Highwoods Properties Inc (HIW) 2005 Q3 法說會逐字稿

Good morning. My name is April and I will be your conference facilitator. At this time I would like to welcome everyone to the Highwoods Properties third-quarter operations 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. (OPERATOR INSTRUCTIONS) Thank you. Ms. Zane, you may begin your conference.

Thank you April and good morning. On the call today are Ed Fritsch, President and Chief Executive Officer, and Terry Stevens, Chief Financial Officer. Mike Harris, our Chief operating officer could not be with us today due to a death in his family.

If anyone has not received a copy of yesterday's press release or the supplemental we distributed, please visit our website at www.highwoods.com or call 919-431-1521 and we will e-mail copies to you.

Before we begin, I would like to remind you that this call will include forward-looking statements concerning the Company's operations and financial conditions including estimates of asset dispositions; the expected timing of the filing of our SEC reports; the expected use of net proceeds from dispositions; the affect of tenant bankruptcies; cost and timing of development projects, roll-over rents, occupancy, revenue trends and so forth. Such statements are subject to various risks and uncertainties. Actual results could materially differ from those currently anticipated due to a number of factors including those identified at the bottom of today's release and those identified in the Company's amended 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 also discuss non-GAAP financial measures such as FFO. A definition of FFO and management's view of the usefulness and risks of FFO can be found toward the bottom of today's release and are also available on the investor relations section of our website at highwoods.com.

I will now turn the call over to Ed Fritsch.

Good morning. Thank you for joining us this morning. We had a solid third quarter with strong leasing activity and meaningful progress on our strategic management plan. I will talk more about the operations in just a minute but want you to know that substantial work has been completed on our financial statements since our last call in that both the Company and E&Y have committed to yet additional resources to this effort. While we cannot provide you with the definitive date as to when our financial review will be completed based on the information currently available and from discussions with E&Y, we believe our 2004 10-K will be filed prior to year end. Following the filing of our '04 10-K, we anticipate filing our 2005 10Qs as quickly as possible.

Obviously filing before year end is an important goal. I know there have been questions about the possibility of Highwoods being delisted from the New York Stock Exchange if we have not filed our 10-K by 12-31. For those who are not familiar with the mechanics of this process, under a new rule companies on the exchange that have not filed their annual reports within nine months of the due date may be delisted by the exchange. The exchange may grant a three-month extension in certain circumstances. In the event we believe we will not file by year end, we will immediately ask the exchange to grant us a three-month extension through March 31, 2006. Such extensions have been granted for a number of companies in similar circumstances. However, there is no guarantee this extension would be granted. We have been in contact with the exchange throughout this process and we continue to provide them with regular updates and we will do so until we file.

Let me reiterate though that based on the financial reviews we've accomplished to date and on input from E&Y, we believe we will file our 2004 10-K prior to year end.

I also want to touch briefly on our FFO guidance for 2005. This guidance does assume that US Airways remains a customer through the latter part of the year. As we noted on our September 28 call, this assumption added $0.02 to FFO offset by approximately $0.02 of higher utility costs.

Turning to operations, it was a very productive quarter. Two development projects were placed into service namely NARA and Saxon and we added a new project to our development pipeline which I will talk about in a few minutes. We also contributed just over 22 acres of land to a 50% owned joint venture for the development of a multi-family residential project in Raleigh. Our partner is an experienced seasoned residential developer and we believe this land use maximizes our return and the value of this land.

Also in the quarter we completed building sales totaling $234.5 million including the $228 million sale of our Charlotte and Sabal portfolio, and we also redeemed $130 million of our high coupon preferred stock. For the nine months ended September (technical difficulty) we have paid down $120 million of secured debt, unencumbering $280 million of assets and paid down 20 million of unsecured debt. As many of you know, strengthening our balance sheet is one of the core goals of our strategic management plan and we are making excellent progress in this area.

We signed 1.6 million square feet of second-generation of space; 1.1 million of which was office space during the quarter. This marks the seventh consecutive quarter that we have topped one million square feet of second-generation office leasing.

On a sequential basis, total occupancy in our wholly-owned portfolio increased 170 basis points to 85.8%. Year-over-year occupancy increased 260 basis points. We also saw a strong increase in office occupancy which was 85% at the end of this quarter compared to 83.5% at the end of the previous quarter and 80.9% a year ago. While the sale of our Charlotte and Sabal Park portfolio and placing and service two 100% leased development projects positively impacted occupancy by approximately 70 bps over second quarter, the remaining increase almost 100 bps was from new and renewal leases.

