Highwoods Properties Inc (HIW) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Highwoods Properties conference call. During this presentation all participant lines will be in listen-only mode. Afterwards, we will conduct a question-and-answer session.

(Operator instructions)

A quick reminder, this conference is being recorded today Wednesday, May 1, 2013. It is now my pleasure to turn the conference over to Tabitha Zane. Please go ahead.

Thank you, and good morning. 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 of 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 financial releases and conference calls for the remainder of 2013. Also, following the conclusion of today's conference call, we will post senior management's formal remarks in 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 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 the management's view of the usefulness and risks of FFO and NOI, can be found toward the bottom of yesterday's release and are also available on the investor relations section of the web at www.highwoods.com. I will now turn the call over to Ed Fritsch.

Good morning, everyone, and thank you for joining us today. While economic indicators continue to shuffle towards improvement, the equity markets replenished 401(k) accounts, and the housing market awakens from its long slumber, we -- we being the American business public -- continue to await the arrival of a well-defined inflection point, one free of any government-contrived crisis de jour. In fact, we are hoping for the inflection point's arrival prior to today's call, but understand that it too has been furloughed.

We are pleased to reaffirm our 2013 FFO per share outlook of $2.68 to $2.81 per share, even with our deliberate 60 basis point reduction in leverage from 43.9% at year end to 43.3% today. Our first-quarter FFO results of $0.68 per share were solid, particularly given the G&A lumpiness noted in yesterday's release. During the quarter, we leased 1.2 million square feet of second generation space, of which 795,000 was office, with an average lease term of 6.1 years. Year-over-year, total occupancy was up 40 basis points to 90.6% and same-store cash NOI was up 3%. Turning to investment activity, during the quarter we announced $145 million of capital deployment, with $89 million of immediately accretive acquisitions, and a 100% pre-leased $56 million build to suit. Combined, these investments are expected to generate GAAP yields in excess of 9%.

First-quarter acquisitions included four office properties, in the best business districts in Tampa and Greensboro. These immediately accretive acquisitions enhance the Highwoods brand, and our deal flow in both markets. The properties in Tampa, which were 86.8% leased at purchase, create an opportunity for value creation through occupancy growth and cost savings, as synergies are captured between the two buildings, and with our immediately adjacent 4200 Cypress. Highwaytizing of these recently acquired assets is well underway, and we will re-brand the quarter-mile contiguous frontage these three properties have on both Cypress Street and I-275. We maintain our guidance of $200 million to $325 million, and presently have $89 million of acquisitions in the bag. We are in discussions at various levels on multiple opportunities and remain confident with this range. Clearly we have been more active on the acquisition front over the past four years as pricing has become more in sync with the underwritten risk profile.

We are pleased with our track record during this period, having completed $785 million in office acquisitions, which are generating a 9% average GAAP yield. In addition, the weighted average occupancy of these assets has grown 600 basis points to 91.3%. Our team will remain disciplined and deliberate with regard to underwriting and pricing in this tenacious pursuit of opportunities to deploy capital, both on and off market. We will remain loyal to the quality of the asset and its corresponding rent roll, and/or value creation opportunities. We will not get caught up in simple chasing the bid.

Turning to development, signing the build-to-suit lease with International Paper Memphis for $56 million, a 241,000 square-foot Class 8 office building, was another highlight in the quarter. This represents the expansion of the headquarters campus for our long-term customer. Our development pipeline is now $129 million and is 93% pre-leased. With $60 million in the bag, we are raising the lower end of our guidance for development announcements from $75 million to $85 million, with the high end remaining at $200 million. We have a sound pipeline of prospects, and forecast signing additional build-to-suit leases as we move through the year.

On the disposition front, we sold three non-core office properties for $19 million in the first quarter. In addition, in April we sold 862,000 square feet of industrial properties and 15 acres of industrial-zoned land for $43 million, all in Atlanta. In light of the strong pricing environment in our Atlanta industrial portfolio's healthy rent roll, we continue -- we have determined that this is the opportune time to sell the majority of our remaining Atlanta industrial assets. This would include 18 buildings encompassing 1.9 million square feet that are currently 94% leased. Accordingly, we raised our disposition guidance from $100 million to $150 million, to a revised range of $125 million to $175 million.

In summary, overall it was a solid and active quarter and I applaud our team for their continued dedication and hard work. I now turn it over to Mike to cover operations. Mike?

