highwoods properties enterprise risk management properties enterprise risk management february 19,...

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Highwoods Properties

Enterprise Risk Management

February 19, 2010

Jeff Miller, General Counsel

2009 Developer of the Year

Overview

“We get it done” video

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Overview

As of 12/31/09

Largest Owner/Operator in SE• Suburban Office• 380 Properties• 36.1M SF (incl. JVs)

REIT

• Founded 1978• IPO 1994• $4.1B Total Market Cap

Strong Management

• Local Management Teams• Cycle-Tested• Avg. 26+ Years Experience

Diversified

• Geographically• Customer Base

Richmond

Raleigh

Des Moines

Kansas City

Nashville

MemphisGreenville

Atlanta

Orlando

Tampa

Greensboro

Winston-Salem

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Overview

As of 12/31/09

% of Annualized Revenue*Office 86.4%Industrial 6.8%Retail 6.8%

SF Occupancy20.4M 88.8% 6.5 87.40.9 98.0

27.8M 88.8%

OfficeIndustrialRetailTotal

Portfolio Summary (wholly owned)

Product

Atlanta

15%

Des Moines4%

Greenville

3%

Richmond

8%

Raleigh

15%

Winston-Salem

3%

Orlando

5%

Tampa

13%

Other

1%

Memphis

6%Nashville

12%

Kansas City

10%

Five Largest Customers

* Includes Pro-Rata Share of Joint Ventures

Greensboro

5%Customer Diversification

2 Customers > 3% of Annual Revenue

Federal Gov’t 8.9%AT&T 3.4%

36 Office Leases > 75,000 SF

11K SF Avg. Office Lease

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Strategic Plan

People Portfolio

CommunicationBalance Sheet

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Improving the Balance Sheet

Strategic Plan

Reduce Interest & Preferred Dividends

Pay Down Debt &

Preferreds

Fund Development

Sell Non-Core Assets

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SELL

Non-Core Assets

Strategic Plan

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BUILD

Infill Locations

Strategic Plan

Strategic Plan

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Forum IVForum V

ACQUIRE

Strategic Assets

4200 Cypress

PennMarc PennMarc

Forum III

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People & Communication

In the Woods

2009 Employee Road Show

Annual Employee Road Show

Internal Buy-In

“Right People on the Bus”

School of Excellence

Strategic Plan

Wall Street

Our Risk Management Principles

• Focus on embedding in culture

• Encourage uncanny peripheral vision

• Leverage skill, experience and dedication of entire employee base

• No silos, increase communication, encourage teamwork and institutionalize best practices

• Mitigate business risks to the extent reasonable and cost-effective

• Create value by taking business risks in a prudent and disciplined manner


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Tone at the Top

• Board immersed in strategic planning

• Audit committee review and oversight

• Weekly senior management meetings

• Monthly Executive Committee report and call

• SWOT analysis (Officer and Board-level)

• Measured performance

• REITs – Transparent industry

• Officer risk assessment process


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Officer Risk Assessment


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Entity Level / Strategic Risks

(What can go wrong?)

Risk Impact X Risk Likelihood =

1) Customer Credit Risk – (a) Risk due to customers failing to pay rent and honor their lease commitments, operating

expense reimbursements or notes receivable as agreed upon. (b) Risk due to concentration of customers in a particular

industry (e.g. a risky industry like sub-prime lenders) or concentration of revenues with one single customer.

1 - None

2 - Minimal

3 - Moderate

4 - Significant

5 - Material

1 - None

2 - Not Likely

3 - Possible

4 - Highly Likely

5 - Expected

2) Liquidity and Capital Markets Risk – (a) Risk due to inability to refinance debt obligations when they come due,

particularly over next 12 to 24 months. (b) Risk of inability to obtain sufficient debt and equity capital for future growth.

(c) Risk that rising cost of capital will lower HIW’s future growth rates, or make new projects and acquisitions less

attractive financially or even economically not viable.

1 - None

2 - Minimal

3 - Moderate

4 - Significant

5 - Material

1 - None

2 - Not Likely

3 - Possible

4 - Highly Likely

5 - Expected

3) Economic Environment Risks - Risk from adverse conditions in the economy as a whole and in our markets that may

impair our ability to meet our objectives. Conditions may include: recession, lack of job growth, unfavorable

capitalization rates, inability to develop due to absence of demand or adequate returns, oversupply of competitive space,

difficulty in leasing or re-leasing space, decreases in rental rates, increases in operating costs, etc.

