Highwoods Properties Inc (HIW) 2007 Q3 法說會逐字稿

Welcome to 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. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Ms. Zane, you may begin your conference.

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 our web site at www.highwoods.com or call 919-431-1529, and we will email copies to you. Before we begin I would like to remind you that this call will include forward-looking statements concerning the Company's Operations and Financial condition. Including estimates and effects of asset dispositions, the costs and timing of development projects, roll-over rents, occupancy, revenue trends, and so forth. Such statements are subject to various risks and uncertainties. Actual results could materially differ from those currently anticipated due to a number of factors. Including those identified at the bottom of yesterday's release. And those identified in the Company's annual report on 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 explanation of management's view of the usefulness and risk of FFO and NOI can be found toward the bottom of yesterday's release and are also available on the Investor Relations second of the web at Highwoods.com. I'll now turn the call over to Ed Fritsch.

Good morning, and thank you for joining us. We're very pleased with our results and our continued growth in core FFO. The team remains focused and driven as evidenced by our strong third-quarter operating performance. We leased more office space this quarter than in any single quarter since the third quarter of 2004. Over 1.4 million square feet of first and second-generation space. This includes taking care of our largest single 2008 office lease expiration in a non-core property, significantly enhancing the value of this property when it is sold, releasing the space also reduced our 2008 revenue exposure to less than 11%, and with other leases now signed this exposure is down to 10%.

Year over year, total occupancy in our in-service portfolio increased 100 basis points to 90.4%. Average cash rental rates for all in-place leases grew 6.2%, and our high yielding development pipeline is now 75% pre-leased. We're also on track to close on the Winston Salem assets by the end of the year. In short, it was a very good quarter for Highwoods. FFO was $0.61 per share, and for the nine months was $2.13 per share. These numbers exclude charges related to the takeout of high coupon preferred stock and a small impairment we took on a building in South Carolina.

We are again reaffirming our full-year 2007 FFO guidance of $2.68 to $2.73 per share, which we increased in May and subsequently reaffirmed twice. At the mid-point of our guidance, this represents core FFO growth of over 7% from 2006. To get "Core" FFO, we take reported FFO, add back impairments for depreciable assets, and the preferred stock redemption charges, and we also strip out landfill gains and impairments, lease term fees, and other unusual items such as the bankruptcy settlement fee we received in 2006 and the insurance settlement we received in the first quarter of this year.

Consistent with when providing guidance in the past, we are expected to publish our 2008 FFO Guidance Outlook in January. Conditions and trends in our top five office markets remain positive. Total net absorption in the quarter was 1.7 million square feet and year to date it was 5.3 million square feet. For the first nine months of 2006, net absorption in these same markets was 4.8 million square feet or about 10% less.

Since our August Conference Call, we have expanded our development pipeline by 183,000 square feet. This includes Cool Springs IV, a 153,000-square foot multi-tenant office building in Nashville. We're also building a 30,000 square-foot retail store in Winston Salem for HH Gregg, a consumer electronic retailer, on lands that we own. We plan to sell this building upon completion in the first quarter of 2008. Since the beginning of the year, we have started seven development projects including four building suits, two for the federal government, one for Comcast in Memphis, and this retail project for HH Gregg.

We are extremely pleased with the level of pre-leasing of our development pipeline. In the third quarter, we leased 300,000 square feet of first-generation space, and year to date we've leased a total of 890,000 square feet of first generation space. As I mentioned, our current pipeline is 75% pre-leased as compared to 66% in August. Year to date, we have completed 860,000 square feet of new development that is 79% pre-leased, and by the end of the year, we will have completed slightly over one million square feet that is currently 83% pre-leased.

Since January, 2005, the year we kicked off our long-term, strategic plan, we have commenced $559 million of development with projected cash and GAAP yields averaging 9% and 10% respectively. These projects encompass 3.2 million square feet including eight build-to-suit properties totaling 800,000 square feet. Of the 2.4 million square feet of spec development, 1.6 million square feet has been deleveraged and is 76% pre-leased today. On average, these properties are expected to stabilize for another nine months.

Of the remaining 700,000 square feet of projects currently underway and scheduled to be completed in late '08 or early '09, and this includes RBC Plaza, Centigreen V, Winlake VI and pre-leasing is already 46%. Plus, the 139 for sale RBC condos are under contract with non-refundable deposits over a year before delivery. As I've said on many occasions, 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 remain extremely deliberate and measured with when analyzing potential development projects and our division heads continue to do a great job of identifying opportunities in strategic infill locations.

Dispositions of non-core assets in the third quarter total $37 million at an average cap rates of 6.6%. Five properties were sold, including an industrial building in Atlanta, encompassing 234,000 square feet that was 96% occupied, and 80,000 square-foot building in Atlanta that was 100% occupied, and two office buildings and one flex property totaling 212,000 square feet in Greenville, which were on overage 44% occupied. The average age of these five properties was 23 years. Year to date, we've sold $108 million of non-core properties at an average cap rate of 6.5%. Land sales were minor this quarter. $1million of sales for a $200,000 gain. This gain was offset by an $800,000 impairment on a land parcel in Baltimore we are planning to sell. Year to date, we've sold $37 million of non-core land for a net gain of $16.2 million or $0.27 per share. We are encouraged by the solid leasing activity and fundamentals and our markets remain positive, which Mike will cover in detail.

