Highwoods Properties Inc (HIW) 2013 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. (Operator Instructions). I would now like to turn the conference over to Tabitha Zane. Please go ahead.

Thank you. 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 from yesterday's press release or the supplemental, please visit our website at www.Highwoods.com, or call 919-431-1529, and we will email copies to you. Please note in yesterday's press release we have announced the planned dates for our 2014 quarterly 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 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 the call, we will also discuss non-GAAP financial measures such as FFO and NOI. Definitions of FFO and NOI and an explanation of management's view of the usefulness and risks of FFO and NOI can be found toward the bottom of yesterday's release, and are also available on the Investor Relations section of the web at Highwoods.com.

I will now turn the call over to Ed Fritsch.

Good morning everyone, and thank you for being on our call. Businesses are continuing to successfully punch their way through this economy. Economic trends remain positive, seemingly muffled only by the continued obstacles being thrown in the economy's path by the happenings or lack thereof in our nation's capital. While corporate balance sheets are flush with cash, and carrying historically low amounts of debt, and corporate credit facilities remain largely untapped, Washington's economic speed bumps are restraining growth from what we believe it could and should be. Regardless, despite these government manufactured obstacles, we are seeing ample customer and prospect flow, users who are genuinely pursuing growth, and adding office space.

2013 has proven to be a very productive year for Highwoods shareholders. Year-to-date, we have announced $1.25 billion of buying, selling, developing, and equitizing, 60% of this activity occurred in the third quarter alone. We have had many deals in the works, some longer than others, and are very pleased that so many came to fruition in the third quarter. This high level of brand enhancing value-add production enabled us to exceed the high end of our initial expectations for all 2013 investment activity. We are also pleased to have delivered on our commitment to grow our Company on at least a leveraged neutral basis.

Looking forward, it is important to note that the upside embedded in our 90.6% occupied same-store portfolio are 3.4 million square feet of 2013 value-add acquisitions, which were 81% occupied at closing, and the balance creating projects in our $276 million 87% preleased development pipeline, gives us momentum as we head into the next couple of years. We have narrowed our 2013 FFO outlook, holding the mid-point at $2.80 per share, with an even more conservative balance sheet. Leverage is now 42%, almost 200 basis points lower than the beginning of the year. Our hard work to further strengthen our balance sheet has not gone unnoticed, and we are pleased to have received our second upgrade this year, this time from S&P, which now has us rated as triple B flat with a stable outlook.

During the third quarter, we delivered solid FFO of $0.71 per share, acquired $316 million of value-add office, announced $110 million build to suit, sold $103 million of noncore, including the remaining Atlanta-based industrial assets, and raised $183 million of new equity.

Also during the quarter we leased 1.7 million square feet of office, including 1.2 million square feet of second gen space station, the highest amount since the first quarter of 2005, and it had an average term of 6.1 years. Net effective rents on second gen office lease assigned in the third quarter were a record high for our Company. This is the result of a higher quality portfolio concentrated in the best business districts, and less overall availability of Class A space in the marketplace. In addition, we are pushing asking rents in many of our markets on average by 3%.

Looking ahead, development remains an important component in fueling our future growth, improving the overall quality of our portfolio, and contributing to the long term cash flow stability. Our current $276 million development pipeline encompasses 1.1 million square feet, and includes three 100% preleased build to suit office projects totaling 871,000 square feet, a 166,000 square foot 25% preleased office building, and a 100%-occupied Highwoods Zone Park, and 59,000 square feet of 70% preleased amenity retail.

In particular, we are excited to have commenced construction on a $110 million, 100% preleased two building campus from Met Life on land that we own, and carries highly desirable mixed use Weston PUD in our Raleigh division. This global technology and operations hub will initially house approximately 1,200 Met Life employees, and completion is being phased in during the first half of 2015. This represents entirely new absorption for us and for the market. They are choosing Cary for this hub, which will be serving the Americas, as a testament to the strong technology oriented employment pool that continues to attract companies to the Greater Triangle area. We are also mass grading the adjoining 13.5-acres to accommodate a third building for potential future growth.

2013 has been a very productive year for acquisitions, which continues to fuel both growth and cash flow stability, as we further enhance the quality of our portfolio, and upscale our brand in our BBD sub-markets. The high end of our initial acquisition guidance was $325 million, which we have now surpassed by 70% or $224 million. The assets we have acquired this year now have a weighted average occupancy of 84%, up from 81%, of the time of acquisition. Our largest acquisition in the third quarter was the Pinnacle at Symphony Place in Nashville, undoubtedly the best CBD Class A office tower in all of Tennessee, for a total investment of $152.8 million. In concert with this purchase, pun intended, we have developed and deployed a highly-detailed marketing plan, and our confident occupancy, which was 84.9% at closing will stabilize within the next two years.

As an aside, at the 553,000 square feet One Alliance Center that we acquired in late June, we already have leases signed or out for signature for an additional 73,000 square feet. With this activity in just four months time, we have put 40% of the acquired vacancy to bed. Similar to our experience at PPG Place, we continue to deliver on lease up of the vacancy in our newly-acquired office buildings.

