Highwoods Properties Inc (HIW) 2006 Q2 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to the Highwoods Properties 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).

I will now turn the conference over to Tabitha Zane. Thank you. Ms. Zane, you may begin your conference.

Thank you and good morning, everybody. On the call today are Ed Fritsch, President and Chief Executive Officer; Terry Stevens, Chief Financial Officer; and Mike Harris, Chief Operating Officer. 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 email 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 condition, including estimates of asset dispositions, the expected timing of the filing of our SEC reports, the expected use of net proceeds from dispositions, the effect of tenant bankruptcies, the cost and timing of development projects, rollover 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 annual report on Form 10-K for the year ended December 31, 2005 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 risk of FFO can be found toward the bottom of the release, and are also available on the investor relations section of the web at www.highwoods.com.

I will now turn the call over to Ed Fritsch.

Good morning. Thank you for joining us. We had a very productive second quarter with strong leasing, increased occupancy, continued expansion of our development pipeline and the filing of our 2005 10-K and 10-Q's. We also filed our first-quarter 2006 10-Q last month, and expect to filed our second-quarter 10-Q by the end of this month. I'm confident we will be back on a normal reporting schedule with the release of our third-quarter financial and operating results in November.

I would also like to announce that our credit facility has now been syndicated to 15 banks, with Bank of America serving as the lead agent. This syndication was over-subscribed and will close today. I thank all the banks who participated, and appreciate their due diligence and high level of confidence in Highwoods. Terry will discuss this in further detail in his formal remarks.

Turning to operations, it was a strong quarter, with over 1.9 million square feet of second-generation space leased, almost evenly divided between office and industrial. On a sequential basis, occupancy in our industrial portfolio increased 150 basis points to 89.5%, and this drove occupancy in our total in-service portfolio to 88.1% at the end of the quarter, a 40 basis point improvement from March 31st. Year over year, occupancy in our wholly-owned portfolio is up 400 basis points.

We continue to expand our development pipeline. Since the start of the second quarter, we have announced five additional class A office developments, encompassing approximately 765,000 square feet that are collectively 60% preleased. These projects include build-to-suits for MetLife, Healthways and the Department of Homeland Security. These projects plus developments already underway or previously announced have increased our wholly-owned development pipeline to $332 million, encompassing approximately 2.1 million square feet that is 49% preleased. This investment increases to $361 million when you include our share of our JV development pipeline.

After closing $154 million of dispositions in the first quarter, disposition closings were quiet this period. However, our focus on the continued disposition of non-core assets has not abated, and by the end of 2006, we expect to dispose of an additional $36 million to $86 million of non-core properties and an additional $23 million of non-core land.

We held our annual shareholder meeting in conjunction with our regularly scheduled Board of Directors meeting last Thursday. The six nominated Board members were reelected by more than 98% of votes cast, which we believe underscores the support from our long-term shareholders of the ongoing success of our strategic plan. The appointment of our new auditor, Deloitte & Touche, was also ratified.

During our regularly scheduled Board meeting, we again reviewed our goals for 2008 under the Company's strategic plan. For those of you may be new to the Highwoods story, in December 2004, after a lengthy and deliberate process, we unveiled a strategic management plan focused on improving the quality of our portfolio, increasing occupancy and strengthening our balance sheet. The initial three-year goals of our strategic plan were developed by our Board and leadership team and were comprehensive in scope, encompassing a wide range of areas including leasing, development, finance, communications, branding and training.

Our goals for year end 2008 build upon the goals set forth in our initial three-year plan. Development is a key component in improving the overall quality of our portfolio, and we are heavily focused on building quality projects in key infill locations, where available space is limited and the demand in that specific submarket is high and resilient. We had initially stated that between 2005 and 2007, we expected between $200 million and $300 million of development starts. Earlier this year, we increased that goal to $300 million to $400 million. Looking out one additional year, we anticipate we'll start $400 million to $500 million of development projects by year end 2008.

Our progress to date is strong. Prior to 2006, we started approximately $101 million of new development that was 46% preleased, and this year we have or will be starting $260 million of development that is currently 50% preleased.

We will continue with our plan of disposing of older, non-core, non-differentiating assets, although at a slower pace, given we are more than halfway through completing this task. This, too, is another key building block in our effort to improve the overall quality of our portfolio. Since January 2005, we have sold $510 million of non-core, non-differentiating properties. We are on our way to meeting our revised three-year goal of selling $600 million to $650 million by year end 2007. As an aside, you may recall that our initial three-year goal of $450 million to $550 million in dispositions was through 2007, was revised upward earlier this year by over $100 million.

