Highwoods Properties, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Unaudited consolidated results cover the REIT and its operating partnership. Highwoods owned or held interests in 31.1 million rentable square feet of in-service properties, with 0.9 million square feet under development and about 500 acres of development land.
Financial and operating performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Rental and other revenue | $152.6 million | $144.8 million | $453.8 million | $407.8 million |
| Net income | $54.3 million | $56.1 million | $92.4 million | $99.4 million |
| Common-stockholder diluted EPS | $0.57 | $0.61 | $0.96 | $1.11 |
| Operating margin | 62.4% | 62.6% | 62.7% | 63.7% |
| Same-property NOI | $77.9 million | $77.6 million | $231.7 million | $235.8 million |
| Cash from operating activities | Not presented by quarter | $183.7 million | $186.5 million |
Q3 revenue increased 5.4%; nine-month revenue increased 11.3%, driven largely by prior-year acquisitions and developments placed in service. Q3 same-property NOI edged higher, while nine-month same-property NOI declined. Occupancy was 91.0% at September 30, up from 89.9% at year-end 2013, but below 91.4% in Q3 2013. Q3 signed lease rents were above prior rents by 3.5% for office, 4.1% for industrial and 2.3% for retail.
Net income and EPS comparisons are affected by material prior-year gains: Q3 2013 included a $37.9 million gain on discontinued-property sales and a $7.5 million gain from obtaining control of a joint venture. For the first nine months of 2013, discontinued operations included $52.4 million of net disposition gains. Highwoods early-adopted an accounting update in Q2 2014 that generally places current real-estate disposition gains in continuing operations; prior-period discontinued-operations amounts remain an important comparability factor.
Balance sheet, debt and liquidity
- At September 30, 2014, total assets were $3.895 billion and mortgages and notes payable were $2.014 billion, versus $1.956 billion at December 31, 2013. Cash and cash equivalents were $11.6 million; restricted cash was $10.6 million.
- Debt included $314.5 million of secured debt at a 5.94% weighted-average rate and $1.699 billion of unsecured debt at 4.05%. The $475 million revolving facility had $150 million drawn and $324.9 million unused at September 30; unused capacity was $326.9 million on October 20. It matures in January 2018, with two optional six-month extensions, subject to conditions.
- The company issued $300 million of 3.20% notes due 2021 during Q2 and prepaid secured mortgages, including $36.9 million during Q3. Management reported compliance with debt covenants. Mortgages and notes payable plus preferred stock represented 35.6% of total capitalization, as reported by the company.
- Nine-month investing cash outflow was $159.2 million, including $122.1 million for development, $80.1 million for tenant improvements and leasing costs, and $39.4 million for building improvements; property-sale proceeds were $152.0 million. Financing cash outflow was $23.1 million. Common dividends remained $0.425 per share quarterly ($1.275 for nine months).
Transactions, outlook and risks
- Q3 acquisition: a 374,000-square-foot Raleigh office property for $83.8 million; planned additional improvements brought anticipated total investment to $92.1 million. Management estimated a 6.7% capitalization rate using projected 2015 GAAP NOI and an 82.1% initial occupancy rate.
- Q3 dispositions generated reported sale prices of $154.8 million in aggregate before specified buyer credits, with gains recorded totaling $36.2 million. The company also reported $180 million of non-core asset sales year-to-date and $92 million of acquisitions.
- Management had announced $147 million of new development starts for 2014 and anticipated starting up to another $103 million during the remainder of the year. It expected up to $208 million of additional property acquisitions and up to $5 million of additional non-core dispositions. Expected capital expenditures for started or committed development projects were approximately $167 million at September 30. These are expectations, not assured outcomes; no specific earnings or FFO guidance is provided in the filing.
- Management expected cash, operating cash flow and revolving-credit availability to meet short-term needs. Long-term funding sources may include operating cash flow, debt, equity and non-core asset sales. Principal risks cited include tenant credit deterioration, leasing and development delays or costs, weaker market conditions, rising interest rates and inability to obtain capital or refinance debt on acceptable terms. Management cautioned that covenant compliance may not continue under changing operating or economic conditions.
- Unusual items included a $0.6 million real-estate impairment during the first nine months and a $0.3 million Q3 loss on debt extinguishment. An October 17 sale of an Atlanta industrial property and land parcel for $11.4 million was expected to produce a $1.7 million gain.
Important facts for investors to verify
- How much reported earnings growth reflects recurring property operations versus disposition and other one-time gains, and how the discontinued-operations accounting change affects period comparisons.
- Whether occupancy, leasing spreads and same-property NOI can improve enough to offset higher property expenses and the nine-month decline in same-property NOI.
- Development spending, lease-up assumptions and returns on the Raleigh acquisition and planned projects, including whether management’s projected yields are achieved.
- Debt maturities, interest-rate exposure, covenant headroom and the availability and cost of refinancing; confirm the company’s reported revolving capacity and compliance.
- FFO is a non-GAAP measure; assess it alongside GAAP earnings, cash flow, distributions and the costs of maintaining and leasing properties.