In the third quarter, we also acquired our JV partners' 60% interest in five Orlando CBD assets, a transaction we described during our last earnings call. Subsequent to that call, we bought our JV partners' 57% interest in Glenlake North and Glenlake South, two 10-story Class A office buildings with structured parking in Atlanta's central perimeter, for a total incremental investment of $46 million, which equates to 30%-plus below replacement cost. These Glenlake Towers which total 505,000 square feet were 82% occupied at closing.

Inclusive of these JV buy-outs, we have now reduced the percentage of our annualized FFO from JV holdings from just over 10% at its peak, to now 3%. This reduction is in line with a key tenet of our long term strategic plan, the reduction of complexity in our business model. Owning these assets outright simplifies the leasing and property management processes, enabling us to be more nimble and provide greater flexibility to accommodate our customers' needs and growth.

Turning to dispositions in the third quarter, we sold $103 million of noncore assets at an average cash cap rate of 6%. $91.6 million of the $103 million was the second tranche of our Atlanta industrial portfolio, which encompassed 16 buildings that were 95% occupied. Our timing for the exit of our Atlanta industrial market was a good move for our Company and our shareholders. Pricing was strong. We averaged a 6% cash cap rate on the combined $140 million sale of 2.7 million square feet, and we recorded an overall gain of $50 million. This move also further concentrates our brand as a top owner of high quality office assets in Atlanta's BBDs.

We are now projecting year end occupancy to be between 89% and 90%, with an 89.5% mid-point, 50 basis points below the mid-point on our last forecast provided to you on July 25th. It is important to note, the 50 basis point adjustment is entirely attributable to our third quarter investment activity.

While Mike will talk about markets, I am going to briefly comment on two of our large vacancies, first, LakePointe One and Two in Tampa. Our extensive interior and exterior renovations are on target for completion by year end. This well-designed urbanizing in and around these two buildings has helped us generate strong prospects for over three-quarters of this space that was vacated this past May.

Second, at Windward Parkway where AT&T vacated 223,000 square feet just this month, this building is already attracting interest from a diversified group of businesses. Our repositioning improvements are well underway, and are also expected to be completed by the end of this year. As we have said before, this building is in a good location with numerous walkable amenities, has good bones, and a generous parking allowance.

In summary, our team delivered a very impressive quarter. I underscore my gratitude to my coworkers for their outstanding work and to all of you for your continued support of Highwoods Properties. I will now turn the call over to Mike.

Thanks Ed, and good morning everyone. As Ed noted in his opening remarks, we had a great quarter, leasing 1.7 million square feet of first and second generation office. Occupancy in our wholly-owned portfolio was 90%, flat sequentially despite losing over 50 basis points of occupancy from acquisitions and dispositions completed in the quarter. On a same-store basis, occupancy in our wholly-owned portfolio was 90.6%, up 60 basis points sequentially, and 20 basis points year-over-year. Cash rent growth for the 158 second gen office leases signed this quarter declined 5.6% while GAAP rents increased a solid 9.4%.

CapEx related to office leasing was $17.35 per square foot, on par with our 5-quarter average, and our average lease term was 6.1 years, slightly longer than our 5-quarter average. As Ed noted, we had the highest office net effective rent on deals signs in our Company's history. Across the board, there are shrinking options for customers seeking large blocks of Class A space, with this plus limited new supply, a recovering economy, and our improved portfolio, we are seeing an attractive amount of demand and occupancy upside.

Turning to our individual markets, our Atlanta division has been further transformed predominately by the very successful sale of our industrial assets. In addition, we acquired our JV partners' 57% interest in Glenlake North and South, which were 82% occupied at closing. Combined, these transactions negatively impacted Atlanta's occupancy 321 basis points. Glenlake North and South, which encompass 505,000 square feet, are high quality assets in the central perimeter sub-market, one of Atlanta's BBDs which has absorbed almost 800,000 square feet already this year. Owning 100% of these Atlanta properties materially enhances our leasing process, and fortifies our position in that sub-market. There is strong interest in these properties, and we have solid prospects for over half of the vacancy.

As Ed pointed out, we are seeing strong interest in One Alliance Center, and the market is increasingly recognizing Alliance Center as an integrated complex with a number of shared amenities enhancing both towers. In Buckhead, a dramatically recovered sub-market, and certainly one of Atlanta's BBDs, we were able to push asking rents particularly for the larger blocks of space. In the Nashville market available Class A space has gone from 5.9% at the beginning of the year, to an even tighter 4.7% at the end of the quarter. Our national portfolio's occupancy is a robust 94.7%, despite the 185 basis point negative impact from our September acquisition of Pinnacle at 84.9% occupancy.

The $42 million LifePoint headquarters building at our Seven Springs Park delivers at year end on time and on budget. We have had great traction on the 41,000 square feet of adjacent amenity retail, which is now 56% pre-leased and we have signed LOIs for an additional 29%. We also have two more pad-ready sites at Seven Springs that can support up to an additional 365,000 square feet of office.

In Raleigh, our team leased 402,000 square feet of second generation space during the third quarter, and occupancy increased 70 basis points to 90.6%. First gen leasing was also strong, with a 427,000 square foot MetLife build to suit, and subsequent to quarter end, 41,000 square feet with two new customers who will relocate to our recently-announced development at Glenlake Park. Our market entry into Pittsburgh continues to exceed our expectations, ending the quarter at 94.2% occupancy, and with Class A vacancy in CBD Pittsburgh at 5.9%, we are pushing rents in all of our properties.

