Business context and reporting period
Highwoods Properties, Inc. is an equity REIT that conducts substantially all operations through Highwoods Realty Limited Partnership. This unaudited Form 10-Q covers the three months ended March 31, 2012, compared with the three months ended March 31, 2011. At quarter-end, the company wholly owned 303 in-service properties totaling 29.3 million square feet; its broader portfolio included interests in 338 properties totaling approximately 34.5 million square feet.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Rental and other revenues | $129.9 million | $114.4 million |
| Net operating income (NOI) | $83.8 million | $73.4 million |
| Operating margin | 64.5% | 64.2% |
| Income from continuing operations | $13.1 million | $11.9 million |
| Net income available to common stockholders | $16.7 million | $10.1 million |
| Basic and diluted earnings per share | $0.23 | $0.14 |
| FFO available to common stockholders, a non-GAAP measure | $53.5 million; $0.70 per share | $46.1 million; $0.61 per share |
| Cash provided by operating activities | $22.1 million | $28.5 million |
| Cash and cash equivalents | $12.2 million | $11.2 million at Dec. 31, 2011 |
| Mortgages and notes payable | $1.904 billion | $1.903 billion at Dec. 31, 2011 |
Q1 2012 investing activities used $12.9 million and financing activities used $8.1 million. Restricted cash was $20.8 million at March 31. The declared common dividend was $0.425 per share, unchanged year over year.
Material changes versus the prior comparable period
- Revenue increased 13.6%, primarily reflecting 2011 acquisitions, which accounted for $12.1 million of the increase, and $3.1 million of higher same-property revenue. Same-property average occupancy rose to 90.6% from 90.0%; annualized GAAP rent per square foot rose to $18.62 from $18.23.
- NOI increased 14.2%. Same-property NOI was $75.9 million versus $71.8 million; same-property cash NOI was $71.9 million versus $68.2 million.
- Common-stockholder net income and EPS benefited from a $5.1 million gain on the sale of 96 vacant residential units. Continuing-operations EPS was $0.16 versus $0.13, separating ongoing results from the disposition-related benefit.
- Interest expense increased $1.3 million to $24.8 million, mainly due to higher average debt balances, partly offset by lower average rates. General and administrative expense increased 24.1% to $9.7 million.
- Operating cash flow declined $6.4 million, primarily because of the timing of real estate tax payments. The company also reported a $1.0 million share of impairment on two properties held by its DLF I joint venture; equity in unconsolidated affiliates shifted from $1.5 million of earnings to a $0.2 million loss.
Debt, liquidity, outlook and risks
- Debt comprised $746.8 million secured and $1.157 billion unsecured. The company reported compliance with debt covenants. Its $475 million revolving facility had $141 million drawn and $333.8 million of unused capacity at March 31; unused capacity was $362.8 million at April 26.
- In Q1, the company obtained a $225 million, seven-year unsecured term loan at LIBOR plus 190 basis points, using proceeds to repay revolver borrowings. Swaps cover $225 million of LIBOR-based borrowings and fix the underlying LIBOR rate at a weighted average 1.678%. Management estimated that a 100-basis-point increase in rates on unhedged variable-rate debt would increase annual interest expense by $3.9 million.
- Management anticipated higher remaining-2012 revenue, adjusted for acquisitions and dispositions, supported by acquisition contributions and modestly higher occupancy. It expected operating margins to be similar to 2011, while interest expense was expected to increase and G&A expense to decrease. These are management expectations, not quantified earnings guidance.
- Management anticipated up to $150 million of new development, up to $300 million of acquisitions, and up to $150 million of non-core property sales for the remainder of 2012. It expected debt to remain below 50% of undepreciated asset book value and said available cash, operating cash flow and revolver capacity should meet short-term liquidity needs.
- Risks cited include weaker tenant finances, leasing delays or lower rents, economic weakness in core markets, competing development, higher operating costs and interest rates, and difficulty obtaining capital or refinancing debt at maturity. Management cautioned that covenant compliance may depend on future performance and economic conditions.
- The $38.3 million interest-only secured advance to DLF I was extended to June 30, 2012; the filing reported $0.4 million of Q1 interest income. In April, $25.3 million of proceeds from a joint-venture property sale reduced the advance. The company also reported a $1.4 million expected gain on an April 25 Tampa-area office sale and an April 27 purchase of a Cary, North Carolina office property for $26 million.
Important facts for investors to verify
- How much of the reported earnings increase reflects recurring property operations versus the $5.1 million disposition gain; compare GAAP EPS with FFO and same-property NOI.
- Whether occupancy, same-property rents and leasing economics continue to improve, including the reported 1.0 million square feet of second-generation office leasing and 1.7% rent growth.
- Cash generation and distribution coverage, given lower operating cash flow, the $0.425 quarterly dividend and Q1 capital spending on tenant improvements and building improvements.
- Debt maturities, covenant headroom, revolver availability and exposure to floating rates; confirm the DLF I advance’s repayment status and the joint venture’s property performance.
- Progress against the stated development, acquisition and disposition plans, and the effect of equity issuance—including 307,900 shares issued in early April for $10.0 million net proceeds—on per-share results.