2008, primarily due to the year-over-year change in the valuation adjustment of marketable securities held under our non-qualified deferred compensation plan, favorable cash settlement of a real estate-related legal claim and gains on the extinguishment of certain outstanding bonds.

Interest Expense

Interest expense was 11.7% lower in 2009 as compared to 2008, primarily due to lower average outstanding borrowings during 2009 mostly due to the application of proceeds of our sales of Common Stock in September 2008 and June 2009 to pay down debt and lower average borrowing rates on our floating rate debt, partly offset by lower capitalized interest resulting from decreased development in process. We anticipate interest expense will increase in 2010 due to higher rates on our floating rate debt, higher fees on our new revolving credit facility, higher amortization of deferred financing costs and lower capitalized interest. Average outstanding borrowings may also increase depending on the net amount of property acquisitions and dispositions, which would also increase interest expenses in 2010.

Gains on For-Sale Residential Condominiums

In 2009 and 2008, gains on for-sale residential condominiums aggregated $0.9 million and $5.6 million, respectively, resulting from sales of majority-owned residential condominiums and related forfeitures of earnest money deposits. Our partner’s interest in these gains was $(0.5) million and $1.3 million, respectively, and was recorded as noncontrolling interests in consolidated affiliates. Our partner will receive a preferred return of the net profits from the joint venture once the partners have received distributions equal to their equity plus a 12.0% return on their equity. Our partner’s preferred return, if any, is determinable only after all units are sold. Our partner’s estimated economic interest decreased from 25% at December 31, 2008 to 14% at December 31, 2009 due to changes in the projected timing of sales and related gains resulting in the allocation of a loss to the partner’s non-controlling interest. We have 38 for-sale residential condominiums as of February 3, 2010. We anticipate these 38 condominiums will be sold over the course of 2010 and 2011.

Discontinued Operations

The Company classified income of $23.9 million and $25.1 million as discontinued operations in 2009 and 2008, respectively. These amounts relate to 1.3 million square feet of office, industrial and retail properties and 13 rental residential units sold or held for sale during 2009 and 2008, and include gains on the sale of these properties of $21.5 million and $18.5 million in 2009 and 2008, respectively.

 
29

 



Net Income Attributable to Noncontrolling Interests in the Operating Partnership; Net Income Attributable to Noncontrolling Interests in Consolidated Affiliates

The Company’s net income attributable to noncontrolling interests in the Operating Partnership was $1.6 million higher in 2009 as compared to 2008 primarily due to higher income from continuing operations, after preferred equity distributions, of the Operating Partnership.

Net income attributable to consolidated affiliates was $2.0 million lower in 2009 as compared to 2008 primarily due to lower gains on for-sale residential condominiums.

Dividends on Preferred Equity

Dividends on preferred equity were 31.6% lower in 2009 as compared to 2008 due to the retirement of $53.8 million of preferred equity in 2008.

Comparison of 2008 to 2007

Rental and Other 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.

Operating Expenses

Rental property and other expenses were 8.2% 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.

Operating margin was slightly lower at 64.1% in 2008 as compared to 64.3% in 2007.

Depreciation and amortization was 5.4% higher in 2008 as compared to 2007 primarily from development properties placed in service in 2007 and 2008.

We recorded impairments of $32.8 million in 2008, related to 11 office properties and one land parcel in Winston-Salem, NC. We recorded an impairment of $0.8 million in 2007 related to one land parcel.

General and administrative expenses were 8.5% lower in 2008 as compared to 2007 primarily due to lower audit and legal fees and lower deferred compensation expense caused by an decrease in the value of marketable securities held under our non-qualified deferred compensation plan, partially offset by higher compensation costs including short and long-term incentive compensation.

Interest Expense

Contractual interest expense was relatively unchanged in 2008 as compared to 2007 primarily due to a decrease in weighted average interest rates on outstanding debt and lower capitalized interest resulting from decreased development in process, offset by an increase in average borrowings.
 
 
Gains on Disposition of Property; Gains on For-Sale Residential Condominiums; Gain from Property Insurance Settlement; Equity in Earnings of Unconsolidated Affiliates

Gains on disposition of property not classified as discontinued operations were $0.8 million in 2008 compared to $20.6 in 2007 and primarily relate to land dispositions. 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 majority-owned condominiums and related forfeitures of earnest money deposits. Our partner’s interest in these gains was $1.3 million and was recorded as noncontrolling interests in consolidated affiliates. There were no gains on for-sale residential condominiums in 2007.

 
30

 



In 2007, we recorded a $4.1 million gain from finalization of a prior year insurance claim related to hurricane damage sustained by one of our office properties located in southeastern Florida.

Equity in earnings of unconsolidated affiliates decreased $7.2 million from 2007 to 2008 primarily due to the sale of 332 rental residential units and five office properties in unconsolidated joint ventures. 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 $25.1 million and $45.0 million as discontinued operations in 2008 and 2007, respectively. These amounts relate to 2.5 million square feet of office, industrial and retail properties and 13 rental residential units sold or held for sale during 2009, 2008 and 2007, and include net gains on the sale of these properties of $18.5 million and $34.5 million in 2006 and 2007, respectively.