TIs and leasing commissions related to office leasing were low averaging $7.85 per rentable square foot well below the five quarter average of $9.12. Office GAAP rents declined 2.6% and cash rents fell 6.8%, both very much in line with our guidance. In 2004 cash rents declined an average of 10.6% for the full year and this year for the first nine months cash rents have declined an average of 7.2%.

Another factor driving our solid results is the continued improvement in virtually all of our markets with free rent all but disappearing in Orlando, Nashville and Richmond. Our top five office markets combined have reported positive net absorption of 5.6 million square feet in the first nine months of 2005. This is greater than total absorption for all of 2004.

Our Atlanta portfolio saw occupancy increase 200 basis points from a year ago and is up 140 basis points from the second quarter. Occupancy in our Raleigh portfolio has increased 440 basis points from a year ago and is up 170 basis points from the second quarter. We continue to see quarter over quarter net positive absorption in both Atlanta and Raleigh. However, both markets remain challenging and we need further strengthening in economic fundamentals before either market reaches equilibrium.

Our Richmond based assets have performed exceedingly well throughout the downturn. Occupancy in our portfolio at the end of the third quarter remained a healthy 93 plus% versus the market at 87%. We are starting the development of a multi-tenant Class A office building in Richmond named Stony Point IV which we announced yesterday. This 104,000 square foot project is 46% preleased and is located in an office park where we own three other properties which are 97% leased. This is a good location for us and we anticipate strong leasing demand atop our already successful preleased efforts.

Another strong performer is Nashville where occupancy is 95.6%, a 220 basis point increase from a year ago. Total office market absorption for the quarter was a healthy 358,000 square feet. The Tampa market continues to improve with positive net absorption of 636,000 square feet in the third quarter. Over the past year our occupancy has increased from 66.1 to 76.7 and the scheduled November start of the 199,000 square foot lease for all of building one preserve will drive occupancy up another 7%.

As we move towards the close of 2005, we are proud of the progress we have made towards meeting the goals of our three-year strategic management plan. Thus far we have disposed of over $336 million of noncore assets; we've exited Charlotte; regained $130 million of high coupon preferred debt; retired $140 million of high coupon secured and unsecured debt; grown our development pipeline; and restructured our leasing rep's commission program. Bottom-line, the quality of our portfolio is better, our balance sheet is stronger, occupancy is improving and our development pipeline is growing.

I know we have hurdles yet to overcome but we remain focused and driven on executing on our strategic management plan and improving this Company from every aspect. Terry?

Thank you, Ed. We have made progress on the open accounting matters that need to get resolved before we can file our 2004 financial statements. As we discussed on our last call, the open matters primarily relate to capitalization of interest and other carrying costs on development projects from 2001 back to 1995 and the application of purchased accounting under APB 16 to our past acquisitions and mergers completed from 1995 through 1998.

With respect to capitalized interest, the issues we've identified primarily relate to how costs were capitalized during the building lease-up period after construction was completed and other computational aspects such as recording capitalized interest on previous capitalized interest. The time period we are focused on is from 2001 back to 1995 because our capitalization methodology was modified in 2002.

Based on our work to date we believe that in years prior to 2002 interest and other carrying costs on our development projects were overcapitalized. The affect of the adjustments will be to reduce net real estate assets and reduce retained earnings as of the January 1, 2002, the opening balance sheet for the three-year financial statements that will appear in the 2004 10-K. The affect to the income statement in 2002 and later periods will be to recognize higher net income caused by the resultant lower depreciation expense and higher gains to be the extent development properties were later sold.

Because depreciation and gains on sales of depreciable assets don't impact FFO, these adjustments are not expected to have any material impact on FFO from 2002 forward.

With respect to the application of purchased accounting under APB 16 to our acquisitions and mergers that occurred from 1995 to 1998, we are reassessing the accounting and how total purchase cost was determined and allocated to the identifiable assets and liabilities including assumed mortgage debt and intangible assets. We will be making adjustments to record the assumed debt at higher fair value amounts because the appropriate interest rates at the time the debt was assumed were generally lower than the stated rates on the assumed loans considering the remaining term and leverage levels. We will also record amounts for certain intangible assets such as third-party management businesses that were acquired at fair values.

