Highwoods Properties Inc (HIW) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Highwoods Properties conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded Wednesday, October 31st, 2012.

I would now like to turn the conference over to Tabitha Zane, please go ahead ma'am.

Thank you, and good morning everybody. On the call today 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 919-431-1529and we will email copies to you.

Please note in yesterday's press release, we have announced the planned dates for our 2013 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 that effect asset dispositions and acquisitions, the cost and timing of development projects, the terms and 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 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 assumed 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 risk 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 everyone. We know many of you live and/or work in the large area impacted by Hurricane Sandy, please know of our genuine concern for those of you, your family members and colleagues, who may have been heavily impacted by this record storm.

During our more recent calls, we have talked about operating in a 2% economy, and the uncertainties our country is facing with the upcoming election and the impending fiscal cliff. By this time next week, one of the many big questions will have been answered. With the elections outcome in hand, our country's elected leadership on both ends of Pennsylvania Avenue will have been decided. Regardless of which 50-plus or minus percent of our population is happy, knowing what hand has been dealt, will hopefully give businesses, households, and elected officials insight into the direction our Company may take towards addressing so many of the ingredients that keep our countries economy exiled in Uncertaintyville.

While we at Highwoods are keenly aware of these macro economic challenges and their impact on many of our customers, our team continues to strive to outperform in this 2% economy. Examples of succeeding in this arena include solid FFO, strong same store NOI, robust leasing, accretive high quality acquisitions, and well executed noncore dispositions, all the while maintaining a strong and flexible balance sheet.

Given our solid performance as reflected in yesterday's release, we now expect 2012 FFO to be $2.72 to $2.74 per share. At the midpoint, this equates to a 5.8% increase over our 2011 performance.

We had another extraordinarily active third quarter, akin to our third quarter recorded last year. We leased over 1 million square feet, announced $177 million of acquisitions, sold $134 million of noncore properties, raised $94 million of equity, and delivered 2.7% growth in same store cash NOI. One of the major highlights of the quarter was our accretive acquisition of the 32-story Two Alliance Center in Buckhead, and an all-cash transaction for $146.7 million, or $298 per square foot, which is 10% below replacement cost. This signature building delivered in 2009 has a stable and diversified rent roll, a ten year average lease term remaining, and no expirations until 2017, when only 24,000 square feet comes up for renewal.

The building is currently 90% occupied, and we have a lease signed that will increase occupancy to 92% in May. One of Two Alliance's key differentiators is its location within Buckhead, giving it a strong competitive advantage. Unlike a number of other Class A properties in Buckhead, Two Alliance is easily accessible to and from both Georgia 400 and Peachtree Road, and is within walking distance of Marta, Lennox Square, and Phipps Plaza.

As a side note, we are pleased to have funded or $177 million of third quarter announced acquisitions on a leveraged neutral basis. We continue to have success in sourcing high quality office acquisition prospects in our core markets best business districts. Accordingly, we have raised the high end of our 2012 acquisition guidance to $330 million.

On the disposition front, year-to-date we have sold $155 million of noncore properties, since our last call we sold a small noncore office building in Kansas City, and we expect to sell two small joint venture properties later this quarter. This is what pushes the high end of our disposition guidance up to $158 million for the year.

On the development starts, it has been disappointing but understandable, all of the aspects of uncertainty discussed at the outset of my comments, have hit this part of the industry hard. Most of the projects we are pursuing are now considered 2013 possibilities, and as a result we have lowered the high end of our 2012 development start guidance to $100 million. While uncertainty remains a formidable foe for our economy, hopefully the mere advancement of the calendar turns out to be a positive.

Our political leaderships legislative powers have remained virtually frozen and inactive for most of the year, and then hasn't served our economy well. However, the inevitable arrival of Election Day, and then January 1st, should reduce some of the uncertainty. While the pending fiscal cliff still hangs over the economy, at least we will soon know who will be writing the rules of engagement, and we are hopeful that armed with at least that piece of information, businesses can begin to plan for 2013 and beyond.

