Highwoods Properties Inc (HIW) 2011 Q3 法說會逐字稿

Welcome to the Highwoods Properties conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded, Friday, October 28, 2011. It is my pleasure to turn the call over to Ms. Tabitha Zane. Please go ahead.

Thank you and good morning everybody. On the call today are Ed Fritsch, President and Chief Executive Officer; Terry Stevens, Chief Financial Officer; and Mike Harris, Chief Operating Officer. If anyone has not received a copy of yesterday's press release or the supplemental, please visit our website at www.highwoods.com or call 919-431-1529, and we will e-mail copies to you. Please note in yesterday's press release, we have announced the planned dates for our 2012 financial releases and conference calls. Also, following the conclusion of today's conference call, we will post senior management's formal remarks on the Investor Relations section of our website under the presentations section.

Before we begin, I would like to remind you that this call will include forward-looking statements concerning the Company's operations and financial conditions, including estimates and effects of asset dispositions and acquisitions; the cost and timing of development projects; the terms and the timing of anticipating financings, joint ventures, rollover rents [occupancy] revenue and expense trends, and so forth. Such statements are subject to various risks and uncertainties. Actual results could materially differ from those currently anticipated due to a number of factors, including those identified at the bottom of yesterday's release and those identified in the Company's annual report on Form 10-K for the year ended December 31, 2010, 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 will now turn the call over to Ed Fritsch.

Good morning and thank you for joining us today. Looking at the overall environment, the US economy is clearly having a tough time. While our monumental debt woes have our economy hospitalized and walking around in one of those gowns, there are days that are less drafty than others. In other words, we subscribe to the notion that the US economic trajectory seemingly changes by the day, which is, in part, why we are seeing so much volatility. It appears to us that the cure all for this long-term chronic sickness requires a sea change on both ends of Pennsylvania Avenue. Unfortunately, the widespread sense of self-preservation over the national interest prevents the patient from being discharged from the hospital. A look at the patient's chart shows that unemployment has remained stubbornly high as new job creation is still elusive, although recent jobless claims suggest that the employment picture may not be getting worse.

Business profits continued to be encouraging, although mostly from productivity gains. According to the US Commerce Department data, corporate spending on equipment and software increased over 17% last quarter. So, there is spending, it just isn't going towards headcount expansion. Consumer spending appears to be trending positive, although mostly from higher debt and reduced savings. A soggy recovery has put the stock market on a roller coaster ride, leaving many to wonder what's in the queue, a meltdown or a melt-up?

Yet, despite these symptoms, business is getting done and leases are being signed. In fact, in the third quarter, we leased 1.1 million square feet of second generation office space, the highest we've delivered in 16 quarters. We continue to outperform markets by a large margin, in terms of office occupancy. Other highlights in our third quarter include leasing 100% of the 116,000 square foot Independence Park office building in Tampa; signing a 129,000 square foot office lease with an existing customer in Orlando, 32,000 of which was an expansion; deploying $300 million through the acquisitions of PPG Place and Riverwood 100; selling $21.5 million of non-core assets; obtaining a new and expanded credit facility with significantly more favorable terms; and prepaying just after the quarter end, a $184 million, 7% secured loan without penalty.

Adjusted FFO for the quarter was $0.65, and we've narrowed our guidance for the full year from a range of $2.52 to $2.60 per share to $2.56 to $2.58. As a reminder, our original 2011 guidance was $2.41 to $2.57. As you know, the continued execution of our strategic plan has led to a meaningful reposition of our portfolio through dispositions and development but very little from acquisitions. In fact, prior to our September deployment, we purposely decided to invest only $166 million towards acquisitions since the launching of our strategic plan in 2005. [Our] long-term strategy and practice is to be patient and deliberate. After careful study, we put $300 million to work through the acquisition of PPG Place and Riverwood 100.

These assets are iconic in key infill sub-markets, were acquired at prices in line with our risk return parameters and at a deep discount to replacement costs, have a stable and diversified customer base with limited near-term roll, and have meaningful upside potential. As a reminder, PPG Place, located in the heart of downtown Pittsburgh, is a 6 building class A office complex comprising 1.5 million square feet with structured parking. Our total investment is expected to be $213.7 million, which includes $17.1 million of planned near-term building improvements and $8.1 million of future tenant improvements committed under existing leases. All in all, this equals $139 per square foot, well under half of the estimated replacement cost.

With regard to Pittsburgh, we are very focused on building up our divisional platform as we continue to Highwoodtize PPG Place and fortify our Highwoods team on the ground. On the asset management side, we are fully staffed with Highwoods employees. On the leasing side, Mike Harris and I are working closely with Andy Wisniewski and his team at CBRE, who are the dominant leasing shop in downtown Pittsburgh. In fact, just yesterday we signed a full floor lease with a new customer in PPG Place One.

On the leadership side, while Mike and I, and others, are investing an appropriate amount of time to properly integrate and run this new division, we are actively evaluating a number of division head candidates, each of whom has a deep and proven track record in the Pittsburgh market. Our coworkers are doing a great job transitioning and branding these assets. Early customer and community feedback has been exceedingly positive. The transitioning of Riverwood 100 is also going well, having already deployed capital and a significant amount of elbow grease to also Highwoodtize this 24-story class A office tower, in the Cumberland Galleria, I-75 sub-market of Atlanta. Since quarter end, we have signed 2 leases totaling 38,000 square feet. One is the expansion of an existing customer, and the other is for a new customer. Having invested these dollars, it is important that we touch on our balance sheet for a minute.

