HIW

Business Context and Reporting Period

Company: Highwoods Properties, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2001
Business Overview: Highwoods is a self-administered and self-managed equity REIT specializing in suburban office, industrial, and retail properties in the southeastern and midwestern United States. As of December 31, 2001, the Company owned 498 in-service properties (37.2 million rentable square feet) and held interests in 74 joint venture properties. The Company operates through Highwoods Realty Limited Partnership, in which it owns 87.7% of the Common Units.

Key Financial Metrics

Per Share Data (2001): Net income per common share (basic) was $1.84. Distributions declared per common share were $2.31.

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased by $25.8 million (4.5%) to $540.6 million. Rental property revenue specifically dropped $36.6 million, primarily due to portfolio changes from the capital recycling program and a decrease in average occupancy rates from 93.8% in 2000 to 92.9% in 2001.
• Same-Property Performance: Despite the overall revenue decline, same-property rental revenues increased by 1.66% due to scheduled rent increases and higher recoveries from tenants. Same-store occupancy declined slightly from 94.2% to 93.2%.
• Capital Recycling: The Company disposed of 268,000 square feet of office/industrial/retail space and 1,672 apartment units in 2001. It also contributed 157,000 square feet to joint ventures. Conversely, 1,351,000 square feet of new developments were placed in service.
• Share Repurchases: The Company repurchased $148.8 million of Common Stock and Common Units and $18.5 million of Preferred Stock during 2001.
• Debt Levels: Total indebtedness increased to $1.72 billion from $1.59 billion, driven by an increase in average outstanding debt, though interest expense decreased by $4.3 million due to lower weighted average interest rates.

Guidance, Outlook, and Risks

Outlook: Management expects a slight decline in occupancy during 2002 due to lower expected economic growth and increasing market vacancy rates in core markets. The Company anticipates funding short-term liquidity needs (including $55.0 million for development) through operating cash flows, revolving credit facilities, and asset dispositions.

Risks and Contingencies:

• Market Conditions: Adverse real estate market conditions, particularly in the Southeast, could impair the ability to make distributions.
• Development Risks: Construction costs may exceed estimates, and lease-up delays could increase debt service expenses.
• Refinancing: A portion of debt matures in the coming years; failure to refinance could impact cash flow and distributions.
• REIT Status: Failure to maintain REIT qualification would subject the Company to regular corporate income taxes.
• Insurance: Potential inadequacy of insurance coverage for losses such as terrorist acts or toxic mold.

Investor Verification Checklist

• Occupancy Trends: Verify the projected decline in occupancy for 2002 and its impact on Funds From Operations (FFO).
• Debt Maturity Schedule: Review the maturity of the $1.72 billion debt portfolio, specifically the $46.8 million due in 2002 and the $490 million due in 2003 (including put options).
• Development Pipeline: Assess the pre-leasing status of the 2.4 million square feet of in-process development projects (currently 75% pre-leased) and the 1.7 million square feet of completed-but-not-stabilized projects (57% pre-leased).
• Capital Recycling Execution: Confirm the closing of the $96.2 million in property sales under contract as of February 19, 2002.
• Joint Venture Exposure: Review the $587.6 million of debt held by joint ventures and the specific guarantee terms for the MG-HIW Rocky Point, LLC debt.