HIW

Highwoods Properties, Inc. - Q1 2010 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2010, for Highwoods Properties, Inc. (the "Company") and Highwoods Realty Limited Partnership (the "Operating Partnership"). The Company is a fully-integrated, self-administered equity REIT operating in the Southeastern and Midwestern United States. As of the reporting date, the portfolio consisted of 308 in-service office, industrial, and retail properties (27.9 million square feet), 96 rental residential units, and 581 acres of undeveloped land. The Company owns 95.0% of the Common Units of the Operating Partnership.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Rental revenues increased 2.3% year-over-year, driven by higher average rental rates in the same-property portfolio, the acquisition of the 4200 Cypress building in Tampa, FL, and contributions from development properties placed in service in 2009. This was partially offset by lower occupancy levels and termination fees due to economic weakness.
• Operating Expenses: Increased 3.5% primarily due to new acquisitions and development properties, though same-property expenses decreased 1.1% due to management cost-reduction efforts. Operating margin declined slightly to 63.7% from 64.1%.
• Interest Expense: Rose 5.9% to $23.1 million, attributed to lower capitalized interest resulting from decreased development activity in progress.
• Discontinued Operations: Income from discontinued operations dropped significantly to $0.2 million from $1.2 million in the prior year, reflecting the sale of 0.5 million square feet of office and retail properties.
• Unconsolidated Affiliates: Equity in earnings decreased by $0.5 million to $0.8 million, primarily due to early lease terminations in a joint venture.

Guidance, Outlook, and Risks

Outlook: Management expects rental revenues for the remainder of 2010 to increase over the same period in 2009, driven by acquisitions and new developments, though this may be offset by lower occupancy levels in the same-property portfolio. Interest expense is anticipated to increase due to higher rates on floating-rate debt and lower capitalized interest.

Liquidity: The Company maintains a conservative balance sheet with $398.9 million of unused capacity on its $400 million revolving credit facility and $28.3 million available on its $70 million construction facility. Cash and cash equivalents were $14.3 million at quarter-end.

Risks and Contingencies:

• Economic Conditions: Continued economic weakness in core markets (Florida, Georgia, North Carolina, Tennessee) poses risks to occupancy and rental rates.
• Debt Covenants: The Company is currently compliant with all debt covenants, including a requirement to maintain a ratio of total liabilities to total asset value of no more than 60%. Lenders have the right to increase capitalization rates, which could impact this ratio.
• Refinancing: Risks exist regarding the ability to refinance debt at maturity, particularly if interest rates rise or market conditions tighten.

Key Facts for Investor Verification

• Occupancy Trends: Verify the specific occupancy rates for the "same property portfolio" to assess the impact of economic weakness on future revenue.
• Debt Maturities: Review the schedule of debt maturities, specifically the $70 million construction facility maturing in December 2010 and the $137.5 million bank term loan due in February 2011.
• Development Pipeline: Confirm the status and expected stabilization dates for the one office and one industrial development property currently in service but not yet stabilized.
• FFO vs. Net Income: Note the divergence between GAAP Net Income ($9.7M) and FFO ($45.8M) due to significant depreciation and amortization charges ($32.5M), which is standard for REITs but critical for valuation.
• Discontinued Operations: Ensure future comparisons exclude the $1.2 million of income from discontinued operations present in Q1 2009 but largely absent in Q1 2010.