Highwoods Properties Inc (HIW) 2006 Q3 法說會逐字稿

Good morning. My name is Ashley and I'll be your conference operator today. At this time I would like to welcome everyone to the Highwoods Properties third quarter 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 session. [Operator Instructions] Thank you, Miss Tabitha Zane, you may begin your conference.

Thank you Ashley 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 today's press release or the supplemental we distributed, please visit our web site at www.highwoods.com or call 919-431-1521 and we'll 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 condition including the estimates and effects of asset dispositions, 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 yesterday'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 managements 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 relation section of the web site at highwoods.com. I'll now turn the call over to Ed Fritsch.

Thank you Tabitha and good morning everyone and thank you for joining us today. Yesterday we reported solid financial and operating results and we continue to make concrete measurable progress on achieving the goals that form the foundation of our long term strategic plan. We're also very pleased to be back on a normal reporting schedule and we genuinely thank Terry and his team and the folks at Deloitte & Touche for their collective efforts. Conditions and trends in our top five office markets remain encouraging with substantial positive net absorption and nominal amounts of new construction. Overall occupancy in these five markets has improved 130 basis points in the past twelve months and occupancy in our portfolio in these five markets has seen a 370 basis points improvement over the same period of time. Our portfolio today is younger, concentrated in better locations, and of a higher quality overall and this is clearly reflected in our increasing occupancy.

Through your targeted disposition program over the past two years, we have sold $558 million of non-differentiating older assets, assets that in virtually every case would have required a disproportionate amount of CapEx to re-let and maintain. Turning to operations, released 1.7 million square feet of first and second generation space and ended the quarter with a total occupancy at 89.4%. This is 130 basis point increase from June 30 and a 360 basis point increase from a year ago. Reported FFO for the quarter was $0.53 per diluted share excluding impairments on depreciable assets and other charges FFO per share was $0.59 for the third quarter and $1.76 for the first nine months. Terry will talk about our first quarter earnings assumptions in a few minutes but the highlight is that we are now projecting a full year FFO for 2006 to be between 242 and 244 excluding asset impairments and other charges. As noted in yesterday's release we sold 95 acres of non-core land in Atlanta two weeks ago for gross proceeds of 22.5 million resulting in a net gain of $0.12 per share which will be concluded in our fourth quarter FFO.

In January we will provide our 2007 FFO outlook. This timing is consistent when we provided our outlook the past two years. In addition, I want to reiterate what we have previously stated that based on our current forecast we expect our 2007 CAD run rate to be positive and we expect to remain CAD positive thereafter. On the development front our current pipeline is now up to $418 million and is 49% preleased. This pipeline includes both wholly owned and our share of J.V. projects. In September we broke ground on Newpoint Five a $11.6million, 263,000 square foot industrial building in Atlanta. This is our fifth industrial building in our Newport industrial park which is currently 91% occupied.

This week we sold Vinings, a J.V. developed, 156 unit multifamily rental apartment complex in Charlotte for gross proceeds of $14 million. We contributed partially 8 acres of land with an estimated market value of $1.3 million in exchange for a 50% equity stake in this project. Our share of the net proceeds was $2.9 million, more than double the value of our original land contribution. We have a similar joint venture project in our Raleigh market comprised of 332 rental units. We contributed approximately 22 acres with an estimated market value of approximately $4 million in exchange for $1.9 million of cash and a 50% equity stake in the project. Our partner is Croslin and we are creating significant value with this partnership as well.

By year-end we expect to have delivered $92 million of new development which should contribute approximately $0.03 per share of FFO in 2007, after allocating interest based on our average borrowing rate. The stabilized cash yield on these developments is projected to be 10.1% and the GAAP yield at stabilization is projected to be 11%. Development remains a key component in fueling our future growth. Improving the overall quality of our portfolio and contributing to long-term cash flow stability. We are actively pursuing additional build to suit deals and we are evaluating other opportunities where we own land in highly desirable and highly occupied sub-markets with significant [inaudible] to entry. We sold 292,000 square feet of non-differentiating properties this quarter for total proceeds for $22.8 million at a cap rate of 9.5%. These properties were 24-year-old single story flex buildings in Northeast Raleigh. This week we closed on the sale of 105,000 square foot class B minus retail strip center in Kansas city for $10.5 million at 12% cap rate. The high cap rate is primarily driven by an above market loan assumed by the buyer.

