Highwoods Properties Inc (HIW) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Highwoods Properties fourth quarter and Year-end 2009 conference call. During the presentation, all participants will be in listen-only mode. After which, we'll conduct a question-and-answer session.

(Operator Instructions).

As a reminder this conference is being recorded Thursday, February 11, 2010.

I would now like to turn the conference over to Tabitha Zane. Please go ahead, ma'am.

Thank you. 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 e-mail copies to you.

Please note, in yesterday's press release we have announced the planned dates and times for our financial releases and conference calls for the remainder of the year. Also, following the conclusion of today's conference call, we will post senior management's formal remarks on the investor relations section of our website under the presentations section.

Before we begin, I would like to remind you that this call will include forward-looking statements concerning the company's operations and financial condition, including estimates and effects of asset dispositions and acquisitions, the cost and timing of development projects, the terms and timing of anticipated financings, joint ventures, 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, 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 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.highwood.com.

I'll now turn the call over to Ed Fritsch.

Thank you, Tabitha. Good morning and thank you for joining us today. During our October conference call, I talked about how we view the path to economic recovery by borrowing from Glenn Mueller's market cycle thesis. I outlined four stages with stage one being fear and uncertainty; stage 2, wait and see; stage 3, the early stage of a growth cycle; and stage 4, sustained confidence.

From what we have experienced over the past few months and represented in our outlook for 2010, we believe that the world remains in stage 2, although let's call it stage 2 plus. There is widespread confidence that the sky isn't going to fall and that the world is indeed round. However, this past recession has resulted in most companies generating higher productivity from the reduced work force, which tempers the outlook for 2010 job growth across the US. We expect a gradual transition to stage 3 to begin in 2011.

2009 was a year of solid accomplishments for Highwoods. At the outset of the year, we outlined a detailed liquidity plan designed to further enhance our financial flexibility and provide us with ample dry powder to grow our business. I'm pleased to report that we achieved every one of our financing goals including a long waited upgrade for annuities. The plan included paying off $339 million of debt, closing on a new unsecured and secured loans totaling $182 million, obtaining a new $400 million unsecured credit facility with a $50 million accordion and raising $144 million through an equity offering.

We also sold $89 million of older non-core properties at an average of 8.5% cap rate including $20 million of that in the fourth quarter. The lion's share was the very successful $62 million sale of the three community retail centers in Kansas City. These properties were on average 55 years old and the sale enabled us to avoid $3 million in near term CapEx. In addition, we maintained our $1.70 cash dividend and generated $25 million of free cash flow. Throughout the year we continued to improve the quality of our portfolio and outperformed the local competition in each of our core markets. FFO for 2009 was $2.61 per share, excluding gains on debt extinguishment and a fourth quarter impairment charge related to two non-core office parks and a non-core industrial park in the Triad.

During the year we placed a $169 million of 91% lease development in service and our wholly owned development pipeline now is $69 million and 48% pre-leased. We are very pleased with our acquisition of the 4200, Cyprus Office building in the West Shore Submarket of Tampa. Including planned improvement cost, our total investment in this asset was $24.7 million. The property is 93% occupied and currently generates annualized NOI of approximately $3.2 million.

Our 2010 outlook reflects our belief that the leasing environment will remain challenging and renewals will continue to dominate. Year-end occupancy in our wholly owned portfolio is projected to range between 87% and 89%. With a dip in occupancy in the first half then improving that was removed through the second half of the year. We expect continued pressure on cash rents as customers maintain the upper hand in lease negotiations. G&A is forecasted to be lower than this year -- is forecasted to be lower in 2010 as compared to 2009 by 10% at the midpoint of our range.

In 2010, we are projecting between $50 million and $200 million of acquisitions. While we have the means to acquire more if opportunities arise, to date we've seen few active targets. We have not reflected the impact of any acquisitions in our 2010 guidance. We employ a disciplined yet nimble process in evaluating potential acquisitions. When scoring an acquisitions opportunity, we evaluate many factors including does it enhance our franchise and improve the overall quality of our portfolio? Is it a differentiated asset? What are the projected returns? What's the rent rolls compensation? Our return hurdle is in part predicated on the answers to these and many other fundamental questions. Obviously if an acquisition is squarely in our bull's eye, our return hurdle will be different than for property that enhances our franchise but has some near term issues such as [lease up] or CapEx, et cetera.

On the disposition front, we expect to sell between $50 million and $150 million of older non-core assets including a number of our Winston-Salem properties, a market we remain committed to exiting. Although development opportunities remain scare, we are pursuing a number of build-to-suit deals and have projected up to $50 million of development starts in 2010.

Our top priority in 2010 leasing space, long-term our focus remains unchanged, disciplined, and opportunistic. We remain committed to owning the best assets in the best submarkets and maintaining a strong and flexible balance sheet. We will continue to provide excellent customer service, network with brokers, refine and execute on our acquisition wish list and actively market our build-to-suit development expertise. All built on the foundation of being good stewards of our shareholders capital.

