Highwoods Properties Inc (HIW) 2003 Q4 法說會逐字稿

Good morning. My name is Latasha (ph), and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Highwoods Properties' fourth-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. Ms. Zane, you may begin your conference.

Thanks, Latasha. Good morning everybody and welcome to Highwoods Properties' fourth-quarter conference call. On the call today are Ron Gibson, Chief Executive Officer; Ed Fritsch, President and Chief Operating Officer; Terry Stevens, Chief Financial Officer and Carman Liuzzo, Vice President of Investments and Strategic Analysis. If anyone on this call has not received a copy of our fourth-quarter press release or supplemental financial package, please visit our web site at www.highwoods.com or call 919-875-6717 and we will fax or e-mail a copy to you.

Before we begin, I would like to remind you that this conference call will include forward-looking statements concerning the Company's operations and financial conditions, including estimates of asset dispositions and contributions to joint ventures, the reinvestment and disposition in joint venture proceeds, the cost and timing of development costs, rollover rents, occupancy expense and revenue trends and funds from operation. Such statements are subject to various risks and uncertainties. Actual results could differ materially from those currently estimated due to a number of factors, including those identified in the Company's annual report on form 10-K for the year ended December 31, 2002 and subsequent reports filed with the SEC. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. During this call, we will discuss non-GAAP financial measures, such as FFO. A reconciliation of FFO and other non-GAAP financial measures to net income as defined by GAAP is available in the investor relations section of our web site. I would now like to turn the call over to Ron Gibson.

Thanks, Tabitha, and good morning everyone. The first thing I want to do today is to welcome Terry Stevens to our team and his first call as the Company's new CFO. As most of you know, Terry brings a wealth of experience to the process and having had the opportunity to work with him over the past couple of months, I can tell you his ability to analyze relevant issues is impressive and we're glad to have him aboard.

We ended '03 with 81.5 percent occupancy in our in service portfolio, compared to 82.1 percent a year ago and on a same-store basis, occupancy was 82.1 percent at year end. So despite what continues to be a very challenging environment, leasing activity remains strong with a total of 2.2 million square feet leased in the fourth quarter, of which 44 percent was office space. Occupancy declined in '03 partly as a result of our aggressive capital recycling program. We took advantage of the strong prices for commercial real estate to get top dollar for our assets, many of which were either non-core, had higher long-term leasing risk and exposure or had significant preferred maintenance costs.

For the year, we had total asset sales of 202 (ph) million and the occupancy of the majority of those properties sold was well above our portfolio's average. For example, the average occupancy of the industrial portfolio sold in December in the three properties that were contributed to the Highwoods-Markel joint venture combined was 98 percent. Occupancy in our in-service portfolio dropped 1.1 percent after these properties were sold. So in total, dispositions negatively impacted occupancy by 1.3 percent for the year.

Also in the third quarter, we added 1.3 million square feet of office space with an average occupancy of 83 percent, below our portfolio's average. These properties were in Atlanta, the Research Triangle and Tampa that had been part of the MG-HIW joint venture. We are making good progress on our '04 lease expirations. We started the year with 6.3 million square feet expiring through February, and through February 19, was have leased 3.1 million square feet with '04 start dates. However, as happened in '03, early move-outs continue to be a fact of life, so to maintain occupancy this year exclusive of any dispositions, we anticipate the need to lease an additional 4 million square feet over and above the 3 million that we have already done.

Is the overall operating environment we're in getting better? Obviously the answer is yes. In our markets, we're seeing positive absorption. Although overall vacancy remains high, there is still sub-lease (indiscernible) space to work through before we experience tangible occupancy gains. We are also seeing more development opportunities. In the last six months, we have announced development transactions valued at $47 million and we're actively pursuing a number of other build-to-suit projects that have real potential. Over the next 12 months, our development pipeline will likely increase, but we can assure you any transaction we do will be significantly pre-leased prior to commencement. We are beginning to see more acquisition possibilities. Pricing today is still rich, but more new opportunities are surfacing and I suspect that is a result of the market's anticipation of higher interest rates. Regarding the Orlando properties and the MG-HIW JV, we plan to acquire Miller Global's 80 percent interest in these assets next month. We will retain 100 percent ownership of these properties until we complete the transaction with DLF. This is our third co-investment with DLF in five years and it has been a positive and mutually beneficial relationship. In this news JV, DLF is going to acquire 60 percent equity interest in the five Orlando properties, which encompass 1.3 million square feet for $45.6 million.

