Business Context and Reporting Period
Company: Highwoods Properties, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1999
Business Overview: The Company is a Real Estate Investment Trust (REIT) engaged in the acquisition, development, and operation of rental real estate properties, including office, industrial, retail, and apartment units. As of September 30, 1999, the in-service portfolio totaled 40.8 million square feet, a decrease from 44.7 million square feet in the prior year due to strategic dispositions of non-core assets.
Key Financial Metrics
| Metric | Three Months Ended 9/30/99 | Nine Months Ended 9/30/99 | Nine Months Ended 9/30/98 |
|---|---|---|---|
| Total Revenue | $140.6 million | $440.7 million | $361.1 million |
| Net Income | $33.0 million | $103.6 million | $93.3 million |
| Net Income Available to Common Shareholders | $24.9 million | $79.2 million | $71.4 million |
| Diluted EPS (Common) | $0.40 | $1.29 | $1.33 |
| Funds From Operations (FFO) | $61.1 million | $183.1 million | $152.1 million |
| Cash Available for Distribution | $46.0 million | $139.9 million | $119.7 million |
| Total Debt | $1.83 billion (as of 9/30/99) | ||
| Cash and Cash Equivalents | $47.5 million (as of 9/30/99) |
Material Changes vs. Prior Period
- Revenue Growth: Rental revenue increased 20.7% year-over-year for the nine-month period ($425.1 million vs. $352.2 million), driven primarily by the J.C. Nichols merger in late 1998 and new development completions. This was partially offset by the disposition of 6.4 million square feet of non-core properties.
- Same Property Performance: Same property revenues increased 3.0% for the nine months ended September 30, 1999, compared to the prior year.
- Expense Trends: Rental operating expenses increased 19.7% year-over-year due to portfolio growth, but the expense ratio improved slightly from 30.9% to 30.6% of rental revenue. Interest expense rose 38.1% due to higher outstanding debt levels.
- Asset Dispositions: The Company sold approximately 5.2 million square feet of non-core office and industrial properties during the nine months, generating gross proceeds of approximately $460.5 million and recording a net gain of $2.9 million.
- Extraordinary Item: The Company recorded a loss of $5.8 million for the nine months ended September 30, 1999, related to the early extinguishment of debt (prepayment penalties and write-off of fees).
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Liquidity Strategy: The Company expects to meet short-term liquidity needs (including $180 million in development funding) through its $600 million revolving credit facility (approx. $141 million available), secured debt issuance, and selective asset dispositions.
- Reinvestment: Proceeds from recent and pending dispositions are expected to be reinvested in tax-deferred exchange transactions (Section 1031) to acquire in-service properties and development land in core markets.
- Distributions: A quarterly dividend of $0.555 per share was declared on October 20, 1999. The Company aims to maintain a flexible capital structure and does not intend to reserve funds to retire debt at maturity, preferring refinancing or new issuances.
Risks and Contingencies
- Legal Proceedings: A putative class action lawsuit filed by former J.C. Nichols stockholders alleges breach of fiduciary duty and securities violations regarding the 1998 merger. The Company intends to vigorously defend the suit, but an unfavorable outcome could have a material adverse effect.
- Environmental Liabilities: Potential liabilities exist regarding hazardous substances and asbestos at various properties. While Phase I assessments have not revealed material liabilities, future laws or unknown conditions could impact financial position.
- Interest Rate Risk: Approximately $314.7 million of variable rate debt is unhedged. A 100 basis point increase in rates would increase interest expense by approximately $3.1 million annually.
- Year 2000: Management does not expect Year 2000 issues to have a material adverse effect on operations or liquidity, as remediation plans are complete.
Investor Verification Checklist
- Disposition Proceeds: Verify the closing of pending sales totaling $181.9 million under contract and $128.4 million under letter of intent, as these are critical for funding development and debt reduction.
- Development Pipeline: Review the status of $372 million in in-process development projects, noting that 71% is pre-leased and completion dates range from late 1999 to 2002.
- Debt Maturities: Assess the impact of the $1.83 billion debt load, specifically the mix of fixed vs. variable rates and the reliance on the revolving credit facility for liquidity.
- Legal Exposure: Monitor the status of the J.C. Nichols merger litigation, as discovery is ongoing and the outcome remains uncertain.
- FFO vs. Net Income: Compare Funds From Operations ($183.1 million for 9 months) against Net Income ($103.6 million) to understand the impact of depreciation and asset sales on cash-generating capability.