ITEM 1. BUSINESS
THE COMPANY
Weeks Corporation (the "Company" or "Registrant") is a self-administered, self- managed, geographically focused real estate investment trust ("REIT") that was organized in 1994 to continue and expand the fully integrated real estate business previously conducted by the Company and its affiliates. Since 1965, the Company, together with its affiliates and predecessors, has developed, owned, managed, constructed and acquired primarily institutional-quality industrial and suburban office properties in Metropolitan Atlanta and in selected metropolitan markets in the Southeast. The Company is one of the largest industrial real estate companies in the Southeast based on square footage owned and managed.
As of December 31, 1996, the Company owned 168 industrial properties, 17 suburban office properties and three retail properties comprising 13.0 million square feet. The Company's primary markets and the concentration of the Company's portfolio (based on square footage) are Atlanta, Georgia (74%), Nashville, Tennessee (11%), Raleigh-Durham-Chapel Hill, North Carolina (9%), Orlando, Florida (3%), and Spartanburg, South Carolina (3%). In addition, 24 industrial and suburban office properties and two property expansions were under development or in lease-up at December 31, 1996, comprising an additional 3.0 million square feet (see "Properties" below).
As used herein, the term "Company" includes Weeks Corporation and its subsidiaries, including Weeks Realty, L.P. (the "Operating Partnership"), unless the context indicates otherwise. The Company, through its wholly owned subsidiaries, is the general partner and owns a majority interest in the Operating Partnership which, including the operations of its subsidiaries, conducts substantially all of the on-going operations of the Company. The Company has elected to qualify and operate as a self-administered and self- managed REIT under the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the Company will not generally be subject to corporate federal income taxes as long as it satisfies certain technical requirements of the Code relating to the composition of its income and assets, and the requirement to distribute 95% of its taxable income to its shareholders.
As of December 31, 1996, the Company had outstanding 14,048,593 shares of common stock and owned the same number of units of partnership interest ("Units") in the Operating Partnership, representing a 75.8% ownership interest in the Operating Partnership. Units held by persons other than the Company totaled 4,485,190 as of December 31, 1996, and represented a 24.2% minority interest in the Operating Partnership. Units are convertible by their holders into shares of common stock on a one-for-one basis, or into cash, at the Company's option, subject to certain restrictions discussed under "Security Ownership of Certain Beneficial Owners and Management" in Item 12. The Company's weighted average ownership interest in the Operating Partnership was 80.6% and 75.9% for the years ended December 31, 1996 and 1995, respectively. Of the 75.8% interest in the Operating Partnership held by the Company as of December 31, 1996, the Company owned the sole 1.3% general partnership interest in the Operating Partnership through Weeks GP Holdings, Inc., a wholly owned Georgia corporation ("Weeks GP"), and a 74.5% limited partnership interest in the Operating Partnership through
Weeks LP Holdings, Inc., a wholly owned Georgia corporation ("Weeks LP"). Both Weeks GP and Weeks LP are qualified REIT subsidiaries within the meaning of Section 856(i)(2) of the Code and their existence will be disregarded for federal income tax purposes.
The Company conducts its third-party service business through two subsidiaries (the "Subsidiaries"): Weeks Realty Services, Inc., conducts third-party landscape, property management and leasing services, and Weeks Construction Services, Inc., conducts third-party construction services. The Company holds 100% of the nonvoting and 1% of the voting common stock of these Subsidiaries. The remaining voting common stock is held by three executive officers of the Company. The ownership of the common stock of the Subsidiaries entitles the Company to substantially all (99%) of the economic benefits from the results of the Subsidiaries' operations (see Notes 2 and 7 to the consolidated and combined financial statements).
On August 24, 1994, the Company completed a business combination and an initial public offering ("IPO") of common stock resulting in the organizational and operating structure discussed above. The Company and its subsidiaries succeeded to substantially all of the interests in certain land and industrial and suburban office buildings under common ownership and to the development, construction, landscape and management businesses of the predecessors to the Company referred to herein as the "Weeks Group."
The Operating Partnership owns five of its industrial buildings in Atlanta, Georgia through its 99% ownership of Weeks Financing Limited Partnership (the "Financing Partnership"). The Financing Partnership buildings are encumbered by mortgage indebtedness assumed in connection with the IPO. The remaining 1% ownership interest in the Financing Partnership is held by Weeks Realty Services.
The Operating Partnership will terminate on the earlier of a sale of all or substantially all of the assets of the Operating Partnership, the election of the general partner (with the consent of the limited partners) to dissolve the Operating Partnership, or December 31, 2093.
Based on shares of common stock outstanding on December 31, 1996, executive officers and directors of the Company own approximately 14.6% of the common stock of the Company, assuming an exchange for common stock of all of the Units which are not currently held by the Company. Such ownership excludes 2,774 shares of common stock and 320,124 Units beneficially owned by A. Ray Weeks, Jr., as trustee of two trusts for the benefit of certain members of the Weeks family, 763,090 Units beneficially owned by John W. Nelley, Jr. and Albert W. Buckley, Jr., as general partners of NWI Warehouse Group, L.P., and 753,000 shares of common stock issuable upon the exercise of options outstanding on December 31, 1996, granted to executive officers and directors of the Company.
COMPANY HISTORY
The Company was founded in 1965 by A.R. Weeks, Sr., the father of A. Ray Weeks, Jr., the Company's Chairman of the Board and Chief Executive Officer. Under the leadership of A. Ray Weeks, Jr. and Forrest W. Robinson, the Company's President and Chief Operating Officer, the Company operated as a private real estate Company until August 1994, when it completed the IPO and elected to be taxed as a REIT. Thomas D. Senkbeil joined the Company as Vice Chairman of the Board and Chief Investment Officer in October 1992. Prior to joining the
Company, Mr. Senkbeil had been a principal in another real estate development and management firm in Atlanta, Georgia.
In November 1996, the Company completed the initial phase of the acquisition of the properties and related operations of NWI Warehouse Group, L.P. ("NWI") and Buckley & Company Real Estate, Inc. ("Buckley"), each of Nashville, Tennessee (see Note 8 to the consolidated and combined financial statements). Through that transaction, the Company established a presence in Nashville, Tennessee, and both of the principals of NWI and Buckley, John W. Nelley, Jr., and Albert W. Buckley, Jr., joined the Company as Managing Directors with responsibility for the Company's activities in Nashville, Tennessee. In December 1996, the Company completed the initial phase of its acquisition of the properties and related operations of Lichtin Properties, Inc. ("Lichtin"), of the Raleigh- Durham-Chapel Hill area of North Carolina (the "Research Triangle") (see Note 8 to the consolidated and combined financial statements). Through that transaction, the Company established a presence in the Research Triangle, and Harold S. Lichtin, the President of Lichtin, joined the Company as a Managing Director with responsibility for the Company's activities in North Carolina. John W. Nelley, Jr., and Harold S. Lichtin also joined the Company's Board of Directors.
The Company was incorporated in Georgia as A. R. Weeks & Associates Inc. in 1983. The Company changed its name to Weeks Corporation in June 1994. The Company's executive offices are located at 4497 Park Drive, Norcross, Georgia, 30093; its telephone number is (770)923-4076. The Company, the Operating Partnership and the Subsidiaries currently employ approximately 335 full-time employees.
COMPETITION
Numerous properties compete with the Company's properties in attracting tenants and corporate users. Some of these competing properties may be newer or better located than the Company's properties. The number of competitive industrial or suburban office properties and the availability of land suitable for industrial or suburban office development in a particular area could have a material effect on the Company's ability to lease or develop space. The Company may be competing with other developers that have greater resources than the Company. In addition, in order to maintain its qualification as a REIT, the Company will be required under the Code to distribute annually significant amounts of cash from operations, while some of its competitors may be able to retain more of their working capital to finance projects.
The Company competes for tenants based on its high level of client service, the quality of its properties and business parks, and its ability to successfully develop a wide range of industrial and suburban office properties. Leases at the Company's properties are priced competitively based on market conditions, supply and demand characteristics, and the quality of the Company's properties and services. The Company does not seek to compete solely on the basis of providing the low-cost solution for all tenants.
REAL ESTATE INVESTMENTS
The Company's real estate investments are subject to varying degrees of risk. Income from the Company's properties and the demand for new development properties may be adversely affected by the general economic climate; local conditions such as oversupply of industrial or office properties or a reduction in demand for industrial or office properties in the markets where the Company owns properties; the attractiveness of the Company's properties; the
ability of the Company to provide adequate maintenance and insurance; and increased operating costs (including real estate taxes). In addition, income from the Company's properties and the value of its real estate are also affected by such factors as the cost of regulatory compliance, interest rate levels and the availability of financing. The Company's income and operations would be adversely affected if a significant number of tenants were unable to pay rent or the Company's properties could not be rented on favorable terms. Certain significant expenditures associated with the Company's investments in real estate (such as mortgage payments, if any, real estate taxes and maintenance costs) are generally not reduced when circumstances cause a reduction in income from the property.
ENVIRONMENTAL LIABILITIES
Under various federal, state and local laws and regulations, an owner or operator of real estate may be held liable for the costs of removal or remediation of hazardous or toxic substances located on or in the property. These laws often impose such liability without regard to whether the owner knows of, or was responsible for, the presence of such hazardous or toxic substances. The costs of any required remediation or removal of such substances may be substantial. In addition, the owner's liability as to any property is generally not limited under such laws and regulations and could exceed the value of the property and/or the aggregate assets of the owner. The presence of such substances, or the failure to remediate such substances properly, may also adversely affect the owner's ability to sell or lease the property or to borrow using the property as collateral. Under such laws and regulations, an owner or entity who arranges for the disposal or treatment of hazardous or toxic substances at a disposal or treatment facility may also be liable for the costs of removal or remediation of all such substances at such facility, whether or not such facility is owned or operated by such person. Certain tenants of the Company handle and store hazardous substances at the Company's properties. As a result, in connection with the ownership of the Company's properties or land held for development and a tenant's improper handling, storage, disposal or treatment of such hazardous or toxic substances, the Company may be liable for such costs, including the removal or remediation of all such substances from such properties. Some laws and regulations impose liability for the release of certain materials into the air or water from a property, including asbestos, and such release can form the basis for liability to third parties for personal injury or other damages. Other laws and regulations can limit the development of and impose liability for the disturbance of wetlands or the habitats of threatened or endangered species.
The Company regularly makes capital expenditures and reviews the conditions of its properties and its land held for development in order to maintain compliance with applicable environmental laws. Based on facts currently known to it, the Company does not believe it will be required under existing environmental laws to expend amounts that would have a material adverse effect on its results of operations, financial condition or liquidity. However, no assurance can be given that material environmental liabilities do not exist, that any prior owner or operator of a property or land held for development did not create any material environmental condition not known to the Company, that a material environmental condition does not otherwise exist as to any one or more of the properties or land held for development, or that future uses and conditions (including changes in applicable environmental laws and regulations and the uses and conditions of properties in the vicinity, such as leaking underground storage tanks and the activities of the tenants) will not result in the imposition of environmental liability. No material expenditures have been made by the Company in 1996 or in 1995 relating to environmental matters.
INVESTMENT OBJECTIVES AND OPERATING STRATEGIES
The Company's primary investment objectives are to increase shareholder value and to increase per share cash available for distribution by (1) developing institutional-quality, functional multi-tenant and build-to-suit industrial and suburban office properties, (2) acquiring industrial and suburban office properties in strategic locations where the Company can establish or enhance its market presence, (3) maximizing cash flow through active leasing and management of its properties, and (4) expanding strategically into new geographic markets. The Company has structured its operations, as discussed in more detail below, to meet these investment objectives.
FULLY INTEGRATED REAL ESTATE COMPANY The Company is a fully integrated real estate company with resources dedicated to:
. marketing . landscaping . development . property management . construction . civil engineering . investment analysis . legal . asset management . design . financing . information systems
The Company believes that by providing a full range of services it can control quality and provide greater client service, improve timely delivery of its industrial and suburban office developments and promote cost savings.
DEVELOPMENT OF BUSINESS PARK ENVIRONMENTS
The Company develops and owns its properties primarily in business park environments (see discussion under "Properties"). Alone or with its joint venture partners, the Company controls all aspects of the development process in a majority of the business parks in which it operates, including site selection and project concept, master planning and zoning, design and construction, leasing and property management. Each business park is in proximity to an interstate highway interchange and retail and residential amenities.
The Company's business parks emphasize flexible land plans, extensive landscaping and protective covenants which restrict the uses and control the architecture and signage. In addition to its properties, the Company provides landscaping services for other corporate users in its controlled business parks. The Company will continue to emphasize business park development in future years.
PRODUCT FOCUS
The Company develops or acquires industrial and suburban office properties, primarily in suburban locations (see related discussion of product types under "Properties"). The Company's properties can include both single-tenant (build- to-suit) buildings and multi-tenant buildings. The Company designs properties that can be modified economically to meet the needs of various clients and that can often function as either multi-tenant or single-tenant buildings.
The Company develops institutional-quality, general purpose properties that are designed to be architecturally attractive and to serve the needs of a variety of tenants in a particular submarket. The Company attempts to limit tenant improvement expenditures to those which are in demand by, and adaptable with moderate modification to, a high number of users in a market. The Company controls tenant improvement expenditures by utilizing its in-house interior finish department to supervise the construction process and by compensating its marketing representatives based on a formula which takes into account the cost of tenant finish requirements. The Company uses standard finish materials for most of its tenants. The Company's annual purchase programs allow it to procure these materials on a volume discount basis.
SOUTHEAST MARKET FOCUS
The Company focuses its activities in what it believes are some of the fastest growing markets in the Southeast. As detailed below, since 1990, the Company's markets within the Southeast have experienced greater percentage growth in employment and population than the United States as a whole.
EMPLOYMENT AND POPULATION GROWTH (PERCENTAGE CHANGE)
(a) Source: Bureau of Labor Statistics. (b) Source: U.S. Census Bureau.
Metropolitan Atlanta, Georgia. The Company was founded and is currently headquartered in metropolitan Atlanta, and is one of metropolitan Atlanta's two largest industrial property owners. Metropolitan Atlanta's rapid growth in both employment and population is due in part to its role as a business and distribution center for the entire Southeast. The Company believes that metropolitan Atlanta has been successful attracting business relocations and expansions because of its educated workforce, high-quality of life and well- developed transportation infrastructure.
According to Jamison Research, Inc. ("Jamison"), who publishes data on metropolitan Atlanta's industrial and office real estate markets, the metropolitan area in 1996 recorded its third straight year of industrial net absorption in excess of 10 million square feet. Over the past five years, metropolitan Atlanta's industrial net absorption has totaled more than 50 million square feet. Increased new supply of multi-tenant industrial buildings, however, has recently resulted in a decrease in industrial occupancy in metropolitan Atlanta from 94.5% at December 31, 1995, to 93.7% at December 31, 1996.