Our long stated strategy is to run our Company with low leverage, i.e., in the low to mid 40s. While we have ample flexibility under our bank covenants and credit ratings, our commitment is to grow on a leverage neutral basis over the long run. We are comfortable with the arrows in our equity raising quiver, such as recycling capital and new equity issuances and therefore, our ability to maintain our balance sheet objectives.

Also during the quarter, we garnered $15 million from the sale of a non-core 80% leased office property in Winston-Salem, and an adjacent 3 acre undeveloped site. Exiting Winston-Salem remains an objective, and our ownership of Winston-Salem-based assets has now been reduced by 88% to 683,000 square feet from an all-time peak of 5.8 million.

We also garnered a $6.5 million, when our majority partner, USAA, exercised its option to acquire our 10% interest in our 171,000 square foot, Charlotte based, GSA joint venture. As a result, we've booked a $2.3 million merchant build gain, generating a 55% return on investment. We also earned a total of $1.3 million in development fees, which were booked prior to the third quarter. Lastly, just a reminder that we will provide 2012 guidance in concert with our fourth quarter earnings.

I now turn the call over to Mike.

Thanks, Ed, and good morning, everybody. Despite the bed-ridden economy as outlined by Ed, we are leasing space, and some of our customers are expanding. For the third straight quarter, our top 5 office markets combined reported positive net absorption. The unemployment rate improved quarter-over-quarter in more than half of our markets, and sequentially, 8 of our markets gained jobs versus only 1 market this same period last year. Our office occupancy continues to substantially outperform the market, by an average of 730 basis points for our top 5 markets combined. New office construction in our markets remains pretty much nonexistent. As Ed mentioned, we had very strong office leasing volume, the highest in 16 quarters. We signed 151 leases for 1.7 million square feet of first and second generation space, 74% of which was office. Average term for office leases signed was 5.9 years. Overall occupancy was up 40 basis points year-over-year. Sequentially, occupancy was down 60 basis points, primarily due to placing our 2 recent acquisitions in service.

On a same store basis, our occupancy at quarter end was 90.2%, up 80 basis points from the third quarter of 2010. On September 19, we revised our year end occupancy forecast to a range of 88.5% to 90%, as a result of the acquisition of PPG Place and Riverwood 100. Given this quarter's strong leasing volume, we are pleased to raise the low end of this forecast to 89.0% and hold the high-end at 90%. On a GAAP basis, office rents grew 1.4%. Average cash rental rates across our entire portfolio, for all in place office leases, increased just under 1% from a year ago, excluding the positive impact of Pittsburgh and Riverwood 100. Office cash rent growth declined 12.4% and CapEx related to office leasing was 16.74 per -- excuse me, $16.74 per square foot. Both metrics were high, driven mostly by 129,000 square foot renewal and expansion in Orlando.

As noted in yesterday's release, cash rent excluding this customer would have declined 8.8%, and CapEx would've been $11.46 per square foot, slightly higher than the previous quarter but below our 5 quarter average. This leasing brings occupancy at these 2 non-core Orlando properties to 96.3%, facilitating our ability to market these assets for sale. Also driving CapEx for the quarter was the larger percentage of new deals signed, 33%, an approximate 40% increase over the previous 4 quarters. This is the highest percentage of new deals versus renewals since the first quarter of 2008.

Turning to our markets, I'll start with Atlanta, where our office occupancy remained strong at 91.5%. We are pleased to have signed 2 leases totaling 70,000 square feet at 2800 Century Center, a solid first step in backfilling the space that AT&T will be vacating. Speaking of AT&T, we had previously disclosed that they would be vacating all of 2800 Century Center at year-end 2011. Now we expect they will remain in all of the space that we have not re-let through June 2012.

Nashville continues to be one of our star performers with occupancy increasing 210 basis points quarter-over-quarter, to 92.7%. A big driver of this increase was the signing and start of a 66,000 square foot expansion with an existing customer. Raleigh had a strong quarter in terms of leasing volume, 247,000 square feet, with an average term of 7.6 years. However, occupancy declined 230 basis points quarter-over-quarter, primarily due to the expiration of a 56,000 square foot lease in 1 of our Glenwood Avenue properties. We've already backfilled almost 20% of this space with very strong interest for a substantial portion of the remainder.

Second generation leasing activity in Tampa was robust; 129,000 square feet, including a combined 25,000 square feet with 2 new customers. This is approximately 30% more than we leased in the first half of the year, and is in addition to the 116,000 square feet of first generation space we leased in Independence Park in the third quarter. We feel good about the level of activity and our position in each of our markets. We believe we will continue to get a larger share of the leasing pie due to our higher quality properties in better locations, a strong reputation for customer service, and our solid financial footing. Terry.

Thanks, Mike. Our results for the third quarter were solid. FFO per share was $0.65, up from $0.63 in the second quarter 2011, and up from $0.58 in the third quarter last year. These numbers include a merchant build gain and exclude building impairments, property acquisition costs, losses on debt extinguishment, and preferred stock redemption charges, all of which are quantified in the tables on page 3 of the release.

Core FFO, which excludes lease termination fees and the effects of selling merchant build projects, land and condos, was $0.61 for the quarter, compared to $0.62 in the second quarter of 2011, and to $0.56 in the third quarter of 2010. Total revenues were up $6.6 million, or 5.7% compared to the third quarter last year. Total revenues from same properties were up $2.2 million or 2%, based on higher average same property occupancy, higher cost recoveries and lower bad debts. Revenues from non-same properties were up $4.4 million, due mostly to acquisitions.

