Should You Retain Highwoods Properties Stock in Your Portfolio Now?

Highwoods Properties HIW is well-poised to capitalize on tenants’ growing preference for premium office spaces with class-apart amenities. An aggressive capital-recycling program and a healthy balance sheet bode well. However, competition from other industry players is likely to limit its pricing power and hurt profitability. High unit supply and interest expenses add to its woes.Early this month, HIW announced that it has agreed to acquire Advance Auto Parts Tower, a 20-story Class AA office tower. The property, spanning around 346,000 square feet, is located in Raleigh’s mixed-use North Hills Best Business District. The move will boost HIW’s portfolio to capitalize on the rising demand for high-quality offices.What’s Aiding Highwoods Properties?Highwoods is seeing a recovery in demand for its high-quality, well-placed office properties, as highlighted by a rebound in new leasing volume. During the fourth quarter of 2024, the company signed 1.3 million square feet of second-generation leases. This includes new leases spanning 370,000 square feet. During the same period, Highwoods signed 161,000 square feet of first-generation leases.Going forward, the next cycle of office space demand is likely to be driven by inbound migration and significant investments announced by office occupiers to expand their footprint in Sun Belt regions, as well as additional hiring plans in the company’s markets. Moreover, the company is seeing an increasing number of tenants returning to offices or announcing plans to come back. This is likely to support office real estate market fundamentals.Highwoods follows a disciplined capital-recycling strategy that entails disposing of non-core assets and redeploying the proceeds in premium asset acquisitions and accretive development projects. Subsequent to the fourth quarter of 2024, Highwoods sold three non-core office buildings in Tampa, FL, for $145 million. Management expects to carry out an additional disposition of up to $150 million and total acquisitions amounting to around $300 million in 2025.The company is also focused on development projects in key markets, which are likely to generate considerable annual net operating income (NOI) upon completion and stabilization. As of Dec. 31, 2024, Highwoods’ development pipeline aggregated $514 million (at the company’s share) and is 58.8% pre-leased.  Upon stabilization, the company expects these projects to provide more than $30 million incremental NOI and be a significant driver of cash flows.Highwoods has adequate liquidity from cash in hand, cash flows from operating activities and other financing sources to meet short-term liquidity needs. As of Dec. 31, 2024, the company had around $34 million of available cash and $119 million drawn on its $750 million revolving credit facility. In the fourth quarter of 2024, Highwoods generated 83.3% unencumbered NOI (at the company’s share), providing scope to tap additional secured debt capital if required.What’s Hurting Highwoods Properties?Highwoods faces intense competition from developers, owners and operators of office properties, as well as other commercial real estate, including sublease space available from its tenants. This restricts its ability to attract and retain tenants at relatively higher rents than its competitors and hinders its leasing activity.Further, though fewer new starts are expected, the ongoing development activities are likely to result in new supply in the upcoming periods. This is likely to affect the company’s ability to backfill vacated space and strain occupancy levels of its office properties. Management anticipates average occupancy to lie in the range of 85-86.5% in 2025.Despite the Federal Reserve announcing rate cuts late in 2024, the interest rate is still high and is a concern for Highwoods. The company has a substantial debt burden, and its net debt, as of Dec. 31, 2024, was $3.28 billion. In the fourth quarter of 2024, interest expenses increased 5.6% year over year to $37.3 million.Shares of HIW have fallen 7.4% over the past three months compared with the industry's downside of 0.1%. Analysts seem bearish on this Zacks Rank #4 (Sell) company, with the Zacks Consensus Estimate for its 2025 funds from operations (FFO) per share being lowered 1.2% over the past month to $3.39.Image Source: Zacks Investment ResearchStocks to ConsiderSome better-ranked stocks from the broader REIT sector are Ventas VTR and Cousins Properties CUZ,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 Ventas’ 2025 FFO per share has been raised marginally northward to 3.41 over the past week.The Zacks Consensus Estimate for Cousins Properties’2025 FFO per share has been raised marginally upward to 2.76 over the past week.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.5 Stocks Set to DoubleEach was handpicked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2024. While not all picks can be winners, previous recommendations have soared +143.0%, +175.9%, +498.3% and +673.0%.Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.Today, See These 5 Potential Home Runs >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Ventas, Inc. (VTR): Free Stock Analysis Report Highwoods Properties, Inc. (HIW): Free Stock Analysis Report Cousins Properties Incorporated (CUZ): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks