Highwoods Properties Inc (HIW) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Highwoods Properties first quarter call. During the presentation, all participants will be in a listen-only mode. (Operator Instructions). I would like to turn the call over to Tabitha Zane. Please go ahead, ma'am.

Thank you, and good morning, everybody. On the call today are Ed Fritsch, President and Chief Executive Officer; Terry Stevens, Chief Financial Officer; and Mike Harris, Chief Operating Officer. If anyone has not received a copy of yesterday's press release or the supplemental, please visit our website at www.highwoods.com or call 919-431-1529 and we will email copies to you.

Before we begin, I would like to remind you that this call will include forward-looking statements concerning the company's operations and financial conditions, including estimates and effects of asset dispositions and acquisitions, the cost and timing of development projects, the terms and the timing of anticipated financing, rollover rent, occupancy, revenue trends, and so forth. Such statements are subject to various risks and uncertainties. Actual results could differ materially 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, 2008 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 explanations of management's view of the usefulness and risks of FFO and NOI, can be found toward the bottom of yesterday's release and are also available on the Investor Relations section of the web at Highwoods.com. I will now turn the call over to Ed Fritsch.

Good morning and thank you for joining us today. We are pleased with the first quarter results. FFO was a solid $0.70 per share, fueled by revenue growth from new developments, a $1.4 million in reduction in G&A, and lower interest expense. We remain comfortable with our original outlook for full year FFO of $2.53 to $2.72 per share.

Our team continues to be focused on four primary areas -- leasing, proactive balance sheet management, expense management, and the disciplined stewardship of capital. During first quarter, we leased 850,000 square feet of second generation space, 64% of which was office. As expected, occupancy dropped to 89%, half of which was the result of two large industrial lease expirations in Greensboro.

Sales of the RBC Plaza condos are going slower than we would like. I recognize we pounded our chest when all units were under contract with non-refundable deposits, so I don't want to go radio silent now that sales have slowed. To date, we have sold 73 units out of the 139. 65 units were sold last year, and eight have been sold thus far in 2009. We have another 12 units under contract. For the full year, our guidance now assumes the sale of 20 to 25 units, including the eight already sold.

Acquisition and disposition activity in our markets remains quiet. Our guidance assumes $50 million to $100 million of dispositions this year, and we remain comfortable with the midpoint of that range. We have yet to see distressed sellers in our market, but as I mentioned before, each of our division heads has a well-defined wish list of targeted Class A properties that fit our strategic profile.

Balance sheet management continues to be a major long-term focus. To illustrate what we are working on right now and where we intend to be at the end of the year, we have created what we call a quote/unquote financing at a glance, which is available on the IR section of our website under Presentations, or ask Tabitha and she will be happy to email a copy to you.

At the end of the first quarter, we had $197 million drawn on our $450 million unsecured credit facility, and $31 million drawn on our $70 million construction facility. We have $117 million of debt maturing between now and the end of the year, having already paid off $50 million of bonds that matured in January. If we were to rely solely on these two facilities to satisfy all of our 2009 funding needs, at the end of the year we would have about $334 million outstanding under our credit facility and $53 million outstanding under our construction facility. However, our plan targets obtaining approximately $250 million in proceeds this year -- $175 million in new loans and $75 million from the sale of non-core assets, which, again, is the midpoint of our 2009 guidance for dispositions.

To date, we have obtained a three year $20 million unsecured material loan at LIBOR plus 2.5%, with an overall floor of 3.9%. We expect to finalize a secured loan on the office component of the RBC Plaza for close to $50 million and we have received competitive bids from a number of [wide] companies for $100 million plus secured loans to replace $108 million [AGON] secured loan which matures in November. The execution of this plan would leave us with less than $90 million drawn on our credit facility come year end 2009.

