Highwoods hoards and waits

Disciplined strategy has put the company in good position

RALEIGH -- Ed Fritsch likes to quote a 1923 Forbes magazine article that offered pre-Depression advice: "Store up money when it is plentiful, and use it only when it is scarce."

That pretty much describes how Fritsch has guided Highwoods Properties since he took over as chief executive in 2004 and why the Raleigh real estate investment trust is winning good marks while other REITs are in the doghouse with investors.

The company used a three-year sellers' market to cull its portfolio, shore up a tangled balance sheet and hoard cash. The upshot: Highwoods is positioned to not only survive the recession, but perhaps emerge stronger because of it.

The sector has slumped since August on concerns that a frozen lending environment will make it difficult, expensive or impossible for some REITs to pay or renegotiate loans due in the next year.

Highwoods has not been spared, but its shares have not suffered as badly.

The decline has prompted at least three analysts to encourage investors to buy Highwoods stock in the past five weeks. Highwoods' limited exposure to debt troubles is among their reasons.

"The company's portfolio and balance sheet are in much better condition to weather economic challenges," Christopher Lucas, a Robert W. Baird & Co. analyst, wrote on Oct. 31.

Real estate investors usually borrow most of the money needed to buy or build. Rental income helps cover debt payments until the owner is ready to sell, usually years later, at an appreciated price.

During the past several years, when money was free-flowing and a booming economy boosted demand for all kinds of commercial real estate, buyers abounded and property prices skyrocketed. Many sellers walked away with huge profits.

What they did with those profits is largely determining who will most comfortably navigate the downturn. Some fed gains back into the frenzy, dumping profits into better buildings fetching inflated prices, or building aggressively as commodity prices drove up construction costs.

But as lack of credit has limited buyers in recent years, selling properties to pay down debt is a tough strategy. Now investors are concerned that some REITs won't be able to pay debts and continue operating in the black.

General Growth Properties, the second-biggest owner of U.S. shopping malls, has become the poster child of commercial real-estate debt troubles. The Chicago company had to scramble to get extensions for $958 million in debt payments due this week.

Another $20 billion will be due next year from commercial real estate companies. None is owed by Highwoods.

Disciplined spending

Highwoods used the buying frenzy to unload the dregs of its portfolio, selling to open-armed investors happy to overpay. Since January 2005, the company has sold $777 million in buildings.

Highwoods was disciplined in what it did with the proceeds.

It paid down $279 million in debt and preferred stock -- which saves the company about $28 million in annual interest. And it funded a $612 million development pipeline that is quite tame. The $336 million in offices still under construction are 71 percent preleased. The pipelines of most its peers are less than half full, Citigroup analysts report.

Highwoods this year finished the 33-story RBC Plaza, which was 97 percent preleased. The $136 million downtown tower is downtown Raleigh's tallest, and a symbolic departure from the suburban low-rises that made Highwoods. It is also the most the 30-year-old company ever spent at a single address. And while that may seem aggressive, Fritsch likes to point down Fayetteville Street for proof of his company's conservatism.