Highwoods Properties Inc (HIW) 2008 Q1 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to the Highwoods Properties first quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (OPERATOR INSTRUCTIONS). I would now turn the call over to Tabitha Zane. Ms. Zane, you may begin.

Thank you. And good morning, everyone. If anyone has not received a copy of yesterday's press release or supplemental, please visit our website at www.Highwoods.com, or call 919-431-1529 and we will e-mail copies to you. Before we begin, I would like to remind you that this call will include forward-looking statements concerning the company's operations and financial conditions, including estimates and effects of acquisitions, 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, 2007, 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 risks of FFO and NOI can be found towards the bottom of yesterday's release and are also available on the investor relations section of the web at www.Highwoods.com. I'll now turn the call over to Ed Fritsch.

Good morning, and thank you for joining us today. Terry is out with the flu, and despite his insisting on being here today, I pulled rank and told him to stay home, drink chicken soup and keep his fever to himself. But Dan Clemmens, our CAO is pinch hitting for Terry and Mike Harris, our COO is on the call with us. I'm pleased to report that 2008 is progressing well. FFO for the quarter was $0.71 per share and FFO from core operations increased 17% year-over-year. In the first quarter, we experienced solid leasing activity, adding one more project to our accretive and well leased development pipeline and expanded an existing development project. Also, on April 3, we acquired through a 25% joint venture, an office park in a strategic Raleigh location at a 9.2% unlevered return, which includes our anticipated management and leasing fees. We have raised the lower end of our 2008 FFO guidance by $0.04 to $2.60 per diluted share, while the upper end remains unchanged at $2.72 per diluted share. We remain comfortable with our year end up occupancy forecast at between 92 and 93%.

During the first quarter, we leased just shy of 1 million share feet of first and second generation space. Occupancy increased 50 basis points from year-ago, but did drop sequentially, as we had forecasted. In March, we announced plans to develop Highwoods River Point, a $10.4 million, 200,000 square foot industrial building in northwest Atlanta. We have preleased 100,000 square feet of this project to Beverage House and we have good activity on the remaining space. This is the first building to be built on this recently acquired well-located 122-acre industrial tract. This tract will support approximately 1.3 million square feet of industrial space in total. We also announced in March that the FAA is doubling the size of the build to suit awarded to us last June from 50,000 square feet to 100,000 square feet. This project is located in the Highwoods-dominated Trade Port, an office and industrial park adjacent to Atlanta International Airport, and is being built on land we already own. As many of you know, Trade Port is a strategic infill location that is becoming increasingly important, as traffic in America's busiest airport continues to grow. We currently own 622,000 square feet of Trade Port, including three office and five industrial buildings. Four development projects were placed in service this quarter. Berkshire in Orlando, Glen Lake Four in Raleigh, HH Greg in the Triad and the office portion in Cordova in Kansas City. These four projects, these four properties increased our in-service portfolio by 330,000 square feet and are on average, 89% leased.

Our development pipeline now stands at $343 million and is 69% preleased. We continue to take a very measured and deliberate approach in analyzing the feasibility of any new project. We are conservatively opportunistic, as illustrated by the success of our development activity over the past few years. Before green lighting any new development product, our senior leadership team and the investment community of our board carefully review all aspects of the project, such as whether the site is an infill location, a long-term viability and strength of the submarket, where the project will be built on land that we already own, and whether the projected yields justify the investment. The nine projects scheduled to deliver this year and next are on average already 62% preleased, with anticipated stabilized first year cash yields of approximately 9%. We're also very pleased with our recent acquisition of The Forum, a five-building office park with structured parking in North Raleigh. These assets are on average 13 years old and 90% leased. This acquisition was made in concert with DLF, our long-standing JV partner for $113 million with Highwoods contributing $11 million in equity for a 25% ownership stake. The JV also closed on a $67.5 million, 66-month secured loan at a fixed rate of 5.13%. We were able to buy The Forum for $178 per square foot, well below replacement cost of approximately $200 a square foot. In fact, an office building across the street sold for $214 per square foot less than two years ago. That building is younger, but has surface, not deck parking. The Forum is one of the best office parks in North Raleigh, and is in a vibrant submarket in which we previously did not have a presence. Another positive for Highwoods is the 9.2% first year stabilized unlevered return.

