|
| | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | Six Months Ended
June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Rental and Other Revenues: | | | | | | | |
Office: | | | | | | | |
Atlanta | $ | 36,537 |
| | $ | 37,692 |
| | $ | 74,496 |
| | $ | 73,995 |
|
Charlotte | 9,010 |
| | — |
| | 17,943 |
| | — |
|
Nashville | 34,622 |
| | 33,109 |
| | 69,119 |
| | 64,508 |
|
Orlando | 12,304 |
| | 12,995 |
| | 25,326 |
| | 26,927 |
|
Pittsburgh | 14,676 |
| | 14,994 |
| | 29,624 |
| | 30,309 |
|
Raleigh | 31,202 |
| | 30,673 |
| | 63,755 |
| | 59,770 |
|
Richmond | 11,834 |
| | 12,341 |
| | 24,094 |
| | 24,627 |
|
Tampa | 25,358 |
| | 23,497 |
| | 50,602 |
| | 39,068 |
|
Total Office Segment | 175,543 |
| | 165,301 |
| | 354,959 |
| | 319,204 |
|
Other | 7,610 |
| | 18,769 |
| | 20,994 |
| | 37,229 |
|
Total Rental and Other Revenues | $ | 183,153 |
| | $ | 184,070 |
| | $ | 375,953 |
| | $ | 356,433 |
|
29
|
| | | | | | | | | | | | | | | |
Net Operating Income: | | | | | | | |
Office: | | | | | | | |
Atlanta | $ | 23,901 |
| | $ | 24,819 |
| | $ | 49,084 |
| | $ | 48,242 |
|
Charlotte | 7,123 |
| | — |
| | 14,325 |
| | — |
|
Nashville | 25,132 |
| | 24,208 |
| | 49,885 |
| | 46,526 |
|
Orlando | 7,750 |
| | 8,007 |
| | 15,755 |
| | 16,563 |
|
Pittsburgh | 9,350 |
| | 8,895 |
| | 18,020 |
| | 18,029 |
|
Raleigh | 23,997 |
| | 22,438 |
| | 47,633 |
| | 43,297 |
|
Richmond | 8,508 |
| | 8,610 |
| | 17,199 |
| | 17,162 |
|
Tampa | 17,663 |
| | 14,291 |
| | 34,196 |
| | 21,376 |
|
Total Office Segment | 123,424 |
| | 111,268 |
| | 246,097 |
| | 211,195 |
|
Other | 4,610 |
| | 12,244 |
| | 12,535 |
| | 24,129 |
|
Total Net Operating Income | 128,034 |
| | 123,512 |
| | 258,632 |
| | 235,324 |
|
Reconciliation to net income: | | | | | | | |
Depreciation and amortization | (59,461 | ) | | (59,460 | ) | | (120,611 | ) | | (128,664 | ) |
Impairments of real estate assets | (1,778 | ) | | (531 | ) | | (1,778 | ) | | (531 | ) |
General and administrative expenses | (10,084 | ) | | (9,560 | ) | | (21,014 | ) | | (21,941 | ) |
Interest expense | (19,840 | ) | | (20,356 | ) | | (41,117 | ) | | (39,095 | ) |
Other income/(loss) | 588 |
| | 321 |
| | 657 |
| | (3,445 | ) |
Gains on disposition of property | 318 |
| | 6,703 |
| | 153,385 |
| | 6,703 |
|
Equity in earnings of unconsolidated affiliates | 1,179 |
| | 765 |
| | 2,142 |
| | 1,429 |
|
Net income | $ | 38,956 |
| | $ | 41,394 |
| | $ | 230,296 |
| | $ | 49,780 |
|
Since early March 2020, efforts to slow the spread of the COVID-19 virus have had a significant impact on the U.S. economy. We continue to follow the policies described in Notes 1 and 2 to our Consolidated Financial Statements contained in our 2019 Annual Report on Form 10-K, including those related to impairments of real estate assets and investments in unconsolidated affiliates, leases and estimates of credit losses on operating lease receivables. While the results of our current analyses did not result in any material adjustments to amounts as of JuneSeptember 30, 2020 and during the three and sixnine months endedJune September 30, 2020,, circumstances related to the COVID-19 pandemic may result in recording impairments, lease modifications and credit losses in future periods.
On JulyOctober 1, 2020, we sold 2 buildingsa building in MemphisGreensboro for an aggregatea sale price of $23.3$4.6 million and expect to record aggregate gainsa gain on disposition of property of $9.3 million.$1.3 million.
On July 28,October 15, 2020, the Company declared a cash dividend of $0.48$0.48 per share of Common Stock, which is payable on September 9,December 8, 2020 to stockholders of record as of August 17,November 16, 2020.
See also Note 15 for information regarding the potential impact of the COVID-19 pandemic in future periods. The severity and duration of the COVID-19 pandemic and the resulting economic recession and the future demand for office space over the long-term are difficult to predict and could materially and adversely impact or disrupt our financial condition, results of operations, cash flows and performance.
ITEM 2. MANAGEMENT’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is a fully integrated office real estate investment trust (“REIT”(“REIT”) that owns, develops, acquires, leases and manages properties primarily in the best business districts (BBDs) of Atlanta, Charlotte, Nashville, Orlando, Pittsburgh, Raleigh, Richmond and Tampa. The Company conducts its activities through the Operating Partnership. The Operating Partnership is managed by the Company, its sole general partner. Additional information about us can be found on our website at www.highwoods.com. Information on our website is not part of this Quarterly Report.
You should read the following discussion and analysis in conjunction with the accompanying Consolidated Financial Statements and related notes contained elsewhere in this Quarterly Report.