Going forward, by the end of 2008, we expect to sell another $190 million to $240 million of non-core assets, in addition to the $510 million sold to date, bringing total building dispositions over the four-year period from 2005 through 2008 to $700 million to $750 million. Non-core land sales will also continue. Since the beginning of 2005, we have sold $31 million of non-core land, and expect to sell as much as another $50 million more by the end of 2008. We have also consumed approximately 80 acres of our land with a book value of $18.6 million, to support our development pipeline.

We continue to believe the acquisition market will remain frothy, and while we explore acquisitions directly and with JV partners, we are currently not projecting any significant building acquisition activity during the next year to 18 months. Occupancy should also continue to decline. Although it may be lumpy as we go, we have publicly stated that we expect occupancy to be in the range of 88% to 90% by year end 2007. By year end 2008, we expect occupancy to be on the high end, reaching 92%.

Remember, when our plan was unveiled in 2004, our occupancy was 83.2%. In six quarters, it has climbed almost 500 basis points. While part of this growth is due to (technical difficulty) market fundamentals, it is also the result of a better portfolio and a more highly incentivized leasing group.

Finally, based on our forecast for development, dispositions and occupancy, we expect our CAD run rate to be positive by fourth quarter 2007, and expect to remain CAD positive through 2008. Our plan is a great roadmap for our future, and our company maintains a strong belief that achieving the goals outlined in this plan will create significant and sustainable long-term value for our shareholders.

Both our Board and our management team are pleased with our overall operating results, growing development pipeline, stronger balance sheet and, perhaps most important, the continuing improvement of our portfolio, which is of significantly higher quality today than it was just 18 months ago. Our strategic plan is providing a solid framework for the long-term future growth and stability of our company.

My fellow co-workers deserve much credit for the success we have achieved over the past 18 months. Our entire team is energized and focused on getting the job done. It's an infectious energy. As we continue to grow our portfolio of high-quality, differentiated assets, it is the collective strength of our people that will determine our ultimate success.

Mike?

Thanks, Ed, and good morning, everyone. As Ed mentioned, we're extremely pleased with our leasing activity this quarter, which I will discuss in greater detail in a few minutes. Occupancy across the entire portfolio was up 40 basis points quarter over quarter and 400 basis points year over year. Office GAAP rents remain positive, and fundamentals in just about every one of our markets continue to improve.

Starting with office, we signed 141 second-generation leases in the quarter, for a total of 950,000 square feet. As a reminder, this leasing volume, which is slightly below our five-quarter average of 1 million square feet, was achieved within an office portfolio that is over 4 million square feet or 17% smaller than second quarter 2005. Office occupancy remained basically flat from first quarter, but was up 360 basis points compared to a year ago. Office GAAP rents increased 1.8%, which is better than we had forecasted, while cash rents declined 5.5%, well within our 2006 guidance. The average term for office leases signed in the second quarter was 4.5 years, which is in line with our strategic management plan goal of extending our average lease terms.

CapEx related to office leasing was $11.17 per square foot. While within our guidance, this was higher than our five-quarter average, due to one five-year lease for 103,000 square feet in Greenville, one of our softer markets. This deal definitely skewed the numbers. Without this lease, CapEx related to office leasing for the second quarter would have been $8.67, well below the five-quarter average of $10.25.

TIs and leasing commissions as a percent of base rent was 12.8%, again skewing higher due to the Greenville transaction I just mentioned. Excluding this lease, TIs and leasing commissions as a percent of base rent would have been 10.1%, well below our five-quarter average of 12%.

Leasing in our industrial portfolio was strong. We executed 36 leases totaling almost 975,000 square feet. CapEx related to industrial leasing was $1.07 per square foot, less than half of our five-quarter average. As many as you know, we had 519,000 square feet of industrial space roll out in the first quarter of this year, with a large portion of this in the Triad division. I'm pleased to report that our leasing team in the Triad has backfilled 56% of this space, including 220,000 square feet leased to Polo Ralph Lauren. This lease with Polo commenced in June.

We continue to see positive economic signs in most of our markets, including solid job growth in small and medium-size business expansions, and our leasing representatives continue to be encouraged by an increased volume of showings. All of our markets saw positive job growth year over year, with the strongest markets being Atlanta, Orlando, Raleigh and Tampa. Overall, our markets averaged 2.4% job growth versus the national average of 1.4%.

Another trend we follow closely is net absorption, and this continues to remain positive. For the second quarter, our top five office markets combined reported positive net absorption of just over 1 million square feet. Additionally, although economic fundamentals continue to improve in just about all of our markets, office construction as a percentage of the total market remains relatively low at under 3%.

