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Highwoods Properties Inc. (HIW - Analyst Report) – a real estate investment trust (REIT) – reported fourth quarter 2012 core FFO (funds from operations) of 68 cents per share, in line with the Zacks Consensus Estimate and 2 cents short of the prior-year quarter figure of 70 cents. However, for full year 2012, core FFO per share increased 5.8% year over year to $2.73 and was also well ahead of the Zacks Consensus Estimate of $2.71.

Though the company benefited from decent leasing and portfolio restructuring activity, a pressure on rent acted as a headwind.

Including the non-core items impact, Highwoods’ reported FFO for the quarter stood at $55.6 million or 67 cents per share, compared with $53.2 million or 70 cents per share in the year-ago period. In 2012, reported FFO stood at $215.3 million or $2.70 per share, compared with $190.2 million or $2.50 per share in the last year.

Inside the Headlines

Total revenue for the fourth quarter reached $134.0 million, up from $123.9 million reported in the year-ago quarter. Moreover, total revenue exceeded the Zacks Consensus Estimate of $130 million.

For the full year 2012, the company reported total revenue of $516.1 million, substantially higher than $463.4 million generated in the previous year. Also, total revenue was marginally above the Zacks Consensus Estimate of $515 million.

During the fourth quarter, bulk of the revenues was generated by the office segment (88.3% of annualized cash revenue), while retail and industrial segments accounted for 6.7% and 5.0%, respectively.

During the reported quarter, same-store rental revenues increased 4.2% year over year to $108.1 million, while cash NOI (net operating income) climbed 3.6% to $69.7 million.

Within the office portfolio, rent moved down 6.3% on a cash basis from the prior-year period. On the other hand, rent for retail portfolio dipped 10.3% on a cash basis and for industrial portfolio, rent decreased 17.5%.

At the end of 2012, overall occupancy was 90.9% – a 90 bps (basis points) increase year over year. Moreover, in 2012, Highwoods inked leases for space spanning 5.0 million square feet.

Acquisitions and Developments

During the quarter under review, Highwoods completed property acquisitions worth $296.0 million. These are: acquisitions of Two Alliance Center in Atlanta for $146.7 million, EQT Plaza in Pittsburgh for $99.2 million, Church Street I, II and III in Greensboro for $29.8 million and 11000 Weston in Raleigh for incremental investment of $20.3 million.

Notably, with the EQT Plaza acquisition, Highwoods strengthened its footprints in Pittsburgh – one of its core operating markets – and expanded its market share to 40%.

Also, Highwoods sold non-core assets worth $158.0 million, spanning 1.3 million square feet during the fourth quarter. The asset sale is part of the long-term strategy of the company to improve the overall quality of its portfolio through the disposal of noncore assets and the development and acquisition of infill core assets.

Liquidity

At year-end 2012, Highwoods had $13.8 million in cash and cash equivalents. The company’s leverage was lowered 340 bps to 43.9%.

In the quarter under review, Highwoods priced 3.625% senior unsecured notes worth $250 million. The notes are scheduled to mature in January 2023 to yield 3.752% on maturity.

Also, the company extended the maturity of a $200 million unsecured term loan scheduled to mature in Feb 2016 to Jan 2018. The modified loan carries interest at LIBOR plus 1.65%, a 55 basis point reduction from the original interest rate of LIBOR plus 2.20%.

In addition, Highwoods obtained term loan worth $225 million, having a fixed interest of 3.578% via swaps. In 2012, Highwoods sold around 7.2 million shares under its at-the-market (ATM) program, raising net proceeds of $236.4 million.

2013 Outlook

For full-year 2013, Highwoods expects FFO per share guidance in the range of $2.68 to $2.81. The company expects occupancy in the range of 89.5% – 91.0% and same property cash NOI growth (excluding termination fees) in the range of 0.5% – 1.5% for full year 2013.

Our Viewpoint

Though Highwoods reported a mixed result in the reported 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 owing to long-term demographic trends.

Also, the company is dynamically repositioning its portfolio to focus on stronger long-term markets and newer assets, which makes it relatively better equipped to outperform competitive pressure. Moreover, a strong and flexible balance sheet further enables Highwoods to capitalize on potential acquisition opportunities to fuel its top-line growth.

Last week, another REIT – Liberty Property Trust reported fourth quarter 2012 FFO of 63 cents per share, in line with the Zacks Consensus Estimate as well as the prior-year quarter.

Highwoods currently holds a Zacks Rank #3 (Hold). However, other REITs that are performing better include Ventas Inc. (VTR - Analyst Report) and Simon Property Group Inc. (SPG - Analyst Report), both carrying 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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