As that chart shows, the REIT has significantly underperformed the S&P 500 over the last five years.
That poor performance is one factor driving its market rotation plan, launched in August of 2019. The strategy aimed to achieve the following goals:
- Accretion: Accretive to cash flow and cash available for distribution while being neutral on an FFO basis.
- Leverage neutral: The REIT aimed to maintain conservative debt metrics.
- Improve portfolio quality: Strengthen its long-term same-property cash NOI growth prospects.
- Improve portfolio efficiency: Reduce its capital spending and building count.
- Simplify operations: Reduce its general and administrative expenses while exiting the industrial real estate sector.
- Enhance future growth: Opportunities for additional investments in the fast-growing Charlotte market.
Phase one of this strategy saw the company purchase the Bank of America Tower in Charlotte for $436 million in November of 2019. It paid for that purchase by selling $428 million of properties in Greensboro and Memphis by early 2020. It has since launched phase two, completing additional property sales in both markets. That gave it the cash to buy out a joint venture partner in Raleigh.
Before this asset rotation plan, Highwoods Properties exited the Kansas City market via several deals in 2016. The largest transaction was the $600 million sale of nearly all its Country Club Plaza portfolio containing 804,000 square feet of retail space and 468,000 square feet of office space to mall REITs Taubman Centers and The Macerich Company (NYSE: MAC). Those sales helped repay debt, fund development projects, pay a special dividend, and make acquisitions in other markets.
Despite all the company's wheeling and dealing, it hasn't been able to grow its FFO per share that much in recent years. It has only increased from $3.28 per share in 2016 to $3.58 per share last year, or 9.1% during the previous five years.
However, that hasn't stopped Highwoods from growing its dividend. The REIT has increased its payout in each of the last five years, growing it at a 2.5% compound annual rate. On top of that, it made a large special dividend in 2017 following its exit from Kansas City. Because Highwoods' payout has continued to grow while the stock price has declined, the dividend yield has increased. Over the past year, it has averaged about 4.5%, above the REIT sector's 3.5% average.
The bottom line on Highwoods Properties
Highwoods Properties has spent the past few years refocusing its office portfolio on faster-growing secondary markets, predominantly in the Sun Belt region. While that shift has stunted its growth in recent years, it should start paying dividends as its development projects come online. That gives the REIT intriguing upside potential as the office market rebounds from its pandemic-related headwinds.