Disclosure Regarding Forward-Looking Statements
Some of the information in this Quarterly Report may contain forward-looking statements. Such statements include, in particular, statements about our plans, strategies and prospects under this section. You can identify forward-looking statements by our use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “continue”“may,” “will,” “expect,” “anticipate,” “estimate,” “continue” or other similar words. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that our plans, intentions or expectations will be achieved. When considering such forward-looking statements, you should keep in mind important factors that could cause our actual results to differ materially from those contained in any forward-looking statement. Currently, one of the most significant factors that could cause actual outcomes to differ materially from our forward-looking statements is the potential adverse effect of the COVID-19 pandemic, and federal, state, and/or local regulatory guidelines and private business actions to control it, on our financial condition, operating results and cash flows, our customers, the real estate market in which we operate, the global economy and the financial markets. The extent to which the COVID-19 pandemic impacts us and our customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic and the resulting economic recession and potential changes in customer behavior, among others. Additional factors, many of which may be influenced by the COVID-19 pandemic, that could cause actual outcomes or results to differ materially from those indicated in these statements include:
•the financial condition of our customers could deteriorate or further worsen;
| |
•
| the financial condition of our customers could deteriorate or further worsen;
|
| |
•
| our assumptions regarding potential losses related to customer financial difficulties due to the COVID-19 pandemic could prove incorrect; |
| |
•
| counterparties under our debt instruments, particularly our revolving credit facility, may attempt to avoid their obligations thereunder, which, if successful, would reduce our available liquidity;
|
| |
•
| we may not be able to lease or re-lease second generation space, defined as previously occupied space that becomes available for lease, quickly or on as favorable terms as old leases;
|
| |
•
| we may not be able to lease newly constructed buildings as quickly or on as favorable terms as originally anticipated;
|
| |
•
| we may not be able to complete development, acquisition, reinvestment, disposition or joint venture projects as quickly or on as favorable terms as anticipated;
|
| |
•
| development activity in our existing markets could result in an excessive supply relative to customer demand;
|
| |
•
| our markets may suffer declines in economic and/or office employment growth;
|
| |
•
| unanticipated increases in interest rates could increase our debt service costs;
|
| |
•
| unanticipated increases in operating expenses could negatively impact our operating results;
|
| |
•
| we may not be able to meet our liquidity requirements or obtain capital on favorable terms to fund our working capital needs and growth initiatives or repay or refinance outstanding debt upon maturity; and
|
| |
•
| the Company could lose key executive officers.
|
•counterparties under our debt instruments, particularly our revolving credit facility, may attempt to avoid their obligations thereunder, which, if successful, would reduce our available liquidity;
•we may not be able to lease or re-lease second generation space, defined as previously occupied space that becomes available for lease, quickly or on as favorable terms as old leases;
•we may not be able to lease newly constructed buildings as quickly or on as favorable terms as originally anticipated;
•we may not be able to complete development, acquisition, reinvestment, disposition or joint venture projects as quickly or on as favorable terms as anticipated;
•development activity in our existing markets could result in an excessive supply relative to customer demand;
•our markets may suffer declines in economic and/or office employment growth;
•unanticipated increases in interest rates could increase our debt service costs;
•unanticipated increases in operating expenses could negatively impact our operating results;
•we may not be able to meet our liquidity requirements or obtain capital on favorable terms to fund our working capital needs and growth initiatives or repay or refinance outstanding debt upon maturity; and
•the Company could lose key executive officers.
This list of risks and uncertainties, however, is not intended to be exhaustive. You should also review the other cautionary statements we make in “Business –“Business – Risk Factors”Factors” set forth in our 2019 Annual Report on Form 10-K and “Item“Item 1A. Risk Factors” contained herein.Factors” set forth in our Quarterly Report on Form 10-Q for the second quarter of 2020. Given these uncertainties, you should not place undue reliance on forward-looking statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements to reflect any future events or circumstances or to reflect the occurrence of unanticipated events.
Executive Summary
Executive Summary
Our Strategic Plan focuses on:
•
| |
•
| owning high-quality, differentiated office buildings in the BBDs of our core markets; |
| |
•
| improving the operating results of our properties through concentrated leasing, asset management, cost control and customer service efforts;
|
| |
•
| developing and acquiring office buildings in BBDs that improve the overall quality of our portfolio and generate attractive returns over the long term for our stockholders;
|
| |
•
| disposing of properties no longer considered to be core assets primarily due to location, age, quality and/or overall strategic fit; and
|
| |
•
| maintaining a balance sheet with ample liquidity to meet our funding needs and growth prospects.
|
COVID-19
•improving the operating results of our properties through concentrated leasing, asset management, cost control and customer service efforts;
•developing and acquiring office buildings in BBDs that improve the overall quality of our portfolio and generate attractive returns over the long term for our stockholders;
•disposing of properties no longer considered to be core assets primarily due to location, age, quality and/or overall strategic fit; and
•maintaining a balance sheet with ample liquidity to meet our funding needs and growth prospects.
COVID-19
The unprecedented nationwide efforts to slow the spread of the COVID-19 virus have obviously had a significant impact on the U.S. economy.
It is still too earlyvery difficult to predict when, if and to what extent economic activity will return to pre-COVID-19 levels. While the COVID-19 pandemic did not have a meaningful impact on our secondthird quarter of 2020 financial results, we believe it is likely our financial results for the remainder of 2020 will be adversely impacted by the COVID-19 pandemic. Given the fluidity of the pandemic and its uncertain impact on economic activity, losses related to customer financial difficulties are difficult to predict.
This outlook reflects management’smanagement’s view of current and future market conditions, including assumptions such as potential losses related to customer financial difficulties and asset usage due to the COVID-19 pandemic, rental rates, occupancy levels, operating and general and administrative expenses, weighted average diluted shares outstanding and interest rates. Factors that could cause actual results to differ materially from our current expectations are set forth under “Disclosure“Disclosure Regarding Forward-Looking Statements.””
While all buildings and parking facilities have remained open for business, the usage of our assets in the secondthird quarter of 2020 wascontinued to be significantly lower than normal due to the COVID-19 pandemic. As a result, parking and parking-related revenues werecontinued to be lower than normal during this period. In addition, our operating expenses, net of expense recoveries, werecontinued to be lower during this period due to reduced electricity, janitorial and other variable expenses. Until usage returnsincreases, which will depend on the duration of the COVID-19 pandemic, which is difficult to normal,estimate, we expect that reduced usage will continue to result in reduced parking revenues, which will be only partially offset by reduced operating expenses. UsageWe do not expect usage to increase over the current level until at least the beginning of our assets for the remainder of 2020, however, depends on the duration of the COVID-19 pandemic, which is difficult to estimate.2021.
