Summary
- Highwoods Properties is an office REIT located in the Southeastern US. The company has properties in some of the most promising cities in terms of growth.
- The company has an interesting growth development profile with $500 million worth of projects currently in development.
- The company is currently yielding around 4.25% and rates highly on all my "safety" metrics.
I've been looking at REITs that are relatively underfollowed and Highwoods Properties (HIW) caught my attention. With the market starting to recover, now might be the last chance to purchase some yield generating assets at a great price.
Highwoods Properties is a REIT primarily focused on office space in the Southeast US. The company’s office properties in terms of revenue are primarily located in Nashville (21% of revenue), Atlanta (19% of revenue), Raleigh (18% of revenue), and Tampa (13% of revenue). These markets have been identified by consulting firm PwC as among the most promising in terms of future economic development and fastest-growing. This is especially true now as these places were not as badly hit by the coronavirus pandemic.
PwC emerging trends in real-estate
The company is firing on all cylinders
The company had a pretty solid Q1 2020 with funds from operations at $0.93 per share an increase from $0.72 in Q1 2019. Like most companies, its results started to suffer at the end of the quarter due to the coronavirus pandemic. Rents continue to increase as same property net operating income was 11.9% higher compared to the same time last year at $12.1 million. The company offered deferral of rent to its clients who needed it. However, the company was able to collect pretty much all of the rent due in April and May due to the Southeast not being as hard hit by the coronavirus.
The company has an interesting growth development profile with $500 million worth of projects currently in development. From these projects, 77% is already pre-leased. The company expects these projects to generate an additional $40 million in net operating income. The company had a total 2019 net operating income of $487 million.
The company as well is planning to dispose of its assets in the Greensboro and Memphis markets in the near future in order to properly re-deploy capital in the high-growth markets of the Southeast US. These development projects along with increasing office rents in the Southeast US should serve as a growth driver for the company.
Apart from looking at future growth, I like to do a tenant analysis for the REITs I am interested in as it gives me an idea of how stable future cash flows will be. This is especially important now to access counter-party risk given the potential of the US entering a recession. Looking at the top 10 clients, Highwoods properties has a bit of concentration risk as these represent 21.3% of the company’s total rent. However, the top two clients which make up 8.6% of total rent are the Federal Government (which will never go bankrupt) and Bank of America (BAC). The rest of the companies on this top 10 list are high-quality companies and household names as well.
