Highwoods Properties, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited. Highwoods is an office REIT operating primarily in Atlanta, Charlotte, Nashville, Orlando, Pittsburgh, Raleigh, Richmond and Tampa. At quarter-end, it owned or had an interest in 27.3 million rentable square feet of in-service properties, 0.8 million square feet under development and approximately 250 acres of development land. Financial amounts below are in millions unless otherwise noted.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Rental and other revenue | $185.5 | $183.2 | $369.3 | $376.0 |
| Net income | $61.8 | $39.0 | $118.7 | $230.3 |
| Net income available to common stockholders | $59.3 | $37.0 | $113.8 | $222.5 |
| Diluted EPS | $0.57 | $0.36 | $1.09 | $2.14 |
| Net operating income (NOI) | $129.3 | $128.0 | $256.9 | $258.6 |
| FFO available to common stockholders per share | $0.93 | $0.93 | $1.84 | $1.86 |
Q2 revenue rose 1.3% year over year, while six-month revenue fell 1.8%. Q2 diluted EPS increased, but the six-month decline reflects significantly lower property-sale gains: $41.8 million in 2021 versus $153.4 million in 2020. Q2 2021 included $22.9 million of disposition gains, compared with $0.3 million in Q2 2020. FFO, a non-GAAP measure, was nearly unchanged for Q2 and lower for the first half.
Q2 same-property NOI decreased 0.2% to $122.9 million; total NOI increased 1.0%, primarily reflecting the acquisition of the remaining interest in the Forum joint venture and development properties placed in service. The filing reports no real estate impairment in 2021, compared with $1.8 million in Q2 and the first half of 2020.
Cash flow, debt and liquidity
- First-half operating cash flow was $197.4 million, up from $180.2 million. Investing activities used $228.4 million, versus $129.7 million provided in 2020, principally reflecting the Forum acquisition and $55.0 million of earnest-money deposits for the planned PAC transaction. Financing activities used $99.8 million.
- Cash and cash equivalents were $6.5 million at June 30; restricted cash was $51.9 million. Combined cash and restricted cash was $58.4 million, down from $189.2 million at year-end 2020.
- Net debt carrying value was $2.476 billion. The company reported a 37.3% leverage ratio against undepreciated asset book value and stated it was in compliance with debt covenants. Debt comprised $92.3 million secured and $2.396 billion unsecured; unsecured debt had a weighted-average rate of 3.26%. It reported $305.0 million of unhedged variable-rate debt.
- The new $750 million revolving facility matures in March 2025. At June 30 and July 20, $155 million was drawn and $594.9 million remained available, excluding the accordion feature. The company prepaid $150 million of 3.20% notes due June 2021.
- Cash dividends were $0.48 per common share for Q2. A $0.50-per-share dividend was declared July 27, payable September 8, 2021.
Operating trends and outlook
- Office occupancy declined from 90.3% at year-end 2020 to 89.5% at June 30. Management expected occupancy of approximately 89%–90% for the remainder of 2021, while warning that pandemic-related tenant difficulties could reduce it.
- Q2 second-generation leases covered 898,560 square feet; weighted-average GAAP rent was $29.64 per square foot, 8.9% above the prior leases in those spaces. Management expected same-property NOI to be lower for the rest of 2021 versus 2020, as higher expenses were expected to outweigh revenue gains. It expected total NOI and rental revenue to be higher, in part due to the Forum acquisition and properties placed in service.
- Management expected parking revenue to remain depressed relative to pre-pandemic levels until building usage recovered, with some offset from lower operating costs. It anticipated usage would gradually improve through the rest of 2021, but emphasized uncertainty.
- The development pipeline was reported at $394 million and approximately 85% funded; expected future spending on started or committed developments was about $51 million as of June 30. Management forecast an additional $35 million of development spending during the remainder of 2021. The Asurion Nashville development was 98.4% pre-leased.
Transactions, contingencies and other notable items
- Highwoods had agreed to acquire a PAC portfolio for an estimated total investment of $769 million, including $28 million of near-term improvements and $5 million of transaction costs. The transaction includes four core office buildings, a redevelopment site and non-core assets; approximately $403 million of secured loans were expected to be assumed. Closing was subject to customary conditions and expected within 30 days of filing.
- As of July 20, $60 million of earnest-money deposits had been posted; $55 million was recorded at June 30. Deposits were non-refundable except in limited circumstances. The planned funding included a $250 million cash portion, revolving borrowings and an expected $200 million six-month bridge facility. Management planned to fund the acquisition primarily through $500–$600 million of non-core asset sales by mid-2022; it cautioned that sales might not occur on expected terms or timing.
- COVID-19 continued to affect building usage, parking and cost recoveries. Management said current assessments produced no material COVID-related adjustments for the period, but future impairments, lease modifications or credit losses remained possible. The filing also identifies risks involving office demand and work-from-home trends, leasing, market conditions, interest rates, operating costs, refinancing and execution of planned transactions.
- The CFO announced retirement effective January 1, 2022; the current Executive Vice President of Finance and Treasurer was named successor.
Important facts for investors to verify
- Whether the PAC acquisition closed as planned, final purchase price and financing terms, and the status and recoverability of the earnest-money deposits.
- Progress, pricing and timing of the planned non-core asset sales needed to fund the acquisition.
- Subsequent office occupancy, lease commencements, rent spreads and tenant credit performance, especially as pandemic-related workplace use changes.
- Cash available after distinguishing restricted from unrestricted cash, revolver borrowings, bridge financing and covenant headroom.
- Whether management’s 2021 occupancy and operating outlook was achieved, and the effect of acquisition and disposition activity on comparable results and per-share FFO.