Business context and reporting period
Highwoods Properties, Inc. is an office-focused REIT operating through Highwoods Realty Limited Partnership. This combined, unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015; comparative figures are for 2014. At quarter-end, the company owned or held interests in 32.5 million rentable square feet of in-service properties, 1.4 million square feet under development, and about 500 acres of development land.
Financial performance and condition
Dollar amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Rental and other revenue | $163.7 | $152.6 | $482.2 | $453.8 |
| Net income | $31.6 | $54.3 | $79.3 | $92.4 |
| Net income available to common stockholders | $29.7 | $51.7 | $74.2 | $86.5 |
| Diluted EPS | $0.31 | $0.57 | $0.79 | $0.96 |
| Net operating income (NOI) | $104.0 | $95.2 | $307.6 | $284.8 |
| Same-property NOI | $95.6 | $90.2 | $284.2 | $268.4 |
| FFO available to common stockholders per share | $0.77 | $0.70 | $2.26 | $2.16 |
NOI margin, calculated as NOI divided by rental and other revenue, was 63.5% in Q3 2015 versus 62.4% in Q3 2014, and 63.8% versus 62.8% for the respective nine-month periods. FFO is a non-GAAP measure; the filing cautions it is not a substitute for GAAP earnings.
- Cash flow: Nine-month operating cash flow was $209.4, up from $183.7. Investing cash use was $564.1, versus $159.2, primarily reflecting higher acquisitions and lower property-sale proceeds. Financing provided $351.0, compared with a $23.1 use in 2014. Cash and cash equivalents ended the period at $5.2; restricted cash was $19.3.
- Debt and liquidity: Mortgages and notes payable were $2,478.8, up from $2,071.4 at December 31, 2014. Debt included $288.6 secured and $2,190.1 unsecured. Debt and preferred stock equaled 45.1% of undepreciated asset book value, above the company’s stated 40%–45% target range. At September 30, the $475.0 revolver had $265.0 drawn and $209.8 available; the $350.0 bridge facility had $250.0 drawn and $100.0 available. The company reported compliance with debt covenants. Cash interest paid, net of capitalized amounts, was $62.7 for the nine months.
- Distributions and equity: Common dividends were $0.425 per share in Q3, unchanged from 2014. The company issued 2.18 million shares in the first nine months for net proceeds of $93.0. Common shares outstanding were 95.3 million at September 30.
Material changes versus prior comparable periods
- Q3 revenue rose 7.3%; management attributed growth to higher same-property revenue and acquisitions and development properties placed in service. Nine-month revenue rose 6.3%.
- Same-property NOI increased 6.0% in Q3, while overall NOI increased 9.2%. Office occupancy rose to 92.1% at September 30 from 91.2% at year-end 2014; Q3 average occupancy was 92.5%, compared with 91.2% in Q3 2014.
- Net income and diluted EPS fell year over year, chiefly because 2014 included substantially larger property-sale gains. Q3 property disposition gains were $7.0 versus $36.2 in 2014. Nine-month property gains were $10.6 versus $42.2; 2015 also included a $4.2 gain on the sale of an unconsolidated-affiliate interest.
- Q3 combined GAAP rents on new and renewal second-generation office leases were 9.6% above rents on the prior leases in the same spaces. The common dividend remained level, while weighted-average shares increased.
- Debt increased following acquisition activity. The company amended and upsized a term loan to $350.0, extended its maturity to June 2020, and reduced its rate spread to LIBOR plus 110 basis points. It also prepaid a $39.4 mortgage carrying a 6.43% effective rate.
Outlook, management commentary, risks and unusual items
- The company announced plans to sell all or substantially all of its wholly owned Country Club Plaza portfolio in Kansas City, comprising 804,000 square feet of retail and 617,000 square feet of office space. It expected closing by early 2016 and intended to use proceeds to repay debt related to Q3 acquisitions and for general corporate purposes. Management said the sale could return leverage to the low end of its target range; neither a sale nor favorable pricing is assured.
- Development projects totaled 1.48 million square feet, with anticipated total investment of $484.7 million and 71.1% pre-leased. Expected capital expenditures for started or committed developments were approximately $344 million at quarter-end.
- Q3 acquisitions included a 528,000-square-foot Tampa building and adjacent land for $115.7 million combined, and two Atlanta buildings totaling 896,000 square feet for $290.3 million. The company estimated a 6.1% weighted-average capitalization rate based on projected first-year GAAP NOI and anticipated total investment of $418.3 million, including planned improvements.
- The planned Kansas City sale is subject to buyer availability, pricing, definitive agreements, due diligence and customary closing conditions. The company expected to accrue $2.5 million of severance costs beginning in Q4 2015 through the sale closing because it intended to close its Kansas City division office.
- Key risks cited include weaker customer credit, slower or less favorable leasing and re-leasing, excess competing development, economic weakness in core markets, higher interest rates and operating costs, challenges completing transactions or development projects, and difficulty accessing capital or refinancing debt. The company had $840.0 million of variable-rate debt not protected by hedges; a 100-basis-point rate increase would raise annual interest expense by an estimated $8.4 million.
- Other notable items: no real estate impairment was recorded in the first nine months of 2015, versus $0.6 million in 2014. Cash-flow hedges generated a $5.7 million unrealized loss in other comprehensive income for the nine months. The company retrospectively revised prior balance-sheet and equity/capital presentation after a joint-venture accounting change; management said income, comprehensive income and cash-flow effects were not material.
- No specific full-year earnings or revenue guidance is provided in the supplied filing text. Management stated that available cash, operating cash flow, and revolver and bridge availability were expected to meet short-term liquidity needs.
Most important facts for investors to verify
- Whether the Country Club Plaza portfolio sale closes by early 2016, at what price, and how much debt is repaid.
- How the $250.0 million bridge borrowing is refinanced or repaid before its 2016 maturity, and whether covenant compliance and liquidity remain adequate.
- Whether development projects meet budget, timing and leasing assumptions, particularly the 71.1% pre-leased pipeline and $344 million of expected committed-project spending.
- Whether occupancy gains and positive lease spreads translate into durable same-property revenue and NOI growth after operating-cost increases.
- How acquisitions, new equity issuance and higher debt affect per-share results, FFO, leverage and the ability to maintain distributions.