Our 2009 FFO guidance continues to assume $0.12 to $0.18 of dilution from these financing and dispositions as a result of expected higher interest rates and loss of NOI from anticipated sales. With regard to equity, we are obviously well aware of the significant wave of recent equity issuances. Our position on equity raise is the same as our position on everything else. We will continue to be disciplined stewards of capital, both with respect to investing existing capital or raising new capital. Our most important job at Highwoods is to continue to strengthen our platform and enhance our ability to deliver sustainable long-term value for our shareholders. That's the test we have used and will continue to use for analyzing, raising equity, or undertaking any other type of financing opportunities.

Finally, as I mentioned on our February call, while we believe it's prudent to never rule out anything that may at some point be in the company's best interest, it remains management and the board's preference to maintain our dividend at its current level and to continue to pay 100% of it in cash. Mike?

Thanks, Ed and good morning, everyone. Leasing activity remains decent and was actually slightly better than the first quarter of last year. In total, we signed 123 leases for 851,000 square feet of second generation space, 64% of which was office. This compares to 791,000 square feet of second gen space leased in the same quarter a year ago. The average term was 4.1 years, equal to our five quarter average.

We made healthy progress addressing our lease expirations. As of March 31, 8% of our portfolio is set to expire this year, down from 11.3% at year end 2008. While occupancy may have bounced around during the year, mostly due to industrial lease maturities, we remain comfortable that we will end the year with occupancy in our wholly owned portfolio between 87% and 90%.

Average in place cash rental rates across our total portfolio rose 2.5% from a year ago, and on our office portfolio, they were up 1.9% from the same period a year ago. Cash rent growth for office leases signed this quarter declined 1.1%, which is better than all of 2008, when cash rents on signed office leases declined 3.1%. GAAP rents on office leases signed this quarter were up 6.6%.

CapEx related to office leasing was $10.28 per square foot in the first quarter, above the five quarter average of $8.69, but well within our long stated range of $10 to $12 per foot. The primary drivers of CapEx this quarter were two larger office leases, totaling 79,000 square feet. Excluding these two leases, CapEx related to office leasing dropped to $8.17 per square foot. In summary, leasing economics are in keeping with the softness of the overall business environment, as reflected in our 2009 guidance.

Looking at all of our markets, aggregate office absorption was a negative 1.7 million square feet, with Atlanta and Tampa combined accounting for just over 1 million of that negative absorption. Office sublease space crept up slightly, but in the aggregate [to] a modest 1.7% across all of our markets. While we continue to watch this closely, as I have discussed on prior calls, the general absence of overconsumption this cycle and reluctance of sublessors to use their balance sheet to fund CapEx has kept sublease space from becoming as competitive in prior downturns.

Last week, I hosted a conference call with all of our directors of leasing, and all of them have seen increased activity in the way of showings quarter over quarter, although the economic terms of most of the deals we're seeing are softer. Most also reported that our customers seem slightly more optimistic, and some of our prospects are contemplating what would be considered sizable transactions in a few of our markets. We are receiving occasional requests for rent relief, usually in the form of a blend and extend, and we address these on a case-by-case basis. The volume of requests and concessions granted thus far has been relatively small. Some of our leasing directors are also reporting that a number of our competitors are struggling to fund leasing CapEx. We are using this to our advantage, aggressively touting our stronger position, inability to fund TIs and commissions.

I would like to provide a bit more color on three more of our larger office markets. First, Atlanta, where we're seeing almost daily headlines about the oversupply and current overbuilding of office in Buckhead, a market that we are not -- and I repeat not located in. Despite the glut, first gen asking rents in Buckhead remain at least $10 to $12 per square foot higher than asking rent at our Century Center in the Northlake submarket.

The Tampa markets remain soft, suffering from significant overbuilding in the west shore and the east Tampa submarkets. We have lost 290 basis points of occupancy in the first quarter, largely due to AT&T vacating 65,000 square feet at the Spectrum in Tampa Bay Park. However, on a positive note, we have already signed a lease for half of the space on respectable terms and have viable prospects for the remainder of that space.