Our balance sheet is strong. We have significantly improved the location and quality of our assets, and we are in the deal flow in all of our core markets. We have dry powder, and we are proactively seeking opportunities for growth in existing and new markets. I want to assure you that everything we do will be in line with the goals of our long-term, strategic plan. High quality assets, infill locations, stable cash flow.

As you know, we've worked very hard to be in the position we are in today, and we will continue to be disciplined in our future development, acquisition, and disposition activities. As always, I thank you for your interest in Highwoods, and I remain extremely grateful to all my co-workers for their continued hard work and dedication. Mike?

Thanks, Ed, and good morning, everyone. As Ed mentioned, we had a very solid quarter, leasing 1.6 million square feet of first and second-generation space, 91% of which was office. The average term for second-generation office leases signed was 4.6 years, and the average term for first-generation leases signed was 8.4 years.

As referenced in yesterday's press release, we recently signed a 223,000 square-foot lease and a 246,000 square-foot building located in the North Fulton submarket in Atlanta. Nortel presently leases 100% of this building and this lease expires in March 1, 2008. It was the largest office lease expiration we are facing next year. Releasing 90%-plus of this space has significant strategic value to Highwoods as this building is on our non-core asset list and is being considered for sale. Needless to say, the incremental value created by leasing this building to a high-quality credit tenant is substantial. We lease this space virtually as is with only $1.10 per square foot in TI's, avoiding what we believe would have been a substantial CapEx outlay. The start date coincides with Nortel's expiration date so there is more down time in rent. The lease term is 5 1/2 years, and the rent is about 9% below market.

As a result of what we consider to be a very good business decision, this one, large transaction significantly skewed both office GAAP and cash rents in the quarter to the downside. Including this transaction and is reported in our supplemental, Office GAAP rents increased 3%, and office cash rents declined 5.6%. Strip out this one deal, and office GAAP rents increased a very healthy 12.4%, and office cash rents actually increased .6%. A testament to the fact that many of our markets are seeing positive cash rent growth. I strongly encourage you to look at average cash rates over the entire portfolio as shown on page 13 of the supplemental. For all in-place leases at September 30, average cash flow rates increased a robust 6.2% from a year ago. Looking just at office, average cash level rates increased 5.5% from a year ago.

CapEx related to office leasing was $8.23 per square foot in the third quarter, versus our five quarter average of $11.48 per square foot. Obviously, the re-rent of the Nortel space contributed to this much lower than the usual leasing CapEX number, but even excluding this transaction our office leasing CapEx is less than $9 per square foot. Turning now to our top five markets. Raleigh continues to gain momentum. Our portfolio's occupancy was 88.1% at the end of the third quarter, a 550 basis point increase from a year ago, and 160 basis point increase from June.

Looking at the market as a whole, year-over-year office occupancy has increased 80 basis points to 87.6%, and for the first nine months of the year, the market absorbed almost 880,000 square feet. The market rents in Raleigh are up 5% to 10%. We have 670,000 square feet of office space in the development pipeline in Raleigh that is currently 63% pre-leased. The business climate remains positive with continued population and job growth numbers that are well above the national averages, and we are confident that our occupancy in this market will be north of 90% by year end.

Occupancy of our Atlanta office portfolio continues to perform significantly better than the overall market. 92.8% versus 88.6%. Net absorption was nearly one million square feet for the quarter, and is over 2.2 million square feet so far this year. Market rent in our submarkets are generally 3% to 6% higher than a year ago.

Our two development projects two build-to-suit for the federal government and spec industrial building are 92% pre-leased. Occupancy in our Tampa portfolio declined slightly from last quarter to 95.6%, primarily as a result of a number of anticipated lease expiration, but we continue to outperform the market. We delivered Bay Center 1 this quarter and it is currently 67% pre-leased, ahead of internal projections. Stabilization is not projected until the fourth quarter of 2008.

The west shore submarket where over half of our Tampa assets are located including Bay Center remains very healthy. Market rents for Class A office space are up over 10% from a year ago and occupancy is 92.1%. Our assets in West Shore were 95% occupied at the end of the quarter. In August, we also acquired four acres of highly desirable, well-located land in West Shore for $5.1 million. The tract and support of the 300,000 square feet of office space with structured parking and is part of a larger mixed use site called Avion Park that is master planned to include three hotels and four restaurants. All three of the hotels currently under construction and scheduled to be open for Super Bowl 43 which will be played in Tampa right down the street from the site in January, 2009.

Occupancy in our Richmond portfolio climbed to 91.8% at the end of September, a 180 basis point increase from the second quarter, and 190 basis points better than the Richmond office market, as a whole. The office market absorbed for 600,000 square feet in the quarter, but most quarterly absorption in over three years. We have two development projects in Richmond. Stoney Point IV, 96% pre-leased and will be placed in service in the fourth quarter, and North Shore Commons II, which is currently 17% pre-leased. We are disappointed with pre-leasing to date at North Shore Commons II, however leasing activity is picking up. Our national portfolio regains the occupancy at a lost in the second quarter and then some. At the end of the quarter, occupancy was 92.5%, up 160 basis points for the second quarter, and better than the national market as a whole. National's economy remained strong, absorbing just under a million square feet so far this year, versus 660,000 square feet for the first nine months of 2006. And market rents are up 3% to 5%.