Also according to Jamison, metropolitan Atlanta'a office market, exclusive of the downtown submarket, recorded net absorption of approximately 2.8 million square feet during 1996, with occupancy increasing from 90.9% at December 31, 1995, to 92.9% at December 31, 1996. Development of new suburban office buildings has also increased recently. The Company believes that this new development activity has occurred in response to strong levels of demand.
The Company's completed and in-service properties located in metropolitan Atlanta were comprised of approximately 94% industrial properties and approximately 6% suburban office properties at December 31, 1996, and had an average occupancy rate on such date of 96.5%. The Company believes that one of the reasons that the occupancy rate of its metropolitan Atlanta properties is higher than the overall market is that it generally focuses its activities on the submarkets that are among the metropolitan area's strongest. According to Jamison, the major submarkets where the Company generally focuses its activities accounted for less than 50% of metropolitan Atlanta's approximately 400 million square feet of industrial and office space at December 31, 1996, but recorded more than 70% of the metropolitan area's net absorption in 1996. The Company allocates its development activity in metropolitan Atlanta among all four of its primary industrial and suburban office property types and among a number of distinct submarkets, based on its determination of supply and demand conditions.
Nashville, Tennessee. The Company entered the Nashville market in November 1996, with its acquisition of NWI (see Note 8 to the consolidated and combined financial statements). The Company's decision to expand into Nashville was based in part on Nashville's economic diversity, with major industries including publishing, health care, automobile production and tourism, high quality of life and rapid growth in both employment and population. In addition, like Atlanta, Nashville is the state capitol and has a well-developed transportation infrastructure. Nashville is also well located as a point of distribution. According to the Nashville Area Chamber of Commerce, Nashville lies within a 600 mile radius of 50% of the United States population.
According to CB Commercial/Torto Wheaton, who publish data on several industrial and office real estate markets, Nashville's industrial real estate market totals approximately 112 million square feet; net absorption was approximately 1.6 million square feet in 1996; and the market occupancy rate was 93.3% as of December 31, 1996.
Also according to CB Commercial/Torto Wheaton, Nashville's office market totals approximately 17 million square feet; net absorption was approximately 552,000 square feet in 1996; and the market occupancy rate was approximately 92.0% as of December 31, 1996.
Because of NWI's established presence in the Nashville industrial real estate market, the Company is initially operating in Nashville under the name "Weeks/NWI."
Research Triangle, North Carolina. The Company entered the Research Triangle area of North Carolina in December 1996, with its acquisition of Lichtin (see Note 8 to the consolidated and combined financial statements). The Company's decision to expand into the Research Triangle was based in part on the area's success as a center for high technology, communications, research and development and health care, as well as its high quality of life, rapid employment and population growth and educated workforce. The area attracts many of its employees from its three universities: Duke University, The University of North Carolina and North Carolina State University.
Research Triangle Park, which is located adjacent to most of the Company's portfolio, is one of the nation's largest planned research parks, with more than 70 national and international research organizations employing over 35,000 people. Research Triangle Park generally consists of corporate-owned facilities devoted to research and development. Many of the Company's properties house administrative, technology and service functions which complement the activities of businesses with facilities located within Research Triangle Park.
Because the Research Triangle's economy is based more on services, government and trade than on manufacturing, the industrial real estate market is smaller than it is in comparable other southeastern cities. According to Karnes Research Company, who publishes data on the Research Triangle industrial and office real estate markets, the Research Triangle's combined industrial and office real estate markets total approximately 37 million square feet; net absorption was approximately 1.1 million square feet in the last half of 1996; and the occupancy rate of the Research Triangle's combined industrial and office market was approximately 92.7% as of December 31, 1996.
Because of Lichtin's established presence in the Research Triangle industrial and suburban office real estate markets, the Company is initially conducting its operations there under the name "Weeks/Lichtin."
Orlando, Florida. The Company entered the Orlando market in April, 1995 with the purchase of an approximately 190,000 square foot portfolio of industrial properties. The Company's decision to expand into Orlando was based in part on the city's geographic location as a point of distribution for the state of Florida, the most highly populated state in the Southeast, as well as Orlando's well-developed transportation infrastructure and its rapid employment and population growth. The Company decided to pursue its own expansion into Orlando, without acquiring an established local industrial or suburban office real estate company, because it perceived a relative lack of competition and an opportunity to build a presence in the market. Since entering Orlando in 1995, the Company has increased its portfolio of properties to approximately 407,000 square feet as of December 31, 1996, and has opened a local office, staffed by a recently hired Vice President of the Company who has approximately ten years experience in the market.
According to CB Commercial/Torto Wheaton, Orlando's industrial real estate market totals approximately 74 million square feet; net absorption was approximately 1.1 million square feet in 1996; and the market occupancy rate was approximately 94.3% as of December 31, 1996.
Also according to CB Commercial/Torto Wheaton, Orlando's office real estate market totals approximately 19 million square feet; net absorption was approximately 354,000 square feet in 1996; and the market occupancy rate was approximately 90.7% as of December 31, 1996. Spartanburg, South Carolina. Spartanburg is the Company's smallest market and is served out of the Company's Atlanta headquarters. The Company's activities in Spartanburg consist of properties owned and developed at Hillside business park. Hillside is located one exit north on I-85 from BMW's automobile production facility that opened in 1995. The occupancy rate of the Company's approximately 389,000 square feet of completed and in-service properties in Spartanburg was 100% as of December 31, 1996.
BUSINESS GROWTH STRATEGY
DEVELOPMENT
The Company is a leading developer of institutional-quality, general purpose industrial multi-tenant and build-to-suit properties, and has substantial experience in all phases of the development process, including market analysis, site selection, zoning, design, civil engineering, construction and landscaping. The Company currently has adequate sources for raw materials needed to construct its new properties, including access to qualified labor and subcontractors. The Company has completed and stabilized 22 development properties and two property expansions totaling approximately 2.7 million square feet since its IPO. All of these properties are currently 100% leased.
ACQUISITIONS
The Company balances its development activity by making opportunistic acquisitions in strategic locations that establish or enhance the Company's market position, or where the Company's skills and market knowledge can enhance value through additional development, property management or physical upgrades. Since its IPO (including the 17 properties acquired in connection therewith) the Company has acquired 112 properties totaling approximately 6.6 million square feet.
RISKS OF DEVELOPMENT AND ACQUISITIONS
New project development is subject to a number of risks, including risks of construction delays or cost overruns that may increase project costs, risks that the project will not achieve anticipated occupancy levels or sustain anticipated rent levels, and new project commencement risks such as the failure to obtain zoning, occupancy and other required government permits and authorizations, and the incurrence of development costs in connection with projects that are not pursued to completion.
Acquisitions entail risks that (i) existing agreements to acquire properties may fail to close, (ii) acquired properties may not perform in accordance with management's expectations, including projected occupancy and rental rates, (iii) the senior executives and employees of an acquired business will not be successfully integrated into the Company, or (iv) the Company may have underestimated the cost of improvements required to bring an acquired property up to standards established for the market position intended for that property. Although the Company has successfully acquired properties and effectively integrated their operations in the past, there can be no assurance that the Company will be able to continue to make successful acquisitions in the future or that any such acquisitions will be successfully integrated into the
Company's operations. Furthermore, there can be no assurance that an acquisition will not have an adverse effect upon the Company's operating results, particularly in the fiscal quarters immediately following the consummation of such acquisition. There can be no assurance that the Company will be able to continue to operate an acquired business in a profitable manner.
Both development and acquisitions also involve risks that the Company will fail to obtain adequate sources of financing (see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources").
LAND CONTROL
An important part of the Company's development strategy is to own or control land sufficient to allow it to develop exclusive business park environments and to accommodate the expansion and relocation needs of its tenants. The Company employs a number of ownership and control arrangements in its land strategy, including outright purchases, joint ventures, staged acquisitions, options and exclusive marketing and development agreements. By doing so, the Company believes that it can control sufficient land acreage, while mitigating the negative impact of land carrying costs.
The Company also owns or controls (through agreements to purchase, options and marketing and development agreements) approximately 1,891 net usable acres of undeveloped land, located primarily in existing business parks with zoning and infrastructure in place. The Company believes the development potential of this land may ultimately total approximately 20.1 million square feet (see "Properties").
INTERNAL GROWTH
The Company maximizes its available cash flow by increasing the occupancy rate of those properties that are not fully leased, maintaining high occupancy rates, raising effective rental rates and controlling operating expenses and capital expenditures. The occupancy rate of the Company's stabilized properties (i.e., those having reached substantial lease-up) was 96.2% as of December 31, 1996. The Company believes that its emphasis on providing quality facilities and client service has resulted in a high retention of its tenants and low turnover. Of the leases that expired in 1996 (representing approximately 1.7 million square feet), tenants occupying approximately 67% of such space renewed their leases with the Company. The Company believes that this high retention of its tenants results in lower re-leasing costs and decreased potential loss due to vacancy. In addition, in 1996, 40 tenant expansions were completed for existing tenants, totaling approximately 490,000 square feet.
The leases for the Company's properties have terms ranging from one to fifteen years, with terms for multi-tenant properties typically between three and five years and for build-to-suit properties typically between seven and ten years. Typically, the tenant in a multi-tenant property pays for increases in taxes, operating costs and insurance above a base year level. For build-to-suit properties, the tenant typically pays for all taxes, insurance and operating costs. Approximately 64% of the Company's leases (based on leased square footage as of December 31, 1996) contain contractual rent escalations.
The high average occupancy of the Company's properties reflects the generally strong supply and demand conditions in its markets. As a result, the Company continues to be able to increase average rents and generally to avoid offering tenant concessions. During 1996, the
Company renewed or re-leased approximately 2.0 million square feet of second- generation space in its properties. Cash-basis rental rates on this space increased by an average of 4.2%, calculated by comparing the initial cash-basis rent to be paid by the tenant under the new or renewed lease with the ending cash-basis rent paid by the tenant under the previous lease on the same space.
As shown in the table provided under "Properties -- Tenants," excluding Scientific Atlanta, which accounted for approximately 3.8% of annualized base rent, no single tenant accounted for more than 1.8% of annualized base rent from leases under which tenants were paying rent as of December 31, 1996.
GEOGRAPHIC EXPANSION
While Metropolitan Atlanta, Georgia will remain the Company's primary focus, the Company intends to continue expanding carefully into new southeastern markets. The Company intends to expand into other markets only when it believes it can achieve over time a significant market presence. The Company's activities to date have included the 1990 expansion into Spartanburg, South Carolina, the 1995 expansion into Orlando, Florida, and the 1996 expansions into Nashville, Tennessee and the Research Triangle area of North Carolina. As a result of its geographic expansion, the Company has reduced its concentration of properties in metropolitan Atlanta, Georgia, to 74% at December 31, 1996 (based on square footage and excluding properties under development and/or under agreement to acquire), from 95% at December 31, 1995 (calculated on the same basis).
ITEM 2.
ITEM 2. PROPERTIES
As of December 31, 1996, the Company owned or had agreements to acquire 233 properties, including 24 properties and two property expansions which were under development or in lease-up and 21 properties which were under agreements to be acquired. Of the 233 properties, 208 were industrial buildings, 22 were office buildings and three were retail buildings. The Company's 188 completed and in- service properties (i.e. excluding properties under development or in lease-up or under agreement to acquire) were 96.2% occupied at December 31, 1996.
The Company also owns or holds joint venture interests in approximately 919 acres of land held for development, has agreements to acquire an additional 200 acres, has the potential to acquire 177 acres under option arrangements and has exclusive marketing or development rights on an additional 595 acres of land. The majority of the properties and land held for development, which are under agreements to acquire, are located in Nashville, Tennessee and the Research Triangle area of North Carolina and are part of the NWI and Lichtin acquisition transactions in 1996. The information appearing on pages 15 to 22 reflects information regarding the Company's properties as of December 31, 1996, including properties under development or in lease-up, or under agreement to acquire.
INDUSTRIAL PROPERTIES
The Company owned and had agreements to acquire 208 industrial buildings as of December 31, 1996, of which 150 are located in Atlanta Georgia, 25 are located in Nashville, Tennessee, 20 are located in the Research Triangle area of North Carolina, nine are located in Orlando, Florida and four are located in Spartanburg, South Carolina. These buildings can be characterized by their use: business distribution, bulk warehouse or business service. The Company owned or had agreements to acquire 136 business distribution buildings, 34 bulk warehouse buildings, and 38 business service buildings at year-end.
Business distribution buildings are generally 20,000 to 100,000 square feet in size, have warehouse clear ceiling heights of 18' to 24', building depths of 120' to 200', office finish of 10% to 50%, dock-high truck doors (which are designed to accommodate tractor-trailers) and typically cost $35 to $45 per square foot to construct. These buildings may function as national headquarters, sales and administration, research and development and light manufacturing facilities in addition to distribution facilities.
Bulk warehouse buildings are generally 75,000 to 250,000 square feet in size, have clear ceiling heights of 24' to 30', building depths of 200' to 300', office finish of 2% to 15%, dock-high truck doors and typically cost $22 to $30 per square foot to construct. These buildings generally function as regional or local storage and distribution facilities.
Business service buildings are generally 20,000 to 80,000 square feet in size, have clear ceiling heights of 14' to 16', building depths of 80' to 130', office finish of 60% to 100%, drive-in truck doors (which are designed to accommodate delivery vans) and typically cost $65 to $75 per square foot to construct. These buildings are used by tenants primarily for clerical, administrative and executive offices.
WEEKS CORPORATION PROPERTIES (As of December 31, 1996)
WEEKS CORPORATION PROPERTIES (As of December 31, 1996)
WEEKS CORPORATION PROPERTIES (As of December 31, 1996)
WEEKS CORPORATION PROPETIES (As of December 31, 1996)
WEEKS CORPORATION PROPERTIES (As of December 31, 1996)
WEEKS CORPORATION PROPERTIES (As of December 31, 1996)
WEEKS CORPORATION PROPERTIES (As of December 31, 1996)
WEEKS CORPORATION PROPERTIES (As of December 31, 1996)
(1) D = business distribution; B = bulk warehouse; S = business service; O = office; R = retail. (2) Represents the percentage of rentable square feet that is built out as office space rather than as warehouse or distribution space. For properties under development represents current pro forma. (3) The year of development means the year in which shell construction was completed. (4) For properties acquired by the Company, including properties previously developed and sold by the Company, the year of acquisition means the year in which an ownership interest in the property was acquired unless otherwise noted. (5) Occupancy rate includes occupancy for completed and in service properties at December 31, 1996. It excludes pre-leasing for properties under development or in lease up and the occupancy rate for properties under agreement to acquire. (6) Property currently under development or in lease up. Twenty four properties and two expansions under development or in lease-up. (7) Property under agreement to acquire (see note 8 to the consolidated and combined financial statments). Twenty one properties under agreement to acquire. (8) Property owned by Weeks Financing Limited Partnership, which is 99% owned by the Operating Partnership and 1% owned by Weeks Realty Services. (9) The Company is the developer for a joint venture which owns this property and in which the Company currently has a 2.5% interest. The Company has an option to purchase this property upon stabilization, as defined in the joint venture agreements. (10) The Company is the developer of this property and has an option to purchase property upon stabilization and can be required by the owner to purchase the property after completion.