During 2007, the Company recorded $1.5 million in income from the release of an uncertain tax 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.

Net Income Attributable to Noncontrolling Interests in the Operating Partnership; Net Income Attributable to Noncontrolling Interests in Consolidated Affiliates

The Company’s net income attributable to noncontrolling interests in the Operating Partnership was $4.1 million lower in 2008 as compared to 2007 primarily due to lower income from continuing operations, after preferred equity distributions, of the Operating Partnership.

Net income attributable to consolidated affiliates was $1.4 million higher in 2008 as compared to 2007 primarily due to higher gains on for-sale residential condominiums.

Dividends on Preferred Equity

Dividends on preferred equity were 37.5% lower in 2008 as compared to 2007 due to the retirement of $53.8 million and $62.0 million of preferred equity in 2008 and 2007, respectively.


 
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Liquidity and Capital Resources

Overview

Our goal is to maintain a conservative and flexible balance sheet with access to multiple sources of debt and equity capital and sufficient availability under our credit facilities. We generally use rents received from customers to fund our operating expenses, capital expenditures and distributions. To fund property acquisitions, development activity or building renovations and repay debt upon maturity, we may use current cash balances, sell assets, obtain new debt and/or issue equity. Our debt generally consists of mortgage debt, unsecured debt securities and borrowings under our secured and unsecured credit facilities.

Statements of Cash Flows

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 2008 to 2009 ($ in thousands):

   
Years Ended December 31,
     
   
2009
 
2008
 
Change
 
Cash Provided By Operating Activities
 
$
189,120
 
$
157,822
 
$
31,298
 
Cash (Used In) Investing Activities
   
(61,824
)
 
(134,343
)
 
72,519
 
Cash (Used In) Financing Activities
   
(117,354
)
 
(12,862
)
 
(104,492
)
Total Cash Flows
 
$
9,942
 
$
10,617
 
$
(675
)

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 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 used in or provided by 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 or provided by financing activities generally relates to distributions, incurrence and repayment of debt and issuances, 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 generally use our revolving credit facility for working capital purposes, which means that during any given period, in order to minimize interest expense, we may record significant repayments and borrowings under our revolving credit facility.

The increase of $31.3 million in cash provided by operating activities of the Company in 2009 compared to 2008 was primarily the result of the net increase in the change in operating assets and liabilities as well as cash flows from net income as adjusted for changes in depreciation and amortization, impairment of assets held for use, gains on disposition of property, gains on disposition of for-sale residential condominiums and distributions of earnings from unconsolidated affiliates. We expect cash provided by operating activities to be slightly lower in 2010 due to lower anticipated net income resulting from lower average occupancy at our same property portfolio and higher interest expense.

The decrease of $72.5 million in cash used in investing activities in 2009 compared to 2008 was primarily the result of lower capital expenditures, higher proceeds from dispositions of real estate assets, and lower contributions to unconsolidated affiliates partly offset by lower proceeds from disposition of for-sale residential condominiums and reductions in changes in restricted cash and other investing activities. We currently expect cash used in investing activities to be higher in 2010 than 2009 resulting from an expected increase in net acquisition activity.

 
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The increase of $104.5 million in cash used in financing activities in 2009 compared to 2008 was primarily the result of higher net reductions in debt, higher common dividends resulting from an increase in the number of shares of Common Stock outstanding and lower net proceeds from the sale of Common Stock, offset by lower redemptions/repurchases of Preferred Stock and lower preferred dividends from a decrease in Preferred Stock outstanding. We expect cash used in financing activities to be lower in 2010 from expected borrowings or sales of additional Common Stock to fund an expected increase in net acquisition activity.

Capitalization

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

   
December 31,
 
   
2009
 
2008
 
Mortgages and notes payable, at recorded book value
 
$
1,469,155
 
$
1,604,685
 
Financing obligations                                                                                             
 
$
37,706
 
$
34,174
 
Preferred Stock, at liquidation value                                                                                             
 
$
81,592
 
$
81,592
 
               
Common Stock outstanding                                                                                             
   
71,285
   
63,572
 
Common Units outstanding (not owned by the Company)
   
3,891
   
4,067
 
               
Per share  stock price at year end                                                                                             
 
$
33.35
 
$
27.36
 
Market value of Common Stock and Common Units
 
$
2,507,120
 
$
1,850,603
 
Total market capitalization                                                                                             
 
$
4,095,573
 
$
3,571,054
 

Based on our total market capitalization of approximately $4.1 billion at December 31, 2009 (based on the December 31, 2009 per share stock price of $33.35 and assuming the redemption for shares of Common Stock of the approximate 3.9 million Common Units not owned by the Company), our mortgages and notes payable represented 36% of our total market capitalization.

