Why Should You Retain Highwoods Stock in Your Portfolio?

Highwoods Properties HIW is well-positioned to benefit from the growing demand for its premier office properties concentrated in high-growth Sun Belt markets. Its disciplined capital-recycling program and accretive development projects are other tailwinds. A healthy balance sheet position augurs well for long-term growth. However, competition from other industry players and elevated interest rates pose concerns for the company.

What's Aiding HIW?

Highwoods has a large part of its portfolio concentrated in high-growth Sun Belt markets, and the company is poised to benefit from this portfolio focus. These markets exhibit promising long-term favorable demographic trends and are expected to continue experiencing above-average job growth. HIW also has a well-diversified tenant base that includes several industry bellwethers. These factors are expected to support its rent growth over the long term.

Highwoods is seeing 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 922,167 square feet of second-generation office space in the first quarter of 2024, including 422,889 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, this REIT 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.

The company maintains a healthy balance sheet, with no consolidated debt maturities until the second quarter of 2026. As of Apr 16, 2024, it had around $17 million of available cash and $10 million drawn on its $750 million revolving credit facility.

It enjoyed investment-grade ratings of BBB/Baa2 from S&P and Moody's as of the end of the first quarter of 2024, 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 HIW?

The overall office demand in some markets is likely to remain subdued in the near term. Further, higher development activities across Highwoods' markets are likely to result in new supply in the upcoming period. This is likely to affect its ability to backfill vacated space and strain occupancy levels of its office properties. Management anticipates average occupancy to lie in the range of 87-89% in 2024. It also expects that occupancy will trough in the first half of next year.

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. As of Mar 31, 2024, it had a substantial debt burden, and its net debt was approximately $3.31 billion. With high interest rates still in place, the dividend payout may seem less attractive than the yields on fixed-income and money market accounts.

Over the past three months, shares of this Zacks Rank #3 (Hold) company have rallied 22.0% against the industry's growth of 14.6%. The Zacks Consensus Estimate for Highwoods' second-quarter 2024 FFO per share has decreased marginally over the past month to 90 cents. HIW is slated to release quarterly numbers on Jul 23 after the closing bell.

Image Source: Zacks Investment Research

Stocks to Consider

Some better-ranked stocks from the broader REIT sector are Americold Realty Trust COLD and Stag Industrial STAG, each carrying a Zacks Rank #2 (Buy).

The Zacks Consensus Estimate for Americold Realty Trust's 2024 funds from operations (FFO) per share has moved marginally northward over the past month to $1.44.

The Zacks Consensus Estimate for Stag Industrial's 2024 FFO per share has moved marginally northward over the past week to $2.39.

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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