Highwoods Properties, Inc. — Q1 2011 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2011; comparisons are with the three months ended March 31, 2010, unless noted. Highwoods is an equity REIT operating primarily in the Southeastern and Midwestern United States through Highwoods Realty Limited Partnership. At quarter-end, it wholly owned 294 in-service office, industrial and retail properties totaling 27.1 million square feet, plus residential units, condominiums and development land. The broader portfolio included 329 in-service properties owned or held through interests, totaling approximately 32.4 million square feet.
Financial and operating performance
Dollar figures below are in millions, except per-share amounts and percentages.
| Metric | Q1 2011 | Q1 2010 / prior date |
|---|---|---|
| Rental and other revenue | $115.6 | $115.1 |
| Net income | $12.4 | $12.1 |
| Net income available to common stockholders | $10.1 | $9.7 |
| Basic and diluted EPS | $0.14 | $0.14 |
| Funds from operations (FFO; non-GAAP) | $46.1; $0.61 per diluted share | $45.8; $0.61 per diluted share |
| Net operating income (NOI; non-GAAP) | $74.2 | $73.3 |
| Same-property NOI (non-GAAP) | $70.5 | $71.4 |
| Same-property cash NOI (non-GAAP) | $67.1 | $70.1 |
| Cash from operating activities | $28.5 | $39.8 |
| Cash and cash equivalents, at quarter-end | $30.8 | $14.2 at Dec. 31, 2010 |
| Mortgages and notes payable, at quarter-end | $1,552.6 | $1,522.9 at Dec. 31, 2010 |
Revenue increased 0.5%; management attributed the increase mainly to a Memphis office acquisition, partly offset by lower same-property revenue. Net income available to common stockholders rose about 4.8%, while EPS and FFO per share were unchanged. NOI increased about 1.2%, but same-property NOI fell about 1.4% and same-property cash NOI fell about 4.3%. The company reported a 64.2% operating margin, versus 63.7% a year earlier.
Operating cash flow declined about 28% year over year, which management attributed primarily to lower cash rents and termination fees and a reduction in accounts payable, partly offset by lower incentive compensation. Investing activities used $14.2 million, principally for real estate and leasing costs. Financing activities provided $2.4 million; common and preferred dividends totaled $32.1 million.
Debt, liquidity and capital
Total debt increased $29.6 million from year-end. At March 31, secured debt was $751.5 million, with a 6.14% weighted-average rate, and unsecured debt was $801.1 million, with a 5.39% weighted-average rate. Debt represented 35.9% of total market capitalization and 46.2% of the undepreciated book value of real estate assets. Management stated that the company was in compliance with debt covenants.
The $400 million unsecured revolving facility had $399.5 million unused at March 31, after letters of credit; at April 25, unused capacity was $366.5 million. The $70 million secured construction facility had $17.9 million available and matures in December 2011, with a one-year extension option subject to conditions. In Q1, the company obtained a five-year $200 million unsecured bank term loan at LIBOR plus 220 basis points, using proceeds in part to repay a maturing $137.5 million term loan and revolving borrowings.
Outlook, management commentary and risks
Management expected the remainder of 2011 to bring higher rental revenue, primarily from slightly higher average occupancy and higher termination fees; slightly higher rental property expenses and depreciation; lower general and administrative expenses; and higher interest expense, reflecting higher average debt and less capitalized interest. These are expectations, not guarantees. Management anticipated up to $200 million of new development, up to $200 million of acquisitions and up to $75 million of non-core property sales during the remainder of 2011, and expected debt to remain below 50% of undepreciated real estate value.
During Q1, the company leased 866,000 square feet of second-generation office space, at GAAP base rents 1.5% above prior leases on average. Same-property occupancy was 90.3% at March 31, versus 89.9% a year earlier. Federal government and AT&T represented 9.6% and 3.6% of annualized revenue, respectively; no other customer exceeded 3%.
Key disclosed risks include customer financial deterioration; difficulty leasing vacant, expiring or newly constructed space; weaker economic growth or excess property supply in core markets; higher interest rates or operating costs; and inability to obtain capital or refinance debt on acceptable terms. Management cautioned that covenant compliance could change with operating performance, transactions and economic conditions. No significant change in off-balance-sheet arrangements was reported.
Subsequent events: on April 1, the company repaid a remaining $10 million term loan and made a one-year, $38.3 million secured, interest-only loan to an unconsolidated joint venture at LIBOR plus 500 basis points, subject to a possible rate reduction. On April 6, it acquired a 48,000-square-foot Raleigh medical office property for approximately $9 million in cash.
Important facts for investors to verify
- Review the trend in same-property NOI and cash NOI against reported revenue growth, including the effect of cost-recovery true-ups, straight-line rents and termination fees.
- Reconcile the sharp year-over-year decline in operating cash flow with working-capital movements and assess cash generation relative to distributions and capital spending.
- Check upcoming maturities, variable-rate exposure, facility availability after quarter-end borrowings, and covenant headroom; the filing reports no outstanding interest-rate hedges at March 31.
- Assess the credit, collateral and repayment risk of the $38.3 million joint-venture loan made after quarter-end, as well as the related asset-sale repayment condition.
- Consider that 2010 comparative results were revised to present certain property operations as discontinued operations, and that FFO, NOI and same-property measures are non-GAAP metrics.
- Review the valuation assumptions and sensitivity for the tax-increment financing bond: its reported fair value was $15.6 million, $2.7 million below principal, and depends on estimated market inputs.