Is it Wise to Hold On to Highwoods (HIW) Stock Now?
Highwoods Properties, Inc. HIW is following a disciplined capital-recycling strategy that entails disposing of non-core assets, and using the proceeds for premium asset acquisitions and undertaking accretive development projects. In sync with this, last August, the company announced a market-rotation plan, per which, it aims to fortify its best business district office focus, and exit Greensboro and Memphis through a two-phased planned departure.
As part of such efforts, the company recently announced the sale of four office buildings comprising 599,000 square feet in the Poplar corridor submarket of Memphis. The move marked the closing of the first phase of its market-rotation plan. In the first phase, the company entered the Charlotte market through the acquisition of Bank of America Tower at Legacy Union in Charlotte, and made select asset sales in Memphis and Greensboro over the recent months.
The buyout marked the company’s entry into the CBD Charlotte and an iconic asset addition in a prime infill location in a top-tier submarket, providing the company a solid footing in a higher-growth market and platform to expand its presence. The rest of the assets in Greensboro and Memphis will be sold in the second phase, which has no schedule as of now.
A large part of the company’s portfolio is concentrated in high-growth Sun Belt markets, which has long-term favorable demographic trends and records healthy job growth. Also, the company has a well-diversified tenant base. This bodes well for its long-term growth.
Furthermore, Highwoods has a strong balance sheet and is trying to further lower its leverage. As of the end of fourth-quarter 2019, the company’s debt had a weighted average maturity of 6.4 years, while unencumbered net operating income stood at 96.5%. A robust balance sheet, along with capital reaped through debt and equity, positions the REIT well to sail through the current challenging times and capitalize on future growth opportunities.
Moreover, solid dividend payouts are the biggest enticement for REIT investors, and Highwoods remains committed to this. This February, the company increased its quarterly cash dividend to 48 cents per share, resulting in an annualized dividend of $1.92 per share. This marked a 1.1% sequential increase in dividend.
However, though an extensive development pipeline seems encouraging for long-term growth, it exposes the REIT to various operational risks, such as construction cost overruns. In addition, Highwoods’ efforts to shed non-core assets will have a dilutive impact on earnings in the near term.
Also, stiff competition from other developers and operators affects the company’s ability to attract and retain tenants at relatively higher rents than its competitors. It also impacts the company’s ability to acquire properties at favorable prices.
Further, the REIT’s assets are mainly concentrated in Atlanta, Nashville, Raleigh and Tampa. As of Dec 31, 2019, the contribution from these markets to the company’s annualized cash revenues were 19.3%, 18.5%, 16.9% and 12.9%, respectively. Hence, any economic or political downturn in these markets might affect Highwoods’ performance. Additionally, the adverse impact on the economy because of the coronavirus pandemic will likely affect demand for space in the upcoming days.
Moreover, the Zacks Consensus Estimate for 2020 funds for operation (FFO) moved 1.4% south to $3.59 over the past month.
This Zacks Rank #3 (Hold) company has underperformed its industry over the past year. Shares of Highwoods have depreciated 22.8%, while the industry has lost 14.7% during this period. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Stocks to Consider
SBA Communications Corporation’s SBAC FFO per share estimate for the ongoing year moved 1.41% north to $9.37 over the past two months. The stock currently carries a Zacks Rank #2 (Buy).
Gladstone Land Corp’s LAND FFO per share estimate for the current year climbed 3.33% to 62 cents in the past month. The stock currently carries a Zacks Rank #2.
Plymouth Industrial REIT’s PLYM Zacks Consensus Estimate for 2020 FFO per share moved up about 2% to $2.08 over the past two months. The stock currently holds a Zacks Rank of 2.
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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