Year-to-date we have disposed of $188 million of wholly owned, non-differentiating properties and since January '05 we have sold $558 million of non-differentiating properties at an average cap rate of 7.1%. At this time we are not seeing any signs that cap rates are increasing in any of our markets. We used a significant portion of these disposition proceeds to pay off $381 million of high coupon debt, expensive preferred stock and we unencumbered $363 million of assets. Clearly we are well on our way to meeting our increased goal of 600 to $650 million selling assets by year-end 2007. We are actively selling non-core land as well generating proceeds of $34 million to date. Since January 2005 we have sold $58 million of non-core land for total gains of approximately $16 million. Remember our year-end 2007 goal calls for 60 to $70 million of non-core land sales. Looking at our remaining 700 acres of land inventory we consider about 400 of those acres to be core, leaving about 300 of non-core land with the market value of approximately $80 million that will generate additional healthy gains. Since January 2005 we have also contributed approximately 120 acres of our development land for 11 projects. These 120 acres had a book value of approximately $24 million.

Now I'll touch briefly on RBC plaza, the development we broke ground on last month. As a reminder, this is a mixed use, 33 storey building in downtown Raleigh that will serve as RBC Centura's new U.S. corporate headquarters when it is delivered in late 2008. Our projected investment in constructing the office retail and parking components is $76 million and its stabilization to cash yield in this project is expected to be 8.5% and the GAAP yield is expected to be 9. RBC plaza will be the first foreleased downtown high rise office building to be delivered in 17 years and in a submarket that is currently 91% occupied. This project is perfectly aligned with the sweet spot of our in field development strategy of building differentiating class A office projects where available inventory is scarce. Downtown Raleigh's Renaissance which is being fueled by over $2 billion of public and private investment in the five-year span, combined with our team's in-depth studies of local housing market data are two of the primary reasons we decided to take an equity stake in the residential piece of RBC Plaza.

We have established a joint venture with the [inaudible] partners and we have a 93% equity position. The [inaudible] began taking initial reservations for the 139 residential units on September 27th and were very quickly 200% reserved. Of these initial reservations 74% have represented their intent to that make this their primary or secondary residence leaving only 26% reserve for investment purposes. So all in all, 2006 is shaping up to be a very good year for Highwoods on a number of fronts. High occupancy growth, development activity and dispositions to name a few.

We're back on a normal reporting schedule and we will file our third quarter 10-Q on time. Also based on our initial reviews of each division 2007 budget, next year is looking to be another good year for Highwoods. Right now we have 9.5% of total annualyzed revenues expiring next year significantly below the 15.3% at the same time last year. We are expecting continued occupancy growth over $100 million of new developments to be completed. 100 million to 200 - - of new developments starts in between 100 and 200 million of non-core asset and lien sales. Again full year 2007 guidance will be provided in January.

I thank those of you on this call who have remained shareholders over the past two years and who have believed in our new management team, believed in our strategic plan and supported us while we achieved our stated goals. I'm really proud of our progress to date and excited about what 2007 will bring. Also I again thank my co-workers for their continued dedication, hard work and believing in themselves in the success of Highwoods. Mike?

Thanks, Ed and good morning everyone. As Ed mentioned we are extremely pleased with our operating results. Occupancy across the entire portfolio was up 130 basis points a quarter over quarter and 360 basis points year-over-year.