We remain active in the hunt for acquisitions that will strengthen our franchise, enhance our portfolio, and generate long-term attractive returns. Of course we continue to approach this as we do any investment decision, measured and deliberate and as good stewards of our shareholder's money. We recognize these are uncertain economic times, with constant chatter about high gas prices, job loss, recession and the like, yet at this point while our markets are feeling the impact of these events, it is not as severe as what we are hearing about in some other parts of the country. All of our markets with the exception of Tampa reported positive job growth in the first quarter. Our customers are taking more time to make decisions, but they continue to lease space. We are not seeing an increase in the number of companies looking to get out of leases early, or putting significant blocks of subleased space back on the market. Our property managers and maintenance techs are not reporting the tell-tale signs of business contractions, such as empty cubicles, delayed rent receipts and half-empty dumpsters.

In recent investor meetings we have been asked about the differences between this cycle and the last one. In the last cycle, we witnessed significant contractions among many high tech firms. They leased significant blocks of space, typically more than they ever needed and left the same way, wreaking havoc in their wake. This time around, the markets haven't experienced the same degree of overconsumption of space. This cycle is also different for Highwoods. When we rolled out our strategic plan in 2005, one of our primary goals was to own a higher quality portfolio in strategic infill locations that would provide us a more stable source of cash flow, particularly during times of economic uncertainty. And that's what we have. By selling $750 million of older non-core assets and delivering nearly $500 million of development in strategic locations, we have transformed our portfolio by 35%. For the most part, we have a very good product and strong, highly desirable submarkets.

We also focused on strengthening our balance sheet and improving our financial flexibility. We have no debt maturities in 2008, limited maturities in 2009, and ample dry powder to be opportunistic. This puts us in a position to make strategic acquisitions in properties such as the Forum, become available. We are pleased with our first quarter results and are comfortable with our FFO guidance of $2.60 to $2.72 per share. With a better portfolio and a stronger balance sheet, 2008 should be a good year for Highwoods. FFO from core operations is growing at a solid pace and is expected to increase approximately 5% over 2007. Same-store cash NOI is projected to be positive and $201 million of new development will deliver. As a company, Highwoods is better prepared towards a down cycle and we are closely monitoring activity in every one of our markets. Overall, we believe in the strength of our markets, the quality of our portfolio, the flexibility of our balance sheet and the excellence of our people. Michael?

Thanks, Ed, and good morning, everyone. As Ed mentioned, we had a good quarter, leasing just under 1 million square feet of first and second generation space. As forecasted on our last call, occupancy did drop sequentially, primarily due to several industrial lease expirations and it may drop very slightly next quarter. However, we remain confident that occupancy will pick up later in the year and by year end, '08 average occupancy should outperform '07. While not officially a first quarter event, we were very pleased to have recently extended our lease with PriceWaterhouse Cooper's in Tampa. As stated in our press release, PWC recently leased an additional 11,000 square feet, and also agreed to extend the term of their leases for 312,000 square feet from mid-2010 to mid-2013. No concessions were made for the remainder of the original lease term, and the three-year extension was consummated with nominal TI of $4.12 per square foot and 4% annual escalators. This extension reduces our 2010 expiring annual revenues as shown on Page 19 of the supplemental, from 13.8% to 11.8%.

Looking at some data points for the quarter, average in-place cash rental rates across our portfolio rose 4.6% from a year ago and average in-place cash rental rates across our office portfolio were up 4.3% from the same period a year ago. CapEx related to office leasing was $7.80 per square foot in the first quarter versus the five-quarter average of $10.61 per square foot, reflected on Page 13 of our supplemental. In our top five office markets, construction as a percent of total market remains steady at 3%, although we have seen a modest increase in new construction in a few of our markets, which I will address in a moment. Raleigh, Richmond and Nashville, all reported healthy net absorption for the quarter, while Tampa and Atlanta were negative. I'll talk about each of those markets in detail.