Let me turn briefly to how we expect '04 to shake out. We've lowered our annual guidance from a range of 250 to 265 to a range of 240 to 250 incorporated in both ranges as a 5 cent reduction from the recent change and how we calculate FFO. On the operations side, we have seen some changes since November that have caused us to lower our outlook. Operating expenses are going to come in higher than originally anticipated, and that is primarily due to a greater than expected increase in real estate taxes and utilities in several of our markets, specifically Tampa, Nashville and Memphis. We also assumed income from a large lease, a 160,000 square-foot lease in Tampa, that we had been assured would be signed. The lease did not materialize, so while we had every indication that the lease would be executed, we counted that chicken before it hatched.

And finally, we're taking a slightly more negative outlook on GAAP rents going forward than we did last November. In the fourth quarter, GAAP rents declined 5 percent and based on current forecast, cash rent concession is just not going to get any better anytime soon. We still have limited pricing power and while we've pushed back where we can and we don't do a deal that it’s unprofitable, it remains a tough environment and that is not going to change for us near term.

So with '04, FFO expected to come in between 240 to 250, the obvious question is where does that leave CAD (ph)? Based on this outlook, we're looking at a shortfall which we think will be between $10 and $15 million, depending on the level and mix of leasing and we expect to fund the shortfall from land sale proceeds which are expected to be between $15 and $20 million this year. We look for significant improvement in our operating environment in '05, possibly earlier, which is the sentiment that we certainly did not share at this time last year. Therefore, while there are still some similarities to a year ago in terms of a CAD shortfall, the company clearly is in a very different place than it was last February. While we are still bouncing along the bottom, our outlook is improving. We're seeing a greater level of acquisition and development opportunities and our customers are definitely feeling more confident about their own business prospects. And I can tell you, we're ready to capitalize on these new opportunities and we're more optimistic today than we have been for quite a while. That concludes my prepared remarks and now I would like to turn over to Ed Fritsch for operational issues.

Good morning, everyone. Last quarter, I reported that we were seeing scattered signs of stability and in some cases, indicators of economic improvement; the same holds true today. While it remains a tough environment, once again our top five markets -- Research Triangle, Tampa, Atlanta, Nashville and Richmond -- combined to report positive net absorption for the third consecutive quarter, a total of 308,000 square feet. However, only two of the five markets -- Tampa and Nashville --experienced positive absorption. While we're encouraged by the combined positive absorption, 308,000 square feet across five markets simply is not enough to impact overall market conditions as market vacancy in these cities continued to average over 17 percent at quarter and.

To make a significant dent in this vacancy, we need sustained, meaningful job growth. We cannot predict when this growth will come, but if history repeats itself, the Southeast will be an early beneficiary when real job growth materializes. Leasing velocity remains strong in the quarter as we signed 224 leases totaling 2.2 million square feet. Excluding the negative impact of our fourth quarter dispositions, occupancy increased by 30 basis points. In all of 2003, we signed 954 leases encompassing 7.5 million square feet of office, industrial and retail space, 34 percent more square feet than we signed in all of 2002. In our office portfolio, which now represents 83.5 percent of annualized revenues, up from 82.1 a year ago, occupancy growth continues to be sluggish and we don't expect much improvement in average occupancy this calendar year.

Turning to page 15 of the supplemental, you will see in the fourth quarter, office tenant improvements and leasing commissions averaged $1.73 per square foot per year lease term; total CapX committed for signed office leases was $7.74 per square foot, lower than our rolling five-quarter average of 839 and significantly below our third quarter amount of $10.51. However, an even more important measure of our leasing economics is TI and leasing commissions as a percent of base rent, each measured on a per square-foot, per-year basis. For Highwoods, that percentage has remained relatively stable over the past two years, averaging 10.5 percent for those two years. Clearly, we have had quarters where the absolute dollars have been relatively high. However on a comparative basis as a percentage of base rents, we have held our ground.

On fourth quarter lease activity, GAAP rents contacted by 5 percent with Atlanta, Nashville and Research Triangle having the greatest negative impact on this decline. Over the past six quarters, our office GAAP rent has run from a low of minus 1.5 percent to a high of plus 2.7 percent with a six-quarter average of plus 1 percent. We believe the negative GAAP rent experienced this quarter will be prevalent for the balance of the year.

In our industrial portfolio, we signed 36 leases totaling 1.1 million square feet. Total CapX committed related to these leases averaged 76 cents per square foot, lower than our rolling five-quarter average of $1.38. The average lease term of 3.2 years is on par with our rolling five-quarter average of 3.5 years. The fourth quarter's industrial lease activity included two lease renewals with Sara Lee totaling 838,000 square feet. Fourth-quarter same property net operating income declined 59.3 percent from a year ago. Excluding Highwoods preserve from the portfolio, the same property NOI decrease by a more modest 3.8 percent. The decline was primarily driven by the decrease in average occupancy to 83.9 percent from 87.4 percent a year ago. Again, excluding Highwoods preserve, average occupancy declined only 1 percent from 87 percent a year ago to 86 percent at year end.

