Highwoods Properties Inc (HIW) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Highwoods Properties' second quarter conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. (Operator Instructions). As a reminder this conference is being recorded Wednesday, July 30th, 2014.

I would now like to turn the conference over to Tabitha Zane. Please go ahead.

Thank you, and good morning everybody. On the call today are Ed Fritsch, President and Chief Executive Officer; Mike Harris, Chief Operating Officer; and Terry Stevens, Chief Financial Officer. If anyone has not received a copy of yesterday's press release or the supplemental, please visit our website at www.highwoods.com, or call 919-431-1529 and we will email copies to you. Please note in yesterday's press release we announced the date for our third quarter 2014 financial release and conference call. Also following the conclusion of today's conference, we will post management's formal remarks on the Investor Relations section of our website under the presentation section.

Before we begin I would like to remind you that this call will include forward-looking statements concerning the Company's operations and financial condition, including estimates and effects of asset dispositions and acquisitions, the cost and timing of development projects, the terms and timing of anticipated financings, joint ventures, rollover rents, occupancy, revenue and expense trends, and so forth. Such statements are subject to various risks and uncertainties. Actual results could materially differ from those currently anticipated due to a number of factors, including those identified at the bottom of yesterday's release, and those identified in the Company's 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 an explanation of management's view of the usefulness and risk of FFO and NOI can be found toward the bottom of yesterday's release, and are also available on the Investor Relations section of the Web at highwoods.com.

I will now turn the call over to Ed Fritsch.

Good morning everyone, and thank you for joining us today. At the beginning of the year when we built our initial FFO outlook, it included our expectations for the US economy with assumptions such as: one, the economy would continue its positive trajectory, albeit void of a full blown recovery; two, measured positive job growth would continue, albeit without meaningful growth in real wages; and three, interest rates, while an influential wild card, we presumed that they would remain in check.

Now, seven months into the year, the economy is generally performing as we had expected. Experts currently believe GDP growth in the last nine months of 2014 will be quite respectable. The economy has reported five consecutive months of over 200,000 jobs created, albeit with barely detectable real wage growth. And much to the surprise of a vast number of economic pundits, interest rates are actually lower now than they were at the beginning of the year. While it's hard to predict to what extent the current wave of global economic crisis, such as Ukraine, Gaza, and Iraq will negatively impact our economy, we are pleased with the current US economic environment, and the performance of our markets in particular.

Office leasing clearly wins the second quarter game ball. Our leasing success underscores the strength of our portfolio and our markets. Also year-over-year office employment growth in our markets is exceeding the national average, while new construction remains at historic lows, the volume of available Class A office space continues to shrink, and asking rents are increasing. We are pleased to report second quarter FFO results of $0.80 per share, which includes $0.06 per share of land sale gains. We have again raised the low end our full year FFO outlook, this time from $2.86 to $2.88 per share. The high end remains unchanged at $2.94, resulting in a $0.01 increase at the mid-point to $2.91 per share.

As noted in yesterday's press release, our updated FFO outlook includes our second quarter $0.06 land sale gain, offset by a $0.04 impact from our $300 million unsecured notes offering in late May, and a $0.02 impact from yesterday's disposition. As a reminder, our outlook does not include any aspects of the impact of any potential dispositions, acquisitions, or development announcements looking forward. In the second quarter we leased 1.5 million square feet of office, 50% more than in our prior five-quarter average of 1 million square feet, and the average term was a robust 7.7 years.

As a result of this strong leasing, we have raised the low end of our year-end occupancy outlook 50 basis points, upping the mid-point to 92.2%. Leasing activity is also robust in the value-add acquisitions we made last year, which encompasses 3.4 million square feet. These buildings were on average 81.3% occupied at acquisition. At the end of the second quarter now occupancy was 87.5%, up 620 bps since acquisition. In addition, we expect these properties on aggregate to be over 80% occupied by the end of this year. On the acquisitions front, we maintain our acquisition outlook of $100 million to $300 million. Obviously, the current wall of capital has resulted in a very competitive environment, and cap rates have continued to compress.

In our view, some assets, particularly stabilized assets without significant future upside, have traded at prices per pound out of sync from our view of their risk profile. We will stay true to our mantra of being disciplined allocators of capital, however we do not believe that our discipline will preclude us from being successful in acquiring BBD located buildings at prices that offer upside, whether through lease-up, Highwood-tizing, and/or harvesting operating efficiencies.