Starting with Atlanta, the office market ended the first quarter with an occupancy rate of 87% and negative net absorption of 368,000 square feet. Our Atlanta office portfolio is 88.6% occupied, which is down from the fourth quarter, due in part to the 246,000 square foot Nortel expiration, 91% of which was immediately back filled, leaving 23,000 square feet vacant. Tampa had negative net absorption of 805,000 square feet in the quarter, and the market's overall office vacancy crept up 60 basis points to 13.2%, as the local economy continues to weed out unstable businesses, particularly those related to residential real estate. Year-over-year employment growth in Tampa was also negative. New construction submarkets such as West Shore and East Tampa is also inflating Tampa's overall vacancy rate, with inventory outpacing absorption. This is more problematic in the East Tampa submarket, where multiple spec office buildings were being delivered in a relatively close timeframe. This should not have any significant impact on Highwoods, as our sole East Tampa presence is in Highwoods Preserve, where we are 100% leased with no near-term expirations.

In West Shore, there is 550,000 square feet under construction and it is only minimally preleased. Most of these projects won't be available for occupancy until late this year, and into '09. For Highwoods, this is somewhat of a silver lining. First, our one development project in West Shore, Highwoods Bay Center 1, delivered last year and is already 85% leased, with prospects for the remaining space. Second, there is a substantial gap between first and second generation rental rates, keeping second gen asking rates pretty firm and providing us with some insulation from competitors rating our existing customers to move to new development. Occupancy of our Tampa portfolio is a very healthy 94.7% and these current weak market conditions don't deter our long-term belief in Tampa as a core market. Raleigh reported positive absorption this quarter, slightly over half a million square feet.

Occupancy in our Raleigh portfolio increased 370 basis points year-over-year, but dropped sequentially, primarily as a result of GSK's 91,000-square foot lease expiration. We have already backed out 79% of this space with minimal leasing CapEx and no down time between leases. Raleigh continues to post strong employment growth with the 2.1% increase from March 2007. Overall, new construction is higher than we would like to see. The new product that we compete with is 3.7% of the market. But new starts have slowed dramatically. We have almost $160 million of development under way in Raleigh that is 60% preleased and good prospects for a significant portion of the space, remaining space. Construction on RBC Plaza is proceeding very well and RBC Bank is expected to move into its 130,000-square foot headquarters in late third quarter. The time -- excuse me. The frame for the building's landmark top hat was put in place last weekend and RBC Plaza is now the tallest building in Raleigh. Occupancy in our Richmond portfolio climbed to 93.5% at the end of the first quarter, a 100-basis point increase from the fourth quarter and 370 basis points better than 1Q 2007. The Richmond market reported positive net absorption of 121,000 in the quarter and occupancy in the overall market is 90%, up 60 basis points from year end and 270 basis points better than a year ago.

The Nashville market reported solid growth, with nearly half a million square feet of office space absorbed in the quarter and office occupancy at 91.6%. Our Nashville office portfolio continues to outperform the overall market, with 95% occupancy and the healthcare and insurance industries are driving much of that market's growth. New construction in the Cool Springs submarket, one of the strongest performing submarkets in our system, is around 350,000 square feet, including our 150,000 square foot Cool Springs 4 building, which is scheduled to deliver late this year. Historically, absorption for the submarket has been about 335,000 square feet per year. Earlier this week, we hosted a two-day meeting for all of our leasing representatives. Each team presented an in-depth analysis of their markets and portfolios. While somewhat of a mixed bag, their overall tone was upbeat. Our leasing reps are still seeing decent activity and there's not been a lot of pushback on rental rates. Some are seeing a slight creep in concessions, usually in the form of a month or so of free rent, or a request for turnkey TI buildout, but this is not pervasive.

