Company Overview
Highwoods Properties, Inc. (HIW) is a leading fully-integrated office real estate investment trust (REIT) that owns, develops, acquires, leases, and manages properties primarily in the best business districts (BBDs) of the Southeast and Texas. With a rich history spanning over three decades, Highwoods has established itself as a trailblazer in the commercial real estate industry, consistently delivering innovative and tailored workspace solutions to its diverse tenant base.
History and Growth
Founded in 1978 and headquartered in Raleigh, North Carolina, Highwoods has grown to become a respected name in the commercial real estate landscape. The company's portfolio comprises 28.0 million rentable square feet of in-service properties, 1.6 million rentable square feet of office properties under development, and development land with approximately 5.2 million rentable square feet of potential office build-out.
Highwoods' journey began with a focus on acquiring and managing office properties in the southeast United States. A significant milestone in the company's history was its initial public offering in 1994, which provided the necessary capital to fuel its expansion. Over the following decade, Highwoods experienced substantial growth through strategic acquisitions and developments, cementing its position as a leading office REIT.
Resilience and Adaptation
The 2008 financial crisis presented a major challenge for Highwoods, as it did for the entire commercial real estate market. However, the company demonstrated its resilience and adaptability by implementing a strategic approach to navigate the downturn. This involved selling non-core assets and concentrating on its strongest markets and properties, ultimately allowing Highwoods to emerge from the crisis in a stronger financial position.
In the post-recession years, Highwoods has continued to execute its strategy of owning and operating high-quality office buildings in the BBDs of its core markets. The company has built a solid reputation as a best-in-class operator, which has been instrumental in attracting and retaining high-quality tenants. Additionally, Highwoods has been proactive in redeveloping and repositioning existing assets to meet the evolving needs of its customer base, ensuring its portfolio remains competitive and relevant in the ever-changing real estate landscape.
Strategic Portfolio Management
Highwoods' strategic approach to portfolio management has been a key driver of its success. The company's focus on acquiring, developing, and operating high-quality office properties in premier BBDs has enabled it to capitalize on the growing demand for amenity-rich, talent-supportive workspaces. By continuously upgrading its portfolio through strategic dispositions and investments, Highwoods has maintained a strong financial position and positioned itself for long-term growth.
Financials
Highwoods' financial performance has shown resilience in recent quarters. For the third quarter of 2024, the company reported revenue of $205,526,000 and a net loss of $3,108,000. The decrease in net income was primarily due to higher interest expense and depreciation and amortization, partially offset by higher other income. Operating cash flow for the quarter stood at $103,726,000, which was also the company's free cash flow for the period.
In terms of rental and other revenues, Highwoods reported $204.32 million for the third quarter of 2024, representing a 1.3% decrease compared to the same period in 2023. This decrease was primarily attributed to lost revenues from property dispositions, partially offset by increased revenues from recently completed development projects and higher consolidated same property revenues. For the nine months ended September 30, 2024, total rental and other revenues were $620.34 million, down 1.1% year-over-year.
Net Operating Income (NOI) for the third quarter of 2024 was $138.62 million, a decrease of 0.9% compared to the third quarter of 2023. Same property NOI, which includes wholly owned and joint venture in-service properties owned for the entirety of the periods presented, was $143.19 million in the third quarter of 2024, up 0.3% year-over-year. For the nine months ended September 30, 2024, total NOI was $419.64 million, down 1.9% compared to the same period in 2023, while same property NOI was $431.87 million, down 0.6% year-over-year.
Liquidity
As of September 30, 2024, Highwoods maintained a solid liquidity position with $23.65 million in cash. The company also had access to a $750 million revolving credit facility, of which $644.9 million remained undrawn, providing additional financial flexibility.
Portfolio Composition
In terms of portfolio composition, Highwoods' properties are diversified across its core markets, including Atlanta, Charlotte, Dallas, Nashville, Orlando, Raleigh, Richmond, and Tampa. This geographic diversification not only mitigates risk but also enables the company to capitalize on the unique growth dynamics of each market.
As of September 30, 2024, Highwoods was actively developing 0.8 million rentable square feet of office properties, with a total estimated investment of $551.1 million and an estimated 55.5% pre-leased. Major development projects include 23Springs in Dallas (50% owned, 642,000 square feet) and Midtown East in Tampa (50% owned, 143,000 square feet).
Sustainability Initiatives
Highwoods' commitment to sustainability and environmental stewardship is another hallmark of the company. The REIT has implemented various green initiatives across its portfolio, including the use of energy-efficient technologies, water conservation measures, and waste reduction programs. These efforts have earned Highwoods recognition as a leader in sustainable real estate practices.
Guidance and Future Outlook
Highwoods has demonstrated strong performance relative to its guidance. For the full year 2024, the company delivered Funds from Operations (FFO) of $3.61 per share, almost 2% higher than the mid-point of their original outlook provided in February 2024. This outperformance was achieved despite selling over $100 million of non-core properties and interest rates remaining higher than expected, factors which were not included in their original 2024 outlook.
Looking ahead to 2025, Highwoods has provided an initial FFO outlook of $3.26 to $3.44 per share. This guidance includes an approximate $0.10 per share short-term dilutive effect from $166 million of recent asset sales, $52 million of equity raised, and the purchase of the ground at Century Center. The company's same property cash NOI growth outlook for 2025 is projected to be between negative 2% and negative 4%, which they believe will be a temporary trough before resuming their trajectory of consistent same-store growth.
Highwoods anticipates an average occupancy outlook for 2025 of 85% to 86.5%, with occupancy expected to decrease around 200 basis points from Q4 2024 to Q1 2025 before growing later in the year. This temporary slowdown is expected to be followed by a return to growth, positioning Highwoods to capitalize on the evolving trends in the office real estate market.
The company's focus on providing best-in-class office spaces in prime locations, coupled with its strong balance sheet and experienced management team, positions it to navigate the challenges and seize the opportunities that lie ahead in the commercial real estate landscape.
Conclusion
In conclusion, Highwoods Properties (HIW) has established itself as a premier office REIT, delivering consistent financial performance, strategic portfolio management, and a commitment to sustainable practices. Despite facing some short-term headwinds, the company's long-term strategy and strong market position in key southeastern U.S. markets provide a solid foundation for future growth. As the commercial real estate landscape continues to evolve, Highwoods remains poised to raise the bar in providing exceptional office experiences for its diverse tenant base.