Highwoods Properties Inc. (HIW) – a real estate investment trust (REIT) – reported second-quarter 2013 core funds from operations (FFO) of 70 cents per share, beating the Zacks Consensus Estimate by a penny. However, this was in line with the prior-year quarter figure of 70 cents.
Decent results came on the back of strong leasing and efficient capital deployment activity as well as cash NOI growth. This increased Highwoods’ expectation for the rest of the year, on the back of accretive acquisitions, thereby prompted it to raise full-year FFO per share guidance for 2013.
Including the non-core items’ impact, FFO was $60.6 million or 70 cents per share, up from the $54.1 million or 69 cents in the year-ago period.
Total revenue for the second quarter jumped 9.3% to $138.5 million from $126.7 million in the year-ago quarter. Moreover, total revenue came well ahead of the Zacks Consensus Estimate of $136 million.
Inside the Headlines
During the reported quarter, same property rental revenues increased 0.9% year over year to $118.9 million from $117.8 million. On the other hand, same property cash net operating income (NOI) excluding term fees climbed 2.8% year over year to $76.4 million from $74.4 million.
Same-store average occupancy fell 40 basis points (bps) to 90.0% from 90.4% in the prior-year quarter. Moreover, during the said quarter, Highwoods inked leases for space spanning over 1 million square feet in second-generation office assets with an average term of 4.7 years.
Portfolio Restructuring Activity
During the reported quarter, Highwoods bought One Alliance Center – the sister building of Two Alliance Center – in Buckhead submarket of Atlanta for $143.4 million. Moreover, the company divested Atlanta industrial assets for $48.0 million.
Subsequent to the quarter-end, on Jul 23, Highwoods acquired its joint venture partner’s 60% interest in HIW-KC Orlando, LLC for $113.3 million. The acquired portfolio included 5 office buildings, spanning 1.3 million square feet, in CBD Orlando.
Notably, year to date, Highwoods has acquired $349.7 million worth Class A office assets. Additionally, the company has sold $68.4 million of non-core assets so far.
Liquidity
As of Jun 30, 2013, Highwoods had $10.1 million of cash and cash equivalents, compared with $12.1 million as of Mar 31, 2013.
During the quarter, Highwoods issued 1.76 million of common shares under its at-the-market (ATM) equity program and generated net proceeds of $66.3 million. Moreover, subsequent to quarter-end, the company sold 0.52 million shares for net proceeds of $17.9 million. Consequently, year to date, Highwoods raised $130.2 million though its ATM equity program.In addition, following the JV interest buyout, the company’s leverage (including preferred shares) is under 45%.
2013 Outlook Reiterated
Impressed with second-quarter results, Highwoods revised its FFO per share guidance for full-year 2013 in the range of $2.76–$2.84, up from $2.68–$2.81 forecasted earlier. The optimism reflects the company’s solid operating performance in the quarter and opportune JV interest acquisition.
Our Take
Highwoods’ decent results reflect the successful implementation of its strategic plan. Moreover, a strong and flexible balance sheet poises Highwoods to better capitalize on new acquisition opportunities to boost top-line growth. Also, the raised outlook by Highwoods reflects the company’s confidence about its accretive purchases, which is encouraging. However, the weak office market scenario at present remains a plausible concern for the company.
Highwoods currently carries a Zacks Rank #3 (Hold).
We are looking forward to the results of other REITs that are scheduled to report next week after the market closes. These include Plum Creek Timber Co. Inc. (PCL), PS Business Parks Inc. (PSB) and American Capital Agency Corp. (AGNC).
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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