Is A Hold Strategy Apt For Highwoods Properties (HIW) Now?

Highwoods Properties, Inc. (NYSE:HIW) owns a portfolio of office properties primarily in the best business districts (BBDs) of Southeast markets. Strong demographic trends and healthy job markets will spur demand for the company’s office properties. However, anticipated higher dispositions will likely result in near-term earnings dilution.

Notably, the record-length economic expansion cycle, steadily low unemployment rates and modest wage improvement have fueled disciplined growth for the national office market as well as office landlords like Highwoods Properties, Cousins Properties (NYSE:CUZ) , Vornado Realty Trust (NYSE:VNO) , Boston Properties Inc. (NYSE:BXP) . Further, continued job creation in office-using sectors is driving leasing activity and absorption levels for Highwoods Properties.

In fact, in July, Highwoods Properties signed a lease for 46,000 square feet of space at 11000 Weston Parkway in Cary NC — one of Raleigh’s BBDs. Given the favorable macro-economic trends and industrial tailwinds, leasing progress will drive the company’s growth in the upcoming quarters as well.

Additionally, the company is following a disciplined capital-recycling strategy that entails disposing of non-core assets and investing the proceeds in premium asset acquisitions and for undertaking accretive development projects. In fact, with expected development starts of $112-$375 million for 2019, the backlog of accretive development opportunities remains healthy. Moreover, management believes the recently-delivered and highly-preleased development pipeline will boost the company’s funds from operations (FFO) and cash flow growth in the near term.

Decent financial position and a strong balance sheet also aid Highwoods Properties to adequately capitalize on future growth opportunities. In fact, as of the second quarter’s end, the company’s debt had a weighted average maturity of 5.9 years, while unencumbered net operating income stood at 96.4%.

Shares of the company have gained 1.9% over the past month, as against the industry’s decline of 1.1%. Additionally, the trend in estimate revisions of 2019 FFO per share indicates a favorable outlook for the company as it has been revised marginally upward over the past month.

Highwoods Properties currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

However, tenant vacancies are a major growth hurdle for the company. Specifically, the abrupt shut down of Laser Spine Institute at 5332 Avion Drive, Avion Park in Tampa might depress the company’s earnings growth in the ongoing year.

Furthermore, amid competitive landscape, the re-letting of vacated space by Laser Spine looks uncertain. Specifically, the company faces intense competition from developers, owners and operators of office properties as well as other commercial real estates, including sublease space available from its tenants. This restricts its ability to attract and retain tenants at relatively higher rents than the company’s competitors.

Highwoods Properties also has an extensive development pipeline worth $503 million, which is 80% pre-leased. Although this is encouraging for long-term impact, it exposes the company to various operational risks such as construction cost overruns and entitlement delays. Moreover, with the 2019 disposition guidance of $100-$150 million, the company expects to close a number of sales in second-half 2019. This might also weigh on its earnings in the upcoming days ahead.

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