Highwoods Properties Inc (HIW) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Highwoods Properties conference 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 Thursday, July 28, 2011. I would now like to turn the call over to Tabitha Zane. Please go ahead, ma'am.

Thank you 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 e-mail copies to you. Please note, in yesterday's press release we have announced a planned date for our third-quarter financial release and conference call. Also following the conclusion of today's conference call, we will post senior management 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 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 10K for the year ended December 31, 2010, and subsequent SEC reports. 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'm now turn the call over to Ed Fritsch.

Good afternoon, everyone. While it's true that growing global economic uncertainty and our country's mushrooming debt load are keeping a lid on meaningful and sustained domestic growth, business is getting done. And while decision-makers are all keenly aware of one of the worst reality TV shows ever aired, broadcasted live from Capitol Hill, the capital markets are open, banks are lending and select business sectors are growing. An ocean of capital and attractive cap rates are increasing investment activity, space contractions have contracted, and the cadence of leasing showings is encouraging.

We delivered strong FFO in the second quarter and our outlook for the remainder of 2011 is relatively upbeat with the midpoint of our updated FFO guidance increasing $0.03. In the second quarter we leased over 1 million square feet, increased year-over-year occupancy, delivered positive same-property cash NOI growth and signed our second large GSA renewal of the year.

Our third-quarter is also off to a good start. Just this week, we signed leases for 100% of our recently acquired Independence Park office building in Tampa and obtained a new $475 million revolving credit facility. With regard to the leasing of the previously vacant building at Independence Park, this is a very encouraging piece of work not just from a leasing perspective but also from a point of having identified this park as a value-add acquisition target. Having a mid-9% return inked well ahead of schedule, validates the investment and the park's development prospects.

With regard to our new credit facility, we are excited to have garnered significantly more favorable terms that will benefit our bottom line. In addition, the breadth and quality of the participating banks and the people who represent those banks is a meaningful endorsement that is not lost on this management team. We are also pleased that July issue of Forbes magazine ranked 3 of our core markets, Raleigh, Nashville, and Orlando, in their top 10 list of the country's boom towns. This level of affirmation regarding the economic fortitude of select midsized cities is exactly the foundation of our portfolios strategic plan.

Year-to-date, capital deployment has been slower than we would have liked, but we anticipate the second half of the year will be more fruitful. While accretive acquisitions have been elusive, the activity level of institutional quality investment trading is picking up. We sense that owners are increasingly willing to sell their high-quality assets given the current cap rate environment. As we move through the year, we are growing increasingly confident that we will be able to buy quality assets that meet our acquisition criteria and risk profile. Therefore, we have increased our acquisition guidance for 2011 from a range of $50 million to $200 million to a new range of $100 million to $300 million.

Build-to-suit decisions remain excruciatingly protracted. We continue to pursue projects across a number of our markets. None of the projects we discussed last quarter have evaporated or been awarded. We now suspect some award decisions may migrate into 2012 and therefore, while holding the top end of our range at 200 million, we are reducing the low end of our range for 2011 development starts from 100 million to 75 million.

This quarter we delivered the 171,000 square foot Charlotte FBI field office on time and well under budget. This $42.5 million JV project with USAA real estate has gone very smoothly from start to finish and our customer and partner are both very pleased with this state-of-the-art building. As you know, the federal government is our largest customer, representing 9.8% of our annual revenues. Core agencies such as the FBI, CDC, FAA, and DHS represent the lion's share of our governments lease revenue, all essential government services.

Also, virtually all of our federal government leases have firm terms, no termination options, and automatic late fee calculation provisions. Before I turn the call over to Mike, I underscore that we continue to be confident about our position in our core markets, our team is focused and energized, and if any of you are interested in coaching college football here in North Carolina -- well, I'll just turn it over to Mike.

Thanks, Ed, and good afternoon, everybody. Even in the midst of the typical summer doldrums and the looming national economic issues which Ed referenced, leasing activity in our markets continues to be positive. This is a testament to the resiliency of corporate America, particularly our core customers, the small and medium-sized businesses, who continue to operate and try to grow the businesses, despite the significant distractions around them.

During the second quarter we signed 153 leases for 1.1 million square feet of second-generation space. 76% was office with an average term of 4.6 years. While overall occupancy increased 60 basis points from the second quarter 2010, it declined 20 basis points from last quarter directly as a result of Triad Centre III in Memphis being placed in service, which negatively impacted occupancy by 34 basis points. Consistent with prior quarters, our office occupancy continues to substantially outperform our markets, by an average of 670 basis points in the second quarter.