Turning to dispositions, we remain focused on continuing the surgical culling of non-core non-differentiating assets from our portfolio. Given the current environment, we are seeing better pricing on our dispositions than originally anticipated. Therefore, we raised the low end of our disposition guidance range from $100 million to $150 million, and the high-end remaining at $175 million. During the quarter we disposed of 16 acres of land for total proceeds of $9.5 million, generating $6 million, or $0.06 a share in total gains. The land is located in the Atlanta airport submarket, which is more conducive for industrial. As you know, we exited the Atlanta industrial market last year, and we are pleased to have garnered the proceeds -- these proceeds with a very nice profit.

Also, as reported in yesterday's release we completed the sale of Research Commons, a non-core five-building office park in the Raleigh area, along with approximately 13 acres of adjacent land, for $58.7 million, and a gain of $11.7 million from the sale of the buildings. Turning to development, our $227 million pipeline includes 950,000 square feet that is 86.7% pre-leased. We are in hot pursuit of additional predominantly pre-leased development opportunities, and therefore will continue to expect to be closer to the high-end of our 2014 development announcements outlook of $150 million.

A key advantage in our development prowess is our 429 acres of well-located, fully entitled core land. As commonly known, multi-family projects across our footprint and beyond have consumed a substantial number of highly desired infill BBD sites. Given this, our land inventory has become even more valuable to the Highwoods story.

In closing, 2014 is shaping up to be a solid year for our Company. We are benefiting from a stable US economic environment, particularly in the Southeast; our higher quality BBD-located portfolio; and limited new supply. We continue to further enhance our portfolio through non-core dispositions, additional forthcoming development announcements, and hopefully success in the acquisitions area.

Mike will now cover operations. Mike.

Thanks Ed and good morning. As Ed noted, leasing activity in our markets remained strong. In the second quarter we signed 139 office leases for 1.5 million square feet of second gen space, and year-to-date we have leased 2.6 million square feet of office. Occupancy in our office portfolio increased 170 basis points from the first quarter to 90.2% at June 30th. GAAP rent growth on office leases signed in the second quarter was positive 14.2%, and cash rent growth continues its positive trend.

For office leases signed in the quarter, cash rent growth was negative 1.3% compared to negative 1.9% during the first quarter. Second quarter CapEx related to office leasing was $29.89 per square foot, with an average lease term of 7.7 years. The CapEx number was significantly skewed by one large re-let, a 175,000 square foot 15-year lease at 5405 Windward Parkway in Atlanta. Excluding this lease, CapEx would have been $22 per square foot, with an average term of 6.7 years. We are very pleased to have achieved net effective rents on second gen office leasing of $12.83 per square foot per year, 10% above the prior five quarter average of $11.68 per square foot per year. Bottom line, while CapEx was higher it was more than offset by upward trending net effective rents.

Turning to our markets, Atlanta's office market continues to strengthen with over 1 million square feet of net absorption in the second quarter. Atlanta has absorbed 5 million square feet over the past year, and market vacancy has declined 12 quarters in a row. Occupancy in our Atlanta portfolio increased 470 basis points sequentially, primarily as a result of the 175,000 square foot lease at 5405 Windward. Moving to Nashville, to quote Moody's Analytics with regards to the city's growth and employment, quote, Nashville's economy is on a tear, close quote.

Net in-migration continues to be a strong positive for the city, and according to the Bureau of Labor Statistics, year-over-year office employment increased 2.7%, almost double the national average. The market's overall vacancy improved 70 basis points sequentially to 9.3%. In JLL's second quarter office outlook for 48 US office markets, only New York City had a lower vacancy rate. Occupancy in our national portfolio was 94.2% at quarter end, up 370 basis points sequentially, and year-over-year asking rents are up 5%.

Quarter end occupancy at The Pinnacle was 89.1%, a substantial increase over the 84.9% occupancy at acquisition last September, and we now forecast occupancy to be over 93% by year-end. The Raleigh market continues to be a true star performer. Here are three examples. First, it reported year-over-year office job growth of 4.5%, triple the national average; second, it ranked number one in Forbes magazine's 2014 list of the Best Places for Business and Careers; and third, a recent study prepared for the US Conference of Mayors reports that the Raleigh metro area's economy is expected to grow above 4% annually through 2020, the second best in the country.