Almost all of the assumed debt was paid off or refinanced prior to 2002 and the third-party management businesses were sold prior to 2002. So again amounts allocated to these liabilities and assets would not have any material affect on operating results or FFO in 2002 and later years. To the extent adjustments are made to assume debt and intangible assets in these acquisition transactions, amounts originally allocated to real estate assets will also be adjusted. Accordingly the primary affect of these fixed asset adjustments in 2002 and later years would be on depreciation expense and to gains and losses from sales of property. And consequently, we don't expect any material affect to current and future FFO from these purchased accounting adjustments.

Because of the age, complexity and volume of transactions under review and the need to roll forward all prior year adjustments to the current time, the amount of work and analysis and the audit effort by E&Y is significant. We have a team of people from within the Company working on this and we have made significant progress since our last conference call. Our process involves completing all of the analysis and determining the required adjustments for each affected period including quarterly periods in 2003 and 2004 because of the required quarterly data in the financial statement footnotes.

As we complete certain aspects of the work we turn it over to E&Y for review and audit. Once all the adjustments are complete, we can finalize the financial statements and adjust all affected amounts and disclosures in the footnotes and MD&A. E&Y is also simultaneously completing its audit review procedures with respect to the content of the 10-K.

While we have not fully quantified the impact of all these adjustments, we currently believe the net impact of the capitalized interest and purchase accounting adjustments on a cumulative basis back to 1995 would be less than 1% of our total current fixed assets and would have no material affect on current or future FFO.

Operator, we are now ready to turn the call over for questions.

(OPERATOR INSTRUCTIONS) Greg Whyte with Morgan Stanley.

Good morning guys. Just a couple of follow-up questions. On the space that is rolling in 2006 I guess it is somewhere around 15 or 16% of office space. Can you give us some indication of where you are in negotiations on that and how those are going?

Good morning, Greg, it's Ed. We are obviously in conversation with all of those customers. Some are reluctant to talk this far in advance but really anyone who is scheduled to expire within the calendar year '06 has been approached. It is a mixed bag. There are some that have entered into negotiations with us with regard to renewals; some are contemplating expansion, some contraction, some we already know are coming out and some have already renewed. Our largest roll coming up in '06 that we know will be a move out is IBM in the building in Raleigh that is about 168,000 square feet that expires in the first quarter.

Okay. When do you expect to be comfortable giving 2006 guidance?

Probably like we were last year. I think some of it depends on when we have all of our numbers available for you. But it would be my hope that we would do that in January.

Okay. So to that end, can you help me understand if the US Airways lease does not continue into next year, what is the annual per share impact there for FFO?

US Air is about $0.05 in total. Now they have accepted one of those leases, Greg, which we mentioned on the last call which equates to a little more than 40% of that total obligation., So that lease for sure will run through 12-31-'07. The others are in limbo or purgatory and they have a right to decide on them and we are confident they will be in through the end of the year and we are hopeful that we will hear from them early next year on what direction they will take on the residual leases. So in total it is $0.025 to $0.03.

Okay. And then just one last question. I know you have sort of avoided commenting on this in the past. Is it fair to say that the SEC review is going to continue until you've filed all of your final financials?

Yes, obviously they want to see those filings and that is part of what they would want to talk with us about, absolutely.

All right, thanks a lot, guys.

Jim Sullivan with GreenStreet Advisors.

Good morning. It looks like in Atlanta and Raleigh you suffered some pretty sizable rent roll downs but you also improved your occupancy. Is this a strategic decision on your part to pursue occupancy perhaps at the expense of what you are getting in rents?

Jim, basically what occurred in these two markets, it was isolated to two deals. The one in Raleigh was a transaction where we did a renewal in a building that we have slated for sale. So the intent was to secure the occupancy and continue our efforts to dispose of that building. And in Atlanta, it was a government transaction where there were no lease commissions and no tenant improvements associated with the transaction. So we secured the deal for a fairly respectable term with no CapEx and in turn we gave some on the rent.

Okay. And then with respect to your redeemable preferred stock which is carrying a pretty high coupon, what are your thoughts with respect to the strategy there?

Jim, this is Terry. We do have 142.5 million of redeemable preferreds and as we continue to execute on the strategic plan in terms of our dispositions and increase the amount of proceeds, we would expect to continue to chip away at the redeemable preferred over time. But we have not committed to anything at the present time.

Okay. And then finally -- Country Club Plaza -- any update on your thoughts with respect to selling that asset?