Fundamentals in most of our markets are solid with year-over-year job growth averaging 2% versus a national average of 1.3%. Construction starts our top five office markets remains relatively low at 2.8% of the total market, a slight increase from a year ago but certainly not close to any level of activity that we find concerning. That absorption remains positive and for the third quarter our top five office markets combined reported positive net absorption of almost 2 million square feet with all of our markets reporting positive absorption of 3.9 million square feet. This quarter we signed 140 second generation office leases for a total of 915,000 square feet.

Office occupancy is up 310 basis points compared to a year ago and up 100 basis points in the second quarter. Office GAAP rents increased a healthy 4.8% and office cash rent declines have improved throughout the year. CapEx related office leasing was $11.08 per square foot, slightly lower than the second quarter but although a bit higher than our 5 quarter average. TI's and leasing commission as a percentage of base rent was 10.6% compared to the 5 quarter average of 11.7%.

Let's take a quick look at how operating expenses are fairing year-over-year. It's no surprise that operating expenses are increasing driven principally by increased utilities, taxes, insurance and labor. I believe that about every real estate company in the country public or private is feeling the impact of these higher costs. It is important to note that Highwoods is taking serious measures to curb these costs wherever possible. We hired a full time manager of energy systems in January and we implemented a $5 million lighting retro fit program that will have a two and a half year pay back through reduced electricity costs. We have a full-time in house property tax expert who will continue to aggressively appeal taxes at the local and state levels to ensure that we're being fairly assessed. Our risk management department has done an excellent job of negotiating favorable casualty and general liability insurance premiums, even with unprecedented increases in named wind storm insurance that impacts principally our Florida properties.

Our building operations department is constantly digging for opportunities to take advantage of our buying power with national and regional suppliers. We are very focussed on maintaining our operating margins through good expense management, but ultimately we need to continue to push top line revenues to ensure that we obtain meaningful NOI growth. On the positive side we have a 200,000 square foot single tenant lease in Tampa where for the first ten months of this year we have been solely responsible for the operating costs about $1.5 million. Starting this month, the customer is responsible for 100% of these costs. Turning to our top five office markets and starting with Raleigh, we are very encouraged about the activity taking place in this market despite the 40 basis point depth in occupancy for the second quarter. This drop is a timing issue. For example, one customer recently expanded by 150% moving into 45,000 square feet in our new GlenLake core development. Their former space has been fully relet but not yet occupied. At our 4800 North Park building we have achieved our year-end occupancy goal of 40% and we continue to have good prospects.

Looking at our development projects we have a letter of intent for 55,000 square feet at RBC plaza from Poyner & Spruill, a prestigious law firm, in addition to the 130,000 square feet RBC is leasing. As a reminder RBC Plaza encompasses 17,000 square feet of retail space, 563 embedded parking spaces, 275,000 square feet of office and 139 for sale residential condominium units . We are also building a 1,000 fifty space free standing parking garage directly across from RBC plaza. Over half of these spaces will be leased to tenants of RBC plaza and the remainder will be owned by will be owned by the city of Raleigh. So with 200% of the 139 condominium units already reserved and the office and retail space 64% preleased, we are confident that the future success of this project, which is not scheduled to deliver until early 2008. GlenLake Four, our other development project in Raleigh is currently 68% preleased. At GlenLake One 100% preleased - - excuse me leased. Strong preleasing at GlenLake 4 and significant interest from prospective customers, wanting to locate in this very desirable location we're taking a hard look at starting construction on a third building in this office park.

Turning to Atlanta, occupancy in our Atlanta Portfolio has been increasing all year and at quarter end was 92.4% up 910 basis points year-over-year. On a same store basis, occupancy grew about 420 basis points year over year and by 60 basis points for the second quarter. We recognize that there is some uncertainty about the Atlanta market as a whole but we are bullish on our geographic concentration and the city's long-term prospects. [Inaudible] from this quarter was just shy of 800,000 square feet with total positive absorption of over the past 5 quarters of just over 4 million square feet. Atlanta has a very diverse economy. Housing remains affordable, the work force is well educated and it has strong infrastructure.

