Highwoods Properties Inc (HIW) 2004 Q1 法說會逐字稿

Good morning. My name is Chastity and I will be your conference facilitator today. At this time I would like to welcome everyone to the Highwoods Properties 2004 first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press star then the number 2 on your telephone keypad. Thank you, I will now turn the conference over to Tabitha Zane, Director of Investor Relations. Please go ahead, ma'am.

Thank you. Good morning, everybody, and welcome to Highwoods Properties' first 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, Michael Harris, Senior Regional Vice President, and Carman Liuzzo, Vice President of Strategic Investments and Analysis.

If anyone on this call has not received a copy of our first quarter press release or supplemental financial package, please visit our website at www.highwoods.com or call 919-875-6717 and we'll 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 expected positions and contributions to joint ventures, the reinvestment of this position and joint venture proceeds, the cost and timing of development 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 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, 2003, 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 website at www.highwoods.com.

I will now turn the call over to Ron Gibson.

Good morning, everyone, and welcome to our call. As most of you know, on March 29, the Company announced that I planned to retire at the end of June. When we founded this company some 26 years ago, our plans were to develop the 122-acre Highwoods Office Park in Raleigh, and our ambitions at that time didn't include evolving or growing into one of the largest owners or operators of suburban office parks in the southeast. And it wasn't until 1994 following our IPO that we actually expanded into the new markets.

Clearly, the biggest reason for our success is the outstanding management team we have assembled over the last few decades, and one of the key members of the team, Ed Fritsch, who will be succeeding me as CEO on the first of July. I have known Ed personally and professionally for over 30 years. Ed actually began working with me on a part-time basis back in the early '70s when Ed was in high school. We convinced him to join our company in '82, a year after he graduated from the University of North Carolina,and fortunately for us, he's never left.

Ed's moved up through the ranks of our organization. He's touched every aspect of our company, and throughout his tenure, he's earned the respect, not only of our senior management team, but also the respect of his peers. He has a sterling reputation, both inside and outside the Company, and those of you who know Ed know he has what it takes to lead our company and bring it to the next level of growth and profitability. So, while I'll remain as CEO through the end of June and continue to serve on the board after that, I am going to ask Ed to take you through our first quarter results. Ed?

Thanks, Ron, and good morning, everyone.

Let me first say that I'm truly honored to have been elected by our Board of Directors to be the next CEO of Highwoods. You will never hear me say that I will be replacing Ron, because no one can replace the uniqueness of Ron's leadership and dedication to this company. Ron's been a superb leader and he will be sorely missed by all of us here at Highwoods. Fortunately, Ron has agreed to remain on our board, so the Company will continue to benefit from his experience and counsel.

Also, I welcome Michael Harris to our corporate team. For the last eight years, Mike's been our Regional Senior Vice President, responsible for overseeing Memphis, Nashville, Kansas City and Charlotte markets. Mike is 54, has a law degree, an MBA and over 25 years of solid real estate experience. He has relocated to Raleigh and will be an integral member of the leadership team, focused on making Highwoods an even stronger company. Mike will be attending the NAREIT conference with me and Terry this June, so hopefully many of you will meet him there. Mike will be reviewing our major office markets on today's call.

Next, I would like to discuss our agreement to sell Building III, the Network Operations Center At Highwoods Preserve. The sale is clearly a positive transaction for Highwoods, our buyer and the City of Tampa. The firm acquiring the property is a large global, financial services firm whose name all of you would immediately recognize. However, our confidentiality agreement prohibits us from disclosing their name at this time.

For those of you who have toured Highwoods Preserve, you probably remember that the Network Operations Center is the most specialized of all the buildings on the campus. It is an 176,000 square foot, state-of-the-art facility that includes a 35,000 square-foot computer room.

We competed with many properties and with many cities for this transaction. It is clear that in addition to the City of Tampa and the State of Florida's business-friendly environment, the buyer was attracted to Tampa and to Highwoods Preserve specifically because of location, the high quality of the asset, and the readily-available educated workforce. Activity at the Preserve has been increasingly steady since the first of the year, and the caliber of prospective customers we're seeing is blue chip. Once this transaction is fully disclosed, the Preserve's appeal will increase even further.

Turning to our first-quarter performance, we reported FFO at 59 cents per share before charges for Ron's retirement package, which is in line with our expectations. From the outset, we have envisioned this year's IFNC (phonetic) and FFO group to come in the latter part of the year and we're on track at this point in time.

As stated in our press release, while we're maintaining our annual guidance of $2.40 to $2,50 before charges for Ron's retirement package and any other impairment charges. We're more comfortable with the low-end of this range, primarily due to our decision not to pay what we believe are off-the-chart prices for real estate. Fractionally, pricing is clearly out of sync with replacement costs and risk profile, and while we're still pursuing targets, we stay loyal to our acquisition criteria.

In fact, let me deviate from my scripted remarks for a second. Tabitha, can you hand me that piece of paper? This-- we have a sheet here that summarizes transactions that we know the sales price on that we are in pursuit of. It's just shy of a half a billion dollars worth of real estate. We understand it will be trading in the 7.3% cap rate on the average. We just feel that these prices are definitely out of sync, and that it's not the right thing for this company to do to pursue real estate at that level of pricing.

Going back to our quarterly performance, leasing activity for the quarter was very strong, particularly in our office portfolio. We signed a total of 251 leases, encompassing 1.9 million square feet, 64% of which was office space and overall occupancy improved in seven of our 10 divisions. The three declines incurred in our three strongest divisions, where we had a healthy number of prospects.

