Highwoods Properties Inc (HIW) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Highwoods Properties conference call. (Operator Instructions). As a reminder, this conference is being recorded today, Tuesday, February 11, 2014.

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

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 and supplementals, 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 this call will include forward-looking statements concerning the Company's operations and financial conditions, including estimates and effects of asset dispositions and acquisitions; the costs and timing of development projects; the terms and timing of anticipating financings, joint ventures, rollover rents, occupancy, revenue, and expense trends and so forth. Such statements are subject to various risks and uncertainties. Actual results could materially differ from those currently anticipated due to a number of factors, including those identified at the bottom of yesterday's release and those identified in the Company's 2013 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 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 and thank you for joining us today. 2014 economic forecasts are out, and as we digest and overlay them on what we see from the perspective of our industry and our markets, the upshot seems to be that the US economy continues its positive trajectory, albeit at a pace less robust than liked; that measured job growth continues; however, it is choppy and not yet accompanied by meaningful growth in wages; that interest rates remain core to crystal balling the economy's future; however, given all the competing influences, their movement will likely be mild in 2014; and lastly, it is obvious that the blame for the shallow economic trajectory emanates from the district. Unfortunately, the Jamaican bobsled team has much better odds of winning gold in Sochi than Washington is in getting its act together in 2014.

2013 was a banner year for Highwoods. We delivered solid FFO of $2.84 per share, a 4% year-over-year increase and $0.03 above the high end of our original guidance. We also completed over $1 billion of investment activity, exceeding the high end of our guidance for each investment category: acquisitions, dispositions, and development. We acquired $549 million of high-quality office buildings, encompassing 3.4 million square feet in our market's BBDs.

In addition to significantly improving the quality of our portfolio, these acquisitions offer material upside being on average 81.3% occupied at closing. At year end, occupancy for these assets was already up to 85.5%, and we expect to grow occupancy in these assets to 90% by year-end 2014.

As a reminder, in 2011 and 2012, combined we bought $605 million of BBD assets encompassing 3.5 million square feet. Occupancy in these assets has increased from 86.5% at closing to 93.5% at year-end 2013.

In 2013 we sold $286 million of non-core assets, including exiting the Atlanta industrial market and selling eight of our nine remaining office buildings in Greenville.

We also announced $206 million of development starts and placed in service $51 million of 100% pre-released development. Our pipeline is now $227 million and is 86% preleased. This includes the $15 million, 100% preleased build-to-suit for Biologics that we announced last month.

We further fortified our balance sheet, raising $290 million of equity and ending the year with leverage at 41.4%. We also increased unencumbered NOI to 77% and earned ratings upgrades from both Moody's and S&P.

Turning to operations, during last year, we had a strong 3.8 million square feet of second generation office space leased, and we continued to garner longer lease terms.

Our fourth-quarter operating results were solid. We delivered $0.74 per share of FFO and leased 838,000 square feet of first- and second-generation office space, including 408,000 square feet of relets, our highest level of relet activity since the second quarter of 2006.

Average lease term exceeded six years. GAAP rent spreads were up a stout 8.5%. And while cash rent spreads were negative 5.4%, they are moving in the right direction.

Late in the fourth quarter, we sold $89 million of non-core assets, including eight multitenant office buildings in Greenville; our remaining property in Pinellas County, Florida; and 50% share of our multifamily JV development in Raleigh. The multifamily sale, which is in the Weston PUD of our Raleigh division, was a good win for our shareholders. We contributed non-core land to a joint venture for a multifamily development, which resulted in meaningful FFO gain for our Company -- 5 times the gain had we sold the land outright.

The ongoing rapid absorption of multifamily in Weston underscores the evolution of the Weston PUD into a mixed use live/work/play environment, which enhances the value of our Weston-based office holdings. We currently own 745,000 square feet of office in Weston, which is 95.2% occupied, and we have an additional 502,000 square feet under development that is 100% preleased, including our build-to-suit for Biologics, a new customer for Highwoods. Upon completion, we will have over 1.2 million square feet in one of the greater Raleigh area's best BBDs.

Turning to 2014, we believe our markets will outperform the national average in terms of job and population growth and net absorption. Supply continues to tighten, particularly for large blocks of space, and we anticipate seeing fewer concessions and improving rents for Class A office. We expect to benefit from these positive trends, which should result in a productive year for Highwoods with FFO between $2.82 and $2.94 per share, excluding the net impact of any potential acquisitions and dispositions.

As in 2013, we expect to be a net investor in 2014, continuing to build our presence in the BBDs and enhancing the quality of our portfolio through acquisitions, dispositions, and development. We are forecasting $100 million to $300 million of acquisitions, $100 million to $175 million of non-core dispositions. We are also forecasting $75 million to $150 million of development announcements this year. As large blocks of available Class A space in the BBDs continues to shrink, more companies are moving development higher on their list of viable options to consider.

We will continue to remain disciplined allocators of capital and maintain our strong commitment to a conservative balance sheet.

