Highwoods Properties, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; compared with the corresponding 2021 periods. Highwoods is an office REIT operating primarily in southeastern U.S. markets. It reported 28.1 million rentable square feet in service, 1.4 million square feet under development, and development land with potential for approximately 5.0 million square feet.
Financial performance
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Rental and other revenue | $207.0m | $195.5m | $617.2m | $564.8m |
| Net operating income (NOI) | $140.7m | $134.9m | $427.1m | $391.8m |
| Net income | $40.1m | $75.6m | $134.8m | $194.3m |
| Net income available to common stockholders | $38.3m | $72.1m | $129.0m | $185.9m |
| Diluted EPS | $0.36 | $0.69 | $1.23 | $1.79 |
| FFO available to common stockholders per share | $1.04 | $0.96 | $3.07 | $2.80 |
Q3 revenue increased 5.9% year over year, while GAAP net income and diluted EPS fell substantially, mainly reflecting lower property-sale gains and higher operating costs, depreciation and interest expense. Nine-month revenue rose 9.3%, but net income declined; results included a $36.5 million real estate impairment charge in 2022 versus none in 2021, and lower gains on dispositions. FFO per share increased in both comparison periods. FFO is a non-GAAP measure and should be considered alongside GAAP results.
Q3 NOI margin was approximately 68.0% of revenue, compared with 69.0% in Q3 2021; nine-month NOI margin was approximately 69.2%, versus 69.4%. Same-property NOI rose 0.5% in Q3 to $118.6 million; management attributed the increase to $7.1 million higher same-property revenue, partly offset by $6.4 million higher expenses. Same-property cash NOI declined to $113.2 million from $115.2 million.
For the first nine months, operating cash flow was $319.9 million, up from $309.2 million. Investing used $341.6 million, and financing provided $19.6 million; cash and restricted cash ended at $29.1 million. Cash dividends were $0.50 per common share in Q3, and another $0.50 dividend was declared for payment in December 2022.
Balance sheet, liquidity and investment activity
- At September 30, 2022, total assets were $5.87 billion and net real estate assets were $5.12 billion. Mortgages and notes payable, net, totaled $2.97 billion, up from $2.79 billion at year-end 2021.
- Cash and cash equivalents were $23.1 million; restricted cash was $6.0 million. The $750 million revolving credit facility had $639.9 million unused at September 30 and $579.9 million unused on October 18, after $170 million was drawn. Management reported compliance with debt covenants and expected available resources to meet near-term needs.
- Debt included $486.0 million of secured and $2.50 billion of unsecured indebtedness. Weighted-average rates were 3.62% and 3.67%, respectively. $460 million of debt was floating-rate and not hedged; a 100-basis-point rate increase would raise annual interest expense by an estimated $4.6 million. The reported leverage ratio was 40.4% of undepreciated asset book value.
- The company acquired SIX50 at Legacy Union, a 367,000-square-foot Charlotte office building, for a net $198 million. It also entered two 50%-owned Dallas development ventures, Granite Park Six and 23Springs, and funded $55.7 million of its equity contributions at formation. The projects had no construction-loan borrowings outstanding at quarter-end.
- Highwoods plans to exit Pittsburgh and use asset-sale proceeds to help fund the Dallas strategy, but gave no fixed timetable and cautioned that sales may not occur on favorable terms or at all. Pittsburgh assets represented about 6% of company NOI and were 90.3% occupied.
Outlook, management commentary and risks
- Office portfolio occupancy was 90.7% at September 30, down from 91.2% at December 31, 2021. Management expected average occupancy of approximately 90.5%–91.0% for the remainder of 2022.
- Q3 new and renewal second-generation leases totaled about 1.04 million square feet. Average GAAP rent was $34.46 per square foot annually, 13.4% above prior leases for the same space.
- Management said office usage remained below pre-pandemic levels; reduced parking and related revenue was largely offset by lower expenses, net of recoveries. It expected usage to increase gradually through the remainder of 2022, while noting uncertainty around work-from-home effects and office-space demand.
- In October, the company obtained a $200 million unsecured term loan and used it, cash and revolver borrowings to prepay $250 million of 3.625% notes due January 2023. The filing describes the new loan as maturing in October 2024 with a one-year extension option; another MD&A passage describes the maturity as October 2025 assuming extension.
- Key risks include interest-rate increases, refinancing and capital availability, tenant credit deterioration, leasing and occupancy weakness, development costs or delays, market supply, non-core asset-sale execution, and economic or pandemic-related changes in office demand. The company recorded a $35.0 million second-quarter impairment on EQT Plaza and a $1.5 million third-quarter impairment on Pittsburgh land; a major tenant’s 317,000-square-foot EQT Plaza lease expires in September 2024, with renewal uncertain.
Important facts for investors to verify
- Whether planned Pittsburgh dispositions can be completed, at what prices and on what timetable, and how resulting proceeds compare with the capital needed for Dallas projects.
- Occupancy, leasing spreads, tenant retention and office usage trends, including renewal prospects for EQT Corporation at EQT Plaza.
- Exposure to floating interest rates, debt maturities and refinancing terms; confirm the October term loan’s maturity and extension provisions in the governing documents.
- Development budgets, leasing progress and funding commitments for Granite Park Six, 23Springs and other projects.
- Underlying operating performance apart from acquisition/disposition effects, impairment charges and gains on property sales; reconcile GAAP earnings with non-GAAP FFO and cash NOI.