Occupancy in our Raleigh portfolio was 92.0% at quarter-end. We have $161 million of development underway in Raleigh, including the two-building, $110 million global technology and operations hub for MetLife, and the $15 million headquarters for Biologics. Both of these projects are 100% pre-leased, are triple-net leases, and are on schedule to deliver in the first half of 2015. Our fourth Raleigh division development building, the $36 million GlenLake Five project is also scheduled to deliver by the end of the second quarter of 2015, and is 25% pre-leased.

The Tampa economy continues to improve with year-over-year office job growth of 2.1%, compared to the national average of 1.5%. Unemployment at June 30 was 6.2%, just 10 basis points shy of the national average, and a 30 basis point improvement from the first quarter. Occupancy in our Tampa portfolio increased 200 basis points sequentially, primarily driven by the commencement of 78,000 square feet of leases at LakePointe One and Two. We have now backfilled 183,000 square feet, or 57% of the LakePointe space, and have strong prospects for another 15%.

Looking at Kansas City, occupancy in our office and retail portfolio is a robust 95.2%, up 60 basis points from the first quarter. At the end of August, Halls Department Store will vacate the 55,000 square feet it has occupied on the Country Club Plaza for 50 years. While Halls is consolidating their singular department store operation to a property it owns in a different submarket, they recently launched a new retail concept, HMK, and opened the first of its kind on the Plaza. This upcoming department store vacancy is prime real estate within Country Club Plaza, and provides Highwoods with a very exciting re-development and NOI-enhancing opportunity. We will be taking the Halls building out of service given the extensive nature of the repositioning of this asset. The exterior panels will be removed and the building will be stripped back to its frame.

The reconstruction will include a brand new facade, and will be home to multiple new retail shops, restaurants and dramatically improved parking. The total cost for this true re-development are expected to approximate $17 million. When stabilized the annual NOI is projected to be triple the amount previously generated by Halls Department Store. In total this dramatic repositioning will create value and an attractive return for our shareholders. In general we are seeing good leasing activity and improving rental rates across all of our markets. Our divisions are poised to take advantage of this rising tide.

Terry.

Thanks Mike. Total FFO available for common shareholders this quarter was $74.6 million, up $13.6 million, or 22% from second quarter of 2013. This increase was primarily driven by $8.3 million in higher NOI from acquisitions and recent developments placed in service, net of NOI from dispositions; $5.7 million in land sale gains, net of related impact to G&A; and $2.1 million in lower interest costs from lower average rates, slightly higher capitalized interest, and net of the impact from higher outstanding debt balances, plus one month's impact from our bond offering which closed in late May.

These three positive items were partly offset by $1.3 million lower FFO contribution from joint ventures, mostly due to our JV buyouts in third quarter of 2013, and $0.5 million in higher G&A mostly from salaries and benefits. As a reminder, FFO and G&A amounts in our comments exclude property acquisition and debt extinguishment costs, which are disclosed in our press release. We recorded a nominal loss on debt extinguishment, including our share of a JV debt extinguishment in the second quarter of 2014. On a per share basis, FFO for the quarter was $0.80, $0.10 higher than second quarter 2013. The $13.6 million in higher FFO dollars was partly offset by higher shares outstanding this quarter, up 6.7 million, to 93.3 million shares or 7.7% from second quarter 2013, due mostly to equity issuances in the third quarter of 2013.

Average leverage during the second quarter of 2014 was 42.0% as compared to 42.9% during the second quarter 2013. As noted in our FFO outlook, we expect full year 2014 weighted average shares outstanding to be approximately 93.4 million. Second quarter FFO per share was $0.14 higher than the preceding first quarter. This was due mainly due to $0.061 from the land -- to the net land sale gains; $0.049 in higher same-property GAAP NOI, from higher revenues and lower operating expenses as compared to the very harsh weather conditions in the first quarter; $0.023 in lower G&A as first quarter routinely has higher long-term incentive compensation from retirement plan accounting as we discussed on last quarter's call; and $0.006 in higher NOI from acquired properties in development. Same-property GAAP NOI this quarter was much improved over first quarter 2014 as this year's solid leasing momentum is beginning to show in the sequential GAAP NOI statistics.

Turning to the balance sheet, we expect average leverage to hover around 42.5% throughout the year, as we continue funding our net growth on a leverage-neutral basis. During the quarter we prepaid two secured loans totaling $131 million. Subsequent to quarter end we prepaid the $36.9 million secured loan and we have no remaining debt maturities in 2014. We are very pleased and appreciative of the robust support shown by investors for our opportunistic 7-year bond offering in May, which we upsized to $300 million, and priced with an effective yield of 3.36%.