The collective work of the last few years is improving our portfolio; acquiring value-add BBD properties; exiting additional non-core assets; and launching heavily preleased development gives our Company significant upside potential. As we backfill a few sizable same-store vacancies, lease up recent acquisitions, and deliver our well preleased development pipeline, our shareholders should see meaningful upside in HIW as we head into the next couple of years.

In closing my comments, I applaud all of my coworkers for their efforts throughout 2013, and I think our board for their continued active support.

Also, on behalf of everyone at Highwoods, I express our collective gratitude to you, our shareholders, for your continued confidence in our Company.

And I will turn it over to Mike.

Thanks, Ed, and good morning, everyone. 2013 was another productive year for Highwoods in both leasing and capital activity. The mix of acquisitions and dispositions that Ed noted had a negative impact on year-end occupancy; however, they further enhanced the quality of our portfolio. In addition, the value-add acquisitions have created significant lease up opportunities.

In 2013 we signed 566 office leases, representing 4.6 million square feet of first- and second-gen space. The average term for second-gen office leases signed in 2013 was a strong 5.7 years.

Looking at the fourth quarter, we leased 791,000 square feet of office, over half of which were new deals. New deal square footage was almost 40% higher than our five-quarter average. This significantly greater percentage of new deals resulted in higher-than-normal office leasing CapEx of $19.95 per square foot. We did garner an average term of 6.1 years for office leases signed during the quarter, also above our five-quarter average.

All of our markets reported positive office absorption in the fourth quarter, and over the past year, these same markets combined have benefited from 8.3 million square feet of net office absorption and very little competitive construction. Asking rents are up year over year in virtually all of our markets, anywhere from 2% to 5%.

Training to our markets, Atlanta is benefiting from a better job market and lack of new supply. The market absorbed 1.4 million square feet of space in the fourth quarter. Increasing demand, limited supply, and a notable lack of large blocks of Class A office space bodes well for our leasing prospects this year.

In the six months since acquiring One Alliance Center, we have increased its occupancy from 67% to 81%. The scheduled October 1 expiration at 5405 Windward accounted for the entire difference in fourth-quarter same-store occupancy compared to the third quarter. The repositioning improvements at Windward that Ed described on our last call have now been completed, including the addition of a buzz-generating 3000 gallon aquarium in the new collaborative lobby that recently aired as an episode on Discovery Channel's TV show, Tanked. We have strong prospects for over half of the space, and as a reminder, we define strong prospects as companies that have toured the space multiple times; test fits are underway; and we have exchanged economic terms.

The Tampa market is also experiencing good growth and was recently ranked by JLL in the top 5% of the fastest-growing metro areas in the country. We're pleased to have signed a long-term lease for 31,000 square feet at LakePointe, and are focused on reletting the remaining 213,000 square feet of vacancy. We currently have strong prospects for an additional 30,000 square feet and prospects for another 135,000 square feet.

Raleigh's office market continues its steep trajectory, driven by solid job growth in technology, financial services, biotech, and clinical research organizations. We are pleased to have relet 100% of the 4301 Research Commons laboratory office building. This property is part of a five-building, non-core office park that we are currently marketing for sale.

As expected, we're garnering strong activity at the 1.3 million square feet we acquired in CBD Orlando in July at 82% occupancy. The streamlined leasing process from these now being wholly-owned has helped us capitalize on the improving market, and occupancy has already grown to 84.6%.

The national market continues to be strong as evidenced by year-end unemployment of 5.5% versus the national average of 6.7%. In addition, Nashville was recently dubbed a standout performer by Wells Fargo. Our Nashville portfolio is performing well with occupancy at 95.2%. We're pleased to have placed the 100% preleased 203,000 square foot LifePoint headquarters development in service in December. We have already relet 9% of the 147,000 square feet LifePoint has vacated. This space is in the Maryland Farms/Brentwood submarket, which is consistently one of the tightest and most desirable submarkets in Nashville. We just got the space back last month, and we already have a substantial pool of prospects.

Activity at The Pinnacle has been good. In the four months since acquiring this asset, we have increased occupancy from 84.9% to 87.2% at year end.

2013 was a solid year for our Company, and we're optimistic 2014 will be as well. Our markets continue to strengthen, and the outlook is for more economic growth and job creation. Terry?

Thanks, Mike. Total FFO available for common shareholders this quarter was $69.0 million, up $12.7 million, or 22.6% from fourth quarter of 2012. This increase primarily reflects $10.4 million higher NOI from JV buyouts and other acquisitions net of dispositions; $3.2 million from our share of a JV merchant build gain net of income taxes; and $1.6 million in lower interest costs from lower average rates and higher capitalized interest, partly offset by higher outstanding debts balances.

These positive items were partly offset by $1.2 million lower FFO contribution from joint ventures, mostly due to our acquisition of seven assets from two of our JVs in the third quarter, $800,000 in higher G&A, and $400,000 in lower GAAP same-property NOI.

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 $0.74, $0.06 better than fourth-quarter 2012 and $0.03 better than third-quarter 2013.

Weighted average shares outstanding this quarter were 93.0 million, up 10.0 million, or 12%, from fourth-quarter 2012 due to issuance of shares under our ATM program and our August equity offering. We have not issued any ATM shares since before the August offering.