Mike?

Thanks Ed, and good morning, everyone. Leasing activity picked up slightly in the fourth quarter. We signed 117 first and second-generation leases totaling 1.3 million square feet, our second best quarter in 2009. For the year, we signed 492 leases totaling 4.6 million square feet, which is respectable given the challenging economic environment. 74% of the leases signed in the fourth quarter were renewals. Many customers remained consumed with running their business on the heels of the recession, so expanding or relocating their offices is not a high priority.

Occupancy in our wholly owned portfolio increased 100 basis points from the third quarter to 88.8% with all three segments, office, industrial and retail reporting increased occupancy. Occupancy in our office portfolio continues to be higher than the overall market's occupancy in each of our core markets. This is a result of our strategic plan to cull out non-core assets and focus our portfolio into better submarkets, which were more resilient during economic downturns. Additionally, it is a testament to our leasing team, who have been charged with leaving no stone unturned in capturing more than our fair share of deals in the market. We also know that many customers are looking more closely at their landlord's ability to fund TIs and leasing commissions. This is a big advantage to Highwoods given our financial strength.

A number of our leasing metrics were heavily impacted this quarter by two large, long-term government leases. The larger of the two was a 280,000 square foot transaction in Atlanta with the Georgia Department of Revenue comprised of a 226,000 square foot renewal and a 54,000 square foot expansion. This government agency is consolidating their operations in our 1800 Century Center Building and the lease runs through mid-2021. The second lease is a new deal with a GSA in the Pamlico Building in Raleigh for 68,000 square feet. This lease runs through late 2019.

As outlined in the press release, excluding these two transactions, our leasing CapEx was $8.39 per square foot and the average term was 4.7 years; both in line with our five quarter average. Likewise, when excluding these two transactions, cash rent growth on office leases signed would have declined 4.9% and GAAP rents on office leases would -- signed would have increased 4.6%; both an improvement from the third quarter.

Average in-place cash rental rates across our total portfolio rose 2.1% from a year ago and in our office portfolio they were up 2.3%. While leasing fundamentals in all of our markets remain challenging, we're hopeful that rents have stabilized and we expect they will remain flat in 2010.

There is little doubt that customers still have the upper hand and lease concessions including turnkey TIs will continue to be part of most relapse.

Turning now to our markets, our heavy concentration in the best submarkets in both Nashville and Memphis has served us well. In Nashville, we ended the year with 95.1% occupancy and occupancy in our Memphis portfolio was 91.5%. We leased 137,000 square feet in Raleigh on par with the third quarter in addition to the 68,000 square foot GSA lease, we also signed a 16,000 square foot first generation lease at Centre Green V bringing leasing at this development project to 92%.

Leasing activity has slowed somewhat in Tampa. However our occupancy at 90.9% continues to significantly outpace the market and new construction in that market is at a virtual standstill. Available sublease space declined 40 basis points quarter-over-quarter to 1.3%. The rate of job losses slowed, and the residential housing market has experienced a slight improvement. However it's going to take several years of employment growth in Tampa to get commercial real estate back on track. We leased slightly over 500,000 square feet in our industrial portfolio, a solid quarter. The majority of activity was in our Triad division, where we've signed 11 leases totaling 290,000 square feet. Despite this leasing volume, we expect occupancy in our 6.5 million square feet industrial portfolio to remain in the mid 80s throughout the year.

As Ed referenced, 2010 will be a challenging year for landlords. We're fortunate to have cycle tested division heads, seasoned leasing agents, well located properties, and a strong balance sheet to carry us through this period.

Terry?

Thanks, Mike.

We're pleased with our financial results for the fourth quarter and the full year. Excluding a $13.5 million impairment charge, FFO for the fourth quarter was $45.2 million or $0.60 per share. For full year 2009, FFO excluding impairments and gains on debt extinguishment was $187.9 million or $2.61 per share, which compares to $175.9 million or $2.70 per share for full year 2008. Reduction in FFO per share is mostly due to dilution from our liquidity transaction, specifically higher shares outstanding from our equity raises in September of 2008 and in May 2009, lower NOI from $82 million in property dispositions during 2009 and $182 million from new unsecured and secured loans in 2009.

Average shares outstanding were 72.1 million in 2009 up 13.5% from 63.5 million average shares in 2008. Total revenues from continuing operations were down 7/10 of a million dollars this quarter or 0.6% compared to the fourth quarter last year. Revenues from same properties were down 4.3% due mostly to a 3.4% reduction in average same property occupancy compared to fourth quarter last year. The lower same property revenues were offset by 32% increase in revenues from development and other properties not yet in the same property pool. For the full year revenues from continuing operations were up $3.7 million or 0.8% compared to 2008.

