FEATURE ARTICLE, OCTOBER 2004

DOWN SIZING
Highland Equity Group concentrates on single-tenant properties.
Randall Shearin

The Park Summit office building in Duluth, Georgia.

When Michael Klump was head of Equity Investment Group, he oversaw the company’s portfolio of grocery-anchored shopping centers. After selling the majority of its portfolio to New Plan Excel in 2002, he decided to down-size in a different way — focusing on acquiring single-tenant properties and smaller convenience-anchored shopping centers. But down-sizing isn’t really what Highland Equity Group — Klump’s new entity — is all about. The company is acquiring at a rapid pace. So far, the company has acquired $122 million worth of single-tenant properties in the U.S.

Southeast Real Estate Business recently met with Klump and David Piasecki, senior managing director of the company, at Highland Equity Group’s Atlanta office.

Highland Equity Group was started at a time when there were a lot of new entrants to the single-tenant net lease market. Highland is differentiating itself by looking for areas in the market that are underserved.

“We like to do things that other companies won’t do,” says Piasecki. “I have phrased what we do as ‘the un-acquisition criteria company.’ We are trying to find ways to perceive and price value in maybe 50 out of 1,000 deals that cross our desks.”

To date, the company has purchased a diverse group of properties, ranging from retail to office to industrial. The company also bought a grocery-anchored shopping center in Jacksonville, Florida. Highland has also purchased or is in contract to purchase some freestanding big box retail properties like a Galyan’s store in Boston and a Circuit City store in Marietta, Georgia. Non-retail properties include a distribution center for Genuine Parts in Atlanta, a warehouse and assembly facility in Miami, two few flex-space facilities for Sun Belt Rentals in Orlando and Philadelphia, and an office building in Gwinnett County, Georgia, net-leased to Risk Management Alternatives.

“We really don’t have a bias to pick any particular type of property,” says Klump. “It depends on what’s available and what fits our needs at the time we are acquiring. So far that has led us to a pretty even mix of retail, office and industrial on the boards right now.”

The company has also started a municipal finance division, whereby it is out looking to finance and purchase municipal properties. It currently is in the process of purchasing a correctional facility.

“In the sale-leaseback business you look for companies that own real estate and need money,” says Piasecki. “Municipalities — whether they be state, county or local — they all fit that criteria: they own real estate and they need money. Sale-leasebacks in many municipalities do not have to go through the voter approval process. It’s a simple, off-balance sheet financing alternative for many municipalities.”

Highland Equity Group is also working with developers and retailers on the front end of its retail deals so that it develops a steady pipeline of properties to acquire. The company isn’t looking for the large drug store developers that have the capital to develop 30 stores, but rather the developers that have the resources to do 10 to 15, but the opportunity to develop 30 or 40 stores. Highland has the capabilities to provide equity, construction financing, a take-out loan or a combination of all.

“We really try to discern what the developer’s needs are to make that opportunity work,” says Piasecki. “We want to be a partner in every way, but we don’t want to develop, but we can be a significant financial player in a development aspect.”

One of the goals of starting a company that focuses on single-tenant properties is that the management and operations of the properties is simplified. Because of this, there is no need, unlike with a portfolio of grocery-anchored shopping centers, to amass a number of properties in any specific geographic region.

“In the single-tenant business you don’t have a lot, if any, responsibility for the property so you don’t have to have critical mass for management capabilities,” says Piasecki.

While Highland will look at a lot of deals that others won’t, Piasecki stresses that the company isn’t a bottom fisher either.

“We’ll win our fair share of the 20-year A-rated bond sale-leaseback deals,” he says. “We have the ability to do those deals. But the true value is in the marketplace for us today, it is the top 50 deals, not the top 5.”

The company’s acquisition specialist in John Sengson, who is a key part of choosing any deal that the company enters. Sengson was also with Equity Investment Group.

“John has been very critical to our success as a company,” says Piasecki. “With his shopping center background, John has a way of seeing value in properties that, quite candidly, a lot of people in the net lease business don’t have. He goes beyond who the tenant is, what their credit is and what the term of the lease is.”

In 2004, Highland Equity Group plans to acquire $200 million to $250 million worth of properties. It wants to increase the amount it acquires. In 2005, the company plans to acquire $300 million; in 2006, the company plans to acquire $360 million worth of properties.

“Everybody involved in this company wants to create a dominant, major player in this business,” says Piasecki. “There’s no area where the foot isn’t on the gas pedal.”

Highland plans to hold some of the properties it acquires, entertaining offers on select assets as they appreciate. The company wants to create a mass of properties so that it can be open to any structures — such as a private or public REIT — that may be more beneficial for it in the long run.

“We would like to have the potential to execute a capital markets play on all our assets,” says Klump.

©2004 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.