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Highwoods Reaffirmed at Neutral

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We reiterate our Neutral recommendation on Highwoods Properties Inc. (HIW) as we expect the stock to perform in line with the broader market.  The company reported FFO (Funds Fom Operations) of $42.7 million or 56 cents per share in the third quarter of 2011 compared with $43.2 million or 57 cents per share in the year-earlier quarter. Funds Fom Operations, 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.

Highwoods is one of the largest owners and operators of suburban office, industrial and retail properties in the Southeastern and Midwestern U.S., providing a complete line of real estate services to its customers and third parties through a fully-integrated organization. This provides a significant upside potential for the company.

Highwoods is currently repositioning its portfolio to focus on stronger long-term markets and newer assets. A large part of the company’s portfolio is now concentrated in high-growth Sun Belt markets, which are expected to exhibit above-average job growth given its long-term demographic trends. Based on this, Highwoods is relatively better equipped to counter competitive pressure.

The company maintains a conservative and flexible balance sheet with ample liquidity and minimal debt maturities that enable it to capitalize on potential acquisition opportunities to fuel top-line growth

However, despite the consistent portfolio repositioning, Highwoods still has a large asset base in low barriers to entry Southeastern markets, such as, Atlanta, Piedmont Triad, Nashville and Kansas City, which historically have not been strong long-term office markets. This undermines the long-term growth potential of the company.

Highwoods currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. We are also maintaining our long-term Neutral recommendation on the stock. One of its competitors, Cousins Properties Inc (CUZ) has a Zacks #3 Rank, implying a Hold rating over the short term.

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