Highwoods Properties Inc (HIW) 2007 Q2 法說會逐字稿

Good morning, and I would like to welcome everyone to the Highwoods Properties' second quarter earnings results conference call.

All lines are placed on mute to prevent any background noise. After the speaker's remarks there will be question and answer session. (OPERATOR INSTRUCTIONS)

I will turn the call over to Ms. Tabitha Zane.

Thank you.

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 supplemental please visit the website at www.highwoods.com or call 919-431-1529 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 condition. Including estimates and effects of asset dispositions, cost and timing of development projects, rollover rents, occupancy revenue trends and so forth.

Such statements are subjects to various risks and uncertainty. 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 the Form 10-K for the year ended December 31, 2006, 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 and NOI. Definitions of FFO and NOI and an and explanation of management's view of the usefulness and risks of FFO and NOI can be found toward the bottom of yesterday's release and are also available on the Investor Relations section of the web at Highwoods.com.

I will now turn the call over to Ed Fritsch.

Good morning and thank you for joining us today.

Since our conference call on May 2nd, we have had continued strong operating results. We have also added three 100% pre-lease projects to our development pipeline. Listed our Winston-Salem assets for sale, cemented our domination in one of the best locations in downtown Orlando, redeemed $40 million of preferred 8% stock and added two more strong members to our management team. Bottom line, it was another productive three months for Highwoods.

FFO for the second quarter excluding a $0.02 preferred stock redemption charge was $0.60 per share and for the six months FFO was $1.52 per share. We are now raising our fully year 2007 FFO guidance to be in the range of $2.68 to $2.73 per share, a $0.03 increase on both the low and the high end of the range. Conditions in our top five office markets remain positive.

Total net absorption was 1.9 million square feet compared to 1.5 million square feet a year ago, and construction as a percent of total market is still below 3%. In the second quarter, we leased, a total of 1.6 million square feet of first and second generation space. As mentioned on our last conference call, we forecasted the dip in occupancy down 90 basis points from the first quarter.

Looking ahead, leasing activity should remain strong and occupancy should increase in both the third and fourth quarters hitting our year-end occupancy target of 91% to 92.5%. In yesterday's release, we announced additional leasing at two of our office development projects, Highwoods Base Center and Berkshire. Base Center, a 208,000 square foot $42 million Class A office building is in the West Shore submarket of Tampa, the most desirable location in that market.

With the signing of the 72,000 square foot lease, the property is now 57% preleased over a year out from its projected fourth quarter 2008 stabilization date. We also signed a 45,000 square foot lease at Berkshire in Orlando. Preleasing this $15 million, 99,000 square foot building is now 61% preleased and is slated to be stabilized in the second quarter of 2008. We take a very deliberate, measured approach to development, sticking firmly to our strategy of suburban infill which is resulting in significant prelease success.

Our $464 million development pipeline is currently 66% preleased and stabilized cash yields, north of 9%, and this is after deducting $60 million of development placement service this year that was 88% preleased. On a weighted investment dollar basis, our pipeline is currently 72% preleased.

We continue to execute on the strategic plan. Year to date, highlights include starting $90 million of development including three build to suits totaling $150 million. Selling $71 million of non-core properties that were on average 90% occupied and 20 years old at an average cap rate of 6.4%, selling $37 million of non-core land for a gain of $17 million, redeeming $40 million of 8% preferred stock and paying off $80 million of high coupon secured debt, unencumbering $179 million of assets.

Our business with the federal government which currently contributes 6.9% of our annual revenues continues to expand. Over the past few month, the GSA has awarded us two build to suits. A $10.2 million, 50,000 square foot office building for the FAA in Atlanta and a $32 million, 110,000 square feet office building for the FBI in Jackson, Mississippi. This will be our second development project for the FBI with the first being in Tampa. In total, over the past three years, we have been awarded $152 million of 100% preleased development projects by the U.S. government.

We have also enjoyed great activity on the for sale condos at RBC Plaza. In June we decided to dramatically accelerate the timing of conversions from non-binding reservations to hard contracts with non-refundable deposits. In fact, we accelerated the process by a full year. In less than two months time we have received executed sales contracts on 139 of the--133 of the 139 units with an average sales price in excess of $416,000.

This is excellent progress and significantly ahead of our own internal projections. Remember these condos don't even begin to deliver until the Fall of 2008. Our view of the capital markets and underwriting is not going to be much different from what many others have said over the past several weeks. We have not seen an increase on cap rates on deals closed in the first half of 2007, however, a deterioration of CMBS spreads and terms have impacted the highly leveraged buyer.

That said, the huge "wall of capital" allocated for investment and direct real estate is still huge and in our opinion underscores that any future shift in cap rates would be small. Given these comments about the capital markets, I would like to touch on how this factors into our thoughts on pending transactions.

As you know, we have listed our Winston-Salem assets for sale and our listing agent, CB Richard Ellis indicates the pricing projections are in line with what we have internally modeled for the first quarter. As far as timetable goes, we continue to target closing prior to year-end.