OFFICE PROPERTIES
At December 31, 1996, the Company owned or had agreements to acquire 22 suburban office buildings, of which 13 are located in Atlanta, Georgia and nine are located in the Research Triangle area of North Carolina. The Company's typical suburban office building ranges in size from approximately 30,000 to 150,000 square feet, with an average of 4.5 parking spaces per 1,000 square feet of leasable space and a typical replacement cost of $85 to $110 per square foot.
BUSINESS PARKS
A key to the Company's success has been the development of properties within business parks where the Company controls all aspects of the development process, including site selection and project concept, master planning and zoning, design and construction, leasing and property management. For developments of the land held in joint ventures, the Company must obtain certain approvals from its joint venture partners.
Each of the Company's business parks is in proximity to an interstate highway interchange and is close to retail and residential amenities. The business parks are generally master planned to accommodate a variety of uses. The business parks are generally well landscaped with protective covenants which restrict the uses and control the architecture and signage.
The majority of the Company's properties and land held for development are located in business parks. The Company's ability to develop both multi-tenant buildings for lease and build-to-suit buildings for lease or sale results in more rapid development of the business parks, as well as generating revenues from various sources including land sales, building construction, landscape installation and maintenance, lease commissions and property management fees.
The buildings within business parks typically have a mix of uses ranging from distribution and service to office and light manufacturing. The Company facilitates the coexistence of these diverse functions within business parks through controlled signage and architecture, landscaping and placement of buildings relative to natural terrain and raised earthen berms.
DEVELOPMENT LAND
The following schedule details the Company's undeveloped land interests at December 31, 1996. The land detailed below is located primarily in existing business parks with zoning and infrastructure in place. The Company estimates that the total development potential of the development land could ultimately total approximately 20.1 million square feet.
DEVELOPMENT LAND (in net usable acres)
(1) The Company's interests in its undeveloped land held in joint ventures range from 0% to 30%. (2) The Company has agreed to acquire this land in three stages to occur prior to April 1998. The second stage was closed in December 1996. (3) The Company has agreed to purchase this land from NWI over a period of up to six years (see Note 8 to the consolidated and combined financial statements). (4) The Company has agreed to purchase this land from Lichtin over a period of up to four years, subject to a one year extension (see Note 8 to the consolidated and combined financial statements). (5) The Company has agreed to acquire 24.6 acres at Orlando Central Park in two stages to occur by December 1998. (6) Under the terms of the Company's development agreements, the Company will generally either develop properties for a fee, or have certain rights to acquire land for development or to acquire developed properties upon their completion. The Company's marketing agreements generally provide for the Company to be paid marketing or management fees in conjunction with services it provides. Both the development and marketing agreements generally contain certain non-competition provisions. (7) The Company estimates it will eventually develop approximately one-half the acreage in Spartanburg it owns in joint ventures and that the remainder will be sold to third parties. Estimated development potential reflects only that land which is not currently expected to be sold.
TENANTS
The Company believes that its emphasis on developing quality properties and providing a high level of client service has resulted in increased tenant retention. As of December 31, 1996, the Company's properties were leased to 560 tenants including local, regional, national and international companies. The Company's 30 largest tenants (measured by annualized base rent at December 31, 1996) occupy a total of approximately 4.1 million square feet and represent 31.0% of the annualized base rent as shown in the table below.
30 LARGEST TENANTS MEASURED BY ANNUALIZED BASE RENT
(1) Annualized cash base rent net of rental concessions, if any, based on leases in place for stabilized properties and properties in lease-up where tenants were paying rent as of December 31, 1996. (2) Scientific Atlanta announced plans during the second quarter of 1996 to relocate over a period of several years certain facilities to a new, owned corporate campus. Based on scheduled lease termination dates and assuming the spaces were not re-leased, the impact on the Company's funds from operations and net income in 1997 would be less than a $0.01 per share.
LEASE EXPIRATIONS
The following tables show scheduled lease expirations for the Company's total property portfolio, for its industrial property portfolio and for its office property portfolio based on leases under which tenants were paying rent as of December 31, 1996, assuming no exercise of renewal options or termination rights, if any:
(1) Annualized base rent represents the annualized monthly base rental at the time of lease expiration. (2) The total square footage expiring as of December 31, 1996 is comprised of 12,484,067 square feet of leases in stabilized properties, and 385,567 square feet of leases in development properties where tenants are paying rent as of December 31, 1996.
RE-LEASING COSTS
Although re-leasing costs may vary from year-to-year depending on conditions in the Company's real estate markets and the mix of leasing between property types, the Company endeavors to control re-leasing costs by:
. agreeing to provide specific tenant improvements based on a detailed space plan rather than committing to a fixed dollar amount;
. acting as general contractor with respect to construction of tenant improvements, thereby saving the fees paid to outside contractors and enabling the Company to control the quality and timely completion of the work;
. constructing general purpose improvements that can be adapted to different tenants' requirements at relatively low cost;
. paying leasing commissions to its in-house marketing representatives that take into account the cost of tenant improvements thereby providing an incentive to minimize cost; and
. using its in-house marketing representatives to negotiate directly with tenants when possible, thereby saving the cost of commissions to outside brokers.
The following table summarizes by year the Company's capitalized tenant improvement and leasing costs incurred in the renewal or re-leasing of previously occupied space.
CAPITALIZED TENANT IMPROVEMENTS AND LEASING COSTS
(1) Includes $1,377,000 or $15.68 per square foot to re-tenant 87,845 square feet of the Company's 94,677 square foot suburban office property which was vacated by Matsushita Electric Corp. and which was converted from a single tenant to a multi-tenant property. (2) Excluding amounts incurred to re-lease the office property discussed in (1) above, capitalized tenant improvements and leasing commissions would have been $3.55 per square foot for released and renewed space during 1995.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any material litigation other than litigation which is expected to be covered by liability insurance or which is not expected to have a material adverse effect on the Company's results of operations or financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders for a vote during the fourth quarter of 1996.
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive Officers of the Company and their positions are as follows:
The following is a biographical summary of the experience of the executive officers of the Company:
A. Ray Weeks, Jr. Chairman of the Board and Chief Executive Officer of the Company since 1983. President of the Company from January 1982 through March 1991. Chairman of the Board of the Georgia Department of Industry, Trade and Tourism. Chairman, Metro Business Forum. Co-Chairman, Regional Leadership Institute. Juris Doctor from Mercer University, Master of Social Science in Urban Studies from Georgia State University and Bachelor of Arts from Furman University.
Thomas D. Senkbeil. Vice Chairman of the Board and Chief Investment Officer of the Company since 1992. Executive Vice President and Managing Partner of Senkbeil & Associates Inc. and Anderson & Senkbeil Inc., each a real estate development firm, from September 1984 to October 1992. Immediate Past President, National Executive Committee of the National Association of Industrial and Office Properties. Master of Business Administration from the University of North Carolina and Bachelor of Science in industrial engineering from Auburn University.
Forrest W. Robinson. Board member, President of the Company since April 1991 and Chief Operating Officer since May 1988. Senior Development Officer from March 1986 to April 1988. Executive Vice President, Marketing from February 1984 to February 1986. Joined the Company in 1977. Bachelor of Business Management from Jacksonville State University.
Harold S. Lichtin. Board member, Managing Director of the Company, with responsibilities for the Company's activities in North Carolina, since December 1996. From 1977 to December 1996, founded and was President of Lichtin Properties, Inc., a commercial development and property management company in the Raleigh-Durham-Chapel Hill area of North Carolina that was acquired by the Company in December 1996. Bachelor of Science in Economics from North Carolina State University.
John W. Nelley, Jr. Board member, Managing Director of the Company, with responsibilities for the Company's activities in Nashville, Tennessee, since November 1996. Since 1982, General Partner and Chief Financial Officer of NWI Warehouse Group, L.P., an industrial warehouse development company in Nashville, Tennessee whose assets and business have been acquired, or are under agreement to be acquired, by the Company. Also since 1973, a practicing Attorney and CPA specializing in real estate and estate planning. Juris Doctor from the University of Notre Dame and Bachelor of Science in Accounting from Western Kentucky University.
Albert W. Buckley, Jr. Managing Director of the Company since November 1996. General Partner and Chief Executive Officer of NWI Warehouse Group, L.P., an industrial warehouse development company in Nashville, Tennessee from 1982 to 1996. Also since 1976, President of Buckley & Company Real Estate, Inc., a real estate brokerage firm specializing in industrial property management and development. Master of Business Administration and Bachelor of Science in Business Administration from Middle Tennessee State University.
David P. Stockert. Senior Vice President and Chief Financial Officer of the Company since June 1995. Vice President and Associate in the Real Estate Investment Banking Group of Dean Witter Reynolds Inc. from July 1990 to June 1995. Master of Business Administration from Columbia University Business School and Bachelor of Science in Accounting from the University of Colorado.
Robert G. Cutlip. Senior Vice President, Development, of the Company since April 1993. Vice President and Principal-in-Charge of Dallas Industrial and Phoenix/Colorado Operations from January 1992 to April 1993, Paragon Group, a real estate development firm, Vice President and Principal of Dallas Industrial from January 1990 to December 1991 and Vice President, Operations from January 1988 to January 1990. Master of Business Administration from University of Southern California, Master of Science in Civil Engineering from Vanderbilt University and Bachelor of Science in Civil Engineering from U.S. Air Force Academy.
Clyde H. Duckett. Senior Vice President, Construction, of the Company since January 1989. Professional Engineer registered in Georgia, South Carolina and Tennessee. Bachelor of Science in Mechanical Engineering from Tennessee Technological University.
Mark W. Flowers. Senior Vice President, Landscape, of the Company since October 1993. Vice President, Landscape of the Company from October 1987 through September 1993. Bachelor of Science in Horticulture from the University of Georgia.
Klay W. Simpson. Senior Vice President, Marketing, of the Company since October 1992. Vice President of Marketing of Senkbeil & Associates Inc. and Anderson & Senkbeil Inc., each a real estate development firm, from 1986 to September 1992. Bachelor of Business Administration from Stephen F. Austin State University.
David L. Barker. Vice President, Property Management, of the Company since October 1989. Real Property Administrator designation from Building Owners and Managers Institute.
Elizabeth C. Belden. Vice President, Corporate Counsel, of the Company since October 1985. Juris Doctor from Emory University and Bachelor of Social Sciences from Colorado State University.
Phillip W. Cobb. Vice President, Building Construction, of the Company since April 1996. Senior Project Manager of the Company's Construction division from January 1993 to April 1996. President of CMC Builders, Inc., a general construction firm from 1982 to 1993. Bachelor of Science in Industry from Georgia Southern University.
Patricia P. Clayton. Vice President, Property Management, of the Company since October 1992. Director of Property Management for Senkbeil & Associates Inc. and Anderson & Senkbeil Inc., each a real estate development firm, from February 1986 to September 1992. Bachelor of Business Administration from the University of California - Northridge.
Arthur J. Quirk. Vice President and Controller of the Company since December 1994. Vice President-Controller and Chief Accounting Officer for Allegiant Physician Services, Inc., a physician management services company, from August 1993 to November 1994. Chief Financial Officer/Controller for TransTel Group Inc., a start-up telecommunications company, from November 1991 to July 1993. From June 1980 to October 1991 served in various capacities including Senior Audit Manager at Arthur Andersen LLP. Bachelor of Science in Accounting from Auburn University.
Moses L. Salcido. Vice President, Orlando, of the Company since October 1996. Vice President and director of marketing for ComTech Properties, Inc., a real estate development firm in Central Florida from 1988 to October 1996. Bachelor of Science in Business Administration from San Diego State University.
Robert K. Sanders, Jr. Vice President, Construction Estimating, of the Company since March 1996. Chief Estimator from September 1993 to February 1996. Bid Group Manager and Senior Estimator for Choate Construction, a construction contracting company, from August 1990 to August 1993. Bachelor of Architectural Engineering with a Construction Option from Southern College of Technology.
Mark L. Scott. Vice President, Interior Construction of the Company since March 1996. Project Manager from March 1994 to March 1996. Senior Project Manager of Choate Construction, a construction contracting company, from 1990 to March 1994. Studied Civil Engineering at Southern Institute of Technology.
Thomas W. Trocheck. Vice President, Development-Engineering, of the Company since May 1989. Professional Engineer registered in Georgia, Florida and South Carolina. Bachelor of Science in civil engineering from the Georgia Institute of Technology and Bachelor of Arts in Government and Business Administration from Florida State University.
Robert T. Weeks. Vice President, Information Technology, of the Company since January 1992. Director of Information Systems of the Company from March 1989 through December 1991. Master of Business Administration from Georgia State University and Bachelor of Business Administration from the University of Georgia. Ray Weeks and Robert Weeks are first cousins.
Cynthia F. Wright. Vice President, Investor Relations, of the Company since September 1994. Vice President, Development of the Company from December 1987 through August 1994. Master of Business Administration from the University of North Carolina, Master of Arts in Urban Studies and Planning from the University of Alabama-Birmingham and Bachelor of Arts in Urban Studies from the University of Virginia.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The common stock of the Company trades on the New York Stock Exchange ("NYSE") under the symbol "WKS." The following table reflects the quarterly high and low closing prices per share of the common stock and its per share quarterly cash dividends for 1995 and 1996, respectively:
As of March 20, 1997, the Company had 130 shareholders of record and the last reported sale price of its common stock was $34.50.
The Company currently anticipates paying regular quarterly dividends of $0.43 per share, which is equivalent to an annual dividend rate of $1.72 per share. The dividends for each quarterly period are declared and paid one quarter in arrears. Future dividends are dependent upon many factors including the Company's earnings, capital requirements, its financial condition and its available cash flow and are governed by the discretion of the Board of Directors. The dividends paid in 1996 are estimated to be 95% taxable to the Company's shareholders as ordinary income with the remaining 5% representing a return of capital. The dividends paid in 1995 were 100% taxable to the Company's shareholders as ordinary income. In future periods, some portion of the dividends paid to shareholders may represent a return of capital.
In the first quarter of 1996, the Company registered 300,000 shares of its common stock and implemented a dividend reinvestment plan under which current shareholders may elect to automatically reinvest their dividends in additional shares of common stock. In 1996, 1,514 shares of common stock were issued through the dividend reinvestment plan.
On November 1, 1996, November 26, 1996 and December 30, 1996, the Company issued a total of 1,352,261 Units in the Operating Partnership, in partial or full consideration for the acquisition of real estate properties and the business operations of NWI. The aggregate value of the properties acquired by the Company in exchange for such Units was approximately $33.8 million. Units are convertible by their holders into shares of common stock on a one-for-one basis, or into cash, at the Company's option. The Units were issued pursuant to an exemption from registration under Section 4(2) of the Securities Act in reliance, in part, upon the representations and warranties set forth in the NWI acquisition agreements. These Units are subject to a registration rights and lock-up agreement which restricts the disposition of the Units for a period of one year from the date of issuance with respect to all Units and further restricts the disposition of Units beneficially owned by the Company's principal executive officers in Nashville, Tennessee (approximately 43% of the total Units issued) until November 1, 1999.
