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Highwoods Properties’ Falling Funds from Operations Payout Ratio



Constant dividend

As mentioned in the previous part of this series, Highwoods Properties’ (HIW) FFO (funds from operations) increased to $2.90 per share in 2014, compared with $2.81 per share in 2013. Despite higher FFO per share, the company maintained its dividend at $1.70 per common share in fiscal 2014. For the last ten years, there has been no change in the company’s dividend and it has remained constant at $1.70 per share. The company is likely to maintain the same dividend for fiscal 2015 as well.

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Importance of dividends

REITs such as Highwoods Properties must pay at least 90% of taxable income to investors as dividends. For REITs, dividends come primarily from the relatively stable and predictable stream of rents paid by the tenants who occupy the properties. Rental rates usually rise during periods of inflation as many lease rates are tied to inflation. As a result, REIT dividends are protected, to a large extent, from the long-term effects of rising prices.

Lower FFO payout ratio

FFO payout ratio is the dividend declared per common share divided by diluted FFO per common share for a given period. FFO payout ratio provides investors with relevant and useful information as it measures the portion of FFO being declared as dividends to shareholders. Though Highwoods Properties’ payout ratio has remained relatively high over the past six years, it is gradually declining. Whereas the FFO payout ratio was 65.9% in 2010, it declined to 58.1% in 2013 and 56.8% in 2014.

Peer group comparison

In comparison to peers’ ratios, Highwoods Properties’ FFO payout ratio was on the higher side in 2014. Boston Properties (BXP) offered an FFO payout ratio of 134.6% and Columbia Property Trust (CXP) offered 62.2%. Boston Properties’ higher dividend was due to a one-time special dividend in 2014. Kilroy Realty (KRC) had a lower FFO payout ratio at 46.4%. The iShares Cohen & Steers REIT ETF (ICF) invests ~0.93% of its portfolio in Highwoods Properties. Continue to the next part of this series for a discussion on Highwoods Properties’ debt position.


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