Highwoods Properties, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. Highwoods is an office REIT operating primarily in Atlanta, Charlotte, Nashville, Orlando, Pittsburgh, Raleigh, Richmond and Tampa. It reported the quarter and nine months ended September 30, 2020. At quarter-end, it owned or held interests in 27.9 million rentable square feet of in-service properties, 1.2 million square feet under development and about 225 acres of development land. Unless otherwise noted, amounts below are in millions of dollars.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Rental and other revenue | $181.0 | $187.5 | $557.0 | $543.9 |
| Net income | $42.3 | $29.6 | $272.6 | $79.3 |
| Net income available to common stockholders | $40.3 | $27.9 | $262.8 | $74.6 |
| Diluted earnings per common share | $0.39 | $0.27 | $2.53 | $0.72 |
| FFO available to common stockholders per share | $0.86 | $0.83 | $2.71 | $2.42 |
| Net cash from operating activities | — | $275.5 | $286.3 |
- NOI: Q3 net operating income was $124.2 million, versus $123.3 million; same-property NOI was $110.3 million, up 0.9%. Nine-month NOI was $382.8 million, versus $358.7 million.
- Cash flows: Nine-month investing activities provided $80.4 million, primarily reflecting $356.6 million of property-sale proceeds; financing activities used $242.3 million. Cash and restricted cash totaled $128.3 million at September 30.
- Debt and liquidity: Mortgages and notes payable, net, were $2.470 billion, down from $2.544 billion at December 31, 2019. Cash and cash equivalents were $118.7 million. The $600 million revolver had $599.9 million available as of October 20, 2020, with no borrowings outstanding. Reported leverage—debt plus preferred stock relative to undepreciated asset book value—was 37.8%.
- Unsecured debt had a 3.42% weighted-average interest rate; $150 million of debt was variable-rate and unhedged at quarter-end. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Q3 revenue fell 3.4%, mainly due to dispositions and lower same-property revenue, partly offset by acquisitions and development properties placed in service. For the first nine months, revenue increased 2.4%, with acquisitions, same-property growth and developments more than offsetting disposed-property revenue.
- Nine-month common earnings and GAAP net income rose sharply, chiefly because property-disposition gains were $163.4 million, compared with $10.2 million in 2019. The 2020 gains primarily reflect the exit from Greensboro and Memphis; Q3 gains were $10.0 million.
- Q3 same-property revenue declined $4.2 million, but same-property expenses declined $5.1 million, producing the increase in same-property NOI. Reduced building usage lowered parking, utilities and other variable costs.
- During Q3, the Operating Partnership issued $400 million of 2.600% notes due February 2031. Proceeds helped fund the repurchase of $150 million of 3.20% notes due June 2021 and prepayment of a $100 million bank term loan. The transactions generated $3.7 million of debt-extinguishment losses.
Outlook, commentary and risks
- Management said COVID-19 had not meaningfully affected Q3 financial results, but expected adverse effects for the remainder of 2020. It anticipated lower revenue and NOI year over year, reflecting dispositions, reduced property usage and slower speculative leasing.
- Office occupancy declined from 92.0% at year-end 2019 to 90.2% at September 30. Management expected occupancy of approximately 90% for the remainder of 2020, subject to further deterioration from tenant difficulties or changing office-space demand.
- Through October 20, the company had collected 99% of contractually required October rent. Temporary deferrals represented 1.2% of annualized rental revenue, averaged about two months of rent and were expected to be repaid before the end of 2021. Management could not estimate the extent of remaining-2020 COVID-related losses.
- Development projects had approximately $137 million of future costs to fund; the stated development pipeline was approximately $503 million and about 70% funded at September 30. Management forecast approximately $64 million of funding during the remainder of 2020.
- The company expected to sell a further $123 million of non-core properties during the remainder of 2020, but cautioned that sales, timing and terms were not assured. It identified the $150 million June 2021 note maturity and stated it expected to meet short-term liquidity needs through cash, operations and financing sources.
- COVID-19 could lead to tenant defaults, bankruptcies, rent concessions, impairments, slower leasing and lasting changes in office demand. Other disclosed risks include weaker market conditions, higher interest rates or operating costs, refinancing constraints, and development or leasing outcomes below expectations. Management noted that future impairments, lease modifications and credit losses may result even though its current analyses did not require material COVID-related adjustments at September 30.
Important facts for investors to verify
- How much of nine-month earnings growth reflects recurring property operations versus the $163.4 million of disposition gains.
- Subsequent rent collections, deferrals, tenant credit losses and occupancy trends, including whether COVID-related effects intensify.
- Progress on the $123 million planned non-core asset sales and the timing and funding of the development pipeline.
- Plans to repay or refinance the remaining $150 million June 2021 notes, and continued revolver availability and covenant compliance.
- Whether the $0.48-per-share quarterly dividend remains supported by operating cash flows and future liquidity needs.