Falling margins and Defensiveness Priced In, Morgan Stanley Downgrades Highwoods To Equal-weight

Despite Highwoods Properties Inc. (NYSE: HIW) announcement of a quarterly dividend of $0.43 set for June 7th Morgan Stanley's Sumit Sharma downgraded Highwoods from Overweight to Equal-weight. He also changed the price target from $47.00 to $50.00. Sharma viewed Highwoods as a strong "defensive play among Office REITs given its track record of value creation from build-to-suit developments with consistent cash flow generation, a stable dividend yield, and exposure to high quality CDB office properties in strong secondary markets such as Atlanta, Raleigh, and Nashville." Occupancy is already at a company high and new rent growth is expected to slow down sector wide. Sharma expects same-store "NOI growth of 4-5% over 2016-18E down from 7% in 2015." Growth is aligned with peers' average and doesn't support Sharma's previous Overweight thesis. Shares of Highwoods traded at 68 basis points higher than the Office REIT average and were "relatively rich when compared to long-term average spread of +120 basis points" Sharma noted. In previous quarters when uncertainty plagued the Office REIT market investors chose "defensive" names such as Highwoods and shares benefited directly. The analyst thinks the "spread will revert closer to its historical average" as HIW defensiveness is already priced in and margins will narrow with more compelling opportunities in the sector:

• Above-peer growth at a reasonable discount at companies such as Paramount Group Inc. (NYSE: PGRE) and Hudson Pacific Properties Inc. (NYSE: HPP).
• Where defensiveness isn't fully price in such as Boston Properties Inc. (NYSE: BXP)

Shares of Highwoods Properties were down 1.93 percent to $47.75 at the market close on Wednesday.