Business Context and Reporting Period
Company: Highwoods Properties, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 1998
Business Overview: Highwoods is a self-administered and self-managed equity REIT specializing in the ownership, development, and management of suburban office, industrial, and retail properties in the southeastern and midwestern United States. As of December 31, 1998, the Company owned or had a majority interest in 658 in-service properties totaling approximately 44.6 million rentable square feet and 2,325 apartment units. The Company operates through Highwoods Realty Limited Partnership (the "Operating Partnership"), in which it holds an 86% interest.
Key Financial Metrics
| Metric | 1998 | 1997 | Change |
|---|---|---|---|
| Total Revenue | $514.2 million | $274.5 million | +87.3% |
| Net Income | $125.7 million | $71.7 million | +75.3% |
| Net Income Available to Common Stockholders | $95.6 million | $58.6 million | +63.1% |
| Funds From Operations (FFO) | $211.4 million | $127.0 million | +66.5% |
| Cash Flow from Operating Activities | $263.4 million | $130.2 million | +102.3% |
| Total Debt | $2.01 billion | $978.6 million | +105.3% |
| Debt-to-Market Cap | 48% | N/A | - |
| Occupancy Rate (In-Service) | 94% | 94% | 0% |
Capital Structure: Total indebtedness of $2.01 billion consisted of $628.1 million in secured debt (weighted average rate 7.7%) and $1.38 billion in unsecured debt (weighted average rate 7.0%). The Company maintains a $600 million unsecured revolving credit facility.
Material Changes vs. Prior Period
- Acquisition Activity: The Company significantly expanded its portfolio in 1998, acquiring 186 properties totaling 14.9 million square feet and 2,325 apartment units for an initial cost of approximately $1.2 billion. The most significant transaction was the merger with J.C. Nichols Company (completed July 13, 1998), valued at approximately $544 million, which added significant presence in the Kansas City and Des Moines markets.
- Development Activity: The Company placed 19 new development projects into service during 1998, totaling 1.7 million square feet at an initial cost of $144.1 million. As of year-end, 59 additional properties were under development.
- Revenue Growth: Rental revenue increased by $231.1 million (87%) to $498.0 million, driven primarily by the acquisition and development activities. Same-property revenues for properties owned in both 1997 and 1998 increased by 4.7%.
- Expense Increases: Rental operating expenses rose 101.2% to $154.3 million, and interest expense increased 104.6% to $97.0 million, reflecting the larger asset base and increased leverage.
Guidance, Outlook, and Risks
Outlook and Strategy: Management continues to pursue a "Managed Growth Strategy," focusing on markets with local knowledge advantages. The Company intends to fund future development and acquisitions through a combination of borrowings under its revolving credit facility, issuance of unsecured debt and equity securities, and selective dispositions of non-core assets. The Company recently entered into agreements to sell approximately 3.9 million square feet of non-core properties for gross proceeds of approximately $385 million.
Liquidity: The Company expects to meet short-term liquidity needs (including approximately $350 million in development funding) through its revolving credit facility, asset sales, and joint ventures. Long-term liquidity will be supported by additional debt and equity issuances.
Risks and Contingencies:
- Legal Proceedings: A putative class action lawsuit was filed in October 1998 by a former J.C. Nichols shareholder alleging breaches of fiduciary duty and false statements in connection with the merger. The Company intends to vigorously defend the litigation but notes the potential for material adverse effects if not resolved favorably.
- Year 2000 Compliance: The Company is actively managing Year 2000 compliance for its IT and property-level systems. Management does not expect material adverse effects on operations or liquidity, though risks remain regarding third-party vendors and utility services.
- Environmental Liabilities: As with all real estate owners, the Company faces potential liability for hazardous substances on its properties. Phase I assessments have not revealed material liabilities, but unknown conditions could arise.
Investor Verification Checklist
- Debt Covenants: Verify compliance with financial covenants in the $600 million revolving credit facility, particularly regarding dividend payments and leverage ratios.
- J.C. Nichols Integration: Assess the operational performance and occupancy trends of the newly acquired Kansas City and Des Moines properties post-merger.
- Development Pipeline: Review the pre-leasing percentages and estimated stabilization dates for the 59 properties currently under development (totaling 6.9 million square feet).
- Asset Dispositions: Monitor the closing status of the pending $385 million sale of non-core properties to ensure liquidity targets are met.
- Legal Exposure: Track the status of the J.C. Nichols shareholder class action lawsuit for potential financial impact.