Highwoods Properties, Inc. - Q1 2007 10-Q Summary
Business Context and Reporting Period
Company: Highwoods Properties, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: A fully-integrated, self-administered equity REIT operating in the southeastern and midwestern United States. The portfolio consists of office, industrial, retail, and residential properties. As of March 31, 2007, the Company wholly owned 320 in-service properties and held interests in various joint ventures.
Key Financial Metrics
| Metric (in thousands) | Q1 2007 | Q1 2006 |
|---|---|---|
| Rental and Other Revenues | $108,742 | $101,079 |
| Net Income | $52,558 | $14,146 |
| Net Income Available to Common Stockholders | $48,445 | $7,619 |
| Funds From Operations (FFO) | $56,550 | $35,768 |
| Net Cash Provided by Operating Activities | $25,744 | $39,880 |
| Total Assets | $2,850,704 | $2,844,853 |
| Total Liabilities | $1,662,896 | $1,657,396 |
| Mortgages and Notes Payable | $1,487,509 | $1,465,129 |
| Cash and Cash Equivalents | $17,004 | $16,690 |
Material Changes vs. Prior Period
- Revenue Growth: Rental revenues increased 7.5% to $108.7 million, driven by higher average occupancy, new developments placed in service, and escalation income.
- Profitability Surge: Net income increased 272.3% to $52.6 million. This was primarily driven by non-recurring gains rather than core operating income growth.
- Dispositions: Gains on disposition of properties (continuing operations) rose to $16.7 million from $4.3 million. Gains on sales of discontinued operations increased significantly to $18.3 million from $1.8 million.
- Insurance Gain: The Company recorded a $4.1 million gain from the finalization of a property insurance settlement related to hurricane damage sustained in 2005.
- Joint Venture Earnings: Equity in earnings of unconsolidated affiliates jumped to $9.7 million from $2.1 million, largely due to property sales by the DLF I and Weston Lakeside joint ventures.
- Operating Expenses: General and administrative expenses increased 25.3% to $10.9 million due to higher salary costs, stock-based compensation, and write-offs related to terminated development projects.
Guidance, Outlook, and Risks
- Capital Recycling: The Company continues a strategy of selectively disposing of non-core properties to fund investments and debt repayment. As of March 31, 2007, $5.5 million in assets were held for sale.
- Debt Financing: On March 22, 2007, the Operating Partnership sold $400 million of 5.85% Notes due 2017. Proceeds were used to repay borrowings under a non-revolving credit facility and the revolving credit facility.
- Liquidity: The Company maintains a $450 million unsecured revolving credit facility with $366.9 million available as of May 1, 2007. Management expects cash flows and borrowings to be adequate for short and long-term needs.
- Preferred Stock Redemption: The Company announced the redemption of 1.6 million Series B Preferred Shares ($40.0 million) scheduled for May 29, 2007. An estimated $1.4 million charge for the excess of redemption cost over carrying value is expected in Q2 2007.
- Internal Controls: Management noted that disclosure controls and procedures were not effective as of March 31, 2007, due to material weaknesses in accounting for real estate assets identified in the prior year. Remediation plans are in progress but not yet fully tested.
- Tax Contingency: The Company is disputing state excise tax assessments of approximately $5.5 million. Management believes a settlement of approximately $0.5 million is probable and has accrued this amount.
Investor Verification Checklist
- Quality of Earnings: Verify the extent to which the 272% net income increase is driven by one-time gains (dispositions, insurance, joint venture sales) versus recurring rental income.
- Internal Control Remediation: Monitor the progress of remediation for material weaknesses in accounting for real estate assets and the appointment of a Chief Accounting Officer.
- Debt Covenants: Confirm continued compliance with financial covenants on the $450 million revolving credit facility and the new $400 million note issuance.
- Preferred Stock Impact: Assess the impact of the upcoming $40 million preferred stock redemption and the associated $1.4 million charge on Q2 2007 earnings.
- Joint Venture Exposure: Review the specific terms and recourse provisions of the guarantees provided for unconsolidated joint ventures, particularly those with significant debt.