Highwoods Properties, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Highwoods is an office REIT operating mainly in Atlanta, Charlotte, Dallas, Nashville, Orlando, Raleigh, Richmond and Tampa. At quarter-end it reported 28.5 million rentable square feet in service, 1.6 million under development and land with potential for approximately 5.2 million square feet.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Rental and other revenue | $207.3 million | $203.8 million | $420.0 million | $410.2 million |
| Net income | $43.9 million | $52.6 million | $88.8 million | $94.7 million |
| Net income available to common stockholders | $42.3 million | $50.5 million | $86.1 million | $90.8 million |
| Diluted EPS | $0.40 | $0.48 | $0.82 | $0.86 |
| Funds from operations (FFO) per share, non-GAAP | $0.94 | $1.00 | $1.92 | $2.03 |
| Net operating income (NOI), non-GAAP | $141.0 million | $141.5 million | $288.0 million | $286.4 million |
Q2 revenue increased 1.7%, but net income and diluted EPS declined. Higher same-property expenses and interest costs, fewer gains on property sales, and the Markel joint venture deconsolidation affected comparisons. Q2 same-property NOI fell 1.6%; total NOI declined 0.3%. For the first half, revenue rose 2.4%, while net income fell about 6%. FFO per share, a non-GAAP measure, decreased in both periods.
- Cash flow: First-half cash from operations was $181.1 million, down from $201.9 million. Investing used $68.2 million and financing used $110.3 million. Cash and restricted cash totaled $22.4 million at June 30, including $17.0 million of unrestricted cash.
- Debt and liquidity: Mortgages and notes payable, net, were $3.198 billion. Debt comprised $679.9 million secured and $2.534 billion unsecured; weighted average rates were 4.23% and 4.31%, respectively. Floating-rate debt was $740 million. The company reported 42.0% leverage against undepreciated asset book value and compliance with debt covenants.
- Credit availability: The $750 million revolving facility had $190 million drawn and $559.1 million unused at June 30; unused capacity was $564.1 million on July 18. The facility matures in March 2025, with two six-month extension options. A separate $200 million secured loan carries a fixed effective rate of 5.69% and matures in 2028.
- Margins and occupancy: Q2 NOI was approximately 68% of rental and other revenue, versus approximately 69% a year earlier. Office occupancy declined from 91.0% at December 31, 2022 to 88.9% at June 30, 2023.
Material changes and unusual items
- Q2 rental revenue rose $3.5 million, driven by the SIX50 at Legacy Union acquisition, higher same-property revenue and completed developments, partly offset by dispositions and Markel deconsolidation.
- Q2 rental property expenses increased 6.3%, mainly from higher same-property operating costs. Interest expense rose 36.1% to $34.1 million, primarily reflecting higher average rates and debt balances.
- In Q2, three Tampa and Raleigh buildings were sold for an aggregate $51.3 million, generating $19.4 million in gains. Gains on property dispositions were substantially lower than in Q2 2022.
- Effective January 1, 2023, Markel was deconsolidated after its governance terms changed; Highwoods recorded an $11.8 million gain and now accounts for it under the equity method. The prior-year period included a $35.0 million impairment of EQT Plaza; no such impairment was recorded in 2023.
- Highwoods and its partner each contributed $40 million to the McKinney & Olive joint venture, which used the funds to redeem Highwoods’s $80 million short-term preferred equity investment. Highwoods used its $40 million net proceeds to repay its revolving facility.
Outlook, commentary and risks
Management expects office occupancy to average approximately 88.5%–89.5% for the remainder of 2023. It expects same-property NOI and total NOI to be lower than the prior-year period for the rest of 2023, as expense increases and the effects of dispositions and Markel deconsolidation are expected to outweigh revenue growth. Management also expects higher interest expense and lower operating cash flow for the remainder of the year. It anticipates up to $150 million of additional non-core property sales in 2023, without assurance that sales will occur.
The development pipeline totals approximately 1.58 million rentable square feet with estimated total investment of $928.6 million; reported investment to date was $371.0 million and the portfolio was 22.4% pre-leased. Management says available cash, operating cash flow and financing sources should cover short-term needs, including the existing quarterly dividend and portfolio capital expenditures. No specific full-year EPS or FFO guidance is provided in the supplied filing text.
Key risks include weaker office demand, including continued work-from-home adoption; lower occupancy or rental rates; higher operating costs and interest rates; development, leasing and joint venture execution; property impairments; and the ability to refinance or repay debt on favorable terms. A 100-basis-point increase in variable rates would raise annual interest expense by an estimated $7.4 million. The board declared a $0.50 per-share dividend payable September 12, 2023.
Important facts for investors to verify
- Whether occupancy stabilizes within management’s forecast and leasing spreads persist: Q2 new and renewal leases had GAAP rents 14.7% above prior leases in the same spaces.
- Whether higher property expenses continue to outpace revenue growth and further pressure same-property NOI.
- Development project costs, leasing progress and funding needs, particularly for the large Dallas projects and other joint ventures.
- Floating-rate exposure, facility availability, covenant headroom, and refinancing plans as debt maturities approach.
- Progress and realized proceeds from planned non-core sales, and the financial exposure to unconsolidated joint ventures.
- Dividend coverage and the distinction between GAAP earnings and non-GAAP FFO, NOI and same-property measures.