Highwoods Properties Q1 Earnings: Resilience Amid Occupancy Challenges

Highwoods Properties (NYSE: HIW) delivered mixed results in its first quarter 2025 earnings report, with funds from operations (FFO) of $0.83 per share, narrowly beating the FactSet estimate of $0.81. However, revenue of $200.38 million missed expectations by 1.9%, underscoring the challenges facing office REITs amid shifting workplace dynamics. While the company highlighted operational strengths—including 3% year-over-year growth in same-store net operating income (NOI)—occupancy pressures and stagnant guidance cloud its near-term outlook.

FFO Beats, Revenue Misses: A Cautionary Balance

Highwoods’ FFO outperformance reflects disciplined cost management and a focus on high-quality assets, particularly in Sunbelt markets like Dallas and Nashville. However, revenue declined 5.6% year-over-year, a trend attributed to lower occupancy and slower rent growth. The absence of forward-looking financial guidance in the release raised eyebrows, with analysts noting the lack of clarity on 2025’s trajectory.

The stock has underperformed the broader market, dropping 7.1% year-to-date, compared to a 6% decline in the S&P 500. This reflects investor skepticism about the office sector’s long-term viability.

Occupancy Dip vs. NOI Resilience: A Strategic Trade-off

Highwoods’ same-store occupancy rate fell to 89% in Q1 2025, down from 90.5% in 2024, as companies continue to reassess office space needs. Management framed this as a temporary trough, projecting stabilization by mid-2025. The resilience of NOI—up 3% year-over-year—suggests the company is mitigating occupancy pressures through strategic leases and asset management.

Key highlights include:
- Leasing Momentum: Highwoods signed 922,000 sq. ft. of second-generation leases, including long-term deals averaging seven years, signaling tenant commitment.
- Development Pipeline: Projects like the $460M 23Springs in Dallas (54% pre-leased) and Midtown East in Tampa (16% pre-leased) are poised to drive future NOI growth.
- Capital Recycling: Plans to sell up to $150M in non-core assets and maintain $915M in liquidity post-dispositions underscore financial flexibility.

Institutional Divisions and Congressional Signals

Institutional investors remain divided on Highwoods’ prospects. Notably:
- PGGM Investments exited entirely, unloading $88.4M in shares, while Janus Henderson Group boosted holdings by 512%.
- Rep. Jefferson Shreve purchased up to $100,000 in HIW shares in March 2025, signaling potential insider optimism.

These moves highlight a market split: some funds see value in Highwoods’ Sunbelt exposure and asset quality, while others question its office-centric strategy in a post-pandemic world.

Risks and Opportunities Ahead

Highwoods faces headwinds, including:
- Interest Rate Pressure: A debt-to-EBITDA ratio of 5.8x (as of 2024) raises refinancing risks amid high borrowing costs.
- Regional Concentration: Over 80% of its portfolio is in just eight markets, leaving it vulnerable to localized economic downturns.

Yet the company’s $500M development pipeline—41% leased as of Q1—offers a growth catalyst, with stabilized projects expected to add $40M in NOI. Its focus on “best business districts” (BBDs), where demand remains strongest, positions it to outperform peers in recovery scenarios.

Conclusion: A Hold with Long-Term Potential

Highwoods’ Q1 results suggest a Hold rating, reflecting mixed execution and uncertain guidance. While FFO outperformance and NOI growth validate its operational discipline, occupancy declines and institutional skepticism warrant caution.

The company’s $850M liquidity and development pipeline provide a cushion for near-term challenges, but recovery hinges on its ability to stabilize occupancy by mid-2025—a goal supported by strong leasing pipelines in key markets. Investors should monitor:
- Q2 occupancy trends to gauge the trough’s depth.
- Development progress on high-profile projects like 23Springs.
- Balance sheet metrics, particularly as interest rates stabilize.

At a 7.1% dividend yield, HIW offers income appeal, but its long-term success depends on proving the office sector’s enduring relevance. For now, the data points to a cautiously optimistic, but not yet convincing, story.