Highwoods Properties Inc (HIW) 2010 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Highwoods Properties Third Quarter conference call. (Operator Instructions).

As a reminder, this conference is being recorded, Friday, October 29, 2010.

I would now like to turn the conference over to Mrs.Tabitha Zane. Please go ahead.

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 e-mail copies to you.

Please note in yesterday's press release, we have announced the plan date for our financial releases and conference calls for 2011.

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 presentation 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 conditions. 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 and expense 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, 2009. 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 the 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. Thank you and I'll now turn the call over to Ed Fritsch.

Thanks, Tabitha. Good morning and thank you everyone for joining us today. We had a solid quarter on a number of fronts in 2010 is proving to be a good year for our company. At the outset of the year we forecasted FFO to be to $2.31 to $2.49 per share.

Through the year we've tightened guidance to the range of $2.44 to $2.46 with the midpoint increasing from $2.40 at the start of the year to $2.45. And this includes the dilutive impact of the non-core sales we closed earlier this year.

Our team has performed well in a number of sectors, particularly with respect to leasing volume, cost control and portfolio improvement. Our operating fundamentals, while still clearly challenging have been somewhat better than we originally anticipated. Leasing volume was again strong with 1.4 million sq. ft. leased in the quarter. And for the first time in three years we leased over one million square feet of second-gen office space in a single quarter. Total office leasing for the first nine months of 2010 was respectable at 2.8 million sq. ft., compared to 1.8 million sq. ft. for the first nine months of 2009. A 56% increase. Over the same comparative period we have seen our average lease term increase by 34%; in some cases we are clearly investing hiring TI's but the spend is in sync with the level of credit and term. Office occupancy across our portfolio continues to outperform our markets by a substantial margin.

Overall a solid operating performance in the face of a challenging economic environment, which unfortunately is likely to persist well into 2011.

We don't see fundamentals worsening but we remain uncertain as to when we will see meaningful broad based improvement.

Turning to investment activity. During the Third Quarter we announced two deals totaling $110 million that should generate 9 plus percent average cash returns. This activity included the $53 million July acquisition of Crescent Center, a 336,000 sq. ft. Class A office building in Memphis. Subsequent to closing we've invested $1 million of the $2.3 million we earmarked, for building improvements as we high (inaudible) the grounds and building.

In August we won a $57 million build to suit headquarters to be constructed on the Country Club Plaza in Kansas City. This is a terrific opportunity for us to develop a Class A 192,000 sq. ft. building in a core in-fill location. It will service the new headquarters for Polsinelli Shughart a large and highly respected national law firm with more than 500 attorneys in 14 cities. This project is subject to rezoning; when completed we will own or have an interest in 1.6 million square feet of office space in the plaza submarket. We are also, adding a second office project to our redevelopment pipeline highway center two in Atlanta.

Earlier this month we signed a long-term lease with the GSA for the entire building. 60,000 sq. ft. for the US Customs and Border Protection Agency. This $11.5 million project, will involve a substantial renovation and upgrade of the property and is expected to generate an 8.5% stabilized cash return over the term. It will also bring our percentage of annualized revenues derived from government leases to 11.6%. A percentage that has nearly doubled over the past five years. Highway Center Two will be taken out of service and added to our redevelopment pipeline in the fourth quarter of this year.

We continue to pursue a number of build to suit opportunities. Our proven track record as a developer, our core land inventory and our ability to undertake a project without financing contingencies provides us with competitive advantages.

Our sense is -- with regard to acquisitions our sense is that owners of higher quality assets now seem to be more willing to consider transactions. And we are seeing an increasing number of offering memorandums. We are focused on pursuing broker deals, as well as leveraging our market knowledge and many local contacts to initiate off market discussions. Volume is up but keep in mind that this is in comparison to a very quite period. With regard to dispositions, while we have a specific list of non-core assets that we plan to market as our guidance reflects we do not anticipate any additional dispositions during the remainder of 2010.

As a reminder we've completed $125 million of dispositions this year including the sale of our interest in our Des Moines joint venture. As well as an office Park in Winston-Salem and an industrial Park in Greensboro. Looking ahead. As we've customarily done we expect to provide FFO guidance for 2011 when we release our fourth quarter results. Leasing remains job one. Our team is winning deals; we are taking advantage of our balance sheet to gain market share, pursue build-to-suit prospects and chase targeted acquisition opportunities through offering memorandums and off market deals.

Given that we have all heard so much this earnings season already, I'm not sure that I won't sound like Bill Murray's Groundhog Day, when I say, "it remains a tough economic environment and we don't see this movie ending soon."

With the sustained absence of job growth and elusive consumer confidence, we find a morsel of encouragement as corporations across many industries are reporting strong earnings and increasingly healthier balance sheets.

It has to be only a matter of time before confidence returns and companies begin deploying their capital to grow their businesses. After all these Mongol war chest of cash aren't earnings shareholders any money.

