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 and a healthy balance sheet bode well. However, competition from other industry players is likely to limit its pricing power and hurt profitability. High interest expenses add to its woes.

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. In the fourth quarter of 2024, the company signed 1.3 million square feet of second-generation leases. This includes new leases spanning 370,000 square feet. During the same period, Highwoods signed 161,000 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 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.

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. The company has made efforts to expand its footprint in high-growth BBD markets and improve the quality of the overall portfolio with acquisitions and development. In March 2025, Highwoods acquired Advance Auto Parts Tower, a 20-story, Class AA office tower. The property, spanning around 346,000 square feet, is located in Raleigh’s mixed-use North Hills BBD. The move will boost HIW’s portfolio to capitalize on the rising demand for high-quality offices.

The company is also focused on development projects in key markets, which are likely to generate considerable annual net operating income (NOI) upon completion and stabilization. As of Dec. 31, 2024, Highwoods’ development pipeline aggregated $514 million (at the company’s share) and is 58.8% pre-leased.  Upon stabilization, the company expects these projects to provide more than $30 million incremental NOI and be a significant driver of cash flows.

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 Dec. 31, 2024, the company had around $34 million of available cash and $119 million drawn on its $750 million revolving credit facility. In the fourth quarter of 2024, Highwoods generated 83.3% unencumbered NOI (at the company’s share), providing scope to tap additional secured debt capital if required.

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.

Despite the Federal Reserve announcing rate cuts late in 2024, the interest rate is still high and is a concern for Highwoods. The company has a substantial debt burden, and its net debt, as of Dec. 31, 2024, was $3.28 billion. In the fourth quarter of 2024, interest expenses increased 5.6% year over year to $37.3 million.

Shares of HIW have fallen 9% over the past three months compared with the industry's downside of 2.1%. Analysts seem bearish on this Zacks Rank #3 (Hold) company, with the Zacks Consensus Estimate for its 2025 funds from operations (FFO) per share being lowered marginally over the past week to $3.38.

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Stocks to Consider

Some better-ranked stocks from the broader REIT sector are Ventas VTR and Cousins Properties CUZ,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 Ventas’ 2025 FFO per share has been raised marginally northward to 3.44 over the past month.

The Zacks Consensus Estimate for Cousins Properties’2025 FFO per share has been raised marginally upward to 2.79 over the past month.

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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This article originally published on Zacks Investment Research (zacks.com).

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