We've got three development projects underway in Nashville. Our 255,000 square-foot build-to-suit for Healthways which is expected to deliver in the fourth quarter, Cool Springs III, a 153,000-square-foot spec building, that is now 94% pre-leased with stabilization projected for the end this year, and Cool Springs IV a twin to Cool Springs III, which we just broke ground on. Cool Springs continues to be one of the strongest submarkets in Nashville with overall occupancy at 92.3% at the end of September.

We are very pleased with the quarter and the year-to-date operating performance in our markets. Due in large part to the dedication and commitment of our division personnel, and we look forward to ending the year in line with virtually all of our projections. Thank you. Terry?

Thanks, Mike, and good morning, everyone. As noted, FFO per share for the quarter was 61 cents, excluding about 1.5 cents in charges from our repurchase of $22 million of 8 5/8% of preferred stock in August, and about a half cent building impairment from a sale we completed in third quarter. The 61 cents does include just over one cent of impairment on non-core land and we have under contract to sell. Lease termination fees were minimal this quarter, contributing less than a half cent to FFO. The 61-cent per share this quarter compares to 59 cents per share in third quarter last year on similar basis. For the nine months, FFO was $2.13 per share, excluding preferred stock redemption charges and the building impairment, up from $1.76 per share last year, excluding similar charges and also excluding debt extinguishment costs we incurred last year.

The $2.13 per share for the nine months this year includes nearly $0.27 in net land sale gains, nearly all of which was in first quarter, seven cents from the settlement of a property insurance claim, also in the first quarter, and $0.04 in lease term fees. Core FFO, which Ed defined in his comments, was $0.61 per share this quarter, which compares to $0.55 for the third quarter of 2006, and to $0.56 in the second quarter of 2007. For the nine months this year, core Fo was $1.75 per share compared to $1.65 per share in the same period last year, a 6% increase.

These improvements reflect growing same property in Hawaii and contribution from delivery of new developments. Total revenues from continuing operations were up $6.8 million or 6.5% for the quarter compared to last year. After the increase relates to same properties and remaining half comes primarily from development properties delivered late in 2006 and in 2007. The growth in same property revenues primarily reflects higher same property average occupancy, plus increases in average in-place rent per square foot. Total company NOI was up $5.7 million or 8.8% for the quarter, compared to third-quarter 2006. Same property NOI was up 3.2% compared to third quarter last year, as noted on page 25 in our supplemental.

Excluding straight-line rents and termination fees, same property NOI was up 5.5% this quarter. Our NOI margin, that is NOI expressed as a percent of total revenues, was up from 62.4% in third quarter last year to 63.7% this quarter, and for the nine months was up from 63.5% last year to 63.9% this year. These improvements result from higher revenues and occupancy. In addition, we are beginning to see the lower cost benefits of having a younger and higher quality portfolio, and also from recent investments in electrical and HVAC energy-saving initiatives. We continue to work hard on controlling operating expenses.

Third quarter G&A was up $1.1 million, just under two cents per share compared to last year. Nearly all of the increase was from higher writeoffs or pre-development costs on certain projects that are now deemed unlikely to occur, and from higher annual and long-term incentive costs reflecting our improved operating and financial results. For the nine months, G&A is up 5.1 million or eight cents per share compared to last year. Three cent of the eight-cent increase was from higher write-offs and pre-development costs, including several GSA deals where we were short-listed but not the winner. Under the GSA contract solicitation process, getting all the way to the finals involves a fair amount of design and related costs which we expense if we are not selected.

One cent of the increases from the RBC residential condominium marketing costs which must be expensed under GAAP. As we've noted, all 139 condo units are now under contract with nonrefundable deposits, and future marketing costs will be minimal. About 1.6 cents of the increase is from higher annual and long-term incentive costs as noted above. And the remainder is primarily from annual merit increases, increases in health care, and employer taxes, and other inflationary effects on our G&A activities. Interest expense and preferred stock dividends combined were down 1.3 million or two cents per share in the quarter compared to 2006. Primarily due to savings from the 40M and 8% preferred stock redeemed at the end of May, and the 22 million preferred repurchased in August. We also had higher capitalized interest from our growing development pipeline.

Primarily as a result of our recent refinancing activities, the weighted average rate on all our debt and preferred stock combined was 6.87% at the end of September. 33 basis points lower compared to a year ago. As we've noted on prior calls, these positive effects on interest expense and preferred dividends were partly offset by the foregone and alike contribution from a dispositions. We used part of the disposition proceeds to pay down some of our higher rate debts and preferred stock, as I've noted, and also to fund our development pipeline which has projected initial yields of 9% on a cash basis and 10% on a GAAP basis.