Cash NOI from all continuing operations was up 0.5% in the fourth quarter compared to last year due to the positive impact from our fourth quarter acquisition of the 4200 Cyprus building in Tampa and from development properties partly offset by a 2.8% decline in same property cash NOI. Cash NOI excludes straight line rents and lease termination fees. For the full year total cash NOI from all continuing operations was up 1.4%. Same property cash NOI for the fourth quarter and for the full year were both down 2.8%. While revenues in the same property portfolio were down from lower occupancies operating expenses in both the fourth quarter and full year were also down due to our continuing efforts to reduce operating cost across our entire portfolio.

This reduction in operating expenses was achieved despite increases in utility rates and higher real estate taxes. Kudos to our asset management team for holding the line on operating expenses while still maintaining superior customer service. G&A for the quarter was $700,000 higher than fourth quarter 2008, excluding a $1.5 million back from the market value change for deferred compensation liabilities which is fully offset by corresponding increase in other income, G&A was down $800,000 primarily from lower salaries and fringe benefit cost from headcount reductions earlier in the year and lower dead deal costs, partly offset by lower capitalized overhead.

The company is fully hedged on its deferred compensation liabilities but the offsetting effects flow through two separate line items in the income statement as required by GAAP. For the full year G&A was lower by $1.4 million, the decrease was caused by $2.5 million in lower dead deal costs, $4.2 million in lower salaries, benefits and incentive compensation and $1.0 million in lower other cost, partly offset by $3.6 million in deferred compensation market value changes and by $2.7 million in lower capitalized G&A.

Net interest expense this quarter was down $2.1 million compared to last year largely due to approximately $120 million in lower average debt balances. This reduction was partly offset by $800,000 in lower capitalize interest. On a full year basis, interest expense was down $11.6 million due to lower debt outstanding and lower average rates on that debt offset by lower capitalized interest. Deferred dividends for the full year were lower by $3.1 million as a result of our retirement of $53.8 million of preferred stock in September of 2008.

The favorable impacts on total FFO per share from the reductions in interest expense and preferred dividends was offset by the higher number of common shares outstanding. We expect interest expense to be higher next year from higher spread and fees on our new credit facility, projected increases in LIBOR, which will increase the cost of our floating rate debt and from lower capitalized interest. In December we closed on a new 38-month, $400 million revolving credit facility with a syndicate of 12 banks. The co-bookrunners were BofA Merrill and Wells Fargo. The facility has a $50 million accordion feature that we can exercise subject to future bank commitments.

There are no borrowings currently outstanding on the new facility, which bears interest at LIBOR plus 2.9%. There is no LIBOR floor feature in our facility and the annual facility fees are 0.6% per year. Other terms and covenants are largely unchanged from our previous facility.

Our balance sheet is in great shape as we have no debt maturities in 2010 and only a $137.5 million maturing in 2011, which is a bank term loan. This assumes that we do exercise our unilateral right to extend our $70 million security construction facility from December of 2010 to December 2012. This facility currently has $42 million outstanding. We also issued our initial guidance for 2010 at $2.31 to $2.49 per share. The key assumptions underlying the guidance were also included in our release.

Operator we're now ready for questions.

Thank you.

(Operator Instructions).

Your first question comes from James Feldman with BofA Merrill Lynch.

Thank you. Terry, I was hoping you could let us know what your 2010 guidance range I mean in terms of AFFO and dividend coverage?

Sure, Jamie. For AFFO, we expect to be tighter than this year where we had approximately $25 million of free cash flow after paying all the common dividends. So we do expect that to come down next year but still be in the positive range. We haven't put out an exact estimate on that number however but it will be lower than 20, our 2009.

Okay, so slightly above the current dividend?

It will be above the current -- yes, it will, but less than $25 million above.

I guess big picture for anyone there, we're trying to figure out when cash flows for the business could bottom. Do you have a sense, is that a 2010 event? I mean is that like a -- it's not a particular quarter but do you think that could happen on a quarterly basis in 2010? Or do you think 2011 is still a lower year?

Jamie, this is Ed. My view of that would be that there's a blend of I think rents will continue to be tough this year and CapEx will continue to be tough this year. But then as thing begin to reverse and we get some lift in rents and we at least get a piece of the baton in negotiations with regard to TIs, some of that will soften but as we build back occupancy, we'll be outlaying more cash. So it could be in 2011 as we and others build occupancy back and incur the expenses to do that.

Okay, and then finally on the acquisition market, you included some acquisitions in guidance, can you give us a sense of what kind of yield do you think you can get? And then what gives you conviction that you can get that level of acquisitions done given the amount of competition we're seeing out there?

As you know, we've got a pretty active or energized detailed wish list. We mentioned in our prepared remarks that we haven't seen a lot of activity in what we think are attractive assets that we'd like to own. We've talked about pricing our bids at a number above our weighted average cost of capital. If the acquisition is right in the bull's eye, then the spread will be more nominal than it would be if it were a greater spread. Like if -- let's say there was some lease up opportunities there or there were some CapEx issues then we would have a much wider spread.

