Highwoods Properties, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; balance-sheet amounts are as of June 30, 2019. Highwoods is an office REIT operating primarily in nine U.S. markets through Highwoods Realty Limited Partnership. It owned or held interests in 31.1 million rentable square feet of in-service properties, 1.2 million square feet under development, and about 325 acres of development land.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Rental and other revenues | $184.1m | $178.8m | $356.4m | $359.2m |
| Net income | $41.4m | $53.0m | $49.8m | $87.2m |
| Net income available to common stockholders | $39.4m | $50.7m | $46.7m | $83.1m |
| Diluted EPS | $0.38 | $0.49 | $0.45 | $0.80 |
| FFO available to common stockholders per share | $0.87 | $0.87 | $1.59 | $1.72 |
| Net operating income (NOI) | $123.5m | $119.1m | $235.3m | $240.1m |
Q2 same-property NOI rose 2.3% to $115.1 million; total NOI increased 3.7%. Q2 NOI was about 67.1% of rental and other revenue, versus 66.6% a year earlier. Q2 diluted EPS declined despite higher revenue and NOI, principally reflecting lower gains on property dispositions and higher interest and depreciation costs. First-half results also included significant Laser Spine Institute-related charges and lower disposition gains. FFO per share was flat in Q2 and lower for the first half.
Q2 office leases signed covered 1.08 million square feet. Combined annual GAAP rents were $30.12 per square foot, 16.8% above the prior leases for those spaces. Office occupancy was 90.5% at quarter-end, down from 91.6% at December 31, 2018.
Cash flow, debt and liquidity
- First-half operating cash flow was $173.3 million, down from $184.0 million. Investing activities used $138.8 million, versus $201.8 million; financing activities used $31.1 million, versus $60.5 million.
- Cash and cash equivalents were $4.5 million, with restricted cash of $9.0 million. The company reported $13.5 million of combined cash and restricted cash at June 30.
- Net mortgages and notes payable were $2.162 billion, up from $2.086 billion at year-end. Debt consisted of $96.3 million secured and $2.077 billion unsecured. The weighted-average rates were 4.0% on secured debt and 3.77% on unsecured debt.
- Debt and preferred stock represented 35.9% of undepreciated asset book value; the company reported a 33.3% share of total capitalization. About $486 million of debt was not fixed-rate or protected by hedges.
- The $600 million revolving credit facility had $136 million drawn and $463.9 million of unused capacity at June 30; unused capacity was $478.9 million on July 16. The facility matures in January 2022, with two optional six-month extensions. Management reported compliance with debt covenants.
- The company issued $350 million of 4.20% notes due 2029 and prepaid a $225 million term loan during the first quarter. It paid $98.4 million in common-stock dividends in the first half; the Q2 dividend was $0.475 per share.
Changes, outlook and material items
- Management expected office occupancy to average about 91% for the rest of 2019. It expected same-property NOI, revenue and total NOI to be higher in the remainder of 2019 than in the comparable 2018 period, while anticipating higher property expenses and interest expense. These are management expectations, not formal earnings guidance.
- Approximately $316 million remained to fund started or committed development projects at June 30. Projects included Asurion in Nashville, GlenLake Seven in Raleigh, and Midtown One in Tampa; reported pre-leasing was 98.3%, 44.1%, and 0%, respectively. The projects’ combined anticipated investment was about $397.3 million.
- Highwoods formed the Midtown One joint venture, holding an 80% interest, and committed up to $46.3 million of interest-only construction financing at LIBOR plus 250 basis points; none of that loan had been funded by June 30. Construction was projected to begin in Q4 2019, with completion in Q2 2021.
- Laser Spine Institute abruptly ceased operations in March. The company recorded $5.6 million of lease-receivable credit losses, $2.3 million of lease-incentive write-offs, $4.1 million of notes-receivable write-offs, and $11.6 million of accelerated depreciation and amortization on tenant improvements and leasing costs.
- Q2 included $6.7 million of gains on sales of two buildings and land and a $0.5 million real-estate impairment. Management expected to sell an additional $62–$112 million of non-core properties during the remainder of 2019, without assurance of timing or completion.
- CEO Edward Fritsch announced retirement effective September 1, 2019; President and COO Theodore Klinck was to become CEO. Brian Leary joined as COO on July 15. Management cited leasing, development, market and customer-credit risks, rising interest rates, access to capital, and the ability to refinance debt as risks to results and liquidity.
Important facts for investors to verify
- Whether occupancy and leasing performance improve as expected, and how lease expirations, concessions and tenant-improvement costs affect cash rents and NOI.
- Laser Spine Institute space re-leasing progress and any additional credit losses or capital costs.
- Development budgets, leasing, delivery schedules and funding needs, particularly the Asurion and Midtown One projects and the $316 million remaining commitment.
- Debt maturities, floating-rate exposure, refinancing terms, covenant headroom and continued access to the revolver and capital markets.
- Actual non-core asset sales versus the $62–$112 million expectation, including proceeds and gains or losses.
- Comparability of GAAP earnings and non-GAAP FFO; first-half results were affected by unusual tenant write-offs, disposition gains and hedge settlements.