Given that disposition since the end of 2004 were sold at an average 6.7% cap rate, we've had minimal FFO delusion from our 705 million of asset sales. In addition, because selling non-core assets has allowed us to avoid highly relative capital expenditures in those buildings, our dispositions have been net accretive to cad, and we expect to be cad positive for 2007 and in future years. We've mentioned the very strong land sales we've had this year, mostly in the first quarter. Going forward, we still have more non-core land to sell, but we are not expecting significant gains on those sales. We do expect to incur an additional land impairment in the fourth quarter this year that could be up to $0.015 per share, which will be included in the fourth-quarter FFO, and which is reflective in our 2007 guidance. This relates to a land parcel in Baltimore, a market we exited several years ago, except for some non-core land that we've been working to sell. On the building side through the nine months, we've sold $78 million in wholly owned non-core buildings, plus another $30 million in joint ventures. All told we've had net building gains through nine months of $37 million or 60 cents per share, most of which is included in discontinued operations. As you know, building gains are not included in FFO.

On the financing front, year to date we've paid off $80 million of secured debt with the weighted average interest rate of 7.9% which an encumbered $179 million of assets based on undepreciated book value and we redeemed and repurchased the total of 62 million of preferred stock as i've already noted. Since embarking on our strategic plan in early 2005, we've unencumbered approximately 30 buildings and today the portion of our total NOI that is not encumbered by secured ones is now 58%, up from 51%. We presently have $258 million of borrowing capacity under our unsecured revolving credit facility. Given this availability combined with proceeds from additional planned dispositions and other potential capital sources, we are well positioned to fund the remaining costs of our accretive development pipeline and have additional dry powder to take advantage of other investment opportunities that may arise. Operator, this includes our prepared remarks and we're now ready to take questions.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster. Our first question comes from Chris Haley.

Ah, good morning guys, it's Brendon and i'm with Chris.

Hey, Brendon.

Ed or Mike, you guys mentioned that your cash rental rates are up about 5.5% for your portfolio. If I think about annual bumps, probably accounts for about 3% of that. Thinking about a static portfolio, that would imply that the cash releasing spreads would be up pretty sizeably. But I think about the cash releasing spreads that you've shown here have been I guess 0.6% in the current quarter, stripping out the one large deal. So is the difference between those two just the mix, and that the change in mix of the portfolio given some of the sales that you've had from the development, and can we expect that releasing spreads on a cash basis would move up as we move into '08 given the rental rate growth that has occurred in your markets?

The first part of your question, you answered exactly right. It is the mix. The second part is we continue to expect it to be lumpy. We continue to expect it to be in line with where our guidance has been for the year. But overall, we do have a better portfolio which has been able to garner better rental rates in the market.

And do you guys look at kind of what the embedded mark to market on the overall portfolio?

What our mark to market is? If -- we've kind of dodged the question in the past. So aside from the fact that we're on the heels of last night's Democratic Presidential debate, and trying not to sound like that, as we've said in the past, we've got around 2,000 office leases that are -- our average office lease represents less than 10,000 square feet. We haven't gone through an exhaustive exercise to take each one of them and compare them to market. But year over year, our asking rates are up 5, 5%-plus. Our leasing representatives have consistently in bad times and good times been able to negotiate as you referenced in your first question, base-year kickers, basically annual kickers in rental rates that are -- that are fixed, escalators, and that's why we show what we show on page 17 of the supplemental with regard to average cash rents. So average cash rents, you'd see there, year over year, of about 6.25%. Office up about 5.5%. So we feel like a thing to monitor for us would be the average cash rents, but we haven't gone through the exercise given the volume in leases and the average size of our lease to take each one of them and compare them mark to market.

Okay. Great.

One other thing I'd add to that, and I've said in the past is that not that everything changed dramatically on this date, but if you look at what we have in place now that was signed before January 1 of 2001, it represents about 14% of our in-place revenues. So we are -- we've worked through a lot of what was signed and what we call primetime, and we are seeing some of the benefit of the deals that we signed subsequent to '01 when times were a little bit slower and we gave on the asking rents.

Okay.

We typically are able to see, though, that the escalators we get, even if we're behind on cash rents, that with the escalators it puts us ahead of the expiring rent within a year or less.

Okay. Great. And then in terms of just thinking about CapEx costs, if I look at the development pipeline you guys -- in terms of the nonstabilized properties, it seems like there were some very good leasing progress on a lot of those properties. Some of the costs increased a little bit. I guess it wasn't too dramatic. But that would suggest to me that CapEx costs maybe increased a little bit or TI costs increased a little bit for those properties. I'm just trying to reconcile that with some of the CapEx costs that you showed up on the second generation leasing, which were lower than where they had been on a per square-foot basis.

So to be sure I understand your question, what you're speaking to is the rise in costs on some of our development projects.

Yes.

Is that --

Relative to your leasing statistics during the quarter.

Right. The -- the increase is because we've been able to garner some longer term leases, which obviously caused for more TI and more commissions. So some of that's just amoritization in the rental rate. And that's helped us in the proforma because we've been able to get a higher rate on what we've amortized for the customer.

And those are truly shelf space, so you're looking at a condition of space for new development that's -- that can be markedly different from a second gen space.

And on those, Chris, we continued to meet or beat our pro forma expected yields.

