HIGHWOODS PROPERTIES, INC. annual report, FY2014

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Highwoods Properties, Inc. — 2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014; includes quarterly results. Highwoods is an office-focused REIT operating primarily in business districts across ten U.S. markets. The Company operates through Highwoods Realty Limited Partnership.

Financial and operating performance

  • Revenue: $608.5 million, up 9.3% from $556.8 million in 2013. Growth reflected acquisitions and developments, partly offset by dispositions.
  • Profit and per-share results: Income from continuing operations was $115.6 million versus $62.7 million. Diluted continuing-operations EPS rose to $1.19 from $0.67. Net income available to common stockholders was $108.5 million, down from $122.9 million; diluted total EPS fell to $1.19 from $1.44.
  • Non-GAAP FFO: FFO available to common stockholders was $271.7 million, or $2.90 per share, versus $249.9 million, or $2.81, in 2013.
  • NOI and margins: Continuing-operations NOI increased 8.3% to $383.0 million. Same-property NOI declined 0.2% to $310.8 million; same-property cash NOI was $299.7 million versus $298.3 million. NOI as a share of revenue was approximately 62.9%, compared with 63.5% in 2013.
  • Cash flow: Operating cash flow was $266.9 million, up from $256.4 million. Investing used $328.2 million and financing provided $59.9 million; cash and cash equivalents ended at $8.8 million.
  • Debt and liquidity: Mortgages and notes payable totaled $2.071 billion, up from $1.956 billion. At year-end, secured debt of $312.9 million carried a 5.95% weighted-average rate and unsecured debt of $1.759 billion a 3.96% rate. Revolver availability was $265.9 million at year-end and $262.8 million on January 30, 2015. Management said cash, operating cash flow and revolver access should cover short-term needs.
  • Dividends: Common dividends remained $1.70 per share for the year. The dividend was unchanged from 2013; the minimum needed to maintain REIT status was $1.13 per share.
  • Portfolio: Wholly owned in-service properties totaled 28.6 million rentable square feet, with 91.9% year-end occupancy versus 89.9% a year earlier. Average same-property occupancy was 91.0%, down from 91.3%.

Changes versus the prior period

  • Revenue growth was driven mainly by 2013–2014 acquisitions and developments placed in service. Overall NOI rose, but same-property NOI edged down as expense growth exceeded revenue growth.
  • Net income and total EPS declined despite stronger continuing-operations results. High 2013 discontinued-operations earnings included substantial property-sale gains; 2014 disposition gains were generally reported in continuing operations following early adoption of a revised discontinued-operations accounting standard.
  • Interest expense decreased 7.4% to $85.9 million, mainly from lower average rates and higher capitalized interest, partly offset by increased debt balances.
  • Debt increased by about $115 million. The Operating Partnership issued $300 million of 3.20% notes due 2021 and the Company issued 2.5 million shares for $104.1 million net proceeds. The Company also prepaid secured loans, leaving approximately $251 million of real estate assets unencumbered.

Outlook, risks and unusual items

  • Management expected 2015 revenue and overall NOI to exceed 2014, citing full-year contributions from 2014 acquisitions and developments and anticipated occupancy improvement. It expected same-property NOI to increase, while property expenses, depreciation and interest expense were also expected to rise.
  • Plans for 2015 included up to $250 million of new development starts, up to $300 million of acquisitions and up to $200 million of non-core property sales. These are plans, not assurances; expected operating-performance commentary excludes potential acquisitions and dispositions.
  • At year-end, 1.589 million square feet were under development, with $492.7 million anticipated total investment, $184.1 million invested and 88.6% pre-leased. Approximately $315 million remained to fund previously announced development activity.
  • Interest-rate exposure included $409.0 million of unhedged variable-rate debt; a 100-basis-point increase would raise annual interest expense by an estimated $4.1 million. Management cited leasing demand, customer credit, expenses, development and refinancing access as key uncertainties. Principal maturities include $488.3 million in 2017, $408.3 million in 2018 and $424.3 million in 2019.
  • Other material risk areas include lease renewals and tenant improvement costs, market oversupply, reliance on major customers, environmental and regulatory compliance, REIT qualification, joint-venture and insurance risks, and the ability to refinance debt. The 20 largest customers represented 24.09% of annualized cash rental revenue; the Federal Government was the largest at 5.98%.
  • The Company recorded a $0.6 million real estate impairment and a $1.4 million impairment of an investment in an unconsolidated affiliate. It reported $44.4 million of gains on property dispositions in continuing operations. Management said ordinary-course legal matters were not expected to have a material adverse effect.
  • The Company and Operating Partnership reported effective internal controls; Deloitte issued unqualified opinions on the Company’s financial statements and internal controls. The filing notes adoption of the revised discontinued-operations standard in 2014, which affects period comparability.

Investor verification priorities

  • Review the reconciliation of GAAP earnings, disposition gains and FFO, especially the impact of the discontinued-operations accounting change on comparisons with 2013.
  • Assess whether occupancy, rent growth and leasing assumptions support management’s 2015 revenue and NOI expectations, and monitor the 2015–2019 lease expirations.
  • Track funding, pre-leasing, completion timing and returns for the development pipeline, including the remaining funding commitment.
  • Evaluate debt maturities, covenant headroom, revolver availability, variable-rate exposure and refinancing needs.
  • Compare the $1.70 annual dividend with recurring operating cash flow, capital needs and debt service; the board retains discretion over future dividends.