Highwoods Properties Inc (HIW) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Highwoods Properties first quarter call. During the presentation, all participants will be in a listen-only mode. Afterwards we'll conduct a question and answer session. (Operator Instructions)

As a reminder this conference is being recorded, Tuesday, May 3, 2011. I would now like to turn the conference over to Tabitha Zane. Please go ahead.

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

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 Presentations section. Lastly, we recently printed our 2010 Annual Report, and you can access it under Presentations in the Investor Relations section of our website. If you prefer a hard copy, contact me and I will mail one to you.

Before we begin, I would like to remind you that this call will include forward-looking statements concerning the Company's operations and financial conditions, including estimates and effects of asset dispositions and acquisitions, the cost and timing of development projects, the terms and timing of anticipated financing, 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 March 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 view of the usefulness and risks of FFO and NOI can be found toward the bottom of yesterday's release and are also available on the Investor Relations section of the web at Highwoods.com. I will now turn the call over to Ed Fritsch.

Good afternoon everyone, and thank you for joining us today. Our economy is being influenced by a number of competing forces, tail winds versus headwinds. The tail winds include increased consumer spending, sustained investor confidence, moderate job creation continued low interest rates, strong corporate profits, and certainly Sunday's military success. Headwinds include continued declines in home sales and prices, higher energy and food prices, continued uncertainty in healthcare, heightened global unrest, and of course our country's suffocating debt load. Overall tail winds appear to be out pacing headwinds and progress is being made, but the chartered course remains choppy.

In our business we're seeing a return to a sense of optimism among a goodly portion of our customer base. This is translating into the usage of some underutilized space and increased showings for anticipated future needs. Demand for future space, however, will be balanced by recent lessons learned regarding cost containment. We believe as the distance continues to increase from the downturn, we'll see greater business investment and expansion.

Our first quarter results were solid, with FFO of $0.61 per share. While occupancy dipped by only 20 bps from the year end 90.1%, occupancy increased by 230 bps year-over-year. Leasing was strong at 1.2 million square feet on par with a year ago, and our average term on office leases signed was 5.1 years. Our office occupancy remained significantly better than the market as a whole.

We also reaffirmed our 2011 FFO guidance of $2.41 to $2.57 per share. We continue to actively pursue opportunities to deploy capital. Our surge for high quality acquisitions to strengthen our franchise, enhance our portfolio and generate long-term attractive returns is ongoing. Unfortunately, owners of institutional quality assets in the better sub-markets have thus far been fairly reluctant to sell, due to continued bank leniency, improving credit markets, declining cap rates, and even though at a moderate rate, improving leasing fundamentals. Those few institutional quality assets that have traded seem to have commanded a scarcity premium, selling at terms we believe not in sync with the assets' long-term values.

Albeit a nominal amount, we're pleased to have invested $9 million in April to acquire the 4201 Lake Boone Trail building. This 48,000 square foot medical office building in Raleigh is 94.3% leased, and enhances our position as a key provider of medical office space for physicians and practices wanting to be near Rex Hospital. This expands footprint of our Rex Woods Medical Office Park, which now encompass eight buildings totaling 338,000 square feet, that is 93.9% occupied. 4201 was on our wish list and was an off-market deal.

We continue to pursue a number of build-to-suits across our markets; however, discussions remain painfully protracted. In Kansas City, while the original customer for our 200,000 square foot office build-to-suit has chosen to pursue alternative options due to their timing constraints, we have received interest from other large users in this project. We also have the opportunity to redevelop the site for higher quality and/or higher density multi-family under our existing zoning.

On the disposition front, we don't have strategic pressure to sell non-core assets, but we continue to balance improving fundamentals, dilution, and investor interest in tertiary non-core sub-markets. For example, we continue to push to exit Winston Salem, where we have a 136,000 square foot office building under contract with a scheduled October closing.

We do not believe the much talked about uncertainty regarding federal spending will have any significant impact on our existing GSA leases, which account for nearly 10% of our annual revenue. Most of our GSA leases are with core agencies, such as the FBI, CDC, FAA, and the Homeland Security Department, and on average, the average lease term remaining is 7.4 years. We are having success with GSA renewals, as exemplified in last Tuesday's release regarding the 101,000 square foot renewal with the GSA, on behalf of the CDC in Atlanta.

We do believe that government spending uncertainty has negatively impacted federal build-to-suit activity. For example, the three federal government projects totaling approximately $50 million, that I described on our last call as being in decision purgatory, were recently formally canceled by the GSA.

During this year's Annual Employee Road Show, which we host in each division, the theme underscored how employees at every level are empowered to examine their work processes and areas of responsibility. We encouraged everyone to rededicate specific time to focus on how they can improve our Company and further differentiate Highwoods. I also found morale in every office to be very energized and committed. Mike will now cover operations.