Right. One final question. On your first-generation CapEx, could you help -- could you refresh my memory as to what is the threshold for which a second-generation space or probably a first-generation space is differentiated to a second-generation space. Is it timing of vacancy?

No, it's -- any time we take it from building shell to a build-out, it becomes second generation thereafter. So you could have first generation if a building doesn't lease -- if a particular suite in a new building doesn't lease for three years, that's still first-generation space. But once we build it out, then when that customer renews or rolls out, we relet it, that's second generation thereafter.

So it doesn't really show given that you haven't done much in terms of acquisitions, some companies take the liberty of assuming that -- or reporting that vacancy and an acquired asset even though they haven't -- it wasn't their asset beforehand, the lease-up of that vacant space is -- probably is first generation and, therefore, is not included in their leasing costs?

Yes. I can't speak to what others do, but -- and we haven't obviously had much of that situation. But we -- we haven't reclassified space like that.

Okay. Congratulations on a good performance.

All right. Thank you, Chris. Brendon?

Yes. If I could steal one more question. Just in terms of the -- your Fad numbers and thinking about dividend coverage toward the end of the year and into next year, I think you guys had indicated when you gave guidance that toward the fourth quarter you hoped to be covering the dividend, just thinking about the large amount of leasing that you've done and the flow-through of those capital costs into your Fad numbers. Seems like that would have a big impact in the fourth quarter and maybe towards the beginning part of '08 upon how comfortable are you that you're going to get Fad coverage over the next couple of quarters?

Let me break it up by years, if I may. We expect as we had said in January of '05 to be cad positive by the end of the initial three years, which is '07. So we continue to believe that we'll be cad positive even in light of the volume of leasing that our folks were able to successfully complete in third quarter and what we expect to do in fourth quarter. So 10 seconds to pat ourselves on the back to go from us being in the -- $25 million range and cad negative to being cad positive this year is an attribute to the team. And we expect to be cad positive each year hereafter.

Thanks.

You're welcome.

Our next question comes from Kaz Matani.

Hey, hi. This is relating to the leasing.

Yes, sir.

Are the volumes as strong in October as they were in 3Q? Has there been any shift in mindsets among the tenants that leasing is not taking longer to sign?

We really haven't seen much of a shift in October versus September. And, you know, I -- I'd like to think that things change that quickly in one direction or another, but I think one month over another doesn't -- you know, it really doesn't define where we are within -- within a quarter. The activity has been decent. We remain to be comfortable with our projections and our guidance. The activity is solid. We have seen some protracted or some added lease time from the time that we meet a prospect, the time we do a deal in our Florida markets and in the other markets, we haven't seen that. And the Florida markets, the rationale what we believe the rationale to be for the more protracted period of time is that Florida was hit more harshly by the subprime and pull-back in housing than any of our other markets.

Great. And given us your economic alignment, do you expect your pipeline to decline from the current $500 million level, or --

Our development? We have put out guidance for future years this year. We're right on schedule with where we expected to be. We have said at the start of this year that we expect '08 starts to be 100 million to 200 million. '09 starts to be 120 to 215. We'll maintain those predictions at this point.

Okay. Great. Thanks a lot.

Thank you.

Our next question comes from Jamie Zelman.

Great. Thank you very much. Can you talk a little bit about what changes in the capital markets have done to the outlook for competitive, new supply in your markets.

From a new supply perspective, Jamie, I don't think it's been substantive, a reminder that most of our competition has been or is, in the local competitor, what we were before we went public. As opposed to us -- I mean, we respectively compete with Duke and Liberty and a few other REITs in some markets but the dominant competitor in most of our market is the local developer, and that's been a fairly deliberate in the past. So we haven't seen much of a change in the way of speculative development starts in our markets. The two that we've had maybe a yellow flag up on have been Nashville and Raleigh. And if you look at those numbers as a whole, construction as a percent of market, both Nashville and Raleigh up now well above 5%. But what we try to do is we call out what we call our competitive sets. So take Raleigh for example. We don't compete with Chapel Hill although statistics are included in the market surveys. We don't compete with Durham, but those statistics are in the market, the market studies that are put out. So we try look specifically at our competitive set. We do that, we also reduced the denominator obviously to reflect that portion of the market we're doing the math on. And it brings both of them back down well under 5%.

I guess what I'm trying to get at, do you think they'll need less supply coming because your competitors don't have as much access to capital or capital that's attractive or does that not really flow through?

No. I think it's going to continue to be a deliberate pace of new development that comes on line. But we haven't seen the capital markets have a significant impact on local competitive advertising development.

What about on the acquisition side? Are people pulling back anything less demand for your assets that you want to sell?

Well, what we sold in the third quarter which, I guess, would be the one to focus on most because those closings, negotiations occurred after some of this activity in the capital markets started to hit the screen, of the three transactions we didn't experience any retreading as a result of capital markets or -- or equity or debt costs whatsoever. On a blended basis, all three came in at or above what we expected. One was slightly below what we expected. But it was primarily due to it being a -- a single-tenant building with only about five years left on the lease. It was about 80,000 square feet. So we were extremely pleased with how the Third Quarter dispositions played out, given that we were right in the middle of negotiations and -- and working through contract language in the middle of probably the most active discussions in the public markets with regard to capital crunch.