Most of our leasing reps were with us in 2001 and when asked how this environment compares to seven years ago, all agreed there is no comparison. Here's why. First, market conditions are not nearly as distressed as they were back then. Second, the quality of our portfolio is significantly better this go-round. As many of you may recall, it was the lower quality, poorly located C and B-minus assets that took the brunt of the damage in the last economic downturn.

In closing, let me say that while we are very mindful that these are not the best of economic times, we like our position in our markets, certainly relative to our competition. Our portfolio is well positioned to weather a storm, should times worsen, and we have highly seasoned division heads and a solid team of leasing and asset management professionals who understand what it takes to survive and thrive during uncertain market conditions. Dan?

Thanks, Mike, and good morning, everyone. As Ed noted in his opening remarks, we had a good first quarter. FFO per share was $0.71 compared to $0.65 in the fourth quarter of 2007. And $0.91 in the first quarter of 2007. First quarter 2007 included $0.26 of land sale gains, $0.07 from an insurance settlement gain, and $0.01 of lease termination fees. First quarter 2008 had $0.03 in lease termination fees. Netting out these items, FFO from core operations was $0. 68 per share this quarter compared to $0.58 in the first quarter of 2007, a 17% increase.

FFO from core operations in the fourth quarter of 2007 were $0.64 , so we had solid growth both year over year and sequentially. This growth trend in core FFO is primarily the result of the impact of $201 million of development deliveries in 2007, occupancy growth and higher average rents. Total revenues from continuing operations from the first quarter were up $8.7 million, or 8% compared to the same period of 2007. $2.5 million of this increase relates to same properties and the remainder comes primarily from development properties delivered in 2007. Total same property cash NOI, excluding straight line rents and termination fees was up 2.8% from the first quarter of 2007 and up 3.2% from the fourth quarter of 2007. The increase from the fourth quarter was primarily due to seasonality trends in operating expenses, which tend to be lower in the first quarter than the rest of the year. We were very pleased with our operating NOI margin, excluding term fee income for all properties increased from 64.2% in the first quarter 2007 to 65.3% this quarter. These improvements are primarily the result of higher revenues and higher average occupancy. In addition, we are benefiting from the lower operating costs associated with a younger and higher quality portfolio.

G&A for the first quarter of 2008 was lower by about $1.2 million compared to the same quarter in 2007, or $0.02 per share. We had a positive effect related to the decrease in the deferred compensation liability, but this was fully offset by the mark to market adjustment on the related investment accounts, as included in other income. Compared to a year ago, we also have lower dead deal and accounting expenses and lower marketing expenses on the RBC condos. We are still forecasting net G&A to be in the 40 to $42 million range for full year 2008, flat over 2007. Net interest expense was up about $600,000 this quarter, or $0.01 per share compared to 2007. Capitalized interest was $400,000 higher this quarter, which favorably impacted net interest expense and our weighted average rates were much lower this quarter. These favorable effects were offset by higher average debt balances due to funding our development pipeline and $62 million of preferred stock retirements last year. This quarter we paid off $100 million of 7.125% bonds at maturity on February 1st, using proceeds from a new three-year $137.5 million floating rate loan, which bears interest at LIBOR plus 110 basis points. The weighted average rate for all our debt was 5.88% at March 31, down from 6.6% a year ago, an 11% decrease.

Preferred dividends were lower by $1.3 million this quarter compared to last year as a result of the lower outstanding preferred stock balances. On the financing front, we are pleased to have no debt maturities for the remainder of 2008. In May 2009, our credit facility's initial three-year term ends, but we have the unilateral right to extend this facility for an additional year on existing terms. In 2009, we have $50 million of [8.125%] bonds maturing in January and about $115 million of low levered secured loans at 7.8% rate that mature in November. We currently have $198 million available on our unsecured facility and $80 million available on our secured revolving construction facilities. Given this $278 million in funding availability combined with the proceeds from additional planned dispositions and other potential capital sources, we are well positioned to fund the approximate $150 million of development costs that remain to be funded as of March 31, and take advantage of other investment opportunities as they arise. We were CAD positive in the first quarter and expect to be CAD positive for the full year. As noted in yesterday's release, we raised the lower end of our FFO guidance by $0.04 to $2.60. This is primarily due in approximately equal parts to having already achieved the low end of our termination fee assumption, the FFO contribution from the forum acquisition, and somewhat lower interest expense from lower floating rates than we originally anticipated.