Office cash rent growth declined 5%, an improvement from a year ago when cash rent growth declined 10.3%, and also better than the last quarter which had negative 7.5% cash rent growth. We also saw strong improvement in gap rents, which increased 5.5%. In comparison, in the second quarter of 2010, gap rents declined 1.8% and last quarter they increased 1.5%. CapEx related to office leasing was a dollars $8.33 per square foot in the second quarter, down significantly from the prior 4 quarters and primarily a reflection of the high rate of renewals, 82.5%, versus an average of 76.1% for the previous 4 quarters.

Turning to our market, I'll start with Tampa, where we've had mixed news this week. Starting with the not-so-good, PWC announced plans to relocate to a 250,000 square foot build-to-suit in Tampa. As a result, PWC will very likely not be renewing all of their leases totaling 319,000 square feet in Tampa Bay Park, where they occupy, on average, 70% of the space in two multi-tenant buildings. Fortunately, these leases do not expire until 2Q 2013, giving us nearly 2 years to backfill the space. These properties are well located in the West Shore submarket, Tampa's submarket, and the long-term outlook for this area is sound. Our Tampa team is already putting together a comprehensive marketing plan to re-let the space and they have significant time to harvest the good prospect pool.

On the good news front, we're very pleased to announce the signing of 2 long-term leases totaling 112,000 square feet at our office building in Independence Park. This property is now 100% leased, well ahead of our projected stabilization date. I also want to point out that these are new Highwoods customers expanding their presence in the market. Both firms were attracted by the prime West Shore location and the substantial parking available at the property. They also chose Independence Park because it provides them ample growth potential as we have the ability to expand our Park by over 500,000 square feet. Kudos to our team for the good work in identifying this acquisition and subsequently securing these leases.

In Atlanta, we've seen a pickup in showings and leasing activity, both in our office and industrial portfolios. Of course, the 137,000 square foot GSA renewal was good news, but we also have good prospects for releasing a significant portion of 2800 Century Center, the 221,000 square foot property currently occupied by AT&T. In Richmond, our portfolio is enjoying 93.6% occupancy and we are seeding our future growth by spearheading a major rezoning initiative at the 630-acre Innsbrook Corporate Center. This is the next step in a 2-year public process to reshape the future of Innsbruck as an urban mixed-use center. Through in-fill development of our parking lots, it was allow significant increase in office density along with residential, lodging, and retail uses. The county has supported this effort by changing the land-use plan to accommodate the rezoning which should be completed by year end.

Overall, it was a good quarter for our Company on the leasing and occupancy front, and based on discussions and frequent interactions with our division heads and directors of leasing, the general mood is positive and improving. We're all looking forward to decision makers completing their vacations and returning to their desks to sign off on headcount expansions and their growing need for office space. Terry?

Thanks, Mike. Our results for the second quarter were solid with FFO per share of $0.63 up from $0.61 in first quarter 2011 and down $0.02 from $0.65 in the second quarter a year ago. The $0.63 this quarter excludes $0.026 related to preferred stock redemption charge and early debt extinguishment loss and expensed acquisition costs. The $0.65 per second quarter last year excluded $0.005 from a depreciable asset impairment and expensed acquisition costs.

Core FFO, which further excludes items such as lease termination fees and gains on land and condo sales was $0.62 for the quarter compared to $0.62 in the second quarter of 2010 and to $0.60 in the first quarter of 2011. The tables in the second page of the press release provide details on these various items.

Total revenues from continuing operations were up $3.3 million or 2.9% compared to the second quarter last year. Revenues from same properties were up $400,000 as $2.1 million of increases from higher same property base rents and related revenues were offset by $1.7 million in lower lease termination fees. While overall same property average occupancy was up 0.2% this quarter, average office same property occupancy was up 1.5% which generates a larger positive overall impact to our revenues in NOI.

Revenues from non-same properties were up $2.9 million, mostly due to the Crescent Center acquisition completed in the third quarter last year, and the medical office building acquisition in Raleigh, completed in early second quarter this year, and higher construction management fees. Operating expenses from continuing operations were up $3 million compared to last year, of which $1.4 million related to the same property portfolio, mostly from utilities and real estate taxes, and the remainder, mainly from the 2 recent acquisitions I just mentioned.

Same-property cash NOI, which excludes straight line rents and lease termination fees was up 1.5% this quarter compared to second quarter last year as growing cash rents outpaced operating expenses. Same property GAAP NOI which is cash NOI plus straight line rents was up 0.9%.

G&A for the quarter was approximately $1 million higher compared to last year, due primarily to a $700,000 quarter-over-quarter change in accrued incentive compensation and $400,000 from the negative mark-to-market impact on funded deferred comp liabilities. The $400,000 is fully offset by corresponding positive mark-to-market impact and other income, so this item has no net effect on FFO.