Thanks, Ed, and good morning. It was a solid quarter, with same-property cash NOI growing 3% year-over-year, and average in-place cash rental rates across our office portfolio increasing a robust 4.8%, which in large part is a function of a higher-quality portfolio in many of our markets' best business districts. As Ed noted, late leasing activity in our markets was solid. Showings our study and deal velocity is good. We are also seeing the timeframe for lease decisions accelerate a bit. Our top five office markets, combined, reported positive net absorption of 1.1 million square feet, and occupancy in our office portfolio remains higher than the overall market occupancy. We signed 147 leases for 1.2 million square feet of space, 795,000 of which was office, and the average office term for leases signed was 6.1 years. Cash rent growth of the office leases signed this quarter declined 11.5%, while GAAP rents increased 10 basis points. New deals represented nearly 37% of our office leasing activity, versus the prior five quarter average of 29%.

Leasing CapEx, while elevated versus prior quarters, is in sync with the typical spend when we are able to see achieve such a high percentage of new leasing and greater than six years of lease term. The 47,000 square foot new lease in Pittsburgh also had a significant impact on recent CapEx. However, we leased this long-term vacant space to a good customer for a term in excess of 15 years, so the deal is attractive as it stands on its own. Excluding this deal, the CapEx for renewals and new deals signed in the quarter would have been $17.53 per foot. We also signed 124,000 square feet in Greenville with leasing CapEx of $24.77 per foot. These leases better position us to ultimately exit this market, and will help maximize our sales proceeds.

Our national portfolio continues to be our strongest performer, with 95.6% occupancy, and it has been over 94% since the end of 2011. Planning is well underway for the 68 acres of office development land that we recently acquired in a prime location in Nashville's Cool Springs sub-market. As a reminder our land is part of a 145 acre mixed-use, high-density development that, in addition to office will include retail, hotel and residential. We are pleased that our re-zoning request for a height [delay] variance was just approved, allowing us to construct buildings as tall as 12 stores, twice the size the original zoning allowed.

Our Pittsburgh portfolio continues to prove itself to be a sound investment for our shareholders. Occupancy at quarter-end was above 91%, and we have leases inked to take occupancy to 93.5% by the end of the second quarter. As an aside, a recent JLL report noted that the downtown Pittsburgh office market enjoys one of the strongest occupancy levels in the country.

In the Atlanta market, we continue to cease positive net absorption and a slow and steady decline in office vacancy. With regard to the 2800 Century Center, we continue to be on course to achieve 92% relap of the AT&T move out by year-end. With regard to Windward, we are actively marketing this 223,000 square feet in advance of the expected move out by AT&T in October. Our plans for repositioning Windward are complete, and we will commence work in and around the building as soon the existing customer grants us access to the space.

In Tampa, we are pleased to have added 372,000 square feet of office product through the Meridian acquisition. We believe these additional buildings meaningfully enhance our market share in Tampa's BBD. Also, we are receiving positive feedback from prospective customers regarding our well-conceived plans to transform Tampa Bay Park into a more urban environment. We continue to work closely with our prospect pool as they evaluate various test [sets] and economic scenarios. Lastly, as backwards as this may sound, we continue to benefit from having one of the few large blocks available space in all of Westshore.

Overall, leasing activity across our portfolio is steady, and despite some larger lease expirations this year, we expect occupancy at year end to be north of 90%. Terry?

Thanks Mike. Total FFO available for common shareholders this quarter was $57.8 million, up $4.4 million from first quarter of 2012. This increase primarily reflects $4.2 million higher NOI from acquisitions, net of dispositions, $800,000 in lower interest expense from lower average debt outstanding, lower rates, and more capitalized interest, partly offset by $400,000 in higher G&A and $400,000 and lower interest income. As a reminder, FFO, FFO per-share, and G&A amounts exclude property acquisition costs, and debt extinguishment costs, which amounts are disclosed in a table in our press release.

On a per-share basis, FFO for the quarter was $0.68, $0.02 lower than first-quarter of 2012, and the same as the fourth quarter. First-quarter 2012 FFO benefited by approximately $0.05 per share because our leverage, including preferreds, was north of 47% then, after the PPG Place and Riverwood acquisitions in September 2011. As you recall, in 2012 we reduced leverage through our ATM program and non-core dispositions, and by July 2012 were back to the 43.7% level we had prior to the 2011 acquisitions.

