Highwoods Properties Inc (HIW) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and 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 today, Wednesday, February 13, 2013. I would now like to turn the conference over to Ms. Tabitha Zane. Please go ahead.

Good morning, and thank you. 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 919-431-1529 and we will e-mail 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 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 condition, 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 2012 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'll now turn the call over to Ed Fritsch.

Good morning, and thank you, everyone, for joining us today. On our last call, we discussed that the mere passage of time, the inevitable arrival of Election Day and January 1 would resolve some of the uncertainties hanging over America's 2% economy. Now that several boxes of uncertainty have been checked, like them or not, businesses have a better sense for the rules of the road and they are able to strategize for growth accordingly. This has led to some optimism about the economic outlook, as exemplified by the strength of the stock market. A burning question is whether business and employment growth will finally shift out of the grind of first gear. Unfortunately, drifting from one economic policy crisis to another will not accelerate business growth. If certain influential elected leaders can reach consensus on the proper way to manage today's "crisis of the quarter", i.e., the pending budget sequester, and give the American public hope that unbridled government spending will be curbed for the health of future generations, there is reason to believe that our economy may finally shift into a higher gear later this year. That's a big if, but certainly possible.

So in 2012, it was a very solid year for us. We delivered FFO of $2.73 per share, a 5.8% year-over-year increase. We reported year-end occupancy of 90.9%, up from 90.0% at end of 2011, generated same store NOI growth at 3.6% on a cash basis and 2.8% on a GAAP basis, improved CAD by $11.5 million compared to last year, leased 4.9 million square feet with an average term of 5.3 years, acquired $296 million of core assets at an average cash cap rate of 7.4%, and sold $158 million of non-core assets at an average cap rate of 6.8%. This solid performance further validates the deployment of our strategic plan and our unwavering dedication to enhancing our portfolio by increasing our concentration in key infill submarkets, which we refer to as "best business districts" or BBDs.

This includes the acquisition of Two Alliance Center, a trophy asset in Buckhead, and EQT Plaza and CBD Pittsburgh, the sale of our single asset in the state of Mississippi, and the exit from two underperforming submarkets, namely downtown Atlanta and Nashville Airport. As a reminder, since late 2011, we have acquired $629 million of best business district assets, encompassing 3.7 million square feet, with average yields of 7.5% on a cash basis, excluding the impact of free rent, and 8.7% on a GAAP basis from acquisition through the end of 2013.

Our fourth quarter results were also solid. We delivered $0.68 per share of FFO and leased 1.2 million square feet of office space. During the quarter, we raised $56.1 million of net proceeds under our ATM program. At the beginning of 2012, we were vocal about our disciplined plan to return our leverage to under 45% and fund growth on a leverage neutral basis. We are pleased to have ended the year with leverage of 43.9%, well within our stated comfort zone, and to have completed the successful $250 million 10-year bond offering in mid-December.

Also in the fourth quarter, we acquired EQT Plaza, a 616,000 square foot 32-story Class A office building. It is a top five Pittsburgh CBD asset and a synergistic complement to our PPG Place, which is just a few hundred yards away. Our total investment in EQT Plaza of $99.2 million is 45% below replacement cost and represents a year one cap rate of 7.1% and a GAAP cap rate of 8.8%. The building is now 96.8% occupied, with an average remaining term of nine years and rents 7% below market. [Highwaytizing] EQT Plaza is well underway. As a side note, we now expect occupancy at PPG Place to top 91.5% by the end of the second quarter of 2013, a full year and a half ahead of our original pro forma.

Also during the quarter, we were able to position ourselves to acquire 68 acres of office development land in a prime location in Nashville's Cool Springs submarket. Our land is part of a 145-acre tract. It's a mixed use high density development that, in addition to office, will include retail, hotel and residential. Having placed in service all of our Cool Springs land for the development of 937,000 square feet of well leased office, we are excited about being back in the development business with the capacity to deliver up to 1.3 million square feet in this very vibrant submarket.

As we look towards 2013, we're encouraged by the recent positive employment trends in our markets, continued tightening of available Class A office space, and practically no new construction. We expect to benefit from these positive trends which should be a productive year for Highwoods, with FFO of between $2.68 and $2.81 per share, excluding the net impact of any potential investment activity. In 2013, we again expect to be a net investor, enhancing the quality of our portfolio through acquisitions, dispositions and development. We will continue building our presence in the best business districts and are forecasting $200 million to $325 million of acquisitions and $100 million to $150 million of non-core dispositions.

We're also optimistic about our development opportunities and anticipate being able to announce $75 million to $200 million of new projects. There are signs that the protracted decision making process for those build-to-suits may finally translate into signed deals. In addition, we will maintain our strong commitment to balance sheet management and expect to remain at least leverage neutral. Like in any year, 2013 will have its own set of opportunities and challenges. We are focused on repositioning and reletting the few large spaces we will be getting back, and we believe timing is playing in our favor.

In closing, I thank and applaud all of my co-workers, our Board and our loyal investors for enabling 2012 to be such a good year. 2013 is off to a good start. And I now turn the microphone over to Mike.

Thanks, Ed, and good morning, everyone. 2012 was another productive year for Highwoods. On a year-over-year basis, occupancy in our wholly owned portfolio increased 90 basis points, to 90.9%, the average office lease term signed was 5.3 years, office GAAP rents increased an average of 2.5%, and same property cash NOI, before term fees, grew 3.6%.

