Business Context and Reporting Period
Company: Highwoods Properties, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2004
Business Overview: A self-administered and self-managed Real Estate Investment Trust (REIT) operating in the southeastern and midwestern United States. The portfolio consists of 525 in-service office, industrial, and retail properties, plus 1,200 acres of undeveloped land. The company operates through Highwoods Realty Limited Partnership (the Operating Partnership).
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2004 | Nine Months Ended Sep 30, 2004 |
|---|---|---|
| Rental and Other Revenues | $114,260 | $351,088 |
| Net Income | $21,559 | $31,903 |
| Net Income Available to Common Stockholders | $13,846 | $8,764 |
| Funds From Operations (FFO) to Common | $43,196 | $85,901 |
| Net Cash Provided by Operating Activities | N/A | $129,336 |
| Total Assets | $3,316,145 | $3,316,145 |
| Total Liabilities | $1,777,236 | $1,777,236 |
| Mortgages and Notes Payable | $1,600,627 | $1,600,627 |
| Cash and Cash Equivalents | $20,468 | $20,468 |
Note: FFO is a non-GAAP measure. Net Income Available to Common Stockholders excludes preferred dividends of $7.7 million (quarterly) and $23.1 million (nine months).
Material Changes vs. Prior Comparable Period
- Revenue Decline: Rental revenues decreased 6.2% for the quarter and 5.8% for the nine-month period compared to 2003. This was primarily due to property dispositions and a slight decrease in average occupancy rates (83.2% in 2004 vs. 83.3% in 2003 for the nine months).
- Net Income Volatility: Net income available to common stockholders dropped 43.4% for the quarter and 34.8% for the nine months. The decline was driven by higher general and administrative expenses (including a $4.6 million CEO retirement package) and losses on debt extinguishment, partially offset by a $14.4 million gain from the WorldCom/MCI bankruptcy settlement.
- Expense Increases: General and administrative expenses rose significantly (48.5% for the quarter, 55.4% for nine months) due to Sarbanes-Oxley implementation costs, financial statement restatement fees, and the CEO retirement package.
- Interest Expense Reduction: Total interest expense decreased 23.0% for the quarter and 15.6% for the nine months, attributed to lower average interest rates and reduced average borrowings.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items:
- WorldCom/MCI Settlement: Recognized $14.4 million in "Other Income" from the settlement of bankruptcy claims.
- CEO Retirement: Incurred $4.6 million in one-time costs related to the retirement of the Chief Executive Officer.
- Debt Extinguishment: Recorded a $12.5 million loss on the refinancing of Put Option Notes in June 2004.
- Outlook: Management expects modest improvements in employment trends and occupancy rates in the remainder of 2004. However, net income is expected to remain lower than 2003 levels due to rising operating costs and pressure on rental rates, offset by lower interest expenses.
- Liquidity: The company maintains a $250 million revolving credit facility with approximately $77.8 million available as of November 2004. Short-term cash needs include funding development activity and debt principal payments.
- Risks and Contingencies:
- Covenant Compliance: The company obtained a waiver in October 2004 for certain covenant violations related to prior debt extinguishment losses.
- Guarantees: Significant off-balance sheet guarantees exist for joint venture debt and lease obligations (e.g., Capital One, Des Moines joint ventures), with maximum potential future payments disclosed in the notes.
- Internal Controls: The company disclosed material weaknesses in internal controls identified during the restatement of prior financial years, though remediation efforts (hiring, new procedures) are underway.
Investor Verification Checklist
- Occupancy Trends: Verify the impact of the 83.2% occupancy rate on future rental revenue stability, particularly given the lease expiration schedule.
- Debt Covenants: Confirm the status of the October 2004 covenant waiver and the company's ability to maintain compliance with the Revolving Loan and term loan requirements.
- Discontinued Operations: Review the carrying value of assets held for sale ($69.0 million) and the likelihood of closing pending dispositions to realize expected proceeds.
- Joint Venture Exposure: Assess the risk associated with significant guarantees provided to unconsolidated joint ventures, specifically the Des Moines and Orlando entities.
- Internal Control Remediation: Monitor the effectiveness of new accounting procedures and staffing in preventing future financial restatements.