Highwoods Properties, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unaudited results are presented for Highwoods Properties, Inc. and its operating partnership, which conducts substantially all of the business. Highwoods is an equity REIT focused primarily on office properties in the southeastern and midwestern United States. At quarter-end it wholly owned 291 in-service properties totaling 29.6 million square feet.
Financial results and key metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Rental and other revenue | $138.5 million | $126.7 million | $274.6 million | $250.8 million |
| Income from continuing operations | $16.2 million | $11.0 million | $29.4 million | $21.9 million |
| Net income available to common shareholders | $27.5 million | $13.0 million | $39.9 million | $29.7 million |
| Basic/diluted earnings per share | $0.33 | $0.17 basic; $0.17 diluted | $0.49 | $0.40 |
| FFO available to common shareholders per share | $0.70 | $0.69 | $1.37 | $1.39 |
- Q2 revenue rose 9.3%, mainly from acquisitions; same-property revenue declined $1.1 million. For the first half, revenue rose 9.5%, with acquisitions contributing $24.1 million and lower same-property revenue partly offsetting growth.
- Q2 net income included $13.2 million of gains on dispositions of discontinued operations, versus $1.4 million a year earlier. The first-half gain was $13.7 million versus $6.5 million. Thus, reported earnings growth materially reflects property sales; FFO per share was nearly flat in Q2 and lower for the first half.
- Same-property NOI was $78.9 million for Q2, versus $79.0 million, and $157.2 million for the first half, versus $157.7 million. Same-property cash NOI increased to $76.4 million from $74.4 million in Q2 and to $151.1 million from $146.8 million for the first half.
- Q2 operating margin increased to 64.2% from 63.8%; first-half margin was 64.2% versus 64.1%. Common dividends declared remained $0.425 per share per quarter ($0.85 for the first half).
- For the six months, operating cash flow was $116.9 million, compared with $93.3 million. Investing used $240.7 million, primarily reflecting $228.5 million of real estate acquisitions; financing provided $120.1 million. Cash and cash equivalents were $10.1 million at June 30, down from $13.8 million at year-end.
- Debt totaled $1.932 billion at June 30, including $544.5 million secured and $1.387 billion unsecured, up from $1.859 billion at year-end. Weighted average rates were 5.75% on secured debt and 4.34% on unsecured debt. The $475 million revolving facility had $339.5 million unused at quarter-end and $361.9 million available July 18.
Material changes, outlook and notable items
- Occupancy declined to 90.0% at June 30 from 90.9% at December 31, 2012; management attributed the decline mainly to a large scheduled Tampa tenant expiration and the acquisition of a relatively low-occupied Atlanta building. Management expected average occupancy of 90.1% in the second half, versus 90.4% in the first half, partly due to a further large Atlanta expiration.
- In Q2, Highwoods acquired a 553,000-square-foot Atlanta office property for $140.1 million; it was 67% occupied at closing. Management estimated a 4.9% capitalization rate based on projected first-year GAAP NOI from existing tenants, after anticipated investment. First-half acquisitions also included properties in Tampa and Greensboro.
- Management anticipated up to $235 million of new development starts, up to $550 million of acquisitions and up to $225 million of non-core property sales in 2013. These are plans, not assurances. Expected capital expenditures for started or committed development projects were $72.9 million at June 30.
- After quarter-end, on July 19, the company acquired its partner’s 60% interest in a joint venture owning five Orlando office buildings totaling 1.3 million square feet for $113.3 million. It expected to record an approximately $7 million gain from remeasuring its previously held interest; acquired debt matures in July 2014.
- Moody’s upgraded the senior unsecured rating from Baa3 to Baa2 in June. The upgrade reduced the revolving-facility margin and fee; rates on two bank term loans were also reduced effective July 1. The company reported compliance with debt covenants.
- Risks identified include tenant credit deterioration, leasing and occupancy challenges, excess market supply, weaker economic growth, higher interest rates or operating costs, capital availability and refinancing risk, and the possibility of losing key executives. A 100-basis-point rise in rates was estimated to increase annual interest expense by $3.4 million on unhedged variable-rate debt.
- Management said operating revenues and expenses would rise for the remainder of 2013 mainly because of the full-period contribution of recent acquisitions; it expected operating margin to decrease slightly, while interest expense was expected to decline. No formal earnings or FFO guidance was provided in the supplied filing text.
Most important facts for investors to verify
- How much of earnings improvement is recurring property performance versus disposition gains; compare GAAP earnings with FFO and same-property NOI.
- Whether occupancy stabilizes after the cited tenant expirations and whether leasing results support management’s second-half outlook.
- Execution, cost and returns on the acquisition and development pipeline, including the Atlanta property’s lease-up and the post-quarter Orlando transaction.
- Debt maturities, covenant headroom, refinancing terms and interest-rate exposure, particularly the Orlando debt due in July 2014.
- Funding needs and dilution from continued equity issuance, while maintaining the stated dividend and planned investment program.