Looking at the fourth quarter, we leased 1.4 million square feet, a 27% increase over the third quarter. Occupancy in our wholly owned portfolio increased 70 basis points from the third quarter, and same property cash NOI increased 4.9%. Office leasing accounted for 87% of total square footage signed in the quarter, with an average term of 5.4 years. GAAP rents on office leases signed increased 3%, while cash rents declined 6.3% and office occupancy at year-end was 90%, up 80 basis points from the third quarter.

Occupancy in our office portfolio remains higher than the overall market's occupancy in each of our core markets. Each of our top five markets reported positive absorption in the fourth quarter and over the past year, these same markets combined have benefited from five million square feet of net absorption and pretty much no new construction. CapEx related to office leasing in the fourth quarter was $16.35 per square foot, a reduction from the previous quarter, but higher than the $15.34 per square foot average of the previous four quarters.

Turning to our markets, with the acquisition of EQT Plaza in December, Pittsburgh is now one of our top five office markets, contributing 10.8% of our annualized office revenue. Year-end occupancy in our Pittsburgh portfolio was 91%, up 830 basis points from the fourth quarter of 2011 and 340 basis points from the end of 3Q.

Looking to our Nashville division, it remains a top performer, ending the year with 95.6% occupancy, a 150 basis point increase from a year ago. The Nashville market continues to be a resilient and growing market. We are pleased to have acquired 68 acres of heavily sought after office development land in Cool Springs, Nashville's best performing submarket. The project, to be known as Mosaic, provides for approximately 1.3 million square feet of office development as part of a high density mixed use planned development, to also include 310,000 square feet of retail, 650 residential units and approximately 300 hotel keys. Highwoods will be the exclusive office developer and will also direct the development of all infrastructure throughout the project.

Southstar, a local Nashville developer, will orchestrate the funding and development of the retail, residential and lodging components. We loaned Southstar $8.6 million to fund a portion of their land purchase and will loan them an additional $8.4 million to fund their share of infrastructure costs. We also expect to invest approximately $9.9 million for our share of infrastructure costs.

The Tampa market is showing meaningful signs of recovery, with 3.2% job growth in 2012 and a pickup in the housing market. Our main focus for our Tampa team this year is repositioning and releasing the space PWC will be vacating at Tampa Bay Park on May 1. To date, we've re-let 24% and have strong prospects considering another 65%. We define strong prospects as those who have expressed a genuine interest in understanding the space and proposed lease terms. Large blocks of Class A space in the West Shores submarket are scarce. With no new supply on the horizon, we have a distinct advantage in attracting larger users.

The Atlanta market had a strong year. A recent CBRE report noted that in 2012, Atlanta reported its highest net absorption since 2007, with the centrally located core submarket, Central Perimeter, Buckhead and Midtown, garnering the bulk of new activity. We significantly enhanced our Atlanta office portfolio in September through the acquisition of Two Alliance Center. This is a top shelf trophy asset in one of the best locations in Buckhead. We've had good lease activity at 2800 Century Center. We've relet 106,000 square feet, or 48%, of the 221,000 square feet AT&T previously occupied. We've also agreed to terms with four prospective customers for an additional 97,000 square feet, which would get to us 92% leased. We also have 39,000 square feet of prospects vying for the remainder space.

Based on recent conversations with AT&T concerning the 223,000 square feet they lease at our Windward building in Atlanta, we believe we will be getting the space back on October 1. This property is well located in the North Poulson submarket, with easy access to Georgia 400 and attractive walkable ammenities. Our Atlanta team is developing a comprehensive marketing plan, and we have engaged a prominent local architectural firm to assist us in repositioning this building for either single or multi-tenant occupancy.

Before turning it over to Terry, I congratulate our Kansas City team, which had a great 2012. Country Club Plaza sales, net of anchors, increased 11% year-over-year, to $549 per square foot, due in part to attracting top notch brands, such as Lululemon, Vera Bradley, Athleta and Moosejaw.

2012 was an excellent year and we are optimistic 2013 will be, as well. There's no doubt we have a couple of challenges in 2013, with expected move-outs in Tampa and Atlanta, but our portfolio continues to outperform the market, due to its higher quality, infill locations and very strong local teams. Terry?

Thanks, Mike. Total FFO available for common shareholders this quarter was $56.3 million, up $3.0 million from fourth quarter of 2011. This increase primarily reflects $1.1 million higher same property GAAP NOI and $2.6 million higher NOI from acquisitions net of dispositions. For the full year, total FFO was nearly $218 million, up $21.3 million, or 10.8% over 2011, driven primarily by same property GAAP NOI, up $7.9 million, and NOI from acquisitions net of dispositions, up $21.6 million. These positive effects were partly offset by higher G&A, lower joint venture FFO contribution and lower land sale gains. We also had a one-time $2.3 million merchant build gain in 2011.

As a reminder, in all my comments, FFO, FFO per share and G&A amounts exclude property acquisition, preferred stock redemption and debt extinguishment cost, which amounts are disclosed in a table in our press release. On a per share basis, FFO for the quarter was $0.68. Fourth quarter FFO per share was $0.02 better than the preceding third quarter, primarily due to our Two Alliance and EQT acquisitions. Full year FFO was $2.73 per share, up $0.15, or 5.8% over 2011, and up $0.27 over 2010, an 11% increase in two years. The $0.15 increase in 2012 over 2011 was driven by the $21.3 million increase in FFO, partly offset by higher shares outstanding.