Interest expense was up $1 million compared to last year due to higher average debt balances outstanding and from slightly lower capitalized interest, partly offset by lower average rates. As I noted on our last call, on October 1, we plan to prepay a $185 million, 7.05 % secured loan which is scheduled to mature on January 1 of 2012, but can be paid off without penalty starting October 1.

Yesterday, we closed our new $475 million revolving credit facility. We compared the main provisions of the new facility to the previous facility in a table in yesterday's press release. The lower LIBOR spread in facility fee will generate future savings for us. We appreciate the continued great support we enjoy from our bank lending group.

We tightened the range of our full-year 2011 FFO guidance from $2.41 to $2.57 to the new range of $2.48 to $2.56. We do expect FFO to drop slightly in third quarter due to the normal seasonal effects of higher utility costs and then increase in the fourth quarter due primarily to lower utility costs, the $1.8 million net impact of the AT&T termination fee that we have discussed on prior calls, and interest savings from the planned fourth quarter prepayment of the $185 million secured loan. As a reminder, our FFO guidance has consistently not included the effects of any potential future acquisitions or dispositions.

Our balance sheet remains very strong and stable. We have plenty of liquidity with approximately $400 million available on our new credit facility. During the quarter we raised $8.3 million in new common equity under our ATM program and we also redeemed in full our $52.5 million 8% series B preferred stock. We capitalized on an opportunity to be a lender to one of our JVs, making a $38.3 million, one-year secured loan at LIBOR plus 500 basis points. The proceeds of this loan were used by the JV to pay off and existing secured loan to a third party. We have no debt maturities for the remainder of this year as we plan to exercise our one-year extension on our $52 million secured construction loan, which will reach its final maturity in December 2012. Operator, we're now ready for questions.

Thank you. (Operator Instructions) One moment please for the first question. Our first question will come from the line of Jamie Sullivan with Bank of America put to please proceed with your question.

Thank you. I was hoping you guys could talk a little bit more about the acquisition opportunities that are out there. Certainly a change in tone from last quarter, maybe some sense of -- I know you've changed your guidance, but kind of how deep is the pipeline be on that and what kind of pricing and what kind of markets?

Hey, Jamie, it's Ed. You know, we again don't comment on or speculate on rumors, but we can say that with regard to the higher offering memorandums, akin to what I reference in the prepared remarks, that we're seeing a higher volume of institutional quality offering memorandums come to market. The Cap rates vary. We've seen quite a few that we passed on because the pricing just wasn't in sync with how we're -- we would find it to be an appropriate buy. But the market is clearly liquid, and there are more opportunities out there now, and we suspect it's because we think that there are a number of sellers that now believe that cap rates have compressed substantially than had they tried to sell these assets a couple or a few years ago when we knocked on their doors. And they don't see a dramatic near-term uptick in fundamentals, but they do see some interest rate and inflation risks, which is driving them to list the assets.

And in terms of market concentration, is it -- are there certain areas you think you could expand more than others? Do you think you'll enter new markets through new acquisition program?

Well, we've been looking at in number of new markets for some period of time and that's nothing new for us. It's tough to tell where the opportunities will be successful versus where they'll fall out. I just think that we will stay true to our core underwriting with regard to conservative -- with regard to lease up, institutional quality, and that there'll be infill locations. We stay focused on, you know, was a well conceived development project the day was delivered?

Okay. And then finally in conversations you're having with your government tenants, can you give us a sense of what they're thinking internally? I know you said in your prepared remarks that your government tenets are pretty much necessary leases, but just from the government side, what are they saying to their people and how do you think they are approaching their real estate?

You know, Jamie, we don't hear anything different from the customer themselves. We have some very strong mutually beneficial relationship with the contracting officers. They know us as a proven landlord, and we don't see them fluctuating right now at any point in time. I mean, they're doing the same thing that we're doing as far as watching to see what the outcome is on Capitol Hill. Our direct contacts, I don't think are in a position where they can share any more insight than what we can garner from Fox or CNN, and I just think those are the facts. I think there's a lot of people from Pennsylvania Avenue to your office to ours that are still pretty much in the dark on how this is going to play out, but none of our leases, as you underscored, none of our leases are leases that can be terminated for the lack of funding.

Okay. All right. Thank you.

Thanks, Jamie.

Our next question will come from the line of Chris Canton with Morgan Stanley. Please proceed with your question.

Hi, thanks. Just wanted to follow up on the rent in the quarter, continued to improve sequentially supported by handful of markets. I wonder how your mood is on rent negotiations in the last half of this year into next year, versus what you saw in the second quarter?