This is Ed Fritsch, and I approved this message, and I turn the phone over to Mike.

Thanks Ed, and good morning everyone. We had a good quarter, leasing 1.1 million square feet, and increasing occupancy 90 basis points from the third quarter last year. The net impact of our third quarter acquisitions and dispositions was a wash on third quarter occupancy. Our office portfolio garnered the lion's share of this leasing activity, 923,000 square feet, with an average lease term of 5.8 years. And once again, our office occupancy continues to substantially outperform our markets, by an average of 590 bips overall, and 730 bips in our Top Five markets.

Cash rent growth for the 130 office leases signed this quarter declined 9.7%, while GAAP rents increased 2.4%. CapEx related to office leasing was $19.46 per square feet, and the average lease term was 5.8 years. Third quarter rent growth in CapEx were skewed by three relapse with high credit customers totaling 112,000 square feet, with an average term of over ten years. Stripping these out of the quarter, cash rent growth would have declined 7%, GAAP rent would have increased 4.9%,CapEx would have been $15.13 per square foot, and average lease term would have been 5.2 years.

Turning to our markets as expected Atlanta's occupancy declined in the third quarter, AT&T completed its move out at 2800 Century Center, and we sold two properties encompassing 443,000 square feet that were 100% occupied. In total, this negatively impacted Atlanta's occupancy by 320 basis points. We were very pleased to have recently announced 26,000 square feet of additional leasing at 2800. In total we have now released 100,500 square feet, or 46% of the space AT&T vacated, and have agreed to terms on an additional 42,000 square feet bringing the total relet to 65%. We have strong prospects for another 60,000 square feet.

Nashville continues to be one of our consistently better performing markets, with occupancy in our portfolio at 95.9%. Our team leased 120,000 square feet in the third quarter, delivering an 8.7% increase in GAAP rents. Nashville's prominence in the healthcare industry continues to be a key driver of all of our absorption. Another top performer is Richmond, with occupancy in our wholly-owned portfolio at 91.4%, up 270 basis points from the third quarter of 2011, and up 60 basis points sequentially. Innsbrook where the bulk of our portfolio is located continues to a much desired sub-market.

Raleigh had a solid quarter, inking 135,000 square feet, with an average term of 5.9 years, and a 7.1% increase in GAAP rents. Occupancy declined 220 basis points, most of which was due to UNC Dental School vacating 4301 Research Commons, and moving to a university-owned building.

Our market entry into Pittsburgh has exceeded our expectations. In the year since acquiring PPG Place, we have increased occupancy by 640 basis points to 87.6%, well ahead of internal projections. We now expect year end occupancy to be 88.3%, verses our most recent projection of 86.5%. We continue to highwaytize the complex, and oversee positive feedback from customers, prospects, and the brokerage community.

Leasing activity in Tampa has picked up, our team leased 127,000 square feet in the quarter, and occupancy is 89.7%. As you would expect, we are investing substantial energy towards releasing the space at LakePointe One and Two, that PWC will be vacating next May. We have relet 59,000 square feet, and have agreed to terms on an additional 15,000 square feet, which will get us to 23% relap of half year in advance of PWC's expiration. We also have over 100,000 square feet of sound prospect. Lastly, we are well into the design phase for substantial common area and motor court improvements, that will significantly enhance the marketability of these assets.

In closing, I just want to comment that last week all of our directors of leasing from across our system were here in Raleigh for a comprehensive planning session. Despite all of the holistic economic uncertainties which constantly swirl around all of us, their outlook is upbeat, and their energy, morale, and dedication is inspiring. Terry?

Thanks Mike, and good morning. FFO per share was $0.66 this quarter, excluding $0.008 of property acquisition costs. This was $0.01 better than the $0.65 of FFO reported for third quarter of 2011, after excluding property acquisition costs for that quarter.

