2 0 0 3 A N N U A L R E P O R T B E Y O N D B U S I N E S S A S U S U A L C O R P O R A T E P R O F I L E : H I G H W O O D S P R O P E R T I E S Highwoods Properties is one of the largest owners Our strategy is simple: Own and manage highly and operators of suburban office properties in the maintained, quality assets in excellent locations. Southeast. A fully integrated, self-administered real By providing outstanding customer service that estate investment trust (“REIT”), Highwoods pro- consistently exceeds expectations and being the vides leasing, management, development, dominant provider of space in the majority of our construction and other customer related services for markets, we are firmly planted in the middle of its properties and third parties. As of December 31, each market’s deal flow. Our ultimate goal 2003, we owned or had an interest in 530 office, is to enhance shareholder value. We will deliver on industrial and retail properties encompassing that goal through service excellence and approximately 42 million square feet and we owned market dominance. 1,305 acres of undeveloped land well-positioned for future development. R I C H M O N D - 7% R E S E A R C H T R I A N G L E - 14% P I E D M O N T T R I A D - 9% C H A R L O T T E - 4% G R E E N V I L L E - 3% A T L A N T A - 14% D E S M O I N E S - 4% K A N S A S C I T Y - 11% M E M P H I S - 4% N A S H V I L L E - 10% O R L A N D O - 7% T A M P A - 12% C O R E M A R K E T S (percent of total annualized revenue including our share of unconsolidated joint ventures) H I G H L I G H T S in thousands, except per share amounts for the years ended December 31, 2003 2002 2001 T O T A L R E V E N U E (1) $ 465,844 $ 508,361 $ 540,615 N E T I N C O M E A V A I L A B L E F O R C O M M O N S H A R E H O L D E R S 24,843 62,609 99,711 N E T I N C O M E A V A I L A B L E F O R C O M M O N S H A R E H O L D E R S P E R D I L U T E D S H A R E 0.47 1.17 1.83 F U N D S F R O M O P E R A T I O N S A V A I L A B L E F O R C O M M O N S H A R E H O L D E R S (3) 133,122 162,405 (2) 205,216 F U N D S F R O M O P E R A T I O N S P E R D I L U T E D S H A R E (3) D I V I D E N D S P E R S H A R E 2.49 1.86 3.04 (2) 3.76 2.34 2.31 R E A L E S T A T E A S S E T S , A T C O S T (4) $3,520,153 $3,421,953 $3,592,709 M O R T G A G E S A N D N O T E S P A Y A B L E 1,558,758 1,528,720 1,719,230 T O T A L M A R K E T C A P I T A L I Z A T I O N 3,451,998 3,240,453 3,661,330 S Q U A R E F O O T A G E O F P R O P E R T I E S O W N E D A N D M A N A G E D 41,699 44,917 44,386 (1) Includes revenue from discontinued operations. (2) Includes non-recurring compensation expense $3,700 and litigation expense $2,700. (3) Includes impairment charges of $2,701 in 2003 and $13,503 in 2002. (4) Excludes property held for sale. For more information about FFO, a non-GAAP financial measure, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the accompanying Annual Report on Form 10-K. F U N D S F R O M O P E R A T I O N S (in dollars per diluted share) D I V I D E N D S (in dollars per share) T O T A L D E B T / T O T A L A S S E T S 2003 - $2.49 2002 - $3.04 2001 - $3.76 2000 - $3.61 1999 - $3.31 2003 - $1.86 2002 - $2.34 2001 - $2.31 2000 - $2.25 1999 - $2.19 2003 - 46.9% 2002 - 45.0% 2001 - 47.1% 2000 - 42.9% 1999 - 44.0% 1 0.00.51.01.52.02.53.03.54.0010203040500.00.51.01.52.02.50.00.51.01.52.02.53.03.54.0010203040500.00.51.01.52.02.50.00.51.01.52.02.5 GlenLake One is an excellent example of our ability to create value. Delivered in an extremely challenging and com- petitive office market, GlenLake One has rap- idly attracted a strong and prestigious customer base. Occupancy over the past 12 months has grown from 41.0% to 94.0%, and we have secured top-of-the- market rental rates. GLENLAKE ONE – RALEIGH, NORTH CAROLINA 2 Highwoods confronted for them in Tampa, Florida. Not only did we another challenging year as lose $12.4 million in annual rental the demand for office space revenue, but we also had to assume the cost remained weak in the face of negligible job of maintaining this campus – approximately growth. Throughout the country, office $2.8 million annually – an expense previ- vacancy rates remained high and our core ously borne by the customer and one that markets were no exception. Our industry directly impacts FFO and net income. D E A R S H A R E H O L D E R S has yet to see a sustained recovery and, as In April 2003, as a result of this lease we look at 2004, we are still uncertain as to rejection, the bankruptcies of WorldCom, when office employment and demand for US Airways, and a number of other larger office space will accelerate at a meaningful customers, which resulted in the loss of and sustained pace. an additional $8.2 million in annual Our financial results for 2003 reflect revenue, our Board of Directors reduced this difficult operating environment. the quarterly dividend to $0.425 per Total revenues declined 