Given the COVID-19 pandemic, we have been experiencing and expect to continue to experience slower than originally anticipated speculative new leasing, which we expect willcould be partially offset by higher renewal activity. This would reduce our anticipated rental revenues. Because construction activities have generally been classified as essential activities throughout our markets during the COVID-19 pandemic, we do not currently expect meaningful delays in customers taking occupancy under recently-signed leases.
We assume we will incur losses due to customers that default on their leases, file bankruptcy and/or otherwise experience significant financial difficulty as a result of the COVID-19 pandemic (including $1.2$3.0 million recorded in during the first sixnine months ofended September 30, 2020), consisting of credit losses of straight-line rent receivables and lower rent payments. Most of the credit losses of straight-line rent receivables during the third quarter were due to the conversion of fixed rent leases to percentage rent leases for certain customers that remain in occupancy but have been impacted by social distancing measures.
Given the fluidity of the pandemic and its uncertain impact on economic activity, we cannot estimate such losses during the remainder of 2020. Generally, in cases where an otherwise viable, creditworthy customer has been able to demonstrate disruption due to the complete or partial shutdown of its business operations, we have agreed and/or may agree to defer, but not abate, the payment of rent for a limited period of time.time or, as noted above, convert traditional leases to percentage rent leases. In other cases, we have agreed and/or may agree to abate rent for a limited period of time as consideration for a lease term extension.
The extent of any losses will depend on whether or not the collectability of future rents from customers experiencing financial difficulty is deemed to be probable under GAAP. Through July 21,October 20, 2020,, we have collected 99% of our contractually required rents for the month of JulyOctober and are not currently aware of any customer-specific facts or circumstances that indicate a likelihood of any material losses at this point during the thirdfourth quarter of 2020. To date, we have agreed to grant temporary rent deferrals that represent 1.2% of our annualized rental revenues. In most cases,On average, these deferrals represent approximately two months of a customer’scustomer’s rent and isare expected to be repaid to us prior to the end of 2021.
For a discussion of the impact of the COVID-19 pandemic on our liquidity and balance sheet, see “Liquidity“Liquidity and Capital Resources”Resources” below.
Revenues
Our operating results depend heavily on successfully leasing and operating the office space in our portfolio. Economic growth and office employment levels in our core markets are important factors, among others, in predicting our future operating results.
The key components affecting our rental and other revenues are average occupancy, rental rates, cost recovery income, new developments placed in service, acquisitions and dispositions. Average occupancy generally increases during times of improving economic growth, as our ability to lease space outpaces vacancies that occur upon the expirations of existing leases. Average occupancy generally declines during times of slower or negative economic growth, when new vacancies tend to outpace our ability to lease space. Asset acquisitions, dispositions and new developments placed in service directly impact our rental revenues and could impact our average occupancy, depending upon the occupancy rate of the properties that are acquired, sold or placed in service. A further indicator of the predictability of future revenues is the expected lease expirations of our portfolio. As a result, in addition to seeking to increase our average occupancy by leasing current vacant space, we also concentrate our leasing efforts on renewing existing leases prior to expiration. For more information regarding our lease expirations, see “Properties“Properties - Lease Expirations”Expirations” in our 2019 Annual Report on Form 10-K. Occupancy in our office portfolio decreased from 92.0% at December 31, 2019 to 91.1%90.2% at JuneSeptember 30, 2020. Without the fluidity of the COVID-19 pandemic and its uncertain impact on economic activity, we would2020. We expect average occupancy for our office portfolio to be approximately 90% for the remainder of 2020. However, average occupancy will be lower, perhaps significantly lower, if the COVID-19 pandemic causes vacancies and move-outs due to (a) customers that default on their leases, file bankruptcy and/or otherwise experience significant financial difficulty.difficulty and/or (b) potential changes in customer behavior, such as the continued social acceptance, desirability and perceived economic benefits of work-from-home arrangements, which could materially and negatively impact the future demand for office space over the long-term.
Whether or not our rental revenue tracks average occupancy proportionally depends upon whether GAAP rents under signed new and renewal leases are higher or lower than the GAAP rents under expiring leases. Annualized rental revenues from second generation leases expiring during any particular year are typically less than 15% of our total annual rental revenues. The following table sets forth information regarding second generation office leases signed during the secondthird quarter of 2020 (we define second generation office leases as leases with new customers and renewals of existing customers in office space that has been previously occupied under our ownership and leases with respect to vacant space in acquired buildings):
| | | | | | | | | | | | | | | | | |
| | | | | |
| New | | Renewal | | All Office |
| Leased space (in rentable square feet) | 189,826 | | | 469,877 | | | 659,703 | |
| Average term (in years - rentable square foot weighted) | 7.2 | | | 4.3 | | | 5.1 | |
Base rents (per rentable square foot) (1) | $ | 31.23 | | | $ | 30.37 | | | $ | 30.62 | |
Rent concessions (per rentable square foot) (1) | (1.43) | | | (1.08) | | | (1.18) | |
GAAP rents (per rentable square foot) (1) | $ | 29.80 | | | $ | 29.29 | | | $ | 29.44 | |
Tenant improvements (per rentable square foot) (1) | $ | 4.63 | | | $ | 0.99 | | | $ | 2.04 | |
Leasing commissions (per rentable square foot) (1) | $ | 0.91 | | | $ | 0.50 | | | $ | 0.62 | |
|
| | | | | | | | | | | |
| New | | Renewal | | All Office |
Leased space (in rentable square feet) | 91,007 |
| | 730,250 |
| | 821,257 |
|
Average term (in years - rentable square foot weighted) | 5.1 |
| | 8.6 |
| | 8.2 |
|
Base rents (per rentable square foot) (1) | $ | 30.02 |
| | $ | 29.69 |
| | $ | 29.73 |
|
Rent concessions (per rentable square foot) (1) | (1.01 | ) | | (0.87 | ) | | (0.88 | ) |
GAAP rents (per rentable square foot) (1) | $ | 29.01 |
| | $ | 28.82 |
| | $ | 28.85 |
|
Tenant improvements (per rentable square foot) (1) | $ | 3.32 |
| | $ | 1.25 |
| | $ | 1.48 |
|
Leasing commissions (per rentable square foot) (1) | $ | 0.89 |
| | $ | 0.65 |
| | $ | 0.67 |
|
__________(1) Weighted average per rentable square foot on an annual basis over the lease term.
| |
(1)
| Weighted average per rentable square foot on an annual basis over the lease term.
|
Annual combined GAAP rents for new and renewal leases signed in the secondthird quarter were $28.85$29.44 per rentable square foot, 13.6%12.5% higher compared to previous leases in the same office spaces.