There are a number of factors underlying this $0.01 increase. On the positive side, we had $0.09 in higher NOI contribution from acquisitions and development projects, $0.014 in higher same property gap NOI, due mostly to 40 basis points higher average occupancy, and lower utilities and property taxes. $0.009 in lower interest expense from debt balances outstanding, and $0.005 in higher interest and other income. These positive factors were partly offset by $0.031 in lost NOI from dispositions,$0.033 from merchant build and land sale gains in 2011 versus none this quarter,$0.031 from higher shares outstanding, and $0.014 in higher G&A, excluding acquisition costs in both periods. Sequentially, the $0.66 of FFO per share was $0.04 lower than second quarter 2012, largely due to $0.026 in lower same property GAAP NOI, caused mostly by the AT&T and UNC vacancies, and also our typically seasonally higher electricity expenses in the third quarter. $0.026 in lower NOI from assets sold in the third quarter, and $0.016 from higher shares outstanding. These were partly offset by $0.015 in higher NOI contributed by development and acquired properties not in the same property pool, and $0.011 in lower interest costs.

Turning to the balance sheet, we are very pleased to have acquired Two Alliance Center and the Three Church Street MOBs on a leverage neutral basis. During the third quarter we raised net proceeds of $93.8 million from selling 2.87 million common shares under our ATM program, at an average gross price of $33.22 per share. Together with recycled equity from third quarter dispositions, our debt plus preferred stock as a percent of gross assets dropped from 45.4% at June 30, to 43.7% at September 30. We are also pleased that our debt to annualized EBITDA ratio declined to 5.8 times.

We currently have $420 million available under $475 million revolving credit facility, and only $18 million of debt maturing in the remainder of the year. With the rate reduction and maturity extension of our $200 million bank term loan completed earlier this month, the weighted average rate on our outstanding debt is 5.04%, down 25 basis points from September 30, 2011. Our next opportunity to further reduce the cost of our debt will come this December, when we plan to prepay without penalty, a $123 million, 6.03% secured loan.

As Ed noted, our updated FFO outlook is now $2.72to $2.74 per share, which at the midpoint represents a $0.03 increase from the midpoint of our prior outlook. This increase is due mostly to solid third quarter FFO, higher expected average occupancy for the rest of the year, and FFO contribution from Two Alliance. As a reminder, our FFO guidance does not include any impact of potential acquisitions or dispositions that may occur by year end.

Operator, we are now ready for questions.

(Operator Instructions). Our first question comes from the line of Chris Caton with Morgan Stanley. Please proceed with your question.

Hey, good morning. Ed, I was hoping you could talk a little bit about the acquisition environment through the end of the year. Do you see a lot of packages in your favored markets? And do you think there will be a big rush into the end of the year? As a follow up, I wonder, Terry, could you comment on the [inaudible] market for acquisitions like that, and you may have said in your prepared remarks, but are you looking to refinance the debt that you will prepay in December?

Okay, good morning, Chris. This is Ed. We don't see a large flood of offering memorandums hitting the market in the fourth quarter, or early first quarter. They have been relatively scant, really throughout the last three or four quarters. We don't see that dramatically changing. We do have some relatively high level of confidence that we will be able to achieve the high end of our guidance, which is why we have maintained, actually upped it a little bit on the deals that we are pursuing, but those discussions are under way. It is not predicated upon new offering memorandums, a hope and a prayer that new offering memorandums hit the market between now and year end that we would be able to close.

And then Chris, on the financing question, one, we have not been in the secured debt market recently, but we understand from just making inquiries of others, that the secured market still remains very robust, as long as your keep your leverage in the 70% range or so. Not trying to push the LTVs. Also everyone is aware of how strong the bond market has been, so there are lots of good financing alternatives. We have not made a determination of what the source of funds will be to pay down that loan in December, but we do know that given the higher rate on that, it makes sense to get it paid down as early as we can, once the prepenalty payment no longer applies, which is on December 1st.