As noted in our FFO outlook, we expect full-year 2014 weighted diluted shares outstanding to be 93.4 million, which includes some modest ATM issuances to fund our accretive development pipeline.

Same-property GAAP NOI was $400,000 or 0.5% lower this quarter compared to last year. Cash NOI without term fees was $1.1 million, or 1.5% lower, reflecting a 0.3% lower average occupancy in the same property pool, largely from the October lease expiration at 5405 Windward in Atlanta and the May expiration at LakePointe in Tampa. Excluding Windward and LakePointe, the rest of the same property pool performed well in the fourth quarter with GAAP and cash NOI growth of 3.0% and 2.3% respectively.

On a full-year basis, the rest of the same property pool had annual GAAP and cash NOI growth of 1.7% and 3.5% respectively.

G&A this quarter was $9.1 million, or $800,000 higher than fourth-quarter 2012, mostly due to modest salary merit increases and higher healthcare premiums. We also recorded higher deferred compensation expense, which is fully offset by higher other income. So no bottom-line impact to FFO.

Turning to the balance sheet, during 2013 we had approximately $300 million of net investment funding, excluding recurring CapEx. We also raised $295 million of common equity through our ATM and the August offering. With these activities, we ended the year with leverage at 41.4%.

In the fourth quarter, we recast our $475 million revolving credit facility and $200 million term loan. Along with other debt refinancings and debt assumptions on acquisitions, the weighted average interest rate on our debt is down to 4.3% or 12% lower at year end versus a year ago. So, despite slightly higher data balances as we have grown the Company, our interest expense was actually $1.6 million lower quarter over quarter and $3.4 million lower year over year.

We have provided our initial 2014 FFO outlook at $2.82 to $2.94 per share, which at the midpoint, is a 2.9% increase from 2013 without including the one-time $0.0316 merchant build gain in 2013.

As a reminder, while we forecast expected ranges for acquisition, disposition, and development activity, we do not include any impact from such activity in our FFO outlook until such transactions close. This is consistent with our past practice.

The outlook also assumes that our $133 million of 2014 debt maturities will be refinanced with either unsecured bank debt or secured debt at rates ranging from 1.8% to 4.0% depending on the term and type of replacement debt.

While we do not give quarterly FFO outlooks, as you may remember, under GAAP certain annual long-term equity grants must be expensed at the grant date, rather than over the normal three- to four-year vesting period for employees who have met the age and service eligibility requirements under the Company's retirement plan. As a result, first-quarter G&A is typically higher than subsequent quarters because the Company's annual equity grants are customarily made in March.

In addition, fourth-quarter 2013 results included $1.1 million of NOI from dispositions that closed late in the quarter.

Finally, as you may have noticed, we made some routine SEC filings yesterday and this morning. Under SEC rules, S-3 shelf registration statements sunset every three years. It has been three years since our last shelf filing, and as a result, last evening we filed two new S-3s with the SEC. The first was a joint shelf filing by the REIT and the operating partnership that registers an indeterminate number of debt securities, preferred stock, and common stock for future capital markets transactions. With this new shelf in place, we also needed to refresh our ATM program, which we filed via Form 424(b) this morning. This new program allows us to sell from time to time up to $250 million of common equity at market prices, less a 1.5% discount. As you know, keeping an ATM program in place is one of the many arrows we like to keep in our capital-raising quiver.

The second S-3 filed last evening registered the resale of common stock underlying outstanding OP units. This allows long-standing limited partners the continued flexibility to redeem their OP units in exchange for freely tradable stock. Most of our OP units were issued in transactions that closed more than a decade ago.

Operator, we are now ready for questions.

(Operator Instructions). Jamie Feldman, Bank of America Merrill Lynch.

I was hoping you could provide a little bit more color on the guidance in terms of if you think about the largest moving pieces in the portfolio, the four big vacancies that happened this year and hit last year, and then also the largest acquisitions you've done over the last year, can you talk a little bit more about what you are assuming for each of those?

Yes, Jamie, I can and Terry will give you a little more color on it.

With regard to the acquisitions, we have moved the occupancy on them fairly substantially. So, if you take what we bought from 2011 through year-end 2013, it is right at 7 million square feet. And at the time of purchase, it was 84.0% leased. At the end of 2012 -- at 12/31/2013, we had moved it to 89.5%, and we are projecting it will be 92%-plus at year-end 2014. So that is for the acquisitions.

On the four expirations that you mentioned, I will take them one at a time. At LakePointe One and Two, we have just signed a lease that we've got 31,000 square feet of that inked. So we now have just right at 200,000 square feet yet to lease there. We have strong prospects for another 30,000 to 40,000 square feet there and then prospects for another 130,000 beyond that. And Terry can give you some feel for how much of that we have factored into the guidance.

On 5405, which we just completed the repositioning on at the end of the year as we did at LakePointe One and Two, we have strong prospects for over half that space. We really just now have finished the dramatic repositioning of that building, both interior and exterior. So Jim and Mike are both fairly upbeat about the prospects there.

And then the other two, Lakeside we just got back. We're going to invest about $2.5 million redoing that lobby. So we will lose about six months of time as far as making that into a war zone because it is a single-tenant building now that we will be doing some dramatic changes on in the lobby and the entranceways.

