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Analyst Blog

On Jul 5, 2013, we reaffirmed our long-term recommendation on Highwoods Properties Inc. (HIW - Analyst Report), a real estate investment trust (REIT), at Neutral. Our decision rests on the company’s successful portfolio repositioning measures. However, continued volatility in the office sector with job cuts, and stiff competition from commercial property developers remain our concerns.

Why Neutral?

Highwoods’ first-quarter 2013 core FFO per share missed the Zacks Consensus Estimate by a penny and the prior-year quarter figure by 2 cents. The company has successfully implemented its strategic plans of portfolio repositioning. These position Highwoods favorably for growth. However, a rise in operating expenses acted as the dampener.

As part of the restructuring activity, Highwoods recently bought a Class A office property – One Alliance Center – which is the sister building of its previously acquired Two Alliance Center. The consequent strength in balance sheet and liquidity position will likely help the company to take advantage of distressed asset selling as office and retail asset values continue to fall post recession.                                                                                 

However, continued volatility in the office sector along with job cuts and depressed market fundamentals may limit the company’s growth prospects. Moreover, stiff competition from commercial property developers remains a headwind.

Over the last 60 days, the Zacks Consensus Estimate for FFO per share for 2013 rose 0.4% to $2.76. However, for 2014, the Zacks Consensus Estimate for FFO per share dropped 0.3% to $2.84. Almost unchanged estimates made this a Zacks Rank #3 (Hold) stock.

Other REITs to Consider

Some better performing REITs include CommonWealth REIT , Sunstone Hotel Investors Inc. (SHO - Snapshot Report) and Winthrop Realty Trust (FUR - Snapshot Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

Note: Funds from operations, a widely used metric to gauge the performance of REITs, are obtained after adding depreciation and amortization and other non-cash expenses to net income.

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