Chris, I think that so much of it depends on the market, the sub-market, the building, the suite, all those factors -- we don't have any blanket leasing guidelines that our in-house staff is required to check a set of boxes before they can make a proposal or negotiate a deal. So it varies tremendously from -- as I mentioned, market to sub-market to building to space. They are very savvy, heavily seasoned leasing brokers that are on our staff, and they try to do the best they can to strike a mutually beneficial long-term deal and CapEx is spent in accord with the risk profile, and rental rate, we tried to push to the degree that we can get most favorable terms possible.

I guess -- go ahead.

I'm sorry, Chris, this is Mike. We also see -- we have seen a little bit of absorption, good positive absorption in some of our markets, and as a result of there being no cranes out there with new product coming on and this absorption inventory is starting to shrink and as that happens, then the pendulum starts to swing. It hadn't gone full-blown yet, but we are certainly pushing our leasing folks to try to push the envelope as much as they can, still trying to obviously maintain our existing customers, not let them get away from us. Interestingly in some markets, bigger blocks of space are hard to find, so if you've got a bigger tenant in the market, you tend to have more leverage than if you have a smaller space because there's just more of those suites around.

Yes. That's helpful. I guess just to put in context, I guess, plus 5.5%, negative 5.5 on cash, probably best results in two years. I wonder, as you look at the leasing, for example in Atlanta, was there anything idiosyncratic this quarter when you look at your suite by suite, pending transactions in the second half of the year, do you think the first quarter is more indicative of where we might be or what's your mood there?

I think that's hard to say. Atlanta was heavily influenced by the FBI renewal. That was a deal that was of size. We had very little CapEx in it. Rents stayed solid and it had the typical kickers, so I believe that heavily influenced what occurred in Atlanta.

All right. Thanks, Ed.

Thank you.

Our next question will come from the line of Rob Stevenson with Macquarie Group. Please proceed with your question.

Good afternoon, guys. Just to follow-up on that last question, Ed, would you say the same on the trend on TI's and leasing commissions, that it was heavily influenced by this FBI lease during the quarter? Because this was probably the lowest level that you have seen probably in two years in the portfolio, in terms of TI's and leasing commissions. Is it more that then a sort of improvement that you're seeing sequentially in that market?

Rob, if you were to look at page 13 of our supplemental with regard to office leasing statistics, the [AF 33] would be $10.78 if you stripped out the FBI.

Still one of the better numbers in the last two years for you guys?

Couple bucks below where our five-quarter average was.

And it's hard to say if that's a trend or not. As Mike referenced, these larger spaces as they get gone, these smaller spaces, there's only so much you can do with them, but if the finishes are out of date, then certainly there is a significant amount of TI spend there. So I would stick with what we've been saying for the last, really four years now, that we'll still be in that $10, $10.50 to $12.50 range.

And the mix of renewals to new leases always can skew. This happened to be a quarter where we had a fairly high percent of renewals, which are obviously lower TI and commissions with those transactions.

Okay. And then lastly, in terms of the acquisition opportunities that are coming up in your markets that you guys are taking a look at, are they newer assets, or are these basically stuff that are in good locations that you guys are going to need to reposition?

Boy, that's a good question, Rob. It's a little bit eclectic, akin to what we did last year. I know it wasn't a tremendous amount of volume, but if you compare Crescent Center to what we bought in Florida, I mean, they were at opposite ends of the spectrum. So Crescent Center, one of the best assets in all of Memphis, well stabilized, well-positioned asset that we were able to get some very attractive pricing on, and then in Florida, we bought 100% empty building surrounded by 32 acres of development land, so those are kind of the bookends. We're looking at things all along that spectrum from value-add to well-positioned and stabilized.

And I think that's true, we still put a premium on location as being a primary factor, versus necessarily the age or quality of building, because location in our business still is the trumping factor.

Okay. And one last thing, I mean, given that there is still -- even though the volumes are picking up, there is still not a tremendous amount of volumes, any consideration into upping your dispositions for the year? Trying to put some assets into the market that you might want to get rid of longer-term?

Yes. I think that's fair that tremendous isn't likely. But we didn't, as you saw, we didn't change our disposition guidance. We're still 25 to 75, so we haven't taken a posture of putting a lot more out than what we've contemplated for the from the beginning of the year. But it is more being driven, Rob, by leasing as opposed to trying to hit the exact right window with regard to cap rates. A number of the larger products that we want to sell, we've got some lease negotiations and renewals that we want to consummate before we put to market.

Okay. Thanks, guys. Appreciate it.

Thanks, Rob.

Our next question will come from the line of Brendan Maiorana with Wells Fargo. Please proceed.

