February 7, 2023

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Motley Fool Issues Rare “All In” Buy Alert
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Office space is a sector in the commercial real estate business that has been particularly hard hit by the pandemic. How much space white-collar businesses will be needing in the years ahead is a pressing question, but then again, not all markets are alike.
The Sun Belt, for instance, is still attracting population and investment growth in many of its large markets, and a real estate investment trust (REIT) with that focus is my pick for a top real estate stock to buy in September.
That would be Highwoods Properties (HIW -3.10%), a Raleigh, North Carolina-based operation that buys, owns, and operates only in what it calls “best business districts,” or BBDs, in its hometown, as well as Tampa, Richmond, Nashville, Charlotte, Atlanta, and, most recently, Dallas.
In fact, the company is shedding its last non-Sun Belt holdings, two prime office properties in Pittsburgh, to help fund the Dallas purchase and focus the portfolio exclusively on cities the REIT says are business-friendly, affordable, and are growing jobs and population faster than national averages.

Within those cities, the focus is on high-quality office space where people want to work and employers are generally offering hybrid return-to-work options while keeping the REIT’s properties close to fully occupied and the rent not only coming in but also growing as the company executes on an aggressive development pipeline.
“The success of these projects illustrates our workplace-making strategy that the most talent-supportive workplace options in energized and monetized BBDs will continue to be highly sought after by customers and their employees,” the REIT’s president and CEO, Ted Klinck, says in its second-quarter 2022 earnings call.

So far, so good. The company has been public since 1994 and has built a fortress-like balance sheet that has a net debt-to-EBITDA ratio below six, giving Highwoods the ability to pursue its current expansion plans without issuing new equity. On top of that, funds from operations (FFO) have grown by 8% year over year and the company just raised its 2022 guidance for that key metric by more than 3%.

Highwoods Properties stock is currently trading at about $29 a share, down about 30% year to date, but the company has raised its dividend for five straight years, producing a yield of 6.83% as of this writing. That dividend yield has been consistently between about 3% and the current level since the recovery from the Great Recession began in about 2009, as the chart below shows.
HIW Dividend Yield Chart
HIW Dividend Yield data by YCharts.
The company also has a payout ratio based on cash flow that is a minuscule (by REIT standards) 38%, paving the way for further dividend growth. Meanwhile, analysts give this REIT a rating of “moderate buy” with a price target of $38.57 (that’s a promising upside of about 31% from its current stock price.)

Highwood’s price/FFO ratio of 5.7 also points to its relative cheapness at the moment. That’s about on par with 6.9 for Cousins Properties, another office REIT with a focus on Sun Belt markets, and well below the 17.2 ratio for Alexandria Real Estate Equities, an office REIT that focuses on the much-trendier life sciences space.

Traditional office REITs are generally out of favor now — and for good reason — but there are gems to be found in this niche, and Highwoods Properties may be one particularly suited for adding diversity to the real estate portion of your portfolio.
I plan to buy some shares soon and just hold on. Along with potential price-share appreciation over time, this REIT’s record of dividend production will fit nicely into my retirement strategy, both for reinvestment now and income later as I need it.

Marc Rapport has positions in Alexandria Real Estate Equities. The Motley Fool has positions in and recommends Alexandria Real Estate Equities. The Motley Fool has a disclosure policy.
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