Highwoods Properties Inc (HIW) 2014 Q3 法說會逐字稿

Operator: Ladies and gentlemen, thank you for standing by and welcome to the Highwoods Properties conference call. During today's presentation, all participants will be in a listen-only mode and afterwards, we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded Wednesday October 29, 2014. And I would now like to turn the conference over to Mr. Tabitha Zane. Please, go ahead, Ms. Zane.

Tabitha Zan: Thank you and good morning, everybody. On the call today are Ed Fritsch, President and Chief Executive Officer, Mike Harris, Chief Operating Officer and Mike Mulhern, Chief Financial Officer. Please visit our website at www.highwoods.comor call 919-431-1529, and we will e-mail copies to you. Please note, in yesterday's press release we have announced the dates for our 2015 financial releases and conference calls. Also, following the conclusion of today's conference call, we will post senior management 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 conditions including estimates and effects of acquisitions and dispositions, the costs and timing of development projects, the terms and timing of anticipated financings and occupancy, revenue and expense trends. This call will also include management's outlook for 2015 full-year FFO and takes into account YTD results including $0.06 per share in land sale gains recorded in the second quarter.

As a reminder, our FFO outlook does not include any effects related to potential acquisitions and dispositions that may occur after the date of this release as well as unusual charges or credits such as debt extinguishment and property acquisition costs. Such forward-looking 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 risks of FFO and NOI can be found toward the bottom's of yesterday's release and are also available in the investors relations section of the web at Highwood.com. I'll now turn the call over to Ed Fritsch.

Ed Fritsch: Thank you, Tabitha. Good morning, everyone, and thank you for joining us today. First, please welcome Mark Mulhern who joined our senior leadership team in September with the retirement of Terry Stevens. Terry was an extraordinary co-worker for the past 11 years and his work and dedications to Highwoods will always be held in the highest regard. As you know, Mark served on our board and audit committee before transitioning into Terry's role. He has a strong and broad accounting and finance background having held roles from Auditor with PWC to CFO with Progress Energy. Mark is an excellent fit for our team and our culture and we are excited to have him onboard.

Before covering third quarter results, a brief comment about the overall environment. Early autumn brought some surprises to the financial markets including the return of volatility. Many prognosticator's expended the wind down of the Feds' qualitative easing program would lead to higher interest rates. This obviously did not occur largely because of economic sluggishness in Asia and Europe, compounded by complex international issues such as ISIS and Ebola.

This has led to an increased demand for US treasuries and to more muted forecasts for long-term interest rates. Conversely on a relative basis, the US economy has been strong with an improving employment picture, low oil prices and a strengthening dollar. As a result, in the trenches we're seeing a steady demand for our product. Now, on to third quarter results. 2014 continues to be a productive year for Highwoods Properties as we've delivered solid leasing, increased occupancy, strong and effective rent growth, and expanding well pre-leased development pipeline and productive net investment activity.

For the third quarter, we reported FFO of $0.71 per share and FFO of $2.16 per share for the nine months. We have tightened our 2014 full year FFO outlook to $2.89 to $2.91 per share which excludes the one cent net impact from acquisitions and dispositions that we closed in August and in September. At the mid point, this is directly in line with our July outlook which, as a reminder, excludes the impact of future investment activity.

Strengthening market conditions, declining vacancy and a robust competition for high-quality real estate assets have significantly influenced our investment activity in 2014. The growing size and strength of our development pipeline is an example of our versatility in light of a heavily competitive acquisition environment and the pace of our dispositions was also influenced by the strong demand for commercial real estate.

During the quarter we announced $362 million of investment activity including the expansion of our development pipeline by $115 million through the addition of two well pre-leased projects, both of which are on company-owned land. A $176,000-square-foot 100% pre-leased build to suit for laser spine institute in Tampa and a 203,000 square-foot 76% pre-lease sister building to the recently delivered life point build to suit in Nashville where AIG will be our anchor customer. Including these two projects, our $349 million development pipeline spans five markets encompassing 1.3 million square feet and is 85% pre-leased.

