Shares of Highwoods Properties HIW have rallied 37.9% year to date (YTD), outperforming the industry’s growth of 3.1%.

Last October, HIW reported third-quarter 2024 funds from operations (FFO) per share of 90 cents, which beat the Zacks Consensus Estimate of 88 cents. However, the figure was lower than the prior-year quarter’s 93 cents.

Quarterly results reflected healthy leasing activity with rent growth amid rising demand for premium office spaces. However, higher interest expenses undermined the results to an extent. HIW raised its outlook for 2024.

Analysts seem positive on this Zacks Rank #3 (Hold) company, with the Zacks Consensus Estimate for its 2024 FFO per share revised marginally northward to $3.61 over the past month.

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Factors Behind HIW Stock Price Surge: Will the Trend Last?

Highwoods’ portfolio is largely concentrated in high-growth Sun Belt markets, which have long-term favorable demographic trends and are expected to continue experiencing above-average job growth. This will likely support Highwoods’ rent growth over the long term. During the third quarter of 2024, its average in-place cash rent witnessed growth of 3.9% per square foot year over year.

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. During the third quarter of 2024, the company signed 906,000 square feet (875,000 square feet at the company’s share) of second-generation leases. This includes new leases spanning 530,000 square feet (500,000 square feet at the company’s share). During the third quarter, Highwoods signed 61,000 square feet of first-generation leases.

Going forward, the next cycle of office space demand is likely to be driven by inbound migration and significant investments announced by office occupiers to expand their footprint in Sun Belt regions, as well as additional hiring plans in the company’s markets. Moreover, the company has a well-diversified tenant base that includes several bellwethers.It is seeing an increasing number of tenants returning to offices or announcing plans to come back. This is likely to support office real estate market fundamentals.

HIW 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. It has made efforts over the years to improve its portfolio quality by expanding its footprint in the high-growth best business district markets through acquisitions and development initiatives. Since the beginning of the year through Sept. 30, 2024, Highwoods completed dispositions worth $84 million. Management expects an additional disposition of up to $150 million in 2024.

The company maintains a healthy balance sheet, with no consolidated debt maturities until the second quarter of 2026. As of Sept. 30, 2024, the company had around $23.7 million of cash and cash equivalents and $644.9 million of unused capacity under its revolving credit facility. In the third quarter of 2024, Highwoods generated 83.3% unencumbered NOI (at the company’s share). Investment-grade ratings of BBB-/Baa2 from S&P and Moody’s render the company access to the debt market at favorable rates.

Key Risks for HIW

Competition from developers, owners and operators of office properties and a significant development outlay are likely to weigh on Highwoods.

Stocks to Consider

Some better-ranked stocks from the broader REIT sector are Cousins Properties CUZ and Welltower WELL, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Cousins Properties’ 2024 FFO per share stands at $2.68, which indicates an increase of 2.29% from the year-ago reported figure.

The Zacks Consensus Estimate for Welltower’s 2024 FFO per share is pegged at $4.26, which suggests year-over-year growth of 17.03%.

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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