Highwoods has had to deal with some tough problems, including its concentration in troubled Southeastern suburban markets and a development pipeline that delivered six new buildings in the fourth quarter in the teeth of the downturn that are now a combined 23% leased. Worse, the company had high exposure to the US Airways Group Inc. bankruptcy and the WorldCom Inc. disaster, which left the company with a combined 900,000-plus square feet of previously leased office space now paying no rent.
Mr. Lutzius, along with Greg Whyte of Morgan Stanley & Co., is emphasizing that Highwoods's earnings have now dropped below the amount needed to pay the quarterly dividend. Mr. Lutzius says Highwoods had cash available for distribution of 53 cents a share in the fourth quarter, but paid about 59 cents a share in dividends.
Going forward, the picture doesn't get any better, at least this year. Carman Liuzzo, Highwoods's chief financial officer, says the company's cash available for distribution is expected to fall short by between $10 million and $20 million this year of its current dividend total of $141 million, or about $2.34 per share. Mr. Liuzzo says the figure is manageable and the company will be able to make up the shortfall. But that is predicated on the office environment improving, which the company expects.
If it doesn't? "We won't sacrifice the company's long-term growth and financial health and flexibility to maintain the dividend at its current level," Highwoods's president and chief executive, Ronald P. Gibson, said in a recent conference call.
There's lots of argument about when the office market will turn around, but Mr. Whyte says Highwoods's margin is now too thin. A dividend cut is now "a very high probability," he says. "Our best guess is that the dividend will be cut sometime during '03," echoes Mr. Lutzius. Mr. Liuzzo says the board will review the matter quarterly.
An important point: Highwoods has had problems, but they aren't so different from those facing other office landlords, also contending with tenant blow-ups and high market vacancy. "We are not alone," Mr. Liuzzo says, and he's right.
Messrs. Lutzius and Whyte point to Mr. Coleman's Arden and Crescent Real Estate Equities Co., Fort Worth, Texas, as having payout margins close to or below predicted cash-available levels. Mr. Coleman says its markets are relatively strong and the company is "very comfortable" with its ability to pay. "We're not considering it," he adds.
John C. Goff, Crescent's CEO, says the company has substantial cash flow from land-development and other businesses that is not counted among funds from operations but will allow the company to comfortably cover the dividend. He says the company also has funds on hand to invest in new properties that will produce additional income. The dividend "is not an issue," he says.
But all the bad news that has been reported in the last two years in the office sector has been like gas seeping into a coal mine. And now the first canary is starting to gasp.
As I remember, there are 3 approaches to valuing real estate. Market, replacement cost, and discounted cash flow. Not one of these approaches involves a dividend. The appropriate question seems to involve the current NAV of HIW using these 3 approaches. Merrill Lynch's opinion that at $20 per share all the negatives are fully discounted (post 1870) is probably accurate. I suspect the stock trades flat to lower for awhile, as ffo misses, ffo cuts, and a likely dividend cuts lead to short term migration regardless of navs.
I'm out of this pos, but I don't see alot of downside. Surely, one can find better stocks in the short term. Maybe I revisit in the summer or after a dividend cut, but realistically, what's the downside? Maybe $18. But perhaps $22 on the upside until we get a couple more quarters of ffo/occupancy and dividend visibility.