CEO credits diversity of portfolio for strong showing amid inflation
Yet another commercial real estate company’s earnings report this week illustrates the continuing strength of the multifamily market – this in spite of inflation and interest rates volatility.
Raleigh, N.C.-based real estate investment trust Highwoods Properties largely met Wall Street expectations in reporting its fourth quarter earnings, posting funds from operations of $103.1 million, or 96 cents per share. Net income was $27.6 million, or 26 cents per share. The REIT posted revenue of $211.7 million in the period.
Highwoods Properties owns, develops, acquires, leases and manages properties primarily in BBDs (Best Business Districts) of Atlanta, Charlotte, Dallas, Nashville, Orlando, Pittsburgh, Raleigh, Richmond and Tampa.
Strong end to a strong year
Ted Klinck (pictured left), president, CEO and director of the real estate investment trust, detailed the fourth quarter performance to shareholders during an earnings call this week. “We had a strong end to a strong year for Highwoods. In the fourth quarter, we enjoyed solid leasing in terms of both volume and economics; acquired a best-in-class property in Uptown Dallas; placed in service our highly successful Midtown West development in Tampa; announced Midtown East, our second development in Midtown Tampa,” he said.
Klinck noted the strong performance in the commercial real estate market emerged in spite of inflation: “Our healthy leasing during the fourth quarter is somewhat contradictory to the broader macro environment, with interest rates up sharply, limited capital availability, and widespread concerns of a pending recession. We continue to believe that, to be resilient, our portfolio must be diversified and not be overly reliant on any single customer, market, submarket, industry, or lease size. This diversification is a core component of our long-stated, simple, and straightforward goal to generate attractive and sustainable returns over the long term. Our largest market, Raleigh, is less than 22% of revenues.”
He provided a client breakdown: “Our largest customer, Bank of America, is less than 4%. Our top 20 customers account for less than 30%. Our largest industry, the highly diversified professional, scientific and technical services category, is less than 30%. And our average lease size is under 15,000 square feet.”
Company tactics led to strong performance
The top executive also detailed tactics that led to the strong fourth quarter performance: “We believe this purposeful diversification, our high-quality portfolio, and continued strong population and job growth across our markets has driven our strong leasing since the onset of the pandemic, including throughout last year. In 2022, we signed 1.5 million square feet of new leases, the most in any year since 2014. We ended the year on a positive note with 337,000 square feet of new leasing and 924,000 square feet of total second-gen leasing. In the fourth quarter, we signed 28 expansions, nearly half of our renewal count, with expansions outpacing contractions by a ratio of 3.5 to 1.0, equating to 81,000 square feet of net expansions.”
One deal in particular boded well for the bottom line, he added: “In addition, we signed a 312,000-square-foot renewal at a 50-50 JV property in Richmond. This renewal was for 100% of the customer’s prior space with a roll-up in cash rents and limited TIs. As a reminder, JV leasing is not included in our overall leasing statistics.”
And he reminded shareholders of good signs for 2023: “As we move into 2023, our occupancy and same property cash NOI will be negatively impacted by the 263,000-square-foot move-out by Tivity in the Cool Springs BBD of Nashville at the end of this month, a space that we have already substantially backfilled.
“The backfill customer’s lease isn’t scheduled to commence until early 2024,” he continued, “As is our practice, we do not remove in-service buildings from our same property pool. In addition to our solid leasing efforts in 2022, we are also pleased with our investment activity during the year. We acquired $400 million of best-in-class assets in Charlotte and Dallas, both with meaningful long-term growth potential.”
Emphasis on strong markets pays off
He expounded on further deals: “We placed in-service roughly $100 million of 99% leased development. We announced over $400 million of development in Dallas, Atlanta, Tampa, and Charlotte. And we sold $133 million of noncore land and buildings. This volume of work, combined with our high-quality office portfolio in the strongest BBDs throughout the Sun Belt, gives us the building blocks we need to generate additional long-term growth.”
Brian Leary (pictured right), executive vice president and chief operating officer, added to the fourth quarter corporate narrative. “A strong fourth quarter capped off a strong 2022 and a strong three-year run through the pandemic that saw the team and portfolio meet every challenge and produce compelling results,” he said.
