Highwoods Properties, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Financial figures below are in U.S. dollars; unless noted, amounts are in millions. The filing combines Highwoods Properties, Inc. and its operating partnership.
Business context and reporting period
Highwoods is an office REIT owning, developing, leasing and managing properties in eight U.S. markets. At September 30, 2023, it reported 28.5 million rentable square feet of in-service properties, 1.6 million square feet under development, and land with potential for approximately 5.2 million square feet of office development.
Financial and operating performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Rental and other revenue | $207.1 | $207.0 | $627.1 | $617.2 |
| Net income | $23.2 | $40.1 | $112.0 | $134.8 |
| Net income available to common stockholders | $22.1 | $38.3 | $108.2 | $129.0 |
| Diluted EPS | $0.21 | $0.36 | $1.03 | $1.23 |
| Net operating income (NOI) | $139.9 | $140.7 | $427.9 | $427.1 |
| FFO per share (non-GAAP) | $0.93 | $1.04 | $2.84 | $3.07 |
Q3 revenue was essentially flat year over year; nine-month revenue increased 1.6%. Q3 net income fell about 42% and nine-month net income fell about 17%. Results included lower property-sale gains than in 2022, while the 2023 nine-month period included an $11.8 million gain on deconsolidating the Markel joint venture. No real estate impairment was recorded in 2023; 2022 included $36.5 million of impairment charges for the nine-month period.
Same-property NOI was $135.9 million in Q3, down 0.8% year over year, primarily due to higher same-property expenses. For the first nine months, same-property NOI was $414.7 million versus $417.9 million. Occupancy declined from 91.0% at December 31, 2022 to 88.6% at September 30, 2023. Management expected average office occupancy of approximately 88.0%–89.0% for the remainder of 2023. Q3 new and renewal leases produced annualized GAAP rents of $31.04 per square foot, 10.2% above prior leases in those spaces.
Net cash from operating activities was $284.2 million for the first nine months, down from $319.9 million. Investing activities used $131.0 million, compared with $341.6 million in 2022; financing activities used $152.2 million, versus $19.6 million provided in 2022. Cash and cash equivalents were $16.9 million at quarter-end; cash plus restricted cash was $20.7 million.
Debt, liquidity and capital
- Mortgages and notes payable, net, were $3.212 billion at September 30, 2023, versus $3.197 billion at year-end 2022. The filing reports $677.8 million secured and $2.549 billion unsecured debt.
- Debt weighted-average rates were 4.23% for secured and 4.39% for unsecured borrowings. Floating-rate debt totaled $755 million; a 100-basis-point rate increase would raise annual interest expense by an estimated $7.6 million.
- The $750 million revolving credit facility had $205 million drawn and $544.1 million of unused capacity at September 30 and October 17, 2023. It matures in March 2025, with two optional six-month extensions, subject to conditions.
- A $200 million secured mortgage loan was obtained in Q1 at an effective fixed rate of 5.69%, maturing in April 2028. A $200 million unsecured bank term loan is due October 2024, with an option to extend one year.
- Management reported compliance with debt covenants and expected available cash, operating cash flow and financing sources to meet near-term requirements. Leverage, defined by the company as debt plus preferred stock relative to undepreciated asset book value, was 41.9%.
- Common dividends were $0.50 per share for Q3. A further $0.50 dividend was declared October 18, payable December 12, 2023.
Material changes, outlook and risks
Interest expense increased 29.8% in Q3 and 33.8% for the first nine months, largely due to higher average rates and debt balances. Management attributed revenue growth over nine months to acquisitions, higher same-property revenues and development properties placed in service, partly offset by dispositions and Markel’s deconsolidation. Same-property expenses rose, including contract services, utilities, repairs, insurance and property taxes.
Management expected available liquidity and planned financing to cover short-term needs and anticipated selling up to $150 million of non-core properties during the remainder of 2023; the filing cautions that sales, timing and terms are not assured. Development projects listed had estimated total investment of $555 million, with $151.6 million invested as of September 30 and 18.8% pre-leased in aggregate. The filing provides no earnings or FFO guidance.
Key risks include weaker office-space demand, including work-from-home trends; lower occupancy or difficulty re-leasing space; tenant financial distress; rising interest rates and operating costs; development and leasing risks; market or economic weakness; and inability to refinance or repay debt at maturity on acceptable terms. After quarter-end, the consolidated Midtown West joint venture obtained a $45 million five-year secured loan at a 7.29% fixed rate.
Important facts for investors to verify
- Whether occupancy stabilizes within management’s stated 88.0%–89.0% range and how leasing spreads translate into cash rents and property income.
- The effect of higher interest rates on interest expense, refinancing costs and the $755 million of floating-rate debt.
- Progress on the October 2024 term-loan maturity, March 2025 revolver maturity and planned non-core asset sales.
- Development funding, lease-up and pre-leasing performance, especially for the large 23Springs project.
- Comparability of GAAP earnings and non-GAAP FFO: FFO excludes specified items and is not a substitute for net income or cash flow.