Highwoods Properties, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Highwoods is an office REIT operating primarily in Atlanta, Charlotte, Nashville, Orlando, Pittsburgh, Raleigh, Richmond and Tampa. It owned or held interests in 27.4 million square feet of in-service properties, with 0.8 million square feet under development and approximately 230 acres of development land.
Financial performance and position
Amounts below are in millions except per-share data and percentages.
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Rental and other revenue | $183.8 | $192.8 |
| Net income | $56.9 | $191.3 |
| Net income available to common stockholders | $54.5 | $185.5 |
| Diluted EPS | $0.52 | $1.79 |
| FFO available to common stockholders, a non-GAAP measure | $97.5 | $98.8 |
| FFO per diluted share, a non-GAAP measure | $0.91 | $0.93 |
| Cash from operating activities | $83.0 | $63.6 |
| Capital expenditures and development investments shown in investing cash flows | $57.2 | $101.2 |
- Net operating income (NOI) was $127.6 million, down 2.3%; same-property NOI was $122.3 million, down 0.7%. Same-property cash NOI was $118.9 million, versus $112.4 million.
- Total assets were $5.21 billion and net real estate assets were $4.57 billion at March 31, 2021. Debt, net of issuance costs, was $2.47 billion, including $92.9 million secured and $2.39 billion unsecured. Unsecured debt carried a 3.42% weighted-average interest rate.
- Cash and cash equivalents were $49.3 million; restricted cash was $9.1 million. The company reported $82.98 million of operating cash flow, $154.9 million of net investing cash outflow and $58.9 million of financing cash outflow.
- Leverage, measured as debt and preferred stock relative to undepreciated asset book value, was 37.5%. Debt and preferred stock were 35.3% of total capitalization. The company said it was in compliance with debt covenants.
- Common dividend was $0.48 per share for the quarter; the same amount was declared April 15, payable June 8, 2021.
Material changes versus Q1 2020
- Revenue declined $9.0 million, or 4.7%, primarily from property dispositions and lower same-property revenue, partly offset by the Forum acquisition and newly placed-in-service developments.
- Net income and diluted EPS fell sharply, principally because gains on property dispositions were $18.9 million in Q1 2021 versus $153.1 million in Q1 2020. Excluding disposition gains, FFO per share decreased modestly, from $0.93 to $0.91.
- Same-property revenue fell $3.6 million, while same-property expenses fell $2.7 million; management attributed much of the change to lower building use during the pandemic. Office occupancy declined from 90.3% at year-end 2020 to 89.6% at March 31, 2021.
- Operating cash flow increased $19.4 million. Investing cash flow swung from $231.1 million provided to $154.9 million used, largely reflecting 2020 asset-sale proceeds and the 2021 Forum acquisition.
Outlook, transactions and risks
- Management expected office occupancy of approximately 89%–90% for the rest of 2021, but warned it could be lower if tenant distress or work-from-home adoption increases. It expected slower leasing through the remainder of 2021.
- Management expected 2021 same-property NOI to be lower than 2020, while total NOI and rental revenue were expected to be higher, supported by the Forum acquisition and development completions. These expectations exclude the proposed PAC transaction and related dispositions.
- In Q1, Highwoods acquired its partner’s 75% interest in the Raleigh Forum joint venture for $131.3 million; the five buildings total 636,000 square feet. It also sold an Atlanta building for $30.7 million, recognizing an $18.9 million gain.
- On April 16, Highwoods agreed to acquire a portfolio from Preferred Apartment Communities for an anticipated total investment of $769 million, subject to customary closing conditions and targeted for Q3 2021. It posted $50 million of earnest money deposits, generally non-refundable except in limited circumstances. Funding plans included borrowing and an expected bridge facility, followed by $500–$600 million of planned non-core asset sales by mid-2022; completion, timing and sale proceeds are uncertain.
- A new $750 million unsecured revolver replaced the prior $600 million facility and matures in March 2025. There was no balance at March 31; $160 million was drawn by April 20, leaving $589.9 million available. On April 15, the company prepaid $150 million of notes due June 2021.
- COVID-19 remained a key uncertainty: reduced property use lowered parking and cost-recovery revenue, while customer defaults, bankruptcies, rent collection, future office demand and potential impairments could adversely affect results. Q1 pandemic-related customer losses were reported at $1.0 million.
- Development projects had approximately $70 million of remaining expected funding; management forecast approximately $79 million of development funding during the rest of 2021. No debt was scheduled to mature during the remainder of 2021.
Important facts for investors to verify
- Whether occupancy, leasing volume and tenant demand recover as management anticipated, and whether work-from-home trends or tenant credit problems create additional vacancies or losses.
- Whether the PAC acquisition closes on stated terms and whether planned non-core asset sales occur on schedule and at adequate prices to fund it.
- Actual development spending, project completion and stabilization, including the remaining funding needs and leasing of properties under development.
- Liquidity and leverage after the PAC transaction, debt refinancing or borrowing, and compliance with financial covenants.
- The distinction between GAAP earnings and non-GAAP FFO: Q1 2020 earnings included substantially larger property-sale gains, while FFO per share declined only modestly year over year.