Operationally talking, one of the vital unstable kinds of REITs over the previous two years have been these devoted to the workplace house class. These corporations have been negatively affected by the COVID-19 pandemic, however not all skilled the identical quantity of ache. Among the operators fared fairly effectively all through the pandemic. And one among them is an organization referred to as Highwoods Properties (HIW). This high-quality prospect appears to be buying and selling at roughly honest worth once you examine it to different gamers in its market. However on the entire, shares of the enterprise look to be fairly inexpensive. No, it isn’t the type of firm that’s prone to create important upside for traders within the close to time period. However for these fascinated by holding for the lengthy haul who’ve a bullish stance on the workplace house market, it actually warrants some consideration.
Administration has been busy
The final time I wrote about Highwoods was in an article printed in March of final yr. In that article, I rated the corporate a bullish prospect and referred to as it a top quality operator. Since then, shares of the enterprise have generated a return for traders of 17%. Typically talking, that may be a strong return. Nevertheless, it was barely weaker than the 19.9% generated by the S&P 500 over the identical time frame. The market appears to nonetheless be cautious of the workplace house area of interest, possible due to uncertainty concerning the latest surge of COVID circumstances (a surge that’s now receding), and possibly as a consequence of questions on whether or not the distant work motion is right here to remain.
Whereas the market kicks these ideas round, administration has been relatively busy. Simply contemplate what has occurred over the previous few months. In July of final yr, as an example, the corporate closed the acquisition of 5 properties in North Carolina for a mixed $683 million. That was the biggest acquisition the corporate engaged in final yr. Nevertheless, it additionally spent $57.8 million for improvement land in Nashville. That land consists of 77 acres. That deal was introduced in October. Additionally since that point, administration has been attempting to unload another belongings. The latest got here in early December when the corporate introduced the sale of three corporations for a mixed $55.8 million that generated $2.6 million in money working revenue yearly. That is along with some gross sales, announced in November, of 5 properties for a mixed $134.1 million. These specific properties generate money working revenue of about $7.3 million yearly. It’s unclear whether or not these transactions have been factored into 2021’s steering.
In all, Highwoods has a relatively giant footprint right this moment. The corporate boasts possession of over 26.8 million sq. toes, 89.6% of which is occupied. Of the property that’s occupied, the corporate has succeeded in amassing rents representing 99% of the quantities that have been as a consequence of it all through the COVID-19 pandemic. This demonstrates the standard operation the corporate has. It seems as if administration is intent on rising the enterprise additional. This may be seen by contemplating the whole acquisitions anticipated for final yr of between $783 million and $933 million. Seeing such a push for development is a internet optimistic.
Final yr, acquisitions made by administration proved useful for shareholders. As have the excessive assortment charges the corporate achieved. Within the first 9 months of the 2021 fiscal yr, as an example, the corporate generated income of $564.80 million. That represents a rise of 1.4% over the $557 million the corporate generated the identical time one yr earlier. With income on the rise, profitability has been rising too. Working money circulate up to now final yr (by the primary 9 months) totaled $309.22 million. That’s 12.3% larger than the $275.46 million the corporate reported for the primary three quarters of 2020. If we take out most popular distributions, then the adjusted working money circulate determine would have been $307.35 million. That compares to the $273.59 million generated within the first 9 months of 2020. In the meantime, FFO, or funds from operations, got here in at $299.77 million. That compares to the $289.62 million generated a yr earlier. And EBITDA has risen from $357.59 million to $368.16 million.
For the 2021 fiscal yr, the one actual steering with regards to profitability was for FFO per share. On the midpoint, this determine totals $3.745 per share. Given the present share depend of the corporate, it really works out to FFO of round $390.91 million. Making use of that very same year-over-year development fee to the opposite profitability metrics, EBITDA needs to be round $472.97 million, whereas the adjusted working money circulate determine needs to be about $363.90 million.
Taking these figures, I used to be in a position to worth the corporate because it stands right this moment. On a ahead foundation, the worth to adjusted working money circulate a number of stands at 13.4. That compares to the a number of of 12 that it was buying and selling for once I final wrote about it. The worth to FFO a number of is 12.5, up from the 11.3 beforehand. And the EV to EBITDA a number of is 16.5. That compares to the 14.1 once I final wrote concerning the agency. To place this all in perspective, I then determined to check the corporate to the 5 highest-rated of its friends as outlined by In search of Alpha’s Quant platform. Utilizing the worth to working money circulate method, these corporations ranged from a low of seven.4 to a excessive of 16.6. Three of the 5 corporations have been cheaper than our goal. I then did the identical factor utilizing the EV to EBITDA method, ending with a spread of 11.3 to 29.5. On this case, three of the 5 corporations have been cheaper than Highwoods as effectively.
|Firm||Worth / Working Money Move||EV / EBITDA|
|Postal Realty Belief (PSTL)||13.7||29.5|
|Metropolis Workplace REIT (CIO)||11.9||11.9|
|Company Workplace Properties Belief (OFC)||11.7||14.9|
|Kilroy Realty Company (KRC)||16.6||11.3|
|Paramount Group (PGRE)||7.4||17.4|
At this second, I need to say that I proceed to be impressed by administration’s operations. The corporate is performing fairly effectively and it’s doing so with little volatility. It’s tough to inform precisely how latest transactions will have an effect on its operations, however the possible final result needs to be optimistic for traders. The pricing of the inventory has risen some, however shares aren’t priced at ranges that I’d contemplate unreasonable. At worst, the corporate is pretty valued. However extra possible than not, I feel it affords extra upside from right here.