Business context and reporting period
Highwoods Properties, Inc. (NYSE: HIW), an equity REIT operating primarily through Highwoods Realty Limited Partnership, filed this Form 10-K for the year ended December 31, 2012. Its portfolio comprised 333 in-service properties totaling 34.6 million square feet, plus development properties and land, across eight states. Office properties generated nearly 90% of rental and other revenues.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Rental and other revenues | $516.1 million | $463.4 million |
| Income from continuing operations | $50.7 million | $39.0 million |
| Net income | $84.2 million | $48.0 million |
| Net income per common share, basic and diluted | $1.02 | $0.54 |
| FFO per share, company-presented non-GAAP measure | $2.70 | $2.50 |
| Net cash from operating activities | $193.4 million | $195.4 million |
| Net cash used in investing activities | $238.8 million | $215.5 million |
| Net cash from financing activities | $48.0 million | $17.1 million |
| Total assets | $3.35 billion | $3.18 billion |
| Mortgages and notes payable | $1.86 billion | $1.87 billion |
Same-property NOI rose to $287.4 million from $279.4 million; same-property cash NOI was $277.2 million versus $267.5 million. Reported operating margin was 63.7%, compared with 63.8%. At year-end, wholly owned in-service occupancy was 90.9%, versus 90.0% a year earlier; average occupancy was 90.3% in 2012.
Cash and cash equivalents were $13.8 million at year-end. Revolver availability was $451.9 million at December 31, 2012 (and $449.9 million at February 1, 2013). Debt included $549.6 million of secured and $1.31 billion of unsecured indebtedness; weighted-average rates were 5.75% and 4.54%, respectively. The company reported compliance with debt covenants. Common dividends remained $1.70 per share for the year.
Material changes versus the prior comparable period
- Revenue increased 11.4%, mainly from acquisitions ($43.8 million of the increase) and higher same-property revenue ($9.4 million). Same-property occupancy and annualized GAAP rent per square foot improved.
- Net income rose substantially, but the comparison includes $29.5 million of net gains on dispositions of discontinued operations in 2012, versus $2.6 million in 2011. Continuing-operations income and FFO also increased, but less sharply than net income.
- Operating cash flow declined slightly despite higher net income. Investing outflows increased, principally reflecting higher acquisition activity; financing cash flow benefited from substantial equity issuance.
- Debt ended the year modestly below 2011. The company issued $250 million of 3.625% notes due 2023, obtained a $225 million term loan with its LIBOR exposure swapped to fixed, and extended and repriced a $200 million term loan.
- Common shares outstanding increased from 72.6 million to 80.3 million, reflecting equity issuance. The company received $236.4 million of net proceeds from 2012 stock sales under equity distribution agreements.
Outlook, commentary, risks and unusual items
Management expected 2013 average occupancy to be slightly below 2012. It anticipated higher rental revenue, chiefly from a full year of contribution from 2012 acquisitions, and slightly higher property expenses; operating margin was expected to be slightly lower. Management anticipated up to $200 million of new development starts, up to $325 million of acquisitions and up to $150 million of non-core property sales in 2013. These are plans, not guarantees; no full-year earnings or FFO-per-share guidance is stated in the provided filing text.
Leasing activity included 1.2 million square feet of second-generation office leases signed in fourth-quarter 2012; annualized GAAP rents were 3.0% above prior rents. Management disclosed that 2013 lease expirations represented about 9.8% of total annualized cash rental revenue across wholly owned property types. The Federal Government was the largest customer, at 7.0% of annualized cash rental revenue.
Key risks include weaker demand or rents in office markets, lease renewals and tenant-improvement costs, customer credit and concentration, competing supply, rising property expenses, development and acquisition execution, refinancing and interest-rate exposure, and maintaining REIT qualification. A partner in the Harborview joint venture may put its 80% interest to the company for cash during a one-year period beginning September 11, 2014; the eventual amount depends on then-current fair value. Unconsolidated joint ventures had $370.4 million of mortgage debt, with the company’s proportionate share reported as $137.3 million, generally non-recourse subject to customary exceptions. Ordinary-course legal matters were not expected to have a material adverse effect; environmental assessments disclosed no known material liability. No real estate impairment was recorded in 2012, although the company recorded its share of impairments in an unconsolidated joint venture.
The company reported effective internal control over financial reporting and disclosure controls; Deloitte issued unqualified opinions on the company’s financial statements and internal controls.
Important facts for investors to verify
- How much of the 2012 earnings increase is repeatable: reconcile disposition gains and discontinued operations against continuing income and FFO.
- Acquisition economics, occupancy, leasing costs and expected full-year contribution from recent purchases; compare actual 2013 results with management’s stated plans.
- Lease rollover and renewal outcomes, particularly the 2013 expirations and the Federal Government’s 7.0% revenue concentration.
- Debt maturities, covenant headroom, revolver availability, interest-rate hedges and the potential Harborview put obligation.
- Dividend coverage and the impact of equity issuance and share-count growth on per-share returns.