Business Context and Reporting Period
Company: Highwoods Properties, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 1999
Business Overview: Highwoods is a self-administered and self-managed equity REIT specializing in the ownership, development, and management of suburban office, industrial, and retail properties in the southeastern and midwestern United States. As of December 31, 1999, the Company owned or had a majority interest in 563 in-service properties totaling approximately 39.0 million rentable square feet and 1,885 apartment units across 17 markets.
Key Financial Metrics
| Metric | 1999 | 1998 |
|---|---|---|
| Total Revenue | $584.9 million | $512.5 million |
| Net Income | $138.1 million | $125.7 million |
| Net Income Available to Common Shareholders | $105.5 million | $95.6 million |
| Funds From Operations (FFO) | $244.2 million | $211.4 million |
| Cash Available for Distribution | $183.3 million | $158.4 million |
| Net Real Estate Assets | $3.67 billion | $3.92 billion |
| Total Debt (Mortgages & Notes Payable) | $1.77 billion | $2.01 billion |
| Weighted Average Interest Rate (Total Debt) | 7.5% | Not explicitly stated |
| Occupancy Rate (In-Service) | 94% | 94% |
| Dividends Paid (Common) | $2.19 per share | $2.10 per share |
Material Changes vs. Prior Period
- Portfolio Restructuring: The Company significantly reduced its portfolio size to increase quality and return on invested capital. It sold 123 properties (8.3 million square feet) for $696.4 million and contributed 13 properties to joint ventures for $142.0 million. Conversely, it acquired only seven properties (960,000 square feet) for $106.8 million.
- Revenue Growth: Total revenue increased 14.1% to $584.9 million, driven by rental operations which grew 13.4% to $564.5 million. Same-property revenues increased 3%.
- Expense Management: Rental operating expenses increased 12.8% to $174.1 million, maintaining a consistent ratio of 31.0% of related revenues. General and administrative expenses decreased as a percentage of total revenue from 4.1% in 1998 to 3.8% in 1999.
- Debt Reduction: Total indebtedness decreased by approximately $242 million to $1.77 billion, primarily due to repayments on the unsecured revolving credit facility and the retirement of a $133 million mortgage note.
- Development Activity: The Company placed 24 development projects (2.2 million square feet) into service during 1999. At year-end, 41 properties (4.8 million square feet) remained under development.
Guidance, Outlook, and Risks
Outlook and Strategy: Management continues to pursue a "Managed Growth Strategy," focusing on markets with local knowledge advantages. The Company intends to fund liquidity needs through a combination of borrowings under its $450 million revolving credit facility, issuance of secured/unsecured debt, equity issuances, and selective dispositions of non-core assets. The Company expects to maintain a flexible and conservative capital structure.
Recent Developments:
- Authorized a share repurchase plan for up to 10.0 million shares; repurchased 1.2 million shares in December 1999.
- Amended the revolving credit facility, reducing the commitment from $600 million to $450 million.
- Has 786,000 square feet under contract for sale ($57.8 million) and 3.2 million square feet under letters of intent ($293.5 million), expected to close in 2000.
Risks and Contingencies:
- Legal Proceedings: A putative class action lawsuit filed in 1998 regarding the merger with J.C. Nichols Company remains pending. The Company intends to vigorously defend the litigation but notes that an unfavorable outcome could have a material adverse effect.
- Environmental Liabilities: Potential liability for remediation of hazardous substances exists, though Phase I assessments have not revealed material liabilities to date.
- Market Risk: Exposure to interest rate fluctuations on variable rate debt (approximately $188 million unhedged). A 100 basis point increase would increase interest expense by approximately $1.9 million.
- Development Risk: Risks associated with construction costs exceeding estimates and lease-up delays for new developments.
Investor Verification Checklist
- Disposition Proceeds Reinvestment: Verify the timeline and success of reinvesting the $696.4 million in disposition proceeds into tax-deferred exchanges (Section 1031) or new core assets, as delays could impact income from operations.
- Development Pipeline Stabilization: Monitor the stabilization rates of the 4.8 million square feet currently under development, particularly the 2.4 million square feet of "Completed-Not Stabilized" properties which are only 74% leased.
- Lease Expirations: Review the lease expiration schedule, noting that 16.6% of leased square footage expires in 2000, requiring successful re-leasing to maintain revenue.
- Legal Litigation Status: Track the progress of the J.C. Nichols merger class action lawsuit for potential financial impact.
- Debt Maturities: Confirm refinancing plans for the $246.6 million of debt maturing in 2001, including the $229 million revolving loan.