Thanks very much. Good quarter guys, appreciate it.

Thanks, Chris.

And our next question comes from the line of Jamie Feldman with Bank of America Lynch, please proceed with your question.

Great, I guess a follow up to the prior question. What are you seeing in terms of demand for assets in your markets, and pricing and how has that changed? .

Well, it is tough to say, Jamie, because there hasn't been much that has been put to market to see a lot of competition on. We have seen a few deals, but we think that given the scant number it is a little bit tough to gauge, but our estimation is that cap rates have been stable, and that there are two main buckets of quality. Those that are on the low end of the quality range that get very little in the way of institutional high interest, and those on the high end of the quality spectrum, that get a lot of interest that are qualifiedbidders.

Okay. And then in terms of cap rates or pricing?

We think that cap rates are relatively stable. We do feel that if we are fortunate enough to be able to close on the transactions that we are working on between now and year end that are reflected in the upper end of our guidance, that if we are able to close on those, that we would be at or above what we have been able to deliver thus far this year.

Okay. And then to get to the $3.30 on guidance, is that one acquisition or are there multiple?

Multiple.

Okay, so another Two Alliance is not really in the cards?

I didn't say that, well we already own Two Alliance, and there is no other Two Alliance.

Okay, and then I guess--

Just to be serious about that, we are continuing to pursue the best assets in the best sub-markets in the markets that we are in, so we are looking to adhere to our policy of anything that we would buy would lift the average quality of what we currently own.

Okay. And then how should we think about this risk of new supply in Buckhead, around the Two Alliance acquisition?

We think that the risk of new development is relatively low. And we think that if new development does come on, that there hasn't been much in the way of a contraction in construction expenses, so the rents will have to be high. And with regard to Two Alliance, we have very little rollover exposure, as I mentioned in my comments, we only have 24,000 that rolls or comes up for renewal, and that is not until 2017. In addition to that, it is a very stable, the average remaining term is ten years for what we have leased in Two Alliance.

Okay. And then can you guys update us on LakePointe, and the big expiration next year? And maybe backfill in progress?

Sure. Sure. So LakePointe One and Two in Tampa Bay Park has 319,000 square feet that PWC will come out of in April of next year. We have relet 19% of that, and we have reached verbal agreement and lease out for signature for another 5% of that, or 15,000 square feet, so as we sit we have either signed or soon to be signed 24% of the building six months before we get it back. We have another 100,000 square feet of solid prospects. If we are able to be successful on that, that would get us above the 50% mark on reletting.

Okay. And then just finally, I know you talked about some of your stronger markets, but can you talk a little bit about some of your weaker markets, and kind of whether they are getting better or worse, or kind of what might be the drag if we do head into more of a recovery here?

Well, I think the continued absence of any meaningful new supply is helping all markets. That the projects that were delivered late in the cycle right before everything turned down or right after everything turned down and then were delivered, that a lot of those large blocks of new space have been absorbed, obviously through some deal making. But those newer buildings have basically been absorbed in the way of big blocks of space. So we think that has helped all of the markets, whether they be weak or strong, across the board it is helping because of the absence of new construction.

We continued to see some that are wanting to expand, some of them are slow to make the decision because of all of the uncertainty that still exists. But those conversations are certainly being had. And we have seen a dramatic shift. Mike mentioned the meeting that we had this past week with our directors of leasing, and to the person, we have seen a dramatic shift in the volume of discussions with regard to extend and blends. They are still on the table from time to time, but nowhere near the volume that we were seeing.

Okay. So when you say extend and blend, that is the lower end?

Yes, where somebody is coming in and saying look, if you will give me some TI dollars now, I will give you more term, or if you give me a lower blended rate, l will give you more term. Those kinds of conversations have for the most part been pushed out of the system. It is fair to say that in our weaker markets we are seeing an equivalent rise in the tide in those markets as in our better markets.

