Highwoods Properties Inc (HIW) 2010 Q4 法說會逐字稿

Welcome to the Highwoods Properties Fourth Quarter and Year End Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded Thursday, February 10, 2011. I would now like to turn the conference over to Tabitha Zane. Please go ahead.

Good morning. On the call today are Ed Fritsch, President and Chief Executive Officer, Terry Stevens, Chief Financial Officer, and Mike Harris, Chief Operating Officer.

If anyone has not received a copy of yesterday's press release or the supplemental, please visit our website at www.Highwoods.com, or call 919-431-1529 and we will email copies to you. Please note, in yesterday's press release we have announced the planned dates for our financial releases and conference calls for the remainder of 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, 2010. 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 views of the usefulness and risks of FFO and NOI, can be found toward the bottom of yesterday's release, and are also available on the Investor Relations section of the web, at www.Highwoods.com. I'll now turn the call over to Ed Fritsch.

Good morning, everyone. We closed on yet another year since the world reversed on its axis in the fall of 2008. While the US recovery for virtually any industry remains painfully slow, the good news is that 2010 is behind us and we are another 12 months further away from the darkness of 2008.

Some have said that 2010 was quote, unquote just another year, but we saw some macro progress even amidst the many tentacled negative impacts of high unemployment. First and foremost, the other shoe didn't drop. In fact, the year bore some material foundation building, which should fortify the probability and pace of the country's economic recovery going forward.

We benefited from another year of historically low interest rates. Cap and trade as originally drafted is all but dead. The widely expected tax increases were postponed for at least two years. Corporate profits continued to build. Productivity sustained a torrid pace. The stock market is up 86% from its 2009 low. Consumer spending is up, and the mid-term elections gave business hope that a totally one-sided Washington DC will no longer run unchallenged.

All in all, 2010 can be measured as a year of improvement for our national economy, further ensuring that the double dip more applies to Ben & Jerry's than a current day economic forecast.

At Highwoods we are genuinely pleased with our 2010 operating results. For the full year, FFO was $2.46 per share, $0.06 above the midpoint of our original guidance, even with $0.035 of unforeseen dilution from the sale of non-core assets. 22 highlights include total revenues growing by $13.2 million, occupancy increasing 150 basis points year-over-year, strong leasing volume at 5.3 million square feet of first and second gen space of which 3.6 million square feet was office, our highest level of office leasing since 2007, a 3.2% reduction in same-store operating expenses, as well as a 10.2% reduction in G&A. The acquisition of $70 million of core assets in Tampa and Memphis committing to $82 million of development activity via winning the build-to-suit in Kansas City, and redevelopment projects in Atlanta and Raleigh.

We also exited $125 million of non-core properties in the Triad and our interest in highly leveraged Des Moines joint ventures. I'm proud of our team's delivery of $2.46, and proud of putting some money to work at attractive returns.

Looking forward, leasing fundamentals still favor the customer, and our 2011 guidance reflects that belief. However, we do anticipate year-over-year average occupancy to slightly improve.

We remain focused on expense management both at the property and G&A levels. We are clearly reaping the benefits of an improved portfolio, better processes, and increased productivity throughout our Company.

Deploying new capital investment through both development and acquisitions remains a high priority, and we have the balance sheet to take advantage of these opportunities.

We are upbeat about the volume of potential build-to-suit opportunities, although customer decision making remains a protracted process. You may recall, I previously mentioned seven build-to-suit -- office build-to-suits totaling roughly $150 million that we were chasing.

We won one, now priced at $58 million, we lost an $8 million one; a $9 million one was unplugged by the customer. Three, all federal government projects totaling over $50 million, are in decision purgatory, and we are in active negotiations for one totaling around $50 million. We were also awarded an $11.5 million redevelopment project that was in addition to this list.

Subsequent to the mentioning of this list, we are now pursuing several additional projects that range in size from $13 million to $100 million. It is way too early to know how many, if any, will ultimately be awarded or how many we may win.

However, it is our biased belief that our land bank, track record, development expertise, and balance sheet give us a distinct competitive advantage.

On the acquisition front, a meaningful volume of quality, right-priced properties remains elusive. While 2010 saw more Class A office transaction in our markets than 2009, volume remains light compared to pre-recession levels.

Based on our ongoing extensive market recon, it is fair to believe that the volume of office assets, which will trade in mid-tier markets in 2011, will be somewhat greater than 2010. However, the quality of this perspective transaction pool is yet to be seen.

Turning to dispositions, while our portfolio still has a modest collection of non-core assets, our decision making with regard to the timing of the selling of these assets will be dependent upon our ability to deploy capital accretively.

In closing, the bottom line is our strategic plan remains unchanged. We are committed to owning the better assets in the better submarkets, maintaining a strong and flexible balance sheet, communicating consistently and transparently, and having the best team of real estate professionals with the experience, expertise, and drive to grow our business. Mike?

Thanks, Ed. Good morning everyone.

We had a strong year in terms of leasing volume, signing 610 leases, totaling 5.3 million square feet of first and second generation space. This compares to 498 leases signed for a total of 4.6 million square feet in 2009, a 15% increase in terms of square footage leased.

Leasing of our wholly-owned Office portfolio, where we generate 87% of our annual NOI, was particularly strong. In 2010, we signed 3.6 million square feet of first and second generation office space, compared to 2.8 million square feet in 2009, a 31% increase. This is the largest volume of office leasing since 2007.

74% of the second generation office leases signed in 2010 were renewals. Customer retention continues to be a high priority, and our leasing reps are very focused on staying close to our customers.

Occupancy in our wholly-owned portfolio increased 140 basis points from the third quarter to 90.3%. Office occupancy posted the largest sequential gain from the third quarter, 170 basis points, as many of the leases signed earlier in the year with new customers commenced in the fourth quarter.

