Highwoods Properties, Inc. - 10-Q Summary (Period Ended Sept 30, 2003)
Business Context and Reporting Period
This filing covers the quarterly period ended September 30, 2003. Highwoods Properties, Inc. is a self-administered equity REIT owning and operating suburban office, industrial, and retail properties in the southeastern and midwestern United States. As of the reporting date, the Company owned 483 in-service properties (approx. 37.2 million rentable square feet) and held interests in 62 additional properties via joint ventures.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 2003 | Nine Months Ended Sept 30, 2003 |
|---|---|---|
| Rental Revenue | $106.99 million | $315.72 million |
| Net Income | $21.47 million | $42.77 million |
| Net Income Available to Common Stockholders | $13.76 million | $19.63 million |
| Funds From Operations (FFO) | $38.06 million | $115.85 million |
| Cash Available for Distribution (CAD) | $22.32 million | $76.97 million |
| Total Debt | $1.61 billion (47.3% of total market capitalization) | |
| Cash and Cash Equivalents | $13.08 million | |
| Dividends Declared (Common) | $0.425 per share | $1.435 per share |
Material Changes vs. Prior Period
- Revenue Decline: Rental revenue decreased 2.3% ($2.5 million) for the quarter and 3.7% ($12.3 million) for the nine months compared to 2002. This was primarily driven by lower occupancy rates (81.6% vs. 84.8% in Q3; 81.5% vs. 86.0% in YTD) due to the bankruptcies of WorldCom and US Airways and slower lease-up of new developments.
- Operating Expenses: Rental property operating expenses increased 6.3% for the quarter and 5.8% for the nine months, largely due to fixed costs and the acquisition of MG-HIW assets in July 2003.
- Discontinued Operations: Significant gains were recognized from discontinued operations ($11.3 million in Q3; $12.5 million YTD) related to the sale of properties, offsetting declines in continuing operations.
- Acquisition: On July 29, 2003, the Company acquired 15 properties (1.3 million sq. ft.) from MG-HIW, LLC for a total consideration of approximately $138.3 million (including debt assumption).
Guidance, Outlook, and Risks
- Outlook: Management expects net income and FFO to be lower in Q4 2003 compared to Q4 2002 due to lower occupancy, lower first-year cash rents, and asset sales. Occupancy is expected to remain flat or increase slightly over the next 12-15 months.
- Lease Expirations: Approximately 19.1% of the portfolio (5.9 million sq. ft.) is scheduled to expire in 2004. As of October 24, 2003, 28.8% of this space had been re-leased.
- Liquidity: The Company plans to refinance $246.5 million of debt maturing in December 2003. It anticipates annual interest savings of approximately $8.9 million from these refinancing efforts.
- Risks: Key risks include the impact of WorldCom and US Airways bankruptcies on re-leasing space, potential further credit rating downgrades (Moody's downgraded the Company to Ba1 in August 2003), and general economic conditions in primary markets.
- Dividends: The annual dividend rate was reduced from $2.34 to $1.70 per share in April 2003 due to lower expected cash available for distribution.
Investor Verification Checklist
- Occupancy Trends: Verify the re-leasing progress of space vacated by WorldCom and US Airways and the impact on same-property rental revenue.
- Debt Refinancing: Confirm the successful closing of the $246.5 million debt refinancing scheduled for December 2003 and the resulting interest rate savings.
- Joint Venture Guarantees: Review the status of guarantees related to joint ventures (e.g., MG-HIW, Des Moines properties) and potential exposure to future payments.
- Capital Recycling: Monitor the progress of the $175.0 million in asset dispositions under letter of intent or contract for sale.
- Credit Ratings: Track any further changes in credit ratings from Moody's, S&P, or Fitch, which could impact borrowing costs on the revolving credit facility.