Now I will give a brief overview on our larger markets. Kansas City, Richmond, Nashville and the Triad are our top performing markets from an occupancy perspective. Highlighting this, the Nashville market reported fourth quarter positive absorption of 291,000 square feet, which moved the market's overall office occupancy from 84 to 85 percent. In 2003, Nashville successfully attracted four corporate relocations, cumulatively absorbing 165,000 square feet of space. Our occupancy in Nashville jumped 280 basis points in the fourth quarter to 91.5 percent. Richmond reported negative fourth quarter absorption of 234,000 square feet, mostly due to Cap One (ph) continuing their announced objective to shed Class B space. Our Richmond occupancy fell slightly from 92.8 to 91.5 due to the contribution of three in-service office properties containing 291,000 square feet of space into our Markel JV. The average occupancy of these three properties was 98.6 percent. Net of these contributions, our Richmond occupancy increased by 1.1 percent.

Atlanta continues to struggle, despite economic indicators pointing to an improvement in that region's economy. 41,000 new jobs are expected in 2004 and the area continues to be the hub of business activity in the Southeast. As expected, BellSouth vacated 112,000 square feet in October and we have re-let that space to the CDC; that lease is expected to start next week. With the Research Triangle market, it remains very competitive, but a few of the high-tech telecommunication companies are expanding. Both IBM and QUALCOMM have announced plans to add jobs and there has been an increase in the hiring of temporary technical labor, an indicator of potential permanent hiring. We're benefiting from this industry expansion (ph) by Infineon occupying 100,000 square feet in our (indiscernible) 4 building in October of '03 and QUALCOMM occupying 35,000 square feet in our Center Green (ph) 2 building in December of '03.

In Tampa, the market continues to show signs of improvement with positive absorption of 522,000 square feet in the fourth quarter. Tampa's unemployment was an impressive 3.7 percent, a solid 2 percent below the national average of 5.7 percent. Traffic at Highway's (ph) Preserve (ph) remains active and we continue to aggressively market the property. We have had numerous showings and have been invited to respond to a significant amount of RFPs. Prospective clients who have toured the space range in size from 60,000 square feet to over 400,000 square feet. Inquiries have increased since the latter part of last year, perhaps driven by a corporate willingness to consider major capital expenditures that grow their businesses and reduce their operating costs.

Looking out at 2004, we don't expect to see a meaningful uptick in occupancy until the fourth quarter at the earliest. Office cap rents are likely to roll down by as much as 5 percent and re-leasing CapX is expected to remain steady at approximately $10 per square foot. Our people have really produced in 2003, having delivered nearly 1000 leases totaling over 7.5 million of square feet. However, everyone knows job growth is the key to the recovery and it is our view that job growth will be modest throughout the year and begin to accelerate in 2005, regardless of who is in the oval office. Terry?

Thanks, Ed. First of all, I want to say that I am very pleased to be part of the Highwoods team and to participate on my first Highwoods earnings conference call. As many of you may know, I was previously trustee and CFO for Crown American Realty Trust, which merged into Crete (ph) back in November and I joined Highwoods on December 1st. I personally know a number of you participating on this call and I look forward to getting to know all of you in the future. This morning, I want to take a few minutes to provide some additional comments on our results for the quarter and the full year, the balance sheet and then our guidance and outlook for 2004.

If you want to turn to page 1 of the supplement, on the income statement and FFO table in the release, you will note that FFO for the quarter was 61 cents per share, down from 75 cents a share in the fourth quarter last year, but down only 1 cent from third quarter 2003. Full year FFO was $2.49 in 2003, compared to $3.04 last year. Approximately 25 cents of this full-year change relates to the impact of WorldCom, who rejected their leases at the end of 2002.

Before I get into other operational and transitional impacts on FFO, let me address briefly the changes in the composition of method for reporting our FFO. First, as we reported previously in our third quarter release last October, impairment charges related to operating properties are now required to be included in FFO are deducted, in accordance with NAREIT's October 2003 financial reporting alert and prior period results have been adjusted for consistency. There were no impairment losses in the fourth quarter 2003, but there was a 2.7 impairment loss, or about 5 cents per share for the full-year '03, compared to 13.5 million, or 22 cents per share in full-year 2002. The '03 impairment loss relates primarily to our 20 percent share of impairment losses in the Miller Global joint venture, which was recorded in the second quarter in connection with our acquisitions of the JV assets located in Tampa, Atlanta and RTP. The acquisition as you recall closed in the third quarter.

The 2002 impairment losses relate primarily to two separate asset sales and one asset here in Raleigh that was demolished and is being held for future development. As we also reported last quarter, due to FASB 145, losses on early debt extinguishments are no longer reported as extraordinary items and thus must now be included in FFO. 2002 FFO was reduced by about 1 cent from this change and there were no early debt extinguishments losses in 2003.

