Highwood Properties, Inc. (NYSE: HIW) is an office-focused real estate investment trust (REIT) that offers investors a stellar 8.64% dividend yield along with enormous upside potential as it trades just above a 52-week low.
Headquartered in Raleigh, North Carolina, Highwoods Properties owns, develops, acquires, leases, and manages properties in the best business districts of Atlanta, Charlotte, Dallas, Nashville, Orlando, Raleigh, Richmond, and Tampa.
Key Details on Highwood Properties:
- Fully integrated office REIT publicly traded on NYSE under ticker HIW
- Owns over 32 million square feet of office space spread across these 8 major metro markets
- Focused in the Southeast and Mid-Atlantic regions of the U.S.
- 90% of net operating income comes from office properties
- Other 10% comes from industrial, retail, and residential assets
- Market cap of $2.4 billion as of December 2023
Why Highwoods Properties is Oversold and Undervalued:
Highwoods Properties stock has struggled in 2022, falling over 40% year-to-date to trade near $28 per share. This has pushed the dividend yield up to very attractive levels above 8.5%.
However, the business fundamentals remain strong for Highwoods. Here are some key reasons why the stock appears oversold and undervalued at current levels:
1. High Occupancy Rate of 91.4%
Despite rising recession fears, Highwoods’ occupancy rate remains exceptionally high at 91.4% as of Q3 2023. This reflects the strength of its assets and locations.
2. Minimal Exposure to Troubled Sectors
Many office REITs are struggling with low occupancy in outdated buildings or heavy exposure to struggling industries like energy and banking.
Highwoods has minimized exposure to distressed sectors while owning high-quality office assets. Its diverse tenant base is stable.
3. Strong Rent Collections
Through the pandemic, Highwoods collected over 97% of rents due each quarter, showcasing the durability of its cash flows. This has continued with 99% rent collections in Q3 2022.
4. Reasonable Leverage Profile
While many REITs are over-levered, Highwoods maintains a reasonable debt profile with net debt-to-EBITDA at 6.4x. This provides safety for the dividend.
5. Trading at a Discount to Peers
Highwoods trades at just 7.9x projected 2023 FFO per share. That’s significantly cheaper than office REIT peers like Boston Properties at 10-12x FFO.
Why Highwoods Properties is Built for Long-Term Outperformance:
Beyond the current undervaluation, Highwoods possesses competitive advantages that make it a compelling long-term investment.
1. Focus on High-Growth Markets
Its presence in fast-growing Southeastern markets like Nashville, Tampa, Orlando, and Raleigh provides a tailwind. These markets benefit from in-migration and job growth.
2. Clustering in Top Submarkets
Within its markets, Highwoods owns premier Class-A buildings clustered in the highest rental rate submarkets. This allows for operational efficiencies and premium rents.
3. Diverse Blue-Chip Tenant Base
Rather than rely on a few huge tenants, Highwoods leases to over 1,500 customers across a wide variety of resilient industries like healthcare, finance, technology, and government.
4. Developments and Redevelopments
The company is continuously enhancing its portfolio value through attractive redevelopments of owned assets as well as developing new Class-A buildings to own.
5. Strong Management Team
CEO Ted Klinck and CFO Mark Mulhern lead an experienced management team that has steered Highwoods to long-term growth and shareholder value creation.
Huge Dividend Yield Above 8.6%
Highwoods offers a best-in-class dividend yield of 8.64% as of late December 2023. And the dividend appears very safe supported by high occupancy, strong rent collections, and conservative payout ratios.
Management has increased the dividend every year since 2010 as well. Reliable dividend growth along with above-average yield provides a powerful income stream.
Attractive Total Return Potential
Given its high cash flow, reasonable valuation, and heavily discounted stock price, Highwoods offers enormous upside potential along with a safe high yield.
A return to a 7% cap rate on 2023 estimated FFO would imply 50%+ upside in the stock. If sentiment improves and the multiple expands from current lows, the upside could be even higher.
Conclusion: An Overlooked Opportunity
While there are certainly macroeconomic headwinds, Highwoods remains a high-quality office REIT with a strong portfolio. Trading at just 0.7x book value and offering a 8.64% dividend yield, the stock is simply too cheap at current levels.
For dividend investors or those seeking deep value opportunities, Highwoods Properties deserves strong consideration. The company has promising total return potential in 2023 and beyond.