On the acquisition front, we remain active in deal flow in all of our core markets, but the low cap rate environment continues to make it difficult to find acquisitions that meet our underwriting criteria. We have made only one acquisition this year, a 167,000 square foot office building in downtown Orlando for approximately $40 million. This building was acquired through one of our JVs in which we have a 20% interest. We now collectively own all the buildings fronting Lake Eola, one of the most sought after location in Orlando.

We continue to maintain a discipline approach to acquisitions even as the [drive pat] on our balance sheet continues to accumulate. Total acquisitions since the beginning of our strategic plan in January of '05 have been nominal, just as forecasted. Although we have evaluated more than $2 billion worth of assets. This has been and continues to be right strategy for Highwoods. We will remain active in the deal flow and continue to display patience awaiting for the right opportunities to arise.

Finally, I want to welcome two new members to the Highwoods team, Dan Clemmens who joins us in two weeks as our Chief Accounting Officer and Dave Matthes who joined Highwoods as Corporate Vice President of Leasing last month. Dan has 13 years of experience in public accounting and knows Highwoods and the REIT industry extremely well. His professional experience and accounting expertise combine with his extensive knowledge of Highwoods will enable him to hit the ground running and contribute broadly to our accounting, budgeting and financial reporting.

Dave has 20 years of direct real estate experience and brings to Highwoods, great talent and skills in both real estate and sales/ He is working with our division heads and leasing agents to further leverage best practices and to enhance our leasing efforts across all markets, and we are already reaping benefits from his expertise, and as you can imagine we are thrilled to have these two very important positions filled with these experienced, high-energy, and hard working individuals. Those of you planning to attend our analyst dinner on September 17th will have an opportunity to meet and visit with Dan and Dave.

Looking ahead. We remain on track to meet or beat our stated goals, both for the year and for the initial three year period of the strategic plan. We continue to improve our portfolio, strengthen our balance sheet and enhance the capacity of our management team. In closing, and as always, I thank you for your continued support and I thank you all of my co-workers for their continued hard work and dedication to our company.

Mike?

Thanks Ed, and good morning, everyone.

As Ed mentioned we had another solid quarter leasing 1.6 million square feet first and second generation space, 61% of which was office. In the first two quarters combined we leased a total of 3 million square feet of first and second generation space. The average term for second generation office leases signed was 4.5 years, the average term for first generation leases was 7.6 years. Office gap rents on signed leases in the quarter increased 5.7%, above our guidance of plus 3% to 5%. Office cash rent on the 166 second generation leases signed this quarter declined a modest 1.7%, better than 2007 guidance of -2% to 4%. This is a trend that continues to improve.

Average cash rental rate for all in place leases at June 30, increased a very healthy 5.7% from a year ago. Looking just at office average cash rental rates have increased 6.1%over the past year. CapEx related to office leasing was $12.58 per square foot in the second quarter. This is up slightly from our five quarter average due to one 41,000 square foot lease here in Raleigh. Taking this out of the mix, office leasing CapEx falls to $11.59 per square foot slightly below our five quarter average of $12.25.

Construction starts in our top five office markets still remain at a comfortable level of 2.9% of the total market, up only 50 basis points from a year ago. Net absorption in these five markets combined was an 1.9 million square feet, this compares to 1.5 million square feet of the net absorption in the second quarter of 2006, and 1.4 million square feet in Q1. Construction costs overall are still trending slightly higher but not at the rapid rate of increase we witnessed a year ago.

Turning now to our top five markets. Raleigh absorbed over 500,000 of square feet in the second quarter with almost 2 million square feet of net absorption over the past year. Office occupancy in this market is steadily increased and our portfolio at June 30 was 86.5% occupied, 300 basis points better than a year ago.

4800 North Park, in the 168,000 square foot building that IBM vacated last year is now over 90% leased ahead of our internal projections. We have 670,000 square feet of office space in the development pipeline in Raleigh that is currently 56% preleased. This includes 275,000 square feet of office space in the 33 story RBC Plaza that also has 139 for sale condos on the top 11 floors. Underscoring what Ed said earlier we have signed contracts on 96% of the units over a year from expected delivery.

This is terrific response and well ahead of where we thought we would be at this time. Business climate in Raleigh continues to be positive and we remain confident that our occupancy in this market will be north of 90% by year end.

A turning south to Atlanta, occupancy in our office portfolio continues to out pace the overall market, 240 basis points better at June 30. Net absorption was nearly 1 million square feet for the quarter and the city expects to add 50,000 jobs this year. Our Atlanta division signed almost 300,000 square feet of first and second generation leases in the quarter and we have three development projects encompassing just over 400,000 square feet in progress.

These projects are, on average, 92% preleased. There is minimal new construction in our Atlanta submarkets so we're not concerned about a flood of new product coming on the market at this time. We also close on the purchase of two significant tracks that will support approximately 1.6 million square feet of future industrial development.

Looking at Tampa, their economy remains healthy. Asking rate for Class A office space are up almost 9% from a year ago. As Ed mentioned earlier, we were pleased to sign a 72,000 square foot lease at Base Center which brings preleasing at this property to 57%. Prospects remain strong for the remaining space and with stabilization targeted over a year from now, we are very comfortable with where we are with this project.