And then at the two LifePoint buildings -- or the two multitenant buildings that LifePoint is coming out of that went into their headquarters building that we built for them, we have leased about 13,000 square feet of that already, and we just got it back at the end of January. And we have about 100,000 to 135,000 square feet of prospects for that space and remind you that that submarket is less than 4% vacant. And we have very nominal improvements we will make there, so -- or we need to make there.

Jamie, the only thing I would add would be that in the guidance for FFO for the year, we are expecting to make good progress on releasing the vacancies based upon the good level of prospects that Ed just summarized. But they will be some delay between even getting the leases signed and when they would go into occupancy and begin to put FFO points on the board, so to speak. So it is a ramp up during the year. And even by the end of the year, we would not be back to the same level of FFO from those properties from what we had when they were still fully occupied.

So we will take some time to get them into occupancy. But as we go into 2015, I know we didn't give guidance on 2015, but we are expecting that the leasing that we are doing in 2014 will even hit in a bigger way in 2015 versus 2014.

So a long way of saying it is going to ramp up during the year; light in the first couple of quarters; turning to put more dollars in as we get into the second half and fourth quarter; and then getting closer to full run rate in 2015.

Thank you.

Was that a long enough answer, Jamie?

It is. But I guess what I'm trying to figure out is, how high a bar did you set for yourself to get to your guidance? Because you talk about strong prospects. You talk about prospects. And I completely get it. It is even if you sign something in 2014, it probably doesn't matter until 2015, which helps your growth rate in 2015. But I just want to see internally, how much risk did you guys take in the guidance in terms of getting stuff done?

We don't want to write a check we can't cash, we once heard somebody from BofA say to us, and we certainly haven't set a bar that we have -- we're going to pull a groin muscle on trying to get over. I think that the bar that we have set is manageable and our typical conservative nature.

Okay. And then can you just talk also about in 2014 your expirations? What are your largest expirations? And just as you think about the portfolio, are there any larger expirations to come as we've seen over the last 12 months?

Yes, the shorter answer to that is no, we don't have large expirations to deal with in that magnitude at all. In fact, the 2014 LifePoint is it. And, again, that is the customer that we grew revenues in occupancy or footprint substantially on by delivering their headquarters building. And the spaces that they are coming of are in a submarket that is less than 4% vacant.

We don't have another expiration of size until really fourth quarter of 2015, and we feel that that customer has a high probability of renewing, in part because of where the building is, and its geographic location is important to them, aside from the fact that we are a really good landlord. Because I think the geography of that is very important to them. So really the next largest of size is well under 100,000 square feet.

Okay. Great. Thank you very much.

Josh Attie, Citi.

Can you talk about the pipeline of build-to-suit opportunities, maybe how much activity you are tracking in dollars, and how much the pipeline could potentially grow over the next 12 months? It is $215 million today. And if you execute on things that are close, just trying to get a sense of how much activity there is.

The guidance we obviously published is $75 million to $150 million for the year. We're working with quite a few customers. We have a number of conversations ongoing. As we have said in the past and it still holds true that it remains a difficult arena for projecting how many we will sign and when they will sign, but we feel our land inventory is crucial to a number of these conversations. We are in conversations across six or seven markets. We feel like the guidance that we provided of the $75 million to $150 million is a very fair number to look at. It's just tough to say who is going to sign and who is not. But we are doing schematics and exchanging lease terms, et cetera, for a number of prospective customers. And I think what aids us is that as the number of large blocks of Class A space continues to contract, the ability or the opportunity to go to or for us to deliver build-to-suits just continues to increase. There is very little sizable, large blocks of available Class A space. And I think Biologics, that we announced just a few weeks ago, is a very good example of that where we have the opportunity to build them a 75,000 square foot, 100% preleased building because it's very difficult to find a block that size of Class A space available in the market.

Thanks. That is helpful. And can you also talk a little bit about yields? I think you mentioned in the context of funding development through the ATM program that you were getting attractive yields. And without talking about any project individually, can you just talk generally about how yields are trending in the development pipeline?

Sure. And I appreciate the way you worded that because we don't like to publish the yields because that puts us at a disadvantage when we're out trying to do build-to-suits and negotiate other development projects. But we can tell you that we continue to, on average, from the development pipeline that we started at the start of the strategic plan through today, we average right at a 9% year-one cash yield. And then we have typical escalators anywhere from 2% to 3% in each of those lease instruments.

And does that factor in the value of the land at a market value?

It does. So where we build on our own land, it attributes -- the incremental spend is really an additional 70 to 80 bps better because we don't have to obviously go out and buy land that is already on the books. So we get another 70 to 80 bps of incremental benefits.

In addition, Josh, I think it is important to note that the majority of the transactions that we're doing that are build-to-suits are open-book deals. So we get a return on what the spend turns out to be. So if either it changes made during the construction process, et cetera, our yield is on whatever cost to develop at the end of the day.

Okay. Thank you very much.

Vance Edelson, Morgan Stanley.

