Highwoods Properties Inc (HIW) 2012 Q1 法說會逐字稿

Good morning everybody, and we apologize for the delay. There have been some technical difficulties. After we finish the formal remarks the operator will come on and tell you how the Q&A session will be conducted. On the call today with us are Ed Fritsch, President and Chief Executive Officer, Mike Harris, Chief Operating Officer, and Terry Stevens, Chief Financial Officer. If anyone has not received a copy of yesterday's press release or the supplemental, please visit our website at www.highwoods.com, or call 919-431-1529, and we will email copies to you. Please note in yesterday's press release we have announced the planned dates for our remaining 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 Presentation section.

Before we begin, I would like to remind you that this call will include forward-looking statements concerning the Company's operations and financial conditions, including estimates and effects of asset dispositions and acquisitions, the cost and timing of development projects, the terms and timing of anticipated financings, joint ventures, rollover rents, occupancy, revenue and expense trends, and so forth.

Such statements are subject to various risks and uncertainties. Actual results could materially differ from those currently anticipated due to a number of factors, including those identified at the bottom of yesterday's release and those identified in the Company's 2011 Annual Report on Form 10-K, 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 www.highwoods.com. I will now turn the call over to Ed Fritsch.

Good morning everyone and thank you for joining us today. The US economy seems to have settled into a slow growth pattern that was so widely forecasted. It is probably best described as a quote unquote, 2% economy. We see a 2%-ish around numerous US economic factors, GDP growth, 10-year treasury rates, office job growth, inflation, personal spending, personal income, and even the FICA payroll tax cut was 2%.

Amidst this 2% economy, businesses are becoming modestly optimistic. Many have right-sized their cost structures, strengthened their balance sheets, and stockpiled cash, so plodding along at 2% ain't all bad, because while it is somewhat anemic, it is positive growth. Our focus at Highwoods is to continue to leverage the core tenants of our strategic plan to outperform in a 2% economy. Given solid leasing and improving same property NOI growth, we expect 2012 FFO to be $2.60 to $2.76 per share at the mid-point. That equates to a 3.9% year-over-year increase. For the quarter FFO was $0.70 per share, 15% higher than the first quarter of 2011. We signed 1.5 million square feet of second gen space, compared to 1.2 million square feet in the first quarter of 2011.

We remain focused on replenishing the volume of dry powder on our balance sheet, and returning to the lower end of our conservative leverage comfort zone of 42% to 48% debt plus preferred, as a percentage of adjusted assets. Since the beginning of the year we have partially achieved this, with a total of $55.9 million from the sale of non-core dispositions and the issuance of common stock through our ATM. On the non-core disposition front, we remain focused on selling those assets we have identified as no longer fitting our investment criteria, due to submarket age, the building's, not ours, location, quality, rent roll, and/or functionality.

Year-to-date we have sold $20.5 million of non-core assets for a gain of $6.5 million, including the 96-unit Neptune apartment complex in Kansas City, and the Feather Sound II, an 80,000-square foot office building in Pinellas County, Florida. We remain comfortable with our 2012 disposition guidance of $100 million to $150 million. On the ATM front year-to-date we have issued 1.1 million shares of common stock raising net proceeds of $35.4 million.

As we reported during our call in February, we are projecting $0.08 to $0.12 of full year FFO dilution from actual and anticipated dispositions in equity issuances. As a reminder our guidance excludes effects of any forecasted acquisitions. Speaking of acquisitions subsequent to the end of the first quarter, we acquired our JV partner's 77% interest in 11000 Weston Parkway, a 178,000-square foot office building in the Cary submarket of Raleigh. This property was valued at $26.3 million including $300,000 of near-term capital expenditures, and is leased 100% to Fidelity. Fidelity has invested substantial capital in tenant and common area improvements throughout this building since taking occupancy in 2007.

Highwoods developed 11000 Weston in 1998 and contributed to the JV in 1999. It is a solid property Class A and a great submarket, and Highwoods owns 16 acres of immediately adjacent core development land, land that was not owned by the JV. Plus as Terry will discuss, the transaction was leverage neutral for us given the net sale proceeds were used to pay down a loan we made to the joint venture last year.