In closing, all of our leasing representatives from across our system were here in Raleigh last week for a comprehensive planning and work session. Our team is energized and very pleased with the current level of leasing velocity. Terry.

Thanks Mike. Total FFO available for common shareholders this quarter was $64.1 million, up $11.3 million from third quarter of 2012. This increase primarily reflects $11.1 million higher NOI from acquisitions net of dispositions, $0.7 million in lower GAAP same-property NOI, $1.3 million lower FFO contribution from joint ventures, due to our acquisition of seven assets from two of our JVs this quarter, and $0.9 million in lower G&A. Third quarter results also included $1.1 million of deferred lease commission income in connection with the Orlando transaction.

As I mentioned on our second quarter call, this amount relates to lease commissions that were scheduled to have been paid to us by the joint venture over the terms of leases signed before our acquisition of the JV assets. This deferred income was paid to us upon closing of the acquisition, and thus recognized in income and in FFO in third quarter. As a reminder FFO and G&A amounts exclude property acquisition and debt extinguishment costs, which are disclosed in a table in our press release.

On a per share basis FFO for the quarter was $0.71, $0.05 better than third quarter 2012, and $0.01 better than second quarter 2013. Weighted average shares outstanding this quarter were 90.8 million, up 10.3 million from third quarter 2012, due to issuances of shares under our ATM program, and our August equity offering. We do not expect to issue any common shares for the remainder of this year. Based on shares issued to date, weighted diluted shares outstanding are expected to be 93.0 million for the fourth quarter, and 88.8 million for full year 2013.

Same property GAAP NOI was $0.7 million, or 0.9% lower this quarter compared to last year, while cash NOI without term fees was $0.6 million, or 0.9% higher, as straight line rental income continues to convert into cash rent. Same property NOI growth this quarter was negatively impacted $1.6 million from PWC vacating 244,000 square feet in Tampa on May 1st, and by $0.4 million to the positive one-time CAM adjustment last year. Excluding these two effects, the rest of the same property pool had positive $1.3 million and $2.6 million of GAAP and cash NOI growth respectively, and accordingly, GAAP and cash NOI growth would have been positive 1.8% and 3.7% respectively. Same property NOI this quarter does not include the $1.1 million of deferred leasing commission income from the acquired Orlando assets.

G&A this quarter was $8.2 million, or 860,000 lower than third quarter 2012, and almost flat with second quarter 2013. The net decrease quarter-over-quarter was driven mostly by lower long term equity-based compensation, offset by modest salary mirrored increases and higher health care premiums.

Turning to the balance sheet, from January 1 to September 30, we had $423 million of net investment funding, acquisitions plus development funding less disposition proceeds. During this same period, we reduced our leverage from 43.9% to 42.6%. Given the size of our 2013 net investment funding, total debt at quarter end is $191 million higher than at last year end, or 10%. But the average interest rate is 50 basis points lower, a 10% reduction. And overall interest expense is virtually flat. The reduction in the average interest rate was achieved from a 30 basis point reduction in average rates on our fixed rate debt, a 19 basis point reduction in the average spread on our bank debt resulting from a ratings upgrade, and from higher use of our revolver.

We are very pleased to have received in late July an upgrade in our senior unsecured debt rating from Standard & Poor's from triple B minus to triple B flat. This followed a similar upgrade from Moody's in late June, which as you know from our last call, immediately reduced the LIBOR spread and facility fee of our unsecured revolving credit facility and bank term loans. As planned during the quarter we paid off at par a $115 million 5.75% secured loan. And in early October, five other secured loans were paid off at par, a $67.5 million 5.12% loan, and four loans totaling $32.3 million at 5.79% in our 50%-owned Markel consolidated joint venture. On September 30, our JV partner contributed half the cash to make this payoff.

In the third quarter we issued 5.2 million shares of common stock, raising $31.9 million under our ATM prior to our August equity offering, when we raised an additional $150.9 million. Year-to-date, we have issued 8.3 million shares and raised $295 million. We are pleased to have a variety of equity-raising alternatives, including noncore dispositions, to fund our growth on a leverage neutral basis consistent with our upgraded credit ratings.

As noted in the release, subsequent to year end, subsequent to quarter end, we sold $25 million of noncore assets with a weighted average cash NOI cap rate of 7.9%. Inclusive of these transactions our pro forma leverage is currently 42.0%.

Lastly we narrowed the range of our 2013 FFO outlook to $2.79 to $2.81 per share, from $2.76 to $2.84 per share, and updated certain of the specific assumptions. As a reminder and consistent with past practice, our FFO outlook excludes the impact of any acquisitions, dispositions or capital transactions that may occur after the date of this release.

Operator, we are now ready for questions.

Thank you. (Operator Instructions) Our first question comes from Josh Attie with Citi, please go ahead.

Good morning, this is Kevin Varin with Josh. On the development front, what should we expect for yields on the overall pipeline?

