Highwoods Properties, Inc. — Q2 2017 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2017; financial statements are unaudited. Highwoods is an office REIT operating through Highwoods Realty Limited Partnership, with properties concentrated in nine southeastern and mid-Atlantic markets. At quarter-end, it owned or had an interest in 32.0 million rentable square feet of in-service properties, 1.2 million square feet under development and approximately 400 acres of development land.
Key financial results
Dollar amounts are in millions, except per-share data. Figures compare the three and six months ended June 30, 2017 with the corresponding 2016 periods.
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Rental and other revenue | $177.3 | $166.9 | $346.7 | $331.7 |
| Net income from continuing operations | $39.6 | $33.5 | $73.0 | $61.7 |
| Net income available to common stockholders | $37.6 | $31.6 | $69.3 | $464.4 |
| Diluted EPS from continuing operations | $0.37 | $0.32 | $0.68 | $0.60 |
| FFO per diluted share (non-GAAP) | $0.90 | $0.82 | $1.69 | $1.64 |
| Net operating income from continuing operations | $118.4 | $109.3 | $230.4 | $216.6 |
| Same-property NOI from continuing operations | $108.2 | $105.6 | $215.1 | $210.0 |
| Common dividend declared per share | $0.44 | $0.425 | $0.88 | $0.85 |
Q2 same-property NOI increased 2.5%; total continuing-operations NOI rose 8.3%. Q2 NOI was approximately 66.8% of rental and other revenue, versus 65.5% a year earlier, calculated from reported NOI and revenue. FFO is a non-GAAP measure and should be considered alongside GAAP results.
Cash flow, debt and liquidity
- First-half operating cash flow was $172.1 million, up from $137.8 million. Investing activities used $156.6 million, compared with $253.8 million provided in H1 2016, which included substantial Plaza-asset sale proceeds. Financing activities used $51.6 million; cash and cash equivalents ended at $13.3 million, down from $49.5 million at year-end 2016.
- Net mortgages and notes payable were $2.005 billion at June 30, up from $1.948 billion at December 31, 2016: $1.914 billion unsecured and $99.9 million secured. Reported leverage was 35.3% of undepreciated asset book value; debt and preferred stock were 27.4% of total capitalization.
- The $475 million revolving facility had $111.0 million drawn and $363.4 million unused at June 30; unused capacity was $377.4 million on July 18. The facility matures in January 2018, with two six-month extension options, subject to conditions.
- Management identified $200 million of unsecured notes due April 15, 2018 and stated it expected to meet near-term liquidity needs through operating cash flow and financing sources. The filing reports compliance with debt covenants at quarter-end.
- Of $2.005 billion reported debt, $596.0 million was variable-rate and not protected by hedges; a 100-basis-point rate increase would raise annual interest expense by an estimated $6.0 million.
Material changes and unusual items
- Revenue increased 6.2% in Q2, primarily from development properties placed in service, same-property revenue growth and acquisitions; dispositions partly offset the increase. Q2 interest expense fell 17.1%, mainly due to lower average debt balances and rates and higher capitalized interest.
- H1 2017 common-stockholder income was $69.3 million versus $464.4 million in H1 2016. The prior-year period included $414.5 million of gains on discontinued-operations dispositions, principally the sale of substantially all wholly owned Country Club Plaza assets. H1 2017 continuing-operations income increased to $73.0 million from $61.7 million.
- Debt activity included issuance of $300 million of 3.875% notes due 2027, repayment at maturity of $379.7 million of 5.85% notes, and a new $100 million secured mortgage at an effective 4.0% rate due 2029. The company also prepaid secured debt and retired Orlando mortgage notes; debt-extinguishment gains totaled $0.8 million in H1.
- Under equity distribution agreements authorizing up to $300 million of common-stock sales, the company issued shares for $68.3 million of net proceeds in H1, including $59.2 million in Q2. It paid an $81.2 million special common dividend during H1, in addition to regular distributions.
- Properties and other assets held for sale totaled $54.5 million, net, at quarter-end and were classified as non-core. A first-quarter building sale generated a $5.3 million gain.
Outlook, management commentary and risks
- Office occupancy was 92.9% at both December 31, 2016 and June 30, 2017. Management expected average occupancy of approximately 92% for the rest of 2017. Q2 leases covering 575,468 square feet had weighted-average GAAP rents 15.1% above prior leases in the same spaces.
- Management expected same-property NOI and total NOI from continuing operations to exceed 2016 levels in the remainder of 2017. It also expected higher revenue from developments, same-property growth and acquisitions, partly offset by dispositions. Interest expense was expected to remain relatively consistent with 2016.
- The development schedule listed 913,900 square feet, with anticipated total investment of $260.6 million, $52.9 million invested at June 30 and 74.9% pre-leased. Management reported approximately $241 million remaining for started or committed development projects; it also cited $187.8 million of contractual development commitments through June 30, 2018.
- Management expected to sell $105 million to $150 million of non-core properties during 2017, but cautioned that sales, timing and terms were not assured. It described expected cash, operating cash flow and financing sources as adequate for short-term requirements, while acknowledging reliance on access to capital markets and asset sales.
- Principal stated risks include tenant financial deterioration, difficulty leasing vacant or newly developed space, weaker market growth or excess competing supply, higher interest rates and operating costs, inability to obtain financing or refinance maturities, and loss of key executives. Debt covenant compliance could change with operating performance, transactions and economic conditions.
Important facts for investors to verify
- Progress on refinancing or repaying the January 2018 revolver maturity and $200 million of notes due April 2018, including actual availability and cost of financing.
- Development spending, leasing and stabilization against the disclosed project schedule, pre-leasing and remaining funding commitments.
- Whether occupancy, same-property rents and NOI meet management’s 2017 expectations, and the effects of large tenant expirations and property dispositions.
- How the special dividend and regular distributions are funded relative to operating cash flow, capital spending and debt levels.
- Interest-rate exposure, hedge effectiveness and counterparties, given $596 million of unhedged variable-rate debt and disclosed rate sensitivity.
- The distinction between continuing GAAP earnings and non-GAAP FFO, and the effect of the unusually large 2016 Plaza disposition gains on year-over-year comparisons.