Highwoods Properties, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Highwoods is an office REIT operating primarily in the Southeast and other selected U.S. markets through Highwoods Realty Limited Partnership. At quarter-end, it owned or had an interest in 27.6 million square feet of in-service properties, with development projects and land for potential future development.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Change |
|---|---|---|---|
| Rental and other revenue | $203.8 million | $185.5 million | +9.9% |
| Net operating income (NOI) | $141.5 million | $129.3 million | +9.4% |
| Same-property NOI | $119.4 million | $119.8 million | -0.4% |
| Net income | $52.6 million | $61.8 million | -14.9% |
| Net income available to common stockholders | $50.5 million | $59.3 million | -14.8% |
| Diluted earnings per common share | $0.48 | $0.57 | -$0.09 |
| FFO available to common stockholders per share | $1.00 | $0.93 | +$0.07 |
For the first six months, revenue was $410.2 million versus $369.3 million; net income was $94.7 million versus $118.7 million; diluted EPS was $0.86 versus $1.09; and FFO per share was $2.03 versus $1.84. FFO is a non-GAAP measure and should be considered alongside GAAP results.
Q2 revenue growth mainly reflected the 2021 Preferred Apartment Communities acquisition, properties placed in service, and higher same-property revenue; dispositions partly offset the increases. Same-property NOI declined as expense growth slightly exceeded revenue growth. GAAP net income fell despite higher disposition gains, principally reflecting a new $35.0 million impairment charge and higher depreciation and interest expense. Q2 property-sale gains were $50.0 million, compared with $22.9 million a year earlier.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $201.9 million, compared with $197.4 million. Investing activities used $69.9 million, versus $228.4 million, and financing activities used $91.6 million, versus $99.8 million. Cash and restricted cash totaled $71.7 million at June 30, including $25.0 million of unrestricted cash.
- Net real estate assets were $4.94 billion. Mortgages and notes payable, net, were $2.80 billion, up from $2.79 billion at year-end 2021. Debt included $488.0 million secured and $2.33 billion unsecured; weighted average rates were 3.63% and 3.47%, respectively.
- Debt and preferred stock equaled 39.3% of undepreciated asset book value; management reported a 43.5% ratio to total capitalization. The company was in compliance with debt covenants at quarter-end.
- The $750 million revolving facility had $659.9 million of unused capacity at June 30 and $619.9 million at July 19. The facility matures in March 2025, with two six-month extension options. A $200 million term loan was extended to May 2026; a $150 million delayed-draw loan, due May 2027, was required to be drawn by August 2022.
- A $250 million unsecured note maturity is due in January 2023. Management said it expects to meet near-term liquidity needs using operating cash flow and available financing sources, including the revolver, term loans, debt or equity issuance, and asset sales.
Portfolio, outlook and material developments
- Office portfolio occupancy was 90.6% at June 30, down from 91.2% at December 31, 2021. Management expected occupancy of approximately 90.0%–91.0% for the remainder of 2022.
- Q2 new and renewal leases produced annualized GAAP rents of $31.15 per square foot, 12.6% above rents on the prior leases in those spaces. Management expected same-property NOI to be relatively consistent with 2021 for the rest of 2022 and total NOI to be higher, mainly due to the PAC acquisition and completed developments.
- Management noted that building use remained below pre-pandemic levels, with low parking revenue largely offset by reduced operating costs, and expected usage to gradually increase during the remainder of 2022.
- The $35.0 million impairment related to EQT Plaza in Pittsburgh, following its classification as non-core amid plans to exit Pittsburgh. The building’s 317,000-square-foot lease with EQT Corporation expires in September 2024; renewal is not assured. Pittsburgh assets represented about 6% of overall NOI and were 92.9% occupied.
- The company planned to acquire 650 South Tryon in Charlotte for $203.0 million, including anticipated leasing capital expenditures. The 367,000-square-foot building was 79% leased; closing was scheduled for August 2022. The company had posted $37.5 million in earnest money deposits, non-refundable except in limited circumstances.
- After quarter-end, Highwoods formed 50%-owned Dallas development joint ventures with Granite Properties for two Class AA projects totaling 1.064 million square feet. Its $55.7 million equity contribution was funded July 12; the projects have $380 million of construction loans in aggregate. The company plans to fund its Dallas entry partly through Pittsburgh asset sales but gave no timetable and cautioned that sales may not occur on favorable terms or at all.
- Key risks include office-space demand and work-from-home trends, customer credit deterioration, leasing and development execution, interest-rate increases, refinancing and covenant risks, and uncertainty around planned acquisitions and non-core asset dispositions.
Important facts for investors to verify
- Whether 650 South Tryon closed as planned, and the final purchase cost, occupancy and required leasing investment.
- Progress and economics of the Dallas projects, including leasing, construction costs, funding needs and stabilization timelines.
- Whether Pittsburgh assets can be sold, at what prices, and how a market exit affects NOI and the use of sale proceeds.
- Repayment or refinancing plans for the $250 million January 2023 maturity and the status and cost of the delayed-draw loan.
- Subsequent changes in occupancy, same-property NOI, office usage, tenant credit conditions and capital requirements.