Highwoods Properties, Inc. — Q1 2024 Form 10-Q
Business and period: Office REIT operating primarily in Atlanta, Charlotte, Dallas, Nashville, Orlando, Raleigh, Richmond and Tampa. The filing covers the three months ended March 31, 2024; dollar amounts below are in millions unless noted. The company reported 28.3 million rentable square feet of in-service properties and 1.6 million square feet under development.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Rental and other revenue | $211.3 | $212.8 |
| Net income | $27.2 | $45.0 |
| Net income available to common stockholders | $26.1 | $43.8 |
| Diluted EPS | $0.25 | $0.42 |
| FFO available to common stockholders (non-GAAP) | $96.0 | $105.7 |
| FFO per diluted share (non-GAAP) | $0.89 | $0.98 |
| Net operating income (NOI) | $140.8 | $147.0 |
| Operating cash flow | $72.4 | $65.7 |
| Cash used in investing activities | $(61.7) | $(74.5) |
| Cash from/(used in) financing activities | $(15.0) | $10.8 |
NOI was 66.7% of revenue versus 69.1% a year earlier; net income was 12.9% of revenue versus 21.1%. These are calculated ratios, not company-reported margin measures. At March 31, 2024, total assets were $6.01 billion, net real estate assets $4.93 billion, and mortgages and notes payable, net, $3.26 billion. Cash and cash equivalents were $16.4 million, plus $10.9 million of restricted cash.
Material changes and operating trends
- Revenue declined 0.7% year over year, primarily because dispositions reduced revenue by $2.9 million; higher same-property revenue and development contributions partly offset the decline.
- Rental property expenses rose 7.2%, including a $6.1 million increase in same-property expenses, led by property taxes, repairs and maintenance, contract services, insurance and utilities. Same-property NOI fell $4.6 million, or 3.2%.
- Interest expense increased 10.4% to $36.6 million, attributed to higher average interest rates and debt balances, partly offset by higher capitalized interest.
- Net income and EPS comparisons include significant unusual items: Q1 2023 included an $11.8 million gain on deconsolidation of an affiliate, while Q1 2024 included $7.2 million of gains on property dispositions. FFO, which excludes specified real estate gains and other adjustments, also declined.
- Office portfolio occupancy decreased from 88.9% at year-end 2023 to 88.5% at March 31, 2024. Q1 new and renewal leases totaled 922,167 square feet; their weighted average GAAP rent of $30.69 per square foot was 6.6% above prior rents in the same spaces.
Debt, liquidity and capital allocation
- Debt comprised $718.6 million secured and $2.56 billion unsecured; reported weighted average rates were 4.43% and 4.61%, respectively. Floating-rate debt totaled $420 million. Debt and preferred stock equaled 42.2% of undepreciated asset book value; the company reported a 53.8% capitalization ratio on its stated measure.
- The $750 million unsecured revolving facility was extended to mature in January 2028, with two optional six-month extensions. At March 31, $70 million was drawn and unused capacity was $679.9 million; by April 16, the draw was $10 million and unused capacity $739.9 million. The company reported compliance with debt covenants and no scheduled debt maturities before 2026.
- Management said available cash, operating cash flow and financing sources should meet short-term needs. Q1 common dividend was $0.50 per share; a further $0.50 dividend was declared April 17, payable June 11, 2024.
- Q1 included sales of two Raleigh buildings for $16.9 million. On April 3, the company sold seven more Raleigh buildings for $62.5 million and expected a $35.0 million gain. It expects to sell up to $150 million of non-core properties during the remainder of 2024, without assurance of timing or completion.
- At March 31, the company was developing 0.8 million square feet through two joint ventures: 23Springs in Dallas and Midtown East in Tampa. Their combined estimated total investment was $543 million, with $231.4 million invested and 46.7% pre-leased.
Outlook, risks and other matters
Management expects office occupancy of 87%–89% for the remainder of 2024. It expects revenue and NOI to be lower than 2023, same-property NOI to decline, property expenses and interest expense to rise, and operating cash flow to be lower. Expectations reflect dispositions, anticipated higher property costs, lower occupancy and higher borrowing costs. Depreciation and amortization is expected to be lower for the remainder of 2024, and G&A is expected to decline.
Risks identified include tenant financial deterioration, difficulty leasing vacant or newly developed space, work-from-home trends and weaker office demand, market oversupply or slower economic and employment growth, higher interest rates and operating costs, natural disasters and climate change, and access to capital or refinancing. Management cautioned that refinancing at higher rates could pressure cash flow and distributions. Joint-venture investments and loans create exposure to partner and project performance; the filing describes several arrangements as non-recourse to wholly owned assets. Q1 operating cash flow exceeded cash used in investing, while financing outflows included dividends and other payments.
Management stated it completed the transition of outstanding debt instruments to SOFR without material financial-statement impact. The modified revolving facility included $7.7 million of Q1 debt issuance costs and a $0.2 million debt-extinguishment loss. Disclosure controls were concluded effective as of March 31, 2024, with no material changes in internal control reported.
Key facts for investors to verify
- Occupancy, leasing spreads and renewal activity, particularly against the company’s 2024 occupancy range and expectations for lower NOI.
- Whether expense growth, interest costs and floating-rate exposure affect operating cash flow, FFO and dividend coverage.
- Execution, proceeds and expected gain from announced dispositions, including the additional non-core sales target.
- Development leasing, costs, funding needs and delivery timelines at 23Springs and Midtown East, including joint-venture exposure.
- Revolver availability, covenant compliance, debt maturity and refinancing plans, and the sustainability of the $0.50 quarterly dividend.
- Comparability of reported earnings: Q1 2023’s deconsolidation gain and Q1 2024’s property-disposition gains affect GAAP results; FFO is a non-GAAP measure and should be considered alongside GAAP results.