Occupancy in our Richmond portfolio at the end of June was 90%, a slight increase from the first quarter and 230 basis points better than the overall Richmond market. We have got two office development projects underway and Stoney Point Four and North Shore Commons Two. Stony Point which is currently 86% leased is slated to stabilize in the fourth quarter of this year and we expect occupancy at that time to be over 90%. Stabilization of North Shore Commons which is currently 17% leased is a year away.

Our Nashville portfolio saw a dip in occupancy this quarter from 92.4% to 90.9% as a result of expected lease expirations of about 71,000 square feet. We have got some good prospect for this space and with signed leases already in the bag, we expect the year in occupancy to be over 93%. Nashville's economy remains strong with some concentration in the health care industry. In fact, the leading provider of hospital programs recently relocated to the Nashville area and leased 20,000 square feet from us.

We have got two development projects underway in Nashville. Our 55,000 square foot build to suit for Healthways which is expect to deliver (inaudible) in the fourth quarter, and Cool Springs Three, a spec building that is 91% preleased with stabilization for the end of this year. The submarket remains strong and it's highly likely we'll commence development of Cool Springs IV this year.

All in all, the year is progressing well. Solid leasing activity in our existing portfolio, good progress on our development pipeline, firmer asking rents and positive net absorption in our markets.

Terry?

Thanks, Mike.

As Ed noted earlier FFO for second quarter was $0.60 per share excluding the $0.02 preferred stock redemption charge from the May 29th redemption of 40 million of 8% preferred stock. This quarter also included $0.016 in land sale gains and $0.024 in lease termination fees. The $0.60 of FFO this quarter compares to $0.55 reported for second quarter of 2006 and $0.91 in the immediately preceding first quarter of 2007. You may remember that first quarter 2007 FFO included $0.26 in land sale gains and $0.07 from the settlement of a property insurance claim.

As Ed also noted we have increased full year FFO guidance by $0.03 from $2.68 to $2.73 per share excluding the preferred stock redemption charge. Total revenues from continuing operations were up $5.6 million or 5.5% for the quarter compared to 2006. $3.0 million of this revenue increase relates to same properties and the balance, $2.6 million comes from new development properties delivered in 2006 and in the first half of 2007. The growth in same property revenues primarily reflects higher average occupancy plus increases in average GAAP and cash rents per square foot.

Total company NOI from continuing operations was up $3.3 million or 5.0% compared to second quarter 2006. Same property NOI was up $0.8 million or 1.2% in second quarter '07 compared to second quarter 2006 as noted on page 25 in the supplemental. Excluding straight line rents and termination fees, same property NOI was up $1.4 million 2.3% in the quarter.

Our NOI margin, that is NOI expressed as a percent of total revenues was down slightly from 64.1% in the second quarter last year to 63.9% this quarter. We are expecting our NOI margin to stabilize this year as the rate of growth in utilities and insurance and other costs should moderate while revenues and occupancy continue to grow. We are focusing hard on controlling operating expenses and negotiating lease terms to maximize recoveries of our operating expenses.

G&A was up $0.03 per share in the second quarter compared to last year. $0.01 of this increase was from the effect of annual merit increases in salaries and other inflationary effects on employee benefits such as health insurance. We had $0.013 in higher write offs of predevelopment costs on certain projects that are now deemed unlikely to occur. Amortization of restricted stock expense was about $0.01 based on projected higher payouts on long term performance shares and from additional stock grants made in second quarter 2007. Just over $0.005 of the G&A increase related to the increase in deferred compensation bit and this was fully off set by the mark to market adjustment on the related investment assets which is included in other income.

These increases were offset by about 9/10 of a cent in lower phantom stock deferred compensation expense compared to second quarter of last year. Expense on deferred comp balances that are denominated in phantom stock varies up or down based on the price of our common stock. Interest expense and preferred stock dividends combined were down $1.8 million or $0.03 per share in the quarter compared to last year, primarily due to savings from the 50 million of 8% preferreds redeemed in the first quarter of last year and the partial quarterly impact from 40 million more preferreds we redeemed at the end of May.

We also had higher capitalized interest from our growing development pipeline and primarily as a result of our recent financing activities, the weighted average interest rate on all of our debt is 29 basis points lower at the end of jUne compared to a year ago. This equates to annualized interest savings of about $0.07 per share.

As we have noted on prior calls, these positive effects on interest expense and preferred dividends were off et of course by the foregone NOI contributions from our dispositions. We have used part of the disposition proceeds to pay down some of our higher rate debt and preferred stock as I've noted and also to fund our development pipeline which currently has projected initial yields over 9% on a cash basis and nearly 10% when you include straight line rents.

Given that our disposition since 1995 were done at an average 6.7% cap rate, we have had minimal FFO dilution from the $668 million of asset sales since January of 2005. In addition because of the avoided capital expenditures, our dispositions have been net accretive to [CAD].

