CUZ Cousins Properties Inc

We maintain our Neutral rating on Highwoods Properties Inc. (HIW), a real estate investment trust (REIT), as we anticipate  the company to perform in line with the broader market. The company reported second quarter 2011 FFO (funds from operations) of $45.8 million or 60 cents per share compared with $48.7 million or 64 cents per share in the year-earlier quarter.

Funds from operations, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

Based in Raleigh, North Carolina, Highwoods owns and operates its properties through its wholly-owned subsidiary, Highwoods Realty Limited Partnerships. Highwoods owns or has management interests in office, industrial, retail, and service center properties, including development projects and apartment units across the U.S. It also provides customer-related and fee-based real estate management services for its properties as well as for third-party clients.

Highwoods is one of the biggest owners and operators of suburban office, industrial and retail properties in the Southeastern and Midwestern U.S., providing a complete line of real estate services to its customers and third parties through a fully-integrated organization. The core markets of the company include Florida, Georgia, Iowa, Maryland, Missouri, Mississippi, North Carolina, South Carolina, Tennessee and Virginia. This provides a significant upside potential for the company.

Presently, Highwoods is in the process of repositioning its portfolio to focus on stronger long-term markets and newer assets. A large part of the company’s portfolio is now concentrated in the high-growth Sun Belt markets, which provides above-average job growth owing to its long-term demographic trends. Consequently, Highwoods is relatively better equipped to counter competitive pressure.

However, despite the company’s continued portfolio repositioning efforts, Highwoods still has a large asset base in low barriers to entry Southeastern markets, such as, Atlanta, Piedmont Triad, Nashville and Kansas City, which historically have been weak over the long term. This undermines the long-term growth potential of the company.

Highwoods currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock. One of its competitors, Cousins Properties Inc. (CUZ) also holds a Zacks #3 Rank.

 
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