So following up on a recent question, when you think about your competitive positioning and your ability to respond quickly to new office demand either with existing space or using the land bank, which markets do you think you are most strongly positioned in relative to other players, and which markets do you think you would face greater competition?

Well, Vance, I think this is going to sound smart-alecky. I don't mean for it to, but I think where we have these big blocks of vacancies is where we have the advantage for capturing them just because like in Westshore, there's not another block of 100,000 square feet that is readily available. So I think we have, if you will call that disadvantage, a leg up on the competition because we have it.

So in the second gen, when we have these larger blocks of space, yes. But if we go into other markets like Pittsburgh where we have good occupancy, Kansas City, other places, there we don't have the opportunity to do a couple hundred thousand square feet in any one place or 100,000 square feet in any one block.

And then if you look at where our land bank is, obviously that is where we feel like we have a good advantage. And then the level of activity in our best markets like Raleigh, Nashville, Atlanta seem to be where we have more of the development opportunities.

Okay. Fair enough. And then on the land bank, maybe just share with us some of the signs you are watching for before making the decision to go ahead on spec -- places like Bay Center 2 in Tampa. Any targets in terms of leasing commitments, or is the construction leadtime such that you really just need to use your judgment and anticipate some on when to break ground?

Good question. I think it's is all predicated on specifically the submarket and what we would build. For example, in GlenLake, in Raleigh, where we decided to pull the trigger on a building that is 25% preleased, everything else that we own in that park that we own is 100% occupied. So we needed to create some space for our existing customers to grow in. We are able to secure 25% preleased. It is in a wonderful BBD. And so for us, it made good sense to go and pull the trigger on that, and we will soon start having to steel up. We have done a lot of in-groundwork on that, but it is 2015 before it delivers, so we have a lot of time to do additional prospecting.

We just need to study the submarket, see who the probable customers are who have rolling expiration dates in and around the time that we would be able to deliver the building and what the nuances of that particular submarket are at this point in time.

So we are clearly studying that, but we're also making sure that we don't deliver a plethora of spec space in our portfolio. And we're very fortunate to be mid-80s preleased on a very sizable development pipeline that we have underway right now.

Vans, this is Mike. You also mentioned, since you mentioned Bay Center in Tampa and as a reminder with the large blocks that we have at LakePointe One and Two and Lakeside, we are able to market that space at competitive rates relative to what a new spec office building would be with new construction. So that is a competitive advantage for us. And that also tends to be a little bit of an impediment for someone to come out with a lot of spec space until we are able to absorb that space.

Okay. Thanks for that. And then one more question, if I may. Could you share some thoughts on your remaining industrial ownership? It is already pretty well leased. Do you view that as indicating fewer growth opportunities ahead so it's a candidate for further sales, or do you think the high occupancy means that real pricing power is around the corner so you want to hold on for that?

Vans, we think that -- well, obviously now we're down to where we have about 2.5 million square feet of industrial in the triad division, mostly Greensboro, or all Greensboro, actually.

We have one 200,000 square-foot building left in Atlanta, and we culled that out of the portfolio that we sold last year for very specific upside reasons, we feel, with regard to the land that surrounds the building that we have there and what is going on in that immediate submarket.

But we still have land that we can build industrial product on, and we feel like in Greensboro that given the scale of that market that the combination of office and industrial gives us a significant advantage as far as market share and deal flow given the size of that market.

So we're very happy with Greensboro and our position there, and we think that we do have rent growth potential and development potential for industrial in that market.

And our development land in Greensboro, which is principally in Enterprise Park, is very well located in proximity to the airport. In fact, we got some good activity just looking out there right now. So, as Ed said, I think we feel pretty good about that going forward.

Terrific. Thank you.

(Operator Instructions). Dave Rodgers, Robert W. Baird.

Maybe for Ed or for Ted either one or both, maybe talk a little bit more on the acquisition side and maybe more broadly, what is in the pipeline today or what would you be interested in broadly? Are there more value-add deals still to come to market or could even be stabilized growth plays? Give us the color of what you are thinking about and how you play that in the current recovery?

Sure. Dave, as you know, we have a wish list by division of what we would like to own, and we also a fair amount of time and shoe leather to look at other markets that we would consider going into that makes sense for us.

As we look at 2014, we gave guidance that is in line with what we have done over the last three years. So we feel like it is in sync, but we don't expect the pool of prospects to be as deep or distressed assets. So, for example, we bought Pinnacle and One Alliance from the lender. So that was the $300 million in the two that we bought from lenders. We expect that activity to be much more shallow than what it has been in the past.

As far as cap rates, we're seeing low- to mid-7s for decent assets, and we are seeing mid-6s for the better institutional quality trophy assets.

We think that the volume of competition is chasing assets right now has seemed to have increased from what it was in the last, say, 24, 36 months. So that is a factor. And if we feel like the pricing is getting out of sync with the risk profile, we will back away from the table, and we've done that.

So I think it's very competitive for the best assets; less distressed. But we do have a wish list of properties that we are looking at and we are in conversations with, and we will hopefully fall well within the guidance range that we provided.

