Highwoods Properties Inc (HIW) 2002 Q1 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the happen 2002 first quarter earnings conference call.

If any participants on this call have not received a copy of first quarter release or a copy of our first quarter supplemental, we invite them to visit www.Highwoods.com.

This conference call will include the forward-looking statements including the financial conditions including estimates of asset deposits, deposition and contributions to joint ventures. The of, discussion of share repurchase activity and cost and timing of developmental projects, rollover rents, occupancy, expense and revenue trends and funds from operations.

Such statements are subject to various risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors including those identified in the company's annual report from 10-k for the year ending December 31, 2001. The company assumes no obligation to update or supplemental forward-looking statements that become untrue because of the subsequent events. I would like to introduce moderator for the conference, Ronald Gibson. Go ahead, sir.

Good morning, everyone. Welcome to our call. With me this morning is the usual cast of characters, Edward Fritsch, Chief Operating Officer and Carman Liuzzo, our Chief Financial Officer. You should have received our press release, as well as our supplemental reporting package. I'm going to begin the call today with remarks about the quarter. And our view of real estate markets. Ed's going to discuss leasing, development, and operations and Carman will review financial information for the quarter, provide guidance for the remainder of the year, and then close as usual with q and a.

Let me begin this morning with an overview of our markets in general. I can tell you that demand for office space continues to be very weak. In fact, a little weaker than we anticipated when we had our fourth quarter call. Once again, direct vacancy in our markets increased this quarter by another hundred basis points from the fourth quarter.

And with the exception of Richmond, four of our top five office markets have direct vacancy rates north of 14%. Richmond continues to be our best market with a reported vacancy of 10.8%.

On the absorption side, space absorption of space is negative. More so than last quarter at roughly 590,000 square feet negative in our top five office markets. That includes Atlanta, Tampa, research triangle, Nashville and Richmond and that compares to 172,000 square feet negative last quarter. Atlanta was the only top five market to record positive absorption, albeit a sparse 100,000 square feet.

Construction continued to decline and now, only totals roughly 1.4% of stock, compared to 4.3% last year. Another positive indicator, sublease space held steady this quarter and most of our markets and I think that's a very good sign. Very positive sign.

Richmond and Nashville are our strongest office markets and we view the Research Triangle market in Atlanta as our two weakest.

At quarter end, our office portfolio 89% leased versus market occupancy of 85%. We expected the first half of the year to be tough, and these vacancy rates are in line with our budgeted vacancy for the first quarter.

Much of the vacancy change in our portfolio can be traced to IBM vacated roughly 200,000 square feet in Tampa to move into a new Highwoods developed property. We're continuing to budget flat to slight decrease in occupancy for the second quarter.

On the industrial side, vacancy also increased as a large tenant in Charlotte portfolio vacated an industrial building roughly 350,000 square feet. Positive side, retail continued to be our strongest property type. Occupancy unchanged from the fourth quarter at 96%. Kansas City overall continues to report one of the few positive occupancy trends as city-wide occupancy increased from roughly 92.4% last March to 95% this year.

This market also generated significant same property NOI growth at roughly 10.1%. As we have communicated on previous calls, we continue to believe that our markets, the southeast markets, early cycle and will lead the recovery as they did during the economic downturn of the early '90s. An example, Reese projects office employment growth in the southeast earn market of 1.1% in '02, 3 hadn't 4% in '03. Growth rate that is are comparable to those we experienced from '98 to 2000 in our markets.

For the first quarter employment statistics in our markets outpaced the national markets by roughly 50 basis points. Research Triangle posted growth of 4%, followed by Nashville and Greenville, South Carolina, half a% and 7/10ths of a percent representatively.

In the fourth quarter, four of our markets were in the top ten relative to employment growth. Again, as measured by Reese. Those markets Raleigh, Charlotte, Orlando and Tampa. So the employment trends are very encouraging and they should begin to impact the absorption numbers later in the year. We feel we're at or near the bottom of the cycle, and we would anticipate improvements in our markets late in the year, most likely beginning in the fourth quarter, which is approximately a year later. Excuse me. A quarter or so later than we communicated on our last call.

