Highwoods Properties, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Amounts are in millions unless stated otherwise. Highwoods is an office-focused REIT operating primarily through Highwoods Realty Limited Partnership. At quarter-end, it wholly owned 299 in-service properties totaling 29.0 million square feet, plus development land and one office property under development.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Rental and other revenue | $128.2 | $117.3 | $382.1 | $339.5 |
| Net income | $35.8 | $8.2 | $68.6 | $35.1 |
| Net income available to common stockholders | $33.4 | $7.0 | $63.0 | $27.3 |
| Diluted EPS | $0.43 | $0.10 | $0.84 | $0.38 |
| FFO per diluted share | $0.65 | $0.59 | $2.03 | $1.80 |
| Net operating income (NOI) | $81.0 | $73.2 | $244.0 | $217.1 |
| Same-property NOI | $70.8 | $69.7 | $216.8 | $210.0 |
- Revenue grew 9.3% in Q3 and 12.6% for the nine-month period, primarily from acquisitions. Q3 same-property occupancy increased to 90.4% from 90.0%; same-property rents were nearly flat at $18.73 per square foot versus $18.72.
- Q3 operating margin, defined as revenue less property expenses as a share of revenue, rose to 63.2% from 62.5%. Nine-month margin edged down to 63.9% from 64.0%. Nine-month same-property cash NOI was $207.6, up from $201.1.
- Net cash provided by operations was $138.0 for the first nine months, versus $136.1. Investing used $94.8, compared with $180.1 used in 2011; financing used $45.4, versus $40.9 provided. Cash and cash equivalents ended at $9.1.
- Mortgages and notes payable were $1,778.6 at September 30, down from $1,868.9 at year-end 2011. Debt was 43.0% of undepreciated asset book value; secured debt averaged 5.71% and unsecured debt 4.72%. The company reported compliance with debt covenants.
- The $475.0 revolving facility had $89.0 outstanding and $385.9 unused at quarter-end; unused capacity was $415.4 as of October 22. Common dividends remained $0.425 per share for the quarter ($1.275 for nine months).
Material changes versus prior period
- Q3 net income included $22.9 of gains on discontinued-property dispositions; nine-month gains were $29.5. Discontinued operations contributed $23.5 to Q3 income and $33.5 for nine months. Thus, GAAP earnings growth substantially reflects asset-sale gains; continuing-operations diluted EPS was $0.14 in Q3 and $0.42 for nine months.
- Acquisitions contributed materially to revenue growth: Q3 purchases totaled $161.2, including a 492,000-square-foot Atlanta office property and two Greensboro medical office properties. The company also acquired a Cary, North Carolina office property earlier in 2012.
- Q3 dispositions included properties sold for $134.0 in aggregate, with reported gains totaling $22.9. No properties remained classified as held for sale at quarter-end.
- Common shares outstanding increased to 78.5 million from 72.6 million at year-end. Equity sales raised $180.2 net over nine months, and increased the capital available for acquisitions while diluting existing holders.
- Interest-rate swap liabilities rose to $10.3 from $2.2 at year-end; nine-month unrealized hedge losses of $10.4 were recorded in other comprehensive loss, not current earnings.
Outlook, commentary and risks
- Management expected remaining-2012 revenue to exceed 2011 levels, excluding future acquisitions, chiefly due to acquired properties and slightly higher same-property occupancy. It expected property expenses and depreciation to be higher, operating margin to be similar, and interest expense to decline. No specific full-year earnings or FFO guidance is provided in the filing text.
- Q3 leasing activity included 0.9 million square feet of second-generation office space, at annualized GAAP rents 2.4% above previous leases. The Federal Government was the only customer above 3% of annualized revenue, at 7.2%.
- Management described its plan as emphasizing high-quality assets in core markets, leasing and operating improvements, selective acquisitions and dispositions, and balance-sheet flexibility. It expected cash, operating cash flow and revolver availability to meet short-term liquidity needs.
- Risks include weaker tenant credit, difficulty leasing vacant or newly developed space, slower economic growth or excess competitive supply, higher rates or operating costs, access to capital and refinancing risk, and possible covenant noncompliance. Management cautioned it could not assure continued compliance under future conditions.
- Other notable exposures include a $13.0 loan to the DLF I joint venture maturing December 31, 2012, and a $20.8 interest-only secured loan to Harborview Plaza at LIBOR plus 500 basis points. The filing notes that impairments may arise if property cash-flow assumptions or collateral values deteriorate.
- Subsequent events: a $200.0 term loan was modified to extend maturity to January 2018 and reduce its spread to LIBOR plus 165 basis points; an additional Greensboro medical office property was acquired for $13.3 on October 18, 2012.
Important facts for investors to verify
- How much of reported earnings growth is recurring: reconcile continuing operations and FFO with the material gains from property sales.
- Whether acquisitions and leasing performance sustain same-property occupancy, rents, NOI and cash flow after acquisition-related costs and capital needs.
- Debt maturities, floating-rate exposure, interest-swap effects and covenant headroom; verify the terms and repayment of the DLF I loan due at year-end.
- The effect of equity issuance and any further share sales on per-share results, alongside the company’s ability to maintain its dividend.
- Assumptions underlying property valuations, impairment testing, joint-venture exposures and expected refinancing or capital-market access.