1 - None

2 - Minimal

3 - Moderate

4 - Significant

5 - Material

1 - None

2 - Not Likely

3 - Possible

4 - Highly Likely

5 - Expected

4) Operational Risks – (a) Risk of ineffective development, acquisition, construction management, leasing and property

management services. Potential causes could be: lack of system integrity, human error, lack of training and/or

technological investment, poor customer service, outsourcing, cost in-effectiveness, or ineffective support from key

corporate departments (such as human resources, asset management, marketing, accounting, legal etc.). (b) Risk of being

too reactionary in our leasing efforts (absence of a sophisticated effort to attract customers from competitors – lack of

warm or cold calling.

1 - None

2 - Minimal

3 - Moderate

4 - Significant

5 - Material

1 - None

2 - Not Likely

3 - Possible

4 - Highly Likely

5 - Expected

5) Financial Reporting and Compliance Risk – Risk (litigation, stock price decline, reputation loss) from non-

adherence to accounting, tax, SEC (including SOX), NYSE, environmental, federal, state and local regulatory requirements

as well as inability to adhere to budgeting and internal accounting policies.

1 - None

2 - Minimal

3 - Moderate

4 - Significant

5 - Material

1 - None

2 - Not Likely

3 - Possible

4 - Highly Likely

5 – Expected

Grassroots Efforts

• Best practices

• School of Excellence Everyone has authority for a good idea

• ERM matrix process

1st step analysis of specialized risks (vertical analysis)

2nd step cross cross-functional linking of company-wide risks (horizontal analysis)

3rd step greater awareness at senior mgmt and Board level


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ERM Matrix


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MEMORANDUM

TO: Corporate Department Heads

FROM: Jeff Miller

RE: Enterprise Risk Management

We will conduct the formal kickoff of our Enterprise Risk Management

Program at 10:00 A.M. on May 15, 2009 in the training room. Why are we

doing ERM?

Some of the rating agencies now require a formal ERM program.

Our Board of Directors has asked us to put an ERM program in place

and report on it regularly.

ERM leverages best practices and allows us to address business risks

and capitalize on business opportunities prudently and effectively.

We already do a lot of ERM around our company. We may not call it

ERM, but it’s all around us. What we’re doing now is recognizing the

importance of bringing everything together.

ERM Matrix


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Our risk management objectives are simple and straightforward:

Risk management is not the responsibility of a single person. Rather,

it is an embedded part of the Company’s overall culture….an

important institutional link in connecting the four tenets of our

Strategic Plan. We want our employees to have uncanny peripheral

vision. In addition to looking out the windshield and the rear view

mirror, we want our employees to look left…look right…look

up….and look down…for anything and everything that makes us

better and helps us avoid potential pitfalls.

We seek to capitalize on the skill, experience and dedication of our

full employee base by breaking down silos, increasing

communication, encouraging teamwork, reducing redundancies and

institutionalizing our best practices.

We seek to mitigate business risks to the extent reasonable and be

even more cost-effective through disciplined decision-making based

on candid and thoughtful analysis of risks and rewards, the purchase

of well-placed insurance and the implementation of processes with

minimal operating complexities.

Our risk management platform is designed to put our business

people…our leasing representatives, our property managers, our

development group and our investments team… in a position to do

business….to create value by taking business risks in a prudent and

disciplined manner.

ERM Matrix


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An important component of our risk management program is to identify department-

level risks, measure probability and magnitude of a deficiency, recognize reliance on

other departments and third parties and reveal any gaps or deficiencies. Another

objective is, as our CFO likes to say, “just because we bake the cake according to the

recipe does not mean the recipe is right in the first place.”

Our next step is for each department listed below to undertake an ERM-brainstorming

exercise within their own departments. We will provide each department with a template

that can be used as a starting point for a risk matrix. Fortunately, our HR department has

served as our guinea pigs for this exercise. Over the past few months, they put together

the attached HR risk matrix. Our ERM team worked with the HR department to design

the matrix. At the meeting, the HR department will describe how they went about putting

together their risk matrix. As you’ll see in the HR risk matrix, probability and magnitude

of a deficiency are measured on a scale of 1 to 5. Set forth underneath the list of

departments is a guide for how to score risks within the department.

We will ask each department to put together their own risk matrix by working with

our ERM team to go through the same or similar exercise that HR has completed.

Afterwards, our ERM team is going to put all the risk matrices together, which are all

ground-up vertical assessments, and look at them collectively from a horizontal

perspective. Our most important goal in this project is to continue to further strengthen

our business risk management processes and be sure that they become an embedded part

of the Company’s overall culture. We hope to identify processes that can be streamlined

and gaps that can be remediated. If too much process is strangling the prudent taking of

business risk, then we’ll fix that too.

ERM Matrix


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Guide to Probability and Deficiency Scoring

Note: A deficiency is basically something that could go wrong.