Same property cash NOI was up $2.2 million, or 3.0% in the quarter compared to first-quarter 2012, driven by 0.7% growth in average same-property occupancy, and by the conversion of straight line rental income into cash rents. Same property GAAP NOI was down 0.4% due to $1.7 million lower straight-line rents and $800,000 lower lease termination fees. Straight line rental income in the same property pool is expected to be $6.6 million lower for the full year 2013, compared to 2012.

G&A, excluding $500,000 in expensed acquisition costs and $300,000 in deferred compensation mark-to-market adjustments, was $9.8 million this quarter, or $500,000 higher than first-quarter of 2012. The net increase was driven mostly by higher long-term equity-based compensation, modest rank-and-file salary merit increases, and higher healthcare premiums, partly offset by lower annual incentive comp. As we have commented in the past, the deferred comp mark-to-market adjustments are fully offset in other income, and have no bottom line effect. As noted in the press release, first-quarter G&A was disproportionately impacted by the GAAP requirement to expense some of our long-term equity incentive grants on the March 1 grant date, rather than over the vesting periods. This is due to certain officers meeting or approaching eligibility under our retirement plan. This effect also occurred during the first quarter of 2012, but was $1 million larger in the first quarter of 2013. However, for full year 2013, long-term equity compensation will be approximately $750,000 lower than full year 2012. As such, the G&A run rate for the next three quarters will be significantly lower than the first quarter. And we remain comfortable with our original G&A outlook assumption of $32 million to $34 million for the full year.

Turning to the balance sheet, we ended the quarter with leverage unchanged from year end, even with $85 million of acquisition and development spending, net of disposition proceeds. Our debt plus preferred as a percent of gross book assets was 43.9%, and debt to annualized EBITDA was 5.86 times. Since quarter end we have lowered the leverage even further to 43.3%, as a result of the April dispositions. In February we paid off, early, a $35 million unsecured bank term loan at par. In addition we expect to pay off two secured loans later this year -- a $116.1 million, 5.75% loan, and a $67.5 million 5.12% loan, which become pre-payable at par on September 1 and October 1, respectively. Once these two loans are paid off, our unencumbered NOI should increase from the current 68.7% to over 77%, providing even further balance sheet flexibility.

In the first quarter we issued 1.3 million common shares under our ATM program for $46.0 million in net proceeds. This morning we reloaded our ATM program, as we like to have multiple avenues readily available to fund our capital deployment activity on a leverage-neutral basis. Lastly we reaffirmed our 2013 FFO outlook of $2.68 to $2.81 per share, and updated certain of the specific guidance assumptions. Operator, we are now ready for questions.

(Operator instructions)

Jamie Feldman, BofA Merrill Lynch

Great, thanks. I guess the first question, given your news this morning, and how the stocks have been acting today. Can you just talk about your thoughts on ATM issuance versus overnight issuance when it comes to raising capital?

Yes, Brendan -- Jamie, I'm sorry -- this is Terry. We like to have multiple sources to finance our growth in a leverage-neutral basis as I mentioned. We have the ATM which is a very cost-effective way, and great for smaller needs if you don't need to have a large raise all at one-time. We also have dispositions, and as you heard, we are looking to exit most of the remaining Atlanta industrial which will provide some additional recycled equity. So, we have a number of sources and the use of proceeds that we have influences the timing and the type of equity that we raise. So, we are aware of all of those types of ways to raise equity and would use them in the way that we would think would be most appropriate for the use of proceeds at hand.

Okay. And I guess just turning to fundamentals, you announced the build-to-suit this quarter. Can you talk a little bit more about your development pipeline and maybe where we may start to see things pick up --? Or just how deep is the pipeline at this point?

Jamie, this is Ed. We are in conversations with many prospects, all at different stages. We have been saying for some time all of those conversations are protracted, and we were pleased with the speed at which the International Paper transaction occurred. It was basically 18 months from when we first started talking with them about it to inking that deal. And it is a solid deal. So we feel like we're off to a very good start for the year with that 100% pre-lease. And like I said, we are in conversations with multiple other genuine users. It just comes down to them actually pulling the trigger.

Okay. And then I guess just bigger picture on fundamentals. Can you talk a little bit about where -- if you think about this quarter versus last quarter, and your largest markets -- where would you gauge the strength of the recovery versus three quarters ago?

