Highwoods Properties (HIW - Free Report) is well positioned to gain from a strong office portfolio located in the best business districts. However, weak rent growth and lower lease pricing ability due to stiff competition might dent profitability.
The company reported better-than-expected results for third-quarter 2017, reflecting improved net operating income performance and strong leasing metrics. Highwoods registered GAAP rent spreads growth of 11.3%, which marked the sixth consecutive quarter of double-digit increase.
The company also raised full year funds from operations (FFO) per share outlook, revising it from the previous range of $3.33-$3.38 to $3.36-$3.38. The Zacks Consensus Estimate for Highwoodsis pegged at the high end of the band.
With the recovery in economy and labor markets, corporate sectors are anticipated to rent more office space to accommodate the increasing workforce. Against this backdrop, Highwoods is well-positioned to capture demand for office spaces with properties situated in the high-growth Sun Belt markets.
Further, to benefit from the optimism in the market, this real estate investment trust (REIT) is considering expansion strategies. The company is making diligent efforts to fortify its presence in high-growth markets through acquisitions. In addition, it is disposing non-core assets to fund these acquisitions. This is anticipated to improve the company’s portfolio quality.
In fact, on Oct 31, 2017, Highwoods announced the disposal of the 187,000 square foot Highwoods Tower One and an adjacent two-acre land parcel located in Northeast Raleigh. The assets were sold for $34.3 million. As of Sep 30, 2017, the tower was 85.5% occupied. The sell-off is in line with Highwoods’ strategy to divest non-strategic assets and invest the proceeds in high-growth properties. Such efforts bode well for long-term growth.
Although demand for office space is recovering, rent growth and leasing activity have bore the brunt of the discouraging space efficiency trends over the past few quarters. This also limits near-term growth opportunities in Highwoods’ office portfolio.
Further, the company has a large development pipeline, totaling 1.5 million square feet, across five markets. With a total expected investment of $440 million, this extensive development plan increases operational risks by exposing it to rising construction costs, entitlement delays and lease-up risks.
The stock has gained 0.3% year to date, underperforming 6.7% growth registered by the industry it belongs to.
Highwoods currently carries a Zacks Rank #3 (Hold).
Stocks to Consider
Some better-ranked stocks in the REIT space are Cedar Realty Trust (CDR - Free Report) , Urstadt Biddle Properties (UBA - Free Report) and DCT Industrial Trust (DCT - Free Report) . All three stocks carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Cedar Realty’s FFO per share estimates for 2017 remained unchanged at 54 cents over a month. Its share price has increased 8.1% year to date.
Urstadt Biddle Properties’ 2017 FFO per share estimates have remained unchanged at $1.25 over the past 60 days. Its share price has declined 4.6% year to date.
DCT Industrial Trust’s current-year FFO per share estimates have been revised upward by a cent to $2.44 in a month’s time. Its share price has increased 25.8% year to date.
Note: All EPS numbers presented in this write up represent funds from operations (FFO) per share. 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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