Thanks, Ed. Leasing activity in our markets continues to be positive. We were pleased to sign 146 leases for 1.2 million square feet of space. 72% of this activity was office, and average term was 5.1 years, slightly above our five quarter average. Our office occupancy continues to substantially out - our markets by an average of 690 basis points in the first quarter. As of March 31st, 9.2% of our portfolio is set to expire this year, down from 12.4% at year end 2010.

While occupancy is projected to decline before year end, it is important to note that a drop would mostly be due to three industrial lease maturities, which I will address shortly. We still expect average occupancy to be higher in 2011 than 2010. Also, as a reminder, in June, Triad Center III in Memphis, which is 42% leased, will be placed in service. While impacting occupancy, it will have no negative impact on NOI. Net net, we remain comfortable with our year end occupancy guidance of 88.5% to 91%.

Average in place cash rental rates across our total portfolio rose 70 basis points from a year ago. Cash rent growth for the 118 office leases signed this quarter declined 7.5% and gap rents on office leases signed this quarter increased 1.5%. CapEx related to office leasing was $12.55 per square foot in the first quarter. While slightly above our long stated range of $10 to $12 per square foot, average term and the percentage of new leases were both above the five quarter average.

I would like to provide a bit more color on the three large industrial lease expirations totaling 325,000 square feet. The largest, a second quarter expiration, is a 189,000 square foot lease that will contract and renew for 80,000 square feet. The next two, both third quarter expirations, are in negotiations and hard to predict at this time.

Turning to our markets, Raleigh, Richmond, and Nashville each signed over 150,000 square feet of office space in the quarter. All three markets continue to perform well, and we're getting more than our fair share of the deals. In Richmond we signed a new customer, SnagAJob.com, which leased our entire 68,000 square foot Rhodia Building. The current customer occupying this space will be moving out when their lease expires this October, and SnagAJob is expected to take occupancy within a few months of this, so down time will be minimal.

In a release distributed last week we announced that our Atlanta division had renewed a lease with the GSA on behalf of the CDC for 101,000 square feet at 1825 Century Center, over a year prior to its July 2012 expiration. The lease economics were favorable, with no cash rent roll down, minimal TI's, and no outside broker commission. The renewal is effective as of July 8, 2012, and is for an additional term of five years. The CDC currently leases 328,000 square feet at our Century Center Office Park, with the average lease term more than five years out.

During the quarter our Atlanta division started the redevelopment of Highwoods Center II at Trade Port for the US Customs, a transaction we announced last October. This property was taken out of service and is now on our Supplementals Development page. As a reminder, we are undertaking an $11.5 million LEED certified renovation and expansion of this 54,000 square foot office building. It is scheduled to be back in service by year end.

This environment continues to be all about blocking and tackling. Our first quarter leasing volume is indicative of our success and staying focused on the task at hand. Terry will now cover financial results.

Thanks, Mike. As Ed mentioned, our results for the first quarter were solid, with FFO of $0.61 per share, unchanged from the $0.61 in first quarter 2010, and down $0.01 from the $0.62 in fourth quarter 2010. Total revenues from continuing operations were up $500,000 this quarter, or 0.5%, compared to the first quarter last year. Revenues from same properties were down $1.7 million, as an improvement in same property occupancy this quarter was more than offset by lower lease term fees and lower cost recovery income caused by $700,000 in lower same property operating expenses this quarter across most cost categories, and negative true ups of last year's CAM accrual. Revenues from non-same properties were up $2.2 million, mostly due to the Crescent Center acquisition completed in third quarter last year.

Same property GAAP NOI, including term fees and straight line rent, was down 1.4% quarter over quarter, due to the factors I just mentioned that impacted revenues and operating expenses. On a cash basis, excluding straight line rents and term fees, same property NOI was down 4.3%. This is mostly due to the impact of free rent concessions and leases signed last year, and as a result, straight line rents were significantly higher this quarter than first quarter last year. G&A for the quarter was approximately $700,000 lower than first quarter last year, due to lower incentive compensation and continued tight controls on discretionary spending.

Our balance sheet includes approximately $600,000 in pre-development costs related to our proposed Kansas City Office Project. These costs have not been expensed, as we continue to pursue the required regulatory approvals. Interest expense this quarter was up $400,000 compared to last year, due mostly to higher average debt balances outstanding, primarily from the $40 million secured loan we assumed on the Crescent Center acquisition, one month's impact from the $200 million term loan we closed in late February to replace the maturing $138 million term loan, and from slightly lower capitalized interest. Later this year, we plan to pay off a $185 million 7.05% secured loan, which is scheduled to mature on January 1, 2012, but which can be paid off without penalty as early as October 1st.