Okay. That suggests your rents would be coming down? Your in place rents would be coming down?

No. What I am saying is those extend and blend conversations are virtually behind us, they used to be plentiful, and now they are seldom and few and far in between.

I see what you are saying. Okay, thank you, guys.

Sure. Thank you.

Our next question comes from the line of Michael Knott with Green Street Advisors, please proceed with your question.

Just to lead off, maybe this is for Mike. Given the 10% roll down this quarter, what is your view of the overall portfolio, mark to market today?

Yes, that is a tough thing for us to gauge, because we don't go through it and mark all of our leases to market. Mostly because they are not all roll-in. I think that 10% was more significantly impacted by a handful of deals. We had a couple of deals in Tampa, and deal in Pittsburgh, that pulled that average down, if we had netted those out, we would have been more in the 6% to 7% range, as opposed to the 10% range, and they were also CapEx intensive. So yes I would, based on that I would stick with what we have said with regard to our guidance, that we would be in the 5% to 8% cash roll down range for the year.

Michael, this is Mike, part of that as Ed mentioned in Tampa, was part of the early relet of the PWC space, and as a reminder, the PWC was in there for many years, and their rate has inflated significantly over the term. So bringing it back to closer to market really was a big part of that driver.

Okay. And how do you feel about the overall leasing pipeline, and tenants willingness to make decisions. It sounds like it is still impaired a little bit? Do you see any uptick at all, was the summer leasing slowdown more than that? How do you feel about that?

Well, we saw pretty good activity in the third quarter, our leasing volumes were up. In addition to that the term was up, average of 5.8 years, and then another statistic that I would want to highlight is that just over 38% of the deals that we did in the quarter were new leases, which is a high number in comparison to where we have been the last few years. So that to us is an encouraging tell tale.

Okay, and then thanks for the color on the Atlanta and Tampa backfilling. How are those proceeding verses your expectations? And then two, are there any other notable potential move-outs on your radar?

So just to add a little bit more, Michael on when Jamie asked about PWC. If I can take this opportunity to give a little bit more color on the 2800, the AT&T space. So AT&T was in that space for 28 years, just as a reminder they leased 221,000 square feet. So we have signed deals now for 46% of that, which is just over 100,000 square feet, and then we have agreed upon terms for another 42,000 square feet, or 19%, which gets us to 65% committed. And then we have another 60,000 square feet of strong prospects, which is about 27%, which should get us to clip 90%, so we are really pleased with how Jim and Mike Wells and the team down there have done in marketing that space. The retrofit that was done in the lobby and to the motor court has been impactful and helpful to them and their showings to brokers and prospective customers.

So we are right now 65% released on that, and if you remember, we got a determination fee from them in the beginning of the year that is in our number this year, so given this level of activity and the termination fee, we are really holding pretty well on that. And our rent has only rolled down about 2% to 2.5% from where AT&T was when they expired.

And then with regard to looking forward, we don't have any major notices yet, I think the one that is biggest on our radar is the AT&T Windward deal,which is north Atlanta, and we haven't received any formal notice to them. We are still talking with them. In the interim, we have gone ahead and we have shown that space to two large prospective users. We know that the local people would like to be in the building, but we don't know exactly yet what AT&T corporate has had to say. And that one doesn't expire until the fourth quarter of next year, so we are basically a year out from that.

And then just two quick ones related, and then I will get back in the queue. One would be given your comments on development, I am surprised that starts number for this year isn't zero. And then two, you guys often don't announce acquisitions until it is closed. So is any part of that 330 at the high end under contract today?