Operating expenses were up $2.7 million compared to last year, 25% is attributable to our same property portfolio, and the balance to acquisitions and new developments being placed in service. Same property cash NOI, which excludes straight line rents and lease termination fees, was up 3.7% compared to third quarter last year, mostly due to growing cash rents, cost recoveries and higher average occupancy. Same property GAAP NOI, which is cash NOI plus straight line rents was up 2.3%.

G&A was higher by $3.3 million compared to last year, due primarily to $4 million in higher acquisition costs, $900,000 in higher dead deal costs, primarily from the termination of the proposed office development project in Kansas City; offset by a $900,000 positive change from the mark-to-market adjustment on deferred compensation; and $400,000 in higher capitalized leasing from the stronger leasing results this year.

The $900,000 positive deferred comp item is fully offset by a corresponding negative mark-to-market impact in other income, so this item has no net effect on FFO. Interest expense was up $1.1 million compared to last year, due to higher outstanding debt balances including those from our acquisitions and higher -- slightly lower capitalized interest, partly offset by lower average interest rates on our debt.

As you saw in the release, we tightened FFO guidance, and, as a reminder, it does not include the effects of potential future acquisitions or dispositions, as well as certain other items noted in the Outlook section of our press release.

We had previously disclosed that we expected to record in the fourth quarter a $3.2 million termination fee from AT&T upon the termination of its lease at 2800 Century Center. The net impact was projected to be $1.8 million because of the corresponding straight line rent write off. As Mike mentioned, we now expect AT&T will retain the majority of the space through June of 2012. As a result, the gross termination fee is expected to be $3.1 million and the net impact to be $1.7 million, of which $400,000 would be recorded in 2011 and the remainder in 2012.

Our balance sheet remains strong. Having already exercised the one-year extension option on our $52 million secured construction loan, we now have no debt maturities until the fourth quarter of 2012, when only $73 million comes due. In addition, our investment grade credit ratings were reaffirmed by all 3 agencies during the last 2 months.

Operator, we are now ready for questions.

Thank you.

(Operator Instructions) Rob Stevenson, Macquarie.

Good morning, guys. You talked earlier about you know, out-performing your top 5 markets. I think the number was 735 basis points, is that correct?

Yes.

Can you talk about where that sort of level has sort of peaked out in recent years? Are you getting to the point to where you can't outperform by an incrementally larger margin than you already are?

I think there is still some opportunity in certain markets. For example, in Raleigh, where we had declined a little bit this quarter as a result of the Kilpatrick move out. I think there's an opportunity to gain that back.

We also have a customer in Richmond who contracted. I think we have an opportunity to gain that back. So, I think it's not substantial, but I think that we'll continue to be in the 650 to 850 range above our competition in our top markets.

I think we have an opportunity in Memphis, as well to pick up some business there.

Okay. And then the second question, can you talk about what drove the leasing activity on the newly acquired assets? Were those leases that were more or less in place, and when you guys came in you just put the finishing touches on this? Or was this stuff that you guys from -- basically took the Highwoods relationships and basically brought those to bear here? Can you give us a little bit of background on that?

It falls into 2 buckets -- obviously, 2 different markets. The one in Pittsburgh was someone we met post closing and consummated that transaction in very short order. So, it wasn't anything that had been identified in any of the underwriting or in the Q, or conditioned upon closing by any means. It was someone that Mike invested the time to go up to Pittsburgh and met with along with the folks at CBRE and consummated that deal and we signed on it yesterday. And then in Atlanta it was a combination of both an expansion and a new customer.

But the transaction in Pittsburgh, Robert, it was from start to finish was less than a 3-week turnaround. So good --

Wow. And lastly, can you just talk about what you're seeing in terms of demand in the private markets for assets that you might be disposing of? I mean, are there bids out there? And are those guys able to get financing at this point? Or, is one or other of that sort of holding things up?

Well, I think that it's a mixed bag. There's decent activity, but it all depends on what we're trying to sell. That's why we've tried to manage these dispositions so that we can finesse the renewals and we can position them appropriately. I think the building that we mentioned, the release in Orlando is a good example of that. To be able to garner a customer to lease those two buildings at 100% and then turn around and sell them, we think is a positive.

So, our goal is, we published in the guidance with regard to dispositions is to do 25 to 75 this year. We still have $300 million of dispositions that we want to do. And we're just gauging the occupancy and the expirations and where the market is. But, I think that the buyer pool, the depth of the buyer pool, the breadth of the buyer pool for non-core assets is certainly different than what it is for institutional quality assets.

Okay. Thanks, guys.

Chris Caton, Morgan Stanley.

Hi. I wanted to follow-up on releasing some of the space you got back in the quarter. I think you specifically just mentioned Raleigh, Memphis and Richmond. What's the condition of that space? Can you talk a little bit more about why you have confidence in the ability to backfill some of that real quick?

Sure. If you like, I'll take that. With regards to Raleigh, the space that was vacated in one of our Glenwood assets and this is truly one of our better located assets. That particular space was a professional firm so it's highly built out. And, as we mentioned, we've got pretty good prospects for that.

Some of this might end up actually being gutted to go more for a utility space where it would be more of the typical cube space -- back office space. With regards to Memphis -- that particular space is out there in our Southwind sub-market. Part of it is, we believe, will be backfilled fairly quickly. And it was very open space that was pretty readily releasable, not necessarily as is, but with hopefully fairly minimal TI.

