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Highwoods Misses Earnings by a Penny

Zacks Equity Research

Highwoods Properties Inc. (HIW) – a real estate investment trust (:REIT) – reported first quarter 2013 core FFO (funds from operations) of 68 cents per share, missing the Zacks Consensus Estimate by a penny. Reported FFO also fell short of the prior-year quarter figure of 70 cents.

Including the non-core items impact, Highwoods’ reported FFO stood at $57.2 million or 67 cents per share compared with $53.5 million or 70 cents per share in the year-ago period.

Inside the Headlines

Total revenue for the fourth quarter jumped 9.7% to $137.0 million from $124.9 million in the year-ago quarter. Moreover, total revenue exceeded the Zacks Consensus Estimate of $135 million.

During the reported quarter, same-store rental revenues increased 2.4% year over year to $118.0 million, while cash NOI (net operating income) climbed 3.0% to $75.3 million.

During the quarter, same-store average occupancy increased 60 basis points (bps) to 90.4% from 89.8% in prior-year quarter. Moreover, during the quarter, Highwoods inked leases for space spanning 1.2 million square feet.

Portfolio Restructuring Activity

During the quarter under review, Highwoods completed office property acquisitions worth $88.8 million in two of its core markets. Moreover, during the quarter, the company penned a long-term build-to-suit deal with a leading packaging and paper products firm – International Paper Company (IP) – for constructing a new office building for $56.1 million in Memphis.

In addition, Highwoods sold non-core assets for $18.9 million during the first quarter. The asset sale is part of the long-term strategy of the company to improve the overall quality of its portfolio through the disposal of non-core assets and the development and acquisition of infill core assets.

Subsequent to quarter-end, Highwoods divested 11 industrial buildings (spanning 862,000 square feet) in Atlanta for $43.3 million. With this, over the past 12 months, Highwoods has sold around 1.2 million square feet of non-core assets, which represents around 37% of its Atlanta industrial portfolio.

Also, the company’s unconsolidated joint ventures sold an unoccupied office building (spanning 148,000 square foot) in Charlotte for $6.0 million. Notably, year-to-date, Highwoods has generated $109.6 million through $63.6 million of non-core assets divesture.


As of Mar 31, 2013, Highwoods had $12.1 million of Cash and cash equivalents, compared to $13.8 million as of Dec 31, 2012.

During the quarter, Highwoods issued 1.3 million of common shares under its ATM (at-the-market) equity program and generated net proceeds of $46.0 million. Year-to-date, the company raised $46.0 million though its ATM equity program.Consequently, the company’s leverage (including preferred shares) was lowered 60 bps to 43.3%.

2013 Outlook Reiterated

For full-year 2013, Highwoods reaffirmed its FFO per share guidance in the range of $2.68 to $2.81.

Our Viewpoint

Though Highwoods reported mixed results in the reported quarter, we note that on the back of a successful implementation of its strategic plan, a large part of the company’s portfolio is now concentrated in the high-growth Sun Belt markets, which provide above-average job growth owing to long-term demographic trends. Also, a strong and flexible balance sheet further enables Highwoods to capitalize on potential acquisition opportunities to fuel its top-line growth.

Yet, despite the continued portfolio repositioning, Highwoodsstill has a large asset base in low-barriers-to-entrySoutheastern markets, which historically have not been strong long-term office markets. This undermines the long-term growth potential of the company to some extent.

Highwoods currently holds a Zacks Rank #3 (Hold). However, other REITs that are performing better include DDR Corp. (DDR) and Simon Property Group Inc. (SPG), both carrying a Zacks Rank #2 (Buy).

Note: Funds from operations, a widely accepted and reported measure of REITs performance, are derived by adding depreciation, amortization and other non-cash expenses to net income.

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