We strive to maintain a diverse, stable and creditworthy customer base. We have an internal guideline whereby customers that account for more than 3% of our revenues are periodically reviewed with the Company’sCompany’s Board of Directors. As of JuneSeptember 30, 2020,, no customer accounted for more than 3% of our cash revenues other than the Federal Government and Bank of America, which accounted for 4.9%4.8% and 3.9%, respectively, of our cash revenues on an annualized basis. Upon stabilization of the MetLife
III development project in Raleigh, it is expected that MetLife will account for approximately 3.3% of our revenues based on annualized cash revenues for June 2020.September 2020.
Expenses
Expenses
Our expenses primarily consist of rental property expenses, depreciation and amortization, general and administrative expenses and interest expense. From time to time, expenses also include impairments of real estate assets. Rental property expenses are expenses associated with our ownership and operation of rental properties and include expenses that vary somewhat proportionately to occupancy levels, such as janitorial services and utilities, and expenses that do not vary based on occupancy, such as property taxes and insurance. Depreciation and amortization is a non-cash expense associated with the ownership of real property and generally remains relatively consistent each year, unless we buy, place in service or sell assets, since our properties and related building and tenant improvement assets are depreciated on a straight-line basis over fixed lives. General and administrative expenses consist primarily of management and employee salaries and benefits, corporate overhead and short and long-term incentive compensation.
Net Operating Income
Whether or not we record increasing net operating income (“NOI”(“NOI”) in our same property portfolio typically depends upon our ability to garner higher rental revenues, whether from higher average occupancy, higher GAAP rents per rentable square foot or higher cost recovery income, that exceed any corresponding growth in operating expenses. Same property NOI was $3.4$0.9 million, or 0.9%, or 3.1%, higher in the secondthird quarter of 2020 as compared to 2019 due to a decrease of $3.8$5.1 million in same property expenses offset by a decrease of $0.4$4.2 million in same property revenues. WithoutAs a result of reduced usage of our assets because of the COVID-19 pandemic, we expect same property NOI to be lower for the remainder of 2020 as compared to 2019 as lower anticipated rental revenues would be expected to more than offset an anticipated decrease in same property operating expenses. With the fluidity of the COVID-19 pandemic and its uncertain impact on economic activity, we would expect same property NOI tocould be higher for the remainder of 2020 as compared to 2019 as higher rental revenues, mostly because higher average GAAP rents per rentable square foot, would be expected to more than offset an anticipated increase in same property operating expenses, particularly higher property taxes. However, same property NOI will befurther negatively impacted if the COVID-19 pandemic causes losses related to customer difficulties or slower than originally anticipated speculative new leasing. As a result, we cannot estimate whether same property NOI for the remainder of 2020 will be higher or lower as compared to 2019.
In addition to the effect of same property NOI, whether or not NOI increases typically depends upon whether the NOI from our acquired properties and development properties placed in service exceeds the NOI from property dispositions. NOI was $4.5$0.8 million, or 0.7%, or 3.7%, higher in the secondthird quarter of 2020 as compared to 2019 due to acquisitions, higher same property NOI and development properties placed in service, partly offset by NOI lost from property dispositions. We expect NOI to be lower for the remainder of 2020 as compared to 2019 due to NOI lost from property dispositions and lower same property NOI, partly offset by acquisitions and development properties placed in service. Like with same property NOI, NOI will be further negatively impacted if the COVID-19 pandemic causes losses related to customer difficulties or slower than originally anticipated speculative new leasing.
Cash Flows
In calculating net cash related to operating activities, depreciation and amortization, which are non-cash expenses, are added back to net income. We have historically generated a positive amount of cash from operating activities. From period to period, cash flow from operations depends primarily upon changes in our net income, as discussed more fully below under “Results“Results of Operations,”” changes in receivables and payables and net additions or decreases in our overall portfolio.
Net cash related to investing activities generally relates to capitalized costs incurred for leasing and major building improvements and our acquisition, development, disposition and joint venture activity. During periods of significant net acquisition and/or development activity, our cash used in such investing activities will generally exceed cash provided by investing activities, which typically consists of cash received upon the sale of properties and distributions from our joint ventures.
Net cash related to financing activities generally relates to distributions, incurrence and repayment of debt, and issuances, repurchases or redemptions of Common Stock, Common Units and Preferred Stock. We use a significant amount of our cash to
fund distributions. Whether or not we have increases in the outstanding balances of debt during a period depends generally upon the net effect of our acquisition, disposition, development and joint venture activity. We generally use our revolving credit facility for daily working capital purposes, which means that during any given period, in order to minimize interest expense, we may record significant repayments and borrowings under our revolving credit facility.
For a discussion regarding dividends and distributions, see “Liquidity“Liquidity and Capital Resources - Dividends and Distributions.””
Liquidity and Capital Resources
We continue to maintain a conservative and flexible balance sheet. We believe we have ample liquidity. As of July 21,October 20, 2020,, we had approximately $6$120 million of existing cash and zero drawn on our $600 million revolving credit facility, which is scheduled to mature in January 2022. Assuming we are in compliance with our covenants, we have an option to extend the maturity for two additional six-month periods. At JuneSeptember 30, 2020,, our leverage ratio, as measured by the ratio of our mortgages and notes payable and outstanding preferred stock to the undepreciated book value of our assets, was 36.8%37.8% and there were 106.7106.8 million diluted shares of Common Stock outstanding.
Rental and other revenues are our principal source of funds to meet our short-term liquidity requirements. Other sources of funds for short-term liquidity needs include available working capital and borrowings under our revolving credit facility, which had $599.9$599.9 million of availability at July 21, 2020.October 20, 2020. Our short-term liquidity requirements primarily consist of operating expenses, interest and principal amortization on our debt, distributions and capital expenditures, including building improvement costs, tenant improvement costs and lease commissions. Building improvements are capital costs to maintain or enhance existing buildings not typically related to a specific customer. Tenant improvements are the costs required to customize space for the specific needs of customers. We anticipate that our available cash and cash equivalents and cash provided by operating activities and planned financing activities, including borrowings under our revolving credit facility, will be adequate to meet our short-term liquidity requirements. We use our revolving credit facility for working capital purposes and for the short-term funding of our development and acquisition activity and, in certain instances, the repayment of other debt. Continued ability to borrow under the revolving credit facility allows us to quickly capitalize on strategic opportunities at short-term interest rates.
