HIW

Highwoods Properties, Inc. - 10-Q Summary (Period Ended Sept 30, 1998)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 1998, for Highwoods Properties, Inc., a Maryland corporation operating as a Real Estate Investment Trust (REIT). The reporting period is significantly impacted by the completion of the merger with J.C. Nichols Company on July 13, 1998. This transaction added 79 office, industrial, and retail properties and 18 multifamily communities to the portfolio, expanding total rentable square footage from 21.9 million to 45.4 million.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Rental revenue increased 99% year-over-year, driven primarily by the J.C. Nichols acquisition and new development completions. Same-property revenues increased 5% for the nine-month period.
• Expense Increases: Rental operating expenses rose 122% to $108.7 million, and interest expense increased 86% to $64.8 million due to higher debt levels supporting acquisitions. Operating expenses as a percentage of revenue increased from 27.7% to 30.9% due to a higher mix of office properties with fewer triple-net lease pass-throughs.
• Capital Structure: Total indebtedness nearly doubled to $1.86 billion. The company secured a new $600 million revolving credit facility in July 1998. Equity raised included multiple common stock offerings and a $96.8 million issuance of Series D Preferred Shares.
• Portfolio Expansion: The portfolio grew from 21.9 million to 45.4 million square feet. As of September 30, 1998, the company had 52 properties under development with a total budgeted cost of $691 million.

Outlook, Risks, and Management Commentary

• Liquidity Strategy: Management expects to meet long-term liquidity needs through the revolving loan, additional debt/equity issuances, and selective asset dispositions. The company does not intend to reserve funds to retire debt at maturity but plans to refinance.
• Forward-Looking Transactions: The company signed letters of intent to form a joint venture for approximately $150 million of office properties (expected close by March 31, 1999) and to sell non-core Florida properties for approximately $130 million (expected close by January 31, 1999).
• Forward Contract Risk: A forward contract with UBS AG regarding 1.8 million shares of common stock requires cash collateral if the stock price falls below the forward price ($32.16). As of September 1998, $12.8 million in cash collateral was posted. Full cash settlement could require an additional $45.1 million.
• Legal Proceedings: A putative class action lawsuit was filed on October 2, 1998, by former J.C. Nichols stockholders alleging breach of fiduciary duty and false statements regarding the merger. The company intends to vigorously defend the litigation.
• Year 2000 Compliance: The company does not expect Year 2000 issues to be material to its business or financial condition, with compliance efforts ongoing for both corporate and property-level systems.

Investor Verification Checklist

• Verify the closing status and terms of the proposed $150 million joint venture and $130 million Florida asset sale.
• Monitor the stock price relative to the $32.16 forward contract price to assess potential additional cash collateral requirements.
• Review the progress of the J.C. Nichols merger-related class action lawsuit filed in October 1998.
• Assess the impact of the increased debt load ($1.86 billion) on future interest coverage and distribution sustainability.
• Confirm the timeline for the stabilization of the 52 properties currently under development ($691 million budget).