The projected stabilized gap yield on this pool is approximately 9%. We continue to have positive discussions with a number of prospects and are optimistic our pipeline will continue to expand over the next few months. Having already reached the high end of our earlier outlook for 2014 development announcements, we have increased the high end of our range from $150 million to $250 million. As I mentioned earlier, we took advantage of the continued strong demand for real estate assets selling $150 million of non-core assets or non-FFO gains of $36 million.

Subsequent to quarter end, we sold our remaining Atlanta industrial building, a 200-square-foot property, and an adjacent industrial track of land for a total of $11.4 million. We expect to sell up to additional $15 million of non-core buildings before year end. On the flip side of the frothy real estate marked, is that competition for institutional quality assets remains extremely competitive and we have seen cap rate compression. In our view, assets without significant future upside are trading at prices out of sync with their risk profile.

As evidenced with our September acquisition of the 82.1% leased One Bank of America Plaza in CBD Raleigh, we are focused on harvesting opportunities to acquire BBD-located buildings at prices that offer upsides through lease-up, rent growth, Highwood-tizing and/or operating efficiencies. Bank of America plaza certainly fits these criteria. We acquired this 17-story 374,000 square-foot multi-customer building for $92 million, 25% below estimated replacement cost. Our investment includes $8.3 million of planned Highwood-tizing. This building will provide solid NOI growth.

We will provide 2015 outlook with the release of our fourth quarter results consistent with our historic practice. That being said, the very good work done by our team will provide meaningful NOI upside as we move into 2015. First, $178 million of development will be delivering during 2015. In addition, we will have a full year of NOI from the international paper build to suit which will be placed in service by year end 2014.

Second, we will continue to garner NOI upside from our relatively recent value-add acquisitions, and third, same store NOI growth will be strong as occupancy grows particularly as T.I. construction wraps up and new customers take possession of larger vacancies. We were very pleased with our progress this year as we continue to build a firm foundation for a strong 2015. Mike?

Mike Harris: Thanks, Ed, and good morning. Our third quarter was solid with 1.3 million square feet of first and second gen office leasing. Office occupancy at September 30 was 90.6%, up 140 basis points year-over-year and 40 basis points sequentially. At quarter end, average in place cash rental rates across our office portfolio rose 3.4% from a year ago. Cash rent growth on office leases signed in the third quarter declined 4.1%, driven in part by backfills signed at Lake Point in Tampa.

Gap rent growth on office leases signed was positive 3.5%. We are very pleased to achieve net effective rents on second gen office leasings, of $14.14 per-square-foot per year. More than 15% above the prior five-quarter average of $12.26 per-square-foot per year. Net effective rents have increased each year this year a function of our higher quality BBD focus portfolio, strong brand and greater negotiating power as vacancy in our portfolio continues to shrink.

Turning to our markets, Raleigh's economy is in full swing with office employment growth 3.7% year-over-year well above the national average of 1.7%. Net absorption in the quarter exceeded 500,000 square feet, the highest quarterly figure since the third quarter of 2007. In total, 1.4 million square feet year to date. We're taking full advantage of the robust economy in Raleigh where we have three development projects underway.

Two projects, MetLife and Biologics encompassing half a million square feet are 100% pre-leased and are on schedule to deliver over the course of next year. The third project, GlenLake V encompassing 166,000 square feet and located in our 100% occupied GlenLake Park is 25% preleased. Activity has been good and we expect preleasing will eclipse 45% by the end of the year. As a reminder, GlenLake V is scheduled to deliver by the end of second quarter 2015 and pro forma to stabilize in the second quarter 2017.

The sequential change in occupancy in our in-service Raleigh portfolio reflects the acquisition of One Bank of America Plaza which was 82.1% leased at acquisition. Atlanta's office market continues to strengthen with over one million square feet of net absorption in the third quarter and the year-to-date net absorption of 3.6 million square feet. Occupancy in our Atlanta ops portfolio was 88% at quarter end, up 110 basis points year-over-year 50 basis points sequentially.