Subject to potential losses in the remainder of 2020 related to customer financial difficulties due to the COVID-19 pandemic, we generally believe existing cash and rental and other revenues will continue to be sufficient to fund short-term liquidity needs such as funding operating and general and administrative expenses, paying interest expense, maintaining our existing quarterly dividend and funding existing portfolio capital expenditures, including building improvement costs, tenant improvement costs and lease commissions. For the full year of 2020, such existing portfolio capital expenditures are expected to be approximately $15 million to $25 million lower as compared to 2019.
Our long-term liquidity uses generally consist of the retirement or refinancing of debt upon maturity, funding of building improvements, new building developments and land infrastructure projects and funding acquisitions of buildings and development land. Our expected future capital expenditures for started and/or committed new development projects were approximately $201$137 million at JuneSeptember 30, 2020.2020. Additionally, we may, from time to time, retire outstanding equity and/or debt securities through redemptions, open market repurchases, privately negotiated acquisitions or otherwise.
We expect to meet our long-term liquidity needs through a combination of:
| |
•
| cash flow from operating activities;
|
| |
•
| bank term loans and borrowings under our revolving credit facility;
|
| |
•
| the issuance of unsecured debt;
|
| |
•
| the issuance of secured debt;
|
| |
•
| the issuance of equity securities by the Company or the Operating Partnership; and
|
| |
•
| the disposition of non-core assets.
|
•cash flow from operating activities;
•bank term loans and borrowings under our revolving credit facility;
•the issuance of unsecured debt;
•the issuance of secured debt;
•the issuance of equity securities by the Company or the Operating Partnership; and
•the disposition of non-core assets.
We have no debt scheduled to mature during the remainder of 2020 or 2021 except for $300$150.0 million principal amount of 3.20% (3.363% effective rate) notes due June 2021. During the remainder of 2020, we forecast funding approximately $89$64 million of our $503$503 million development pipeline, which was approximately 60%70% funded as of JuneSeptember 30, 20202020. We
. We generally believe we will be able to satisfy these obligations with existing cash, borrowings under our revolving credit facility, new bank term loans, issuance of other unsecured debt, mortgage debt and/or proceeds from the sale of additional non-core assets.
Investment Activity
As noted above, a key tenet of our strategic plan is to continuously upgrade the quality of our office portfolio through acquisitions, dispositions and development. We generally seek to acquire and develop office buildings that improve the average quality of our overall portfolio and deliver consistent and sustainable value for our stockholders over the long-term. Whether or
not an asset acquisition or new development results in higher per share net income or funds from operations (“FFO”(“FFO”) in any given period depends upon a number of factors, including whether the NOI for any such period exceeds the actual cost of capital used to finance the acquisition or development. Additionally, given the length of construction cycles, development projects are not placed in service until, in some cases, several years after commencement. Sales of non-core assets could result in lower per share net income or FFO in any given period in the event the resulting use of proceeds does not exceed the capitalization rate on the sold properties.
Results of Operations
Three Months Ended JuneSeptember 30, 2020 and 2019
2019
Rental and Other Revenues
Rental and other revenues were $0.9$6.4 million, or 3.4%, or 0.5%, lower in the secondthird quarter of 2020 as compared to 2019 primarily due to property dispositions and lower same property revenues, which decreased rental and other revenues by $10.7$11.5 million and $0.4$4.2 million, respectively. Same property rental and other revenues were lower primarily due to lower cost recovery income and lower parking income as a result of reduced usage of our assets because of the COVID-19 pandemic and higher credit losses, partly offset by higher average GAAP rents per rentable square foot. These decreases were partly offset by acquisitions and development properties placed in service, which increased rental and other revenues by $9.1$8.9 million and $1.6$0.7 million, respectively. We expect rental and other revenues to be lower for the remainder of 2020 as compared to 2019 due to lost revenue from property dispositions and lower parking incomesame property revenues as a result of reduced usage of our assets because of the COVID-19 pandemic, partly offset by acquisitions and development properties placed in service and higher same property revenues.service. Rental and other revenues, particularly same property revenues, could be further adversely affected, perhaps significantly, in the event customers default on their leases, file bankruptcy and/or otherwise experience significant financial difficulty or slower than originally anticipated speculative new leasing as a result of the COVID-19 pandemic.
Operating Expenses
Rental property and other expenses were $5.4$7.2 million, or 11.3%, or 9.0%, lower in the secondthird quarter of 2020 as compared to 2019 primarily due to lower same property operating expenses and property dispositions, which decreased operating expenses by $3.8$5.1 million and $3.5$4.0 million, respectively. Same property operating expenses were lower primarily due to lower utilities, contract services and repairs and maintenance and contract services as a result of reduced usage of our assets because of the COVID-19 pandemic, partly offset by higher property taxes.pandemic. These decreases were partly offset by acquisitions and development properties placed in service, which increased operating expenses by $1.9 million and $0.4$0.2 million, respectively. We expect rental property and other expenses to be lower for the remainder of 2020 as compared to 2019 due to lower operating expenses from property dispositions partly offset by acquisitions, higherand lower same property operating expenses (net of lower operating expenses as a result of reduced usage of our assets because of the COVID-19 pandemic)pandemic, partly offset by acquisitions and development properties placed in service.
Depreciation and amortization was unchanged$0.5 million, or 0.9%, lower in the secondthird quarter of 2020 as compared to 2019 primarily due to property dispositions, partly offset by acquisitions and development properties placed in service offset by property dispositions.service. We expect depreciation and amortization to be higherlower for the remainder of 2020 as compared to 2019 for similar reasons.
We recorded aggregate impairments of real estate assets of $1.8$5.3 million and $0.5 million in the secondthird quarter of 20202019 as a result of shortened hold periods from classifying all of our assets in Greensboro and 2019, respectively. TheseMemphis as non-core. We recorded no such impairments resulted from changes in market-based inputs and our assumptions about the use of the assets.2020.