We remain pleased with the performance of PPG Place and Riverwood 100, our two acquisitions from last September totaling $300 million, our occupancy of PPG Place, our 1.54 million square foot CBD office complex is 83.3% leased, 210 basis points up since closing. Also based on current forecasts we expect year end 2012 occupancy of PPG Place to exceed 85%, and we remain comfortable that we will be able to grow occupancy to over 91% by year end 2014, as we suggested at closing. At Riverwood 100, which is 503,000 square feet, occupancy is 89.3%, up 230 bps since closing, and based on our current forecast we expect year-end occupancy to be over 91%.

We continue to pursue a number of build to suits across our markets. We are having lots of conversations, we are running numbers and we are refining designs, but only time will tell which of these will translate from a conversation into grading a site, and of course when we grade a site we will use Josh Attie's Caterpillar D8. We are pleased that two national upscale restaurants, Seasons 52 and Capital Grille will be establishing their first Memphis locations on our land at Crescent Center, the office building we acquired in July of 2010. Our investment will be approximately $7.25 million, and the restaurants will invest substantial capital of their own in each of these venues. These projects are subject to standard regulatory approvals, and both restaurants are expected to open in the second half of 2013. Our kudos to Steve Guinn and the rest of our Memphis team for their creative thinking to carve-out land to add these vibrant amenities which are within walking distance of 1.3 million square feet of Highwoods-owned office product.

Lastly, we also are pleased to welcome Ted Klinck to our team in the newly-created position of Chief Investment Officer. Ted has 24 years of extensive experience in capital investments, with a strong focus on sourcing core and opportunistic real estate investments. Ted is fortifying our already strong investment team, and is playing an integral role in helping us achieve our vision of improving our portfolio through the purchase of core assets, and the disposition of non-core buildings.

In total it was a good quarter for Highwoods, and I thank all of my Highwoods associates for their very good work. Mike will now cover operations. Mike.

Thanks, Ed and good morning. As Ed noted leasing activity in our markets was strong. We were fortunate to sign 153 leases for 1.5 million square feet of space, 66% of this activity was office, and the average term was a solid 5.3 years. Office leasing increased 14% year-over-year, and for the trailing four quarters we have leased 21% more office space than the same trailing four quarters a year-ago. Occupancy in our wholly-owned portfolio increased 10 basis points year-over-year to 90.2%, on a same property basis occupancy in our wholly-owned portfolio increased 80 basis points to 90.8%.

Our office occupancy continues to substantially outperform our markets by an average of 760 basis points. In the first quarter we decreased our 2012 annualized revenue expiration exposure by 350 basis points, from 10.7% to 7.2%. Average in place cash rental rates across our portfolio rose 1.5% from a year ago. Cash rent growth for the -- 126 office leases signed this quarter declined 6%. GAAP rents on office leases signed this quarter increased 1.7%, as we continue to get 2% to 3% annual escalators in most leases. CapEx related to office leasing was $12.29 per square foot for the first quarter. This is below our five quarter average and well below the last two quarters, despite signing a greater percent of new versus renewal deals.

Turning to our markets our Nashville portfolio remains one of our best performers, with occupancy increasing to 94.6%, up 50 basis points from the fourth quarter, and 510 basis points from the first quarter of 2011. The overall national market is also performing well, with positive net absorption, and a vacancy rate of 11.2%, a 30 basis point improvement from the fourth quarter.

Leasing in our Raleigh portfolio was sound at 222,000 square feet, with an average term of 5.6 years. While occupancy did decline sequentially due to a number of expected move-outs, we expect Raleigh's occupancy to increase to 90% by year-end. The overall Raleigh market has had five consecutive quarters of positive net absorption, totaling over 800,000 square feet and total market vacancy is down to 13.4%, a 170 basis points improvements. Occupancy in our Atlanta portfolio is 91.2%, up 110 basis points from the fourth quarter, primarily driven by Yates Insurance and Northrop Grumman at 2800 Century Center and Aon Hewitt at Riverwood 100.

As we previously reported, AT&T is set to vacate 151,000 square feet at 2800 Century Center at the end of June. Century Center is a well-located office park where occupancy has remain consistently above 90% throughout the entire duration of the Great Recession. We are deep in the process of renovating a hefty portion of 2800's exterior and interior common areas, and are working a good pool of prospects.

As Ed mentioned, occupancy at PPG Place has improved since we acquired it last September. During the first quarter we expanded and renewed a high credit customer at PPG Place 6, where they grew by 14,000 square feet. Their commitment to PPG Place is a sound endorsement of our work as we continue to Highwood-tise this complex.

