Highwoods Properties, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Highwoods is an office REIT operating primarily in nine U.S. markets through Highwoods Realty Limited Partnership. Unless stated otherwise, dollar amounts below are in millions; the filing reports financial statements in thousands.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Rental and other revenue | $169.4 | $164.9 | Up 2.8% |
| Net operating income (NOI), continuing operations | $112.0 | $107.3 | Up 4.4%; calculated NOI margin was approximately 66.1% versus 65.1% |
| Same-property NOI | $106.9 | $104.4 | Up 2.4% |
| Income from continuing operations | $33.5 | $28.1 | Up approximately 19% |
| Net income | $33.5 | $446.7 | Prior year included large gains from sales of the Country Club Plaza assets |
| Diluted earnings per common share | $0.31 | $4.49 | Prior-year figure included $4.22 per share from discontinued operations |
| FFO available to common stockholders per share | $0.80 | $0.82 | Non-GAAP measure; down 2 cents |
| Operating cash flow | $68.9 | $48.2 | Up $20.7 |
Operating expenses were $125.0 million, including $56.1 million of depreciation and amortization. Interest expense was $17.9 million, down from $20.7 million. The regular dividend declared was $0.44 per share; the Company also paid a $0.80-per-share special dividend in January, principally related to taxable gains from the 2016 Plaza asset sales.
Balance sheet, cash flow and liquidity
- At March 31, 2017, total assets were $4.55 billion and mortgages and notes payable, net, were $2.04 billion, up from $1.95 billion at year-end 2016. Cash and cash equivalents were $4.9 million; restricted cash was $29.2 million.
- Cash from operations of $68.9 million was more than offset by $83.7 million of investing outflows and $29.8 million of financing outflows, producing a $44.6 million decrease in cash during the quarter.
- Capital spending included $59.4 million for development in-process, $24.6 million for tenant improvements and deferred leasing costs, and $17.2 million for building improvements.
- The $475 million unsecured revolver had $131 million outstanding and $343.8 million of unused capacity at quarter-end. The filing states the facility matures in January 2018, with two optional six-month extensions, subject to conditions.
- Debt actions included issuing $300 million of 3.875% notes due 2027 and repaying $379.7 million of 5.85% notes at maturity. The Company also increased its unsecured term loan from $150 million to $200 million. A $100 million secured loan at an effective 4.0% rate was obtained on April 24, 2017.
- Management reported a 36.2% leverage ratio, measured against the undepreciated book value of assets, and stated that the Company was in compliance with debt covenants. It identified $108.3 million of secured debt due November 2017 and $200 million of notes due April 2018.
Material changes and operating trends
- Office occupancy declined to 92.4% from 92.9% at December 31, 2016, primarily after a large Nashville customer’s scheduled lease expiration. Management expected average occupancy to be slightly above 92.0% for the rest of 2017.
- First-quarter new and renewal office leases totaled 715,106 square feet. Combined annual GAAP rents of $27.27 per square foot were 16.6% above prior leases for the same spaces.
- Management attributed revenue growth to development properties placed in service, stronger same-property revenue and acquisitions, partly offset by dispositions. Same-property NOI increased by $2.5 million, reflecting higher revenue and lower expenses.
- Development activity covered approximately 1.64 million square feet in the MD&A; 78.4% was pre-leased. Anticipated total investment was $541.2 million, of which $324.5 million had been invested. Management cited approximately $220 million remaining to fund previously announced development activity.
- Compared with Q1 2016, the quarter had no discontinued-operations income or large Plaza disposal gain. Q1 2017 included a $5.3 million gain on the sale of a building for $13.0 million before $1.2 million of buyer credits.
Outlook, risks and unusual items
- Management expected 2017 rental revenue, continuing-operations NOI and same-property NOI to exceed 2016 levels, with higher rents, cost recovery income, developments and acquisitions cited as drivers. It expected property expenses and depreciation to rise, and interest expense to decrease for the remainder of 2017. No full-year earnings-per-share or FFO guidance is provided in the filing text.
- Management anticipated meeting short-term liquidity needs through operating cash flow and financing sources, including debt and equity issuance, revolver availability, secured borrowing and possible asset sales. It expected to sell $50 million to $150 million of non-core properties in 2017, but gave no assurance of the amount or timing.
- Approximately $656 million of debt was variable-rate and unhedged at quarter-end; a 100-basis-point rate increase would raise annual interest expense by an estimated $6.6 million. Management also cited risks from tenant credit deterioration, leasing and occupancy, market conditions, development costs, interest rates, capital availability and debt refinancing.
- A $7.3 million gain from terminating forward-starting swaps was recorded in accumulated other comprehensive income and is reflected as a settlement adjustment in operating cash flow. The filing estimated $0.5 million of derivative losses would be reclassified to interest expense during the following 12 months.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Key facts investors should verify
- Whether occupancy stabilizes after the Nashville lease expiration and whether management’s expectation of occupancy above 92.0% is achieved.
- Leasing results, including the reported 16.6% rent increase, and whether lease concessions and tenant-improvement costs affect realized returns.
- Funding, completion, leasing and stabilization of the development pipeline, including the remaining investment requirement.
- Refinancing or repayment plans for the 2017–2018 maturities and the January 2018 revolver maturity, as well as continued covenant compliance.
- Actual non-core asset sales, proceeds and use of capital, alongside the Company’s leverage-neutral growth objective and dividend commitments.
- Underlying recurring performance: prior-year Plaza gains materially distort comparisons of GAAP net income and EPS, while FFO per share declined from $0.82 to $0.80.