Highwoods Properties: The People, the Plan, the Balance Sheet
By: Ron Derven, contributing editor, Development
Award Winners 2009
Cool Springs V, a five-story, 255,000-square-foot building, was designed to consolidate all of Healthways' operations, while meeting the demand for an open and collaborative office environment consistent with Healthways corporate culture.
One of Edward J. Fritsch's favorite quotes, taken from a 1923 issue of Forbes (later reprinted in a 2008 edition), is: "Store up money when it is plentiful, and use it only when it is scarce." As president, CEO and director of Raleigh-based Highwoods Properties, Inc., one of the largest developers in the southeast, he has used this strategy to help steer the company through one of the most treacherous commercial real estate markets in memory and to set a course for long-term growth and success.
For Highwoods' approach to and success in adapting to changing market conditions, its quality of products and services, its social consciousness, its leadership in the real estate and general business communities and its commitment and involvement in NAIOP, Highwoods has been selected as the Developer of the Year for 2009.
"What enabled Highwoods to earn this prestigious award are its people and its business partners," commented Fritsch. "We have a collection of attractive and successful buildings, but it is the vision, intellect, camaraderie, tenacity, energy and dedication of the team that I so fortunately work with every day that enabled us to earn this much appreciated recognition."
Highwoods' Roots in Raleigh
Highwoods Properties, Inc. is a publicly-held, fully integrated, self-administered real estate investment trust (REIT) that was founded in Raleigh in 1978 to develop, lease and manage a 122-acre parcel called Highwoods Office Center. Over the next four years, the company developed its first dozen buildings at the site plus other properties in the Raleigh area.
During the next decade, the firm constructed many more buildings throughout the area and continued to obtain third-party development, leasing and management contracts.
In June 1994, Highwoods began trading on the New York Stock Exchange under the symbol HIW, with a market cap of $250 million. The company expanded into 11 markets over the next 10 years, including Atlanta, Des Moines, Greensboro, Greenville, Kansas City, Memphis, Nashville, Orlando, Richmond, Tampa and Winston-Salem and developed over $2.2 billion in new product.
GlenLake Office Park is a 35-acre Class A office development that will encompass seven office buildings totaling over 985,000 square feet when completed.
The 2005 Business Plan
Fritsch joined Highwoods in 1982 and became CEO in 2004. Although the commercial real estate market was booming at the time, he and his senior team wanted to look at everything the company was doing. "The world was changing in 2005 and we knew we had to do some things differently at Highwoods to survive and thrive over the long term. We asked ourselves, 'Is there an opportunity or good reason for us to re-invent how we operate?' At the outset, the leadership decided that this was going to be an all-out, no-holds-barred analysis. No person, property, or process was sacred. We undertook a lengthy and comprehensive evaluation of our business to identify what we should be doing differently."
This effort led to the development of a 130-page strategic plan that had many specific initiatives, some small, some big. This was a significant plan, particularly looking back at it from the perspective of mid-year 2009. The plan's key objectives were to:
- retain the company's best assets in its most desirable submarkets;
- dispose of all non-core land and buildings at historically high price levels;
- take the proceeds of those sales and pay down debt to dramatically strengthen the balance sheet; and
- fund a robust development pipeline.
"At times our strategy was questioned by people outside of the company," Fritsch recalled. "For example, in the period from about mid-2005 to mid-2007, many real estate entrepreneurs were buying properties at all-time high prices -- we weren't. Instead, we were focused on selling older, non-core buildings and marginal land. We sold at the peak and used the proceeds to pay down debt and fully fund our development pipeline." Highwoods' plan was to accumulate money when others are buying at higher prices and to deploy it when others are selling at discounted prices.
Fritsch said that the plan was implemented in January 2005 and since that time, it has developed $615 million of strategic, infill development and sold close to $1 billion of older, non-core buildings and marginal land. has 402 employees in nine divisions and corporate, according to Fritsch. "While we have centralized many corporate services such as accounting, IT and HR, we strongly believe that real estate is inherently a local business," he said. "All of our division vice presidents have strong ties to their local communities and are active participants in a variety of professional and community-based organizations. They are entrepreneurs, identifying development and acquisition opportunities within their respective markets, which they then bring to our investment committee where final capital allocation decisions are made."
