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Page 1 1
Highwoods Properties
Enterprise Risk Management
February 19, 2010
Jeff Miller, General Counsel
2009 Developer of the Year
Page 2
Overview
“We get it done” video
2
Page 3 3
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
Page 4 4
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
Page 5 5
Strategic Plan
People Portfolio
CommunicationBalance Sheet
Page 6 6
Improving the Balance Sheet
Strategic Plan
Reduce Interest & Preferred Dividends
Pay Down Debt &
Preferreds
Fund Development
Sell Non-Core Assets
Page 7 7
SELL
Non-Core Assets
Strategic Plan
Page 8 8
BUILD
Infill Locations
Strategic Plan
Strategic Plan
9
Forum IVForum V
ACQUIRE
Strategic Assets
4200 Cypress
PennMarc PennMarc
Forum III
Page 10 10
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
Page 11
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
Enterprise Risk Management
11
Page 12
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
Enterprise Risk Management
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Page 13
Officer Risk Assessment
Enterprise Risk Management
13
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
Page 14
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
Enterprise Risk Management
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Page 15
ERM Matrix
Enterprise Risk Management
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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.
Page 16
ERM Matrix
Enterprise Risk Management
16
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.
Page 17
ERM Matrix
Enterprise Risk Management
17
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.
Page 18
ERM Matrix
Enterprise Risk Management
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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.
Page 19
ERM Matrix
Enterprise Risk Management
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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).
Page 20
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
Enterprise Risk Management
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Page 21
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
Enterprise Risk Management
21
Page 22
Lessons Learned
22
If you ask why and the answer is “cause that’s the way we’ve always done it,” RUN!
Page 23
Lessons Learned
23
If you prepare for a worst-case scenario, you’ll reduce the chance it will ever happen.
Page 24
Lessons Learned
24
You can’t stop every problem, but you can contain the biggest ones.
Page 25
Lessons Learned
25
Make sure you have the right recipe. Otherwise, the cake might not taste good.
Page 26
Lessons Learned
26
Bottlenecks are a recipe for missing opportunities and missing risks.
Page 27
Lessons Learned
27
Don’t bet your business on a single point of failure.
Page 28
Lessons Learned
28
You’ll have big problems if you fail to see the forest through the trees.
Page 29
Lessons Learned
29
Be sure your eyes are wide open when entering into a business arrangement.
Page 30
Lessons Learned
30
There’s no substitute for good peripheral vision.
Page 31
Lessons Learned
31
Break down silos.
Page 32
Lessons Learned
32
Sometimes, there really are two legitimate ways to look at the exact same thing.
Page 33
Lessons Learned
33
“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.
Page 34
Lessons Learned
34
It is critical to have the right people in the right seat on the bus.
Page 35
Lessons Learned
35
One bad apple can spoil the whole bunch.
Page 36
Lessons Learned
36
2009 Employee Road Show
Building consensus is harder than dictating, but more rewarding for your business.
Page 37
Overview
“Crazy world” video
37
Page 38
Lessons Learned
38
The world does sometimes get turned upside down.
Page 39
Lessons Learned
39
2009 Employee Road Show
“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.
Page 40
Lessons Learned
40
Don’t become addicted to something you can’t control.
Page 41
Lessons Learned
41
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.
Page 42
Lessons Learned
42
Don’t ERM your business to death.
Page 43
Lessons Learned
43
Sometimes you just have to hold hands, hope for the best and jump.
Page 44
Lessons Learned
44
There is no finish line in business.
Page 45
Lessons Learned
“There’s no finish line in business” video
45
alexander169@gm
February 2010
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