Good morning Kevin, this is Ed. We don't disclose yield project by project, because I think that gives us a competitive disadvantage if we quote it while we are still chasing other transactions. But I can tell you of the pipeline that we have, and all that we have done really since the deployment of the strategic plan, we have been all over a 9% cash yield upon stabilization year one. And then we are probably 70 to 80 bips better than that on incremental cash, because most of the projects that we have done have been on Company-owned land, and then we are about 100 bips better on the GAAP side.

Okay.

And then credit varies, and circumstances vary, but we have been all over that average.

Sure. Thanks. How should we think about the funding of future development? You mentioned non-core dispositions in your opening remarks as a means to fund growth. Should you expect a combination of asset sales and equity like you have done in the past, and then what does the disposition pipeline look like heading in 2014 if that is the case?

Hi, Kevin, this is Terry. Based upon the current pipeline, there is about $200 million of additional incremental costs to be incurred. That will be spent over really the next 21 months or so. Those projects won't all finish delivering until second quarter of 2015. The funding of that will be covered basically on a leverage and neutral basis, we will use a combination of non-core dispositions, and likely some ATM funding, along with some additional debt financing, to cover the costs of that over that period of time.

And Kevin, a footnote to that, with regard to 2014 obviously we haven't given out guidance yet, but we continue to cull the portfolio, we still have several hundred million dollars of noncore assets that when the timing is right we will dispose of them. I think we have had a very productive year with what we have sold this year both in pricing timing and gains, and we will continue along that same type of cadence over the next couple of years.

Alright, thank you, guys.

Sure.

Thank you, our next question comes from Jamie Feldman with Bank of America Merrill Lynch, please go ahead.

Great, thank you. So Mike, you had commented that there are shrinking options for tenants looking for large blocks of space, and limited new supply, can you just provide more color on that? Is it specific markets; is it only a couple of markets? And then also, what are your expectations for supply starting to pick up in your markets?

Sure. It really is pretty much across all markets. Obviously we look in Tampa, and we talk about the big block being our own block that we took back from PWC, 244,000 square feet today, that is one of the bigger blocks in the market. But if we go across every one of our markets, what we see is a lot of available suites in the 5,000 to 10,000 square feet, very few when you start getting over 25,000 and 50,000 feet. So to the extent you have that type of supply, it puts you at a little bit of a competitive advantage.

In terms of new development right now, the only market where we really see any steel going up is in Cool Springs in Nashville with a spec project down there, about 250,000 square feet. It has I think across all of the markets that we are in very, very little in terms of just available supply coming on.

Okay, so the next question is, what does it mean for rent growth? If there is such a tight market at the high end, the larger end?

Sure.

A similar question for Terry, can you talk through the big spread between the cash and the GAAP leasing spreads, and what the drivers were of that?

Do you want to take it first? We are still seeing, as I mentioned in my remarks, we had all of our leasing folks here in Raleigh last week, and across the board I think all indications were good for demand. So as a result of that, we are going to start seeing us push rents up as we see vacancies shrinking and no new supply. So I think that is a logical follow-on for that. Again, this is part of being in the better BBDs that we are in, where we see that tightening up, and that is where we like to think we have got the opportunity to push rents. We talked about Buckhead being one, where you are seeing big blocks of Class A space tightening up, so we are going to try to push it wherever we can, in every sub-market where we have that opportunity.

Jamie, this is Terry, on the second part of your question, the large delta this quarter between the GAAP rate and the cash rent growth, it is just driven by the mix of customers, and the fact that we had several of them that had very long terms, and you can see that the average rental term this quarter was about 6.1 years, which is higher than normal. So it was the longer term on certain deals that we did, that drove the GAAP rent growth up relative to the cash.

For example, Jamie, this is Ed, we did one deal that was 90,000 square feet, for 15.25 years so when we get strong escalators on that obviously that pushes the GAAP.

Okay, I think Mike had mentioned something about pushing rents 3%, is that market rents, or is that your escalators?

Our asking. We do have, in virtually every lease, we have on average about a 2.5% to 2.7% annual kicker. But with regard to asking rents on average we are going up on the asking side, depending on city, market, et cetera, but 2% to 5%.

Okay, and then you are getting bumps of 2% to 3%?

Correct. Annual escalators built into the lease documents.

Our asking is our starting rent, and we escalate from there.

Alright, and then just the final question on Windward, just you mentioned you are working on it, but there is some demand. Can you give a little more color on the size of the demand, and realistically what you think how long it will take to backfill that space?

Sure, I am glad you tossed in realistically. So we call it 5405 Windward. Just as a reminder, it's 223,000 square feet that vacated a few weeks ago, October 1. Right now we have good prospects for about 125,000 square feet, and we have what we call suspects for about another 0.5 million square feet.

It is very diversified with regard to business sector, the 125,000 square feet we are currently doing space planning for them right now. That doesn't mean we have a deal, but that gives you a sense for how seriously they are looking at it. They have toured it numerous times, so now we have got the test fits underway, and they are -- we have exchanged economic terms back and forth several times. Just a reminder we are investing several million dollars there to reposition the approach to the building and the building's common areas, and we think that will also make a significant positive impact for showings.

Okay, and then just remind me the total size of the space?

223,000, so the prospect we have right now would fill 56% of the 223,000.

Okay, my understanding is that it is on like a fiber line, or something unique about that sub-market that attracts tech tenants. Is that true?