Thanks. Just a question, follow-up on the leasing, is -- Ed, as you have talked about over the last several quarters, the tenant poaching that you've done which has allowed your occupancy to move up pretty significantly, is there kind of less of a push of that going on in the portfolio now and maybe that's helping the leasing staffs? Or is it just that the markets are getting a little bit better, allowing you guys to give a little less on the concession side of things and a little better on the rent side?

I think, Brendan, that it's much more the latter. I don't think that anybody's knocked the pointy edges off of our leasing agents ferocious teeth. They're out there, doing their best to retain and attract. And given the absence of material migration out of other sectors of the country into our markets, it is really only one way to -- or two ways to increase market share, that's business expansion of existing customers and poaching customers from competitors. So they're out doing the cold calling and working prospects, just as much today as they were two quarters ago. We are seeing some natural expansion of existing business sectors, such as clinical trials, healthcare management, engineering, technology, those particular sectors, but the absence of this migration keeps everybody pretty focused on how we can secure some of the better customers that aren't currently in our buildings.

Okay. And then with respect to the acquisitions, Terry, how would you envision the funding? Would that happen, at least the equity portion, would that happen via the ATM, or would you envision kind of borrowing on the line or some other source of capital? What's your expectations for our --

Sure, Brendan. A lot of the things that we have as we've talked before have come with existing secured debt attached that really can't be paid down immediately without incurring some very punitive prepayment penalties, so not in every case but in many cases, we bring an acquisition on board with some secured debt and a lot of the funding already in place. The equity portion would come -- could come from the ATM and that's a great vehicle when you just need smaller bite-sized pieces of equity for one-off acquisitions, and depending on the size, we could raise the additional equity from an offering if it was -- if we had a larger transaction. It could be also a recycled equity too from -- dispositions could provide some of the existing equity.

But as we look at your balance sheet today, do you believe that you've got a sizable portion of incremental debt capacity, or do you think as you go forward, it's kind of batch funding?

Thanks for asking that follow-on, because we do want to keep our leverage levels basically where they are today. I think we could take leverage up to some degree and still hold our ratings, but we're not trying to push that. We want to basically stay where we are from a leveraged perspective.

Sure. And then just last one for Ed or Mike, the PWC build-to-suit down in Tampa. You guys have land there the Bay Center stuff, you also have Independence Park, assuming that you were talking to them about the build-to-suit that they were doing, is there anything that -- were you guys in the running and if so, was there a reason why you guys didn't get it over the competitor?

We were in the running with a couple of options beyond them renewing in Tampa Bay Park. We don't know the ultimate economic terms that were offered by the prevailing developer, but obviously different locations to be offered up, different pricing to be offered, and they do have an amenity package that's developing there that I suspect was pretty attractive to the user.

And Brendan, Bay Center was not large enough for them for the second pad site. That was illuminated pretty early, just wasn't big enough for their --

It's a 209,000 square foot building max that we could build there.

Right. And the constituency that PWC has, they have a large influx of transient folks that come in internationally into this as a training center, so the location and the use of this space for them was largely what kind of drove them we think over that to particular location.

But they give did give us a good luck because our relationship.

And is the location is in West Shore where they are going?

That's correct. And same sub-market where we least 100% of the Independence Park building.

Got it. Great. Thank you.

Thanks, Brendan.

Our next question will come from the line of Michael Bilerman with Citi. Please proceed with your question.

Hi, thanks it's Josh Attie with Michael. Can you give us an update on the AT&T space in Atlanta? I'm sorry if I missed it in the prepared remarks, what the activity level is and if you're close to releasing it.

Sure, Josh. What we've said is that we've had more showings for that space than we have square footage to offer. I understand that showing versus a signed lease are two different things. But we do have -- what we would consider pretty firm prospects for what's approaching almost half the building. We're also in some conversations about some other potential leasing that it's just too early to put out there, it's just too early to take a stance on that, but we feel quite good about half the building at this juncture and maybe more.

As soon as this was announced that they were coming out, I think our Atlanta team were pleasantly surprised at the level of inquiries that they received from the brokerage community. That building with its prominence on I 85 there, the location, is just a natural attraction for someone both from an access, ingress, egress but also visibility and signage, so it has brought some folks out of the woodwork, so we're pretty pleased with what we're seeing thus far.

Just as a reminder there's over 300,000 cars that pass it per day, it fronts right on I 85, and then at our Century Center office park there, we have 1.7 million square feet and we're 93% occupied.

And for the building in Tampa that PWC is moving out of, what's the condition of that building? Is that something that would require substantial redevelop in order to release or can it be released the way it is?