As you may recall, our original 2012 FFO outlook included a dilutive impact of $0.08 to $0.12 per share from planned dispositions and equity issuances in 2012 to return our balance sheet back to the same leverage level as before the acquisitions of PPG Place and Riverwood in September, 2011. The actual deleveraging impact in 2012 ended up being just under $0.11 per share, mostly flowing through in the third and fourth quarters. Same property GAAP NOI was up 1.6% in the quarter and up 2.8% for the full year, driven by 0.6% and 0.9% growth in average occupancy for the respective periods. Same property cash NOI growth was even stronger, as a growing portion of non-cash straight line rents converted to cash rents in 2012; and we see this positive trend continuing in 2013. Same property NOI growth in 2012 was also bolstered by cam true-ups from 2010 that negatively impacted 2011, which we had previously disclosed.

G&A increases this year were driven mostly by higher incentive compensation, salary merit increase and higher healthcare costs. We expect lower G&A expense in 2013, up to $32 million to $34 million, net of any acquisition costs. Interest expense was slightly higher for the full year compared to last year, as higher average debt balances were mostly offset by lower average interest rates.

Turning to the balance sheet, we had a very productive year. We reduced our year-end leverage 340 basis points, from 47.3% to 43.9%, even while being a net acquirer in 2012. In 2012, we issued 7.25 million shares under our ATM program, for $236 million in net proceeds, plus another $6.6 million in early January, 2013. In addition, we closed a new $225 million seven-year bank term loan and fixed the all-in rate at 3.58% for the full term, extended our $200 million five-year bank term loan for two additional years, now maturing in 2018, and lowered the spread by 55 basis points, to LIBOR plus 165 basis points, paid off $196 million of secured debt at a weighted average rate of 4.73%, and closed a $250 million10-year unsecured bond at an all-in rate of 3.752%.

As a result, at year-end we only had $23 million outstanding under our credit facility, leaving us with $452 million of line capacity. And we lowered the weighted average rate on our outstanding debt from 5.46% last year-end to 4.94% this year-end, excluding the credit facility. 68.6% of our NOI, including pro rata share of JV NOI, now comes from assets unencumbered by secured debt. Unencumbering our portfolio provides additional balance sheet flexibility and will continue to be a long-term goal. We only have $152 million of debt maturities in 2013, of which $117 million is a 5.75% secured loan that matures in December and can be prepaid at par as early as September.

With respect to CAD, we were $6 million positive for the full year. Recurring CapEx was unchanged year-over-year, but gross FFO adjusted for non-cash items was up $17 million, more than offsetting the $5.8 million increase in common dividends from higher outstanding shares. We are pleased to start 2013 with a projected FFO outlook of $2.68 to $2.81 per share. This assumes average leverage of 43.7% throughout the year. This compares to FFO of $2.73 per share and average leverage of 45.3% in 2012. As in the past, our guidance assumes no impact from potential acquisitions or dispositions, other than those that have closed this year. We plan to finance our net capital deployment activity in 2013 on a leverage neutral basis. Operator, we are now ready for questions.

(Operator Instructions)

Our first question comes from the line of Jamie Feldman with Merrill Lynch. Please proceed with your question.

Thanks. I was hoping you could talk a little bit more about maybe improving demand from housing related, or just any key themes you're seeing that give you a little more optimism after the beginning of the year, in terms of either job growth or tenant demand.

Sure, Jamie, good morning. We have seen more activity as far as just pure showings and customers who show an interest in expansion versus just a pure renewal over what we've seen in the past. In addition, if you look at the Southeast region versus other parts of the country, the December year-over-year growth versus the other areas of the country was either better by 2 to 1 or 4 to 1, somewhere in that range. So statistically, from government statistics, like the Bureau of Labor Statistics and other sources, as well as what we're seeing in the field, there is certainly an uptick in the volume of interest for renewals and expansions.

And specifically two markets, Jamie, Tampa and Atlanta, where we're seeing market improvements and that's where we obviously have exposure, with the move-outs we've discussed. It's encouraging to see that pickup in those markets.

Okay. And then actually focusing on those move-outs, can you talk a little bit more about where you stand in marketing and prospects and what you baked into your guidance?

Sure. So we'll take them in two parts. First, 2800 Century Center, which just as a reminder, is where AT&T vacated a total of 221,000 square feet, 150 or so of that, June 30 of 2012. We're currently 48% re-leased. We have LOIs out for 44%, in addition. So that would get to us 92% leased. And we have additional prospects who have looked at the space, as Mike defined in his comments, and as for rental information terms for another 18%. So that adds up to well over 100%. We expect that, based on our guidance, that we would be 90% by the end of this year. And then -- I'm sorry?

You're pretty conservative. So I guess -- you guys are usually pretty conservative, so you're feeling pretty good about that.

Well, I did wear a tie just for the call. But we do feel good about it. The LOIs are out. We feel that most of the business terms have been negotiated. So we're optimistic that a lot of that will hit. And then the other prospecting has gone well, as we've repositioned the building with the lobby, the motor court and the approach of the building.