But what we want to be careful about is to not put out exactly what our WAC -- anybody can compute our WAC. What we don't want to put out is what our margin above WAC would be, because then those bidding against us for an asset and prospective sellers would know what we would be pricing. But we're sticking to the criteria that I outlined in my script with regard to how we would underwrite or classify a target for us. We have seen a couple of packages in the market. We feel that there may be some more that will come towards the middle or later part of the year that we could play on.

And Jamie, this is Terry. Just to clarify, one thing we said in the lead-in to the guidance section in the press release was that the range that we gave of $2.31 to $2.49 for next year, does not include any impact from dispositions or acquisitions. Even though we have a view that we can achieve some of those during the year, we didn't put any impact for those in the guidance. So everything else though is reflected in -- under the assumptions that you see are in that range of guidance for next year.

And Jamie what we tethered the upper end of our guidance to was dry powder available today in order to keep our own internal debt metrics where we think that they need to be. So to maintain debt levels that are appropriate in our view, that's how we drove the 200. We don't necessarily have bid that for $200 million worth of acquisitions today.

Okay, thank you.

Thank you.

Our next question comes from the line of John Stewart from Green Street Advisors. Please proceed.

Thank you, good morning.

Good morning, John.

Sticking with acquisitions for a moment, Ed can you maybe touch on the Tampa acquisition in particular, I know there is some near term rollover so maybe the yield comes down a bit, but what does the stabilized yield look like and how did you source that? Was it an off-market deal and what can you tell us about that transaction?

It was a marketed deal. We had a package on it and we bid on it with what we understood to be other cash buyers and we were trying to have really leveraged the fact that we were a cash buyer and differentiate ourselves from others, but we understand that there were some other cash buyers. I think one of things that enabled us to win it was the volume of due diligence that we put into our bid before we even bid. They saw the volume of time that we spent at the asset making sure that we dialed in our bids, as best we can.

This nominal roll, there is some roll that becomes meaningful in latter years like 2013, 2014 but near term there is not much roll. So the going in cap was like a [126] and we said that over the first five years based on our conservative underwriting that we would still be well north of 10.

So I guess, was that just a one off deal a moment in time that you don't expect to be able to source anything else like that this year.

Well, I wouldn't want to say never but we haven't seen, we haven't seen that thus far, we have seen a few packages, we don't know how they will play out, we've put our bid in on a couple and will just have to see how they play out. I do think that we are very pleased with how we ended up with a 4200 building. I guess -- to clarify, I just, you know our expectation to be able to replicate that in large magnitude is suspect.

Right, okay. How about on the disposition side, do the impairments set the stage for getting out of Winston-Salem this year and can you also clarify, I think one of the charges was on a Greensboro asset. Is the entire Piedmont Triad market on the block?

Good question. I appreciate you asking that John so we can clarify it. Winston-Salem, we said in April of 2007 that we would like to get out of it. Our presence there is dramatically lower today than it was when we started. We had hoped to get out in a one-fell swoop closing, but we weren't successful in that. So we have sold one-off assets pretty methodically since we've tried to get out of it. But yes, we want to get out Winston-Salem in total.

With regards to Greensboro, no, we'd like to stay there. The asset that we took the impairment on is a five building complex called Chimney Rock and they are older non-core industrial assets in the Greensboro market that we'd like to exist.

Okay, that's helpful, thank you. And then maybe lastly, Mike, I know you touched on some of the leasing deals during the quarter, but could you give us just a little bit of additional color in terms of the outlook or activity on the ground, particularly in Raleigh and Atlanta, at what you see over the course of 2010?

Sure John. As I mentioned, we believe that 2010 is going to continue to be a fairly flat market for us from a rental standpoint. We're hopeful as it were kind of trudging along the bottom here for a period of time and as Ed mentioned hopefully get some, some lift. This clearly goes back to job growth as you know in our markets and we have seen some job contraction in the Southeast and largely because people flocked in here to seek jobs. So, oddly enough, some of our unemployment is come from people coming into our markets including Atlanta and Raleigh looking for jobs, which has spiked that. So I would expect that leasing activity itself will be -- I would say fair.

We still are seeing a good number of tire kickers in the market. It is still taking a little bit longer to get a deal done, but there's movement, it's just not totally frozen. This time a year ago I think there was that deer-in-the-headlight syndrome, when people weren't sure what was going to happen after Lehman collapsed, financial markets collapsed, et cetera. So we're seeing activity. We had an all hands leasing conference call last week and it was little bit of mixed results but I think that all in all our folks are saying, "Hey we're starting to see deals." The quality of the deals themselves in terms of what it cost us to get a new deal. It's a little more to pry a tenant loose from an incumbent landlord. Good for our retention, but a little tougher to get somebody out of a building unless they're looking to either expand or contract and can't do so in place.