I think that what happened, Chris, in Raleigh -- the 57,000 square feet that was vacated was a law firm space. And to be -- we're about 90% committed now on backfilling that. Another example, I think would be what has occurred at 2800 Century Center in Atlanta, where we had the 221,000 square feet of AT&T.

And Jim and Mike and the team have already relet 70,000 square feet of that. So, I think that gives us reason to believe that there's adequate prospects to backfill the space, not to mention that we had the most volume in a quarter that we've had in 16 quarters this past quarter.

And I think the 2800 space Ed mentioned, it's largely, I'd say, driven by just a great location. It probably is going to require a little more CapEx to relet because AT&T had been in there quite some time, and we've already earmarked the capital to get that building to where we need it to relet it.

Thanks. And then in Pittsburgh -- could you just talk a little bit about, I guess, how do you think occupancy will trend over the next couple of quarters? What is the right kind of frictional vacancy that you'll see in that property? And then lastly, will, I guess -- there's not a lot of leasing that asset over the near-term, so we won't really see that affect the leasing results. Is that correct?

Well, as Mike mentioned we've already leased a floor in the first 3 or 4 weeks of ownership.

Sorry, I meant the renewal rents. My mistake.

On the renewals, we are fairly low occupancy, compared to the competitive set. As we said on our September call, we're about 81.5% leased when the competitive set, which is comprised of 9.3 million square feet is 96.3% leased. So, we feel like we have, you know, the one Class A building in the market that has significant opportunities for releasing.

On the renewals, there's not a lot of options for customers to go to take down big blocks of space given what I just outlined with regard to the competitive set for the Class A buildings in CBD Pittsburgh. So, unless they were going to consider going out into the suburbs or someone moved out of an existing Class A building and created the space, there are not a lot of options. So, we believe that, as we've said before, that the rents are on average a dollar plus below market, and we should see renewals hold, to increase up to 5%.

Thanks. And just what do you think the frictional vacancy at the property will eventually turn out being?

Well, you know, we've been pretty conservative on it, so we've underwritten it to be 91.5% to 92.5%. Again, the competitive set is 96.3%.

Certainly we have aspirations to get there, but we don't have any space that we walked in and said, we just need to mothball this. This will never lease. We don't have that situation in any of the buildings.

Thanks very much.

Steve Benyik, Jefferies.

Thank you. I guess I just wanted to touch base on the disposition plans again. Obviously, the lease in Orlando -- a sign that maybe you guys could be ramping that, you mentioned the $300 million of planned sales. I'm just wondering, as you look out over the next 12 to 18 months, would you expect sort of dispositions and acquisitions to be more of a matched funding type of scenario, versus the net acquisitions you guys have had so far this year?

I think net matching is a fair way to say it, but we're just not going to close them on the same day. So, the closing of the $300 million on September 16 -- it didn't mean that we were going to -- we tried to do an equity raise that same night. We've really worked hard to get our balance sheet to be positioned such that we could capture an opportunity exactly like what we did in both Atlanta and Pittsburgh.

So, as Terry said in his prepared remarks, we continue to stress our goal of having a leverage neutral balance sheet but obviously, it will ebb and flow as deals are done. We're still in the market out researching and evaluating acquisitions and Terry is still paying careful attention to the balance sheet.

Okay. And, sorry if I missed it, but did you guys mention the cap rate on Winston-Salem and just how would that compare to the planned sales that could potentially be out there?

Well, Winston-Salem first of all was -- you know, it's a building in a non-core market, and we've been striving to get out of Winston for some period of time. We sold 136,000 square feet at about a 9.5% cap rate.

Okay. I guess turning to CapEx and dividend coverage -- obviously, looks like dividend coverage looks a little worse this quarter than in recent quarters, and as you look at higher CapEx, to backfill some of the spaces you mentioned earlier, potentially some more to lease up the PPG Place, and the Riverwood asset -- sort of how do you look at dividend coverage over the course of the next 12 months? And could planned asset sales also help from a dividend coverage perspective?

This is Terry. I think for the year, we're expecting our CAD position for '11 to be an improvement over '10, and we'll end up in the positive territory when the year is over. So, we feel good about the direction of our coverage of the dividend, and the dispositions could help in time as well, because typically the non-core assets tend to be a little bit more CapEx intensive than some of the other core assets.

So, as we move to acquire more core assets and sell off some of the non-core, that should help as well over the longer run. But, we're moving in the right direction on that, and we'll end up the year in positive territory.

Steve, we did allocate dollars, which we disclosed on both of those transactions, for both be BI CapEx and existing obligations for TI.

Okay. And then just lastly, for Ed, I guess in light of the upcoming super committee decision, the company's exposure to federal government being almost 9%. Obviously you mentioned last quarter some of the major core agencies, FBI, CDC, FAA, DHS, as making up the lion's share of that, but I'm just wondering which of those you think could be most and least affected. And do you have any major expirations over the course of the next 12 to 18 months where you could see some level of contraction?

To answer the last first, we don't have any significant exposure. Most of our occupancy from the government is a result of build-to-suits that we've done in the last 3 to 5 years, and they were long-term leases, so we don't have any significant roles.

And we did, in the past 6 or 9 months or so, did 2 sizable renewals, the FBI and -- with the FBI and the CDC, both of them for 60 months or more. So, I think we're in pretty good shape. With regard to the super committee, if they would just get a copy of all the work that Simpson and Bowles did, they could be done.

