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Should You Hold Highwoods (HIW) Stock in Your Portfolio?

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In this article:
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Highwoods Properties, Inc. HIW is following a disciplined capital-recycling strategy that entails disposing of non-core assets and using the proceeds for premium asset acquisitions and undertaking accretive development projects. In sync with this, in August 2019, the company announced a market-rotation plan, per which, it aims to fortify its best business district office focus, and exit Greensboro and Memphis through a two-phased planned departure.

Recently, Highwoods announced the sale of office properties worth $89.6 million in Memphis, which marks the first closing of sales under the company’s market-rotation plan. Prior to this, it had acquired Bank of America Tower at Legacy Union, indicating solid progress with its market-rotation plan.

Moreover, healthy job market environment is likely to help maintain steady demand for office spaces. Particularly, Highwoods is experiencing stable demand from existing and prospective tenants. Also, the company is addressing its lease expirations and has rolled over its two largest 2021 lease expirations by signing two long-term renewal leases.

Furthermore, Highwoods has a strong balance sheet and is trying to lower its leverage further. As of third-quarter end, the company’s debt had a weighted average maturity of 6.7 years, while unencumbered net operating income was 96.4%. A robust balance sheet, along with capital reaped through debt and equity, positions the REIT well to capitalize on future growth opportunities.

Moreover, solid dividend payouts are arguably the biggest enticement for REIT investors, and Highwoods remains committed to this. Its 2.7% increase in its fourth-quarter 2018 dividend announced in February 2019 represented third consecutive year of common dividend hike. Subsequently, the company has maintained the same payout.

However, though the company’s development pipeline worth $500 million seems encouraging for long-term growth, it exposes the REIT to various operational risks such as construction cost overruns. In addition, Highwoods’ efforts to shed non-core assets will have dilutive effect on earnings in the near term.

Also, the company faces intense competition from developers, owners and operators of office properties and other commercial real estates, including sublease space available from its tenants. This restricts its ability to attract and retain tenants at relatively higher rents than its competitors. It also affects Highwoods’ ability to acquire properties at favorable prices.

Further, the REIT’s assets are mainly concentrated in Atlanta, Nashville, Raleigh and Tampa. As of Sep 30, 2019, the contribution from these markets to the company’s annualized cash revenues were 18.8%, 18.7%, 17% and 13%, respectively. Hence, any economic or political downturn in these markets might affect its performance.

The Zacks Consensus Estimate for 2019 funds for operation (FFO) has moved marginally down to $3.32 over the past 30 days. Also, this Zacks Rank #3 (Hold) company has underperformed its industry in the past year. Shares of Highwoods have recorded growth of 20.8%, underperforming the industry’s rise of 24.4% in the period.

Key Picks

EastGroup Properties, Inc. EGP currently carries a Zacks Rank of 2 (Buy). The company’s FFO per share estimates for 2019 have been revised marginally upward to $4.96 in two months’ time. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Duke Realty's DRE Zacks Consensus Estimate for 2019 FFO per share has moved marginally north to $1.44 in the past two months. It carries a Zacks Rank of 2, at present.

PS Business Parks, Inc.’s PSB Zacks Consensus Estimate for 2019 FFO per share has remained unchanged at $6.74 over the past month. Currently, it carries a Zacks Rank of 2.

Note: Anything related to earnings presented in this write-up represent 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
PS Business Parks, Inc. (PSB) : Free Stock Analysis Report
Duke Realty Corporation (DRE) : Free Stock Analysis Report
EastGroup Properties, Inc. (EGP) : Free Stock Analysis Report
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