HIW

Highwoods Properties, Inc. - 10-Q Summary (Period Ended June 30, 2007)

Business Context and Reporting Period

Highwoods Properties, Inc. is a fully-integrated, self-administered equity REIT operating in the southeastern and midwestern United States. The company owns and manages office, industrial, retail, and rental residential properties. This report covers the quarterly period ended June 30, 2007. As of this date, the company owned 320 in-service properties and 18 properties under development.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Rental revenues increased 6.5% year-over-year, driven by higher average occupancy, contributions from new developments, and escalation income.
• Profitability Surge: Net income available to common stockholders increased 434.7% to $52.4 million. This was primarily due to significant gains on property dispositions ($19.1 million) and a $4.1 million gain from a property insurance settlement.
• Discontinued Operations: The company recorded $18.5 million in income from discontinued operations, largely due to gains on the sale of non-core assets ($18.4 million).
• Joint Venture Earnings: Equity in earnings of unconsolidated affiliates increased 192.5% to $11.7 million, driven by property sales by the DLF I and Weston Lakeside joint ventures.
• Debt Structure: The company issued $400 million in 5.85% Notes due 2017 to repay prior credit facilities and reduce interest costs. Total debt increased by approximately $92 million.

Guidance, Outlook, and Risks

• Capital Recycling: Management continues a strategy of selectively disposing of non-core properties to fund investments, debt repayment, and preferred stock redemptions.
• Liquidity: The company maintains a $450 million unsecured revolving credit facility with approximately $308.8 million available as of August 1, 2007. No debt matures prior to the end of 2007 (excluding amortization).
• Preferred Stock: The company redeemed $40 million of Series B Preferred Stock in May 2007 and repurchased $22.3 million of Series A Preferred Stock in August 2007.
• Internal Controls: The company disclosed that disclosure controls and procedures were not effective as of June 30, 2007, due to material weaknesses in accounting for real estate assets identified in the prior year. Remediation plans are underway, including software upgrades and hiring a Chief Accounting Officer.
• Risks: Key risks include interest rate fluctuations, tenant financial deterioration, and the ability to lease space on favorable terms in competitive markets.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the sustainability of earnings by excluding the $18.5 million gain from discontinued operations and the $4.1 million insurance gain.
• Internal Control Remediation: Monitor progress on remediation of material weaknesses in accounting for real estate assets and the effectiveness of new disclosure controls.
• Debt Maturities and Covenants: Review the $400 million note issuance and ensure compliance with financial covenants on the revolving credit facility and indentures.
• Development Pipeline: Assess the status of the $260 million in expected future capital expenditures for development projects and their pre-leasing rates (72% as of June 30).
• Joint Venture Exposure: Review the $11.7 million equity earnings from unconsolidated affiliates to understand reliance on partner performance and specific asset sales.