Thanks very much.

Jamie Feldman, Bank of America.

Thank you and good morning, everyone. You know, there's been a lot of talk on conference calls this quarter about tech and new media driving more than their fair share of demand -- maybe a little bit less from financial services. This is mostly on the East and West Coasts.

Can you guys talk a little bit more about what you're seeing in the Southeast, in terms of what the real drivers are of demand? And then also kind of big company versus small company -- I know it sounds like you know from a lot of the data we're getting that small businesses really aren't really coming back to life. Can you just kind of frame that across your markets?

Yes. I'll take a swing at that, Jamie. We have certain business sectors that we see continued to fully utilize their space and look for expansion space.

Some of the primary areas are certainly clinical trials, clinical research, biotech, biopharma, pharmaceutical sciences. We've seen engineering, healthcare, medical, insurance. Some legal services are consolidating. They're not hiring new but certainly when law firms consolidate, we've seen it.

We continue to see some retail expansion. In fact, we're opening up 4 or 5 new stores between now and year end. On the contracting side, it continues to be heavily related towards the homebuilding side, where they just have gone away and not come back.

But, we have seen those small- to medium-sized businesses that we're going to flush out, it seems like they've flushed out. We haven't seen any uptick in bad debt reserves or account receivables as a result of the last 6 months or so.

And then if you think about the sectors that are expanding, which markets are they most focused in? I mean, are they things like biotech engineering, that's more the Carolinas? But --

Well, biotech and Carolinas, Pittsburgh and Nashville also with regard to healthcare, have been the primary. We think that we've certainly seen insurance as a meaningful user and ballast in the market in Richmond.

I think, Jamie, you may start seeing -- we look pretty hard at Pittsburgh in terms of energy as a new sector that is growing up there due to the Marcellus shale. And we are actually starting to see some of those companies looking at CBD Pittsburgh, where historically they have been out in Southpoint and south of Pittsburgh. But now, as these law firms and others that are related to energy are starting to move into town, they are focusing on CBD, which is good for that market.

Okay. And then generally, what are you seeing in terms of tech and new-media?

We've seen tech in the triad. We also seen it here in Raleigh and Atlanta. We've seen tech from a gaming perspective here in Raleigh, like Red Storm, other customers that write the software for video games.

So, as I mentioned in my prepared remarks, the volume of money that's being invested in software and hardware technology has been pretty significant across the board from coast to coast. You know, a local company here that's headquartered here, a huge privately-held company called SAS continues to grow. They own all their own buildings and their own campus, and they just announced recently the construction of a new building to add headcount.

And then just focusing on Atlanta, can you kind of do a deeper dive there, in terms of what's really driving the market? And then you know, where -- of the major submarkets, downtown, Midtown, up north, you know, where the best prospects are? And then also I think Promenade 2 is on the market. Any interest in that?

So, 3 questions. Downtown, Midtown, not Highwoods-town for us. Those are 2 sub markets that we wouldn't participate in. Never say never, but they're not markets that we have interest in.

You know, what's going on in Buckhead, that's highly publicized. Again, another market that we're not in. Where we are at Century Center, our heaviest concentration continues to be remarkably good.

I think that park, well over 1 million square feet, has held up extremely well throughout the downturn, staying in the mid- to low-90s throughout. And I think the 70,000 square feet that we've already leased before AT&T has even moved out of the building at 2800 is good evidence of that, to knock out 3 of 10 floors.

You know, we obviously did a ton of homework before we invested in Riverwood 100. We think that the stature of that building stands well in comparison to the competition.

And the activity in that building, already having done some deals you know, with the 25,000 square feet that we've done. And we're seeing healthcare and engineering, it's really pretty eclectic across-the-board.

Professional services, insurance, finance, is driving it. The Cumberland submarket, which is where Riverwood is, has actually held up very well, and this being probably the iconic asset in that submarket, it certainly gets more than its fair share of looks. And it's also been a good asset from a retention standpoint, so we think that's -- that bodes well for us going forward.

Your comment, Jamie, on Promenade, that's a building that we would not pursue.

Okay. And then, as we think about next year, do you have a sense of where your mark-to-market is on the leases coming due?

Ugh. (laughter) You know, we wrestle with this question all the time, and we give the same lame Bill Clinton answer each time. We don't go through our entire rent roll and try and figure out how to mark it to market. You know, we do have the annual escalators in each of our leases, but to quote a number is a difficult thing for us to say.

We did talk about, in the past how leases that were done in the heyday back -- '07 is kind of when things -- late '07 when things kind of stopped, if you would, and our average lease term is somewhere around 5 years. So, those transactions were done back then. They'll start expiring this year, next year, and then it will start you know -- basically deals that were done -- remember, as Ed said they have an annual escalators plus the cam pass-throughs that have been going through.

So, as those cycle through, starting in late '12, '13, you'll probably start seeing some of those leases that were done in '08, where starting rents have dropped off a little bit. So next year, I think you could probably expect to continue some roll downs and after that, hopefully it will taper off.

And I think, Jamie, a key component of this is just what's going to happen with regard to job growth, and are people going to start adding to headcount as we get closer to November of 12? Is that something that we're going to do?

In addition to that, our expirations for 2012, from a company portfolio perspective are pretty low at 11.4%. We've typically run in the 14% to 15%, so the amount of exposure that we have in 2012, inclusive of the $300 million that we deployed is relatively low.