Our Tampa portfolio also benefited from several lease starts which increased occupancy 100 basis points from the fourth quarter. With regards to the LakePointe One and Two where PWC will be coming out of 319,000 square feet next April, we have initiated a comprehensive marketing program. Currently we have good prospects for about 30% of the space a year in advance of PWC's expected move out. Overall we are pleased with the quarter, and believe our leasing volume is indicative of our success in staying heavily focused on the fundamentals. Terry.

Thanks Mike, and good morning. We are pleased with our financial and operating results for the quarter. The $0.70 in FFO per share was $0.09 better than the first quarter of 2011, primarily due to $0.09 and higher NOI contribution from acquisitions and development projects, $0.05 in higher same property GAAP NOI due to 60 basis points in higher average occupancy, 2.5% lower OpEx in large part from lower utilities and snow removal costs from the milder winter, and the effects of prior year negative CAM true-ups recorded in the first quarter of 2011. And also $0.014 in lower preferred dividends from the June 2011 redemption of our remaining Series B preferred stock.

These positive changes were partially offset by $0.025 in higher G&A, caused mostly by cost of living increases, higher healthcare premiums, and higher short and long-term incentive compensation. $0.016 in higher net interest expense as a result of debt incurred to finance acquisitions and developments in the preferred stock redemption, partly offset by lower average interest rates. $0.008 from higher shares outstanding mainly shares sold under our ATM program, and $0.007 in lost NOI from dispositions. Sequentially the $0.70 of FFO per share was the same amount as fourth quarter 2011, but with some fully offsetting effects. Namely, $0.04 in higher NOI from 20 basis points higher average occupancy, negative true-ups in the fourth quarter of 2011, and lower OpEx this quarter mostly repairs and maintenance.

The NOI increase was offset by $0.025 in higher G&A, due mostly to timing of employer taxes and long-term incentive costs, which are typically higher in the first quarter. $0.008 from higher interest costs, mostly from paying down our 1.74% credit facility with the proceeds from our 3.58% $225 million term loan, and $0.007 from lower land sale gains and other smaller items.

Turning to the balance sheet we had a productive quarter in closing the $225 million seven-year term loan at an effective 3.58% fixed rate, and raising $35.4 million in net cash proceeds from stocks sold under our ATM, which includes $10 million that settled in early April. We currently have $363 million of availability on our $475 million revolving credit facility, and we only have $73 million of debt maturing this year, all in the fourth quarter. As Ed mentioned in April we acquired 11000 Weston Parkway from a joint venture in which we have a 22.8% interest. The net sale proceeds of $25.3 million were used by the joint venture to partially pay down a $38.3 million short-term secured loan, which bears interest at LIBOR plus 500 basis points that we made in April of 2011 to the joint venture. As a result this acquisition was leverage neutral.

We updated 2012 FFO guidance by increasing the low end of the range by $0.04 to the new range of $2.60 to $2.76 per share. Certain key underlying assumptions were also updated, including slightly higher same property cash NOI growth, and also slightly higher G&A, both of which reflect the impact of first quarter activity.

Operator, we are now ready to take questions.

Thank you. (Operator Instructions). One moment please for our first question. And our first question comes from James Feldman of Bank of America. Please go ahead, sir.

Great. Thank you. Good morning.

Good morning.

Hi. First question would just be can you guys talk about economics of deals and concessions and kind of how things feel across your different markets this quarter versus prior quarters?

Yes. Just painting with a roller there is not a dramatic change this quarter over last quarter. The last few quarters have been really the last five quarters have been pretty robust with regard to total activity. Probably the biggest change that we have been able to note over a little bit longer than quarter to quarter has been the volume of term that we have been able to garner in leases, and you see that on our leasing page in the supplemental, the term this quarter was 5.3 years so we are continuing to get substantial term on the office side. We really haven't done the full shift from turnkey to TI allowances, but there is more of that coming, and the volume remains sound.

I think we are also starting to see a little bit of subsiding on the level of free rent as well that is being requested and we are able to command as the market is starting to tighten up, particularly on larger blocks of space.

And then just thinking about the pipeline of leasing demand, we keep hearing from other office companies that tech and media are really driving the ship. What are you guys seeing across your markets?

I am sorry Jamie. What is driving the ship?

Well, tech and media tenants growing seems to be certainly in the [CBD space], the biggest drivers of demand. How are your markets different?