Let me take a minute to cover several first quarter statistics. Cash available for distribution on a per share basis was flat with '01 at 77 cents. Due to lower capital expenditures and noncash straight line rents. Our cad dividend pay out ratio strong 75% and I want to emphasize that occupancy levels would have to fall to the low 80s this payout ratio to approach 100% and stay there for quarters -- for dividend to be affected. As expected, FFO per share declined 4% to 92 cents per share and reflected lower occupancy and lower than trends gains on land sales. At the end of March, we held assets for sale with a book value of 73 million compared to aggregate sale prices of approximately 97.6 million.

What are we doing? What should you expect from us going forward? We'll continue to focus on operations first. With particular emphasis on occupancy preservation, expense control, as well as customer control. Our forecast for 2002 average occupancy is 88 to 89% lowered by 1% than our previously communicated range of 89 to 90%.

We expect to start 75 million or less of new development in '02 with substantially all of it build to suit transactions and we expect to complete between 150 and 250 million of asset recycling transactions in '02.

The bulk of these will come from the sale of recently developed build to suit projects. We're more confident at the low end of this range than we are at the mid-point or the upper end.

As market conditions and capital allow, we'll make opportunistic acquisitions that enhance our franchise. By the way, we continue to see very little in the way of attractive acquisitions, and have yet to seedy stressed sellers come to the market. So the cap rate environment remained stable for office and industrial properties and that we think that clearly confirms the stability of ownership. So, in concluding my remarks, I want to convey to you that I'm confident that we have the right people, we have the right product, and the right locations providing exceptional levels of service to our customers.

We've operated through tough market cycles and conditions many times before. And as a result of the experience we've gained through these challenges, we're better equipped to handle the challenges this time around. And, I can assure you we're up for the challenge.

With that, I'm going to ask Ed to discuss our development and leasing trends.

Good morning. I'll start with the review of leasing efforts for the quarter. During the first quarter, completed 110 second generation office leases totaling 417,000 square feet, down to peak quarter levels of 1 plus million square feet.

A comparable to our 4 Q. 01 level. The volume in line with budgeted leasing expectations, reflecting the very low to negative levels of absorption in our office markets.

For the quarter, our office leasing cap ex per square feet of lease term totaled $1.76 lower than fourth quarter and slightly lower than recent trends. 1.76 includes lease transactions, primary renewals without T.I. requirements. As expected, higher than usual up front concessions and isolated to deals, specifically ten out of 110 deals 9% of transactions.

Last quarter, revised our rollover rent projections in light of current market conditions and said we expected rents to contract for the next 12 months or so. This quarter, the rents on the 110 office leases we signed rolled down 3.8%.

Also, as we said last quarter, targeting shorter lease terms in the rent environment to avoid long term leases at less than desire face results. The leases average approximately 4 years in term versus five year terms. The industrial leasing activity down from the last quarter's high level, 79,000 square feet leased this quarter. And a prior trend of approximately 200 to 300,000 square feet per quarter. The industrial rents rolled down by 4%, and cap ex on industrial transactions slightly higher than trends, the higher cap ex primarily driven by one deal in Atlanta.

Our development pipeline is now comprised of 2 million square feet and has a budgeted cost of $250 million. The free leasing is currently at 57%, and we have funded $208 million of the budgeted cost. Somewhat encouraged by the showings of the projects and cautiously optimistic about the possibility of improving prelease number over the coming six months.

Regardless of whether these suspects become threw prospects and or customers, we are comfortable with the long term value with the pipeline. Every one of the assets in the pipeline in the (inaudible) business park and the more promising sub markets.

This quarter we delivered 35 million dollars of new development, and four projects, which were 92% leased. During the quarter, we sold 128,000 square foot k-force in Tampa's e bore city for $157 per square feet at cap rate and gain of $1.2 million. Also, one of the in process development projects, 214,000 square feet build to suit for international paper sold in the second quarter at an 8.8% cap rate and generate a $5 million gain on sale. The sales price per square foot equals $187. As far as new development projects go, evaluating a couple of transactions. Potential small industrial project in a build to suit office project most likely be in a joint venture.

Our leasing strategy can be sum up in a word, aggressive. Focused on the occupancy level, portfolio and continuing the strategy I discussed last quarter. Staying short on term is significantly conceded, and going long, if additional capital and concessions are required to make the deal.

