Fitch Affirms Highwoods' IDR at 'BBB'; Outlook Stable
KEY RATING DRIVERS
Fitch's ratings for HIW reflect the company's credit metrics, which are consistent with a 'BBB' rated office REIT with the company's asset profile. HIW owns a high quality real estate portfolio within its core Southeast and Mid-Atlantic markets that has a granular tenant base with solid credit quality and manageable lease expirations over the next several years. HIW also has adequate financial flexibility and good contingent liquidity provided by unencumbered assets, which cover unsecured debt by 2.1x assuming a stressed 9% cap rate.
Factors that balance these credit strengths include the company's portfolio focus on capital intensive office properties in secondary urban and suburban markets with fewer barriers to new supply, as well as a modest shortfall under Fitch's base case liquidity analysis driven by elevated utilization under the line of credit and the company's high adjusted funds from operations (AFFO) payout ratio.
APPROPRIATE CREDIT METRICS
Fitch expects HIW's leverage to sustain in the mid-to-high 5.0x range through 2017 assuming low single digit same store net operating income (SSNOI) growth, successful stabilization of its development pipeline and moderate (\\$50 million per year) equity issuance.
Fitch's leverage projection for the company would increase to roughly 6.0x over the projection period absent our equity issuance assumption and holding all other assumptions constant (see KEY ASSUMPTIONS section below). Notably, the company's shares trade at a 4.7% discount to the SNL Financial consensus NAV estimate versus an average 10.3% discount for all office REITs and 4.5% discount for all equity REITs.
The company's trailing-12 month (TTM) leverage was 5.7x at March 31, 2015. This compares to 5.7x and 5.8x for the years ended 2014 and 2013, respectively. Fitch defines leverage as recurring operating EBITDA (excluding non-cash (above)/below market lease income and non-cash stock compensation expense, but including recurring cash distributions from joint ventures) over consolidated debt net of readily available cash for debt repayment.
Fixed charge coverage should improve to the low 3.0x range in 2017, supported by lower interest expense through debt refinancings, as well as the internal growth and development completions that support Fitch's leverage expectations.
Fixed charge coverage was 2.6x for the TTM ended March 31, 2015, compared to 2.6x in 2014 and 2.7x in 2013. Fitch expects that coverage will improve to the high 2x to low 3.0x range over the next 12-24 months, driven by low-single digit same-store NOI (SSNOI) growth, incremental cash flow from development completions and value-add acquisitions, and continued access to debt capital at favorable rates. Fitch defines FCC as recurring operating EBITDA, less recurring capital expenditures and straight-line rent adjustments, divided by total cash interest incurred and preferred dividends.
PRE-LEASING MITIGATES DEVELOPMENT RISK
The cost to complete HIW's development pipeline grew to 5.5% of gross assets at March 31, 2015, compared to 6.1% at Dec. 31, 2014 and 3.7% in 2013. High pre-lease rates (the pipeline is currently 93% pre-leased) mitigate the risk from growth in HIW's unfunded development commitments by reducing leasing risk inherent in the development business.
MINIMAL NEAR-TERM REFINANCING RISK
Less than 10% of the company's debt matures through Dec. 31, 2016, and HIW does not face any unsecured debt maturities until 2017, which limits corporate refinancing risk. Fitch expects HIW to be 100% unencumbered when it refinances its last maturing mortgage during 2017.
LIQUIDITY AND DEBT STRUCTURE
Fitch's stressed liquidity analysis shows HIW's sources of liquidity covering its uses of liquidity by only 0.7x between April 1, 2015 to Dec. 31, 2016 period, leading to an approximate \\$200 million deficit. Unfunded development expenses of \\$280 million and the company's high (48% drawn) revolver utilization rate are the principal reasons for the shortfall.
HIW's liquidity coverage improves to 0.9x on a pro forma basis that includes \\$125 million of proceeds from the company's recast term loan completed during 2Q'15. The company used the proceeds to repay debt, including 39 million of secured mortgage debt and a portion of its outstanding revolver borrowings. Fitch's projected deficit for HIW declines to \\$90 million after making these adjustments.
Fitch expects the company to bridge the funding gap with asset sales and unsecured debt/equity issuance under the company's \\$250 million at-the-market equity program. HIW's \\$3.5 billion unencumbered asset pool (based on a stressed 9% cap rate) can provide liquidity in a more challenged capital markets environment. The company's unencumbered assets cover its unsecured debt (UA/UD) by 2.1x at March 31, 2015.
The liquidity shortfall is driven in part by a \\$228 million balance on the \\$475 million line of credit at March 31, 2015 that matures in 2018. The company's 52% line availability compares with a median availability of roughly 80% for the office REIT sector at March 31, 2015.
