Raleigh-based Highwoods Properties announced Friday that it has acquired Two Alliance Center, one of Atlanta’s premier office towers, for $146.7 million.
The deal is the real estate investment trust’s largest acquisition since it paid $214.1 million last year for a six-building complex in Pittsburgh.
Two Alliance Center was built in 2009 in Atlanta’s Buckhead district. Highwoods CEO Ed Fritsch said that Buckhead, after experiencing significant overbuilding in 2009 and 2010, has been among the best performing markets over the past two years with 1.4 million square feet absorbed.
“Which is really a stunning number,” said Fritsch, noting that the occupancy rate has risen 6.3 percent over that period.
Highwoods has been in deal-making mode in recent months, selling five aging buildings in Nashville for $41 million while acquiring three medical office buildings in Greensboro for $29.8 million. The moves are consistent with the REIT’s long-term strategy of periodically pruning its portfolio of older assets and using the proceeds to pay down debt and acquire newer properties.
With very little new construction occurring in the office market, Fritsch said now is a good time to be a buyer. The company’s recent acquisitions have been well-stabilized buildings that, while immediately adding to the company’s earnings, also have some room for improvement.
Two Alliance Center, which includes 492,000 square feet, is 90 percent leased, and Fritsch said a contract is in place that will take that to 92 percent by the middle of next year. The building is expected to generate $11.1 million in operating income in 2013.
Investors appeared to like the deal, with Highwoods shares closing up 51 cents at $32.94 on Friday.
Two Alliance Center had been on the market for several months, but the price Highwoods paid, $298 per square foot, was a bit below what many thought it would fetch, said Brendan Maiorana, an analyst with Wells Fargo.
“It’s a very good quality building in Buckhead, and they’re getting it for a reasonable price with rents that are modestly below market,” he said. “… We look at it pretty favorably.”
Maiorana, who has a hold rating on the stock, said investors were also probably responding to the fact that Highwoods paid for the deal with existing cash and by tapping its revolving credit line. That means the company won’t have to sell additional assets or issue more stock to pay for it.
The Two Alliance Center purchase comes almost exactly 12 months after Highwoods made one of its biggest bets in recent memory, paying $214.1 million for PPG Place in Pittsburgh.
The Pittsburgh acquisition was the first new market Highwoods had entered in more than a decade, and many analysts were initially skeptical of the deal.
But Highwoods, one of the largest office landlords in the Southeast, has helped assuage those concerns by making solid strides in leasing up the buildings. The complex, which includes 1.54 million square feet of office space, was 81.2 percent occupied when Highwoods acquired it in September 2011. The occupancy level is expected to reach 86.7 percent by the end of the year.
“Initially I think a lot of us were skeptical,” Maiorana said. “It seems like it was a pretty good deal.”
As for Highwoods making additional acquisitions in the Triangle, where it owns and manages 5.1 million square feet, Fritsch said the company is always looking.
“There’s not a lot that’s come to market, but we’re certainly having conversations with various entities to see if they would have an interest in selling,” he said.
Highwoods is also one of several developers that has submitted plans to develop a new Triangle campus for the state’s Department of Health and Human Services. The company is one of three developers that submitted proposals for the former ConAgra site in Garner.
Fritsch declined to comment specifically on the DHHS project, citing confidentiality agreements, but said in general there’s a lot of uncertainty about when build-to-suit projects will move forward.
“We’re certainly chasing more than a handful of others, but the decision-making process is protracted,” he said. “… We find that the decision-makers are really taking their time and trying to dope out where the world is before they pull the trigger.”