Highwoods Properties, Inc. — FY2022 Form 10-K
Business context and reporting period. Highwoods is an office REIT that owns, leases, manages, acquires and develops properties, primarily in business districts across the Southeast and Texas. This annual filing covers the year ended December 31, 2022; it is not a standalone fourth-quarter report. At year-end, the portfolio included 27.6 million rentable square feet and was 91.0% occupied.
Financial and operating performance
| Metric | FY2022 | FY2021 | Change / context |
|---|---|---|---|
| Rental and other revenue | $828.9 million | $768.0 million | Up 7.9% |
| Net operating income (NOI) | $569.1 million | $531.6 million | Up 7.1%; NOI margin approximately 68.7%, versus 69.2% |
| Same-property NOI | $478.4 million | $474.4 million | Up 0.9% |
| Net income | $164.0 million | $323.3 million | Down substantially |
| Diluted EPS | $1.49 | $2.98 | Down $1.49 |
| FFO per diluted share | $4.03 | $3.86 | Up 4.4%; non-GAAP measure |
| Cash from operating activities | $421.8 million | $414.6 million | Up $7.2 million |
| Cash used in investing activities | $614.8 million | $287.7 million | Greater investment in joint ventures, improvements and other activity |
| Mortgages and notes payable | $3.20 billion | $2.79 billion | Up approximately $408 million |
| Cash and cash equivalents | $21.4 million | $23.2 million | Year-end balance |
Net income fell mainly because gains on property dispositions were $110.5 million lower than in 2021, while 2022 included $36.5 million of real estate impairment charges and higher interest expense. Revenue growth reflected acquisitions, development properties placed in service and higher same-property revenue, partly offset by dispositions. Interest expense rose 22.8% to $105.4 million. The Company reported $936 million of variable-rate debt not protected by hedges; a 100-basis-point rate increase would add an estimated $9.4 million to annual interest expense.
Material changes and strategic activity
- Occupancy at year-end edged down to 91.0% from 91.2% in 2021. Average occupancy for the full year was 90.8%, versus 90.0% in 2021.
- New and renewal second-generation leases signed in the fourth quarter had annual GAAP rents 9.0% above the prior leases in those spaces.
- Highwoods entered Dallas through joint ventures for Granite Park Six, 23Springs and McKinney & Olive, and acquired the Charlotte office building SIX50 at Legacy Union for a net purchase price of $198 million.
- The in-process development pipeline totaled 1.6 million square feet, with anticipated gross investment of $928.6 million; projects were 20.1% pre-leased at year-end.
- Management plans to exit Pittsburgh over time and expects to sell up to $400 million of non-core properties in 2023; no sale timetable or completion is assured. A $35 million impairment was recorded on Pittsburgh’s EQT Plaza, whose 317,000-square-foot EQT Corporation lease expires in September 2024.
- Effective January 1, 2023, changes to the Markel joint-venture agreement require both partners’ consent on major policies. Highwoods consequently stopped consolidating Markel and will use the equity method.
Outlook, risks and contingencies
- Management expects 2023 average occupancy of approximately 89%–90%, same-property NOI below 2022, and total NOI approximately similar to 2022. It expects revenue to rise, while operating expenses and interest expense are expected to increase; operating cash flow is expected to decline.
- Highwoods declared and paid $0.50 per common share each quarter in 2022, or $2.00 for the year. The board declared another $0.50 quarterly dividend in February 2023. Future dividends remain discretionary and depend on cash flows, debt obligations, capital needs and REIT requirements.
- Liquidity included $21.4 million cash and $363.9 million of unused revolving-credit capacity at December 31, 2022. The company reported compliance with debt covenants and expects liquidity sources to meet near-term needs. Its $750 million revolver was scheduled to mature in March 2025, with extension options; management cited no debt maturities before 2026 apart from term-loan obligations and other items described in the filing.
- Key risks include sustained work-from-home adoption and weaker office demand, lease renewals and tenant-improvement costs, customer credit and concentration, rising interest rates, refinancing and covenant risks, development costs and leasing, property dispositions, and weather, climate, environmental and cybersecurity events.
- Ordinary-course legal claims were not expected to have a material adverse effect. The auditor issued unqualified opinions on the financial statements and the Company’s internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether occupancy, leasing spreads and tenant retention meet management’s 2023 expectations, especially as large leases expire.
- Progress and funding needs for the $928.6 million development pipeline, including the economics and commitments of unconsolidated joint ventures.
- Execution and pricing of planned non-core and Pittsburgh dispositions, including the implications of the EQT Plaza lease expiration and impairment.
- Debt maturities, variable-rate exposure, revolver availability and any effect of higher rates on interest expense, refinancing and dividends.
- How the 2023 Markel deconsolidation affects reported assets, revenue, NOI and comparability with 2022.
- Reconciliation of GAAP earnings and FFO, and the sustainability of the $2.00 annualized common dividend against cash flows and capital requirements.