I think we are somewhat better. We're not dramatically better, but I think the word I used in my opening comments that we have shuffled towards improvement is a fair descriptor. I think that as we get deeper into the portfolio, obviously we have some lower-quality spaces, or tougher spaces to lease. But we continue to improve the portfolio through dispositions, acquisitions and development, so we think that that will continue to work in our favor.

So in summary, it is somewhat improved, but there are still some challenges out there. I think some of the things that occur outside of the same-store sales impact the numbers. For example, the sale of Industrial will have a negative impact on our occupancy, yet we've upped the lower end of that guidance based on what we see in the way of leasing velocity.

We did some aggressive leasing import in our Greenville portfolio, to better position pieces of that portfolio for sale. And that you impacted some of our rent roll down number. Or, we decided to do a lease on a long-term vacant space in one of the buildings that we bought in Pittsburgh -- as Mike mentioned in his comments, we got more than 15 years on that term with good credit. But there was some significant TI involved in that because it had been vacant for such a long period of time and we really needed to gut it and start over. So there are things I think that we do like that where the deal certainly has merit as it stands on its own, but it impacts the optics of some of these numbers. But it is just good real estate operating, in our view.

Okay, thank you.

Sure Jamie.

Dave Rodgers, Robert W Baird.

Good morning, Ed, as always, appreciate your opening remarks. In first terms of macro on deployment and use in source of proceeds, you maintain guidance on acquisitions, development looks like maybe it's coming in a little bit better. But you did increase disposition guidance. Is that more a tactical strategy where you are right now and what is coming your way, or is there something more strategic we should read through those modest changes?

No, thank you for your comments. I don't think there is any writing between the lines on this. I think the most substantive of the three buckets that you touched on, Dave, would be on the dispositions. We saw some very attractive pricing on the industrial assets that we put to market and that was compelling enough for us to go ahead and make the decision that we feel like now is the time to see what happens with virtually all of the remaining industrial portfolio that we have in Atlanta. So I think strategically that is the most substantive thing within those three buckets. The other is just that we continue to feel comfortable with the ranges that we established at the beginning of the year.

On the build-to-suit activity, is that mostly coming on Highwoods-owned land?

Yes.

Okay. Then I guess my last question, and it would go back to maybe to some of the comments that Mike made and I think where he was going with his comments about strategic leasing and transactions that were executed during the quarter -- I guess as you just look back over the last six to eight quarters, the actual margin on the new leases, and something we have discussed before has continue to come in. Is there a mix issue that maybe we are not understanding? Are you leasing more B spaces? Maybe just give a little bit of color if you can, if that even make sense, in terms of what you are seeing that is driving the margin on new leasing activity lower over the last couple of years?

Yes, I think that we have such of bifurcation of assets in some of the leasing that we're doing. So, we will get to a building that is 96% leased, and the 4% that is left is the tough space to lease and we decide to go ahead and do some attractive terms to get it knocked out.

On others, as I mentioned in my response to Jamie, we're doing the leasing so that we can better position the building for sale. We have one building where we have a owner-user-investor that is interested in acquiring the building, and they would prefer there to be less occupancy then occupancy. So that had an impact on our thinking and on how it impacted occupancy. But it is a sale that we want to consummate because it is a non-core building. So I think that we have a mix across the board. Also, if you look at our six largest buildings today versus the six largest buildings we owned five or six years ago, it is a different set and a higher profile and a higher quality asset. So we are spending a little bit more in TI but we are typically getting a longer lease term, commensurate with that TI spend.

And Dave, this is Mike, just a further comment on that. The lumpiness also depends quarter-over-quarter. So this is where we have concentration of deals. For example, in some of our divisions, we have operating expenses that are running in the low $5 per foot, but you have other markets where -- Orlando, Pittsburgh where you're up north of $10 a foot, and that obviously could have some impact as you get down to your net out. And then, this quarter we were pleased to have a high percentage of new deals, which as we have talked in the past, the new deals generally command higher PI commissions, loosened CapEx in general. Also reflected this quarter was a longer-term that we did for the deal in Pittsburgh. So it really will change quarter-to-quarter on where the leases are t transpired, if there is a concentration, and then as Ed said, just space by space. When we get down to the -- in some divisions where we are short of inventory, we're basically filling the Cinderella slippers, so to speak.

