Highwoods Properties, Inc. - 10-Q Summary (Period Ended June 30, 1999)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 1999, for Highwoods Properties, Inc., a Maryland corporation operating as a Real Estate Investment Trust (REIT). The Company acquires, develops, and operates rental real estate properties, primarily office, industrial, and retail spaces, along with apartment units. As of August 9, 1999, there were 61,696,481 shares of common stock outstanding.
Key Financial Metrics
| Metric | Six Months Ended June 30, 1999 | Six Months Ended June 30, 1998 |
|---|---|---|
| Total Revenue | $300.0 million | $218.1 million |
| Net Income | $70.6 million | $59.4 million |
| Net Income Available to Common Shareholders | $54.3 million | $45.6 million |
| Diluted EPS (Net Income) | $0.89 | $0.89 |
| Funds From Operations (FFO) | $122.0 million | $95.0 million |
| Cash Flow from Operating Activities | $95.5 million | $110.4 million |
| Total Debt (Mortgages & Notes Payable) | $1.78 billion | $2.01 billion (Dec 31, 1998) |
| Cash and Cash Equivalents | $104.0 million | $31.4 million (Dec 31, 1998) |
Material Changes vs. Prior Period
- Revenue Growth: Rental revenue increased 35.3% to $288.8 million for the six months ended June 30, 1999, driven by the acquisition of 4.2 million square feet of properties and the completion of 1.6 million square feet of development. This was partially offset by the disposition of 6.6 million square feet of non-core assets.
- Expense Increases: Interest expense rose 77.2% to $63.1 million due to higher outstanding debt levels. Rental operating expenses increased 35.8% to $89.1 million, consistent with the expanded portfolio.
- Asset Dispositions: The Company sold approximately 4.9 million square feet of non-core office and industrial properties and development land for gross proceeds of roughly $432 million ($323 million in South Florida and $109 million in Baltimore), recording a net gain of $2.1 million.
- Liquidity: Cash and cash equivalents increased significantly from $31.4 million to $104.0 million, largely due to proceeds from asset dispositions and a reduction in acquisition activity compared to the prior year.
Guidance, Outlook, and Risks
- Capital Strategy: Management intends to use proceeds from dispositions to fund existing development activity (approximately $210 million needed) and to reinvest in tax-deferred exchange transactions (Section 1031) for core market properties.
- Dividends: On July 26, 1999, the Board declared a quarterly dividend of $0.555 per share ($2.22 annualized), payable August 18, 1999.
- Legal Contingencies: A putative class action lawsuit filed by former J.C. Nichols stockholders regarding the 1998 merger remains pending. The Company intends to vigorously defend the litigation, which could have a material adverse effect if not resolved favorably.
- Year 2000 Compliance: The Company does not expect Year 2000 issues to be material to its business. Remediation efforts for operations and property-level systems are approximately 90-95% complete.
- Market Risk: The Company has approximately $136.2 million of variable rate debt not protected by interest rate hedges. A 100 basis point increase in rates would increase interest expense by approximately $1.4 million annually.
Investor Verification Checklist
- Disposition Proceeds Reinvestment: Verify the timeline and success of reinvesting the ~$432 million in disposition proceeds into new core assets or development projects.
- Leasing Velocity: Monitor the pre-leasing percentages of the 3.6 million square feet currently in development (61% pre-leased as of June 30, 1999).
- Legal Litigation Status: Track the progress of the J.C. Nichols merger class action lawsuit and any potential settlement costs.
- Debt Maturities: Review the schedule for the $1.78 billion debt portfolio, noting that the Company plans to refinance rather than reserve funds for retirement at maturity.
- FFO Coverage: Confirm that the dividend payout ratio (62.3% of FFO for the six months) remains sustainable given the high capital expenditure requirements for development.