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Highwoods Q4 FFO Beats; Revs in Line

Zacks Equity Research

Highwoods Properties Inc. (HIW) – a real estate investment trust (:REIT) – declared fourth-quarter 2013 funds from operations (:FFO) of 74 cents per share, beating the Zacks Consensus Estimate by a cent and the prior-year quarter figure by 7 cents.

Excluding the non-core items’ impact, FFO per share was 74 cents, up from 68 cents in the year-ago period. Improved results came on the back of higher revenue growth and efficient capital deployment activities, partly offset by a dip in occupancy rate.

Total revenue for the fourth quarter jumped 17.9% year over year to $149.0 million. This was in line with the Zacks Consensus Estimate.

For full-year 2013, Highwoods reported FFO per share of $2.81 on revenues of $556.8 million. Results were substantially higher than the prior-year FFO per share of $2.70 on revenues of $485.0 million. Additionally, excluding the non-core items’ impact, FFO for 2013 was $2.84 per share, up from $2.73 per share in 2012.

Quarterly Highlights

In the reported quarter, same property rental revenues declined marginally (by 1.1%) year over year to $112.6 million. Also, same property cash net operating income (:NOI) excluding term fees moved south 1.5% to $70.8 million from the year-ago quarter.

Highwoods also inked leases for around 3.8 million square feet of second generation office space in the quarter. However, same property average occupancy declined 30 basis points (bps) year over year to 90.1%.

Notable Portfolio Restructuring Activity

In full-year 2013, Highwoods bought Class A office buildings worth $549 million in five best business districts (BBDs) of US markets. This includes The Pinnacle at Symphony Place (Nashville: CBD), One Alliance Center (Atlanta: Buckhead), Meridian I and II (Tampa: Westshore) and Green Valley (Greensboro: Green Valley). This also comprises the acquisition of joint venture partner’s 60% and 57% interests in the Orlando and Atlanta portfolio, respectively.

On the other hand, Highwoods sold non-core assets worth $286 million in 2013, which included Atlanta industrial assets. This marked the exit of Highwoods from the Atlanta industrial market.

Moreover, Highwoods declared LEED certified Class A office development worth $206 million in 2013. This included build-to-suit deals with MetLife, Inc. (MET) and International Paper Company (IP).


As of Dec 31, 2013, Highwoods had $10.2 million of cash and cash equivalents, down from $13.8 million as of Dec 31, 2012. Also, at the end of the year, the company’s leverage (including preferred shares) was 41.4%, down from 43.9% at the beginning of 2013. Moreover, in 2013, Highwoods issued 8.3 million of common shares and reaped net proceeds of $295 million.

2014 Outlook

Highwoods provided guidance for 2014 FFO per share and expects it in the range of $2.82 – $2.94. This is in line with 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 90.8% – 92.0%.

Our Viewpoint

Although same property revenues fell this time, Highwoods' efforts to improve its portfolio base pave the way for bottom-line growth in the future. In particular, the company has been focusing on shifting its portfolio mix to high growth markets and offloading its asset base in non-core markets. Yet, the current weakness in the office market remains a concern.

Highwoods presently has a Zacks Rank #3 (Hold). However, PS Business Parks Inc. (PSB) is a better-placed REIT having aZacks Rank #2 (Buy) and is slated to release fourth-quarter 2013 results on Feb 18, 2014.

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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