Second, in connection with the SEC's Regulation G related to non-GAAP financial measures, the Company made a minor revision to its FFO definition effective as of 01/03 and all periods presented have been adjusted. This relates to non-real estate depreciation and amortization. The Company's revised FFO definition is, we believe, in strict accordance with the definition provided by NAREIT. This change had the effect of reducing FFO per share by 1 cent in each of the fourth quarters of '03 and '02 and by 6 cents and 5 cents per share for the full year '03 and '02, respectively. All of these changes are described in the FFO table and all periods are presented on a consistent basis. If you would add back all of these definitional changes to get to the old basis, full-year FFO would've been $2.60 cents for '03 and full year FFO for '02 would've been $3.33. Fourth-quarter '03 FFO would have been 62 cents, which was within our guidance range and fourth quarter would have been 77 cents -- fourth-quarter '02.

Moving now to operations, the core business continues to be challenging as Ron and Ed have mentioned, both as to occupancy and rental rates. Excluding the impact from the WorldCom bankruptcy and related loss of rental income that began at the beginning of '03, same property NOI on a cash basis since (ph) the details are on page 27 in the supplemental is down 3.8 percent, or 4 cents per share in the quarter and 5 percent, or 23 cents per share for the full year. With the WorldCom effect included, same property NOI was down by 9.3 percent, or 10 cents per share in the quarter and 10.2 percent, or 48 cents per share for the full year. Of the 23 cent decline in same property NOI which is not due to WorldCom, 5 cents relates to U.S. Air leases that were terminated or restructured in bankruptcy late last year and the remainder is mostly from lower rental income caused by lower average occupancy in '03 versus '02 and somewhat higher rent abatements and concessions. Same property operating expenses were off, but less than (ph) 2 cents in '03 compared to '02, so the NOI drop in '03, other than WorldCom and USAir, was prominently occupancy and rent concessions growth.

Net G&A expenses were slightly worse for the year and the quarter, although when the onetime litigation expenses shown as a separate line item in '02 is factored in, total G&A was favorable by 4 cents for the year. For the fourth quarter, G&A was worth about a penny due mostly to variable and stock-based compensation expense and slightly higher senses (ph), including backfilling the Raleigh divisional VP position. Interest expense for the fourth quarter was 3 cents better this year versus last year due to one month's saving, which was about 1 cent, from the debt refinancing completed on December 1st and about 2 cents combined from slightly lower average rates and from a small year-end adjustment last year on capitalized interest. Interest expense was worth about 6 cents for full-year '03 versus '02, mostly from about 10 cents in higher interest capitalization last year on the 2.3 million square feet of developments that were delivered then, offset by the favorable impact in the fourth quarter. The gain on land sales was low in the fourth quarter, less than a cent and flat with last year. For the full-year, land sales were more normal, running at around 6 cents, but still down 5 cents compared to the fairly high level of land sale gains we had in 2002.

FFO contributed by discontinued operations including related impairment losses was down 4 cents in the quarter and down 7 cents for the full-year compared to the comparable periods. There were no impairment losses in '03 that were not related to discontinued operations, but there was 17 cents of such impairments in 2002. All that was not was prior to the fourth quarter of '02. Remaining changes to FFO, which is about 2 cents for the fourth quarter and 10 cents for the full-year, is mostly attributable to be combined impact of our asset recycling program and FFO contributed from developments placed in service.

Ed covered our leaving activity in some detail, but just to clarify and comment relative to our lease expiration date for 2004, you will note on pages 20 and 21 of supplemental that we have changed the way we are reporting lease expirations. Expirations now reported in the supplemental represent square footage that has not yet been renewed as of the quarter end, or in this case, as of December 31, 2003. Previously, the table included all expiring leases until the date of actual expiration. For example, if we had a lease for 100,000 square feet expiring in February, but the tenant had renewed the lease in November for a new five-year term, it would be shown as a 2004 expiration in the year-end lease expiration table under the old method. Under the new approach, this 100,000 square foot lease would be shown as expiring in 2009. We think this gives you a more accurate picture of the remaining expirations as of each reporting date.

Turning to the balance sheet, which is page 4 of the supplemental or the last edge of the release, it is relatively consistent with the prior quarter. Land held for development increased 17 million from September due to 4 million of land purchase for the FBI build to suit, plus 7 million of additional land in Tampa that was purchased for future development. The remainder of that increase was just the balance sheet reclassification from developments in process. Property held for sale dropped 98 million in the fourth quarter, due mostly to the sale of the industrial properties in the Piedmont, Triad and Richmond divisions and the sale of the three Markel buildings in Richmond to our 50 percent joint venture. Our debt balances was reduced by 54 million during the quarter, largely from applying the proceeds received from the fourth quarter asset sales to reduce outstanding debt. We have no debt maturing in '04, although we do expect to call or repurchase our exercisable put option securities issued by a trust. Notes issued by the Company which mature in 2011 are held by the trust and constitute the security underlying these expos (ph). A third party has an option to acquire the expos at 100 percent of principal amount and we also intend to acquire that option from the third party. We would then cancel the original notes and reissue a similar amount of new bonds or similar securities. We expect to structure of this transaction as an exchange of indebtedness and accordingly, no gain or loss will be recorded. We expect future interest expense all-in to be approximately unchanged based on current market rates and conditions. This is generally similar to the refinancing of our moppers (ph) that was completed in the first quarter of 2003.

