Highwoods Properties, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Highwoods is an office REIT operating primarily in Atlanta, Charlotte, Nashville, Orlando, Pittsburgh, Raleigh, Richmond and Tampa. It reported 28.1 million rentable square feet of in-service properties, 1.2 million square feet under development and approximately 250 acres of development land.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Rental and other revenue | $192.8 million | $172.4 million; up 11.9% |
| Net income | $191.3 million | $8.4 million |
| Net income available to common stockholders; diluted EPS | $185.5 million; $1.79 | $7.3 million; $0.07 |
| FFO available to common stockholders; per diluted share | $98.8 million; $0.93 | $76.5 million; $0.72 |
| Net operating income (NOI) | $130.6 million | $111.8 million; up 16.8% |
| Same-property NOI | $113.7 million | $101.5 million; up 11.9% |
| Cash from operating activities | $63.6 million | $62.7 million |
| Cash from investing activities | $231.1 million | Use of $81.5 million |
| Cash from financing activities | Use of $185.4 million | Provided $21.1 million |
NOI was approximately 67.7% of revenue, compared with 64.9% in Q1 2019. Net income and GAAP EPS were substantially boosted by $153.1 million of property-disposition gains; FFO, which excludes such gains, provides a different view of operating performance.
At March 31, total assets were $5.13 billion and mortgages and notes payable, net, were $2.41 billion, down from $2.54 billion at year-end 2019. Cash and cash equivalents were $12.7 million, with restricted cash of $111.4 million. At April 21, the company had about $24 million of cash and no revolver borrowings; the $600 million revolver had $599.9 million available. The company reported compliance with debt covenants. Leverage, defined by the company as debt plus preferred stock divided by undepreciated asset book value, was 37.7%.
Material changes versus prior year
- Revenue increased $20.4 million, reflecting same-property growth, acquisitions and development properties placed in service, partly offset by dispositions.
- NOI increased $18.8 million. Same-property NOI rose $12.1 million, primarily on higher rents and cost recoveries, parking income and the absence of Laser Spine Institute-related losses recorded in 2019.
- Net income increased sharply mainly because Q1 2020 included $153.1 million of disposition gains; Q1 2019 included no disposition gains and had a $3.8 million other loss, primarily related to Laser Spine Institute.
- Operating cash flow was broadly stable. Investing cash flow swung to a $231.1 million inflow, principally from $331.8 million of net real estate sale proceeds. Financing cash flow turned to an outflow, including debt repayments and common dividends.
- Office portfolio occupancy declined from 92.0% at December 31, 2019 to 90.9% at March 31, 2020. First-quarter new and renewal leases totaled 892,812 square feet; combined GAAP rents were 13.6% above prior leases in those spaces.
Outlook, risks and unusual items
- Management said COVID-19 had not meaningfully affected Q1 results but expected adverse effects for the rest of 2020. Lower building usage had reduced parking revenue; management expected slower speculative leasing, possible rent-related credit losses and uncertain occupancy and NOI outcomes.
- Through April 21, the company had collected 95% of contractually required April rent and reported no then-known customer-specific circumstances indicating material Q2 losses. It had recorded $0.6 million of COVID-related credit losses in Q1. Rent deferrals, and in some cases limited abatements tied to lease extensions, were possible.
- Management expected revenue and operating cash flow to be lower for the remainder of 2020 versus 2019, with dispositions and COVID-related impacts among the factors. It expected full-year NOI to be lower, principally from dispositions, partly offset by development, acquisitions and same-property performance.
- Management cited ample liquidity and expected available cash, operating cash flow and financing sources to cover near-term needs, subject to pandemic-related customer losses. Approximately $10 million of planned building improvements were delayed until at least 2021; tenant improvements and leasing commissions were expected to be $10–$20 million lower.
- Remaining expected capital expenditures for started or committed developments were approximately $239 million at March 31; about $133 million was forecast for the remainder of 2020. The company had no debt maturities in the remainder of 2020, but had $300 million of 3.20% notes due June 2021.
- Q1 disposition activity: 41 buildings and land in Greensboro and Memphis sold for $338.4 million before $3.8 million of buyer credits, generating $153.1 million in gains. The company also acquired Nashville development land for $6.2 million, funded with common units and costs.
- The board declared a $0.48-per-share dividend for payment June 8, 2020. Management warned that pandemic-related tenant distress, leasing weakness, impairments, capital-market access and covenant compliance could materially affect results, liquidity and dividends.
Important facts for investors to verify
- Whether rent collections, tenant credit quality, occupancy and new leasing weakened after the April 21 update, and the resulting effect on cash flow and same-property NOI.
- How much of reported earnings came from property sales versus recurring operations; compare GAAP net income with FFO and NOI.
- Development spending, leasing costs and project timelines, including the $239 million remaining commitment and expected funding schedule.
- Liquidity, revolver availability, covenant headroom and refinancing plans for the $300 million June 2021 maturity, especially if asset sales or financing conditions change.
- Whether the $0.48 quarterly dividend remains supported by operating cash flow and future REIT taxable income requirements.