Highwoods Properties: A Contrarian Gem in a Downgraded Office Market

In a sector plagued by skepticism, Highwoods Properties (NYSE: HQS) presents a compelling contrarian opportunity. While analysts have recently downgraded the office REIT, its operational resilience, geographic advantages, and undervalued metrics suggest a stock primed for recovery. Let's dissect the case for buying HQS amid the pessimism.

The Analyst Downgrades: A Symptom of Sector-Wide Headwinds

Recent analyst actions paint a cautious picture for Highwoods. Truist Securities downgraded the stock from Buy to Hold in July 2024, citing concerns about slower earnings growth and valuation relative to apartment and healthcare REITs. Wells Fargo similarly lowered its price target in November 2024, contributing to a consensus Hold rating with an average target of $24.75.

Yet, these downgrades stem largely from broader office sector challenges—not Highwoods' fundamentals. The REIT's Q1 2025 results, including a $0.91 EPS (surpassing estimates of $0.22) and raised FFO guidance, underscore its ability to navigate these headwinds.

The Case for Highwoods: Strength in Sunbelt Markets and Leasing Momentum

1. Leasing Activity Outperforms Expectations

Despite analyst pessimism, Highwoods reported 750,000 sq. ft. of leases signed in Q2 2025, including 300,000 sq. ft. of new leases—a strong indicator of demand. CEO Ted Klinck emphasized that tenant expansions outnumber contractions 3-to-1, reflecting enduring demand for centralized workspaces in Highwoods' Best Business Districts (BBDs) like Raleigh, Nashville, and Tampa.

2. Sunbelt Dominance and Supply Constraints

Highwoods' portfolio is concentrated in Sunbelt markets (e.g., Atlanta, Dallas, Orlando), where office pipelines are lean. For instance, Raleigh's office pipeline is empty for the first time since 2011, reducing supply-side risks. These markets boast 1.7% annual population growth and 3.6% office employment growth since 2010, outpacing national averages.

3. Financial Fortitude

• Balance Sheet: A $712 million liquidity cushion and 6.4x net debt/EBITDARE ratio (conservative for the sector) support its $2.00 annual dividend (6.7% yield).
• Growth Pipeline: A $474 million development pipeline (63% leased) and strategic asset recycling (e.g., acquiring the 100%-leased Advance Auto Parts Tower in Raleigh) position HQS to capitalize on future demand.

Valuation: A Discounted Gem in the Office Sector

Analysts' caution has pushed HQS to a P/FFO multiple of 10.5x, below its 5-year average of 13x and well below peers like Vornado Realty Trust (VNO) (P/FFO ~14x). Meanwhile, its 6.7% dividend yield—sustained for 32 years—offers downside protection.

The stock's $31.83 consensus price target (as of June 2025) implies 12% upside from recent lows. Even conservative growth assumptions suggest potential upside:
- Scenario 1: If HQS achieves its $3.31–3.47 2025 FFO guidance, a 12x multiple would value the stock at $39.84–$41.64.
- Scenario 2: A recovery to its historical average (13x) would imply a $40.30 price target.

Risks and Considerations

• Office Sector Uncertainty: Hybrid work trends and recession risks could pressure occupancy. Over 25% of leases expire by 2026, requiring proactive tenant retention.
• Valuation Compression: If Sunbelt markets underperform, or if Highwoods' lease renewal rates slip, the stock could face further downside.

Why Now? A Contrarian's Opportunity

The Hold consensus and downgrades reflect sector-wide pessimism, not HQS' intrinsic value. Key contrarian catalysts include:
1. Upcoming Earnings (July 29, 2025): A strong Q2 report could lift sentiment, especially if occupancy rates stabilize or improve.
2. Dividend Yield: At 6.7%, HQS offers income protection while investors wait for a valuation rebound.
3. Undervaluation: The stock's P/FFO discount and Sunbelt-focused strategy suggest it's pricing in worst-case scenarios.

Investment Thesis and Action Items

• Buy: For investors with a 3–5 year horizon, HQS offers a dividend yield + growth combination at a discount. Target entry points below $30, with a $40 price target over the next 18–24 months.
• Hold: If near-term macro risks (e.g., recession) pressure office demand, but consider adding on dips.
• Avoid: Only for those deeply skeptical of long-term office demand or unwilling to tolerate sector volatility.

Final Thoughts

Highwoods Properties is a classic contrarian play: a well-managed REIT trading at a discount due to sector sentiment, yet demonstrating operational strength in high-growth markets. With a robust balance sheet, strong leasing momentum, and a dividend that outperforms peers, HQS could reward investors who dare to go against the crowd.

Act now—before the market catches on.

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Data as of June 19, 2025.