FFO from our JVs declined just under $600,000 this quarter compared to last year. This decrease is primarily due to the sale of our Des Moines joint venture interest in second quarter of 2010, partially offset by a positive adjustment from 2010 in one of our non-Highwoods managed joint ventures that was identified and booked in the first quarter this year.

As Ed noted, we reaffirmed full year FFO guidance of $2.41 to $2.57 per share. We slightly lowered our same property cash NOI growth assumption to reflect the effect of the true-ups of prior year CAM accruals recorded this quarter. We expect FFO per share to remain relatively stable in the second and third quarters compared to the first quarter, with higher FFO in the fourth quarter due primarily to the $1.8 million net impact of the AT&T term fee that we discussed in our February conference call, and interest savings from the planned fourth quarter prepayment of the $185 million secured loan I just mentioned.

Our balance sheet and liquidity position continue to be very strong and stable. Our leverage is low at 41.6% debt to gross assets, our ratio of debt to trailing twelve month EBITDA is 5.7 to 1, and our ratio of EBITDA to fixed charges is 2.5 times. We have plenty of liquidity at quarter end, with $31 million of cash and nothing drawn on our $400 million credit facility. We have no debt maturities for the remainder of this year, and we believe the capital markets are wide open for healthy REITs for all forms of debt and equity. Operator, we're now ready for questions.

(Operator Instructions) Our first question comes from the line of James Feldman with Bank of America.

Thank you. Terry, I just want to make sure I understand. I know you said it a couple of times on the call, but the true-ups, exactly how does that work in terms of the math, that the same store guidance declined?

Yes, Jamie. This is a little bit of we're a victim in part of our own success, because last year we were able to reduce our same store operating expenses about $4.7 million, and when we estimated what the CAM income would be for the full year, we probably underestimated a little bit too much how much of the savings would flow back to the customers. We did all of our billings here in the first quarter into April, and as those billings came in, we identified that we had slightly over accrued last year. We had to take that true-up in the first quarter.

This is not necessarily the first time these things happened. I would say that CAM is probably the most complicated accounting estimate we do. It is very complicated. There's always going to be some difference between what you accrue at the end of the year and how the final bills come out in the following year when you get those done. So we just adjusted that through the first quarter as we became aware of those differences.

Okay. Thank you. And then I guess just bigger picture, as you guys are thinking across your markets, where are you the most optimistic, and where do you think you can maybe surprise the upside, and where do you think things are just not going to be better soon?

Jamie, this is Ed. Probably we continue to be pretty bullish on Raleigh and Nashville. If you look at the unemployment and job growth statistics, they're two of the better markets by a pretty good distance, and we're continuing to see good activity there. Richmond continues to do a nice job of holding its own, and we're seeing some decent activity in Memphis. On the other end of the scale would be the Florida markets continue to struggle to some degree, and Atlanta is a tweener, and I would say that the Triad is how we have described it in the past, but that's predominantly due to the industrial.

Okay. And then as you think about your asset mix in those markets, if things start to get a little bit better, do you think that your portfolio is positioned well? I mean, I guess my question is, are there certain asset types that should benefit more than others in those markets as things start to get a little better?

Well we always feel that the best building does the best and the worst building does the worst, and I think that there will continue to be, as things begin to tighten as confidence continues to increase, there will be a greater demand for the better located, better quality assets.

Okay. Alright. Thank you.

Thanks, Jamie.

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

Thanks. Good morning. Ed, you sounded a little bit frustrated about the inability to maybe go on offense with certain opportunities, either acquisitions or development, and the build-to-suit stuff has been delayed I guess a little bit, especially on the government. Is the lack of ability to get deals across the finish line, is that what's keeping you from maybe disposing of some of the non-core assets, or do you feel like your portfolio is in pretty good shape and there is not a lot that you would like to dispose of over the next couple of years?

There continues to be assets that we want to dispose of. Once we sell the building that we referenced in Winston Salem, we'll be 88% off the peak of what we owned, then down to about 12% left, and we still want to continue to push out of that. We have said that we still have up to a total of about $300 million of assets that we would like to sell, but as we said in the opening comments, we would like to continue to balance the dilution with improvement in fundamentals and potentially some continued improvement in the tertiary less desirable sub-markets.

Your word frustration I think is fair, and I think that we're probably not the only shop that's experiencing that. Our balance sheet we feel has been in pretty good shape throughout this downturn. Other balance sheets in other shops have improved, and we see a lot of potential for acquisitions with regard to capability, but we just haven't seen many institutional quality assets come to market, or where there has been receptivity to conversations on those. Those that have come have gotten a significant amount of interest, and we think that some of the pricing on those have gotten a little bit out of sync with the risk profile.