Construction starts have increased slightly from a year ago, when we were seeing most developers approach the market in a careful, deliberate manner. Clearly, higher interest rates and construction costs are constraining the flow of new construction, which will obviously help overall absorption of second-generation space as demand remains positive.

Turning to our top five office markets, leasing in Raleigh continues at a brisk pace and occupancy increased this quarter compared to the first quarter of the year. Our Raleigh portfolio is currently underperforming the market as a whole, primarily as a result of IBM relocating back to their company-owned campus in Research Triangle Park and vacating 160,000 square feet in our 4800 North Park building in the first quarter. We have talked about this expected move-out previously. However, the good news is we have already relet 23% of this space, and are confident we will meet our goal of having this building at least 40% released by year end.

We are very bullish on Raleigh as a market over the long term. Some of you may have seen the announcement last week that Fidelity Investments is expanding its presence here and will be adding 2,000 local jobs in the next three years. Their plan is to build a campus on land they brought in Research Triangle Park. In the meantime, Fidelity is expected to lease about 500,000 square feet throughout the Raleigh area on a three to five-year basis. This is one of the state's biggest economic deals in recent history, and will make Fidelity, which already employs 1,000 people in the Triangle, one of the area's largest private employers. This is just another example of the many high-quality companies who are relocating or expanding here in Raleigh.

Occupancy in our Atlanta portfolio increased both quarter over quarter and year over year, and stands at a healthy 91.8%. The Atlanta office market reported net absorption of just under 0.5 million square feet, and over the last five quarters has absorbed a total of 3.8 million square feet. While some of our occupancy increase in Atlanta is due to our having a better collection of assets, it is also due to improving market fundamentals, as evidenced by the increase in occupancy on a same-property basis, which was up 440 basis points year over year and 80 basis points quarter over quarter.

Richmond, which has always been one of our strongest office performers, saw occupancy decline this quarter as a result of an expected April lease expiration impacting 46,000 square feet. The good news is that over 50% of this space has already been backfilled, and we already have strong prospects for the rest of the property. Even with this temporary dip in occupancy, we fully expect our Richmond portfolio to reclaim its position as having one of the lowest vacancy rates within the Company.

Another consistent strong performer, Nashville, continues to exhibit positive trends with 2.5% employment growth and positive net absorption of 250,000 square feet in the second quarter. Leasing activity in our latest Cool Springs project, which is slated to come online this quarter, is starting to pick up, conforming our bullish outlook for that prominent submarket.

The office markets in Central and West Florida remain very healthy, and our properties in Tampa and Orlando are clearly benefiting. Our wholly-owned portfolio in Atlanta is at 100% occupancy, and our joint venture assets in that market are 93.3% occupied. This success presents us with an enviable problem. We have very little available inventory to service our customers' growth needs. This is why we're so eager to get our 99,000 square foot Berkshire building in the MetroWest submarket completed. There has been a lot of interest in this building. As we get closer to our first-quarter 2007 completion date, I believe we will see a flurry of leasing activity.

Tampa continues to garner our most improved portfolio of occupancy increasing to 93.6%, up 170 basis points from the first quarter, due to over 50,000 square feet of new starts. As a reminder, occupancy in our Tampa division at the end of second quarter 2005 was just 77.2%, 16.4% below its current level. This is quite a remarkable turnaround, and very indicative of the strength and resiliency of that market.

Some of you may be aware that Steve Meyers, who served as head of our Tampa division for almost nine years, retired at the end of June. Steve served us well during his tenure with us, and we wish him well in this next phase of his life. His replacement, Dan Woodward, was most recently Senior Vice President of Development for Central Florida with Trammell Crow in Orlando. Dan is a 21-year real estate veteran, most of this in Tampa and Orlando, and has a strong background in leasing development and asset management. He is a graduate of the University of Florida, both BA and MBA, and earned his Masters in Real Estate Development from MIT. Dan has relocated to Tampa, and officially assumed responsibility for that division as of July 10th.

In closing, let me say that as a result of the crisp execution of our strategic plan, our portfolio is of much higher quality today than it was just 18 months ago. Although the markets remain competitive, we are well-positioned to take advantage of improving fundamentals in all of our markets.

With that, I will turn the call over to Terry.

Thanks, Mike. I will take a few minutes to discuss our recent financing activities, timing of our SEC filings and our first-quarter financial results, which we released on July 19th.

