Highwoods Properties, Inc. — Q2 2015 Form 10-Q
Business and period: Highwoods is an office-focused REIT operating primarily in ten U.S. markets through Highwoods Realty Limited Partnership. This unaudited report covers the quarter and six months ended June 30, 2015. At quarter-end, the portfolio included 31.4 million rentable square feet in service, 0.9 million square feet under development and about 500 acres of development land.
Financial performance and position
- Revenue: Q2 rental and other revenues were $161.1 million, up 5.5% from $152.7 million. First-half revenue was $318.4 million, up 5.7% from $301.2 million.
- Profit and EPS: Q2 net income was $26.9 million versus $24.5 million; diluted EPS was $0.27 versus $0.25. First-half net income was $47.7 million versus $38.1 million; diluted EPS was $0.47 versus $0.39. First-half 2014 EPS included discontinued operations.
- REIT operating measures: Q2 net operating income (NOI) was $103.9 million, up 6.6%; same-property NOI increased 4.2% to $95.5 million. First-half NOI was $203.7 million versus $189.5 million. FFO per diluted share was $0.77 in Q2 versus $0.80, and $1.49 for the first half versus $1.46.
- Occupancy and leasing: Office occupancy was 92.4% at June 30, up from 91.2% at year-end 2014. Q2 second-generation leases covered 916,498 square feet; annualized GAAP rents were 9.3% above rents for the prior leases in those spaces.
- Cash flow and distributions: First-half operating cash flow was $122.3 million, investing cash outflow $116.8 million and financing cash outflow $9.4 million. Cash and cash equivalents were $4.9 million at June 30. Common dividends declared were $0.425 per share for Q2 and $0.85 for the first half.
- Debt and liquidity: Mortgages and notes payable totaled $2.124 billion, up from $2.071 billion at December 31, 2014. Debt included $290.1 million secured and $1.834 billion unsecured. Leverage was 42.1% of undepreciated asset book value; management’s target range is 40%–45%. The $475 million revolver had $315.6 million available at June 30 and $316.6 million at July 27. Management reported compliance with debt covenants.
Changes, outlook and notable items
- Revenue growth reflected improved same-property results, acquisitions and developments placed in service, partly offset by dispositions. Q2 average office occupancy was 92.6%, compared with 90.2% a year earlier.
- Management expected office occupancy of approximately 92%–93% for the rest of 2015, and expected same-property and overall NOI to be higher than in the comparable 2014 periods. No specific full-year revenue or EPS guidance is provided in the filing.
- Management expected about $390 million of capital expenditures remaining for started or committed development projects. Seven listed projects totaled 1.48 million square feet, were 71.1% pre-leased and had anticipated total investment of $484.7 million; $99.2 million had been invested by June 30.
- Q2 net income included gains on property dispositions and higher equity earnings from unconsolidated affiliates, including the company’s share of a joint-venture property-sale gain. These items contributed to reported earnings; FFO, which adjusts for certain property gains and depreciation, declined per share in Q2.
- During Q2, the company acquired its joint-venture partner’s 77.2% interest in a 168,000-square-foot Orlando building, acquired Atlanta land, amended a term loan by increasing it from $225 million to $350 million and extending maturity to June 2020, and prepaid a $39.4 million mortgage. It incurred a $0.2 million debt-extinguishment loss.
- A joint-venture accounting change followed the partner’s irrevocable exercise of a buy-sell provision: the investment shifted to equity-method accounting and the company recorded a $2.2 million gain. The filing retrospectively revised certain prior balance-sheet and equity/capital amounts; income-statement and cash-flow effects were described as immaterial.
- On July 23, 2015, the company sold a building for $15.3 million and expected to record a $6.5 million gain.
- Risks identified include tenant financial deterioration, difficulty leasing vacant or newly developed space, excess competing supply, weaker market growth, higher interest rates or operating costs, limited access to capital, refinancing needs and failure of acquisition or development projects to meet expectations. Management noted that future covenant compliance cannot be assured.
Most important facts to verify
- Whether occupancy, same-property NOI and lease-rate gains continue, and how much is attributable to acquisitions, development and portfolio changes.
- How much reported earnings growth depends on disposition and joint-venture gains, alongside the Q2 decline in FFO per share.
- Funding, leasing, completion timing and returns for the development pipeline and approximately $390 million of expected remaining capital needs.
- Debt maturities, interest-rate exposure, covenant headroom and available revolver capacity; $484 million of debt was not fixed-rate or protected by hedges at June 30.
- The cash-flow, valuation and refinancing implications of the Orlando building’s subordinated note and its contingent “waterfall” payment terms.