Highwoods Properties, Inc. — FY 2021 Form 10-K
Reporting period: Year ended December 31, 2021; comparisons are primarily with FY 2020. Highwoods is an office REIT operating mainly in Atlanta, Charlotte, Nashville, Orlando, Pittsburgh, Raleigh, Richmond and Tampa.
Financial performance
- Revenue: Rental and other revenues were $768.0 million, up 4.2% from $736.9 million. Acquisitions and developments contributed to growth, partly offset by dispositions.
- Profit: Net income was $323.3 million, down from $357.9 million; diluted EPS fell to $2.98 from $3.32. Gains on property dispositions were $174.1 million versus $215.9 million in 2020, a significant factor in the comparison. No real estate impairment was recorded in 2021, compared with $1.8 million in 2020.
- Operating results: NOI increased 5.2% to $531.6 million. Same-property NOI rose 1.2% to $467.4 million; same-property cash NOI increased to $453.7 million from $423.8 million. The filing does not present a conventional operating-margin guidance measure.
- FFO: NAREIT FFO available to common stockholders was $413.3 million, or $3.86 per diluted share, versus $382.1 million, or $3.58, in 2020. FFO is a non-GAAP measure and is not a substitute for GAAP earnings.
- Cash flow: Operating cash flow was $414.6 million, up from $358.2 million. Investing activities used $287.7 million, compared with $110.7 million provided in 2020; financing activities used $284.9 million. Cash and cash equivalents ended the year at $23.2 million, down from $109.3 million.
- Debt and liquidity: Mortgages and notes payable were $2.789 billion, up from $2.470 billion. Debt and preferred stock were 39.4% of undepreciated asset book value. The company reported $679.9 million of unused capacity on its $750 million revolving facility and $23.2 million of cash at year-end. It stated it was compliant with debt covenants.
- Dividends: Common dividends totaled $1.96 per share, up from $1.92 in 2020. A $0.50-per-share dividend for March 2022 was declared after year-end.
Material changes and operating developments
- Office occupancy at year-end improved to 91.2% from 90.3% in 2020. The portfolio totaled 27.4 million rentable square feet of wholly owned in-service office space.
- Acquired a portfolio from Preferred Apartment Communities for a net purchase price of approximately $653.6 million and acquired the remaining 75% interest in the Raleigh Forum joint venture for $131.3 million. Assumed mortgages of $403 million in the PAC transaction.
- Sold 13 office buildings and land parcels for aggregate proceeds of $384.6 million before buyer credits, recording $172.8 million in gains. The company said it had sold $353 million of non-core assets toward its announced $500–$600 million sale plan by mid-2022.
- At year-end, 0.4 million rentable square feet of office projects were in development, with anticipated total investment of $173.6 million; the projects were 32.9% pre-leased. Expected remaining funding for previously announced development activity was about $176 million.
Outlook, risks and unusual items
- Management expected 2022 office occupancy of approximately 90.5%–91.5%, higher total NOI, but lower same-property NOI than in 2021. It expected same-property expenses to rise as building usage recovers, partially offset by higher rents, cost recoveries and parking income.
- COVID-19 continued to depress building usage and parking revenues versus pre-pandemic levels. Management expected usage to increase gradually during 2022, while noting uncertainty around the pandemic, office demand and work-from-home patterns.
- Debt maturities include a $200 million unsecured bank term loan due November 2022 and $250 million of notes due January 2023. Management expected to meet liquidity needs through operating cash flow, available credit, financing and asset sales; refinancing availability and cost remain risks.
- Other material risks include lease renewals and rollover costs, customer creditworthiness, interest-rate increases and LIBOR transition, development cost and leasing risks, property-market weakness, environmental and climate exposure, cybersecurity, and maintaining REIT qualification. The filing reported no litigation expected to have a material adverse effect.
- Auditors issued unqualified opinions on the financial statements and the company’s internal controls. Acquisition purchase-price allocations and impairment assessments were identified as critical audit matters involving significant estimates and judgment.
Key facts for investors to verify
- Whether occupancy, office utilization and parking revenues recover as management projected, and whether work-from-home trends affect leasing demand.
- Execution and pricing of the planned non-core asset sales and the use of proceeds.
- Funding needs and leasing progress for development projects, alongside expected tenant improvements and leasing costs.
- How the company will refinance or repay the 2022 and January 2023 maturities, and the resulting interest expense and covenant headroom.
- Whether same-property NOI and cash flows support the dividend as operating expenses and capital needs change.