Amid the recovering office real-estate market, Highwoods Properties, Inc. HIW is well-poised to benefit from its premium portfolio of office assets, concentrated in the high-growth markets of the Sun Belt region. Also, its aggressive capital-recycling efforts and solid balance-sheet strength bode well.
Highwoods is witnessing a recovery in demand for its high-quality office properties, reflected by the rebound in new leasing volume. More so, the next cycle of office-space demand will likely be driven by an inbound business migration and significant investments being made by office occupiers to expand their footprint in the Sun Belt regions. This is expected to boost the demand for HIW’s high-quality portfolio of office assets in the forthcoming quarters.
Highwoods has been following an aggressive capital-recycling program through which it disposes of non-core assets and redeploys the proceeds to fund various acquisitions and development projects. In second-quarter 2022, Highwoods sold non-core properties worth $101 million in this context.
Further, it has been making concerted efforts to expand its footprint in the high-growth best business districts (BBD) markets and enhance its portfolio quality on the back of acquisitions and development.
Its development projects in key markets, which are likely to generate considerable annual net operating income upon completion and stabilization, augur well for its long-term growth.
On the balance sheet front, HIW had around $22 million of available cash and $130 million drawn on its $750 million revolving credit facility as of Jul 19, 2022. This October, the company amped up its financial flexibility with a new two-year unsecured bank term loan of $200 million, set to mature in October 2024.
With investment-grade credit ratings of BBB/Baa2 from S&P and Moody’s, respectively, and a strong financial footing, HIW is well-poised to bank on future growth opportunities.
Also, the company’s trailing 12-month return on equity (ROE) is 11.44% compared with the industry’s average of 3.60%, indicating that it is more efficient in using shareholders’ funds than its peers.
However, a rise in the supply of office properties weighs on Highwoods. In addition, intense competition from developers, owners and operators of office properties and other commercial real estate, including sublease space available from its tenants, limits its ability to increase rents and/or backfill tenant move-outs and vacancies.
Highwoods’ extensive development pipeline, although encouraging in the long run, exposes it to various operational risks, such as construction cost overruns and delays in development.
Further, interest rate hikes are likely to increase borrowing costs, affecting the company’s ability to purchase or develop real estate.
Shares of HIW, carrying a Zacks Rank #3 (Hold), have lost 23.4% in the past three months compared with the industry’s decline of 17.2%.
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Stocks to Consider
Some better-ranked stocks from the REIT sector are Extra Space Storage EXR, Host Hotels & Resorts HST and Xenia Hotels & Resorts XHR, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Extra Space Storage’s ongoing year’sfunds from operations (FFO) per share has been raised marginally upward over the past week to $8.49.
The Zacks Consensus Estimate for Host Hotels & Resorts’ current-year FFO per share has moved 2.9% northward in the past two months to $1.80.
The Zacks Consensus Estimate for Xenia Hotels & Resorts’ 2022 FFO per share has moved 3.2% upward in the past two months to $1.59.
Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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Host Hotels & Resorts, Inc. (HST): Free Stock Analysis Report
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