Highwoods Properties, Inc. — Q1 2015 Form 10-Q
Business context and reporting period. This unaudited report covers the three months ended March 31, 2015, and combines Highwoods Properties, Inc. and its operating partnership. Highwoods is an office-focused REIT operating in U.S. business districts. At quarter-end it owned or had interests in 31.3 million rentable square feet of in-service properties, 1.2 million square feet under development, and about 500 acres of development land.
Financial and operating results
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Rental and other revenue | $157.3 million | $148.5 million; up 6.0% |
| Net income | $20.8 million | $13.6 million |
| Net income available to common stockholders | $19.3 million; diluted EPS $0.21 | $12.1 million; diluted EPS $0.13 |
| Net operating income (NOI), continuing operations | $99.8 million | $92.1 million; up 8.4% |
| Same-property NOI | $93.7 million | $87.2 million; up 7.5% |
| FFO available to common stockholders | $69.0 million; $0.72 per diluted share | $61.2 million; $0.66 per diluted share |
| Cash from operating activities | $33.1 million | $31.4 million |
| Cash used in investing activities | $47.1 million | $44.3 million |
| Cash and cash equivalents | $11.4 million at March 31 | $8.8 million at December 31, 2014 |
| Mortgages and notes payable | $2.089 billion at March 31 | $2.071 billion at December 31, 2014 |
- Office portfolio occupancy was 91.5% at March 31, up from 91.2% at year-end and 89.5% in Q1 2014. The filing reports expected occupancy of approximately 92%–93% for the remainder of 2015.
- Q1 office leases covered 1.26 million square feet. New and renewal lease GAAP rents averaged $24.77 per square foot, 9.8% above prior rents for the same space.
- Rental property expenses rose 2.0%; depreciation and amortization rose 4.4%; general and administrative expenses rose 6.7%. Interest expense was nearly unchanged.
- Common dividends declared were $0.425 per share, unchanged year over year. The Company issued 914,126 shares under equity sales agreements at an average gross price of $45.34, receiving $40.8 million net.
Debt, liquidity and capital
- Debt comprised $311.5 million secured and $1.778 billion unsecured. Weighted-average rates were 5.95% and 3.94%, respectively. The filing states that all but $428 million of debt was fixed-rate or protected by hedges.
- The $475 million unsecured revolving facility matures in January 2018. At March 31, $228 million was drawn and unused capacity was $246.8 million; availability was $235.8 million on April 20. The Company reported compliance with debt covenants.
- Debt and preferred stock represented 41.8% of undepreciated asset book value, within management’s targeted 40%–45% range. Operating cash flow did not cover Q1 investing outlays and common and preferred dividends; financing activities provided $16.6 million.
- Management expects cash, operating cash flow and revolver capacity to meet short-term needs. It expects long-term funding from operating cash flow, debt, equity and asset dispositions.
Changes, outlook and notable items
- Revenue growth reflected 2014 acquisitions, developments placed in service and higher same-property revenue, partly offset by $5.2 million of revenue lost from dispositions. Same-property revenue increased $8.0 million while same-property expenses increased $1.4 million.
- Common-stockholder net income included $1.2 million of property-sale gains and increased equity-method earnings, including Highwoods’ $1.1 million share of a joint-venture property-sale gain. These items contributed to earnings growth; FFO, a non-GAAP measure, also increased.
- Management expects higher same-property and overall NOI for the remainder of 2015, and higher revenue and operating expenses. It expects interest expense to rise, citing higher average debt and anticipated increases in LIBOR. The filing provides no specific full-year EPS or FFO guidance.
- At March 31, approximately $274 million remained to fund started or committed development projects. Management anticipated up to $250 million of new development, up to $300 million of acquisitions, and up to $191 million of additional non-core asset sales during the rest of 2015. These are plans, not completed transactions.
- Development projects totaled 1.21 million square feet with anticipated investment of $403.9 million; 93.0% was pre-leased. Timing, costs, leasing and stabilization remain execution considerations.
- Cash-flow hedges generated $2.9 million of unrealized losses in Q1, recorded in other comprehensive loss. Management estimated $3.0 million would be reclassified to interest expense over the following 12 months. Forward-looking results are subject to tenant credit, leasing, market, development, interest-rate and capital-access risks.
Important facts for investors to verify
- Whether occupancy, lease spreads and same-property NOI improve as management expects, and how much growth is offset by property expenses and lease-up costs.
- Development commitments, project delivery and stabilization schedules, pre-leasing, remaining capital requirements, and the outcomes of planned acquisitions and dispositions.
- Debt maturities, revolver availability, covenant headroom, variable-rate exposure and the effect of higher LIBOR on interest expense.
- Cash available after capital spending and distributions, including the sustainability of the $0.425 quarterly dividend amid equity issuance and ongoing development funding.
- How much reported earnings growth depends on property-sale and joint-venture gains; assess GAAP earnings alongside FFO and NOI, which are non-GAAP measures.