Well, there is a lot of fiber throughout that general sub-market. It is a technology corridor. So that it is known for that to be part of the amenity base for customers that locate out in that area. Obviously the utility companies whether it is fiber, or power, understand the type of customer that typically inhabits out there, so they cater to that with both the fiber and the redundancy, and electrical power.

Also a reminder, these buildings have a very large footprint that is divisible. It is really two pods, so it can either be 60,000 square feet on one floor plate, or we can split it into two 30,000 square foot wings, which really gives a lot of flexibility to the customers, if they want to go horizontal or if they want to go vertical.

And also, mention that we have a better than market parking ratio, and there are amenities within walking distance. So we feel -- we don't feel cocky about it, but based on the improvements we are making and the feedback we have gotten thus far from the brokerage community, and this early prospect, less than a month of getting the space back, we feel fairly good about it, plus the fact that the ending rent versus the asking rent, there is about a 15% increase in the delta. So we expect to be able to roll up rents 10% to 15%.

Okay, great, thank you.

Thanks, Jamie.

Thank you. Our next question comes from Vance Edelson with Morgan Stanley, please go ahead.

Hi guys.

Hi.

Sorry, this is Vikram in for Vance. Could you maybe just on that same topic given the fact that currently at least there are fewer options for larger A grade space, can you maybe just talk about any competing supply that you might be starting to see from the private side, or just any other in some of the markets? And in the same vein, given the low supply, how have you seen occupancy trends in October and just generally your expectations for the next 12 months? Just more broader, I'm not looking for specific numbers.

Sure. As Mike said, we are not really seeing any spec development. He enumerated one example, but there really aren't others beyond that. The development that we are doing, we have got $276 million of development underway, and it is 87% preleased. We are not seeing other developers whether it be our REIT peers, or the private sector coming out with spec space. I think that given how uncertainties have become more of a permanent thing, we see less aggression with regard to spec space coming on the market.

And then a very unusual phenomenon has occurred that I think deserves underscoring, and that is despite the fact that demand dropped off in concert with the arrival of the Great Recession, pricing for construction remained high, which is counter-intuitive. Normally you would think with the drop in demand that the cost of the supply would drop in accordance with that. But the cost of construction has stayed high, so in order to get into first gen space built new today, you have to think about a 20% or so increase in your occupancy cost. Hence, I think that is holding a lot of spec development at bay, and any development that is coming out is much more likely to have some form of anchor, or build to suit aspect to it.

Okay, thanks. And just generally any kind of early trends in October in terms of occupancy, and your expectations for trends over the next 12 months?

Yes, as Mike said, we recently had all of our -- an all-hands leasing representative meeting here. The energy was good. They feel very positive about the velocity of showings and deals. We had a phenomenally active third quarter. We have very good prospects for some of these larger holes that we have in our portfolio. And they are also energized about the fact that we don't have any large expirations coming up.

Just to expand a little bit, if you look over the last 15 months, we did experience some large move outs. The last of which occurred the first of this month with AT&T, but there were two move outs that meant more than $4 million in annual revenues and one at $7 million. We don't have anything that even approaches that with the exception of one that is just above $3 million, and that is where we grew a customer's revenues by 60% by expanding them into a build to suit. So we don't have these big large pending move outs like what we have experienced in three or four cases over the last 15 months, and that will sure energize a group.

Okay, thank you, guys.

Thank you, sir.

(Operator Instructions). Our next question comes from Brendan Maiorana with Wells Fargo, please go ahead.

Thanks, good morning.

Hey, Brendan.

So Ed, I guess from that comment you just made, if I kind of look at the occupancy outlook for the next few quarters, AT&T at Windward was out October 1, and then I think you kind of referenced LifePoint that comes out, and obviously that is an expansion into your new development, but it is a space to fill. And then I think T-Mobile has a little less space. I think if I add those three up, it is about 460,000 square feet.

I guess reading your comments or listening to your comments it sounds like you feel maybe 12 months from now, or a few quarters from now, you will more than offset those move outs with the activity in the portfolio, and lease up on the current portfolio as it stands today?

I do. I think that is well stated Brendan, and then I would add one bullet to that. We also feel pretty good about the activity that we are having on the value-add acquisitions we made this year. So this year, we have bought over 3 million square feet of space, and the occupancy at the time of purchase was 81. We are already at 84 on that, and we are seeing good velocity of showings on that space.

So it is an added, call it 3.4 million square feet that came in the door at 81. We are now at 84 already, and we have good prospecting on where we are going further on those. So it is not just a backfill of these few larger holes, but it is also the delivery of some developments like LifePoint will come in at 100% leased. It is also this 3.4 million square feet that we bought at 19% vacant, and we are having good movement on the up lease of that.

Okay, so that is actually even more positive than what I thought, because I was sort of including that acquisition in the current portfolio. But you are saying kind of if you look at your same-store portfolio as it gets reported in the supplemental, things that you have owned for the past 12 months, that number your occupancy is probably at least in line with where it stands today? Plus you have got lease up on of all the value-add stuff that you did?

That is exactly right.

Okay, great. An update, I think in prior quarters you had said that the backfill on PWC, you felt pretty confident that you guys would have 100,000 square feet or so of the roughly 250,000 that they gave back leased by the end of the year. It sounds like you have very good activity. Do you still feel pretty confident in that number? Or do you think maybe that slips a little bit in terms of timing?