Daily, our people are out selling to prospects, economic development personnel and others. We emphasize the quality of seasoned staff, market flexibility and customer service.

Process improvement is not a weak market initiative for us at Highwoods. It is an integral part of our daily regimen. In the second quarter, begin rolling out work order management system to further enhance services and differentiate us from the local competition. Same property net operating income cash declined by 1.3% for the quarter driven by 5.6% decline in same property occupancy somewhat offset by growth in the leases and lower operating expenses. Year over year operating expenses decreased by 1.7%, with a variable expenses of janitorial and utilities the primary reasons behind a positive trend offset by property taxes.

In closing, I can assure you that our people are working hard. They are creative and aggressive and ignoring the daily headlines of doom and as well as a lot of the solicitation signs on customers. Carman?

I'd like to start with a review of a couple of items on the balance sheet which is page 1 of the supplemental and the table to the press release. I'd just like to note that our accounts receivable trend continues to be positive, down from the December 31st accounts receivable amount of 23.6 million to 20.5 million at the end of the first quarter. And if you look deeper in the accounts receivable, greeter than 90 days is lower than in over a year. Had an increase in debt level from 46.3% of total assets to 47.6 at quarter end.

Our dead level is lower by about 20 million today, from the March 31st levels and will continue to decline as we complete the asset dispositions that Ron and Ed spoke about in this quarter.

Turning over to the income statement, I'd like to just focus on a few line items there and keep them in the context of the guidance that we gave for the forty quarter call. In rental property expense or rental property income for the quarter, we included lease termination fees of 1.8 million compared to 1.5 million in the fourth quarter and 1.4 million a year ago. This is slightly above trend. I believe we communicated a normalized level of fees approximately 1.4 million. We had an expected decline in equity and earnings of unconsolidated affiliates. The 2.6 million this quarter in line with guidance provided you on our fourth quarter call. Interest and other income down from 4.2 million at the December, 7.8 million a year to total of 3.4 million. Most of that decline driven by lower levels of development fees and leasing fees. Generated from the joint ventures.

And we would expect that line item to continue. We provided guidance at year end of run rate for the quarter of 4 million and we'll stick with that.

Rental property expenses as a percentage of revenues, 30.8%. Again, we had an anomaly at the fourth quarter where those expenses were 33% of revenues, the 30.8 in line with trend and provided guidance year end that we would expect that to come in around 31% of revenues and we'll stick with that again.

G&A expenses 4%, run rate of 5.2 million for the quarter. Slightly lower than we expected. We provided guidance year end for G&A expenses in the 5.6 to 5.7 million dollar range. We'll expect G&A costs to increase modestly over the course of the year primarily because of lower costs being capitalized to develop pipeline as that pipeline continues to shrink.

You'll also note in the income statement, income from discontinued operations, that line item is reported here. Net of minority interest and that reflects the net income for properties that were placed under contract after January 1st of 2002. That doesn't include a number of properties held for sale on the balance sheet, the 72 million dollar net number because much of those assets were placed under contract prior to January 1st. With respect to 2002 guidance at fourth quarter, we provided guidance for FFO per share for 2002 in the range of $3.71 to 3.80. Maintain the guidance and like to emphasize that we are much more comfortable as Ron pointed out with occupancy at the lower end of the range than the mid-point or the upper end.

But again, we're going to reiterate the guidance of $3.71 to 3.80 a share for 2002. Operator, with that, like to open up the call for questions.

Thank you. Ladies and gentlemen, at this time, if you have a question, you'll need to press 1 on the touch tone phone. You'll hear a tone acknowledging the request and the questions taken in the order received. If your question is answered, you may remove yourself if queue pressing the pound key. In addition, if you're using a speakerphone, please pick up the hand set before asking a question. One moment for our first question.

Mr. Hailey, go ahead with your question.

Good morning, everybody. Question on, Ron, you mentioned negative absorption of the first quarter. Could you provide that number again? Top five? Negative 172 in the second quarter and what was the first quarter?

The absorption of space as we said was negative. It was for the quarter 590,000 square feet negative in the top five markets including Atlanta, Tampa, Research Triangle, Nashville and Richmond and compared to roughly 172,000 square feet negative for the previous quarter.

