Business Context and Reporting Period
Company: Highwoods Properties, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: Highwoods is a self-administered equity REIT specializing in suburban office, industrial, and retail properties in the southeastern and midwestern United States. As of year-end 2002, the Company owned 493 in-service properties totaling approximately 37.1 million rentable square feet, plus 213 apartment units. The portfolio is managed through an Operating Partnership (UPREIT structure), in which the Company holds an 88.4% interest.
Key Financial Metrics
| Metric | 2002 | 2001 |
|---|---|---|
| Total Revenue | $475.9 million | $502.7 million |
| Net Income | $93.5 million | $131.2 million |
| Net Income Available to Common Stockholders | $62.6 million | $99.7 million |
| Funds From Operations (FFO) | $201.8 million | $238.0 million |
| Cash Flow from Operating Activities | $201.5 million | $249.1 million |
| Total Debt | $1.53 billion | $1.72 billion |
| Net Real Estate Assets | $3.01 billion | $3.17 billion |
| Portfolio Occupancy (Year-End) | 84.0% | 91.9% |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 5.3% to $475.9 million. Rental revenue dropped $15.1 million, primarily driven by a decline in average occupancy from 91.6% in 2001 to 86.0% in 2002. This was exacerbated by the bankruptcy of WorldCom and US Airways, leading to lease rejections and a shift to cash-basis accounting for certain receivables.
- Profitability Impact: Net income available to common stockholders fell 37.2% to $62.6 million. This decline was due to lower rental revenue, a $9.1 million impairment loss on a property slated for redevelopment, and a $2.7 million litigation reserve.
- Capital Recycling: The Company disposed of 2.27 million square feet of properties for gross proceeds of $248.7 million. Conversely, it placed 2.21 million square feet of new developments into service. The net change in the portfolio was a reduction of 108,000 square feet.
- Share Repurchases: The Company repurchased $4.8 million of Common Stock and Common Units in 2002, a significant decrease from $148.8 million in 2001.
Guidance, Outlook, and Risks
Outlook for 2003: Management expects net income and FFO to be lower in 2003 compared to 2002. Key factors include lower average occupancy, lower re-leasing rates, and lower first-year cash rents. Approximately 19.0% of the portfolio (5.9 million square feet) is scheduled to expire in 2003.
Key Risks and Contingencies:
- Tenant Bankruptcies: WorldCom rejected leases totaling 819,653 square feet ($14.9 million annualized revenue). US Airways rejected leases totaling 119,013 square feet ($3.1 million annualized revenue). The Company has filed claims but recovery is uncertain.
- Debt Maturities: Approximately $316.0 million of principal payments on long-term debt are due in 2003. The Company intends to refinance rather than reserve cash for retirement.
- REIT Status: The Company must distribute at least 90% of taxable income to maintain REIT status. Failure to qualify would result in significant corporate income taxes.
- Legal Proceedings: A $2.7 million reserve was established for probable losses related to legal proceedings from prior mergers and acquisitions.
Investor Verification Checklist
- Occupancy Trends: Verify the re-leasing success rate for the 5.9 million square feet expiring in 2003, particularly in the Tampa and Research Triangle markets.
- Bankruptcy Recoveries: Monitor the status of claims filed against WorldCom and US Airways to assess potential recoveries on rejected leases.
- Debt Refinancing: Confirm the terms and interest rates for the $316 million in debt maturing in 2003, as higher rates could impact cash flow.
- Impairment Charges: Review future impairment assessments for properties held for sale or redevelopment, given the $9.1 million charge taken in 2002.
- Dividend Sustainability: Assess whether FFO and Cash Available for Distribution (CAD) will support the current dividend rate of $2.34 per share given the projected decline in operating performance.