Highwoods Properties, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Highwoods is an office REIT operating mainly in Atlanta, Charlotte, Nashville, Orlando, Pittsburgh, Raleigh, Richmond and Tampa. It reported 29.0 million rentable square feet of in-service properties and approximately 300 acres of development land.
Key financial metrics
Amounts below are in millions, except per-share data and where noted.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Rental and other revenues | $195.5 | $181.0 | $564.8 | $557.0 |
| Net income | $75.6 | $42.3 | $194.3 | $272.6 |
| Net income available to common stockholders | $72.1 | $40.3 | $185.9 | $262.8 |
| Diluted earnings per common share | $0.69 | $0.39 | $1.79 | $2.53 |
| Net operating income (NOI) | $134.9 | $124.2 | $391.8 | $382.8 |
| Funds from operations (FFO) per share, non-GAAP | $0.96 | $0.86 | $2.80 | $2.71 |
- Cash flow: Nine-month operating cash flow was $309.2 million, versus $275.5 million. Investing activities used $373.2 million, compared with $80.4 million provided in 2020; financing activities used $84.3 million, versus $242.3 million used. Cash and restricted cash totaled $40.9 million at September 30, down from $189.2 million at year-end 2020.
- Debt and liquidity: Mortgages and notes payable, net, were $2.943 billion, up from $2.470 billion at year-end. The company reported a 41.0% leverage ratio, measured as debt and preferred stock relative to undepreciated asset book value. It had $27.9 million of cash and $13.0 million of restricted cash. Revolver availability was $614.9 million at September 30; $88.0 million was drawn on a separate bridge facility due January 2022. Management said it was in compliance with debt covenants.
- Other: Common dividends were $0.50 per share for the quarter. Office occupancy was 90.4% at September 30, compared with 90.3% at December 31, 2020.
Material changes and drivers
- Q3 revenue increased 8.0% year over year, primarily reflecting the PAC portfolio acquisition, the purchase of the remaining 75% interest in the Forum joint venture, development properties placed in service and higher same-property revenues. Dispositions partly offset the increase.
- Q3 net income and diluted EPS rose substantially, but results included $38.6 million of property disposition gains, compared with $10.0 million a year earlier. For the first nine months, disposition gains fell to $80.4 million from $163.4 million, contributing to lower year-over-year net income and EPS despite higher revenue and NOI. FFO per share increased for both periods.
- Q3 same-property NOI increased 1.6% to $118.7 million; total NOI increased 8.7%. Same-property revenue growth was partly offset by higher property expenses.
- The PAC portfolio purchase price was $653.6 million, including acquisition costs. The company assumed four secured loans recorded at approximately $403 million. It also acquired development land in Nashville; a further $35.1 million land acquisition closed October 4, 2021.
- Q3 office leases signed covered 672,347 square feet. Weighted average GAAP rents were $30.40 per square foot annually, 19.3% above prior leases in those spaces.
Outlook, commentary and risks
- Management expected average office occupancy of approximately 90%–91% for the remainder of 2021. It anticipated higher total NOI for the rest of 2021, supported by acquisitions and developments, while expecting lower same-property NOI versus 2020 as operating expenses rise with increased building usage.
- Management said asset usage remained well below pre-pandemic levels and did not expect a meaningful increase until at least Q1 2022. Lower parking revenue was partly offset by lower related operating costs. COVID-19, customer financial distress, work-from-home trends and office-space demand could affect leasing, occupancy, rents and credit losses.
- The company planned to sell $500–$600 million of non-core assets by mid-2022 to help fund the PAC acquisition. It had sold $163 million since announcing the plan and expected another $87–$137 million of sales in the remainder of 2021; completion, timing and pricing were not assured. Approximately $250 million of planned sales were expected to qualify for Section 1031 tax deferral.
- Other risks include refinancing and interest-rate exposure, property operating-cost increases, development and acquisition execution, and potential oversupply or weaker office employment in its markets. At quarter-end, $373.0 million of variable-rate debt was not protected by hedges; a 100-basis-point rate increase would raise annual interest expense by an estimated $3.7 million.
- The PAC acquisition used entities intended to facilitate Section 1031 reverse exchanges; the company stated it must complete exchanges and take title to the relevant buildings within 180 days of acquisition to obtain the anticipated tax deferral. It also disclosed potential future COVID-related impairments, lease modifications or credit losses, although its current analyses had not required material adjustments through September 30.
Important facts for investors to verify
- Whether planned non-core asset sales are completed by mid-2022, at expected values, and whether the intended Section 1031 exchanges are completed on time.
- How the PAC and Forum acquisitions affect recurring NOI, FFO, occupancy and debt levels, apart from disposition gains and other nonrecurring items.
- Whether occupancy, tenant credit quality, parking revenue and same-property NOI recover as management expects, particularly amid continued changes in office usage.
- How the January 2022 bridge-facility balance is repaid or refinanced, and whether liquidity, covenant compliance and interest costs remain manageable.
- Reconcile GAAP earnings with non-GAAP FFO and evaluate the effect of property sale gains, acquisitions, dispositions and capital spending on recurring cash generation and dividend capacity.