We announced in early May that we had obtained a new three-year, $350 million revolving credit facility from Bank of America. This new facility replaced our existing $250 million revolving credit facility and a $100 million bank term loan, both of which were scheduled to mature in July. The new facility bears interest at 80 basis points over LIBOR, down from 105 basis points under the replaced credit facility, has lower annual facility fees and has other changes to financial covenants that provide us with better flexibility.

In late June, we and Bank of America kicked off the syndication process for this loan which is now complete. A total of 15 banks, including all of the previous banks plus seven new banks, have made firm commitments totaling over $450 million. I, too, echo Ed's thanks to all of the banks for their support. We now plan to upsize the credit facility to $450 million, a $100 million increase, when we close the loan today. The credit facility has a one-year extension option to May 1, 2010, and also allows us to request a further $50 million increase in the facility, subject to lender approval at the time.

In July, our Iowa joint venture closed on a $65 million 12-year fixed-rate secured refinancing in which 15 separate secured loans were consolidated into a new single loan with over $16 million of additional proceeds, of which $8 million has been received as our share. The (technical difficulty) has an interest rate of about 6%, which is almost 100 basis points lower than the weighted average rate of the prior 15 loans.

Ed discussed our growing, wholly-owned development pipeline of over $330 million, of which approximately $90 million has already been funded. We have various sources available to finance the remaining development costs of our current pipeline plus other potential new development projects. These sources include $190 million to $240 million of additional sales of non-core assets; $50 million available under an existing secured construction facility; $60 million of additional proceeds on existing low-leveraged secured loans; $60 million to $100 million in separate construction loans for certain projects; $100 million to $200 million in potential issuance of new unsecured borrowings under rule 144A, public bonds or direct unsecured loans; $165 million of capacity under our new upsized credit facility; and $15 million to $30 million of cash received from exercise of stock options, for a total of $640 million to well over $800 million from all these sources combined. So we are very comfortable that we have the financial flexibility to handle our development pipeline and other investment opportunities that may arise.

Turning to our SEC filings and accounting matters, as a reminder and to help set the stage for the current update, last December, we filed our 2004 10-K, which included a restatement of prior-year results. In February of this year, we disclosed that our audit committee engaged new auditors, Deloitte & Touche, to audit our 2005 annual financial statements, and that we expected to file our 2005 10-K and 10-Q's by the end of June. We beat that date when we filed all four documents on June 5th. Deloitte's opinion on our financials was unqualified, and there was no restatement of prior periods. We were very pleased to have a new set of accounting experts examine our accounting policies and practices, and to have rendered an unqualified opinion. I also want to express my thanks to the entire accounting team here for their dedication and effort during this period.

On July 19th, we released our first-quarter results and filed the related Form 10-Q. We expect to file our second-quarter 10-K around the end of August, which is a few weeks late, and to file our third-quarter 10-Q on a timely basis in November, and to continue to be a timely filer thereafter.

We have recently been focusing our efforts on posting all of the adjustments from our two past restatements directly into our J.D. Edwards general ledger system. These adjustments had been temporarily tracked in Excel for expediency purposes, but represented a material weakness in our internal controls that we had previously reported in our 2004 and 2005 10-K's. We are nearly complete with this project, and thus expect to soon eliminate this material witness. We will also continue to work on our goal of remediating our other reported material weaknesses by December 31, 2006.

Finally, turning to first-quarter 2006 financial results released on July 19th, we had a solid first quarter, with $0.59 in FFO or $0.62 after excluding the $0.03 non-cash charge related to the redemption of $50 million of preferred stock in the first quarter. First quarter 2006 also included $0.05 in landfill gains and slightly over $0.01 in lease termination fees. These results compare to $0.60 in the first quarter 2005 and $0.43 in the immediately preceding fourth quarter of 2005. Adjusting to eliminate impairments on depreciable properties and other unusual charges, these quarters would have been $0.60 and $0.57, respectively.

First quarter of 2005 results were reduced by $0.04 of land impairment charges, but we also had $0.04 of lease terminations fees that quarter. Fourth quarter 2005 included $0.01 in land sale gains and $0.01 in lease terminations fees.

We reaffirmed in the press release our full-year FFO guidance of $2.28 to $2.42 per share. This range excludes the $0.03 preferred stock redemption charge I just mentioned and any other impairments, debt extinguishment costs or unusual charges that may be incurred during the year. In the second quarter, we had no building sales and only one small land sale that was essentially breakeven. But we do have a number of land parcels under contract, some of which we expect should close for gains in the second half of the year. The somewhat wide-range in our guidance is partly from the extent of these potential land sale gains, which are more difficult to predict as to certainty of closing or timing.