In our top five markets, our office occupancy is outperforming the market by an average of 820 basis points, and in an all of our markets combined our office occupancy is better than our markets by an average of 680 basis points.

This outperformance is due to a higher-quality portfolio and better locations, aggressive pursuit of our competitors' customers, poaching is another way to put it, and our ability to fund TI's and leasing commissions. A big advantage to Highwoods, given our financial strength.

Year-end occupancy is projected to range between 88.5% and 91%. The low end of the range reflects the possibility that several large expiring industrial leases do not renew.

CapEx related to office leasing in 2010 average $13.62 per square foot. In this competitive environment, customers continue to push landlords for concessions. We were willing to invest higher CapEx in exchange for longer term if the credit warrants the investment. Average term for office leases signed in 2010 was five years, the highest in over 10 years.

Looking ahead, leasing fundamentals will remain challenging, but we believe effective rents in the market have bottomed. Based on current activity, we believe 2011 will be brighter than 2010. We are seeing decent deal flow, some customers are actually talking about expansion, and requests for rent relief have slowed significantly.

Turning to our markets, each division achieved an increase in occupancy from the third quarter, except for Greenville, which was flat. Raleigh reported the largest increase of all of our divisions, both year-over-year and sequentially, ending the year at 90.6%. This is a 680 basis point increase from year-end 2009, and a 430 basis point increase from the third quarter. We signed one million square feet of office leases in Raleigh in 2010, more than double 2009's production. In Tampa, while the market as a whole remains soft, our portfolio continues to substantially outperform, and we continue to be bullish on the market's prospects over the long-term.

In December, we announced the acquisition of Independence Park in the Westshore submarket. This acquisition included 33 acres of entitled development land and a 117,000 square foot vacant office building. Our investment at closing was $12.8 million, including planned near-term building and site of improvements.

We also anticipate spending an additional $4.8 million of future leasing CapEx, resulting in a 9.9% projected stabilized cash yield for the building. Independence Park offers the largest remaining development tract in Westshore, and is a key infill opportunity. The tract can support up to 524,000 square feet of additional office space.

Occupancy in our Atlanta portfolio increased 30 basis points from the third quarter, including 53,000 square feet of government leases. We recently received notice from AT&T that they plan to vacate 221,000 square feet at 2800 Century Center at the first of next year, consolidating into AT&T owned space. Terry will discuss the impact of the AT&T termination on 2011 FFO. We are confident we will have success in re-leasing the building, and our team is already talking to a number of prospects.

We believe that the worst is behind us, but sustained office job growth is key to the return of market expansion. While we can't control job growth, we can make sure we get a look at every deal in our submarkets and aggressively pursue every viable customer.

Terry?

Thanks, Mike, and good morning. We're pleased with our financial and operating results for the fourth quarter and the full year, with FFO of $0.63 per share for the quarter and $2.46 per share for the year, excluding property acquisition costs, a small debt extinguishment charge, and a small building impairment.

These compare on a similarly adjusted basis to $0.60 per share for the fourth quarter of 2009 and $2.61 per share for full year 2009. The $0.63 of FFO per share this quarter was $0.03 better than the fourth quarter of 2009, primarily due to $0.031 in higher same property GAAP NOI driven mostly by lower OpEx and lower bad debts, 3.3% in NOI growth from recent acquisitions and development projects not yet in the same property pool. And $0.011 in lower G&A, offset by $0.025 in lower NOI from non-core dispositions, and $0.014 in higher interest expense.

For the full year, FFO was down by $0.15 compared to 2009, primarily due to $0.108 in lower NOI for non-core dispositions, $0.081 in higher interest expense, mostly driven by lower capitalized interest and higher fees on the revolving credit facility, and $0.118 from 3.5 million higher shares outstanding year-over-year, mostly from our May 2009 common stock offering. These were partly offset by $0.035 in NOI growth from recent acquisitions and developments not yet in the same property pool and $0.042 in lower G&A.

Sequentially, fourth-quarter FFO was $0.05 higher than the third quarter, primarily due to $0.052 higher same property NOI, excluding term fees, from higher revenues on a 50 basis point quarter-over-quarter improvement in same property average occupancy, lower bad debts, and lower utilities expense versus the seasonally high third quarter, and a $0.007 improvement in additional NOI from acquisitions and development, $0.004 in lower G&A, offset by $0.009 in higher interest expense.

G&A for the fourth quarter was approximately $800,000 lower than the fourth quarter 2009. This was due to $1.1 million in lower incentive compensation, offset by $300,000 of lower capitalized G&A. For the full-year G&A was $3.7 million lower than 2009, due to $2.2 million of lower short and long-term incentive compensation, $1.0 million in the favorable impact from deferred compensation valuation adjustments, which are fully offset by corresponding unfavorable adjustments and other income, $1.0 million in lower spending and multiple expense categories, offset by $500,000 in lower capitalized G&A.

Interest expense in the fourth quarter was up $1.8 million compared to fourth quarter of 2009. Due mostly to $670,000 on the loan assumed in the Crescent Center acquisition, $275,000 in lower capitalized interest from fewer development projects, and $340,000 in higher fees on the revolving credit facility we closed in December 2009.

For the full year, interest expense was up $6.6 million, of which the largest drivers were $3.1 million in lower capitalized interest, $1.1 million in interest on the Crescent Center loan, and $2.1 million in higher fees from the revolving credit facility.

Our balance sheet remains in great shape. At year end, we only had $30 million drawn under our $400 million credit facility. Just last week, we announced that we executed a new $200 million, five-year unsecured term loan with nine of the participating banks in our revolving credit facility. This new loan bears interest at 2.2% over LIBOR, with no LIBOR floor.