On the build-to-suits, it is just a very, very long process. The government, we expected, and I think we said, that we had hoped to hear the award on those. Atlanta [had] GSA deals in April of '10, and it was almost a year later that they were withdrawn after a fair amount of effort was put into that by us and others.

Thanks. That's helpful color. And then this is probably either for Mike or Terry, but you guys report your occupancy stats, you don't report your leased percentage stats, but your leasing in the quarter was pretty good and it was a pickup from Q4 activity levels. You guys showed good progression I think last year, probably because of some of the leasing that was done in the second and third quarter, but really hit occupancy in the fourth quarter. Do you see - - I know you mentioned some of the industrial move outs that you've got, but on the office side do you see that sort of pent-up lease signings that should move into occupancy during the latter part of this year, or do you think your spread of leased rate versus occupied rate is about in line with where it will remain during the rest of the year?

This is Mike, Brendan. Yes, I think it is going to be fairly similar. Remember, it does take a little bit longer from the time on an office lease, from the time you sign it to occupancy, just the buildout of it and a little more preliminary planning that you do to get an office tenant in. The industrial deals tend to come in a little bit quicker just because most of those deals are fairly minimal TI's, so you don't have the same level of down time and incubation period in order to get one in.

Brendan, this is Ed. I would also add that we do expect to see our average occupancy in the office side to be higher in 2011 than in 2010.

Sure. Okay. That's helpful. And then just last one for me. Terry, the straight line rent was $3.5 million in the quarter. I think the guidance for 2011 is $6 million to $9 million, so do you still feel comfortable with that level for the full year? And I guess does that indicate that that line item should start to move down throughout the rest of the year?

That's a good observation, Brendan. We do see our straight line rental income coming down almost each quarter slightly lower than the quarter before that. And then in the fourth quarter, don't forget, as I mentioned on my prepared remarks, that we do have a write-off of straight line rent on the AT&T lease termination, which is included in the guidance, so that will be a negative as well. And in our current estimate at least, straight line rent should be well within the assumption that we had in the press release.

Okay, right. And then just the write-off on the AT&T lease, was that $1.2 million?

I think it is $1.4 million.

Okay. Right. Thank you.

(Operator Instructions) Our next question comes from the line of John Stewart from Green Street Advisors. Please proceed with your question.

Thank you. Ed, I was hoping I could get you to shed a bit more light on the $300 million of non-core assets you talked about, primarily are those all office, and what do you think is the market clearing cap rate for those assets?

It is not all office, it's a variety of assets. We've talked about, again, getting out of Winston Salem. We still have the 820 or so thousand square feet there. We have circled Greenville, South Carolina; we have talked about potentially getting [into] that market at the right time. In fact, we have some pretty good leasing velocity right there from some engineering firms right now, so we would like to get the benefit of some of that leasing. And the others are just one-offs, probably just a little bit more industrial, but some of them are older, typical three-story brick and glass assets that don't differentiate themselves considerably from the building next door or across the street.

And the cap rate?

The cap rate is going to vary depending on the occupancy, where we are with the building. Some of the cap rates we expect to be in the low 8's, and some of them could be low teens, but I think the average would probably be somewhere around a 10, 10.5.

Okay. That's helpful. Thank you. And on Winston Salem, I am sorry if I didn't quite catch it, but did you say you have a building under contract to sell?

Correct.

Did you mention the proceeds on that?

No. It is not until an October close, so we referenced it as an example of how we're looking at dispositions, but we didn't give many statistics on that. We'll disclose when the time comes to close.

Okay, and a couple of quick ones for Terry. Terry, did you mention the dollar amount of the expenses on the Kansas City build-to-suit that you are not expensing yet?

It is about, I think it's in our press release, we had $600,000 of costs that were incurred primarily for the zoning effort and - - well, primarily for the zoning which are still on the balance sheet. We did expense some that related specifically to the Polsinelli deal, but it is about $600,000.

Okay, and then maybe this one is more for Mike, but I guess I am wondering if you could give us a bit of color in terms of those other conversations that you're referencing that give you the comfort to press ahead on other options there, given the resistance you have run into.

I am sorry, John, on what - -

On Polsinelli

On Polsinelli, okay. Well, we have had discussions with their Chairman. They are, as Ed had mentioned - -

I think John is asking about the other options.

Oh, the other options. It is very preliminary. These were inquiries that basically came through these companies through their broker. When word came out that Polsinelli was reconsidering other alternatives, they made inquiries. These are good names, and we're obviously excited that there is that type of interest in this world-class site that came in right afterwards, but we're not at liberty to disclose who they are at this point.

