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Capital Recycling Moves Aid Highwoods (HIW) Amid High Rates
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Highwoods Properties (HIW - Free Report) is well-positioned to benefit from its portfolio of premier office properties concentrated in high-growth Sun Belt markets with favorable demographic trends. Also, its disciplined capital-recycling program and robust balance sheet position augur well for long-term growth. Nonetheless, competition from other industry players and elevated interest rates pose concerns for the company.
What’s Aiding it?
Highwoods enjoys a significant presence in the high-growth Sun Belt markets, which are characterized by long-term favorable demographic trends and are expected to continue experiencing above-average job growth. It also has a diversified tenant base that includes several industry bellwethers. These factors are likely to support the company’s rent growth over the long run. For 2023, we project rental and other revenues to exhibit a slight improvement despite the current choppy macroeconomic environment.
The company is witnessing a recovery in demand for its high-quality, well-placed office properties as highlighted by a rebound in new leasing volume. The company leased around 918,000 square feet of second-generation office space in the second quarter, including 222,000 square feet of new leases over 39 deals.
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 the Sun Belt regions. HIW is likely to experience healthy demand for its properties, boosting leasing activity. Also, the rise in the number of tenants returning to offices will act as a tailwind.
Highwoods 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. Over the years, it has made concerted efforts to improve its portfolio quality by expanding its footprint in the high-growth best business districts markets through acquisitions and development initiatives.
Notably, during the first half of 2023, Highwoods divested its interest in three office buildings, namely One Independence Park, Riverbirch and 5000 North Park for an aggregate sales price of $51.3 million. For 2023, management expects to carry out an additional disposition of $150 million in 2023.
Moreover, HIW’s focus on development projects in key markets, which are likely to generate considerable annual net operating income upon completion and stabilization, seems encouraging.
Apart from its capital-recycling strategy, this office real estate investment trust maintains a decent balance sheet position with no consolidated debt maturities until the fourth quarter of 2025. As of Jul 18, 2023, the company had around $22 million of available cash and $185 million drawn on its $750 million revolving credit facility.
It enjoyed investment-grade credit ratings of BBB/Baa2 with a stable outlook from S&P and Moody’s as of the end of the second quarter of 2023, rendering it favorable access to the debt market. Hence, with ample financial flexibility, Highwoods seems well-positioned to bank on long-term growth opportunities.
What’s Hurting it?
The company faces stiff competition from developers, owners and operators of office properties, as well as other commercial real estate. This is likely to restrict its ability to attract and retain tenants at relatively higher rents than its competitors and hurt leasing activity. It could also impact the company’s ability to acquire high-quality properties at favorable prices.
Higher development activities across its markets will likely result in new supply in the near term. This will likely affect the company’s ability to backfill vacated space and strain occupancy levels of its office properties. Management anticipates occupancy to range between 88.5% and 90% in 2023. Our estimate stands at 89.4%.
A high interest rate is another concern for Highwoods. Elevated rates imply high borrowing costs for the company, affecting its ability to purchase or develop real estate. Management expects to incur higher interest expenses in 2023 compared with 2022 due to higher average interest rates and higher average debt balances, partially offset by higher capitalized interest. Our estimate indicates a year-over-year increase of 25.6% in the company’s interest expense for the current year.
Over the past three months, shares of this Zacks Rank #3 (Hold) company have declined 21.7% compared with the industry’s fall of 14.1%.
The Zacks Consensus Estimate for Welltower’s current-year funds from operation (FFO) per share has moved marginally northward over the last 30 days to $3.55.
The Zacks Consensus Estimate for Americold’s current-year FFO per share has been revised marginally upward over the last 30 days to $1.26.
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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Capital Recycling Moves Aid Highwoods (HIW) Amid High Rates
Highwoods Properties (HIW - Free Report) is well-positioned to benefit from its portfolio of premier office properties concentrated in high-growth Sun Belt markets with favorable demographic trends. Also, its disciplined capital-recycling program and robust balance sheet position augur well for long-term growth. Nonetheless, competition from other industry players and elevated interest rates pose concerns for the company.
What’s Aiding it?
Highwoods enjoys a significant presence in the high-growth Sun Belt markets, which are characterized by long-term favorable demographic trends and are expected to continue experiencing above-average job growth. It also has a diversified tenant base that includes several industry bellwethers. These factors are likely to support the company’s rent growth over the long run. For 2023, we project rental and other revenues to exhibit a slight improvement despite the current choppy macroeconomic environment.
The company is witnessing a recovery in demand for its high-quality, well-placed office properties as highlighted by a rebound in new leasing volume. The company leased around 918,000 square feet of second-generation office space in the second quarter, including 222,000 square feet of new leases over 39 deals.
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 the Sun Belt regions. HIW is likely to experience healthy demand for its properties, boosting leasing activity. Also, the rise in the number of tenants returning to offices will act as a tailwind.
Highwoods 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. Over the years, it has made concerted efforts to improve its portfolio quality by expanding its footprint in the high-growth best business districts markets through acquisitions and development initiatives.
Notably, during the first half of 2023, Highwoods divested its interest in three office buildings, namely One Independence Park, Riverbirch and 5000 North Park for an aggregate sales price of $51.3 million. For 2023, management expects to carry out an additional disposition of $150 million in 2023.
Moreover, HIW’s focus on development projects in key markets, which are likely to generate considerable annual net operating income upon completion and stabilization, seems encouraging.
Apart from its capital-recycling strategy, this office real estate investment trust maintains a decent balance sheet position with no consolidated debt maturities until the fourth quarter of 2025. As of Jul 18, 2023, the company had around $22 million of available cash and $185 million drawn on its $750 million revolving credit facility.
It enjoyed investment-grade credit ratings of BBB/Baa2 with a stable outlook from S&P and Moody’s as of the end of the second quarter of 2023, rendering it favorable access to the debt market. Hence, with ample financial flexibility, Highwoods seems well-positioned to bank on long-term growth opportunities.
What’s Hurting it?
The company faces stiff competition from developers, owners and operators of office properties, as well as other commercial real estate. This is likely to restrict its ability to attract and retain tenants at relatively higher rents than its competitors and hurt leasing activity. It could also impact the company’s ability to acquire high-quality properties at favorable prices.
Higher development activities across its markets will likely result in new supply in the near term. This will likely affect the company’s ability to backfill vacated space and strain occupancy levels of its office properties. Management anticipates occupancy to range between 88.5% and 90% in 2023. Our estimate stands at 89.4%.
A high interest rate is another concern for Highwoods. Elevated rates imply high borrowing costs for the company, affecting its ability to purchase or develop real estate. Management expects to incur higher interest expenses in 2023 compared with 2022 due to higher average interest rates and higher average debt balances, partially offset by higher capitalized interest. Our estimate indicates a year-over-year increase of 25.6% in the company’s interest expense for the current year.
Over the past three months, shares of this Zacks Rank #3 (Hold) company have declined 21.7% compared with the industry’s fall of 14.1%.
Image Source: Zacks Investment Research
Stocks to Consider
Some better-ranked stocks from the REIT sector are Welltower (WELL - Free Report) and Americold Realty Trust (COLD - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Welltower’s current-year funds from operation (FFO) per share has moved marginally northward over the last 30 days to $3.55.
The Zacks Consensus Estimate for Americold’s current-year FFO per share has been revised marginally upward over the last 30 days to $1.26.
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.