In addition, through last Friday, April 30, we signed leases totaling 4.5 million square feet with 2004 start dates. To achieve our year-end occupancy goal of 83.5%, we need to lease an additional 3.5 million square feet with 2004 starts, which takes into account all these expirations and estimated early move-outs. So, today, we're 56% of the way towards reaching our goal, with eight months left in the year.

In mid-March, we completed the acquisition of Miller Global's 80% equity interest in five Orlando-based CBD buildings, totaling 1.3 million square feet or $62.5 million. The properties were 82.3% leased. In June, we anticipate selling 60% of our equity interest in these properties to Kapital-Consult for $45.5 million. Additionally, in the first quarter, we acquired Miller Global's 50% equity interest in an 88,000-square-foot, 85.6%-leased, suburban Orlando office property for $6.1 million dollars.

As Ron reported last quarter, we're seeing more discussions regarding development opportunities, as some businesses look to expand operations and head count. In fact, this week we successfully negotiated an agreement to expand an existing customer into an 110,000-square-foot office building under a 12-year lease. The cost of this project is predicted to be $14.5 million, with an expected un-leveraged yield of 10.2% and a third quarter 2005 delivery. Again, we've signed a confidentiality agreement with this customer and can't disclose their name at this time. However, the lease is fully executed.

Looking ahead, I am encouraged about our opportunities. The economy is improving. First quarter job statistics are positive, and certain market indicators are stabilizing. Is it soon to be a landlord's market? Absolutely not, but we believe the erosion has stopped, and while the country's economic recovery and increasing job growth will take some time to reach the Alpha sector, we like what we're beginning to see.

I also want to highlight the outstanding senior management team we've put in place over the last few months. Bob Cutlip, who heads our Raleigh division, Steve Guinn, who's replacing Mike Harris in Memphis, Carman in his new role heading up our Strategic Analysis and Investment team. Mike, who is focusing on improving performance and efficiencies in all of our markets, and Terry Stevens, our highly-talented CFO. Not only is the depth of experience here, but so is the chemistry and the drive to succeed. This team is committed to analyzing our company, what works, what doesn't, and asking ourselves what we can do better. We're putting together a plan that best positions Highwoods for the next phase of growth so we can maximize the benefit of every opportunity.

Mike?

Thanks, Ed. Good morning.

First, let me say that it's great to be here in Raleigh and I look forward to working closely with Ron, Ed, Terry and the rest of our management team. I also look forward to meeting many of you over the next few months.

While each of our markets are, to varying degrees, showing signs of improvement, we're still operating in a difficult and very competitive environment. Vacancy rates in our top five markets remain high, averaging almost 18.1% combined. However, it appears that fundamentals are strengthening.

As Ed mentioned earlier, our leasing velocity in the first quarter remained strong. During the quarter, we signed leases for 1.2 million square feet of office space. Of the office leases signed, 44% were new leases and 56% represented renewals of expiring leases. We're also pleased with our 76% office-customer retention rate, which increased from 64% in the fourth quarter and is above the prior five-quarter average of 71%.

Office tenant improvements and leasing commissions averaged $2.15 per square foot per year of lease term. And total cap ex committed for signed office leases was $10.75 per square foot, in line with our forecast and to be expected, given the higher percentage of new leases to renewals. TIs and leasing commissions combined were a modest 12.3% of term base rent.

On first quarter lease activity, and adjusting one new triple-net, 24,000-square-foot lease here in Raleigh to a gross rent equivalent, office GAAP rents for the Company contracted by less than 1%, which compares to a 5% contraction for leases signed in the fourth quarter. In our guidance assumptions for 2004, we're forecasting office GAAP rents to decline on average 5%. While first-quarter GAAP rents were clearly better than anticipated, we're not comfortable revising our assumptions so early in the year.

Taking a look at our five largest office markets, Raleigh reported positive absorption of 121,000 square feet, the largest quarterly positive absorption in nearly three years. We have also seen a decline in sublease space. A year ago, available, sub-lease space in Raleigh represented almost 6% of the market. Today, that sub-lease space has declined to 3.3%.

Raleigh's unemployment rate fell to 3-1/2% in March from 4.1% in February, its single biggest monthly drop in 15 years, as employers added 3,000 net new jobs. Lease activity in Raleigh was ahead of schedule for the quarter, and real prospects, as opposed to the tire-kicker variety, are surfacing at an accelerated rate.

Our biggest challenge in this market relates to our properties located in the Research Triangle Park sub-market. High vacancy resulting from the dot-com/telecom bust remains challenging, and while these properties will continue to command higher-than-normal rental concessions near term, we are seeing some of this space being absorbed by the business services, healthcare and technology industries, as well as the federal government.

Tampa continues to report positive economic growth. In the first quarter, Tampa's unemployment was 3.9%, compared to 5.7% average for the U.S.. Tampa also reported positive absorption of 294,000 square feet, the second quarter of absorption, and market vacancy decreased 28 basis points to 16.3%. In our in-service portfolio, we had 94,000 square feet of new leases started in the quarter and occupancy increased by 30 basis points.

To give you some idea of the positive direction we're experiencing in Tampa, we were successful recently in back-filling all but 13,000 square feet of the 69,000 square feet being vacated later this year by Verizon in our Sable Atrium Building, with minimal down time. This would not have been the case a year ago. Clearly, our single biggest focus in Tampa is Highwoods Preserve, and as Ed mentioned, the pending sale of the Network Operations Center is indicative of the growing interest in this world-class office campus.