Our prior FFO outlook for 2014 assumed heavier usage of our line of credit and a potential bank term loan. While the difference to FFO per share in 2014 is about $0.04, this opportunistic deal significantly fortified our balance sheet and extended our maturity ladder. As Ed mentioned, our revised FFO outlook is $2.88 to $2.94 per share, which represents a $0.01 increase at the mid-point. While we disclose our expected ranges for acquisition, disposition and new development announcements for full year 2014, we do not include any impact from such investment activity in our FFO per share outlook until such transactions close. This is consistent with past practice.

Operator, we are now ready for questions.

Thank you very much. (Operator Instructions). One moment please for the first question. And we will proceed with our line of Jamie Feldman from Bank of America. Go right ahead.

Great. Thank you, and good morning.

Good morning, Jamie.

I guess looking at your supplemental and the leasing spreads, you have pretty wide diversions across the different markets, some of the markets you mentioned is your better markets were definitely the strongest, but can you talk a little bit more about whether this quarter was kind of representative of what we should see going forward, or is it more lease specific, and how we should be thinking about leasing spreads and mark-to-market going forward?

Well, I think that the volume was a bit extraordinary obviously in part driven by the fact that we had some of the large blocks of space to backfill, and we met with success on those faster than expected, and it impacted the volume of leasing that we did, but on the mark-to-market we think it's fairly representative. We think that cash rent growth has continued to improve. We continue to get annual escalators of 2% to 3% in 99% of the leases that we execute, so I think that when you look at our core buildings that are in BBDs, that it's a representative quarter.

Okay. And what are you seeing on the incentive side? It looks like market rents are going up. What about concessions?

I think the whole package, Jamie, holistically is getting better whether it be concessions, turn-key TIs versus TI allowances, annual kickers, things that are on the margin that typically don't show in supplemental, like afterhours HVAC and signage, and disproportionate parking ratios, et cetera. I think across-the-board as new construction stays at 20%-plus premium to second gen, and new construction remains relatively idle that all of the metrics with regard to the various aspects of a lease negotiation should continue to improve.

Okay. And then you had mentioned potentially development starts moving towards the high end of your guidance range. Can you talk a little bit more about the projects you're potentially working on, and how that lines up with your land bank?

No to the first part. Yes to the second part. But as soon as we have something to say obviously we'll say it. Given the verbiage that we carefully chose for the analysts for the script, we have a fairly high level of comfort. As they say it's not over until the fat lady sings, but the microphone is plugged in and on, and the stage is prepared, so we feel fairly confident that we have some announcements to make, and the announcements will predominantly be on Company-owned land if we're successful.

Okay. And then finally a question for Terry, can you just walk us through your thoughts on capital needs and financing sources over the next 12 or 18 months?

Sure, Jamie. It obviously depends on the relative mix of dispositions and acquisitions, and to the extent that the acquisitions and development draws exceed the recycled capital from selling assets, we would finance that leverage-neutral, as we have consistently said now, and we have the ATM in place for bringing in smaller quantities of equity, and that's perfect for development draws, if we had a really big deal and needed to raise equity quicker, we could go out and do an offering similarly to what we did last year. Our leverage currently is on the low side of kind of the ratings, or the leverage level that we want to operate in, so we have a little bit of runway where we sit here today on our leverage as well. So we feel very comfortable with the future financing ability that capital markets are wide open for virtually all forms of capital right now. So it's not going to be an issue getting it. It's just a matter of letting the developments and the acquisitions and dispositions kind of play out during the rest of the year.

We're also, just as an aside, we were also very pleased with the bond offering that we did in May, as I mentioned in my formal remarks, and that really set us up well from a liquidity perspective, allowed us to pay the line down, and give us lots of liquidity on the line. The impact of that bond deal, as you know, is not in the original, or the guidance that we issued back in April. We hadn't made a decision on anything like that yet, but we saw interest rates beginning to come down, spreads were continued to tighten up at that time, and we made the decision toward the end of May to pull the trigger on a bond deal, and that is partly why the impact on our guidance this year was the $0.04 from that financing transaction that we didn't have in the April guidance.

Okay. That's very helpful. Thank you.

Thank you.

Thank you very much. Our next question is from the line of Brendan Maiorana from Wells Fargo. Go right ahead.

Thanks. Good morning.

Good morning.

Terry, I just wanted to follow up on guidance. So just very high level simplistically thinking about it, I think your FFO average for the back half of the year would be sort of $0.72 or $0.73. Is that just -- let's strip out the land sale gain, take the dilution from the asset sale, and then I think your margins tend to be weaker in Q3 than Q2, and that margin decline would kind of be offset by the occupancy gains that you expect by year-end?