No change.

Which means that you are not going to sell it or --?

Our posture on that remains the same as we have discussed in the past with regard to we continue to feel like we have good growth opportunities within the Plaza, the NOI growth continues to average north of 7% a year. It has been a good diversify for us and a stable source of income and as we discussed at length, there are is some very significant and severe tax implications if we were to sell the Plaza that would have to be managed. And to go out and identify alternate properties, that we would be in love with -- and the reason I say be in love with is because we would have to -- we are just displacing the tax burden from one property to the next. So you have to -- it would have to be a product or project or portfolio that we would want to keep long term. The pricing on those are just out of sync in our view with the risk profile.

Any thoughts on what the cape rate might be if you were to sell it?

Well we knew that Oak Park Mall which is in South Johnson County sold for what we understand to be in the 5.5 to 6% range. And I would like to think that ours would attract that or better.

Doesn't a 5.5 cap give you a lot of leeway in terms of dealing with the tax issues on Country Club Plaza?

You still have to pay the taxes.

Okay. Thank you.

Chris Haley with Wachovia Securities.

That was butchered. That is okay. Sometimes I get referred to as Halley's Comet, all that kind of stuff. Good morning to you all. Thank you for giving us more time to react.

Glad we had it this time.

Ed, could you remind me where you thought -- before all the accounting issues -- where you thought you were going to be on an occupancy goal at your end '05? Kind of what was the average for the year of '05?

Sure, and that really hasn't been impacted by --

Maybe I just got distracted with all the other stuff.

Sure. We had said that last year our goal was to end up at 83.5 and we actually ended up at 85. And we said despite ending up higher than we thought, we would still close 2005 at 86 plus%. When we gave the 86 plus%, that was net of the 80 bps that US Air would contribute if they are in occupancy.

Yes, I'm sorry -- so 86 --?

I said 86 plus is what we would be at 12-31-'05.

And that includes?

And that is excluding --

Excluding.

Excluding US Air which equates to 80 bps. So given US Air is staying, in order to honor my commitment or our goal I would have to be at 86.8 or above. And we still feel confident that we will be able to achieve that goal.

And that imputes to what level of gross leasing? Roughly for the full year of '05.

It would have to be -- I'm working off the top of my head now -- but somewhere in excess of 6 million square feet.

6 million square feet. Okay. Portfolio wide, not just office?

That is correct.

And how would you characterize the improvement in your portfolio occupancy levels in relation to the market you are in? I guess we could go to that market by market sheet you track.

Right. We have gained and obviously the most significant movement, Chris, has been in Tampa where we have dramatically lagged the market in great part due to what WorldCom left us with. Given the good work that our folks and the folks at CW (ph) have done on that project we have clearly closed the gap there. On a percentage basis we are 16% better than the 66 that we were which equates to about a 76, 77% occupancy there. And we will gain some more when Syniverse kicks in which I mentioned a few minutes ago in my comments.

So Tampa is where we have made the most progress on a percentage basis but across the board, Raleigh, Atlanta, they have caught up or are now exceeding market. And then the good work that we continue to have in Richmond and Nashville where we continue to outpace the market by a substantive amount and really have throughout this downturn.

All right. Before obviously you are giving guidance for FFO, maybe just to ask if you can, Terry, provide some information on what you think the G&A cost might look like for the full year '05 with all these items? I'm assuming there would be some carrying into '06 too?

A lot of the G&A cost from the E&Y audit, Chris, is being accrued to '04 which is still open because it relates to the '04 audit. Now E&Y's cost in '05 will actually come down from what they were in '04 because we had -- we don't expect to go through obviously the same level of work that we did last year. They are working on the quarters for '05 in completing their review. But most of that is being accrued into '04.

So from an accounting perspective you are holding your FFO guidance, your GAAP FFO guidance for '05 even though on a cash basis -- but on a cash basis you are expending this capital --?

That is correct.

Okay, so, how much of a variance should we expect or cost should we expect from a cash perspective in '05 versus '04? Can you give us some perspective? Above and beyond your normal rate, I mean it can't be cheap.

Probably on a cash basis, a couple million dollars.

Chris, that is being offset to some degree by our G&A savings as a result of shutting down our Charlotte office.

Correct. Okay. Thanks, Terry. On the land sale side, where do you -- where are you today on land divestiture or land modernization versus plan?