HIW has also maintained higher utilization historically; the line was 43% drawn on average at the end of each year between 2006 and 2014 compared to 24% for its peers. Fitch does not expect the elevated balance to impact credit quality in the near term given an accommodating capital markets environment and minimal near-term debt maturities; however, the company is less well positioned to handle an unanticipated, stressed liquidity environment similar to late 2008-2009.
BELOW PEER INTERNAL GROWTH
Fitch expects HIW's GAAP same store NOI (SSNOI) to increase by 3.5% in 2015 and 2016, followed by 3% growth in 2017. The company's SSNOI growth has historically been lower and more volatile than its office REIT peers. Fitch attributes this to its secondary market locations and related lower barriers to new supply.
HIW's 0.4% average SSNOI growth during the last five years was moderately (40 bps) below its peers, largely due to its negative rent cash spreads for new and renewal leases. Importantly, HIW's SSNOI growth has outpaced many of its suburban office peers and the margin of underperformance to the broader office REIT sector (including CBD focused peers) is small.
HIW's largest markets as a percent of annualized base rent (ABR) include Atlanta (16.0% of ABR), Raleigh (15.7%), Nashville (14.3%), Tampa (10.9%) and Pittsburgh (9.1%) as of March 31 2015. Positively, the company has increasingly targeted ownership within the better submarkets that have historically outperformed their broader respective markets. The company has also improved asset quality within its submarkets. Class A properties comprise 76% of the portfolio square feet compared to 38% at year-end 2004.
HIW's occupancy rate averaged 89.8% during the last five years has exceeded its market averages (and was slightly above its peers), suggesting the company's better quality assets are garnering more than their fair share of demand. Rent growth has been challenging but has shown some improvement during the last six months. The company's cash rent spreads were negative 2%, negative 7% and negative 7% during 2014, 2013 and 2012, respectively. However, spreads turned modestly (less than 1%) positive during the last two quarters. GAAP lease spreads were 10% during 2014, 5% during 2013 and 2%.
WEAK DIVIDEND COVERAGE, MODESTLY IMPROVING
The company's first-quarter 2015 AFFO payout ratio improved to 96.4% from 100.5% during 2014 and was 95.3% in 2013 and 98.6% in 2012.; however, the high payout ratio limits HIW's ability to generate internal liquidity.
Fitch views a reluctance by REITs generally to cut dividends when AFFO payout ratios are near, or exceed 100% as speaking to management's investor priorities, recognizing that the REIT structure requires a careful balancing of investor constituencies. High payout ratios are only one of many credit metrics, not as important to credit evaluation as leverage, unencumbered asset coverage and other liquidity measures.
KEY ASSUMPTIONS
Fitch's key assumptions within its rating case for the issuer include:
--SSNOI growth of 3.5% in 2015 and 2016 and 3% in 2017,
--Acquisitions of \\$125 million per year during the 2015 to 2017 projection period at cap rates of 6%,
--Dispositions of \\$150 million during 2015, \\$125 million during 2016 and \\$100 million during 2017 at an 8.25% cap rate,
--Development spending of \\$175 million during 2015, \\$150 million during 2016 and \\$100 million during 2017,
--Development deliveries of roughly \\$175 million, \\$115 million and \\$200 million at 8% yields in 2015, 2016 and 2017, respectively,
--Capital spending slightly north of \\$100 million per annum through 2017,
--Incremental unsecured debt issuance of \\$125 million during 2015, \\$350 million during 2016 and \\$250 million during 2017 at yields of 4.0%, 4.3% and 4.5%, respectively,
--Equity issuance of \\$50 million per year during the forecast period.
RATING SENSITIVITIES
The following factors may have a positive impact on Highwoods' ratings and/or Outlook:
--Fitch's expectation of leverage sustaining below 5.5x (leverage at March 31, 2015 was 5.7x);
--Maintaining a fixed charge coverage ratio above 2.5x (fixed charge coverage was 2.6x for the TTM ended March 31, 2015);
--Unencumbered asset coverage of unsecured debt assuming a stressed 9% cap rate above 2.5x (coverage is currently 2.1x).
The following factors may have a negative impact on the company's ratings and/or Outlook:
--A persistent shortfall in the company's liquidity coverage under Fitch's stressed liquidity analysis, in the context of Highwoods' historical above peer revolver utilization.
--Fitch's expectation of leverage sustaining above 6.5x.
--Fitch's expectation of fixed-charge coverage sustaining below 2.0x.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Highwoods Properties, Inc.
--IDR at 'BBB';
--Preferred stock at 'BB+'.
Highwoods Realty Limited Partnership
--IDR at 'BBB';
--Senior unsecured lines of credit at 'BBB';
--Senior unsecured term loans at 'BBB';
--Senior unsecured notes at 'BBB'.
Комментарии