Okay. And then just one last one if I may for Ed. On the build-to-suit pipeline, first of all, Ed, if I could just get you to comment on the government projects that have been withdrawn. Are those permanent cancellations, or do you expect those deals might come back to life later, and what does the private sector build-to-suit pipeline look like, absent those deals?

Sure. On the government deals, they withdrew the SFO, but we have seen deals in the past where the SFO has been withdrawn, and then reissued. We believe that the agency still has a need for space, so that could potentially generate some second-gen demand if they don't come back out with a build-to-suit SFO. We did have good success with the renewal that we just recently announced with the GSA for the CDC. The TI was very low, the rent held, and we got good term out of it, so that is kind of point counter point with regard to federal spending.

In the private sector we continued to have a number of build-to-suits that we have conveyed in the past that are still out there. We're still in negotiations. Some of them are seeking subsidies from the various government agencies, and they want to have those fully documented in hand before they go forward, but we have a number of sites that are of key interest to other prospects. Just like what Mike mentioned, if this law firm is for sure going to go to another location, what's interesting to us that on an unsolicited basis we received a number of phone calls from users that would have a potential interest in that site.

Okay. Thank you.

Thanks, John.

Our next question comes from the line of Nicholas Yulico with Macquarie. Please proceed with your question.

Hi. Thanks. You give the cash rent growth for the entire office portfolio. I was looking to get a feel for what the cash spreads are for some of your top office marketing like Raleigh, Atlanta, Tampa and Nashville, if possible?

Nick, this is Ed. I think that really depends on the lease. Each building, each sub-market, each space is different from one to another. We don't go through and go market by market or building by building to do a mark-to-market calculation. It just depends on what was in the prior lease.

But we are seeing an improvement in our ability to hold terms in discussions now more so than we were a year ago. We have said that it still continues to be a tenant market, but we are seeing more of a sense of an optimism. We're seeing less Class A space available today than what was available, and we're seeing us to be able to take out some of the things that were on the margin that typically don't show up in the supplemental in negotiations, with regard to after hours HVAC and a disproportionate share of parking and signage and those types of things.

Just as a reminder, also, you're seeing leases coming up today that are coming off leases that were done back in '06, '07, when the market was probably at its peak, and then you add to that the annual escalations that we have been able to get plus the CAM pass-throughs, you're seeing pretty historically high rates that were ending up, and that's what we compare on this cash rent roll down.

Okay. And then I guess along those lines, maybe if you could talk a little bit about your expectations for market rent growth across those top five office markets. I know you said Raleigh and Nashville, you're more bullish on. Are these going to have positive growth this year, is it not until next year? And then, what about how to think about Atlanta and Tampa?

I would kind of broad brush it in a general response. We can get specific on markets, but given the vacancy rates in the markets today, we think that the clout and the negotiations are much more likely going to come in the form of free rent, TI, OpEx stops, those types of things, before we're able to push rent. So escalators, base years, things on the fringes, and the TI spend is much more likely to come to the landlord before being able to push rents substantially year-over-year in actual true net effectives. But we did show, if you look at our leasing page in our supplemental, we do show that net effectives were improved, but some of that has to do with the balance of the space, et cetera. But I think that it will be hard to see that substantively across the board in 2011.

And it is not just market to market. It is also gets into sub-markets as well. The stronger sub-markets we're in we'll see the opportunity for rent growth before others, and that's where we have really tried to stake our claim with this in-fill strategy that we started six years ago.

Okay. Just one last piece on this is are there any, in those markets, is there any market where free rent is having a bigger impact? Where you're having to offer more free rent?

Again, it varies by the market, the building, the credit worthiness of the customer, how much you want to do in order to get them in, what their prospects are for growth down the road, what their financial strength is. We judge those one on top of another based on all of those plus some parameters, so free rent is still a component in our deals and virtually everyone else's. As long as it's a tenant market you're going to see some of that, but as I mentioned earlier, we see our way to start working out of some of these periphery concessions as confidence continues to increase.

Okay. Thanks.

Another thing is you could see in our leasing this past quarter, our average term was in excess of five years, so you're seeing a propensity, or we are for some longer commitments, whereas a couple of years ago the only thing we had to report, as many others, was a heavy dose of renewals on a very short-term until people could figure things out.

Okay, thanks, guys.

Yes, sir.

Our next question is from the line of Chris Caton with Morgan Stanley. Please proceed with your question.

Hi. I was hoping you could talk a little bit more about markets, specifically Raleigh, talk about being the best market, I think, could you compare and contrast this cycle to the last cycle? I think the last cycle was much deeper, the last cycle being the tech correction; I think it was probably not until '06 or so that you were seeing positive GAAP renewal spreads. I wonder how you think this cycle sets up different than the last cycle, just at a little bit higher level rather than quarter to quarter detail?

