Business Context and Reporting Period
Company: Highwoods Properties, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2001
Business Overview: The Company is a real estate investment trust (REIT) engaged in the acquisition, development, and operation of rental real estate properties, primarily office, industrial, and retail spaces, with a smaller apartment segment. The Company operates through Highwoods Realty Limited Partnership (the Operating Partnership).
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2001 | Nine Months Ended Sep 30, 2001 |
|---|---|---|
| Total Revenue | $134.1 million | $407.0 million |
| Net Income | $39.0 million | $108.5 million |
| Net Income Available to Common Shareholders | $26.3 million | $84.7 million |
| Funds From Operations (FFO) | $58.6 million | $179.5 million |
| Cash Flow from Operating Activities | N/A | $176.3 million |
| Total Debt (Mortgages and Notes Payable) | $1.68 billion (as of Sep 30, 2001) | $1.68 billion (as of Sep 30, 2001) |
| Cash and Cash Equivalents | $53.1 million | $53.1 million |
| Weighted Avg. Shares Outstanding (Basic) | 53.7 million | 54.7 million |
Material Changes vs. Prior Period
- Revenue Decline: Rental revenue decreased 4.0% ($5.3 million) for the three months and 6.0% ($24.1 million) for the nine months ended September 30, 2001, compared to the prior year. This was primarily due to the disposition of 2.7 million square feet of office/industrial properties and 1,672 apartment units, partially offset by new acquisitions and development completions.
- Same-Property Growth: Despite the portfolio reduction, same-property revenues increased 3.1% for the quarter and 2.5% for the nine-month period, driven by higher rental rates on executed leases.
- Net Income Increase: Net income increased 2.9% for the quarter and 19.4% for the nine months compared to the prior year periods. The nine-month increase was aided by a significant gain on the disposition of land and depreciable assets ($16.1 million in 2001 vs. a loss of $8.6 million in 2000).
- Expense Reduction: Rental operating expenses decreased 4.6% (quarter) and 6.1% (nine months), tracking with the reduction in the property portfolio. Interest expense also declined slightly due to lower outstanding debt and weighted average interest rates.
- Share Repurchases: The Company completed a $241.9 million repurchase program in May 2001 and initiated a new program in April 2001, repurchasing an additional 1.2 million shares/units by November 2001.
Guidance, Outlook, and Risks
- Liquidity and Capital Resources: The Company maintains a flexible capital structure with approximately $141.5 million available under its $300 million revolving credit facility. Total indebtedness represents approximately 47.2% of total market capitalization. The Company expects to meet short-term liquidity needs through operating cash flows, the revolving loan, and selective asset dispositions.
- Development Pipeline: As of September 30, 2001, the Company had 2.9 million square feet of development projects in process or completed but not stabilized, with an estimated cost of $319.1 million. Approximately 55% of this pipeline was pre-leased.
- Reinvestment Strategy: The Company plans to reinvest proceeds from recent and pending dispositions (up to $74 million) into tax-deferred exchange transactions (Section 1031) to acquire in-service properties and development land in core markets.
- Risks and Contingencies:
- Market Risk: Approximately $103.5 million of variable rate debt is not covered by interest rate hedges. A 100 basis point increase in rates would increase interest expense by approximately $1.0 million.
- Environmental Liabilities: Potential liability exists for remediation of hazardous substances, though current assessments have not revealed material liabilities.
- Forward-Looking Uncertainties: Risks include unexpected increases in development supply, tenant financial deterioration, and delays in leasing or reinvestment activities.
- Dividends: The Board declared a quarterly dividend of $0.585 per share ($2.34 annualized) for the third quarter of 2001.
Investor Verification Checklist
- Portfolio Composition: Verify the impact of the 2.7 million square foot disposition on future revenue streams and the timeline for stabilizing new development projects.
- Debt Maturity Profile: Review the maturity schedule of the $1.68 billion debt load, specifically the $103.5 million of unhedged variable rate debt.
- Disposition Proceeds: Confirm the closing of pending sales totaling $53.0 million and the successful execution of Section 1031 tax-deferred exchanges.
- Occupancy Trends: Monitor the 92.7% occupancy rate for in-service properties and the pre-leasing rates (55% average) for the development pipeline.
- Share Count: Note the significant reduction in outstanding shares due to repurchases, which impacts per-share metrics.