Operator, we are now ready to take

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Chris Haley.

Good morning. Chris Haley at Wachovia. Wanted to ask a question about the leasing assumptions as part of guidance. The full year, Mike, where do you stand in terms of your aggregate leasing assumptions for the full year 2008 to reach the low and high end? And how would that compare to the aggregate leasing recorded during the 2007 year? Just trying to compare the two in terms of how much of a delta there is.

Okay. Chris, first of all, let me make sure I understand the question. You want to understand for the balance of 2008 to reach our guidance, what we're expecting to do from here in terms of assumptions. And you're talking about making sure we get renewals versus new leasing, et cetera?

Just the aggregate of renewal and new leasing, Mike, and put those together for the remaining three quarters, plus what was done in the first quarter, so that would be the aggregate calendar year '08 versus the aggregate amount in 2007.

Okay.

Are you expecting your velocity to be higher or lower by what magnitude in 2008 versus 2007?

Chris, I think it would be about 80% of '07. '07 total second gen was about 5.4 million. We think it's somewhere around 80% range would get us there. We anticipate to hover around this occupancy level of, you know, mid 90% for the middle part of this year and then given activity that we have to end the year up, basically where we ended up last year or maybe a little bit higher, depending on some spec leasing. But overall, the average occupancy should be at or better than what our average occupancy was for calendar year 2007.

Okay, and, Mike, was there any feedback between industrial versus office from your officer meeting?

No, it was actually -- they were both upbeat. Remember, our industrial is principally in the triad, principally Greensboro and Atlanta, and I think they both felt that activity was, was good. I think on the office front, as we discussed, there is a certain amount of spec activity we're looking for, for the last half of the year. We have a call every month with our leasing folks, every leasing agent comes in and gives us the reforecast on their leasing assumptions and thus far we're seeing it looking pretty good.

And last question is, I noticed in one of your recent investor presentations that there were three NCAA final four basketball teams noted. Is this implying that you're looking to go to the fourth market, UCLA?

No, they went out of that tournament pretty early, like another one of the four teams closest to our heart.

Compliments to our Memphis division, which is also performing well, by the way.

Thank you.

Thanks, Chris.

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

Hi, nice job, guys.

Thanks, John.

Question, your G&A as a percent of income tends to be consistently pretty high relative to your peer group. Do you -- are you aware of any accounting treatments that you do that are different than the immediate peer group?

John, this is Dan. I'll take that question. And I can tell you that based on having looked at some of our peers as well, looking at some of their financial information, but I don't believe there's any difference between what we do and that of our peers in terms of accounting treatment. I think what's driving it up is predominantly our pursuit of these GSA transactions. It's a high stakes game. The cost to pursue those transactions is high, but the reward when you win them is high, given the quality of the credit, the length of the lease and the stability of the product, given they are likely to stay come renewal time. I think that's probably a significant differentiator of the dollars that we invest to pursue those costs. And then obviously you can't win them all and when we hit a dead deal, it's certainly has an impact on G&A. And we may also allocate less OpEx, but our margin after G&A is certainly in the ball park with our peers.

Got you. Second question really quick, any movement on land pricing in your markets?

We have not seen that -- I think in the land that we have an interest in, we follow it to some degree, but more on the periphery, that land which is more conducive, large tracts for single family, residential development, you know, we understand that that's moved downward some. But land that we're in pursuit of for office and industrial development, we haven't.

Great, thank you.

You're welcome.

