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Neutral Stance on Highwoods

Zacks Equity Research

On Sep 27, 2013, we reaffirmed our long-term recommendation on Highwoods Properties Inc. (HIW) – a real estate investment trust (:REIT) – at Neutral. The move depicts the company’s decent second-quarter results, strategic portfolio restructuring activity, solid operating metrics and a strong and flexible balance sheet. Yet, stiff competition, rising interest rates and a volatile office sector remain our plausible concerns.

Why Neutral?

Highwoods’ second-quarter 2013 core FFO (funds from operations) per share of 70 cents exceeded the Zacks Consensus Estimate by a penny and was in line with the year-ago figure. This was driven by decent leasing and efficient capital deployment efforts as well as cash net operating income growth. Moreover, Highwoods also raised its full-year 2013 FFO per share guidance, on the back of expected accretive acquisitions.

Likewise, we expect Highwoods to benefit from its concerted efforts to expand its footprint in high growth markets, through premium assets acquisitions. In addition to this, the company is disposing non-core assets and investing the amount to boost further expansions.

In this context, Highwoods’ CBD Nashville-buyout and purchase of joint venture partners’ interest are noteworthy. In addition, the company’s exit from the Atlanta industrial market, through significant divestitures, is commendable. These activities bode well for Highwoods’ long-term growth.

Highwoods also received a rating upgrade from Standard & Poor's Ratings Services, which boosts its creditworthiness. This was based on Highwoods’ improving balance sheet position along with the successful execution of acquisition and development activities.

However, the weak office market scenario at present remains a plausible concern for the company. In addition, stiff competition from commercial property developers, dependency of retail assets on local market conditions and rising interest rates remain headwinds.

Over the last 30 days, the Zacks Consensus Estimate for both 2013 and 2014 FFO per share remained stable at $2.80 and $2.88, respectively. The stock currently has a Zacks Rank #3 (Hold).

Other Stocks to Consider

Better performing REITs that are worth a look include Sovran Self Storage Inc. (SSS), CubeSmart (CUBE) and Sotherly Hotels Inc. (SOHO). All the stocks carry a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on HIWRead the Full Research Report on CUBERead the Full Research Report on SOHORead the Full Research Report on SSSZacks Investment Research