On December 31, 1996, the Company issued 565,459 Units and 282,178 shares of common stock in partial or full consideration for the acquisition of real estate properties and the business operations of Lichtin. The aggregate value of the properties acquired by the Company in exchange for such Units and shares was approximately $21.4. The Units and shares of common stock were issued pursuant to an exemption from registration under Section 4(2) of the Securities Act in reliance, in part, upon the representations and warranties set forth in the Lichtin acquisition agreements. The shares of common stock and Units are subject to a registration rights and lock-up agreement which restricts the disposition of the Units and shares of common stock until December 31, 1999.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(1) Represents the historical combined operations and combined financial position of Weeks Group, the predecessor entity. On August 24, 1994, Weeks Corporation (the "Company") completed an initial public offering and related formation transactions. (2) Includes dividends for the fourth quarter of 1996 ($0.43) which were declared and paid in January 1997. (3) Includes dividends for the fourth quarter of 1995 ($0.40) which were declared and paid in January 1996. (4) Includes dividends for a partial third quarter of 1994 ($0.15) after the Company's August 1994 initial public offering and dividends for the fourth quarter of 1994 ($0.375) which were declared and paid in January 1995. (5) The Company believes that funds from operations provides an additional indicator of the financial performance of the Company. Funds from operations is defined by the National Association of Real Estate Investment Trusts ("NAREIT") to mean net income (loss) determined in accordance with generally accepted accounting principles ("GAAP"), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis. Funds from operations should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of the Company's financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company's needs. (6) Effective for the year ended December 31, 1996, the Company implemented the new NAREIT recommended guidelines for calculating funds from operations. The primary difference between the Company's funds from operations under the new guidelines and those used in prior years is that the Company now reduces reported funds from operations for the amortization of deferred financing costs and recognizes rental income on a "straight-line" basis. Previously reported funds from operations were $15,201,000 and $4,571,000 for the year ended December 31, 1995 and the period from August 24, 1994 to December 31, 1994, respectively. (7) Represents the Company's share of funds from operations.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the Selected Financial Data and the accompanying Consolidated Financial Statements of the Company and the Combined Financial Statements of "Weeks Group," the predecessor to the Company, and notes thereto.
GENERAL
The Company was founded in 1965 and operated as a private real estate company until August 1994, when it completed an initial public offering ("IPO") and elected to be taxed as a real estate investment trust ("REIT"). As a self- administered and self-managed REIT, the Company owns, develops, acquires and manages primarily high quality industrial and suburban office properties in the southeastern United States. For a further description of the Company, see Note 1 to the consolidated and combined financial statements.
RESULTS OF OPERATIONS
The results of operations as discussed herein include the historical results of the Company for the years ended December 31, 1996 and 1995, and for the period from August 24, 1994 to December 31, 1994, respectively; and of Weeks Group for the period from January 1, 1994 to August 23, 1994. For the purpose of comparison to 1995 operating results, the results for the periods from January 1, 1994 to August 23, 1994 and August 24, 1994 to December 31, 1994 have been aggregated.
Subsequent to the Company's IPO, all third-party service businesses conducted through the Company's subsidiaries (the "Subsidiaries"), Weeks Realty Services, Inc. (fee landscape and property management services) and Weeks Construction Services, Inc. (fee construction) have been deconsolidated and accounted for on the equity method of accounting. Therefore, certain of the revenue and expense captions relating to the third-party service business operations in 1994 are discussed after aggregating the portion of these items reported as part of the Weeks Group combined financial statements with those of the Subsidiaries (see Notes 2 and 7 to the consolidated and combined financial statements).
On November 1, 1996 and December 31, 1996, the Company completed the initial closings of the acquisitions of properties and the related operations of two privately-owned real estate companies -- NWI Warehouse Group, L.P. and affiliates ("NWI") whose properties and operations are located in Nashville, Tennessee, and Lichtin Properties, Inc. and affiliates ("Lichtin") whose properties and operations are located in the Raleigh-Durham-Chapel Hill area of North Carolina (see Note 8 to the consolidated and combined financial statements). While these transactions did not have a material impact on 1996 reported results of operations, they were significant transactions as they provided for the Company's continued expansion in the southeast United States.
Operating information relating to the Company's properties is summarized below (in thousands):
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Year to year comparisons of property operating revenues and expenses for 1996 and 1995 are discussed herein using the categories "core properties," "development properties" and "acquisition properties." Core properties are defined as properties which were stabilized and operating for comparable full year periods. The Company defines a property as stabilized upon the earlier of substantial lease-up or one year from building shell completion. Development properties reflect properties completed and stabilized, and acquisition properties are properties acquired, subsequent to January 1, 1995.
Property operating revenues (rental revenues plus tenant reimbursements) increased $18,664,000 or 54.9% in 1996. Of this increase, $13,733,000, $3,750,000 and $1,181,000 was attributable to acquisition, development and core properties, respectively. The increases from acquisition and development properties were due to the acquisition of 81 properties (49 in 1995 and 32 in 1996) totaling 4,727,000 square feet, excluding 14 properties totaling 1,109,000 square feet acquired on December 31, 1996, and the stabilization of 15 development properties (seven in 1995 and eight in 1996) and two property expansions (one each year) totaling 1,799,000 square feet. Property operating expenses increased $9,151,000 or 60.7% between years, due primarily to the growth in the property portfolio resulting from the acquisition and development properties discussed above.
The impact on 1997 rental revenues of the acquisition properties acquired and the development properties stabilized in 1996 when combined with the core properties should increase rental revenues to approximately $65 million based on noncancelable operating leases in place at December 31, 1996 (as reflected in Note 10 to the consolidated and combined financial statements). In addition, as discussed under the subheading "Current Development Activity" detailed below and in Note 8 to the consolidated and combined financial statements, the Company estimates the stabilization of certain properties currently under development and the acquisition of additional properties associated with the NWI and Lichtin acquisition transactions which will also increase rental revenues in 1997. (The information provided in this paragraph includes forward-looking statements based upon noncancelable operating leases in
place at December 31, 1996, the status of negotiations with potential tenants, current construction schedules and other relevant factors currently available to the Company. There can be no assurance that any of these factors will not change or that any change will not affect the accuracy of such forward-looking statements.)
For the comparable years of 1996 and 1995, operating results of the core properties, representing 78 properties totaling 5,331,000 square feet, are summarized below (in thousands):
Property operating revenues from core properties increased 4.5% despite a slight decrease in overall average occupancy, due in part to the re-leasing in 1995 of two buildings totaling 344,000 square feet vacated in early 1995 by Matsushita Electric Corporation (Panasonic). Re-leasing these two buildings produced an operating revenue increase of $912,000 in 1996. The positive impact of re- leasing these buildings was offset by decreased average occupancy in six other buildings totaling 336,000 square feet which resulted in decreased operating revenues of $691,000. Exclusive of these occupancy related impacts, core properties operating revenues increased 4.2% between years due primarily to rental rate increases.
Property operating expenses increased 11.4% due to both increased operating and maintenance expenses and depreciation and amortization in 1996. Net of the impact of the eight buildings affected by occupancy changes, property operating expenses increased by 8.6% (6.1% excluding depreciation and amortization expense). The 6.1% increase in property operating expenses, excluding depreciation and amortization, reflects increased property maintenance and security expenses between years. Also excluding the impact of the eight buildings affected by occupancy changes, property operating revenues less property operating expenses from core properties, increased 0.4% (3.7% exclusive of depreciation and amortization) between years.
Interest expense increased $3,673,000 or 45.3% from $8,106,000 in 1995 to $11,779,000 in 1996, due to higher interest on the Company's revolving line of credit ( the "Credit Facility") and higher mortgage interest in 1996. Higher weighted average Credit Facility borrowings in 1996 compared to 1995, due to the Company's acquisitions and increased development activity, resulted in higher Credit Facility interest costs in 1996 of $1,410,000. Mortgage interest increased $2,263,000 due to interest costs associated with mortgage debt assumed in connection with the Company's 1995 and 1996 acquisitions.
Amortization of deferred financing costs increased by $173,000 or 25.0% from $691,000 in 1995 to $864,000 in 1996, due primarily to the amortization of the deferred financing costs associated with a $5.1 million industrial revenue bond refinancing in the first quarter of 1996 and costs associated with increasing the availability under and restructuring the Credit Facility.
Company general and administrative expenses increased by $1,191,000 or 64.4% from $1,848,000 in 1995 to $3,039,000 in 1996, due primarily to increased personnel and related administrative costs attributable to the Company's growth and to a lesser extent by a shift in certain expenses relating to properties which were fee-managed by the Subsidiaries in 1995, but which were subsequently acquired and were owned by the Company in 1996. A portion of the increased expenses in 1996 also relates to the establishment of an office in Orlando, Florida and the general and administrative expenses associated with the Company's acquired Nashville, Tennessee operations, both of which occurred in the fourth quarter of 1996. As a percentage of total revenue, general and administrative expenses increased from 5.2% in 1995 to 5.6% in 1996. General and administrative expenses of the Company, when combined with the general and administrative expenses of the Subsidiaries increased by $1,367,000 or 40.6% from $3,366,000 in 1995 to $4,733,000 in 1996 for the reasons discussed above. As a percentage of the combined revenues of the Company and the Subsidiaries, the combined general and administrative expenses of the Company and the Subsidiaries decreased from 8.0% in 1995 to 7.6% in 1996.
Interest income for the year ended December 31, 1996, consists primarily of interest earned under the development loan arrangements discussed more fully in Note 6 to the consolidated and combined financial statements. For the year ended December 31, 1995, interest income represented $213,000 earned under a short-term note arrangement, made in conjunction with a 1995 property acquisition, $60,000 earned under the development loan arrangements discussed above with the remainder earned on short-term cash investments.
Equity in earnings of the Subsidiaries of $1,340,000 in 1996 and $1,220,000 in 1995 represents the Company's 99% economic interest in the earnings of the Subsidiaries after the elimination of interest expense to the Company (see Note 7 to the consolidated and combined financial statements). As discussed below, in 1995 the Company acquired 37 properties which the Subsidiaries previously managed. Additionally, the Subsidiaries provided other third-party services, such as landscape maintenance, leasing and tenant interior work for these managed properties. Due to the acquisition of these properties by the Company, the Company's third-party service revenues associated with these properties ceased at their acquisition dates (generally in the second half of 1995). The impact, if any, on the comparative results for 1996 and 1995 is included in the discussion below.
Construction and development fees increased by $750,000 or 50.6% from $1,483,000 in 1995 to $2,233,000 in 1996. The increase resulted primarily from higher general contracting fees earned from a higher volume of general contracting work in process in 1996 compared to 1995.
Landscape revenue increased $1,181,000 or 30.6% from $3,854,000 in 1995 to $5,035,000 in 1996 due to increases in landscape installation revenue of $847,000 resulting from more installation jobs in process in 1996, with the remaining increase due primarily to net growth in the number of maintenance contracts.
Property management fees decreased $305,000 or 61.2% from $498,000 in 1995 to $193,000 in 1996, due primarily to the reduction in the size of the third-party property management portfolio discussed above.
Commission income decreased $134,000 or 23.0% from $582,000 in 1995 to $448,000 in 1996, due to lower third-party building lease commissions associated with the reduction of the third-party property management portfolio discussed above, offset somewhat by increased land sales commissions in 1996 on land managed and marketed by the Subsidiaries.
Direct costs increased by $823,000 or 23.5% from $3,504,000 in 1995 to $4,327,000 in 1996, due primarily to costs associated with a higher volume of landscape installation and maintenance contracts in 1996.
Equity in earnings of partnerships and joint ventures decreased from earnings of $101,000 in 1995 to a loss of $1,000 in 1996, due primarily to lower profits from underlying partnership and joint venture land sales activities between years.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO THE COMBINED RESULTS FOR YEAR ENDED DECEMBER 31, 1994
For the 1995 and 1994 comparison of property operating results, core properties were defined as properties which were stabilized and operating for comparable full-year periods. Development properties reflected properties completed and stabilized subsequent to the IPO and acquisition properties were properties acquired in conjunction with the IPO and acquired from third parties subsequent to the IPO.
Property operating revenues (rental revenues plus tenant reimbursements) increased $13,224,000 or 63.6% in 1995. Of this increase, $7,781,000 and $5,612,000 related to acquisition and development properties, respectively, offset by a $169,000 decrease from core properties. The increases from acquisition and development properties were due to the acquisition of 66 properties (17 in August 1994 and 49 in 1995) totaling 3,351,000 square feet and the stabilization of 14 development properties (seven in 1994 and seven in 1995) totaling 1,821,000 square feet. Operating revenues from core properties, which totaled 3,690,000 square feet, decreased due to reduced average occupancies during 1995 at the Company's core office properties, primarily caused by the February 1995 lease termination of Matsushita Electric Corporation (Panasonic) in the Company's 94,677 square foot office building in Gwinnett Park (representing net lost property operating revenues of $372,000). This decrease was offset by property operating revenue increases due to rental rate growth for all other core properties. The office property discussed above was re-leased during 1995 and was 92.8% occupied at December 31, 1995. Average occupancy levels for industrial core properties were generally consistent year-to-year.
Property operating expenses increased $5,620,000 or 59.5% between years due primarily to the growth in the property portfolio resulting from the acquisition and development properties discussed above.
Interest expense decreased by $534,000 or 6.2% from $8,640,000 in 1994 to $8,106,000 in 1995 primarily as a result of the refinancing and paydown of debt in August 1994 in conjunction with the Company's IPO, offset by borrowings incurred in 1995 to fund certain of the Company's acquisition and development activities. Interest expense of $8,106,000 in 1995 consisted of mortgage interest of $6,670,000 and Credit Facility interest of $1,436,000.
Amortization of deferred financing costs increased by $117,000 or 20.4% from $574,000 in 1994 to $691,000 in 1995 due primarily to the amortization of the deferred financing costs associated with mortgage debt refinanced in August 1994 in conjunction with the Company's IPO, and as a result of the amortization of fees associated with the Credit Facility.
Company general and administrative expenses decreased by $138,000 or 6.9% from $1,986,000 in 1994 to $1,848,000 in 1995 due primarily to the deconsolidation of $987,000 of net general and administrative expenses between years associated with the Subsidiaries discussed below, offset by approximately $616,000 of increased expenses of being a public entity for all of 1995 compared to four months in 1994, as well as increased personnel costs between years. General and administrative expenses of the Company when combined with the general and administrative expenses of the Subsidiaries increased by $825,000 or 32.5% from $2,541,000 in 1994 to $3,366,000 in 1995 for the reasons discussed above. As a percentage of the combined revenues of the Company and the Subsidiaries, the combined general and administrative expenses of the Company and the Subsidiaries decreased from 9.1% in 1994 to 8.0% in 1995.
