Business Context and Reporting Period
Company: Highwoods Properties, Inc. (and Highwoods Realty Limited Partnership)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: A fully-integrated, self-administered equity REIT specializing in the acquisition, development, and operation of suburban office, industrial, and retail properties in the southeastern and midwestern United States. As of year-end 2008, the Company wholly owned 311 in-service properties (approx. 27.4 million rentable square feet) and held interests in 72 additional properties.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Rental and Other Revenues | $461.0 million | $428.4 million |
| Net Income | $32.0 million | $90.7 million |
| Net Income Available for Common Stockholders | $22.1 million | $75.0 million |
| Funds From Operations (FFO) | $143.5 million ($2.27/share) | $168.1 million ($2.73/share) |
| Operating Margin | 64.1% | 64.2% |
| Total Assets | $2.95 billion | $2.93 billion |
| Total Debt (Mortgages & Notes Payable) | $1.60 billion | $1.64 billion |
| Cash Provided by Operating Activities | $157.8 million | $161.7 million |
Material Changes vs. Prior Period
- Revenue Growth: Rental revenues increased 7.6% year-over-year, driven by new developments placed in service and higher average rental rates (9.1% increase on second-generation leases), partially offset by a slight decline in occupancy.
- Impairment Charges: A significant non-cash impairment charge of $32.8 million was recorded in 2008 related to 11 buildings and one land parcel in Winston-Salem, NC, compared to $0.8 million in 2007.
- Discontinued Operations: Net income from discontinued operations was $19.1 million in 2008 (including $17.3 million in gains on sales) compared to $38.0 million in 2007. The Company sold approximately 744,000 square feet of office and industrial properties in 2008.
- Equity in Earnings: Equity in earnings of unconsolidated affiliates decreased by $7.2 million to $5.9 million, primarily due to the absence of large gains from joint venture property sales that occurred in 2007.
- Dividends: The Company maintained a quarterly dividend of $0.425 per share ($1.70 annualized), consistent with 2007.
Guidance, Outlook, and Risks
- Outlook: Management expects a slight decline in total occupancy in 2009, primarily in industrial properties. Rental revenues are expected to increase slightly in 2009 (adjusted for discontinued operations) due to new developments, offset by occupancy declines.
- Liquidity: The Company relies on a $450 million unsecured revolving credit facility (scheduled to mature May 2009, with an extension notice submitted to May 2010) and a $70 million construction facility. Management expects to use operating cash flows and asset dispositions to reduce debt balances in 2009.
- Development Pipeline: Approximately $92.6 million of new office and industrial development is expected to be delivered by the end of 2009, currently 68.2% pre-leased.
- Risks: Key risks include economic downturns in the Southeast, oversupply of space, rising operating costs, and the potential inability to refinance debt or access capital markets due to credit market dislocations. The Company also faces risks related to joint venture partners and environmental liabilities.
Investor Verification Checklist
- Impairment Specifics: Verify the specific valuation assumptions and future cash flow projections used for the $32.8 million impairment charge in Winston-Salem.
- Debt Maturity Wall: Confirm the status of the extension for the $450 million revolving credit facility maturing in May 2009 and the availability of alternative financing sources.
- Occupancy Trends: Monitor the projected decline in industrial occupancy and the impact on rental rate renewals in 2009.
- Discontinued Operations: Assess the impact of the reduced volume of property dispositions on future earnings compared to the high gains realized in 2007.
- Joint Venture Exposure: Review the financial health of unconsolidated joint venture partners and the status of guarantees provided by the Company (approx. $16.6 million in financing obligations and various debt guarantees).