HIW

Highwoods Properties, Inc. - 10-Q Summary (Q1 2006)

Business Context and Reporting Period

Company: Highwoods Properties, Inc. (Highwoods)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2006
Business Overview: Highwoods is a fully-integrated, self-administered equity REIT operating in the southeastern and midwestern United States. As of March 31, 2006, the portfolio included 348 in-service office, industrial, and retail properties, 96 apartment units, and 896 acres of undeveloped land. The company conducts operations primarily through Highwoods Realty Limited Partnership.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Rental revenues increased 2.0% year-over-year, driven by higher average occupancy and new developments placed in service late in 2005, partially offset by lower lease termination fees.
• Net Income Decline: Net income decreased 33.2% to $14.1 million. This was primarily due to a significant reduction in gains from discontinued operations ($1.8 million in 2006 vs. $14.1 million in 2005) and a $1.8 million charge for the excess cost of preferred stock redemption.
• Discontinued Operations: The company reclassified operations of 6.6 million square feet of properties sold or held for sale to discontinued operations. Net gains on these sales dropped significantly from the prior year.
• Debt Reduction: Total debt decreased by approximately $21.4 million. The company paid off $196.2 million of loans during 2005 and Q1 2006, funded by property dispositions.
• Preferred Stock Redemption: In February 2006, the company redeemed $50 million of Series B Preferred Shares, resulting in a $1.8 million charge against net income available to common stockholders.

Guidance, Outlook, and Risks

• Liquidity and Capital Resources: The company maintains a conservative balance sheet. Future capital needs (approx. $202 million for development) are expected to be funded by operating cash flows, asset dispositions, and borrowings. A new $350 million unsecured revolving credit facility was secured in May 2006 (post-period) to replace prior facilities.
• Dividends: To maintain REIT status, the company must distribute at least 90% of taxable income. Dividends declared per common share were $0.425 for the quarter.
• Internal Controls: Management reported that disclosure controls and procedures were not effective as of March 31, 2006, due to material weaknesses in real estate asset accounting and journal entry approval processes. Remediation plans are underway, including hiring a Chief Accounting Officer and implementing new policies.
• Regulatory Risks: The company is subject to an SEC investigation regarding a previous restatement of financial results. Additionally, the company received a $6.4 million state excise tax assessment for periods prior to 2006, which it intends to dispute vigorously.
• Market Risks: The company faces risks related to interest rate fluctuations (approx. $2.9 million impact on interest expense for a 100 basis point change in variable rates) and economic conditions in key markets (Florida, Georgia, North Carolina).

Investor Verification Checklist

• Internal Control Remediation: Verify the progress of remediation plans for material weaknesses in financial reporting and the effectiveness of new disclosure controls.
• SEC Investigation Status: Monitor updates regarding the SEC Division of Enforcement investigation into the prior financial restatement.
• State Tax Dispute: Track the outcome of the $6.4 million state excise tax assessment dispute.
• Debt Maturities: Review the company's strategy for refinancing $110 million of unsecured notes maturing in December 2006 and $63 million of secured debt maturing in February 2007.
• Occupancy Trends: Monitor occupancy rates and rental rate renewals in the core office markets to validate revenue growth sustainability.