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Highwoods to Enter Charlotte, Exit Greensboro & Memphis

Zacks Equity Research

Highwoods Properties HIW has come up with a number of strategic investment actions, in an effort to fortify its Best Business District (“BBD”) office focus.

Specifically, the company has agreed to acquire Bank of America Tower at Legacy Union for a total investment of $436 million, in a bid to enter CBD Charlotte. This entry is likely to be match-funded through asset sales and the acquisition is slated to close in November 2019.

Particularly, the company plans to exit Greensboro and Memphis markets. In Greensboro, its portfolio includes 2,672,000 square feet of industrial space, 1,151,000 square feet of office space and 30 acres of development land. Assets in Memphis comprise 1,656,000 square feet of office space.

Markedly, the company has a two-phase plan for departure. In the first phase, it will be selling a hand-picked portfolio of assets in Greensboro and Memphis by mid-2020. The sales price will come close to the $436 million total investment for Bank of America Tower at Legacy Union. The rest of the assets will be sold in the second phase, which has no pre-planned schedule.

The plan to enter CBD Charlotte with the Bank of America Tower acquisition is a strategic fit for the company. This marks an iconic asset buyout in a prime infill location in a top-tier submarket, offering the company a solid footing in a higher-growth market and platform to expand its presence. This LEED gold-registered office building comprises 841,000 square feet and is presently 90% leased. On the basis of existing leases, the Bank of America Tower is projected to generate cash net operating income of $22.9 million during 2020.

Notably, Highwoods has been making concerted efforts to expand footprint in high-growth markets and improve portfolio quality. In addition, the company is following a disciplined capital-recycling strategy that entails disposing of non-core assets and investing the proceeds in premium asset acquisitions and for undertaking accretive development projects. It is currently focused on developing office properties in BBDs. Notably, the latest market rotation plan is expected to help Highwoods ride on growth trajectory over the long run.

With the completion of the buyout, planned phase one of market exit and anticipated G&A savings, the move is projected to be roughly neutral to the company’s current funds from operations (FFO) run rate. Further, the lease-ups at the Charlotte office asset offer additional upside potential to the NOI and bolster its cash flows.

Shares of this Zacks Rank #3 (Hold) company have gained 13.6% so far this year compared with its industry’s 23.4% rally.

Stocks to Consider

Some better-ranked stocks from the real-estate space include Alexandria Real Estate Equities, Inc. ARE, Extra Space Storage Inc. EXR and Prologis, Inc. PLD, each carrying a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Alexandria Real Estate’s Zacks Consensus Estimate for 2019 funds from operations (FFO) per share has moved marginally north to $6.98 in the past two months.

Extra Space Storage’s FFO per share estimates for the current year have inched up 0.8% to $4.86 over the past month.

Prologis’ Zacks Consensus Estimate for the ongoing year’s FFO per share has moved up slightly to $3.27 in a month’s time.

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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