HIW

Business Context and Reporting Period

Company: Highwoods Properties, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2005
Business Overview: A fully-integrated, self-administered equity REIT operating in the southeastern and midwestern United States. As of March 31, 2005, the portfolio included 439 in-service office, industrial, and retail properties, 156 apartment units, and 1,115 acres of undeveloped land. The company conducts operations primarily through Highwoods Realty Limited Partnership.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Surge: Net income increased 246% to $21.2 million, driven primarily by $14.1 million in net gains from the sale of discontinued operations (compared to $3.4 million in Q1 2004).
• Continuing Operations: Income from continuing operations rose to $5.7 million from $1.2 million, aided by a $2.6 million impairment loss in Q1 2005 (vs. none in 2004) and reduced general and administrative expenses ($8.4M vs. $11.3M).
• Revenue Decline: Rental revenues decreased 2.0% to $115.5 million, largely due to the contribution of properties to the HIW-KC Orlando joint venture, partially offset by higher lease termination fees.
• Interest Expense: Total interest expense decreased 15.6% to $28.1 million due to lower average borrowings ($1.56B vs. $1.74B) and reduced financing obligations.
• Cash Position: Cash and cash equivalents more than doubled to $55.3 million, fueled by $54.2 million in proceeds from real estate dispositions.

Guidance, Outlook, Risks, and Unusual Items

• Discontinued Operations: Significant gains were recognized from the sale of non-core properties, including a $4.8 million gain from a related-party sale of industrial buildings to a former director.
• Impairment: A $2.6 million impairment loss was recorded on a land parcel held for use where carrying value exceeded fair value less cost to sell.
• Debt Refinancing: The company secured a new $350 million unsecured revolving credit facility in May 2006 (post-period) with improved terms (LIBOR + 80 bps), replacing previous facilities. Approximately $196 million of debt was paid off in 2005/Q1 2006.
• Preferred Stock Redemptions: Proceeds from dispositions were used to redeem all Series D Preferred Shares and 3.2 million Series B Preferred Shares in late 2005/early 2006.
• Internal Controls: Management reported that internal controls over financial reporting were not effective as of March 31, 2005, due to material weaknesses in real estate asset accounting, lease incentive accounting, and the financial statement close process. Remediation efforts are ongoing.
• SEC Investigation: The company is cooperating with a confidential formal order of investigation by the SEC Division of Enforcement regarding a previous restatement of financial results.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the sustainability of earnings by excluding the $14.1 million gain from discontinued operations, which significantly inflated Q1 2005 net income.
• Internal Control Remediation: Monitor progress on fixing material weaknesses in accounting processes, specifically regarding capitalization of interest and lease incentives, as these pose a risk to future financial reporting accuracy.
• Debt Maturities: Review the schedule for $110 million of unsecured notes maturing in December 2006 and $63 million of secured debt maturing in February 2007 to assess refinancing risks.
• Related Party Transactions: Confirm the fair market value of the $27 million sale of industrial buildings to a former director and the land acquisition from an executive officer.
• FFO vs. Net Income: Analyze Funds From Operations ($0.60/share) as a more stable indicator of operating performance compared to GAAP Net Income, which is volatile due to asset sales.