HIW

Highwoods Properties, Inc. - 10-Q Summary (Period Ended June 30, 1996)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 1996, for Highwoods Properties, Inc., a Maryland corporation operating as a Real Estate Investment Trust (REIT). The Company owns and manages office and industrial properties, primarily in the southeastern United States. As of June 30, 1996, the portfolio consisted of 201 in-service properties totaling 10.4 million square feet, with an additional 11 properties under development.

Key Financial Metrics

Liquidity: Cash and cash equivalents increased significantly to $227.2 million, driven by a $292.9 million net equity offering in June 1996. The Company maintains a $140 million unsecured credit facility (currently unused) and has secured a commitment for a new $250 million revolving line of credit.

Material Changes vs. Prior Period

• Revenue Growth: Rental revenue increased 68% year-over-year (to $50.3 million) due to acquisitions in 1995 and the April 1996 acquisition of the Eakin and Smith portfolio (848,000 sq. ft.). Same-property revenue increased 1.5%.
• Expense Increases: Rental operating expenses rose 81% to $13.2 million, and interest expense increased 60% to $9.1 million, reflecting the expanded asset base and higher debt levels.
• Leasing Activity: 253 new leases (1.5 million sq. ft.) commenced in the first six months of 1996 at rates 5.1% higher than expired leases.
• Capital Structure: The Company completed a public offering of 11.5 million shares, raising approximately $309 million gross. Outstanding shares increased from 19.4 million (Dec 1995) to 31.5 million (June 1996).

Outlook, Risks, and Recent Developments

Recent Developments: On April 29, 1996, Highwoods entered into agreements to acquire 100% of Crocker Realty Trust, Inc. for approximately $297 million in cash plus the assumption of $240 million in debt. The transaction is expected to close in Q3 1996, adding 5.7 million square feet of office and service center space.

Guidance & Commentary: Management expects to use cash from the recent equity offering and the new $250 million revolving credit facility to fund the Crocker acquisition. The Company intends to refinance $200 million of debt in Q4 1996, utilizing forward-starting interest rate swaps to lock rates near 6.75%.

Risks:

• Interest Rate Risk: While the Company has caps and swaps limiting exposure on variable debt to 7.0% and 7.45%, it remains exposed to counterparty default risk and potential rate increases on future variable debt.
• Liquidity Risk: The ability to make distributions depends on cash flow from operations and access to capital markets. If funding sources are insufficient, distributions may be adversely affected.
• Acquisition Risk: The pending Crocker merger is subject to closing conditions and market acceptance.

Investor Verification Checklist

• Verify the closing status and final purchase price of the Crocker Realty Trust acquisition.
• Confirm the execution of the new $250 million revolving credit facility and the terms of the proposed Q4 1996 refinancing.
• Monitor occupancy rates and rental rate trends for the newly acquired Eakin and Smith portfolio and the pending Crocker assets.
• Review the impact of the significant share dilution (from 19.4M to 31.5M shares) on future earnings per share growth.
• Assess the Company's ability to maintain the 95% REIT distribution requirement given the increased debt service obligations.