Asking rents are up in average a 6% to 7% year-over-year. At One Alliance Center, leasing has been strong resulting in occupancy of 84.4% at quarter end, up over 1,700 basis points in the 15 months since acquisition. We expect the occupancy of our Atlanta assets to increase steadily through the end of 2015. With office employment growth of 3.5% year-over-year, double the national average, the Nashville economy continues to grow at a pace that places it in the top 10% of US metro areas according to our recent Cassidy Turley market report.

Occupancy in our national portfolio was 96.4% at quarter end, up 170 basis points year-over-year and 220 basis points sequentially. Year-over-year asking rents are up 5%. Quarter end occupancy at The Pinnacle at Symphony Place was 94.8%, a substantial increase over the 84.9% occupancy at acquisition just last September and occupancy is forecasted to be 98% by year end.

Last month, we announced a new development project in Nashville. Seven Springs West. This 203,000 square foot lead certified multi-customer office building will be located in the highly desirable Brentwood sub market, a BBD. AIG has pre-leased 76% of the building which is expected to be completed in the third quarter of 2016. Currently our Seven Springs park encompasses 373,000 square feet that is 96.8% occupied.

While the recovery in Tampa has been slower than many of our other markets it is bouncing back as evidence of the continued contraction of large blocks of available space. A highlight for our Tampa division was completing the back bill of 90% of the space PWC vacated at Lake Point 1 and 2. Since our July conference call, we have signed four leases totaling over 100,000 square feet, all of which is scheduled to commence by the end of the first quarter of 2015.

Another highlight was being awarded a new headquarters for Laser Spine Institute in the Westshore sub market, Tampa's most prominent BBD. It's 176,000 square feet, 100% pre-leased office building being built on Company owned land will be delivered by the end of the first quarter of 2016. Ed outlined why there are sound reasons to be optimistic about 2015.

One more reason starts with the sizable renewal we announced last week of 199,000 square-foot lease on favorable terms with Vanderbilt University in Nashville. Based on annual revenues, this was by far our largest lease expiration in 2015. This renewal is reflected in the expiration table in our supplemental, but not on a leasing statistics page. Inclusive of this renewal as we sit here today, only 9.2% of annualized revenues are scheduled to expire during 2015.

I now turn it over to the rookie. Mark?

Mark Mulhern: Thanks, Mike. And good morning, everyone. It's a pleasure to be part of the Highwoods team. Total FFO available for common shareholders this quarter was $66.3 million, up $2.2 million or 3.4% from the third quarter of 2013. This increase was primarily driven by $2.7 million in higher NOI from acquisitions and recent developments placed in service, net of NOI lost from dispositions.

Also $1.3 million in lower interest costs from lower average rates and higher capitalized interest net of the impact of our bond offering which closed in late May, and $0.8 million in lower G&A from lower incentive compensation partly offset by higher salaries and benefits. These net positive items were partially offset by $2 million lower FFO contribution related to joint ventures, mostly due to the joint ventures we bought out in the third quarter of 2013, and half a million in lower interest and other income due to the repayments of mortgages receivable in the first quarter of 2014.

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.

On a per share basis, FFO for the quarter was $0.71, the same as the third quarter of 2013. The $2.2 million in higher FFO dollars was partly offset by higher weighted average shares outstanding this quarter, up 3 million to 93.7 million shares from third quarter of 2013 due mostly to equity issuances in 2013. As noted in our FFO outlook, our forecast assumes full year 2014 weighed average shares outstanding of approximately $93.6 million.

The primary variances in FFO per share versus the second quarter of 2014 of $0.80 per share are as follows. 6.1 cents from the net land sale gains from the second quarter. 1.8 cents in NOI loss from dispositions, 1.2 cents in higher interest expense. Again, mostly from the May 2014 bond financing. And 1.1 cents in lower same property GAAP NOI from seasonally higher utility expenses partly offset by an increase in average occupancy.

Offsetting these decreases were 1.4 cents in lower G&A from lower incentive compensation and 8-tenths of a cent in higher NOI from acquisitions and development. Turning to the balance sheet, we ended the quarter with leverage of 41.6%, down from 42.4% at the end of the second quarter of 2014. During the quarter, we prepaid a $36.9 million secured loan and have no remaining debt maturities in 2014. As Ed mentioned, we have updated our FFO outlook to $2.89 to $2.91 per share from $2.88 to $2.94 per share in Q2.