These proceeds will be drawn on February 25 and used to pay off the $137.5 million term loan due on that day and any amounts outstanding on our revolving credit facility, with the remainder held as cash for dry powder. We also plan to pay off a $10 million, 3.9% bank term loan on April 1st.

With respect to CAD after common dividends, we were $5 million negative in 2010, due mostly to higher leasing CapEx. In 2011 we expect to break even, due mostly to improved cash NOI.

Finally, we issued our initial 2011 FFO guidance of $2.41 to $2.57 per share. Same property cash NOI growth is expected to be positive in 2011, as some of the higher straight line rent we had in 2010 is turning into cash rent, and average occupancy for our office properties is expected to be up in 2011.

The guidance range for 2011 also includes a $3.2 million termination fee to be paid by AT&T for the lease termination in Atlanta that Mike discussed. However, given a corresponding required straight line rent write-off of $1.4 million for that lease, the net impact of the AT&T termination on 2011 FFO, relative to 2010, will be $1.8 million or $0.024 per share. As in the past, our guidance range assumes no impact for potential acquisitions or dispositions.

Operator we are now ready for questions.

Absolutely, thank you.

(Operator Instructions)

Our first question comes from the line of Jamie Feldman with Banc of America Merrill Lynch. Please go ahead.

Thank you, and good morning. Terry, I noticed --- so there is a pretty big spike in CapEx spend on leasing TI's in the fourth quarter, up to $12 million from a run rate of six. Can you talk a little bit more about your expectations for next year, for that line item?

Jamie, just as a reminder, the CapEx that we show on page two in the supplemental is based on when the CapEx was spent, not when it was committed. And if you've been tracking, we have had some higher TI commitments, as we have been signing longer-term leases. So the spend actually did spike up in the fourth quarter as you said.

Our current expectation for full year 2011 for all of our recurring CapEx is roughly the same for the full year of '10, although it could be a little bit lumpy, but we think year over year those should be about the same.

Okay, and then I heard you say in your comments that you think you'll be breaking even on the dividends. I know you guys didn't really --- didn't cut your dividend the last couple of years when a lot of other REITs did.

Ed, how are you thinking about the kind of AFFO coverage you would like to see, and when you think you can grow into it, or how should we be thinking about the dividend in general?

Well, we expect to hug the line of being break-even this year. So we were $25 million to the good in 2009, minus $5 million last year, and we expect in 2011 to break even, and then our model shows continued improvement from there. So we believe that our current dividend of $1.70 per year per share is safe.

Okay.

Sorry, Jamie. We also have some nominal land sales that we plan to execute this year that would help support that.

Okay. I guess just in terms of, where would you be comfortable in an AFFO payout ratio? What's your target?

Jamie, I don't think we have an exact percentage target, but we obviously would love to be running at a reasonably modest positive amount per year to generate free cash flow for future growth.

So, as Ed said, slightly negative in 2010, we're getting back to break-even in 2011, and hopefully in our models are showing improving even beyond that in the future years.

But the goal -- financial model shows our ability to get back to the point where we are growing the dividend.

Okay. And, then finally, can you just clarify the occupancy guidance versus the same store guidance? The occupancy guidance suggests slightly down at the midpoint occupancy from year-end, but you're talking about positive same-store. What are the big drivers of the occupancy guidance?

Year over year average occupancy is forecasted to be up by a nominal amount. On the low end of the year end statistic that we provided of the 88.5, we have a handful of Industrial leases, obviously isolated to the Greensboro and Atlanta markets, that if these roles were all to turn out to be not renewed and they vacated, that would push us to the low end of that.

We're in discussions with all of them. Some discussions are further along and better than others. We think the probability of them all rolling out is slim, but we felt it was the appropriate thing to do to put the --- to reflect the 88.5.

Okay, thank you.

Jamie, sorry. You're welcome. Just to underscore, it's industrial, so the impact on CapEx is nominal and the impact on revenues is nominal.

Operator, I think Jamie --.

Okay our next question is from the line of Joshua Attie with Citi. Please go ahead.

Hi, thanks. It's Josh Attie and Michael Bilerman. Can you just talk a little bit more about the AT&T lease? What's the NOI contribution for that lease? Where are the rents versus market? Does that building need capital to be leased back up? And then also the timing of the termination fee you'll receive and the offsetting straight line rent write-off?

Okay, if I missed any of that, Josh, you can bring me back around. Basically, this is a building in our Century Center Office Development Park that fronts I-85 inside the perimeter in Atlanta. AT&T's lease was scheduled to terminate in the third quarter of 2014. They have a termination right that enables them to vacate in January of 2012. Their rate right now is slightly below market.

The building is a 10-story building, and the space is predominately open space, so depending on what the new user would need in the way of build out would drive the CapEx, but the building from a infrastructure perspective, HVAC, roof, parking lot, et cetera, is not in deep need of repair.

The $3.2 million termination fee should be in receipt in the fourth quarter of 2011. We are in a position with our customer where we have the ability to show the space, and we're doing that. What did I miss?

What's the NOI contribution?

Annual revenues were about $4.3 million from that.

I think he asked NOI.

NOI, Josh, would be about $2.9 million, $3 million or so for next year when you back out the operating expenses on that building.

$2.9 million. Okay, and what was the square footage again, and are they the only tenant in the building?

Yes, it's a single tenant building, and it's 221,000 square feet. This is one of the buildings also that immediately fronts I-85, so the signage opportunity is significant, and AT&T has taken advantage of that.

