Highwoods Properties Inc (HIW) 2007 Q4 法說會逐字稿

Good morning and welcome to the Highwoods Properties fourth-quarter and year-end conference call. (OPERATOR INSTRUCTIONS) Thank you. Ms. Zane, you may begin your conference.

Thank you and good morning. 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 a copy to you.

Before we begin, I would like to remind you, that this call will include forward-looking statements concerning the company's operating and financial conditions, including estimates and effective asset disposition, the cost and timing of development projects, rollover rents, occupancy, revenue trends and so forth. Such statements are subject to various risks and uncertainties.

Actual results could materially differ from those currently anticipated due to a number of factors, including those identified at the bottom of yesterday's release, and those identified in the company's annual report on Form 10-K for the year ended December 31, 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 the subsequent events. During this call, we will also discuss non-GAAP financial measures, such as FFO and N O I. Definitions of FFO and NOI and an explanation of management's view of the youthfulness and risks of FFO and NOI can be found towards the bottom of yesterday's release and are available on the Investor Relations section of the web at, again, www.highwood.com.

I will now turn the call over to Ed Fritsch. Good morning. Thank you for joining us today.

2007 was another year of solid accomplishments for Highwoods. Full year FFO per share was $2.77, excluding impairments and stock exemption charges and FFO from core operations was $2.40, up 9% from 2006.

We are also CAD positive for the year. In addition, in 2007 we ended the year with 92% occupancy, started $124 million of new development that's 59% preleased, delivered $201 million of development that is 90% leased, sold $144 million of non-core properties at an average cap rate of 6.3%, sold $37 million of non-core land for a $16 million gain, retired $62 million of high-coupon preferred stock, paid down $92 million of secured debt, and issued $400 million of 5.85% unsecured bonds.

All in all, it was a very productive year, and we ended the year strong with just under 2 million square feet of first and second generation space leased in the fourth quarter. While our customers are being more deliberate in their decision-making process, leases are still being signed. From what we see, the general mood of small to medium-sized businesses, which is our sweet spot, is cautiously optimistic.

Mike will go into further detail regarding our top five markets.

On January 28th, we published our 2008 guidance, projecting FFO from core operations to increase 5%, from 2007, at the midpoint of our 2008 range. We projected growth of core FFO -- the projected growth of core FFO demonstrates that we are reaping the rewards of the key initiatives of our long-term strategic plan.

Since implementing our plan in January of 2005, we started $563 million of development in 12 markets with average stabilized cash yields of 9%.

During this three-year period we also increased occupancy by 700 basis points, reduced our land (Inaudible) by almost 50% by selling non-core land which generated gains of $0.51 per share and placing core land into service for new development.

We sold $742 million of non-core, older assets at an average cap rate of 6.7%, retired $242 million of high-coupon preferred stock, refinanced expensive debt and increased unencumbered NOI from 51% to 58%.

Looking ahead in 2008, we expect to deliver $211 million of development. This includes RBC Plaza, the mixed-use office, retail and residential project in downtown Raleigh.

We also plan to sell 100 to $250 million of non-core properties. Raleighs Properties targeted for sale are non-differentiating older assets. On average, they are not as quote/unquote curb-appeal challenged, as the properties sold over the last three years. We will continue to preen our non-core land holdings generating cash proceeds. However, we expect future land sale gains to be nominal.

Less than 25% of the 634 acres we own today is non-core, and of 493 core acres can support approximately $1 billion of development. This year we have budgeted to buy $10 to $20 million of land in strategic infield locations in a number of our markets.

To date, we have not seen a drop in the pricing of premium infill land but we are watching our markets closely.

Finally, we expect to remain CAD positive for the full year 2008. We have a lot of good news to report and continue to see good leasing activity. We aren't looking at the world through rose-colored glasses. We recognize that the economy is experiencing turmoil and uncertainty at balance. However, we believe Highwoods is significantly better prepared to weather and take advantage of a slowdown today than we were 36 months ago.

We have an experienced a highly-energized management team. We have a significantly better portfolio. We have well-leased accretive developments delivering in virtually all of our markets and we have drive power to take advantage of acquisitions and/or development opportunities that make sense for our shareholders. Mike?

Thanks, Ed, and good morning, everyone.

As Ed mentioned, we had a very solid quarter, leasing almost 2 million square feet of first and second generation space, which helped to increase occupancy by 200 basis points year-over-year.

Looking at occupancy for all of 2008, we expect a drop in the first quarter due to several lease expirations. As we move through the year, we expect occupancy to pick up and should finish the year in our forecasted 92% to 93% range.

In my monthly call with all of our leasing reps, they commented that our customers are generally satisfied with the size of their current space and, in fact, some of our customers have hinted they would expand if they could get comfortable with the economy. Due to the uncertainty of the market place, deals are taking a little longer to sign, but they are still getting done and we have not seen much of an increase in concessions.

We were also very pleased that in December, we removed what was by far our largest 2009 lease expiration, 221,000 square feet in Atlanta, with AT&T. Average in-place cash across our total portfolio was 2.4% from a year ago and we're up 3.1% from the same period a year ago for our office portfolio.

There's still a fairly wide spread in rental rates between first and second generation space in our markets and this should serve to show up second gen rates. CapEx related to office leasing was $11.32 per square foot in the fourth quarter, versus the five quarter average of $11.52 per square foot, reflected in our supplemental.

While I will go through our top five office markets. Overall for 2008, we expect to see positive market absorption with flat to modest rent increases and no meaningful change in T I's and lease commissions.

New construction was 3% of market year end and we don't anticipate a material increase in 2008. Turning to our top five markets and starting with Raleigh> In 2007, occupancy in our portfolio increased a healthy 540 basis points year-over-year to 91.5%.

