Highwoods Properties, Inc. - 10-Q Summary (Period Ended Sept 30, 2008)
Business Context and Reporting Period
Highwoods Properties, Inc. is a fully-integrated, self-administered equity REIT operating in the southeastern and midwestern United States. As of September 30, 2008, the Company owned or had an interest in 383 in-service office, industrial, and retail properties totaling 34.8 million square feet, along with 514 rental residential units. The reporting period covers the three and nine months ended September 30, 2008.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 2008 | Nine Months Ended Sept 30, 2008 |
|---|---|---|
| Rental and Other Revenues | $116.2 million | $346.2 million |
| Net Income | $14.7 million | $45.3 million |
| Net Income Available to Common Stockholders | $12.2 million | $37.1 million |
| Funds From Operations (FFO) | $44.6 million ($0.71/share) | $130.3 million ($2.11/share) |
| Net Cash Provided by Operating Activities | N/A | $128.1 million |
| Total Debt (Mortgages and Notes Payable) | $1.59 billion (as of Sept 30, 2008) | |
| Cash and Cash Equivalents | $13.7 million (as of Sept 30, 2008) | |
| Revolving Credit Facility Availability | $315.9 million (of $450.0 million total) |
Material Changes vs. Prior Period
- Revenue Growth: Rental revenues increased 8.0% ($8.6 million) for the quarter and 8.8% ($28.0 million) for the nine months compared to 2007, driven by new developments placed in service and higher same-property occupancy.
- Net Income Decline (YTD): While quarterly net income rose 9.7% to $14.7 million, year-to-date net income fell 39.8% to $45.3 million. This decline is primarily due to a significant reduction in net gains on property dispositions ($1.9 million in 2008 vs. $20.4 million in 2007) and a $4.1 million insurance settlement gain recorded in 2007 that did not recur.
- Discontinued Operations: Net income from discontinued operations decreased significantly year-over-year due to fewer property sales and the absence of a $1.5 million tax liability release recorded in 2007.
- Capital Structure: The Company sold 5.5 million shares of Common Stock in September 2008 for net proceeds of $195.0 million. Proceeds were used to repurchase $52.5 million of Series A Preferred Stock and reduce borrowings on the revolving credit facility.
Guidance, Outlook, and Risks
Management Commentary: Management emphasizes a strategy of selective disposition of non-core assets to fund growth and debt reduction. The Company maintains a conservative balance sheet and expects to meet liquidity needs through operating cash flows, credit facilities, and potential equity issuances.
Risks and Contingencies:
- Credit Market Dislocations: The filing highlights risks associated with the current credit market environment, noting potential difficulties in refinancing debt or obtaining capital on favorable terms.
- Counterparty Risk: The Company relies on major financial institutions for its revolving credit facility and interest rate swaps; a default by a banking partner could severely impact liquidity.
- Market Conditions: Economic growth in key markets (Florida, Georgia, North Carolina, Tennessee) remains a critical determinant of future operating results. Speculative development by competitors could lead to excessive supply.
- Debt Covenants: The Company must maintain compliance with financial ratios in its credit agreements; failure to do so could result in debt acceleration.
Investor Verification Checklist
- Debt Maturities: Verify the schedule for the $450 million revolving credit facility (maturing May 1, 2009) and the $137.5 million term loan to assess refinancing risks in a tight credit market.
- Discontinued Operations Impact: Confirm the extent to which future earnings will be impacted by the reduced volume of property dispositions compared to the prior year.
- Occupancy Trends: Monitor same-property rental revenue and occupancy rates in key markets to validate the sustainability of the 8% revenue growth.
- Preferred Stock Reduction: Track the impact of the Series A Preferred Stock repurchase on future dividend obligations and net income available to common shareholders.
- Joint Venture Exposure: Review the financial health of unconsolidated joint ventures, which held $657.3 million in liabilities as of September 30, 2008.