This concludes our prepared comments, and we are now ready for questions.

(OPERATOR INSTRUCTIONS). Michael Bilerman, Citigroup.

Jon Litt is on the phone with me as well. I was wondering if you can just update your guidance assumptions, and whether any of them have changed from the last quarter.

None of them have changed from where we were when we put them out at the beginning of the year.

Thinking about G&A specifically, you're -- I guess, coming out of the first quarter, what was filed, you are about a $35 million run rate, relative to $32 million to $33.5 million. Was there anything in particular in the first quarter that was higher and that expects to moderate?

The increased appreciation in the stock price -- certainly, we had an unusual charge with having to address any phantom stock that was in the accounts, given the run-up. We do expect to be on the high end of the guidance that we gave, close to the $33.5 million.

Can you just go over the land sale guidance? I guess you've booked $3 million. How much more do you expect for the rest of the year?

The total proceeds that we projected for the year were $15 million to $30 million, so we expect that we are very comfortable with the middle of the range. There's a good probability we'll push towards the upper end of that range for total proceeds. On land sale gains, we said $4.2 million to $9 million. We are currently at about $2.8 million, and we expect, again, to be very comfortable with the middle of that range, and a good probability we'll push to the high end of it.

Can you just go over what the status is of currently Capital Partners' unsolicited bid, and whether there has been further conversations since you rejected it in late June?

Yes. I'll just take you back to the press release that we issued on June 29th, where our Board rejected their unsolicited overture, and that the Company isn't going to comment on that any further.

Have they made subsequent offers for the Company or subsequent conversations, or is it dead at this point?

We are not going to comment on that, as I just mentioned. What I would like to remind you, though, Michael, is that we have a heavily seasoned Board. They fully understands their fiduciary responsibilities. Any credible offers that would come in, our Board would evaluate as their fiduciary role dictates to them. However, they continue to believe that our strategic plan will create significant and sustainable long-term value for our shareholders.

I completely understand that. I was just wondering if they have continued to pursue you, or whether they have walked away at this point.

Again, we're not going to comment beyond the comments I provided.

John Guinee, Stifel Nicolaus.

Nice job this quarter. On your preferreds, how much more can you pay off? How much is callable in the next 12 to 24 months?

$92.5 million of the Series B is callable, and I think will remain callable for the indefinite future. I don't think there's any time limit on when that could be redeemed. All of the Series A, by the way, is not redeemable for some time.

Okay. But your series B, you have an outstanding basis of $42.5 million right now?

$92.5 million on that series. That's at 8%.

On page one of your supplemental it says $42.5 million. That's why we're confused.

It should read $92.5 million is what we have redeemable on that. Then, as a footnote, we also have a $63.4 million secured loan that is scheduled to expire in February of 2007 that is at 8.2%, and it's our intention to pay that off as well.

So $92 million of preferred to remain. Second question is it appears the way we're looking at your company is you run $1.70 a share in dividends, and then you run straight-line at about $10 million a year, second-generation TIs and leasing commissions at about $45 million a year, and then base-building capital costs at another $10 million. So that comes out to $65 million or, say, $1.08 a share. If you do the math, to cover a $1.70 dividend out of CAD, you really have to get your FFO up to about $2.80 a share. Is that the correct math, and is that how you're looking at the Company?

I think what will also be happening is our CapEx will be coming down in the future as our releasing needs, and particularly in 2007 and continuing into 2008 should be down from the current levels where we are building up occupancy, which is always more expensive, and also having to replace the higher rolls that we have had currently. So it would be a combination of growing FFO and reduced CapEx needs that would get us to a CAD-positive position.

We expect the CAD shortfall for 2006 to be in the $20 million range.

Chris Haley, Wachovia Securities.

Terry, I'm sorry if they didn't write all this down quickly enough. From here, from today's development pipeline, what is the incremental new start number, the development, through 2008?

For 2006?

Yes. Or projects that you are using in your model that have not already been announced. You said, what, $500 million worth of development, total, from 2005 to 2008?

For the SMP? For what we have said by year end 2008?

Yes.

For year end 2008, we said the high end would be $500 million.

That includes 2005, though?

That's right. We're currently at $361 million. (Multiple speakers) 139.

So that's what your using in kind of your new start assumptions?

Correct, beyond what we have announced to date.