Well, certainly tech has been a component of it. We have also seen across-the-board companies like financial services and clinical trials, clinical research has been very substantial to us. Healthcare has been an important driver for us and continues to show promising opportunities. It has been pretty steady with the financial services. The insurance. Some legal firms are merging, so we are seeing some down-play in that energy. The eds and meds that we spoke about in Pittsburgh is certainly meaningful there.

Okay. And then a question for Terry. After raising capital on the ATM, what are your thoughts on leverage today?

We are making progress on the de-leveraging that we have talked about, that we still have the $0.08 to $0.12 range as part of the guidance that we put out in February, and still maintain that assumption. So we have made some progress on that with the ATM that we were able to get out in the first quarter and early in April. We also had two dispositions close this year. The Neptune apartments in the first quarter, and then here in April we closed on another building in Pinellas County, Florida. So we are also making some progress on the disposition side. I would say we still have some wood to chop to get all of that done that we had planned to do this year, but we have a good start.

Jamie, we remain comfortable with our disposition guidance for the year.

Okay. And finally what was Highwoods' actual spend for the acquisition during the quarter, the JV that you bought out?

The purchase price for 100% was $26.3 million that we talked about, but we already owned almost 23% through our interest in the joint venture. So effectively you can think about this as we paid about $20 million to acquire the 77% that we didn't already own.

And we included $300K for CapEx near-term.

Okay. Great. Alright thank you.

Thanks Jamie.

Thank you, our next question comes from Rob Stevenson of Macquarie. Please go ahead, sir.

Good morning guys. You guys have talked extensively about AT&T in the past, and I think we have also talked about PW Coopers is another sort of decent sized tenant that is rolling in the near-term. Is there anybody else in the sort of 2013, early 2014 roles that is sort of in your top 10 or 20 tenants size-wise, or is most of the rollover the next, call it 18 months plus mostly smaller tenants?

Well the PWC roll is a 2013 date. They would be out as of May 1 of 2013. So we are a year out from that. The next largest that we would have as a potential expiration would be AT&T in the fourth quarter of next year, in another large block of space they have around 200,000 square feet.

And that is in Atlanta as well?

Correct.

Okay. And then can you talk a little bit about what the appetite you are seeing today from potential tenants to do build to suits versus just moving into already constructed space?

Sure. I mentioned in my scripted remarks that we are talking with a lot of different entities. I hate to quote a number but I can tell you it is in excess of a dozen, about potential projects, but it does remain a very protracted process from going from the conversation to actual execution, as we witness with the LifePoint deal, where we have been in conversation with them about a build to suit for over three years before we are were able to start digging footings there, which we did this past week. So there is a lot of conversation, there is interest, there are still obviously cost deltas to go from a second gen space into first gen, that is somewhat meaningful. 20%-plus. But I think that as the larger blocks become consumed of the institutional quality space, the well conceived development projects in our market that those conversations will become more active, and more we will make decisions to go ahead and pull the trigger.

Given the availability of land in some of your markets, are you seeing the private guys who have been sitting on land and looking to monetize them, are you seeing them be rational still in terms of what they are willing to do on build to suits, or have you started to see a few irrational deals out there that keep you scratching your head?

Well, it is hard to define rational nowadays, but we are seeing, we basically see four buildings in our footprint that are speculative in nature of size. One is in Cool Springs in Nashville, about 175,000 square feet, there are [a couple] actually in Durham, North Carolina, and then there is one for only about 70,000 square feet in a suburban submarket in Pittsburgh.

Okay. And then --.

So not a meaningful amount, but there is some of it beginning to happen which obviously we haven't seen in over the last four years.

Rob, the developer on the Cool Springs building, we know them well, they are good competitors, and they are pretty rational in their approach to things, and there are not many markets that could justify it, but Cool Springs is one of those rare markets, that is just very hot and probably would make some sense.

Okay. And then lastly -- sorry if I missed this -- what do you guys have under contract or letter of intent to both buy and sell today?

Yes. You didn't miss it. We typically don't disclose the transactions until we reach a closing date. We found that public disclosure that typically comes back around in the negotiations, we end up negotiating with ourselves, so we typically don't disclose that until the horse is in the barn or out of the barn, depending on whether we are selling or buying, but there is meaningful activity as we underscored we are still comfortable with our guidance for 2012 on both of those fronts, Rob.