As a reminder, again with no construction activity, out there, if we can see some decent job growth, it keeps this positive absorption trend going, it's the supply and demand. At some point we'll be in a position where we hopefully can move rents back up.

Okay. I mean, that actually leads to my next question. Of the 11.4%, where would you handicap that in terms of what's kind of in the bag? What is open, and what is not even under discussion?

It's all under discussion from our side. We don't get that close to an expiration date without offering up the invitation to have a discussion. Now, some will Heisman you and some others will -- we've been talking about it and we're way down the road.

I think that the largest expiration, by a significant amount is the AT&T 2800 Century Center, which we have been talking about for a couple quarters now. They are likely to stay in that space through mid-2012, and we backfilled the component that they're not going to be in, actually that was part of the negotiation. After that, the largest that we have that will be a known vacancy is about 71,000 square feet.

We also have some of these year-to-year annual renewables with the state, particularly in Georgia, that we never like to assume 100% that they're going to renew, but we've had a pretty good track record with them renewing every year.

Okay. And then finally, Terry, your dividend discussion, where do you guys think, assuming coverage gets weaker next year, with CapEx, you know, where are you guys comfortable at a dividend level? How much above AFFO on a percentage basis or a dollar amount?

Well, I don't think we feel that it's going to get worse next year in terms of our overall coverage. I think you know, we will put out thoughts on that when we do our guidance you know, with the fourth-quarter results. But I think where we are now and the trajectory that we're on, we're comfortable with our dividend coverage.

Okay. Great. Thank you, everyone.

Michael Knott, Green Street Advisors.

Hey, everybody. Hey, Ed, just wondering if you can talk about how you're thinking about your different capital allocation alternatives for next year in terms of acquisitions, and then also really compared against either build to suit opportunities you may be working on, or other developments that you might be potentially thinking about?

Well, we'll give out the guidance in February, but the build to suits, we're hopeful that those that we are in talks with have the gumption to go ahead and pull the trigger. We've said before, and we still continue to see the development decision, the build to suit decision to be a fairly protracted process.

With regard to acquisitions, we identified these wish lists that we have pretty heavily publicized the concept of a couple of years ago. We continue to have activity on all fronts in our markets. Unfortunately, a lot what we're seeing come to market of late has been more noncore assets, things that aren't of high appeal to us.

We're still hopeful that there'll be more institutional quality assets come to market, which is more of our focus. With regard to our own portfolio, as I mentioned, we have $300 million plus and we've said this for some time now, of dispositions that we still would like to achieve, and we're just continuing to finesse those, so that we can put them to the market at the right point in time.

I do want to ask one question on the disposition number you mentioned, but just one last question on acquisitions. Do you think there is a chance that we see another new market expansion in 2012?

I think that's a possibility. We have a pretty deliberate process for going through how would we acquire, Michael, so this might be able to have a longer answer. Fortunately, I won't see you roll your eyes if it gets too long. (laughter) But just a quick touch on our strategy for that. We've said that as we consider new markets, you know, it's got to be a market that is basically a mid-tier market. We're not going to go into LA or Boston or San Francisco or Chicago. That's just not our niche.

Secondly, it's got to be a market that has demographics way beyond population growth. I'm talking about jobs, average income, industries, et cetera. It just needs to be a diversified economy, and to have these demographics that typically outpace that of the national averages. And then third, it has to have some geographic sense. For example, Pittsburgh is our third closest division outside of North Carolina.

We would see that as a positive, but just let's say, hypothetically, that Honolulu was a mid-tier city, had very strong demographics but geographically it doesn't make sense for all of us, except for Kevin Penn, who's from there. So, that kind of outlines how we would make a decision.

We've looked hard in a couple of markets in Texas. We've certainly looked in our country's Capital. And that's in part what drove us to do a greater level of research in Pittsburgh, and came to the conclusion that maybe it's better to hit them where they ain't, because the buildings that we saw and spent a lot of time studying in some of those markets I just mentioned, the cap rates were mid-to low-6s.

And some of them clipped the 6. To be able to buy the assets that we did on 16 September, with demographics that do outperform national averages, seemed to us to be a good play. So, that's what we'll continue to look for. Right price, right market, and right demographics to support a future in it.

Okay. And then last question is just on the dispositions that you mentioned, the $300 million. How much of that is existing -- in properties in existing core markets versus just sort of wholesale exit of certain sub markets? How long do think that process will take to clear that $300 million?

Well, we've talked about again, Winston-Salem -- sorry to be redundant -- but we still want to get out of there, we've got about 700,000 square feet there to get out of, but we've sold 88% of what we had from the peak. We've talked about Greenville, South Carolina, as that being a market that we would want to get out of, and that's somewhere under 1/3 of the total of the $300 million.

And the rest is basically cleanup, here and there. And, Michael, too, I have a record long answer here for you, the strategy that we've always had is if we own 10 buildings, we're going to rank them one through 10. And if we find an opportunity to flip out of 9 and 10 to buy another 1, 2, or build another 1, 2 or 3, that's what we want to do.

Okay.

Thank you. (Operator Instructions) Brendan Maiorana, Wells Fargo.

Thanks. Probably a question for Terry. Looking at the guidance, the change in the AT&T lease is about $0.02 a share, I think if I calculate the differential between what you expected and what you now expect. Was that in your -- was that change in your expectations when you gave the revised guidance on September 19?

