HIW

Highwoods Properties, Inc. 2003 10-K Summary

Business Context and Reporting Period

Company: Highwoods Properties, Inc. (NYSE: HIW)
Reporting Period: Fiscal year ended December 31, 2003
Business Model: Self-administered equity REIT focused on suburban office, industrial, and retail properties in the Southeastern and Midwestern United States.
Portfolio Overview (Dec 31, 2003):

• Wholly-owned: 465 in-service properties (34.9 million rentable sq. ft.) and 213 apartment units.
• Joint Ventures: Interest in 65 properties (6.8 million rentable sq. ft.).
• Development Land: 1,305 acres suitable for approximately 14.3 million sq. ft. of development.
• Geographic Focus: Research Triangle (NC), Atlanta (GA), Tampa (FL), Kansas City (MO), Nashville (TN), Piedmont Triad (NC), Richmond (VA), Charlotte (NC), Memphis (TN), Greenville (SC), Columbia (SC), and Orlando (FL).

Key Financial Metrics

Note: Net income includes significant income from discontinued operations ($31.9 million in 2003 vs. $33.3 million in 2002). Income from continuing operations was $23.8 million in 2003 compared to $60.1 million in 2002.

Material Changes vs. Prior Period

• Revenue Decline: Rental revenue decreased 2.5% to $422.1 million. This was driven by a drop in average occupancy from 85.9% (2002) to 81.6% (2003), largely due to the bankruptcies of major tenants WorldCom and US Airways.
• Profitability Drop: Net income available to common stockholders fell 60.4% to $24.8 million. Income from continuing operations dropped 60.5% due to lower rental revenue, higher operating expenses, and increased depreciation.
• Occupancy Impact: The rejection of the 816,000 sq. ft. lease by Intermedia (WorldCom) significantly impacted occupancy rates. Total portfolio occupancy would have been 83.4% without this vacancy.
• Capital Recycling: The company continued its strategy of disposing of non-core assets. In 2003, dispositions and contributions to joint ventures totaled 3.6 million sq. ft., generating gross proceeds of $257.2 million.
• Acquisitions: Acquired assets from MG-HIW, LLC in July 2003, adding 1.3 million sq. ft. to the portfolio.

Guidance, Outlook, and Risks

Management Outlook:

• 2004 Occupancy: Anticipated to decrease slightly in the first half and increase slightly in the second half of 2004.
• Rental Rates: Expect straight-line rents on new leases to remain lower than expiring leases due to oversupply in Southeastern markets.
• Net Income: Expected to be lower in 2004 compared to 2003 due to flat occupancy, rental rate pressure, and higher operating costs, partially offset by lower interest expense.

Key Risks & Contingencies:

• Tenant Concentration: While no single tenant exceeds 3.4% of revenue, the bankruptcies of WorldCom and US Airways demonstrated significant vulnerability to major tenant defaults.
• Debt Covenants: The company is currently in compliance with debt covenants (e.g., Adjusted EBITDA coverage ratios), but failure to comply could restrict borrowing or accelerate debt.
• Refinancing: Approximately $13.1 million in principal payments are due in 2004. The company plans to refinance $100 million of Put Option Notes due in June 2004.
• REIT Status: Failure to maintain REIT qualification would subject the company to corporate income taxes, significantly reducing cash available for dividends.

Investor Verification Checklist

• Occupancy Trends: Verify the actual lease-up rates for the 4.7 million sq. ft. of space expiring in 2004 (only 32% renewed as of Feb 2004).
• Discontinued Operations: Confirm the sustainability of income from discontinued operations, which comprised 57.2% of total net income in 2003.
• Debt Maturity Wall: Review the schedule for the $100 million Put Option Notes due June 2004 and the refinancing terms.
• Joint Venture Exposure: Assess the financial health of joint venture partners and the company's exposure to guarantees (e.g., Plaza Colonnade, LLC construction guarantees).
• Dividend Coverage: Monitor FFO coverage of dividends, which was 74.7% in 2003, indicating a payout ratio above 100% of FFO.