We ended the year with debt to total capital market cap at 45.1 percent, excluding JVs and 50.7 percent including our pro rata share of JV debt, although nearly all JV debt is nonrecourse for the Company. At year-end, we are within all of the covenants on our loans and are just finalizing those calculations. We will include details about the covenant rations in our form 10-K, which we expect to file on March 15th.

Finally turning to our updated FFO guidance for '04, Ron gave you the overview; I'll work through some of the assumptions and details. We're currently protecting average occupancy for the year to be flat with average occupancy in '03. While lease volumes have been strong, we still continue to have some amounts of early move-outs and space consolidation and we think those trends will continue in '04 and thus, tend to hold average occupancy in check. We expect to see some slight decline in occupancy during the first half, but rising occupancy in the second half; overall average for the year about flat. As Ed mentioned, we have seen recently and expect to see continued pressure on new and renewal lease rates on a GAAP basis and are thus anticipating some GAAP rent roll-downs in '04. Coupled with the unexpected last-minute loss of an anticipated major tenant, which alone reduces '04 FFO by almost 4 cents and some higher operating expenses, particularly some recent property taxes and utility rate increases in three of our markets, we now expect same center NOI to be down by 8-10 cents in '04, compared with our prior guidance. Other factors and assumptions from our prior guidance are still the same, mainly G&A expenses up about 2-4 cents versus '03 due to costs for SOCS (ph) compliance and normal inflationary increases and lease termination fees and land sale gains coming in on a combined basis of about 3-5 cents lower than '03. Both of our current and prior guidance includes no impairment losses on operating assets, although such items could arise if we determined to sell certain noncore assets or change the classification of certain assets from held for use to held for sale. This concludes our prepared comments and operator, we would like to turn the call back to you for the Q&A session.

(Operator Instructions) Greg Whyte, Morgan Stanley.

Good morning, guys. I think Ed, you and Terry both went through obviously some higher operating expenses. I was curious -- when we look at the fourth quarter, operating expenses as a percentage of rent for revenues had jumped to -- call it 35.5 percent from about 32 percent a year ago. Is that all because of the higher real estate tax and utilities?

Greg, it's a number of factors. One is obviously revenues are down, so the percentage is up. Two is because of the utilities and the taxes and insurance, but insurance is a smaller number, but certainly on a percentage basis, that number is up. And then third is we have some buildings that are now vacant that were triple-net buildings that now we're having to pick up the operating expense cost on those, so it is more of a negative drag than before.

So if I think about this going forward, your prognosis is pretty much flat (technical difficulty) for '04, so is it fair to expect a similar percentage in '04?

On the occupancy side?

In terms of operating expenses as a percentage of revenue?

Yes, we expect it to increase a bit, because both the state of Tennessee and the state of Florida, there has been recent announcements with regard to significant increases in real estate tax, mil rates and utilities.

And (indiscernible) I understood -- Terry, when you said the change in the data on the lease reporting, if I look at the supplemental, say, page 20 for the office, the 14 percent of rentable square feet that you're predicting is coming up in '04 -- that is after the space that Ron mentioned had already been taken care of -- is that correct?

The expirations on that page do not include any renewals that have been done as of December 31, 2003.

Renewals or new leases.

Okay, so the 14 percent that you're showing here would in fact be lower given the fact, given the volume Ron mentioned has already been taken care of, or I am a misunderstanding?

Let me take it to a higher level and walk through it. I suspect other people may have this same question. In a broad nature, at the start of the year, we were looking at about 6.3, 6.4 million square feet of expirations. And then we had signed the 3.1 million square feet through last week, so that got us to about 3.5 million square feet left to do. The 3.5 in theory would maintain us at the 81.5 percent. However, as you know, we have some leases that are on a month-to-month basis and some of those roll out during the year, and we also have some early move-outs, whether it be through a cancellation clause that is built into their lease instrument today or through bankruptcies, we have some of that rollout. So we add back in another approximate half a million square feet to 600,000 square feet to that. The way we're looking at it internally is we have about 4 million square feet to lease with '03 starts for the remainder of the year in order to maintain that occupancy level of 81.5. And then to get to where we hope to be at the end of the year, which would be an 83-84 percent occupancy, we would need to lease another approximate million to 1.2 million square feet. So about 4 million inclusive of the anticipation of unknown at this point, early move-outs or month-to-month that don't continue, we need 4 million square feet. And then to get to the 83-84, we need about 5 million square feet.

