Highwoods Properties, Inc. — 2017 Form 10-K
Business and period: Annual report for the fiscal year ended December 31, 2017; includes fourth-quarter information. Highwoods is an office-focused REIT operating mainly in nine U.S. markets through Highwoods Realty Limited Partnership. Office properties represented more than 97% of annualized cash rental revenue. The wholly owned in-service portfolio totaled 26.8 million rentable square feet and was 92.9% occupied at year-end.
Financial performance
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Rental and other revenues | $702.7 million | $665.6 million | Up 5.6% |
| Net operating income (NOI), continuing operations | $465.8 million | $434.5 million | Up 7.2%; 66.3% of revenue in 2017 |
| Same-property NOI | $419.5 million | $410.8 million | Up 2.1% |
| Income from continuing operations | $191.7 million | $122.5 million | Up 56.4% |
| Net income available to common stockholders | $182.9 million | $521.8 million | 2016 included large gains on the Plaza asset sale |
| Diluted EPS | $1.78 | $5.30 | Down $3.52, primarily because of the 2016 Plaza sale gains |
| FFO available to common stockholders per share | $3.39 | $3.28 | Up 3.4%; non-GAAP measure |
| Cash from operating activities | $352.5 million | $305.8 million | Up $46.7 million |
| Cash used in investing activities | $256.2 million | Cash provided: $203.9 million | 2016 benefited from Plaza-sale proceeds |
| Cash used in financing activities | $142.5 million | $465.2 million | 2017 included the special dividend paid in January |
| Total debt, net | $2.014 billion | $1.948 billion | Up $66.3 million |
Other operating indicators: Year-end occupancy was unchanged at 92.9%; average occupancy was 92.5% versus 92.8% in 2016. Annualized cash rent per square foot increased to $23.46 from $22.55. Fourth-quarter new and renewal office leases had GAAP rents 16.8% above prior leases in the same spaces.
Material changes and financing
- Revenue growth came principally from developments placed in service, higher same-property revenue and acquisitions; dispositions partly offset the increase. Development properties placed in service contributed $26.5 million of revenue growth, while same-property revenue contributed $10.7 million.
- 2017 property sales totaled $135.6 million before buyer credits, generating $54.2 million of gains. The 2016 comparison included the $660 million sale of substantially all wholly owned Country Club Plaza assets and $414.5 million of discontinued-operation gains.
- Debt comprised $99.0 million of secured and $1.924 billion of unsecured indebtedness. The reported leverage ratio was 35.0% of undepreciated asset book value. Unhedged variable-rate debt was $605 million; a 100-basis-point rate increase would raise annual interest expense by an estimated $6.1 million.
- Highwoods replaced its $475 million revolver with a $600 million facility maturing in January 2022, with a potential $400 million accordion subject to lender commitments. Unused capacity was $354.5 million at year-end and $345.0 million on January 26, 2018.
- The Operating Partnership issued $300 million of 3.875% notes due 2027 and repaid $379.7 million of 5.85% notes at maturity. A $200 million unsecured note at 7.5% remained due April 2018.
- Cash dividends declared were $1.76 per share in 2017, including regular quarterly dividends of $0.44; the 2016 total of $2.50 included a $0.80 special dividend. A $0.4625-per-share dividend was declared in February 2018.
Outlook, risks and unusual items
- Management expected 2018 revenue and NOI to exceed 2017, supported by development completions and higher same-property rents, parking and cost recovery income. It expected lower average occupancy and higher same-property expenses; overall same-property NOI was nevertheless expected to increase. Interest expense was expected to rise, mainly because of lower capitalized interest and higher average debt balances.
- At year-end, 0.7 million square feet of office development was in process, with anticipated total investment of $246.0 million and 82.1% pre-leasing. Approximately $198 million remained to fund started or committed development projects. Management expected to sell $61 million–$136 million of non-core properties in 2018, without assurance of timing or completion.
- Key risks include office-market weakness, lease renewals and tenant retention, customer credit, oversupply, property operating costs, development and lease-up execution, access to capital, covenant compliance, and interest-rate exposure. About 10.1% of annualized cash rental revenue was under leases scheduled to expire in 2018.
- Other material risks include environmental and regulatory liabilities, cybersecurity disruption, REIT qualification and tax-law changes, and the availability and cost of refinancing. Management reported compliance with debt covenants and expected no material adverse effect from ordinary-course litigation; outcomes and future covenant compliance are not assured.
- Unusual items included $1.4 million of real estate impairment charges and a $0.1 million tax expense from the 2017 tax-law change. The 2017 cash balance fell to $3.3 million, while restricted cash was $85.1 million. Auditors issued unqualified financial-statement and company internal-control opinions; management reported effective controls.
Investor verification priorities
- Confirm repayment or refinancing of the $200 million April 2018 notes and subsequent debt balances, costs and covenant headroom.
- Track renewal outcomes and leasing costs for 2018 expirations, including whether reported lease spreads translate into cash rent and occupancy.
- Verify development spending, completion dates, lease-up and stabilization against the disclosed commitments and pre-leasing.
- Assess sensitivity to interest rates, particularly the $605 million of unhedged variable-rate debt, and confirm expected hedge and financing actions.
- Reconcile recurring earnings and cash available for distributions with FFO, dividend increases, capital spending and planned asset-sale proceeds.