Dave, this is Terry, one other thing to add -- if you look at the overall NOI margin across the entire Company, GAAP NOI divided by total GAAP revenues, that ratio's holding, and actually going up a little bit. It was 63.5% in fiscal 2011, 63.7% in 2012, and here in the first quarter of 2013 was 64.3%. So we're not saying the margin erosion in the actual consolidated numbers across the Company.

That is very helpful. Thanks everyone.

Brendan Maiorana, Wells Fargo

Thanks. Good morning. So, Ed, how far along are you guys in the process for selling the remainder of the Atlanta industrial portfolio?

We are putting the books together now.

Okay. And given that you've got strong -- you had nice pricing on the first portion of it, or the first couple of portions of it, does that change your thinking with respect to your triad industrial portfolio as well that could be a candidate?

Excellent question. It does not. Which doesn't still make a good question. It doesn't because the return that we have been able to garner on our triad industrial assets has been significantly better than what we have garnered in Atlanta. And in addition to that, looking at it from the other end of the telescope, the size of the Greensboro market is such that we believe that the brand recognition, the deal flow that we are in, to have both industrial and office is very important to our franchise there.

Okay. And then sort of the last big of the regions that I would think of as candidates, and I think you mentioned too, was Greenville. You guys imagine that you got one of the big leases there which seemed to impact your overall metrics. So, what is the update in terms of the outlook for potential disposition or marketing of the portfolio, or portion of it?

Another good question. So just to level-set, it is about 900,000 square feet that we own there, that's about 83.5% occupied or about 2.6% of our total revenues. What we are looking at, Brendan, there is breaking that portfolio up rather than mass collecting it and putting all of the buildings to market at one point in time. There are a total of eight buildings that we will probably break it up and parcel out those buildings. So our target is to sell about one-third of it this year, and then continue to work the leasing on the remaining two-thirds and work our way out of that.

So is the third you are selling, it is above 90% occupied?

93%.

Okay, great. And then I had a question for Mike, you mentioned -- and I appreciate the update on 2800 Century Center -- you mentioned that you still target 92% occupancy, I think, by the end of the year. Lake Point one and two, I think you had previously mentioned targeting 40% by year end? Is that still a fair target that you are looking for there?

Well, for lease activity, Brendan, yes. We have strong prospects for that project somewhere I think around the 160,000 square feet for those that I would suspect will be late '13 executions. Whether there will actually take occupancy then, there are more than likely going to be '14 occupancy.

Yes, so, Brendan, what we said on the last call, is that we expected to sign about 100,000 this year. So, if you take that, it is about one-third of the total vacancy, and then add it to the 24% or so, so that puts us just above 50% inked by the end of the year. That's our forecast.

That is helpful. Sure. And then just last one if I could, AT&T -- we know you have got the move out as we have talked about a bunch at Windward, which I think is 223,000 square feet, but they're listed in the [sup] as about 580,000 square feet, with an average expiration of nine months.

So it's probably 350,000 square feet, give or take, with maybe call it a year expiration? And I was unsure where the remainder of those expiries are and the likelihood of renewal?

They very, Brendan, from market to market, and we feel pretty stable about where we will be with those renewals, based on the use in the space. So, we have call centers, we have advertising, we have operations support. We have the global real estate, we have sales and marketing. We have accounting. So all different types of uses and the various buildings that they lease from us. And they're in one, two, three, four, five, six, sever, eight markets of ours. So the major exposures that we have with them we feel like we have identified.

Okay. I'm just glad there's not another one in Atlanta because I don't think that I could keep it straight.

Yes I should have never changed from AT&T to Verizon for my cell phones.

All right. Thanks, guys.

(Operator instructions)

Michael Knott, Green Street Advisors

Good morning. It's Jed Reagan here with Michael. Can you just talk about how the Atlanta assets you sold compared to the rest of the Atlanta industrial portfolio in terms of quality, location, lease term, that sort of thing? Would you say what you sold is pretty representative of what you have left in terms of quality?

Yes. The word I would use, Jed, is comparable.

Okay. All right. Thanks. Just as far as cash releasing spreads, those came in quite a bit lower than recent levels. Should we think of that as a decent vetting line for the rest of the year? Or is that more of an anomaly this quarter?

Based on where we feel the year will be, we feel like it's on the low end. That -- if you were going to bet that you may want to capture that range. But I think the other end of it would be better than the number we see for this quarter.

