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Shares of Highwoods Properties HIW have gained 13.1% in the year-to-date period against the industry’s decline of 6.8%.

This Raleigh, NC-based office real estate investment trust (REIT) is well-positioned to benefit from the growing demand for its premier office properties concentrated in high-growth Sun Belt markets. Its disciplined capital-recycling program and accretive development projects are other tailwinds. A healthy balance sheet position augurs well for long-term growth.

The company, carrying a Zacks Rank #3 (Hold) at present, expects 2024 FFO per share in the range of $3.46-$3.61. The Zacks Consensus Estimate for HIW’s current-year FFO per share is pegged at $3.56, which lies within expectations.

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Let us decipher the factors behind the surge in the stock price.

Highwoods has a large part of its portfolio concentrated in high-growth Sun Belt markets, and the company is poised to benefit from this portfolio focus. These markets exhibit long-term favorable demographic trends and are expected to continue experiencing above-average job growth. It also has a well-diversified tenant base that includes several industry bellwethers. These factors are expected to support its rent growth over the long term.

Highwoods is seeing a recovery in demand for its high-quality and well-placed office properties, as highlighted by a rebound in new leasing volume. The company leased 922,167 square feet of second-generation office space in the first quarter, including 422,889 square feet of new leases.

With the next cycle of office space demand likely to be driven by inbound migration and significant investments announced by office occupiers to expand their footprint in the Sun Belt regions, as well as additional hiring plans in the company’s markets, Highwoods is likely to experience healthy demand for its properties, boosting leasing activity. Also, the rise in the number of tenants returning to offices or announcing plans to come back is likely to support office real estate market fundamentals.

Highwoods has been following a disciplined capital-recycling strategy that entails disposing of non-core assets and redeploying the proceeds in premium asset acquisitions and accretive development projects. It has made efforts over the years to improve its portfolio quality by expanding its footprint in the high-growth best business districts markets through acquisitions and development initiatives.

The company maintains a healthy balance sheet position, with no consolidated debt maturities until the second quarter of 2026. As of Apr 16, 2024, it had around $17 million of available cash and $10 million drawn on its $750 million revolving credit facility. It enjoyed investment-grade ratings of BBB/Baa2 from S&P and Moody’s as of the end of the first quarter of 2024, rendering it access to the debt market at favorable rates. Hence, a solid balance sheet positions Highwoods to adequately fund its remaining capital obligations, such as the development pipeline and capitalize on growth opportunities.

However, competition from other industry players is likely to limit its pricing power and hurt profitability. High interest rates add to its woes.

Stocks to Consider

Some better-ranked stocks from the broader REIT sector are Alexandria Real Estate Equities ARE and Americold Realty Trust COLD, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for ARE’s 2024 FFO per share stands at $9.49, indicating an increase of 5.8% from the year-ago reported figure.

The Zacks Consensus Estimate for COLD’s 2024 FFO per share is pinned at $1.44, suggesting year-over-year growth of 13.4%.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO), a widely used metric to gauge the performance of REITs.

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