As Tabitha mentioned, we do not include any impact from potential investment activity in our FFO outlook until such transactions close. This is consistent with our long-held practice.

Our 2014 full year FFO outlook obviously takes into account year-to-date results including the $0.06 per share in land sale gains recorded in the second quarter. Before we take your questions, as you know, I was at the board table over the last few years as Terry and the team executed the strategy to further strengthen the balance sheet and earn improved ratings from the rating agencies.

These moves had the full support of our board and we will continue to adhere to our strategy of maintaining a flexible and conservative balance sheet. As you heard today, the Company is in very good shape. We intend to fund our continued external growth, especially our robust development pipeline, and our modest debt maturities in 2015 with a combination of disposition proceeds, debt, and equity including through our ATM program.

I'm excited to be part of this great team and I look forward to meeting many of you at NAREIT next week and other investor events in the coming months. So, Operator, we are now ready for your questions.

Operator: (Operator Instructions). And our first question comes from the line of Dave Rodgers with Robert W. Baird.

Unidentified Participant: Good morning. It's Matt here with Dave. In the quarter you had a nice spike had your net effective rents for leases signed in the period, the best buy I would imagine over three years. Could you maybe talk about what was driving that increase?Was it the overall health of your markets or maybe just a mix, and what do you expect going forward?

Ed Fritsch: Hey, Matt, it's Ed. We've seen a pretty good trend of that number increasing quarter over quarter and we give the primary attribution of that to the improvement of the portfolio as we continue to churn assets, something that we've been doing for quite some time in the improvement of the portfolio. So it's a combination of having sold assets with lower net effective rents, acquiring and developing assets with higher net effective rents, the value-add on acquisitions we've been able to increase occupancy at higher rents and then certainly the overall marketplace just being in better condition. As all landlords went for a period of time where we didn't get to see the negotiation baton with the customer and now we have firm grasp on that. So I think those things come together to substantiate why we're seeing that steady trend.

Unidentified Participant: That's helpful. Thank you for that.

Ed Fritsch: Sure.

Unidentified Participant: The next question, One Bank of America Plaza was your first acquisition in over a year. Are you starting to see more opportunities that fit your investment hurdles or are you gaining more comfortable with the underlying fundamentals that might allow you to be more aggressive on the acquisition front?

Ed Fritsch: On acquisitions it's pretty broad topic there. We're clearly seeing a very competitive environment. If you look at all that we bought in the each of the last three years, 2011, 2012 and 2013, we invested amounts that were substantially higher than where we are year-to-date today. We're seeing that low interest rates and this unbridled sea of capital that's out there continue to cause cap rate compression. But to more specifically answer your question, we're definitely in the hunt. We are remaining disciplined underwriters. I would say that it's fair to say that we've lowered some of our return expectations or hurdles given what we're seeing now as far as the strength in the duration of the strength of fundamentals and the fact that new construction is still relatively dormant.

We have a very good acquisition team. I would say one of the better ones out there. I think that our team does an excellent job with pre bid due diligence. We all invest time and understanding all the attributes of the sub markets and asset before bidding. And you can be assured that we are and thoroughly evaluating every opportunity that comes to market. With specific regard to One Bank of America Plaza, we said in the comments, it's a building that happens to fit all criteria. The occupancy is in the low 80s. We project that we'll clip better than 90% by the end of next year. There's opportunities to Highwood-tize it from the BIs perspective. There's an opportunity to increase rents there and there's some operating efficiencies on the expense side that we feel that we can capture. So it checks all the attractive boxes for us.

Unidentified Participant: Great. Thanks Ed. Appreciate the color.

Ed Fritsch: Thanks, Matt.

Operator: Our next question comes from the line of Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.

Jamie Feldman: Great, thank you, good morning. I know you gave some color on the call but if you could talk more about your stronger outlook for development starts?Are these all build to suit?Are some of them spec?What markets? And is it all on your own land?