We also have $186 million of development underway, that's a 64% preleased. This includes RBC Plaza, as well as, GlenLake Four and Six, and CentreGreen Five. Market absorption was solid, just under half a million square feet per quarter and over [1.2](Inaudible) million square feet for the year. As we have discussed on previous calls, there's quite a bit of development and activity underway in Raleigh. About 4.8% of the market or 1.9 million square feet.

Taking a closer look, if you strip out Highwoods development and development in our -- in outlying submarkets where we don't compete, like Durham and Chapel Hill, the competitive landscape is not nearly as crowded. In fact, construction as a percent of market drops to 2.4%. The competitive subset, excluding our development is 54%.

Demand in Raleigh should remain relatively strong, led by such growth in industries such as clinical research organizations, pharmaceuticals and telecommunications. Occupancy by our Atlanta office portfolio continues to perform better than the overall market. 90.5% versus 87.2%. Net absorption was 3.3 million square feet last year.

We have 23 million of development underway in Atlanta, including a 50,000 square-foot build-to-suit for the F.A.A. and 263,000 square-foot industrial building, Newpoint 5, that is now 88% preleased.

In the fourth quarter of 2007, we placed our $21 million, 91,000 square foot build-to-suit for Department of Homeland Security into service.

New office construction remained moderate in Atlanta, about 2.4% of the total market, but most of this construction occurring in the Buckhead and midtown submarkets, where we do not directly compete. Market rents in our submarket, specifically Central Perimeter and I-85 are trending up by on average 3 to 5%.

Occupancy is in our Tampa portfolio declined slightly from last quarter, but is still a very respectable 95%, and we continue to outperform the office market as a whole, which was 87.4% occupied at the end of the fourth quarter. The submarket, where over half of our Tampa assets are located, continues to demand the highest office rental rates in the area. We are seeing significant new spec office construction starts in the submarket.

A few weeks ago, we announced that we had signed a 25,000 square-feet lease at Highwoods Bary Center I with a major software supplier.

We started construction of this 208,000 square foot, $42 million Class A office building as a 100% speculative project in 2006, and it's now 78% preleased. We are getting higher rents than pro forma in our initial model and this project should be stabilized before the new product in West Shore delivers.

Occupancy in our Richmond portfolio climbed 92.5% at the end of December, a 70 basis point increase from third quarter, and 270 basis points better than December 2006. For the year of the Richmond office market absorbed close to 800,000 square feet, compared to negative absorption of 32,000 square feet in 2006.

Stony Point IV, which is 96% leased, was placed in service in the fourth quarter. This is our second development project in Richmond, North Shore Commons II started out slower than originally expected. But leasing activity has been picking up and the project is now 46% preleased. This is a significant improvement from the third quarter when preleasing stood at 17% .

Our Nashville portfolio ended the year at 95.1%, occupied up 350 basis points from December 2006. Net absorption of that market was 1.6 million square feet, compared to 908,000 square feet in 2006, and the healthcare industry continues to drive much of that market's growth.

We will place two of our three development projects into service in the fourth quarter. Our 255,000 square feet build-to-suit for Health Ways, in Cool Springs III, a 153,000 square foot total spec office building that is now 100% leased.

The third project, Cool Springs IV is underway and expected to deliver this and expected to deliver this fall. The Cool Springs submarket is one of the most vibrant and active submarkets within our system. Although new supply continues to be delivered, the demand remains strong, largely from Bergeron healthcare companies, such as Healthway and CHS.

Based on the level of activity we are presently seeing, we believe our markets will continue to enjoy healthy demand in 2008. However, we are mindful that prolonged economic uncertainty could slow activity.

With higher portfolio occupancy, and less spec development inventory, our leasing folks are highly incentivized to take care of renewals, re-rent vacant space, and preleased

Thanks, Mike and good morning, everyone.

As Ed noted in his opening remarks, we had a very solid year.

FFO per share for the fourth quarter was $0.65, with no unusual charges or credits. FFO for the full year was $2.77 as adjusted to exclude $0.04 in preferred stock redemption charges in prior quarters and $0.01 from a third quarter impairment charge. These results compared to $0.71 and $2.46 per share in the corresponding periods of 2006.

FFO from core operations, which we defined to exclude lease termination fees, land gains and any similar items was $0.64 this quarter, which compared to $0.56 for the fourth quarter of 2006, and $0.61 in the preceding third quarter of 2007.

For the full year, FFO from core operation was $2.40, compared to $2.20 in 2006, a 9% increase. These improvements primarily reflect growth in the same property NOI and contribution from new development deliveries.

Total revenues from continuing operations in the fourth quarter were up $8.6 million or 8%, compared to the same period of 2006. $2.2 million of the increase relates to same properties and the remainder comes primarily from development properties delivered late 2006 and in 2007.

The growth in same property revenues primarily reflects higher same property average occupancy, plus increases in average in-place rents per square foot. Total same property NOI, excluding straight line rental income and lease termination fees was up 2.4% for the quarter, compared to fourth quarter '06 and up 4.2% for full year '07 compared to 2006.

We were pleased that our total NOI margin for all properties increased from 62% in the fourth quarter last year, to 63.9% for this quarter, and for the full year increased from 63.2%, to 64%.

Three improvements result from high revenues and higher average occupancy and in addition, we are benefiting from a lower operating cost of a younger and higher quality portfolio and also from recent investments in such things as lighting, HVAC and energy savings initiatives. We continue to work hard in controlling both fixed and variable operating expenses. G&A for the fourth quarter of 2007, was lower by about $1 million, compared to the same quarter in 2006, just under $0.02 per share.

The fourth quarter decrease was due in large part to lower expenses from marking to market deferred compensation liabilities and phantom stock. For the full year, G&A was up $4.2 million or $0.07 per share. $0.03 of this increase was due to higher writeoffs and predevelopment costs, including several GSA deals that were short listed but not the winner. $.01 of the increase was from RBC residential condo marketing costs, which must be expensed under GAAP. And as we previously reported, all 139 condo units are now under contract with non-refundable deposits.