Mike will now cover fundamentals in more depth. Michael?

Thanks Ed, and good morning everyone. In the Third Quarter, we signed 154 leases for 1.4 million sq. ft. of first and second generation space, 79% of which was office. This compares to 913,000 sq. ft. leased in the same quarter a year ago.

Occupancy in our wholly owned portfolio declined 40 basis points from the Second Quarter to 88.9%, but is up 110 basis points year-over-year. Based on current projections we are very comfortable that year-end occupancy will be within our forecasted range of 89% to 90%.

Cash rent growth for office leases signed this quarter declined 8.3% while GAAP rents increased 3.1%. Even in the face of economic headwinds we have continued to garner escalates between 2.5% and 3% in virtually all of our leases.

Capex related to office leasing was $16.65 per square foot in the Third Quarter. A reflection of longer weighted average lease term of 5.9 years. On a trailing four quarter basis the average weighted lease term was 5.7 years, compared to an average weighted lease term of 4.0 years for the same trailing 12 month period last year.

Our ability to fund TI's and lease commissions due to our strong balance sheet is well known in the marketplace and gives us a competitive edge particularly in attracting customers away from other landlords. In some cases when the credit is solid, we will invest higher capex for more term. And in this quarter, no one or two deals skewed this number.

Looking across all of our markets there were approximately 11 transactions totaling 441,000 sq. ft. with significant tenant improvement commitments. In exchange the average lease term of these deals was 7.2 years and the credit quality of the customers was solid.

We don't expect TI's to continue at this run-rate, but we won't shy away from opportunities to poach more customers from the competition.

In the aggregate our markets reported 872,000 sq. ft. of positive net absorption. There is virtually no new development construction in any of our markets. And sublease space remains very low at approximately 1.5% of total market inventory.

Our portfolios in Raleigh, Richmond, Memphis and Greenville all reported increased occupancy from the Second Quarter. The Raleigh market continues to be active and we signed 33 leases in the quarter totaling 354,000 sq. ft. This compares to 133,000 sq. ft. signed in the Third Quarter of 2009 and 229,000 sq. ft. last quarter.

Activity included two, 10 years deals totaling 217,000 sq. ft. One deal was for 163,000 sq. ft. with Talecris Biotherapeutics, which was announced in July. Talecris extended and expanded its lease at Research Commons by 40,000 sq. ft.

The second transaction was a 53,000 square ft. lease at CentreGreen Four in Cary, with a multinational corporation that recently expanded into the Raleigh area. This lease is set to commence in December at, which point our CentreGreen Office Park will be approximately 91% occupied.

Our Nashville division delivered solid leasing results this quarter, with our team signing 20 leases totaling 220,000 sq. ft. with GAAP rent growth of 13.4%.

Although occupants in our national portfolio did drop this quarter due to several larger lease expirations, we do expect occupancy to improve slightly by year-end.

While the Atlanta office market continues to suffer from an overdevelopment hangover, we are encouraged that the trend of negative net absorption is improving. Our Atlanta team leased 143,000 team lease 143,000 sq. ft. of office space more than the previous two quarters combined. While occupancy in our office portfolio was down quarter over quarter, we significantly outperformed the market as a whole by 830 basis points.

The Tampa office market experienced positive net absorption of over 500,000 sq. ft. The second consecutive quarter this market has posted positive absorption. Market occupancy improved 120 basis points quarter-over-quarter, but is still a weak 79%.

Occupancy in our portfolio at quarter end was 89.5%, a drop from the Second Quarter due to several expected move outs. It is a particularly difficult operating environment right now, but we remain bullish on the markets long-term prospects, especially the Westshore submarket, where the majority of our assets are located.

We continue to bounce along the bottom in most of our markets; however, there is a silver lining, as there are no more late in the cycle development deliveries to further compound weak fundamentals. As we await the much anticipated and long overdue economic recovery, our leasing team is pounding the pavement and winning more than their fair share of deals. Terry?

Thanks Mike and good morning. Our financial and operating results for the Third Quarter were solid, with FFO of $0.58 per diluted share, excluding the effects of expense property acquisition costs and a small debt extinguishment charge.

This compares to $0.62 per share in the Third Quarter of 2009 and $0.65 per share in the preceding Second Quarter of 2010.

Core FFO, which we define to exclude lease termination fees, debt extinguishment gains and losses, property impairments and property acquisition costs and so forth was $0.56 per share for the Third Quarter. Compared to $0.60 per share in the Third Quarter of 2009 and $0.62 per share in the preceding Second Quarter of 2010.

The $0.58 of FFO per share this quarter, was $0.04 lower than the Third Quarter of 2009 primarily due to $0.013 in lower same property GAAP NOI, $0.029 of lower NOI from sales in the Second Quarter of non-core properties and non-core JV interests. $0.026 in higher interest expense and $0.014 from a favorable legal settlement in 2009. These were offset by $0.024 of additional NOI from recently acquired properties. $0.01 of additional NOI from development and other properties not yet in the same property pool. And about a $0.005 in lower G&A.