And the Park itself is 1.5 million square feet, and we all know what the occupancy rates are in Atlanta, and we are 93% occupied in the Park. The government is a significant customer of ours in the Park, and we're hopeful that this won't be a burdensome vacancy.

Okay, thank you.

You're welcome, Josh.

Our next question is from the line of Rob Stevenson with Macquarie.

Good morning, guys. Terry, I just wanted to make sure, the $2.41 to $2.57 guidance does not include any of this $50 million to $200 million of acquisitions, nor any acquisition costs?

That's exactly right, Rob. That's been our standard practice with our guidance, that we do not put anything in there for acquisitions that we may close in the year or any properties that we may sell.

Okay. Then a couple of questions on the balance sheet. What do you guys think you need to do in order to get a rating agency upgrade at this point, and how soon could you address the 2012 secured debt maturities that are at almost a 7% cost?

Sure. On the ratings, we are probably, in most of our metrics, very close to triple-B flat or one notch higher already. I think the one metric that we need to work on is the level of our secured indebtedness, we're running around close to 19% or 20%. Moody's has told us they would like that to below 15% for them to consider an upgrade, but most of the other things that the agencies look at, we're very close or already there.

The first chance we have to really work on that secured debt level is a loan that matures in January of '12 on our Country Club Plaza property, about $180 million or so, and that loan can be prepaid without a penalty on October 1 of 2011. We haven't committed to do that yet, but we're thinking about the options for that, and it's likely that we would try to prepay it early given that the rate on that loan is over 7%.

Okay, and if you were to refinance that and basically take that from secured to unsecured, does that basically get you down to where the level that you would need for a rating agency upgrade, you think?

That one loan itself probably would do that, yes.

Okay. And then just one last question, can you just, guys, just talk a little bit about what markets, as you look into 2011, have the greatest opportunity for upside surprise here? And which ones, when you're thinking about it, you might be a little concerned about?

I'll start, Mike. I think, Rob, that we would have to go to those that have the best statistics with regard to unemployment and job growth and population growth. Those obviously are Raleigh, Nashville, Richmond, Memphis has some good data. Those markets have been resilient throughout.

The Raleigh market, particularly our portfolio, our guys have done a phenomenal job with improving occupancy over the last four or five quarters after we did a little cold calling of our own customers to expand them into the RBC Plaza Building. But they've done a phenomenal job back-filling that space, and now in excess of 90% occupancy. I think the tougher markets will continue to be Triad in Florida, and I would put Atlanta and Kansas City as tweeners.

I think just in terms of sheer upside, if you look at Nashville, Nashville had a little dip in occupancy as a result of one move out of a fairly large tenant back in the first quarter of last year. And that market, particularly with the healthcare related business, has good promise.

Okay, thanks, guys.

Thanks, Rob.

And our next question is from the line of Brendan Maiorana with Wells Fargo. Please go ahead.

Thanks, good morning.

Hi Brendan.

Hi, guys. A question on the guidance, just on the occupancy side, it sounds like the potential drop is on the Industrial side. If your office today is 89.9, where do you think that -- what's in your guidance for the end of the year '11 office occupancy?

Very close to that number.

Okay, so call it basically flat?

Yes.

Brendan, that's true for end of year to end of year, but average occupancy during the year for Office will be up, about 80 basis points over the average in '10. Even though the end of the year might be the same, it does fluctuate, and if you look at average during the year, there isn't a meaningful increase in Office occupancy next year.

This year.

Well, for '11.

But Terry, you're saying that that's because average '11 versus average '10 because your occupancy moved up in '10, but not because you are expecting Office occupancy to move up in '11 during the year and then move down at the end?

It fluctuates around. That's right.

I think Terry's point is that average occupancy is maybe a better indicator than just single data point end of the year occupancy, and that the average occupancy in '11 should be about 80 bips higher than average occupancy in '10 in the Office.

Right, but I guess if I'm looking at it from a sequential basis from today, your expectations are sort of flat during the year of '11 throughout the year, right? You're not expecting a ramp and then a drop?

No, in fact, it actually -- typically we have the dip in the first quarter, as you have all of these expiring leases that come at the end of the year, and then it starts ramping back up mid-year.

Right, and then the end of the year '11 number does not include the AT&T move out, that is going to hit January 1 of 2012, right?

That is correct.

Okay, so if you are at $0.63 of a clean number in Q4, you've got G&A that's going to be lower in your expectations for '11, you've got term fees that are going to be higher, and that's probably going to be offset a little by the term loan. It seems like, with flat occupancy expectations on the Office side we're sort of already getting to the high end of your range. Is there something else that's going to impact your numbers as you look out in '11?

We do expect higher interest rate, for example on the term loan that we just signed, we'll have a higher spread than what we just signed. And there should be some -- just some extra cash from that sitting around earning nothing for a while until we can put that to use. So that's one effect.

OpEx will be a little -- we were able to enjoy some nice OpEx reductions in the same property pool this year versus '09. That will be a little --OpEx is projected to be slightly up next year, so that's a little bit of a difference in the trend, even though overall NOI is favorable next year, but OpEx is moving up.

Okay, and then, expectations for kind of acquisitions as you look out, Ed, is that -- do you think that the deal that you did in Tampa which is more of a value-add or buying an empty building, is that what you are more likely to see in '11 as opposed to some of the stabilized assets that you were able to pick up at the end of '09 and early in '10?

No, I would think, Brendan, that they would be more stabilized in the value add. For us the play in Tampa was more of a land acquisition given its location, its entitlement, and the pricing that we were able to garner on it.

The prior buy on that was $23 million in '05, plus another $6 million in improvements, and you saw what were able to buy it for. So our FAR, would be very attractive for us to be able to pitch build-to-suit opportunities, and so it was much more of a land play, although we think the building clearly has some value.