So future marketing costs will be minimal. Over $0.01 of the increase was from higher annual and long-term incentive costs, offset by lower phantom stock expense under deferred compensation and the net remainder of the increase is primarily from annual merit increases on salaries, increases in healthcare and employer taxes, and other inflationary effects on our G&A activities.

Interest expense and preferred dividends on a combined basis were up about $1 million or $0.02 per share in the quarter, compared to fourth quarter last year, primarily due to higher average balances quarter-over-quarter, offset by slightly lower average rates. For the full year, interest expense and preferred stock dividends combined were down $4 million or $0.07 per share, due to lower average debt and preferred stock balances year-over-year and from higher capitalized interests from our growing development pipeline.

Primarily, as a result of our recent refinancing activities and declining floating rates, the average -- the weighted average rate on all of our preferred stock and debt combined was 6.79% at year end, or 29 basis points lower compared to the end of 2006.

We have mentioned a very strong land sales gains we had in 2007, mostly in the first quarter. Going forward, we will still have more non-core land to sell, but the gains should be nominal. We do expect to generate gains beginning in late 2008, and into 2009, from sales of the residential condos being constructed in the RBC Tower here in downtown Raleigh, and we will include those gains in FFO.

On the building side, during 2007, we sold wholly owned non-core buildings for gross proceeds of $114 million, plus another $30 million representing our share of joint venture dispositions.

All told, including our share of the JV gains, we recorded gains on building sales in 2007 of $46 million or $0.75 per share, most of which is included in discontinued operations. As you know, building gains are not included in FFO. The FFO contribution from our unconsolidated joint ventures was $4.8 million for the quarter, and $19.4 million for the full year, up modestly from $4.5 million and $18.0 million for the corresponding periods in 2006.

We have recently been advised that our joint ventures in Des Moines, which we do not manage, and which are not audited by our independent auditor will be adjusting their 2007 financial statements to correct for the cumulative effect of using certain non-GAAP depreciation methods for building and tenant improvements in prior year. We record our share of their net income using information provided from our joint venture partner.

After we received the revised information from our partner, we will determine as part of the final conclusion of the audited financial statements, whether any adjustments should be made to depreciation expense, included in our share of income from the joint ventures.

However, because any such changes will relate to depreciation expense, there will be no impact to FFO. On the financing front in 2007, we paid off $92 million of secured debt, with a weighted average interest rate of 7.9%, which unincumbered $202 million of assets, based on undepreciated book value, and retired a total of $62 million of preferred stock.

Since embarking on our strategic plan in early 2005, we have unincumbered approximately 7 buildings today the portion of our total NOI that is not encumbered by secured loans is 58%, up from 51%.

Just about two weeks ago we paid off at maturity, $100 million of 7 1/8% of secured bonds. We used our credit facility to fund this pay down on a temporary basis. We are working on a $137.5 million three-year bank term loan that is expected to have the same covenants as our credit facility and bear interest of LIBOR plus 1.1%. The rate would equate to 4.3% using today's LIBOR.

We have received signed commitments from 8 banks and expect to close this term loan on these terms before the end of the quarter and use the net proceeds to pay down our revolving credit facility. Pro forma after the term loan closing, we will have $263 million of borrowing capacity under our unsecured revolving credit facility, plus another $70 million of capacity under a new revolving construction facility that we closed in December.

Given this $333 million in expected funding availability, combined with proceeds from additional planned dispositions and other potential capital sources, we are well-positioned to fund the approximate $190 million of development costs that remain to be funded as of year-end '07, and still have additional dry powder to take advantage of other investment opportunities that may arise.

In 2007, our CAD ratio was 97%, the first time we had been CAD positive in several years. We funded our CAD shortfall in prior years from land sale proceeds. Getting to CAD positive territory was a key initial goal in our strategic plan and we are very pleased to have achieved it in 2007.

We are projecting to remain CAD positive and to grow our free cash flow in future years that we can use to further grow our business. A few weeks ago, we issued our 2008 FFO guidance of $2.56 to $2.72 per share. FFO from core operations for 2008 is projected to grow from $2.47 to $2.57 per share, which at the midpoint is up 5% from the $2.40 we earned in 2007, on the same basis. As we discussed, 2007 was positively impacted from significant land sale gains, lease term fees and a gain from insurance claims settlement.

Land and condo gains and lease term fees are expected to be lower in 2008, but FFO from core operations is expected to grow meaningfully as our development properties are placed in service, and we reap the benefits of lower interest rates and higher average occupancy.

These gains will be offset in part by some dilution from the expected dispositions in 2008. Other assumptions underlying our 2008 guidance were included in yesterday's press release.

Now, I will turn the call back to Ed for his final comments.

Thanks, Terry.

In closing our scripted remarks, I want to spend two minutes talking about how we at Highwoods are looking at the future of our Company.

We recognize we have run a good race these last three years in meeting, and in most cases exceeding, the initial three-year goals of our strategic plan. However, as the old saying goes, if you find yourself enthused over yesterday, you aren't doing enough today.

The fact is that Highwoods our enthusiasm about tomorrow couldn't be higher. We knew there's no finish line business, so as we launch into a new year, we are setting our sights on continuing to raise the bar on many fronts.

This means working even smarter and staying energized. It means continuing to improve the quality of our portfolio, seizing opportunities, securing, anchor tenant and build-to-suit development projects and being prepared to tackle whatever challenges may face us.

Our strategic plan continues to serve as the framework for our future. It is a living plan that is routinely reviewed and updated by our management team and board.

We will remain true to the key tenants of this plan, and all that we do. This includes enhancing long-term shareholder value through the establishment of ongoing defined goals with quantifiable results.

Owning a portfolio of high-quality differentiated assets, maintaining a strong and flexible balance sheet, continuing to communicate consistently and transparently with shareholders, customers, directors, co-workers and vendors. Being deliberate stewards of our shareholders money.

Expanding on the last point about being quote/unquote deliberate stewards of our shareholders money, we take that responsibility very seriously.