That's right. We have done a lot of leasing, as you have known, in the first -- as we have talked about in the first two quarters. That will begin to start taking occupancy. Some already has, but there's a lot of ramp-up on the occupancy side of that as the next two quarters unfold. So that's exactly what I would say.

Okay. All right. That's helpful. And then just the International Paper development that moved into Q4, but I'm assuming that probably is sort of slated towards the end of the year, so probably not likely to have a big impact in terms of 2014 FFO?

It has a modest impact; you're right, not that much.

Okay great. Thanks. Last one on guidance. I assume the land portion of the Raleigh sale there is no gain or loss associated with that?

That's exactly right. Brendan, the Research Common sale that Ed talked about did include 13 acres of developable land, $3.75 million of the purchase price was allocated by the buyer to the land portion of that transaction, and that gave us basically a breakeven transaction on the land. All of the gain, nearly $12 million, relates to the buildings.

Okay. Great. So Ed or Mike, I was looking back over the past ten years, and you have actually never put a plus-14% GAAP rent spreads. And even over the trailing four quarters, you're plus-10%, which is higher than you have done over a trailing four-quarter basis over the past 10 years. How much of the -- and I think, Ed, you mentioned in response to Jamie's question -- you feel like where your portfolio is marking rents now is a pretty reasonable level going forward? How much of this improvement in terms of where rent spreads are shaking out now, do you think is the improvement that you guys have done in the portfolio versus where your markets are today, versus maybe where they have been historically at least over the past ten years?

This is Ed. And, Mike, feel free to jump in, but I think that would be tough to do, kind of separating salt from sand. We think both contribute to it. We think the term that we secured -- the average weighted term that we secured this quarter obviously influenced, the 7.7 years obviously influenced the GAAP rent growth, because we have the kickers built in, and the longer the term the bigger that GAAP number is going to be, so I don't think that the 7.7 years is the trend, and I'm not sure that's what Jamie was asking. I think he was just saying overall mark-to-market, but given the distortion and the amount of term there, we are continuing to push for more term, and I think the benefits of that are showing up in our expiration schedule, so as we sit here today in July looking at 2015 expirations, we're just over 10%, and the same thing for 2016. So those numbers historically, just given your look back over ten years, have been in the 15% to 18%, 19% range, so the benefits are coming, but I think for us to maintain 7.7 years on a quarterly basis is not likely, and it's in part driven by those large blocks that we had to fill, that we no longer have.

Particularly I mean we talked about the Atlanta transaction, which is a large transaction in its own right, and that was a 15-year transaction. The other large transaction in that same building was an 11-year transaction, Brendan, so we have got good cash and GAAP rent growth in that transaction, and as we continue to talk about our escalations that we're able to get market-by-market, we're able to get them as the market improves we like to push those up close to the 3% if we can. So I think all of that goes into the bucket to contribute to that better GAAP rent growth. 14.2% I think would be hard to say we could get that every quarter, but certainly the trend is moving up.

Yes. That's helpful. I guess what I was sort of trying to drive at is if you felt like it was a lot because of some of the repositioning of the portfolio, and a lot of the acquisitions that you have done over the past several years. That was sort of driving better rent economics. Does that make you feel like maybe you want to get more aggressive in terms of buying those types of assets? Because it does seem like maybe that's not what's driving the rent economics to be better, but if it were, it seems like maybe that would cause you to think about being more aggressive, in terms of acquiring those type of assets. I'm not sure if that's the case or not.

I think that's fair. I think part of the reason that it has improved is that we have made acquisitions along the lines of what you gave in the way of an MO, but I think that now, and this has really changed just within the last 90 to 150 days, it just seems to be even more frothy, so what was aggressive a year ago may be seen as somewhat timid today, and so we have to be careful on how we define aggressive, and how we underwrite so that we can be a little bit more aggressive on our underwriting, but is it in keeping with how rapidly more aggressive pricing seems to have been come. And so yes, our underwriting is a little bit more aggressive than it was a year, a year and a half ago, but it may not be keeping up with the aggressiveness of the way some others are seeing the risk profile, at even more aggressive underwriting. Does that make sense?

Yes. That's very helpful. You mentioned kind of last 90 to 120 days it seems like maybe things have ratcheted up even more. Any sense of where cap rates have moved over that time frame?

