Highwoods Shows Stability on Fundamentals - Analyst Blog

Highwoods Properties Inc. HIW, the Raleigh, NC-based real estate investment trust (REIT), is focused on strengthening its leasing business and gearing up its portfolio enhancement activity.

Last month, Highwoods inked a lease deal with a new customer for 28,000 square foot of space at Green V in Nashville. This space was previously occupied by LifePoint (vacated in Feb 2014) for which Highwoods constructed a 203,000 square foot build-to-suit facility, earlier this year (read: Highwoods Leases Green V in Nashville)

In April, Highwoods declared first-quarter 2014 core funds from operations (FFO) of 66 cents per share, missing the Zacks Consensus Estimate by a nickel and the prior-year quarter figure by 2 cents. One-time expenses like retirement plan-related costs and a bad winter were the spoilers.

Nevertheless, on the back of successful implementation of its strategic plan, a large part of the company's portfolio is now concentrated in the high-growth Sun Belt markets, which provides above-average job growth prospects owing to the long-term demographic trends. In particular, the company's portfolio restructuring activity positions it well in target markets. Additionally, the strong and flexible balance sheet position and rating upgrade by Fitch are commendable.

However, although Highwood's large development pipeline is encouraging for its future growth, it increases operational risks. Also, the current sluggish office environment and persistent office space efficiency trends remain a concern for the company. Alongside, with a gradual reduction in the Fed's support, interest rates are expected to increase, which may in turn hurt the rate-sensitive business of the company in the long run.

To gain deeper insight into Highwoods, you can refer to our updated research report, which was issued on Jun 26, 2014.

Over the last 30 days, the Zacks Consensus Estimate for 2014 FFO per share remained stable at $2.90. On the other hand, it moved up by a penny to $3.04 for 2015. The stock currently has a Zacks Rank #3 (Hold).

Stocks That Warrant a Look

Investors interested in the REIT industry may consider stocks like Chatham Lodging Trust CLDT, The GEO Group, Inc. GEO and Terreno Realty Corp. TRNO. All these stocks carry a Zacks Rank #1 (Strong Buy).

Note:FFO, a widely used metric to gauge the performance of REITs, are obtained after adding depreciation, amortization and other non-cash expenses to net income.

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