On the financing front, year to date, we've paid off $80 million of debt with a weighted average interest rate of 7.9% which unencumbered $179 million of assets based on undepreciated book value. Since embarking strategic plan in early 2005, we have unencumbered numerous properties and today the portion of our total NOI that is encumbered by secured loans is 44% down from 49% two and a half years ago. We presently have $394 million of borrowing capacity under our unsecured credit facility and our secured construction facilities combined.

Before turning the call over for Q&A, I also want to echo Ed's welcome to Dan Clemmens and Dave Matthes, the two newest additions to our management team. As you can imagine, I am thrilled that Dan will soon be starting as our new CAO. I've had the opportunity to work with Dan and can attest to his professionalism and account expertise. Dan already knows most of the folks in our accounting department, is familiar with our accounting system and processes and will make a positive contribution from the day he starts.

Operator, this concludes our prepared remarks and we are now ready to take questions.

(OPERATOR INSTRUCTIONS) We will pause for a moment to compile the Q&A roster.

Your first question comes from the line of John Guinee with Stifel.

John Guinee. How are you?

Good morning ,

Couple of questions, one is when you are quoting nine and ten cash and gap yields on development, are you using your land at cost or are you marketing up--marking it up to fair market value?

At cost.

Okay, what is the mark up to fair market value, if any, rough number?

10% to 15%.

Okay, second question, a lot of your peers Duke and Corporate office specifically have used '06 and '07 to acquire significant land positions while you guys have been net sellers. Any change in that strategy or reflections on your decision to be a net seller while others have been net acquirers?

Yes, a couple comments, John, one is that we still have 553 acres of core land that would support a build out of 4.6 million square feet of office and about 3 million square feet of industrial. We felt that the land that we sold was really non-core to what we were trying to achieve from an infill development strategy. We have modeled $10 million to $20 million worth of land acquisitions over each of the next several years to supplement what we have.

Great. Thank you.

You're welcome.

Your next question comes from the line of Steve [Binyik] with Citigroup.

Hey, good morning guys, it's actually Steve [Binyik] with Credit Suisse.

I guess sticking with the land development, can you give us an idea is the full 4.6 million square feet of office and 3 million square feet is that fully entitled, I guess it looks like you significantly increased the industrial build out space in Atlanta so we can talk about that market a little bit and how much of the development land you think you would build out over the next five years or so?

I would think, Steve, that we would--just handling these in backwards order, that we would build out a majority of this land over the next five years. With little left beyond the five year, maybe reaching six or seven but most of it would be in the next five years. All of this land is entitled, zoned for the development that we would want to do and in fact, in many instances, the infrastructure is already in place with regard to access and utilities. With regard to land, the land that you spoke to in Atlanta, we did increase our position in Atlanta with regard to industrial land south of the airport and northwest of town.

Okay, and then as you look at preferred redemptions, can you talk about how you view allocating capital that way versus share buy backs and development pipeline?

Sure, maybe we will--we will deal with that in maybe backwards order too. Right now, and we have said this in the past, we have certainly looked at share buy backs, in fact historically we have bought back about $240 million worth of stock back in 1999 through 2001, and then more recently we have been redeeming units and in fact in the last two and a half years, we redeemed over 2 billion units for about $72 million.

So, it is kind of a stealth buy back, but we continue to see the better use of our dollars going towards development which as John mentioned in the prior question is generating for us unlevered returns of just north of nine and levered returns of north of 12. So, we have had very good success in our development, we continue to expand the pipeline, in fact, we grew the development pipeline by nearly 15% over last quarter and our preleasing is up by over 22% from last quarter. The balance sheet with regard to the preferred as they sit they're redeemable and we continue to generate proceeds from the sale of non-core assets, it makes sense for us to bring those in and in fact you saw what we recently did in May, $40 million worth, and we have another $52.5 million worth at 8% that are redeemable.

There after, we think that it is wise for us to continue to inventory dry powder. We continue to look at acquisition opportunities, we've looked at in excess of $2 billion worth of assets over the last 24 months or so, our acquisitions have been very nominal over that period of time, but we think that as we work through the cycle that us maintaining dry powder, is an important aspect of the Highwoods story going forward.

Okay, just finally, can we assume you are going to redeem the $52.5 million at some point--the balance of this year?

Yes, sir.

Your next question comes from the line of Michael Bilerman with Citigroup.

Good morning, this is Irwin Guzman here with Michael Bilerman.

My first question is regarding your year end occupancy targets. I was wondering how much of the--call it 250 basis points of improvement do you expect to get over the next six months is going to come from asset sales and for the remaining piece, which markets do you expect to make up the lion's share of that leasing?

Irwin, this is Ed, and the majority of uptake in occupancy between now and let's say the end of the year we would expect to come in Columbia, it's only 252,000 square feet there and we also have it on disposition list, but we have good leasing there that we hope to capitalize on. Raleigh which is our largest office market would be the next highest with significant upside there. Richmond, and Orlando, Nashville, really across the board, the markets expect to improve.

