August 04, 2015

Public, Private Firms Weigh Real Estate Risks Differently

By:  Andy Ashby
Memphis Business Journal
Just like there is more than one way to skin a cat, there are a variety of ways to operate in commercial real estate.
One of the biggest operational differences lies in whether a company is publicly traded or privately held. Each offers different advantages and challenges, from making executive decisions to raising capital.
Highwoods Properties Inc., a self-administered and self-managed equity real estate investment trust, holds a significant portfolio of Class A office properties in the Memphis market.
The Raleigh, N.C.-based company was privately held when founded in 1978 and went public in June 1994.
CEO Ed Fritsch, who is in his 30th year with Highwoods, has seen both sides of the commercial real estate fence.
Fritsch and the people at Highwoods really like the REIT structure and what being publicly traded offers.
“It’s different things for different people,” he says. “There are some people who would never want to do what we do each day and we may not want to ever do what they do each day.”
The challenges Highwoods faced as a private entity didn’t change when it went public, it was just a different set of challenges.
One of the reasons it went public was because the company’s principals were looking to grow at a more rapid rate.
“We like the REIT vehicle because when we were private we had access to private equity and private debt,” Fritsch says. “As a publicly held company, we still have access to private equity and private debt, but we also have access to public equity and public debt. That gives us a lot of options from a balance-sheet flexibility perspective.”
Another advantage Highwoods has as a public company is that most of its buildings are owned in fee simple title. This means it can move tenants to other buildings in their portfolio without punitive impact because different buildings are not held by different limited liability companies and are not collateralized by different lenders. For example, a tenant could move around in any of the three Triad Centre office buildings in East Memphis without a lot of fuss.
“That gives us great flexibility with customers,” Fritsch says.
Highwoods currently has a $475 million revolving credit line through several banks. The company has $350 million available on that credit line, so it can buy a $30 million building or guarantee tenant improvements for a new customer quickly.
“We can write a check for whatever we want,” Fritsch says. “We don’t have to go to a banker, we don’t have to go to a board, we write the checks to run the business.”
Being publicly held, Highwoods also can offer certain services to multi-market users. It can give a company the same lease document with minor changes for offices in different cities.
“He doesn’t have to renegotiate all that verbiage and hire another attorney to go through that,” Fritsch says.
Private companies, however, don’t have to deal with quarterly earnings, analyst calls, investor conferences, mandatory board meetings and Securities and Exchange Commission compliance and regulatory issues. It requires more administrative work than if Highwoods was a private company. And investors want to see the senior executive leadership to get updates on the company, not just read a quarterly report.
“There are some days you’d prefer not doing it, but there is a benefit to doing it,” Fritsch says. “You’re holding yourself accountable.”
Memphis-based Boyle Investment Co. is a private commercial real estate firm with a long history of conservative, strategic growth. While public debt could help it grow faster, it hasn’t proven necessary., executive vice president, says.
“Our firm has done great and always found sufficient sources of capital to fulfill our mission,” Mark Halperin
In 2011, the company raised some additional money through a fund, a move which allowed it to buy Germantown Village Square locally as well as properties in Birmingham, Ala., and Nashville. Boyle has also done joint ventures with various institutional firms.
Many private firms like Boyle are small enough to do a handshake deal with a potential tenant and not have to clear it through many people.
“It’s nice having a short chain of command and being able to execute rapidly,” Halperin says.
While private firms don’t have to worry about pleasing Wall Street, the flip side of the equation is these companies are often risking their own money. Publicly traded commercial real estate firms have a big group of shareholders to spread risk.
“With us, it’s a very small group of people who have resources at risk,” Halperin says.
In the end, it’s mainly a matter of business preference.
“I don’t think either way precludes doing it the other way,” Halperin says. “They both have their pros and cons.”