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Highwoods Buys CBD Nashville Asset

Zacks Equity Research

Highwoods Properties, Inc. (HIW) acquired The Pinnacle at Symphony Place – a prized office asset in CBD Nashville recently. This 29-story, 520,000 square foot Class A building is currently 84.9% leased and the company’s total investment is projected to be $152.8 million ($294 per square foot) including planned near-term building improvements of $0.8 million.

The building enjoys an average remaining lease term of 11 years, with less than 2% expiring in the next five years, therefore offering the company an opportunity to enjoy a steady revenue stream. Furthermore, Highwoods expects occupancy to rise to 93% within two years at The Pinnacle.

Its position at the center of Nashville's booming CBD office, entertainment and arts district makes it a prized buyout. Occupancy level at Nashville CBD increased 1,100 basis points to 93.1% at second-quarter end from year-end 2010. It is also well ahead of the 90.8% occupancy reported for the Nashville office market as a whole.

This acquisition is estimated to help reap full-year 2014 cash and GAAP net operating income of $8.8 million and $10.7 million, respectively. For this property, which is on a ground lease with 93 years of residual term and 2014 cash rent of $0.6 million, Highwoods expects to incur $0.4 million of acquisition costs in the third quarter.

In Conclusion

With no debts assumed with this acquisition and funded through recent equity issuances, proceeds from non-core assets sell off and borrowings under its revolving credit facility, the purchase is a strategic fit for Highwoods.

The acquisition is expected to benefit from the promising market of Nashville's CBD that has witnessed significant public and private investment (more than $4 billion) over the last 10 years. The buyout is expected to add meaningfully to the company’s profitability going forward. It brings the company’s Nashville portfolio to 3.1 million square feet that is 93.8% occupied. Other upcoming projects in The Pinnacle’s vicinity are Hyatt Place Hotel and the high-rise residential condominium tower, The Encore.

Of late, Highwoods is riding high on its acquisitions and build-to-suit deals. Last week, the company also disclosed the penning of a build-to-suit deal with MetLife, Inc. (MET) for construction of offices for MetLife’s global technology and operations hub in the mixed-use Weston planned unit development (:PUD) in Cary, N.C. The deal will strengthen Highwoods’ cash flow position and its ties with MetLife.

We expect such opportunistic deals to drive the company’s top-line growth and strengthen its position in vibrant office markets of the U.S.

Highwoods currently carries a Zacks Rank #2 (Buy). Other REITs with the same rank include SL Green Realty Corp (SLG) and EastGroup Properties (EGP).

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