And then on LakePointe One and Two, again just as a backdrop reminder, those are two buildings in our Tampa Bay Park in the West Shore submarket of Tampa. PWC will be vacating in total, when their lease expires, 319,000 square feet that we'll get back May 1. They have turned around and relet 24% of that 319,000 square feet. In addition to that, we have strong prospects for another 75% to 80% of the building. We've had multiple full floor and multi-floor showings, two just yesterday. So we feel good about that, in that we're still months away from getting the space back. We also, as Mike referenced in his scripted comments, we've invested a fair amount of shoe leather and elbow grease working with two local architectural firms that have combined and done really good work in enabling us to reposition those buildings and making, for example, a heavily vegetated area between the two buildings into more of a pedestrian motor court, to really open it up and give it more of an urban feel, along with a lot of other appointments that we're going to do in and outside of the buildings. So these schematics alone have helped us with this marketing effort. In addition, the fact what Mike stated about there aren't many large blocks available in the West Shore submarket.

So the last part of your question, with regard to guidance, we estimate to be in the 40% range by the end of the year, given that we don't get it back until May 1 and we would need time to do renovations. And then we feel good about how this prospecting activity will play out, as we close out the year.

Okay. Thanks.

Thank you.

Our next question comes from the line of Rob Stevenson with Macquarie. Please proceed with your question.

Good morning, guys. Just to follow up on that last question, can you talk a little bit about where on the renewals at both Atlanta and Tampa, where the new leases are versus the expiring, and what the expected spend on redevelopment, or however you want to term it, TI, et cetera, is expected to go at both those assets?

Sure, Rob, good morning. On 2800, we're at flat to positive, 0% to plus 2% on the relet, as far as cash rent growth. We're a little bit coy about putting out the TI allowance, because we are obviously in conversations with a lot of prospective customers on both of these, or all three of these buildings combined. I would say, it's a market allowance.

But we have pretty much taken this back to almost first generation space. So it's -- when we -- the AT&T moved out, we basically took the building back almost in shelf condition. So we almost look at it like first gen space, from that standpoint.

But that $3.2 million, $3.3 million has been spent, motor court, lobby, that work in the building. And then at LakePointe, we expect rather than being up, to be down. Price Waterhouse had been in that building since the earth cooled, and so the escalators had gotten ahead of asking rents. So we expect roll down in that building just north of 10% to 15% -- or in the 10% to 15% range. And then with regard to the building, this building is already -- this space in these two buildings is already 70% open space, so there's not a lot of demo to do in that office space. But we are planning on spending in the $5 million to $6 million range to create the motor court, new canopies, new entrance ways, and to do some parking deck work.

Okay. Thanks for that. And then, you have a T-Mobile lease for a little over 200,000 square feet expiring next year. Can you remind us which market that's in and what the latest conversation has been with them on renewing?

We have two separate leases with them that make up that space. One is out at the Highwoods Preserve and the other is in Tampa Bay Park. And it's too early to comment on those. T-Mobile has been a heavy user of the space. They were one of the customers that came in and took a full building when we had the Highwoods Preserve open up back in the early 2000s. And that park has been vibrant. So we feel relatively good about the way that they've consumed the space out there.

There are two different user groups within T-Mobile.

Do they both expire next year, or does one expire this year and one in three years from now?

They're both 2014 expirations

One on January 1 and one in December.

Okay. Thanks, guys.

Sure.

You're welcome, Rob.

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

Thanks. Good morning.

Good morning.

Hello, Ed. So -- and then AT&T, I don't think you answered this part in response to Jamie's question, but AT&T at Windward? What's the outlook there? I assume, given that the move-out isn't until, I think it's November 1, it's unlikely that you assume occupancy by year-end. But what's the longer term outlook at Windward Plaza?

Yes. Good question. I'm sorry if I missed that with Jamie. Yes, it's actually in October 1, Brendan, that we'll get that back. It's 246,000 square feet. Their rent hadn't escalated there like what it had done in Tampa Bay Park. So we see it right now to be below market. They have not given us official written notice, but they have given verbal to Jim Bacchetta, our DVP in Atlanta. We feel like it's the best -- and we've studied it. We're not just doing this out of grandmother pride. We feel like it's the best large block of space outside of the Perimeter. There are a lot of local amenities that it has access to. The building itself, as far the plate and the skeleton of the building, are good. We do have some planned improvements there, too, with regard to repositioning the lobby of the building, but the approach and everything else is in pretty good shape. So location, amenities, the good bones, we feel relatively good about it. And it also has a very positive parking ratio, sorry, which is meaningful out there

And the building is, Brendan, very adaptable, whether it's for a large user that wants potentially as much as a 60,000 square foot print, to break it up, down into two pods. It's really laid out pretty well. And our initial look at it, it's not going to require near as much, from a renovation standpoint, for example, as we would at LakePointe or at 2800.

Yes. And is it a little too early, given that you haven't gotten official notice yet, to have significant tenant interest or LOIs or anything like that?

Well, we have shown the building a few times, just in a preliminary manner. But yes, I think that since we're so far out from that, that it's early to be able to build that book of business. We have made good progress in a short period of time with how we'll recast the common area of that building, and Jim and his team have put together marketing materials and have defined a marketing plan to show that space. So I think it is a little bit early, but we're not fearful of getting that space back. And also, Brendan, I misspoke, it's 223,000 square feet, not 246,000. Sorry.

Okay. Great. And then the other one that I don't think you guys view as a major concern, but I just wanted to ask to get the update on, is the LifePoint space that they'll be moving out of, the two buildings that they're moving out of in Maryland Farms, I think it's in Nashville. I think it's 146,000 square feet total, and then they go into the new Seven Springs development. I think that's either at the end of this year or maybe it's the very beginning of '14. Is there the backfill prospects there? How does that look like for those two spots?

