Business context and reporting period
Highwoods Properties, Inc. and its operating partnership are an equity REIT focused on office properties, with industrial and retail holdings, in the Southeastern and Midwestern United States. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2010; comparisons are to the corresponding 2009 periods. At quarter-end, the portfolio included 294 wholly owned in-service properties totaling 27.1 million square feet, plus other interests and development assets.
Financial results and key metrics
Amounts below are in millions of dollars except per-share data. Operating margin is rental revenue less property expenses, as a percentage of rental revenue.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Rental and other revenue | $116.1 | $113.2 | $345.5 | $337.4 |
| Net income | $8.8 | $12.6 | $60.9 | $62.8 |
| Net income available to common stockholders | $6.9 | $10.3 | $52.8 | $54.3 |
| Basic earnings per common share | $0.10 | $0.15 | $0.74 | $0.81 |
| Net operating income (NOI) | $72.6 | $70.6 | $221.9 | $215.7 |
| Operating margin | 62.5% | 62.4% | 64.2% | 63.9% |
| Funds from operations (FFO), per diluted share | $43.2; $0.57 | $46.4; $0.62 | $137.7; $1.82 | $143.3; $2.02 |
For the nine months, operating cash flow was $142.7 million, down from $154.8 million; investing cash outflow was $37.5 million versus $44.6 million, and financing cash outflow was $107.9 million versus $81.9 million. Cash and cash equivalents were $21.0 million at September 30, 2010, compared with $23.7 million at year-end 2009.
Total assets were $2.878 billion and total liabilities were $1.648 billion. Mortgages and notes payable were $1.502 billion, up from $1.469 billion at year-end 2009; financing obligations were $33.6 million. Debt comprised $763.1 million secured and $738.5 million unsecured, with weighted-average rates of 6.15% and 5.43%, respectively. The common dividend declared was $0.425 per share per quarter, unchanged from 2009.
Liquidity included $398.9 million of unused capacity under the $400 million revolving facility and $17.9 million under the secured construction facility as of October 21, 2010. The revolver had no borrowings at that date; the construction facility had $52.1 million outstanding at September 30. Management reported compliance with debt covenants.
Material changes versus the prior comparable period
- Third-quarter revenue increased 2.6%, mainly from acquisitions and newly placed-in-service development properties; slightly lower average occupancy and lower expense recoveries partly offset the growth. Q3 common earnings fell to $6.9 million from $10.3 million, while NOI and operating margin improved modestly.
- Nine-month continuing income included a $25.3 million gain from selling interests in Des Moines-area unconsolidated ventures. The sale generated $15.0 million cash proceeds and reduced exposure to the ventures’ property portfolio and related debt. This gain lifted reported continuing income, while FFO declined year over year.
- In Q3, the company acquired a 336,000-square-foot Memphis office property, paying $10.0 million cash and assuming $40.3 million of secured debt. Near-term building improvements of about $2.3 million were expected.
- Comparative 2009 income statement amounts were revised to present certain disposed or held-for-sale properties as discontinued operations.
Outlook, management commentary, risks and unusual items
Management’s stated near-term focus is leasing and operating the existing portfolio efficiently, while selectively acquiring and developing assets intended to improve portfolio quality and long-term returns. It expected remaining-2010 rental revenue and property expenses to be relatively unchanged from the prior-year period; depreciation and interest expense were expected to be higher, while general and administrative expense was expected to be lower, subject in part to deferred-compensation investment values. No numeric full-year earnings or FFO guidance is provided in the supplied filing text.
Management anticipated that cash, operating cash flow and available credit would meet short-term liquidity needs. Expected capital expenditures for started or committed development and redevelopment projects were approximately $13.2 million, excluding leasing and routine building costs. The $70 million construction facility was initially due December 20, 2010; management had submitted an extension notice, but extension to December 20, 2011 depended on paying the fee and having no default. The company also reported $137.5 million outstanding on a bank term loan due February 2011.
Disclosed risks include weaker customer finances, difficulty leasing vacant or newly built space, excess competing supply, slower economic growth in core markets, higher interest rates, and inability to obtain capital or refinance debt on favorable terms. The filing states there were no outstanding interest-rate hedges at quarter-end; $147.5 million of debt was variable-rate. A rent guarantee associated with a sold industrial-property lease had no accrual because loss was considered not probable; the filing gives maximum exposure as approximately $1.0 million in a note and approximately $0.9 million in MD&A. Seller financing on property dispositions also exposes the company to borrower repayment risk. Management cautions that the buyer indemnity on the Des Moines venture sale may not protect the company if the buyer defaults.
Important facts for investors to verify
- Review leasing, occupancy, rent trends and tenant credit quality, particularly in office markets; the supplied text does not provide a clear portfolio-wide occupancy rate.
- Assess recurring earnings and dividend coverage using FFO and operating cash flow, excluding the one-time $25.3 million venture-sale gain; FFO is a non-GAAP measure.
- Verify near-term debt maturities and the status of the construction-facility extension, including refinancing plans for the February 2011 term loan.
- Track variable-rate exposure, covenant headroom and the availability and terms of credit facilities.
- Confirm the maximum exposure and status of the property-sale rent guarantee, seller-financed notes and remaining liabilities or guarantees from the disposed joint ventures.