Yes, I think that the compression is pretty obvious, and it's most evident in the CBD or the BBD infill property that has embedded parking, et cetera. We have seen those numbers in a couple of cases be high 5s, so it's broken the 6%. We think that is a very aggressive number, even for a trophy asset. But where we have seen it, it's been even confused by the fact that the buildings have some heavy concentration of a single customer, and/or there are some really unique uses, specialized uses within the product. So for good stuff we're seeing high 6s to low 7s. For the trophy buildings, we have seen it now break 6 down into the 5s.

Okay. Okay. That's great color. Thanks.

Sure. Thanks, Brendan.

Thank you very much. We'll get our next question from Dave Rodgers with Robert Baird. Go right ahead.

Yes. Good morning. Question on the development pipeline. It sounds like for the second half of the year, Ed, that you guys have obviously some very specific projects that hopefully you will be able to announce. But I guess more broadly, are you seeing a swell of development negotiations that it could carry on into 2015 as well? And I guess as a part of that, you have been successful with relocation. Are you seeing tenants outgrowing space, or simply just looking for upgrades in the market? Maybe a little more color around what those discussions are involving.

Sure. A couple of good points you made there. And I may not take them in the exact order that you presented them, but as the markets continue to tighten because business is decent, and because of the absence of new spec development because of the pricing gap between first and second gen being anywhere from 20% to 30%, we think that those who are in need of space, to your other point about businesses are growing, and obviously we have captured that in the almost 1 million square feet that we have underway now. Build-to-suits are now becoming much more part of the dialogue because of necessity. I think if we just go back a year or two ago, build-to-suits were part of the dialogue, but part of it was necessity, but part of it was also a desire to consolidate from multiple locations into one, a relocation from one region to another, or an understanding that they're paying a premium because that's what they want to do to change their culture, their personality, their MO, or their personality to their client base, employee retention recruitment, et cetera.

Now given how markets are becoming tighter, and particularly when you look at Class A space in the better locations it's even tighter, out of necessity build-to-suits are becoming more of a conversation. More part of the conversation, not solely, because there are still class -- second gen blocks that are available, just not nearly as many. And the last thing I would want to touch on is your word swell. I don't see a swell of it. I see a good living can be made on it, but I don't see a swell of it. That may come, but I think that given the time it takes to deliver, that second gen rents will grow and contract that 20% to 30% gap to something materially less than that, and then there won't be the delta between first and gen, and then we will start to see more first gen.

That's helpful. Thanks. Maybe on the asset sales too, you talked about, I think in your opening comments, better pricing than you thought maybe going into the year. Was that better pricing specific to those assets? And I didn't hear if you addressed this, but specific to those assets, or do you think if you came out with additional properties over the course of the next year or two that pricing is just materially improving for some of that older product?

Door number two.

All right. Fair enough. And last maybe on Tampa, you made some comments about it, but can you go into maybe a little bit more detail in and around Tampa where you still have some availability to lease, and the activity that you're seeing in that market?

Sure, just kind of holistic down to micro. We see Tampa improving. It is a little bit late to the party, and it's certainly suffered more than some other markets, given its dependency on the housing industry, and all of the services that support that, but Tampa has made the largest forward jump on the recovery clock, if you will, that JLL publishes. And so it's coming; it is just late to the party, and it's more specifically on the backfill for the PWC space, the 319,000 square feet at LakePointe One and Two.

As we sit today we're 57% backfilled, and we expect to be north of 70% inked by the end of the year, so we have seen decent movement on that. It hasn't been as rapid as what we have seen in Nashville or Atlanta, but in both Nashville and Atlanta it moved exceedingly fast. We had assumed some of those backfills would take greater than two years, and it took less to up to one. Nashville, a lot faster; 5405 in Atlanta did exceedingly well. So I think we're in pretty good shape with these large backfills, and I think that Tampa is coming into its own.

Yes. Dave, this time last year, six months ago, we were taking a swing at some potential home runs, some big blocks that didn't really materialize in the market, and then Dan Woodward and his group down in Tampa have done a good job hitting solid singles and doubles with transactions in the 15,000 to 30,000 square feet, which we like because it does create some diversity of tenancy that goes into those buildings, which was really helps us staggered lease terms, good credit. So it's taking a little bit longer, but I think generally we're pleased with what we're seeing now in the way of velocity.

All right. Great. Thank you.

Thanks, Dave.

Thank you. And we'll get to our next question from the line of Jed Reagan with Green Street Advisors. Go right ahead.