General and administrative expenses were $0.5$2.6 million, or 21.9%, or 5.5%, higherlower in the secondthird quarter of 2020 as compared to 2019 primarily due to higher incentive compensation and gains on deferred compensation plan investments in 2020 (which is fully offset by a corresponding increase in deferred compensation that is recorded in other income/(loss)), partly offset by lower severance costs, salaries and benefits associated with the closure of our Greensboro and Memphis offices.offices, lower expensed pre-development costs and lower executive retirement and consulting costs. We expect general and
administrative expenses to be lower for the remainder of 2020 as compared to 2019 due to lower severance costs salaries and benefitssalaries associated with the closure of our Greensboro and Memphis offices and lower executive retirement and consulting costs, partly offset by higher long-term equity incentive compensation.offices.
Interest Expense
Interest expense was $0.5$0.6 million, or 3.1%, or 2.5%, lower in the secondthird quarter of 2020 as compared to 2019 primarily due to higher capitalized interest and lower average interest rates, partly offset by higher average debt balances. We expect interest expense to be lower for the remainder of 2020 as compared to 2019 for similar reasons.
Other Income/(Loss)
Other incomeincome/(loss) was $0.3a loss of $3.3 millionhigher in the secondthird quarter of 2020 as compared to income of $0.2 million in 2019 primarily due to gainslosses on deferred compensation plan investmentsdebt extinguishment in 2020, which is fully offset by a corresponding increase in the deferred compensation expense that is recorded in general and administrative expenses.2020.
Gains on Disposition of Property
Gains on disposition of property were $6.4$6.5 millionlower higher in the secondthird quarter of 2020 as compared to 2019 due to the net effect of the disposition activity in such periods.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates was $0.4$0.1 million, or 12.4%, or 54.1%, higherlower in the secondthird quarter of 2020 as compared to 2019 primarily due to higher average occupancy.lower leasing activity. We generally expect equity in earnings of unconsolidated affiliates to be higher for the remainder of 2020 as compared to 2019 for the same reason.due to higher average occupancy. However, equity in earnings of unconsolidated affiliates could be adversely affected, perhaps significantly, in the event customers of our unconsolidated affiliates default on their leases, file bankruptcy and/or otherwise experience significant financial difficulty as a result of the COVID-19 pandemic.
Earnings Per Common Share - Diluted
Diluted earnings per common share was $0.02lower$0.12 higher in the secondthird quarter of 2020 as compared to 2019 due to a decreasean increase in net income for the reasons discussed above.
SixNine Months Ended JuneSeptember 30, 2020 and 2019
Laser Spine Institute
Laser Spine Institute
In the first quarter of 2019, we provided information on Laser Spine Institute, which occupied a 176,000 square-foot, six-story building with structured parking in Tampa’sTampa’s Westshore submarket, a BBD. The building, developed by us, had been used by Laser Spine Institute for both its company headquarters and an ambulatory surgery center. After the market closed on March 1, 2019, Laser Spine Institute announced it would immediately discontinue its operations. This unexpected announcement affected all of its locations nationwide. As a result of this sudden closure, in the first quarter of 2019, we incurred $5.6 million of credit losses on operating lease receivables and write-offs of $2.3 million of lease incentives, $4.1 million of notes receivable and $11.6 million of tenant improvements and deferred leasing costs.
Rental and Other Revenues
Rental and other revenues were $19.5$13.1 million, or 2.4%, or 5.5%, higher in the first sixnine months ofended September 30, 2020 as compared to 2019 primarily due to acquisitions, higher same property revenues and development properties placed in service, which increased rental and other revenues by $18.1$27.1 million, $12.8$8.8 million and $5.9$6.5 million, respectively. Same property rental and other revenues were higher primarily due to higher average GAAP rents per rentable square foot and no credit losses and write-offs associated with Laser Spine Institute, partly offset by lower cost recovery income and lower parking income as a result of reduced usage of our assets because of the COVID-19 pandemic. These increases were partly offset by lost revenue of $16.7$28.3 million from property dispositions.
Operating Expenses
Rental property and other expenses were $3.8$11.0 million, or 6.0%, or 3.1%, lower in the first sixnine months ofended September 30, 2020 as compared to 2019 primarily due to property dispositions and lower same property operating expenses, which decreased
operating expenses by $5.2$9.2 million and $2.7$7.8 million, respectively. Same property operating expenses were lower primarily due to lower utilities, contract services and repairs and maintenance and contract services as a result of reduced usage of our assets because of the COVID-19 pandemic, partly offset by higher property taxes. These decreases were partly offset by acquisitions and development properties placed in service, which increased operating expenses by $3.7$5.7 million and $1.3$1.5 million, respectively.
Depreciation and amortization was $8.1$8.6 million, or 4.5%, or 6.3%, lower in the first sixnine months ofended September 30, 2020 as compared to 2019 primarily due to accelerated depreciation and amortization of tenant improvements and deferred leasing costs associated with Laser Spine Institute in 2019 and property dispositions, partly offset by acquisitions and development properties placed in service.
WeDuring the nine months ended September 30, 2020, we recorded impairmentsan impairment of real estate assets of $1.8$1.8 million, and $0.5 million in the first six months of2020 and 2019, respectively. These impairments which resulted from changesa change in market-based inputs and our assumptions about the use of the assets. During the nine months ended September 30, 2019, we recorded aggregate impairments of real estate assets of $5.8 million primarily as a result of shortened hold periods from classifying all of our assets in Greensboro and Memphis as non-core.
General and administrative expenses were $0.9$3.5 million, or 10.4%, or 4.2%, lower in the first sixnine months ofended September 30, 2020 as compared to 2019 primarily due to lower long-term equity incentive compensation, partlylower salaries and benefits (partly offset by higher severance costscosts) associated with the closure of our Greensboro and Memphis offices.offices, lower expensed pre-development costs and lower executive retirement and consulting costs.
Interest Expense
Interest expense was $2.0$1.4 million, or 2.3%, or 5.2%, higher in the first sixnine months ofended September 30, 2020 as compared to 2019 primarily due to higher average debt balances, partly offset by lower average interest rates and higher capitalized interest.
