Highwoods Properties HIW is well poised to capitalize on tenants’ growing preference for premium office spaces with class-apart amenities. An aggressive capital-recycling program bodes well. However, competition from other industry players is likely to limit its pricing power and hurt profitability.

What’s Aiding Highwoods Properties?

Highwoods is seeing a recovery in demand for its high-quality, 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 and 61,000 square feet of first-generation leases. HIW 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 in the upcoming quarters.

Highwoods has a well-diversified tenant base that includes several bellwethers. A large part of its portfolio is concentrated in high-growth Sun Belt markets with favorable demographic trends, which are expected to continue experiencing above-average job growth. This is likely to 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 follows a disciplined capital-recycling strategy that entails disposing of non-core assets and redeploying the proceeds in premium asset acquisitions and accretive development projects. Over the past years, the company has made efforts to expand its footprint in high-growth, best business district markets and improve the quality of the overall portfolio on the back of acquisitions and development. From 2010 to the third quarter of 2024, Highwoods completed buyouts worth $3.6 billion, while dispositions totaled $3.0 billion.

Highwoods has adequate liquidity from cash in hand, cash flows from operating activities and other financing sources to meet short-term liquidity needs. As of Sept. 30, 2024, the company had around $23.7 million of available cash and a revolving credit facility of $644.9 million. In the third quarter of 2024, Highwoods generated 83.3% unencumbered net operating income (at the company’s share), providing scope to tap additional secured debt capital if required.

Shares of HIW have risen 7.4% over the past six months against the industry's downside of 3.2%.

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What’s Hurting Highwoods Properties?

Highwoods faces intense competition from developers, owners and operators of office properties, as well as other commercial real estate, including sublease space available from its tenants. This restricts its ability to attract and retain tenants at relatively higher rents than its competitors and hinders its leasing activity. Management anticipates average occupancy to lie in the range of 87-89% in 2024. It also expects that occupancy will trough in the first half of 2025, though it will be better than the year-end of 2024.

Despite the Federal Reserve announcing rate cuts in recent times, the interest rate is still high and is a concern for Highwoods. The company has a substantial debt burden with a net debt of around $3.26 billion as of Sept. 30, 2024. In the third quarter of 2024, interest expenses increased 9.4% year over year.

Analysts seem bearish on this Zacks Rank #3 (Hold) company, with the Zacks Consensus Estimate for its 2024 funds from operations (FFO) per share lowered marginally over the past month to $3.61.

Stocks to Consider

Some better-ranked stocks from the broader REIT sector are Cousins Properties CUZ and OUTFRONT Media OUT, 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’ 2025 FFO per share has been raised marginally over the past month to $2.74.

The Zacks Consensus Estimate for OUTFRONT Media’s 2025 FFO per share has been revised northward marginally over the past two months to $1.90.

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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