HIW

Highwoods Properties, Inc. 10-Q Summary

Business Context and Reporting Period

Company: Highwoods Properties, Inc. (and Highwoods Realty Limited Partnership)
Reporting Period: Quarter and nine months ended September 30, 2009
Business Overview: A fully-integrated, self-administered equity REIT operating in the southeastern and midwestern United States. The portfolio consists primarily of office, industrial, and retail properties, along with undeveloped land and for-sale residential condominiums. As of September 30, 2009, the Company wholly owned 309 in-service properties and held 580 acres of undeveloped land.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Rental revenues increased 1.3% year-over-year, driven by new development properties placed in service and the acquisition of the PennMarc building in Memphis, offset by lower occupancy in the same-property portfolio.
• Profitability: Net income available for common stockholders increased 46.4% ($54.3M vs $37.1M). This significant increase was largely due to a $20.6 million gain on the disposition of non-core retail properties classified as discontinued operations.
• Debt Reduction: Total debt decreased by approximately $132 million. The Company utilized proceeds from a June 2009 common stock offering ($144.1 million net) to retire $107.2 million of secured debt and reduce borrowings under its revolving credit facility.
• Operating Expenses: Rental property expenses increased 3.5% due to new assets and higher same-property costs (utilities/taxes), causing the operating margin to decline slightly to 63.8%.
• Discontinued Operations: The Company recorded net gains of $20.6 million from the sale of three non-core community retail centers in Kansas City during the second quarter of 2009.

Guidance, Outlook, and Risks

• Liquidity: The Company maintains a conservative balance sheet with $42.1 million in cash and $448.8 million of availability under its unsecured revolving credit facility (maturing May 1, 2010). Management expects to obtain a new facility in late 2009 or early 2010, though terms may be less favorable than the current facility.
• Development: Approximately $10 million in capital expenditures are expected for started/committed new development projects. Two office properties are currently under development with 62% pre-leasing.
• Risks:
  • Economic Conditions: Adverse economic conditions in southeastern markets could lead to lower occupancy and rental rates.
  • Refinancing: The revolving credit facility matures in May 2010; failure to refinance or secure alternative capital could impact operations.
  • Competition: Oversupply of space in key markets could pressure rental rates.
  • REIT Status: Failure to maintain REIT qualification would subject the Company to corporate income taxes.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the extent to which the 46% increase in net income is driven by the one-time $20.6M gain on property sales versus core operating performance.
• Occupancy Trends: Review same-property occupancy rates and rental rate trends, as management noted lower occupancy offsetting revenue growth from new assets.
• Debt Maturity Wall: Confirm the status of refinancing the $450 million revolving credit facility maturing in May 2010 and potential changes in interest rate spreads.
• Development Pipeline: Assess the 62% pre-leasing status of new developments and the risk of cost overruns or lease-up delays.
• FFO vs. Net Income: Note that FFO per share decreased slightly ($2.02 vs $2.10) despite the rise in GAAP net income, highlighting the non-recurring nature of the property sale gains.