That's helpful.

And then to maybe brag about it a little bit more, Greg, in 2003, we signed the 7.5 million square feet. Approximately 4.7-4.8 million of that was signed in '03 and commenced in '03. So it is basically between this 4 million and 5.1 is what we did last year, and if we're able to produce at the level we did this past year, we'll certainly maintain the 81.5, if we're able to, outpace that a little bit. We hope to get to the 83-84 by year end.

To continue in a somewhat similar theme, when you talk about the anticipated early move-out, which I guess are from a variety of factors, can you give us -- and again, I'm asking here for fort of almost a subjective comment. Can you give us a sense on how that paces tracking versus fourth quarter and also year ago levels? Are we starting to see a stabilization of the early move-outs, or is that still tracking at a pretty significant pace?

We are budgeting -- we're estimating -- we're anticipating in these numbers that I provided you, approximately 60,000 square feet per month. And we tracked a little that higher than in 2003. It is lumpy from month-to-month, but that number is down to a small degree from what we experienced last year.

One last question for Ron. Ron, you made a comment in the early part of your call today about the prospects for acquisitions getting better through the balance of the year, and part because this is an improvement higher sort of rate environment. I'm just curious to know -- of assets that you would ordinarily be interested in acquiring, who is buying them today? Who are you losing out to right now?

Let me qualify your question just a little that if I may, Greg. First of all, we have not been a player on portfolio acquisitions; we have been more one-off internal through our existing markets. So I think the profile of potential suitors for that property are a little different than what you might see nationally. We obviously have the local investors, or what we would consider country club equity, and we do see a greater level of interest from life companies in direct investment in these markets, and there is a moderate level of institutional investments in some of these properties. So they are primarily the players that we see. Interestingly enough, there is a sense among the owners of these smaller properties, meaning properties from 50 to 150,000 square feet in one-offs and markets -- there is a sense that now is the time to evaluate what they're going to do with these properties. And it's in my view, pretty much related to their take on what the interest rate environment might be at the end of the year, and they are more sensitized to that today than they were six months ago.

So are you foreshadowing that your interest level in '04 is likely to be more sort of these one-off assets than portfolios as well?

What we think we will be able to do in '04 is somewhere between $50 and $100 million, and that is not far out of line where we have been. It is up from November. We were contemplating at that point in time the low end of that range, but we are more optimistic now than we were then.

Okay, thanks a lot guys.

Frank Greywitt, McDonald Investments.

Hi, guys. Getting back to be acquisition investment (technical difficulty).

Frank, we're having trouble hearing you.

As far as the net acquisitions or the acquisitions, what are you expect net of dispositions?

Basically, we feel like it will probably be neutral for the year.

How does that compare to your previous expectations?

Last year, we sold a little over 200 million and we had contemplated before 100 to 200 million, and now we're in the range of 50 to 100.

Is it the timing? You indicated in the press release that some of the timing of these acquisitions and dispositions, was it part of the reason for your lower guidance -- is that just the acquisitions or the dispositions that occurred towards the end of '03?

Yes, I think that is what was meant by that comment in the release and some of the earlier remarks. Our acquisition activity is going to be more back-end loaded than we anticipated. And although we're having a lower level of dispositions, and we had planned for those in our earlier guidance to be further toward the end of the year and we were really counting on matching up some acquisitions with the disposition activity we reported in the fourth quarter. And therefore today, we have a bit more dilution in our '04 numbers from what we sold in the fourth quarter of 2003.

The 160,000 square foot lease -- was that something you were expecting to sign that you did not sign?

That's right, Frank. It was a fully negotiated lease for the entire building with an anticipated December 15 start, and the NFC (ph) decided they were going to stay on their existing base.

What market was that in again?

Tampa.

That was not part of the Highwoods reserve, was it?

That is correct.

Could you also give me what lease term fees for the quarter and year were?

The quarter numbers were 2.6 million, and for the year, it was a total of 5 million.

Finally, I was wondering if Carmen you could comment a bit on what you have been focusing on in your new role and how that is playing out?

What I have been focused on in addition to transitioning with Terry, is really focusing on a more in-depth portfolio analysis and really focusing on our existing asset base with a view toward reducing volatility going forward. I have also been working with investment team to seek and evaluate acquisition activity. And then thirdly, taking a very hard look at our land inventory and really with a view toward putting that in service or selling the noncore pieces. So those are really the areas I've been spending me time on recently.

Thanks a lot.

John (indiscernible), Greenstreet Advisors.