Sure, Chris. This is Ed. I think that you hit on one of the two largest differentiators. One is that in the last cycle we saw entities like IBM, Nortel, Cisco, Erickson, who have owned campuses, that had run beyond what they were able to accommodate onsite and went out into the market and multi-tenanted for-lease buildings and took down significant blocks of space in significant , I mean, 75,000 to 200,000. And then when the world turned upside down, even the blue chip tech companies coughed up that space in 75,000 to 200,000 square foot blocks. At the same time, new development continued to, even though it had throttled back, new development continued forward, and so that compounded the problem. So there was new development that was large spec footprints, and there large second-gen footprints coughed up by the IT companies.

This time around we haven't seen the development. It stopped literally on a dime in virtually every market, and it has been quiet since, so I think that's been a huge delta. And then the other is that it has been more contractions as opposed to coughing up the 75,000 to 200,000 square feet of space at one point in time. I think those are the two main differences in our market, and if I had to add a three, I would say that there are more new entities that are cropping up in Raleigh than have in the past with regard to biopharma and different types of spin-offs that have come from the larger R&D companies that are housed in RTP

I think if you look at the diversity that we have today versus ten years ago, with financial services, people like Fidelity that come in the market, and Lenovo, you still have the tax, but the biopharma CROs, there's just a lot wider spread of users today than there were ten years ago.

Our employment growth this past quarter was 2.2%, and unemployment 7.5%.

Yes. And then an unrelated question. You talk about developments. Are you seeing any movement in construction costs, as you think about bidding these projects, and if so, what are the 2 million or 3 million underlying constituents that are moving?

We're seeing that nominal amount of that as we price and re-price and estimate and re-estimate. We continue to see the general contractors to be very aggressive on their pricing to our favor, with regard to profit and overhead and general conditions. They're spending a lot of time pricing projects in concert with us, but yet they haven't set a job site sign in the ground. We're seeing some chatter with regard to commodity pricing that would go up. Those aspects of the construction materials that are affiliated with petroleum such as EPDM roofs, paving, carpet backing, PVC piping, et cetera, have clearly been impacted, but we don't see anything that would become an obstacle to proceeding with any of the build-to-suits that we're in discussion with right now from a pricing perspective.

Sure. And then just last question on that. As the construction environment normalizes, how much of an impact could the first part of your answer, the GC pricing, have an impact on the dollar per foot development cost? If they start to feel better and get a little more aggressive to their favor, does that have at all a meaningful impact on the yields you'd underwrite or the dollar per foot, the build to cost?

My guess is we would be able to hold the yield. If things moved in that front to the point where they felt healthy enough to start pushing their profit and overhead and general conditions, I think that would indicate that inflation is back across the board, and I think that it would transfer into the rental rates.

Labor clearly is the largest component of any of our costs. There is no one commodity that will exceed that. So if you start getting inflation and start seeing wages rising pretty quickly, then that would have the bigger impact than just a particular - - one commodity.

But again, it would translate, in our view, back into the rental rates.

Yes, absolutely

It would be true across the board.

Yes, thank you.

Thanks, Chris.

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

John Guinee here. Nice job, guys. I got in a little late, Ed, so if I missed this, let me know. When you're looking at your land value, you've got about $142 million. Looks to me like it is a fairly high, $232,000 an acre, but maybe a reasonable 15, 16 per FAR, can you walk through how you guys arrived at the estimated market value for your land?

Yes, we go through that on a track by track basis, based on what we see with regard to the competitive set, and what we have seen in the way of pricing in the past, although some of that, given the lack of activity, has been more conjecture than being able to make it scientific. Virtually all of our land has infrastructure in place and entitlements in place, so there is not a lot of exposure with regard to spine roads and bringing utilities in to the various sites. Of the acreage we have we can build about $1 billion dollars plus worth of new development, and I think that some of it, for example, like GlenLake, which you have seen, we have three buildings that are now high 90s occupied and pad sites for four more buildings. The track i.d., signage and the landscaping and the lighting and the common area, all of that's in place, and that's what drives us to being a mid-teen FAR.

Okay, and then the second question is, within your dozen joint ventures, as you list them towards the end of the supplemental, about 90% of the value is in five of them, and the other seven are just usually under $10 million in total value. Are these going to be unwound any time soon, whether you end up being the buyer or the seller as these get unwound?

My conjecture would be that existing JVs would continue to contract as we've said in the past, as far as total volume. I think our exit of Des Moines last year was a good exhibit of that. There was over $200 million in total, and we stepped out of that, so there definitely are ones on our list that we are in conversation with to either buy or sell.