I think that going forward as I mentioned in my scripted remarks that we do think that based on all of our market recon, and as we've long said, we've spent a lot of time talking to I-bankers, investment brokers, bankers and perspective sellers, and there seems to be a consensus that there will be more offering memorandums distributed in our markets in '11 than '10, but we're not sure yet what the quality of those investment opportunities are going to be.

As an example, we've seen three offering memorandums of Class A office space just in the first five weeks of the year, and approximate total value among the three of about $240 million or 1.3 million square feet, and we're not bidding on any of them due to either quality or location.

Yes, so it sounds like there's just a limited amount of stuff that fits your requirements for your portfolio, and I guess that's just driving you to do more on the development side, then?

Well, I think we have the capacity to multi-task and do both. I just think that --- I don't think that our investment criteria is too constrained. I think it's appropriate in the way that we've underwritten things so that we're adequately focused on location, quality, and pricing and what the credit or the exposure may be.

So we're looking at a lot of things and we have very, very active wish list that we're working, but the development is something that we can run parallel to our diligence on acquisitions. And we have just seen an uptick in the RFPs that are actively in the market for development projects and we're pursuing those.

Okay, and then lastly in terms of leasing and occupancy, you mentioned that you're 800 basis points above your markets with occupancy in your core markets. At what point do you kind of get to the point where you can be a little bit less, or a little more aggressive or conscious of the rent levels that you guys are charging and a little bit less concerned about the occupancy levels, as it compares to your portfolio versus the market?

Does there come a point when you get pretty full and you can be a little bit more rent conscious?

You're going to hate this answer, but it goes back to the same thing, it depends on the market, the submarket, the building, and the suite and the user. How long is the term, how much of an investment is going to be needed, what is their credit, how long has the space been vacant, what is that submarket like, what is our outlook for the building, is it a long-term hold for us or is it something that we are trying to position for disposition? Is it a customer that needs this space on a temporary basis so that they can grow into a larger space in a neighboring -- there's so many factors that go into that.

But one thing that I can assure you is that our leasing team, our division Vice Presidents, and Mike Harris spend somewhere between 150 and 160 hours a week looking at all those opportunities to be sure that we're making the best deal we can so that it's in our shareholders' best interest, but a yet we're able to attract the customer and grow with them as they grow over the years to come.

Brendan as nice as it is to be at this outpacing the market, it also means the competitors are --- they're looking at us and they'd love to be poaching us, so we're doing a good job of keeping our arms around our customers and looking at retention.

There are certain instances, we look at Memphis for example, where with our recent acquisition of Crescent Center we have a very dominant position in the Class A market in the best submarket there, and that does give us an opportunity to have a little better control on pricing, because we have such a big position.

The tenants are out in the market and they want to be on Poplar Avenue, for example, they pretty much have to look at us. I think that is one of the few instances where being in a dominant position will help us at least keeping a little bit of a floor on where go with rents.

Ed, I think you're right, I really did not like your answer that much, so maybe I can just ask it a slightly different way. Mike, if you're pushing rents maybe a little bit in the Poplar corridor, are there -- let's say, is that the only area where maybe you were doing it in 2010? Are there other areas where you think that might start to happen in 2011?

I think there are a few submarkets, particularly where we have a big position. You look at Nashville, for example, down in Brentwood, where we have a major position in Maryland Farms and Seven Springs, and then to a lesser extent at Cool Springs. There is one where, again, we get a look at every deal, and because of the choices we'd probably have a better opportunity to hold firm.

But look, there are still vacancy in our markets and we cannot be arrogant or oblivious to what's going on. I think that our guys understand that we want to push rents as best we can. But, we still -- we look at occupancy as important to us and we're not going to lose a deal over a nickel or a dime. We're going to push, but we're still out there to make deals.

That's very helpful, Mike. Alright, thank you guys.

Thanks.

Our next question is from the line of Chris Lucas with Robert Baird. Please go ahead.

Good morning, everyone.

Good morning, Chris.

I guess a couple of follow-up questions here. Just on the leasing environment, how is the leasing sales cycle changing or evolving? Is there more decision making, is that timeframe tightening up at all, or is it still fairly protracted?

I think, in the scale of a stabilized environment to 18 months ago to today, I would still put it in the protracted, maybe a little less protracted, but I would still define it as protracted.

Certainly for the national companies where they have to go up the ladder more, that's definitely true, and I mentioned in my remarks that we're actually seeing a few expansion opportunities. That the local group would like to expand, but the process they have to go through to expand is probably equal to or more than what they had to go through before, just because of tightening of G&A by corporate America.

Okay, and then, Ed, just how are you guys thinking about the -- we've seen interest rates compress quickly last year and then expand quickly. How are you thinking about that as it relates to the investment side, but maybe more importantly on the disposition side? How is that impacting the cap rates and the market in general?

We've seen compression on the cap rates for the higher end assets. We haven't seen cap rates do much of anything on the lower end assets, which is predominately why we held onto some of the non-core that we still own, plus our challenge of getting a good capital at accretive numbers. I think that you're trying to time the market on getting out of a non-core asset is a little bit too gamey today, and that cap rates hopefully will come more in line for some of those non-core assets than what's perceived today.

Okay. Then just on the AT&T building, if memory serves me correct, is that not also one of the locations where there was a possible government build-to-suit opportunity? So is that a potential backfill solution for you?

I think that's very intuitive.

Okay. Then the last question, is related to the preferreds, Terry, you have an opportunity to redeem those at some sort of a spread, given where the market for preferreds is at this point?

I think we do, Chris, the preferreds we have that are currently redeemable are at 8.0%. I think we could do something inside of that today. You have to take into account the transaction cost in terms of whether you'd make a lot of savings.

