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On Apr 18, 2013, we reiterated our long-term recommendation on Highwoods Properties Inc. (HIW - Analyst Report), a real estate investment trust (REIT), at Neutral. The move reflects the company’s decent leasing and portfolio restructuring activity, completion of Tampa–based office building buyouts as well as the recent long-term build-to-suit deal. Yet, volatility in the office sector and pressure on rents remain our concerns.

Why Neutral?

Highwoods is one of the leading owners and operators of suburban office, industrial and retail properties in the Southeastern and Midwestern U.S. Its extensive presence has helped it generate decent growth in revenues.

The company is focused on enhancing its business in premium markets through the successful execution of its portfolio repositioning measures. In February, Highwoods announced the acquisition of Colonial Place I and II in order to boost its presence in the vibrant Westshore submarket of Tampa.

Moreover, in March, Highwoods penned a long-term build-to-suit deal with a leading packaging and paper products firm – International Paper (IP - Analyst Report) – for constructing a new office building in Memphis. The transaction is in line with Highwoods’ strategic move toward strengthening its relationship with existing customers. Also, Highwoods has a relatively strong balance sheet and adequate liquidity.

Yet, we expect volatility in the office sector to continue with the layoffs, which in turn would adversely affect the company’s top line. Additionally, the pressure on rent continues and this remains our concern. Hence, we believe that the risk/reward profile is currently balanced and maintain our Neutral recommendation on the stock.

Highwoods reported fourth-quarter 2012 core FFO (funds from operations) of 68 cents per share, in line with the Zacks Consensus Estimate and 2 cents short of the prior-year quarter figure. Though the company’s results benefited from solid leasing and portfolio restructuring activities, pressure on rent acted as a headwind.

Over the last 60 days, the Zacks Consensus Estimate for full-year 2013 remained unchanged at $2.75 per share while the Zacks Consensus Estimate for full-year 2014 stood at $2.84 per share. In addition, Highwoods has now delivered positive earnings surprises in 2 out of past 4 quarters with an average beat of 2.24%. Hence, Highwoods now has a Zacks Rank #3 (Hold).

Other Stocks to Consider

REITs that are currently performing well include Federal Realty Investment Trust (FRT - Analyst Report) and Cousins Properties Inc. (CUZ - Analyst Report), both carrying a Zacks Rank #2 (Buy).

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

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