Ed Fritsch: Good question, Jamie. So holistically just with regard to development, we're real pleased to have $349 million underway that's 85% preleased and covers five different markets. To put your question in perspective just with what's in the pipeline, 84% of the monies being invested today are on Highwood's own land. We're in a number of conversations for development. The preponderance continues to be heavily anchored or 100% preleased build to suit projects. Majority of it remains on company-owned land. We have 429 acres of land that would support $1.1 billion of new development.

We've been saying all along that development is hard to predict. Lots of conversations but it's hard to predict when the buzzer will go off on the oven and you can pull it out. But I would say that we are comfortable enough to increase the high end of our 2014 guidance by $100 million based on various conversations we have ongoing right now and in hopes that the buzzer goes off on at least a couple. If you take the $349 million dollar of development we have underway, divide it by the 7 buildings, it just has to come out to $49.9 million, let's call it $50 million. So, our average is 50 so I think it's fair to say that we continue to see good opportunity in the 175 to 200-square-foot range buildings.

Jamie Feldman: Okay. And then, to Marks comment before in terms of financing. I assume the comments in terms of using the ATM and using dispositions would apply to the new pipeline as well?

Mark Mulhern: Yes, Jamie, it's Mark. I think one of the advantages we had and Ed went through the development pipeline is I think we're in very good shape, have a good strong balance sheet, have flexibility about raising capital and I do expect to continue what Terry and the team have done here and that is use a variety of sources for capital. That's disposition, the debt markets, it's the equity markets and the ATM program has been very good to us in the numbers we posted today so I would expect more of the same going forward.

Jamie Feldman: Okay. And then, looking across your markets, it looks like Raleigh was the one with some occupancy decline and I know you had asset sales too. Was there anything beyond acquisitions and dispositions that moved that occupancy number down?

Mark Mulhern: You're right, the main thing is the acquisition number. We bought Bank of America, that's 370,000 square feet and was low 80s occupancy. That was the most impactful aspect of that and then we had a couple of customers that did move out that weren't of significant size but we did have a couple of customers move out, one to a build a suit downtown.

Mike Harris: And Jamie, this is Mike. We've already got good activity for backfill for a substantial amount of that space so our leasing folks are all over it and I would expect that in the next few quarters we'll be making significant progress on bringing that back up.

Jamie Feldman: Okay. And I guess along those lines my last questions, can you just refresh us where you stand on backfilling the major vacancies in the portfolio, what's left to do?

Ed Fritsch: Very little. We're done at 5405 we're done at 2800. The 4301 building at Research Commons we did and sold. With regard to Life Point, we've backfilled all that they came out and we have backfilled about half of the Corazon space which moved out of about 50,000 square feet and expanded into a significant component of what Life Point came out of and we have another prospect for the in the majority of the remainder of that. Really, the only hole that we have left is Lakeside which is 91,545 square feet. And we had said that what we wanted to do to that building was have a little bit of a bobcat demolition derby inside. So we've spent a lot of time and energy gutting that building, redoing common area finishes, etc. and it's getting to the point now where it's starting to show better. But really that's the only hole that we have left and we got that space back at the beginning of this year. It's not a carryover from last year.

Jamie Feldman: Okay. And then, Ed, you had said you expect strong same store NOI growth next year. Would you care to characterize what that means in terms of a range?

Ed Fritsch: Yes, on February 10, we'll put out guidance for 2015 but strong I would say is bigger than a breadbasket. There's lots of reasons to feel confident about where NOI growth is going given the development. We'll have a full year of IP. We'll have these backfills as Mike outlined. We've been successful in leasing up some of these value-add assets. I think he pointed out one alliance in his script going from 67 to better than 84. We've taken Pinnacle from 84.9 to just shy of 95. We have made good movement in other areas and now with BofA, we bought it at 82.1. We expect it to eclipse 90 by the end of the year. The developments, these backfills and good fundamentals, I think there's good reason to feel confident in that growth.