There probably are some, but it is not so dramatic at this point that it compels us to make that transaction. We like having that little bit of base of preferred in our capital stack. It's not large, but we understand that Arbitrage opportunity, if it gets large enough, it might be something we could do eventually, but not at this time.

Would you look to potentially expand the preferred component of your capital?

I don't think we'd look to expand at this point as long as the common equity market is attractive as it is today.

Okay, great. Thanks guys.

Thanks, Chris.

And our next question is from the line of John Stewart with Green Street [Advertisers]. Please go ahead.

Thank you. Mike, I appreciate your comments on Raleigh during the prepared remarks, but could you sort of help us put some names with the faces there? What drove the activity in the fourth quarter? Was it pent-up demand or is that market recovering much more quickly than others?

I think it was a little bit of pent-up demand, John. We had obviously some good transactions, one came to fruition and actually started hitting the books for us in the fourth quarter, and those were basically some leases we did with BB&T Inc. These were existing customers that were expansion. We also had a major transaction with Talecris out in RTP that was an expansion there.

So, these are largely what we like to see is expansions of good customers that we've maintained good relationships with for a long time. So I think that's the good work of our leasing guys have done over the years of, again, staying with our customer and being there for them when they grow, and have the ability to move customers around as they expand is paying big dividends for us.

And do you see that momentum carrying forward into '11, or was that really just sort of a one-off in the fourth quarter?

Look, '10 was an incredible year for our folks to take the occupancy from what they did. I would love to think that they could do it again in '11. But I think that they have got good momentum going in, I don't think it would be fair to say that they could repeat all of '11, because of what they did in '10. Because that's --.

Just to pool the space that we have available is almost half of what we had at the beginning of the year.

The inventory of what we have available compared to what we had. You also have, again, there is no cranes out there from the standpoint of new supply, so things will start tightening up a little bit. There are a couple of -- Ed mentioned there are a couple of build-to-suit opportunities that we're pursuing, and Raleigh is one of the markets where we are looking at that.

John, just one last footnote, our largest office exposure in 2011 is in Raleigh. So, our guys also have that to confront.

Okay that's helpful. Thank you. Terry, on the AT&T lease, just confirming that you will the, call it $3 million run rate of NOI, you'll receive a full year contribution in '11, is that right?

That is right because it will terminate right at the end of the year.

January 12?

Yes.

Got it, okay.

Don't forget we have the write-off of the term fees so the net --- I mean of the straight-line rent, so the net of impact would be we get to enjoy the full NOI for the year, plus we get the term fee less the write-off of [1/8]. That is in our guidance number. The full 1.8 net impact.

Got it. Terry can you walk us through the small loss -- accounting for the small loss on the condos, was that just price point or was there some sort of percentage of completion complication?

It was basically just adjusting our projected profits on the remaining units, as we look ahead, and it's --- is something we did as we closed the books for '10 and took a small kind of correction to the profitability that we had booked in the earlier quarters. But that's really all it was, pushing that small adjustment through in the fourth quarter.

And John, sorry, another footnote on that, you may recall when we originally came out with this, we expected to have a gain on the condo aspect of $5 million to $6 million, and after this adjustment and based on where we are today in our forecast we'll still be well above the $6 million.

Okay. So, on the remaining units, would you expect to see sort of a comparable loss or will there be gains on the remaining units?

There will be gains on the remaining units. They are a little bit lower now than what we thought they might be maybe a couple of quarters ago.

We still have a very unique product, we have no debt on it. We're in no means fire sale mode.

Got it. So it was essentially almost like a true-up in the fourth quarter?

Yes, exactly.

Okay. Terry, can you help us understand, I guess, your philosophy, as much as anything, in terms of replacing the existing term loan with another term loan? It's been a while since you've tapped the bond market. Are you waiting for that upgrade, or what's the thought process there?

One, we like having some small amount of floating rate debt in our capital stack, and so this term loan basically replaced what we already had. It's at a very good rate, as we talked about, and it also gives us some flexibility down the road as well. It's something that, if we had to, we can prepay.

One of the things that, as we look ahead for acquisitions that we hope to bring in over the years, many of the things that we look at have fairly high levels of secured debt that comes with them. And we need to in our planning think about if we bring in acquisitions that are highly levered and we can't pay the secured debt off immediately, are there any other pieces of debt or capital in the overall stack that we can pay down? So the term loan provides a little bit of flexibility that way as well.

We do watch the bond rates. We know bond rates are attractive right now. It's just a matter of what will we do with the proceeds, and at this point we just haven't had the need to do that, to tap the bond market.

Okay. I know in the release you said that you expect approval on the Kansas City build-to-suit in April, any update there?

Just what we --- what's been out in -- the same news, is that the local AIA has supported it, staff is in full support of it. It goes before the City Council Planning on February 15, and then we expect approval, like Mike said in his comments, by the first of April.

Okay. Then lastly, Ed, with respect to the development projects that you referenced, is 100% of that activity build-to-suit?

95% or 96%. There is a small component of retail in Nashville in our master plan that would be basically Amenity Retail, not Destination Retail. But yes in the high 90s is 100% pre-leased Office.

Okay, great. Thank you.

You're welcome.

Our next question is from the line of Paul Morgan with Morgan Stanley. Please go ahead, Mr. Morgan.

Hi, it's [Chris Kegel]and Paul on the line. Wanted to pick up on the transaction markets again, Ed. You've got some dispositions in guidance, so can you talk about kind of commentary on it having a little bit tougher sledding on more B assets in terms of dispositions? Is this going to be user sales? Can you talk a little bit about that?