Other Income/(Loss)
Other incomeIncome/(Loss)
Other income/(loss) was$0.7 million in the first six months of2020 as compared to a loss of $3.4$2.7 million in the nine months ended September 30, 2020 primarily due to losses on debt extinguishment. Other income/(loss) was a loss of $3.3 million in the nine months ended September 30, 2019 primarily due to the write-off of notes receivable associated with Laser Spine Institute in 2019.Institute.
Gains on Disposition of Property
Gains on disposition of property were $146.7$153.2 millionhigher in the first sixnine months ofended September 30, 2020 as compared to 2019 primarily due to the completion of the first phase of our market rotation plan of exiting the Greensboro and Memphis markets in 2020.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates was $0.7$0.6 million, or 25.2%, or 49.9%, higher in the first sixnine months ofended September 30, 2020 as compared to 2019 primarily due to higher average occupancy.
Earnings Per Common Share - Diluted
Diluted earnings per common share was $1.69$1.81 higher in the first sixnine months ofended September 30, 2020 as compared to 2019 due to an increase in net income for the reasons discussed above.
Liquidity and Capital Resources
Statements of Cash Flows
We report and analyze our cash flows based on operating activities, investing activities and financing activities. The following table sets forth the changes in the Company’sCompany’s cash flows (in thousands):
| | | | | | | | | | | | | | | | | |
| Nine Months Ended
September 30, | | | | |
| 2020 | | 2019 | | Change |
| Net Cash Provided By Operating Activities | $ | 275,459 | | | $ | 286,261 | | | $ | (10,802) | |
| Net Cash Provided By/(Used In) Investing Activities | 80,369 | | | (250,260) | | | 330,629 | |
| Net Cash Provided By/(Used In) Financing Activities | (242,299) | | | 76,880 | | | (319,179) | |
| Total Cash Flows | $ | 113,529 | | | $ | 112,881 | | | $ | 648 | |
|
| | | | | | | | | | | |
| Six Months Ended
June 30, | | |
| 2020 | | 2019 | | Change |
Net Cash Provided By Operating Activities | $ | 180,215 |
| | $ | 173,289 |
| | $ | 6,926 |
|
Net Cash Provided by/(Used In) Investing Activities | 129,729 |
| | (138,827 | ) | | 268,556 |
|
Net Cash Used In Financing Activities | (310,979 | ) | | (31,098 | ) | | (279,881 | ) |
Total Cash Flows | $ | (1,035 | ) | | $ | 3,364 |
| | $ | (4,399 | ) |
The increasechange in net cash provided by operating activities in the first sixnine months ofended September 30, 2020 as compared to 2019 was primarily due to the timing of cash paid for operating expenses and property dispositions, partly offset by higher net cash from the operations of acquisitions, development properties placed in service and same properties and the settlement of cash flow hedges in 2019, partly offset by property dispositions. Without the fluidity of the COVID-19 pandemic and its uncertain impact on economic activity, we would2019. We expect net cash related to operating activities to be higher for the remainder of 2020 as compared to 2019 due to acquisitions, and development properties placed in service and the settlement of cash flow hedges in 2019,same properties, partly offset by property dispositions. However,With the fluidity of the COVID-19 pandemic and its uncertain impact on economic activity, net cash related to operating activities willcould be negatively impacted if the COVID-19 pandemic causes losses related to customer difficulties or slower than originally anticipated speculative new leasing. As a result, we cannot estimate whether net cash related to operating activities for the remainder of 2020 will be higher or lower as compared to 2019.
The change in net cash provided by/(used in) investing activities in the first sixnine months ofended September 30, 2020 as compared to 2019 was primarily due to net proceeds from disposition activity in 2020, non-refundable earnest money deposits for the acquisition of Bank of America Tower at Legacy Union in Charlotte in 2019 and higher acquisition activity in 2019, partly offset by higher investments in development in-process in 2020. We expect uses of cash for investing activities for the remainder of 2020 to be primarily driven by whether or not we acquire and commence development of additional office buildings in the BBDs of our markets. Additionally, as of JuneSeptember 30, 2020,, we have approximately $201$137 million left to fund of our previously-announced development activity in 2020 and future years. We expect these uses of cash for investing activities will be partly offset by proceeds from property dispositions for the remainder of 2020.2020.
The increasechange in net cash provided by/(used inin) financing activities in the first sixnine months ofended September 30, 2020 as compared to 2019 was primarily due to higher net debt borrowings in 2019. Assuming the net effect of our acquisition, disposition and development activity in 2020 results in an increase to our assets, we would expect outstanding debt and/or Common Stock balances to increase.
Capitalization
The following table sets forth the Company’sCompany’s capitalization (in thousands, except per share amounts):
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| | | |
| Mortgages and notes payable, net, at recorded book value | $ | 2,469,554 | | | $ | 2,543,710 | |
| | | |
| Preferred Stock, at liquidation value | $ | 28,826 | | | $ | 28,859 | |
| Common Stock outstanding | 103,908 | | | 103,756 | |
| Common Units outstanding (not owned by the Company) | 2,842 | | | 2,724 | |
| Per share stock price at period end | $ | 33.57 | | | $ | 48.91 | |
| Market value of Common Stock and Common Units | $ | 3,583,598 | | | $ | 5,207,937 | |
| Total capitalization | $ | 6,081,978 | | | $ | 7,780,506 | |
|
| | | | | | | |
| June 30,
2020 | | December 31,
2019 |
Mortgages and notes payable, net, at recorded book value | $ | 2,337,662 |
| | $ | 2,543,710 |
|
Preferred Stock, at liquidation value | $ | 28,843 |
| | $ | 28,859 |
|
Common Stock outstanding | 103,897 |
| | 103,756 |
|
Common Units outstanding (not owned by the Company) | 2,842 |
| | 2,724 |
|
Per share stock price at period end | $ | 37.33 |
| | $ | 48.91 |
|
Market value of Common Stock and Common Units | $ | 3,984,567 |
| | $ | 5,207,937 |
|
Total capitalization | $ | 6,351,072 |
| | $ | 7,780,506 |
|
At JuneSeptember 30, 2020,, our mortgages and notes payable and outstanding preferred stock represented 37.3%41.1% of our total capitalization and 36.8%37.8% of the undepreciated book value of our assets. See also “Executive“Executive Summary - Liquidity and Capital Resources.””