Interest income increased by $110,000 or 49.1% from $224,000 in 1994 to $334,000 in 1995. The increase was due mainly to interest income totaling $213,000 earned under a short-term note arrangement in 1995 associated with the Company's acquisition activity, offset by lower interest earnings from short-term cash investments in 1995. Interest income in 1994 represents short-term interest earned on the excess proceeds of the Company's IPO.
Equity in earnings of the Subsidiaries of $1,220,000 in 1995 and $692,000 for the period from August 24, 1994 to December 31, 1994 represents the Company's 99% economic interest in the earnings of the Subsidiaries after the elimination of interest expense to the Company (see Note 7 to the consolidated and combined financial statements). As discussed below, in 1995 the Company acquired 37 properties which the Subsidiaries previously managed. Additionally, the Subsidiaries provided other third-party services, such as landscape maintenance, leasing and tenant interior work for these managed properties. Due to the acquisition of these properties by the Company, the Company's third-party service revenues associated with these properties ceased. The impact, if any, on 1995 is included in the discussion below.
Construction and development fees decreased by $143,000 or 8.8% from $1,626,000 in 1994 to $1,483,000 in 1995. The decrease resulted primarily from somewhat lower tenant interior work fees due to the reduction in the size of the third- party property management portfolio discussed above.
Landscape revenue increased $631,000 or 19.6% from $3,223,000 in 1994 to $3,854,000 in 1995 due to increased landscape installation revenue of approximately $177,000 resulting from one large job completed in the last half of 1995 and due to net growth in the number of maintenance contracts between periods.
Property management fees decreased $123,000 or 19.8% from $621,000 in 1994 to $498,000 in 1995 due primarily to the reduction in the size of the third-party property management portfolio discussed above.
Commission income decreased $163,000 or 21.9% from $745,000 in 1994 to $582,000 in 1995 due to fewer commissioned land sales transactions and lower third-party lease commissions associated with the reduction of the third-party property management portfolio discussed above.
Direct costs increased by $516,000 or 17.3% from $2,988,000 in 1994 to $3,504,000 in 1995 due primarily to costs associated with a higher volume of landscape installation and maintenance contracts in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to generate increasing cash flows from operations. Cash provided by operating activities increased 50.1% or $9,353,000 to $28,031,000 in 1996. The increase results primarily from a full year of operating income in 1996 from 49 buildings acquired and seven development properties and one property expansion stabilized in 1995, and from the partial year operating income from 32 buildings acquired and eight development properties and one property expansion stabilized in 1996.
In 1996, the Company invested $121,202,000 in property acquisition, development, construction and development loan activities. This compares to $115,179,000 in 1995. The Company's aggregate acquisition, development, construction and development loan activity, including non-cash investing activities, totaled $281,039,000 and $158,230,000 in 1996 and 1995, respectively. This increased activity reflects the impact of the 1996 NWI and Lichtin acquisitions (see Note 8 to the consolidated and combined financial statements).
Financing for the Company's property investment activities consisted primarily of $45,042,000 of additional net borrowings and $68,532,000 from an equity offering in 1996 compared to $35,833,000 of net borrowings and $72,800,000 from an equity offering in 1995. The debt and equity components of the Company's on- going financing strategy may differ based upon future market conditions.
The Company's net cash flow from operations is currently sufficient to meet the Company's current operational needs and to satisfy the Company's current quarterly dividends. Company management believes that operating cash flows will continue to be adequate to fund these requirements in 1997. The Company operates as and intends to maintain its qualification as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the Company will generally not be subject to corporate federal income taxes as long as it satisfies certain technical requirements of the Code, including the requirement to distribute 95% of its taxable income to its shareholders.
In 1996, the Company increased its available borrowing capacity under its line of credit arrangements from $100 million to $175 million and lowered its borrowing costs from LIBOR plus 1.50% to LIBOR plus 1.35%, and replaced its single-bank revolving line of credit with the $175 million syndicated, unsecured Credit Facility. The Credit Facility may be used to, among other things, meet the Company's operational obligations and annual REIT dividend requirements. The Company currently intends to finance its development, construction and acquisition activities primarily through borrowings under the Credit Facility. At December 31, 1996, the Company had available capacity under the Credit Facility of approximately $72 million (see Note 5 to the consolidated and combined financial statements). The Credit Facility has an initial term through December 31, 1999, and provides for annual extensions through December 31, 2002.
On November 1, 1996, the Company closed the initial phase of its announced acquisition transaction with NWI (see Note 8 to the consolidated and combined financial statements). Other than cash closing costs and acquisition expenses totaling approximately $1.6 million, the transaction was consummated through the issuance of units of partnership interest ("Units") in Weeks Realty, L.P., the partnership subsidiary through which, along with its Subsidiaries, the Company conducts substantially all of its operations (the "Operating Partnership") and the assumption of mortgage indebtedness. As a result, the initial closing transaction did not have a significant impact on the Company's liquidity and capital resources. Additionally, on December 31, 1996, the Company closed the initial phase of its announced acquisition transaction with Lichtin (see Note 8 to the consolidated and combined financial statements). The initial closing of the Lichtin transaction was consummated primarily through the issuance of Operating Partnership Units, the issuance of shares of Company common stock and the assumption of indebtedness. The Company also utilized Credit Facility borrowings to retire approximately $15.0 million of assumed debt, to provide $8.6 million of cash at closing and to fund approximately $1.2 million of closing costs and acquisition expenses.
As part of these acquisition transactions, the Company has agreed, subject to updating its due diligence procedures, to the future acquisition of land, buildings and buildings under development not acquired at the initial closing dates (see Note 14 to consolidated financial statements). It is expected that these future acquisitions will be consummated primarily through a combination of the issuance of Operating Partnership Units and the assumption of indebtedness, some of which, in amounts up to approximately $44.0 million, will be repaid through borrowings under the Credit Facility.
On November 13, 1996, the Company completed a public offering of 2,573,333 shares of common stock and received net proceeds of approximately $68.5 million. The net proceeds were applied to outstanding Credit Facility borrowings. This equity offering fully utilized the Company's available capacity under its $150 million equity shelf registration originated in 1995. In January 1997, the Company completed a $300 million equity shelf registration which can be utilized, upon the successful completion of public offerings, for equity financings in future periods.
The Company believes it currently has adequate liquidity and sources of capital, including available borrowing capacity under its existing Credit Facility and capacity under its $300 million equity shelf registration, to meet its current operational requirements, to fund annual principal requirements under existing mortgage notes payable and to fund its current development and acquisition activity. It is management's expectation that the Company will continue to have access to the additional capital resources necessary to further expand and develop its business and to refinance mortgage notes payable as they begin to mature in 1998. These resources include long-term mortgage debt and other forms of debt and equity financing, in both public and private markets, including the use of the Company's available capacity under its current shelf registration. Future development and acquisition activities will be undertaken by the Company only as suitable opportunities arise. Such activities are not expected to be undertaken unless adequate sources of financing are available and a satisfactory budget with targeted returns on investment has been internally approved. The Company maintains staffing levels sufficient to meet its existing construction and leasing activities. If market conditions warrant, the Company may adjust staffing levels to avoid a negative impact on the Company's results of operations.
Total consolidated debt amounted to $297.0 million at December 31, 1996, including Credit Facility borrowings of $99.4 million and mortgage notes payable of $197.6 million. Of the $197.6 million of mortgage indebtedness, $191.8 million is fixed rate and $5.8 million is variable rate. The weighted average interest rate on the Company's fixed rate mortgage debt was 7.98% and on its variable rate mortgage debt was 4.43% at December 31, 1996. The weighted average interest rate under the Credit Facility, exclusive of the impact of the interest rate swaps discussed below, at December 31, 1996, was 6.94%. Based on the outstanding balance of mortgage notes payable at December 31, 1996, the weighted average interest rate on the mortgage notes with a final maturity in each of the next five years were 7.92% in 1998, 7.31% in 1999, 8.55% in 2000 and 6.96% in 2001. None of the mortgage notes mature in 1997.
As discussed in Note 5 to the consolidated and combined financial statements, in July 1996, the Company entered into interest rate swap agreements to effectively fix the Company's interest costs on $50.0 million of the Company's Credit Facility borrowings. The weighted average interest rate under the fixed swap arrangements is approximately 8.0%. If interest rates under the Credit Facility, in excess of the $50.0 million discussed above, and under the Company's variable rate mortgage debt fluctuated by 1.0%, interest costs to the Company, based on outstanding borrowings at December 31, 1996, would increase or decrease by approximately $550,000 on an annualized basis.
At December 31, 1996, the Company's mortgage debt on its consolidated properties of $197.6 million plus its pro rata share of mortgage debt on unconsolidated properties of $1.4 million totaled $199.0 million. Including Credit Facility borrowings of $99.4 million for the Company and $3.6 million for its unconsolidated Subsidiaries, the total debt obligations of the Company and its unconsolidated Subsidiaries was $302.0 million or 33% of total market capitalization at December 31, 1996 (assuming the exchange of all of the Units in the Operating Partnership for shares of common stock). Based on the closing price of the common stock of $33.25 on December 31, 1996, and assuming the exchange of all of the Units in the Operating Partnership for shares of common stock, there would be 18,533,783 shares of common stock outstanding with a total market value of $616.2 million.
CURRENT DEVELOPMENT ACTIVITY
The Company's development activity as of December 31, 1996 is summarized below. The properties are located in metropolitan Atlanta, Georgia, unless otherwise indicated.
(1) Actual leasable square feet may vary upon completion. (2) Estimated cost information includes the Company's estimate of future capitalized costs through the stabilization date, including costs incurred to acquire certain properties after completion (see Note 6 to the consolidated and combined financial statements). There can be no assurance that the actual capitalized cost of a building will not exceed the estimated capitalized costs. (3) Represents building shell completion. There can be no assurance that a property will be completed by the estimated completion date. (4) Represents the Company's current estimate of the date the property will reach stabilization. Properties are considered stabilized upon the earlier of substantial lease-up or one year from building shell completion. There can be no assurance that the property will reach stabilization by the estimated stabilization date. (5) The Company is the developer of and has an option to acquire this property from an affiliated joint venture upon stabilization, as defined in the joint venture agreement. The date above reflects the estimated stabilization and resulting acquisition date by the Company. (6) Shell completed; interior tenant finish to be completed.
The information provided above includes forward-looking data based on current construction schedules, the status of lease negotiations with potential tenants and other relevant factors currently available to the Company. There can be no assurance that any of these factors will not change or that any change will not affect the accuracy of such forward-looking data.
SUPPLEMENTAL DISCLOSURE OF FUNDS FROM OPERATIONS
The Company believes that funds from operations provides an additional indicator of the financial performance of the Company. Funds from operations is defined by the National Association of Real Estate Investment Trusts ("NAREIT") to mean net income (loss) determined in accordance with generally accepted accounting principles ("GAAP") excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis. Funds from operations is influenced not only by the operations of the properties, but also by the capital structure of the Company. Accordingly, management expects that funds from operations will be one of the factors considered by the Board of Directors in determining the amount of cash dividends the Company will pay to its shareholders. Funds from operations does not represent cash flow from operating, investing and financing activities as defined by GAAP, which are discussed under "Liquidity and Capital Resources" above. Additionally, funds from operations does not measure whether cash flow is sufficient to fund all cash flow needs, including principal amortization, capital expenditures and dividends to shareholders, and should not be considered as an alternative to net income for purposes of evaluating the Company's operating performance or as an alternative to cash flow, as defined by GAAP, as a measure of liquidity.
Effective for the year ended December 31, 1996, the Company implemented the new guidelines issued by NAREIT for calculating funds from operations. The primary difference between the Company's funds from operations under the new guidelines and prior years is that the Company now reduces reported funds from operations for the amortization of deferred financing costs and recognizes rental income for the purposes of computing funds from operations on a "straight-line" basis. The amortization of deferred financing costs totaled $864,000 and $691,000 for the years ended December 31, 1996 and 1995, respectively. The "straight-line" rental adjustment increased rental revenues by $475,000 for the year ended December 31, 1996 and decreased rental revenue by $19,000 for the year ended December 31, 1995. All funds from operations information detailed and discussed below relating to the year ended December 31, 1995 has been restated to reflect these differences.
Funds from operations presented herein under the new NAREIT guidelines is not necessarily comparable to funds from operations presented by other real estate companies due to the fact that not all real estate companies calculate funds from operations in the same manner. However, the Company's funds from operations is comparable to the funds from operations of real estate companies that use the current NAREIT definition.
For the year ended December 31, 1996, funds from operations increased $8,978,000 or 61.2% to $23,640,000 compared to funds from operations of $14,662,000 for the year ended December 31, 1995. Funds from operations calculated under the current guidelines for the years ended December 31, 1996 and 1995, respectively, are detailed below (in thousands):
(1) The calculation of funds from operations has been revised from the prior year presentation as discussed above. Previously reported funds from operations attributable to the Company's shareholders were $15,201,000 in 1995. (2) Represents the Company's weighted average ownership of the Operating Partnership for the year.
SUPPLEMENTAL INFORMATION ON CAPITAL EXPENDITURES AND LEASING COSTS The following table details the Company's capital expenditures for the year ended December 31, 1996 and 1995, respectively (in thousands):
(1) Reflects aggregate acquisition costs including the assumption of mortgage notes payable of $104,628,000, the issuance of $48,085,000 of Units, the issuance of $7,124,000 of common stock and other acquisition related payables, net of receivables, of $906,000 in 1996, and aggregate acquisition costs including the assumption of mortgage notes payable of $39,511,000 and the application of notes receivable and deposits of $3,540,000 in 1995 (see Note 15 to the consolidated and combined financial statements). (2) Includes first-generation leasing costs on development properties totaling $1,287,000 and $1,292,000 in 1996 and 1995, respectively. (3) Reflects aggregate development and leasing costs, exclusive of the decrease in construction payables of $743,000 in 1996 and the increase in construction payables of $52,000 in 1995. (4) In 1995, revenue-producing building improvements included $520,000 in building improvements to convert a 94,677 square foot single-tenant office building to a multi-tenant facility. By dividing the space for lease to a number of tenants, rather than leasing the entire building to a single tenant, the Company believes it has achieved higher rents and has substantially reduced its rollover risk and potential loss due to vacancy. Also in 1995, the Company invested approximately $3.0 million in building improvements to convert a 249,200 square foot bulk warehouse building to a manufacturing facility. The new tenant also invested a similar amount in improvements to the building. Management believes that this combined investment has enhanced the value of the building and that the Company has achieved higher rent as a result of the renovation and conversion of this building. (5) The 1995 amount includes $1,377,000 of tenant improvement and leasing costs to re-tenant the Company's 94,677 square foot office building discussed in footnote (4) above which was vacated in February 1995 by Matsushita Electric Corporation (Panasonic). (6) Includes second-generation leasing costs totaling $1,331,000 and $1,159,000 in 1996 and 1995, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1995, Statement of Financial Accounting Standards ("SFAS") 123, "Accounting for Stock-Based Compensation" was issued prescribing new fair value-based accounting for stock-based compensation. SFAS 123 required the Company, in 1996, to elect to utilize the fair value method under SFAS 123 or continue its current generally accepted accounting under the intrinsic value method prescribed by Accounting Principles Board Opinion ("APB") No. 25. The Company elected to continue to account for stock-based compensation under APB No. 25 and implemented the additional disclosure requirements of SFAS 123, including pro forma net income and earnings per share amounts, in its 1996 financial statements (see Note 12 to the consolidated and combined financial statements).