No acquisitions, dispositions up. I'm trying to, again, reconcile the cash flow numbers. If I look at your roll exposure in 2007, which was lighter than 2006, and then 2008 comes back up again, and the fact that you'll have more development in progress [from the] more new projects that will carry a straight-line rent component been passed, and the fact that you have more roll in 2008 than 2007 -- are you assuming a burnoff in the concession rate into 2007-2008 to get the dividend covered?

We're anticipating less CapEx as a result of a better portfolio. We're anticipating, on the lease expirations, that we will get a fair amount of that work done in 2007, with renewals that are typically less expensive than re-lets as the markets continue to tighten. We do expect rent growth to go -- and it has been a very good, steady trend with regard to rent growth for -- if you look at us for the last couple years, back in 2004, we were talking in the office of rent growth to the negative, in the high single digits, low double digits. Then last year, we hovered around 7.5%, and now we're sub-6%. The GAAP rent is certainly continuing to improve, where we were negative in 2004 of almost 2% and the same in 2005, and now we're positive 2% for the first half of 2006.

In your experience, through these cycles in the Southeast, in these sunbelt markets or at least these Southeastern markets, what would you say if you went back in time and looked at your mark-to-market and where we are today, in terms of what we are rolling in 2006 and in 2007? What do you think the upside potential is, as things continue to trend with regard to net absorption in your markets? What do you think the potential is for rent movement over the next one, two, three years? Some of the company executives, your other public company executives, have proffered a pretty rosy picture for some of the urban markets. I would be interested in what you would say regarding rent inflation for your suburban markets.

This may be a bit of a long answer, but I think it's important. First of all, we anticipate the mark-to-market question for each one of these calls. We do think that that calculation is a difficult calculation to make. I've talked to a number of people -- analysts, peers, et cetera -- on how that calculation is done in different shops. Do you take the last few deals and compare them to the deals that are in place? Were those last few deals the best space in the building? Were they the worst space in the building? I think it's difficult to go through and do that, unless you do it literally on a lease-by-lease basis, which is relatively time-consuming.

We do have a fair -- couple of points to make on that. First of all, 17% of today's in-place revenues were signed before the year 2000. The market in our view, in are markets, really turned about mid-2000. So if you pushed it out another six months, 26% of our in-place revenues today were signed prior to the start of 2001. So it would lead one to believe that we have worked through the large majority of leases that were signed in the heyday with full escalators.

Prior to year end 2000?

Prior to start of 2001, 26% of today's revenues started prior to that date. So if you then look at our guidance, as it relates to what we said with regard to rent growth on a cash basis, we said negative 3% to 8%. We're currently sub-6%, about 5.8%. On a GAAP basis, we said flat to negative 2%, and we're currently better than that. We're in the positive.

I think that what all that suggests is that we expect to still suffer some negative rolldown on the office, although it's relatively nominal. As I mentioned earlier, clearly it's tracking in the right direction quarter over quarter now, for 10 quarters. Then, on the GAAP side, it's certainly in the black. Retail for us has consistently been high single to double-digit appreciation in rent growth.

So long answer to that is we expect to still suffer a little bit more as we work through some of these leases that were signed back in the heyday, but a lot of that work is done. We anticipate the fundamentals to continue to improve beyond 2007.

That's helpful. Maybe to move kind of to maybe redirect a question to the markets that you're in, what would you characterize as the occupancy potential in the markets that you operate in, over the next one to two years, regarding occupancy upside?

Well, we have a couple of silos, I guess. Clearly, South Carolina is our Achilles heel right now, with Greenville and Columbia. Columbia, you know, we only have 252,000 square feet left there. We're working to get out of that. We sold one office park. We're hopeful to get out of the other office park in the not-too-distant future. But that has been on our to-do list for some time. The occupancy is low, so we're playing opportunities on a sale basis versus leasing opportunities that may come our way.

Greenville, where we have over 1 million square feet, occupancy there, too, is low; it's sub-70%. Right now, we've got some good opportunities. We just signed the Fluor Daniel deal to backfill the space that MCI came out of. We have new people on that. They are aggressive. They have invested a significant amount of time. They are bullish. They are seeing some good activity. They are spending a lot of time in the market. So we're hopeful that we'll be able to bring a fair amount of upside to the shareholders with Greenville.

Maybe the next category would be the Raleigh market, where, as Mike pointed out, there are a lot of good things happening. We remain bullish on that. Tampa, Orlando, Richmond, Nashville and Kansas City retail all continue to do well. Richmond has stumbled a little bit with this move-out of Owens & Minor, but as Mike mentioned, we have already re-let 50% of that. Richmond has been our best office performer from day one, and don't expect that it will relent that position within our portfolio.