Customers, Not Tenants
As brilliant as Highwoods' strategic plan was, Fritsch said that it is only part of the Highwoods story. A key reason for the firm's ongoing success is its unwavering commitment to the occupiers of its space. For all the real estate that it owns and manages, Highwoods does not have a single tenant at any of its properties--only customers. "We refer to them as 'customers,' not tenants, because we believe there is a missing relationship when you have just the landlord/tenant structure; it becomes purely a legal arrangement," continued Fritsch. "When you say 'customer,' however, that denotes a significant business and moral responsibility you have to that individual, that entity. We want to build a long-term, mutually beneficial relationship with them. Regardless if they are growing or contracting, we want to be their space provider."
The culture of Highwoods is focused on customer service. To ensure that every employee understands this, Highwoods launched its School of Excellence in 2006. Within six months of being hired, every employee--regardless of position--visits the Raleigh headquarters for a multi-day training program where he or she is taught how to implement and exemplify "The Highwoods Standard."
Highwoods wants its people to focus on the relentless pursuit of excellence. " 'Good' is not an option," explained Fritsch. "Anyone who performs at a lackluster level compromises the integrity and credibility of our company and our founders. If I underperform at a task, I've let down my 401 co-workers. My parents taught me that it's what you do when no one's watching that truly defines you. While good intentions and calculated risk taking never result in 100 percent perfection, if each of us does his or her best, whether somebody's watching or not, and we push to be better tomorrow than we are today, then Highwoods is destined to succeed."
Northshore Commons II, a four-story, 96,000-square-foot lakefront Class A building located in Glen Allen, Virginia's Innsbrook Corporate Center, an 800-acre business park recognized as one of the major office parks on the East Coast.
Creativity and Motivation
To achieve a high level of creativity and motivation, the company believes in constructive debate and open communication. CEO Fritsch personally detests internal hierarchies that restrict who can say what to whom. "Everyone at Highwoods has unbridled authority to propose an idea," he said.
Fritsch visits every company office at least once a year for a two-hour working session with the employees at that office to discuss the company and its long-term strategic plan. A very open, no-holds-barred question and answer session follows every presentation. Further, the company believes in giving every employee the tools and the latitude for professional growth. It actively supports continuing education and tries to promote from within whenever possible. "We support mentorships and active involvement in professional organizations such as NAIOP," said the CEO.
Building Relationships and Best Practices
Regarding NAIOP, Highwoods has been heavily involved in the association for many years and CEO Fritsch feels that it has been a win-win for both the association and the company. Over the past years, a number of the company's division vice presidents have served NAIOP in the roles of president and director of their local NAIOP chapters including Raleigh, North Carolina; Greensboro, North Carolina; Nashville, Tennessee; Tampa, Florida; and Atlanta, Georgia as well as served on NAIOP's national board of directors.
"NAIOP provides great networking opportunities," said Fritsch. "There's wide exposure to a large number of commercial office and industrial professionals -- be it brokers, vendors or prospective co-workers. NAIOP gives us an opportunity to build relationships and it also has a positive impact from a legislative perspective.
"We believe what NAIOP does as a whole is encourage best practices," he went on. "Without the non-ending pursuit of best practices, a company cannot be in the top quartile of an industry. If you get lackadaisical on continued process improvement, then you're going to get passed by."
Defining Raleigh's Skyline
Highwoods has produced many outstanding projects throughout the southeast. One project that the firm is particularly proud of is RBC Plaza in downtown Raleigh. Delivered in 2008, RBC Plaza is the tallest building in the city, standing 538 feet tall. This 33-story structure is a mixed-use tower with street-level retail, nine floors of in-building parking, 11 floors of office space and 11 floors of residential condominiums. The project, Highwoods' largest investment in one street address to date, contains 760,000 square feet of space. The facade is architectural precast glass and concrete, designed to replicate the craftsmanship of stone. The lobby finishes are detailed stone and custom woodwork.