Mark Mulhern: Jamie, one other thing to add on that same numbers. I know there's some noise in the numbers here and I think just on some of the early reports, people are wondering about our guidance for 2014 on same store NOI. I think we what we have to look at is our fourth quarter of '13. We had a fair amount of vacancy. You know the names in Atlanta and Tampa in particular so I think filling those vacancies makes those comparative numbers a little tough and I think that the acquisitions that is we've made in 2011 and 2012 picking up the occupancy in those has really helped on that same store NOI numbers. I think we have a good path here going into 2015 on that topic.

Jamie Feldman: Okay. Great. Thank you.

Ed Fritsch: Thanks, Jamie.

Operator: Your next question comes from the line of Jed Reagan with Green Street Advisors. Please go ahead.

Jed Reagan: Good morning, guys.

Ed Fritsch: Good morning, Jed.

Jed Reagan: You talked, Ed, about the cap rate compression that you're seeing and I'm just wondering if you've seen meaningful compression even over the last three months or so or if that was more just a general comment about trends you've seen over the year 2014?

Ed Fritsch: I would call it meaningful even though it's in the 25 to 50 bip range over the 90-day period that was outlined. For institutional quality, assets that don't have unusual customer concentrations and we're good well conceived development project that they were delivered regardless of when that was. There's no doubt that there's been an uptick in the level of investment interest in mid tier markets, if you will. It seems like money that was chasing assets in the Gateway coastal markets has more than found its way into the mid tier cities and now part of the competitive landscape.

Jed Reagan: Last time you talked about something could even have a high-5 handle to call it a 6%, does that mean that same building may trade in the mid 5s today?

Ed Fritsch: I think it's fair to say that a mid 5 could be seen.

Jed Reagan: Okay. And how about sort of a lower quality locations and more commodity-type stuff, any compression there or is that just flat?

Ed Fritsch: The only change there has been a higher level of interest. A deeper, bigger pool. The 170 that we've closed on year-to-date and probably do another 13 to 15 before the end of the year. It's certainly not keeping pace with the trophy in-fill BBD assets but there's certainly a market out there and that's why we've gone above the high end of our guidance for 2014 because we've seen a steady demand, different pricing but a steady demand and good stuff to get off our books.

Jed Reagan: Okay. And just wondering if you can talk about just general comments on the leasing pipeline today versus, say, three months ago and maybe if you're seeing any rent growth acceleration in any of your markets?

Ed Fritsch: So the volume of leasing that we've done throughout the past three quarters has been robust. We always decide what the difference is between solid, robust and strong. But the last three quarters have been very good, and occupancy across the board's getting better in each of our markets. So there are fewer and fewer large blocks of class A space in urban in-fill locations, and so as a result, we as landlords are having a better day at the negotiation table. We continue to see, depending on the markets, somewhere between 2% and 7% year-over-year asking rate increase on terms. We're having a greater influence on the level of T.I. and we're seeing some deals with a nominal amount of T.I. being needed in order to consummate the renewal.

And while we're on it, I think Mike touched on it with regards to expirations and the renewal that we did for Vanderbilt. That's a good book of business to have signed, and we feel good about going into this year as we sit today only 9.2% of annualized revenues are due to expire in 2015 now. We don't have a single customer with a lease of 75,000 square feet or more. We think that it's due for expiration. We don't have any customer who represents let's call it $2 million or more in annual revenues that's up for expiration. Next year we don't have a lot of exposure. A lot of it's been put to bed. We signed another 101,000-square-foot renewal between the Vandy press release we put out and as we sit here today.

Mike Harris: One last thing. Ed mentioned the large box of space that is shrinking not only in the market but in our portfolio. So, our guys are really focusing on our bread and butter, 5 - 15,000 foot square foot blocks of space. Good activity on those and virtually every market. A lot of that is, I would say, potential organic expansion of existing customers who are growing. So, it's in the last few quarters having the big blocks of space was actually somewhat of competitive advantage particularly down in Tampa and Atlanta, where we were somewhat the only game in town and that's proved out true for us.

Jed Reagan: Okay, great, thank you

Ed Fritsch: Thanks, Jed.

Operator: Our next question comes from the line of Brendan Maiorana from Wells Fargo.