Our mortgages and notes payable as of JuneSeptember 30, 2020 consisted of $94.3$93.8 million of secured indebtedness with an interest rate of 4.0% and $2,255.3$2,390.2 million of unsecured indebtedness with a weighted average interest rate of 3.45%3.42%. The secured indebtedness was collateralized by real estate assets with an undepreciated book value of $147.4 million.$147.6 million. As of JuneSeptember 30, 2020,, $264.0 $150.0 million of our debt does not bear interest at fixed rates or is not protected by interest rate hedge contracts.
Investment Activity
Investment Activity
In the normal course of business, we regularly evaluate potential acquisitions. As a result, from time to time, we may have one or more potential acquisitions under consideration that are in varying stages of evaluation, negotiation or due diligence, including potential acquisitions that are subject to non-binding letters of intent or enforceable contracts. Consummation of any transaction is subject to a number of contingencies, including the satisfaction of customary closing conditions. No assurances can be provided that we will acquire any properties in the future. See “Item“Item 1A. Risk Factors - Recent and future acquisitions and development properties may fail to perform in accordance with our expectations and may require renovation and development costs exceeding our estimates”estimates” in our 2019 Annual Report on Form 10-K.
On October 1, 2020, we sold a building in Greensboro for a sale price of $4.6 million and expect to record a gain on disposition of property of $1.3 million.
During the secondthird quarter of 2020, we acquired development land in Raleigh for a purchase price, including capitalized acquisition costs, of $2.3 million.
On July 1, 2020, we sold two buildings in Memphis for an aggregate sale price of $23.3$23.3 million and expect to recordrecorded aggregate gains on disposition of property of $9.3 million.
$9.4 million. During the second quarter of 2020, we sold land in Atlanta for a sale price of $2.8 million and recorded a loss on disposition of property of $0.1 million. During the secondthird quarter of 2020, we also recognized $0.4$0.6 million of gainaggregate gains related to the satisfactiondisposition of a performance obligation as partproperty in the first quarter of a 2016 land sale.2020.
During the second quarter of 2020, we recorded an impairment of real estate assets of $1.8 million, which resulted from a change in market-based inputs and our assumptions about the use of the assets.
As of JuneSeptember 30, 2020,, we were developing 0.9 million rentable square feet of office properties. The following table summarizes these announced and in-process office developments:
| | Property | | Market | | Rentable Square Feet | | Anticipated Total Investment (1) | | Investment
As Of
June 30, 2020 (1) | | Pre Leased % | | Estimated Completion | | Estimated Stabilization | Property | | Market | | | Rentable Square Feet | | Anticipated Total Investment (1) | | Investment
As Of
September 30, 2020 (1) | | Pre Leased % | | Estimated Completion | | Estimated Stabilization |
| | | | ($ in thousands) | | | | | | | | | | | ($ in thousands) | | | | | | | |
GlenLake Seven (2) | | Raleigh | | 125,700 |
| | $ | 43,881 |
| | $ | 30,738 |
| | 100.0 | % | | 1Q 21 | | 1Q 21 | GlenLake Seven (2) | | Raleigh | | | 125,700 | | | $ | 43,881 | | | $ | 31,492 | | | 100.0 | % | | 1Q 21 | | 1Q 21 |
Virginia Springs II | | Nashville | | 111,000 |
| | 37,900 |
| | 20,059 |
| | — |
| | 4Q 20 | | 3Q 22 | Virginia Springs II | | Nashville | | | 111,000 | | | 37,900 | | | 24,072 | | | 5.3 | | | 4Q 20 | | 3Q 22 |
Midtown One (3) | | Tampa | | 150,000 |
| | 71,300 |
| | 34,462 |
| | — |
| | 2Q 21 | | 4Q 22 | |
Midtown West (3) | | Midtown West (3) | | Tampa | | | 150,000 | | | 71,300 | | | 42,015 | | | 6.6 | | | 2Q 21 | | 4Q 22 |
Asurion | | Nashville | | 552,800 |
| | 285,000 |
| | 153,563 |
| | 98.3 |
| | 4Q 21 | | 1Q 22 | Asurion | | Nashville | | | 552,800 | | | 285,000 | | | 205,089 | | | 98.3 | | | 4Q 21 | | 1Q 22 |
| | 939,500 |
| | $ | 438,081 |
| | $ | 238,822 |
| | 71.2 | % | | |
| | | | 939,500 | | | $ | 438,081 | | | $ | 302,668 | | | 72.9 | % | |
|
During the first quarter of 2020, we entered into separate equity distribution agreements with each of Wells Fargo Securities, LLC, BofA Securities, Inc., BTIG, LLC, Capital One Securities, Inc., Fifth Third Securities, Inc., Jefferies LLC, J.P. Morgan Securities LLC, Regions Securities LLC and SunTrust Robinson Humphrey, Inc. Under the terms of the equity distribution agreements, the Company may offer and sell up to $300.0 million in aggregate gross sales price of shares of Common Stock from time to time through such firms, acting as agents of the Company or as principals. Sales of the shares, if any, may be made by means of ordinary brokers’brokers’ transactions on the New York Stock Exchange (“NYSE”(“NYSE”) or otherwise at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices or as otherwise agreed with any of such firms. The Company did not issue any shares of Common Stock under these agreements during the secondthird quarter of 2020.2020.
We are currently in compliance with financial covenants and other requirements with respect to our consolidated debt. Although we expect to remain in compliance with these covenants and ratios for at least the next year, depending upon our future operating performance, property and financing transactions and general economic conditions, we cannot assure you that we will continue to be in compliance.
available for common stockholders per share should never be considered as alternatives to net income, net income available for common stockholders, or net income available for common stockholders per share as indicators of the Company’sCompany’s operating performance.
In calculating FFO, the Company includes net income attributable to noncontrolling interests in the Operating Partnership, which the Company believes is consistent with standard industry practice for REITs that operate through an UPREIT structure. The Company believes that it is important to present FFO on an as-converted basis since all of the Common Units not owned by the Company are redeemable on a one-for-one basis for shares of its Common Stock.
