Office space is a sector of the commercial real estate industry that has been particularly hard hit by the pandemic. How much space office businesses will need in the coming years is a pressing question, but not all markets are the same.
The Sun Belt, for example, is still attracting population and investment growth in many of its major 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 Highwoods Properties (HI W -2.11%)a Raleigh, North Carolina based company that only buys, owns and operates in what it calls “best business districts” or BBDs in its hometown as well as in Tampa, Richmond, Nashville, Charlotte, Atlanta and most recently Dallas.
Focus on business-friendly, affordable markets
In fact, the company is divesting its last non-Sun Belt holdings, two prime office properties in Pittsburgh, to fund its Dallas purchase and focus the portfolio solely on cities that the REIT says are business-friendly, affordable, and creating jobs for the population faster than the national average.
In these cities, the focus is on quality office space that people want to work in, and employers generally offer hybrid return-to-work options while the REIT properties remain near full occupancy and rent not only comes in, but does as well growing The company is conducting an aggressive development pipeline.
“The success of these projects illustrates our workplace design strategy that the most talent-enhancing workplace options in energized and monetized BBDs continue to be highly sought after by clients and their employees,” said the REIT’s President and CEO, Ted Klinck, in its Q2 2022 earnings call.
Past success lays the foundation for further growth
So far, so good. Publicly traded since 1994, the company has built a fortress-like balance sheet with a net debt to EBITDA ratio of less than six, giving Highwoods the ability to continue its current expansion plans without issuing new equity. Additionally, funds from operations (FFO) are up 8% year over year, and the company just raised its 2022 guidance for this key metric by more than 3%.
Highwoods Properties shares currently trade at about $29 per share, down about 30% year-to-date, but the company has increased its dividend five straight years and has a yield of 6.83 as of this writing % achieved. That dividend yield has remained steady between around 3% and current levels since the recovery from the Great Recession began in 2009, as shown in the chart below.
The company also has a payout ratio based on cash flow of a tiny (by REIT standards) 38%, paving the way for continued dividend growth. Meanwhile, analysts give this REIT a moderate buy rating with a target price of $38.57 (that’s a promising upside of about 31% from the current share price).
Highwood’s price-to-FFO ratio of 5.7 also indicates its current relative cheapness. That equates to about 6.9 for cousins propertiesanother office REIT focused on Sun Belt markets, and well below the 17.2 for Alexandria Real Estate Stocksan office REIT focused on the much trendier area of life sciences.
Traditional office REITs are generally out of favor these days — and for good reason — but there are gems to be found in this niche, and Highwoods Properties could be a particularly good way to diversify the real estate portion of your portfolio.
I plan to buy a few stocks soon and just hang in there. Coupled with the stock’s potential appreciation in value over time, this REIT’s dividend production will fit well into my retirement strategy, both for reinvesting now and for income later when 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.