Should You Retain Highwoods (HIW) Stock in Your Portfolio Now?
Highwoods Properties, Inc.’s HIW portfolio of premium office properties concentrated in the high-growth markets of the Sun Belt region, with favorable demographic trends, is well-poised to benefit from the healthy demand for premier office spaces.
Amid the recovering United States office real estate market and healthy demand, Highwoods has been witnessing a rebound in new leasing volume. In the fourth quarter of 2022, it leased 923.9 million square feet of second-generation office space, including 0.34 million square feet of new leases.
More so, the next cycle of office-space demand will likely be driven by an inbound business migration and significant investments made by office occupiers to expand their footprint in the Sun Belt regions. This is expected to boost the demand for HIW’s high-quality portfolio of office assets in the forthcoming quarters.
A well-diversified tenant base assures stable rental revenues for the company.
Highwoods follows an aggressive capital-recycling program. Over the years, it has disposed of non-core properties and has redeployed the proceeds to expand its footprint in the high-growth best business districts (BBD) markets through acquisitions and development activities.
Notably, from the beginning of 2019 through 2022, the company completed its exit from Greensboro and Memphis, and entered Charlotte and Dallas, two higher-growth markets with greater upside prospects. It intends to fund these developments by disposing of its non-core assets in Pittsburgh over the next few years.
Moreover, Highwoods’ development projects in key markets seem encouraging. As of Dec 31, 2022, its development pipeline aggregated $517.6 million (at the company’s share).
On the balance sheet front, Highwoods had around $25 million of available cash and $392 million drawn on its $750-million revolving credit facility as of Jan 27, 2023. Also, investment-grade ratings of BBB/Baa2, with a stable outlook from S&P Global Ratings and Moody’s, render the company favorable access to the debt market. With enough financial flexibility, HIW is well-positioned to capitalize on growth opportunities.
The company’s trailing 12-month return on equity (ROE) is 6.41% compared with the industry’s average of 3.60%, indicating that it is more efficient in using shareholders’ funds than its peers.
Nonetheless, a choppy office market environment could soften the demand for the company’s properties, hurting leasing volume in the near term. Also, intense competition from industry peers can limit its ability to retain tenants at relatively higher rents and dent its pricing power.
The elevated supply of office properties in certain markets weighs on Highwoods. This is likely to affect the company’s ability to backfill vacated space and strain the occupancy levels of its office properties. For 2023, management anticipates occupancy between 89% and 91%. Our estimate for the same is pegged at 90.2%.
Interest rate hikes are likely to increase borrowing costs, affecting the company’s ability to purchase or develop real estate. We expect interest expenses in 2023 to rise 18.3% year over year.
HIW currently carries a Zacks Rank #4 (Sell).
Its shares have lost 18.6% in the quarter-to-date period compared with the industry’s fall of 1%.
Image Source: Zacks Investment Research
Stocks to Consider
Some better-ranked stocks from the REIT sector are Alexandria Real Estate Equities ARE and Terreno Realty TRNO, each currently carrying a Zacks Rank #2 (Buy), and Service Properties Trust SVC, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Alexandria Real Estate’s 2023 FFO per share is pegged at $8.95.
The Zacks Consensus Estimate for Terreno Realty’s current-year FFO per share stands at $2.17.
The Zacks Consensus Estimate for Service Properties Trust’s 2023 FFO per share is pegged at $1.89.
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
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