8.4% from 2002 share. At that time there were no concrete to $465.8 million and net income for signs that the office market environment common shareholders was $24.8 million, was improving and our Board made the or $0.47 per share. Funds from difficult but correct decision that our Operations (“FFO”), the most commonly Company’s long-term growth and finan- used metric to value real estate investment cial health and flexibility should not be trusts, declined to $133.1 million, or jeopardized to maintain the dividend at a $2.49 per share, from $162.4 million, or level we could not comfortably support. $3.04 per share in 2002. We were pleased that our common A substantial portion of stock performed well throughout the year, this decline in revenue, net generating a 24.9% annual total return. income and FFO was due to Our entire industry has been the benefici- WorldCom’s rejection of ary of a greater allocation of investment their lease at Highwoods dollars to real estate securities as investors Preserve, the 816,000 seek diversification, income, real assets square-foot, five-building campus we built and capital appreciation. 3 Occupancy continued to financial, accounting and reporting be our primary focus in aspects of our Company, including the new 2003 as it was in 2002 demands of Sarbanes-Oxley. Terry held and 2001. This year, we leased a total of 7.5 various executive positions at another million square feet, a 34.0% increase from publicly traded REIT for nearly ten years, 2002. Unfortunately, this volume was not including Chief Financial Officer, and he the result of new demand coming into our was a member of its Board of Trustees. He 2 4 . 9 % T O T A L A N N U A L R E T U R N markets but was primarily driven by lease also spent 18 years with Price Waterhouse renewals and capturing market share from including seven years as an audit partner our competitors. in New York and Baltimore. Terry’s exten- Strengthening Senior Management Team sive finance, accounting and real estate management experience is invaluable, and he is a great addition to Highwoods. This year we made important changes to Our previous Chief Financial Officer, our senior management team, significantly Carman Liuzzo, was named to the newly strengthening the group. Ed Fritsch, the created position of Vice President of Company’s Chief Operating Officer, was Investments and Strategic Analysis. In his promoted to President, a title previously new role, Carman is evaluating our assets, held by Ron Gibson. Ed joined Highwoods market positions, and acquisition and in 1982 and over the past 22 years he has disposition opportunities. touched every aspect of our Company, We are very proud of our entire team including property management, leasing, of seasoned professionals and are confi- development and strategic planning. dent they will work together closely to Throughout his tenure, he has earned the position our Company for long-term respect not only of our employees, senior profitable growth. management team, Board of Directors and customers, but also the respect of his peers. Terry Stevens joined our management Taking Advantage of the Demand for Real Estate Assets team in December as Chief Financial Like last year, the demand to purchase real Officer, responsible for managing all assets was strong as interest rates remained 4 Highwoods Preserve anchors the Tampa Bay area’s fastest growing and most sophisticated mix of new commercial and residential develop- ment. It is the classic corporate campus – redefined for the way business works today. HIGHWOODS PRESERVE – TAMPA, FLORIDA 5 Our customers use ServiceLink, a state-of- the-art work manage- ment system, to report service requests through the Internet. ServiceLink has significantly improved our response times, increased customer satis- faction, reduced mainte- nance costs and increased our operational efficiency. RAPIDLY AND EFFICIENTLY MANAGING CUSTOMER SERVICE REQUESTS 6 low and investors con- 6.5%. As a result, our Company expects to tinued to seek hard save $8.2 million, or $0.14 per share, in assets with steady rev- annual interest this year. Over time, this refi- enue streams. We took nancing should also improve our fixed advantage of this environment by charge coverage ratio, an important measure selling $202.0 million of both non-core used by the credit rating agencies and other and highly leased assets on extremely lending institutions. $ 2 0 2 M I L L I O N O F A S S E T S A L E S attractive terms. In most cases we continue Looking Ahead to manage and lease these assets for the We anticipate another challenging year for purchaser, generating recurring manage- Highwoods. Based on economic forecasts, ment fees for our Company. the earliest we expect to see meaningful While we recognize that these sales employment growth in our markets is late may negatively impact occupancy and this year or the first half of 2005. earnings in the