Highwoods Properties, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Highwoods is an office-focused REIT operating through Highwoods Realty Limited Partnership. At quarter-end, it owned or had interests in 32.1 million rentable square feet of in-service properties, 0.9 million square feet under development and about 600 acres of development land. Financial amounts below are in U.S. dollars; millions are rounded.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Rental and other revenue | $152.7m | $132.6m | $301.2m | $263.0m |
| Income from continuing operations | $24.5m | $15.5m | $37.7m | $26.8m |
| Net income available to common stockholders | $22.7m | $27.5m | $34.8m | $39.9m |
| Diluted EPS | $0.25 | $0.33 | $0.39 | $0.49 |
| FFO per diluted share, non-GAAP | $0.80 | $0.70 | $1.46 | $1.37 |
| Same-property NOI | $82.3m | $82.6m | $160.1m | $164.6m |
Q2 revenue increased 15.2%, principally from properties acquired in 2013 and developments placed in service. First-half revenue grew 14.5%, while same-property revenue and NOI declined. Operating margin (revenue less rental property expenses as a share of revenue) was 63.8% in Q2 versus 64.3% a year earlier, and 62.9% for the first half versus 64.3%.
Common-stock dividends were $0.425 per share for Q2 and $0.850 per share for the first half, unchanged from the comparable 2013 periods. The lower GAAP EPS versus 2013 reflects, in significant part, the prior-year gains on sales reported in discontinued operations; 2014 also had higher weighted-average shares outstanding. Continuing-operations EPS improved to $0.25 from $0.17 in Q2 and to $0.38 from $0.30 for the first half.
Cash flow, debt and liquidity
- First-half cash from operations was $114.5m, down from $116.9m. Investing used $133.1m, compared with $240.7m in 2013; financing provided $27.1m, versus $120.1m. Cash and cash equivalents ended June at $18.7m.
- Debt at June 30 was $2.059bn, up from $1.956bn at year-end 2013: $352.9m secured and $1.706bn unsecured. Weighted-average rates were 5.67% for secured debt and 4.04% for unsecured debt. Debt and preferred stock equaled 34.6% of total capitalization and 42.4% of undepreciated asset book value.
- The $475m revolving facility had $157m drawn and $317.9m available at June 30; availability was $293.9m on July 21. The facility matures in January 2018, subject to extension options. Management reported compliance with debt covenants.
- The Operating Partnership issued $300m of 3.20% notes due June 2021 at a 3.363% effective yield. In Q2, it prepaid $123.7m and $7.2m of secured loans. It prepaid another $36.9m on July 1.
Material developments, outlook and risks
- Occupancy rose from 89.9% at year-end 2013 to 90.8% at June 30. Management expected average occupancy of about 90.9% for the rest of 2014 and year-end occupancy of 91.8%–92.5%.
- Q2 new and renewal lease rents, measured as annual GAAP rents against prior leases in the same space, were higher by 14.2% for office, 1.9% for industrial and 19.4% for retail. Same-property Q2 average occupancy was 90.3%, versus 90.7% a year earlier.
- Management anticipated up to $150m of new development commencement, $100m–$300m of acquisitions and $150m–$175m of non-core dispositions in 2014. It expected approximately $100m of remaining funding for previously announced development at June 30. These plans and projections are forward-looking and not assured.
- Two Atlanta land parcels sold in Q2 for $9.5m, generating $5.9m in gains. A $0.6m impairment was recorded on a Greensboro office property. Eleven Richmond office properties and five Raleigh office properties plus a land parcel were classified as held for sale at quarter-end. The Raleigh assets sold on July 29 for $58.7m; the company expected an $11.7m gain.
- Management expected revenue to rise for the remainder of 2014, driven by the full-year contribution of 2013 acquisitions and developments, occupancy, cost recoveries and rents. It expected operating margin to increase slightly, and interest expense to decrease slightly, versus 2013. Higher property operating costs and depreciation were identified as offsets to growth.
- Key stated risks include tenant financial deterioration, leasing or releasing space more slowly or on less favorable terms, excess competing supply, weaker core-market economic growth, rising interest rates or operating costs, constrained access to capital, refinancing risk and possible covenant noncompliance. Management cautioned that refinancing at higher rates could pressure cash flow and distributions.
The company early adopted a real-estate disposition accounting update effective April 1, 2014. Current-period dispositions and properties held for sale are included in continuing operations; prior-period presentation was revised. This limits direct comparisons of reported continuing and discontinued results without considering the reclassification.
Important facts for investors to verify
- Whether occupancy reaches the stated year-end range and whether leasing spreads translate into durable same-property revenue and NOI growth.
- Execution, funding needs and returns on planned developments and acquisitions, alongside the timing and proceeds of non-core asset sales.
- Debt maturities, revolver availability, interest-rate exposure and continued covenant compliance, particularly under less favorable operating or refinancing conditions.
- The effect of the accounting change and prior-year property-sale gains when comparing GAAP earnings; assess FFO alongside, not as a substitute for, GAAP results.
- Whether operating cash flow and available liquidity support development spending, debt service and distributions, including the $0.425 quarterly common dividend.