We have worked hard towards building a strong platform to deliver significant long-term value for our shareholders and assure you, we will continue to be entrepreneurial, while taking deliberate and measured approach to all investment decisions we make.

The same approach we have been taking over the past three years. Finally, I thank and applaud all of my co-workers for their continued dedication, fortitude and hard work.

Thanks also to our board for their active involvement and ongoing support of the strategic plan. And, of course, to our shareholders whose belief in our plan and in this management team has been extremely gratifying and energizing. Operator, we will now open up the call for questions. [Begin Q-And-A]

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Jamie Feldman from UBS.

Great. Thank you very much.

I noticed on your NAV estimate, you raised the cap rate 50 basis point. Is that the future or is that what you are seeing already in the market?

Hey, Jamie, it's Ed. That's what we are seeing in the market.

We look at a lot of transactions that we consider for acquisitions. We try to monitor what happens within our core markets. We subscribe to real capital analytics for that data and we have seen about a 50 bps move.

And then if you would give a look at the future, do you think they go higher from here or is that as bad as it looks.

I think there's the potential for it to move from here.

We will have to wait to see what data points are out there. But as you know, the volume of transactions is off dramatically from what it was a year ago, less than half in the fourth quarter of '07 than in the fourth quarter of '06. So -- you know, we participated in some.

So we have been able to see, from what we sold. Columbia being an example, which was a very attractive cap rate.

We have looked at potential acquisitions and we have watched what others have done in the market, and talked with a lot of investment brokers. So from those four different sources, I think the information that we have is -- is fairly accurate, and, you know, time will tell what happens in 2008.

The important thing to remember with regard to RNAV pages that we provide all the statistical data for anyone to draw your own conclusions on what they think NAV should be.

We give a range of rates based on product type, but certainly all the data is there. So if someone has -- you know, if somebody believes that the cap rates are actually lower, they can compute that.

Great. Can you give us a little more color on your development outlook? You know, as the economy slows? I think last quarter, you mentioned that the competition for GSA developments has probably increased as the margins have come down.

As we look out to '09 and 2010, you know, where do you think you will be able to compete effectively? And where do you think margins go?

Well, I -- we have -- of all that we have started over the past three years, our blended stabilized cash return in year one is right at 99.1%, and the GAAP is at about 10. We don't think that we'll stray far from that in the next 12 to 18 months. I think a lot of that is dependent upon what the mix is.

Build to suit versus buildings that we build with an anchor tenant but have some speculative component to it. With regard to markets, I feel good about it, almost, you know cross the board. Of course, we still have an interest in exiting Winston Salem. We have said a number of times that we are keeping a watchful eye on Greenville, South Carolina.

We're out of Columbia, but at the other markets, we have land inventory and we will continue to pursue strategic in-fill locations and those locations that we think would be the last to turn down and the first to turn up in tough times.

Okay. Thank you.

Thank you, Jamie.

Your next question comes from the line of John Guinee.

Hi. Hi, Ed. Did Virginia beat North Carolina last night?

They did not. A good effort, though.

Yes, thank you.

One quick question and I have to ask this. Everything else looks good, trending in the right direction, except the dividend. You guys are CAD positive. What's your plan for that?

We feel with regard to the dividend, we will hold tight where we are with $1.70 per year. We expect to be cash positive again in 2008, and if our models - forecast models work, that free cash flow will grow as we get into '09 and 2010.

So for right now, I think that, you know, holding the dividend at $1.70 is the appropriate thing to do. And obviously, you know, like everybody says -- and we certainly do, you know this is a topic that is discussed with our board. I think that, you know, it's important for to us have some flexibility right now to take advantage of some opportunities that may come our way.

Okay. And the second question, in terms of land inventory, you clearly need to have some in order to fund your development pipeline, and build to suit and be available for the right opportunities.

What is your overall strategy as a percentage of total assets in terms of ability to carry them and how do you look at that? And then how much of your land are you expensing the cost and how much are you capitalizing right now?

Terry, let me say something generic and then you can be more specific on the accounting aspect. John, with regard to the land, we have called a lot of it out.

We still have some more to go with regard to what we want to sell with regard to non-core versus core. We break that out in the supplemental what we feel is core.

We think that having good land positions that enable us to have a competitive advantage when there are build to suit activities or anchor tenant opportunities or even the better spec product that you can put online is important.

So we'll have some of that, but we certainly won't blow to where we were in the past by any means. Terry?

And I would say, as a percent of our total market value of our total company, you know, having a land inventory somewhere in the maybe 2 to 3% range makes sense. And, you know -- and I think right now we are right in that sweet spot.

Okay. And then of your 150 million plus or minus in land, which I think you quoted at market, how much of that are you capitalizing to carry and how much are you expensing?

We don't capitalize any carry costs, John. The carry costs would be primarily property taxes.

So that is all charged to expense currently. And Mike -- I don't that exact. I think $1.5 million to $2 million a year.

How about your interest carry?

Interest carrier is also expensed. We don't capitalized interest on land until it's placed in service for a development project, and then once that starts then we capitalize interest on the land and any other building costs until complete.

So if you are actively marketing, which is sort of a nebulous term, you are expensing your interest on your land?

Yes. Even for marketing, we are not capitalizing any imputed interest carry. And none of the raw land is covered by a secured loan. It's all unencumbered land. So there's no direct interest in event but even the imputed interest is not being capitalized.

Very conservative. Thank you.

John, one other footnote with regard to land. You may see that market value move from time to time.

We periodically evaluate the value of our land, but the -- the movement in value quarter-over-quarter or year-over-year is more driven -- because we take a pretty conservative tact, I think with regard to how we valuate it. It's more on where we are in the site planning phases.

