HIW

Business Context and Reporting Period

Company: Highwoods Properties, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1997
Business Overview: Highwoods is a Real Estate Investment Trust (REIT) focused on office and industrial properties. As of September 30, 1997, the portfolio consisted of 21.9 million square feet of in-service space (94% leased) and 2.8 million square feet under development. The company qualified as a REIT under Section 856-860 of the Internal Revenue Code.

Key Financial Metrics

Liquidity: The company held $175.1 million in cash and cash equivalents at period end. Debt represented approximately 26% of total market capitalization ($2.5 billion). The company maintained a $280 million revolving credit facility with $59 million outstanding.

Material Changes vs. Prior Period

• Revenue Growth: Rental revenue increased 87% ($28.7 million) for the quarter and 112% ($93.8 million) for the nine-month period compared to 1996. This was driven by the acquisition of 6.4 million square feet in late 1996 and 3.2 million square feet in early 1997.
• Expense Increases: Rental operating expenses rose 93% for the quarter and 121% for the nine months, consistent with the expanded portfolio. Operating expense ratios increased slightly to 28.2% (quarter) and 27.6% (nine months) due to a higher mix of office properties with fewer triple-net leases.
• Interest Expense: Interest expense increased 85% for the quarter and 130% for the nine months, reflecting higher outstanding debt levels.
• Same Property Performance: Same property revenues increased 3% for the quarter. New leases commenced at rates 8.2% higher than expired leases for the quarter.

Guidance, Outlook, and Recent Developments

Recent Developments (Post-Period):

• ACP Transaction: On October 1 and 7, 1997, the company closed a merger with Associated Capital Properties, Inc. (ACP), acquiring 84 office properties (6.5 million sq. ft.) for a total consideration of $617 million (including $481 million assumed debt).
• Capital Raise: On October 1, 1997, the company sold 7.5 million shares of common stock for net proceeds of approximately $249 million, with an additional $33.2 million from an over-allotment exercise.

Outlook and Risks:

• Distributions: The Board declared a quarterly dividend of $0.51 per share ($2.04 annualized) on November 4, 1997. The company expects to meet distribution requirements through operating cash flows and borrowings.
• Interest Rate Risk: The company utilizes interest rate collars and swaps to cap variable rate debt exposure (e.g., capping the revolving loan at 7.25%). Risks include counterparty non-performance and potential increases in interest rates on future variable debt.
• Liquidity Strategy: The company intends to refinance maturing debt rather than reserving cash for retirement, relying on the revolving loan for development funding.

Investor Verification Checklist

• Debt Structure: Verify the terms of the $649.2 million debt load, specifically the split between secured ($258.4M) and unsecured ($390.8M) obligations and the effectiveness of interest rate hedges.
• ACP Integration: Assess the financial impact and integration risks of the $617 million ACP acquisition closed in October 1997.
• Occupancy Trends: Monitor the 94% in-service occupancy rate and the ability to maintain rent growth (8.2% increase on new leases) in the current market.
• Preferred Stock Obligations: Confirm the impact of $7.0 million in preferred dividends paid during the nine-month period on cash available for common shareholders.
• Development Pipeline: Review the $271.3 million budgeted cost for 2.8 million square feet of properties under development and their pre-leasing status (33% pre-leased).