John this is Ed, just to put a few footnotes in addition to what Mike said. I reviewed my notes last night from that call that Mike referenced that we hosted last week and the common theme across all the presentations made by the various directors of leasing into the divisions was that there's more activities, there's more showings, there are more RFEs, but it's not necessarily translating into more leasing, that there seems to be lot of shopping against renewal proposals driven by tenant broker churn.

Then to -- just a self-serving comment. One of the directors at leasing I thought made a comment that tenant and brokers are focused more than ever on who the landlord will -- who their landlord would be and others chimed in and said that they're seeing that and hearing that. Particularly where leases don't start for some period of time and the second piece of the commission is further out. So our folks are fully engaged in touting our financial clout with regard to being able to renew and to win market share from the competition.

Okay, great. Thank you.

Thanks, John.

Your next question comes from Chris [Caton] with Morgan Stanley.

Thanks very much. Good morning.

Good morning, Chris.

Mike, I appreciate the comments on Raleigh. Specific question there is how is the team doing on back filling some of the spaces that was vacated to fill up RBC tower, so I just -- like Glenlake or on Glenwood Ave?

Actually, Chris, the biggest space vacated by RBC was here in Tower Two, which is in Highwoods Office Center and there's actually some good activity in that park right now. You never know until you get them signed, but a couple of pretty good size prospects that we're working there and that's very encouraging. The other space that was vacated was by a [Pointer & Spruill] at 3600 Glenwood Avenue and there's likewise some activity in that building. Nothing signed, but I would say compared to a quarter ago, two quarters ago, we are seeing better activity.

And just as a reminder again, RBC actually kept 28,000 square feet in that tower. So they didn't totally vacate it and we had back filled a part of the Pointer space with a financial services company shortly after Pointer left. So I think we're little bit encouraged certainly on the Tower Two space in recent weeks, that activity has picked up. We just hope we can now get them across the line into signed leases.

And Chris we also took the 3600 building, the Pointer Spruill building and we gutted it, so we took it back to shell conditions so that we -- you know we're not working with the 20 plus year old second gen space there, and we also redid the lobby. So I think we are very well positioned, it's a great street address, long term they're good buildings.

Yeah, absolutely. So I think you have a couple of floors there. So would the strategy would be to do full floor? Are you still holding on to that for full floor given their requirements you see in the market or are you got a point where you might chop that up? And just a question -- I'm sorry, go ahead.

That's right, it's a three story building and Ameriprise went into the first floor and we are hopeful that we have single tenant users for floors two and three. So yes, we have decided to go ahead given Ameriprise was about 10 or 12,000 square feet, they went on the first floor.

Got it, thanks.

(Operator Instructions).

Our next question comes from the line of Brendan Maiorana from Wells Fargo. Please proceed.

Thanks, good morning.

Hi, Brendan.

So, Terry on the guidance, just trying to reconcile your same store NOI guidance is down 2.5 to 3.5. It seems like the occupancy is only going to be down roughly about 100 basis points overall, because you were fairly steady throughout the year. And you mentioned that you've been taking some operating cost out of the business. I know rents will be down a little bit on new leasing activity, but just I would think that your in-place cash rent bumps would kind of offset that. So I'm struggling to kind of figure out why same store NOI would be down quite that much?

I think Brendan, by year-end we expect to get our occupancy back to the 87% to 89% range that we listed in our assumptions. We do expect occupancy during the middle of the year to be a little bit lower. So I think on average, the average occupancy year-over-year will be a little lower perhaps than what you were using, that maybe part of the difference.

And also having gotten lot of our expenses down dramatically in 2009, you start bumping -- I think a lot, not all but a lot of the maybe easier changes to make have been reflected. It will be a little bit harder to get the same percentage decreases in operating expenses in 2010 over 2009. So we've already made a lot of progress. So those are probably two factors that might account for a little bit different view than what you had.

Okay, that's helpful. In terms of the CapEx during the quarter, was the CapEx for the two large deals that were signed during the quarter, has that been reflected in the amount of CapEx dollars that were spent during the quarter?

Good question. No, the CapEx that was committed that you saw on page 13 of the supplemental will not get spent or incurred until next year sometime. So those were not in the fourth quarter CapEx numbers that appeared on the page 2 of the supplemental. Those CapEx numbers on a quarterly basis tend to be somewhat lumpy and I went back and looked at the level of commitments that we've done over the years and the CapEx is tracking on an annual basis pretty close to the commitments.

We committed for example $32 million in CapEx during all of 2009 and we spent in leasing capital just about $30 million in 2009. Even though it's on a lag basis, it's at least one to two quarters lag between what you commit and when you get it spent. And some aspects of your commitment might not get incurred for a year or two later because part of its leasing commissions and if you are doing early renewals some of the spend is pushed out of ways. But I think by and large, the incurred cost are tracking generally the committed levels and but by quarter it can vary a lot.