Great question. And you're dead on with your statistics, Brendan. It is exactly 146,000 square feet. Just a little more backdrop on that, maybe for others, is that we're doing a build-to-suit for their headquarters of 203,000 square feet in our Seven Springs development, which is across the interstate from where the buildings are that they'll be vacating. The submarket as a whole is just shy of 5 million square feet and it's 95.4% occupied. Within that 5 million, we own about 1.25 million, and we're just shy of 96% occupied.

We'll get the space back the first of '14, as you suggested. It's in two different buildings. One is 103,000 square feet and it's a solid block of space among four floors. It will be the only big block of space in Brentwood that's available for the next two years. And we've already had very good activity on it, even though we're this far ahead of it, given the tightness of that submarket and the well-publicized build-to-suit that's underway across the interstate. So Brian and his team have already had several showings for multi-floor users, and we don't expect having to multi-tenant any of the four floors. And then the other building is 42,000 square feet, 43,000 square feet, and it's more multiple suites. We have very good prospects right now -- again, what we define as strong prospects, somebody who has seen the space in person and asked for a rental quote -- for about 50% of that. So we -- you're right. We are very comfortable with the space that we'll get back with LifePoint, assuming that they don't come back and ask to keep some of it.

Sure. And is there any material move in rents one way or the other?

Not really. No.

Okay. Great. And then I had a question for Terry. I think you mentioned this in your prepared remarks about the movement of GAAP rents to cash rents in 2013, which is a pretty big help. And if I look at the guidance that you're putting out for straight line rent for 2013, I think it's $12 million to $15 million per your guidance. When I look at straight line rent in 2013, it was about $19 million, but you've got -- my recollection was that both Two Alliance and EQT had sizable portions of free rent, which are probably somewhere between $6.5 million or $7 million for a full year, I think for 2013. So is the same store number really benefiting very significantly from this drop in the same store pool of free rent going to cash rent in '13?

Yes. In the same property pool, Brendan, straight line rents will be down about $7 million year-over-year, converting into cash, primarily, from that swing from straight line to cash rent. So there's a still fairly big reduction, or that positive improvement for cash rents, flowing through the same property pool.

Yes. Not to think about 2014, but I gather you'll get a similar -- I don't know if it will be the same magnitude, but they'll be the similar sort of dynamic, as Two Alliance and EQT start paying cash rent from free rent that they're paying in '13?

That will start happening, too, probably more in '14 than '13. EQT and Two Alliance are not in the same property pool yet in '13. They'll be coming in the pool beginning in '14, so -- but you're right.

And just for consistency's sake, as you guys put the details in the NAV page within the supplemental, when you're showing that NOI, that is a true cash basis NOI. And to the extent that you've got this sizable free rent at any of the new acquisitions, you're not adding to that number. I mean, that would be additive to the NOI run rate as that free rent comes on. Is that right?

That's right. That's projected cash rents for the year. And just going back to EQT, that building, as you know, was acquired already at a very high occupancy. There wasn't a lot of lease-up coming into our acquisition. So there's not that much free rent in the EQT building. It was more in Two Alliance where we had that.

Okay. I thought there was something. Maybe it's not considered free rent, but there was a pretty large discrepancy between the cash and the GAAP numbers, and I thought a portion of it was credited, roughly half --

Part of that is maybe FAS 141, where you have to mark leases and so forth to market.

And EQT's rents are like 7% below market.

Maybe we can follow up offline. But thanks for the color.

Thanks, Brendan.

(Operator Instructions)

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

Hello. Good morning. Maybe you could talk through the acquisition pipeline a little bit and the volume that you're seeing today versus 6 or 12 months ago, how you feel about the ability to close on these and what types of deals might be backfilling the pipeline.

Okay. Good morning, Dave. There's not a tremendous amount that's trading in our backyard. We've been fortunate that some of the deals that we've recently done, we've been able to do off market. So I think that we've had a good blend of off market and those that have been marketed. I think that as we look at some of the offering memorandums that have come to market to date, late in '12 and early in '13, the quality hasn't been what we would have hoped it to be for some of the things that have come to market. Obviously, we're evaluating anything that is in our footprint, whether it's for sale or not. But those that have come have been a little bit less attractive. We are working on a number of transactions. We think that the volume of transactions will continue to improve. Certainly, there's a lot of money out there with regard to financing options for others, and we feel that we're well fortified to acquire the right assets.

I know you'd prefer us to buy vacant than leased, but we're -- I think we're properly managing that risk. But we feel quite confident about the guidance that we put out there. And I don't want to miss the opportunity to underscore the ability that we have on our team, not just our team as it sits, but having brought Ted Klinck on, who is a 25-year absolute pro bowler on this. We've got a very strong team to be able to go out and wake up each day looking for opportunities, whether they're on or off market.

And I guess maybe a follow-up to that, on the development side, you gave the guidance toward new development starts that you're hoping to get to this year, is that all build-to-suit or do you get greater confidence as the year progresses, maybe at a Cool Springs or somewhere else, that you could start to do a little bit of spec in measured chunks?

Yes. I think -- measured chunk. I would want to qualify that just a little bit. Yes, I think that if it's in the right place with the right anchor tenant that we would consider that, if we had a user come and they weren't in a position to take the entire building, but they were a strong anchor or strong collection of anchors, that we might do that, but being extraordinarily selective about what submarket that we would do that in. But most of what we're pursuing or referenced in our script and in the guidance are really carry overs from, I want to say 2012, but some of the conversations started in 2010 and '11 and '12, and I've made the reference to maybe some of those are finally coming to fruition for us. So we're further down the line with regard to space programming and finish selections and negotiations. Nothing's signed until it's signed, but there's reason to believe that we'll have better momentum in '13 than we've had with regard to development, and a predominant amount of it would be pre leased.