We've sold approximately $19 million worth of land thus far this year. We have some in the Q that we would hope to close prior to year end. And as I mentioned in my scripted comments, we've also contributed some land to a residential development which we think will give us a higher return.

And what would be the plan over the next couple of years? I am assuming there is some profit in your FFO that is from land sales? Is that correct?

Well, we have given a three-year goal of 60 to $70 million by 12-31-'07 and we would expect to certainly achieve that goal.

Okay.

And the gains that we have in our guidance for 2005 are zero to about 1.2 million.

In your guidance?

Yes sir.

Because even if your G&A cost actually went up assuming there will be a little bit extra profit coming from the land side would offset that?

To some degree.

Okay. On a mark-to-market basis, could you give us a sense where your office portfolio is on '06 expirations and maybe the overall portfolio?

We feel that we will continue -- our guidance this year was on a cash basis that we would roll down in the 5 to 10% range on a cash basis. And that GAAP rents would be 2 to 4. We are right now pulling together all of the budget numbers for 2006 so I think it is a little bit early for me to provide some foreshadowing on that. But I would expect that it would be at least this or better.

Okay. Great, thanks so much.

John Guinee with Legg Mason.

Good morning. Looking forward -- hard to do. You are clearly focusing on growing in other markets and remaining stable in others and most markets are active or very small markets. And it is obviously very easy to build in all of these markets. Can you just go through the markets that you've targeted for growth what other significant starts you see in those markets? What is your competition doing in Tampa, Nashville, Raleigh, Richmond?

Sure. The development projects that we have underway at present are across six or seven different markets of the 11 or so that we are in. Taken on a goal perspective, we are heavily focused on our development infill strategy. We recognize that we are in mid tier markets that don't have terribly high barriers to entry. But we do remain convinced that there are opportunities to develop within these markets and infill locations that genuinely do have barriers to entry.

So the projects that we are undertaking either currently underway or on the drawing board are in keeping with this infill development strategy that we have. Most significantly to take it across the board, Raleigh which you have seen, our GlenLake project is a perfect example of the infill that we are trying to deliver. And we've evidenced with the first building that that project reached -- was built on a totally spec basis, reached 90 plus% occupancy at a point in time when the market was experiencing negative absorption.

So to take it across the markets, we really only have one competitive building in Richmond that is under construction and we will build as we mentioned in Stony Point and we have continued development prospects in Innsbruck, where we own the dominant share of the remaining infill land.

In Raleigh we have a few competitors with development underway. And the project that we have underway is nearing 50% preleased and we are just getting out of the ground with that. So we feel good about it and other projects that we could develop at GlenLake.

You mentioned Tampa. We continue to believe that Westshore is the best submarket in all of Tampa. We have an attractive -- it is a self-serving comment -- but we feel it is an attractive infill location there where we can develop over 400,000 square feet and we are very bullish on that. And we would expect something to happen there as well.

In Nashville, which you also mentioned, we do have some competitors that are building product but we are developing our Cool Springs III project. We are basically fully leased in the other buildings that we have there and the submarket is really a landlord's market now in that it is better than 94% preleased.

Across the board we are sticking with our infill. We don't have really many markets that we don't have a development project on the drawing board and where our leasing people aren't out beating the streets, marketing predevelopment, preleasing projects.

Okay. Next question you've got a lot of moving pieces with the land sales with all the asset sales, with all the starts. From the way you look at FAD (ph), when do you think you're in a position where you can cover your dividend out of FAD?

One of our three-year goals is exactly that and we projected that we would be positive by year end 2007.

Thank you.

Jonathan Litt with Citigroup.

This is Drew (ph) (indiscernible) with Jon Litt and John Stuart. Thinking about your Charlotte disposition, I'm wondering if you have any thoughts on selling out of additional markets especially Columbia and Greenville considering that their occupancies are substantially lower than the rest of your portfolio?

That is an excellent question. We are in pursuit of exiting Columbia South Carolina. I can't give you a timeline on that but I can tell you that we have good activity underway and it is our hope that we would exit that market within this three-year plan window which we are now nine months of the way into.

With regard to Greenville, we have new oversight on that market from an internal perspective. Brian Reames, our Regional Manager out of Nashville is now dedicating a significant amount of time toward that. And I can give you a better read on that in six to nine months. Right now we are hopeful that we will be able to improve our occupancy there, have some incremental benefit from a revenue perspective and hopefully we will see a rebound in '06 and '07.