Okay, so sort of mark-to-market on your portfolio that you have indicated in the last quarter or two, that's it is still a reasonable expectation?

Yes, sir, for what is rolling.

Okay. And last one, you talked on previous calls how the slow housing recovery was kind of an impediment getting corporate relocations to your Sunbelt markets. Now that housing is picking up a bit, are you seeing an increased flow or end migration into your markets? Or is it too early to pick up on that trend?

No, I think that is fair. We think that the improvement in housing I think I said in my comments coming out of its long slumber. We think -- you would certainly mix the Southeast -- puts us back in a position of being able to capture corporate relocations as people are able to sell their houses elsewhere.

Okay. So there is signs of life on that front, and A leading to B?

I think that is fair. A leading to B, and some of the B comes in pockets, and some of it comes through economic development partners, Chambers of Commerce etcetera, coming through with brown paper-wrapped prospects. So, we don't always know what part of the country they're coming from. We just know that it is a relocation.

And Jed, just as an example that the IP build-to-suit for example, it was not just a consolidation of operations within Memphis. There was some relocation into that market, which was freed up a little bit when they made an acquisition and they were able to pull that trigger when they felt like they could bring their folks in. So that is hopefully what we see as widespread and starting to be more of a mindset of corporate America.

Okay great. That's helpful. Thank you.

Thanks, Jed.

John Guinee, Stifel Nicolaus

I popped on a little late, Ed, so you may have answered this, but if you talked to typical brokers in the various markets, what they would tell you is that 20% of the inventory is class-A space and has some impact power, and 60% of the inventory is fairly commodity in nature. And 20% of the inventory is B minus-, C, D quality which is unleasable in this day and age. When you look at your 25 million square-foot office portfolio, what do you think on a square foot basis is category one, category two, and category three?

I would say that 70% is category A. 25% is category B and 5% is category C. And that 5% is really where we have assets where we have much -- we have more interest in the land than the asset itself, and we're just waiting for the opportune time to raise it and redevelop.

Wonderful. Thank you.

Yes, sir.

Michael Carroll, RBC Capital Markets.

Thanks. Ed, those Greensboro assets that you purchased in the quarter, was that from CBL?

Yes, Sir.

And then, I believe that they have some more properties in that area. Do those assets interest you too?

They're retail.

(inaudible) Centers is their primary retail.

But more office assets around that area?

Not of anything that we would be interested in.

Okay great. And then for the remainder of the year, are those the type of acquisitions that we should expect? Or do you have any other type of bigger deals in the pipeline that you are looking at?

Yes and yes. Just to qualify on the CBL, or little bit more, and then I will go back to the yes and yes. Part of the attraction for us to the two assets that we bought from them is that when they did their development, they were doing it kind of hand-in-hand with this office being near the retail, so we feel like part of what makes it in the BBD is its proximity to significant retail. But we don't have any interest in buying that retail, because it is not a mini retail it is really free standing and separate from the buildings. And then, the other office assets they have, those are really the reason that we are little bit cost-side on those is because those are much smaller buildings that we would not have an interest on. And then as far as our acquisition pipeline, we are looking at some one-off buildings, but we are also looking at some larger portfolios.

All right thank you.

Sure.

Brendan Maiorana, Wells Fargo

Thanks, Ed, one more follow-up for Terry. Terry, in the NAV page in the supplemental, the NOI is listed as GAAP, I think less straight line rent. It looks like there is a sizable amount of free rent associated with the disposition in Atlanta for the industrial. Is that straight line rent number encompass free rent? Or is that actually just sort of a technical straight line GAAP rent?

It is the standard GAAP straight line rent that we back out of the total rental income from the properties that you see there on the NAV page. So if there were free rent projected in any of those buildings during 2013, because it is a 2013 projected and line number that we show there, would have backed out any straight line rent that we would have projected that would have covered that free rent period. So it is in essence, the free rent would be to the extent that there is straight line rent covering the free rent, that would be backed out.

Right. So the $17,500 on the industrial is the actual true cash amount of the NOI that you are going to get?

Correct.

Okay, great thanks that's all I have.

Thanks Brendan.

(Operator instructions)

Mr. Fritsch, there are no further questions at this time, I will now turn the call back to you.

Okay, thanks so much operator, and thank you everyone for dialing in. As always if you have any additional questions please don't hesitate to reach out to us. Thank you.

Thank you.