There is no reason for us not continue to cling to Project Santa Claus. We feel quite good about the prospecting we have for that. A deal is not a deal until both parties have signed, sealed, and delivered it. We are certainly not backing off of that by any means.

Okay, great. And then just --

And maybe even better than what we forecasted.

Okay.

I know the leasing agent right now is rolling their eyes because I may have just jinxed something, but we feel good about it.

I am sure they will do fine down there. And maybe I am looking at this a little bit as splitting hairs a little too much, but it looks like Pinnacle probably the occupancy there, even in the little time that you had it moved up from where you guys were at 84.9%. Can you maybe give a little bit more color on where you think you can take occupancy for that, given the tightness in downtown Nashville?

Sure. You are correct, so we bought it on September 5th, at 84.9%. We have signed another 2.3%, or 16% of the vacancy exposure. And then we have strong prospect for another 2%, so that would get us to 89.2% with signing these two deals. One is signed, and one is a very strong prospect. We feel good that we will be pushing 90% here, once we execute this second lease. So 90%-plus is certainly well within sight.

Great, and then just the last one for Terry. The pay off of the mortgages that happened, how do we think about how you fund that? You have got another mortgage that comes due kind of mid-year. Do you do an unsecured issuance, and how should we think about the credit facility balance, and maybe where that is likely to, where you would be comfortable with that over the longer term?

You are right, we did pay off about $100 million in early October of debt that would otherwise have come due in early 2014. And it shows that actually on the supplemental as of 9/30, but those have now been paid off using the credit facility as a funding source. The credit facility just so you know today has a balance of about $273 million, out of the $475 million. So there is still a good balance there.

In terms of what we would do on the loan that comes due in mid 2014, it is a secured loan; we really haven't made our mind up on that yet. We could decide to roll it back in the secured market. We have so many assets now that are unencumbered, we have great options to use that pool for secured loans, if you want to go that way, or we could go unsecured and do a bond deal. We haven't made our mind up on that yet, but we have a lot of options to take care of the maturities that we have in 2014.

Our total floating rate debt today which is the line and one bank loan is just under 10% of our total book value. We feel comfortable with floating rate exposure at that level. Or could even go a little bit higher, so I think if that gives you maybe some sense of where we are comfortable at in terms of the line of credit.

Do you think that -- I think the mortgage that comes due is a little over 3%. Is that on today's terms if you did mortgage debt, or if you did unsecured, is it fair to say that it goes up the rate?

Good question. That loan came in through the acquisition of the Orlando assets so it was a mark-to-market at that rate. And it was lower because there was only about a year left on the term, so it just got a lower market rate given the shorter term. And you are right, if we rolled that back into the market, into the secured market on a more realistic term, say five to seven years, the rate would be probably somewhere in the mid-4s. So it would go up a little bit.

Sure. Got it, thank you.

Thanks, Brendan.

Thank you, the next question comes from Dave Rodgers with Robert W Baird, please go ahead.

Good morning, maybe on the disposition side as you start to talk a little bit more about development, and you have certainly been more acquisition friendly this year. You quoted I think it was a 7.9% cap rate on sales, maybe that was subsequent to the end of the quarter. One, did that include the industrial blend into that number or was that separate? And then maybe just more broadly, talk about how you are viewing non-core dispositions. Is there any incremental market for what you consider to be non-core?

Sure, if I miss any aspect of that, pull me back. We have very favorable results with the timing of the sale or our industrial assets, to have sold as much as we did, and basically earn a low 6 cap, and a $50 million gain on that. It was very well leased, so I think the timing of that was excellent, and we kind of need to look at the industrial versus what else we have to sell.

The other aspects that we have been selling have really been the non-core office properties, and they vary in occupancy and sub-markets, and has been much more of a one-off sale here and there. But we still have, as I mentioned, a couple of hundred million dollars worth of non-core sales that we would like to do, and we are working them in concert with renewals, to be sure that we can maximize the value. So what we do is we compare how long do we think it would take to lease it up, if we have a hole, and what the return on that would be versus if we just went ahead and ripped the Band-Aid off now and sold it.

Dave, this is Terry, just to be clear, the $25 million that was sold in October were office assets in two markets. There was several buildings in Winston, and one in Atlanta. And those office buildings were at the 7.9% cap rate that I talked about in my comments. That did not include obviously the industrial assets in Atlanta that were sold partly in the second quarter, and then the balance in third quarter.

Great, thank you for that color. And then maybe going back to total availability in the portfolio, due to some of the recent acquisitions and maybe a little bit due to the move-outs, I think your total availability on the office side at least, is kind of the highest really that it has ever been, and I think you have positioned yourselves to grow obviously occupancy over the course of the next couple of quarters. As you look at that available space, maybe break it down if you can in just broad terms, in the sense of what is CBD or infill, what is maybe more BBD. Or even maybe a better way would be, can you tell us a little bit more about the demand for value space versus the Class A premium space in that availability pool, and how you kind of see that leasing up?