And then finally, the building improvement part of the CapEx does tend to be a little bit weighted toward the back end of the year. Late summer and fall are good times to get a lot of the BI work done, a lot of that involves exterior work. And so that if those things do tend to bunch up in the second half of the year and you see that in the data of this year as well.

This is Mike. The DOR lease, which is the larger transaction impact, they are just in the process of really preparing plans for this. So that, that process could protract out well over the year and it's a large transaction with 280,000 square feet to go in and do all the work they have. So it's -- I don't think we can really start seeing many of those dollars coming in until second half of the year.

Right. I mean the dollars that you guys have committed and then just your earlier comments that you expect to be AFFO, your AFFO coverage on the dividend to be positive for the year, that's reflective or -- that's including all of the CapEx dollars from those two deals being spent in 2010 or some of that goes over to (multiple speakers).

It does and we -- the amount of CapEx that we expect to spend in 2010 is definitely higher that what you see on -- that we did spend in 2009. So, but even reflecting that we -- as I said earlier to Jamie's question, we do expect the end of the year cap positive.

And then, just in terms of -- last one on the CapEx side. Are there any markets where you are seeing more lease concession pressure than some of the other ones? We've heard from some of your competitors that Atlanta and Richmond have been a little bit soft. Are you guys seeing that, can you give us sense by market where there maybe some softness?

It's kind of hard, -- what pool do you jump in and get wetter? I mean we're seeing concessions across the board. I don't know that any one particular is tougher because some of it's just driven by what we have in the way of mix of space and the quality of the building and the quality of the lease that we're trying to relay, but we probably are seeing competition offer up more concessions in Raleigh and Richmond than in any of the other markets we are in.

Yes, Atlanta would be coming in third and then from there it tends to be a little less. It just builds supply and demand and largely result of -- there was Raleigh delivered a fair amount of new developments back into 2009 and that's creating some more concession pressure there.

Okay, that's helpful. Then just lastly for Ed, or whoever I guess, when you're doing your underwriting for acquisition opportunity and you think about -- I'm not sure exactly what your timeframe is but I'm assuming it is like a five or ten year underwriting. Have you looked at what the exit value is on a per square foot basis as you were kind of thinking about investing in properties and compare that to where the values may have been on a per square foot basis at the peak?

Brendan, honestly we don't. As we've said in many occasions that we really don't run,-- I mean we did do an IR computation, but there's so many data points that go into an IR calculation but it's all driven by the exit cap rate which is difficult to project, in our mind ten years out. So we typically just look at what the building would bring to us in a way raising the quality of what we have in the market and then what the likelihood that building would be one of the last to de-lease and one of the best to re-lease going through a downturn.

So we look at on a long-term hold and seldom do we look at what the price per square foot would be the day we'd sell it 10 years out versus the day that we buy it. And we are looking at price per square foot going in today versus what we would consider a today replacement cost and how it compares on a cap rate both first year and through the first five years on average. But we're pretty conservative in the way that we underwrite these assets.

So just in terms of then just -- I guess in terms of your underwriting above, at some spread above your WAC, is that suggesting then that you're underwriting to kind of the current year cash flow or cash flow once it stabilizes above your WAC? If you're not really looking so much at the exit value.

Yeah, we'd look at first year and then we look how it runs -- how it looks for the first five years and then depending on what the rent roll -- let's say hypothetically there's a big move out 6.5 years into it. Then we'll look at it over the 7 year term, so we can understand the implications of our underwriting for that large roll because we want to be conservative on that. So I think a fair amount of it is dependent upon what the rent roll says with regard to expirations.

Sure, okay.

The goal is to create value and add an asset that's better than the average of what we own today.

Yes, okay, great. Thank you.

Thanks, Brendan.

Our next question comes from the line of Michael Bilerman from Citi. Please proceed.

Hey it's Joshua Attie with Michael. I have two questions; first one, sorry if you said this already, but can you explain what's driving the G&A lower in 2010 versus 2009?

It's Ed's compensation.

This is Terry, Josh. This is Terry Josh. There's a couple of things driving G&A down. Salaries and benefit costs are definitely part of it because we have reduced our head count and worked hard to get the shop as lean as we can. Incentive comp, bonus and long-term incentive is also down this year over last year. Another big component, our dead deal costs. Those are costs where we incur free development or other costs relative to deals that we are chasing and if we don't get them -- and no one can bat a thousand on those things -- we have to write-off those investments at that time. That alone was down $2.5 million in 2009 compared to the amount that we had in 2008. Going in the other direction, we are, since we are -- have less development in process, we are capitalizing less of our G&A. That's for the year is about $2.7 million in higher net G&A, because we are just capitalizing less of what we are incurring.

