HIW

Highwoods Properties, Inc. - 10-Q Summary (Period Ended Sept 30, 2005)

Business Context and Reporting Period

Highwoods Properties, Inc. is a fully-integrated, self-administered equity REIT operating office, industrial, retail, and apartment properties in the southeastern and midwestern United States. This report covers the quarterly period ended September 30, 2005. As of this date, the Company owned or had an interest in 454 in-service properties totaling approximately 37.1 million square feet and 514 apartment units, along with 988 acres of development land.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Rental revenues increased 4.4% in the third quarter and 0.9% for the nine months ended September 30, 2005, compared to the prior year periods. This was driven by higher average occupancy and a new development property placed in service in July 2005.
• Discontinued Operations: A significant portion of net income ($10.7 million for the quarter; $30.0 million for the nine months) was derived from discontinued operations, primarily due to gains on the sale of non-core properties in Charlotte, NC, and Tampa, FL.
• Impairment Charges: The Company recorded $4.4 million in impairment charges for assets held for use in the third quarter and $7.6 million for the nine months, compared to no similar charges in the prior year periods.
• Preferred Stock Redemption: The Company redeemed $130.0 million of Preferred Stock in the third quarter, resulting in a $4.3 million charge (excess of redemption cost over carrying value) reducing net income available to common stockholders.
• Debt Reduction: Total mortgages and notes payable decreased from $1.57 billion at year-end 2004 to $1.44 billion at September 30, 2005, due to significant debt pay-downs funded by property dispositions.

Guidance, Outlook, and Risks

• Liquidity and Capital Resources: The Company maintains a capital recycling program, disposing of non-core assets to fund growth and debt reduction. As of May 1, 2006, the Company secured a new $350 million unsecured revolving credit facility with improved terms (LIBOR + 80 bps).
• Future Capital Needs: Expected future capital expenditures for started or committed development projects are approximately $200 million. Significant debt maturities include $110 million of unsecured notes in December 2006 and $63 million of secured debt in February 2007.
• Internal Controls: Management reported that internal controls over financial reporting were not effective as of December 31, 2004, and remained ineffective as of December 31, 2005, due to material weaknesses in real estate asset accounting and financial statement close processes. Remediation plans are underway.
• Market Risks: The Company faces risks related to interest rate fluctuations, tenant financial conditions, and economic growth in key markets (Florida, Georgia, North Carolina). Approximately 60% of office properties are located in these states.
• SEC Investigation: The SEC's Division of Enforcement has issued a confidential formal order of investigation regarding the Company's previous financial restatement.

Investor Verification Checklist

• Verify the sustainability of FFO growth excluding the one-time gains from discontinued operations ($24.9 million gain in the nine months).
• Confirm the status of remediation for material weaknesses in internal controls over financial reporting.
• Monitor the Company's ability to refinance $110 million in unsecured notes maturing in December 2006 and $63 million in secured debt in February 2007.
• Review the impact of the $4.3 million preferred stock redemption charge on future earnings per share calculations.
• Assess the progress of the $200 million in committed development expenditures and their effect on future cash flows.