Wow. So again, if I missed some aspect of that pull me back. But we have sold occupancy. For example, we've sold well over 2 million square feet of industrial that was 93% to 94% occupied, so we have sold occupancy that has had a negative impact on our overall number. But just this year alone, we've bought 13 buildings that comprised 3.4 million square feet that had 80 bips of negative impact on overall occupancy, but it does create that lease up opportunity.

So we have sold out of the six on non-core product, and we have bought in at what we think attractive numbers and what we have invested in is BBD. We haven't gone and bought anything that is really not in a mini-rich environment. And so we think we have already evidenced some pretty good leasing velocity on what we have bought already this year.

Last year we bought more stabilized properties in that they were in the low-90's at the time of acquisition to expand footprints, but we have already seen good activity on what we bought, akin to what we experienced with our delivery, our purchase and delivery of the assets in downtown Pittsburgh.

The activity on Pinnacle has been good; the activity on One Alliance and Buckhead has been excellent. We have got good activity with the CBD buildings in downtown Orlando. Really across the boards on this value-add, it is not value-add discount space. This is quality assets in the BBDs that for one reason or another had low occupancy. In virtually every case it has been because there has been some issue related to the capital stack, and it has been confusing to brokers and users and prospects, and we have been able to come in and put our balance sheet behind it. So we have Highwood-tized the asset, put together a very sophisticating marketing plan, put our people and our brand on it, and we are seeing occupancy move in the right direction.

Great, last question on the developments, what is driving a lot of these discussions? Is it just greater efficiency and overall real estate costs? Is it out of market locations? It may be some of both, but underlying I guess some of these discussions where do you see decision makers at your tenant levels making decisions, in terms of wanting to do new development?

There is no doubt that the decision is at the, it is being made in the C suite in every one of these instances. None of these are kind of cavalier moves. But the rationale for going into a build to suit fits into just a few silos. One is it is the pulling together of space that is in multiple buildings into one building under one roof, to garner synergies and better functionality, and better communications, production and morale.

Two, is it is to given the fact that a lot of what Mike was asked earlier I think by Jamie, with regard to the reduction of large blocks of class A space, those large blocks of class A space that were available in 2011 and 2012, really were the result of new construction that was started in 2008 and delivered in 2009, that was very late in the cycle. So there was an absorption of those with no new backfill of development, once those were absorbed. And I think that is what is really playing well into our hands in each of these markets.

So it is a customer who wants to be either needs to condense from multiple locations into one, or it is a customer that wants to dramatically restack, willing to pay some 20% increase over second generation space, and/or wanting to present a whole new image to their client base, their employee base, or it is a relocation much like MetLife is. So MetLife is an absolute home run, three men on, bottom of the 9th, game 7 of the series. It is just total new absorption for us, it is total new absorption for the market. It is good all of the way around for business. It is 100% preleased with a Fortune 40 company for a long term lease. So that type of migration/relocation is the third silo, and it is very accretive.

Great, thank you for the color.

Thank you.

Thank you, our next question comes from Michael Knott with Green Street Advisors, please go ahead.

Hey good morning guys. It is Jed Reagan here with Michael.

Hey, Jed.

How is it going? Where do you think the mark-to-market rents on your portfolio stands today? I think you talked recently about maybe being sort of mid-single digits above market. And then sort of related to that, when do you think releasing spreads could turn positive?

Yes, I think you answered the question I think that the first part of the question, I think that is appropriate. I think that some of it depends on a lot of the answers to the previous questions with regard to how much spec space comes on. We don't see much of that happening, which obviously will help us to push rents. So does inflation come where we can push rents, does absorption continues to come, we have seen very significant absorption in our markets quarter after quarter after quarter now. Atlanta absorbed 1.3 million square feet after absorbing 950,000 square feet just last quarter. So we are seeing good absorption rates which means that we can continue to push these asking rates up, like we said, 2% to 5% right now.

And of course, the compounding of the annual kickers is the thing that really shows the way that we compute it, and I am sure that since it is not a NAREIT-defined calculation. The way that we compute cash rank comparisons is we take the initial rental rate, plus all of the compounded annual escalators, plus the full CAM paid in the last year, and we compare that to the rent in the first year of the new lease. And we include whether it is a renewal or a re-let.

So we think that these annual escalators obviously accrue to our benefit, and sometimes just outrun the appreciation in the market. But when we do fall a little bit short, like you said in mid-single digits, we are making that up within the first year, 1.5 years of the new lease.

Okay, great, have you been seeing any noticeable changes in cap rates in your core markets over the last quarter or so? And maybe any changes in the buyer profiles in these markets?

We have not, Jed. There just hasn't been that much activity, so I would describe it as stable. I think that the gap between gateway or CBD versus other has narrowed, because the other has gotten so expensive, that money has kind of flowed into the mid-tier markets. But I would just, that gap narrowed and I would say it is stable right now.

Okay. That is helpful, and then lastly, can you just talk a little bit about the decision to move forward on the new Raleigh development in Glenlake with the 25% preleasing? Just how do you feel about your chances there? And could we see you moving further out the risk spectrum for developments in some of your other markets?

Sure. With regard to Glenlake, we have about 450,000 square feet in the three existing buildings there, and we are 100% leased in those buildings. We have four more pads that are already graded, infrastructure in place. And given that we are 100% on the 450,000 square feet, we got to the point where we really are going to lose expanding customers to the competition, or we are going to accommodate them in that park.

