Highwoods Properties, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Highwoods is an office REIT operating primarily in business districts across eight U.S. markets. At quarter-end, it owned or held interests in 28.8 million rentable square feet of in-service properties, with 1.6 million square feet under development.
Financial performance
Amounts are in millions except per-share data. Comparisons are with Q1 2022 unless stated otherwise.
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Rental and other revenue | $212.8 | $206.4 | Up 3.1% |
| Net operating income (NOI) | $147.0 | $145.0 | Up 1.4%; NOI margin approximately 69.1%, versus 70.2% |
| Same-property NOI | $143.3 | $143.0 | Up 0.2% |
| Net income | $45.0 | $42.1 | Includes an $11.8 gain on deconsolidation in 2023 |
| Net income available to common stockholders | $43.8 | $40.3 | Up approximately 8.9% |
| Diluted EPS | $0.42 | $0.38 | Up $0.04 |
| FFO available to common stockholders per share | $0.98 | $1.03 | Down 4.9%; non-GAAP measure |
| Operating cash flow | $65.7 | $74.1 | Down $8.4 |
Revenue growth reflected same-property revenue, the SIX50 at Legacy Union acquisition and completed developments, partly offset by dispositions and Markel’s deconsolidation. Rental property expenses rose 7.0% to $65.7 million; interest expense rose 35.7% to $33.1 million, driven mainly by higher average rates and debt balances. Same-property revenue increased $4.5 million, but same-property expenses rose $4.2 million.
Balance sheet, debt and liquidity
- At March 31, total assets were $6.07 billion, net real estate assets were $5.09 billion, and mortgages and notes payable, net, were $3.26 billion, up from $3.20 billion at year-end 2022.
- Cash and cash equivalents were $15.7 million; cash plus restricted cash totaled $21.6 million. Revolver availability was $494.1 million at quarter-end and $492.1 million on April 18, net of letters of credit.
- Debt included $682.0 million secured and $2.60 billion unsecured; weighted average rates were 4.23% and 4.27%, respectively. Variable-rate debt was $805.0 million; a 100-basis-point rate increase would raise annual interest expense by an estimated $8.1 million.
- The company reported a 42.8% ratio of debt and preferred stock to undepreciated asset book value and said it was in compliance with debt covenants. A new $200 million secured mortgage loan carries a 5.69% fixed rate and matures in April 2028.
- Q1 investing cash use was $74.5 million, principally for property improvements, leasing, and joint-venture investments. Financing cash flow was positive $10.8 million, including $200 million of mortgage borrowings and net revolver repayments.
Material changes, outlook and risks
- Markel, a 50%-owned joint venture, was deconsolidated effective January 1, 2023 after governance changes; Highwoods recorded an $11.8 million fair-value gain. This boosted GAAP net income, while FFO per share declined year over year.
- Office occupancy fell from 91.0% at December 31, 2022 to 89.4% at March 31, 2023. Management expects occupancy of approximately 89.0%–90.0% for the remainder of 2023. Q1 new and renewal second-generation leases had GAAP rents 15.9% above prior leases in the same spaces.
- Management expects same-property NOI to decline for the rest of 2023 as higher expenses and anticipated lower occupancy outweigh revenue growth. It also expects total NOI to be lower than the comparable 2022 period, while rental revenue and interest expense are expected to be higher. No specific full-year EPS or FFO guidance is provided in the filing text.
- Highwoods expects to sell up to $400 million of non-core properties in 2023, but gives no assurance on timing or proceeds. It had approximately $928.6 million of anticipated total investment across listed development projects.
- After quarter-end, the State of Georgia indicated it may reduce its leased space at 1800 Century Boulevard by about 60% when its lease expires in December 2024 and is considering alternatives. Highwoods is evaluating renovation, multifamily conversion or sale; a future impairment is possible.
- On April 21, Highwoods received $40 million net proceeds from full redemption of its $80 million McKinney & Olive preferred-equity investment and used the proceeds to repay revolver borrowings. The filing identifies risks including office-space demand and work-from-home trends, tenant credit, leasing and development execution, operating-cost and interest-rate increases, refinancing access, and economic or natural-disaster impacts.
- The Q1 common dividend was $0.50 per share; a further $0.50 dividend was declared April 19, payable June 13, 2023. The board retains discretion over future distributions.
Important facts for investors to verify
- Whether occupancy stabilizes within management’s stated range and whether leasing spreads translate into durable same-property revenue growth.
- Whether expense growth and the expected occupancy decline result in the forecast decline in same-property NOI and total NOI.
- Progress and funding needs for development projects, joint ventures, and the planned non-core asset sales.
- The occupancy, redevelopment or sale outcome for 1800 Century Boulevard and whether an impairment is recorded.
- Debt refinancing terms, variable-rate exposure, revolver availability and covenant compliance as rates and operating conditions change.
- The distinction between GAAP earnings, which benefited from the Markel deconsolidation gain, and FFO, which declined per share.