The Atlanta office market into the first quarter with an overall vacancy rate of 21%, 42 basis points higher than the previous quarter. Office absorption was a positive 177,000 square feet, the third consecutive quarter of positive absorption. Our leasing agents in Atlanta are reporting increased activity and our office occupancy was up 40 basis points, sequentially. A 98,000-square-foot lease for the Center for Disease Control commenced in March at Century Center, and another government agency has recently leased over 30,000 square feet at Century Plaza 2.

For the third consecutive quarter, Nashville reported positive net absorption, with first quarter absorption being approximately 92,000 square feet. Overall market occupancy increased 35 basis points to 84, excuse me, 85.4%, and in certain sub-markets, we are seeing class-A occupancy rates above 90%, which is certainly encouraging. Occupancy in our national portfolio actually declined slightly in this quarter, primarily due to the early move-out of one customer vacating 90, excuse me, 39,000 square feet. Nonetheless, we expect our national portfolio to maintain above-market occupancy for the balance of the year.

Richmond continues to perform well, reporting positive net absorption of 117,000 square feet, and a decline in office market vacancy from 13.1% to 12.2%. We saw a slight dip in occupancy in our Richmond portfolio this quarter, due primarily to the anticipated exploration of State Farm's short-term lease for a temporary disaster recovery facility. Lease prospects in this vacant space are good, and we believe occupancy will remain above 90% for the rest of the year.

In general, we believe the worst is behind us, but until such time as we see sustained job growth and significant shrinkage in office vacancy, we will continue to see intense competition for tenants. Concessions will be prevalent in most lease transactions. With eight months left, we're over halfway toward achieving our year-end occupancy goal of between 83% and 84%. Despite challenging market conditions, our leasing personnel are fully committed and focused on successfully finishing the job at hand.

Thank you. Terry?

Thanks, Mike. I'll take a few minutes to provide some additional comments on our financial results for the quarter, the balance sheet, and our guidance and outlook for 2004, and then after that, we'll turn the call open to Q&A.

Turning to page one of the supplemental or the income statement FFO table in the press release, as Ed noted, FFO per share, excluding the $0.08 charge this quarter associated with Ron's retirement package, which I will talk about in a minute, was $0.59. There were no impairment losses in the first quarter. $0.59 is $0.07 lower than the first quarter of 2003 and $0.02 lower than the immediate prior quarter. The seven-cent FFO difference from first quarter 2003 primarily results from 3.7 cents lower, staying center NOI, which I will comment on later. About $0.08 in lower contribution from discontinued operations, which were assets that were owned and held last yer, but not owned this year, and about 3.5 cents in higher G&A, and I'll comment on that later as well.

These effects were partly offset by higher contributions from newly acquired assets, aggregating about $0.06 per share, and those were mostly from the Miller Global joint ventures we acquired assets from in July of last year and then in early March of this year. About 2.3 cents in overall lower interest costs and slightly higher land sale gains. Compared to the fourth quarter of '03, the 2-cent difference is almost-- is more than due to about $0.04 in lower termination fees, which were children $260,000 this quarter, verse $2.5 million in the fourth quarter of '03. That, in fact, was offset by about two cents or so in lower interest costs.

Let me provide a few comments about the accounting for Ron's retirement package, which is a little complicated. As disclosed in our Form 8-K filing in early April, the Board of Director, with advice from an independent national compensation consulting firm, approved a retirement package for Ron. This package includes a $2.2 million cash payment to be made after his retirement on June 30, accelerating the vesting of previously-granted but unvested stock options and unvested restricted stock, and allowing the stock options to remain outstanding according to their original terms, rather than terminate upon his early retirement, and continuation in company insurance plans for several years. And, just to be clear, the grant prices for previously awarded options were not changed, nor were more options or restricted shares awarded in connection with his upcoming retirement.

Under GAAP, accelerated vesting or extending lives of existing options and restricted stock grants gives rise to new measurement dates and revised compensation computations. Generally, the amount to be expensed related to most of his options and restricted stock was based on the stock price as of the Board approval date, which was not equal to the lower, current stock price, nor what the price may be at June 30, his actual retirement date.

So, the total cost to be recognized under GAAP is approximately $6.3 million, which is comprised of the $2.2 million cash payment, $2.3 (million) related to the changes to the stock options, $1.7 million related to restricted shares, and about $100,000 for the insurance costs. And without going into all the GAAP rules, certain cost components were required to be recognized as of the board approval date, which was in the first quarter, while other components are required to be amortized from that date until his June 30 retirement date. Accordingly, $4.6 million, or $0.08, was expensed in the first quarter of this year, and the remaining $1.7 million will be expensed in the second quarter.

Moving now to operations, leasing activities remain strong, as both Ed and Mike have mentioned. Same-property NOI on a GAAP basis, on page 27 in the supplemental, was down 3.3% or 3.7 cents per share this quarter, compared to the same quarter a year ago. This reduction in same-center NOI is primarily due to 1% lower average occupancy compared to last year, and somewhat higher operating expenses, generally from general inflationary effects, and particularly higher property taxes and utility costs in certain divisions.

Net G&A, excluding the retirement package costs, which I've already discussed, was about 3.5 cents per share higher compared to first quarter 2003. This increase is primarily due to the following: There was about a $0.01 impact, because last year there was a credit recorded in G&A resulting from the resolution of a litigation matter.

