Business context and reporting period
Highwoods Properties, Inc. is a self-managed equity REIT operating primarily office properties in the Southeastern and Midwestern United States. This Form 10-K covers the fiscal year ended December 31, 2010; the company conducts substantially all operations through Highwoods Realty Limited Partnership. Office properties generated 86.5% of 2010 rental and other revenues.
At year-end, the company wholly owned 295 in-service properties totaling approximately 27.2 million rentable square feet; its wholly owned portfolio was 90.3% leased. It also held interests in 35 in-service properties and owned 611 acres of undeveloped land.
Financial and operating performance
| Metric | 2010 | 2009 |
|---|---|---|
| Rental and other revenues | $463.3 million | $450.2 million |
| Income from continuing operations | $72.0 million | $47.4 million |
| Net income | $72.3 million | $61.7 million |
| Net income available to common stockholders | $61.8 million; $0.86 per share | $51.8 million; $0.76 per share |
| FFO, a non-GAAP measure | $184.4 million; $2.44 per share | $175.0 million; $2.43 per share |
| Net operating income (NOI) | $298.9 million | $287.3 million |
| Cash provided by operating activities | $190.5 million | $189.1 million |
| Cash and cash equivalents at year-end | $14.2 million | $23.7 million |
| Mortgages and notes payable | $1,522.9 million | $1,469.2 million |
| Common dividend per share | $1.70 | $1.70 |
Operating margin, defined by management as rental and other revenues less property expenses divided by revenues, improved to 64.5% from 63.8%. Same-property NOI was essentially flat at $270.8 million versus $270.7 million; same-property cash NOI fell to $261.2 million from $268.9 million. Average occupancy increased to 88.6% from 88.2%, while annualized cash rent per square foot declined to $17.40 from $17.53.
2010 cash flows included $78.2 million used in investing activities and $121.9 million used in financing activities; cash decreased by $9.5 million. The 2010 common dividend exceeded reported GAAP earnings per share, although REIT distribution requirements are based on taxable income rather than GAAP earnings.
Changes and significant items
- Revenue increased 2.9%, primarily from acquisitions, developments placed in service, and slightly higher average occupancy. Property expenses rose 1.0%; general and administrative expenses fell 10.2%.
- Interest expense rose 7.6% to $93.4 million, reflecting higher average rates, lower capitalized interest and higher credit-facility fees, partly offset by lower average debt and swap expense.
- Continuing-operations income included a $25.3 million gain from selling interests in Des Moines joint ventures. The sale generated $15.0 million cash proceeds; the gain reflected a negative book basis and should be distinguished from recurring property performance.
- Debt increased by approximately $53.8 million year over year. At year-end, $754.4 million was secured debt and $768.5 million unsecured debt. Reported unused capacity was $369.5 million on the revolving facility and $17.9 million on the construction facility.
- Annualized cash rental revenue scheduled to expire in 2011 was $53.2 million, or 12.4% of portfolio annualized cash rental revenue. The filing reports 2011 office lease expirations alone at 12.5% of office annualized cash rental revenue.
Outlook, risks and contingencies
Management expected 2011 average occupancy to be slightly higher, with modestly improved renewal and re-leasing rents. It expected rental revenue to increase, operating expenses to rise, operating margin to remain similar, and interest expense to increase modestly. Plans included up to $200 million of new development, up to $200 million of acquisitions and up to $75 million of non-core property sales in 2011. Development projects begun in 2011 were not expected to enter service before 2012.
Management expected mortgages and notes payable to remain below 50% of undepreciated asset book value during 2011; the year-end 2010 ratio was 41.1%. It stated the company was in compliance with debt covenants and expected short-term liquidity to be adequate, while cautioning that refinancing, capital availability and covenant compliance were not assured. A $200 million five-year unsecured term loan obtained February 2, 2011 was scheduled to fund February 25 and repay a $137.5 million term loan at maturity, revolving borrowings and other corporate needs.
Key risks include weak regional employment and office demand, tenant defaults and leasing costs, competing supply, rising property expenses and interest rates, debt refinancing and covenant risks, development and acquisition execution, environmental and insurance exposure, joint-venture risks, and maintaining REIT status. The filing identifies no legal proceedings expected to have a material adverse effect. A rent guarantee associated with a property sale had maximum exposure of approximately $0.7 million at year-end; no loss accrual was recorded because management did not consider a loss probable. The company reported effective internal control over financial reporting and received an unqualified audit opinion.
Important facts for investors to verify
- How recurring earnings and cash generation compare with reported results that included the $25.3 million joint-venture disposition gain; review FFO and same-property cash NOI reconciliations.
- Whether occupancy and rental-rate improvement materialized, especially as 2011 expirations represented 12.4% of annualized cash rental revenue.
- Execution and leasing progress on the vacant Tampa acquisition and completed, not-yet-stabilized properties; year-end leased percentage for those properties was 13.4%.
- Debt refinancing and liquidity after the new term loan funded, including near-term maturities, floating-rate exposure and credit-facility availability.
- Progress against 2011 development, acquisition and disposition plans, and the effect of those plans on leverage, cash flows and dividends.
- Collection of $17.2 million in seller-financed mortgages and potential exposure under the rent guarantee and remaining joint-venture arrangements.