John, this is Terry.

Thanks a lot.

John, Terry. Just to clarify as well, none of the JV's have a fixed life that we're required to sell out of or close down at any point in time, so there is no deadline in that regard.

Good. Thanks.

Thanks, John.

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

Hey, guys, it is Mike Carroll here. Would you have to see anything change for Highwoods to reach the top end of your acquisition expectation for 2011?

See things change from the first four months of the year?

Exactly, yes.

Yes. I guess it depends on some of the irons that are in the fire right now, how they turn out, whether we're successful on those or not. I don't see the 200 to be unrealistic otherwise, given our conservative nature, we would have pulled it back for this call. We don't see it to be unachievable. We're in conversations both for marketed and non-marketed deals and we're heavily focused on pursuing those, and so a sea change, no. Are there things that could happen in the world that would make it easier, yes, and it's just a matter of more deals coming to market.

We had conversations, publicly, after we saw the latter part of 2010, we saw a significant amount of activity within the brokerage shops. They were telling us about the volume of offering memorandums that they were working on that were institutional quality deals, and then right after the first of the year, that turned around and got fairly quiet in our backyard anyway. If that picked up, I think the probability of hitting or exceeding the high-end would be higher. Is the 200 unachievable now, I would say no. I would say, no, that it is achievable. Just depends on how some things play out that we're pursuing right now.

Great. Can you explain the status of your Kansas City office project, specifically related to the current zoning issues?

Sure. I will try to do this in Reader's Digest form, but we could go right on into tonight with this, but bottom line is that the City Council voted for it in favor of it last week, and the City Council was due to rotate out. When the City Council was rotating out, the Mayor in his last act on Friday afternoon before he walked out of the office, he vetoed the City Council's vote, so now we can go back to the new City Council, which we hope to do, and see if that City Council, which has the authority to override the now former Mayor's veto. That should happen within the next two weeks or less.

There is a process after that has yet to be defined by the government interpretations on whether or not the rezoning, if passed by the new City Council, can be put to referendum or not. If it is capable of being put to referendum, then we wouldn't know until the November election whether or not we would have it or not. We'll know a lot more within two weeks, and then we'll have to go from there. But we still believe that what we're doing is very much in sync with what should occur at Country Club Plaza with regard to continuing to enhance it on behalf of our shareholders and the merchants and the community.

Okay. Great.

And just as a reminder, the City Council vote that occurred last week was 8 to 3 in our favor.

Okay. Great. Thank you.

Thanks, Mike.

(Operator Instructions) Our next question comes from the line of Joshua Attie with Citi. Please proceed with your question.

Good morning. Thank you.

Hi John.

Hi. Can you give us an update on the AT&T space, and if there has been activity to back fill that before they move out at the beginning of next year?

Sure. Just as a reminder for everyone else, that's a 221,000 square foot building in our Century Center Office Park in Atlanta, which fronts I-85. AT&T has given us notice that they expect to vacate the building after the lease expires at the end of this year, so that vacancy would hit our supplemental in 1Q of '12. We have had a number of showings there, multiple showings, Josh, from different parties. We're not to the point yet where we are in heavy lease negotiations, but we have done some space programming for a couple of prospects, and we have had more than a couple of prospects tour through the building. We have some things that we want to do with the lobby that we've also shared with these prospects, which is intriguing to them, and I think that given that this building fronts I-85 with in excess of 300,000 cars a day going by it and signage opportunities, that we should have some success in re-letting this building prior to AT&T's vacating in January of '12.

Thanks. On the Kansas City development project, you mentioned that you have the ability to make it residential. If you pursued a residential project, would that somehow make it easier to get past the local government resistance?

The residential comes in two silos, Josh. One would be if we just took what's there and dramatically upgraded it, and hence were able to significantly push rents for the 96 units that are there, or we have the ability to build over 20 units in a ten-story where we'd do a total demolition of existing and rebuild. So we can either do higher quality, or we can do higher quality and higher density, so two different buckets, but either one of them require no modifications to zoning. We have the right to do that today, as zoned.

The renovation would require nothing. The tear down and redevelopment would only require site plan approval, which is administrative. It would actually go through the staff, so it would not have to go back in before council.

And when you pencil out the numbers, what kind of yields do you think you can get if you went down that road?

Relatively just under where we are from an office perspective. We're still studying it. We haven't given up our hope to be able to build a 200,000 square foot office building. We're studying these other options. We haven't gone too deep into them.