So on the development side, we are still working at least a handful of prospects from a development perspective. We are hopeful that as these progress, I mean we are at a point where the customer could certainly commit, so on development, we announce when a customer is ready to, has signed and ready to announce to their constituents. So we still have reason to believe that we could bring in a few of these development build to suit projects before year end. We don't see any of them the likelihood is higher that they would come across and they would die. And then we have others that it has become obvious that they are just not at a point where they would pull the trigger in 2012.

And on the acquisition side, you are correct, we don't announce those until we close. We felt an obligation to refine the guidance, and that is based on things that we are working on right now, and our confidence level we felt it would be appropriate to have the low end reflect what we have done thus far this year, and the high end reflect what we hope to complete by year end. So is that evasive enough about the question about under contract or not?

Yes, you could go into politics, Ed. (laughter)

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

Thanks, good morning.

Hey.

Hey, guys. This probably for Ed or Mike Harris, you talked act a plan for LakePointe One and Two, and you guys were very clear about the tenant prospects, what are the costs that are likely both from a TI perspective, and then just kind of base building improvements to the lobbies, and whatever else is likely for those properties?

We expect to invest a like amount in LakePointe One and Two as we did at 2800, with regard to aesthetic improvements, so several million dollars for doing some lobby work, but most of it will be motor court, courtyard, hardscapes, areas as you approach, and then interact between the two buildings, and the structured parking that is there. With regard to the TI amounts, given that PWC has been in the buildings, or one building for 13 years and another building for 20 years, we expect the TI numbers to be fairly substantive.

We are seeing, though, Brendan, more and more open plan for these large block users, so our hope is that once we have white boxed this space, and demoed with, as Ed said, the older improvements that PWC had, that it won't be quite as bad, because the users in that sub-market tend to be a little more back office, and less hard wall intensive, so our hope is that might mitigate those costs somewhat, and the common area improvements inside, LakePointe One is the older of the two assets, and is really where you would see more of the interior common improvements that are needed. LakePointe Two is actuallyone of our better newer buildings from a lobby, et cetera.

So we are quoting Brendan $25 a square feet in TI for those buildings.

Okay, so in line with what you guys did in Tampa, this past quarter?

Yes, sir.

Okay, great. A question for Terry, the straight line rent burned off a fair, you had a nice improvement in straight line represent on the same store basis this quarter relative to last year, and that is sort of the first quarter where you have had this kind of nice improvement, should we expect to get that over the next few quarters, and so that will be in a tailwind for your same store outlook as we go forward?

That is a good observation, Brendan, the straight line rent component of our same property performance has actually been coming down a little bit every quarter this year, and should come down a little bit in the fourth quarter. I don't have next year's handy, but what is really happening here is that some of the straight line rents that we had given and the free rent that we had given in the past, are beginning to turn in the same property pool. Now, overall, total Company straight line rent is going up a little bit, in part because of some the big acquisitions that we have done, Two Alliance and River Point last year, both had a reasonable amount of free rent in some of the deals that we took in, so overall the straight line rent for the Company is going up this year over last year. But the part that is in the same property pool came down a little bit.

Sure. And then Terry, this is related to Chris Caton's question, but the prepay of the mortgage, you are going to do that, and then I think you have got another one that comes up sometime next year. Is the light, would you be comfortable putting that on the line, or should we think that you are likely to do some type of bank term loan, or some type of unsecured issuance next year at a more reasonable rate?

We would probably want to get that termed out before too long. If it goes on the line initially, which we have plenty of capacity to do, and take advantage of just getting that rate down to something lower, we would do that even if it goes on the line temporarily. But we would like to get that term down before too long.

Okay, and then just a last one for Ed. The Two Alliance deal,I think you guys have been pretty clear over the last couple of quarters that Buckhead was a market that you were looking at, that you are interesting in, but this is the first move into that sub-market for you guys in Atlanta, are there, I heard the comments focus on the best sub-markets, the best buildings in those sub-markets, are there other sub-markets that you aren't in that are likely over the next couple of years? Or do you think now where you stand within your markets you are in the sub-markets that you like?

