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TEXT - Fitch rates Highwoods Realty Limited Partnership
December 13, 2012 / 6:21 PM / 5 years ago

TEXT - Fitch rates Highwoods Realty Limited Partnership

Dec 13 - Fitch Ratings assigns a credit rating of 'BBB-' to the $250 million
aggregate principal amount 3.625% senior unsecured notes due 2023 issued by
Highwoods Realty Limited Partnership, a subsidiary of Highwoods Properties, Inc.
 (NYSE: HIW). The notes are due Jan. 15, 2023, were issued at 
98.9% of par and priced to yield 3.752%. 

Highwoods expects to use the net proceeds to reduce amounts outstanding under 
the Company's $475 million revolving credit facility and for general corporate 

Fitch currently rates Highwoods Properties as follows: 

Highwoods Properties, Inc. 
--Issuer Default Rating (IDR) 'BBB-';
--Preferred stock 'BB'. 

Highwoods Realty Limited Partnership
--Long-term IDR 'BBB-';
--Unsecured revolving credit facility 'BBB-';
--Unsecured term loans 'BBB-';
--Senior unsecured notes 'BBB-.' 

The Rating Outlook is Stable. 

The 'BBB-' IDR reflects Highwoods' improved asset portfolio that is 
well-positioned in its core markets, a granular, strong credit quality tenant 
base, and manageable lease expiration and debt maturity schedules. These 
strengths are tempered by challenging office operating fundamentals in many of 
these markets, which have resulted in stagnant same-store NOI growth and 
difficult leasing conditions. This is evident by elevated capital expenditures 
and sustained negative cash rent spreads. 

However, Fitch expects Highwoods' leverage and coverage metrics to remain 
appropriate for the rating over the next 12-to-24 months. The Stable Outlook 
considers Highwoods' adequate liquidity and access to capital and solid 
unencumbered asset coverage of unsecured debt, partially offset by Fitch's 
expectation of soft property-level fundamentals. 

The economic recovery remains fragile, with the high unemployment rate 
continuing to adversely impact business prospects of many of Highwoods' current 
tenants, and general office space users. Highwoods' portfolio is focused 
primarily in the Southeast region, with the top four markets represented by 
Raleigh (16.3% of annualized cash revenue), Atlanta (15.2%), Tampa (12.8%) and 
Nashville (11.9%). The company has also continued to grow in the Pittsburgh 
market, which Fitch views favorably. The recent acquisition of EQT Plaza is 
consistent with management's strategy to expand the company's footprint in 
downtown Pittsburgh, which is expected to see above-average demand and robust 
fundamentals over the near to medium-term. 

Highwoods' geographic focus, with exposure to some weaker markets with lower 
barriers to entry, has resulted in same-store NOI declines of 0.6%, 2.9% and 
2.8% for 2011, 2010 and 2009, respectively. Operating performance has seen 
positive momentum more recently, however, with 5.4% same-store NOI growth in 
first quarter-2012 (1Q'12), 1.8% in 2Q'12 and 2.7% in 3Q'12. This was driven by 
an increase in same-store occupancy, which has seen sustained improvement to 
90.4% at 3Q'12 from 90.0% at 3Q'11. 

Occupancy improvement has been partially offset by continued rent declines. 
Office cash rollover rents declined 6% in 1Q'12, 6.3% in 2Q'12 and 9.7% in 
3Q'12. This follows significant declines in 2010-2011 that ranged from 5% to 
12.4%. Despite the decline, average cash rental rates for all in-place leases 
were flat year-over-year. This was driven by contractual rent escalators and 
recent acquisitions and dispositions, which have had a higher net effect on 
in-place rents. 

Highwoods' portfolio benefits from solid tenant diversification. The top 10 
tenants represent 21% of annual base rent (ABR) as of Sept. 30, 2012. In 
addition, the US Federal Government is the largest tenant, contributing 7.2% of 
ABR as of Sept. 30, 2012 (down from 8.9% at Sept. 30, 2011). Highwoods also has 
a well-laddered lease expiration schedule, with an average of 12% of annual base
rent expiring in each of the next five years. This should mitigate the impact of
further rent declines. 

From 2006 - 2011, Highwoods underperformed in comparison to a selected group of 
office REIT peers by 40bps in same-store NOI performance and 130 bps in 
occupancy rates. However, Highwoods outperformed its markets on an average NOI 
basis (as followed by Property & Portfolio Research (PPR)) by nearly 100 bps for
the same timeframe. Highwoods competes in markets with more private developers. 
This enables Highwoods to utilize its stronger liquidity and access to capital 
to attract and retain tenants. Few of the selected REIT peers own properties in 
the same markets as HIW. 

