Highwoods Properties, Inc. — 2013 Form 10-K
Business and period: Fiscal year ended December 31, 2013; quarterly data includes the three months ended December 31, 2013. Highwoods is an office-focused REIT operating primarily in U.S. Sun Belt and selected other markets. At year-end, it owned or had an interest in 32.2 million rentable square feet of in-service properties, 0.9 million square feet under development and approximately 600 acres of development land. The filing reports the Company and its operating partnership together; financial amounts below are generally Company figures.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Rental and other revenues | $556.8 million | $485.0 million |
| Income from continuing operations | $62.7 million | $40.3 million |
| Net income | $131.1 million | $84.2 million |
| Diluted earnings per share | $1.44 | $1.02 |
| FFO available to common stockholders per share | $2.81 | $2.70 |
| Cash from operating activities | $256.4 million | $193.4 million |
| Cash used in investing activities | $356.6 million | $238.8 million |
| Cash from financing activities | $96.6 million | $48.0 million |
- Revenue rose 14.8%, principally from acquisitions and developments placed in service; same-property revenue was flat. Net income growth included $63.8 million of gains on discontinued-property dispositions and a $7.5 million gain from acquiring control of a joint venture.
- Operating margin was 63.5%, versus 63.6%. Same-property NOI was $296.3 million, slightly below $296.4 million; same-property cash NOI increased to $286.8 million from $281.9 million.
- Year-end occupancy was 89.9%, down from 90.9%. Management cited a large Tampa lease expiration, acquisitions of comparatively less-occupied buildings and disposition of highly occupied industrial assets. Office occupancy was 89.2%; industrial 94.1%; retail 97.3%.
- Year-end total assets were $3.81 billion and mortgages and notes payable were $1.96 billion, up from $1.86 billion. Secured debt was $488.7 million at a 4.98% weighted-average rate; unsecured debt was $1.47 billion at 4.07%. Debt plus preferred stock equaled 41.4% of undepreciated asset book value.
- Unrestricted cash was $10.2 million at year-end. The $475 million revolver had $259.2 million unused capacity at December 31 and $251.9 million at January 31, 2014. Management said expected cash, operating cash flow and revolver availability should meet short-term needs.
- Common dividends remained $1.70 per share for 2013, unchanged from 2012. Quarterly dividend was $0.425 per share.
Material changes and notable items
- 2013 acquisitions included office assets in Orlando, Nashville, Atlanta, Tampa and Greensboro. The company reported approximately $548.5 million anticipated total investment for acquired buildings, including committed improvements.
- Dispositions generated $254.0 million net cash proceeds. Major sales included Atlanta industrial assets and office properties; disposition gains materially boosted reported net income.
- Common shares outstanding increased to approximately 89.9 million from 80.3 million, reflecting equity issuance and unit conversions. The Company raised $295.1 million net through public offerings in 2013.
- The company refinanced its $475 million revolving facility, extending maturity to January 2018, and extended a $200 million term loan to January 2019 at a reduced spread. It prepaid certain secured loans, leaving approximately $147 million of real estate assets unencumbered.
- Cash flow hedges effectively fixed the LIBOR rate on $225 million of debt at 1.678%. A further $415.7 million of variable-rate debt was unhedged; a 100-basis-point rate increase would raise annual interest expense by approximately $4.2 million.
Outlook, risks and contingencies
- Management expected 2014 revenue to increase, mainly from a full year of 2013 acquisitions and development contributions, with modest same-property improvement. It expected operating margin to be slightly lower, property expenses and depreciation higher, and interest expense lower than 2013.
- Plans for 2014 included up to $300 million of acquisitions, $100 million–$175 million of non-core dispositions and $75 million–$150 million of new office development; another section describes development commencement of up to $150 million. These are expectations, not guarantees. The company also had $136.4 million remaining to fund on projects in process.
- Debt maturities are concentrated in 2017 and 2018: contractual principal payments include approximately $488 million in 2017 and $416 million in 2018. A $125.2 million secured loan assumed with the Orlando acquisition matures in July 2014.
- Principal risks include office-market weakness, lease rollover and tenant concentration, occupancy and rent pressure, redevelopment and acquisition execution, refinancing and interest-rate exposure, and maintaining REIT qualification. The 20 largest wholly owned-property customers accounted for 25.1% of annualized cash rental revenue; the Federal Government was the largest at 6.36%.
- Joint ventures had $189.4 million of mortgage debt, of which the Company’s proportionate share was $64.4 million, mostly non-recourse subject to customary exceptions. A joint-venture partner also held a put right over its Harborview interest during the year beginning September 2014; the eventual cash requirement, if exercised, depends on fair value.
- Management reported no legal proceedings expected to have a material adverse effect and no environmental liability believed material. The Company and Operating Partnership reported effective internal controls; the auditor issued unqualified opinions on the financial statements and the Company’s internal controls.
Key facts investors should verify
- How much of 2013 net-income and EPS growth reflects recurring property operations versus disposition gains and the one-time joint-venture acquisition gain; compare GAAP results with FFO and same-property NOI.
- Whether occupancy recovers, particularly in Tampa and Atlanta, and how the 2014–2017 lease expirations, renewals, concessions and tenant-improvement costs affect rent and cash flows.
- Funding and refinancing plans for the July 2014 Orlando loan and the substantial 2017–2018 maturities, including the availability and cost of debt and equity capital.
- Execution, leasing and return assumptions for development projects and acquisitions, alongside planned non-core asset sales.
- Dividend sustainability relative to operating cash flow, capital spending, debt service and the REIT distribution requirement; the board retains discretion over future dividends.