If we are able to garner a better site plan that generates a higher density that we think suits the land better, that could drive the land value. Or if we put infrastructure in place, like Bay Center in Tampa. We have infrastructure in place for Phase 2. That enhances the land value. I don't want to you interpret that where growing land value is just based on square footage market caps. We are not changing FAR's - value of FAR's. We are modifying density and infrastructure.

Great. Thank you.

Thank you.

Your next question comes from the line of Michael Bilerman from Citi.

Yes, you are looking at the portfolio and the asset sales. You have done a tremendous amount - $750 million over the past two years. You set a goal of another $300 to $600 million for the next two to three years with $150 to 200 this year. I think in your opening comments, you said these are not as curb challenged as the previous ones you sold.

What does the portfolio get to as far as average age. What characteristics have when you are done with this next 300 to 600, in terms of what you are left with.

First of all, congratulations, Michael on your announcement from everyone here at Highwoods.

Thank you.

You're welcome. Well deserved.

Second, with regard to -- it's a fairly broad question and, you know I don't want to give you too limp of an answer on that -- with regard - it really depends on the asset. But if we are in the best submarket and we have one of the best assets in that submarket and if it will perform well over time, you know, the age doesn't worry me that well because it has certain insulations given where it is and what it is.

But what we have sold clearly the average being 21, 22 years of age. We started to get into a lot of CapEx needs and they were aspects of the buildings that were functionally obsolete, but we also sold off a fair amount of flex space. So I think the -- the largest component of that pie would be flex. We made a -- a very defined decision that we wanted to be out of flex and that -- that certainly was a significant component of the $750 million.

Once we get through this next tranche, as you said, the 3 to 600, I think that -- and we have said this a number of times that as long as we own 10 buildings, we ought to look at number 10, is it something we ought to keep or exchange it for a one, two, or three.

And when you think about this, are you going to lower the industrial or the retail when you think about 300 to 600?

I would think that there's a prospect for us to cull out some of the non-plaza retail potentially, and the industrial -- we really pulled back to two markets now. We have Greensboro, North Carolina, and Atlanta. I think as a percentage it would stay in proportion to where we are right now with the overall holdings within the portfolio move.

Right. Terry, maybe comment a little bit on the balance sheet by swapping the fixed rate for floating rate piece . Your floating rate debt will rise further, which given where rates are is not a bad thing from an accretion standpoint.

Can you just talk through what your plans are on the balance sheet through this year, in terms of more fixed rate

Yeah, sure being Michael. At this point, with those bonds paid off, there really are no additional debt maturities to deal with in 2008, and in 2009, looking out two years, we have 50 million of bonds coming due in early '09. They are currently at, I think 8 1/8 percent.

A fairly high rate. I'm looking forward to getting those paid off. And then late in '09, we have some secured debt coming due which carries a rate of 7.9%, also well above market. The next two pieces of debt that we have to deal with are both in '09 and both of them have above market rates.

It will be good to get both of them refinanced in some way. We do have a little bit more floating rate debt as you point out. We have entered into a few small swap agreements to fix the LIBOR on a piece of that, but we are comfortable with the floating rate exposure that we have now, given where we see interest rates going and, you know, indications of that from the swap market.

So right now, we are quite comfortable with that and really have not much to do until we get to next year.

So now you have time to try to fix up debt further in terms of reducing the credit line further, because you are probably low 20% floating rate debt?

We will consider those things, Michael. We haven't made any decision, but we -- you know, we could enter into additional swaps to take -- to basically fix the floating rate, but that's certainly an option for us.

Right. Just a quick question on the NAV page, which is extraordinarily helpful.

There's a line in the other assets, assets not fairly valued by NOI capitalization, it's about $205 million, what's -- what's embedded in that?

What that is -- our methodology is to take the cash NOI projected for next year -- as a starting point, but some of the buildings, the cash NOI for next year is really not reflective of what the annualized cash NOI would be. There might be some free rent next year or prelease -- maybe it's prelease, but the leases are not scheduled to start until halfway through the year.

So just taking the projected cash NOI for '08, doesn't really give you the appropriate value. We go through our portfolio for property by property, and where we have a situation where the numbers don't make sense, we will take a look at that.

Maybe we'll put in a pro forma cash flow or utilize a deferred -- or, I mean, a discounted cash flow approach to come up with the number that we feel is more representative of what the value is - rather than just taking the cash NOI from the budget and applying the cap rate to it.

We won't do that on a 2500 square foot lease. These are -- this is probably less than a handful of buildings that comprise this, and -- and the -- the component has to be very significant in order for to us do this. I don't want you to think that we go suite by suite, building by building.

Could you give us a sense of how much cash NOI that $200 million of assets represents and just what the square footage is so we get an idea of what's being stripped out.

I think it's about five to ten buildings all together. I don't have the exact number, Michael, but it's not a significant part of the overall portfolio.

Okay.

And one other point worth making is it does have to be where a contract is in place. This isn't hypothetical lease up. There has to be a fixed, firm, agreement in place in order to make that happen.

Okay. My final question, just on the development that was delivered in the quarter, the fourth quarter, that -- is that average 9% cash, 10% GAAP for the ones that actually got delivered in the fourth quarter?

I'm quickly looking at our deliveries. Yes. Yes, they are in line.

Yes, I would agree with him.

Okay. Thank you very much.

Thank you.

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

Just wanted to go back to the asset sales on the $300 to $600 million. How are you guys thinking about, you know, potential, you know, dilution from those sales and how are you thinking about relative to the -- you know, your dividends.

How are you going to go about thinking about whether or not to go through with selling those assets?

David, it's Ed.

We have taken the potential dilutive effect into consideration when we gave 2008 guidance. We're trying to make these decisions in keeping with our -- you know, the key tenants of the strategic plan with regard to these being strategic decisions and not financial decisions.

So like Winston, which we talked about a fair amount, the assets that we have there aren't necessarily terribly bad, but there hasn't been a for leased building built by us or any other landlord in that market since 2000/2001, which to me is representative of a market that doesn't have a lot of future rent or development opportunity to grow.

