Highwoods Properties, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; comparison is with the corresponding 2011 periods. Highwoods is an equity REIT focused primarily on office properties, with industrial and retail assets. At quarter-end, it wholly owned 304 in-service properties totaling 29.5 million square feet.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Rental and other revenue | $130.7m | $114.7m | $258.8m | $227.0m |
| Net operating income (NOI) | $83.6m | $74.7m | $166.5m | $147.1m |
| Net income available to common stockholders | $13.0m | $10.1m | $29.7m | $20.2m |
| Diluted earnings per share | $0.17 | $0.14 | $0.40 | $0.28 |
| FFO available to common stockholders per share | $0.69 | $0.60 | $1.39 | $1.21 |
Q2 income from continuing operations was $12.4m versus $13.7m; the increase in common-stockholder net income also reflected discontinued-operation gains and lower preferred dividends. Six-month discontinued operations included $6.5m of disposition gains. FFO is a non-GAAP measure; Q2 FFO available to common stockholders was $54.1m versus $45.8m.
Q2 same-property average occupancy increased to 91.4% from 89.9%, and annualized GAAP rent per square foot rose to $18.82 from $18.54. Same-property NOI was $74.6m in Q2, up from $72.6m; six-month same-property NOI was $149.5m versus $143.5m. The Q2 operating margin, defined as revenue less rental property expenses as a share of revenue, declined to 64.0% from 65.2%; six-month margin was 64.3% versus 64.8%.
For the six months, operating cash flow was $93.3m versus $87.6m. Investing activities used $39.0m and financing activities used $59.0m; cash declined to $6.5m from $11.2m at year-end. Common dividends were $0.425 per share for Q2 and $0.85 per share for the first half, unchanged from 2011 comparable periods.
Mortgages and notes payable totaled $1.823bn at June 30, down from $1.903bn at December 31, 2011; debt consisted of $743.5m secured and $1.080bn unsecured. Reported interest expense was $49.3m for the first half, up from $47.5m. Debt was 40.0% of total market capitalization; management reported debt at 44.9% of undepreciated asset book value. The $475m revolving facility had $399.4m unused at quarter-end and $446.8m unused on July 19. Management said it was in compliance with debt covenants.
Changes, transactions, and unusual items
- Revenue growth reflected acquisitions, including Pittsburgh and Atlanta properties acquired in 2011 and a Raleigh-area acquisition, as well as improved same-property occupancy and rents. Acquisitions accounted for most of the increase in rental expenses and depreciation; the Q2 margin nevertheless declined.
- In Q2, the company acquired a 178,300-square-foot Cary, North Carolina office property from a joint venture for an agreed value of $26m, offset against an advance due from the venture. It sold a non-core Pinellas County office property for $9.5m and recorded a $1.4m gain.
- It repurchased $12.1m principal amount of 5.85% notes due 2017 at 107.5% of par, recording a $1.0m debt-extinguishment loss. A $225m seven-year unsecured term loan obtained in Q1 was effectively fixed through interest-rate swaps.
- Six interest-rate swaps covering $225m of borrowings had a $7.8m fair-value liability at quarter-end. The resulting hedge losses reduced comprehensive income; the company estimated $3.1m would be reclassified as additional interest expense over the following 12 months.
- In the first half, the company issued 2.62m shares through its equity sales program, raising $86.4m net. The company reported 75.6m shares outstanding at June 30; 76.1m were outstanding as of July 19.
- After quarter-end, it sold five Nashville office buildings for $41m and three GSA-leased buildings for $86.5m, expecting respective discontinued-operation gains of $6.8m and $14.0m. It acquired two Greensboro medical office properties for $16.4m, partly for approximately 77,000 common units, and expected to acquire a third for $13.4m.
Outlook, risks, and contingencies
Management expected the remainder of 2012 to have higher rental revenue and property expenses than the prior-year period, largely from 2011 acquisitions; it expected operating margins to be similar. It anticipated higher depreciation and interest expense, while general and administrative expense was expected to decline due to lower deal and acquisition costs. These are qualitative expectations; the filing provides no numeric earnings or FFO guidance.
Management’s stated strategy is to improve existing property operations, pursue selective development and acquisitions, dispose of non-core assets, and preserve balance-sheet flexibility. Risks identified include weaker customer finances or economic growth, slower or less favorable leasing and development, excess market supply, rising interest rates or operating costs, and difficulty obtaining capital or refinancing debt on favorable terms. The $38.3m interest-only loan to the DLF I joint venture was extended to September 30, 2012; repayment and collateral performance warrant attention. The company also reported a $1.0m share of first-quarter impairment at two properties in that venture, tied to lower projected occupancy and a changed holding-period assumption. Management stated that it expected available cash, operating cash flow, and revolver capacity to meet short-term liquidity needs, but cautioned that future covenant compliance and refinancing cannot be assured.
Important facts for investors to verify
- Whether post-quarter property sales closed as described and whether expected proceeds and gains were realized.
- Same-property occupancy, rents, leasing costs, renewals, and the impact of the cited early lease termination on future results.
- Liquidity, debt maturities and covenants, floating-rate exposure, and the September 2012 DLF I loan maturity and repayment.
- How equity issuance, acquisitions, dispositions, and capital spending affect per-share FFO, distributions, and leverage.
- The contribution of recurring property operations versus disposition gains to reported earnings and cash generation.