No. Because we weren't sure yet what was going to happen with that deal. We knew it was being talked about, but it was not far enough along to bake in. So, we picked up -- that is now down, you're right, about $0.02. But it's being offset in part by the earnings on the acquisitions, as well. So --

But the earnings on the acquisitions -- I mean, you guys -- that was the big raise on September 19, right?

Yes. That's correct. That's correct.

So is there anything else that's driving because your midpoint is basically the same, I guess, if anything, it's maybe a little bit higher than what you had previously given?

I just think it's a continued view of the rest of the portfolio and the rest of the company. It's just gotten a little bit better since we did, as you point out, raise the midpoint slightly in the narrowed range of guidance this time. So, it's just up a penny.

I mean, is there -- was there an assumption of equity issuance, either via ATM or some other way in Q4 that was in the prior guidance, as it relates to keeping leverage neutral and now it's not in there?

That is really not what's driving it.

And is there -- so in your current guidance, is there any assumption of an equity issuance in Q4?

Within the range of guidance that we have, Brendan, there could be a disposition. We still have recycled equity in our guidance, you know, from the range of $25 million to $75 million in disposition, so that could be factored into the number. We do have our ATM program, which brings in small amounts of equity but given that we're so far, so late in the year, and we're still in the blackout period, as we sit today.

So, there really -- the impact of either dispositions, or if we would hit the ATM for a little bit this quarter would not be that material to the quarter in any event. We're -- the key thing is, we want to be patient in how we approach the balance sheet. As Ed mentioned, we don't have any covenant or heavy -- or pressures from the rating agencies to do this.

This leverage neutral strategy is really a management commitment. It's not something being mandated on us from the outside. And so, we're just going to be patient, look at the alternatives, try to do it smart and at the best execution we can over time.

So, how do you guys kind of handicap the difference between selling assets as a way to reduce leverage or keep the balance sheet neutral, versus the $300 million of acquisitions, as opposed to equity where your shares currently trade?

Well, all of our dispositions, Brendan, have been strategic in nature. And when we first started this whole process back in early '05, we outlined that we went street address by street address and decided which buildings to dispose of because we needed to reposition the portfolio, and we're almost dilution be damned, we've got to fix the portfolio. So they've all been strategic.

We were just fortunate that the time in which we sold them we were able to garner a low 7% cap rate on a lot of buildings. So, we're continuing to follow that strategy of what buildings need to be out of the portfolio, when is the right time to sell them.

But we're truly not trying to match each sale directly to an acquisition, because it's almost like there's a steady business of trying to continue to clean up the portfolio and utilizing the right timing on there, while there is a steady business of very patiently and deliberately evaluating acquisitions to bring in the door. And I think Terry is kind of like in the back room making sure that these things don't get too far ahead of one another, from an overall perspective.

Yes. No, I understand. I appreciate the kind of color on it. I was just sort of interested -- I recognize you guys have the $300 million of assets that you want to get rid of, but there is -- and they're going to be sold over time, but there's an opportunity to sell them when it's better than other times. I was just trying to get the sense of that.

In terms of the 2 acquisitions for Riverwood 100 and PPG, and the cap rate that you guys provided or the NOI that you provided for 2012, how much lease up is required to get those numbers? Or is that kind of based on your in-place run rate, does that get you to the cap rates that you guys have provided previously?

Right. It's basically in place. The only nuance is the free rent component at Riverwood that creates a little bit of noise. But when that flushes out, which would be next year, then yes. We're there. There's not any material amount of anticipated lease up in any of the 2 million square feet with regard to the numbers we have provided.

Okay. That's helpful. And then last one is probably for Mike. Just in terms of the CapEx, I know the mix was a little bit tougher this quarter in terms of new versus renewal, but it did seem like your CapEx was pretty high, relative to kind of the level of rents, and is actually I think the highest that I've got going back to 2001 for you guys.

Do you think there's any likelihood that that number starts to trend down a little bit in terms of your CapEx? Or do you think it's going to be elevated as you try to lease up the portfolio from 89.3% up to your target range of 92%? Do you think we're just sort of in a higher CapEx environment for the next several quarters?

I think that for this quarter, Brendan, again, we mentioned we had a fairly high percentage of new deals versus renewals, and as we know, bringing new customer in generally costs us more to go in and build it out, plus the full commission that's paid versus a renewal. So, I think that was one of the drivers.

And the obvious one that stood out was the transaction in Orlando. But I think on a go forward basis, at least for the near term, you know, it's still a situation where the customer doesn't want to put their capital into leased space. So, as a result of that, we tend to basically say we're going to have to basically buck it up and pay whatever is necessary to keep them in there, if it's a renewal or attract them as a new tenant. So, I think near-term costs, at least the next 12 to 16 months, we could expect that that trend would stay with us.

And I had one quick note that, Brendan, if you -- as Mike mentioned, if you net out the Orlando deal, the total number was $11.46 for the third quarter. If you look back over the last 16 quarters, it's coincidentally $11.40, so it's within $0.06 of that. So, we've been running on average now for 4 years, this $11.40 in total lease commission and TI relet CapEx.

And the one good thing I would say though, Brendan, is we are seeing where customers have expressed a willingness to extend term in order to get that TI if they need it. If they really said we don't want to put the space in -- I mean, put the CapEx in, so our leasing guy has been pretty successful in pushing term.

Do you guys -- I mean, is pushing term an objective now? Because I guess, you know, you could look at it in one sense that, you know, it's good to kind of push that term out especially when your CapEx dollars are high, but then you've also got rents that are probably towards the low part of the cycle?

