HIW

Business Context and Reporting Period

Company: Highwoods Properties, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Nine months ended September 30, 1996 (Unaudited)
Business Overview: Highwoods is a Real Estate Investment Trust (REIT) focused on office and industrial properties. The period was defined by significant expansion through the acquisition of the Eakin & Smith portfolio in April 1996 and the merger with Crocker Realty Trust, Inc. in September 1996.

Key Financial Metrics

Portfolio Statistics (as of Sep 30, 1996):
- Total Rentable Square Feet: 17,989,000 (16,736,000 in-service)
- Occupancy Rate (In-Service): 91% (Office: 93%, Industrial: 89%)

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 72% year-over-year, driven by the acquisition of 89 properties (7.5 million sq. ft.) in the first nine months of 1996 and properties acquired in 1995.
• Expense Increases: Rental operating expenses rose 87% to $22.2 million. The expense-to-revenue ratio increased from 24.0% to 26.6%, attributed to a higher mix of office properties (fewer triple-net leases) and severe winter weather costs.
• Interest Expense: Increased 53% to $15.1 million due to higher indebtedness supporting acquisition and development activities.
• Debt Load: Total indebtedness surged from $182.7 million to $597.7 million, primarily due to the assumption of debt in the Crocker Merger and new borrowings under a $280 million Revolving Loan.
• Extraordinary Item: A $2.14 million loss was recorded for the nine-month period related to prepayment penalties on debt extinguished during the Crocker Merger.

Guidance, Outlook, and Risks

Management Commentary:
- Acquisition Integration: The Crocker Merger closed September 20, 1996. Management expects to eliminate duplicative personnel costs and realize synergies in the fourth quarter of 1996.
- Dividends: On November 4, 1996, the Board declared a quarterly dividend of $0.48 per share ($1.92 annualized).
- Liquidity: The company expects to meet short-term needs via operating cash flow and the Revolving Loan. Long-term needs will be met through secured/unsecured borrowings or equity issuance.

Risks and Contingencies:
- Interest Rate Risk: Significant exposure to variable rates on the Revolving Loan ($245 million outstanding) and variable mortgages ($47 million). The company utilizes interest rate collars and swaps to cap exposure, but counterparty default risk remains.
- Refinancing Risk: The $280 million Revolving Loan matures October 31, 1999. The company does not intend to reserve funds for repayment but plans to refinance or issue new securities.
- Contingent Liability: A potential deferred contingent purchase price of up to $4.4 million related to the Crocker acquisition, payable in 1998 if cash flow targets are exceeded (management currently does not expect this to be payable).

Investor Verification Checklist

• Crocker Merger Synergies: Verify the realization of cost savings from eliminating duplicative operations in Q4 1996 as projected by management.
• Debt Structure: Confirm the terms and interest rate caps on the $280 million Revolving Loan and the status of the $140 million Mortgage Note assumed from Crocker.
• Occupancy Trends: Monitor the 91% in-service occupancy rate, specifically the 89% industrial occupancy, against market conditions.
• Development Pipeline: Review the completion status and pre-leasing percentages (currently 49% overall) for the $116.4 million in properties under development.
• Dividend Sustainability: Assess the "Cash Available for Distribution" metric ($41.2 million for 9 months) against the dividend payout ratio (92.9% for 9 months) to ensure coverage.