Good morning. Ron, can you address please your view as to why Highwoods has had so much trouble with guidance, lowering guidance here so quickly after the guidance was set? And I remember back to last year, there were a couple of occasions as well. Can you give some perspective as to why Highwoods has had more trouble than some of the other peers?

I think probably, John, that our view has been that historically, the markets in which we operate have recovered from downturns more quickly than other parts of the country. And we in our planning had contemplated taking advantage of that again as we provided guidance going forward. The fat of the matter is, the impact of the WorldComs, the USAirs, as well as the overall demise of the telecom and high-tech industry in our markets has been greater than what we had anticipated and the recovery has been slower, and that is the long and the short of it. We probably in hindsight should have been a little that more conservative in our outlook than we have been.

When you think about the history of your market and the past recovery cycles, you think about what has happened in mid-cycle, is it job growth? That's what everybody continues focus on. Is it just frustrating lack of job growth that has been the problem?

Let me try to draw a comparison, if I may. In the past downturns we've had, it has really been a situation that was related to oversupply. Obviously, that is not the case this time around. And the job growth component has been absolutely frustrating. And just to sort of tie this to the previous question, we believe and we continue to believe that the characteristics of the markets in which we operate are very attractive to users, to companies that are expanding. The fire (ph) segment, the biotechnology and the recovery of the tech sector will be attracted to the markets that we're in. It has just been the pace of that recovery has been painfully slow and we are starting to see some of it. And to be quite candid about it, John, there are periods where we say it's here and we see a spike up and we think maybe it's for real and then we sort of flatten out again. But the bottom line is the job growth component that we need to fill up this vacancy that we have and to get back on track with our development programs and our acquisition programs has been slowed to materialize.

Ron, let's hear an anecdotal view as to how important the role of sending jobs offshore to places like India has been and the lack of recovery in job growth?

John, my view on that is it's something needs to be evaluated constantly. But if you look across our portfolio, we have relatively small, limited exposure to the types of jobs that are currently being exported. Whether that goes to the next level or not remains to be seen. But this is my personal view. There are many good characteristics and many positives to a Company to be able to reduce their labor costs offshore, but there is a corresponding risk associated with that. You have to be fully recognized and I think evaluated by industry in general. And so I think it has less of an impact certainly than the general economic conditions in which we are operating.

Your comments, Ron, paint a picture of not much recovery in '04, but your comments with respect to '05 were, as I took them at least, were pretty upbeat. How realistic do you think this concept of an '05 that would allow you to close the gap, for example, on the dividend problem -- how confident are you really that '05 will be the recovery year?

John, you know now that you have focused on '05, I clearly am excited about '05, but I don't want to leave this call suggesting that '04 is a throwaway year because it is not in our mind. Obviously, we're not excited about our operating results, but we are enthusiastic about the opportunities that we see on the horizon. We have experienced by the first time in a while some fairly significant development successes with some build to suits that we have on online. And as I said in my earlier comments, there are others out there that we think we have a realistic shot at. So I think '04 will continue to demonstrate improvement in all of our markets, not just the ones where we have already seen some of it at the end of '03. But quite candidly, we are trying to balance our guidance that we're giving you folks a little better when you compare it to our enthusiasm for where we're going. We are a little bit downtrodden now, but we're not beaten and we're not pessimistic about our markets. It's more of a matter of timing and the win situation as opposed to if. So again, I don't want to throw away '04 based on the activity that we have seen, particularly in the development area, we could have some surprises in '04. But it gives us a much higher level of confidence in '05.

Thank you. Just a couple of detailed questions for Terry. I guess I don't fully understand why you're taking 5 cents out of '04 guidance for Reg G. I would (indiscernible) adding back non-real estate depreciation?

That was a consistent minor adjustment that we made effective '02 and '03 and it will be a little bit less in '04 than it was in '03, but yes, it will continue.

I guess I just don't understand that. Highwoods had what a nonconforming definition in the past?

To a slight degree, I think that is the case. And with the introduction of Regulation G in early '03, we wanted to bring everything into exact compliance.

Does '04 guidance have land sale gains in it? If so, how much?

We have about five or six sites of land sales in our '04 guidance, which is sort of back to our normal run rate.

Last question. On a percentage basis, your same-store NOI guidance on your last call had been positive 2 percent to negative 2 percent. What does this new guidance translate into on a percentage basis?

It's down about 2 to 3 percent. Every 1 percent change in same property NOI is about 4 cents, so 2 percent would be 8 cents a share.

I'm sorry, so did everything shift down by 2 percent, is that what you're saying?

It was a change from a little bit up to a little bit down, but it's about an 8-10 cent reduction from where our prior guidance was. So we're now projecting a little bit NOI -- negative growth in same property NOI in '04.

I'm sorry I'm being (indiscernible) here, but what is the new guidance for percentage change in same-store NOI for '04?

