Highwoods Properties, Inc. - 10-Q Summary (Period Ended June 30, 2002)
Business Context and Reporting Period
Highwoods Properties, Inc. is a self-administered and self-managed equity REIT operating in the southeastern and midwestern United States. The company owns and operates office, industrial, and retail properties. This report covers the quarterly period ended June 30, 2002, and the six months ended June 30, 2002. As of June 30, 2002, the company owned 500 in-service properties encompassing approximately 37.9 million rentable square feet.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2002 | Six Months Ended June 30, 2001 |
|---|---|---|
| Total Revenue | $253.8 million | $269.2 million |
| Net Income | $55.5 million | $74.5 million |
| Net Income Available to Common Shareholders | $40.1 million | $58.5 million |
| Funds From Operations (FFO) | $110.4 million | $120.9 million |
| Cash Flow from Operating Activities | $99.9 million | $117.0 million |
| Total Debt | $1.675 billion | $1.719 billion |
| Cash and Cash Equivalents | $14.2 million | $0.6 million |
| Weighted Average Shares Outstanding (Basic) | 53.1 million | 55.2 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased by $15.4 million (5.7%) compared to the prior year. Rental property revenue dropped $8.6 million, primarily due to a decrease in average occupancy rates from 93.4% to 88.0% and a $3.1 million write-off of accrued straight-line rent receivables from WorldCom and affiliates.
- Net Income Reduction: Net income available to common shareholders fell by $18.4 million (31.5%). This was driven by lower rental revenues, reduced interest and other income (down $9.4 million), and lower gains on dispositions.
- Occupancy Trends: Same-store average occupancy declined from 93.6% in the first half of 2001 to 88.1% in the first half of 2002.
- Dispositions and Impairments: The company recorded a $9.9 million impairment loss on properties held for sale or use, offsetting gains from the disposition of office and development properties.
- Debt Reduction: Total mortgages and notes payable decreased by approximately $44 million, reflecting net repayments on revolving loans and mortgages.
Outlook, Risks, and Management Commentary
- Major Tenant Bankruptcies: Significant risks were highlighted regarding the Chapter 11 filings of WorldCom (July 2002) and US Airways (August 2002). WorldCom leases represent approximately 3.7% of total annualized rental revenue ($17.5 million), and US Airways leases represent 1.5% ($6.9 million). While tenants were current on payments through August 31, 2002, the long-term impact on occupancy and revenue remains uncertain.
- Liquidity: The company maintains a flexible capital structure with $114.1 million available on its unsecured revolving loan and $49.4 million on its secured revolving loan. Management expects cash flows and borrowings to be adequate for short and long-term needs.
- Capital Recycling: The company continues its capital recycling program, selling non-core assets to fund development and acquisitions. During the six months ended June 30, 2002, the company sold 856,000 square feet of office properties and 75 acres of land for $120.2 million.
- Development Pipeline: As of June 30, 2002, the company had 1.2 million square feet of development projects in process or completed but not stabilized, with an aggregate anticipated investment of $130.4 million.
Investor Verification Checklist
- WorldCom Exposure: Verify the status of the 13 leases with WorldCom/Intermedia (986,082 sq. ft.) and the potential for lease terminations or rent concessions in bankruptcy proceedings.
- US Airways Exposure: Monitor the 7 leases with US Airways (414,059 sq. ft.) in Winston-Salem, NC, for potential sub-lease failures or occupancy drops.
- Occupancy Recovery: Assess the company's ability to re-lease vacant space at rates comparable to previous leases, given the 5-6% drop in occupancy rates.
- Impairment Accuracy: Review the $9.9 million impairment charge to ensure it fully captures the decline in fair value of properties held for sale.
- Debt Maturities: Confirm the company's ability to refinance or repay the $199.5 million unsecured revolving loan maturing in December 2003 and the $4.4 million secured revolving loan maturing in March 2003.