Our optimism is also guided by our significantly improved position in the market with well located assets in Century Center, the Georgia 400 perimeter sub-market and our industrial portfolios located near the Atlanta Hartsville airport and the I 85 northeast quarter. As one of our consistently strong performance, Richmond's occupancy increased slightly from the second quarter.. We have two development projects in this market Stoney Point Four, which will be completed this quarter and is 85% preleased and North Shore Commons which has been generating increased interest and that building stabilization is slated for second quarter 2008.

This week we closed on the $10.7 million acquisition of an 70,000 square foot office building in Innsbrook where 86% of our properties Richmond's located This building is 100% occupied and the cap rate is 10.6%. With almost 100,000 square feet of lease starts, Nashville's occupancy increased 200 basis points in the second quarter. Our leasing team there also signed close to 28,000 square feet of first generation space bringing preleasing at Cool Springs Three, our only spec building in this market, to 36%. Tampa and Orlando are clearly two of the hottest growth markets in the country and we are seeing the benefits of that. Our wholly owned portfolio in Atlanta is 100% occupied and our J.V. assets net market for 94% occupied, enabling us to increase rents.

Tampa posted solid occupancy gain ending the third quarter at 96%, up 240 basis points from June 30. Rental rates for class A properties in the West Shore markets were direct class A vacancy is less than 5% and increased over $2 per square foot already this year. The I 75 sub market where Highwoods Preserve is located is enjoying a class A vacancy close to 7%, and as a result we should start to see pressure on rental rates in that area too. Activity at Bay Center One are $41 million, 209,000 square foot office development in the West Shore sub market is increasing and we expect to have some signed leases to announce in the coming months. In closing, we continue to be optimistic about the future of virtually all of our markets to be sure there are challenges mostly in holding the line on operating expenses but we are very encouraged about by the prospects for further improvement of occupancy and rent growth to medicate these increases. Terry?

Thanks, Mike. On a personal note, it's very gratifying to be reporting financial and operating results together and on a timely basis. It's been some time since we were in this position. I want to thank all of my fellow team members in finance and accounting for their hard work and dedication As Mike and Ed have said we are pleased with third quarter nine-month operational and financial results. FFO after excluding depreciable assets, preferred stock redemption charges and other charges was $0.59 for the quarter and $1.76 for the nine months compared to $0.63 and $1.85 on a comparable basis for the same periods of 2005. Third quarter 2006 results had $0.04 from landfill gains and term fees on a combined basis versus $0.09 for no sources in third quarter 2005.

So FFO from core operations without land sell gains or term fees was $0.55 for the third quarter up slightly from both the second quarter of this year and the third quarter of 2005. We are pleased with this core FFO performance given that it is occurring during a period of heavy capital recycling and dispositions, rising interests rates, higher operating expenses and higher net G and A. Total revenues from continuing operations are up 6.2% quarter over quarter and up 4.3% nine months versus nine months. This growth primarily reflects contributions for new development properties placed in service since last year plus higher occupancy. NOI margin on total revenues was 62.3% in the third quarter down slightly from 63% last year, caused mostly by higher operating costs which are not fully recoverable from our customers. As Mike mentioned, utilities and property taxes have had the largest increases. Also two of our Tennessee - - our two Tennessee divisions are experiencing higher state franchise taxes due to a tax law change effective mid year 2006. And franchise taxes typically are not recoverable from tenants.

As Mike also mentioned, we are focusing hard on controlling our operating expenses and negotiating the most favorable lease terms we can to maximize our CAN income. G and A is up this quarter and for the nine months as compared to last year primarily from modest annual merit increases in salaries and other inflationary effects on expenses. Higher long-term incentive costs and retirement costs. Long-term incentive costs consist of stock option expense, restricted stock expense and unfunded deferred compensation in the form of phantom stock for which expense is recognized in direct proportion to the total return on our common stock which is over 40% this year so far.