IMPACT OF INFLATION
In the last three years, inflation has not had a significant impact on the Company because of the relatively low inflation rate. Substantially all tenant leases do, however, contain provisions designed to protect the Company from the impact of inflation. Most of the Company's leases require the tenants to pay a share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from inflation. In addition, many of the leases are for terms of less than seven years which may enable the Company to replace existing leases with new leases at higher base rentals if rents under the existing leases are below the then-existing market rate. However, there can be no assurance that the Company would be able to replace existing leases with new leases at higher base rentals.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Registrant and the combined financial statements of Weeks Group, predecessor to the Registrant, and supplementary data are detailed under Item 14(a) and filed as part of this report on the pages indicated.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The sections under the heading "Election of Directors" entitled "Nominees for Election -- Terms Expiring in 2000," "Nominees for Election -- Terms Expiring in 1999," "Nominees for Election -- Terms Expiring in 1998," "Incumbent Directors - - - Terms Expiring in 1999," and "Incumbent Directors -- Terms Expiring in 1998" of the Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders to be held May 21, 1997 (the "Proxy Statement") are incorporated herein by reference for information regarding Directors of the Registrant. See Item X in Part I hereof for information regarding executive officers of the Registrant.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The section under the heading "Election of Directors" entitled "Compensation of Directors" of the Proxy Statement and the sections under the heading titled "Executive Compensation" of the Proxy Statement are incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning the beneficial ownership of shares of Common Stock of the Company as of February 28, 1997 for (i) directors of the Company, (ii) the Chief Executive Officer and each of the four other most highly compensated executive officers of the Company (collectively, the "Named Executive Officers"), (iii) the directors and executive officers of the Company as a group and (iv) each person known to the Company who is, or may be deemed to be, the beneficial owner of more than 5% of the Company's common stock. The number of shares represents the number of shares of common stock the person holds plus the number of shares into which Units in the Operating Partnership held by the person are exchangeable (if the Company elects to issue shares rather than pay cash upon such exchange). Units are exchangeable for common stock or cash, at the option of the Company. The right to exchange Units for shares of common stock or cash (the "Exchange Rights") may be exercised by the holders of Units (other than A. Ray Weeks, Jr., Thomas D. Senkbeil, Forrest W. Robinson, John W. Nelley, Jr. and Harold S. Lichtin and certain entities controlled by them) from time to time, in whole or in part.
The Exchange Rights may be exercised by A. Ray Weeks, Jr., Thomas D. Senkbeil and Forrest W. Robinson and certain entities controlled by them from time to time, in whole or in part, subject to the limitation that the Exchange Rights may not be exercised prior to the later of August 24, 1997, or the date on which a registration statement under the Securities Act of 1933, as amended, (the "Securities Act"), relating to the shares of common stock issuable upon exercise of such Exchange Rights becomes effective. The Exchange Rights may be exercised by John W. Nelley, Jr., and certain entities controlled by him, with respect to Units beneficially owned by him through such entities, from time to time, in whole or in part, subject to the limitation that the Exchange Rights may not be exercised prior to the later of one year from their date of issuance or the date on which either a registration statement under the Securities Act relating to the shares of Common Stock issuable upon exercise of such Exchange Rights becomes effective or, in the opinion of counsel, such shares of Common Stock may by issued without registration; provided that in no event may such Exchange Rights be exercised prior to November 1, 1999. The Exchange Rights may be exercised by Harold S. Lichtin and certain entities that he controls from time to time, in whole or in part, subject to the limitation that the Exchange Rights may not be exercised prior to the later of one year from the date of issuance, as defined, or the date on which either a registration statement under the Securities Act relating to the shares of Common Stock issuable upon exercise of such Exchange Rights becomes effective or, in the opinion of counsel, such shares of Common Stock may be issued without registration; provided that in no event may such Exchange Rights be exercised prior to December 31, 1999.
* Represents less than 1% of the Company's outstanding common stock. (1) Except as otherwise indicated, each of the parties listed has sole voting and investment power over the shares owned. (2) According to a Schedule 13G, dated February 11, 1997, filed on behalf of Cohen & Steers Capital Management Inc., a registered investment advisory company, Robert H. Steers, by virtue of his position as Chairman may also be deemed a beneficial owner of said shares. These parties disclaim the power to vote 298,000 shares of Common Stock.
(3) According to a Schedule 13G, dated February 14, 1997, filed on behalf of FMR Corp., a parent holding company, Edward C. Johnson 3d, as Chairman and a significant shareholder of FMR Corp., and Abigail P. Johnson, as significant shareholder of FMR Corp., may also be deemed beneficial owners of said shares by virtue of their relationships to these companies. FMR Corp. through a wholly owned investment advisory company, Fidelity Management & Research Company ("Fidelity"), has sole power to dispose of 1,271,700 shares owned by Fidelity funds ("Funds") for which it serves as an advisor. Neither FMR Corp. nor Mr. Johnson has the sole power to vote or direct the voting of these 1,271,700 shares as such power resides with each Funds' Board of Trustees. FMR Corp., through a wholly owned subsidiary bank, Fidelity Management Trust Company, has sole power to dispose or direct the disposition of 284,700 shares, the sole power to vote or direct the vote of 276,300 shares and disclaims the power to vote or to direct the vote of 8,400 shares in its capacity as investment manager of the bank's institutional accounts. (4) According to a Schedule 13G, dated February 11, 1997, filed on behalf of LaSalle Advisors Limited Partnership ("LaSalle") and ABKB/LaSalle Securities Limited Partnership ("ABKB"), registered investment advisory companies, William K. Morrill, Jr., and Keith R. Pauley by virtue of their employment positions may also be deemed beneficial owners of said shares. LaSalle claims beneficial ownership of 787,750 shares or 5.58% of the Company's common stock, the sole power to vote or to direct the vote and sole power to dispose or to direct the disposition of 370,950 shares, shared power to vote or to direct the vote of 143,800 shares, shared power to dispose or to direct the disposition of 416,800 shares and disclaims sole or shared voting power of 273,000 shares of common stock. ABKB claims beneficial ownership of 647,600 shares or 4.60% of the Company's common stock, the sole power to vote or to direct the vote and sole power to dispose or to direct the disposition of 150,400 shares, shared power to vote or to direct the vote of 404,255 shares, shared power to dispose or to direct the disposition of 497,200 shares and disclaims sole or shared voting power of 92,945 shares of common stock. Mr. Morrill and Mr. Pauley may be deemed to be the beneficial owners of the shares included in the table above, including the sole power to vote or to direct the vote and sole power to dispose or to direct the disposition of 521,350 shares, shared power to vote or to direct the vote of 548,055 shares, shared power to dispose or to direct the disposition of 914,000 shares and disclaim sole or shared voting power of 365,945 shares of common stock. Mr. Morrill and Mr. Pauley disclaim beneficial ownership of any of said shares. (5) According to Schedule 13D, dated November 13, 1996, filed on behalf of The Annenberg Foundation (the "Foundation"), Mr. Walter H. Annenberg may also be deemed a beneficial owner of the shares held by the Foundation by virtue of his position as Chairman, President, sole director and sole stockholder of the Foundation.. (6) Beneficial owner's address is 4497 Park Drive, Norcross, GA 30093. (7) Includes 3,467 shares of common stock and 400,155 Units held by trusts of which A. Ray Weeks, Jr. is co-trustee and a 20% beneficiary, and 255,623 Units held by corporations that A. Ray Weeks, Jr. controls, including Units held by those corporations discussed in notes (9) and (10) below, and 2,442 Units held by Mr. Weeks' spouse. (8) Includes 80,000, 55,000, 55,000, 15,000, 40,000 and 40,000 shares issuable to Mr. Weeks, Mr. Senkbeil, Mr. Robinson, Mr. Simpson, Mr. Nelley and Mr. Lichtin, respectively, upon exercise of stock options which are currently exercisable or exercisable within 60 days, but does not include 35,000, 20,000, 20,000, 67,500 and 8,000 shares issuable to Mr. Weeks, Mr. Senkbeil, Mr. Robinson, Mr. Stockert and Mr. Simpson, respectively, upon exercise of stock options which are not exercisable within 60 days. (9) Includes 42,993 Units held by a corporation which is owned 60%, 30% and 10%, respectively, by Mr. Weeks, Mr. Senkbeil and Mr. Robinson. (10) Includes 257 Units held by a corporation which is owned 75%, 20% and 5%, respectively, by Mr. Weeks, Mr. Senkbeil and Mr. Robinson. (11) Includes 1,332,261 Units held by a partnership of which Mr. Nelley is a general partner. Mr. Nelley disclaims beneficial ownership of 1,044,983 of such Units. (12) Includes 282,178 shares of Common Stock and 134,673 Units held by entities which Harold S. Lichtin controls and 1,228 Units held by Mr. Lichtin's spouse. (13) Includes 10,000 shares issuable upon the exercise of stock options which are currently exercisable or exercisable within 60 days. (14) Includes 477,000 shares issuable upon the exercise of stock options which are currently exercisable or exercisable within 60 days, but does not include 187,000 shares issuable upon exercise of stock options which are not exercisable within 60 days.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The sections under the heading titled "Certain Transactions" of the Proxy Statement, are incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(A) 1. Financial Statements
The following Consolidated Financial Statements of the Registrant and Combined Financial Statements of Weeks Group (Predecessor to the Registrant), together with the applicable Report of Independent Public Accountants, are listed below:
Certain of the exhibits required by item 601 of Regulation S-K have been filed with previous reports by the Registrant and are herein incorporated by reference thereto.
* Filed as an exhibit to the Registration Statement on Form S-11 (SEC File No. 33-80314) of the Registrant. ** Filed as an exhibit to the Company's Current Report on Form 8-K dated November 1, 1996. *** Filed as an exhibit to the Company's Current Report on Form 8-K dated December 31, 1996. **** Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. # Filed as an exhibit to the Company's Current Report on Form 8-K dated August 31, 1995. ## Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. ### Filed as an exhibit to the Company's Current Report on Form 8-K dated August 9, 1996. #### Filed as an exhibit to the Registration Statement on Form S-8 (SEC File No. 333-18305). + Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996. ++ Filed as an exhibit to the Company's Current Report on Form 8-K dated July 12, 1995.
(B) 1. Reports on Form 8-K
Form 8-K/A dated August 9, 1996, and filed on October 18, 1996, amending the Company's Form 8-K dated August 9, 1996 and filed on August 22, 1996, reporting the acquisition of the Principal Properties on August 9, 1996.
Form 8-K dated November 1, 1996, and filed on November 6, 1996, as amended by Form 8-K/A dated November 1, 1996, and filed on November 8, 1996, reporting the acquisition of certain properties and business operations of NWI on November 1, 1996.
Form 8-K dated November 5, 1996, and filed on November 6, 1996, reporting the proposed acquisition of certain properties and business operations of Lichtin.
Form 8-K dated November 7, 1996, and filed on November 12, 1996, as amended by Form 8-K/A dated November 7, 1996, and filed on November 13, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WEEKS CORPORATION (Registrant)
March 27, 1997 /s/ A. Ray Weeks, Jr. --------------------- A. Ray Weeks, Jr. Chairman of the Board, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capabilities on the dates indicated:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Weeks Corporation:
We have audited the accompanying consolidated balance sheets of Weeks Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended December 31, 1996 and 1995, and for the period from August 24, 1994 to December 31, 1994. We have also audited the combined statements of operations, owners' deficit and cash flows of Weeks Group for the period from January 1, 1994 to August 23, 1994. These financial statements and schedule are the responsibility of the management of Weeks Corporation. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Weeks Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the years ended December 31, 1996 and 1995 and for the period from August 24, 1994 to December 31, 1994, and the results of operations and the cash flows of Weeks Group for the period from January 1, 1994 to August 23, 1994, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia February 21, 1997
WEEKS CORPORATION CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these balance sheets.
WEEKS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS AND WEEKS GROUP COMBINED STATEMENT OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
WEEKS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND WEEKS GROUP COMBINED STATEMENT OF OWNERS' DEFICIT
The accompanying notes are an integral part of these financial statements.
WEEKS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS AND WEEKS GROUP COMBINED STATEMENT OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
WEEKS CORPORATION AND WEEKS GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Weeks Corporation and its subsidiaries own, operate, develop, construct, acquire and manage industrial and suburban office buildings in the southeast United States. As used herein, the term "Company" includes Weeks Corporation and its subsidiaries, including Weeks Realty, L.P. (the "Operating Partnership"), unless the context indicates otherwise. The Company, through its wholly owned subsidiaries, is the general partner and owns a majority interest in the Operating Partnership which, including the operations of its subsidiaries, conducts substantially all of the on-going operations of the Company. The Company has elected to qualify and operate as a self-administered and self-managed real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the Company will not generally be subject to corporate federal income taxes as long as it satisfies certain technical requirements of the Code relating to the composition of its income and assets, and the requirement to distribute 95% of its taxable income to its shareholders.
As of December 31, 1996, the Company had outstanding 14,048,593 shares of common stock and owned the same number of units of partnership interest ("Units") in the Operating Partnership representing a 75.8% ownership interest in the Operating Partnership. Units held by persons other than the Company totaled 4,485,190 as of December 31, 1996, and represented a 24.2% minority interest in the Operating Partnership. Units are convertible by their holders into shares of common stock on a one-for-one basis, or into cash, at the Company's option. The Company's weighted average ownership interest in the Operating Partnership was 80.6% and 75.9% for the years ended December 31, 1996 and 1995, respectively.
The Company conducts its third-party service businesses through two subsidiaries (the "Subsidiaries"): Weeks Realty Services, Inc. conducts third-party landscape, property management and leasing services, and Weeks Construction Services, Inc. conducts third-party construction services. The Company holds 100% of the nonvoting and 1% of the voting common stock of these Subsidiaries. The remaining voting common stock is held by three executive officers of the Company. The ownership of the common stock of the Subsidiaries entitles the Company to substantially all (99%) of the economic benefits from the results of the Subsidiaries' operations.
On August 24, 1994, the Company completed a business combination and an initial public offering ("IPO") of common stock resulting in the organizational and operating structure discussed above. The Company and its subsidiaries succeeded to substantially all of the interests in certain land and industrial and suburban office buildings under common ownership and to the development, construction, landscape and management businesses of the predecessors to the Company referred to herein as the "Weeks Group."