Morning, guys. Just wondering if you looked at the Cousins acquisition in Charlotte, and if your thesis on that market has evolved at all in recent quarters, and maybe just also what kind of look through you think the trade might suggest for your portfolio?

Yes. Hey, Jed. It's Ed. As you all know, we look at anything that's generally in our backyard, and that may be from Texas up to DC, that we think could be a viable asset for Highwoods to own, and that certainly includes Charlotte, and we certainly took a good look at that building. We decided for us it wasn't something that we could aggressively underwrite, but that doesn't mean it's not right thing for our friends in Atlanta. I mean every company has their own philosophy and tactic, so I'm not -- and risk tolerances. So I am not being negative on what they did. I'm just answering your question, yes, we looked at it and we decided not to aggressively pursue it.

To the latter part of your question about how it -- what the implications are for the rest of our portfolio, I think it goes back to my comments earlier with regard to cap rate compression. We're seeing cap rate compression continue, and the better location, the better the asset, the more it is contracted. The more that there is a value-add to opportunistic assets, the less it's contracted.

Great.

I'm sorry. When you all and others look at NAV, you put together a mosaic of data points, and certainly Fifth Third ought to be part of that mosaic.

Okay. Just to be clear, for the right opportunity maybe you would consider making a move in Charlotte?

Oh, yes. We looked at -- yes. We look at Charlotte. There are some things there that we would need to be comfortable with. But, yes, we look at Charlotte, along with a few other markets that we're not presently in.

Okay. Great. On another market in Atlanta it sounds like there's a private competitor now building on spec in Buckhead, and perhaps another developer lined up behind them. Just wondering about how concerned you are about that supply, and if you think it could dampen fundamentals, and then maybe just a broader view of if there's any supply coming online in other markets, if that is of concern at all?

A broader answer first. We're not having to take Ambien about anything that we're hearing about that may, or is coming out of the ground, so we don't have a heightened level of concern anywhere. Atlanta construction as a percent of market is currently less than 0.5%. If the project you talk about comes out, which all indicators are that it will, there's a dramatic -- underscore dramatic -- price difference between it and what we experience in our two buildings next door. So we see that as beneficial to what we would be able to do with quote, unquote, neighboring rents. And given the average weighted average lease term that we have in place in those two properties in that 1 million square feet, the new building would have to sit for a long time, or they would have to pay some monumental buyout fees in order to move customers from those two locations into the new building in addition to the upside, the delta in the rent spread of where we sit, to where we think they need to be in order to be successful in renting that building.

Okay. Thank you for that. And you guys had talked previously about pushing rents kind of in the 2% to 5% range across your markets, and just wondering with some of the strength you're seeing recently if that range has moved up in any locations?

I think on average, Jed, that we're comfortable with the 2% to 5%. In the at-a-glance that we put out, we reflected almost literally by market what we expect to see. I think that if you take a blend of the assets that we hold in each market, and so that's blending everything from the quality of Two Alliance to Century Center, which is a different price stratification, I think we're comfortable with that number, and we don't see it leaping, but we see it to be -- year-over-year it should continue to get better.

And I think submarket by submarket, within one we may say that it's 2% to 5% in a particular market. But a strong BBD submarket, we may find a building that has low inventory, and we might come in even higher than 5% on a particular building, but on average across this I think the range is still good.

And like you note, Jed, we experienced greater than 20% rent growth in the re-let of 5405, so to Mike's point it's really building by building, submarket by submarket, but I think the 5% in general, the 3% to 5% in general is good when you just look across the entire footprint.

Okay. Great. And just last one for me if I may. It looks like the back half of the year could be pretty busy for you guys on external growth if guidance is any indication, and on the acquisition side just wondering what the opportunity set is looking like, and based on some of your comments about pricing getting pretty aggressive, if you think it's likely that acquisition guidance ends up closer to the low end of your range, or where you kind of actually get to, that is?

Well, we tightened the range a little bit, so I think that's as far as we probably want to go on what we want to say about that. I would want to underscore that on development announcements, obviously we wouldn't get any FFO benefit from them immediately. We've got the construction period to go through on that. Given that we did say that we would be near, or we expect to be closer to the high-end rather than the low end of our dispos, obviously there is an impact there from a dilution perspective, but we think the pricing is very good. The development yields stay attractive but we don't get that money day one.

