Fitch Affirms Highwoods Properties, Inc.'s IDR at 'BBB-'; Outlook Stable

Highwoods Properties, Inc.

--Issuer Default Rating (IDR) at 'BBB-';

--Preferred stock at 'BB+'.

Highwoods Realty Limited Partnership

--IDR at 'BBB-';

--Senior unsecured notes at 'BBB-';

--Unsecured revolving credit facility at 'BBB-'.

The Rating Outlook is Stable.

The affirmations center on the strength of HIW's credit metrics, supported by a solid liquidity position, and improved debt service coverage and leverage ratios. The ratings also reflect the company's well laddered lease expiration schedule and unencumbered real estate asset coverage of unsecured debt, which at 2.6 times (x) as of June 30, 2009, provides ample protection to unsecured bondholders.

HIW's debt to recurring operating EBITDA at June 30, 2009, was 5.6x, improved from 6.3x at Dec. 31, 2008, and much improved from 7.0x at Dec. 31, 2007. The company's solid fixed charge coverage ratio (defined as recurring operating EBITDA less capital expenditures and straight-line rents, divided by interest expense, capitalized interest and distributions on preferred stock) was 2.0x for the twelve months ended June 30, 2009, up from 1.7x at Dec. 31, 2008 and 1.4x at Dec. 31, 2007.

HIW is an office real estate investment trust (REIT) that owns properties primarily in the Sunbelt area of the Southeastern United States, and Fitch believes that operating fundamentals are likely to continue to deteriorate, placing some pressure on the company's leverage and coverage metrics. However, on a projected basis, Fitch believes that HIW's metrics will likely remain strong for the 'BBB-' rating.

While same store NOI declined for the first two quarters of 2009 by 4.5% and 3.1%, respectively, the well laddered lease expiration schedule should provide steady revenues over the next two years. Fitch marked the 4.5% and 12.3% of leases expiring in 2009 and 2010, respectively, to estimated market rates and determined that a -0.8% and -2.5% decline in revenues would occur, presuming occupancy levels remained unchanged. Fitch projects 2009 and 2010 debt to recurring operating EBITDA to be 5.6x and 5.7x, respectively, and fixed charge coverage ratios of 2.1x for both 2009 and 2010, given expectations of reduced capital expenditures, due to higher tenant lease renewal rates.

HIW's strong liquidity position further supports the rating affirmations. As of June 30, 2009, the company had a liquidity surplus (cash, availability under its revolving credit facility, expected retained cash flows from operating activities less debt maturities and expected capital expenditures through Dec. 31, 2011) of over $200 million. Fitch notes that if HIW's revolving credit facility, which matures in May 2010, were reduced by one third, the company would have a $57 million liquidity surplus.

Further, HIW has a manageable debt maturity schedule with one unsecured term loan coming due in 2011 and debt secured by portfolios of assets due in 2012 and 2013. Refinance risk on the secured assets is mitigated by low loan to values, and HIW has the choice of refinancing smaller pools of assets or encumbering the portfolio depending on the appetite of the secured debt lenders.

While HIW engages in development, development in process is not a significant portion of gross depreciable property (2% as of June 30, 2009) and the properties in process of development are currently 62% pre-leased. HIW is appropriately capitalized at the 'BBB' rating category at 1.0x as of June 30, 2009, improved from 0.9x as of Dec. 31, 2008.

In addition, the financial covenants in the company's unsecured debt agreements do not limit Highwoods' financial flexibility.

Fitch's credit concerns revolve around the weakening operating fundamentals of HIW's core and more challenged markets (e.g., Raleigh, Tampa and Atlanta). The company's presence in primarily less supply-constrained secondary markets will provide a challenge for HIW over the next couple of years to maintain consistent fixed charge coverage levels. Each of these markets has weakening fundamentals, generally due to oversupply of office space as well as some new supply expected to be added in the next few years.

A one notch difference between HIW's IDR and its preferred stock is consistent with Fitch's criteria for corporate entities with an IDR of 'BBB-'. Based on Fitch's criteria report, 'Equity Credit for Hybrids & Other Capital Securities', the company's preferred stock is 75% equity-like and 25% debt-like since the its preferred stock is perpetual and has no covenants, but has a cumulative deferral option. Total debt plus 25% of preferred stock to recurring operating EBITDA and debt plus 25% of preferred stock to undepreciated book capital were 5.6x and 42.2%, respectively, as of June 30, 2009.

The following factors may have a positive impact on HIW's ratings:

--Maintaining a healthy liquidity surplus;

--Maintaining fixed charge coverage above 2.0x (for the twelve months ended June 30, 2009, fixed charge coverage was 2.0x);

--Total debt to recurring operating EBITDA remaining below 6.0x. (for the twelve months ended June 30, 2009, leverage was 5.6x);

--Demonstrated access to the unsecured debt markets.

Going forward, the following factors may have a negative impact on HIW's ratings:

--If fixed charge coverage declines below 1.8x;

--If leverage increases above 6.5x;

--If the gross book value of unencumbered operating real estate assets to unsecured debt falls below 2.0x (as of June 30, 2009, this ratio was 2.63x).

Founded in 1978, Highwoods Properties, Inc. is a Raleigh-based REIT in the business of providing leasing, management, development, construction and other customer-related services for its properties and for third parties. At June 30, 2009, the company wholly owned 307 in-service office, industrial and retail properties; 96 rental residential units; 580 acres of undeveloped land suitable for future development, of which 490 acres are considered core holdings; and an additional six properties under development.

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SOURCE: Fitch Ratings

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