Maybe for Mike, Mike, can you talk about more in-migration into the markets that we are operating? I think of Tampa and Bristol-Myers moving down there. Are you seeing more evidence of that? I mean obviously the build-to-suit pipeline, that is some of it, but can you talk about maybe just in the straight-up leasing of the existing assets?

Sure. Well, first of all, I think the in-migration we consider our top markets, all are good, but markets such as Nashville, Raleigh, Atlanta, is where we are seeing most of the in-migration from the standpoint of corporate relocations. This is something we saw back in the early 2000s when the Sun Belt was the recipient of that. So that's starting to pick back up. I think Tampa, we hope, will also be a recipient of that. There have been a couple of situations where there are -- the economic development arm of, say, Hillsborough County has identified prospects for this. Of course, it could be competing cities where there it might be Tampa versus Dallas versus Charlotte, whatever.

So Tampa seems to be in the mix on a lot of these. So that is encouraging for us that we will see some activity. And, again, we will be the recipient of that in our big blocks down there. Because that is really from a pricing standpoint, we should be most competitive and actually with the location being in the Westshore area, also be poised to do that. And I think --.

And the last question maybe for Terry, I just want to go back to your comment in the prepared remarks about -- did you say secured debt -- I didn't know if you maybe misspoke or I heard that right -- and talk about how you would use secured debt? Would that be construction financing, or are you thinking on the straight-out portfolio and how you would be thinking about using secured debt?

Sure, Dave. What I was talking about, we have $133 million of secured debt maturing in 2014, and we haven't made a decision how we will handle that, but it will come in one of two flavors, most likely. It will either be we will refinance it back into the secured market, or we could take it out with unsecured, and most likely that would be in the form of some form of bank term-loan financing.

So we haven't made the decision, but I just wanted to give you some sense that we have those two options and are thinking about those, and I gave a range of rates. The lowest rate that we could refinance at that would be if we just put those loans on our line in the short run, and that would be in the low -- mid-1s all-in. Or if we went back longer term secured, you could get closer to 4% if we wanted to take it out close to 7 or 10 years.

So it's not a huge amount of debt to begin with. It is only $133 million on a $5 billion balance sheet, but just to give you a sense what we were assuming for the range of the FFO guidance.

Okay. That is helpful. Thank you.

Brendan Maiorana, Wells Fargo.

Ed, so just a question on development and maybe Mike mentioned the good in-migration in Nashville, Raleigh and Atlanta. Are you seeing signs or is the rumbling that new construction, new supply is likely to pick up in some of those markets and maybe those three specifically, but in any other markets, any color on that would be helpful?

Sure. I Think it is fair to say that there is rumbling. I'm not sure how much of that we will see. I do think that those who do it, it is going to be important to be early to do it, and our view is that there won't be a lot of it, that there is not enough confidence that the markets would be able to withstand a significant amount of spec space -- any one of those or any one that we are in, and I'm not sure that is not true countrywide, that the markets and the level of uncertainty just aren't going to withstand a tremendous amount -- an onslaught of spec development.

But we, obviously, have brought some to market in Raleigh. There has been rumblings about it in Atlanta and Nashville, but we haven't seen a whole lot of it happen. There is one project out in cool Springs, which is about 20 minutes south of Nashville in that submarket. There has been others in the press in Atlanta, but we haven't seen anybody turning any dirt there. So it's really nominal in scale at this point. And our view is that if it does start, that we don't expect that there will be a tremendous amount of it.

Okay. That is helpful. And just -- you guys talked -- you gave a lot of good detail in terms of the prospects that you have for some of the big vacancies in the portfolio. Can you maybe just shed a little bit of color on at LakePointe I think you had previously said you thought you had a pretty good prospector or a couple of prospects to get a little more traction by year end of 2013, was that a deal that fell out of the pipeline? Did they go somewhere else? Did they go to a competitor, or did it just not materialize at all?

Door number three. It didn't materialize. We had an agreement on business terms. We had done some test fits, and we did not lose it to a competitor. It just -- the entity made a decision not to execute on the expansion. And so that is what happened with that, and we disclosed that when we put out our press release on December 20 when we talked about some dispositions we had achieved. And then we tried to provide you with some comfort by saying, yes, we lost that, but we were successful in 100% relet of the 4301 building, which was a good deal to get executed.

It is by no means -- you know, Cricket is at these buildings now. We didn't have that one ring buoy of a prospect is disappointing that it went away. But, like I said, we've signed 31,000. We have another 30,000 to 40,000 of strong prospects, and we have over 100,000 square feet of other prospects. So it wasn't four or five prospects that totaled up to over 100,000 square feet that all chose to go to brand X or do something different.

That is helpful. And then at Windward, I think we had spoken last conference call that there was -- I'm not sure if it was a single prospect or two for about 125,000. It sounds like there's still at least strong prospects for 125,000. Just any sense -- is that your building and one other, or are there a dozen other buildings that are competitive with this tenant or tenants that are looking at space?

That one is more door number one. A limited number of options that they are considering down to, and we feel we are absolutely going to hunt on that, wouldn't you say, Mike?

Yes, I think and there are actually now I guess three what we would consider good prospects, Brendan, for actually more space than we have. So we are hope you're going to have that tough task of which ones do we pick because we can't do all three. That would be an enviable situation.