There's about a half cent of incremental costs this quarter to implement and comply with Sarbanes-Oxley. And the balance of about 2%, 2 cents from normal salary increases, higher long-term incentive compensation, some of which is due to expensing of stock options, which we adopted in 2003, employee fringe benefits and relocation costs, and legal and insurance costs, including DNO insurance. Some of the compensation, relocation and long-term incentive costs in the first quarter are not reflective of the expected run rate for the remainder of the year, which we expect will be lower than first quarter.

Interest expense was better than last year by 2.3 cents per share, reflecting about 3.5 cents in savings from the debt refinancing we completed back in December. This was partially offset by interest expense and higher debt balances this quarter that arose mainly from the acquisition of the Miller Orlando JV. We also had slightly lower capitalized interest this quarter.

With the Company now owning 100% of Miller Global Orlando assets, we consolidated the operations, assets and debt beginning on March 2, the acquisition date. The gross real estate assets recorded in our books from this transaction approximated $210 million, and the joint venture's floating rate debt of $136 million is now included on our balance sheet. Plus, the $62.5 million of costs to acquire our partner's JV interest was financed on our line of credit. The consolidation of the Orlando assets and the related debt aspects accounted for nearly the entire increase in real estate assets and in debt during this quarter, and it also accounted for the increased percentage of floating-rate debt this quarter.

As previously discussed, we intend to sell a 60% equity JV interest in these same assets to Kapital Consult. We are in the process of refinancing the existing floating rate loan with a new $143-million, 10-year-fixed-rate loan, which will bear interest at a rate of 5.21%. The new loan and the transaction with Kapital-Consult should both close in late June. And when the sale closes, we will account for our 40% JV interest going forward under the equity method and will de-consolidate those assets and related debt.

Land sales this quarter were about $0.02 2 per share, in line with expectations. Net sales price on these land sales was $3.1 million. Other non-core asset sales this quarter included a strip shopping center and a small office building in Kansas City, and an office building in Raleigh. The net sales proceeds for these three were about $19.8 million, with gains of about 4 million.

Turning to the balance sheet, the increase in real estate relates to the Orlando assets, as I have discussed. Property held for sale declined this quarter from the sales that we completed. And the current property held for sale at the end of March with the net-carrying value of $38.5million represents four land parcels and three office buildings, with an aggregate expected sales price of about $51 million.

We have no debt maturing in 2004, although, in the second quarter, we do expect to call and refinance 100 million of exercisable put options securities, as we discussed last quarter. We expect to structure this transaction as an exchange of indebtedness, so there would be no gain or loss records, and we expect the interest rate all in on the new bonds to be approximately the same as the existing expos. This planned transaction is generally similar to the refinancing of our moppers (phonetic) that was completed in th first quarter of 2003, and you may recall that.

We ended the quarter with debt-to-market cap of 47.6%, not counting JVs, and at quarter end, our principal loan covenants was as follows. Total liabilities to total assets, 52.6% versus the maximum, 57.5%. Unencumbered assets, unsecured debt ratio of 2.12 versus a 2.0 minimum, and a fixed-charge ratio of 1.59 versus a 1.50 minimum. These ratios are based on the definitions in the loan documents and are not directly computable from the financial statements.

And, finally as stated in the release, other than for the 11 cent total impact from the retirement package and for any operating asset impairment losses, we are not changing our FFO guidance of $2.40 to $2.50. And, as Ed commented on earlier, we're probably more comfortable with the lower end of that range, due to the lower volume of expected acquisitions this year. This concludes our prepared comments, and operator, we're ready for Q&A.

Thank you. At this time, I would like to remind anyone if you would like to ask a question, press star then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Greg White with Morgan Stanley.

Hi, good morning, guys. A couple of questions. Maybe I can just start with some more macro ones. You talk about the acquisition being quite tough, and in fact, it's leading you to lower guidance with the lower end of your guidance on FFO. I'm just curious, if the acquisition pricing is so high, why are you not selling more assets?

Good morning, Greg. This is Ed. We're looking at exactly that. We're going through our portfolio. That's a big job part of Carman's job now, he's literally ranking our portfolio from top to bottom.

We will probably end up in the year being a net seller, and we currently have, year to date, about $20 million worth of sales. We have another $30-plus (million) under LOI and contracts. What we're focusing on with regard to strategy on that is, we want to focus on properties that we're calling non-differentiators, properties that you don't have unique features, that will survive and perform better in down times. So, that's what we're focused on. And, clearly, the sell and the knock will be accretive as well.

Thank you. If you were to sell more assets, might you find it tough having to revise guidance down?

It depends on what we find in the way of this (inaudible) properties that we focus on disposing of. And whether or not we find any additional acquisitions during the remainder of the year.

Okay. And just secondly, again, on a more macro perspective, maybe I'm reading this wrong, but I get the sense that after seeing a slight uptick in the operating characteristics and fundamentals in the fourth quarter, we seem to have lost some ground again in the first quarter. Things look as though they have weakened. And hen I see what is happening to occupancies and the fact you're still paying an enormous amount to attract, tenants can you, again, maybe just step back for a second and tell us what you're sensing here?

Sure, Greg. On what we're paying to attract tenants, we've said all along that we would be, you know, $9 to $11 a square foot, and we're certainly within that range this quarter at $10.75 on the office. We pay very close attention to what we pay in the way of TIs and lease commissions as a percent of base rent. We have consistently been between 8% and 12% on that statistic, and we're there this quarter as well.

