Highwoods Properties, Inc. — Q3 2019 Form 10-Q
Business context and period. This unaudited filing covers the quarter and nine months ended September 30, 2019. Highwoods is an office REIT operating through Highwoods Realty Limited Partnership, with 31.2 million rentable square feet of in-service properties, 1.2 million square feet under development and approximately 275 acres of development land. Its markets include Atlanta, Greensboro, Memphis, Nashville, Orlando, Pittsburgh, Raleigh, Richmond and Tampa.
Financial performance
Amounts below are in millions, except per-share data. Comparisons are with the same 2018 period.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Rental and other revenues | $187.5 | $179.4 | $543.9 | $538.6 |
| Net income | $29.6 | $35.0 | $79.3 | $122.3 |
| Net income available to common stockholders | $27.9 | $33.2 | $74.6 | $116.3 |
| Diluted EPS | $0.27 | $0.32 | $0.72 | $1.12 |
| Net operating income (NOI) | $123.3 | $118.3 | $358.7 | $358.4 |
| FFO available to common stockholders | $88.2 | $91.6 | $257.9 | $274.4 |
| FFO per diluted share | $0.83 | $0.86 | $2.42 | $2.58 |
Same-property NOI increased 1.6% in Q3 to $114.2 million, while total NOI rose 4.3%. Nine-month same-property NOI declined to $334.9 million from $338.5 million. Q3 revenue growth reflected properties placed in service and stronger same-property revenue, partly offset by dispositions. Office occupancy was 91.2% at September 30, down from 91.6% at year-end 2018. Q3 new and renewal leases achieved average GAAP rents 19.4% above prior leases in the same spaces.
Cash flow and liquidity. Nine-month operating cash flow was $286.3 million, compared with $293.0 million; investing cash outflow was $250.3 million, versus $290.9 million; and financing provided $76.9 million, versus using $78.1 million. Cash and cash equivalents were $116.7 million at quarter-end; cash plus restricted cash was $123.0 million.
Debt and capital. Mortgages and notes payable, net, were $2.322 billion, up from $2.086 billion at December 31, 2018. The company reported a 37.4% leverage ratio, defined as debt plus preferred stock relative to undepreciated asset book value. It had $599.9 million of unused capacity on its $600 million revolving credit facility and reported compliance with debt covenants. During Q3, it issued $400 million of 3.050% notes due 2030 and prepaid $100 million of a bank term loan. A further $250 million of debt was variable-rate and unhedged at September 30.
Material changes and unusual items
- Net income and EPS declined despite higher quarterly revenue and NOI. Higher depreciation, interest and general and administrative expenses, as well as real estate impairments, weighed on results.
- The Laser Spine Institute’s abrupt closure in Tampa contributed to nine-month credit losses on operating lease receivables of $5.6 million, lease-incentive write-offs of $2.3 million, notes-receivable write-offs of $4.1 million and accelerated write-offs of tenant improvements and leasing costs of $11.6 million.
- Highwoods recorded $5.8 million of real estate impairments in the first nine months, primarily after classifying Greensboro and Memphis assets as non-core and shortening their expected holding periods.
- Management announced an agreement to acquire the 841,000-square-foot Bank of America Tower at Legacy Union in Charlotte for $436 million, with closing then expected in November 2019. The company had deposited $50 million, non-refundable except in limited circumstances.
- The company plans a two-phase exit from Greensboro and Memphis. The first phase targets selected asset sales by mid-2020 for proceeds approximating the tower investment; the remaining assets have no set sale timetable. Sales are not assured. Related severance costs were $0.7 million in Q3, with another $1.5 million expected in Q4.
Outlook, risks and other disclosures
No quantitative earnings or FFO guidance is provided in the filing. Management expected cash, operating cash flow and available financing sources to meet short-term liquidity needs. It cited approximately $316 million of expected future capital expenditures for started or committed developments. Active or announced office development projects totaled approximately 939,500 square feet, with anticipated total investment of $435.2 million and 63.7% preleased.
Key risks include failure to complete the Charlotte acquisition or achieve expected proceeds and timing from Greensboro and Memphis sales; customer credit deterioration and leasing or occupancy weakness; construction costs, project execution and market supply; rising interest rates and refinancing needs; and continued covenant compliance. Management also noted that dividends reduce cash available for debt reduction and investment. Q3 common dividends were $0.475 per share; a further $0.475 dividend was declared payable December 3, 2019. CEO Edward Fritsch retired effective September 1, 2019, and Theodore Klinck became CEO. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Charlotte tower acquisition closed on the expected terms and how it was financed.
- Whether planned Greensboro and Memphis dispositions achieved expected proceeds and timing, and the impact of the market exits on NOI and expenses.
- Occupancy, leasing spreads, customer collections and re-leasing progress for the former Laser Spine Institute space.
- Debt maturities, fixed-versus-variable exposure, interest costs, covenant headroom and liquidity after acquisition and development spending.
- Development budgets, preleasing, completion schedules and returns relative to project costs.
- Whether reported FFO trends, dividend levels and cash flows remain sustainable; FFO is a non-GAAP measure and should be considered alongside GAAP results.