At the same time, mentioned sublease levels remained the same. So this, I guess, for a lack of better term is pure contraction?

Yes.

Of space.

Yes.

What makes you think that -- what's besides just employment numbers and aggregate employment numbers, what makes you feel as though we're trudging along the bottom particularly in light of fourth quarter expectations which probably were not as sour as the performance that was reported in the first quarter?

You know, a lot of it's predicated upon the reconnaissance that we received from our marketing teams throughout the company. The volume of showings. The level of interest. Prospects versus suspects.

To be really candid with you, Chris, a lot of it's intuition. With that and a dollar, you can get a cup of coffee. With the reconnaissance in the field, indicates that folks are responding to improvement or perceived improvement in the economy translates into inquiries about space and hopefully leases for us. Again, the level of activity is up.

Would you say the level of activity is up from trading spaces or expanse from users or new entrants to the market if you had to break it down where the demand might come from.

I would say it's a combination of all three. Ed, you might want to elaborate on that.

The profile we're seeing is contractions, expansions, relocations, immigration. There's o-line firms growing. Regional firms growing. Seen very few start-ups. A flurry of activity.

Clearly, prospects are looking to upgrade space with a decrease in rental. Moving around within the markets and trying to benefit from some of that.

Okay. Carman, on your guidance comments, rental property expenses probably rental line item of 1.8 million of termination fees. That is in your top line.

That's correct, Chris.

Okay. And your normalized 1.4?

That's correct.

Your joint venture income through that line item as well?

No. Through the line below it.

You include some income in your -- I mean, the top line revenue from the joint ventures.

That's correct.

Okay. I was interested in that you had a 290 basis point drop in occupancy from year end to 331. So, 2.9%. Your reported revenue, gap revenue, even with straight line rent dropping only declined just under $2 million sequentially or 1.5%.

And I'm trying to figure out how that happened if you lost that much in occupancy. Was the occupancy loss weighted in the month of March?

Let's go through it. Let's go -- first off, about a percentage point of the occupancy declines from an industrial property which clearly doesn't have the same impact on rental revenues as an office property and that was the twin lakes property Ron mentioned it as Charlotte industrial property in his remarks.

And then, it's an average occupancy that really impacts us. Not the quarter end. And so part of it is because it was back end weighted. And then, you also have other factor ins that line item, much of our or a number of our contractual increases are CPI related. Not straight line and that has an impact. And then there are -- the impact -- our estimates of expense recoveries which, again, that varies from period to period which is not directly occupancy related.

I think all of those taken together impact that line and then, the impact of development properties which were delivered offset by the single asset disposed of this quarter which really never -- was not in much in the fourth quarter because we completed the project, so, I mean, that's the primary reasons why you would not see the decrease that would mirror occupancy.

Okay. And you are, again, you are 88 to 89% expected occupancy for the year down a percent versus earlier expectations? And very simply, the offsets to that trying to maintain your guidance?

Part of it is you will have some savings in the rental property expense line. We're watching that really closely. And again, a lot of that's variable. That variable a portion of it. And then, we expect slightly lower interest costs over the course of the year. And then we'll maintain -- I didn't say this in the prepared remarks. The expected gain on sale of assets are -- on land, if you will, will be in our range of about 6 to 800,000 cents -- 6 to 800,000 dollars, excuse me, per quarter. We were below that this quarter because we had a loss of 200.

But that 6 to 800 is not a change?

It's not a change. I don't mean to make it sound like a change either.

All right. Thanks.

Mr. Litsius, please state your question.

Following up on Chris' line of questioning. When I look at the same store performance, develop of only 1.3%, despite a drop in occupancy of 560 basis points, it just seems surprising that the drop in NOI wasn't more. I guess you've gone through the revenue side of that.

Can you spend a moment on the expenses and comment and a little more depth and also comment to the extent that the savings that you have achieved are recurring?

John, a piece is variable component. The janitorial staffs that they move out, the utilities contract the day they move out with regard to lighting, and we have most of our properties on management systems and the property managers pull back the systems and widen the range so we're not heating and cooling those. The service requests by the spaces. All that contracts. Some of it's offset to some degree by operating expenses on the real estate taxes side. But, primarily the variable expense component.