We don't think we're paying an unusual amount, and probably less than some of our peers, to attract customers into our buildings. The occupancy change, if you look on page 14 in the supplemental, the 10-basis-points change is really the result of the dispositions that Terry touched on. The retail in Kansas City and the office building in Raleigh attributed for that 10%. So, if you look at the current properties line, you know, there really was no change between the 81.4 from last quarter to this quarter.

As I mentioned, you know, this clearly is not a landlord's market and it's not going to be, and we're going to continue to endure pain with regard to concessions that it takes to attract customers into our buildings. But with, you know, the GAAP contractions being at 1.7% and, you know, really, when we look at that, it includes one deal that was triple net. And for a company, we're really about 1% contraction, and there is really not much in the way that's weakened in this the first quarter over the fourth quarter. And, certainly, activity, just as far as the confidence in their step that our prospects are having when they walk into our spaces and are trying to make decisions, the decisions seem to be coming quicker, and the number of showings we have has certainly increased.

I realize there's a slightly smaller market for you, but can you comment on Columbia and Greenville? I mean, the LOI declines are quite precipitous.

Sure. Greg, this is Mike. Looking at Greenville and Columbia, the biggest contraction there would be in Greenville in our Patewood Business Center (phonetic) where we had had a fair amount of vacancy there, and a backfill in that space, primarily to RTM, Inc., was fairly expensive for us. Columbia, principally in Center Point and in the Fontaine Business Center, which has had sustained vacancy. Small market, lack of depth. It's really showing itself now, as we come back and try to back-filll the space. In terms of whether this is a trend, I think it is, certainly, for the near-term because those markets are fairly small.

But Greg, I just-- I want to restate something we've said. As soon as we can get some decent occupancy and interest, you know, it's our intent to exit Columbia in total.

Okay. And just one last quick thing here. The development, completed developments, there doesn't seem to be a lot of progress on the lease-up.

That's correct. There are two projects that are listed there in Raleigh, and there has been no progress on that. They're mostly in the RTP sub-market, which is the softest sub-market in the greater Raleigh area.

So, it's -- I mean, we should probably expect it to stay that way for a bit. Is that what you're saying?

Well, we've had some traffic come in on that. We've got a lease-out on 801 for about 5,000 square feet. We have seen in our joint venture the Colonnade in Kansas City. The pre-leasing on that, which we own 50% of, has gone from 56% to 75%.

All right. Thank you very much, guys.

Thank you, Greg.

Thank you. Your next question comes from the line of Lou Taylor with Deutsche Banc.

Yes, thanks, good morning. This is a follow-up to that, to Greg's question. Where do you guys stand in terms of the share repurchase program as a potential use of disposition proceeds?

Lou, this is Ed. Right now, we're focused on-- our first priority is to reduce our debt, as we still have 5 million shares remaining under our authorization from the Board for stock buyback. But we're committed to getting this debt level lower than what it is today.

I recognize that, but given where your payout ratio is and your stock price, wouldn't your cash flow be better off potentially with share repurchases?

It could be.

Okay. Second question, just pertains to the overall leasing volume and then the net impact on occupancy, you know, you're leasing activity was certainly up. Your leasing costs were up, but your occupancy really moved didn't move a whole heck of a lot. Is that just, you know -- is that just, you know, turn during the quarter or do you expect it to pick up in the second and third quarter? Was there timing difference? Can you reconcile the issues?

Yeah. There are a couple of things. One is that we still believe that we can reach the 83.5% by the end of the year.

As I mentioned earlier, we have leased thus far as of the end of the daylight Friday, 4.5 million square feet of leases that have 2004 starts. If we lease another 3.1 million square feet with '04 starts, we'll maintain our occupancy release and another 3.5 million square feet will hit our goal. We do have some early move-outs, you know, that we continue to endure, and I think that, you know, that will continue. Our hope is that that will subside, but as this-- as of this point, it hasn't.

Okay. I also noticed your retention level has been slipping. When you talk to tenants as they leave your properties, where do you find them going? And then, in terms of, are you still seeing, you know, more net contractions than expansions?

Lou, I'm not sure I want to agree with on you that.

All right. Maybe I misread it.

The retention rate, actually, for this quarter was 79%. It was one of our better retention levels. Maybe you're looking at the mix of deals--

Yeah, I may have misread it, then.

-- and new business. So, actually, the statistic that you're looking at, then, is, you know, it's encouraging to us that we're having more new business in addition to being able to retain our customers.

It's currently about 5% above our average five-year, five-quarter rate of 71% to 76%, in office, anyway.

Okay. Maybe I was just wondering at the property types. Okay.

And then, I guess, last few questions pertain to the Preserve, in the sense that, you know, how aggressive was the city and state in terms of providing this particular tenant, you know, incentives to come to Florida and to come to Tampa?

Lou, we would rather not comment on that right now, because they have an application submitted and we don't want to -- we don't want to go into detail on that. But, suffice it to say that the City of Tampa and the the State of Florida are both very business-friendly, that all levels of government, within the state, are focused on this deal, and very anxious to get this transaction in the State of Florida. You know, they understand the job growth that it brings and the the average base comp of the position that will be working in this building is significantly above the average.

Okay. Do you or the state, do you view this as an anchor tenant for that complex, in such that incentives required to lease the other buildings there either may not exist or may not be as great?

No. There is -- none of the latter part of your question. Anything that they have offered to this customer will not diminish what they could offer to other potential customers that would come to this property or other properties within the City of Tampa. I mean, they've offered others incentives beyond just a fund with regard to job training and tax credits. So, you know, similar incentives are clearly available to others.