But they are largely disappearing, particularly up in the North Fulton submarket, where this is. I think there was an announcement last week about a project that is nearby that a company committed to it more than we had.

And we didn't have adequate space for --

We didn't have adequate space to handle it anyway. But that took that big block of space off the market, and that was one that we were constantly competing with. So all-in-all, we feel pretty good that the number of options are getting down to where we are one of two or one of three. And with the improvements that we have talked about in my script and Ed's talked about, we're getting really good reads from the folks that walk through it. So I think we feel pretty good about that big space.

Okay. That is great. Last one for Terry. The average shares for the year, I'm not sure exactly what the timing is to get to the average, but if I assume mid-year convention, it looks like maybe you've got a little less than 1 million shares on the ATM that you would issue. That is probably somewhere around $30 million or $35 million of equity coming in the door relative to the full development pipeline is about $175 million to finish the current development pipeline. And I'm not sure exactly what is budgeted for spend during 2014, but is it fair to think that leverage maybe moved up a little bit as we go throughout the year based on your current guidance plan? Because your leverage is probably towards the low end of your comfort range now.

That is fair. I think your math is pretty good, Brendan. We do have --

He is a Carolina grad.

Okay. We do have some ATM proceeds coming in during the year. I think the $93.4 million is about $400,000 higher than where we were right at the end of the year. So we're averaging in $400,000 over the course of the year. And we did end up the year at a low leverage, as we mentioned, 41.4%. We probably, I think, plan to bring it up slightly during the year. I think your point is valid. But we're going to stay very comfortably within our conference zone, and our average leverage during 2014 should be a little bit less than our average leverage was in 2013, but up a little bit from where we ended the year.

Okay. Great. Thanks. Ed, we can cheer together tomorrow night.

Yes, amen to that.

Brendan, a quick follow-on comment on your question about the competing subset. The space that I alluded to that was basically off the market was 360,000 square feet. So that is pretty much gone. So that was a nice chunk to take away.

Good for the submarket.

Good for the submarket. And also, I owe you an apology. I think in my script I alluded to you as Wells Fargo. I had a little speech slip there. Sorry about that.

Okay. Thanks, guys.

Kyle McGrady, Stifel Nicolaus.

It is actually Aaron Aslakson from Stifel. A question for you just in terms of CapEx, and it looks like it is coming back up again this quarter as you guys alluded to in your comments. Considering all the move out that you guys had last year and all the new assets that you brought on that were not stabilized, how would you expect CapEx to trend on a per-square-foot basis per year this year, and how does that relate to your dividend coverage?

This is Ed, Aaron. We ended the year 2013 with $10.5 million CAD positive. We expect to be in that range or twice that amount in 2014. So we really don't have any concerns -- we expect to be in that same ZIP code or better for 2013 than we were in 2013.

And this is Terry, Aaron. What I would also add is that when we look ahead to 2015 when we have the development projects beginning to deliver, they have virtually no recurring CapEx for years. It's just pure cash flow increase. So the coverage is getting increasingly better. The $10.5 million that Ed mentioned was better than last year, and we are expecting 2014 to be somewhat better than 2013 and 2015 to be better than 2014. So all of that is trending in the right direction.

Also, Aaron, as we look at these -- when you look at the upgrades we made in the portfolio, we're getting obviously, higher quality portfolio, higher quality tenants. We're also looking at getting longer lease terms and with longer lease terms gives us typically little bit higher CapEx.

This quarter, as we pointed out, there were a couple of transactions that skewed that number. But for that, those transactions, we would have been down more in line with the range of where we were on our five-quarter average.

But if there is a trend, it is largely because we're trying to get more term, which is good, and also the quality of assets dictates the higher improvements.

One footnote on that, we are actually succeeding in doing that -- getting longer term. I think when we look at it, when we rolled out the strategic plan, we said that one of our goals was to get longer lease terms. And when we go back and look at what was in our supplemental when we ended 2014 and launched the plan, we had 15.5% or more expiring in some years. And now you look at our expiration table and the highest number is 12.4%, and that is in 2017.

So we have clearly made good progress on the length of lease term that we have gotten. And I think that will start to show in volumes because we can't do the same volume because we don't have the same number of deals that are rolling on a per-annum basis.

Right. Right. And then could you just discuss in terms of the leases or the releasing that you have to do in the portfolio, the big vacancies, which ones are going to be second gen versus first gen?

It is all second gen. If I follow your question.

It would be all second gen?

Restate your question.

We have some that is possibly first gen, for example, in Pinnacle, but most of ours, the big blocks, is second gen.

Were you referring, Aaron, to the vacancies that we have?

Yes.

Can you restate your question?

Yes, I am referring to the larger vacancies like Windward, for instance.

Oh yes, yes, yes.

You have done a lot of work at the asset, but is that a second gen or a first gen?

No, we always consider that -- we consider anything that has had a customer in it before -- in other words, unless it is the first time we're building out the space since the general contractor delivered it, whether we just bought it or we have owned it since we have built it for 15 years, any space where we are building out after a customer has been in that space, we define that as second gen. It is only first gen when it is truly first gen, and that is when the general contractor has completed the building. So that includes acquired vacancy or same-store vacancy. It is second gen.