It's 1-2 percent down.

Thanks a lot.

Larry Raymond (ph), CSFB.

Quick question. Maybe you could eliminate the temperament of some of the customers you're talking with in terms of new lease transactions. I'm hearing on the call that it's still a little bit choppy in the marketplace, it's going to be tough for a little while, yet before the rebound really starts occurring, occupancies are 80 percent, net effective rents are only about $8-$9 per square foot, so there's a lot of space still out there to lease within your portfolio and some of the others in the marketplace. Yet you said at the beginning of the call your development pipeline should start picking up and your build-to-suit transaction activity should start picking up. Why wouldn't those tenants look towards existing space, existing direct vacancy or indirect vacancy in order to get some good lease deals, rather than building new square footage?

Clearly, the NAREIT (ph) deal that is now in our development pipelines of 350,000 square feet is a size issue and is somewhat of a unique use, 20-year lease, though. The FBI deal in Tampa, they wanted specific requirements, 15-year deal. The prospects that we're seeing in the pipeline are prospective customers that want a new facility that is a single tenant occupancy. And when you look across the markets in order to get a single building that is single occupancy, it calls down the list (ph) to some degree, there's some functional obsolescence in some of the existing product that's on. And given interest rates and pricing, a lot of people understand now that they can get into a new facility that is custom for them with regard to build-out and it fits their needs better if they can afford to do it.

Might this dynamic inhibit to a degree the ability for not only you, but some others in the marketplace to drive up net effective rents over the near-term?

I just want to frame those (indiscernible) volume in this development work. The volume has picked up, but it has picked up from near flat to absent. So there is some activity, but clearly, there is still a lot of bargain hunters out there in the market looking for existing space. It's a small percentage.

Okay. Thank you.

You're welcome.

Keith Mills, UBS.

Good morning, it's John Kim (ph) with Keith. I had two questions. First of all, what is the interest rate (indiscernible)?

Interest rate? We couldn't hear the question.

The interest rate on the debt of the Orlando assets.

It's currently a floating-rate debt that's about 3.1 percent.

So you will be carrying that on your books for two quarters?

Yes.

The second question had to do with regarding FIN-45 and FIN-46. I just wanted to get an update on the company's current position regarding joint ventures exposed to FIN-45 and FIN-46?

We've taken a look at all of our joint ventures as part of our year-end closing process and we really don't have to bring I don't believe any of those on our books on a consolidated basis.

Okay, thank you.

John (indiscernible), Greenstreet Advisers.

Thanks. For Ed, I just wanted to follow up on Atlanta. Atlanta's been getting some good press due to the recovery and job growth, but as I think about your comments on the call, you're a little bit more down-beat on it, at least that was my take-away. Can you talk a little bit more about Atlanta, what you're seeing in terms of job growth there and how the market is reacting?

Sure. Of our markets on a market basis, not Highwoods portfolio, but markets, it's the certainly the softest at about 18.5 percent vacancy and another 3.3 available for sublease. Construction as a percent of market is low to absent, so that is not a factor, but if you add the 15.5, the 3.3, it is a substantive amount of space that is available. We have seen some positive corporate relocations, South Trust bank, RBC, Tractor Supply, AIG, Adkins, others that have gone into the market that has been good movement, but there is such a plethora of supply, some of it functionally obsolescent, but most of it active and competing that I think it's going to be slow to come around.

What is happening in terms of market rental economics on a true net affective rent basis? Are rents and steady, are they still going because of all the vacancy?

I don't mean to give you a wishy-washy answer on this, but it really depends on the product. But when you are competing head-to-head for Class A space, I'd say that the asking rent is down from what it was last year. But certainly, the TIs and things like moving allowances and free rent concessions are a significant component of the deals that are being talked about today. I think each landlord is just looking at how long they've had that particular space that they have in the hunt for a particular prospect, and then they're deciding how much they want to give in the way of concessions versus how long they think they will continue to hold that space before somebody else comes along. So I would say with regard to just market asking rates, they might be down net effective 2-5 percent from where we were a year to 18 months ago. We're still encouraged. Your questions earlier with regard to markets and what has happened to us, we signed 34 percent more square footage in '03 than we did in '02 and 70 percent more in '03 than we did in '01. We think there was just so much overhiring in the '90s and this productivity has become compelling and real, that it has become tough. If you look back in 1982, unemployment rate was 10.8 percent. The highest we've hit so far is 6.3. It's just going to take awhile for this job growth to come back to absorb like in Atlanta, 22 percent of the space is sitting vacant today.

Okay, thank you.

At this time, there are no further questions. Are there any closing remarks?

No. We'd like to thank you all for to joining us for the fourth quarter conference call and we'll talk to you all soon. Thank you.

This concludes today's Highwoods Properties conference call.