All right. And then the last question, is there any potential, or are you having any conversations with potential suppliers or vendors for this particular financial services firm that might take space in the other buildings?

Not necessarily suppliers or vendors, but complementary businesses, as you would find Texaco in one corner and Exxon on the other.

Thank you.

Thank you, Lou.

Thank you. Your next question comes from the line of John Kim with UBS.

Good morning, it's John with Keith Mills. And, first of all, congratulations to Ron, Ed, and Mike. Your rent roll-downs seem to be relatively modest, given your occupancy. And I realize you have had a very busy leasing quarter, but is there a strategy to maintain rents as much as possible, similar to what you have done in TIs?

We are. One of the things we strive to do is to be sure that we listen to the prospective customer before we offer a proposal in any instance that we can. In other words, we recognize that it's clearly a tenant's market, but we're not throwing out every conceivable concession that might attract into our buildings. Our key step is to first listen and understand what are the key factors, the hot points, for that particular prospect. And one of the things that our leasing people have done a superb job of doing is staying loyal to the base-rent lease escalators that we have in virtually every one of our office leases that are, you know, 2%to 3% per year over the term of the lease.

Okay.

I'm sorry, just one other footnote on that.

Sure.

We also have-- I am sure you have heard of pro calc? It's also called pro cap. (phonetic) We have an in-house version that we've built of that, a little bit more simplified, to deal with strictly the office lease. And that's something that all of our division heads study before we committed to any deals so that they understand what the exposure is in the way of TI and lease commissions, in comparison to the base rent of the revenue stream that we'll receive back, inclusive of escalators that will come to us during the term of the lease.

Okay. Thanks. The Highwoods Preserve sale, can you break out the value of the building versus the land?

Sure. The net proceeds for the building, approximately $8.2 million, and for the land, about $1.5 million. $18.2 million for the building and $1.5 million for the land.

Okay, so it's about 100-- over $100 per square foot on the building.

$103.63.

Okay. I'm sorry if I missed this, but can you discuss the sell-or-lease strategy regarding the Highwoods Preserve going forward.

Say that again, please.

The sell-or-lease strategy. Are you going to focus more on selling or leasing?

We're going to focus more on how we can create the maximum value for the shareholder. We are pursuing both options with multiple suspects and prospects at this time for the remaining four buildings.

Okay. And, final question is for Terry. What are the expectations for termination fees for the rest of the year compared to the $5 million last year?

Termination fees, as you know, are quite lumpy. Just if you look at last year's history by quarter, you can see that, and we started off low this year. So it's hard to predict. I think they could be somewhere between $1 million and $2 million. They would be about $1 million if we stayed at the current run rate, but they were $2.5 million just one quarter ago. So, they can vary a lot and it's just hard to project.

Okay, thanks a lot.

Thanks, John.

Thank you. Your next question comes from the lean of John Litt with Smith Barney.

Hi. Good morning, it's Gary Boston here with John. Ed, I wanted to go back to the cap rate that you quoted on the beginning of the deals that you guys have taken a look at and passed on or got out-bid on. The 7.3 cap rate that you quoted, can you just give me a sense on what that is. Is that sort of a stabilized cap rate or is that kind of in place, and how much of that is reflective of sort of trough occupancies, trough rent?

It's in place, and there's healthy occupancy in the properties, and its in, you know, it's not just a market. It's in four different markets. It's a total of six, seven different deals, some of them multi-building, some of them single building.

We continue to evaluate acquisition opportunities, and we have, you know, people here at the corporate level and certainly all of our capable people in the field trying to source deals. But when we see the sales price substantially in excess of replacement costs, we just think it's out of sync with what we want to do as a company.

So you're really not seeing anything yet in terms of your pricing on assets that may have some -- some leasing risk or, you know, near-term tenants moving out, that would sort of attract you into that market?

Well, not necessarily. It's also blatant that we have, we have an opportunity in our portfolio today. We've got 18.5% of the space we have today, we can go lease.

So I don't know that we need to buy a lot more of property that has upside and that we have a fair amount of that in our back yard in at least, you know, six of our 10, maybe seven of our 10 divisions. So, we're looking at, you know, opportunities that come in the door, but it's got to be in keeping with where we think the upside is. And, you know, we just haven't seen -- seen prices move at this point. Where we do think that the opportunities will come will not be on, not necessarily be on a sophisticated package that is broadly marketed. If opportunities come to us, they're more likely to be where one of our people have a relationship with a prospective buyer and we can transact a deal with them prior to a three-pound, 200-page, you know, glossy going out to everybody this side of the Mississippi.

Great. Thank you.

Thanks, Gary.

Thank you. Your next question comes from the line of Jim Sullivan with Greenstreet Advisors.

Thanks. Can you give us the cash rent numbers, the declining cash rent for the quarter, and related to that, you gave the GAAP estimate for your guidance. Can you give us the cash rent decline that you expect for the full year?

One second there, Jim. Jim this is Mike Harris. We're really looking at, in the 10 to 15% range, what we expect it to be on a cash basis and, you know, on the GAAP, you've got that number. We've typically-- last year we ran, you know, plus or minus flat and we said this year will be -5%, and this quarter, we were -1.7%. If you pick up the triple net deal of 24-25,000 square feet that we did in Raleigh, it was just under 1% on a GAAP basis.

Okay. And then, when you were running through your markets, you gave occupancy statistics for most of the markets but you didn't give one for Raleigh, a number for Raleigh?