(OPERATOR INSTRUCTIONS) . Your next question comes from the line of

Can you just talk about the Country Club Plaza occupancy? Looks like it declined in the retail portfolio 200 basis points. Was the lease termination fees related to that asset? And what are you seeing in store closures and bankruptcy there?

We haven't received any lease termination fees whatsoever from them in this quarter. The change in occupancy was about 200 basis points, which equates to about 26,000 square feet, so there are a number of smaller lease expirations. We have a strong backfill prospects with long-term leases and substantial increase in rents.

Actually, Ed, one of the biggest buyout spaces have already been back filled, actually signed an agreement with the lease, so that's already been taken care of.

Okay, and so where did the term fee get generated from?

The term fee was generated here in Raleigh, where Burroughs Welcome occupied a building called 4301 and Research Commons out in the Research Triangle Park and the lease provided -- they were bought out by GSK. GSK, we knew they were going to move out of that space and track back to their company-owned campus. The lease provided that they restore the building back to its original condition at the time of lease expiration, so we received compensation from them that made up 1.8 of the 1.9 in termination fees that we had for the quarter.

Okay.

Sorry, David, one footnote to that. Obviously we didn't restore it back to its original condition in 1989. In fact, we were fortunate to backfill 70% of that space with no downtime in an as-is condition to the University of North Carolina.

Okay. You talked about the increasing supply in the West Shore market in Tampa. You had a building Bay Center 2 that was going to follow Bay Center 1. What are the plans now?

We have the building pad ready, the utilities infrastructure are in place for that sister building, which is approximately 209,000 square feet somewhere in the 43 to $45 million investment. We right now have got that fully designed, but we don't have any plans on pulling the trigger on that. We're holding it for some substantial preleasing. We understand that, or we know well that MetLife and Crescent have both started their approximate 250,000 square foot buildings. We understand that Rubenstein has put his on hold and will not start it at this point in time based on scuttlebutt. But the Phase I's done extraordinarily well. The rental rates that we've been able to secure there have been above market, but we'll hold on Phase II until we have significant preleasing.

We also understand, David, that of the two spec projects that Ed mentioned, that there is some scuttlebutt, that there's pretty good lease activity on at least one of those buildings. So that would release some of the pressure of that supply.

How much, how much space, in space requirements do you think there is in the market? How many buildings could the current demand fill?

The west shore absorption per year is somewhere around 350 to 400,000 square feet a year.

Okay, and there's 500,000 just on the market right now?

Well, it's under way, David. One of the buildings is scheduled to deliver late '08 and the other building is scheduled to deliver in '09.

And there's 550,000 in those two buildings.

Okay, and just have a question on the forum acquisition. Why, I guess why did you decide to do that deal? What's, you're going from an initial cap of 9.2 to a stabilized 7.4, so you're obviously losing some type of leasing. Can you just give us some more color on why you did that deal and what's going on in terms of the yields?

Sure. I just want to -- correct. That's probably too strong a word to use, but what's occurred there is that the joint venture performance first year stabilized yield will be the 7.4. The return to Highwoods is a 25% joint venture partner out of the gate is a 9.25, because we're receiving fees on the management of that project. So we're not going to erode from a 9.2 down to a 7.4. The Highwoods position that is going toe be at a 9.25 and in fact we have opportunity if our occupancy improves from 90% up towards 92, 93%, our return would even enhance. So there's very little roll in that project, less than 10% between now and the end of 2010. About 25% in the first five years, so the roll exposure is less than what we have in our typical portfolio. They are great buildings. We bought below replacement cost. There's some upside in the mark to market, so I think overall it's a very good play for us and there's no way that Highwoods interest is slated to roll down to anything less than where we are now, unless something catastrophic were to occur.

Okay. I misread it. And just in terms of -- I mean, was that a marketed deal, or was that an off-market transaction?