Interest expense net of amounts capitalized and preferred dividends are lower for both the three months and the nine months compared to last year due to the paydowns on debt preferred that we've made from the capital recycling during the last two years. The reduction in interest expense would have been larger but for the fact of rising rates on a [Inaudible] rate debt mainly our revolving credit facility. Rate increases since last September equate to about $0.06 in higher interest expense on an annualized basis. Capitalized interest was also up about $800,000 in the third quarter compared to last year as our development pipeline is larger now. However, this is largely neutral to FFO as gross interest expense was also higher due to higher borrowings to fund the construction costs.

We expect capitalized interest to grow somewhat in 2007 in proportion to developments under construction. We did record a 2.6 million impairment on depreciable properties this quarter which relates to a building in Greenville that we now view as non-core and have recently begun working to market and sell. This is a low-occupied single story office flex property with high basis and apparently was required under GAAP given the changing plans for this asset. When we reported second quarter results, I commented on our new upsize credit facility.

And I again thank the banks, and especially the seven new banks who have invested time to learn our story and then decided to participate in the new credit facility. As for future financing, we have 110 million of 7% bonds maturing in December of this year and a 61 million, 8.2% secured loan maturing in the first quarter 2007. We are currently exploring a number of options to refinance the bonds and pay off the secured loan that we expect will result in lower interest costs. We also expect to unencumber the properties on the secured loan which have undepreciated book value of nearly 140 million. We have no other debt maturities until 2008.

As noted in yesterday's release, we closed a large land sale in October with gross proceeds over 22 million and which we'll have a fourth quarter gain of about $0.12 per share. With this sale completed and continuing strong leasing momentum, we increased our full year 2006 FFO guidance and also narrowed the range to $2.42 to $2.44 per share excluding impairments and other charges consistent with our past guidance. This implies fourth quarter FFO of 66 to $0.68 including the $0.12 land gain. We are not currently projecting any other land sales in the fourth quarter. We also included our NAV analysis page in the supplemental this quarter which is just a point in time snapshot intended to help provide data to help investors with their own estimates. The approach annualizes the nine month cash NOI rather than in place NOI of September 30 and caps that annual amount of NOI using what we believe to be a conservative range of cap rates.

Given our development pipeline leasing growth - - leasing and occupancy growth and annual cash rent kickers that are in most of our office leases, we expect cash NOI to grow significantly in the future. Other adjustments are made for join ventures managing the income and balance sheet effects including marking our debt up to estimated fair value. Total assets of amounts are then divided by current diluted shares outstanding, which are up about 2% from the end of 2005 to get to the per share amounts. Computation of NAV is very sensitive to cap rates and we have not reduced cap rates in this model from rates we have been using in the model for some time. As Ed mentioned, we will be providing 2007 FFO guidance in January. We are encouraged by what we've seen so far in our budgeting process.

We expect to see core NOI and FFO growth given continued strong leasing momentum, a lower level of expirations and contributions from development properties. We expect to have land sale gains again in 2007 as we continue to monetize and harvest the value in our non-core land holdings. And we should also benefit from interest savings due to the plan refinancing I discussed a moment ago. So in summary, we have a lot of the good things happening in Highwoods and we are looking forward to 2007. Ashley, this concludes our prepared remarks, and we're now ready to take questions.

[Operator Instructions] Your first question comes from [Inaudible] with Deutsche Bank

Good morning guys. I just wanted to ask about your outlook for rent spreads. You've been pretty good so far this year ahead of your expectations so I was just wondering what you were thinking going forward?

Did you say on rent growth?

Yes, rent spreads.

We had guided for this year for GAAP to be zero to negative two and fortunately we're positive 2.4 on a blended basis through the year. We have seen a very positive trend on both cash and GAAP over the past six to eight quarters. Each quarter - - each successive quarter basically better than the prior. We would expect that on a cash basis that we would become positive by the latter part of next year. I think it's important to note that of the revenues that we have in place today, only 15% of that was from leases that were signed prior to 2000 and only 19% of that is from leases signed prior to 2001. So we really have done a very good job. The team has done a great job of having worked through the leases that were signed in prime time with full escalators and hopefully we'll be able to capture more of these renewals that were signed in more difficult times.

