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Highwoods Properties Inc. (HIW - Analyst Report), a real estate investment trust (REIT), has recently increased its fiscal 2011 FFO (fund from operations) guidance from $2.48-$2.56 per share to $2.52-$2.60, keeping in view the accretive effect of the just-concluded acquisitions of two of the most sought-after office properties.
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.
The company acquired PPG Place – a six-building Class A office complex spanning 1.54 million square feet with structured parking in the heart of downtown Pittsburgh, for $214.1 million. The purchase price included $17.1 million of planned near-term building improvements and $8.1 million of future tenant improvements committed under existing leases.
With the purchase, Highwoods also assumed a debt secured by the property to the tune of $124.9 million (recorded at fair value) bearing an effective interest rate of 4.27% and scheduled to mature in November 2017. PPG Place is presently 81.2% leased and is expected to generate full year 2012 cash and GAAP net operating income of $16.2 million and $19.8 million, respectively.
The acquisition of PPG Place has enabled Highwoods to enter the vibrant Pittsburg market that is characterized by a highly skilled and dedicated workforce, with a 7.4% unemployment rate that is well below the national average of 9.1%.
In addition, the city has experienced about $4.5 billion of completed and in-process public and private investment over the past five years, with the CBD (central business district) office market particularly showing adequate resilience throughout the recession.
Highwoods also purchased Riverwood 100 – a 24-story, 503,000 square foot Class A office building with structured parking in Atlanta, for $86.3 million. The transaction price included $5.6 million of planned near-term building improvements and $2.4 million of future tenant improvements committed under existing leases.
The purchase price also included the assumption of a secured debt of $67.9 million (recorded at fair value), with an effective interest rate of 5.45% and scheduled to mature in January 2014.
Riverwood 100, currently 87.0% leased, is expected to generate full year 2012 GAAP net operating income of $7.0 million. With this property, Highwoods presently has 21 wholly-owned office buildings in Atlanta spanning over 3 million square feet of space that is 90.9% leased.
The two-pronged acquisition is part of the long-term strategy of the company to own prime infill assets in top-tier submarkets with significant barriers to entry and priced below replacement costs with a diversified and financially sound customer base. A large part of the company’s portfolio is now concentrated in the high-growth Sun Belt markets, which provides above-average job growth owing to its long-term demographic trends.
Based in Raleigh, North Carolina, Highwoods is one of the biggest owners and operators of suburban office, industrial and retail properties in the Southeastern and Midwestern U.S., providing a complete line of real estate services to its customers and third parties through a fully-integrated organization. The core markets of the company include Florida, Georgia, Iowa, Maryland, Missouri, Mississippi, North Carolina, South Carolina, Tennessee and Virginia.
We maintain our long-term Neutral recommendation for Highwoods, which currently retains a Zacks #3 Rank that translates into a short-term Hold rating. We also have a Neutral recommendation and a Zacks #3 Rank for Cousins Properties Inc. (CUZ - Analyst Report), one of the competitors of Highwoods.