So the 25% prelease we have are actually new customers to Highwoods. So that is 40,000 square feet of brand new business to us from two different users. In addition to that, we have very good prospects to grow some of our existing client base within Glenlake, as well as others in the market. Nobody else to date has put a spade in the ground to start any new construction. And we think we are in a very good position to capture that.

And a reminder, Glenlake is definitely in the BBD sub-market here for us. Good amenities nearby. So if there was ever a place we were going to embark on this, this is one of the sub-markets we would want to do it.

Just one minor footnote, the space that we leased were the lower floors, so we have theoretically the best space in the building still available, in one of the best parks in the market.

Okay, and then how about in other markets? Might you start development with that kind of a preleasing profile?

Yes. I would be cautious to say that we would start another one at 25% preleased. It would really depend on what our conditions are in that immediate sub-market. And I think we would also be very calculated on how much we do as far as total spec within the portfolio. I don't want to say that we wouldn't. We are looking at a few things here and there, but more of the irons that are in the fire are predominately strong anchor tenant to build to suit and development projects.

Alright, great, thank you very much.

Thanks, Jed.

Thank you. The next question comes from Michael Salinsky with RBC Capital Markets, please go ahead.

Good morning guys. Just to go back to Dave's question, you talked about strong demand with your acquisitions in the BBD districts. Can you talk a little bit about non-BBD? Are you seeing any pickup in some of the commodity space, suburban stuff, most of all basically Class A?

I think on the margin, I wouldn't say that there has been a stampede of expansion in commodity space. I would say on the margin that there are aspects of the lease terms that are tightening up to some degree. But I wouldn't say that it is a dramatic change in personality on demand or economics for that space.

Okay, that is helpful. Second, as you look to 2014 at this point, other than T-Mobile and LifePoint, any additional large vacates that you are aware of at this point?

Yes, I am glad you brought that up. I just want to underscore this again, and I appreciate the question that we do have for better or worse, I think that when we find out we are going to have a big move out, we tell it. We put it out there, so that we can start to communicate, and give context to it, and be sure that we are able to give updates as we go. But the three largest holes that we have right now are customers who are paying us $4 million or more in annual revenues.

And going forward, so if you look over the next 15 months, say starting with the first quarter of 2014 running into the first quarter of 2015, we don't have any such customer of size that is even due to expire, whether we have renewed them, or think they would renew or not. The only large ones are the two that you pointed out. So LifePoint which is 147,000 square feet, just over $3 million in revenue, I just want to footnote that we have grown their revenues by 59% by moving them into a bigger more expensive space.

We currently have 11% out for strong prospects on that, but it is also in a sub-market that is just around 3.5% vacant, and we are about 3.2% vacant on that. So you can't get a sub-market much tighter than that. We feel quite comfortable about the ability to grow those rents.

And then with regard to T-Mobile in Tampa at Lakeside, we currently have a strong prospect for 100% of that space. I call them a strong prospect. That doesn't mean there is a lease out, that doesn't mean that we have a ribbon-cutting party, but it does mean that we have good activity on it. We don't get that space back until the first of next year. And beyond that, we just don't have anything of size that we have to worry about or wrestle with.

That is helpful. Third question, you talked about 3% growth in asking rents, what are you seeing on effective rents?

I think, Michael, when we look at the leasing CapEx that we are seeing today and we look at the blocks of space that we have, the concession levels, I think it has all subsided a little bit. As demand has increased, and the amount of concessions that we have to give have subsided somewhat, particularly in the pre-rent area, we have to look at it space by space, in terms of the condition from a TI standpoint. But I would expect that we had one of the best quarters we have ever had, in terms of our net effective rents this quarter at 1357. I would love to think that is a trend. We hit a high water mark on this quarter, but I believe that trend will continue to stay up from our previous 5-quarter average.

That's encouraging. Finally, just as we look at sources and uses, explaining the development for next year, how much of your portfolio would you consider non-core, and kind of in that sales bucket in the next couple of years?

Michael, Ed, I think over the next couple of years we haven't given guidance for 2014, but as we have said, we still have a few hundred million of assets that we would like to sell. We have sold $1.3 billion, $1.4 billion at this point in time, so between acquisitions, development and dispositions, our portfolio is dramatically different than from when we started the strategic plan.

I also think that as part of our strategic plan, that as long as we own, let's call it 100 buildings for hypothetical, we ought to rank those buildings 1 through 100, and we ought to be looking at buildings 90 through 100, and say is it time to swap out of those, are the dynamics of the market changing, is there anything changing with regard to that sub-market of the building? How do we trade those buildings for another set of buildings that are more akin to buildings 1 through 10?

So I think it is a constant culling process that we will be a capital recycler as we always evaluate the bottom 10% of our portfolio.

Appreciate the color guys, thank you.

Thanks, Michael.

Thank you. I am showing no further questions. I will turn the conference back over to you, Mr. Fritsch, please continue with your presentation or closing remarks.

Thank you, operator. Again great quarter for the team, a phenomenal amount of capital activity, very good lease prospecting, I appreciate all of the investors and others who are listening in for your continued support. And as always, we are available for any questions you may have after this call. Thank you.

Thank you. Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation, and ask that you please disconnect your lines. Have a good day.