Okay. Thanks, guys.

Hey Rob, just one clarification. I know that you asked and I mentioned AT&T in Atlanta. I just want to be sure you said expirations, but not move-outs. Just want to clarify that we have no indication from them that they will be leaving that space.

No, no. I just wanted to figure out like what was the major tenants was up for expiration versus a bunch of small space accounting for the big roll in 2013. Thanks. Okay.

Good, I just wanted to be sure I properly communicated, appreciate it.

Thank you. Our next question comes from Brendan Maiorana of Wells Fargo, please go ahead.

Thanks. Good morning.

Good morning.

I want to maybe just get your sense of it sounds like your view of the economy is largely unchanged from a quarter ago and it is a slow growth kind of environment. How do you kind of view the potential for value-add acquisitions, given what sounds like some good success you have had in the first six months with Riverwood 100 and PPG Place, getting some lease-up there. What was your appetite for value-add acquisitions relative to more stable deals, which seem like pricing is pretty high at these levels, and maybe can you compare that to development and your view on new development as well?

Yes. I think that in order to do a value-add we would need to be mighty comfortable with the submarket, and going all of the way back to what we bought in December of 2010 with Independence Park in Tampa, that was 116,000 square feet that was 100% vacant, but we were also able to acquire 30 some acres of land, and seven months later we were 100% leased, so it just happens to be in the best submarket of Tampa. So I think there are a lot of factors that need to go into it as far as pricing, what we think the vibrancy of the submarket is, where we think our opportunities to Highwood-tize the asset fall. We are looking at value-add deals, but we are not committed to just simply run a single course on value-add. We are certainly looking at all across the board what our opportunities may be. We are finding though, that on the more institutional quality stabilized assets, that the pricing is getting a bit frightening for us. Maybe use Rob's term, scratching our heads on some of that, as they reach into the low to mid-6s on some deals that we are learning about.

I think we just need to also clarify. Our perception of value-add is still a very well located class A building that may have some vacancy, but it is not -- value add can be anything from a C building to a B building. That is not the arena that we are looking for.

Right. We would still like to be in adherence with our stated rule of whatever we buy it should lift the overall quality of the portfolio.

Have you guys found that value-add properties that the bid for those, or the asset value for value-add properties has accelerated to the same degree as say the core properties that have stabilized?

We haven't because most of the value adds aren't of the institutional quality that the core assets are.

Okay.

It is a product that is a tick or two to the left of what we would consider institutional quality.

But some of the players for those assets the institutions that are looking for [stabilizing], they are just not in the value-add game, so they just haven't come to market yet.

Sure. And then, Mike, I think you guys you talked about a couple of big expirations. I think you also have, I know not a huge expiration, but I think there is maybe 80,000 or 90,000 square feet in Raleigh that is moving out, I think it is UNC that is moving out of a lab space building in the second quarter?

That is correct, [Research] Commons.

Is that lab space rents or is that more typical of office rents which would be lower, and what are the prospects like for essentially backfilling that space?

Well, it is a mixed bag in that particular building. It was a being that was originally developed for Glaxo, so it is probably on the order of two-thirds of lab space and one-third of traditional office, so obviously would love to find a single user that would come in that would like that mix, but no doubt that building is a challenge for us as we go back and look at it, because it's basically 15 year old lab space. So we're putting together a pretty extensive marketing plan for this, working with consultants on lab space, Skip Hill and his group in Raleigh have been reaching out to a lot of the locals that are in that arena today, and in fact we are even touring the building this Friday to get a better handle on it. So I think it is a building that is clearly on our radar for looking at, and potentially even considering some repositioning.

Sure. Okay. That is helpful. And then just had a couple for Terry. First, the transaction buying 11000 Weston Parkway. Do you get a lift when you compare the cap rate relative to the amount of the loan payoff with respect to earnings?

Yes. We do, Brendan. Good question. The cap rate on that was probably in the mid-9s, and the loan which was 500 over LIBOR is about 5.25, so just maybe around 4%, a little over 4% spread on the effective $20 million that we acquired. So that will be a lift going forward.

Okay. And are you expected to get repaid at the maturity which on the balance which I guess would be in June?

