Highwoods Properties, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Highwoods is an equity REIT operating primarily through Highwoods Realty Limited Partnership. At quarter-end, it wholly owned 282 in-service properties totaling 30.1 million square feet, plus four office developments.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Rental and other revenue | $147.3 million | $123.4 million | $416.0 million | $368.0 million |
| Net income | $56.1 million | $35.8 million | $99.4 million | $68.6 million |
| Net income available to common stockholders | $53.3 million | $33.4 million | $93.2 million | $63.0 million |
| Diluted earnings per common share | $0.61 | $0.43 | $1.11 | $0.84 |
| FFO per share, non-GAAP | $0.70 | $0.65 | $2.07 | $2.03 |
| Operating property margin | 62.4% | 62.8% | 63.5% | 63.6% |
Net income and EPS benefited materially from property-sale gains and a $7.5 million gain on acquiring control of an Orlando joint venture. Discontinued operations included $37.9 million of net sale gains in Q3 and $52.4 million year to date. FFO excludes specified items, including gains on property sales and the acquisition gain; it is a non-GAAP measure, not a substitute for GAAP earnings.
For the first nine months, same-property NOI was $227.6 million versus $228.4 million; same-property cash NOI was $219.4 million versus $215.0 million. Cash from operations was $186.5 million versus $138.0 million. Investing used $401.6 million, largely reflecting acquisitions and property improvements; financing provided $233.0 million. Cash and cash equivalents ended at $31.7 million.
At September 30, mortgages and notes payable totaled $2.05 billion: $591.8 million secured at a 5.03% weighted average rate and $1.46 billion unsecured at 4.14%. Debt and preferred stock represented 38.6% of total capitalization. The $475 million revolving facility had $268.5 million unused at September 30, declining to $190.5 million on October 21. Management reported compliance with debt covenants. Common dividends were $0.425 per share for Q3, unchanged year over year.
Material changes and operating context
- Revenue rose 19.3% in Q3 and 13.0% year to date, primarily from acquisitions. Property operating expenses also increased, principally with acquired properties; Q3 same-property expenses were higher.
- Occupancy declined from 90.9% at December 31, 2012 to 90.0% at September 30, 2013. Management attributed the decrease to a large Tampa tenant expiration, acquisitions of relatively low-occupied buildings, and dispositions of relatively high-occupied industrial properties.
- Q3 acquisitions included the remaining 60% of an Orlando joint venture, a Nashville office property and two Atlanta properties. The company reported $548.5 million of property acquisitions and $196.8 million of non-core asset sales in 2013 to date.
- Common shares outstanding increased to 89.9 million from 80.3 million at year-end 2012. A Q3 public offering generated $150.9 million net proceeds; equity sales agreements generated $144.2 million net proceeds in the first nine months.
- Q3 net gains on discontinued property sales were $37.9 million, including $36.7 million related to Atlanta industrial properties. Year-to-date real estate impairments were $2.2 million; the filing also reports impairments recorded by unconsolidated affiliates.
Outlook, risks and unusual items
- Management announced $205.6 million of new development starts in 2013 and estimated $199.5 million of future capital expenditures for started or committed development projects at September 30. It anticipated selling up to an additional $53 million of non-core properties during the remainder of 2013. These are expectations, not guarantees.
- Management said available cash, operating cash flow and revolving-credit availability were expected to cover short-term liquidity needs. Long-term funding sources may include operating cash flow, debt, equity and non-core asset sales.
- Subsequent to quarter-end, the company and a consolidated joint venture prepaid mortgage balances of $32.3 million and $67.5 million, respectively. Several property sales also closed in October; expected gains were estimates in the filing.
- Key stated risks include tenant credit deterioration, difficulty leasing vacant or newly developed space, weaker local economic growth, excess competing supply, higher interest rates or operating costs, reduced access to capital, inability to refinance debt, and execution risks for acquisitions, development and dispositions.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- How much reported earnings growth is recurring property performance versus sale gains and the one-time acquisition remeasurement gain?
- Whether occupancy stabilizes and same-property NOI improves, given the decline in occupancy and slightly lower same-property NOI.
- Funding and refinancing plans for debt maturities, including the Orlando acquisition debt due July 2014 and the revolving facility due July 2015.
- Actual costs, leasing progress and returns on development and acquisition commitments; the filing states acquired buildings averaged 82.7% occupied at closing.
- Whether October sales and debt prepayments were completed as described and how they affect liquidity, leverage and subsequent-period results.