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Highwoods Q2 FFO Beats Estimates, Up Y/Y on Strong Revenues

Zacks Equity Research

Highwoods Properties Inc. (HIW) posted strong results in second-quarter 2014 with a positive earnings surprise of 9.6%. The results came on the back of higher revenue growth, a rise in occupancy rate and notable leasing activity.

In particular, this real estate investment trust (:REIT) declared funds from operations (:FFO) of 80 cents per share, surpassing the Zacks Consensus Estimate by 7 cents and the prior-year quarter figure by a dime.

Also, total revenue for the quarter jumped 15.2% year over year to $152.7 million and comfortably exceeded the Zacks Consensus Estimate of $150 million.

Inside the Headlines

Highwoods leased around 1.5 million square feet of second-generation space in the quarter, up from 1.4 square feet leased in earlier quarter. Also, same property total occupancy increased 170 basis points (bps) sequentially to 91.2%.

Same property rental revenues edged up 1.3% year over year to $125.5 million. Moreover, same property cash net operating income (:NOI) excluding term fees moved up marginally (0.9%) to $80.0 million from the year-ago quarter.

As of Jun 30, 2014, Highwoods had $18.7 million of cash and cash equivalents, up from $13.3 million as of Mar 31, 2014.

Subsequent to the second-quarter end, Highwoods divested a five-building park – Research Commons Office Park – in Raleigh for $58.7 million. The company will gain $11.7 million approximately from this sale in third quarter of 2014.

2014 Outlook

Highwoods increased the lower end of the 2014 FFO per share guidance range. The company now expects it in the range of $2.88 – $2.94 (prior range being $2.86 – $2.94). This is well above the Zacks Consensus Estimate for the same of $2.90.

The outlook is based on expectation of same property cash NOI growth (excluding termination fees) of 0.5% – 1.5% and year-end occupancy of 91.8% – 92.5%.

Our Viewpoint

Highwoods repositioned itself on the winning track with encouraging results in the second quarter, after posting meek results in the last quarter, on the back of notable operating portfolio’s performance. In particular, Highwoods has been focusing on shifting its portfolio mix in high growth markets and offloading its assets base in non core markets. Also, a strong balance sheet further enables Highwoods to capitalize on potential acquisition opportunities to fuel its top-line growth. Yet, the current weakness in the office market remains a concern for this Zacks Rank #3 (Hold) stock.

We are now looking forward to the results of other REITs like Duke Realty Corporation (DRE), Cousins Properties Incorporated (CUZ) and PS Business Parks Inc. (PSB) that are going to report this week.

Note: Funds from operations, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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