Highwoods Properties, Inc. — 2016 Form 10-K
Business context and reporting period. This combined filing for Highwoods Properties, Inc. and its operating partnership covers the fiscal year ended December 31, 2016; it is an annual report, not a standalone fourth-quarter filing. Highwoods is an office-focused REIT operating primarily in business districts across nine core markets. At year-end, wholly owned in-service office properties totaled 27.0 million rentable square feet and were 92.9% occupied.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Rental and other revenues | $665.6 million | $604.7 million |
| Income from continuing operations | $122.5 million | $85.5 million |
| Net income | $541.1 million | $101.3 million |
| Diluted EPS | $5.30 | $1.00 |
| Funds from operations (FFO) per share | $3.28 | $3.08 |
| Cash provided by operating activities | $305.8 million | $288.9 million |
| Cash and cash equivalents at year-end | $49.5 million | $5.0 million |
| Mortgages and notes payable, net | $1.948 billion | $2.492 billion |
| Total assets | $4.561 billion | $4.486 billion |
- Revenue increased 10.1%; management attributed the increase primarily to acquisitions, developments placed in service, and higher same-property revenues.
- Same-property NOI from continuing operations rose 4.2% to $375.6 million; total NOI from continuing operations rose 11.8% to $434.5 million. Same-property cash NOI was $361.5 million, up from $343.5 million.
- Operating cash flow increased $16.9 million. Investing activities provided $203.9 million, principally reflecting substantial property-sale proceeds; financing activities used $465.2 million, mainly due to net debt repayments.
- Reported debt was $1.948 billion net of debt issuance costs; debt and preferred stock represented 27.1% of total capitalization and 34.7% of undepreciated asset book value. Debt carried a weighted-average rate of 4.63% fixed (including effectively fixed borrowings) and 1.77% variable. Unhedged variable-rate debt was $475.0 million.
- At January 27, 2017, unused revolving-credit capacity was $426.0 million. The $475.0 million facility matures in January 2018, subject to extension options.
Material changes versus the prior comparable period
- Net income and diluted EPS were sharply higher, but the comparison is dominated by the first-quarter 2016 sale of substantially all wholly owned Country Club Plaza assets in Kansas City: sale price was $660.0 million and the company recorded a $414.5 million gain in discontinued operations. Continuing-operations income is a more useful indicator of recurring performance than total net income for this comparison.
- Revenue increased by $61.0 million. Company-reported drivers included $35.6 million from acquisitions, $15.5 million from developments placed in service, and $15.7 million from same-property revenue growth, partly offset by $5.1 million of revenue lost to dispositions.
- Year-end net debt was lower than in 2015, following debt repayments and equity issuance. The company issued 5.08 million common shares in 2016 and received $246.2 million net proceeds under its equity distribution program.
- Wholly owned in-service property area declined by 1.056 million square feet net, primarily reflecting 1.429 million square feet of dispositions.
- Fourth-quarter revenue was $167.6 million versus $160.1 million in Q4 2015; continuing-operations income was $27.0 million versus $19.0 million, and diluted EPS from continuing operations was $0.25 versus $0.18.
Outlook, management commentary, risks, and unusual items
- Management expected 2017 same-property NOI and total continuing-operations NOI to exceed 2016, citing rent growth, cost recovery, and the full-year effect of 2016 acquisitions and developments. It also expected higher revenue and operating expenses; no specific full-year earnings or FFO guidance was provided in the supplied filing text.
- At year-end, announced and in-process office developments totaled approximately 1.2 million square feet, with anticipated total investment of $415.1 million; 74.1% was pre-leased. Management reported $165 million remaining to fund previously announced development activity, including $132.3 million of contractual commitments scheduled for 2017.
- Management anticipated refinancing or repaying 2017 maturities of $379.7 million of unsecured notes due March 15 and a $109.1 million secured loan due November 1. Planned funding sources included new debt, a proposed approximately $100 million fixed-rate secured loan, an additional $50 million term loan borrowing, the revolver, equity, and non-core asset sales. These plans were subject to financing and closing conditions.
- Management expected $50 million to $150 million of non-core property sales in 2017 and stated a general intent to fund growth on a leverage-neutral basis. These are expectations, not assured outcomes.
- The 2016 common dividend declared was $2.50 per share, including a $0.80 special dividend paid January 10, 2017 to distribute taxable gains from the Plaza sale. The regular quarterly dividend was $0.425 during 2016; a $0.44 regular dividend was declared in February 2017.
- Key risks include office-market weakness and oversupply, occupancy and lease-renewal risk, tenant credit and concentration, development cost or lease-up shortfalls, refinancing and interest-rate risk, and REIT qualification and regulatory requirements. The Federal Government was the largest customer at 5.52% of annualized cash rental revenue; no customer generated more than 6% of consolidated revenue in 2016.
- A 32,000-square-foot building sold for $4.7 million to a family business controlled by a company director. The filing states the sale price exceeded an independent appraisal. Ordinary-course legal matters were not expected to have a material adverse effect; environmental assessments had not identified a known material liability.
- The independent auditor issued an unqualified opinion on the financial statements. Management and the auditor reported effective internal control over financial reporting for the Company at year-end.
Most important facts for investors to verify
- Whether 2017 maturities were refinanced or repaid as planned, and the resulting cost, terms, and covenant headroom.
- Whether recurring performance supports management’s expected NOI growth, excluding the Plaza-sale gain and other disposition effects.
- Development completion, leasing, stabilization, remaining funding needs, and actual returns versus projected investment.
- Lease expirations and renewal outcomes: 9.3% of leased square footage was scheduled to expire in 2017 and 10.9% in 2018.
- The effects of share issuance and the special dividend on per-share FFO, leverage, liquidity, and the capacity to maintain future distributions.