It's actually two buildings, Josh. They're both multi-tenant buildings, so we won't have to incur down time and expense to convert single tenant user building into multi-tenant, so the lobbies, elevator lobbies, all the services are already set up to facilitate it as a multi-tenant -- both of them as multi-tenant buildings. On average they're both about 225,000 square feet. They have good floor plates, just shy of 30,000 square feet per floor. The parking ratio, on average, is about 4.5 per thousand. One building is 20-pkus years old. The other building is about 12 years old, so the space is about 70% open queue versus 30% built out, so there's not a lot of demo work that would need to happen. Obviously, the younger building shows better than the other, but they are both in a very attractive park setting in West Shore.

And there's great covered parking there right in the middle of Tampa Bay Park for these buildings, and we have relocation provisions in our other multi-tenant leases, so if we were fortunate enough to get a full building HQ type transaction, we have ability to work with that. And we've got two years, important thing is we've got two years to implement our marketing plan, which as I mentioned in my remarks, our Tampa team is already putting it in place, and I promise you there'll be no moss growing on this stone to get that space leased.

Thanks. That's helpful. And then one last question, the guidance for termination fees, widened a little bit? Is there anything that we should read into that in terms of is there more uncertainty as to who's leaving and who's not?

Widened versus --

The prior guidance.

It actually came in a little bit. We narrowed it to 4 million to 4.5 million on lease termination in common.

And prior, it had been 3.5 to 5.5. So we went from 3.5 to 5.5 to 4 to 4.5.

I'm sorry. I misread that.

That's fine.

Thank you.

Yes, sir.

Our next question will come from the line of John Stewart with Green Street Advisors. Please proceed with your question.

Thank you. Mike, thanks for the color on PWC. I was hoping what you could share with us where the Fleur 190,000 square foot lease role is and what are the prospects for that space?

John, I'm pleased to tell you that we just renewed it, so we are signed up, and --

You can change that 0.6 on page 24, just move the decimal one to the right.

Okay. And how did the releasing spread, what did the -- what was the mark-to-market on that deal?

It was a healthy renewal.

Okay.

And we've just done it.

Okay. And, Terry, I'm sorry if I missed this, but what is the expected source for $185 million mortgage that you are going to prepay?

John, it will initially go on the credit facility, and we're just, as I mentioned earlier about the question about funding acquisitions, we're finding so many acquisitions coming with fairly high level secured debt and if we're looking to maintain our leverage levels, which we are, I would like to keep some debt short-term so I could then eventually, over time to raise equity to pay something down. Right now in the capital stack, there's really nothing I can pay down without incurring fees. So having a little bit of short-term financing in the near term until these acquisitions, either land or not land play out and we have better visibility, that would be the game plan. It wouldn't be long term but maybe a quarter or two would be on the line.

In terms of acquisition funding, you know, let's say -- I guess, what's your comfort level before you do feel that you need to raise additional equity? If we're talking one-off $80 million acquisition with $65 million of debt on it, and you really only need a $15 million equity check, what's the kind of threshold of pain before you would think about an overnight offering as opposed to either something you do on the line or on the ATM?

We -- there's really no rule of thumb. I think we have a reasonable cushion on our leverage statistic so we don't have to be in a rush to raise that equity. We're not being pressured by the agencies to do something quickly and we have lots of options there. So I think we would just watch and see how the -- what other things might be coming down the pipeline, whether we want to wait a little bit to aggregate, for a bigger transaction, and we still have the ATM to raise small amounts of equity as we go as well. So, I think we can be opportunistic and patient on that.

Okay. Thank you.

(Operator Instructions) Our next question will come from the line of Steve Benyik with Jefferies. Please proceed with your question.

Thanks very much and good afternoon. I was hoping you guys could provide a little more color on where you think market rents are, for example on the AT&T space in Atlanta, or the PWC space Tampa. It looks like AT&T, all in is paying about an average of $19 per square foot, and PWC is probably at about $28.

This is Ed, Steve. On the AT&T 2800 building, we expect the delta between what's being paid now and re-let, to be flat to up $1 or so, and on the PWC space, it's a little tough to tell two years out, but if we were to release it with today's rental rate versus what their rent is, we would see about a 15% roll down.

Okay. Thanks for that. I guess on the -- you mentioned the greater volume of offering memorandums that are out there. Can you sort of just give us a sense for what the Cap rate ranges might be?

I prefer not to do that because I suspect some of the people we are in the process of negotiating this could easily obtain that, so we've seen Cap rates on non-core stuff in the mid-teens, and we've seen Cap rates on absolute trophy fully leased government buildings close to the White House that are rumored to be trading sub-five. It's a broad range, it all depends on the quality, et cetera. But I really prefer not put numbers out there that I may find that we're negotiating against ourselves, based on any data we would put out on this call.