John, like to add to that. When we present our same store numbers, these are cash, not gap. So what you have in the revenue line is the full impact of any contractual increase in revenue, both those that are straight lined, meaning contractual entities identified increases and those that are CPI or really tough to predict that you record as you identify them.

So those, we're averaging two to 3% bumps in 70 plus percent of our deals, and so that would offset the occupancy impact.

John, clearly that 346,000 square foot project industrially in Charlotte has an impact on the items.

Okay. What is the current yield based on sign leases in place today on the projects that were delivered in the first quarter?

Hold on one second, John.

While you're looking, love to have that number, too, on a trailing 12-month basis, if you have it.

I may have all that right here. If you can bear with us just one second.

Thanks.

Based upon leases in place, it's 11% on the projects that were delivered. There were four of them. And, if you look at the back section of the development table, you will find that the occupancy on those were 193%. The very smallest number at 60, and then the other one was at 100. We had essentially three build to suits in the delivery.

Blended of 92%.

Correct. And then -- that's what's in place. I don't have the trailing 12-month number.

Okay.

And again, given that most of those delivered, there really isn't -- what's in place is really the only number we have because they weren't generating any NOI until this significant NOI until this quarter. We'll get back to you on that.

Okay. And can you comment on your expectations of yields on the remaining development pipeline given -- I guess, modest releasing in a difficult environment?

I think, John, that we would see some dilution there. 25, 35 basis points off original proforma projections of 11% or so. Actually, a net down to 11% or so. And, that obviously is coming from slower lease up, some increase in T.I. costs and the interest costs associated with the lease-up period.

And reduction of face rates.

Yeah.

Ron, how comfortable are you with that projection at this time? Can you give me a sense of your view of the range of potential outcomes?

John, at the risk of sounding too confident, the development work that we're doing is in our contiguous to existing parks where we have a significant tenant base there that's beginning to expand again. And I know every developer will tell you they have the best product and the best location and the best service, we're just very confident with the limited pipeline that we have out there now.

And I would be very comfortable representing to you that we don't anticipate anymore dilution in that going forward.

John, we're more comfortable with certain projects over others. Don't want to come across as if they're all going to hit the same -- the number of contractions of 25, 35, 50 basis points back to a 11 is blended across the board. We're optimistic that we're going to be okay but on some of these, we're better off than others.

I think I could summarize by saying that we're not too concerned with the value created there at the end of the day.

Okay. Looking at page 17, it looks as if you have about 2.8 million square feet that is rolling in the remainder of '02. Can you give some discussion of to what extent you're in discussions or have hand shake agreements, and can you also give some sense on where the rental rates will be versus where the leases are rolling off?

John, this is Ed. The rental rates we expect flat to negative 3% on the rolls on those. The 14% of that's 12.1 shown on the prior page which is a blended. If you turn to page 16, that's 12.1, the far right column for 2002. We have got 14% of that signed. Make that 12.1, 10-4. We're in strong discussions and negotiating leases on another 10% of that.

Okay. Thanks very much.

You're welcome.

Mr. Martin, from Prudential Securities, please state your question.

Hi. Good afternoon. Just following up on the occupancy questions, we have, I guess, 2.8 million square feet expiring in the office portfolio, and you only did 400,000 up for renewals in the first quarter?

Renewals and relets.

Renewals and relets which implies about a 50% retention ratio. And, obviously, if you continued at that rate, you wouldn't meet an 88 or 89% average occupancy rate.

Am I missing something in that -- in the math there?

Mike, this is Carman. We recognize there's a lot of leasing to do based on that. I think for the first quarter renewals of leasing activity 60 plus percent and we've just finished our reforecast and spent time with our guys out in the field. The leasing activity is back end loaded.

And they have budgeted renewals to pick up and we're in as Ed mentioned discussions with a number of folks. You're right on with the math. We do have a lot of work to do henceforth to get to this 88, 89 occupancy number.

Okay.

This is what we've communicated in previous calls. Lease up this year, we anticipated back end loaded.

Okay.

Are you having a lot of tenants ask for month to month leases or the expirations are back end loaded?

No. It's the roll schedule. Not month to month schedules. It's just we've routinely stayed about 14 to 15% portfolio-wide annual roll, and this is right in line with your continued schedule.

