Highwoods Properties, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports unaudited fourth-quarter results. Highwoods is an office REIT operating primarily in Atlanta, Charlotte, Nashville, Orlando, Pittsburgh, Raleigh, Richmond and Tampa.
Key financial results
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Rental and other revenue | $736.9 million | $736.0 million | Up 0.1% |
| Net income | $357.9 million | $141.7 million | Increase largely reflects $215.9 million of property disposition gains |
| Net income available to common stockholders | $344.9 million | $134.4 million | GAAP diluted EPS was $3.32 versus $1.30 |
| FFO available to common stockholders | $382.1 million; $3.58 per share | $354.8 million; $3.33 per share | Non-GAAP measure; not a substitute for GAAP earnings |
| Net operating income (NOI) | $505.1 million | $487.5 million | Up 3.6% |
| Same-property NOI | $438.3 million | $421.9 million | Up 3.9%; reduced pandemic-related operating costs contributed |
| Cash provided by operating activities | $358.2 million | $365.8 million | Down $7.6 million |
| Cash and cash equivalents at year-end | $109.3 million | $9.5 million | Restricted cash was an additional $79.9 million |
| Mortgages and notes payable, net | $2.470 billion | $2.544 billion | Leverage ratio was 37.7% of undepreciated asset book value |
| Common dividend declared per share | $1.92 | $1.90 | $0.48 per quarter throughout 2020 |
Fourth-quarter 2020 revenue was $179.9 million, net income was $85.3 million and diluted EPS was $0.79, compared with $192.1 million, $62.3 million and $0.58, respectively, in fourth-quarter 2019. The filing attributes the annual earnings increase principally to dispositions; 2020 property gains were $215.9 million versus $39.5 million in 2019.
Portfolio and material changes
- Year-end office portfolio occupancy was 90.3%, down from 92.0% at year-end 2019. The portfolio comprised 25.9 million wholly owned rentable square feet.
- During 2020, Highwoods sold 52 buildings totaling 4.489 million square feet, mainly exiting Greensboro and Memphis. Aggregate sale price was $494.2 million before buyer credits; recorded gains were $215.5 million.
- Dispositions drove a net reduction of 4.529 million square feet in wholly owned in-service space. The company’s market rotation plan focused on divesting non-core assets.
- Same-property NOI increased despite lower parking and cost-recovery income, as higher rents and lower operating expenses offset pandemic-related impacts. Reduced building usage lowered utilities, janitorial and other variable costs.
- At year-end, three projects totaling approximately 828,500 square feet were in process, 81.9% pre-leased, with anticipated total investment of approximately $400.2 million. Expected remaining committed development spend was approximately $104 million.
- The 20 largest customers represented 29.4% of annualized cash rental revenue. The Federal Government and Bank of America represented 4.3% and 4.1%, respectively.
Liquidity, debt and capital allocation
- At January 29, 2021, the company reported approximately $85 million of cash and no revolver borrowings; the $600 million revolving credit facility had $599.9 million of available capacity. Its scheduled maturity is January 2022, with two six-month extension options subject to conditions.
- Debt consisted of $93.4 million of secured debt and $2.391 billion of unsecured debt. Weighted average interest rates were 3.42% on unsecured debt and 4.0% on secured debt. $150 million was unhedged variable-rate debt at year-end.
- In 2020, the Operating Partnership issued $400 million of 2.60% notes due 2031, using proceeds partly to repurchase $150 million of 2021 notes and repay a $100 million bank term loan. It recorded $3.7 million of debt-extinguishment losses.
- The remaining $150 million of 3.20% notes was scheduled to mature in June 2021; management said it intended to redeem them at par on April 15, 2021. The company reported covenant compliance at year-end.
- Management said it expected liquidity sources to cover short-term needs and anticipated selling another $100 million to $150 million of non-core properties during 2021. The board declared a $0.48-per-share dividend payable in March 2021.
Outlook, commentary and risks
- Management expected 2021 average portfolio occupancy of approximately 89%–90%, while cautioning that pandemic-related defaults, vacancies and work-from-home trends could make occupancy lower.
- Management expected slower speculative leasing to continue in 2021. It projected lower same-property NOI and lower total NOI than in 2020, with increased property usage and operating costs, dispositions and occupancy pressure among the factors. It expected rental revenue and operating cash flow to be higher, partly reflecting development completions and the subsequent Forum acquisition.
- COVID-19 reduced building and parking usage, lowered parking revenue and prompted some customer requests for rent relief. Reported 2020 losses related to customer defaults, bankruptcies and straight-line rent credit losses totaled $4.5 million; $3.4 million of temporary rent deferrals, net of repayments, were included in the same-property cash NOI reconciliation.
- Key uncertainties include the duration and economic effects of COVID-19, persistent remote work and office demand, customer credit and lease renewals, interest-rate and refinancing risk, development and leasing costs, property impairments, and the transition from LIBOR to an alternative benchmark.
- Management reported no legal proceedings expected to have a material adverse effect. Deloitte issued unqualified opinions on the company’s financial statements and internal control over financial reporting.
Important facts for investors to verify
- How occupancy, leasing spreads, renewals and customer credit quality develop against management’s 2021 expectations.
- Whether the earnings increase is understood in light of the substantial, non-recurring disposition gains; review FFO and NOI definitions and reconciliations alongside GAAP results.
- Execution and funding of the development pipeline, including remaining commitments, leasing and completion timing.
- Completion of the stated 2021 note redemption and the timing, price and proceeds of planned non-core property sales.
- Availability and terms of refinancing for the revolving credit facility, covenant headroom, unhedged variable-rate exposure and LIBOR transition provisions.
- Whether the dividend remains supported by operating cash flows and future REIT taxable income, rather than relying on asset sales or increased borrowing.