Okay. I guess on the 100 million to 300 million of acquisitions, is there a possibility that a decent chunk of that might be medical office related, and I guess when you look at how that range might be completed, do you think there may be some larger portfolios or would it be a number of small acquisitions?

I would focus more on the office. We are -- you're a student picking up on the MOBs, it's certainly something that we're pursuing. But we don't see right now a large one-time closing MOB in the very near future.

And then just finally, maybe bigger perspective, when you look at the trend of corporate relocation to the southeast, it's probably slowed quite. What do you think it's going to take from a macroeconomic perspective for that to really start up again?

That's a very easy question. Two things. One is certainty. We've got to get to get some certainty out of DC, not just with this debt ceiling but with a lot of things with regard to regulation, taxation, cap and trade, healthcare costs, I could go on but I know you all have other things to do. And then the second thing and probably more germane to what slowed down migration of businesses that need to move a significant percentage of headcount from one area of the country into the southeast is the inability for their workforce to be able to sell their homes where they are now. So if you and I ran a business in XYZ-ville outside of our footprint and we were considering relocating to Raleigh. And in order to make that successful we needed to move 250 heads, you and I would probably reach the conclusion that we didn't want to take fee simple title to 250 homes that would have a very difficult time selling. However, if you and I wanted to start a business or grow a business, then we are a prime candidate as Forbes magazines pointed out. But I think the biggest anchor to relocations and migration at this point, where headcount needs to be moved, is the housing crisis.

Great. Thanks, Ed.

Yes, sir.

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

Thanks. Most of my questions have been answered but I guess, Ed, just curious as to your thoughts about the higher tenant retention, is that symptomatic of anything specific or do you think that, that's, you know, just sort of the mix that you had during the quarter?

I think that's the mix in -- certainly the FBI, that one deal being significantly larger, a little bit what Mike called summer doldrums, here towards the latter part of the quarter, but I wouldn't read too much into that, Chris.

And then just how has released traffic been in your markets, relative to prior quarter?

As we mentioned in the scripted remarks, the cadence is relatively attractive. What's difficult to tell, Chris, is how many of these showings are advanced teams who are trying to find out what opportunities they have for relocation and/or expansion, if the decision is made to add headcount, versus those that are being conducted now for genuine, relatively near-term relocations or expansions? It's very difficult to bifurcate those two.

Okay. And then the last question is -- mentioned several times the lack of sort of a large-block space availability in many of your markets. I guess the question then is how soon do you see the opportunity for doing either full build-to-suits, or sort of pre-leased major new development type projects.

Well, we continue to see that to be a very labored process. The volume of pre-commitment work that's being done on a number of fronts is extraordinary. And it falls into a few silos. One is test fits. If you remember, when so much space was absorbed during the technology boom, they wouldn't even do a test fit. They would kind of drive by the building, slow down a little bit to about 20 miles an hour, and say, let's get three floors of that one. Now, it's where, not only are test fits being done in comparison to the scope that they have, but they're also spending a fair amount of time making sure that the adjacency's and efficiencies make sense, so that if you, Terry, and I all need to work together and interact that we make sure that we and our respective teams and support all have the adjacency's that make us as efficient as possible.

The second silo is with regard to tax credits, the volume of effort that's being put forth on that is a substantive and they're not coming as freely as they used to just because the revenue coffers are much more shallow than they used to be. So there's a lot more elbow grease that needs to go into garnering any type of TIF or pilot or incremental tax benefit to relocate.

There's also, Chris, still a fairly substantial margin between new first-gen space for developing a building versus second-gen even in the big blocks out there, so customer is going to have to really be out of options before they would want to jump in to the anchor or build-to-suit knowing that they'll be paying a premium over what's in the market today.

And those that we are talking to basically fall into again, two categories. One is where they're willing to pay up for first-gen space in that they believe that the return will come in the way of employee retention when the market comes back around with regard to keeping folks that they have today versus moving elsewhere and employee retraction in their presentation of the community, so they're willing to pay for the panache of that and the efficiencies of a new building. And then the other is where they're consolidating from multiple street locations into a single location.

Great. Thanks a lot, guys.

Sure, Chris.

Our next question will come from the line of Dave Rodgers with RBC Capital Markets. Proceed with your question.

Afternoon, guys. Maybe a longer-term question on RBC/PNC potential merger down in Raleigh, and have you had any early discussions with the folks at PNC to determine their commitment to the Raleigh market? I know that your asset there is fairly secured in a long-term lease but I guess was wondering two things, is one, the impact of the market and two, the law firm that's in there supporting that major tenant, how comfortable you are with them in this merger situation?

Dave, I'll take those backwards. The law firm, certainly they value them as a customer, but they are no by means of the lion's share of their business, and they don't see any material impact to the way that they need and consume space. And in fact, they continue to add headcount to their firm, so I'm highly confident that's a non-factor and we have an excellent relationship with them.

