Highwoods Properties, Inc. — 2018 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2018; quarterly figures below highlight the fourth quarter. Highwoods is an office-focused REIT operating primarily in business districts across nine U.S. markets. The filing combines the Company and its operating partnership; reported financial results are substantially the same.
Financial and operating performance
| Metric | 2018 | 2017 |
|---|---|---|
| Rental and other revenues | $720.0 million | $702.7 million |
| Income from continuing operations | $177.6 million | $191.7 million |
| Net income available to common stockholders | $169.3 million | $182.9 million |
| Diluted earnings per share | $1.64 | $1.78 |
| Funds from operations (FFO) per share | $3.45 | $3.39 |
| Net cash provided by operating activities | $358.6 million | $352.5 million |
| Net cash used in investing activities | $306.7 million | $200.3 million |
| Net cash used in financing activities | $130.1 million | $142.5 million |
- Fourth-quarter revenue was $181.4 million and net income was $55.4 million; diluted EPS was $0.51.
- Same-property NOI rose 1.2% to $432.1 million; total NOI rose 2.5% to $477.6 million. Same-property revenue increased $11.5 million, partly offset by $6.3 million higher expenses.
- Year-end wholly owned office occupancy was 91.6%, down from 92.9% a year earlier. Annualized cash rent per occupied square foot increased to $24.06 from $23.46.
- New and renewal office leases signed in Q4 had combined GAAP rents of $29.93 per square foot, 20.2% above prior rents for the same spaces.
- Total assets were $4.68 billion; mortgages and notes payable, net, were $2.09 billion. Debt and preferred stock equaled 35.4% of undepreciated asset book value. Year-end cash and cash equivalents were $3.8 million.
- The $600 million revolving facility had $417.8 million unused at year-end; unused capacity was $408.8 million as of January 25, 2019. The company reported $2.1 billion of contractual debt principal and $401.5 million of associated future interest payments.
- Common dividends declared were $1.85 per share for 2018. A $0.475-per-share dividend was declared for payment in March 2019.
Material changes versus the prior comparable period
- Revenue grew 2.5%, but continuing income fell 7.3% and diluted EPS declined from $1.78 to $1.64. Lower gains on property sales and lower equity earnings from unconsolidated affiliates outweighed revenue growth; gains on disposition were $37.6 million versus $54.2 million.
- FFO per share increased from $3.39 to $3.45, despite lower GAAP income.
- Operating cash flow increased $6.1 million. Investing outflow increased $106.4 million, primarily reflecting greater acquisition spending and lower disposition proceeds.
- Debt increased from $2.01 billion to $2.09 billion. The company issued $350 million of 4.125% notes due 2028 and repaid $200 million of 7.5% notes at maturity.
- The year-end share price was $38.69, down from $50.91 at the end of 2017.
Outlook, commentary, risks and unusual items
- Management expected 2019 same-property NOI, total NOI, rental revenue and operating cash flow to increase. It also expected higher operating expenses and interest expense, and described these expectations as dependent on leasing, development, dispositions and other factors.
- At year-end, 1.1 million rentable square feet of office development was in process, with $486.7 million anticipated total investment and 91.1% preleased. Remaining expected capital spending for started or committed projects was approximately $331 million.
- Management expected to sell $100 million to $150 million of non-core properties in 2019; no assurance was given that sales would occur on the anticipated timing or terms.
- Interest-rate exposure increased after $225 million of floating-to-fixed swaps expired on January 11, 2019. As of January 25, $766 million of variable-rate debt was unhedged; a 100-basis-point rate increase would raise annual interest expense by an estimated $7.7 million.
- Key risks include office-market weakness and oversupply, occupancy and lease-renewal pressure, tenant credit and concentration, development cost or lease-up overruns, refinancing and interest-rate risk, and REIT qualification, environmental, cyber and insurance risks. The 20 largest customers represented 25.68% of annualized cash rental revenue; the Federal Government was the largest at 4.86%. No 2018 legal proceeding was expected to have a material adverse effect.
- Unusual items included a $2.9 million restoration fee contributing to revenue, $37.6 million of property disposition gains, and $0.4 million of real estate impairment. The 2017 comparison included higher disposition gains; 2016 results were exceptional due to the sale of the Country Club Plaza assets.
- The company adopted new revenue guidance in 2018 with no cumulative adjustment. It planned to adopt the new lease standard in 2019; management expected recognition of $31 million to $36 million of ground-lease right-of-use assets and liabilities and higher G&A expense from expensing certain leasing costs.
- Deloitte issued unqualified opinions on the financial statements and the Company’s internal controls; management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Track occupancy, lease renewals and expirations, especially the 8.9% of annualized cash rent scheduled to expire in 2019 and 12.6% in 2020.
- Assess development completion, lease-up and total funding needs against the $331 million remaining committed spend and the 2019 disposition plan.
- Review debt maturities and refinancing capacity, including the $225 million 2020 term loan maturity and the company’s post-swap variable-rate exposure.
- Reconcile the dividend against recurring cash generation, FFO, capital spending and debt obligations; FFO is a non-GAAP measure and is not a substitute for GAAP earnings or cash flow.
- Monitor leasing costs, same-property expense growth, customer credit and concentration, and any changes to management’s 2019 expectations.