Highwoods Properties Inc.
(HIW), a leading real estate investment trust (REIT), recently obtained two loans totaling $162 million that improved its liquidity and enabled it to repay the remaining $91 million outstanding under its $450 million unsecured credit facility.

Highwoods owns and manages office, industrial, retail and service center properties, including development projects and apartment units. It also provides customer-related and fee-based real estate management services for its properties and for third-party clients. As of June 30, the company owned or had interests in 377 in-service office, industrial holdings and retail properties, with 34.9 million square feet of gross leaseable space. In addition, it also owned 580 acres of developable land.

The company will utilize available cash from the loan proceeds to pursue possible acquisitions and new developments. We suspect that there will be distressed selling from private owners and developers due to the recessionary economy and problems in credit markets. Well-capitalized REITs like Highwoods, which have access to cash and credit, could take advantage of this situation and yields on new acquisitions should become more attractive as 2009 progresses.

Currently, Highwoods is in the process of repositioning its portfolio to focus on stronger long-term markets and newer assets. A large part of the company’s portfolio is now concentrated in high-growth Sun Belt markets, including Atlanta, Nashville and Tampa, which should exhibit above-average job growth due to long-term demographic trends.

On the other hand, the US economy is rapidly declining and office/industrial owners will continue to suffer as the nation sheds jobs. We think operations will weaken in 2009 and suburban office owners will have difficulty maintaining occupancy and holding rents. Occupancies are dropping in many of Highwoods’ core markets. Consequently, we remain skeptical about the overall performance of the office sector.

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