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Highwoods Properties Inc. (HIW - Analyst Report) – a real estate investment trust (REIT) – declared first-quarter 2014 core funds from operations (FFO) of 66 cents per share, missing the Zacks Consensus Estimate by a nickel and the prior-year quarter figure by 2 cents.

Bad weather conditions and the company’s retirement plan related expenses were the dampeners. Also, including the non-core items’ impact, FFO per share was 66 cents, down from 67 cents in the year-ago period.

However, total revenue for the quarter jumped 13.9% year over year to $148.5 million and came marginally above the Zacks Consensus Estimate of $148 million. The company also experienced decent leasing activity and its shares were up 2.10% during the trading session on NYSE on Apr 30.

Quarterly Highlights

In the reported quarter, same property rental revenues upped marginally (by 0.4%) year over year to $121.9 million. However, same property cash net operating income (NOI) excluding term fees moved south 2.7% to $75.0 million from the year-ago quarter.

Highwoods inked leases for around 1.4 million square feet of second generation space in the quarter. However, same property average occupancy declined 150 basis points (bps) year over year to 89.6%. Also, during the quarter, Highwoods declared a $14.9 million build-to-suit agreement with Biologics, Inc.

Liquidity

As of Mar 31, 2014, Highwoods had $13.3 million of cash and cash equivalents, up from $10.2 million as of Dec 31, 2013. During the quarter, the company received a rating upgrade from Fitch Ratings and now enjoys senior debt rating of BBB from BBB- with a stable outlook.

2014 Outlook Narrowed

Highwoods narrowed the guidance for 2014 FFO per share and now expects it in the range of $2.86 – $2.94 (prior range being $2.82 – $2.94). This is well above the Zacks Consensus Estimate for the same of $2.79.

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 91.3% – 92.5%.

Our Viewpoint

Although one-time expenses hampered Highwoods’ FFO per share in the first quarter, we note that on the back of a successful implementation of its strategic plan, a large part of the company’s portfolio is now concentrated in the high-growth Sun Belt markets, which provide above-average job growth prospects owing to long-term demographic trends. A strong and flexible 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.

Currently, Highwoods has a Zacks Rank #3 (Hold). Investors interested in the REIT industry may consider stocks like Duke Realty Corporation (DRE - Analyst Report), Cousins Properties Incorporated (CUZ - Analyst Report) and SL Green Realty Corp. (SLG - Snapshot Report). All stocks carry a Zacks Rank #2 (Buy).

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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