Raleigh, N.C.-Based Highwoods Properties to Sell Charlotte Office Portfolio

Hoping to take advantage of a seller's market, Highwoods Properties said that it would put its Charlotte portfolio on the block and close its office in the Queen City.

The Raleigh real estate investment trust, the biggest owner and operator of suburban office properties in the Southeast, owns 30 buildings totaling 1.5 million square feet and 28 acres in Charlotte. The listing, with CB Richard Ellis, includes Highwoods' third-party managed properties in Columbia, S.C., which total 426,000 square feet. The company tried to sell that property before the decision to pull out of Charlotte.

The listing accounts for about 5 percent of the Highwoods' holdings. As of June 30, the company owned or held interest in 527 office, industrial and retail properties totaling 41.6 million square feet in 11 states.

The move is consistent with the company's strategy to maximize market share and be the dominant real estate owner and operator in its markets. The Charlotte market consists of about 39 million square feet of office space, according to Karnes Research, giving Highwoods about 4 percent market share.

"We thought that we'd test the market and see what the market pricing would be for these assets," said Ed Fritsch, the company's president and chief executive. "We don't have to sell. If we don't get the pricing, the returns that we want, we won't sell it."

Fritsch wouldn't reveal the portfolio price, but said Highwoods would sell the assets as a package and use the proceeds to pay off debt. Also, closing the 23-employee office would save the company $650,000 annually.

As of the first quarter, the company's long-term debt was $1.8 billion. After an announcement in August that the company would adjust the way it booked about 10 property transactions and restate results for 2001 through the first quarter of 2004, Moody's Investors Service began reviewing Highwoods' debt ratings for possible downgrade. The company hasn't issued its restatements, and Moody's is still reviewing.

This kind of market departure is common among real estate investment trusts, said Louis Taylor, a Deutsche Bank analyst.

"If they don't think they can be competitive in a market or they think they've got better opportunities elsewhere, that's when you typically see them selling their assets and reducing the size of their portfolios," he said.

In 1999, Highwoods began selling off portfolios in South Florida and Maryland. Shedding the Charlotte portfolio for the right price could prove tricky, analysts say. Twenty-five percent of it is vacant -- about 10 percentage points higher than the market's vacancy rate, according to Karnes.

"There's an incredible amount of capital that wants to buy office buildings -- especially buildings that are fully leased," said Jim Sullivan, a principal at Green Street Advisors in Newport Beach, Calif. "When you talk about buildings that are not fully leased, the pool of capital gets much skinnier."

Highwoods shares fell 16 cents to $25.83 and gained 1.7 percent this year, less than the 18 percent increase in the Morgan Stanley Real Estate Investment Trust Index.