Highwoods Properties, Inc. and Highwoods Realty Limited Partnership — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Highwoods is an office REIT operating primarily in nine southeastern and mid-Atlantic markets through its Operating Partnership. At quarter-end, it owned or held interests in 31.2 million rentable square feet of in-service properties, 1.3 million square feet under development and approximately 500 acres of development land.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 or prior period |
|---|---|---|
| Rental and other revenues | $164.9 million | $145.2 million |
| Income from continuing operations | $28.1 million | $16.9 million |
| Net income | $446.7 million | $20.8 million |
| Net income available to common stockholders; diluted EPS | $432.8 million; $4.49 | $19.3 million; $0.21 |
| FFO available to common stockholders; FFO per diluted share | $81.5 million; $0.82 | $69.0 million; $0.72 |
| Net cash from operating activities | $48.2 million | $33.1 million |
| Net cash from investing activities | $333.8 million | Used $47.1 million |
| Net cash from financing activities | Used $383.8 million | Provided $16.6 million |
| Debt, net of issuance costs | $2.101 billion | $2.492 billion at Dec. 31, 2015 |
| Cash and cash equivalents | $3.3 million | $5.0 million at Dec. 31, 2015 |
Q1 2016 net income includes a $414.5 million gain on discontinued operations from the sale of the Country Club Plaza assets; reported earnings and EPS therefore substantially exceed recurring operating results. Continuing-operations diluted EPS was $0.27, versus $0.17 in Q1 2015. Dividends declared were $0.425 per common share, unchanged year over year.
Continuing-operations NOI was $107.3 million, up 15.7%; same-property NOI was $93.4 million, up 4.5%, and same-property cash NOI was $88.5 million versus $85.3 million. Office occupancy was 92.2% at quarter-end, down from 92.6% at year-end 2015. Q1 second-generation lease rents were 9.7% higher than rents on the prior leases, on a combined GAAP basis.
Total assets were $4.514 billion. Debt consisted of $174.5 million secured and $1.934 billion unsecured indebtedness; weighted-average rates were 5.14% and 3.73%, respectively. The company reported a 38.4% leverage ratio under its stated measure and $216.8 million of unused revolving-credit capacity at March 31. The $475 million revolver matures in January 2018, with two optional six-month extensions. Management reported compliance with debt covenants.
Material changes and notable transactions
- On March 1, the company sold substantially all Country Club Plaza assets for $660.0 million before buyer credits. It recorded $414.5 million in discontinued-operations gains and $1.3 million in property-disposition gains. Net proceeds included $420 million used to repay debt; approximately $230 million was held in escrow pending potential 1031 reinvestment, debt repayment or other corporate uses.
- The company prepaid its $350 million unsecured bridge facility without penalty. Debt fell approximately $391 million from year-end, reflecting repayments including the bridge balance and sale proceeds.
- Equity issuance generated $47.6 million net proceeds during the quarter. The company had authorization to sell up to $250 million of common stock under equity distribution agreements.
- At quarter-end, 1.445 million square feet of development was underway, with anticipated total investment of $452.6 million, $162.1 million invested and 64.7% pre-leased. Management identified approximately $297 million of remaining funding for started or committed development projects.
- After quarter-end, the company acquired 14 acres of Nashville development land for $9.0 million.
Outlook, commentary and risks
- Management expected 2016 office occupancy to remain approximately 92%–93%, same-property NOI to exceed 2015, and continuing-operations NOI to benefit from the full-year contribution of 2015 acquisitions and developments. It also expected revenue and operating expenses to rise for those reasons, while interest expense was expected to decline. These are management expectations, not formal earnings guidance.
- Management expected operating cash flow for the remainder of 2016 to be higher than in 2015, while investment spending would principally reflect acquisitions and development, partly offset by non-core asset-sale proceeds.
- Key stated risks include weaker customer finances or market economies, leasing delays or less favorable lease terms, excess competing development, higher interest rates or operating costs, difficulty obtaining capital or refinancing debt, and delays or failure to reinvest escrowed 1031 proceeds. Management cautioned that covenant compliance may depend on future operating results, transactions and economic conditions.
- The company entered into $150 million of forward-starting swaps locking the underlying Treasury rate at 1.90% for an expected debt issuance during June 2016–March 2017. It had $583 million of variable-rate debt not protected by hedges; a 100-basis-point rate increase would raise annual interest expense by an estimated $5.8 million.
- A 32,000-square-foot building was sold to a family business controlled by a company director for $4.7 million before buyer credits; the company stated the price exceeded an independent appraisal. The filing also reported no default or impairment indicators for its mortgage and notes receivable.
Important facts for investors to verify
- Separate the $414.5 million Plaza disposition gain from recurring results; review continuing-operations earnings, FFO and same-property NOI trends.
- Track where the approximately $230 million of escrowed proceeds is reinvested or otherwise applied, including any tax consequences or delays.
- Monitor occupancy, lease renewals, rent spreads, development pre-leasing and the remaining $297 million of expected development funding.
- Review debt maturities, variable-rate exposure, revolver availability and covenant compliance as conditions and financing needs change.
- Assess the effect of common-stock issuance and potential future equity sales on per-share results and ownership dilution.