NEW YORK - (Business Wire) Fitch Ratings has affirmed the following ratings for Highwoods Properties, Inc. (NYSE: HIW) and Highwoods Realty Limited Partnership.
Highwoods Properties, Inc. (Highwoods or REIT)
-- Issuer Default Rating (IDR) 'BBB-';
-- Preferred stock 'BB+'.
Highwoods Realty Limited Partnership
-- IDR 'BBB-';
-- Senior unsecured notes 'BBB-';
-- Unsecured revolving credit facility 'BBB-'.
The Rating Outlook is Stable.
Fitch's affirmations reflect the solid improvement in Highwoods' operating performance of its wholly owned 312 in-service office, industrial and retail properties geographically diversified in the southeastern United States, and Fitch calculated unencumbered asset coverage of unsecured debt (book value of unencumbered real estate assets divided by total unsecured debt), which at 2.0 times (x) as of June 30, 2008 provides ample protection to unsecured bondholders. During fiscal year 2007 and the first six months of 2008, Highwoods exhibited solid improvement in its recurring operating performance. Higher revenue (slightly offset by higher property operating expenses) led to substantially higher recurring EBITDA for the 12 months ending June 30, 2008 as compared to the fiscal year ending Dec. 31, 2006. Strong top line revenue growth of more than 16.5% since 2005 has driven EBITDA fixed charge coverage (recurring EBITDA less capital expenditures less straight-line rent adjustments, divided by interest expense, capitalized interest and preferred dividends) higher by 56 basis points (bps) to 1.82x for the 12 months ending June 30, 2008 from fiscal year ending Dec. 31, 2006. Also, same store NOI growth more than doubled to 2.5% for the 12 month period ending June 30, 2008 from 1.2% in 2007.
The affirmations are also reflective of the strength of Highwoods' funding profile, which is composed mostly of unsecured debt (60% of total debt as of June 30, 2008), which gives the company the ability to reposition assets if needed through market cycles. Further, Highwoods has a manageable debt maturity schedule with only 11% of all debt outstanding (excluding maturity of Highwoods' unsecured revolving credit facility) maturing by the end of 2009. In addition, while Highwoods engages in development, development in process is not a significant portion of gross depreciable property (3.8% as of June 30, 2008) and generally the properties under development are not very risky as the properties in process of development are 68% pre-leased.
The proposed ratings also point to the strength of Highwoods' management team, including senior officers as well as property managers.
Fitch's credit concerns revolve around the slight increase in leverage, weak risk-adjusted capitalization, the company's presence primarily in less supply-constrained secondary markets and declining operating fundamentals in Highwoods' more challenged markets (Nashville, Tampa and Atlanta). Each of these markets has weakening fundamentals, generally due to oversupply of office space as well as some new supply expected to be added in the next few years. As of June 30, 2008, total leverage (defined as total debt and preferred stock divided by undepreciated book capital) was 53.6%. Although total leverage has increased from 51.8% as of Dec. 31, 2006, Fitch believes that leverage remains consistent with the rating category. In addition, Highwoods' debt/recurring EBITDA ratio was 6.5x as of June 30, 2008, up slightly from 6.3x as of Dec. 31, 2007, but also supportive of a 'BBB-' IDR. The company's risk-adjusted capitalization ratio is not sufficient for the 'BBB' rating category at 0.82x and 0.85x, as of June 30, 2008 and Dec. 31, 2006, respectively, due primarily to capital charges applied to the company's stabilized office properties.
The Stable Outlook reflects the fact that property performance on a portfolio-wide basis has been strong and Fitch expects performance will continue to improve due to the company's strategic management plan, initiated in 2005, to sell non-core assets and develop more desirable properties in key markets. Further, Highwoods is an experienced real estate operator in these southeastern U.S. secondary markets. However, Fitch will continue to monitor Highwoods' operating performance in its weaker markets.
Founded in 1978, Highwoods Properties, Inc. is a Raleigh-based REIT in the business of providing leasing, management, development, construction and other customer-related services for its properties and for third parties. At June 30, 2008, Highwoods had $3.0 billion in total book assets and $3.487 million in undepreciated book capital. At June 30, 2008, the company wholly owned 312 in-service office, industrial and retail properties; 96 rental residential units; 610 acres of undeveloped land suitable for future development, of which 475 acres are considered core holdings; and an additional 10 properties under development.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings, New York
Kimberly Chan, +1-212-908-0346
Taqim Spradley, +1-212-908-0291
Media Relations: Sandro Scenga, +1-212-908-0278