So to summarize that, I think that our strategic plan says that by 2008, 90% to 92%, I think, has stabilized. Equilibrium portfolio for us could easily be 92.5% to 93.5%.

Michael Bilerman, Citigroup.

Jon Litt here with Michael. A question on your land value. I think, in the supplemental, it says you're estimating that at about $209 million. I think that's at cost? Is that correct? Development land?

$200 million plus, $208 million to $209 million at total market value.

Oh, that's market value. That's not --

Right.

Because on your balance sheet, I think it showed $146 million, so the difference would be the mark-to-market?

That's right.

Then your construction in progress is about $60 million. What's the total expected buildout cost of construction projects (technical difficulty)?

Around the end of June -- and we disclosed this in the first-quarter 10-Q -- we had about $200 million left to spend on the started development project around the end of June. So when you take the 60 plus what we had spent through the second quarter plus what was left, there was about $200 million left.

What kind of yields do you expect to earn on those developments?

On a cash basis, we are running in the low to mid 9's, and on a GAAP basis we're running in the high 9's to low 10's.

What do you estimate those assets to be sold for, when they are completed?

We're having trouble hearing you.

What would you estimate those assets could be sold for, when they are completed?

Well, since we have been selling non-core, non-differentiating assets for low 7's to high 6's, I would expect that most of this we could sell in a sub-7 range with a 15% to 20% margin.

My sense on the assets, the non-core you're selling, they probably have occupancy challenges, and that might be what is driving the lower cap rate.

Some do, some don't. That's fair.

As I look at your overall portfolio, in the high 80's percent occupied, I would think that a cap rate that low would not be something that would be achievable.

I would suggest -- and maybe you have. But I would keep in mind that there's a fair amount of build-to-suit with the high credit leases in that mix.

In which mix?

Excuse me?

In which mix, the development?

Yes, sir, in the development.

Right. But I'm also thinking about a little bit the non-core you have been selling, and then just trying to relate that to what your core portfolio of owned assets are. Again, you're in the high 80% occupancy. It seems to me unlikely that those could go much below a 7.25% cap rate.

I think that would be up for speculation. I still think that the class of assets that we have remaining are certainly a higher class than that which we have sold. There is a good mix of trophy assets in there, and particularly when you look at projects that are long-term credit leases. GSA represents almost 7% of our total revenues. Country Club Plaza, which certainly helped bring the average down with a value of well in excess of $450 million.

So your argument would be it would be something south of 7.25%?

Yes, but I'm not sure that I would put it in the context of an argument, because we honestly don't spend our time trying to evaluate the portfolio on a day-to-day basis. What we're trying to do is just do the best we can with each opportunity that we can either create or that comes our way.

Jim Sullivan, Green Street Advisors.

With respect to the land value, you have been selling quite a bit of land. How have the land sale proceeds measured up to your mark-to-market value?

Right in line.

Terry outlined a number of different capital sources. I didn't get them all, but it sounds like they add up to several hundred million dollars. Why not take $92.5 million of that available capital and redeem the preferred stock at 8%?

That is something that we might consider doing in the future. We have no immediate plans to do that, but that is certainly one opportunity, and something that we would look at as we get maybe a little bit better visibility on the timing of the dispositions.

Is that decision to not do anything now predicated on rating agency concerns or other factors?

I think it's just watching in terms of the timing of the dispositions. We just got the credit facility done today, which was another big piece of our financing. So we're kind of taking these things one step at a time. We have no current plans, but that certainly is something that we could do.

Remember, we have already done $180 million worth. The other aspect that comes into consideration is our development pipeline. Certainly, it's more robust than even we had anticipated. We are chasing a number of SFOs right now. So I think Terry is properly being cautious that if we continue to be successful on attracting development projects to our portfolio, that he's going to need to balance that need for cash as well.

Related to that, you had $300 million out on the line at the end of the quarter, $110 million of unsecured bonds maturing in December. Can you outline the game plan for refinancing the $110 million, certainly, and for reducing the $300 million that's currently on the line? What is the game plan with respect to the balance sheet?

With respect to the bonds that mature in December, we have a couple of possibilities there. One would be to do a 144A non-public deal, because we're not shelf-eligible right now, and it would be a little bit more difficult to do a public shelf deal. But we could do a 144A deal. We also are looking into the possibility of direct unsecured loans. We've talked to a few insurance companies. So we have couple different possibilities, and we would expect to take care of that sometime in the fall, October-November. Those bonds mature on December 1st, as you know.

