Highwoods Properties (HIW) Q4 FFO Tops Estimates, Dividend Up

Highwoods Properties Inc.’s (NYSE:HIW) fourth-quarter 2019 funds from operations (FFO) per share of 91 cents surpassed the Zacks Consensus Estimate of 90 cents. The figure also improved from 86 cents reported in the year-ago period.

Encouraging business conditions across its markets facilitated healthy leasing metrics and Highwoods is also on track with the company’s market-rotation plan. Also, backed by its solid cash flow, the company increased the annualized dividend to $1.92 per share from the $1.90 paid earlier.

Rental and other revenues of approximately $192.1 million in the quarter increased 5.9% year over year. However, the reported figure narrowly missed the Zacks Consensus Estimate of $192.7 million.

For full-year 2019, FFO per share came in at $3.33, lower than the prior-year tally of $3.45. Nevertheless, rental and other revenues of nearly $736 million increased 2.2% year over year.

Quarter in Detail

Highwoods leased 1.2 million square feet of second-generation office space during the fourth quarter, including 398,000 square feet of new leases. Rents were up 19.8% on a GAAP basis and 6.1% on a cash basis.

Highwoods achieved a dollar weighted average term of 6.1 years. Moreover, the company reaped net effective rents of $18.17 per square foot, 14.3% above the prior five-quarter average.

Same-property cash net operating income (NOI) inched up 1.1% year over year and 2.6%, excluding the effect from Laser Spine’s sudden closure. The company ended the October-December quarter with in-service portfolio occupancy of 92.2%.

Notably, the fourth quarter has been a notable one for Highwoods, as the company progressed well with its market-rotation plan aimed to fortify its portfolio in BBDs of higher-growth markets, such as Charlotte, and exit the Greensboro and Memphis markets. Particularly, in the quarter, the company acquired Bank of America (NYSE:BAC) Tower at Legacy Union in Charlotte for a total investment of $436 million. The company also sold $89.6 million of assets in Memphis, comprising 332,000 square feet with a combined occupancy of 95.6%.

Apart from these, the company acquired a development parcel in Pittsburgh for $2.5 million and purchased a mixed-use development parcel in Richmond for $3.3 million.

At the end of the quarter, Highwoods’ $500-million development pipeline is 77% pre-leased on a dollar-weighted basis.

As of Dec 31, 2019, Highwoods had around $9.5 million of cash and cash-equivalents compared with around $3.8 million reported as of Dec 31, 2018. The company exited the reported quarter with a net debt-to-EBITDAre ratio of 5.18x and a leverage ratio of 39.3%. It did not issue any shares under the ATM program.

Outlook

For 2020, Highwoods expects FFO per share of $3.60-$3.72. The Zacks Consensus Estimate for the same is currently pinned at $3.60.

The company’s full-year outlook is backed by expectations of same-property cash NOI growth of 3.25-4.25% and year-end occupancy of 91-92.3%. Moreover, the company assumes completion of the first phase of its two-phased plan to exit the Greensboro and Memphis markets. In the first phase, the company planned selling a select portfolio of assets in Greensboro and Memphis by mid-2020 for a total sales price that approximates the $436 million total investment for Bank of America Tower at Legacy Union.

Dividend Hike

On Feb 4, Highwoods increased its quarterly cash dividend to 48 cents per share, resulting in an annualized dividend of $1.92 per share. This marks a 1.1% increase over the prior quarter’s dividend. The increased quarterly dividend will be paid on Mar 10, to shareholders of record as of Feb 18, 2020.

Our Viewpoint

Highwoods’ better-than-expected performance in the fourth quarter in terms of FFO per share is encouraging. The company is making significant progress with its market-rotation plan and recently announced $233.4 million worth of asset sales in Greensboro. Amid healthy job-market environment, Highwoods is well poised to capitalize on solid demand for office space. Further, a robust balance sheet positions it well to pursue growth endeavors. However, large-scale asset disposition is expected to result in near-term earnings dilution. Moreover, an extensive development pipeline exposes the company to operational risks such as higher development costs.

Highwoods currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Highwoods Properties, Inc. Price, Consensus and EPS Surprise

Highwoods Properties, Inc. price-consensus-eps-surprise-chart | Highwoods Properties, Inc. Quote

We, now, look forward to the earnings releases of other REITs like Federal Realty Investment Trust (NYSE:FRT) , Healthpeak Properties, Inc. (NYSE:PEAK) and Welltower Inc. (NYSE:WELL) . All three companies are scheduled to release their quarterly numbers next week.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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