Okay. Just a question for Terry. The ATM has been a good program for you. Can you talk about how much you have left under the current authorization? And then also, have you thought, with spreads coming in on the offerings the way we've seen them, have you thought about going back to a more traditional methodology, as it relates to funding some of the acquisitions and eliminating maybe some of the daily bleed on the stock?

Sure, David. We have $40 million left under the authorized ATM program that's in place today. In terms of would we go back to regular offering, I think it would all depend on the size and the use of proceeds. We have been noticing the tighter spreads, as you mentioned, and which is encouraging. For smaller acquisitions, where you only need maybe $15 million to $20 million, ATM is perfect. If we get something larger, then taking the risk off the table of financing that over a period of time and going with a marketed deal may make more sense. It worked -- we're very pleased with how the ATM program worked for us in 2012, but we're open to going both ways, again base upon our needs next year.

Okay. Thank you.

Thanks, Dave.

Our next question comes from the line of Tayo Okusanya with Jefferies. Please proceed with your question.

Good morning. Just a quick question about leasing spreads. They remain negative, but generally moving in the right direction. As we start thinking more about the back half of 2013, going into 2014, going into 2015, what do you generally see as where you think trends are going? At what point do we see an inflection point to get positive mark to market? Especially as you start talking about leases that were signed in 2008, 2009 starting to come up for renewals.

Yes, Tayo. Great question. We think there are a few moving parts there. One that is as the economy -- although we all know it's waddling towards improvement, it's not even a fast-paced walk. But it is continuing to improve, that particularly in the Class A space there's becoming less and less of that available. At the same time, there's been virtually no new construction. So we think that that is actually creating an opportunity and gives us reason for optimism, and I think it's reflected in how quickly we have had very attractive activity at both 2800 and the two LifePoint buildings in Tampa, that there's going to be an opportunity where maybe the customer doesn't have 100% control of that negotiation baton and we actually get a hand on one end of it. I think given the absence, or the dramatic reduction, in quality blocks of space and no new product coming online that that may give us that clout.

All of us our leases -- I shouldn't say all, but virtually every one of our leases, there might be one or two that don't have, but virtually all of our leases have annual kickers in them. So the annual kicker is really if we have rent roll down, we get caught up within a year or two, and our average lease term has been extended through our strategic plan from what it had traditionally been. We've been averaging well over five years now for the last couple of years. The leases that we signed in the gut of the great recession in, let's call it '09 and first half of '10, those will -- some of them were short, but some of them will have a longer period of time. So we won't hit those until like what you said, maybe in '15, late '14, then '15.

That's a long answer to your short question. But we see that some of the stars and the timing is actually working in our favor. And as we focus more on what we've termed the BBDs, the best business districts, and now more than 50% of our NOI comes from our BBDs, that we'll be in an even better position to capture that.

Got it. All right. That's helpful. Thank you.

Sure, Tayo. Thank you.

(Operator Instructions)

Our next question is a follow-up question from the line of Jamie Feldman with Merrill Lynch. Please proceed with your question.

Thanks. I'm hoping you can talk a little bit more about the Cool Springs land. What do you any your all-in development costs will be there? What are the prospects, tenant prospects? And can we start to see more land banking for you guys going forward?

Let me take the first part, and then Mike can follow up. Just as far as land banking, we have about $20 or so million of land that we consider to be non-core, of our 648 acres. So we consider about 560 or so to be core. So we're actively marketing the other 82 acres, because the highest and best use is not office, at this juncture. The remaining land, that which is core, is land where we have building pads, building sites, akin to, Jamie, what you're familiar with at our GlenLake development in Raleigh, where we have three buildings on the ground and we have pads for the future four buildings. So all the infrastructure is in place. The signage is there. The branding is there. The synergies are being built. So that, to us, is core land for future build out for new customers and expanding existing customers.

With regard to building, we're -- in preparation over the weekend and last couple days, I told everybody, we're not going to use the word, or the term, land bank, unless it refers to where a pond meets the side of the -- where it meets the land. Our view is that this is good raw material, but we're not looking to fatten up on this raw material much further. We just feel like the Cool Springs opportunity is a tract of land that we have been in pursuit of for some period of time to be back in business, as we said, in the Cool Springs submarket. It's very vibrant. We already have active prospects for over 200,000 square feet of build-to-suits there. It is early in the life of this tract of land. We really have just closed on it, named it, and are working with blocking exercises to figure out how best to lay out the infrastructure and then the four different components, hotel, residential, retail and office. We think that, given how exclusive this land is and how attractive the site is, that this will be deck parking, not surface parking, so it will be a dense retail development.

There are a lot of corporate headquarters that are in this area. The most recent was Nissan North America, which occupies 0.5 million square feet, very close proximity to where we are. And as I said in my comments, we've delivered about 1 million square feet that's very well leased, mid-90s, in Cool Springs, so we're out of land there. But are we looking to take down $15 million to $30 million tracts in each of our markets? The categoric answer to that is no.