The ones that wouldn't, would be Winston-Salem which is on our disposition list as well and then Tampa where we are at 98.2 we are still north of 96 and we have got some turnover there but we continue to see good activity. One thing I would also want to take the opportunity here to bullet is we did reflect in our supplemental that in Tampa, we had a roll down of about 3.8%, that was driven by one deal where we had a subprime lender blow out of about 25,000 or 26,000 feet and we were able to immediately back fill it with Price Water House, one of our top customers with no TI expenditure. The other six deals that we did in that market over the quarter were all plus 10%.

So that--those occupancy gains are those same-store or is any piece of that coming from (inaudible) lower occupancy assets?

This is basically same-store and we haven't taken into consideration to much degree, what the impact would be from dispositions.

Okay. My next question has to do with the build to suits that you are working on, how big do you see that part of your development pipeline getting in terms of annual starts and can you compare the yields on that business to the overall 9% to 10% yields that you are achieving on the developing pipeline.

Sure, we have disclosed what our near and long term goals are with regard to our development pipeline. This year our guidance was 100 to 200 and we have put out numbers, what we expected, not too dissimilar from that for the next--each of the next two years since we give three year rolling guidance. Thus far this year of the 100 to 200 we are at 90. We would expect to easily eclipse the lower end of that before the end of the year and hopefull do even better than that based on some of the things that we are in pursuit of but I would stick with where we have been, I wouldn't dramatically alter the size of what we have already forecasted over the next couple of years with regard to the signs of our development pipeline.

With regard to the second part of your question about yields, they clearly vary by the credit of the tenant and the length of the lease, the specialty of the building, whether it is a four lease speculative building versus a build to suit. The GSA deals obviously offer us the highest level of credit that we can attain, so that would have a--be on the lower end of the range, and then, where we have been able to achieve good leasing in multi-tenant speculative buildings much akin to what we've recently announced at Base Center in the West Shore submarket of Tampa where the lease rates have been at or better than proforma and the lease terms have been better than eight years, the escalators have been at or better than proforma, the TIs have been in line with proforma, those yields are on the high end of what we've disclosed.

And in terms of the build to suits is that something that you would continue to doing on a merchant basis or would you consider doing that on a fee basis?

Yes, and we would certainly do both, and we continue to try and follow our customers as exemplified by the build to suit that we were awarded with the GSA for a building that is out of market for us, but we--yes, we would continue to pursue customers and other opportunities.

Okay, thank you.

Your next question comes from the line of David Cohen with Morgan Stanley.

Good morning. Ed or Terry, just want to talk about the guidance increase for a second. You didn't seem to change your occupancy or your same-store expectations and it seems like the higher land sales and lease term fees are offset by higher G&A, so I'm curious where--can you walk me through how you are getting the $0.03 higher guidance.

David, this is Terry, in a nutshell, we are probably feeling more comfortable at the higher end of the ranges even though we didn't change the range itself on same store NOI, and also just looking ahead at development deliveries and timing of leasing in some of our development projects which don't go into occupancy until they hit the stabilized rates, so you are getting FFO contribution even though they don't really affect the reported occupancy numbers. So just feeling better on those aspects of the future performance.

You did mention lands sale and term fees which are up and we did raise the guidance on that. Another thing that may have missed your attention is we did lower the estimated number of diluted shares outstanding for the full year, and that is in part because of the treasury stock impact, when the stock price goes down there is a less of a dilutive effect from the options that are outstanding. And then those real overall positive effects on our guidance per share and they were offset as you did note by slightly higher G&A.

Okay. So of the $0.03, how much is kind of core versus--just higher core expectations versus the fully diluted shares.

You could look at it that most of it is the core operations, and the other stuff kind of nets out. The G&A is being netted out by the share increase and the term fees and land sale gains.

Okay, and in terms of the G&A guidance that you increased, I am just curious, you outlined where most of that is coming from. How much--what surprised you during the quarter in terms of the G&A and how much of that is going to be one time versus kind of continual?

There is several nonrecurring items in the first half that we've talked about. I did mention higher cost--predevelopment costs and projects that we had to write off and there's kind of good news and bad news there, we are chasing a lot of development deals and a lot of GSA deals. We have come in second on a number of GSA deals and that gets to be expensive when you get to number two because you are incurring a lot of costs for architects and engineers and so forth and we feel very good about how well we are doing there but it does get expensive if you don't win the deal and you have to write off your investment, but we are still creating good value in the development pipeline even though there is somewhat of a cost to that.

These pursuit costs that when you don't get them, we write those off through G&A. We did have in the first half some higher than expected higher advertising costs for the for sale condos in RBC Plaza here in Raleigh but Ed has already commented on how well the sales have gone on that, so that's a good investment now that's going to pay off in gaines when we start to sell these units in the second half of 2008.

And I think to your point, David, that is something that clearly will subside with us being 96% at contract on those. Those marketing right now is just to keep some level of excitement but to rescind the contract for anybody they would be working away from their earnest money.

Okay, can you just talk about the Nortel lease in Atlanta which is expiring in first quarter? You mentioned it last quarter. Where are you on that?

David, this is Mike Harris. Yes, with regards to that, we are very close to executing a back fill lease for a substantial amount of that space with actually a good customer and other markets so we feel like that will be substantially taken care of here within the next few weeks.