As of December 31, 1996, the Company owned 168 industrial properties, 17 suburban office properties and three retail properties comprising 13.0 million square feet. The Company's primary markets and the concentration of the Company's portfolio (based on square footage) are Atlanta, Georgia (74%), Nashville, Tennessee (11%), Raleigh-Durham-Chapel Hill, North Carolina (9%), Orlando, Florida (3%), and Spartanburg, South Carolina (3%). In addition, 24 industrial and suburban office properties and two property expansions were under development or in lease-up at December 31, 1996, comprising an additional 3.0 million square feet.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the consolidated financial position of the Company and its subsidiaries at December 31, 1996 and 1995, and their results of operations for the years ended December 31, 1996 and 1995 and for the period from August 24, 1994 to December 31, 1994. Subsequent to the IPO, the Subsidiaries are reflected in the accompanying consolidated financial statements on the equity method of accounting as discussed below. The accompanying historical results of operations of Weeks Group for the period from January 1, 1994 to August 23, 1994, represent the operations of certain industrial and suburban office properties controlled by the predecessors to the Company through real estate partnerships and affiliated entities which provided development, construction, landscape, and property management services for the partnerships and third parties. The historical results of operations of Weeks Group are presented on a combined basis because these entities were under common ownership and control and were the subject of a business combination in connection with the IPO. All significant intercompany balances and transactions have been eliminated in the consolidated and combined financial statements.
REAL ESTATE ASSETS
Real estate assets are stated at depreciated cost. Major improvements and replacements are capitalized and depreciated over their estimated useful lives when they extend the useful life, increase capacity or improve efficiency of the related asset. All other repairs and maintenance are expensed as incurred. Costs related to the acquisition, planning, development and construction of buildings and improvements, including interest, property taxes and insurance and allocated overhead costs incurred during the construction period, are capitalized.
The Company adopted Statement of Financial Accounting Standards ("SFAS") 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of" in the fourth quarter of 1995. SFAS 121 established new standards on how impairment losses on long-lived assets, including real estate assets, should be measured. The implementation of SFAS 121 had no impact on the Company's 1996 and 1995 consolidated financial statements.
Depreciation is calculated using the straight-line method, generally over 35 years, for buildings and improvements. Tenant improvements are capitalized and depreciated using the straight-line method over the term of the related lease.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments, consisting primarily of money market accounts, with original maturities of three months or less.
REVENUE RECOGNITION
All leases, other than the lease discussed in Note 3, are classified as operating leases and the related rental income is recognized on a straight- line basis over the terms of the respective leases. Straight-line rent receivables totaled $3,023,000 and $2,548,000 at December 31, 1996 and 1995, respectively. Tenant reimbursements for property taxes and other recoverable expenses are recognized as revenues in the period the applicable expenses are incurred.
Revenues for development, construction, landscape, property management and leasing services provided by the Subsidiaries, and Weeks Group prior to the IPO, are recognized over the period during which the related services were rendered.
DEFERRED COSTS
Costs incurred to procure operating leases and in conjunction with financing arrangements are capitalized and amortized on a straight-line basis over the terms of the related lease or loan arrangements. Unamortized lease and financing costs are written off upon the early termination of the related lease or loan agreement.
INVESTMENTS IN UNCONSOLIDATED ENTITIES
Effective for years ended December 31, 1995 and thereafter, the Company changed its method of accounting for the Subsidiaries to the equity method in accordance with Emerging Issues Task Force Issue No. 95-6, "Accounting by a Real Estate Investment Trust for an Invesment in a Service Corporation." For the period from August 24, 1994 to December 31, 1994, the Subsidiaries were accounted for on the cost method. The consolidated financial statements of the Company were not restated for periods prior to January 1, 1995 as the impact of this change was not material.
INTEREST RATE SWAP AGREEMENTS
The Company uses interest rate swap arrangements to manage its exposure to interest rate changes. Such arrangements are considered hedges of specific borrowings, and differences paid and received under the swap arrangements are recognized as adjustments to interest expense.
INCOME TAXES
The Company has elected to be taxed as a REIT under the Code for all periods subsequent to August 24, 1994. As a REIT, the Company will not generally be subject to corporate level federal income taxes as long as it satisfies certain technical requirements of the Code relating to the composition of its income and assets, and the requirement that it distribute 95% of its taxable income to its shareholders. In any event, the Company may be subject to certain state and local taxes and to federal income and excise taxes on its undistributed income. If the Company fails to qualify as a REIT under the Code, it will be subject to federal income taxes at regular corporate tax rates in such year of disqualification.
The Subsidiaries of the Company, which conduct the related construction, landscape, property management and leasing service businesses, are taxed as regular taxable corporations. The impact of income taxes, if any, reduces the amount of Subsidiary earnings otherwise recognized by the Company under the equity method. For the years ended December 31, 1996 and 1995 and for the period August 24, 1994 to December 31, 1994, the impact of the Subsidiaries' income taxes and their related tax attributes were not material to the accompanying consolidated financial statements.
Weeks Group is a combination of legal entities, primarily partnerships and subchapter S corporations, not subject to federal and state income taxes. Accordingly, no income taxes have been provided for in the accompanying combined financial statements of Weeks Group. The individual partners and subchapter S corporation shareholders included their respective share of profits and losses from these entities in their individual income tax returns. There could be significant differences between each individual owner's tax basis and their proportionate share of the net assets reported in the financial statements. SFAS No. 109, "Accounting for Income Taxes," requires a public enterprise to disclose the aggregate difference in the basis of its net assets for financial and tax reporting purposes. However, Weeks Group does not have access to information about each individual owner's tax attributes in Weeks Group, and the aggregate tax bases cannot be readily determined. In any event, management does not believe that, with respect to Weeks Group, the aggregate difference would be meaningful information.
DIVIDENDS
The Company declared and paid dividends of $17,860,000 or $1.60 per share, $11,513,000 or $1.50 per share and $1,151,000 or $0.15 per share in 1996, 1995 and 1994, respectively. The Company's 1996 dividends are estimated to be 95% taxable to the Company's shareholders as ordinary income with the remaining 5% representing a return of capital. The 1995 and 1994 dividends were 100% taxable to the Company's shareholders as ordinary income. Additionally, Unitholders of the minority interests in the Operating Partnership received cash distributions totaling $4,108,000 or $1.60 per Unit, $3,890,000 or $1.50 per Unit and $388,000 or $0.15 per Unit in 1996, 1995 and 1994, respectively. In January 1997, the Company declared and paid dividends and made distributions of $6,043,000 or $0.43 per share and $1,446,000 or $0.43 per Unit relating to fourth quarter 1996 operating results.
PER SHARE DATA
Net income per share is calculated using the weighted average number of common shares outstanding of 11,512,000 in 1996, 8,171,000 in 1995 and 7,675,000 for the period from August 24, 1994 to December 31, 1994. The impact of outstanding stock options was not dilutive in any period. An assumed conversion of Units into common stock would not affect net income per share.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1996 presentation.
3. DIRECT FINANCING LEASE
The Company holds an investment in a 15-year direct financing lease with the tenant of a build-to-suit facility in Atlanta, Georgia. The lease agreement, which commenced in June 1992, provides the tenant the option to acquire the facility and associated land on the tenth anniversary of lease commencement for $3,766,000 plus any prepayment penalty due on the mortgage note encumbering the property. The lease also provides for the transfer of the property to the tenant upon lease termination if the early buyout option is not exercised. The components of the investment in the direct financing lease are as follows (in thousands):
Future minimum rentals receivable under the lease as of December 31, 1996, assuming the lessee exercises its buyout option after year ten are $886,000 in 1997, $913,000 in 1998, $940,000 in 1999, $968,000 in 2000, $998,000 in 2001 and $4,188,000 through June 2002. Minimum annual rentals will be $1,050,000 during the remaining five years of the lease, if the tenant does not exercise the buyout option.
4 DEFERRED COSTS
Deferred costs consist of the following (in thousands):
5. BORROWINGS
The Operating Partnership, the Subsidiaries and Weeks Development Partnership (Note 7), as co-borrowers, entered into a new $175 million syndicated revolving credit facility (the "Credit Facility") with four banks in 1996. The Credit Facility is unsecured and can be used for development and construction, acquisitions and general corporate purposes. Each co-borrower is liable for its own borrowing; however, the entire Credit Facility is guaranteed by the Company. Additionally, the Company and the co-borrowers are required to meet certain financial and non-financial covenants including limitations on secured borrowings and a restriction on the amount of dividends and distributions to not more than 95% of funds from operations, a REIT industry measure of operating performance, unless additional amounts are necessary to maintain the Company's REIT status under the Code. The Credit Facility matures on December 31, 1999 and may be extended annually through December 31, 2002, subject to an annual extention fee of 0.125%. The Credit Facility replaced the Company's previous single- bank revolving line of credit.
The Credit Facility provides for advances of up to $175 million, subject to certain covenants, including those governing the Company's maximum unsecured borrowings and total leverage. Maximum available advances, governed by the existing covenants, currently total $175 million. Credit Facility borrowings are detailed as follows (in thousands):
Interest under the Credit Facility accrues at bank prime minus 0.25% or at LIBOR plus 1.35% at the election of the co-borrowers. The weighted average interest rate on Credit Facility borrowings, exclusive of the impact of the interest rate swaps discussed below, was 6.94% and 7.32% at December 31, 1996 and 1995, respectively. Fees on the unused portion of the Credit Facility are 0.20%.
In July 1996, the Company entered into three interest rate swap agreements with a commercial bank to effectively change the interest costs on $50,000,000 of Credit Facility borrowings from the variable rates discussed above to fixed rates. The agreements, with notional principal amounts of $10,000,000, $10,000,000 and $30,000,000, terminate in July 1998, July 1999, and July 2001 with effective fixed interest rates of 7.72%, 7.89% and 8.14%, respectively.
Mortgage notes payable at December 31, 1996 and 1995, specifically listed for notes with outstanding balances in excess of $10 million, consist of the following (in thousands):
At December 31, 1996 and 1995, fixed rate mortgage notes payable included 27 notes with a weighted average interest rate of 7.98% and 12 notes with a weighted average interest rate of 7.58%, respectively. The weighted average term to maturity of fixed rate mortgage notes payable was 5.1 years at December 31, 1996. Fixed rate mortgage indebtedness increased by $84,553,000 in 1996 due to the assumption of 16 notes totaling $89,535,000 in conjunction with the NWI and Lichtin acquisition transactions (Note 8), net of principal repayments. The weighted average interest rate on the assumed fixed rate indebtedness was approximately 8.50%. Certain Company officers and Unitholders guarantee a portion of fixed rate mortgage notes.
Variable rate industrial revenue bonds include two separate arrangements. One bond issue with an outstanding balance of $5,140,000 was refunded in 1996 through the issuance of tax-exempt adjustable-rate bonds with interest at rates equivalent to short-term tax-exempt Aa2 rated securities. The second bond issue accrues interest at 78% of the prime lending rate. Weighted average interest rates under these arrangements were 4.43% and 7.63% at December 31, 1996 and 1995, respectively. The bonds are supported by letters of credit totaling $5,345,000.
Scheduled maturities of mortgage notes payable, at December 31, 1996, are summarized as follows (in thousands):
Net real estate assets totaling $265,235,000 and $127,228,000 at December 31, 1996 and 1995, respectively, are pledged as collateral under mortgage notes payable. Interest capitalized for the years ended December 31,1996 and 1995, and for the period from January 1, 1994 to August 23, 1994, totaled $2,358,000, $1,198,000, and $89,000, respectively.
The extraordinary loss of $2,667,000 ($1,993,000 net of minority interests) during the period from August 24, 1994 to December 31, 1994 resulted from mortgage loan prepayment penalties of $2,180,000 and the write-off of deferred financing costs of $487,000 related to the early retirement of debt from the proceeds of the IPO.
6. REAL ESTATE DEVELOPMENT LOANS
As part of certain joint development agreements entered into with third parties, and upon the approval of joint development projects, the Company lends funds on a secured basis to develop and construct certain properties and can be required by its development partners to acquire the properties upon their completion based on the terms specified in the development agreements, generally at prices equal to the greater of capitalized costs or the property's net operating income capitalized at specified capitalization rates, as defined. Additionally, the Company has options to acquire the properties upon substantial lease-up of the buldings. At December 31, 1996, the Company had funded $7,645,000 under development loan agreements relating to three industrial buildings under development in Atlanta, Georgia. Total loan commitments from the Company for the three approved projects are approximately $11,741,000. Loans under these agreements are secured by the industrial buildings under development, bear interest at rates ranging from LIBOR plus 2.35% to LIBOR plus 2.50%, and mature from August 1998 to March 1999.
Additionally, at December 31, 1996, the Company had a real estate development loan to an affiliated joint venture with an outstanding balance of $1,810,000 ($1,309,000 at December 31, 1995). The total loan commitment is $2,360,000 and the loan is secured by an industrial building. Interest accrues at 9% and the loan matures in March 1998. The Company has an option to acquire the property upon substantial lease-up of the building.
7. INVESTMENTS IN AND NOTES RECEIVABLE FROM UNCONSOLIDATED ENTITIES
The Company conducts third-party construction, landscape, property management and leasing service businesses through the Subsidiaries. Through Weeks Development Partnership ("Weeks Development"), wholly owned by the Subsidiaries, the Subsidiaries also own land in various business parks, either directly or through ownership interests in real estate partnerships and joint ventures. The Company and Weeks Group developed and own operating properties in these business parks. The Company intends, based on market conditions, to acquire land from Weeks Development and its affiliated partnerships and joint ventures for the development of future operating properties. As discussed in Note 2, these Subsidiaries are accounted for on the equity method of accounting. Under the equity method, the Company recognizes, in its consolidated statements of operations, its economic share (99%) of the Subsidiaries' earnings and losses.
The following information summarizes the financial position, results of operations and cash flows of the Subsidiaries and Weeks Development on a combined basis for the years ending December 31, 1996 and 1995, and for the period from August 24, 1994 to December 31, 1994, and selected operating data of Weeks Group for the period from January 1, 1994 to August 23, 1994. The operating data of Weeks Group is included in the combined financial statements of Weeks Group (Note 2) but is also reflected below for comparison purposes (in thousands):
The notes payable to the Company accrue interest at 12%, payable annually, and mature in 2004. The notes are secured by land and by Weeks Development's interests in real estate partnerships and joint ventures. The operations of the Subsidiaries and Weeks Development are financed, as necessary, through direct borrowings under the Credit Facility.
At December 31, 1996, the Company's investment in and notes receivable from the Subsidiaries totaling $7,760,000 includes notes receivable from the Subsidiaries of $10,921,000 and the Company's investment in the Susidiaries of ($3,161,000).
8. ACQUISITIONS
On November 1, 1996, the Company completed the first phase of an acquistion of a 2.2 million square foot, 23 building industrial portfolio located in Nashville, Tennessee, owned and managed by NWI Warehouse Group, L.P. and its affiliates ("NWI"). The first phase of the transaction was comprised of the acquisition of 17 industrial buildings and the combination of NWI's business operations, management and employees with those of the Company, for aggregate acquisition consideration of approximately $71.1 million including closing costs and acquisition expenses. Acquisition consideration was comprised of the assumption of approximately $42.0 million of mortgage debt, the issuance of approximately $27.5 million of Units in the Operating Partnership (at a price of $25.00 per Unit), and the funding of closing costs and acquisition expenses of approximately $1.6 million through Credit Facility borrowings. In 1996, subsequent to the initial closing, the Company acquired 45 net usable acres of undeveloped land for aggregate consideration, consisting solely of Units in the Operating Partnership, of approximately $6.3 million, including reimbursement for certain infrastructure costs. The Company has agreed, subject to updating its due diligence procedures and the completion of properties under development, to acquire six development properties over a 17-month period and to acquire 105 net usable acres of undeveloped land over a period of up to six years. The estimated aggregate acquisition consideration for the remaining assets to be acquired is expected to be comprised primarily of Units in the Operating Partnership and assumed indebtedness that total approximately $47.9 million (subject to adjustment for inflation and actual operating results for certain development properties to be acquired).