And then on the acquisitions, we left guidance the same, and we're continuing to pursue things, but we also need to be sure that we're identifying assets where we believe that there's upside, whether it be through operating efficiencies, leasing up or Highwood-tizing. And I think that as I said in my scripted remarks, we've had terrific success on being able to achieve additional leasing on the value-add properties, and I think you gave an example in the script of the 3.4 million square feet we bought last year, and how we have moved it well over 600 bps already, and expect it to move even more before the end of the year. So you are -- underwriting, as I mentioned earlier to Brendan or Dave, that we are more aggressive on that. We'll find out if our aggressiveness on that is keeping up with the aggressiveness of the market and the pricing of it.

Okay. Great. That's helpful. Thank you.

Sure. Thanks, Jed.

(Operator Instructions). We will proceed to our next question from the line of Vance Edelson from Morgan Stanley. Go right ahead.

Hi, thanks for taking the questions. I have just a few. First, given the state of competition out there for acquisitions which sounds like it may have picked up some more in your markets, who are you typically bidding against? Are there any new categories of entrants, and is it the same cast of characters that you will be looking to sell to as you work toward this year's disposition guidance?

So in backwards order, no, it's not traditionally the same set, because we're selling from the bottom of the deck, and buying adding to the top of the deck, so it's a little bit different. A lot of it depends on the deal itself, but I can attest that the breadth of competition that's bidding for high-quality assets is eclectic. We're seeing everything from publicly traded REITs to non-traded REITs, to institutional money, sovereign money. It's quite a collection, and it's not any one sector of investor. When we go to selling, we're also seeing a wide variety, but it's not exactly the same cast of characters, character to character. More there's an insertion, some of them are there, but there's also the insertion of local buyers, some small regional funds, et cetera.

Great. Okay. And then I joined the call a little late, so I might have missed it, but with the trends in asking rents generally improving, could you comment on the likely future direction of TIs and LCs over the next several quarters?

Yes, Vance, the way that we answered that earlier was just the deal as a whole is improving, so whether it's something on the margins, for example, a disproportionate amount of parking, or building signage, or after hours HVAC, to the next category of TI allowances versus turn-key, to annual kickers, whether it be 1.5% or 3%, amount of free rent, whether it be one month per year or half a month per year, the whole mosaic is improving. It's improving not at a very -- not at an exceedingly rapid rate but certainly one that's definable, and so we see that across-the-board the different metrics that make up a lease transaction are improving.

Okay. Got it.

This is Mike. Just one quick add to that. As we're seeing somewhat TI construction costs going up a bit, and tenants asking for this CapEx, or this allowance or turn-key, we're able to accommodate but when we do that we ask for more term. When we get more term, obviously we're getting better GAAP rent. So it all kind of tends to feed off of each other. So that's, I think, part of what's going to be indicative of the trend going forward.

Okay. That's helpful. Then just a random question on one vertical. Could you comment on how the law firms on your tenant roster are doing? Some of your peers have given mixed signals. Would you say the law firm prospects are generally improving with the broader economy, or is there anything else at work there?

Well, I would say that -- two things with regard to law firms. Obviously with regard to how they consume space is the old model, the new model, so that's the first thing that we look at with regard to a law firm. Are they in a new model space, or an old? In the old, the biggest differentiator, other than the library, is the fact that lawyers historically were heavily dependent on an admin to construct and put them in a position to make it deliverable to the client. Whereas today's attorney does that themselves with cut and paste and computers, et cetera.

So there's still some dependency, but nowhere near the amount to get the the deliverable out the door. So is the build-out of it the new, or the old?

Second is, we do see continued movement of attorneys from one firm to another, and some consolidation of firms which should not be ignored. That's an important aspect of dealing with law firms.

And then third, I think it's fair to say that as the economy gets better and business gets better, that there are more deals for them to be involved in, and more issues for them to be involved in, et cetera. So it's not a sector that we have concern about. We're seeing some firms hiring, while others are merging or having to contract. But, all in all, I think that it's not a business sector that we're losing any sleep over.

And law firms are using space, whether it's new space, new formats as a recruiting tool, to have these young guys; and not dissimilar from tech firms and others, they are creating an environment for their younger lawyers, so we have seen a little bit of that as they have started to renovate their space.

Okay. Makes sense. Thanks, guys.

Sure. Thanks, Vance.

Thank you very much. And we have no further questions at this time. Please continue with any closing remarks.

Okay. Thank you, Operator, and thank you everybody for dialing in. As always if you have any additional questions, please give us a holler. Thank you.

Thank you very much. Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. We ask that you disconnect your lines. Have a great day, everyone.