HIW

Highwoods Properties, Inc. - 10-Q Summary (Period Ended June 30, 2009)

Business Context and Reporting Period

This filing covers the quarterly period ended June 30, 2009 for Highwoods Properties, Inc. (the "Company") and Highwoods Realty Limited Partnership (the "Operating Partnership"). The Company is a fully-integrated, self-administered equity REIT operating in the southeastern and midwestern United States. As of June 30, 2009, the portfolio included 307 in-service office, industrial, and retail properties, 96 rental residential units, and 580 acres of undeveloped land. The Company conducts virtually all activities through the Operating Partnership, in which it owns 94.6% of the common partnership interests.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Rental revenues increased 1.4% year-over-year, driven by new development properties placed in service and the acquisition of the PennMarc building in Memphis, offset by lower occupancy in the same-property portfolio.
• Profitability: Net income available for common stockholders increased significantly (76% year-over-year) primarily due to a $21.0 million gain on the disposition of discontinued operations (three non-core retail centers in Kansas City) compared to an $8.8 million gain in the prior year.
• Debt Reduction: Total debt decreased by approximately $176 million. The Company utilized proceeds from a June 2009 common stock offering ($144.1 million net) to retire $107.2 million of secured debt and reduce borrowings under its revolving credit facility.
• Expense Management: General and administrative expenses decreased 13.1% due to headcount reductions and lower costs from unsuccessful projects. Contractual interest expense decreased 13.4% due to lower average borrowings.

Guidance, Outlook, and Risks

• Liquidity: The Company maintains a conservative balance sheet with $338.5 million of availability on its $450 million revolving credit facility (as of June 30, 2009) and $28.3 million on its construction facility. Management expects to meet liquidity needs through operating cash flows, credit facilities, and asset dispositions.
• Development Pipeline: As of June 30, 2009, expected future capital expenditures for started/committed development projects were approximately $18.5 million. Pre-leasing for properties under development was 62%, while recently completed but unstabilized properties were 43% pre-leased.
• Forward-Looking Risks: Management highlights risks including tenant financial deterioration, inability to lease new space on favorable terms, potential declines in economic growth in target markets, and difficulties in obtaining capital or refinancing debt due to global credit market turbulence.
• Subsequent Events: Following the period end, a joint venture sold a property for $7.1 million, resulting in an expected impairment loss of $0.2 million to be recorded in the third quarter of 2009.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the extent to which net income growth is driven by one-time gains on property dispositions ($21.0 million) versus core operating performance.
• Occupancy Trends: Review same-property occupancy rates and lease expiration schedules, as revenue growth was offset by lower occupancy in the existing portfolio.
• Debt Maturities: Confirm the status of the $450 million revolving credit facility maturing on May 1, 2010, and the Company's ability to refinance given current credit market conditions.
• Development Pre-leasing: Assess the 43% pre-leasing rate on recently completed properties and the timeline for stabilization.
• FFO vs. Net Income: Compare Funds From Operations ($1.41/share) to GAAP EPS ($0.68/share) to understand the impact of depreciation and asset sales on reported earnings.