Total revenues from continuing operations were up $2.9 million this quarter or 2.6%, compared to the Third Quarter last year. $5 million came from acquisitions and developments not yet in same properties. Offset by $2 million in lower same property revenues.

The decrease in same property revenues was mostly from lower recovery income, due to $1 million in lower same property operating expense of this quarter compared to Third Quarter last year. And a small refinement to our expected recovery rate for the year.

Sequentially, same property operating expenses were up $3.2 million in the Third Quarter compared to the Second Quarter nearly all of which was from utilities. As we've experienced every year, operating expenses are highest in the Third Quarter compared to the rest of the year due to typical seasonality.

Fourth quarter same property operating expenses normally decline significantly from Third Quarter and we expect that again this year.

G&A for the quarter was approximately $600,000 lower than Third Quarter 2009. This was due to $450,000 lower market adjustment to existing deferred compensation liabilities. Which is -- the effect of which is fully offset in other income as we discussed on prior calls. And $400,000 of various cost savings offset by $250,000 of acquisition costs. Sequentially G&A was $1.9 million higher than the preceding Second Quarter, mostly due to non-FFO market adjustments on deferred compensation liabilities of $700,000. $800,000 in estimated short and long-term incentive compensation and $200,000 in acquisition costs from the Crescent Center transaction.

Net interest expense this quarter was up $2 million compared to last year, due mostly to $400,000 from the loan assumed in the Crescent Center acquisition, $800,000 in lower capitalized interest from fewer development projects, and $500,000 in higher fees related to the $400 million credit facility we closed in late 2009.

Sequentially, the $400,000 increase in interest expense in the Third Quarter compared to the Second Quarter was due to the Crescent Center assumed loan. Our balance sheet remains in great shape. We have nothing outstanding under our $400 million credit facility and have $21 million of cash at the end of the quarter.

With respect to CAD we said on our last call that we expect to have the positive-negative line for the rest of the year and next year. Nothing has changed that expectation at this point. Finally, as Ed noted we narrowed the range over 2010 full year FFO guidance to $2.44 to $2.46 per share from $2.40 to $2.48 per share.

While we don't provide quarterly guidance our revised full year 2010 FFO guidance implies that we anticipate Fourth Quarter results now of $0.61 to $0.63 per share.

Operator we are now ready for questions.

Thank you. Ladies and gentlemen, if you would like to register a question please press the one follow by the four on your telephone. (Operator Instructions).

Our first question comes from the line of James Feldman from Bank of America, Merrill Lynch. Please proceed.

Hi good morning this is Andrew V. I am here with Jamie Feldman I just wanted to ask you if I can go back to your comments earlier how you're seeing increased offerings in terms of acquisition, but what are you seeing on the bidding side -- how is competition there?

We used the term on our last quarter call scarcity premium. We are still seeing that in a number of deals where the volume of deals that are in the market still remains thin. And based on the number of capable buyers we are seeing some degree of premium being offered for certain deals. The volume is up, as Real Capital Analytics stated, it was 3 times higher than the low, which was in the Second Quarter of '09, but still 7.5 times lower than the high, which as we all know was Second Quarter of '07.

And what is your sense where cap rates are heading?

We see them continuing to tighten.

Okay.

There's a fair amount of money obviously on the sidelines to invest. Debt is inexpensive. So, I think that there are capable buyers that are bidding on marketed deals. And we're certainly not.

Great, and if I could switch gears. If I think, if I look out to next year and how should we -- regarding your expiration schedule, have you -- as you start to have conversations with your tenants, how many of these leases have already been taken care of? Can we get a sense, just a general sense? And what does relisting spreads look like for those?

Well we haven't given out guidance obviously yet for 2011. We've been working on leases that expire in 2011 for more than six quarters now. And as you may recall, we've seen the brokerage community reach into future years to try and negotiate and recast new deals well before their expiration. So, there's been an unusual amount of activity in forward expiring deals over the past year and a half, two years as we've often talked about.

A specific number as to how many of them have been scotched. I don't have that at hand but we certainly show in our supplemental on page 19, what percent still needs to be addressed.

Okay thank you

You're welcome

Our next question comes from Michael Bilerman from Citigroup. Please proceed.

Hey, good morning guys this is David Shamis here with Michael. I was wondering if you could update us on the status of your build-to-suit in Kansas City. It sounds like there's been some controversy there, I'm wondering if it's been completely finalized and if you could give us a little bit of color that would be great.

Sure as I mentioned in the prepared remarks it's subject to rezoning. That process will take a couple more quarters. We expect it to be completed by the latter part of First Quarter.