Turning to Raleigh, occupancy in our wholly owned portfolio dropped 310 basis points to 85.5%, mostly attributable to two lease expirations totaling 98,000 square feet, over half of which was a relocation to an owner-occupied building. We are seeing some pickup in activity, but new supply in the overall market is still a factor. Qimonda, a 100,000 square foot customer in Raleigh, recently filed for bankruptcy and this will obviously impact future occupancy. We are fully reserved for this loss.

While our markets are clearly not immune from the downturn, we continue to outperform the market in most of our markets. We continue to aggressively chase every deal and emphasize our financial strength to our customers, prospects, and tenant rep brokers. Terry?

Thanks, Mike. We are pleased with our financial and operating results for the first quarter, with FFO of $0.70 per share, which compares to $0.71 per share in the first quarter of 2008. Core FFO, which we define to exclude lease termination fees and land and condo gains, was $0.68 per share for the quarter, the same as the first quarter of 2008.

Total revenues from continuing operations were up $2.5 million this quarter or 2.2% compared to the first quarter last year. Revenues from the same properties, those in service during both periods, were down $3 million, of which $900,000 relates to lower term lease fees and $1.4 million relates to lower straight line rental income. The remaining $700,000 reduction in cash revenues largely reflects the drop in occupancy, partly offset by higher average rental rates. Revenues from non-same properties were up $5.5 million, primarily from new development deliveries and the fourth quarter 2008 PennMarc acquisition in Memphis.

Total company cash NOI, which excludes straight line rents and lease termination fees, was up by 1.3% in first quarter 2009 compared to the first quarter of 2008, due to the NOI contribution from our development deliveries partly offset by a 4.5% decline in same property cash NOI. Same property cash NOI was impacted by the revenue and occupancy declines as I noted previously, combined with continuing operating cost increases -- primarily utility rate increases that went into effect last year and early this year -- and from higher property taxes. We continue to put significant attention on controlling operating expenses, though some expenses are relatively fixed in the short run. Our full year total cash NOI growth is expected to be lower than first quarter, primarily because of the strong NOI growth we had last year from development deliveries. That growth pace will be lower this year, as our development deliveries will be fewer over the next several quarters, due to our disciplined slowdown in development activity.

G&A for the quarter was approximately $1.4 million lower, or $0.02 per share than first quarter 2008. The primary reasons were $450,000 from lower salaries and fringe benefit costs from recent headcount reductions net of the related severance costs, $1.1 million in lower short-term and long-term incentive compensation, and $450,000 in lower audit, legal, and dead deal costs. These reductions were partly offset by $700,000 in lower capitalized G&A costs.

Net interest expense this quarter was down $2.9 million compared to last year, due to lower average debt balances from paying down debt using proceeds raised in our September 2008 common offering and from a 47 basis point reduction in quarter over quarter average interest rates. These reductions were partly offset by lower capitalized interests.

Preferred dividends were lower by $1.2 million this quarter compared to last year as a result of our retirement of 53.8 million of preferred stock last September. The quarter-over-quarter per share impact with significant reductions in interest expense and preferred dividends was offset by a higher number of shares outstanding this quarter due to the September 2008 common equity offering. On a net basis, the common equity offering was dilutive to FFO by approximately $0.02 per share in the first quarter of this year.

We reaffirm full year FFO guidance of $2.53 to $2.72 per share. Two of our guidance assumptions have offsetting changes. Land and condo gains are now expected to be lower than originally anticipated, offset by lower projected G&A expense.

Turning to financing and capital markets, in January, we paid off $50 million of bonds at maturity using our credit facility, and in February, we exercised our option to extend the maturity date of our credit facility to May 2010. This one-year extension officially becomes effective tomorrow. Even though our current credit facility does not mature until May 2010, we have already begun to develop internal renewal strategies and we will soon begin renewal discussions with our leading banks. It is early in the process, and therefore inappropriate to speculate on any specific terms or commitment levels. Given the $290 million of unused capacity on our facilities at the end of the first quarter, combined with proceeds we expect from the new secured and unsecured loans we discussed, dispositions, free cash flow, and other potential capital sources, we are well-positioned to manage our future debt maturities and fund the remaining costs to complete our development pipeline.

