Business Context and Reporting Period
Company: Highwoods Properties, Inc. (Maryland REIT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 1997
Business Overview: The Company owns and operates suburban office and industrial properties. As of June 30, 1997, the portfolio consisted of 361 in-service properties totaling 21.6 million square feet, with an additional 2.3 million square feet under development. The Company qualified as a Real Estate Investment Trust (REIT).
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 1997 |
Six Months Ended June 30, 1996 |
|---|---|---|
| Total Revenue | $119,559 | $51,437 |
| Net Income | $30,388 | $15,812 |
| Net Income Available to Common | $26,286 | $15,812 |
| Funds From Operations (FFO) | $55,947 | $27,289 |
| Cash Flow from Operations | $54,807 | $27,508 |
| Total Debt (Mortgages & Notes) | $647,473 | $555,876 |
| Cash and Cash Equivalents | $8,904 | $11,070 |
| Dividend Payout Ratio (FFO) | 72.5% | 78.1% |
Per Share Data (Six Months): Net income per common share was $0.74 for 1997 versus $0.80 for 1996. The decrease was due to an extraordinary loss on debt extinguishment and preferred dividends.
Material Changes vs. Prior Period
- Revenue Growth: Rental revenue increased 130% to $115.5 million, driven by the acquisition of 8.2 million square feet in 1996 and 4.1 million square feet in the first half of 1997 (including Anderson Properties and Century Center portfolios).
- Expense Increases: Rental operating expenses rose 139% to $31.6 million, and interest expense increased 159% to $23.6 million, reflecting the expanded asset base and higher debt levels ($647.5 million total).
- Same-Property Performance: Same-property revenues increased 1% for the quarter, offset by expected vacancies in two properties.
- Leasing Activity: New and renewal leases commenced at rates 7.2% higher than expired leases for the six-month period.
- Extraordinary Item: The Company recorded a $3.3 million loss in the first quarter related to the early extinguishment of debt assumed in acquisitions.
Guidance, Outlook, and Risks
- Liquidity Strategy: The Company expects to meet short-term liquidity needs through working capital, operating cash flows, and a $280 million revolving credit facility (interest rate reduced to LIBOR + 100 bps). Long-term needs will be met via secured/unsecured borrowings or equity issuance.
- Capital Markets Activity: In February 1997, the Company issued $121.8 million in preferred stock. In June 1997, it sold $100 million of Exercisable Put Option Securities (X-POSSM) at an effective cost of 7.09% to refinance higher-cost debt.
- Dividends: On July 29, 1997, the Board declared a quarterly dividend of $0.51 per share ($2.04 annualized).
- Risks:
- Interest Rate Risk: While the Company utilizes interest rate swaps and collars to cap variable rates (mostly capped at ~7.25%), it remains exposed to counterparty non-performance and potential rate increases on future variable debt.
- Lease Expirations: Significant lease expirations are scheduled for 1998 (16.7% of office square footage) and 1999 (13.5%).
- REIT Compliance: The Company must distribute at least 95% of taxable income to maintain REIT status.
Investor Verification Checklist
- Debt Refinancing: Verify the terms and maturity dates of the $100 million X-POSSM and the $280 million revolving credit facility.
- Occupancy Trends: Monitor the impact of the 1998 and 1999 lease expiration walls on occupancy rates and rental rates.
- Development Pipeline: Review the completion status and pre-leasing percentages of the 2.3 million square feet currently under development (38% pre-leased).
- Preferred Stock Obligations: Confirm the impact of the $125 million preferred stock issuance on cash flow available for common shareholders.
- Minority Interest: Assess the redemption rights of Common Units in the Operating Partnership following the recent amendment regarding change of control.