Highwoods Properties, Inc. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. Highwoods is an office REIT operating primarily in business districts across southeastern and selected other U.S. markets. The filing combines the Company and its operating partnership; figures below are primarily Company consolidated amounts.
Financial and operating highlights
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Rental and other revenue | $736.0 million | $720.0 million | Up 2.2% |
| Net income | $141.7 million | $177.6 million | Down 20.2% |
| Net income available to common stockholders | $134.4 million | $169.3 million | Diluted EPS declined to $1.30 from $1.64 |
| Funds from operations available to common stockholders (non-GAAP) | $354.8 million; $3.33 per share | $366.2 million; $3.45 per share | Down 3.1% in total and 3.5% per share |
| Net operating income | $487.5 million | $477.6 million | Up 2.1%; implied NOI margin was approximately 66.2% of revenue |
| Same-property NOI | $445.3 million | $445.6 million | Down 0.1%; same-property cash NOI rose to $429.6 million from $424.3 million |
| Cash from operating activities | $365.8 million | $358.6 million | Up $7.2 million |
| Cash used in investing activities | $607.4 million | $306.7 million | Higher chiefly due to the Charlotte acquisition |
| Total assets | $5.14 billion | $4.68 billion | Up $463.2 million |
| Mortgages and notes payable, net | $2.54 billion | $2.09 billion | Up $457.9 million |
| Cash and cash equivalents | $9.5 million | $3.8 million | Additionally, $5.2 million of restricted cash |
- Wholly owned in-service office portfolio: 27.7 million rentable square feet and 91.9% occupancy at year-end, versus 91.6% in 2018. Average occupancy for the year was 91.4%, versus 91.7%.
- Annualized cash rent per occupied square foot increased to $25.06 from $24.06. Fourth-quarter 2019 second-generation leases achieved GAAP rents 19.8% above prior leases in the same spaces, as reported by management.
- Debt included $95.3 million secured and $2.46 billion unsecured. The company reported a 39.3% leverage ratio against undepreciated asset book value; $471.0 million of debt was variable-rate and unhedged.
- The $600 million revolving credit facility had $378.9 million unused at December 31, 2019. The Company reported $374.9 million available on January 24, 2020. Cash dividends were $1.90 per share for 2019, up from $1.85.
Material changes and notable items
- Revenue growth reflected developments placed in service, acquisitions, and higher same-property revenue, partly offset by dispositions and lower restoration fees. Overall NOI increased, but same-property NOI was nearly flat as higher expenses and Laser Spine Institute impacts offset revenue growth.
- Interest expense rose 14.3% to $81.6 million, primarily from higher average debt balances and rates and lower capitalized interest. Depreciation and amortization rose 10.7% to $254.5 million.
- Net income included $39.5 million of property-disposition gains, compared with $37.6 million in 2018. Reported profit also reflected increased depreciation, interest costs, and a $5.8 million real estate impairment charge, versus $0.4 million in 2018.
- Laser Spine Institute abruptly ceased operations in March 2019. Highwoods reported $5.6 million of lease-receivable credit losses, $2.3 million of lease-incentive write-offs, a $4.1 million notes-receivable write-off, and $11.6 million of tenant improvements and deferred leasing cost write-offs.
- In the fourth quarter, Highwoods acquired the 841,000-square-foot Bank of America Tower at Legacy Union in Charlotte. Total anticipated investment was $436 million, including planned leasing capital; the building was 89.5% leased at closing. The Company issued $750 million of long-term notes during 2019 and prepaid $325 million of bank term loans.
- After year-end, Highwoods reported selling 35 Greensboro buildings and land in 2020 for $193.4 million and expected approximately $105 million of gains. This was part of a two-phase plan to exit Greensboro and Memphis, including closing division offices. A reverse Section 1031 exchange was intended in connection with the broader market-rotation plan.
Outlook, risks and contingencies
- Management expected 2020 revenue and NOI to be higher than 2019, citing acquisitions, developments placed in service, higher same-property rents and cost recovery, and the absence of Laser Spine Institute-related charges; dispositions were expected to offset some growth. Same-property operating expenses and interest expense were expected to rise, while general and administrative expense was expected to decline.
- Management estimated approximately $277 million remained to fund previously announced development activity at December 31, 2019. The filing also reported $466.8 million of lease and contractual commitments, including $279.8 million scheduled for funding in 2020.
- Major risks include office demand, occupancy and rent pressure; lease renewals and tenant credit; concentration in large customers; development and acquisition execution; rising operating costs and interest rates; debt refinancing and covenant compliance; and the availability of capital. Management identified the LIBOR transition after 2021 as an additional financing uncertainty.
- Approximately 10.0% of annualized cash rental revenue was tied to leases scheduled to expire in 2020. The Federal Government and Bank of America represented 4.6% and 3.7% of annualized cash rental revenue, respectively.
- Highwoods said it was in compliance with debt covenants and expected ordinary-course legal matters and assessed environmental matters not to have a material adverse effect. It cautioned that future covenant compliance, asset sales, refinancing, and projected operating results are not assured.
Important facts for investors to verify
- Whether the Greensboro and Memphis dispositions, planned exit, and intended tax-deferred exchange proceed on expected timing and terms; the 2020 Greensboro sale is a post-year-end event.
- Leasing and occupancy performance, especially renewal outcomes for 2020 expirations and credit quality of major tenants.
- Development completion, leasing, stabilization, and remaining funding needs for the approximately 0.9 million square feet in process at year-end.
- Debt maturity and refinancing exposure, variable-rate interest sensitivity, and continued access to the revolving facility; the largest scheduled principal maturities were in 2021 and 2022.
- How management’s 2020 NOI and revenue expectations compare with reported results, and the effect of nonrecurring charges and property-sale gains on earnings and FFO.