Jamie, this is Mike. Just to add on to what Ed said. I think the thing that really attracted us to this piece, aside from the location, which is really premier, was the mixed use nature of this thing. And we're really -- very focusing on this live, work, play concept that we see. And this tract, bringing combining with SouthStar and what they intend to do with sizable retail. This is more than amenity retail. This is 310,000 square feet of retail walkable amenities, 300 hotel keys, 650 residential units, which is a combination of both multi-family and single family. And we're the exclusive office developer. It really creates a community in Franklin. Franklin is really the city which Cool Springs resides in.

We've still got to go through some process for our planning, but we've already started -- we'll be submitting -- responding to an RFP for a late delivery, I think it's 2015 is a build-to-suit. So we're throwing this project in the hat for that. So that's our first prospect, and we've barely closed on this thing. So really excited about that component of it.

Okay. And what do you think your all-in development costs will be there?

For our land, our acquisition cost was $15 million for the 68, plus about another $10 million for our share of infrastructure. So you're going to be in at about [$19.50 in FAR,] or thereabouts.

We expect to be within the norm of 10% plus or minus of the total build out.

Right.

Okay. And then, Terry, can you talk a little bit about -- I mean, you talk about backfilling some of these larger spaces in your 2013 guidance. Can you talk about what you're thinking on AFFO this year?

I would say, Jamie, that we'd probably be positive, but maybe in roughly the same range that we were this year, just the low few millions. We still have a little bit of a backlog on TIs from stuff that we signed this year yet to get paid out. So just working through all that. I think we're going to be in positive territory, but not dramatically different from this year.

All right. But you do expect to cover the dividend?

Yes.

And we did cover -- Jamie, we were at $6-plus million positive.

Yes. We were positive in '12 and expect to be positive in '13.

Okay. Great. Thank you very much.

Thanks, Jamie.

Thanks, Jamie.

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

Hello, everybody. Mike or Ed, could you talk about the trends and net effect of rents across your markets? Are rents ready to grow a little? Are concessions easing yet?

I think it depends on what pocket, what market, what submarket we're in, which I know is a little bit of an evasive political answer, but it really does. I do think that from a macro view that we could look at this as things are coming together so that holistically things are moving, the regression analysis is going in the right direction, particularly as infill locations, Class A blocks of space, become less available and new construction isn't on the near term horizon. In the new construction which is, it's much more likely to be heavy build-to-suit than what it was back in the last cycle, as far as pure spec.

And Mike, you have some of the smaller customers, oddly a little bit of an inverse of what you'd think. The bigger customers are tending to lose some leverage, because as Ed said, there are dwindling number of large blocks. So they have limited opportunities and the disparity between new rents for a build-to-suit or a new building are still pretty wide compared to existing product. So I think you have more opportunity to push the envelope a little bit for the larger tenant. The smaller tenants that are more commodity spaced, in certain submarkets there's a plethora of suites available there, and I think we won't have quite as much opportunity to move rates on those, but even those are starting to come down a little bit. So that's why we're again pretty encouraged with the big blocks that we have in Tampa and Atlanta.

And Michael, I think that as we're at this 90% occupancy level, that gives a little more pricing power in the better submarkets as we move forward. So we've seen concessions coming down some, and we've also seen what Terry and his team have had to do with regard to reserves for potential bad debts. That metric continues on a very positive regression analysis that the line there is clearly going in the right direction, as well as the number of extend and blends have really dropped off dramatically. So there are telltale signs that would suggest that your premise is right.

I'd also say that with the economy slightly improving, we are seeing customers that were previously in B space are now saying, hey look, things are picking up. They're looking to recruit for employment, and they're stepping into higher quality spaces. So we are hopefully the recipient of that, with our better infill Class A properties.

Okay. Thanks. That's helpful. Just with respect to tenant psychology, how important is the efficiency issue, less space per employee? And then are more tenants planning for growth in their business with respect to their space needs than before, or is that about the same, not much?

I think that there's a higher confident -- you used the word psychology, so we are in a little bit of an abstract arena here. But I do think that there is a higher comfort level, as I mentioned in the scripted comments, about just where we are in the world. A lot of the unknowns have been answered. And the answers may not what about people want them to be, but at least they know what a lot of the rules are right now, as far as regulation, taxation, cap and trade, where that's probably headed. And things like that, I think, are important to have some sense of that.

I also think that thesises that have been written and heavily publicized about a dramatic -- a suggested dramatic downsizing of square feet per person, I think that that may be much more applicable in markets where the rental rates are $75 to $90 a square foot as opposed to $20 to $28 a square foot. And I also think it's important to make a clear discernment between what we call me space versus we space. We have seen some customers where you as an associate within the firm get less space to you, but the collaborative workspace, the what used to be a few vending machines and a laminate table, is now an elaborate cafe of sorts, and there's other areas for collaboration. So I think that we went through a lot of conversation, as an industry, about hoteling years ago, about off shoring years ago, about Y2K years ago. And it was a whole lot more bark than bite. And I think that, particularly in our markets, where we're sub- $32, $33 per square foot is the highest end of the range, that this isn't going to be the threat that some of these widely distributed thesis suggest would be the case for us, meaning us being an industry.

Right. Okay. Thanks. Can you update us on your thoughts on additional new market expansions, especially in the context of one of your peers recently making a bold bet on Houston?

Well, we really haven't deviated from where we were. We still have an interest in markets where the demographics outperform the national averages, where there's geographic synergistic benefits to that. We need to be able to get in at the right entry point. We need to be able to find infill. We don't have a grocery list, though, that is so selective that every -- it has to be perfect before we'll do it.

