Highwoods Properties' (NYSE: HIW) portfolio has undergone a lot of changes in recent years. The office REIT launched a market rotation strategy, shifting from slower-growing secondary markets to those with more upside potential in the Sun Belt region. That repositioning plan will likely result in additional changes over the next few years.
Here's a look at where Highwoods Properties seems to be headed over the next three years.
Where Highwoods Properties is today
Highwoods Properties currently owns 25.9 million square feet of office space across the following cities:
- Atlanta: 21% of its revenue
- Nashville: 20%
- Raleigh: 18%
- Tampa: 13%
- Pittsburgh: 8%
- Orlando: 7%
- Richmond: 6%
- Charlotte: 4%
- Greensboro and Memphis: Less than 2%
Charlotte is the newest market for the company, which entered that fast-growing Southern city in late 2019 as part of its market rotation strategy. That phased plan saw the company sell a portion of its properties in the Greensboro and Memphis markets.
Where Highwoods Properties is going over the next three years
Highwoods Properties recently unveiled the next phase of its market rotation strategy. It has agreed to acquire a portfolio of office properties from residential REIT Preferred Apartment Communities (NYSE: APTS). The company will pay $769 million for five core properties and two non-core assets it intends to sell. The core properties include two office buildings apiece in Raleigh and Charlotte and a redevelopment site in Atlanta. The company plans to finance this acquisition by selling non-core assets, including those acquired in the Preferred deal and additional properties in the Greensboro and Memphis markets. That strategy will allow it to maintain a solid balance sheet as it enhances its portfolio.
The transaction will double Highwoods Properties' presence in Charlotte, increasing it to 8% of its revenue, and make Raleigh its largest market at 21% of its revenue.
The company could launch new phases of its asset rotation strategy in the coming years. For example, it could eventually exit the slower-growing Pittsburgh and Richmond markets to further increase its presence in faster-growing cities in the South, such as Charlotte, or add new markets, like Austin and Dallas/Fort Worth. It could also sell non-core assets in some of its current markets to finance higher-returning acquisitions in those same cities. For example, it sold a property in Atlanta for $30.7 million earlier this year, giving it some cash to acquire a joint venture partner's interest in an office complex in Raleigh for $131.3 million.
Highwoods will also likely continue investing in development projects. The REIT recently finished building two properties in Raleigh for $108 million, adding 345,000 square feet of fully leased space. Meanwhile, it's currently investing $394 million to build two projects in Nashville and another in Tampa -- adding 814,000 square feet of space, 76% of which it has pre-leased. The REIT has enough land to build more than 5.6 million square feet of additional space across all eight of its current core markets, representing $2.2 billion of future investment potential. That includes the redevelopment site it's acquiring in the preferred deal in Atlanta, which could see it build up to 600,000 square feet of office space and more than 300 multifamily units.
Expect a continued shift to faster-growing Sun Belt markets
Highwoods Properties has been steadily pivoting its portfolio to the fastest-growing markets, namely those in large metro areas in the Southeast. That strategy will likely continue over the next three years. The REIT seems poised to make additional acquisitions and invest in development projects in its target markets, which it could finance by exiting slower-growing markets. In the coming years, this steady shift should enable it to grow its income faster than if it maintained its existing portfolio.