HIW

Highwoods Properties, Inc. - Q1 2009 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009, for Highwoods Properties, Inc. (the "Company") and Highwoods Realty Limited Partnership (the "Operating Partnership"). The Company is a fully-integrated, self-administered equity REIT operating primarily in the southeastern and midwestern United States. As of the reporting date, the portfolio included 310 in-service office, industrial, and retail properties, 96 rental residential units, and significant development land holdings. The filing reflects the adoption of SFAS No. 160 regarding noncontrolling interests and the reclassification of certain sold properties to discontinued operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Rental revenues increased 2.2% year-over-year, driven by new development properties placed in service and the acquisition of the PennMarc building in Memphis, offset by lower occupancy and straight-line rental income.
• Expense Trends: Operating expenses rose 8.4% due to inflationary costs and new properties. However, General and Administrative expenses decreased 14.4% due to lower audit, legal, and incentive compensation costs.
• Interest Expense: Contractual interest expense declined 12.3% due to lower average borrowings and interest rates, partially offset by reduced interest capitalization on development projects.
• Discontinued Operations: Income from discontinued operations dropped significantly to $0.07 million from $4.40 million in the prior year, as the Company sold non-core properties in 2008 and early 2009.
• Dividends: Preferred stock dividends decreased 40.9% following the retirement of $53.8 million of preferred equity in September 2008.

Outlook, Risks, and Management Commentary

Liquidity and Capital Resources: The Company maintains a conservative balance sheet with $251.7 million available under its $450 million revolving credit facility (maturing May 2010) and $39.1 million under its construction facility. Management expects to generate positive cash flow from operations to fund debt maturities and development costs, though they anticipate reduced investing activity due to tight credit markets.

Development Pipeline: As of March 31, 2009, the Company had approximately $36.7 million in expected future capital expenditures for committed development projects. Pre-leasing for development projects was approximately 71%, while recently completed but unstabilized properties were at 67% occupancy.

Risks and Contingencies:

• Credit Market Dislocation: Risks include potential defaults by banking partners, increased borrowing costs, and difficulty refinancing debt.
• Tenant Financial Condition: Deterioration in tenant financial health could impact lease renewals and rental rates.
• Market Supply: Competitor development activity could lead to excessive supply in key markets.
• Covenant Compliance: The Company is currently compliant with debt covenants, including a 60% total liabilities to total asset value ratio, but notes that economic conditions could impact future compliance.

Investor Verification Checklist

• Debt Maturities: Verify the $118 million of debt maturing in the remainder of 2009 and the Company's plan to refinance or repay using the revolving credit facility.
• Occupancy Trends: Monitor the 67% occupancy rate of recently completed properties and the ability to achieve stabilization (95% occupancy).
• Credit Facility Availability: Confirm the continued availability of the $450 million revolving credit facility given the volatility in the credit markets.
• Condominium Sales: Track the sales velocity of the 66 remaining for-sale residential condominiums in Raleigh, NC.
• FFO vs. Net Income: Note the divergence between Net Income ($10.81M) and FFO ($47.64M) due to significant depreciation and amortization charges.