Highwoods Properties, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. Unless noted, dollar amounts are in millions. The company is an equity REIT operating primarily in the Southeastern and Midwestern United States; its portfolio included 330 in-service office, industrial and retail properties or interests totaling approximately 32.0 million square feet, plus residential units, condominiums and development assets.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Rental and other revenue | $114.3 | $111.9 | $229.4 | $224.3 |
| Net income | $40.0 | $37.1 | $52.1 | $50.3 |
| Net income available to common stockholders | $36.2 | $33.2 | $45.9 | $44.0 |
| Diluted EPS | $0.50 | $0.50 | $0.64 | $0.68 |
| FFO per diluted share | $0.64 | $0.70 | $1.25 | $1.41 |
Q2 property operating margin, defined as rental revenue less rental property expenses as a percentage of revenue, rose to 66.5% from 65.2%. For the first half it was 65.1%, compared with 64.7%. Total net operating income increased to $76.0 million in Q2 from $73.0 million and to $149.4 million for the half from $145.1 million.
Q2 net income included a $25.3 million gain from selling interests in Des Moines-area unconsolidated joint ventures. The sale generated $15.0 million cash proceeds; excluding the gain, reported earnings comparisons are materially different. FFO, a non-GAAP measure, declined year over year in both periods.
Cash flow, debt and liquidity
- First-half operating cash flow was $100.0 million, down from $104.6 million. Investing used $15.7 million, versus $11.4 million; financing used $72.3 million, versus $93.6 million. Cash ended June at $35.8 million, up from $23.7 million at year-end 2009.
- Mortgages and notes payable were $1.464 billion, slightly below $1.469 billion at year-end; financing obligations were $33.6 million. Secured debt was $715.2 million at a 6.21% weighted-average rate; unsecured debt was $748.5 million at 5.43%. Management reported debt at 39.9% of total market capitalization.
- The $400 million unsecured revolver had no borrowings and $398.9 million unused capacity at June 30 and July 22, 2010. The $70 million construction facility had $41.7 million drawn and $28.3 million available. The company reported compliance with debt covenants.
- Common dividends were $0.425 per share for Q2 and $0.85 per share for the first half, unchanged from the comparable 2009 periods.
Changes, outlook and notable items
- Revenue growth reflected a 2009 Tampa acquisition, recently placed-in-service development properties and higher lease-termination fees, partly offset by lower average occupancy in the same-property portfolio. Management expected revenue for the remainder of 2010 to be relatively unchanged year over year.
- Management attributed lower Q2 rental expenses to cost controls and expected expenses for the rest of 2010 to be relatively unchanged. It expected lower general and administrative expense, but higher depreciation and interest expense than in the comparable 2009 period.
- The company sold seven office and six industrial properties in North Carolina, providing $17.0 million of seller financing. It also committed up to $1.7 million for improvements and leasing costs on one sale; a separate rent guarantee had maximum exposure of approximately $1.0 million, for which no loss accrual was recorded because management did not consider a loss probable.
- In July 2010, the company acquired a 336,000-square-foot Memphis office property for $10.0 million cash and assumed debt expected to be recorded at approximately $40.3 million fair value. It anticipated approximately $2.3 million of near-term improvements and $0.4 million of acquisition costs.
- Key risks identified include weaker customer finances, lower occupancy and leasing outcomes, economic weakness in core markets, excess competing supply, rising interest rates, and difficulty obtaining capital or refinancing debt at maturity. The company had no outstanding interest-rate hedges at June 30.
Important facts for investors to verify
- How much of reported earnings came from the one-time $25.3 million joint-venture disposition gain, and what recurring trends are reflected in FFO and property-level results?
- Whether occupancy, leasing, rent collection and same-property performance improved or weakened; the filing attributes pressure to lower average occupancy but provides no clear portfolio-wide occupancy rate in the supplied text.
- Debt maturities, extension options and covenant headroom, especially the construction facility initially due December 2010 and bank term loans due in 2011 and 2012.
- Collection and credit exposure on seller-financed property sales, and the scope of remaining obligations or indemnity protection connected with the sold joint ventures.
- Whether the July acquisition and planned improvements meet management’s stated return and liquidity objectives; the filing provides no numerical earnings guidance.