Just as a back drop, David, for others that may be listening. Sorry to narrate. What David is referencing is Nortel single leases of building from us in Atlanta, that is about 246,000 square feet. The back fill prospect that Michael said we were well down the road with will back fill about 89% of that total.

And the rents, last time you said we should expect them to contract a little bit from where Nortel was, is that still the case or have rent rates started to move more?

No, that's correct.

Okay, just last question on the development, the leases on the Base Center and in Berkshire, can you just talk about what are the rents that you are getting there?

Yes, David, I can, but I want to hedge that just a little bit, and let me explain why. Our folks down in Tampa, Steve [Gerharty] and the team there are in the process of negotiating other deals. We have--we continue to have very good prospects for that building.

What I'd like to do, if this satisfies you is to be able to say that the three major deals that we have done there, the lease terms have averaged more than eight years, the TIs have been right in line with proforma, the annual escalators have been 3% or better and rental the rates have been at or better than proforma. So our asking rates now are in excess of $30, and we have met that with good success.

Is that adequate answer?

Yes, I think so. Just lastly. In terms of the rent rates. The momentum that you have, can you talk about how rent growth has been versus how it has been over the past--like six months ago, are you still seeing the same type of rent momentum?

Yes, I think that if you were to look at gap rents for example, just take a bit of a longer term look, in 2004, we were minus two, '05, minus two, '06, plus nearly three, and this year we are averaging plus better than six just on the office side. If you take total portfolio '04/'05, we were a minus two plus, '06, we were a plus two and a half, and '07 year to date, we're pushing 6%, so if you look at the trend whether it is gap or cash, the trends continue to be positive, a little but lumpy from quarter to quarter much akin to our occupancy levels but the overall trend when you dial out just a little bit continues to be very positive.

Okay, I'm sorry, just finally, you talked about the minimal supply. When you look out to the next six to 12 months, are you seeing the number of projects in the pipeline worrisome at all in any particular markets?

The two markets that had the highest level of construction as a percent of market right now, are Raleigh, and Nashville. Two qualifiers to that, of the total constructions underway in Nashville we're at 20% of it and in Raleigh, we're 25% of it, so we are a good piece of both of those. When you drill in a little bit further for example in Raleigh, of the 5% total of market that is under construction, there is about one and a half of that five, we don't compete with, it is, foreign, Chappel Hill all the way north in Durham.

So, there is nothing in either market right now that is alarming us and where we are building in the infill submarkets the strategy is clearly working, it's evidence like in Cool Springs where absorption is out stripping the supply. I feel good about where these numbers are but we have in the past if this gets back to some historic levels where it is starting to look and smell like 9% to 10%. That would be of concern to us but we don't see that right now.

Thanks a lot.

You are welcome.

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

Hi, good morning guys, it's Brendan Maiorana with Chris.

Hey, good morning, Brendan.

Ed you mentioned that some--that the credit markets have backed up a little bit but that is not having an impact in terms of cap rates. Ed or Terry, can you just offer an opinion of how much you think your financing costs have moved up over the past 60 to 90 days?

Brendan, this is Terry, our financing cost for the Company in terms of what we actually have on book have not changed at all. Our credit facility is priced off of LIBOR which has been flat for some time, and I'd also remind the listeners that at the end of March we did a $400 million, 10 year loan at 5.85%, so what's actually been happening is we have had higher rate debt that we have been able to rollover, refinance over the last couple of years, and as I said in my comments our average rate on all of our debt combined is down almost 30 basis points from a year ago.

Now--so we are just not seeing a whole lot of impact yet, it may come on future debt financings, but basically, the stuff we have maturing in the next two years is still at a rate that's above where current rates are. So we should still see declining overall average cost to the Company as those bonds and secured loans get refinanced at lower rates.

And that is on page 7 of the supplemental, Brendan, that shows about $437 million at about 7.2%, 7.3%, I'm sorry, 7.13%, 7.12%.

Okay, Terry, if you had to do that deal again today, the deal you did in March, do you have a sense of what you think the rate would be on that?

I think treasuries are up about 25 basis points over where we were at that point in time and--I am sorry, I don't know that spreads--spreads may be up a little, I just haven't really checked that out, so I would say most of the increase would be from where treasuries were at that point in time.

Okay, so thinking about your development yields which are holding around 9%, maybe a little bit better than that on a going and cash yield and I guess your debt comps are somewhere around 6.5% to 7% so there is about a 200 to 250 basis point spread there, how do you think that compares to where you've been historically in terms of your financing costs versus your development yields?

I would say in the past both the development yields might have been a little bit higher, of course, this goes back before I joined the Company and debt costs were a little bit higher, so I think the spreads were probably not too different but maybe Ed or Mike would have some insights on that as well.

I think that's a fair response.

Right.

Okay, and then Ed, you mentioned that at this point development are more attractive use of marginal investment dollars than stock buyback. At what point do you think, the implied cap rate on your stock, on your public share price would have to get to versus what the development yields are. When that crossover happens so that a share buyback might be a more attractive use of capital relative to a development yield--development deal, sorry?

