Highwoods Properties, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited consolidated results cover Highwoods Properties, Inc. and its operating partnership, which conducts the business. The company is an office REIT operating primarily in nine southeastern and Pittsburgh markets. At quarter-end it owned or held interests in 30.7 million rentable square feet of in-service properties, 1.5 million square feet under development and approximately 400 acres of development land.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Rental and other revenues | $180.4 million | $169.4 million; up 6.5% |
| Net income | $34.2 million | $33.5 million |
| Net income available to common stockholders | $32.4 million | $31.7 million |
| Diluted earnings per common share | $0.31 | $0.31 |
| FFO available to common stockholders per share | $0.85 | $0.80 |
| Net operating income (NOI) | $121.0 million | $112.0 million; up 8.0% |
| Same-property NOI | $110.9 million | $107.8 million; up 2.8% |
| Cash provided by operating activities | $78.5 million | $68.9 million |
| Cash used in investing activities | $145.6 million | $83.6 million |
| Cash and cash equivalents at March 31 | $31.0 million | $3.3 million at December 31, 2017 |
| Net mortgages and notes payable | $2,112.6 million | $2,014.3 million at December 31, 2017 |
| Total assets | $4,695.5 million | $4,623.8 million at December 31, 2017 |
Cash and restricted cash combined was $67.9 million at March 31. Net cash decreased $20.5 million during the quarter. The company’s 2018 common dividend was $0.4625 per share for the quarter; the same quarterly dividend was declared again in April for payment in June.
Debt comprised $98.5 million secured and $2,024.7 million unsecured indebtedness. Weighted average interest rates were 4.0% and 3.83%, respectively. The company reported $360 million of variable-rate debt not protected by hedges, a 36.0% leverage ratio against undepreciated asset book value, and compliance with debt covenants. The $600 million revolving facility had no borrowings at March 31; unused capacity was $599.5 million then and $427.5 million on April 17.
Changes versus the prior comparable period
- Revenue increased $11.0 million, mainly from development properties placed in service, higher same-property revenue and a $1.9 million restoration fee. Property dispositions reduced revenue by $4.1 million.
- Same-property NOI rose $3.0 million: revenue growth of $4.7 million was partly offset by $1.6 million higher expenses. Overall NOI benefited from development properties placed in service, partly offset by NOI lost from sold properties.
- GAAP net income increased modestly despite no property disposition gains in Q1 2018; Q1 2017 included $5.3 million in gains. Diluted EPS remained $0.31, while FFO per share increased to $0.85 from $0.80.
- Operating cash flow increased $9.6 million. Investing outflows rose mainly due to acquisition activity and the absence of prior-year property-sale proceeds. Financing cash flow was positive $46.6 million, versus an outflow of $29.8 million in 2017, when a special dividend was paid.
Outlook, management commentary and risks
- Office portfolio occupancy declined from 92.9% at year-end 2017 to 92.1% at March 31, primarily following scheduled expirations by two Atlanta customers. Management expected average occupancy of approximately 91% for the rest of 2018.
- First-quarter second-generation office leases covered 857,142 square feet; weighted average GAAP rent of $28.35 per square foot was 19.7% above the prior leases in those spaces.
- Management expected same-property NOI and total NOI to be higher for the remainder of 2018 than in 2017. Expected drivers included higher rents, parking income and development activity, partly offset by lower occupancy, higher operating expenses and dispositions. Management also expected higher revenues, rental expenses and interest expense for the remainder of 2018.
- Approximately $156 million of expected capital expenditures remained for started or committed development projects. Five disclosed projects totaled 728,400 square feet, were 82.7% pre-leased and had anticipated total investment of approximately $246 million.
- Management expected to sell $61 million to $136 million of non-core properties during 2018, but gave no assurance on whether or when sales would occur. Short- and long-term funding sources include operating cash flow, debt, revolving credit, equity issuance and asset sales.
- In Q1 the company acquired two Nashville development parcels totaling approximately nine acres for $50.6 million and issued $350 million of 4.125% notes due 2028. On April 16 it repaid $200 million of 7.5% notes at maturity.
- Key risks cited include tenant credit deterioration, leasing and re-leasing uncertainty, development delays or cost overruns, excess office supply or weaker market employment, higher interest rates and expenses, access to capital, debt refinancing and loss of key executives. Future distributions are at the board’s discretion and reduce cash available for other uses.
- Revenue-recognition guidance adopted January 1, 2018 had no cumulative-effect adjustment. The company was still evaluating the effects of the new lease standard due in 2019, including expensing certain leasing costs that currently may be capitalized. No material effect was expected from the hedge-accounting update; the company was evaluating the expected-credit-loss standard due in 2020.
Important facts for investors to verify
- Whether occupancy stabilizes near management’s approximately 91% expectation, particularly after the Atlanta expirations.
- Whether leasing spreads, development commencements and stabilization support forecast NOI growth, and whether development costs remain within budgets.
- Execution and timing of the planned $61–$136 million non-core asset sales and the remaining approximately $156 million of committed development spending.
- Debt maturities, interest-rate exposure and liquidity after the April repayment of $200 million of 7.5% notes; confirm the revolving facility’s subsequent availability and borrowings.
- How much of reported earnings and cash generation is recurring: Q1 2017 included disposition gains, while Q1 2018 included a restoration fee and hedge-related comprehensive income.
- Potential effects of the upcoming lease-accounting and credit-loss standards, and any changes in dividend capacity or covenant headroom.