Sure. We did a nominal amount of dispositions in calendar year 2010. The number was mostly driven by us exiting our highly leveraged position in some complex Des Moines joint ventures that we were not an active manager in. We were there as an investment partner as a result of the J.C. Nichols merger back in July of 1998.

So the preponderance of the 125 was, about 100 of it was tied to the Des Moines, so we only did about 24 or 25 in calendar year 2010. What we would like to do is we have identified our priorities, and we will temper that in concert with what the demand may be perceived to be by those that we would list it with, along with what we see in our ability to deploy capital on the acquisition and development side as we crank through the year.

I think that as we look at the potential transactions, there are only a few that you would say are really user-oriented that -- where someone might be looking to buy that for their own use.

It sounds like you think that there may be a window for certain other properties you want to sell to actually -- to disposition them?

Correct, but we're going to just be sure that we temper that with making sure we get the appropriate pricing. We're in no hurry to sell. It's not a financial need, it's strategic driven solely.

And then do you think, going forward after '11, can you continue to prune the portfolio, or will you be pretty happy with what you have?

I think that we should never be content with what we have. As long as we own 10 buildings, we ought to rank them one through 10 and be sure we can justify to you and ourselves why we own buildings nine and 10.

Great. And then just on operating expenses, down kind of year on year in the same-store, but Terry, I think I heard you say in guidance, or your commentary on forward-looking, that you thought it would be up. But can you talk about the decline that you saw in the fourth quarter and what you think you'll see going forward? I should just say, I know some of it's seasonal, but even on the year on year, it seems like the margin improved and was down year on year.

Yes, we've been working hard on controlling our operating expenses, as we've talked on a number of calls now. And the improvement from the third quarter in OpEx, as I said in my scripted comments, was heavily influenced by the drop in utility expenses.

But --- and overall for the Same Property portfolio full year '10 versus '09, we were almost $5 million lower in expenses, which was a great performance. Fast forwarding to next year, we don't see the same reduction level continuing. So, it's basically bottoming out,

There may be some additional opportunities, but some of the easier cost savings in the OpEx may have already been garnered. That's being offset, though, by the higher cash rent on the revenue side that we talked about, and that's what is driving the cash NOI in the Same Property pool to go into positive territory in '11 versus '10.

So we continue to watch that and drive it down as best that we can, but we are just not expecting to see the same level of decrease next year that we enjoyed this year.

What were you doing at the properties to be able to get them down? Was it a matter of installing capital items or were you just kind of turning the lights off at night?

It's a full range of things, from -- that is one where we've invested capital in energy management and new chillers and so forth, which have a fairly quick payback. A few years ago, we did all of the lighting. It was retrofit in our properties, which also had a great payback.

It is just working on the contracted services with our vendors and being just cautious, I mean being aggressive on pricing, and working everything we can and applying best practices across the portfolio. There is no one thing, it's just a lot of little things that have added up.

I think as a reminder, our two largest operating expenses are taxes and utilities, and I think that we have benefited and have worked it, particularly on the property taxes. As values have somewhat come down, our folks have really aggressively gone to the tax assessors and really done appeals at every level to get those down, and we've been able to garner some savings from there.

Contrarily, if the market starts heating up and you start seeing some sales in the market going up, that could turn. But we don't do assessments in many markets every year, so that has been a big help. I think our asset management group and/or property manager, maintenance techs, everybody is employing best practices. So it's a lot of blocking and tackling.

And, Paul, I'd want to underscore that best practices. We are not going from two ply to one ply in restrooms. We are maintaining a quality standard of maintenance across the board. It's just best practice implementation.

Thanks guys.

You're welcome.

Our next question is from the line of Steve Benyik with Jefferies. Please go ahead.

Thanks, and good morning. Can you guys talk a little bit about the types of returns that you are targeting on the build-to-suits that are in active discussions or that you're planning to pursue, versus what you could potentially achieve on the acquisition front?

Sure. We have historically stayed away from giving specific return numbers, because we find ourselves in bid situations, either in responding to a RFP for a build-to-suit or in a bidding war for an acquisition that we have competitors parrot back either to ourselves or to the broker who is running the business that on February 10th on a analyst call, Ed Fritsch said we would build to X and we're quoting Y.

So we've really been somewhat guarded to that number. What I can tell you is that we have historically built to a 9% plus year one cash on cash return in our Development portfolio, and that we will continue to strive to adhere to that level of underwriting.

With regard to the building asset that we would acquire, it kind of akin to the answer that I gave to Brendan that he did not like, it depends on what's the age of asset, what is the ingress, egress, what are the floor plates like, what is it credit quality, what is the rollover, what CapEx is needed, how synergistic is it to our neighboring buildings, et cetera.

And all that would drive, but we take everything from what is our weighted average cost of capital, and then we add bips to that predicated upon what is needed in the building, or what flaws or weaknesses it may potentially have, with regard to credit or CapEx or re-let exposure.

Okay, I appreciate that. Regarding guidance can you provide what is being assumed for cash leasing spreads or retention rate for 2011?

The retention rate that we are maintaining are 65% to 70% plus of customers. On the cash basis we are minus six or so on cash, and we are break even to plus two on GAAP.

Okay. And then in terms of just how prevalent the termination rates are in your portfolio overall ,whether you see any other major tenants that have those rights that may sort of exercise over the next 12 to 18 months?

Termination rates are not systemic throughout our portfolio. We do have some but they are certainly not in a meaningful portion of them. In the cases where we do have termination rights, we traditionally have a penalty affiliated with making us whole on TI and commissions and free rent and some form of rent penalty.

Okay. I think you mentioned some land sales nominal land sales this year. Can you talk a little bit where those might be located and also how much of the land bank would you guys consider to be non-core?