"Given that Raleigh is our headquarters and my home, it means a lot for our company and to me personally to deliver a building that has truly transformed Raleigh's skyline," explained Fritsch. "This tower serves as the U.S. headquarters for RBC Bank and will soon be home to two very prominent law firms. Attracting RBC Bank's U.S. headquarters to Raleigh has been extremely positive for our community, not only from a business perspective, but also from a philanthropic perspective. RBC is a very active and engaged corporate citizen, and we are thrilled to have been part of the team that secured their long-term commitment to Raleigh."
Since its completion in the fall of 2008, Highwoods' RBC Plaza has transformed Raleigh's downtown skyline. The 760,000-square-foot mixed-use building features Class A office, residential condominiums, structured parking and street level retail space.
Supporting Community and Country
Like the new bank in town, Highwoods itself is a deeply engaged corporate citizen in Raleigh and in all of the communities in which it works. The firm's efforts are concentrated on programs involving health and welfare and community development. "We understand the unwritten obligation of giving back," said the CEO. "We cannot be integrated or respected within a community if we are not an active part of that community. Highwoods supports health, welfare and community development through leadership roles in many non-profit organizations. Many of our associates volunteer their time and talent to a number of worthy causes. We strive to synchronize monetary contributions and sweat equity, so we are financially supporting the deserving entities where our people are investing their own professional and personal time."
One company effort that greatly touched Fritsch and probably every employee was a donation it made to help an organization called Homes for Our Troops. "This past year has been economically tough for so many people," said Fritsch. "During the holidays Highwoods has always given a gift to each associate. In 2008, we decided to take a different approach. We took the money typically spent on a gift and made a donation to Homes for Our Troops. This organization supports the U.S. military by building specially adapted homes for our severely wounded veterans. I sent an e-mail to my co-workers explaining this decision and, unsolicited, I received more positive feedback, applauding this decision, than I have for any other communication I've sent. It just reinforced how lucky I am to work with such a great group of caring people who appreciate the sacrifices being made for our freedom."
The Highwoods' donation helped build a new home for Sergeant Darryl Wallace from Georgia. Sergeant Wallace was with the 82nd Airborne stationed in Afghanistan. On June 9, 2007, his military truck broke down. As it was being towed back to camp, an IED exploded under the truck. The Sergeant lost both of his legs, broke his left arm and suffered a crushed pelvis and severe stomach injuries when the vehicle exploded. He now lives in an adapted home with his wife Tiffany and son Chase.
Positioning for the Future
CEO Fritsch said that the biggest challenge in the commercial real estate business is its cyclical nature. He explained that every cycle has its own personality: "We have experienced down cycles driven by crazy high interest rates, oversupply, the implosion of the tech industry and dramatic employment contraction -- real estate is a balancing act."
Asked if this is the worst down-cycle he has seen, he replied that he was hesitant to call it the worst but that it is certainly tough. "Severity is in direct proportion to preparedness," said Fritsch. "Getting caught in a storm without water, batteries and an adequate supply of Slim Jims contributes to the severity of the storm. If you only manage your business for the upside, it's very difficult to be a long-term player in any industry.
"You have to manage your business so that you not only survive the downturns, but possibly find a way to benefit from them," he added. "While today's economic environment is extraordinarily severe, through good fortune and solid planning, our company is in a position of relative strength. We don't have much development overhang, our balance sheet is strong, we have a well-diversified rent roll and a seasoned management team that is energized and prepared to seize opportunities such as buying high-quality assets from distressed sellers."
For the moment, the company is finishing up two buildings for the federal government -- an FBI building and an FAA building. It is also seeking build-to-suits for high-credit-quality customers. It is using this time to refine master planning of hundreds of acres of land it owns. "This way," concluded Fritsch, "when the cycle does turn, we are well-positioned to move quickly."
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