Probability of Deficiency:

1. Remote – The likelihood of a deficiency is remote, meaning less than 10%

chance.

2. Unlikely – There is a minimal likelihood of a deficiency, meaning 10-35%

chance.

3. Possible – There is a reasonable likelihood of a deficiency, meaning 35-65%

chance.

4. Likely – There is a substantial likelihood of a deficiency, meaning 65-90%

chance.

5. Definite – The likelihood of a deficiency is almost guaranteed, meaning greater

than 90% chance.

ERM Matrix


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Guide to Probability and Deficiency Scoring

Note: A deficiency is basically something that could go wrong.

Magnitude of Deficiency:

Note: It is difficult to rank the magnitude of a deficiency, which requires more art than

science. The degree of magnitude could be measured by dollar impact, reputational

harm, detrimental impact on employee morale, amount of senior management attention,

extent of regulatory involvement, negative publicity, stock market reaction etc.

1. None – It’s hard to imagine that a deficiency would have any negative

consequences.

2. Nominal – Even if a deficiency occurs, it does not result in any costly or long-

term damage, typically does not require senior management attention and can be

remedied without much effort.

3. Moderate – A deficiency that could result in up to $X of unexpected costs to the

company, requires notification of senior management, but can typically be

remedied in less than three business days without a whole lot of effort.

4. Significant – A deficiency that could result in more than $X in unexpected costs

to the company, requires some concentrated amount of senior management

attention, could result in negative publicity if not fixed and/or cannot be remedied

in less than one week.

5. Severe – A deficiency that could result in greater than $Y in unexpected costs to

the company, generate any type of negative publicity, require extensive senior

management attention and possible board involvement and/or cannot be remedied

without lots of effort and diversion of employee attention (typically more than

two weeks).

Functional ERM Processes

• Counterparty Risk

Ongoing Customer credit review

Co-tenancy provisions

Financial institution risk

1031 exchange risk

Insurance company risk

• Credit Instruments

Covenant compliance

Notice requirements

Operational restrictions


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Functional ERM Processes

• Economic Crisis Stress Testing

Financial

Legal

Operational

• Crisis Management

• Records Retention

• Information Technology

• Insurance

Property, Auto, Casualty, Umbrella

E&O, D&O, EPL, Fiduciary


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Lessons Learned

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If you ask why and the answer is “cause that’s the way we’ve always done it,” RUN!

Lessons Learned

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If you prepare for a worst-case scenario, you’ll reduce the chance it will ever happen.

Lessons Learned

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You can’t stop every problem, but you can contain the biggest ones.

Lessons Learned

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Make sure you have the right recipe. Otherwise, the cake might not taste good.

Lessons Learned

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Bottlenecks are a recipe for missing opportunities and missing risks.

Lessons Learned

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Don’t bet your business on a single point of failure.

Lessons Learned

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You’ll have big problems if you fail to see the forest through the trees.

Lessons Learned

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Be sure your eyes are wide open when entering into a business arrangement.

http://www.wallpapersphere.com/preview/abstract/eyes-wide-open/1280+x+800/808/20715

Lessons Learned

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There’s no substitute for good peripheral vision.

Lessons Learned

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Break down silos.

Lessons Learned

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Sometimes, there really are two legitimate ways to look at the exact same thing.

Lessons Learned

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“We sailed forward today

south by south west.”

Christopher Columbus

Journal Entry

Upon reflection, the waters might not have been as calm as you originally thought.

Lessons Learned

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It is critical to have the right people in the right seat on the bus.

Lessons Learned

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One bad apple can spoil the whole bunch.

Lessons Learned

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Building consensus is harder than dictating, but more rewarding for your business.

Overview

“Crazy world” video

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Lessons Learned

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The world does sometimes get turned upside down.

Lessons Learned

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“The market can stay

irrational longer than you

can stay solvent”

John Maynard Keynes

Don’t ever talk yourself into thinking that it can’t get worse.

Lessons Learned

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Don’t become addicted to something you can’t control.

Lessons Learned

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March 2008

… store up money

when it is plentiful and

use it only when it is

scarce. Then you can

buy it when everyone

else wants to sell. This

means that, in a period

of prosperity, it is

better to buy nothing

at all, but let your

money accumulate

until it is needed.

February 1923

Sometimes going against the grain is the right thing to do.

Lessons Learned

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Don’t ERM your business to death.

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Lessons Learned

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Sometimes you just have to hold hands, hope for the best and jump.

Lessons Learned

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There is no finish line in business.

Lessons Learned

“There’s no finish line in business” video

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alexander169@gm

February 2010

highwoods properties enterprise risk management properties enterprise risk management february 19,...

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