Business Context and Reporting Period
Company: Highwoods Properties, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2008
Business Overview: Highwoods is a fully-integrated, self-administered equity REIT operating in the southeastern and midwestern United States. As of March 31, 2008, the Company wholly owned 314 in-service office, industrial, and retail properties, 96 rental residential units, and 616 acres of undeveloped land. The Company conducts operations primarily through Highwoods Realty Limited Partnership (the Operating Partnership).
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2008 | Q1 2007 |
|---|---|---|
| Rental and Other Revenues | $114,780 | $106,108 |
| Net Income | $15,643 | $52,558 |
| Net Income Available for Common Stockholders | $12,805 | $48,445 |
| Funds From Operations (FFO) | $43,459 | $56,550 |
| FFO Per Share (Diluted) | $0.71 | $0.91 |
| Net Cash Provided by Operating Activities | $20,814 | $25,744 |
| Total Assets | $2,957,818 | $2,926,955 |
| Total Liabilities | $1,880,673 | $1,834,824 |
| Mortgages and Notes Payable | $1,703,238 | $1,641,987 |
| Cash and Cash Equivalents | $6,595 | $3,140 |
Material Changes vs. Prior Period
- Revenue Growth: Rental and other revenues increased by $8.7 million (8.2%) compared to Q1 2007, driven by higher average occupancy, new developments placed in service, and $1.9 million in lease termination income.
- Net Income Decline: Net income decreased significantly by $36.9 million (70.3%) to $15.6 million. This decline is primarily attributable to the absence of significant gains on property dispositions and insurance settlements recorded in Q1 2007 ($16.7 million and $4.1 million, respectively) and a decrease in equity earnings from unconsolidated affiliates.
- Operating Expenses: Total operating expenses increased by $2.1 million (2.7%). Depreciation and amortization rose by $2.1 million due to new developments, while General and Administrative expenses decreased by $1.2 million due to lower audit fees and project write-offs.
- Debt Levels: Total mortgages and notes payable increased by $61.3 million to $1.70 billion. The weighted average interest rate on outstanding debt decreased from 6.83% in Q1 2007 to 6.26% in Q1 2008.
- Discontinued Operations: Income from discontinued operations dropped from $19.0 million in Q1 2007 to $3.6 million in Q1 2008, reflecting fewer property sales in the current period.
Guidance, Outlook, and Risks
- Liquidity and Capital Resources: The Company maintains a conservative balance sheet with $201 million available under its unsecured revolving credit facility and $111 million under secured construction facilities. Management expects cash flows from operations, asset dispositions, and borrowings to meet short- and long-term liquidity needs.
- Development Pipeline: The Company has 12 properties under development (2.1 million sq. ft.) with an expected total cost of $343 million. Approximately $131 million in future capital expenditures for started/committed projects remain.
- Interest Rate Risk: The Company utilizes interest rate swaps to hedge variable rate debt. As of March 31, 2008, $311 million of variable rate debt was unhedged. A 100 basis point increase in rates would increase interest expense by approximately $3.1 million.
- Market Risks: Key risks include speculative development by competitors, deterioration of tenant financial conditions, inability to lease space on favorable terms, and potential declines in economic growth in the Company's core markets (Florida, Georgia, North Carolina, Tennessee).
- REIT Compliance: The Company must distribute at least 90% of REIT taxable income to maintain tax-qualified status. Dividends declared per common share were $0.425 for the quarter.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the extent to which Q1 2007 earnings were inflated by one-time gains on property dispositions ($16.7M) and insurance settlements ($4.1M) that did not recur in Q1 2008.
- Debt Maturities: Confirm the schedule of debt maturities, noting that the $450 million revolving credit facility matures in May 2009 (with a one-year extension option).
- Development Costs: Review the $131 million in committed future capital expenditures for development projects to assess funding requirements.
- Occupancy Trends: Monitor occupancy rates in core markets (Nashville, Raleigh, Tampa) which drive the majority of revenue, as economic slowdowns could impact lease renewals.
- Joint Venture Exposure: Assess the $556.9 million of outstanding mortgage debt in unconsolidated joint ventures, noting that while mostly non-recourse, the Company has specific guarantees and master lease obligations.