Business context and reporting period
Highwoods Properties, Inc. is an office REIT operating through Highwoods Realty Limited Partnership. This unaudited combined Form 10-Q covers the quarter and nine months ended September 30, 2016. At quarter-end, the company owned or held interests in 31.1 million rentable square feet of in-service properties, 1.1 million square feet under development, and about 450 acres of development land across its core markets.
Financial and operating performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Rental and other revenue | $166.3 million | $150.8 million | $498.0 million | $444.5 million |
| Income from continuing operations | $33.8 million | $27.4 million | $95.5 million | $66.5 million |
| Net income available to common stockholders | $32.0 million | $29.7 million | $496.4 million | $74.2 million |
| Diluted earnings per common share | $0.32 | $0.31 | $5.08 | $0.79 |
| Net operating income from continuing operations | $107.6 million | $96.3 million | $324.3 million | $285.2 million |
Nine-month 2016 net income includes a $414.5 million gain on discontinued operations from the sale of the Country Club Plaza assets; the resulting $5.08 diluted EPS is not representative of recurring operating performance. FFO available to common stockholders was $84.1 million, or $0.82 per share, in Q3 and $247.7 million, or $2.46 per share, for nine months.
For Q3, same-property NOI increased 3.0% to $93.2 million; total continuing-operations NOI rose 11.7%. Same-property Q3 revenue benefited from average occupancy of 93.0%, versus 92.2% a year earlier, and higher average GAAP rents. Portfolio occupancy at September 30 was 92.2%, down from 92.6% at December 31, 2015, primarily reflecting acquisition and disposition activity. New and renewal second-generation office leases signed in Q3 had combined GAAP rents 20.7% above rents for the prior leases in those spaces.
Cash flow, debt and liquidity
For the first nine months, operating cash flow was $232.4 million, versus $209.4 million in 2015. Investing activities provided $305.1 million, compared with $564.1 million used in 2015, chiefly reflecting Plaza sale proceeds and lower acquisition activity. Financing activities used $536.1 million, mainly due to net debt repayments and distributions. Cash and cash equivalents were $6.4 million at September 30.
Debt, net of issuance costs, was $1.901 billion, down from $2.492 billion at December 31, 2015. Debt comprised $129.0 million secured and $1.779 billion unsecured; weighted-average rates were 4.35% and 3.94%, respectively. The company reported a 34.6% leverage ratio under its stated measure and said it was in compliance with debt covenants. Debt not fixed-rate or protected by hedges totaled $428.0 million. The $475 million revolver matures in January 2018; $28 million was drawn and $446.8 million was available at September 30. At October 17, total availability under credit facilities was reported as $511.8 million.
Material changes, outlook and risks
- Revenue rose 10.3% in Q3 and 12.0% for nine months year over year, reflecting acquisitions, development properties placed in service, and same-property growth. Q3 interest expense fell 13.1%; nine-month interest expense fell 8.8%.
- The company sold substantially all Plaza assets for $660 million in Q1 and used most net proceeds for tax-deferred 1031 exchanges; remaining proceeds were applied to the revolver in Q3. Q3 acquisitions included a 243,000-square-foot Raleigh building for $76.9 million, Pittsburgh land under an existing building for $18.5 million, and Raleigh development land for $5.8 million.
- At quarter-end, five announced or in-process developments totaled about 1.20 million square feet and $415.1 million anticipated investment; they were 73.7% pre-leased. Expected capital expenditures for started or committed development projects were about $216 million. Management’s strategic priorities include upgrading the portfolio, leasing and developing in core markets, disposing of non-core assets, and maintaining balance-sheet flexibility.
- The company anticipated a special cash dividend of at least $0.75 per share by January 31, 2017, with the amount potentially up to $0.25 higher; the amount was to be finalized by year-end and depended on taxable gains and cash flows. No specific earnings guidance is provided in the filing.
- Risks cited include customer financial deterioration, difficulty leasing vacant or newly developed space, excess competing supply, weaker market growth, higher interest rates or operating costs, limited access to capital or refinancing, and loss of key executives. Management cautioned that development, acquisition and disposition outcomes may differ from expectations.
Important facts for investors to verify
- Final special-dividend amount, timing, and tax characterization.
- Actual occupancy, rent growth and leasing costs versus reported leasing spreads, including progress leasing unoccupied development space.
- Development spending, completion and stabilization timing, and whether projected returns are achieved.
- Debt maturities, floating-rate exposure, revolver availability and continued covenant compliance.
- Recurring operating performance excluding the one-time Plaza disposition gain, and the effect of share issuance on per-share results.