Should You Retain Highwoods Properties Stock in Your Portfolio Now?
Highwoods Properties HIW is well-poised to capitalize on tenants’ growing preference for premium office spaces with class-apart amenities. An aggressive capital-recycling program bodes well. However, competition from other industry players is likely to limit its pricing power and hurt profitability.
In September 2024, Highwoods announced that the company has signed 738,000 square feet of second-generation leases since July 1, 2024, including new leases spanning more than 400,000 square feet.
Shares of HIW have risen 27.1% over the past three months compared with the industry's upside of 20.1%. Analysts also seem bullish on this Zacks Rank #3 (Hold) company, with the Zacks Consensus Estimate for its 2024 funds from operations (FFO) per share revised upward marginally over the past month to $3.59.
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What’s Aiding Highwoods Properties?
Highwoods has a well-diversified tenant base that includes several bellwethers. A large part of its portfolio is concentrated in high-growth Sun Belt markets, which have long-term favorable demographic trends and are expected to continue experiencing above-average job growth. This is likely to support Highwoods’ rent growth over the long term. Its average in-place cash rent witnessed a CAGR of 4.2% from 2013 to the second quarter of 2024. In the second quarter of 2024, its average in-place cash rent witnessed growth of 4.8% per square foot year over year.
Highwoods is seeing a recovery in demand for its high-quality, well-placed office properties, as highlighted by a rebound in new leasing volume. Since the beginning of the year 2024 through Sept. 9, this REIT has signed 37% more new deals than the whole of 2023. This marks a solid recovery in demand for the company’s properties.HIW is seeing an increasing number of tenants returning to offices or announcing plans to come back. This is likely to support office real estate market fundamentals in the upcoming quarters.
Highwoods follows a disciplined capital-recycling strategy that entails disposing of non-core assets and redeploying the proceeds in premium asset acquisitions and accretive development projects. Over the past years, the company has made efforts to expand its footprint in high-growth best business district markets and improve the quality of the overall portfolio on the back of acquisitions and development. From 2010 to 2023, Highwoods completed buyouts worth $3.6 billion, while dispositions totaled $3.0 billion.
Highwoods has adequate liquidity from cash in hand, cash flows from operating activities and other financing sources to meet short-term liquidity needs. As of June 30, 2024, the company had around $27 million of available cash and a revolving credit facility of $750 million. In the second quarter of 2024, Highwoods generated 80.7% unencumbered net operating income (at the company’s share), providing scope to tap additional secured debt capital if required.
What’s Hurting Highwoods Properties?
Highwoods faces intense competition from developers, owners and operators of office properties as well as other commercial real estate, including sublease space available from its tenants. This restricts its ability to attract and retain tenants at relatively higher rents than its competitors and hinders its leasing activity. Management anticipates average occupancy to lie in the range of 87-89% in 2024. It also expects that occupancy will trough in the first half of next year.
Although the Federal Reserve has announced a rate cut, the interest rate is still high and is a concern for Highwoods. Elevated rates imply high borrowing costs for the company, affecting its ability to purchase or develop real estate. The company has a substantial debt burden, and its net debt as of June 30, 2024 was approximately $3.25 billion.
Stocks to Consider
Some better-ranked stocks from the broader REIT sector are Cousins Properties CUZ and Lamar Advertising LAMR, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Cousins Properties’ current-year FFO per share has been raised marginally over the past week to $2.67.
The Zacks Consensus Estimate for Lamar Advertising’s current-year FFO per share has moved northward marginally over the past two months to $8.09.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO), a widely used metric to gauge the performance of REITs.
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Highwoods Properties, Inc. (HIW) : Free Stock Analysis Report
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