Mortgages and notes payable at December 31, 2009 was comprised of $720.7 million of secured indebtedness with a weighted average interest rate of 6.21% and $748.4 million of unsecured indebtedness with a weighted average interest rate of 5.41%. At December 31, 2009, our outstanding mortgages and notes payable and financing obligations were secured by real estate assets with an aggregate undepreciated book value of approximately $1.2 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 existing revolving credit facility and revolving construction credit facility (which had $398.4 million and $28.3 million of availability, respectively, at February 3, 2010). Our short-term liquidity requirements primarily consist of operating expenses, interest and principal amortization on our debt, distributions and capital expenditures, including building improvement costs, tenant improvement costs and lease commissions. Building improvements are capital costs not related to a specific customer to maintain existing buildings. Tenant improvements are the costs required to customize space for the specific needs of customers in spaces other than in new development projects. We anticipate that our available cash and cash equivalents and cash provided by operating activities, together with cash available from borrowings under our credit facilities, will be adequate to meet our short-term liquidity requirements.

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 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 $5.0 million at December 31, 2009. Additionally, we may, from time to time, retire some or all of our remaining outstanding Preferred Stock and/or unsecured debt securities through redemptions, open market repurchases, privately negotiated acquisitions or otherwise.

 
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We expect to meet our liquidity needs through a combination 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; and

·  
the disposition of non-core assets.

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 accounting principles generally accepted in the United States (“GAAP”). Under temporary IRS regulations, for 2010 and 2011, 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. 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 program 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.

Cash distributions reduce the amount of cash that would otherwise be available for other business purposes, including funding debt maturities or future growth initiatives. The amount of future distributions that will be made is 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 Activity

In 2009, we paid off at maturity $50.0 million of 8.125% unsecured notes and retired the remaining $107.2 million principal amount of a two-tranched secured loan. We also obtained a $20.0 million, three-year unsecured term loan, a $115.0 million, six and a half-year secured loan and a $47.3 million, seven-year secured loan. We also repurchased $8.2 million principal amount of unsecured notes due 2017.

In 2009, we obtained a new $400.0 million unsecured revolving credit facility, which replaced our previously existing revolving credit facility. Our new revolving credit facility is scheduled to mature on February 21, 2013 and includes an accordion feature that allows for an additional $50.0 million of borrowing capacity subject to additional lender commitments. Assuming we continue to have three publicly announced ratings from the credit rating agencies, the interest rate and facility fee under our revolving credit facility are based on the lower of the two highest publicly announced ratings. Based on our current credit ratings, the interest rate is LIBOR plus 290 basis points and the annual facility fee is 60 basis points. We expect to use our new 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. Continuing ability to borrow under the revolving credit facility allows us to quickly capitalize on strategic opportunities at short-term interest rates. There were no amounts outstanding under our revolving credit facility at December 31, 2009 and February 3, 2010. At December 31, 2009 and February 3, 2010, we had $1.7 million and $1.6 million, respectively, of outstanding letters of credit, which reduces the availability on our revolving credit facility. As a result, the unused capacity of our revolving credit facility at December 31, 2009 and February 3, 2010 was $398.3 million and $398.4 million, respectively.

Our $70.0 million secured construction facility, of which $41.7 million was outstanding at December 31, 2009, 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. The interest rate is LIBOR plus 85 basis points. Our secured construction facility had $28.3 million of availability at December 31, 2009 and February 3, 2010.

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

Covenant Compliance

We are currently in compliance with all debt 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.

Our revolving credit facility, $137.5 million bank term loan due in February 2011 and $20.0 million bank term loan due in March 2012 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, as defined in the respective agreements, of no more than 60%. 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 in any twelve-month period. The lenders have not previously exercised this right. Any such increase in capitalization rates, without a corresponding reduction in total liabilities, could 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. If we were to fail to make a payment when due with respect to any of our other obligations with aggregate unpaid principal of $10.0 million, and such failure remains uncured for more than 120 days, the lenders under our credit facility could provide notice of their intent to accelerate all amounts due thereunder. Upon an event of default on the revolving credit facility, the lenders having at least 66.7% of the total commitments under the revolving credit facility can accelerate all borrowings then outstanding, and we could be prohibited from borrowing any further amounts under our revolving credit facility, which would adversely affect our ability to fund our operations.

The Operating Partnership has $390.9 million principal amount of 2017 bonds outstanding and $200.0 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.

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 distributions. 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 distributions.


 
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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, 2009 ($ in thousands):

       
Amounts due during years ending December 31,
     
   
Total
 
2010
 
2011
 
2012
 
2013
 
2014
 
Thereafter
 
Mortgages and Notes Payable:
                                           
Principal payments (1)
 
$
1,469,155
 
$
52,860
 
$
149,344
 
$
240,214
 
$
242,782
 
$
34,664
 
$
749,291
 
Interest payments
   
455,705
   
84,907
   
82,128
   
67,068
   
58,491
   
49,169
   
113,942
 
Financing Obligations:
                                           
SF-HIW Harborview Plaza, LP financing obligation
   
12,230
   
   
   
   
   
12,230
   
 
Tax increment financing bond
   
15,374
   
1,116
   
1,193
   
1,277
   
1,365
   
1,460
   
8,963
 
Repurchase obligation
   
4,250
   
4,250
   
   
   
   
   
 
Capitalized ground lease obligations
   
1,191
   
   
   
   
   
   
1,191
 
Interest on financing obligations (2)
   
6,801
   
1,117
   
1,042
   
963
   
880