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Highwoods Properties Inc. (HIW - Analyst Report) – a real estate investment trust (REIT) – declared third-quarter 2013 core funds from operations (FFO) of 71 cents per share, beating the Zacks Consensus Estimate by a penny and the prior-year quarter figure by a nickel. Decent results came on the back of higher revenue growth, strong leasing and efficient capital deployment activities.

Furthermore, including the non-core items’ impact, FFO per share was 70 cents, up from 65 cents in the year-ago period.

Total revenue for the third quarter rose 19.3% year over year to $147.3. Moreover, this significantly exceeded the Zacks Consensus Estimate of $139 million.

Quarterly Highlights

In the reported quarter, same property rental revenues increased 1.1% year over year to $116.1 million. On the other hand, same property cash net operating income (NOI) excluding term fees, nudged up 0.9% to $72.4 million from the year-ago quarter.

Highwoods also inked leases for around 1.7 million square feet of office space in the quarter. This included deals for 1.2 million of second-generation office space with an average term of 6.1 years. Same-store average occupancy upped 30 basis points (bps) year over year to 90.2%.

Portfolio Restructuring Activity   

In the reported quarter, Highwoods bought upscale office properties worth $316 million in Orlando, Atlanta and Nashville.  The company also signed a build-to-suit deal worth $110 million with MetLife, Inc. (MET - Analyst Report). Moreover, Highwoods divested non-core assets of $103 million, which included the Atlanta industrial assets.

Subsequent to quarter-end, Highwoods vended non-core assets comprising five office buildings in Winston-Salem and one office property in Atlanta, for $25.3 million. Moreover, the company announced the construction of the fourth office building in GlenLake Park in Raleigh for $35.8 million. Spanning 166,000 square feet, the multi-tenant office building is already 25% pre-leased.

Notably, year to date, as of Oct 29, Highwoods has acquired $549 million worth Class A office assets. Additionally, the company has sold $197 million of non-core assets and exited the Atlanta industrial market as well.

Liquidity

As of Sep 30, 2013, Highwoods had $31.7 million of cash and cash equivalents, up from $10.1 million as of Jun 30, 2013. Also, at the end of the quarter, the company’s leverage (including preferred shares) was 42.6%, down from 43.9% at the beginning of 2013.

In the quarter, Highwoods issued 5.2 million of common shares and reaped net proceeds of $183 million from the offering. Also, Standard & Poor’s Ratings Services raised the senior debt rating of Highwoods to BBB, with stable outlook, from BBB-.

2013 Outlook Narrowed

Highwoods narrowed its FFO per share guidance for full-year 2013 in the range of $2.79–$2.81 from $2.76–$2.84 forecasted earlier.

Our Viewpoint

We are encouraged with Highwoods’ decent quarterly results on the back of successful implementation of its strategic plan. The company’s strong and flexible balance sheet positions it favorably to capitalize on new acquisition opportunities to drive top-line growth. The new senior debt rating of the company is also a boost. On the flip side, weakness in the office market scenario remains a concern.

At present, Highwoods has a Zacks Rank #4 (Sell). Better-performing REITs include SL Green Realty Corp. (SLG - Snapshot Report) and Sovran Self Storage Inc. (SSS - Snapshot Report), both of which hold 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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