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S&P Global Ratings revised its outlook on Highwoods Properties (NYSE:HIW) to negative as the REIT's southern U.S. office portfolio as hybrid work reduces demand for commercial office space. The company's BBB ratings (one notch above investment-grade) are affirmed by the ratings company.
Highwoods (HIW) stock slipped 1.1% in Friday premarket trading.
"We expect operating performance for most office rated REITs will continue to be under pressure, as secular fundamentals remain weak," said S&P analysts led by Diandra Prutton. "This could cause access to a wide variety of capital to be constrained."
The REIT is better positioned than some of its peers due to its exposure to markets with higher job and population growth and higher utilization rates. "Yet the portfolio is not immune to the broader challenges facing the overall office sector," they said.
Also, Highwoods (HIW) faces an elevated lease expiration schedule for the next two years. Some 10.3% of annualized rent is scheduled to expire in 2024 and 13.8% in 2025.
S&P is monitoring the company's progress in leasing its development pipeline, "which could weaken operating metrics, if not leased up to expectations." The pipeline was 25% pre-leased as of Sept. 30, 2023, relatively unchanged from a year ago, the analysts noted.
"We expect credit metrics, which have weakened in recent quarters, to remain near current levels over the next two years," they said. Its adjusted debt to EBITDA for the trailing 12 months ended Sept. 30 was 6.4x vs. 6.0x in the prior-year period, with the increase due to spending on acquisition and development combined with a lower level of dispositions.
Overall, office REITs are in the green in Friday premarket trading. Boston Properties (BXP) +0.7%, SL Green (SLG) +1.2%, Vornado Realty Trust (SLG) +1.6%, City Office REIT (CIO) +3.2%, and Kilroy Realty (KRC) +0.3%.