The JV is working on a few other properties, evaluating whether they should be sold or not, and the way the loan is structured any proceeds from asset sales in that joint venture whether they are assets that secure our loan or any other assets that might be sold, go first to pay down the loan. So we have basically almost a cash sweep on asset sales until the loan is repaid, and the loan is now down to $13 million, so we would expect that it would be paid maybe by the second quarter, but it is so well secured that if we need to extend it again for another three months or so that's not going to be an issue for us, but I think we would certainly expect by the end of the year that it would be paid down.

Are there other properties within the venture that, or properties that are secured by your loan that it would be attractive to [happen]?

Yes. There were four assets as I recall that we used to secure the loan originally. The one that we just acquired was one of the four. So there are still a few other loans in there and the LTV on the loan is low, so we feel totally comfortable, there is no credit exposure from our perspective, and we were just glad that we were able to provide flexible financing for the partnership when they needed it, because it was a little bit tough to get something with the flexibility in the third-party market, and we were prepared to step in last year when we did that in April of 2011.

Sure. Okay. Alright. Thank you.

Thanks, Brendan.

Thank you. (Operator Instructions). Our next question from Dave Rodgers of RBC.

Ed or Mike maybe you could chat a little bit about the decision making, or characterize the decision making among your small tenants? It sounds like the larger tenants are kind of being finally forced into making longer-term existing commitments longer-term build to suit commitments, but talk about the decision making process for some of these smaller tenants, do they have more competitive options today, are your competitors on the landlord side finding more capital to do deals?

I think that the second part of your question clearly there is more capital to do deals. There is not that distress that we all thought would emerge. Now some of it has and certainly there were brokers who would only do deals with the better landlords, to ensure that build-outs would occur and commissions would get paid. I think that a number of the smaller users the 5,000 to 10,000 square foot footprint have taken advantage of a little bit of a flight to quality, moving to better quality space, and a lot of that has already transpired, and so the vacancy in the market when you look at the overall vacancy stat, it is disproportionate to the lower class assets than it is to the higher class assets, and I think that we will find more of the 5,000 to 10,000 square footers basically staying put, as the opportunities come up with lease rollover because they have already seized the opportunity to move to a higher grade building.

And, Dave, we really because that 5,000 to 10,000 square foot block of space tends to be a little more of a commodity in most markets, just more options, our folks particularly our leasing property management folks have gotten their arms around our customers and done a good job. I think we have a very high retention percentage this quarter, which was I think evidence of that initiative.

And then on the build to suit side, I don't know if you kind of gave a range for build to suit yields, and I know it is always kind of a dangerous game, but maybe a better question is, are you seeing added pressure to build to suit yields as you think about them today, just given where all-in debt costs are and the availability of capital?

From the customer? From the user?

Yes or your development perspective, where you would be willing to develop to, are you seeing added pressure to your own ability to generate returns off development?

Well, if you aggregate everything that we have done from a development perspective since January of 2005, we have averaged just above a 9, and I would say that that's not a guideline that we would stray from very much at all. Obviously credit, specialty use, location, flexibility, being able to multi-tenant, all those things still factor into it, but I would say we wouldn't stray far.

Okay. Thank you.

Sure.

Thank you. One moment, please. Our next question comes from Michael Knott of Green Street Advisors. Please go ahead.

Morning, guys. It is Jed Reagan here with Michael. Can you talk a little bit about Pittsburgh? How would you grade yourself on that market so far, and does the experience there make you more or less eager to initiate expansion to other new markets?

Two things come to mind. One is everybody on the Management Team has consumed the Primani sandwich and survived it, so that is a good thing. Then second is yes, we are enamored with the city. We have found probably the most surprising factor, not to suggest that we had a different perception going in, but the quality of the people that we have worked with, whether it be a customer, a vendor, a broker, a contractor, an elected official, the work ethic and integrity has just been really refreshing. We obviously have been able to move the needle on what we bought. We have cut significant opportunities out of the operating expense side, while enhancing services and we have had good leasing. We are getting very close to reaching agreement to have a division Vice President to oversee the division to be committed to it on a daily basis. So yes, overall our experience has turned out to be as good or better than we had anticipated.

Okay. Great. Thanks. And how much would you say you are seeing in terms of tenants looking to get more efficient with their space use on a per employee basis just kind of across your markets?