Okay. What's your outlook on leasing costs? They've been pretty steady around sort of $11 a square foot on for the office?

Our guidance has been 10 to $12 and we've stayed very steady on that and we anticipate to stay in that range through next year.

Oh, thank you.

You're welcome.

Your next question comes from Michael Bilerman with Citigroup.

[Inaudible]Ed can you talk a little bit about NAV. You know on the last conference call you threw out a 38 to 42.50 range using the same 7-1 to 7-6 cap rate. What changed the net analysis relative to this analysis that shows 35 to 39?

This is Terry. The primary changes were in that when we last discussed that we were using, I think, first quarter '06 NOI and we're annualizing that. This time we used nine months and so there were some annualization effects and also the number of shares that we're dividing by has gone up significantly this year due to the effect of our rising stock price on the treasury stock method which results in additional diluted shares.

I'd add to that just as a reminder, which I'm sure Michael you well know that, NAV is a useful metric but it's only one data point and excludes goodwill and certainly we expect an improvement in this number as we go forward with our robust development pipeline.

You know I understand, I was trying to determine if there was a methodology change or there was something thats you were including before and you weren't including now, just trying to get a grasp of that $3.00 difference. 7% so. Moving on, you disclosed in the queue potential of almost $6 million of state excise taxes. Where are you currently in terms of battling that potential increase?

This is Mike. First of all, it was not $6 million. Basically looking at about - - I believe it was $1.2 million on annual franchise taxes.

Mike, let me jump in. There was a disclosure that we did receive assessments on excise taxes, and we're not the only one, this was a number of other rates as well who have operations in Tennessee. And we - - and the industry had been negotiating and fighting this, the excise taxes in that state. And we continue to believe that we have particularly strong defenses and do not expect ultimately to have to incur those excise taxes. Now there is a different tax, a franchise tax that has been changed. And as I indicated in my comments in mid-2006 and we have begun to accrue expenses for the franchise taxes. Those are much less significant. And are probably running at around $1 million a year rate.

And that tax is basically 25 basis points roughly of your book value of your assets.

Okay. Turning to the development pipeline, the 352 million. What's your anticipated yield on that and does that represent total share or just your share?

It's a - - We're showing our wholly owned as well as the [Inaudible] of the date J.V.s cost wise and our cash yield, first year cash yield we expect to be in the low nines and the GAAP in the high nines to low tens.

Okay. Then in terms you talked about the refinancings of the unsecured bonds and the mortgage debt. Is there also a plan to redeem the preferreds that are currently callable within your sort of the capital plan in the coming to the end of the year?

Michael, that's always a possibility for us. As you know, we have $92 million of preferred - - 8% preferreds that are callable at this time. And the degree to which we would regain preferreds would depend upon the how we might refinance the bonds and other sources of capital that we have. Again, and also being - - watching that - - those redemptions relative to our bank covenants and the total liabilities to total asset customs so forth. So we can redeem additional preferreds but we have no firm plans at this time to do so.

Okay and then my final question is on development land. I guess you have about 150 million post the sale. I just want to make sure I heard correct. About 80 million of that you still consider non-core and would look to sell?

Correct.

And what sort of gain are you expecting and where is the book value on that 80 million?

The largest gains we'd expect due are gone are in Charlotte, Orlando and Kansas City. And the gain is in the neighborhood of 15 to $20 million.

Pretax. Right, thank you.

You're welcome.

Your next question comes from Michael Gorman with Credit Suisse

Morning guys, If we could just go back to NAV for a minute. Just looking at the sort of the mid-point scenario of 37-27. Given your comments about it's a sensitive metric and doesn't account for goodwill et cetera. I know you don't want to discuss the capital partner situation any more. But can you sort of hypothetically walk us through what role this analysis plays and your viewing any potential future offers? For the front how do you evaluate those offers?

