Highwoods Properties, Inc. — Q1 2013 10-Q
Reporting period: Three months ended March 31, 2013. Highwoods is an equity REIT focused primarily on office properties, operating through Highwoods Realty Limited Partnership. At quarter-end, it wholly owned 303 in-service properties totaling 30.1 million square feet, plus development land and two office development properties.
Financial performance and position
Amounts below are in millions, except per-share data and percentages.
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Rental and other revenue | $137.0 | $124.9 |
| Net operating income (NOI) | $88.1 | $80.5 |
| Same-property NOI | $79.1 | $79.4 |
| Income from continuing operations | $13.1 | $11.3 |
| Net income available to common stockholders | $12.3 | $16.7 |
| Basic and diluted EPS | $0.15 | $0.23 |
| FFO available to common stockholders per share (non-GAAP) | $0.67 | $0.70 |
| Operating cash flow | $42.1 | $22.1 |
| Cash and cash equivalents at quarter-end | $12.2 | $13.8 at Dec. 31, 2012 |
| Mortgages and notes payable | $1,896.3 | $1,859.2 at Dec. 31, 2012 |
- Rental revenue rose 9.7%, mainly from acquisitions and recently placed-in-service development properties. NOI increased 9.4%, while same-property NOI slipped 0.4%. Operating margin was 64.3%, versus 64.5%.
- Continuing-operations EPS remained $0.14. Lower total net income and EPS primarily reflected smaller gains on discontinued-property sales: discontinued operations contributed $0.6 million in Q1 2013 versus $7.0 million in Q1 2012.
- Cash used in investing was $99.3 million, largely reflecting $88.3 million of real estate acquisitions; financing provided $55.5 million. Common dividends declared were $0.425 per share, unchanged year over year.
- Total assets were $3,420.6 million and total liabilities were $2,093.1 million. Debt comprised $547.2 million secured and $1,349.2 million unsecured; weighted average rates were 5.75% and 4.44%, respectively. The company reported a 43.9% debt-and-preferred-stock-to-undepreciated-assets leverage ratio and compliance with debt covenants.
- The $475 million revolving credit facility had $97.5 million drawn and $377.4 million unused at March 31; unused availability was $380.4 million on April 19. The facility matures in July 2015, with a one-year extension option subject to conditions.
Material developments and outlook
- Q1 acquisitions included four office properties in Tampa and Greensboro and five acres of Memphis development land, for stated purchase prices totaling approximately $88.1 million. The company sold two Orlando office properties for $14.6 million and recorded a $0.3 million disposition loss.
- Occupancy decreased from 90.9% at year-end 2012 to 90.6% at March 31, 2013. Management expected average occupancy of approximately 90.0% for the remainder of 2013, citing scheduled expirations of large Tampa and Atlanta customers.
- Management anticipated up to $200 million of new development starts, up to $325 million of acquisitions, and up to $175 million of non-core property sales during 2013. It expected revenue and property expenses to rise for the remainder of the year, operating margin to remain broadly consistent, and interest expense to decrease. These are forward-looking expectations, not guarantees.
- Management reported Q1 impairment charges of $0.4 million on two Atlanta industrial properties and $0.7 million on five Atlanta industrial properties held for sale. Unconsolidated affiliates also recorded $4.8 million of impairments, of which Highwoods’ share was $1.0 million.
- After quarter-end, Highwoods sold five Atlanta industrial properties for $4.5 million on April 15, and six industrial properties plus land for $38.7 million on April 24; it expected a $13.2 million gain on the latter sale. A joint venture sold an office property for $6.0 million on April 17.
- Key risks identified include tenant financial deterioration, difficulty leasing vacant or newly developed space, weaker market conditions or excess supply, rising interest rates and operating costs, access to capital and refinancing risk, and potential loss of key executives. Management cautioned that it cannot assure continued covenant compliance under all future conditions.
Investor verification priorities
- Confirm occupancy, lease expirations and renewal economics, especially the expected large-customer expirations in Tampa and Atlanta.
- Assess whether acquisition-driven revenue and NOI growth offsets lower same-property NOI, operating costs and leasing capital requirements.
- Review debt maturities, borrowing costs, revolver availability, covenant headroom and the ability to refinance on acceptable terms.
- Separate recurring operating performance from property-sale gains, impairments and other discontinued-operation items; review FFO alongside GAAP earnings.
- Track execution of the 2013 development, acquisition and disposition plans, including the reported post-quarter sale proceeds and expected gain.