Then find a bigger -- the biggest item is, is this non-cash change in the value of our deferred compensation liabilities and I mentioned that in my script as well. That we have deferred comp liabilities and we have deferred comp assets, so we are fully hedged but -- and both of them have to be mark-to-market and as value of those securities go up or down we get gains and losses on the portfolio of assets and we get losses and gains on the amount of our deferred comp liabilities. Those things flow through G&A and they flow through other income, but in opposite directions. No net bottom line, but it creates volatility in those two line items. That difference was $3.6 million for the year.

So G&A was higher, which makes sense, because during 2009 the stock market was strong and the value of the securities went up and so the amount of the deferred comp liabilities went up. But then we also had a lot more other income based upon the value of the securities. So it's a lot of noise on that particular point but the bottom line is we are just working hard to lower all of our operating costs including G&A.

Thanks. I have a separate question. It seems like your guidance assumes occupancy losses early in the year and then occupancy gains later in the year. How much of visibility do you have on those gains? Are they based on known lease signings or what you have under negotiation?

It's a mix Josh, some of it is spec leasing and some of it are transactions that we feel fairly confident about, some of which are signed and some aren't.

And it's Michael Bilerman speaking, and you should get paid for the performance that you've been (inaudible) with. Just wanted to rile a little bit of humor into these (multiple speakers).

After last nights' basketball game, I'll take it.

Just on the government side, I know that you went and I'm like talking about these two government leases, which obviously impacted the [leased out.] I'm just wondering does that change at all your thinking? I mean you've been pushing a lot of built-to-suit activity towards government tendency and increasing the government tendency overall. But I guess if the spreads were that bad and you have to spend that much CapEx to get these government tenants in, -- is there -- is it not all that it's cracked up to be?

So are you saying our government is not all it's cracked up to be?

Well, they drive a hard bargain.

I think that, one of the ways to look at that, we inserted a little table on page 4 of our press release that showed with and without as reported and without. But if you take the average term, average release term as reported was 7.6 years excluding the two government leases at 4.7. If you divide that into the line above, the tenant improvements per square foot, it comes out within a penny. It's $1.78 as reported and excluding the two government releases, it's [$1.786]. So if the additional term -- yes the dollars are more, but the additional term it's within a half a penny of being in line with the private sector leases.

And also, Michael, one thing both of these government transactions there was no outside broker involved there. So a little bit more commitment in leasing CapEx is appropriate because we'd rather have that money going back in our space if you would. So that, whether it comes time to renew or for whatever reason they bake it, at least we've got some hard assets in there that we paid for. So that's actually a plus for those two transactions.

And then just on the G&A that the acquisition, now that you have to expense all the cost related to deal flow. How much is actually embedded in 2010 G&A versus what was expensed in 2009?

Yeah, zero Michael in 2010. We didn't include any assumptions in our 2010 guidance for acquisitions. So there is -- there is no built in accretion for anything that we would buy and we would just deal with that on a deal-by-deal basis. But we did provide in the guidance that we would hope to buy between $50 million and $200 million.

So if you hit the high end, so the high-end of guidance includes $200 million of acquisition that does not include the write off or the cost to get them?

No, no I'm sorry. We said that we would hope to do between 50 and 200, but we have not included any benefit or any negative impacts of making any acquisitions in 2010 in our range of 231 to 249. So there is no hit to G&A for expenses and there is no benefit to revenue for NOI.

Is that the same thing in the dispositions?

Yes. That's correct.

So even though -- even though in the guidance table it says dispositions and acquisition, the effects of those are not within the guidance range?

That's correct, and we state that in the release.

Okay, thank you.

Thank you. Thanks, Michael.

Our next question comes from the line of John Guinee from Stifel Nicolaus. Please go ahead.

Thank you very much. Just a couple clarifications. Question, you got about $5 million of assets held for sale net on your balance sheet, is that -- I'm assuming that's net of leverage? What does that net mean? Terry, I guess. Or net of depreciation? I'm not sure.

It's probably net of accumulated depreciation, that's exactly what it means.

Okay, how many square feet of assets do you have for sale right now both wholly owned and joint venture?

In that particular line item or stuff that we're trying to sell?

The latter, trying to sell?

Well, it would be, -- it's everything in Winston. The total amount is somewhere around 600,000 square feet. That would also include, I'm sorry, John, that Chimney Rock that I referenced earlier. That's another 800,000 square foot of older industrial.

Okay, and then the last question can you describe and update us with what's going on in Des Moines? As I recall, you're effectively a lender there.

Yes, we're a passive investor. And that came about (multiple speakers).

Indefinite term, or how did that come together?

It came about through the J. C. Nichols acquisition in July of 1998 and when they were the passive investor and then we just assumed their role. Along the way, we did true up some of the partnerships because they weren't all fifty-fifty [parity pursue]. So we did that and it's been over the past 12 years, it's been very beneficial to us. But it's certainly something that we look at because we don't have people on the ground there, and we don't have brand recognition there whatsoever, in fact the Highwoods name is little known. So we've made a lot of money there but certainly it's not core for us in that it's not a Highwoods' brand at a Highwoods' operated division.