And how would you characterize those buyers and their -- how much leverage they're using?

One was a public REIT, one was a fund affiliated with USA A, and one was an insurance company.

Low leverage --

Yes, I think the leverage was generally less than what we've seen in the past with the -- you know, the private buyers coming in with high -- high amounts of CMBS.

Okay. And then finally, I know you didn't give any '08 guidance, but if you were to characterize the mood of businesses in your core markets,are they -- are they concerned, are they -- you know, feeling pretty good about what's to come? How would you characterize that?

I would say that our team across the board has a fair amount of confidence as to where we're headed. We feel much better where we are with -- I think everybody's seeing the economy slowing down. Now it's just a question of how much are you going to slow down? We continue to see good activity in the markets, I think as evidenced by Third Quarter activity. Our expirations with regard to revenues rolling in coming years, there is not as much to rustle as we had in prior years because our folks have done a good job of extending the average term of our existing, in-place revenues. So, you know, if you wanted to put it in forms of, you know, the icon happy faces, I mean, there's nobody down around here who's got a sad face looking at 2008.

Okay. And then finally, your Credit Watch List, has -- any major addition there's quarter? How is that changing?

No, sir.

Nothing. Okay. Thank you very much.

Sure. Thanks, Jamie.

Our next question comes from Steve Binyik.

Hey, good morning, guys. Just I guess starting with your G&A. I mean, looks like when you guys initially gave guidance, it was $34.5 million to $36 million, now we're at $41.5 - $42.5 million. I know you mentioned three sense of that was the latest developments that were pursued that are unlikely to occur, GSA-related or what not. Can you just provide me further color on that and what kind of the dollar value and the square footages that were associated with those deals that were pursued were.

Let me -- let me take the last part and you take the first part, Terry. With regard to the dead deal costs, if you will, we -- we haven't disclosed deal by deal what those were. Terry's quantifies it with regard to the dollar amount. It's predominantly GSA deals that we've pursued where they're expensive to be in the final round. We see those development deals where there is a wide range of initial bidders. And then the GSA through a very elaborate process narrows it down to final contestants, and to get to that final round, we typically spend a fair amount of money in the way of our own labor and design fees so that the GSA has something that they consider, and we obviously have to get good pricing on that. So its a bit of an exhaustive pros. And when you lose, it's a bit expensive. But we've won I think our fair share, is not maybe a little bit more, and created significant value. So we'll continue to pursue those even though the dead deal costs are obviously impactful to G&A. And also when you gets down to the best and final, you're usually down to a fairly low number of folks, maybe two or three, so your probability of success is higher as you get to that level where you're usually spending the higher dollars. You want to take the first part --

In terms of the other increases, I think I covered most of the larger items in my, you know, prepared comments. In addition to the write-offs of the pre-development, that we had some marketing costs that were higher relative to those RBC condos. But the good news there was they're all now under contract. We have had some increases in our annual and long-term incentive comp compared to prior periods. And that's also just reflecting of the improved operating results coming through on the performance-based compensation metrics. And there's always, of course, the annual merit increases, and,, we have continued growth in our health insurance costs. We've -- we have been very good at trying to absorb the annual increases in health insurance for our employees year over year. And so forth. So it's been a combination of things, and despite the fact that we did increase the G&A guidance from where it started out to its beginning of the year, we still were able to raise our overall guidance about three times. And -- but we recognize the G&A is important. We're focus on it. And we're continuing to look for ways to -- to reduce our G&A costs. And obviously, when we complete the Winston-Salem transaction, there will be some G&A savings there, as well.

We're part of those related to the headcount reductions and the triangle division I guess, what was part of that decision driven by what you guys are looking with Winston-SalemHotel. Does it help to clarify that?

No. Is it - What happened in Raleigh was we are continuing to right size the portfolio and the staffing. I think that maybe where you saw that, the fellow who writes in the newsroom server on Highwoods is extremely intelligent and traditionally does a very excellent job. That article I think was a little bit blown out of proportion. You know, at six people, less than 10%, and you have -- three of them were secretaries. So, you know, we're just continuing to monitor to be sure that we have the right number of people to run the real estate, and it goes back to what we said in early '05. We just want to have the right people on the bus and in the right seats and the wrong people off.

Got it. I guess related to your development pipeline, and I guess the land acquisitions that support it. Can you just talk about kind of land acquisitions year to date. I know kind of Highwoods River Point is something that's been in the news recently. It's something in a project and kind of how you guys look at pursuing that on a speculative or build-to-suit basis, just the market overall.

Let me speak in general and then, Mike, if you want to fill in. With regard to land, we have worked at getting rid of the non-core. We have about 124 acres left of non-core. We have 523 acres of core that's left that would support about 4.6 million of office and about three million of industrial. We know that we're a little bit land rich in some markets and land poor in a few others, and hence what Mike referred to in his comments with the piece of land that we've been fortunate to acquire in Tampa's best submarket. We have said that we want to acquire between $10 million $20 million worth of land each of the next two years to continue to support our development pipeline.