Yes, Terry can supplement this response, and I think your question is extremely good and we have discussed that here at the senior leadership team at length for some period of time now. I think it would be remiss of us to drive a stake in the ground and pin a number because there are other moving factors, how much development opportunity is there, how much upside in the balance sheet do we have with regard to continued improvement akin to Terry's response to your prior question and then the dry powder, where do we see things going with regards to our acquisition opportunities over the next 12, 15, 18 months and do we want to use the dry powder now on a buyback when we could potentially acquire something that would long term be accretive and beneficial to the Company not only from an FFO perspective, but from marketing position and in continued expansion. So I think it's kind of like when somebody says what rental rate would you charge me, well the rental rate is going to be impacted by how much TI I have to give you or how good your credit is or how long a term of least you're going to sign, so Terry, you may want to comment to that, but I think broadly to pin a specific number maybe a slippery slope.

I don't have anything really to add, Ed. All I could say is it would-- clearly at these prices, we think the stock is undervalued but when we'd run our models and our analysis we (inaudible) every metric, FFO, NAV, CAD, leverage, all is better if we take our capital and use it for developments at the yields that we're currently achieving.

Terry and Ed, this is Chris.

If I look at kind of over the next year, two, three year period, could you kind of give me a sense of how much additional capital is required for your existing development and how much capacity you think you have from a rating perspective that might leave room for what level or what size of a potential buy back if that were the prudent thing to do?

In terms of our refunding requirements, and what we have--I think started today, we have about 200, a little over $200 million more to spend on our development pipeline. We have buried sources of funding for a future development, probably the biggest single thing is just dispositions, we still have some non-core assets we want to get out of the portfolio, including the Winston-Salem portfolio that we talked about and so we're still going to take advantage of the market out there in terms of pricing on dispositions.

We have lots of availability on our credit facilities as we commented in the prepared remarks and we feel we could still tap the secured and unsecured markets for additional capital, so we could easily do--if you add up all the different sources that we have, it is approaching $1 billion. Now we wouldn't use all of those bit we could add substantially to that before we'd start to get tight on any of our covenants or with the rating agencies.

That $1 billion, that's a gross number, when you look at the sales, what would you say on the intended sales, is there leverage associated with those?

Well, if there is--not that much and if there is any loans we'd basically substitute those out, but mostly it is not levered assets that we are selling.

Okay. To go back to Brendan's question, and then I will yield the floor is when you guys start your development projects and you've done very well on preleasing and you know where your rates of return are. What we don't know is what the cost of capital is going to be today or over the next six months versus where we have been, so when you look at terming out your funding costs for that development, is it fair to say that we should use some type of higher funding cost and therefore, a little bit tighter spread in terms of value creation?

We are not really planning to go to the CMBS markets, Chris, I think right now, we're financing off of our credit and dispositions, and we are not seeing changes in cap rates either. So I think at this point the primary sources for us, the rates are essentially locked in at least over the next few years, so I don't see that this spread is tightening to any significant amount.

Okay. Thank you.

Your next question comes from the line of Wilkes Graham with FBR.

Hey, guys. Just to follow up on a previous question about specific leasing activity at some of your development projects. Can you talk about--if you can't talk about rents at RBC Plaza, maybe just talk about the leasing activity you are seeing there on the upside?

Sure, Wilkes, this is Ed. We continue to see good activity really across the board, maybe even if I dial back and said how are we doing with regard to the entire 2.8 million square feet. There really isn't a building of concern with the exception of North Shore Commons B or North Shore Commons II in Ensbrook at Richmond. That is going slower than we'd expected, we are about 17% preleased on a $14 million project and we are hopeful that activity will pick up on that given that it is in Ensbrook PUD, but the other activity across the board for the projects that we are bringing on line, the activity continues to be good and we are on average a year in advance of what we expect to be for stabilization dates, specifically to RBC Plaza, we're 65% preleased there and we have a good, I would say about 9 or 10 prospects that we are in conversations with in addition to our existing customer base there.

Okay. That is helpful, and then when I look up and down the preleasing column there in the supplemental, I guess I could point to GlenLake Four and Six as having some room left there. Can you just talk about--I know GlenLake is a strong market, just talk about the activity you're seeing there?

Again, backing up just a little bit, Raleigh is probably one of our most dynamic markets right now absorbed in excess of 0.5 million square feet this past quarter. Year-to-date the absorption has been extremely strong with just shy of a million square feet so Raleigh has a lot of good things happening. We are continuing to show the space at GlenLake FOUR, in fact we had a very good showing just yesterday, and GlenLake FOUR, we are just now starting to top out the steel, so we're very early in that. I have and I would assume Mike would echo this that we have no concerns with GlenLake--

None whatsoever

--and the vitality of the Raleigh market.

GlenLake Four as you know, Wilkes, is about 72% leased right now, so we are really looking at our kind of bread and butter smaller tenants in there that are in the 5,000 to 10,000 square feet, and there's good activity out there right now. A lot of our markets where we have spec space and we are still a good six months out before we deliver GlenLake Six, this is when we start seeing the activity to start increase as we get closer to completion, tenants will start focusing on the property.

Okay, thanks, guys.