We are looking at these as strategic decisions. We will deploy the proceeds in an accretive manner. I think, you know, based on what we have with the change in cap rates, we may not get as aggressive pricing as we received in the past but I think the deployment of the moneys will -- will be appropriate with regard to a balance of -- of development, maybe acquisitions and we still have some things that we could do on the balance sheet with regard to preferred stock. And then from, like, pure CapEx perspective, these older assets typically are -- are maybe slightly FFO dilutive, but they are CAD accretive.

Okay. That may not be -- I guess my question is, that may not be the case six months from now or a year from now. How will you take that into consideration.

It sounds like you wanted to get out of a lot of these markets, I wouldn't say irregardless of, you know, the FFO, impact. And I just wanted to kind of get a sense of whether you would be willing to kind of accept that cash dilution as well?

I do think that we will take a little bit of gas in order to get strategically where we want to be.

Okay in terms of -- you talked about you have been bidding on a bunch of deals and so are you how evaluating, you know, the IRRs? Have you changed your hurdle rates at all.

We haven't -- we haven't changed our hurdle rate and just sorry semantics but not necessarily bidding on a lot, but looking at a lot. The majority of what we have looked at, we have chosen not to bid on, but we have -- we have bid in certain instances.

We make sure that when we do decide to bid, that there's a careful balance of it being a strategic play, it being accretive, and where we are being guided by the listing brokers with regard to replacement costs, versus pricing.

And how are you -- so what type of unlevered returns are you guys trying to solve for?

We don't look at -- at IRRs in maybe the same way that's an investor does. Typically when we buy or build, we are looking for the long haul and not what will be our exit cap rate in 10 years and so forth. We tend to look at what the returns will be relative to our cost of capital.

We want to make sure that whatever we do will be accretive for us going forward and generate long-term value.

Okay. Just --

David -- sorry, just one more clarifier. In that we are -- you know, we are bidding on some of these things, we are a little bit reluctant to give out too many statistics because we are in a competitive environment right now with other bidders. For example, if we say we wouldn't do anything less than a 7.5, that could work against us in a couple of shops right now, where we are looking at some one off assets.

Okay. And just a quick question on the CAD payout, for 2008, does that include RBC, meaning, are you going to be able to cover CAD through just your core properties.

We expect to, yes, David, the RBC condos should be $3 or so million at the mid-range. 3 to 3.5 in 2008. With those gains obviously, there's more of a cushion. Without, we still expect to be CAD positive, but the cushion will be more narrow.

Okay. Just in terms of how you are accounting for those condos, that's not a percentage of completion, but as you sell the unit.

Yes, we looked into that and because of the size of the downpayments and so forth under GAAP, we -- we would be using the completed contract methodology.

So those gains won't get recorded until closings start, which are scheduled, I think in the fourth quarter of '08 and then we'll continue on into the first part of '09.

David, as we said, and I think Michael said in the script, we are 100% under contract with those. The earnest money is hard.

It's 5% on those who attested that they would be residents and 10% who attested that they would be investors and only 27% are those who attested investor. We have $3.5 million non-refundable deposits and then we have another about $400,000 in non-refundable money that people have given for upgrades to their units.

And we are 100% under contract in third quarter '07 and we are 100% under contract today.

Thank you.

You're welcome.

Your next question comes from the line of Lou Taylor from Deutsche Bank.

Good morning, guys.

Mike or Ed, can you give us a sense of what the development yields were on the Q4 delivers and what do you expect in the average for the pipeline.

They were pretty much in sync with the 9% stabilized cash yield.

Great. That's for the pipeline as well?

Yes, the -- the overall pipeline, right, that's exactly right.

Okay.

There is some lumpiness in there. The build to suits are a little bit less than the multi tenants.

Sure.

And then second question just pertains to the deposits on the RBC plaza condos. I mean, how big are those deposits? You know, what would people be walking away from? And how many people do you have on the waiting list?

It's about $3.5 million.

Those who attested to be residents were asked for 5% and those who attested to be investors, we asked for 10% and the mix is 27% investors and then there's another $400,000 plus or minus of monies that we received as non-refundable for upgrades that people have asked to be made to the finishes in their units. So in total, about -- about $3.5, $4 million.

The average price unit, Lou, just a shade over $400,000. So you are looking at the deposits that are $20,000, lets say on the low side. And the higher priced units could be up to $70,000 in terms of the average earnest money deposits.

Last question for you Mike, in terms of Raleigh, you did gain a 550 basis points of occupancy, yet your same store NOI really only grew by 200 bits. Can you reconcile the difference there?

Yes, hang on one second.

Primarily if you look at it year-over-year, back in '06 when we had a bankruptcy settlement from a former tenant in the fourth quarter and that was significant. That's not there in '07. So that was the big spread between NOI year-over-year.

Great. Thank you.

Thank you. Your next question comes from the line of Chris Haley with Wachovia.

Good morning.

Hi, Chris.

A couple of questions. First, in the fourth quarter, at the volume of leasing commissions was down significantly, and the year-over-year, full year leasing commissions paid were down about two to three times the amount of leasing was actually executed in '07 versus '06.

I would like your view on why the fourth quarter commissions were so low and the full year, and kind of get your look into '08. That seems to be the major variance in terms of helping the FAD numbers get up to where they were.

Chris, the leasing commissions really don't vary as far as what we pay in the market from market to market. Atlanta is the only one that's a bit unusual in that they still have that pro rate the fee.

What really drives this number is how much we do in house with our people, versus brokers, tenant brokers. So we have renewals where we can manage it in-house, then we do that. And when we interact with the brokerage committee, we do that as well.

Now, the -- the deal that Mike talked about with regard to the AT&T renewal. Half of that commission was paid in '07 and half in '08.

Okay. So by our calculations, aggregate commissions paid were down by about 30% in '07 versus '06. Yet aggregate leasings volume was only down about 10% to 12%, which would imply a much greater percentage of either renewals - and/or in-house deals. Could you provide any commentary in terms of '08?