Highwoods has solid fixed charge coverage levels despite same-store NOI 
deterioration since early 2009. Fixed charge coverage has declined to 2.1x for 
the twelve months ended Sept. 30, 2012 from 2.2x for full year 2009, but remains
appropriate for the 'BBB-' rating. Fitch defines fixed charge coverage as 
recurring operating EBITDA less recurring capital expenditures, less straight 
line rent adjustments, divided by interest expense, capitalized interest, and 
preferred dividends. 

Leverage (measured as net debt to trailing twelve months recurring operating 
EBITDA) was 5.7x as of Sept. 30, 2012, compared with 6.7x and 5.4x at Dec. 31, 
2011 and 2010, respectively. Highwoods has made ample progress in de-levering 
since executing debt-financed acquisitions in Pittsburgh and Atlanta in late 
2011. Leverage is appropriate for the 'BBB-' rating and is expected to remain so
during the forecast period. Highwoods uses a prudent combination of asset sales,
common equity and unsecured debt to finance growth and repay debt maturities. 

Fitch views Highwoods' elevated adjusted funds from operations (AFFO) payout 
ratio as a credit concern given it has paid out more than 100% of AFFO in common
dividends since 2010. Highwoods maintained the dividend level through the 
downturn while also electing to pay the common dividend entirely in cash, rather
than utilize a combination of cash and stock. 

Additionally, difficult leasing conditions in HIW's markets have led to elevated
recurring capital expenditures, which have pressured AFFO. This high payout 
limits Highwoods' ability to generate internal liquidity. In turn, it will 
result in Highwoods needing to draw on its credit facility or source other forms
of liquidity to fund a portion of the common dividend. An AFFO payout ratio in 
excess of 100% is inconsistent with an investment-grade rating and could have 
negative rating implications. 

The Stable Outlook reflects Fitch's view that Highwoods' credit metrics will 
remain in an acceptable range for a 'BBB-' rating. The Outlook also takes into 
account Fitch's expectation that Highwoods will maintain adequate liquidity and 
appropriate coverage of unsecured debt by unencumbered assets. 

Pro-forma for the bond issuance, sources of liquidity (unrestricted cash, 
availability from Highwoods' unsecured revolving credit facility, projected 
retained cash flows from operating activities after dividends and distributions)
divided by uses of liquidity (pro rata debt maturities and projected recurring 
capital expenditures) result in a liquidity coverage ratio of 1.6x for the 
period from October 1, 2012 through Dec. 31, 2014. 

If Highwoods refinanced 80% of its secured debt due in the period, its liquidity
coverage would be a strong 3.0x. In addition, Highwoods has a well-laddered debt
maturity schedule with no unsecured debt maturities until the revolver in 2015. 
However, this facility may be extended at Highwoods option to 2016. 

Highwoods has historically maintained strong coverage of unsecured debt by 
unencumbered assets. The implied value of unencumbered assets (calculated as 
unencumbered NOI divided by a stressed capitalization rate of 9%) covered 
unsecured debt by 2.1x as of June 30, 2012. Fitch deems this adequate for a 
'BBB-' rating, though it has fallen since 2009 (when it was approximately 2.9x).

The two-notch differential between Highwoods IDR and preferred stock rating is 
consistent with Fitch's criteria for corporate entities with an IDR of 'BBB-'. 
Based on Fitch research on 'Treatment and Notching of Hybrids in Nonfinancial 
Corporates and REIT Credit Analysis' dated Dec. 15, 2011, these securities are 
deeply subordinated and have loss absorption elements that would likely result 
in poor recoveries in a corporate default. 

Fitch does not anticipate positive rating momentum over the near term. That 
said, the following factors may result in positive momentum on the ratings or 
Rating Outlook: 

--Fitch's expectation of fixed-charge coverage sustaining above 2.25x (fixed 
charge coverage was 2.1x for the 12 months ended Sept. 30, 2012); 

--Fitch's expectation of leverage sustaining below 5.5x (leverage was 5.7x as of
Sept. 30, 2012);

--Fitch's expectation of unencumbered asset coverage of unsecured debt 
sustaining above 2.5x (implied unencumbered asset value calculated as annualized
unencumbered property NOI dividend by a 9.0% capitalization rate);

--Demonstrated consistent access to the unsecured bond markets;

--Maintaining a healthy liquidity surplus. 

Conversely, the following factors may precipitate negative momentum on 
Highwoods' ratings and/or Outlook: 

--Fitch's expectation of fixed charge coverage declining below 1.75x;

--Fitch's expectation of leverage increasing above 6.75x;

--A sustained decline in unencumbered asset coverage of unsecured debt below 

--An AFFO payout ratio exceeding 100%.

Our Standards:The Thomson Reuters Trust Principles.
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