Highwoods Properties, Inc. - Q1 2002 10-Q Summary
Business Context and Reporting Period
Company: Highwoods Properties, Inc. (Highwoods)
Reporting Period: Quarter ended March 31, 2002
Business Overview: Highwoods is a self-administered and self-managed equity REIT focused on acquiring, developing, and operating suburban office, industrial, and retail properties in the southeastern and midwestern United States. As of March 31, 2002, the Company owned 501 in-service properties (approx. 37.5 million rentable square feet) and 213 apartment units. The Company conducts operations through Highwoods Realty Limited Partnership, in which it holds an 87.8% interest.
Key Financial Metrics
| Metric ($ in thousands) | Q1 2002 | Q1 2001 |
|---|---|---|
| Total Revenue | $130,950 | $136,849 |
| Net Income | $27,035 | $38,581 |
| Net Income Available to Common Shareholders | $19,322 | $30,436 |
| Funds From Operations (FFO) | $55,746 | $61,589 |
| Cash Flow from Operating Activities | $42,622 | $66,769 |
| Total Debt (Mortgages & Notes Payable) | $1,725,032 | $1,719,230 |
| Cash and Cash Equivalents | $3,863 | $46,119 |
| Weighted Avg. Shares Outstanding (Basic) | 52,896 | 56,393 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased $5.8 million (4.3%) to $130.9 million. Rental property revenue dropped $3.2 million (2.5%) primarily due to a decline in average occupancy rates from 94.2% in Q1 2001 to 89.0% in Q1 2002 and portfolio reductions from the capital recycling program.
- Net Income Reduction: Net income fell $11.5 million (30%) to $27.0 million. This was driven by lower rental revenues, a significant decrease in gains on disposition of assets ($6.2 million drop), and lower interest/other income.
- Occupancy Trends: Same-property average occupancy declined from 94.2% to 88.9%. Management expects a slight decline in occupancy for the remainder of 2002 due to lower economic growth and increasing market vacancy rates.
- Expense Management: Interest expense decreased $2.6 million (9.0%) due to lower weighted average interest rates, partially offset by higher average outstanding debt. Rental operating expenses increased $1.7 million (4.6%) largely due to higher real estate taxes.
- Capital Recycling: The Company sold 128,000 square feet of office property and 50.9 acres of land for $23.2 million in proceeds during the quarter. Additionally, 551,152 square feet of office space and 128.8 acres of land were under contract for sale totaling $103.4 million.
Guidance, Outlook, and Risks
- Outlook: Management anticipates a slight decline in occupancy rates for the remaining three quarters of 2002. The Company expects to fund short-term liquidity needs (approx. $42.0 million for development) through working capital, operating cash flows, and borrowings under revolving credit facilities.
- Liquidity: Total indebtedness was $1.7 billion, representing approximately 45.5% of total market capitalization. The Company maintains a BBB- credit rating (S&P) and has $85.0 million available under its unsecured revolving loan and $40.9 million under its secured revolving loan.
- Risks: Key risks include speculative development by competitors leading to excessive supply, deterioration of tenant financial conditions, rising interest rates increasing debt service costs, and potential inability to lease space on favorable terms. The Company also faces risks related to joint venture debt guarantees, though most debt is non-recourse.
- Dividends: Distributions declared per common share were $0.585 for the quarter. The Company must distribute at least 90% of REIT taxable income to maintain tax status.
Investor Verification Checklist
- Occupancy Rates: Verify the trend of the 89.0% occupancy rate and the impact of the capital recycling program on future rental revenue stability.
- Lease Expirations: Review the lease expiration schedule, noting that 14.0% of leased square footage expires in 2002 and 14.0% in 2003, creating near-term renewal pressure.
- Development Pipeline: Assess the pre-leasing status of the 2.0 million square feet of development projects (57% pre-leased) and the timeline for stabilization.
- Debt Maturity: Confirm the maturity schedule of the $1.7 billion debt, specifically the $39.5 million due within one year and the $233.0 million unsecured revolving loan maturing in December 2003.
- Joint Venture Exposure: Review the $590.2 million of debt held by unconsolidated affiliates and the specific guarantees provided by Highwoods ($3.4 million and $2.4 million construction debts).