I think May accelerates to some degree because as you saw in the supplemental, we did shorter term leases this quarter, but it's four years instead of average trend of five, but we're not headed to month to months.

Okay. Carman, how much capitalized interest in the quarter?

The quarter was approximately $4 million.

4 million. Okay. And do you know how much space is available for sublease in your portfolio?

We do. It's approximately 3% of our portfolio.

Okay.

And some of that's still occupied. The customers come to us and said, will you help us sublease this? Some of it they're staying in the lease so it's not totally dark.

Okay, great. Thank you, gentlemen.

You're welcome.

Mr. Boston from Solomon Smith Barney, please go ahead with your question.

Good morning. I was wondering if you could give us some color, I guess, on what -- unless I missed this early on, what's going on at the Charlotte project that has the vacancy come up. What's the prospect of getting that released?

Well, we have a winnebago outside with two leasing agents in it. We're pushing hard. We've done all that we can. It's standing as tall as -- we're actively showing it.

We've had people look at it to say that we've got prospect in hand, I'm not in position to say that. But I can say that some people have looked at it. Our guys have clear recognition that it's a big hole in a portfolio in the occupancy side. It's getting all the attention. I have offered to come and meet with any suspect prospect and I have offered to bring Carman or Ron, if need to.

Gary, this is Ron. Let me take a different approach to answer your question. It is a high-quality asset. It is not -- there's no functional obsolescence associated with it. It's not a distressed property by any stretch of the imagination. It's just timing and market conditions.

The showings are there and we're going to -- if the business is available in the market, this building will be seriously considered for it.

Do you know what the reason was, though, for the tenant leaving?

Yes. They built their own property.

Which they owned.

Which they owned.

Okay. In terms of, Ron, your comments about being early cycle and comments on the employment growth, sort of balancing that with what you're seeing on the supply side, which markets do you sort of look to, to be the first to recover in terms of your ability to start pushing rents a little more going forward?

I'm going to let Ed respond to that.

Gary, this is a -- this is a bill Clinton answer. It varies from week to week. We have a flurry of activity in one market, and then things go quiet for two weeks while another market picks up. Clearly, Orlando and Atlanta and Memphis have some softer conditions than the likes of Nashville, Kansas City, and Richmond. So I'd stick with the three that I think are referenced early in the call with reference to stronger today, and I think staying the most viable, but we've got -- it's just a mixed bag and it's difficult to be clairvoyant on where that's going to come.

The other thing to point to is job growth. Research Triangle park or area, we had 4% job growth, employment growth, and Nashville's at about a half a percent while the others lag behind that.

We're optimistic that job growth statistic in the Research Triangle area will bode well for the need for additional space. We have a fair amount of sublease in the market and seeing that number contract but it's a competitive factor in virtually every deal.

The one market that is probably an anomaly compared to other markets is Atlanta predicated upon its size. All of our other markets are mid-tier markets. Atlanta is first-line market. And, it's a bit schizophrenic. We have seen the absorption vary last quarter to a million 3. This quarter positive 108,000. We're hopeful that the trend stays positive in Atlanta.

Okay. I appreciate the color. Carman, in terms of the asset disposition guidance that you gave, a couple of questions. One, I wanted to make sure that you're looking at primarily selling recently completed build to suit projects. Or is that just what's been sold to date?

Well, what was sold in the first quarter was recently developed build to suit project. What we have in the held for sale category right now is about 50/50. International paper 3 which Ron referred to is in the held for sale category. It is a recently developed property. We also have another single-tenant asset in Kansas City that will close this quarter that represents about 26 -- almost $30 million of proceeds. And then, the -- so that takes care of what we have underway. Additionally with land in there.

We are marketing for sale which when Ron spoke of the range for the guidance, to get to this sort of the mid-point there, we would sell additional build to suit assets, but those aren't in the pipeline right now. When I say recently, the last year, year and a half.

Right. But I guess in sort of where I was going with this, in the occupancy guidance, that you're giving, and the down a hundred basis points, do you have a sense of what amount of that is due to selling off 100% lease buildings versus how much true occupancy declines?

