HIW

Highwoods Properties, Inc. - Q1 2003 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2003. Highwoods Properties, Inc. is a self-administered and self-managed Real Estate Investment Trust (REIT) operating in the southeastern and midwestern United States. As of the reporting date, the Company owned 494 in-service office, industrial, and retail properties, along with 1,341 acres of undeveloped land. The Company conducts operations through Highwoods Realty Limited Partnership, in which it holds an 88.6% interest.

Key Financial Metrics

Note: The dividend declared on April 24, 2003, for the quarter ended March 31, 2003, was reduced from the previous rate of $0.585 to $0.425 per share.

Material Changes vs. Prior Period

• Revenue Decline: Rental revenue decreased by $7.2 million (6.2%) primarily due to a drop in average occupancy rates from 87.5% to 81.7%. This was significantly impacted by the rejection of two WorldCom leases (819,653 sq. ft.) and one US Airways lease, resulting in approximately $4.2 million in lost revenue.
• Profitability Drop: Net income available to common stockholders fell by $15.7 million. Income from continuing operations decreased by $14.0 million due to lower rental revenue and higher operating expenses as a percentage of revenue.
• Operating Expenses: Rental property expenses increased by $1.2 million. Expenses as a percentage of revenue rose from 31.1% to 34.2% because fixed costs remained while revenue declined due to vacancies.
• Discontinued Operations: The Company recognized a $288,000 impairment loss on two properties held for sale, classified as discontinued operations.

Outlook, Risks, and Management Commentary

• Dividend Reduction: Due to lower Funds From Operations and higher capital expenditures for re-leasing, the Board reduced the annual dividend rate from $2.34 to $1.70 per share.
• Occupancy and Leasing: Management expects occupancy to remain lower in 2003. Approximately 4.4 million square feet (14.2% of the portfolio) will expire in the last nine months of 2003. Re-leasing rates are expected to be lower than historical norms, and rental rates for new leases are trending downward (7.0% lower than expired leases in Q1).
• Bankruptcy Impacts: Significant risks remain regarding WorldCom and US Airways. The Company has filed claims for rejected leases totaling over $20 million for WorldCom. US Airways emerged from Chapter 11, but the Company agreed to a $600,000 annual rent reduction on one lease.
• Liquidity: The Company maintains a $300 million unsecured revolving loan with $93.5 million outstanding. Management is negotiating a replacement for the loan maturing in December 2003. Debt represents approximately 49.5% of total market capitalization.
• Accounting Changes: The Company adopted SFAS 148 for stock-based compensation, recognizing fair value for options granted after January 1, 2003. FIN 45 required the recognition of a $1.7 million liability for guarantees related to a joint venture construction loan.

Investor Verification Checklist

• Dividend Sustainability: Verify the impact of the dividend cut on the dividend payout ratio relative to FFO and CAD.
• WorldCom/US Airways Exposure: Assess the likelihood of recovering claims from rejected leases and the long-term impact of rent concessions.
• Lease Expirations: Review the schedule of 4.4 million square feet expiring in late 2003 and the current re-leasing status (31.8% re-leased as of April 24, 2003).
• Debt Refinancing: Monitor the status of the $300 million revolving credit facility maturing in December 2003 and potential covenant compliance issues.
• Impairment Risks: Evaluate the carrying value of assets held for sale ($135.9 million) against potential fair value less cost to sell.