Just to add to that, Steve, you mentioned River Point, which is our property we bought up in Emerson, Georgia. This is further to our interest in expanding our industrial pipeline. We feel like it's a good submarket, bigger than Northwestern Atlanta submarket. And we're already working on some potential opportunities there. And then in Henry County, which is a high growth market in South Atlanta submarket, again, parts of that industrial initiative. So we like it. We think those markets, submarkets are tight. Just since we announced acquiring the tract-up at Emerson we won, we've had interested people who want to buy it from us, but we're interested in developing it ourselves. We believe it will be a good, long-term play for us there.

Great. Thank you.

Thank you.

Our next question comes from Michael Bylerman.

Hi, this is Irwin with Citigroup with Michael. My question - my first question is about the development pipeline. How much are you targeting to start in the fourth quarter and in 2008 in terms of dollar volume and square footage?

Fourth quarter of '08?

Fourth quarter of this year and in 2008.

Well, we've said as I mentioned, more than $200 million next year, and I think that right now we don't have anything in the forecast for development starts in the Fourth Quarter of this year. We're pursuing build-to-suit opportunities in a number of our cities, along with our competition. We don't know at this point whether we'll be successful. But it they were awarded, they likely would not start until 2008.

And on two -- there were two development projects, build-to-suits that were 100% leased that got pushed out during the quarter. Can you talk about why the -- why the delay and if there's going to be any impacts to your yield expectations?

Sure. Both of them were GSA deals. And both of them were delayed as a result of the GSA doing some reviews of whether it be approval of plans or just getting started with the project itself. So the completions were delayed. And so were the starts. So really no cost impact to the Highwoods shareholder on that. On either of those.

Okay. And --

And for one of them, it really -- what it did is it bridged a quarter. It went from early September to mid October. So it -- it's what pushed it out a quarter.

And on your NAV estimate, if you were going to update that for today, what change in cap rate would you expect to use?

Well, we provide all the data points for that in our supplemental. What we decided to do early this year was to provide an updated of NAV annually instead of quarterly. We had lots of conversations and good input. Some solicited, some unsolicited, from interested parties on updating it quarterly. And the conclusion we drew that we communicated a few quarters ago that we would update it once annually unless there was a very material change in internal operations. So that's the objective of putting out the -- all the data points. With regard to cap rates, we recognize that they've moved up the range that we give in our NAV page it's already a 50-bit range. So obviously in our view, you know, it's migrated toward the high- end of what's in our supplemental.

Okay. Ok,thank you.

You're welcome.

Our next question comes from Kristin Brown.

Hi, good morning, guys.

Thank you, good morning.

I was hoping you could talk a little bit more about the leasing of national this quarter. Were there any outline in rent spreads for the pretty representative of all the transactions there during the quarter?

Kristin, say the first part of that again, please.

Oh the leasing in national this quarter. Just the rent spreads, were they representative of all the transactions during the quarter, or were there any outliers?

No, Kristin, this is Mike. There were no outliers. It was pretty straightforward. Of course the market we continued to have good growth there.

Okay. Do you think the construction is going to have any dampening effect going forward?

I think that there's a lot of activity in Cool Springs, particularly a lot of competition down there. We're down to really Cool Springs IV which we just announced. It's 154,000-square-foot building. It is spec'd. A lot of activity in market has been corporate relocations, Nissan America, CHS, so there's been -- a lot of the absorption down there that has come from owner-occupied buildings.

And I'd add to that that we're in the deal flow in Nashville. We're seeing and competing on every deal. The team in Nashville has done a superb job with Cool Springs I, II, and III in securing the build-to-suit for healthways and so - I think the very last part of your question, Kristin, the biggest impact is new construction costs continued to drive very high rents that are in the mid-20's. So there remains a significant gap between second generation and first generation space. So in my view, where there's absorption which there is in -- in a positive absorption of markets, it's helping with the asking rates on second-generation space because there's such a significant gap between what you have to get in order to meet your pro- formas, whether it's us or a private competitor, with first generation versus second generation.

Okay. And I just wanted to ask those leasing cost question from a -- a different way. I just want to understand, you know, even excluding the Atlanta lease, that they were a lot lower for any happening in previous quarters. And what was really driving that decrease?

In the Nortel building?

Uh-huh. Excluding that, they were still pretty low.

We do have a followup question from Chris Haley.

Hold on.

We didn't push a button there. I think if you look at -- in general, we had exclude the Nortel transaction, you had a good mix of renewals where the tenants were in spaces that did not require a lot of upfit. So therefore we didn't have to -- didn't have to offer it up. And as Ed's mentioned on several calls, the markets have been strong enough that we've been able to command allowances versus doing turnkey. And we continue to do that. And on renewals, we've been able to hold those allowances to -- to fairly modest sums. So I think that that has been to a large degree which had helped us keep these costs down. It also depends on the mix. Again, of the spaces that are coming up during that market. And we are very fortunate that this quarter to have leased space that was renewed or relet in pretty good condition. That continues -- can be lumpy. We still believe that on balance it's going to be around 11% of your term rents overall. But we are free to set up a good quarter in terms of the mix we had. And Kristin, I would add that obviously Atlanta continues to be a market that has more vacancy in the market as a whole than any of our other markets. So customers continue to have a wider range of choices for alternatives in Atlanta than we do in our other markets. I think the overall market there is 13%, 12.9% vacant. Somewhere in there.

