HIW

Highwoods Properties, Inc. - 10-Q Summary (Period Ended June 30, 2011)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2011, for Highwoods Properties, Inc. (the "Company") and Highwoods Realty Limited Partnership (the "Operating Partnership"). The Company is a fully-integrated, self-administered equity REIT operating primarily in the Southeastern and Midwestern United States. As of June 30, 2011, the portfolio consisted of 296 in-service office, industrial, and retail properties (27.3 million square feet), 96 rental residential units, 19 for-sale condominiums, and 603 acres of undeveloped land.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Decline: Net income available for common stockholders decreased significantly by approximately 56% year-over-year. This was primarily driven by a $25.3 million gain on the disposition of unconsolidated joint ventures in the second quarter of 2010, which did not recur in 2011.
• Preferred Stock Redemption: In Q2 2011, the Company redeemed all 2.1 million outstanding 8.0% Series B Preferred Shares for $52.5 million. This resulted in a $1.9 million charge (excess of redemption cost over carrying value) reducing net income.
• Revenue Growth: Rental revenues increased 1.7% year-over-year, driven by recent acquisitions and development activities, offset by a slight decrease in same-property portfolio revenue due to lower termination fees and operating expense recoveries.
• Expense Increases: General and administrative expenses rose 1.8% due to higher incentive compensation and deferred compensation expenses. Interest expense increased 3.0% due to higher average debt balances from acquisitions and a new $200 million bank term loan.
• Investing Activity: Net cash used in investing activities increased to $78.9 million (from $15.7 million in 2010), primarily due to higher advances to unconsolidated affiliates ($39.4 million) and lower proceeds from property dispositions.

Guidance, Outlook, and Risks

• Capital Plan: Management anticipates commencing up to $200 million of new development and acquiring up to $300 million of new properties in the remainder of 2011. They also plan to sell up to $75 million of non-core properties.
• Leasing Activity: In Q2 2011, the Company leased 807,380 square feet of second-generation office space at rents 5.5% higher than previous leases. Same-property average occupancy improved slightly to 90.0% in Q2 2011.
• Liquidity: The Company maintains a conservative balance sheet. On July 27, 2011 (subsequent to period end), the Company replaced its $400 million revolving credit facility with a new $475 million facility maturing in 2015, featuring improved pricing (LIBOR + 150 bps) and an accordion feature for an additional $75 million.
• Risks: Key risks include adverse economic conditions in core markets (Florida, Georgia, North Carolina, Tennessee), competition for leasing, potential inability to refinance debt at favorable rates, and customer concentration (Federal Government accounts for 9.8% of annualized revenues).

Investor Verification Checklist

• One-Time Gains: Verify the impact of the $25.3 million gain on unconsolidated affiliates in 2010 to understand the true operating performance trend.
• Preferred Stock Charge: Confirm the $1.9 million redemption charge is a non-recurring item affecting Q2 2011 earnings.
• Debt Maturities: Review the schedule for the $52.1 million secured construction facility maturing December 20, 2011, and the $200 million term loan.
• Same-Property NOI: Analyze the slight decline in same-property NOI ($141.9M in 2011 vs $143.9M in 2010) to assess core portfolio health excluding acquisitions.
• FFO vs. Net Income: Compare FFO ($1.21/share) to Net Income ($0.28/share) to evaluate cash-generating capability independent of depreciation and one-time asset sales.