Yes, CB Richard Ellis out of the Atlanta office put a 5-pound glossy package together and broadly marketed it. We were fortunate that it was in our backyard. We were able to tell the buyer through the broker that we would waive any due diligence requirements with regard to the market or submarket, which the competition was unable to do. It's our understanding that we weren't high bid, but given the credibility of what we put together and the way of being able to close and the timing of close put us in the driver's seat of that and we delivered. It was very narrow period of time from when the offering went out and closing, which I think is a good example of our being able to properly dispense our dry powder and being opportunistic.

Did you want to do that as a wholly-owned, or did you bring in the partner at some point, or was it always going to be a joint venture?

We brought the partner in at the get-go when we received the package.

Great, thank you.

and, David, just a clarification. That partner is DLF and we have a very broad partnership platform for them with, in three other cities, four including Raleigh. So it's a large platform and we were able to replicate documents, et cetera. So the long-standing relationship is working well.

Okay, thank you.

Your next question comes from the line of Wilkes Graham.

Hey, guys. Ed, I think I recall you saying at the investor day down at the Ohmstead that over the past couple of years, and this is probably a little dated now, that you would look at $2 billion of product to acquire and only bought $51 million. Obviously transaction volumes are down, but I'm just curious how much product there is out there relative to what you've seen in the past and are IRRs getting any closer to your hurdles to where you think you could start acquiring wholly owned acquisitions either later this year, early into '09? Just want to get your thoughts on kind of how you view the acquisition market out there.

Well, there's certainly fewer large packages that are being presented for the same reason that we believe that, you know, Winston-Salem didn't go when it went. We still see a fair number of smaller packages. In the fourth quarter of '07, there was a few large deals done and, the North Port deal in Atlanta was fairly substantial and a few others we've tracked. When I say substantial, I mean over 100, $125 million. What we're seeing is a larger volume, larger percentage of transactions now are collections of one, two, three, four buildings. So what we're looking at is how can we be strategic like the exercise that we were able to consummate at the forum? I think cap rates haven't, based on what we've been able to track and what we've provided in the way of market data from capital analytics, is that the cap rates are still hovering in the same exact range that we have our office cap rates in our NAV page in the supplemental.

Okay. Thank you.

Thanks.

Your next question comes from the line of Jamie Feldman.

Thank you very much. So if we look at some of the broker data from the first quarter of '08, particularly CB Richard Ellis, it looks like there were pretty dramatic vacancy increases in Nashville, Orlando and Tampa. Can you talk a little bit about what those are and why your portfolio has been able to outperform or why that's not really a cause for concern?

This is Mike. First let's address national. National, which you probably saw was new product that had come on the market in the Cool Springs, Crescent had delivered a building last quarter with minimal occupancy there. We note that, I think it was in my script, 500,000 square feet under construction down there, including our 150,000 square feet so you got them out there, there's some new construction in downtown Nashville as well that's partially leased to a major law firm and a bank.

And if you bifurcate CBD from the suburbs, the CBD is where the hit occurred.

correct, and that's why also there's a tremendous amount of residential development at west end toward downtown. And that's getting to be a little bloody on the residential end, but we're not in that fray. In Orlando, if you look, it would really be two markets. It would be CBD, where you had one project that actually was built as a condo development, came back and basically the developer went bust, so some of those units came on the market in an auction. And then you've got, out in, call it in South Orlando, if you would, there's projects near Millennium Mall, which delivered that, I think Duke actually delivered one building out there that was a pure spec building and they are just getting going on their occupancy. I'm sorry. What was the other market?

Tampa.

Tampa.

Tampa, well, as Ed discussed in Tampa, what you really got is two markets that it's really getting very competitive. East Tampa, which is up and down I-75 corridor, there are a number of spec buildings that were just delivered or will be delivered, and we expect it to get pretty bloody out there before it's over with, too much supply chasing too few deals. We feel very insulated with our Highwoods project -- we're at the north end of that submarket. We're 100% leased and I think our closest expiration is like 2014, so we don't see anyone coming after our tenants up there. West Shore, as Ed pointed out, again, the new product that's in West Shore, they are going to he be looking at asking rates somewhere in the lower to mid-30s for this product, where the second gen space is going to be somewhere in the mid-20s, so I think it would be a lot of concessions for them to get back where our existing tenants would look to migrate over there.