What we're looking at is a bottoms up value for the company when we produce the NAV. Our board clearly believes in our strategic plan. The board, as you know, the composition of the board is not comprised of shrinking violets. They all understand their judiciary responsibilities to look at any credible offer that would come to the company, but the company at least from the management team's perspective gets up every morning to run the business and we don't get up speculating on what others might be doing with regard to interest. We're building a platform for the future. We've had very crisp success on the strategic plan. It's a long-term plan, we give out three-year metrics. We expect to have significant NOI growth as we go forward and to drive NAV value up.

Okay. And then just a question on developments. The overall yield on the pipeline, I think you said cash was in the low nines. How does that compare with the developments that you started in this quarter? Are they sort of in the same neighborhood or have you seen some reduction in yield due to rising construction costs?

There's been a slight reduction in yield as a result of rising construction costs, but it's really been fairly consistent across the board and us being in the low nines for the cash and the high nines to low tens for the GAAP.

Okay, great. And I think just one last quick one for Mike. On Atlanta, the industrial leasing, was there something unusual or one-time in the 200,000 of leasing you did this quarter that took the rent spreads down 17%, or is that a function of the space that you leased or is something going on in the market there?

Well I believe that Michael, again, most of our product in Atlanta is light industrial shallow bay. As you know, that product can depend if it has - - depending on the office component of the space from the time it relets so it could have gone from a higher percentage office dent to more of a distribution and that would impact the rent as we bring it down. For example, one of our light industrial buildings was at 22, 23% office and goes back to a more historical 10% you can see an equivalent reduction in the rate there.

Thanks.

Your next question comes from Chris Haley with Wachovia.

Good morning, this is Brendan for Chris. Hello?

Chris? Brendan?

Yes, can you hear me okay?

Can I just footnote one thing to Michael's last question? Most of the deal - - the three basic deals that were done in industrials that drove that down, two of them were done in what we called that Winnete Distribution center its comprises a little of over 100,000 square feet of leasing that we did and those properties are in excess of fifteen years old and that's part of what drove some of those operational costs. Okay, go ahead, sorry Brendan.

Sure. I think you guys mentioned that construction under development was about 2.8% of current stock and that's not a worrisome stat. At what level would you start getting more concerned?

We would have to tie it - - what it is that direct correspondence between that and absorption in the market. We're comfortable with it being in the three or below percent range. It's basically been that level. Some of it will depend on how much of it's preleased and how much of it's speculative. But market absorption speculative component of it anywhere its been developed would be the keys to us.

Okay thanks. Going back to the land sales, I just want to make sure that I have these numbers right. Since the beginning of the year '05, you guys have done 58 million to date. And you're projecting 60 to 70 million through year-end '07. Are those figures accurate?

That's right. We have done 58 million since January of '05. Our projection was 60 to 70 million. And year-to-date we've done 34 of the 58. So we're very comfortable with us hitting the high end of that range.

Okay, great. And the margins on the future potential land is the stuff that you had targeted for sale. Can we expect those to be in line with what you have done over the past 24 months?

Right I think in keeping with what we said in response to a prior question about $80 million of market value and we expect 15 to $20 million worth of gain.

Okay, thank you.

You're welcome.

Your next question comes from David Cohen with Morgan Stanley.

Good morning, you talked - - you said the average cap rate on disposition this year is about 7.2. And you've kind of given that number over the past couple of quarters. I think you once said 6.7 and then 7 and it's now kind of rising to 7.2. But you've also said that cap rates have remained stable. Can you just characterize the asset sales before versus today and why that number is kind of creeping up over time?