With respect to the overall balance on the facility, the new facility is $450 million. I think we're currently around $285 million on the borrowings on the facility. Again, we could take that down over time, depending on the timing of the additional sources I walked through previously, including the dispositions and so forth, offset by the need for funding the development pipeline. But overall, I'm very comfortable with the financing strategy and the timing of our debt maturity schedule and so forth. I think we have a nice current structure with good flexibility, given what we're dealing with.

Finally, with respect to the unsolicited offer that was received and rejected, was the rejection of the offer strictly related to the price, or were there other factors that led the Board to reject it outright, as opposed to entering into a negotiation?

I don't think we will comment on that beyond what we have said. But again, I want to underscore that we have a seasoned, independent Board that takes its duties responsibility, takes its job responsible, understands its fiduciary roles. They believe in the strategic management plan. It's our obligation to run the Company, and its their obligation to oversee what we do. If they believe otherwise, they certainly would act in that manner.

John Guinee, Stifel Nicolaus.

You've got a lot of JVs on your balance sheet. Are any of these going to unwind anytime soon?

Not likely in a substantive matter.

John Stewart, Credit Suisse.

Ed, you used to publish an NAV in your supplemental when you were reporting financial results at the same time as your leasing statistics. The last estimate that I show was $36.09 at a 7.72% cap rate. I know you said you don't spend all your time evaluating the value of the portfolio, but can you give us a sense for what your internal estimate looks like today?

Sure. Fair question. We would have it in our supplemental when we publish full financials, as we customarily do. Our internal NAV model now suggests a $38 to $42.50 range, and that is a blended cap rate. We think it's relatively conservative, and maybe it's in line with where Jon Litt's question was earlier. But the blended cap rate to get to that range is a high of 7.6% to a low of 7.1%.

That's very helpful, thank you. I believe you raised your disposition guidance by year end 2008 to $190 million to $240 million, which just strikes me as a bit of an odd range. Can you give us a sense for maybe -- is that a specific market that you are looking at there?

There are really two drivers. It's not getting out of any one particular market, but what we are -- where the majority of it comes from is Raleigh and the Triad.

David Cohen, Morgan Stanley.

My questions have been answered.

Chris Haley, Wachovia Securities.

As a follow-up, where would you say your marginal debt cost is in a private deal versus if you were to be shelf-registered?

We understand that the increased cost to do a private deal versus a public deal is probably in the 5 to 10 basis point range. We don't think it's that material.

What would the all-in cost be? Say, if you were out there in the market, what would you say? Would you be 6.7, 6.6, (multiple speakers)?

I think in the high 6's right now, mid to high 6's.

Ed, you mentioned -- you used the term an SFO?

Solicitation for offer or RFP, request for proposal -- users that are out in the market or tenant rent brokers that are out in the market looking for a build-to-suit project.

I wasn't sure. Hopefully, it wasn't a single-family opportunity. That's what I was --

On personnel and your new leasing management system that you put in place, could you give us some feedback on whether or not you have seen incremental traction or pickup with regard to this new system? Related to that, any other personnel adjustments that have been made recently or expect to be made at the regional level?

I think we have seen good traction. Obviously, if you look at the numbers in our occupancy and having our guys on direct incentive comp based on transactions, we think, has been a good direct line of sight to the production and what we have seen in the way of occupancy pickup. In terms of the personnel changes, no. I mean, obviously, Steve Meyers has given us ample notice in terms of his retirement, and has been in this game along time. So we hate to see him go, but we are delighted to have Dan Woodward on board.

One footnote to that. We are continuing our search for a CAO. We understand the importance of that position. The prospect pool is better today than it was back when we launched this, at a point in time when I think a lot of CAOs felt an obligation to close out the year and hang around into the early part of the second quarter to earn their vesting and their cash bonuses.

I will also mention, as you know, Skip Hill joined us as the Division Head over in Raleigh. We are also actively pursuing opportunities for a replacement of him in the VP of Leasing position.

Michael Bilerman, Citigroup.

Just on your NAV estimate, is that off of stabilized NOI, or that is just off a current NOI number?

It's based on annualizing first-quarter 2006 NOI.

(OPERATOR INSTRUCTIONS). [Howard Yee], Fitch, Inc.

On the line, on the new agreement, I just wanted to know is that unused fee? Has it changed from last?

The unused facility fee is down slightly. It was 25 BPS, and it's now 20 basis points.

There are no further questions in queue at this time.

I thank everybody for investing the time to listen to our call and review our press release and our numbers. I want to be sure again to thank all my co-workers for the tremendous effort that they continue to put forward. Thank you.

Thank you for participating in today's conference. This concludes today's conference. You may now disconnect.