We have received some good constructive input from some of the residents there. We feel very good about this project. It's a terrific win for Kansas City to be able to attract this headquarters or keep the headquarters in Kansas City as opposed to lose it to some cities that have heavily competed for it.

We've been responsive to the input that we've heard with regard to some design aspects that some in the community would like to see incorporated into the project.

And we've basically modified the design where we believe that we've overcome the primary objections.

Is there -- is there a Plan B in case the site doesn't get the rezoning approval? For a different site location?

There is not. We feel good about the prospects for this.

We do actually have another site; this is the second phase of Valencia that we initially proposed to Poulsen Elliott David. But this was their preferred site. They want to stay on the plaza and we feel like at the end of the day, we will end up winning out on this.

We have got great support from the city council folks that we've spoken to about this. The job creation. The mayor there is a lot of positive things. The business community. There is a very vocal minority out there of folks that have expressed interest in maintaining the [plazaesque] feel of this project, but we think when all is said and done, as Ed said, incorporating their constructive comments for the new design that this project will go forward.

Hey, David keep in mind that there's hardly anybody that has more interest in this being successful for the plaza, not just the building. We're not going to put ourselves in the position of being able to beat our chests and win a $50 plus million build-to-suit at the expense of a near $0.5 billion investment in a project in 12 or 13 blocks that surrounds it.

So, we are keenly interested in this being a win-win.

Great. And then just looking at your Orlando statistics there, it looks like the occupancy fell from around 92 to just under 85 with 20% rent roll down. I'm wondering if that's general market conditions or some one-time expected move-outs?

That's really a one-time transaction. Our wholly owned portfolio is fairly small, because we have a large percentage of JV properties there. And this is the result of one -- pretty large customer out in our Metro-West area vacating a project we've already got some traction to back fairly a good part of that. So, that's fairly isolated to that one project.

Keep in mind David we only own 416,000 sq. ft, wholly owned in Orlando. Most of our ownership there is in joint ventures.

That's about a 70,000 sq. ft. move-out, coming out of that one portfolio

Okay great. Last question, looks like your same-store NOI guidance came down a little bit from last quarter, but it sounds like, generally based on your prepared remarks leasing velocity has been good; things are looking a little bit better, so, what specifically is driving that decrease?

It's just the mix of deals that was in the quarter. Certain expirations keep in mind when we provide those numbers we reach all the way back to the last expiration, whether the space has been empty or vacant more than a year or not. And the deal comparison includes the escalators, so we've dropped a little bit based on the mix that was within the quarter.

But as Mike stated in his [scripted] comments, we continue to be able to secure annual escalators in the deals that we do. And there are between 2.5% and 3% and we consistently get those on new deals signed even in this tough environment.

So, while we may have a negative in the 2.5% to 3.5% range upon signing, we see that we can call back to that pretty quickly.

Great. Thanks a lot guys

Thank you, David.

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

Thanks good morning

Good morning Brendan.

I think this is probably my first question, probably for Mike or Ed. I look at your occupancy stats on kind of a same property basis the current properties. And that has moved down a little bit consistently, over the past several quarters. But I think you guys have made the case that commodity space is suffering more. I think your properties would be higher on the quality scale. But, Mike you mentioned that absorption was positive by 872,000 sq. ft. in your markets this quarter. So, that moved up, but your occupancy moved down. Is there a reason why there's a disconnect there?

This is Mike, Brendan. I think if you look at -- there are several markets. I think we had five divisions where we have this occupancy drop and they were specific to a few large deals in Tampa. We had three tenants that came out of space; one was a fairly large consolidation within the market.

One was a tenant that really probably should have been in a back office space to begin with and they relocated out to a converted grocery store. So, that was the nature of that.

Nashville was another market where we had a year where we just had three tenants one was in the building related business that basically went out of the market totally. So, I think this was more unique to these specific properties not more systemic to our portfolio. Because we believe with the quality raise that we have done through dispositions over the years we are in much better shape this time around, to absorb this than we would have been had we not disposed of those

And Brendan, remember we remain comfortable with our year-end occupancy guidance of 89% to 90%

And also, remember, even with that our portfolio continues to be in the top five markets over 700 basis points greater than the market across all markets almost 600 bips over the market. So, we're still well outperforming the market in general

So, if we look at that market and let's say as you guys discussed that we are in a tough environment and the market let's say are, call it, roughly sideways over the next year or so. You guys are paying more for capex for certain deals which it sounds like that makes sense. So, should we see your occupancy, if we are in a flat market, should we see your occupancy move up because you've got, call it, better quality space than the market average?

I think that's fair. But it all depends on what happens with certain key renewals in 2011. And I don't want to get into 2011 guidance, but I think just in the genre of what you're talking about, some key renewals, whether they ink up or not, or if they downsize or not, or if they expand or not.

