In the aftermath of the pandemic and the rise of remote work, the office REIT sector has faced significant challenges. However, amidst this downturn, Highwoods Properties (HIW) emerges as a strong investment opportunity. While many office REITs have been negatively impacted, HIW stands out due to its strategic positioning and robust financial performance.

HIW's Strategic Advantage

HIW focuses on owning and managing properties in fast-growing cities and the Sunbelt region, where there has been notable employment and population growth. With properties in cities such as Atlanta, Charlotte, Dallas, Orlando, and Tampa, HIW benefits from high-demand locations. The company leases its offices to reputable companies like Amazon, Pfizer, and Bank of America, with Amazon being its largest tenant.

Weathering the Pandemic Storm

Although the office REIT sector continues to grapple with the effects of the pandemic, HIW has shown resilience by consistently growing its cash flow and funds from operations (FFO). Despite the industry's challenges, HIW reported FFO of $3.58 in 2020, $3.77 in 2021, and $4.03 in 2022. Remarkably, the company has achieved 12 consecutive years of FFO growth, an achievement few can claim, particularly within the office sector.

Is the Office REIT Sector Doomed?

While the office sector is still on the path to recovery, HIW distinguishes itself with a strong balance sheet and a BBB credit rating. Comparing HIW to other prominent REITs reveals that HIW has outperformed its peers, with many experiencing a decline of over 30% in the past three years. Moreover, HIW's 10-year total return has remained positive, positioning it favorably against its competitors.

The Changing Office Landscape

The future of office spaces has become a subject of speculation, with remote work becoming more prevalent. While the long-term impact of this trend is yet to be fully understood, HIW believes there will always be a need for office spaces. Currently, around a third of workers capable of remote work choose to do so permanently. However, an increasing number of individuals are gradually returning to the office, and many companies have adopted hybrid work schedules.

Valuation and Dividend

HIW's current valuation presents an attractive opportunity for investors. The stock's price has experienced a significant decline, trading at a substantial discount compared to its historical average. With a price-to-AFFO ratio of 10.5 and a dividend yield of almost 8%, HIW offers a compelling proposition. Furthermore, the company's dividend is well-covered by its current FFO, ensuring its safety.

Strength of HIW's Balance Sheet

HIW boasts an underrated balance sheet, often overlooked by investors due to the nature of the sector. The company's management and balance sheet strength are commendable, featuring well-laddered debt maturities. With no debt maturing until Q4 2025 and a net debt to EBITDA ratio below the sector average, HIW is in a solid financial position. Additionally, the company has substantial existing liquidity, further enhancing its stability.

Potential for Growth: Significant Discount to NAV

Analysts project a fair value price target for HIW at $45, indicating a substantial upside potential from its current stock price. While many REITs have struggled to recover, HIW has managed to slightly grow its net asset value (NAV) during the past year and has achieved a 3.4% growth over the last 12 years. The stock is currently trading at a significant discount to its NAV, making it an appealing option for investors.

Catalysts and Investor Outlook

In the event of a recession, HIW could face some challenges with portfolio vacancies. However, the company's experienced management has demonstrated resilience in previous economic downturns, successfully capitalizing on discounted property acquisitions. Patient and strategic decision-making could enable HIW to seize opportunities even during challenging times.

Investment Opportunity Summary

For investors seeking income in the current high-interest-rate environment, HIW offers an attractive choice. Despite the challenges faced by the office REIT sector, HIW has consistently delivered FFO and NAV growth over the past three years. With a dividend yield of nearly 8%, HIW provides a higher return than bonds and CDs. Moreover, the company's investment-grade rating, well-laddered debt maturities, and safe payout ratio further enhance its appeal. Investors looking for a stable investment with strong growth potential can find a promising opportunity in Highwoods Properties.