A portion of it is, but it's limited. I mean, there are in the occupancy number right now, it's probably a half a million square feet. A half a million square feet related to those properties. Yeah, we have a modest impact but when you factor in the timing of the dispositions and given that we're talking about average occupancy here, it's limited.

Okay.

Gary, we have one building that international paper at 214,000 square feet not in service today. It's a development in process. Not included in occupancy stats.

Right. Great. I appreciate the color. Thanks.

You're welcome.

Mr. Forbes from Merrill Lynch. Go ahead.

Good morning, gentlemen. Two questions. Have you considered or done anything about locking interest rates on the line of credit?

This is Carman. We have not given we have a limited amount of floating indebitness and planning to pay that down over the course of the year. Maybe not entirely depending on hitting on the disposition targets but we are not at this point and not planning to near term.

Okay. Thank you. And the other question relates to the joint venture property placed in service during the quarter.

A partial quarter.

Okay.

Probably to assume mid-quarter for purpose of your analysis.

Thank you very much.

You're welcome.

Ed Hughes from bank of America. Go ahead with your question.

It's aLexus. Carman, is the above average termination fee recognized and expected to continue or should we expect it to get back to the 1.4 for the rest of the year.

1.4. Yeah, we're not revising what we would expect to be normalized there. 1.4 is what we expect. Again, we may have 0 next quarter, but it will -- we would expect to average about 1.4 million.

Okay. And then on the last conference call, you mentioned that you're anticipating a total buy back activity of 50 to 55 million mid or late year. Is that still reasonable to expect?

ALexus, again, depends on asset value which we said we're comfortable in the $30. I think it's reasonable depending on how you're modeling dispositions.

Okay. Thank you.

Mr. Hailey, please state your company name.

Hi. Chris Hailey again. Follow-up question on the composition of profits for 2002 and the assumptions looking at the changes that you talked about, Carman. You provided some G&A guidance expense for rental expense guidance. From a gap perspective, how are you going to disclose your gain on sales that you're talking about? Not the land sales.

I understand. Let me go ahead and get that out of the way. We're going to continue to report in FFO a portion of that gain that relates to land and land only. The portion that would be categorized as build to suit for sale, if you want to call international paper that, will not be included in FFO. It will be a gap EPS number. It will not be an operating EPS gain in that calculation.

But it will -- so that's -- does that help clarify for you?

Trying to reconcile your comment that in terms of -- obviously, you're stressing a low end of guidance. And, you're talking about first quarter you had net loss on the gain on land sales and you're not changing your quarterly outlook for gains on sale of land assets. You will benefit a little bit from lower interest expense. And, looks like the run rate for straight line rent included in gap revenue is off about a million dollars versus last year and if I want to run that through, finding it very difficult.

Chris, on that, just one second on straight line rent. That's the portion of the revenues that are non-cash but what's offseting that is the cash portion coming in.

Again, depending on the model, I would be careful. Don't expect revenue to decline by that. You have cash coming in because you're further along in the leases.

So, to make sure, looking at 2, 2 and a half million of straight line rent per year?

Yeah.

Per quarter, excuse me.

That's fair.

You mentioned you have a portion of your leases that are CPI based. Would you happen to know the difference between those that are flat versus contractual versus CPI, your mix of leases?

Well, the flat piece is about 20% or so. 20, 25%. Maybe even say 20.

The majority, Chris, is contractual. 2 to 3% on gross rent.

Right.

Small percentage is CPI, the older leases that are still in place. We haven't done CPI deal in sometime.

Okay. And still in terms of incremental leasing or marginal leasing, Ed, getting contractuals?

Yes, sir. Now what we're doing in some cases and, for example, you may have seen rent roll down, rent growth pretty dramatic in a couple of markets. We have entered into deals to secure the business, did a graduated rent schedule. So we may have gone in several bucks below the asking rate today, and stepping it up aggressively than the 2 to 3%, but that's really more of a step rent deal opposed to a mechanism in the lease to keep the -- to protect us against inflation.

Right. And last question for you and Ron would be, let's go back to that dime and a cup of coffee, Ron.

A dollar.

A dollar. Okay.

We want the dollar.

