Highwoods Properties Inc. is an office landlord based in Raleigh, N.C. -- and a canary in a coal mine.
At least that's the view of Green Street Advisors' John Lutzius and other analysts who view Highwoods's recent fourth-quarter earnings disappointment as a portent of serious problems that may afflict the entire U.S. office market if leasing and rents don't improve.
"This canary is gasping," Mr. Lutzius wrote last week.
The company, which is one of the nation's largest office owners, with 46.9 million square feet in 589 properties, reported fourth-quarter funds from operations of $46.3 million, or 77 cents a diluted share, compared with $58.5 million, or 96 cents a share, a year ago. The results missed Wall Street estimates by five cents, which is considered a wide margin.
The downward trend in funds from operation, the most common measure of real-estate investment trust financial performance, is especially worrisome. Commercial real estate is considered a particularly stable investment because buildings' long leases usually provide guaranteed, visible income that generally increases over time. Lease income is considered "guaranteed" because tenants may escape rent payments only through bankruptcy.
But the drastic deterioration in office fundamentals -- the dramatic decline in rents and rapid rise in vacancies to 16% nationally that has been the subject of much commentary -- is starting to take a toll. Office landlords have fixed obligations they must pay every quarter, including payroll, the light bill, bank loans and other debts. And as operating income dwindles, the margin between the rental income taken in and expenses to be paid starts to get mighty thin and in some cases to disappear.
One of these quarterly obligations is the dividend promised to stockholders. Companies aren't required to pay dividends, but that's one of the main reasons for REITs to exist. If leases can't provide rapid growth, they are supposed to generate the kind of steady income stream that allows for a predictable dividend. And because of their exemption from federal corporate income taxes, REITs can pay annualized dividends that currently average around 7%, way above those of companies in the Standard & Poor's 500 Index, which average less than 2%.
Cutting the dividend is considered a drastic measure, the breaking of an implied promise and, more importantly, a negative commentary on management's outlook for future prospects for growth.
"It is truly the kiss of death," says Victor J. Coleman, president and chief operating officer of Arden Realty Inc., the Los Angeles office giant, adding that investor confidence is always impaired. "You're out of the box for two years."
<<<< Cutting the dividend is considered a drastic measure, the breaking of an implied promise and, more importantly, a negative commentary on management's outlook for future prospects for growth.
"It is truly the kiss of death," says Victor J. Coleman, president and chief operating officer of Arden Realty Inc., the Los Angeles office giant, adding that investor confidence is always impaired. "You're out of the box for two years.">>>
I agree with the above.
But only if it occurs in normal times, under normal conditions. I don't consider these times normal. I think of these times as a harbinger of depression. Another year or two like the past several, and I don't think that anyone will think of these times as anything less.
I don't think if HIW cuts the dividend, given the times, that is will be the kiss of death. I think a dividend cut to preserve health will be looked upon more favorably than keeping the dividend at normal time levels. I think that the kiss of death will be reserved for those REITs that hold the dividend and weaken their financials.
The kiss of death comes when a reit can't pay a dividend. Then there is no reason to own the POS. Reduced divvies without the promise of future growth will always result in lowered share price, thus keeping the yield in comparative synch with comparable reits. Prognostications are always worth the ability of the seer to know the future. So based on the buy low--sell high theory, the time to buy is when the present is grim and the future CLOUDY. You have nothing to lose because if the bottom drops out, we are all in the poor house together, but if the future improves, you stand to do very well. JMO,