HIW

Highwoods Properties, Inc. - 10-Q Summary (Period Ended Sept 30, 2007)

Business Context and Reporting Period

Highwoods Properties, Inc. is a fully-integrated, self-administered equity REIT operating in the southeastern and midwestern United States. The company owns and manages office, industrial, retail, and rental residential properties. This report covers the quarterly period ended September 30, 2007. As of this date, the company owned 312 in-service properties and 109 rental residential units, with 20 properties under development.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Rental revenues increased 6.6% for the quarter and 6.4% for the nine-month period compared to 2006, driven by higher occupancy and new developments placed in service.
• Net Income Surge: Net income available to common stockholders increased 106.3% for the quarter and 327.4% for the nine-month period. This was significantly influenced by gains on property dispositions and discontinued operations.
• Discontinued Operations: The company recorded net gains on sales of discontinued operations of $6.2 million for the quarter and $24.5 million for the nine months, compared to $2.6 million and $4.6 million in the prior year periods, respectively.
• Unconsolidated Affiliates: Equity in earnings of unconsolidated affiliates increased to $12.9 million for the nine months (up from $5.3 million in 2006), largely due to property sales by joint ventures (DLF I and Weston Lakeside).
• Debt Structure: Total debt increased to $1.60 billion from $1.47 billion at year-end 2006. The company issued $400 million in 5.85% Notes due 2017 to repay other borrowings.

Guidance, Outlook, and Risks

• Capital Recycling: Management continues a strategy of selectively disposing of non-core properties to fund investments, debt repayment, and preferred stock redemptions.
• Liquidity: The company maintains a $450 million unsecured revolving credit facility with approximately $256.4 million available as of November 1, 2007. Management expects cash flows and borrowings to be adequate for short- and long-term needs.
• Preferred Stock Redemptions: The company redeemed $40 million of Series B Preferred Stock in May 2007 and repurchased $22 million of Series A Preferred Stock in August 2007, reducing preferred dividend obligations.
• Internal Controls: The company disclosed that its disclosure controls and procedures were not effective as of September 30, 2007, due to material weaknesses in accounting for real estate assets identified in the prior year. Remediation plans are underway, including software upgrades and hiring a Chief Accounting Officer.
• Restatement: The company intends to restate interim financial statements for Q1 and Q2 2007 to reclassify certain cash disposition proceeds from "cash and cash equivalents" to "restricted cash."
• Risks: Key risks include interest rate fluctuations, tenant financial deterioration, and the ability to lease space at favorable rates in competitive markets.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the sustainability of earnings by analyzing Net Income excluding the $24.5 million gain from discontinued operations and the $4.1 million insurance settlement gain.
• Internal Control Remediation: Monitor the progress of remediation plans regarding material weaknesses in accounting for real estate assets and the effectiveness of new disclosure controls.
• Debt Maturities: Review the schedule of debt maturities and the company's strategy for refinancing, particularly given the reliance on the revolving credit facility for liquidity.
• Development Pipeline: Assess the status of the 20 properties under development and the $210 million in expected future capital expenditures.
• Restatement Details: Confirm the impact of the Q1/Q2 2007 restatement on liquidity ratios and cash flow presentation.