On December 31, 1996, the Company completed the first phase of a separate acquisition of a 2.1 million square foot, 29 building industrial and suburban office portfolio in the Raleigh-Durham-Chapel Hill area of North Carolina, owned and managed by Lichtin Properties, Inc. and its affiliates ("Lichtin"). The first phase of the transaction was comprised of the acquisition of 14 industrial and suburban office buildings and the combination of Lichtin's business operations, management and employees with those of the Company for aggregate acquisition consideration of approximately $90.5 million (including closing costs and acquisition expenses), and approximately 37 net usable acres of undeveloped land and options to acquire an additional 177 net usable acres of undeveloped land for total acquisition consideration of approximately $3.3 million. Acquisition consideration consisted of shares of Company common stock and Units in the Operating Partnership having an aggregate value of approximately $7.1 million and $14.3 million, respectively, (at a price of $25.25 per share and Unit), approximately $8.6 million of cash, the assumption of approximately $47.6 million of mortgage indebtedness, the assumption and repayment of other indebtedness through borrowings under the Company's Credit Facility of approximatley $15.0 million and the funding of closing costs and acquisition expenses of approximately $1.2 million through Credit Facility borrowings. The Company has agreed, subject to due diligence procedures and the completion of properties under development, to acquire 15 completed and under development properties over the ensuing 18- month period and to acquire 64 net usable acres of undeveloped land over the next four years. The estimated aggregate acquisition consideration for the remaining assets to be acquired is expected to be comprised primarily of Units in the Operating Partnership and assumed indebtedness that total approximately $71.7 million (subject to adjustment for the actual operating results for certain completed and development properties to be acquired).
The NWI and Lichtin acquisitions have been accounted for as purchases and the related acquisition costs have been allocated to the assets acquired and liabilities assumed based on estimates of their fair values.
The Company's consolidated results of operations for the year ended December 31, 1996, included the operating results of NWI beginning on November 1, 1996, the acquisition date. The unaudited pro forma information below presents the consolidated results of operations as if the initial phases of the NWI and Lichtin acquisitions had occurred at the beginning of the respective periods presented. The unaudited pro forma information is not necessarily indicative of the results of operations of the Company had the acquisitions occurred at the beginning of the periods presented, nor is it necessarily indicative of future results. Additionally, the unaudited pro forma information excludes the impact of the buildings and land to be acquired in future periods from NWI and Lichtin.
Additionally in 1996, the Company acquired 15 industrial and suburban office buildings totaling approximately 761,000 square feet located primarily in the northeast submarket of Atlanta, Georgia for an aggregate price of $40,102,000, including closing costs and acquisition expenses. The acquisitions were funded through Credit Facility borrowings.
In 1995, the Company acquired 49 industrial buildings totaling 2,564,000 square feet for an aggregate price of $110,141,000, including closing costs and acquisition expenses. These acquisitions were funded through Credit Facility borrowings and through the assumption of existing mortgage indebtedness of $39,511,000. Four of the acquired buildings totaling 190,000 square feet are located in Orlando, Florida, and the other buildings are located in metropolitan Atlanta, Georgia. In conjunction with two of the property acquisitions, the Company entered into agreements with the sellers to jointly develop additional industrial buildings, as market conditions warrant, on adjacent land controlled by the sellers (Note 6).
9. SHAREHOLDERS' EQUITY
In November 1996, the Company completed a public offering of 2,573,333 shares of common stock and received net proceeds of $68,532,000. The proceeds of the offering were used to reduce Credit Facility borrowings. This equity offering was the final drawdown under a $150 million equity shelf registration filed in 1995. In January 1997, the Company completed a new $300 million equity shelf registration. Additionally in 1996, the Company implemented a dividend reinvestment plan and registered 300,000 shares of common stock for future issuance thereunder. In 1996, a total of 1,514 shares of common stock were issued through the dividend reinvestment plan.
In November 1995, the Company completed a public offering of 3,450,000 shares of common stock and received net proceeds of $72,800,000. The proceeds were used to reduce Credit Facility borrowings. The equity offering was a partial drawdown under the Company's $150 million equity shelf registration filed in 1995. Additionally, in November 1995, Operating Partnership Units totaling 25,602 were converted into 25,602 shares of common stock. The conversion was reflected in the accompanying consolidated financial statements at book value.
10. LEASING ACTIVITY
Future minimum rents due under noncancelable operating leases with tenants at December 31, 1996, are as follows (in thousands):
11. RELATED-PARTY TRANSACTIONS
At December 31, 1996 and 1995, receivables included $465,000, due from the Subsidiaries, relating to accrued interest (payable annually) on the Subsidiaries' notes. At December 31, 1996 and 1995, accounts payable and accrued expenses included $154,000 and $1,395,000, respectively, due to the Subsidiaries.
In periods subsequent to the IPO, the Subsidiaries have provided development, construction, landscape, property management and leasing services to affiliated partnerships and joint ventures. Prior to the IPO, those services were provided by Weeks Group. Total revenues for such services to related parties of the Subsidiaries and Weeks Group were (in thousands):
The controlling partners of Weeks Group historically utilized their capital accounts in the various Weeks Group entities similar to a clearing account whereby they regularly made contributions and received distributions. Since the contributions and distributions did not necessarily reflect the economic cash flows or cash needs of Weeks Group, management believes that, in Weeks Group's circumstances, the separation of contributions or distributions made in periods prior to the IPO would not provide meaningful information. Therefore, such amounts are reported net in the accompanying Weeks Group financial statements.
12. INCENTIVE STOCK PLAN
The Company has an Incentive Stock Plan (the "Plan") under which shares of Company common stock have been reserved for the issuance of options and restricted stock. Total shares reserved for issuance under the Plan were increased by 390,000 shares in 1996, to a total of 1,000,000 shares, as approved by the shareholders in May 1996. Participants in the Plan may be officers and employees of the Company, its Subsidiaries or designated affiliates, as well as Company directors. The exercise price of all options under the Plan is not less than the fair market value of the Company's common stock on the date of grant and such options may be exercised for periods up to ten years.
In 1995, SFAS 123, "Accounting for Stock-Based Compensation" was issued requiring the Company either to continue its current accounting for stock- based compensation under Accounting Principles Board Opinion ("APB") No. 25 or elect the fair value-based method of accounting prescribed by SFAS 123. The Company elected to continue to account for stock-based compensation under APB No. 25 and has implemented the additional disclosure requirements prescribed by SFAS 123 and such disclosures are included below.
Under SFAS 123, the fair value of stock options granted in 1996 and 1995 has been estimated using a binomial option pricing model with the following weighted average assumptions for grants in 1996 and 1995, respectively: risk free interest rates of 5.7% and 5.8%, expected option lives of five years for options granted in both years, expected volatility of 16.5% for both years and expected dividend yields of 5.7% and 6.2%. Using these assumptions, the estimated fair value of options granted in 1996 and 1995 was $945,220 and $174,850, respectively, and such amounts would be included in compensation expense over the vesting period of the options. Pro forma net income and earnings per share for the years ended December 31, 1996 and 1995, assuming the Company had accounted for the Plan under SFAS 123 are as follows (in thousands, except per share amounts):
As the provisions of SFAS 123 have not been applied to options granted prior to January 1, 1995, the resulting pro forma annual compensation cost may not be representative of that expected in future years.
A summary of stock option activity under the Plan is presented in the table and narrative below (share amounts in thousands):
At December 31, 1996, options for 606,000 shares are outstanding having exercise prices ranging from $19.25 to $26.00, with a weighted average exercise price of $21.31 and a weighted average contractual life of 7.70 years, of which 420,000 options are exercisable with a weighted average exercise price of $19.48. Options for 147,000 shares are also outstanding having exercise prices ranging from $28.63 to $33.25, with a weighted average exercise price of $30.27 and a weighted average contractual life of 9.9 years, of which 132,000 options are exercisable with a weighted average exercise price of $30.45.
13. EMPLOYEE BENEFIT PLAN
The Company and the Subsidiaries ("Plan Sponsors") sponsor a 401(k) retirement savings plan covering substantially all employees meeting certain age and service requirements. Employees may contribute up to the lesser of 20% of their annual compensation or the annual statutory limit ($9,500 in 1996) to the plan. Plan Sponsors' contributions are made on a discretionary basis up to a maximum of 100% of the employees' contributions (currently 50% of the employee's contribution up to 3.2% of an employee's annual compensation). Total Plan Sponsor contributions were $88,000, $76,000, and $63,000 in 1996, 1995 and 1994, respectively.
14. COMMITMENTS AND CONTINGENCIES
As reflected in Note 8, the Company has entered into agreements for the future acquisition of land and buildings from NWI and Lichtin totaling approximately $119.6 million at December 31, 1996. In addition, the Company has agreed, subject to updating its due diligence procedures, to acquire development land totaling approximately $2.2 million. Letters of credit totaling approximately $7.2 million were issued on behalf of the Company in support of certain development, land acquisition and financing arrangements at December 31, 1996.
The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. While the resolution of these matters cannot be predicted with certainty, management believes that the final outcome of such matters will not have a material adverse effect on the Company's financial position or results of operations.
15. SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of amounts capitalized (Note 5), totaled $11,265,000 in 1996, $7,892,000 in 1995, $1,809,000 for the period from August 24, 1994 to December 31, 1994 and $6,568,000 for the period from January 1, 1994 to August 23, 1994.
Significant noncash investing and financing activities were as follows:
a. The Company's 1996 acquisitions of NWI and Lichtin included the assumption of mortgage notes payable of $104,628,000, the issuance of Units valued at $48,085,000 and the issuance of common stock valued at $7,124,000. b. The Company's 1995 property acquisitions included the assumption of mortgage notes payable of $39,511,000 and the application of notes receivable and deposits of $3,540,000. c. In conjunction with the Company's IPO in 1994, the Company acquired certain property interests subject to mortgage notes payable of $9,072,000 and in exchange for Units totaling $8,053,000.
16. FINANCIAL INSTRUMENTS
Based on interest rates and other pertinent information available to the Company at December 31, 1996, the Company estimates that the carrying values of cash and cash equivalents, the notes receivable from the Subsidiaries, the real estate development loans, the direct financing lease receivable, other receivables, mortgage notes payable, other liabilities and Credit Facility borrowings approximate their fair values when compared to instruments of similar type, terms and maturity.
The estimated fair value of the Company's interest rate swap arrangements (Note 5), determined based on quoted market prices for similar financial instruments, was approximately $955,000 less than the Company's carrying value at December 31, 1996. The Company uses interest rate swaps to manage its exposure to interest rate changes on Credit Facility borrowings. Under current accounting principles and as long as the Company maintains outstanding Credit Facility borrowings at least equal to the $50,000,000 notional amounts of the interest rate swaps, the difference between the fair value and carrying amount of the arrangements are not recognized in the Company's consolidated financial statements. The Company monitors the credit quality of the financial institution which is the counterparty to its interest rate swap arrangements and does not anticipate nonperformance from the financial institution.
Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 1996. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date.
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected quarterly financial information for 1996 and 1995 was as follows (in thousands, except per share amounts):
SCHEDULE III PAGE 1 OF 10
WEEKS CORPORATION REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996 (Dollars in Thousands)
S-1
S-2
Schedule III Page 3 of 10
S-3
SCHEDULE III PAGE 4 OF 10
S-4
S-5
S-6
S-7
SCHEDULE III PAGE 8 OF 10
(1) D = business distribution; B = bulk warehouse; S = business service; O = office; R = retail. (2) The year of development means the year in which shell construction was completed. (3) For properties acquired by the Company, including properties previously developed and sold by the Company, the year of acquisition means the year in which an ownership interest in the property was acquired or is expected to be acquired, unless otherwise noted.
(a) These properties are collectively encumbered by a mortgage of $38,000. (b) These properties are collectively encumbered by a mortgage of $31,170. (c) These properties are collectively encumbered by a mortgage of $10,300. (d) These properties are collectively encumbered by a mortgage of $ 6,952. (e) These properties are collectively encumbered by a mortgage of $ 5,200. (f) These properties are collectively encumbered by a mortgage of $ 5,140. (g) These properties are collectively encumbered by a mortgage of $ 3,425. (h) These properties are collectively encumbered by a mortgage of $ 1,813. (i) These properties are collectively encumbered by a mortgage of $ 1,262. (j) These properties are collectively encumbered by a mortgage of $ 7,076. (k) These properties are collectively encumbered by a mortgage of $ 2,174. (l) These properties are collectively encumbered by a mortgage of $ 2,633. (m) These properties are collectively encumbered by a mortgage of $12,278. (n) These properties are collectively encumbered by a mortgage of $ 1,957. (o) These properties are collectively encumbered by a mortgage of $ 8,841. (p) These properties are collectively encumbered by a mortgage of $ 6,924. (q) These properties are collectively encumbered by a mortgage of $ 2,901.
S-8
SCHEDULE III PAGE 9 OF 10
(r) These properties are collectively encumbered by a mortgage of $ 2,707. (s) These properties are collectively encumbered by a mortgage of $ 2,922. (t) These properties are collectively encumbered by a mortgage of $ 2,590. (u) These properties are collectively encumbered by a mortgage of $ 6,851. (v) These properties are collectively encumbered by a mortgage of $16,028. (w) These properties are collectively encumbered by a mortgage of $ 7,683. (x) These properties are collectively encumbered by a mortgage of $ 5,873. (y) These properties are collectively encumbered by a mortgage of $ 703.
(z) Total related encumbrances include all mortgage notes payable in the accompanying financial statements, except a mortgage of $4,172 which is secured by the property at 1950 Vaughn Road which underlies a direct financing lease discussed in note 3 to the consolidated and combined financial statements. (aa) The aggregate cost for federal income tax purposes was approximately $456 million. (bb) Excludes developments in progress of $56,571.
S-9
SCHEDULE III PAGE 10 OF 10
WEEKS CORPORATION REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996
Depreciation of the Company's real estate assets is calculated over the following estimated useful lives on a straight-line basis:
. Buildings -- 35 Years . Tenant Improvements -- life of the lease
A summary of activity for real estate assets and accumulated depreciation for the years ended December 31, 1996 and 1995, for the period from August 24, 1994 to December 31, 1994 and for the period from January 1, 1994 to August 23, 1994 were as follows (in thousands):
(a) See Note 15 to the Company's consolidated and combined financial statements, included herein on page, for a summary of certain noncash consideration utilized in the Company's property acquisitions.