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Highwoods' (HIW) Rating Outlook Revised to Negative by S&P
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Highwoods Properties, Inc.’s (HIW - Free Report) rating outlook was recently revised to negative by S&P Global Ratings on concerns regarding the continuation of hybrid work setup, which has diminished the demand for commercial office space.
The rating agency reaffirmed HIW’s credit ratings of BBB, which is a notch above the investment grade criteria.
Highwoods owns a portfolio of premium office properties concentrated in the high-growth markets of the Sun Belt region, which is characterized by favorable demographics and higher utilization rates.
However, S&P analysts believe that despite being better positioned than some of its peers due to its Sun Belt-focused portfolio, the overall weakness in the secular fundamentals of the office real estate market is likely to keep the real estate investment trust’s (REIT) operating performance in distress in the upcoming period. They also noted that this could constrain access to a wide variety of capital.
Highwoods’ lease expiration schedule for the next two years remains elevated, with around 10.3% and 13.8% of the annualized rent being scheduled to expire in 2024 and 2025, respectively. Consequently, without a significant rebound in leasing activity, the company’s top-line growth is likely to be partly hampered.
Further, S&P analysts are keeping a close watch on the company's progress in leasing its development pipeline, which if not leased up to expectations, could weaken operating metrics. As of Sep 30, 2023, HIW’s development pipeline aggregated $517.6 million (at the company’s share) and encompassed around 1.6 million square feet. The pipeline was 25% pre-leased as of the same date.
Speaking of HIW’s leverage, the rating agency noted that the adjusted debt to EBITDA for the trailing 12 months ended Sep 30, 2023, was 6.4X, up from 6.0X in the year-ago period. The rise was mainly due to spending on acquisition and development against a lower level of dispositions. Per S&P analysts, “We expect credit metrics, which have weakened in recent quarters, to remain near current levels over the next two years.”
The REIT had around $16 million of available cash and $205 million drawn on its $750 million revolving credit facility as of Oct 17, 2023.
Hence, a choppy office market environment remains a key concern for Highwoods and is expected to weigh on its prospects in the near term. Also, intense competition from other industry players is likely to limit the company’s ability to retain tenants at relatively higher rents and dent its pricing power.
Further, with high-interest rates still in place, borrowing costs will likely be on the higher end, which may hamper Highwoods’ ability to purchase or develop real estate. Our estimate indicates a year-over-year increase of 29.3% in the company’s current-year interest expense.
HIW currently carries a Zacks Rank #4 (Sell).
The company’s shares have lost 18.7% in the year-to-date period against the industry’s 6.3% upside.
The Zacks Consensus Estimate for EastGroup Properties’ 2023 FFO per share has moved marginally upward in the past two months to $7.70.
The consensus estimate for Stag Industrial’s ongoing year’s FFO per share has increased 1.3% over the past two months to $2.28.
The consensus mark for Park Hotels & Resorts’ current-year FFO per share has moved marginally northward over the past month to $1.99.
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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Highwoods' (HIW) Rating Outlook Revised to Negative by S&P
Highwoods Properties, Inc.’s (HIW - Free Report) rating outlook was recently revised to negative by S&P Global Ratings on concerns regarding the continuation of hybrid work setup, which has diminished the demand for commercial office space.
The rating agency reaffirmed HIW’s credit ratings of BBB, which is a notch above the investment grade criteria.
Highwoods owns a portfolio of premium office properties concentrated in the high-growth markets of the Sun Belt region, which is characterized by favorable demographics and higher utilization rates.
However, S&P analysts believe that despite being better positioned than some of its peers due to its Sun Belt-focused portfolio, the overall weakness in the secular fundamentals of the office real estate market is likely to keep the real estate investment trust’s (REIT) operating performance in distress in the upcoming period. They also noted that this could constrain access to a wide variety of capital.
Highwoods’ lease expiration schedule for the next two years remains elevated, with around 10.3% and 13.8% of the annualized rent being scheduled to expire in 2024 and 2025, respectively. Consequently, without a significant rebound in leasing activity, the company’s top-line growth is likely to be partly hampered.
Further, S&P analysts are keeping a close watch on the company's progress in leasing its development pipeline, which if not leased up to expectations, could weaken operating metrics. As of Sep 30, 2023, HIW’s development pipeline aggregated $517.6 million (at the company’s share) and encompassed around 1.6 million square feet. The pipeline was 25% pre-leased as of the same date.
Speaking of HIW’s leverage, the rating agency noted that the adjusted debt to EBITDA for the trailing 12 months ended Sep 30, 2023, was 6.4X, up from 6.0X in the year-ago period. The rise was mainly due to spending on acquisition and development against a lower level of dispositions. Per S&P analysts, “We expect credit metrics, which have weakened in recent quarters, to remain near current levels over the next two years.”
The REIT had around $16 million of available cash and $205 million drawn on its $750 million revolving credit facility as of Oct 17, 2023.
Hence, a choppy office market environment remains a key concern for Highwoods and is expected to weigh on its prospects in the near term. Also, intense competition from other industry players is likely to limit the company’s ability to retain tenants at relatively higher rents and dent its pricing power.
Further, with high-interest rates still in place, borrowing costs will likely be on the higher end, which may hamper Highwoods’ ability to purchase or develop real estate. Our estimate indicates a year-over-year increase of 29.3% in the company’s current-year interest expense.
HIW currently carries a Zacks Rank #4 (Sell).
The company’s shares have lost 18.7% in the year-to-date period against the industry’s 6.3% upside.
Image Source: Zacks Investment Research
Stocks to Consider
Some better-ranked stocks from the REIT sector are EastGroup Properties (EGP - Free Report) , Stag Industrial (STAG - Free Report) and Park Hotels & Resorts (PK - Free Report) . While PK sports a Zacks Rank #1 (Strong Buy), EGP and STAG each carry a Zacks Rank #2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for EastGroup Properties’ 2023 FFO per share has moved marginally upward in the past two months to $7.70.
The consensus estimate for Stag Industrial’s ongoing year’s FFO per share has increased 1.3% over the past two months to $2.28.
The consensus mark for Park Hotels & Resorts’ current-year FFO per share has moved marginally northward over the past month to $1.99.
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.