Yeah. Market vacancy, Jim, is 16.8%.

Okay, and I note that Raleigh was the market where you had the largest decline in GAAP rent during the quarter. Do you think that decline is representative of your portfolio, or were there some different circumstances, or is it related to leases signed during the first quarter that made that number particularly large?

No, Jim. That was what I referenced a minute ago with regard to that 27,000 square foot lease in Raleigh where we did a triple net deal, and it was-- the triple net rate was compared to the prior full-service rate. So if you correct that and make it apples to apples, the Company's was less than 1% on a GAAP basis.

Okay, got it. Thank you.

You're welcome.

Your next question comes from the line of Chris Haley with Wachovia.

All right. I hope you can hear me okay. I'm actually on a train. But I wanted to say congratulations and good luck to Ron. Tough time to get out of the business. Hopefully, Mike will see the recovery fully, fully through.

There you go. Thanks.

I have several questions. My apologies. On the preserve, the 103 a foot this specialized building, how do you think that translates to the completed and show value of the other buildings? And, I note that you used $80 a foot in your own current value estimate in your package. How do you feel about that number on the remaining assets versus the $103 a foot on specialized building?

On the remaining, you know, it's under the $80, but it's not substantially under. You know, Chris, that Building Five is, you know, doesn't have any TI in it whatsoever. So, the value on that would be less than what we had for the knock, which was fully fitted out, inclusive of the computer room.

On the leverage, Terry, looking at the quarter-to-quarter change in leverage or overall assets from an overall leverage and then looking at your interest expense quarter to quarter, is the primary reason you had a decline is simply lower rate on the higher amount of floating rate debt? Is that correct?

Yes, it is. The floating rate debt, as I said earlier, went up to about 25.8% of total, because we consolidated a floating rate loan from the Miller transaction, and we find the empty equity on our line and both of those had fairly low rates. We also had, as you may recall, a refinancing of debt that we talked about last year in the fourth quarter of '03, which lowered the effective interest rate for us this year. And that alone, that refinancing transaction, is about 3.5 cents a quarter by itself in interest savings this year.

Right. Okay, and Terry, your expectations for G&A for the remaining year or, you know, even if you strip out Ron's compensation, the number was about 7, 7.4, 7.5 a quarter. What was the run rate?

Well, I'm not -- it may vary a bit by the quarter, but I think for the rest of the year, the G&A should average maybe $300,000 -$500,000 lower than what it was in the first quarter. It may not be flat. It might be a little bit variable there, but that's what I would say it should average for the year less.

Okay. And could you go through looking at kind of the straight-line number that was reported in the quarter, which was a little higher than we had expected, but could you go through the components of your capital expenditure profile, in terms of expectations for the full year straight line, overall cap ex, in terms-- just on (inaudible) commissions building Cap Ex. Could you review that again with us?

Yeah, the cap ex --

I'm assuming this is under the assumption that you lease the 4.5 million feet.

We're projecting building improvements in the 10 to 12 million range, which is, in this quarter, if you look on page 2 of the supplement, it's about 1.8. So, that was a little bit lower than run rates. TIs and second gen are going to be, again, as Ed said, in the 9 to $11 per square foot basis, and depending on how many square feet we lease, could be, you know, in the, you know, another 39 or 40 to 50 million in total for the full year. So I think it could come up a little bit, but we're also going to be leasing up space, you know.

Right.

In terms of as we go through the year. And, just another comment, and in the the cab percentage this quarter was higher at 139, but we included $2.3 million of the cash costs of Ron's ret retirement package was included in that number.

Right.

If you strip out that, the cash work fall percentage was 122%.

Right. And your straight-line rent expectations for the year?

Again, depends on the volume of leases, because most deals, new deals that we do, do have a fair amount of, you know, rent run concessions up front. But I think it could run somewhere in the $2 million to $2.5 million a quarter.

Okay.

You're all set to look at the effective mix of the deals that we're doing. We did some higher quality transactions in the first quarter, which would actually increase our average base rent on a GAAP basis. quarter over quarter.

Okay. Last question. When I look at the year-over-year comparisons, Terry, that you went through in terms of the 15 cent, one of the things that you mentioned was the land sale gains. Could you review? You said 2 cents, I think, in the quarter. What were your expectations for the full year?

Which period are you talking about? The land sales for which period compared to which?

I think you said 2 cents in your prepared remarks, $0.02 of land sale gains-- Land sale gains were $0.02 this quarter. Okay.

Our guidance is somewhere in the-- for the year, about $2 million to $3.6 million in land sales or about, you know, 2.5 cents to 6 cents in total for the year.

Right. Okay. I'm sorry. The last thing I wanted to go through was, my recollection was that your acquisition and sale assumptions for the 2004 period were neutral, meaning you were going to see somewhat of a-- possibly net selling, but generally around sales equal buys. I look at the quarter, the first quarter numbers, in terms of being a net buyer, and then your planned asset sales, including the Preserve, which will hit in the third or fourth quarter. Could you review or update us on your expected buy-sell activity for the remainder of the year?

On the sell side, as I talked about in my comments, we have about four land parcels and a couple office buildings under contract for sale and are shown as held-for-sale on the balance sheet. In terms of the acquisitions, we have a couple teed up, an office building here in Raleigh, which will result in a gain, that should close later in the year. The sales price on that's about $27 million, and we have the knock that we talked about earlier. But other than that, we're, you know, as Ed said, we're still looking at a lot of deals that there aren't a lot of ones that are imminent or under contract.

