Highwoods Leasing Holds Despite Economy

The Raleigh, NC-based REIT's executive team also reported strong FFO as well as net income for the quarter ending June 30. In the second-quarter earnings call, the performance was labeled as "stronger-than-expected operating results" by analysts at Milwaukee-based Robert W. Baird & Co. Highwoods, which was spotlighted in a in a GlobeSt.com feature with senior vice president Michael Beale recently, is primarily an office REIT that generates 83.2% of its revenue from its office properties. It also owns some retail and industrial properties that account for 9.2% and 7.6% of its revenue, respectively.

As Highwoods COO Mike Harris pointed out during the conference call, "leasing activity has slowed slightly, but deals are being signed." Harris cited the 1.5 million sf of second-quarter leases versus 1.6 million sf in last year's second quarter, adding "the current leasing theme points towards shorter-term renewals with many customers choosing to stay put until economic uncertainty passes."

Although the REIT would prefer to sign longer-term leases--as all building owners generally would--Harris said Highwoods is directing its leasing agents to get deals done. "Customers are willing to pay more and accept lower TI allowances for the flexibility of shorter term," he said.

Harris reported occupancy in Highwoods' buildings is higher than the overall market average in all of its markets, adding the office portfolio in general is faring well. "Within our portfolio we saw no increase in sublease space, no deterioration in accounts receivables and an improvement in net effective rents," he said. The company is facing higher operating expenses as a result of rising utility charges, fuel costs and property taxes--factors affecting all building owners.

Ed Fritsch, president and CEO, reported Highwoods' development pipeline now stands at $336 million and is 66% preleased. Year to date, the company has delivered $55 million of projects with another $146 million are scheduled to delivered by yearend. Highwoods Bay Center in Tampa is the city's first new waterfront office building in the last two decades. It has reached 85% occupancy after opening a year ago.

In discussing acquisition opportunities, Fritsch mentioned a theme that commercial real estate experts have been commenting on increasingly often in recent months: the wide spread between bid and ask rates for commercial properties. "One of the reasons there has been limited property trading in our markets is the wide spread between the bid and the ask," he said. The spread has potential to narrow as sellers who are financially motivated "face increasing pressure to sell," he said, which "could mean buying opportunities for us down the road."

With Highwoods' FFO growing 19% to $42.3 million in the second quarter in comparison with last year's second quarter and net income rising to $12 million from $4 million in the comparable quarter last year, Baird analysts Christopher R. Lucas, Avi Lerner and David S. Nebinski commented in their recent research report that "this quarter's results were impressive and the moderating economic environment has yet to impact Highwoods' financial results."