You're welcome. Thank you.

Your next question comes from the line of Cedric [Lechance] with Greene Street Advisors.

Thank you. Ed, you made a couple of remarks during the Q&A session, and I think in your prepared remarks as well that pertain to new markets. On, you mentioned following your customers in new markets exemplified by your entry into Jackson and then you talked about keeping some dry powder perhaps in your acquisition, perhaps a new market. How many more markets would you like to be invested in and what are those?

Well, I am going to put it in two silos akin to how you did it, Cedric. The following a customer, we will follow them as long as the credit and the opportunity is there, and we may look at it at a merchant build or we may look it as short term hole, but in all likelihood we would view it as a long term--on a long term basis as a sale, and that's something that we would hold long term.

So to me just pursuing a customer where we have established a track record with them and we understand the nuances of what they need and want in their product, travels well, and we would continue to do that. So that-- with regard to the reference to the Jackson, Mississippi FBI deal, we are just following a customer there, it doesn't mean the dawn of a new market for us.

The second silo is it makes sense for us to be in a position to be prepared to move into contiguous like kind markets when the opportunity arises. So we have people here as we mentioned on our call last quarter who have and continue to invest time evaluating markets that are much like the mid-tier markets like we are in now where the total office market is say, 30 million to 45 million, total population is 1 million to 1.5 million. Not dissimilar from a Raleigh, a Tampa, a Nashville, a Richmond.

So we are evaluating those opportunities so that should acquisition opportunities arise we don't lose time getting up to speed, studying the market, we know whether or not it's market that has the demographics that fit into the type of market that we would like to go into. I think it's fair to say that they would be relatively contiguous to where we are now, you' wouldn't see us jump into something on the west coast from where we are, or jump into a New York or Boston or Chicago market but we would want to be--when we went into a market where we'd have a decent enough position and good potential near term expansion so that we would be in the deal flow which is exactly why we exited Charlotte. We didn't have a collection of assets that positioned us to be in the deal flow and the only way to get there in Charlotte was either to build or buy our way in and pricing was too high and building was too slow, so we got out of it.

So we'd want to be able to step into a market where we'd have a strong position in the best submarkets and a good platform for growth. The reason we haven't done it to date, again goes back to pricing, if we can't buy the better products in our own backyard right now where we have brand recognition and systems and people in place, then to go into a new market would be additionally expensive but those opportunities may come.

Okay, and just to return to the buyback. At what level should your stock be for you to prefer to buyback your shares rather than invest in development and equally at what level do you think it is worth going into a new market and forego perhaps the discount any (inaudible) in the 25% to 30% range right now and buying back your shares. That is based on your own NAV, of course.

Cedric, as Ed said just a few minutes ago, we don't want to give a specific point in the stock price where we would go to a buyback. We understand we are undervalued rye right now but even given that situation when we run the numbers and do the analysis to us the value creation from development, is a better use of the capital than doing a buyback which has potentially a short term effect, it levers up the Company because we just have to borrow the money to do it and we just get a better result from the developments at the returns that our developments have been yielding.

And Cedric, and the analogy that I gave to Brendan at Wachovia was there has got to be a lot of the things to take into consideration, that's why we're routinely modeling this. This isn't something that we said, hey we're not going to do--let's not spend time looking at it. We have done it in the past, we're doing the stealth buyback now with the operating partnership units that we are redeeming, but we need to look at a number of factors all at one time before we make the decision to do that.

So if the development pipeline was to dry out and we'd made all the advances we can with regard to improving our balance sheet and we didn't see acquisition opportunities on the horizon, that's a very different set of circumstances than where we sit today. So I think there are a number of things for the mosaic to come together.

And have you redeemed any OP units in the last few months and do you think you will have the opportunity to redeem some more in the next few months.

It is difficult to forecast those. We have--year to date we've redeemed about 620,000 units for a total of about $27.5 million. It's just--it is very difficult to forecast where that would be, but given that our stock prices is woefully undervalued I suspect the probability today is less than what it was in the last year, and the first part of this year.

So you have expanded a little bit your land for industrial. Where does industrial fit in your strategy and what are the synergies with your substantially larger office portfolio?

Well, the investor presence that we have in two markets. It is the area around the Greensboro Triad Airport where we have seen significant dollars expended there just recently with Fed Ex opening up their hub, with Dell's manufacturing plant and with Honda Light Jet's manufacturing plant. So given all that's happened around that airport and the land position that we have and the industrial presence that we have, it makes sense to continue to lever that and expand that opportunity.

Likewise, for Atlanta, where we have an office park that has--continues to have valuable land basically adjacent to Atlanta Hartsfield, why not continue to expand on the opportunities that we've created there by expanding existing customers and we will continue to evaluate the industrial opportunities in Atlanta because it continues to be a good business for us down there. It is been accretive and it has certainly demonstrated expansion.

Okay. Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS)

There are no further questions at this time. Mr. Fritsch, do you have any closing remarks.

Again, I just want to thank everybody for taking their time to continue to understand the story and I appreciate everyone attending today.

This concludes today's Highwoods Properties' conference call, and you may now disconnect.