And I think we have proven that our -- I don't mean this to sound self-serving for the Company, but I think that we've evidenced that the move into Pittsburgh was a good move for our investors. To be able to hit $91.5 million a year and a half ahead of pro forma at PPG and already moved occupancy at EQT, and to have expanded the footprint since we got in by 40%, I think all that really works well for the bottom line. I think that as we study these other markets, that it would be in the same genre. You know, something within this Southeast region, from Pittsburgh to the other side of Texas, is somewhere where we spend a lot of time studying. But we also don't want to catch a falling knife in Houston, if we have to go in and pay a 4.8% cap rate in order to acquire an asset where they've already enjoyed all the upside.

Okay. That's helpful. And then just a question on your land comments. It sounds like you want to monetize the portion of your land bank that won't eventually be office. Just to be clear, so you have limited or no appetite for staying involved in some of those land parcels where maybe there is an alternative use besides office? Your preference is to monetize, not stay involved?

Yes. That's an excellent question, Michael. It's only about $20 million-plus worth of land. We have stayed involved in two previous transactions, both of them in the town of Cary, which abuts Raleigh. We contributed a piece of land for a multi-family development and then prior to -- as soon as it was close to stabilized, we sold it and we doubled the proceeds that we would have garnered had we just sold the land outright. We have another one underway right now that basically adjoins the first one that we did. So we're looking to do the same thing there. We'll look at these others to see what the opportunities are. So I think having done two like this in the past evidences that we have the appetite and willingness to do it, as long as the risk profile is appropriate. But we're not looking to become multi-family developers.

Okay. Right.

This would be -- in both of these past cases, Michael, is where we contributed the land, but the partner took 100% of the risk on the construction loan.

Okay. So we won't see you in student housing any time soon?

Only to visit my daughter.

Okay. And then last question from me, can you pitch me on why you bought the Greensboro assets? I would have thought Greensboro is a market that's closer to your sell list than your buy list.

Well, Winston-Salem is. Winston-Salem struggled, and we have culled out from the peak. We're more than 80% gone from what we had in Winston-Salem. But we think Greensboro is a viable market, as long as we can be the dominant brand in that market. And we clearly are. And that's why we own both industrial and office. The buildings that we bought are the best location, ground zero, good opportunity to Highwoodtize, great residential neighborhood that backs up to it, and they make money. So we didn't see a reason to pass on it, given the synergies, the pricing and our opportunity to make them dramatically better than what they are today. With all due respect to the prior owner, it just wasn't their focus, which meant low hanging fruit for us, and we -- you can ask any of the customers in either of those buildings. We hit it with shock and awe within 10 minutes of closing and stayed on it for a week, and we've really made significant improvements in those. And to be able to garner 9%-plus returns where we already have a team and a brand, it just made good sense to us.

And I think also, Michael, our team there in Greensboro under Rick Dehnert, really, they're the best by far in that market. And we've already seen great comments from the customers in the two buildings we bought, only owned them a month or less, and already seeing a huge turn. We think that will convert to high retention in those assets, long term, and an opportunity to grow rents there. So that was kudos to Rick and his group for staying after this, as well as the Church Street MOBs that we bought last quarter.

And our occupancy in Greensboro, if you break it out from Triad, is 93.4% leased. So we're well leased and making money.

Okay. Thanks a lot.

Sure, Michael.

Our next question is a follow-up question from the line of Brendan Maiorana with Wells Fargo. Please proceed with your question.

Thanks. I just had a clean-up one for Terry. Per your guidance, it looks like diluted shares and units, I think, is 84.8 million average throughout the year. If I look at the end of the 12-31 balance, it looks like it's 84 million. So is there an assumption that there will be equity issued throughout the year, even though I think included in the guidance you don't assume the impact from acquisitions or anything like that?

We did assume a few more shares that would be issued. The year-end leverage was 43.9%, and we built in an average of 43.7% in the guidance. So we took the shares and assumed some additional shares or equity to get the leverage down a couple more tenths of a percent. That's basically it.

Okay. Has anything been issued on the ATM in '13?

The only thing was the $6.6 million that I mentioned in my comments that were done in very early January.

Okay. Great.

I think that's about 200,000 shares, $6.6 million were issued in January.

Okay. Great. Thanks.

Our next question is a question from the line of John Guinee with Stifel Nicolaus. Please proceed with your question.

Hello. John Guinee here. I missed the lion's share of this. But just out of curiosity, Ed, in the old days when you were buying something like Cool Springs, you'd probably be competing with Duke and maybe a couple other REITs. Who else is out there looking to buy this magnitude of land, with a long-term development horizon these days? Who's your competition on that?

Well, there are a few competitors out there. Boyle has been a competitor. There's the McEwen site, Southern --

Southern Land, the JPMorgan Spectrum. There was heavy competition.

But we feel, John, that -- this will sound very self-serving, but a lot of that is just pure office development, and we're out to be an integral part of a high density, for-product type mixed use development that would clearly differentiate ourselves from the others, really creating a true live, work, play environment as opposed to a free standing office.

Okay. And then probably my more important question is, who is going to win tonight, Duke or UNC?

Well, two things. Duke is likely to win. They're favored by 11. And then secondly, I'm sorry that you missed a lot of the call, because it's been remarkably positive.

Good. Thanks. (Laughter)

Thanks, John.

And there are no further questions at this time.

Thank you, everyone. We appreciate you taking the time to participate. As always, if you have any follow-up questions, we'd love to have an opportunity to resolve them for you. Thank you so much

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