Right.

There are really no others under contract at this time.

Okay. So, you've got four land deals, two offices and your helper sales, plus the Raleigh deal, plus the Highwoods Preserve, and no more acquisitions built in for the rest of the year, is that correct?

That's the -- yes.

Okay. All right. Great. Thank you.

Hey, Chris? Ed again. Can I just go back to the question with regard to the sales price on the knock--

Yeah.

-- the remainder.

Yeah.

There's a portion-- you know, I know you have been through this building and you saw how it built out, where the network operations center, itself, the nucleus of that. There is a portion of that building, about a third of it that's not built out, so I think it's very safe and conservative to say that the floor for the, you know, gross sales price, you know, the $80 that we have is a good floor.

Yeah.

if we were to invest another, say $15 to $20 per square foot to build out and pay commissions for the leasing on any of these other buildings, you know, we could have some significant upside on a retail flip of that, or just accretive rents coming to the bottom line.

Right. Okay, great. Thank you very much.

Thanks, Chris.

Thank you, your next question comes from the line of Frank Greywood with Key McDonald (phonetic).

Good morning. If you look at the value of the Highwoods Preserve, are you expecting any additional writedowns?

Frank, this is Terry. The Highwoods Preserve in total is on our books right now at a net book value at in the low $90 millions. If we would sell it today, sort of as is with the Knox transaction in place, there would be additional impairment losses on top of that. The 3.3 that we have already talked about.

But, as Ed said, if we can do some leasing and create some value down there and flip them later, we should be able to exit without a significant impairment. It just depends where we want to take the lease-up risk and go forward or make a decision earlier to, you know, exit and get as much as we can from a user-buyer and reinvest the proceeds elsewhere.

Okay. Can you go over-- what is the -- I really think there is going to be no, the put-option call, there's going to be no -- the exchange of indebtedness doesn't cause any charge, but what is the actual cash component of that, that you're going to be paying?

This is for the Expos, Frank?

Yeah.

The Expos have a base amount of $100 million, and there is an auction out there that we have to buy from an auction holder of about $14 million. So, the total cash outlays will be about $114 million to refinance those Expos. We intend to raise an approximately equal amount of funds from another bond deal to replace those.

Okay. And -- and finally, I mean, as far as your credit ratings go and the short form, the dividend, how comfortable do you feel with your dividend going forward, as far as being able to leverage up at all to pay it or with the sale of assets?

Well, we don't think we need to leverage up to pay it, because we have 15 to 20 million teed up in proceeds from land sales. Not the gain part, just the gross proceeds, that is basically equal to what we would see the shortfall being for this year. So, at this point, we are very comfortable sort of offsetting the land sale proceeds with the dividend shortfall in '04.

And then you're hoping for a recovery in '04, '05, and '06 to--

Well, we're-- yes. As we talked about, we are expecting an increase in occupancy by the end of the year, and that would bode well for '05. We also have a number of development projects that are going to start coming onstream in mid '05 as well. We've talked about those in the past. The FBI building, the National Archives building, the one that we just announced today with the tenant, and the Colonnade Plaza joint venture development in Kansas City. All of those will be start to coming on stream in '05.

Okay. Thank you.

Thank you. Next you have a follow-up question from Chris Haley with Wachovia.

Sorry, I just couldn't go away. [ Laughter ] The problem is that you guys give very good disclosure, and unfortunately, good disclosure begs more questions. Two things. On your development yields, obviously, your wholly-owned developments are taking a little bit longer because they're Raleigh locations. Your JV developments appear to be going along pretty well. Could you remind us what your-- or at least give us a revised yield on your wholly-owned, maybe the yield on development JVs, JV developments? Excuse me.

The ones that I just talked about, Chris? The government deals are in the low 9% on leveraged return on the NARA (phonetic) and FBI returns.

Yeah.

And I think the--

Ten-two on the one that we announced today.

--mentioned today.

Plus, the Colonnade was pro forma around 10.5.

Okay.

The government deals were a bit lower than the commercial deals.

Okay. So, 10-plus JVs, nine-plus on the development wholly-owned stuff?

Both of the GSA deals are wholly-owned, that are right around nine.

Yeah.

Remember, one of them is a 15-year deal and the other is a 20-year deal.

Okay.

Plaza Colonnade was 10.2%, was our pro forma yield. And that's in the 50/50 JV.

Okay, great. On the land side, I noticed that, at least sequentially, your land, your land acreage dropped. But you increased your assigned market value. Could you help me understand why that may have happened or was there re-zoning issues?

It's a couple of things. One is we have undertaken some rezoning.

Okay.

Some of it is that we have bought land for these developments that we're pursuing. And we have sold land of lesser value.

Okay.

So the number of acres is down, but we bought land, particularly to support these two GSA transactions.

Okay. In general, though, what would you -- are you signaling that -- are you saying that land values or -- the land value being driven by the end deal helps you pay upwards just in terms of the market? Are market land values changing at all?

Well, we have certainly seen a greater level of interest in our land holdings that we have offered for sale over the last six months.

Okay. Great. Thank you.

Thanks, Chris.

There are no further questions at this time. I will now turn the conference over to Ed Fritsch for closing comments or remarks.

I just want to thank everybody for their continued interest in the Company. I want to thank everybody who put effort in to prepare for today's call. And, of course, Tabitha and the rest of us remain available for any follow-up questions anybody may have. Thank you.

Thank you for joining today's Highwoods Properties 2004 first quarter earnings conference call. You may now disconnect.