It's -- you know, it's tough to say. We have forecasted that we would use brokers more often than not. You know, time will tell.

It's difficult to project when a customer will come back and say, we have engaged on a national basis ABC brokerage house out of you know, Xville and, you know, we sign up and we deal with that.

So I think that a lot of it is dependent on how the customers do it. But we haven't changed anything with regard to our customer relations that would cause it to be different, dramatically different in '08, versus in '07 or '06, which I know you said was higher.

But our people, our leasing folks make more money when there's not an outside broker involved.

Chris, also I think there's clearly been a trend of the national brokerage firms that have tried to push for higher commissions, particularly on renewals that in most of our markets, it was caught, 4% on a new deal and 2% on a renewal and we have seen the big push by many of the firms to go to a full 4%.

We have resisted and tried to hold in line with that, but given the size of the transaction and the tenant, if they are pushing hard, we'll occasionally cave.

Is there anything -- one of the risks -- this obviously can be viewed as a positive in terms of the greater number of direct deals versus broker deals, yet we have run across the situations where relationship between brokers and landlords can sour based upon activities of certain companies and their friendliness to brokers. How are you -- is this a -- should we expect to see a lesser increase in leasing commissions paid versus volume of leases?

I don't think so. I think that there's two things.

One, we really do encourage our leasing folks to get out to our customers early and often and stay in touch with them throughout the term and in that case, if we got a good relationship, often times the tenant will like to go direct with us and not feel the necessity to go to a broker.

On the other hand, most of them have affiliations with national firms and irrespective of that relationship, they are going to be involved, may or may not add a lot to the transaction, but we'll still be obligated to pay that commission, if the tenant suggests it.

And we try to foster a broker friendly environment, where we have programs and we put them in place sometime ago where we want -- we call it sign, sealed and delivered, where we will pay a broker their commissions that's due long before it's due.

We try to tie it as close as the lease signing and the commencement of the lease as possible and we certainly host more than our fair share of broker functions and our brokers spend a significant amount of time with the brokerage community. The tone from the division head is broker friendly.

We also send out an annual broker survey. So we listen to them. We get their response back.

We have an idea where we may have issues with brokers and we do reach out to them and try, as Ed said to foster good relationships there.

That's very help full.

Maybe we could do this offline, but I would also like to reconcile the capital expenditure page in terms of those leasing commissions paid, verse us the committed numbers -- the commissions targeted to be paid on a per foot basis in the fourth quarter were up well over trends. Maybe we could do that offline as well.

Yeah, just as a -- Chris, this is Terry. The leasing commissions that show on the -- on page 2, which is the components of how you get the CAD are based on actual cash payments and not leases actually committed in that period.

Right.

You do have timing effects. I think that's what we are dealing with is just timing.

You know, as Ed and Mike have both said, the actual trends per square foot on commitment have not really changed but the timing of when you make those payments can vary. If you do some large -- single large deals, the commission on a -- on a multi year, large deal can be very -- can be very substantial. And, you know, you can have one of those in one quarter and not the other.

That number can get lumpy quarter to quarter, but over the long term should stay relatively consistent with the amount of leasing being done.

And in the fourth quarter, as Ed mentioned, the AT&T transaction in Atlanta was the driver of commissions being up in that quarter. That was a 220,000 square foot transaction, multi year. So that was the big number there.

Thank you. Terry, keep you on the seat.

The core number you mentioned was 247 and 257, up 5% which is what you outlined a couple of weeks ago.

If you could help me understand where we were versus 2007, on the core numbers, and looking at the fourth quarter run rate, annualizing that with a little bit of earnings growth, plus development, plus the potential up side from this refinancing. Can you give me a sense as to what type of -- what type of items would bring you down to the lower end of your range, which we're having a difficult time to get to?

We did put in for the core FFO next year impacts for dilution, because we do expect to have sales.

And I don't know whether you factored that in or not .And I think that might be one thing that could be the difference. We --

Will it be -- will the developments be offset by sales?

Not entirely obviously, because we are still having positive core growth year-over-year.

If it weren't for dispositions, there would be even a greater growth than what we've projected, obviously.

All right. Thank you.

Thanks, Chris.

Your next question comes from the line of Cedrick LaChance from Green Street.

Ed, in selecting the cap rate to use for your NAD page, how did you think about some of the transactions that have not closed? And in particular, if you think your Winston-Salem portfolio where you didn't get the type of pricing that you expecting, what is that telling us about, where the market prices are going at this point?

We did take that into consideration and what we tried to come up with is a fair blend of our best assets and some of our worst assets.

So the numbers on that -- it wasn't so much the numbers that we saw coming in, but it was just that -- the contingency is tied to it because it was such turmoil in the capital markets is what gave us pause from the lenders side.

So we felt until prospective buyers could get more clarity on where the debt was coming from, that we shouldn't participate in that scrum for now. You know, let's back up and wait to see what happens. So Winston-Salem, clearly a tertiary market. We knew it would be a struggle more so than other assets that we sold because of the blend.

There is some very good product in it and then there's some lower end product in it that we didn't want to bifurcate out. But we took into consideration what we are seeing inclusively of what we closed in the fourth quarter and inclusive of some other things that we have under contract aside from Winston-Salem that we would expect to close in the first half of 2008.

Okay. In regards to Winston-Salem, is it fair to assume that the cap rate, where that's been on that transaction is well in excess of the high-end cap rate used on NAV.

I would say that we need to stick to what we said in the past about us not putting out too much information, because when we do, we end up negotiating against ourselves.

So I answer your question, prospective buyer hears my answer, and then I'm in the negotiation room and I hear my answer again. So I'm -- I know that's not the answer you are looking for, but that's how -- that's the hard lesson we have learned in the past.

Okay. So your NAV range, the low end is $42 a share, your stock trades at $29, $30 a share. Isn't a buyback the best option for your capital right now?