As I mentioned when Mike asked, we'll know more in a couple of weeks with regard to a timing and where we stand. Once we have some indication from that, we'll decide where to allocate time going forward. But I think that the unsolicited interest we've got in this building, and I think that our ability to have a couple of options, just underscores that this is a very unique setting and a very desirable opportunity for us.

We would also say, though, for a multi-family opportunity, if for whatever reason we were not able to get the rezoning, we think it is a highly desirable location for that, given its proximity to the plaza, as evidenced by the fact the existing apartment complex has maintained north of 95% occupancy almost forever. It's just a very desirable location for that as well.

Thanks. That's helpful. And just one more question. It seems like the medical office acquisition that you did in the first quarter was opportunistic and the property was on your wish list, but as you think about acquisitions going forward, is medical office an area that you would like to be larger in, either through acquisitions or development?

Yes, Josh, and I think we had talked about the River Birch building, which was a building that last year we took that was a 60,000 square foot office building, and we took it out of service and we're doing things to convert it to an MOB, with regard to adding an elevator so we can get a gurney in it, adding a porte-cochere so patients can get in and out without being exposed to the weather, adding a tabletop deck, wet stacks, all of those types of things. So we are certainly investing a significant amount of time in exploring our MOB opportunities in each of our markets. It is just a very logical diversification for us, yet within our office efficiency, our office expertise.

We also found that whether it is our MOBs or even our general office, where we have a fair amount of medical and healthcare, that they tend to be more sticky. We have get longer terms, a lot better retention with these, particularly the doc groups. They just don't like to move, so it's just something we like from a customer retention standpoint.

And today, Josh, we have pushing 400,000 square feet of pure medical office, and then some modified, where it is more, maybe another 50,000 to 60,000 square feet of that, and then we have back office healthcare of about 1.4 million, so it is certainly something that is not new to us, and I think that your interpretation of that is astute.

Thank you very much.

Thanks, Josh.

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

Good afternoon, guys.

Hi, Chris.

Terry, just a couple of points of clarification. I think early in your comments you talked about a true up on the CAM and there was conversation about that, and you also mentioned a one-time event related to the JV's as well. Could you maybe provide some color on what that was?

Chris, we have a couple JV's where we are not the manager, or we don't do the leasing, the management or keeping the books. We just pick up our share of the income, and during the year end audit in February that was being done after we already released year end results and became aware of an adjustment, I think it was an income - - I think it might have been a straight-line rent adjustment, but I will get that for you after the call. But it was something that impacted favorably results of that JV, and we had to catch up on that adjustment and push that through in the first quarter of this year.

Can you give us a sense of the magnitude?

It was probably about $0.075.

Okay, and then one other quick question. Just on the, I think Ed mentioned about some of the build-to-suit related to the government being pulled, and how do you deal with your, what I would call, dead deal costs here on the build-to-suits, and have you incorporated those into the current G&A guidance? Is that where that would be found? And also, how would the Kansas City activity play out, particularly if it went apartments rather than office?

Yes. Chris, this is Terry again. We do review regularly our deferred pre-development costs, and as things change over time with various projects that we're thinking about or working on, we will take those and write them off as dead deal costs. We do budget for some amount of those, kind of what you call maybe a normal run rate, during the year for those things. I would say the annual amount of those which runs through G&A is probably in the $500,000 to $700,000 range. And then your second point, I think, on the Kansas City situation, as we disclosed in our press release, there is about $600,000 still left on the balance sheet. If we would finally lose the zoning that we're seeking to obtain there, most of that would have to be written off at that time.

Okay. Great. Thanks a lot.

Thanks, Chris.

Our final question for today is a follow-up question from the line of James Feldman with Bank of America. Please proceed with your question.

Thank you. Just a quick follow-up. So we have been hearing about this Charter Hall office portfolio that's out in the market, or potentially out in the market. Can you guys talk about whether you would be interested in it, and whether it is a fit with the portfolio? I know it has some southeast exposure, but not completely.

Jamie, I would have to stick with what - - we anticipated we might get this question, and our response has to be that we don't comment on the market rumors.

Okay. All right. Thank you.

Is that the answer you were looking for?

I mean, I just want to get - - when I think about the portfolio, it has some southeast and it has a lot that's not.

Well you've heard us talk in the past about what types of markets we would go into and which ones we wouldn't, so there are certainly aspects of that portfolio that don't align with what we have said in the past on markets that we would have an interest of growing into if we were to grow into them.

Okay. And do you have a general sense, whether you're interested or not, of what kind of pricing you're hearing about for that portfolio?

No.

Okay. All right. Thank you.

All right. Thanks, Jamie.

And sir, that's all the time for questions. I will now turn the call back to you.

Okay. Thank you everyone, for your interest. As always, if you have any questions, please do not hesitate to give us a holler. Thanks.

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.