Highwoods Properties: FFO Set To Begin Recovery From 2021-2024 Slump

Highwoods Properties (HIW), a Sun Belt office REIT, reported a Q1 2025 FFO decline due to occupancy issues, but raised its full-year outlook based on increased Q2 leasing activity. Anticipated higher occupancy and reduced interest expenses are projected to drive FFO growth in 2026, supporting a Buy rating, though risks remain from slower Fed rate cuts and uncertain occupancy stabilization.

Analysis

Highwoods Properties (HIW), an office REIT deriving over 95% of its net operating income from the Sun Belt region, reported a decline in Funds From Operations (FFO) for Q1 2025, both year-over-year and quarter-over-quarter, attributed to reduced occupancy levels. Despite this setback, the company has increased its full-year 2025 guidance, buoyed by a notable uptick in leasing activity observed in Q2 2025. The prevailing expectation is for HIW's FFO to re-enter a growth phase in 2026, supported by projections of higher occupancy and diminished interest costs, forming the basis for the analyst's "Buy" rating. However, this outlook is subject to material risks, specifically the potential for slower-than-anticipated interest rate cuts by the Federal Reserve and the possibility that office occupancy rates may not stabilize as projected, which could temper the recovery.

Key Decisions for Investors

• Given the analyst's Buy rating and the projection for FFO to resume growth in 2026, investors might consider HIW based on its anticipated recovery, especially those with a positive view on Sun Belt office assets.
• It is critical for investors to closely monitor HIW's reported leasing activity and occupancy rates in the coming quarters, as these are key indicators for the forecasted FFO improvement.
• Investors should remain cognizant of the primary risks, namely the potential for slower-than-anticipated Federal Reserve interest rate reductions and the uncertainty surrounding the stabilization of office occupancy, both of which could impact the REIT's financial performance and FFO growth trajectory.