short term, they are best for However, behind the scenes we have been our Company and our shareholders over the preparing for the inevitable upswing. We long term as they represent the optimal continue to optimize our portfolio, strategic management of the assets. strengthen our balance sheet and seek out opportunities to enhance our position in Improving Financial Flexibility our core markets. When the Southeast It is critical to maintain financial flexibility begins to participate in the economic to capitalize on attractive opportunities as recovery, our shareholders will be one of the they arise. In July we closed on a new primary beneficiaries. $250.0 million senior credit facility, a por- Thank you for your continued support tion of which can be used to make strategic and belief in our business, management acquisitions and fund substantially pre- team and associates. leased developments. We also successfully refinanced $371.5 million of public debt, R O N A L D P. G I B S O N O . T E M P L E S L O A N , J R . taking advantage of low interest rates to Chief Executive Officer Chairman of the Board reduce the weighted average interest rate on March 2004 all of our outstanding debt from 7.0% to 7 SENIOR OFFICERS BOARD OF DIRECTORS Ronald P. Gibson* Chief Executive Officer and Director Edward J. Fritsch* President, Chief Operating Officer, and Director Gene H. Anderson* Senior Vice President and Director Atlanta, GA Michael F. Beale* Senior Vice President Orlando, FL Barrett Brady Senior Vice President Kansas City, MO Thomas F. Cochran Senior Vice President Charlotte, NC Robert G. Cutlip Vice President Research Triangle, NC Michael E. Harris* Senior Vice President Memphis, TN Paul W. Kreckman Vice President Richmond, VA Carman J. Liuzzo* Vice President, Investments and Strategic Analysis Stephen A. Meyers Vice President Tampa, FL Kevin E. Penn Chief Information and Business Solutions Officer Mack D. Pridgen III* Vice President, General Counsel and Secretary W. Brian Reames Vice President Nashville, TN Mark W. Shumaker Vice President Piedmont Triad, NC Terry L. Stevens* Vice President, Chief Financial Officer and Treasurer * Officers subject to the reporting requirements of Section 16 of the Securities Exchange Act of 1934. 8 Ronald P. Gibson(2**)(4) Chief Executive Officer O. Temple Sloan, Jr.(2)(3)(4) Chairman of the Board of Directors Chairman and CEO, General Parts, Inc. Thomas W. Adler(2)(4) Chairman, PSF Management Gene H. Anderson(4) Senior Vice President Kay N. Callison(1) Former Director, J.C. Nichols Company Edward J. Fritsch(2)(4**) President and Chief Operating Officer William E. Graham, Jr.(3) Senior Counsel, Hunton & Williams and Former Vice Chairman, Carolina Power and Light Lawrence S. Kaplan(1**) Former Tax Partner, Ernst & Young LLP L. Glenn Orr, Jr.(2)(3**) Former Chairman, President and CEO, Southern National Corporation Willard H. Smith Jr.(1) Former Managing Director, Merrill Lynch John L. Turner (4) Managing Member, Gateway Holdings LLC F. William Vandiver, Jr.(1)(2) Former Corporate Risk Management Executive, Bank of America (1) Audit Committee (2) Executive Committee (3) Governance/Compensation Committee (4) Investment Committee ** Denotes Chair for Each Committee S H A R E H O L D E R I N F O R M A T I O N S H A R E H O L D E R C O N T A C T D I V I D E N D R E I N V E S T M E N T P L A N For shareholder mailings and Company information: As provided by the terms of the Dividend Reinvestment Highwoods Properties, Inc. and Stock Purchase Plan (the “Plan”), eligible sharehold- Attention: Investor Relations Coordinator ers are able to reinvest all or a portion of their dividends in shares of the Company’s stock. Shareholders are also able to make optional cash payments for the purchase of addi- tional shares. No brokerage commissions or fees will be charged under either option. For assistance or questions about the Plan, contact Highwoods’ Investor Relations Coordinator. T O T A L R E T U R N T O S H A R E H O L D E R S December 31, 2003 1 Year 3 Years 5 Years Highwoods Properties, Inc. 24.9% 33.8% 55.9% S&P 500 28.6% (11.7%) (2.6%) 3100 Smoketree Court, Suite 600 Raleigh, North Carolina 27604 T 919.872.4924 800.256.2963 F 919.876.6929 E HIW-IR@highwoods.com W www.highwoods.com A N N U A L M E E T I N G May 18, 2004, at 11:00 a.m. Marriott Crabtree Valley 4500 Marriott Drive Raleigh, North Carolina 27612 T 919.781.7000 T R A N S F E R A G E N T For information regarding change of address or other matters concerning your shareholder account, please con- tact the transfer agent at: Wachovia Bank, N.A. Equity Services Group 1525 West W.T. Harris Boulevard, 3C3 Charlotte, North Carolina 28288-1153 T 800.829.8432 F 704.590.7618 H i g h w o o d s P r o p e r t i e s , I n c . 3 1 0 0 S m o k e t r e e C o u r t , S u i t e 6 0 0 R a l e i g h , N o r t h C a r o l i n a 2 7 6 0 4 9 1 9 . 8 7 2 . 4 9 2 4 w w w . h i g h w o o d s . c o m