They are just some sizable ones still out there that we are working on that will help dictate that. But I would think that what your premise is that we would subscribe to that. And I think it's also buoyed by the fact that these late in cycle development deliveries just simply won't be a factor in calendar year 2011.

You tend to get a flight to quality in a market like this, where customers have an opportunity to step up in class a bit.

Yes you have to pay to move them to get there. But they have an opportunity to get into Class A space at a pretty good rate. And we just have to be mindful that there is a limit as to how much we are willing to pay to gain that occupancy.

To your comment Brendan. Our occupancy projection for this year is up some from where we started

Sure. Okay. Ed, maybe if we can move to the build-to-suit transactions that you guys announced during the quarter. The Kansas City deal is about $300 a square foot. The deal with the GSA in Atlanta in the airport submarket is around $190 a square foot, both of those from a basis standpoint seem like they are pretty high.

Why are you comfortable kind of building projects at that cost per square foot? Even though the yields seem like they are relatively attractive based on acquisition opportunities

Yes, the yield is indeed attractive. There is no doubt that the yields are strong.

The GSA as we have done the build-to-suits over the past five years, we know that they are expensive as they have certain requirements. But we get a very long-term lease. We get a very high propensity for renewal. And we get theoretically the best credit you can get.

So, we think that those factors offset anything that we would do to quote-unquote specialize the building. And we've tried to make them as generic as we can. But again, given the credit and the term and the propensity to renew it's justified. Within Country Club Plaza very long-term lease, we think that there's probably not a better infill mixed use development in the country with regard to the integrity of that entire project and to be able to leverage some existing parking and put a 100% prelease building at a very attractive return makes good sense to us. So, if 20 plus years from now when that lease expires we cannot justify the investment I think that we will regret it, but I can't imagine that being the case.

We also, have in Kansas City remember, one, this is a law firm; law firms tend to have fairly high TI's, which are baked into that price. You also have -- Kansas City is a union shop town. So, you typically have higher construction per foot when you've got more union to deal with.

Sure. And then for Terry, just in the Q4 guidance, if we look at the $0.04 delta between your midpoint of Q4 versus what you did in Q3. Is all of that really going to be driven by reduced operating expenses? Or is there something else that is driving the number up in Q4?

About three quarters of it is reduced OpEx. There's -- should have a little bit lower G&A in the Fourth Quarter compared to the Third. And some acquired properties, still kicking in some additional NOI in the Fourth Quarter compared to the Third Quarter. It will be offset a little bit by interest. Expense will still be higher.

And those are the basic changes, Brendan from Third to Fourth Quarter in our outlook.

Okay. Alright, thank you.

Sure.

Thanks Brendan.

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

Good morning. Ed, a question for you on your acquisition pipeline and what you have been underwriting. I know you have your wish list that's out there and you continue to look at those every quarter. But if we put those aside what type of level if can you quantify, now versus six months ago what you may be looking at, whether you're looking at value add versus core how many of those are coming across your desk? If you could put some color around those that would be great?

Sure, we are seeing more stabilized assets than value add assets come to the market. We've probably underwritten in the last 3 to 5 months, about $1 billion worth of assets and maybe half of that is still seriously in play. The half that went away either it was pulled back off the market. Or it simply hasn't traded because the sellers haven't made decisions on what they want to do. Or we've been outbid. Which has been more the minority of the half that is gone.

The other half, we are out there; we are in the mix, and we are at different stages of conversations and the sellers are at different stages of contemplation on what they want to do.

We have seen some come to market where -- think of it like an option, where they have an unstated reserve on it and they are seeing what they would be able to attract in the way of sales price. Before they decide for certain whether or not they are going to cut loose with the fee simple title.

We continue to leverage our operating partnership units as a potential competitive advantage, because even though the ability to bid with no financing contingencies is attractive to prospective sellers we are not alone is attractive to prospective sellers we are not alone in the room anymore in being able to tout that we can bid net of any financing contingencies.

Thanks for that. And then with respect to the leasing side of the equation. I know you've had a superior capital position to your competitors out there and that's allowed you to win and push that occupancy above market where you usually are. As capital rolls downhill, let's say, when do you expect to see more of that competition come online and are you already seeing where lower quality owners or cash restricted owners are finding sources of capital to compete more aggressively.

We haven't seen the low end find more sources of capital. In fact, we've seen some of them get toe tagged. But their Class B- and down assets that simply don't seem to be able to find the capital and some of them are turning over the keys. And then once they're in that purgatory of ownership I think it's even easier for us to compete or cold call if we can pull some of the higher credit customers out of those buildings.

In the middle tranche, if you will, we are seeing some but we are still not seeing their -- a dramatic uptick in their ability to source capital to go out and fund significant TI's and commissions.

What we're also, hearing, Dave, is from several brokers that the lesser capitalized companies are offering up to the tenant prospects that they will take the space as is. They may lower their rate significantly, but the customer is just not willing to use their capital to put back into [leased] space.

