Business Context and Reporting Period
Company: Highwoods Properties, Inc. (NYSE: HIW)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: Highwoods is a fully-integrated, self-administered equity REIT focused on suburban office, industrial, and retail properties in the southeastern and midwestern United States. As of year-end 2007, the Company wholly owned 311 in-service properties (approx. 26.6 million rentable square feet) and held interests in 67 additional properties. The portfolio is geographically diversified across markets including Raleigh, Atlanta, Kansas City, Tampa, Nashville, and the Piedmont Triad.
Key Financial Metrics
| Metric | 2007 | 2006 |
|---|---|---|
| Rental and Other Revenues | $437.1 million | $409.3 million |
| Net Income | $90.7 million | $53.7 million |
| Net Income Available for Common Stockholders | $75.0 million | $34.9 million |
| Funds From Operations (FFO) | $168.1 million ($2.73/share) | $145.3 million ($2.37/share) |
| Operating Margin | 64.0% | 63.2% |
| Total Assets | $2.93 billion | $2.84 billion |
| Total Debt (Mortgages & Notes Payable) | $1.64 billion | $1.47 billion |
| Weighted Average Interest Rate (Debt) | 6.74% | 6.92% |
| Dividends Declared per Common Share | $1.70 | $1.70 |
Material Changes vs. Prior Period
- Revenue Growth: Rental revenues increased 6.8% to $437.1 million, driven by higher average occupancy (92.0% vs. 90.0% in 2006), new developments placed in service, and higher rental rates on renewals (5.2% increase over prior leases).
- Profitability Surge: Net income available for common stockholders more than doubled to $75.0 million (up 114.9%). This was significantly aided by Discontinued Operations, which contributed $35.4 million in 2007 (vs. $17.1 million in 2006) due to net gains on sales of $32.0 million.
- Dispositions: The Company sold approximately 1.2 million square feet of office and industrial properties and 132.8 acres of non-core land in 2007, generating gross proceeds of approximately $151.3 million.
- Development: The Company placed 930,000 square feet of new development in service in 2007. As of year-end, 15 properties (2.2 million sq. ft.) were under development or redevelopment.
- Debt Profile: Total debt increased to $1.64 billion, primarily due to the issuance of $400 million in 5.85% Notes due 2017 and increased borrowings on the revolving credit facility to fund development and acquisitions.
Guidance, Outlook, and Risks
Outlook and Liquidity: Management expects positive cash flows from operating activities in 2008. Net cash flows from investing activities are expected to be negative due to development costs exceeding disposition proceeds. The Company maintains a conservative balance sheet with approximately $298 million in combined availability under revolving credit and construction facilities as of late February 2008. No debt maturities are scheduled for 2008 other than normal amortization.
Key Risks and Contingencies:
- Real Estate Market Risks: Exposure to economic downturns in the Southeast, oversupply of space, and competitive pressures affecting rental rates and occupancy.
- Interest Rate Risk: The Company has significant variable-rate debt exposure. A 100 basis point increase in rates would increase interest expense by approximately $2.0 million on unprotected variable debt.
- REIT Status: Failure to maintain REIT qualification would subject the Company to corporate income taxes. The Company paid dividends of $1.70 per share in 2007, exceeding the minimum requirement of $0.54 per share.
- Joint Venture Risks: Dependence on partners for unconsolidated joint ventures and potential conflicts of interest regarding property sales.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the sustainability of earnings by analyzing Net Income excluding the $35.4 million gain from discontinued operations, which significantly inflated 2007 results.
- Debt Maturity Wall: Review the $409.7 million in principal payments due in 2009 and the $100 million in notes maturing in early 2008 (already refinanced) to assess refinancing risk.
- Development Pipeline: Assess the 56% pre-leasing rate on the $211 million of new office/industrial developments expected by end of 2008.
- Preferred Stock Reduction: Confirm the impact of the $62.3 million Preferred Stock redemption in 2007 on future dividend obligations and net income available to common shareholders.
- Lease Expirations: Review the lease expiration schedule, noting that 10.4% of leased square footage expires in 2008, requiring successful re-leasing to maintain revenue.