This is Terry.

We continue to run those numbers and we still believe that building -- or using our capital that we have, when we have development opportunities that we do, is probably for us the best source of our capital. You know, we have brought in many times in the past, some operating partnership units for cash which is a little bit of a stealth equity buyback.

It doesn't get the publicity that it has over the last two years or so.. But at this point, given what we still believe are some decent development opportunities, and the GSA initiative, we feel that that's probably the best use of our capital at this time.

It's not something that we don't ignore. We do think about it. But we're comfortable with where we are today.

In 2007, we redeemed about -- between '07 and what we have done here to date, almost 1 million operating partnership units.

In your guidance for next year, you expect to acquire as much as $200 million worth of building. Would you still consider acquiring assets instead of shares?

I think it's important that we be very -- as I mentioned in my postscript remarks, that we be very good stewards with this money that we built in the way of dry powder and if there's opportunities coming our way, then we need to be in a position to take advantage of those for strategic and long-term shareholder enhancement opportunities to -- you know to buy back the stock today, it's real hard to go out -- not hard, but it's very expensive to go out and raise that equity again.

So I think that we need to to be selective and strategic and be additive to the franchise with how we -- how we deploy these dollars.

All right. With your stock trading at an implied yield of 8.8%, it will be hard to find anything in the market with higher yields than that. You mentioned that -- so -- you mentioned that land prices haven't really moved yet.

But, of course, your perspective on cap rates moved up about 50 basis points. How is it that land prices have yet to move? Is there a lot of reluctance on land sellers or is there just not that many transactions?

Well, I think there has been movement on land, but -- and I'm kind of speaking out -- a little bit out of school here, but from our perspective, the land prices that have moved are the large single family tract sites that are -- that are not of interest to us for our product.

The core in-fill locations that we're seeking that we consider to be premium sites have -- have held their value, if not inflated, and one of the reasons for that is because of all the recent transactions that have occurred where land was bought and then improvements were made upon that land and then the tax assessors came in and used all the sales comps to value those parcels.

As a result, those family entities or other entities that old land now have -- have a very high value in their minds of what that land is worth. So we haven't seen that come in our direction, really whatsoever.

Particularly for the in-fill pieces that we would be interested in.

Specifically for that. Because we really -- we are really not looking to go all the way to the end of the existing market, and buy the next 100 acres of land and, you know, build it and hope they will come to it.

Okay. Final question on your retail leases that rolled over in the past quarter. You had the decline in rent.

Can you help me understand if there's anything specific about those leases and explain that performance?

I think -- this is Mike. If you look at these transactions, most of which are at the plaza, you are sitting here at 96% leased. These are smaller transactions, number one.

A little bit of a Cinderella story, and the amount of TI dollars that are required and then the rates. You are basically trying to back fill a space, probably not with a national tenant where you could command that.

So it's not -- we don't think it's certainly that's indicative of a trend there that we have seen, but again, the size of the transactions that we did there were pretty small.

What is your best guess is the embedded NOI of your retail portfolio? The NOI growth if you were to lease all the space at today's market rate?

We would have to do that math. We can do that and give you a call back offline, Cedrick.

Thank you.

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

Hey, guys. Just looking at the occupancy gains in the fourth quarter, they were pretty impressive.

It looks like a hundred percent of those gains came in Raleigh, Nashville and Triad. I wonder if you have any visibility into where you see -- you know, if you hit the high end of your guidance of is hundred basis point increase and occupancy in '08. What markets might those come?

Obviously, Greenville if we are up 10% from a year ago in Greenville, but still mid-80s so there's clearly room in Greenville.

Kansas City, although it's probably one of the tougher office markets overall that we're in, so I wouldn't expect a significant amount there.

Raleigh, we do -- we do have opportunity we have some rolls that we need to take care of with very good prospects, but hopefully, there's some up side there.

And we care of - well, for example, in Atlanta, where we had our expiration come up in '08 - we took care of a substantial amount of that already. That was the Nortel back fill. Raleigh probably has, in terms of just rollout, you know this year a pretty good bit of that and already seeing good activity on a portion of that. So I think that's probably the one market where you would see - going down earlier in the year the pickup towards the end of the year.

Okay. That's helpful. There was some -- you know, you guys talked about leasing commissions for a while earlier. I'm looking at second generation TIs were down about half.

They were in fourth -- in fourth quarter, they were about half of what they were the previous two quarters and I think that they were in the $11, $12 million range in the second and third quarter was a big factor in -- in AFFO not covering the dividend.

Do you have any visibility into what the second generation TIs -- you know, what those levels could be if you saw occupancy increase 100 basis points in '08? They ran 30 -- you know $38 million in '06 and $36 million in '07, but were only $5.5 million in the fourth quarter?

This is Terry.

We have always felt that for every 100 basis points in occupancy growth, which is about -- close to 300,000 square feet, that we would need somewhere in the range of 6 to $7 million in leasing CapEx to generate that additional occupied space, because by definition, that all has to be new leases.

We are increasing our occupancy and on newer deals, the CapEx is closer to $20 a foot for office. You know, all in. So 20 times 300 is about that $6 million for every 100 basis point of occupancy.

I guess if I add to that, everything that expires this year and assume you resign it all, figure out that number of square feet.

Yes, and that obviously depends on the mix of renewals versus relets.

Right.

Because obviously the newer tenants are more expensive and that's somewhat hard to predict but you could probably look at the average that we have in the supplemental to give you a reasonable run rate on that.

Sure. Okay. Thank you.

Thanks, Wilkes.

(OPERATOR INSTRUCTIONS) At this time, we have no further questions.

Okay. Thank you, Stephanie, and thank everybody for calling in. Please feel free to call us with any follow-up questions and those of you who we committed to do some math on, we will certainly do that and give you a call back. Thank you.

This concludes today's Highwoods Properties fourth quarter year end conference call. You may now disconnect.