I think that everybody is pretty sensitive to that and we are seeing that in particular on the efforts that are being put forth on those who were considering or evaluating a build to suit. The number of test fits that customers are putting themselves through to be sure that they have the adjacencies and the efficiencies and the functionality tying into what they want it to be has been at a level that I haven't seen in 30 years of doing this. I think that with regard to the concept of taking everybody from 10 by 12, or 14 by 16 offices, into a giant cubeland is probably more chatter than fact. The analogy I have used for this is back in 1974, I remember cars were in line to get gas, and the amount that they could acquire was limited. So everybody projected that it would just be a matter of short time before people would be in Toyota Corollas and Honda Accords, but if you were here and you looked out our window, you would see just as many Four Runners, Tahoes, Yukons, F-150s in the parking lot now with gas at $3.70 a gallon. So I don't think that in the $20 to $24 rent world, that making a substantial change in a customer's use of space from 200 to 250 down to 150, 175 really isn't that meaningful to the bottom line, and we are not seeing a lot of that except for in a few cases where it has been mandated by an office typically out of the Northeast.

Okay. Okay. That is helpful. And lastly just wonder if you could talk a little bit about the how the Cary acquisition compares to the rest of your Raleigh Durham portfolio in terms of things like quality, location, tenancy?

Well, the developer has a superb reputation. We built it so the building is akin to, the same architect that we used for construction in our Creekstone Park, Situs, and other places, good floor plates, we have the adjacent land to grow another 150,000 square feet. So we are very pleased with it. Ample parking, four story open atrium with [livers] rails in the corridors. It is all good.

Okay. Thank you.

Thank you.

Thank you. Our next Chris Caton of Morgan Stanley. Please go ahead, sir.

Hi. Good afternoon. I wanted to follow up on the use of space. You talk about build to suits. How are those, what are users looking at when they're making a decision in the current environment to go with a build to suit rather than existing build? Is there anything on the latest design trends that is different from the existing base of availability?

Well, just the fact that it's new and you can have, you start from scratch. So some of that are looking at it are driven by a consolidation, so coming out of three different buildings and consolidating into one and garnering those G&A efficiencies help offset an increase in rent going from second gen to first gen. Also, some are doing it for their statement to their employees, their prospective employees, their customers in the community that they want a specific look and feel for their space that helps with retention attraction and business, but as far as just the overall product itself other than doing things today that are more green than you typically would have done a number of years back, there is really not a dramatic change in the design of the footprint.

I think with the PWC the deal we talked about in Tampa and their move into a build to suit in Tampa is exactly what Ed described where they came out of 319 they are going into 250 and they are actually keeping or actually adding bodies, so they are making a little bit more dense use and they have changed their template for that use, but they really couldn't work with an existing structure to do that. Otherwise, it was economically probably more likely for them to stay where they were.

But Chris is it still needs to be a very deliberate decision to pay up for first gen space, so you have got to have some compelling aspect, or it is just not that meaningful to your bottom line in a mid-tier market.

Okay. Thank you. And then on the new markets that you've talked about in the past, I guess Pittsburgh was different for your existing markets in certain ways and so if you look at new markets are they going to be more akin to your existing markets in terms of in the Southeast, or are you not looking at new markets as much as you may have been?

Well, we are continuing to evaluate other markets. We have done things like looked at Washington, DC. We have been looking at that market for a considerable amount of time, but we just can't find anything compelling. We feel like Pittsburgh has a lot in common with our other markets, other than the fact that it is north of the Mason-Dixon line. It is closer to our home office than Atlanta is and us in, this is unabashed shameless self promotion for Highwoods, but I think that we really hit them where they ain't, by being able to go in there and buy something for less than $0.50 on the replacement square foot, and have upside to go from 81 up 10 or more percentage points in occupancy and streamline the OpEx. But we will continue to look in other markets, but the proximity needs to make sense, the demographics needs to make sense, and then the obviously, the particular street address or bricks and sticks need to make sense, so we are not going to catapult out into Portland or Honolulu. Just the proximity needs to be basically like what we have done with Pittsburgh to home.

Thank you for the color. What I was trying to ask is, are you trying to hit them again where they ain't, or do you have a willingness to go into a different market which maybe has a little bit more composition, maybe not DC because of pricing, but maybe other major markets that are kind of close to you either in South Florida or elsewhere farther to the West?