Okay. So yes, so Pinnacle would be also second gen is what you are saying.

Unless that is the one case where if the space has never been built out since the general contractor delivered the shell, then it is first gen. And so Pinnacle would be the only place that has some of that that I can think of. Two Alliance a little bit --

Have a little bit but not much.

But Windward, LakePointe, the LifePoint backfills, that is all second gen for us. And anything in One Alliance or Meridian or PPG, when we retenant it, for us it is second gen.

Okay. Excellent. Thank you, guys.

Michael Knott, Green Street Advisors.

Ed, on your comment about not pulling a groin muscle on reaching your full-year guidance number, just be careful. Now that we are under ObamaCare, you don't want to deal with that. (laughter)

A question for you. Your Q4 leasing volume looked like it slowed a little bit. Is that any indication that something that you're seeing or just more timing and maybe seasonality?

Yes, I think it is a couple of things, Michael. One is what I commented to Aaron on with regard to -- we have been successful in getting longer lease terms. So if you look at the December 31, 2004 supplemental for lease expirations and how much we had of percent of annual revenues expiring in a year, we had two years that were 15.6% -- the coming year and the year after that. If you look at that same table in our most recent supplemental that we published last night, the highest number is 12.4%. And so we're clearly getting longer lease terms, so that would attribute to the volume.

The other is I do think that there was some seasonality in what occurred in fourth quarter. And to try to give context to that, as an example, we are just shy now of the 50% mark, let's say, of first quarter of 2014, and we have already inked 75% of what we inked in all of fourth quarter of 2013.

Okay. That is helpful. Appreciate it. And then just thinking about market rent growth in your various markets, looking ahead to 2014, Mike, I think you might have mentioned a number. I'm just curious if you guys can talk a little bit about where you think you might be able to push rents and just maybe the magnitude of what your markets might see in 2014?

Yes, I think I mentioned, Michael, 2% to 5%, depending on which markets we're looking at. And I would say that the obvious ones that we alluded to were vis-a-vis Nashville, Raleigh, Atlanta, possibly Pittsburgh because you've got a very tight downtown market there where we are -- we hope to have the opportunity to push rents.

And even in our other markets, worst case they are flat and not down. So I think that I would say in at least half our markets we will be looking to try to push the envelope to the high end of that range. As the competitive subset basically with new construction stays on the sidelines and things get tight, we're able to do this. And even when you would start seeing a few markets like Nashville, which Ed mentioned where you got the two spec projects, one in downtown, one in Cool Springs, their asking rates are substantially higher than second gen rates. So that actually allows us to push our rents a little bit more where you have that because we have got room to push it and still be competitive against that.

So just to be clear, the 2% to 5% is an average encompassing most of your markets, or is the 2% to 5% for the best markets?

I would say that 2% to 3% would be like Orlando, Atlanta, Pittsburgh, and the 3% to 5% would be more Nashville, Raleigh, Richmond, Tampa.

Left to the other markets.

Yes, and then Kansas City retail is just a better number all the way around.

Okay. And then just on your operating expenses for 2013, full year, same-store, I think they were flat. Just curious if you can just make a couple of comments on your expense control and maybe are you seeing any pressure there looking forward? I know part of that gets reimbursed, but just curious -- flat seems a pretty good outcome compared to a lot of your competitors.

Well, we, once again, applaud our folks out in the field for doing a great job, Michael, of folding expenses. I think if there is any pressure this year, we will be looking at things like snow removal. We have had a pretty tough winter for January and February. So we still should be within our forecast, barring a really bad second half of February or March. But that is one number that could have a little bit of a driver. And, of course, the worst of those markets is Kansas City where we have the highest level of recovery from a CAM standpoint. So hopefully that will be less impact.

There is some question about utility expenses, particularly with the EPA starting to shut down coal-fired plants and what impact they may have on utility expenses going forward. But this year we feel like we're going to be pretty good.

Yes, we feel we are well within, given the vortex and the ice and 285 becoming a parking lot and all that, we've taken all that into consideration. We have looked at the storm that is coming. We still feel that we are well within the norm of what our operating budget is for 2014.

Okay. Thanks. And then just last one for me. You guys have done quite a few acquisitions in Buckhead here lately, and we understand that one of your public competitors has a historically challenged building on the for sale market. Just curious if that is on the wish list.

Well, we look at everything that comes to market, Michael, and so we'd rather not publish our wish list because we feel that creates competition in some places and may tip our hand. So our best answer to that is, in any of the submarkets that we are in, we look at anything that comes to market to either pursue it or understand it.

Okay. But you are not necessarily full-on Buckhead after the couple of acquisitions you have done there now?

We still like it.

Yes, we still like it.

It is still a great market, and I think some of this is a question of, was the problem the operators/owners versus the market? That is something we feel like we do a better job than others. Hate to sound boastful about it.

Okay. Thanks.

And there are no further questions at this time.

Okay. Thanks, everybody, for dialing in. And of course, as always, feel free to follow up with any additional questions.

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