Okay. Thank you.

You're welcome.

We do have the followup from Chris Haley.

Hey, guys, it's Brendon again. And in thinking about new speculative development, has there been any change in your willingness to do new specs that would deliver in '09 relative to maybe where your willingness was six to nine months ago?

Two -- two thoughts on that, Brendon. One is that we said early on that we wanted to be early in this. And that's why we had such a significant amount of speculative starts in the recent prior years. And it's obviously slowed somewhat in 2007. I think of the 127, about 40% or so of that was GSA, and the rest is multi-tenant or traditional office space, build to suit. We're clearly cognizant of the existing conditions in the marketplace. We remain extremely deliberate, as we said in our scripted remarks. We've worked mighty hard to get where we are. I don't think you're going to see us go out and do anything that's frivolous. I do think that there are some opportunities just as what we've done in. Cool Springs and Nashville. We're starting Cool Springs IV. It's a very strong submarket. There's a lot of activity going on there. The entire senior leadership team is very comfortable with the team in Nashville. Brian's done a superb job, and we're confident he'll do the same with the team on Cool Springs IV. We have other opportunities in Richmond. Paul's done a great job at Stoney Point. We may very well look at another building there. Memphis, we're about out of office space. We'll -- we know where we have the opportunities. I assure you we won't be frivolous in -- in how we pursue them.

Okay. Thanks. Just thinking about the -- the guidance for development starts for next year, I guess it's moving towards the high end, would that imply that there would be a large, a larger portion of build-to-suit deals that would get in there relative to, you know, the lower end which would imply more speculative deals?

That's -- that's exactly right. Or -- or less speculative deals in total. But clearly to get to the higher end, we would be able to deliver some build-to-suit projects or start some build-to-suit projects, inclusive of the GSA.

And don't underestimate, we also are really pushing our guys, and they're going after just general pre-leasing, even on the multi-tenant buildings. It may not be build- to -suit, but they're garnering an anchor tenant in these buildings. excuse me, - in this multi-tenant buildings.

ok guys has there been any change in say, not a per say build-to-suit deal, but maybe a -- what would be classified as a spec deal, but that's got a significant amount of pre-leasing to kick it off? Has that -- has the requisite level of pre-leasing changed at all over the past six months?

It's -- as Mike said, sure, we prefer more pre-leasing now than what we would have sought a year or two ago. But everything that we've done continues to be evaluated on a sub-market by sub-market, , a

Great. Thanks a lot. Thank you.

At this time, I would like to remind everyone, if you would like to ask a question, please press star, then the number one on your telephone keypad. Our next question is a followup from Jamie Feldman. Your line is open, Jamie.

Thank you. Just a quick followup on your comments on GSA leases from before. How much flexibility do they have in terms of delaying when they take the buildings or even breaking contracts? I imagine -- my assumption it s that those are pretty safe, but I just want to know kind of where they can have some flexibility.

Yes. I guess two, I'd have to put it in two buckets. One is in the contracts or contracts --, but they're also a mighty big customer of ours. And if they came to us just as if we went to somebody else hats in hand and said, hey, we need to back up and re-think this, we'd certainly sit at the table and have a discussion about it. I don't think we'd be philanthropic and toss the costs that we've incurred to date, you know, just -- that we would carry those on ourselves, and the delays that we've had to date we've been compensated for. So there are -- there haven't been any economic changes. But I -- I think that their process is exhaustive as a process that you're going to meet. And those guys are pretty sure they're going to jump off the cliff when they get to the edge of it.

Typically when we sign a lease for SLA with the GSA, it is a firm contract. If they're going to pull back on a project, it's usually done during the SFO process, and it could be for a appropriation issue, etc. but we've not experienced situation where they come to us and said we've signed the SLA, we've had a change of appropriations, we want to pull out of the lease we want to cancel it. And It hasn't happened to us.

And we have a pretty good understanding of how that whole process works. So we're pretty comfortable with it. It just comes back to, you know, it's a bit of an expensive seat at a table to play. And we understand that. But it's -- it's dramatically offset by the value that we've been able to create with the projects we've done and those that we continue to pursue.

And point out these leases that we're doing with them are firm leases. These are not the leases that you may hear about that have annual renewable or annual cancelable leases. These are from 10 to 15, possibly 20-year firm leases.

Okay. So if they were to change their plans, you have a nice termination fee?

We would have term - -- no, really. You've got at lease that you're going to say honor the lease. Obviously the government -- cause they're a large customer, came and said "We have a problem," would we entertain a lease buy-out, that's something we would have to look at.

The document doesn't include a breakup fee if they change their mind. An agreement is in place.

Ok, great. Thank you very much.

You're welcome.

There are no further questions at this time. I would now like to hand over the conference to Ed Fritsch.

Frederica, thank you for your help. And thanks again, everybody for dialing in. If you have any questions, please don't hesitate to call us. We'd be glad to talk to you. Thank you.

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