Highwoods Properties, Inc. — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015; includes fourth-quarter results. Highwoods is an office-focused REIT operating through Highwoods Realty Limited Partnership, with properties in multiple U.S. markets. The Company owned 97.1% of the Operating Partnership’s common units at year-end.
Financial and operating results
- Revenue: Rental and other revenue was $604.7 million, up 8.8% from $555.9 million in 2014. Growth reflected acquisitions, development completions and stronger same-property results, partly offset by dispositions.
- Profit and EPS: Net income was $101.3 million, down from $116.0 million; diluted EPS was $1.00 versus $1.19. Continuing-operations income was $85.5 million versus $97.0 million. Lower disposition gains and higher share count contributed to the decline. FFO per share, a non-GAAP measure, increased to $3.08 from $2.90.
- Fourth quarter: Revenue was $160.1 million, continuing-operations income $19.0 million and net income $21.9 million. Diluted EPS was $0.21, compared with $0.24 in fourth-quarter 2014.
- NOI and occupancy: Continuing-operations NOI was $388.7 million, up 11.1%; same-property continuing NOI rose 5.9% to $350.2 million. Office occupancy was 92.6% at year-end, up from 91.2%; wholly owned in-service properties were 93.1% occupied. Fourth-quarter new and renewal office leases had combined GAAP rents 10.6% above prior rents in the same spaces.
- Cash flow: Operating cash flow was $288.9 million, compared with $266.9 million in 2014. Investing used $654.2 million, chiefly reflecting acquisitions and capital investment; financing provided $361.5 million. Year-end cash and cash equivalents were $5.0 million, with $16.8 million of restricted cash.
- Debt and liquidity: Mortgages and notes payable totaled $2.50 billion, up from $2.07 billion. Debt included $175.3 million secured and $2.32 billion unsecured; $974.0 million was variable-rate debt not protected by hedges. Revolving-credit availability was $175.8 million at year-end and $161.1 million on January 29, 2016. The company reported compliance with debt covenants.
- Capital and distributions: Total assets were $4.49 billion. Common dividends remained $1.70 per share for the year; the board retains discretion over future dividends. The company issued about 2.9 million shares in 2015, receiving $124.9 million net proceeds.
Material changes and significant transactions
- 2015 acquisitions included two Atlanta buildings, a Tampa building and land, and an Orlando building interest; anticipated total investment for the acquired buildings was $440.6 million, including planned improvements.
- Highwoods agreed to sell substantially all wholly owned Country Club Plaza assets in Kansas City for $660.0 million. The assets were about 95% leased and classified as held for sale; closing was scheduled for March 1, 2016, subject to customary conditions. The buyer had placed $25.0 million in non-refundable deposits, subject to limited exceptions.
- Management intended to use $430.0 million of expected net sale proceeds to repay acquisition debt and hold $220.0 million in escrow for potential tax-deferred exchanges, additional debt repayment or general corporate purposes. The company expected the sale to reduce leverage; its planned target leverage range after closing was 38%–43%, versus a prior 40%–45% range.
- The company sold its 20% interest in Harborview for $6.9 million net proceeds and recorded a $4.2 million gain. It also recorded $1.6 million of expected $2.6 million severance costs associated with closing its Kansas City division office after the Plaza sale.
Outlook, risks and unusual items
- Management expected 2016 same-property NOI and total continuing-operations NOI to increase, supported mainly by higher occupancy, rents and the full-year contribution of 2015 acquisitions and completed developments. It also expected 2016 revenue and operating expenses to rise, depreciation and amortization to increase, and interest expense to decrease. These are expectations, not formal earnings guidance.
- At year-end, 1.45 million square feet of development was in progress, with anticipated total investment of $467.7 million and 76.3% pre-leased. Management reported $294 million remaining to fund previously announced development activity.
- Debt refinancing and interest-rate exposure are key risks. Scheduled 2016 debt principal payments were approximately $396 million; the $350 million bridge facility was due in March 2016, with management expecting repayment in connection with the Plaza sale. A 100-basis-point increase in rates on unhedged variable debt would increase annual interest expense by about $9.7 million.
- Other principal risks include office-market weakness, lease renewals and expirations, customer credit, development costs and lease-up, property operating-cost inflation, access to capital, REIT qualification, environmental and regulatory obligations, cybersecurity, and the uncertain completion and proceeds of the Plaza transaction. The 20 largest customers contributed 24.05% of annualized cash rental revenue; the Federal Government was the largest at 5.45%.
- Reported results include discontinued operations for the Plaza assets, and comparative periods were retrospectively revised under discontinued-operations accounting. No real estate impairment was recorded in 2015; a $0.6 million impairment was recorded in 2014. The auditor issued unqualified opinions on the financial statements and the Company’s internal controls.
Important facts for investors to verify
- Whether the Plaza sale closed on schedule, final net proceeds and gain, debt repaid, and use of escrowed proceeds.
- Actual 2016 leasing, occupancy, rent growth and NOI versus management’s expectations, including lease rollover and tenant-improvement costs.
- Liquidity and refinancing plans for 2016 maturities and the bridge facility, alongside development commitments and remaining project funding.
- Debt leverage, variable-rate exposure, covenant headroom and the effect of any change in interest rates or credit ratings.
- Dividend coverage and sustainability, considering operating cash flow, capital needs, dispositions and REIT distribution requirements.