H ighwoods Properties is
currently going against
the grain of its REIT
peers. The Raleigh, NC-based
regional office developer, one
of Florida’s largest office land-
lords, posted gains in funds from operations in 2008 and has continued that momentum into this year’s first quarter. Ed Fritsch,
Highwoods’ president and CEO, recently discussed that success
with Real Estate Florida:
What has Highwoods been able to do lately that your peers haven’t,
especially with the office sector’s challenges lately?
While we certainly have had a good year, I don’t think there’s an
industry today that isn’t focused on preserving capital and we’re
there as well. Our development pipeline was over $350 million in
2006 and today it’s a small piece of that. We didn’t want to be in a
position of having a lot of development under way.
One of the good fortunes we’re having now is the timing that
we had with three major aspects of our business over the past few
years. One was that we sold a lot of assets at a time when pricing
was at a historic high, and they were assets that we wanted to sell
for strategic reasons rather than financial reasons, but it turned
out to be extraordinarily beneficial to our shareholders. Two is
that we were able to position ourselves from a balance sheet perspective where we paid down a significant amount of debt. We
took the collateral off of a lot of our assets so that we have a significant portion of assets that are unencumbered by debt today.
We’re able to reduce our total cost of capital by putting in place
some longer-term less expensive debt. Third is we started a significant amount of development and have delivered nearly $600
million with another $130 million yet to deliver, that was substantially preleased and heavily focused on infill locations.
Is Highwoods more likely to be a buyer or seller now?
The short answer is buyer. If you study good companies over time,
they are able to consistently recognize opportunities regardless of
where they are in the cycle. We feel like as tough as the environment is right now, given negative absorption and negative job
growth in some markets, that there are opportunities. We’re fortunate in that we have the dry powder on our balance sheet that
allows us to make some acquisitions.
What we’re looking for now is not necessarily distressed assets,
but we’re looking for distressed sellers—those who may find themselves in a position of having to sell in order to meet some other
obligations, or some directive to get out at some number substantively below what they bought it for. If those don’t occur, we don’t
have to buy anything.
We’re hopeful that there will be some opportunities, but they
have to be assets that, when they come into our fold, they raise
the overall average of our portfolio. We want to focus on higher-end assets in the best submarkets we can find in our markets.
What are Highwoods’ stronger and weaker markets?
From a job growth perspective some of the better markets for us
are Raleigh, Richmond and Nashville. Tougher markets would be
Atlanta and Tampa. The others fall in between.
From an overall absorption, our mantra now is that it’s important to keep the customers you have. There is such a nominal
amount of new prospects in the markets. The benefit that we have
from an economic perspective is that in the last downturn a lot of
the markets suffered from such a high percentage of sublease
space that flooded the market because there was such an overconsumption of space given the anticipated need for internal
growth by a lot of companies. For most of them, that internal
growth never materialized and they were put in a position of having to put large blocks of space on the market. We don’t have that
situation this time.
Construction cost escalations over the last three years have put
a governor on the amount of new space coming out of the ground.
Two things work in favor of landlords to keep second-generation
space leased—there is not a flood of first-generation space available, and there is a significant gap in pricing between first and
second generations driven by higher construction costs. In the last
downturn, that gap was relatively narrow. This time that gap is
substantive, more than 20%.
Can office landlords do anything to keep their tenants stable?
We have very little influence over a customer’s business plan. If a
tenant is going to get into financial trouble, a landlord can’t do
much to influence that. Once the storm hits, it’s too late to race to
the store for bottled water and batteries because everybody else
has already cleared the shelves.
When we complete two buildings that we have under way right
now, the federal government will represent 8.5% of the company’s
total revenues. It’s 23 different governmental agencies, it’s diversified and it’s within virtually every one of our markets. We’ve done
$160 million worth of build-to-suits in the last few years for the
federal government. To have that ballast, that stability and that
reliability is significant. —REFLA