Sure. As I said in the script, two of the assets that we recently sold, one was over 200,000 square feet of - - or almost 300,000 square feet of single story flexed property that was 23, 24 years old out in northeast Raleigh. So we sold it at a nine five. The other was a class D minus service center that had a very high rate on its mortgage and had some significant occupancy challenges and particularly with regards to upcoming renewals and clearly non-core to us. But we made that comment because we continued to see - - and that was retail in Kansas City. We continued to see good numbers. As an example, right now, we expect to close about 600,000 square feet. That equates to about $38 million of sales. In the fourth quarter it's about 92% leased and we expect a sub seven cap rate on that.

Okay and I mean in terms of your - - the rest of the assets that you intend to sell through 2007, Can you give us an estimate of what you think cap rates would be if you sold them today?

We expect it still to be in the seven to below seven range. We right now have in the queue 80 to $90 million worth of sales, roughly 900 to a million square feet. We would expect to be seven or below.

Do you expect any - - I mean, do you expect this appetite for those suburban assets to be sustainable over the next 12 to 24 months?

I don't want to take the crystal ball out 24 months, but we have, by far, surpassed our original goals on what we expected to accomplish. We're continuing to outpace what we thought we would be able to achieve. And there continues to be a lot of money looking for these types of projects. It's leaving us with a better quality of assets. It's our sense right now that that this forever will continue. We see no relaxation in the dollars that are out there pursuing assets. We've seen high quality assets right here in Raleigh within the last couple of months sell at record numbers. We just haven't seen any reduction in this whatsoever. And we continue to have discussions with very viable prospective buyers for these one off buildings and small office parks at attractive numbers.

On the TIs, you did a lot more renewal leases it looks like this quarter but the TIs were still kind of flat. Would that be an indication that costs are really actually higher than they would have been had you done a similar level of renewal on new leases this quarter?

David this is Mike. Basically we categorize our lease as either renewals or new leases and that's basically how the TI with commissions go in those buckets. In the renewal category we also include both expansions and relocations. So for this quarter we had a particularly high level of expansions, tenant expanding and some relocations to accommodate that expansion so the cost of those spaces will be higher just as a result of the - - it's much like a new lease.

Great, thanks a lot.

Sure.

Your next question comes from [Inaudible] of Green Street Advisor

Thank you, just quickly, what is your same property NOI growth so far this year?

This is Terry, we haven't disclosed that in part because of all of the restatement adjustments that we had to post and getting those pushed down at the very detailed property level for the '05 numbers, we didn't have that totally ready. We didn't have what I felt would be sufficiently reliable numbers to put them into the supplemental. But based upon our overall look at that, our same store NOI growth is within the range that we had in our guidance which was minus one to plus one percent. It would appear that the third quarter NOI growth was better that the nine month average for the trend is clearly up. But given the situation that we're in, we just didn't feel that we could put out, you know, hard numbers like that. We do plan to begin disclosing same store NOI first quarter '07.

Okay, thank you.

Your next question comes from Susan Berliner with Bear Stearns.

Hi good morning. Just a question following up on your potential financing. I'm guessing the two potential sources are the unsecured bond market of 144-A or an unsecured bank line and also, if you can just give us an approximate amount. I know you have a decent amount outstanding on your bank line as well.

Sue this is Terry again. We have multiple options. I mean the ones that you mentioned are among those but there are a number of sources we have. About $170 million available on our existing credit facility. So we have no urgency to do a deal because we could easily carry this on our line if we wanted to for some time. We're just exploring a lot of different possibilities at this point in time. We don't have, you know, a hard view on any dollar amount that we would raise at this point. We will just evaluate that as we get closer to the time to execute a transaction.

So it's not necessarily by year-end transaction.

We just hesitate to say what our timing might be at this point. We are actively exploring all of this as we speak.

Okay, great, thank you.

[Operator Instructions] At this time, there are no further questions.

Want to again thank everybody for taking the time to dial in and also want to underscore the management team's gratitude to all of our co-workers for their continued tenacity, creativity and hard work. Thank you, operator.

This concludes today's conference. You may now disconnect.