That's what happens when you move from Richmond to Baltimore. You have to pay a little more. One of the issues -- we suspect that direct number, sublet numbers in excess of 2 to 3% on top of that, and what we're trying to grapple with and doing studies on office square footage per employee by major markets is kind of utilization rates and what we saw over the last two years was obviously excess leasing above historical square footage per employee ratios and seen a come back off more recently but not the levels in the early and mid 1990s. We expect one to 2% excess space that is being leased but is not utilized by customers to expand before they need to get new space or they could take on the sublet space.

One of the markets that shows up poorly on this ratio is Raleigh. And maybe -- I appreciate your comments at least a little bit more color on Raleigh, and just a general sense on utilization.

You want to start, Ed?

Sure. With regard to utilization, there are obviously and been well publicized in early 2001, 2000, companies took down space because markets were tight and anticipated expansion and took a space to grow in it and contiguous space to existing operation.

That's not happening, clearly not 457ing anymore bought readily available space on the market. One of the things we sell when we go in the door of a prospect is flexibility and we feel that's pretty well unparalleled in mid-tier markets because we have such a dominant position in the larger sub markets. If you have a customer that needs to grow, most likely we have to build next door or down the block to grow them into that space and so we're often in flexibility and where a customer senses three years out need a 20% gross spurt, we position ourselves to capture that more readily than the competition.

Not taking that space at this point in time.

That's correct. It's a sales tool we're putting out there.

Okay.

The second thing is clearly we're seeing more people in less space than we have before. The ratio we have typically used and you probably got this in your study about 250 square feet per person.

As employee rollover turns downward in these companies virtually every company where turnover is single digit and historically in a lot of industries north of 20, employee retention just isn't on the front page like it was to some degree for the typical office worker.

We think that as things improve down the line that employees will not be -- more difficult to recruit an employee, put them in a 6 by 8, 8 by 8 cube and some of that migrate back. It typically does.

And ebbs and flows with the market and the economy. We're seeing definitely as you state more people in less space. I'm not confident that it's going to be a long-term trend. I think more ebbs and flows with the economy. Ron?

I would agree with that. I mean, you've heard of hoteling concepts, and the smaller cubes, open space planning and we have actually seen a number of companies prior to this beginning of this contraction and this cycle to start going away from that because of employee morale and productivity issues.

The second thing I'd like to relate to you specific to the Research Triangle park, our Research Triangle area, some bigger names you're familiar with have been experiencing contractions and attempting to sublease space but it's interesting that the bio tech component of this economy is really growing.

And, it's my belief that this sublease space will go much quicker in this market than in many others particularly because of that industry component that we have here.

And, it's growing exponentially. And beginning to show in the absorption of the sublease space.

Have you thought about how to underwrite the potential tenant to fill the 4% sublet you have?

Yes, we have. Unfortunately, there's a plus and minus to that scenario. The bio tech situations are start-ups as you might assume. So, we're having to evaluate the credit carefully and understand the risk profile, etcetera, going forward.

But we're actively pursuing that business, and various directions.

Chris, we're as I mentioned in my comments, we're being pretty creative. Let me give you an example. Companies that have moved out of space and given it back, whether it be a big name like Sisco or Nortel or smaller technology companies, the cost of breakdown furniture and break it and store it is pretty costly. The resale of it is pennies on the dollar even though some of it still has the new labels on it.

Give you an example of one of the things we have done to underwrite in response to your question, we took the furniture when they moved out, said that they could leave it and when we lease the space, we tell perspective customers, if they do a five-year deal, at the end of the five years, the furniture reverts to us. If it's a seven to ten-year deal, they keep the furniture and cost us nothing but certainly a way to underwrite it. Already set up. A good mechanism or gets customers into the business.

Plug and play. It works.

Okay. Thanks a lot.

You're welcome. Thanks for your questions.

We have a follow-up question from miss Hughs. Please go ahead again.

Hi, Carman. I know it's not a big number but do you have a breakout of the income from discontinued operations line item?

I do. For the current period?

Yes.

Rental property revenue 432,000. Rental property expenses 122. Depreciation, 80,000. And, that gives you an income -- there's no identifiable interest expense. That would give you gross income of 230 and then need to apply the minority interest ratio to get to the number reflected in the income statement.

Great. Thank you.

You're welcome.

Gentlemen, there seem to be no further questions at this time. Please continue with closing comments.