Do I think there is potential for us to continue that. There are two sub-markets in Pittsburgh, sub-markets that we have an interest in. We won't rule out any new market whatsoever. But our focus right now is on our core markets, and trying to figure out how to expand our footprint by meeting our underwriting criteria and the quality that we want.

Okay, alright, thank you.

Thank you, Brendan.

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

Hey, good morning, Ed. A question for you, typically the combination of lower rent, longer term are great for the landlord, better for the tenant, maybe just following up on an earlier question, can you give a little bit more color on maybe where we are in that trade off? And is that something that is driving the tenants in? Are the brokers driving that decision, is the market stabilized enough, that we will see more and more of that activity to boost occupancy at the expense of rate? Or was this kind of a more unique quarter?

I don't think it was terribly unique, Dave, it is probably somewhere in between. I do think that there is certainly a heightened confidence level in decision makers today than what it was two years ago. We are anxious to see where that goes in the coming year, and I think we are all anxious about a lot of things over the next six to nine months to see how that plays out. But I don't think it is the brokers coming in saying, get all you can now, while the blue light special is on. I don't see that to be the environment whatsoever. I think it is more a confidence level to sign up for a longer term, I also think that it is intrinsic in a higher quality asset, that the customer wants a longer term lease. So I think that as we continue to improve the portfolio, longer term leases are germane to that business strategy of ours.

Dave, this is Mike. Also the customers come in, they may not want to put as much of their capital in, and they are willing to go longer term for us to put a little more CapEx in the deal. And that will sometimes drive this longer term as well.

Okay, and then I guess on the development activity you talked about, should we be thinking more medical office in this pool, what are your discussions regarding maybe more traditional office? Is there a mix in the pool that maybe keeps that number elevated?

There is not MOB, a material amount of MOB in our list of build to suit projects that we are pursuing right now. It is more an eclectic direction of different businesses. Now some of it is healthcare, but it isn't MOB.

Great, thank you.

Thanks, Dave.

And we have a follow-up question from the live of Chris Caton, please proceed with your question.

Hi, we were just going through some release that you were doing and, I may have missed it, but did you speak to the lab space that you have gotten back. I know that you were evaluating your options there. Are you going to rebuild that as lab space, are you going to go office, are you still determining what direction to take, I think this was in Raleigh?

Yes, they are called the 4301 Building. It is the 71,000 square feet that UNC Dental Care occupied after GlaxoWellcome came out of using it as a lab. We knew UNC, we knew when we did that deal it would be for about 3.5 years, because they were building an on-campus lab that included the vivarium and those types of things that are in this building. Your memory is correct, the building is a mix of lab and office, and we are still evaluating that. We thought that what we would do is see what kind of activity we generated throughout calendar year 2012. And then in the first quarter decide whether we stick with where we are, if we start to make some changes to the building to adhere to the prospect pool that we have experienced in the nine months since we get it back.

And we have reached out to two local brokers who are very well heeled in specialty lab space building in this market. And have them really birddogging this for us as well.

So what is your stance? Has there are been some traffic that would convince you to keep it as lab space, and maybe put some capital in and achieve a higher rent? I think you said it was 85,000 or 90,000 square feet, so that could be a nice lift in 2013?

Yes, the building as a whole is right at 90,000 square feet. We have two prospects now, one for the building, and one for about one-third of the building. And we are in conversation with them as they would keep aspects of the building as labs. So it is not, these are not office users who have come in and said, if you will gut it and convert it back to pure office, that we would take it. These will users who are interesting in the way that it is set up now.

Very early in discussions with them.

Thank you very much.

Thanks, Chris.

And there are no further questions. Gentlemen, I will turn the call back to you, please continue your presentation or closing remarks.

Okay. Thanks Sean. Thanks everybody for dialing in, if you have any follow-up questions, as always please don't hesitate to reach out. Thanks so much.

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