Great. And also in terms of the office leases that you are signing, I noticed that they have trended downward in terms of the average term. I'm wondering if that speaks to people being less confident of real estate or potential -- the future just given interest rates and potential for inflation and everything else. Do you think that people are more hesitant to sign real estate leases given these factors?

No, I think the driver for this particular quarter was we have a number of government leases, not any of the build to suits that we have recently done, but we have some other government leases both state and federal that are basically renewable year after year. They are of a defined term with the government genuinely provides us with a renewal notice year-over-year. And what drove it in this quarter was we had several of those government leases that exercised their one-year renewal. And that pulled the term down.

But I think that core to our strategic management plan is to achieve longer-term leases which we think would generate more stability. We are in situations where we are exiting buildings that are more difficult to lease and we typically have to do shorter term leases there because the buildings don't differentiate themselves from the competitors. And the only way to get them in is to -- in occurrences agree to shorter term leases. But it is the Company's goal and certainly understood by all of our leasing representatives that we are pushing for term where the economics are in sync with what we would achieve with the lease we would get.

Okay, in terms of your 10-K filing, I know you said that your goal is to file it by the end of the year. So far as the Qs go for '05, is your expectation to file that in the year as well or do you think that is going to become an '06 event?

It all depends when we get the 10-K filed. We are working on the Qs as well but they will follow the filing of the 10-K as quickly as we can.

I think John Stuart has a couple other questions.

Hi. The 60 to $70 million of land sales that you referenced, I presume that is the gross proceeds? What is the expected gain on those land sales?

John, this is Terry. It depends which assets we sold. We do believe that overall the fair value of our land holdings is in excess of its cost but the amount of gains can vary from property to property. So there are too many factors really to guess.

If you took the whole bucket that you expect to sell by the end of '07, what do you think the fair market value is relative to book?

It could be maybe 10 to $15 million on 70 million. That would seem to be within the ballpark.

Okay. A couple of follow-up questions on the accounting issues. Terry, you mentioned that the net impact is expected to be less than 1% of fixed assets from the adjustments that we're talking about, no impact on FFO. What about the percent of net income. In other words is it expected to be material or above the 5% threshold for net income?

I think -- I'm not sure which periods, but the impact on current period net income is going to be positive because to the extent that asset values in the past are reduced by having less capitalized interest, for example, we would have less depreciation going forward. So we would have positive net income effects in the current years but that doesn't impact FFO.

Right. I guess I was referring to net income.

Net income in the years that the adjustments would relate to which would be prior to 2002, that income in those years would have been lower.

Okay. You also mentioned that as you go through the process, you complete your work and hand it over to E&Y. Can you give us a sense for where you stand in the process? In other words have you essentially completed all your work and you are just waiting to hear back from E&Y before you are able to file?

We have not completed all of the work yet. As I tried to indicate in the comments, it is fairly complicated. There's a lot of transactions and a lot of them go back many years. So as we finish up different pieces of the work, we turn it over and E&Y has been very good at giving us quick turnaround of their review and answering our questions as we go along.

So are you 80% or 90% of the way there?

I don't think we are 90%. I think we are a little bit maybe in the 50 to 60%. And as I said, I think the key thing is not so much the percentage but the fact that we do expect to get this filed by year end.

Okay. And then lastly, can you just refresh our memory what the topics are that are covered in the scope of the SEC review?

John, this is Ed. They remain tied towards the continuing involvement and the sales transactions. Beyond that we can't comment.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Lou Taylor with Deutsche Bank.

Thanks. Ed, real quick, just in terms of asset sales during the quarter, how much has that helped your occupancy improvement or your occupancy increase in the quarter?

For the quarter itself it was about 60 bps, Lou. I think it's important and if I can just take your question and expand it a little bit to look at the impact that it has had for the year. During the first quarter we sold about 1.2 million that was 99 plus% occupied. And in the second quarter netting out the two buildings at the preserve which really were in my mind, velocity in that we dealt with those buildings in selling them to a user, we had an impact of about 50 bps. But total year-to-date netting out those two buildings at the preserve, it is about a wash with what our current portfolio occupancy is.

Okay, thank you.

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

No, this is Ed. I appreciate everybody's continued interest and taking time to listen and ask the questions. And as always, if there are any follow-up questions please don't hesitate to call the Company. Thank you.

This concludes today's Highwoods Properties third-quarter operations conference call. You may now disconnect.