That migrates it back to us, because we do have the capital and are willing to do the deals albeit we get paid for it with slightly higher rates than what these guys can do.

And keep in mind Dave most of our competition is the local private operator.

Right, right great. Thanks for the color.

Thanks, Dave.

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

Thank you. Ed, just looking at the guidance I noticed that you tweaked the various ranges for dispositions and developments, but left the high end of the acquisition range unchanged at $200 million. Can you give us a sense for what may potentially be in the pipeline that you expect to close in the Fourth Quarter?

Well I can't give too much color on that. We are in the hunt on some things any combination of a couple transactions that could come together. So, we are not to a point where we can disclose anything and were not to the point where I can say we've got outbid or it got pulled off the market. You know it's just -- I think that we wouldn't have left the 200 out there if it wasn't plausible. But I also want to manage expectations and I don't want you to think that we are right now in the process of collecting a estoppel certificates.

Got it. And I know you haven't exactly published your wish list. But if you stacked all of those properties up and then weighted them by markets, where would it be most heavily weighted?

In our probably top five markets in the better submarkets within those, I think would clearly be the more heavily weighted. We are thrilled with our position as an example with market share now on Poplar Avenue in Memphis. Would we buy another building or two? Sure. But we would be more interested in having maybe a more significant presence in some of the better CBD's in the markets that we are in as an example

Okay. Mike, I'm sorry if I missed this in your comments. But can you speak to prospects for Triad Centre?

Sure the Triad Centre III in Memphis. We've got a good level of prospects John. I would say that for at least if not more than half of the remaining space in the building. I know Steve Glenn and his team out there are working hard to get these. You do still have a little bit of the disconnect between first-gen and second-gen space, obviously, because the quoted rates are higher. But now as Ed mentioned given our position on Poplar Avenue, we control a substantial amount of the Class A space on the Carter itself.

So, any activity in that market almost have to come to us. And given that the vacancy in our Class A space is pretty tight out there Triad Centre becomes almost the default choice of any size space. Good prospects for it. I would say again, nothing that we would be announcing in the next few weeks. But we are pretty pleased with what we are seeing

And John, put some numbers with that we are basically in the process of pursuing again different stages of RFP's for about 75,000 sq. ft. the building in total is 148,000 and is 24% leased at this point in time. And more financial services type companies than anything else

And how is -- how are the yield expectations or how it is coming in relative to pro forma?

I think we are going to be a little off of where we pro [formaed]. We broke ground in this market just about the peak of the market and where we projected to be. We did expect there to be some downturn when we started this thing. I would suggest that because of the location, because Poplar Avenue, we will still do better than the market per se for Class A space. But I would say it will be off some what for -- relative to where we originally [underwrite it].

We still have nine months though for a stabilization period.

Sure. It won't even be official in the market in service until Third Quarter next year.

When you say a little bit, you mean 50 bips or what are we talking?

It's really hard to say at this point because again, it depends on where we shake out with the 75,000 sq. ft. that Ed talked about. I would say maybe in the 25 to 50 bip range would be more appropriate

Okay. And then just lastly when do you expect to be out of the rest of the condos at RBC?

I think our conservative projection is year-end next year. We've made pretty good progress on those. It's been slow, but I think we're down to 26 units. And two of those are under contract.

Twenty-eight (multiple speakers) and then two of the 28 are under contract. You interested?

I'll let you know. Thanks guys.

You're welcome. Thanks John.

Our next question comes from the line of Chris [Cathit] from Morgan Stanley. Please proceed.

Ed, could you talk for a minute about -- I guess going longer-term at the bottom of the market in terms of rent? Versus maybe waiting for the market to [strengthen] -- passing on a deal or trying to renegotiate the deal or not renegotiate it, I guess -- but versus getting escalations, how are you thinking about your leasing strategy at the bottom here?

Yes, I could give you a really long answer to that, but bottom line is if the credit is there, bird in the hand. That's basically been our tact on each deal. If the credit is there, we have the capital to do it; we have the options. We have fee simple title. So, we can move customers around as they need to grow. That's really been our marching orders at this point in time. But if the credit is not there you're not going to see us take big risks with commissions and TI's for soft credit.

Chris, this is Mike. Ed and I think alike; we've been doing this for well over 50 years.

Mike -- he is older than I am.

A lot longer than that. And my experience has been trying to market -- time leases to hit the bottom of the market or top of the market rarely plays out. So, as Ed said if you've got a good credit tenant and you can go on and get the escalators that we are getting, produces good GAAP rents, you do take the bird in the hand

And there's some things you get out of that as well, Chris. You get a relationship. If we can establish a relationship with a customer like the one we talked about last quarter where we ere able to poach 50,000 sq. ft. from a competitor. They had a sizable lease with us, a sizable lease with a competitor. Now we're their sole landlord in the market; were giving them signage on the interstate. It gives us a great opportunity to grow with the customer beyond just getting the net wash absorption as the world turns around and begin to grow we want to be there as their landlord.