Okay. This shows that Raleigh did tick down 80 basis points, so that's good. All right. Thank you very much.

Thank you.

You do have a follow-up question from the line of John Guinee.

Stop me if this has already been answered, but can you refresh us on your strategy on your 8.625 preferred shares that are outstanding right now?

Sure.

I think they are callable any time.

The 8% are, John, that we still I think have $52.5 million that's callable, but that's at a flat 8. The 8.625 is not callable until 2027 and the amount that we have left on that is, you remember Dan, I think it's about 82, $82.5 million in that range. We have brought some of that in. I think we've brought about 25 million of that when a broker connected us with somebody who held those and wanted to get out and we were able to buy them back right at par, or right around par. So what we'll do is we'll monitor the 8.625. If someone has an interest in getting out of those and we can buy them close to par, then depending on our dry powder, we may make that decision. The 8%, we'll call those in based on how our proceeds go from dispositions.

Great, thank you.

Thanks, John.

You have another follow-up question from the line of David Cohen.

Hey, just wanted to follow up on the FAA development in Atlanta. Looks like you pushed back the stabilization about a year I think. Can you discuss that?

Sure. The FAA expanded their SFO by 100%. The original deal that we had done was 50,000 square foot build to suit in our Trade Port park adjacent to Hartsfield, and they doubled the requirement to 100,000 square feet, so that hence pushed out the delivery date and obviously reduced the return for us because we are doing it on company-owned land.

We were ready to go on the 50,000, when they said stop, we need to double it. So we don't mind delaying delivery for that kind of growth.

And it obviously required some engineering and architectural time, so don't want you to think it's taken us 12 months to build an additional 50,000.

We're still getting the full term on the new lease from the delivery date.

Okay, that's helpful. And on the RBC Plaza, there was no additional lease-up. Sounds like there's activity. Can you tell us how much is under negotiation that could potentially close over the next couple of quarters?

We've had showings for more space than we have space. There are discussions ongoing, but I put them in discussion/negotiations for more space than we have space. So, the stabilization data on that isn't until I think 15 or 18 months after delivery. It's in the supplemental, so we have plenty of time build in the pro forma. We feel like, the volume of interest in that is significant. As Mike mentioned in his script, the steel workers setting the structure for that spire really makes it even all the more distinctive on our skyline. So I have no concerns about that project within our portfolio. And also on the residential side, we're still 100% under hard P&S agreements with nonrefundable money.

And, David, in the negotiation/discussions that we're having, the rent rates that we're quoting are at or above where we pro formaed, so they seem to be holding steady there.

Given where we are and kind of the economy right now, are you -- how -- I guess how firm are you planning to be, I guess, on those rents and how much wiggle room do you think that there will be and how are tenants kind of responding? Is there some sticker shock right now?

I think that any new competitive product, as Mike mentioned in West Shore, for example, this new product that's asking well north of $30 and we're not there, I think that given where we are in our asking rates and given the uniqueness of this product, there hasn't been any new office space of size built downtown since October of 1991. We're sitting out there with brand-new product that's extremely attractive and I feel that we're quite comfortable with where we are on it.

Thanks.

Time will tell.

Yes.

But discussions are strong.

Thank you.

Thanks, David.

I am showing that there are no further questions at this time.

Okay. I would like to thank everyone for being on the call and if there's any question that anybody held back on perchance because Terry wasn't here, he should be back riding high in the saddle next week. We just didn't want him here pulling a George Bush and throwing up during the dinner, during the analyst call, to find out how the stenographer would be with that, so he'll be here early in the week, so feel free to call now with any questions you have or Terry will be available next week. Thanks so much.

Thanks.

Thank you, ladies and gentlemen. This concludes Highwoods Properties first quarter results conference call. You may now disconnect.