Highwoods Properties, Inc. — 2011 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Highwoods is an equity REIT operating primarily through Highwoods Realty Limited Partnership, with an office-focused portfolio across U.S. markets. At quarter-end, it wholly owned 302 in-service properties totaling 29.2 million square feet; the broader portfolio included interests in 337 in-service properties totaling approximately 34.5 million square feet.
Financial results and key metrics
Unless stated otherwise, amounts are in millions of dollars. Comparisons are with the corresponding 2010 period.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Rental and other revenue | $122.1 | $115.5 | $354.1 | $343.8 |
| Net income | $8.2 | $8.8 | $35.1 | $60.9 |
| Net income available to common shareholders | $7.0 | $6.9 | $27.3 | $52.8 |
| Basic and diluted EPS | $0.10 | $0.10 | $0.38 | $0.74 |
| Net operating income (NOI) | $76.1 | $72.2 | $225.8 | $220.8 |
| Funds from operations (FFO), per diluted share | $42.7; $0.56 | $43.2; $0.57 | $134.5; $1.77 | $137.7; $1.82 |
| Operating cash flow | — | $136.1 | $142.7 |
Q3 revenue rose 5.7%; continuing same-property occupancy averaged 90.2%, versus 89.5%. Same-property NOI was $70.5 million in Q3 (up from $69.0 million) and $212.4 million for nine months (versus $212.8 million). Operating margin on rental revenue was 62.3% in Q3 versus 62.5%, and 63.8% for nine months versus 64.2%. FFO is a non-GAAP measure; it was nearly flat in Q3 and lower year over year for the nine-month period.
Nine-month net income and EPS were materially affected by a $25.3 million gain on joint-venture dispositions in 2010, compared with a $2.3 million gain in 2011, and by the 2011 preferred-share redemption charge. Q3 earnings included a $2.6 million gain on a property sale and a $2.3 million gain on a joint-venture interest sale. The common dividend was $0.425 per share for Q3, unchanged from 2010.
At September 30, total assets were $3.17 billion, cash and cash equivalents $11.1 million, restricted cash $23.2 million, and mortgages and notes payable $1.89 billion, up from $1.52 billion at December 31, 2010. Debt was 46.1% of total market capitalization. Nine-month additions to real estate assets and deferred leasing costs were $150.6 million, versus $66.4 million in 2010; investing cash outflow was $180.1 million. The filing reports no debt-covenant violations.
Material changes, outlook and risks
- Q3 acquisitions included a 1.54-million-square-foot Pittsburgh office complex and a 503,000-square-foot Atlanta office building, with stated purchase prices of $188.5 million and $78.3 million. The company expects $33.2 million of additional building improvements and tenant costs for these properties. It estimated an 8.9% weighted-average capitalization rate on $300 million of anticipated total investment, using projected 2012 NOI.
- Management expected rental revenue for the remainder of 2011 to exceed the comparable 2010 period, primarily due to acquisitions. It anticipated up to $50 million of new development in the remainder of 2011 and up to $75 million of non-core property sales. Management expected remaining-2011 rental expenses to be higher, G&A to be lower excluding deferred-compensation valuation effects, and interest expense to be relatively unchanged year over year.
- A new $475 million unsecured revolver replaced the former $400 million facility; it matures in July 2015, with a one-year extension option. Unused capacity was $309.8 million at September 30 and $127.8 million on October 20, as revolver borrowings increased. A $52.1 million secured construction facility was scheduled to mature December 20, 2011, with an extension option.
- On October 3, 2011, Highwoods repaid a $184.4 million secured loan bearing 7.05%, ahead of its January 2012 maturity and without penalty. The company also redeemed its remaining Series B preferred shares during Q2, lowering preferred dividends but recording a $1.9 million redemption-cost charge.
- Key disclosed risks include weaker tenant finances or economic growth, difficulty leasing vacant or newly developed space on expected terms, excess competing supply, higher operating costs or interest rates, constrained access to capital, inability to refinance debt, and potential loss of key executives. A $2.4 million impairment was recorded on two Orlando office properties due to changed disposition timing; management cautioned that further impairment charges could occur.
Most important facts for investors to verify
- Whether same-property occupancy, rents and NOI trends persist, particularly given the slight nine-month decline in same-property NOI.
- Lease-up, tenant retention, required improvement costs and realized returns for the Pittsburgh and Atlanta acquisitions; the projected 8.9% cap rate is forward-looking.
- Liquidity after the October debt repayment and subsequent rise in revolver borrowings, along with refinancing or extension plans for the construction facility.
- How much reported earnings depended on asset-sale gains, and whether FFO and cash generation support the $0.425 quarterly dividend.
- Whether market conditions or disposition assumptions lead to additional property impairments, and whether debt covenants remain satisfied.