Operator, we are now ready for questions.

Thank you. (Operator Instructions). Our first question comes from the line of [Alex Denoville] with Aton Capital. Please proceed with your question.

Hi. Thank you for taking my question. Could you give us some perspective on potential future G&A expenses cap? Should we expect a cap going forward if (inaudible) deteriorates.

I think our future G&A run rate should be fairly similar to what we had in the first quarter of this year. And in our guidance, which is in the press release, we indicated that G&A for full year 2009 should range between $32 million and $34 million.

Which is about 13% reduction over 2008 actual.

Okay. Thanks a lot.

Thank you.

Our next question comes from the line of Wilkes Graham with FBR. Please proceed with your question.

Hey, guys, it's Wilkes. Can you just talk about how you feel about the prospects for the slug of lease expirations coming up in the industrial portfolio and the Piedmont Triad this quarter? Because that looks like that's the last big expiration you'll have there for a long time and how leasing was there in the first quarter?

You might want to be more specific. I think overall, the leasing in the industrial has been tough to maintain customers, but we have had a respectable level of activity as indicated by the press release we put out a couple of weeks ago with 166,000 square feet of leasing that we have done. So I think it's going to be one step forward, one step back in the Greensboro industrial. And as a reminder -- and I know you know this, Wilkes, we are 100% out of industrial in the Winston Salem market.

Yes. The character of the industrial in the Triad is largely influenced by logistics companies who tend to go shorter term contracts based upon a contract they may have with a Procter & Gamble or Gillette, some of the bigger users in that market. So it tends to bounce around a little bit, depending on whether they are able to retain their contracts with their providers. It's a little hard to predict, to be honest with you.

Okay. Okay. Thanks.

Thanks, Wilkes.

Our next question comes from the line of Irwin Guzman with CitiFinancial. Please proceed with your question.

Good morning, everybody. Ed, I think you started addressing this in your answer to Wilkes's question, but with occupancy around 89%, which is close to the midpoint of where you expect them to be at the end of the year, it would seem at least on the surface that you expect things to stay flattish -- which sounds somewhat in contrast to your top down view on what's happening in the markets. Realizing the industrial occupancies will move around, can you just bridge that gap on where you see -- how you see sort of making up for some of the weakness that you are seeing on the occupancy front?

I think that it's a fair question. As indicated, if you look at the leasing statistics page, overall we, like everybody else, are feeling the impact of the economy in the volume of recessions and where net effective rents are. There continues to be a fair level of activity, and as Mike indicated in his script, the call that we hosted just recently with our directors of leasing -- they are seeing more prospecting activity now than they just -- than they saw just 30 to 90 days ago. Now, showings don't always turn into leases and there are people who kick tires who end up staying put where they are. But I think overall, we expect occupancy to move around over the next quarter or two, but based on the deliveries that we have, the leases that we have signed in hand today that are scheduled to start in the latter part of the year, I think the range that we put out for guidance overall is -- we feel comfortable with that.

And I didn't mention to Wilkes, but we are seeing some decent prospects for our industrial activity in the Greensboro market. Will they come to fruition? I'm not sure. But it's an indication we have there is it's pretty good momentum going forward.

It's worth noting too, that we have two 100% build-to-suit buildings, the FAA project in Atlanta, and the FBI building in Jackson, Mississippi. Both will deliver 100% lease, so that will bolster the occupancy a little bit.

Fair enough. Thank you.

Thank you.

(Operator Instructions). Sir, there appears to be no further questions at this time.

We thank everybody for listening, and if you have any questions, as always, please give us a call. We will be glad to review them.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.