OREANDA-NEWS. Fitch Ratings has affirmed and withdrawn the following ratings for Highwoods Properties, Inc. and its operating partnership Highwoods Realty, L.P. (collectively, HIW):

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

Highwoods Realty Limited Partnership
--IDR at 'BBB';
--Senior unsecured line of credit at 'BBB';
--Senior unsecured term loans at 'BBB';
--Senior unsecured notes at 'BBB'.

The Rating Outlook is Stable.

Fitch has chosen to withdraw the ratings for Highwoods for commercial reasons.

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 good contingent liquidity provided by unencumbered assets, which cover unsecured debt by 2.1x, on a pro forma basis that includes the sale of the company's Country Club Plaza (CCP) asset.

The company's focus on capital intensive office properties in less supply constrained secondary urban and suburban markets, as well as a shortfall under Fitch's base case liquidity analysis and the company's high adjusted funds from operations (AFFO) payout ratio are ratings limiting factors.

APPROPRIATE CREDIT METRICS
Fitch expects HIW's leverage to sustain in the mid-to-high 5.0x range through 2018 assuming low single digit same store net operating income (SSNOI) growth, successful stabilization of its development pipeline.

The company's leverage was 6.3x as of Dec. 31, 2015 and 6.0x on an annualized fourth-quarter 2015 basis, which includes a full period contribution from the company's $440 million of acquisitions on Sept. 30, 2015. This compares to 5.7x and 5.8x for the years ended 2014 and 2013, respectively. Fitch defines leverage as consolidated debt net of readily available cash for debt repayment over 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).

Fixed charge coverage (FCC) should sustain in the high 2.0x range through 2018, supported by lower interest cost on debt refinancings in addition to the internal growth and development completions that support Fitch's leverage expectations.

Fixed charge coverage was 2.9x for the year ended Dec. 31, 2015 compared to 2.6x in 2014 and 2.7x in 2013. 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
Fitch expects Highwoods to increase its development risk exposure during the next one-to-three years. HIW has moderately increased its speculative development starts, primarily adjacent to existing owned assets with healthy tenant demand. The company's development pipeline was 76.8% pre-leased based on total estimated investment at the end of 2015 compared to 88.9% at Dec. 31, 2014, excluding developments placed in service. The company also plans to selectively replenish its land bank during 2016.

Highwoods had $333 million of unfunded development spending commitments that comprised 6.1% of gross assets at Dec. 31, 2015, compared to 6.1% and 3.7% at Dec. 31, 2014 and 2013, respectively.

ELEVATED NEAR-TERM MATURITIES
Sixteen percent of the company's debt matures during 2016, primarily comprised of the $350 million unsecured bridge loan facility associated with its Monarch Centre and SunTrust Financial Centre acquisitions completed during 3Q15. The company plans to repay borrowings under its bridge loan with a portion of the $660 million of proceeds from its CCP asset sale expected to close on March 1, 2016. HIW also has roughly $44 million of consolidated mortgage maturities that Fitch expects the company to refinance with unsecured borrowings. Fitch expects HIW's portfolio will be 100% unencumbered when it repays its last maturing mortgage during 2017.

MODERATE LIQUIDITY PRESSURE
Fitch's stressed liquidity analysis shows HIW's sources of liquidity covering its uses of liquidity by only 0.8x between Jan. 1, 2016 to Dec. 31, 2017 period (on a pro forma basis including the sale of CCP), resulting in an approximate $368 million deficit. Unfunded development expenses of $330 million and the company's high (63% drawn) revolver utilization rate are the principal reasons for the shortfall.

Fitch expects the company to bridge the funding gap with asset sales, unsecured borrowings and equity issuance under the company's $250 million at-the-market equity program. HIW's unencumbered asset pool can provide liquidity in a more challenged capital markets environment.

The liquidity shortfall is driven in part by a $299 million balance on the $475 million line of credit at Dec. 31, 2015 that matures in 2018. The company's 37% line availability compares with a median availability of roughly 80% for the office REIT sector at Dec. 31, 2015.

Highwoods 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 roughly 25% 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.

SOLID INTERNAL GROWTH
Fitch expects HIW's GAAP same store NOI (SSNOI) to increase by 3% in 2016 and 2% in 2017 and 2018. The company's 1.4% average SSNOI growth during the last five years was moderately (+50 bps) higher than its peers, largely due to its strong (+6.7%) 2015 growth. Over longer periods, HIW's SSNOI growth has generally trailed CBD focused office REITs by a small margin, although it has outpaced many of its suburban office peers.

HIW's occupancy rate averaged 90.7% during the last five years, which exceeds 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. Cash and GAAP rent spreads have shown mixed trends during the last three years. The company's cash rent spreads were negative 1%, negative 2% and negative 7% during 2015, 2014 and 2013, respectively. GAAP lease spreads were 10% during 2015, 10% during 2014 and 5% during 2013.

WEAK DIVIDEND COVERAGE, MODESTLY IMPROVING
The company's AFFO payout ratio improved to 91% during 2015 from 100.5% and 95.3% during 2014 and 2013, respectively. However, the payout ratio remains elevated and limits HIW's internally generated liquidity.

Fitch views 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% in 2016 and 2% in 2017 and 2018,
--Acquisitions of $100 million per year during the 2016 to 2018 projection period at 6% cap rates,
--Dispositions of $150 million per annum through 2018 at an 8% cap rate,
--Development spending of $150 million during 2016, $325 million during 2017 and $100 million during 2018,
--Development deliveries of roughly $115 million, $400 million and $200 million at 8% yields in 2016, 2017 and 2018, respectively,
--Capital spending within a range of $100 million to $125 million per annum through 2018,
--Incremental unsecured debt issuance of $250 million during 2016, $750 million during 2017 and $500 million during 2018 at yields of 4%, 4.25% and 4.5%, respectively,
--HIW pays a $100MM special dividend during 2016.

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 Dec. 31, 2015 was 6.3x);
--Maintaining a fixed charge coverage ratio above 2.5x (fixed charge coverage was 2.9x for the year ended Dec. 31, 2015);
--Unencumbered asset coverage of unsecured debt assuming a stressed 9% cap rate above 2.5x (coverage is currently 1.5x).

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.