With regard to RBC, we have not yet met with Jim Rohr there. It's certainly something that we're going to and hope to get an audience, and we understand that, that's something that can be facilitated. He has made reference to part of what attracted him to -- he's made this publicly stated -- what attracted him to this is the presence of this building. There's no doubt that there's significant signage opportunity that's on display now in what's Raleigh's corner stone building, and he has mentioned that, that's of attraction to them. They do not have infrastructure here in the southeast, and that was one of their -- the attractions for them is to be able to come into a new geographic area and in them doing so, I think that it lends us a fair amount of security that they're going to backfill or preserve the people in place and continue to have this space. And then lastly to underscore your point, we still have well over 17 years left on that lease.

And I guess more broadly, can you talk about from a leasing perspective, what is working, what isn't working, is there the same dichotomy in your markets that we've seen elsewhere where quality is winning out at a price, or are you able to move some of the smaller spaces today, giving hope to that smaller tenant start-up business?

Yes. You'll hate this Bill Clinton answer, but it just depends on the user. So for some, we are seeing that flight to quality continue. As things begin to become absorbed, you know, there's a sense that maybe that window may start closing although a very slow rate, so why not go ahead and move to nicer space now? But some people are still out trying to make ends meet, and they're quite content in the space that they're in, and so they're solely driven by economics of the rental component as opposed to having a desire to go from 28-ounce carpet to 60-ounce carpet. It really depends on the user's business and we haven't seen a sea change in sentiment on that front.

Thanks, Ed.

Thank you.

Our next question will come from the line of John Guinee with Stifel Capital. Please proceed with your question.

Thank you. Couple quick ones. First, Ed, you guys have done a great job of keeping the office portfolio about 90% occupied over the last year or two, industrial a little bit higher than that. What do you think is the sort of maximum you can run this portfolio, if you look forward the next three to five years? Can you get it up above 90, or is there just too much in the way of no move outs, frictional, fractional vacancy that 90 is really stabilized?

I believe in trying to strip our self-bias out of this, but I believe that the number that we've given out over the last couple years when asked this same good question was, we think that a 92.5 to 93.5 range is achievable and could be equilibrium. Michael's reference earlier to the fact that no development -- that basically two belts were dropped and haven't been picked up certainly aid that. I think the biggest thing that we need to get the cure on is the uncertainty so that these decision-makers can proceed as they continue to -- a number of them as we've all seen have significant corporate profits again this quarter, be able to deploy that in the way of headcount.

Okay.

What are we-- in Richmond now we're 93.6. All these will ebb and flow but I certainly believe clipping 92 is realistic.

And just I probably should know the answer to this, but of the 800,000 feet that your leasing to AT&T, how much of that is subject to the lease term fee and vacating the space pretty soon?

221, and they vacate January 1 of 2012.

Okay.

And the term fee is $3.2 million, $1.4 million will go to the straight-line write-off and $1.8 million will go to FFO.

It's all confined to that one property.

Got you. Okay. And then last question, you guys -- you have a great team at Country Club Plaza in Kansas City. You've owned that for a long time. Last 12 months, you've gone from 97.2% to 93.3% occupied. The retail world is changing. That's not really your expertise, despite the fact that you have a great team out there. Any thoughts on that asset?

Sure. Thanks for the compliments with regard to the team. We obviously think the world of them and Glenn has been a very strong team leader out there, and he's been a very dedicated component of the Highwoods organization since the merger in '98. We continue to see infill opportunities there from the office side. You know, this one transaction that we've been working on, we're still hopeful that we can deliver that building. We have other sites that we feel have merit for continued densification. We think that the Country Club Plaza is prime example of a mixed-use development. We continue to secure some good retail leases. Glenn just opened up -- or announced the H&M and the Kate Spade transactions, so the ebbing of the occupancy is really more seasonal related. It typically is down midyear and then comes back up. Glenn's working with some other prospects like Seasons 52. These are names that don't just end up in every mall on every corner. And I think that being able to have folks like that along with Tiffany's and Armani and Apple and all the others lend a certain panache to the office development that is rare, and we hope we just have an opportunity to continue to improve the quality of the retail and supplement it with more office.

And John, that temporary dip by the way, was largely just a contraction of Eddie Bauer who moved from a larger space to a smaller space and then it is being backfilled by Seasons 52, so that occupancy should dip back up once they take occupancy.

Did you said dip back up?

Yes. Reverse dip.

And there are no further questions from the phone lines at this time.

Okay. Thank you everyone. As always, if you have any follow-up questions, please don't hesitate to call. And we'll do our best to answer. Thanks so much.

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