Got it. Thank you.

Thanks, John.

Our next question comes from the line of Dave Rodgers from RBC Capital Markets. Please proceed.

Thanks, guys and good morning. Really just last question for me that we've got left here is you talked about the activity on the acquisition you made in Tampa in the competitive all-cash buyers. Give us an update on the trend for your dispositions? What's the activity like? Obviously pricing is not where you would like it to be, given the impairments. But what does the activity look like, the likelihood that you'll continue to be or maybe continue to offer some sort of seller financing on those assets? And do you think you can get out of those this year?

Great question, Dave, because it's really what we are bidding on is different. It's not akin at all to what we're trying to sell. We're trying to continue to sell out of the non-core, non-differentiating assets. So there are more tertiary markets, and more tertiary assets. Now for us again just as a reminder it's a strategic move for us to sell these not a financial move, but we do want to get out of them. So we have put some into market and we have offered some seller financing. But the activity, the prospect on activity on this, I am going to hate. I said this publicly because it'll come back to haunt me when we look at bids, but certainly not that of which it would be for the level of activity and the quality of buyers with regard to financial clout that we saw in the competition for the Tampa asset. These are more -- these are smaller, more local driven deals.

These would be a value add type situation for somebody versus opportunistic versus core that we are looking at.

But you are getting enough activity where that you think you can make the transaction or effective transaction this year?

Yeah, as long as you let me keep that word "think" in there. It's our -- we are certainly making efforts. It remains to be seen, but we are in conversations with prospective buyers. But I'd keep that word "think" in there. It's our expectation to get out of these by year-end.

And those are not tied to the acquisitions, both the acquisition and dispositions are mutually exclusive this year?

That's correct, and up to the $200 million. After that we would have to do something else to fund and still keep our own internal guidelines with regard to debt metrics.

Okay, that's fair. Thanks.

Our last question comes from the line of Chris Lucas from Robert W. Baird. Please proceed.

Good afternoon, guys. Terry, just a quick question on details, did you guys have snow removal leakage in the fourth quarter and if so how much?

Snow removal?

Yeah.

It was very modest in the fourth quarter. We did have a little bit more actual cost, but the recoveries got most of that back, so it was really very, very modest overall.

Okay.

We do have some Chris obviously for the first quarter, we'll have some.

And our total contract services OpEx was down pretty significantly, so we had mitigated a good bit of that in the increase we had in snow removal by other reductions in contract services that Terry mentioned for the year.

Yes, we were only about $250,000 higher in 2009 than prior year.

Okay. Then Ed, on the wish-list can you remind us what the sort of relatives breakout between office, industrial, and retail component mixes of that overall wish list?

Yes, I think it will be fair to say Chris it is, that it's virtually 100% office. We wouldn't necessarily ignore industrial activities in Atlanta and Greensboro but you can expect our overall percent of revenues driven from office to grow as we work through those.

Okay, and then just last question, you've been very proactive in commenting on the value of your balance sheet in this environment relative to whether it would be acquisition or tenant activities. I guess I'm wondering if we are at a point in the process of the extend and pretend where poaching tenants becomes a more active opportunity. How many of that?

Sure, in our view in this current environment we are seeing very little migration into markets. Like for example, we are thrilled that Research In Motion RIM, the folk who, the technology backers to Blackberry are coming to Raleigh and that [Garmin] the handheld GPSs are coming to Raleigh, and then Deutsche Bank came to Raleigh, all net positive absorption. But there is -- there is not enough of that, to really where you can grow market share. So the only way to grow market share today is recognize that, if we have 25% of the market, 3 out of 4 people we meet are prospects and they're leasing space from a competitor. So it's our hope to grow market share by doing exactly what you said and poach away from the competition.

Now we meet three forces when we do that, the probability renewal is there, the competition is there and then the customer or the prospect at that point in time is still hesitant to make a move. But we are pushing that hard and particularly with any RFP that comes out in the market and we, as I mentioned in the past week, we are now having a larger number of brokers express a lot of interest in understanding our commission process.

Last question, I'll ask one last question and then drop off. You've got two -- there have been rumors I guess two relatively large re-locations looking at actually many of your markets. Any senses to what the status of those are and if you are competing, if you feel like you're in the competitive mix with those? My understanding maybe Radio Shack?

Yeah, I don't -- I don't know the names of the customers I just know project names, but we haven't heard much on them lately.

Okay. Thanks. Thanks a lot.

Thanks, Chris. Operator, anymore?

There are no further questions at this time.

Okay, I'll just thank everybody and also I want to let everybody know that we will file our 2009 10-K after today's market close for any additional detail that you may want and of course always feel free to give to us a call. Thank you very much.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.