Sure. We have 611 acres of total usable land in our land bank. About 523 are core and 88 are non-core. The core will support a little over $1 billion worth of development, and that's about 5.5 million to six million square feet of Office, and then about 2.5 million to 3 million square feet of Industrial.

The non-core, the 88 acres, is predominately in Raleigh and Atlanta, and then a few small tracts in a couple of our smaller markets like Winston- Salem, Richmond and Memphis.

The ones that we would think that we may be able to dispose of in 2011 are two small tracts, one in Winston-Salem, North Carolina and one in Raleigh.

Okay, and then just finally, I was hoping you could provide an update on what you are hearing federal and state tenants, just given the challenges those guys are facing on the fiscal side?

Yes, I used the term decision purgatory in my scripted remarks. I think that there is a lot to be figured out there. There are new SFOs coming to market, which is soliciting build-to-suits, so there hasn't been a kibosh put on build-to-suit SFOs. The GSA continues to grow in our portfolio. Now 10% of total revenue is just from federal government leases. Our focus has traditionally been on the core agencies of the federal government, agencies that are not likely to be unfunded, like the FBI and the CDC and Homeland Security and the FAA.

More on the local and state government level, we don't see much activity there. I think that they have trillions of dollars of national debt., but I think our local unit municipalities and state governments are more keenly focused on budget cuts and consumption, and we are not seeing near the activity on that front as we are in the federal level.

Great, thanks very much.

You're welcome, Steve.

(Operator Instructions)

Our next question is from the line of Dave Rodgers with RBC Capital Markets. Please go ahead.

Hi, good morning guys.

Good morning, Dave.

I think you made the comment that location, quality, and the ability to fund CapEx over the last year has really allowed you to take share in the market, and I think that's been clear in your numbers. As you look at the set of leases you were looking at, maybe at the beginning of 2010 versus those that you are sitting on and looking forward to today, is there any shift in the way that you are winning those deals, are you seeing a shift toward quality, different locations, is CapEx still as big? Any color you can give on the tenant psyche with regard to those categories or any other categories you think are important, that would be appreciated.

I think the biggest material shift over the last year to year and a half has been from extend and blends. Go back even a year before that, it was just let me renew, leave me alone, just let me renew. I don't know what's going on, you don't know what's going on, nobody knows what's going on, where did Wachovia go. I mean, it's let's just renew.

Then it went to more of an extend and blend environment, and then it went to more of where tenant rent brokers were reaching out into the far future expirations and trying to get either capital dollars or some modification in the current lease arrangement in exchange for term. And that has now abated and now it's more going back towards a traditional let's have the conversation well in advance of the maturity date, but not 3.5 to four years in advance of the maturity date. Concessions remain a component of every discussion in every market in virtually every building that we have.

But I think that when we referenced the CapEx earlier, Dave, if you look at how that occurred for us in 2010. A lot of that was driven by some of the proficient poaching that some of our guys did in pulling large customers of good credit out of an existing landlord's building and into ours, where there really was no net positive absorption, but we thought it was wise to invest the dollars to get the customer into our portfolio. That more drove our CapEx spend above the norm in 2010 than anything else.

I think we can expect to see a continued trend where customers are looking for turnkey deals versus just allowance, because they still don't want to put their capital necessarily in leased space, so I think we'll see that. But I think we are seeing less resistance. If we're willing to put the capital up, less resistance on the rate as well. So we have double whacked, call it a little bit, back in '09 and early '10, so there's a slight firming of rent, but you still have to basically put your capital in to garner a new deal.

Thanks for that color. And then with respect to that capital type discussion as well as the quality comment you made earlier on. The opportunity to pursue some redevelopment of some of your existing assets, at what point do you start to feel comfortable with that in your markets, given where the occupancy of the market is? But obviously what you had said earlier about your portfolio and having a lot fewer spaces to lease today than you did a year ago. Any thoughts around that?

We've done a couple. We announced the US Customs deal and the Duke Medical deal, one in Atlanta and one in Raleigh, where we are redeveloping buildings, repositioning buildings, and that's a total spend of about, is that $20 million in all for those two. So we look at that, Dave.

It certainly has merit, and those who are looking for build-to-suit projects are being driven by a few things. Either they are reporting to some office out of town where, when we talk about going to a $28 or $30 rent instead of a $22 rent it really doesn't phase the decision makers who are paying $75 or $80 rents in their corporate office. Or, it's where they want to change the total functionality of their space, or they're growing beyond where they feel like they can appropriately piecemeal it in existing vacant blocks within the market.

Then, what you've touched on is a tweener group, where we can take an existing building and make some CapEx modifications to it, change the image, maybe change the parking allotment, change the flow of the space, and it fulfills their needs. So we have done that in the past, as I exhibited with those two. We have a law firm that we relocated out of one building in Raleigh into the RBC Plaza downtown. We gutted that building, we repositioned the lobby, the exterior, the way it presents itself to the community, and it's leasing up well.

Just as a reminder, the transaction we're looking at in Kansas City, which was announced, that is redevelopment that basically, will be taking down a 30-year-old stick-built apartment complex and developing a brand-new 194,000 square foot Class A building. We do have, and we mentioned in the past, in our Century Center Development in Atlanta, some single story buildings that are very ripe for redevelopment at the appropriate time, if or when we find a customer to go in there.

Alright, great. Thanks for the comments guys.

Sure Dave, thank you.

And we have no more questions on the telephone lines at the moment. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Thank you operator, and thank you everyone for participating on the call. Just a reminder that today we went X dividend, so when you are looking at how our performance is, please keep that in the back of your mind, and as always if you have any questions, please don't hesitate to call us. Thank you.

Ladies and gentlemen that concludes our conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day everyone.