And we continue as we mentioned earlier to get these 2.5% to 3% annual kickers which we think is important when you look at a 5 to 10 year deal.

Have you -- I mean maybe you can't do this at the bottom of the market but have you been able to push those kickers longer for your longest term deals? Do the tenants understand they are getting a great deal? Or is that basically all discounted market?

Well I'd put it this way, the customer obviously has to look at their own business plan. But those who are representing the customer and the landlord whether they be our in-house brokers or the tenant-rep brokers if there is one involved. They all understand that the longer the deal, the more the rent, the higher the commission. So, I'm confident that customers before they sign they are shown the economic benefits. They are shown, where we are in the market with regard to being able to lease quality space, and the brokers know if they get higher rate, better kickers, longer term the commission is going to be higher.

Got it. And then I have two more questions. One for Mike and maybe one for Terry. Mike you talked about some of the move outs this -- recent move outs. Can you tell me the downtime there? Are you able to turn around and market the space right away or do you have to put some work into it?

Sure, Chris in some of these for example, in Nashville, which is one of the markets I mentioned the building related that moved out. They moved out; we had downtime of less than 90 days before we already signed a deal for a backfill of a substantial part of that space.

We've had -- I also mentioned the large tenant in Orlando. They are moving out of that -- out of one building. Actually they're going to backfill part of an existing building . Excuse me, a subtenant is actually going to backfill part of that space.

And then we have, what I would say advanced negotiations with a good part of that space. I'd say we're pretty fortunate right now to have good activity on those large move outs. One building in Tampa, where we just lost a pretty good-sized tenant to a consolidation to another project, is going to be a little more of a challenge because it's virtually an entire building. So, were going to go back and do some repositioning on that and that may take us a little bit more time. I would expect that could take us 9 to 12 months to backfill that; that's a good-sized chunk of space, about 35,000 sq. ft.

All in all I'd say we are pretty pleased with where we are for backfill of those

Chris we do have a very defined process though, when a customer comes out of a space. We walk it with the maintenance techs, we walk with the leasing agents and the property managers and the division head. And a decision is made on what to do to that space so that we are not looking at it six months later and saying maybe we should got this. If it is space that needs to be gutted, we will gut it. If it doesn't show well, if it comes off like a rat maze we are going to go in there and gut it. There are things we just need to do with regard to touching up some walls, some patching and painting, we will do that. But the space is going to show well. We're not going to have any cars on the lot that it is evident that a bird had camped out on it. Everything is going to be presented well and we're going in and shampooing carpets and making sure that is done, but it's done in a very timely manner.

They are out by midnight the night before. The next day we are in there evaluating what we need to do with the space and putting the team on it. And this is again, where were leveraging that strong balance sheet to be able to reinvest back into those properties and be able to remarket it, is a big advantage. Because we do have some competitors where they've lost tenants and they don't have the capital go back, and those properties get very shopworn and tired. Once again, another place for us to seek a competitive advantage using our capital.

Thanks and then sorry just last question was for Terry. You might have already covered this, but I must have missed it. Is I think you have a maturity in December for about $52 million. Is that something you are going to extend? And then at a higher level, how do you think about balancing or I guess what is your interest rate outlook for balancing your variable versus fixed exposure?

Sure, the maturity that you see in the supplemental is our construction loan it's a secured loan with a couple different banks. Bank lenders. That loan has two one-year maturity options which we plan to exercise and already have given notice for the first one-year renewal. We pay the fee for the renewal in December and then it will roll until next December. The spread is 85 basis points over; it is such a low rate loan that we definitely want to keep that in place as long as we can. So, we plan to roll that again next December. To stretch it out for the full term. Just looking ahead to next year we only have one loan maturing in 2011; it's a bank unsecured term loan of $137 million. It matures in late February. We haven't made our -- a final decision how to refinance that. But we have a couple different options but one is to roll that back into the bank term loan market. That may be probably the more likely but we haven't made a final decision on how we intend to refi that. But the rate there is [1.10] over that will go up, just -- to more to market next year when that rolls. Which would probably be -- I'm guessing Chris maybe another 140 to 150 bips higher on the cost when that rolls.

In terms of our preference for fixed versus floating rate. I like having a small portion of our capital our debt stacking in floating rate debt. I just think over the long run that's not a bad thing to have. And I think where my uncomfort zone starts to kick in is somewhere when it hits maybe 15 % or 20% I don't think we've ever had it that high, but we don't mind having a relatively small portion of our debt being floating.

Thank you

Yes, thank you

Thanks Chris

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

Good morning everyone

Hey, Chris.

Ed can you give us an update on the build-to-suit pipeline. I know you've announced a couple of wins, but curious as to where the rest of the pipeline fits and what your thoughts are in terms of timing?