I don't think we've ever felt like it was appropriate to market time a deal that you take a shorter term deal, for the sake of hoping that in 3 years or 4 years versus 7 years that you'll catch the market on the upswing. We've been in this business long enough to know that you do that and you could end up getting caught with your pants down. That's just not a game we like to play.

Sure. Okay. Thank you, guys.

And our next question comes from the line of Dave Rodgers from RBC Capital Markets.

Yes, good morning, guys. Maybe a two-part question, one opportunity, and one on the risk side. Obviously over the last number of years you've probably been taking share of your market. As we've talked about earlier in the call, as tenants have down-sized, traded up -- you've had a better balance sheet to go out and spend the dollars.

I guess in the next 12, 18 months, you've got those 2007 deals rolling through the market. Does that give you the sense that it's kind of the last push to go out there, be aggressive to capture some of these leases? And do you think you can grow your lease percentage over the market for that? You addressed it earlier in the call, but I'd love some more color.

And, on the risk side of that, for your own leases from 2007 it would seem like that's the last wave of low utilization space that could start to come back to you a little bit. Do you sense that you've got some low utilization left that could come back next year and hit you on that side?

Well, I would say on the rent side, that I would stick with what Mike said about, it's kind of a fool's game to try and times these things. Our folks are out, their interests are directly aligned with that of the shareholder with regard to how our leasing representatives get paid. They're paid off of the net effectives, so the better the deal the better they do.

And I think that they're out peddling hard to capture all that we can capture. I think a lot depends on what happens economically for the US over the next year or 2, and where the confidence comes back, where entities will again feel that it's not a bad thing to earn a profit and it's not a bad thing to expand your business by adding headcount.

I think those are critical things that we constantly get battered by the news on, that have really become cliche, but something's got to get fixed on that front in order for this whole thing to turn around. I think on the low utilization, that a lot of that has been flushed out.

We still see some of it. We had a customer in Richmond that was the biggest change that we had in Richmond this quarter, is we had a customer down-size by better than 50%. So, we still see some of that. But, I think the majority of it has been flushed out of the market.

I also have -- David,it's a little bit of an anomaly, but as there has been no new development in the last few years, the larger customers really have -- they have less options. There are probably more opportunities for the smaller customer when you've got a big, big customer, 50,000, 60,000 feet, they really have limited options where to go unless they really want to step down in class, and most of the customers just don't want to do that.

So that helps us from a retention standpoint there. And our leasing guys, job one for them is first and foremost is hanging onto our existing customers. Retention is huge around here.

And then poaching and going after those new customers as you mentioned that will be coming up out of the '07 cycle and our competitor they're going after those as well. They're more expensive to get, but if 'they're good credit, good customers, and we feel like we've got an opportunity to get them, we'll do it.

Dave, just to make this answer longer, there's also another global component to this. Our markets have traditionally benefited from the migration of companies from other regions of the country into this region of the country.

And, unfortunately, if you want to relocate a company which includes moving a lot of people, the anchor, the Achilles' heel to that is, that those people can't sell their homes in the region that they are moving from whereas in past cycles, that's never really been an issue.

They've been able to sell their homes and relocate, so when Square D opened up a big plant and operations down here, it was no problem selling their homes to move to North Carolina. But now, that becomes another obstacle that needs to clear through the system in order to re-accelerate the relocations of companies where they're moving people.

Now, if it is just you and a couple partners who want to start a business, certainly we feel that our markets are very attractive for that from a cost perspective and a labor pool perspective. And that happens. But, to move 200 people from one region to another is difficult to do and it's just another thing that has to flush through the system.

Thanks for the color.

And our next question comes from the line of Michael Bilerman, Citigroup.

Hi, thanks. It's Josh Attie with Michael. Can you talk a little bit about the line of credit balance? It's pretty sizable today, assuming you used it to pay down the mortgage debt in October. I know you mentioned you're considering both acquisitions and dispositions, but, as we think about the next 12 months, would you like the next capital transaction to be one that paid down the line as opposed to an acquisition? Or is that decision purely based on where the opportunities are?

Hi, Josh. This is Terry. The line balance, as we sit today is about $350 million and you're exactly right, we did use the line to pay off the Country Club Plaza loan in early October. You know, we have the line is at $475 million, and we also have an accordion of $75 million that we could trigger as well, so we still have a good capacity on that line.

We have talked about in the past, do we want to try to term out some of the short -- that line with other kinds of financing. And there are some possibilities out there but we've made no decisions, it's just something that we keep and routinely evaluate.

But, right now we have plenty of capacity for what we want to do. And as we -- the line basically becomes sort of -- if we have excess cash from a disposition or something else, that's what we use to pay down, because we really have no other debt or other uses that we have and it beats putting the money in the bank account, where we get even nothing. So, the line becomes sort of that governor, that what we borrow for short-term needs and then pay down when we have short-term excess funds.

Okay. So, it sounds like, as we think about earnings for 2012, it sounds like it's a possibility that, that $350 million balance could be on the line for all of next year. Or it could be termed out or it could be paid down with --

Yes. We're still obviously thinking through that and you know, when we give guidance for 2012, in the next couple of months, we'll talk more about what our assumptions would be for how we finance the business for the balance of 2012.

Okay. Thanks very much.

Thank you. And that does conclude the questions on the phone lines.

Okay. Thank you, everyone. And, as always, if you have any follow-up questions, please feel free to reach out. Thanks for your time.

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