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Should You Retain Highwoods (HIW) Stock in Your Portfolio Now?

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Highwoods Properties’ (HIW - Free Report) portfolio of premier office properties concentrated in high-growth Sun Belt markets with favorable demographic trends positions it well for growth over the long term. An aggressive capital-recycling program, accretive development projects and a healthy balance sheet position are other tailwinds. However, competition from other industry peers and high interest rates remain key concerns for the company.

What’s Aiding It?

Highwoods benefits from a significant portion of its portfolio being focused on high-growth Sun Belt markets. These markets exhibit promising long-term favorable demographic trends and are expected to continue experiencing above-average job growth. The company also has a well-diversified tenant base that includes several industry bellwethers. These factors are expected to support the company’s rental income over the long term.

Highwoods is witnessing a recovery in demand for its high-quality and well-placed office properties as highlighted by a rebound in new leasing volume. The company leased 655,060 square feet of second-generation office space in the third quarter, including 152,105 square feet of new leases.

With the next cycle of office-space demand likely to be driven by inbound migration and significant investments announced by office occupiers to expand their footprint in the Sun Belt regions as well as additional hiring plans in the company’s markets, the company 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 nine months ended Sep 30, 2023, the company divested its interest in three office buildings, namely One Independence Park, Riverbirch and 5000 North Park for the aggregate sales price of $51.3 million. For 2023, management expects to carry out an additional disposition of $150 million.

Moreover, HIW’s focus on development projects in key markets, which are likely to generate meaningful annual net operating income upon completion and stabilization seems encouraging.

The company maintains a healthy balance sheet position with no consolidated debt maturities until the fourth quarter of 2025. As of Oct 17, 2023, it had around $16 million of available cash and $205 million drawn on its $750 million revolving credit facility. It enjoyed investment-grade ratings of BBB/Baa2 with a stable outlook from S&P and Moody’s as of the end of the third quarter of 2023, rendering it access to the debt market at favorable rates. Hence, with sound financial footing, Highwoods seems well-positioned to capitalize on long-term growth opportunities.

What’s Hurting It?

Highwoods faces intense 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 the company’s markets will likely result in new supply in the upcoming period. This will likely affect its ability to backfill vacated space and strain occupancy levels of its office properties. Management anticipates occupancy toward the lower end of its guidance range of 88.5-90%. Our estimate is pegged at 88.7%.

A high interest rate is another concern for HIW. Elevated rates imply high borrowing costs for the company, affecting its ability to purchase or develop real estate. For the remainder of 2023, management expects interest expenses to increase due to higher rates in the new fixed-rate mortgage at Midtown West. Our estimate indicates a year-over-year increase of 29.2% in the company’s interest expense this year.

Over the past six months, shares of this Zacks Rank #3 (Hold) company have declined 10.9% against the industry’s rise of 1.7%.


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