Sure

For knowing how the deals are going to work out.

Sure, I think I said on a call or two ago that we had seven projects we are in a hunt on. One has been awarded. The Polsinelli deal in Kansas City. One has died, which was the smallest of all of them; it was a $8 million, $9 million project down in Florida. And the others are still out there and, as we referenced, three of the others are GSA transactions that we responded to the SFO on and we and others had hoped to hear by now, but an announcement hasn't been made thus far on any of those three projects. So, I feel like we still have a very good quote. Total it's just shy -- it's in the $175 million to $200 million range. About 0.5 million square feet or so, and we stay in the hunt [on that]. The GSA has not come back and asked anyone for clarification -- to our knowledge -- for clarifications on bids, etc. So, we're just waiting for a decision from them.

The deals are across a couple of markets there are some others that I would call more suspects then prospects out there. A few -- a total of three build-to-suits that are somewhat rumored that we haven't seen sophisticated RFPs on at this point in time

Okay. And then listening to your comments about the acquisition landscape, and it seems to me anyways that you are interpreting that the acquisition that appears to be wider than it had been in prior quarters. Is that fair to say?

Our net?

Yes, your net has widened somewhat.

As far as what we pay or geography or --?

Just seemed to me in the past you were more focused on what you would call your hit list. And today's comments you sort of broaden -- it seemed like you broadened that out to include other type deals.

Yes, I think that what we are seeing right now in those deals that we continue to have in our scope are -- I'd say by far the large majority are dead on with our targeted wish list. There are one or two others that we are looking at; they are not dramatic in scale, so I would say that what we're really pursuing is building addresses that were on our wish list that are actually now coming to market. But we are still heavily focused on our bull's-eye of trying to identify properties that have stabilized rent rolls and were well conceived development projects.

Okay great thank you guys

Thank you Chris

Thank you

You have a follow question from Brendan Maiorana from Wells Fargo. Please proceed

Thanks, a couple of quick ones, probably for Terry. The condo sale gains in the quarter, you guys did four transactions. The total gains were almost $0.5 million so it was about $120,000, I think, of gains per unit. Is that a reasonable go forward run rate? That's about double what you have been doing?

Brendan, you picked up on an interesting event that happened in the quarter. What we do every quarter is evaluate where we stand on our sales and our partner's promoted interest. And you remember we have a 7% partner and that partner was entitled to a promoted return depending on the return that's left over after each of us get a 12% pref on our cash investments. And given at the time has stretched out little bit from going back to the very original expectations of sales, his promoted interest is coming down. And that really helps our net gain. So, when you add the -- [in effect] the minority interest that we have for him and the outright gain on the sales it resulted in that $0.5 million total gain for us.

So, it's a combination of what you might call cash gain on each transaction combined with an adjustment to the minority interest given that it's less likely that he's going to achieve or the partner is going to achieve the promote that we had originally expected.

But from just a general standpoint, Brendan. Because of the uniqueness of this product relative to the condos in the downtown Raleigh market, we've been very fortunate to be able to hold our pricing pretty good. But it's still a tough market down there. And I think that we want to make sure we maintain momentum down there, so our sales team -- they are being aggressive as they need to be but they're not just comparing apples to oranges by trying to sell our product to a low or mid-rise condo. So, I would say we could expect to see a little discounting to make sure we stay in the game for the high end condos. But it's not going to be an auction type situation.

And just to clarify Brendan as a result of that adjustment to the minority interest, the rate -- the total net gain in the Third Quarter would not be the same run rate you should think about going forward if we were selling two or three per quarter.

Sure, that's very helpful, thank you . And then just lastly for Terry can you just give us a sense of how much development spending dollars you may do over the next four quarters or so? I think if I look at your schedule, you've got around $13 million left to kind of complete the development pipeline and then you have the two build-to-suit transactions that you announced during the

Well, we talked about the Polsinelli; then Ed mentioned on the call the other one that's going to be added here in the fourth quarter down in Atlanta. That's also around $12 million dollars. So, there's probably roughly $24 million on the two redevelopment projects, not a whole lot left on any of the other projects that we started in the past, and there's some -- there's just build-out, tenant build-out costs. And then Polsinelli -- with Polsinelli Shughart in Kansas City construction there probably won't start, Ed, until --?

We wouldn't see any payouts for that until the Third Quarter of 2011

Okay but you guys on those expenditure dollars you will be capitalizing the interest on that?

Once we start to spend, yes, we would

Okay great. Thank you.

Thanks Brendan.

Thanks Brendan.

There are no further questions at this time; please continue with your presentation or closing remarks.

Thanks, Frank. We appreciate everybody dialing in. I just want to say that I will attend Citi's 2011 Global Property CEO Conference on March 13 through the 16th in Destin Diplomat, Hollywood, Florida. If you have any more questions with regard to the quarter or anything else, please give us a call. Thanks.

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, everybody.