Yes. I will say that every day we are trying to hit them where they ain't, but some of that may be right here in our own backyard, as opposed to having to go into a new market. If you had asked me five, six -- five years ago would we be in Pittsburgh in the fall of 2011, I would have said probably not because, it is nothing but rust and molten steel, and after educating ourselves on it, we got comfortable with the overall market and then we found a great opportunity with PPG Place. So I hate to rule anything out other than a market that doesn't have good demographics, a market that is a big gateway city like New York, Chicago, or Boston, or LA, or a market that doesn't have good proximity for us, but I think it is important for us to evaluate opportunities that make sense, but we sure don't want to announce something and not be able to stand behind our commitment on it, that it is the right move for our shareholders' money to go into a city that doesn't have the demographics and the upside that we have been able to evidence in Pittsburgh.

Thank you very much.

Thanks, Chris.

Thank you. (Operator Instructions). Our next question is from Michael Bilerman of Citigroup. Please go ahead, sir.

Thanks. Good morning. It's Josh Attie with Michael. How is the asset sale program trending versus your expectations in terms of timing and pricing, and did the adjustment to guidance at all reflect the slightly later timing of asset sales?

We are still very comfortable with our guidance number, Josh. I would say slightly all the way down to like paper thin. We still feel comfortable that we will be first half of the year, so it may have slid a little bit during the second quarter, but I don't think that we see a significant move that would take us from say second quarter to fourth quarter.

And how has the activity been on the assets that you're looking to sell? It seems like demand for higher yielding assets in the secondary markets is picking up. Are you seeing that on the assets you are looking to sell?

I think the activity is good, yes.

And could you remind us where you stand on potentially selling the industrial assets?

Well, we haven't committed to sell industrial assets. We are sticking with our mantra of no person, no process, no property is sacred as part of our strategic plan, so we evaluate them all, but we haven't made a commitment to sell out of industrial. It is certainly something that we consider, but there is no update there.

Can you remind us how do you think about those assets in the context of the portfolio, are they core assets that you want to hold onto long-term, or is there something that needs to change those assets fundamentally, where you think value would be higher if you waited to sell them?

Well, in a number of the places we have additional pad sites where we can continue to build out the part that we either bought and further developed, or we developed ourselves from day one. So we will look at those and what is our opportunity to build out of the park, and then sell it, or build out of the park and then keep it. But I wouldn't holistically across the Board say that we would sell our 6% or so of revenues from industrial in a single day, but it is certainly something that we look at.

Okay, thank you very much.

Sure, Josh.

Thank you. Our next question comes from John Guinee of Stifel. Please go ahead.

Hi. John Guinee here. Along those same lines Ed you have got a great team out in Kansas City, and you have --

Thank you.

-- possibly the best, or one of the best retail centers in the Midwest. My guess is tax protection by now has burned off. My guess is there is a lot of people knocking on your door at plus or minus a 5 cap for that kind of real estate, who can employ some national or International synergies. Is it time to sort of tighten up the portfolio in that regard?

Well, again, I go back to there is no person, no process, no property that is sacred. I think the knocking you hear though, are customers at all the stores. The sales are up dramatically again. We are up 8% sales year-to-date and we continue to have robust leasing there. I am not sure, not to be argumentative, but I am not sure that I subscribe to a national or international retail owner being able to leverage it, because it is not one of those situations where we are having to say look, if you will lease space in these other three models, I will let you in this one in Vegas. This is where customers come to us, and given the uniqueness of it, we have a pretty good stable corral of prospects and existing customers, when the Tiffanies of the world for example decide they are going to start with retail stores outside of New York, Kansas City is one of the first calls, so I am not sure that I am fully subscribing to, that somebody can come in and dramatically do it better than we have done it from a leasing and sales per square foot perspective.

On the tax side a component of that burned off on the tenth anniversary which was July of 2008, but we would still incur $120 million or so of a tax bill if we were to sell it, so what we would need to do is basically 1031 it in some form, and that means we would need to find somewhere around, $0.5 billion of assets that we dearly love, because we would simply be moving the basis from Ward Parkway to somewhere else. How is that for a long answer, John?

Well, beauty is in the eye of the beholder, and there is some awfully aggressive retail capital out there these days.

Understood.

But you have a great answer.

Thank you.

And, Mr. Fritsch, I will turn the call back over to you sir for any closing remarks as there are no further questions at this time.

Again thank you everybody for joining us today. We again apologize for the five minute glitch in getting started due to technical difficulties. As always, please don't hesitate to call us if you have any further questions. 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 all lines. Thank you, and have a good day.