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Is it Wise to Retain Highwoods (HIW) Stock in Your Portfolio?
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Highwoods Properties (HIW - Free Report) is well-poised to benefit from the growing demand for its premier office properties concentrated in high-growth Sun Belt markets. An aggressive capital-recycling program and accretive development projects are other tailwinds. A healthy balance sheet position augurs well. However, competition from other industry peers and high interest rates are key concerns.
What’s Aiding It?
Highwoods has a large part of its portfolio being concentrated in high-growth Sun Belt markets and the company is poised to benefit from this portfolio focus. These markets exhibit promising long-term favorable demographic trends and are expected to continue experiencing above-average job growth. The company also has a well-diversified tenant base that includes several industry bellwethers. These factors are expected to support the company’s rent growth over the long term.
Highwoods is seeing a recovery in demand for its high-quality and well-placed office properties as highlighted by a rebound in new leasing volume. The company leased 698,229 square feet of second-generation office space in the fourth quarter, including 266,697 square feet of new leases. From Jan 1, 2024 to Mar 1, 2024, the company has leased more than 700,000 square feet of second-generation office space, including more than 300,000 square feet of new leases.
With the next cycle of office space demand likely to be driven by inbound migration and significant investments announced by office occupiers to expand their footprint in the Sun Belt regions, as well as additional hiring plans in the company’s markets, it is likely to experience healthy demand for its properties, boosting leasing activity. Also, the rise in the number of tenants returning to offices will act as a tailwind.
Highwoods has been following a disciplined capital-recycling strategy that entails disposing of non-core assets and redeploying the proceeds in premium asset acquisitions and accretive development projects. The company has made concerted efforts over the years to improve its portfolio quality by expanding its footprint in the high-growth best business districts markets through acquisitions and development initiatives.
Moreover, HIW’s focus on development projects in key markets, which are likely to generate meaningful annual net operating income upon completion and stabilization seems encouraging.
The company maintains a healthy balance sheet position, with no consolidated debt maturities until May 2026. As of Jan 26, 2023, it had around $15 million of available cash and $36 million drawn on its $750 million revolving credit facility. It enjoyed investment-grade ratings of BBB/Baa2 from S&P and Moody’s as of the end of the fourth quarter of 2023, rendering it access to the debt market at favorable rates. Hence, with sound financial footing, Highwoods seems well-positioned to capitalize on long-term growth opportunities.
Over the past three months, shares of this Zacks Rank #3 (Hold) company have gained 1.7% against the industry’s fall of 2.4%.
Image Source: Zacks Investment Research
What’s Hurting It?
Highwoods faces intense competition from developers, owners and operators of office properties, as well as other commercial real estate. This is likely to restrict its ability to attract and retain tenants at relatively higher rents than its competitors and hurt leasing activity. It could also impact the company’s ability to acquire high-quality properties at favorable prices.
The overall office demand in some markets is likely to remain subdued in the near term. Further, higher development activities across the company’s markets will likely result in new supply in the upcoming period. This will likely affect its ability to backfill vacated space and strain occupancy levels of its office properties. Management anticipates occupancy to dip in late 2024 and early 2025 and expects average occupancy in the range of 87-89%. Our estimate is pegged at 87.3%.
A high interest rate is another concern for HIW. Elevated rates imply high borrowing costs for the company, affecting its ability to purchase or develop real estate. As of Dec 31, 2023, it had a substantial debt burden and its net debt was approximately $3.27 billion. For the first quarter of 2024, we project a year-over-year increase in the company’s interest expense.
The Zacks Consensus Estimate for HST’s 2024 funds from operation (FFO) per share has moved 1.6% northward over the past month to $1.92.
The Zacks Consensus Estimate for LAMR’s current-year FFO per share has been raised marginally over the past month to $7.74.
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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Is it Wise to Retain Highwoods (HIW) Stock in Your Portfolio?
Highwoods Properties (HIW - Free Report) is well-poised to benefit from the growing demand for its premier office properties concentrated in high-growth Sun Belt markets. An aggressive capital-recycling program and accretive development projects are other tailwinds. A healthy balance sheet position augurs well. However, competition from other industry peers and high interest rates are key concerns.
What’s Aiding It?
Highwoods has a large part of its portfolio being concentrated in high-growth Sun Belt markets and the company is poised to benefit from this portfolio focus. These markets exhibit promising long-term favorable demographic trends and are expected to continue experiencing above-average job growth. The company also has a well-diversified tenant base that includes several industry bellwethers. These factors are expected to support the company’s rent growth over the long term.
Highwoods is seeing a recovery in demand for its high-quality and well-placed office properties as highlighted by a rebound in new leasing volume. The company leased 698,229 square feet of second-generation office space in the fourth quarter, including 266,697 square feet of new leases. From Jan 1, 2024 to Mar 1, 2024, the company has leased more than 700,000 square feet of second-generation office space, including more than 300,000 square feet of new leases.
With the next cycle of office space demand likely to be driven by inbound migration and significant investments announced by office occupiers to expand their footprint in the Sun Belt regions, as well as additional hiring plans in the company’s markets, it is likely to experience healthy demand for its properties, boosting leasing activity. Also, the rise in the number of tenants returning to offices will act as a tailwind.
Highwoods has been following a disciplined capital-recycling strategy that entails disposing of non-core assets and redeploying the proceeds in premium asset acquisitions and accretive development projects. The company has made concerted efforts over the years to improve its portfolio quality by expanding its footprint in the high-growth best business districts markets through acquisitions and development initiatives.
Moreover, HIW’s focus on development projects in key markets, which are likely to generate meaningful annual net operating income upon completion and stabilization seems encouraging.
The company maintains a healthy balance sheet position, with no consolidated debt maturities until May 2026. As of Jan 26, 2023, it had around $15 million of available cash and $36 million drawn on its $750 million revolving credit facility. It enjoyed investment-grade ratings of BBB/Baa2 from S&P and Moody’s as of the end of the fourth quarter of 2023, rendering it access to the debt market at favorable rates. Hence, with sound financial footing, Highwoods seems well-positioned to capitalize on long-term growth opportunities.
Over the past three months, shares of this Zacks Rank #3 (Hold) company have gained 1.7% against the industry’s fall of 2.4%.
Image Source: Zacks Investment Research
What’s Hurting It?
Highwoods faces intense competition from developers, owners and operators of office properties, as well as other commercial real estate. This is likely to restrict its ability to attract and retain tenants at relatively higher rents than its competitors and hurt leasing activity. It could also impact the company’s ability to acquire high-quality properties at favorable prices.
The overall office demand in some markets is likely to remain subdued in the near term. Further, higher development activities across the company’s markets will likely result in new supply in the upcoming period. This will likely affect its ability to backfill vacated space and strain occupancy levels of its office properties. Management anticipates occupancy to dip in late 2024 and early 2025 and expects average occupancy in the range of 87-89%. Our estimate is pegged at 87.3%.
A high interest rate is another concern for HIW. Elevated rates imply high borrowing costs for the company, affecting its ability to purchase or develop real estate. As of Dec 31, 2023, it had a substantial debt burden and its net debt was approximately $3.27 billion. For the first quarter of 2024, we project a year-over-year increase in the company’s interest expense.
Stocks to Consider
Some better-ranked stocks from the REIT sector are Host Hotels & Resorts (HST - Free Report) and Lamar Advertising (LAMR - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for HST’s 2024 funds from operation (FFO) per share has moved 1.6% northward over the past month to $1.92.
The Zacks Consensus Estimate for LAMR’s current-year FFO per share has been raised marginally over the past month to $7.74.
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.