Brendan Maiorana: Mike, were you able to offer the terms of the Vandy lease? I think you mentioned it was positive or it was favorable terms but is that a sort of flattish cash roll-up on gap?The TI dollars, things likes that?

Ed Fritsch: Hey, Brendan, Ed. I waived my hand at Mike and said let me start on that one. We included it in the expirations page of the supplemental but we didn't include it in the leasing page. And we seldom like to give exact terms on each deal so that we're tipping our hand to the market or being respectful to our customer. But suffice it to say that we did get a rent growth positive rent growth in the three or so percent range. We have no down time. There was no outside broker involved. Jimmy Miller, one of our hero's in Nashville did that deal without an outside broker so there's no outside broker commission. It was good terms all the way of across the board. It was good piece of work. They're a good customer and we're glad to have that one in the way of renewal and really we don't have anything over $2 million in annual revenues that expires now until November of 2016.

Brendan Maiorana: Okay, great. So your occupancy guidance by year end at the low end it's up 80 basis points from where we ended the quarter. At the high end it's up 150 basis points. I gather there's a lot of leases that are set to come on or I can't recall whether or not 5405, whether I think it was two tenants for that building have come on or if some of that is attributable to space down in Tampa or if there are some other big leases that are embedded in the Q4 gains that you expect?

Ed Fritsch: Yeah, you're saying it exactly right. And it may be better communication on our part going forward. When we have announced these leases that we've signed for the backfills at the buildings that you just enumerated, the press releases didn't say when those leases were to commence. And lesson to us going forward is we should put that information in there when those rents would commence. So yes, for example, we have about 70,000, 65,000 square feet of leases at Lake Point 1 and 2 where they won't start until early spring. So work is well underway. The larger one starts in March and I think the smaller one starts in May. So we have a number of those where they really don't take possession of the space in earnest until first quarter, early second.

Brendan Maiorana: So, there's a little bit of variability in your occupancy target by year ends. I gather there's probably some leases that you're working on, maybe they commence, maybe they don't. But given what you highlighted which is a very low role year now for 2015, is there any reason to think that by the end of '15 you shouldn't at least be sort of a that 92-and-a-half or maybe 93% range which is at the high end of your year end '14 occupancy guidance?

Ed Fritsch: I think that just to keep us all on safe territory, with we'll give out the 15 guidance but when we put out fourth quarter results, but I think that you're right. There's good reasons to believe that the portfolio should be better occupied at the end of next year than it is at the end of this year. And then the only thing I want to amend on your comment, you said maybe they commence, maybe they don't. They will commence. It's just whether they commence in '14 or '15.

Brendan Maiorana: Yeah, correct, sorry.

Ed Fritsch: No problem. Just want to be sure.

Brendan Maiorana: And then I don't know if this is Ed or if you want to take this or maybe Mark.

Ed Fritsch: Is it EBITDA?I'm going to give it to Mark?

Brendan Maiorana: It's maybe related to that. It's even more detailed. So I'm going to indoctrinate you into the Highwoods call here. The straight line number in Q3 picked up on the same store basis and I think that was really the reason why your same store number went from a positive in Q2 versus negative on a cash basis in Q3. But if I look at what you've done year-to-date and what your guidance is for the year, it effectively implies at the mid point probably +3.5 to 4% in Q4 which, part of that is what you highlight window is you kind of have an easy comp quarter compared to last year in Q4. But I would think that given the lease up that you expect, there's probably free rent associated with those leases as they come into Q4. So I'm kind of interested to sort of how you get up to that +4 number because I would gather a lot of the occupancy gains you're going to get aren't cash paying in fourth quarter.

Mark Mulhern: Yeah, Brendan, there's a little bit of that. I don't know if I would call it free rent as much as I would early possession. So in other words we didn't given a lot of rent concessions but we do have some early move-ins so you're right, there's some cash drain on that. But what I would say again, if you look at the comparisons, I think the big thing is really that fourth quarter weakness in '13 with all the vacancies that we had. But I understand your point about cash but I do think, at least today, that's how the numbers shake out. We expect to have a pretty strong cash NOI number in Q4 and get that number at least in the range that we affirmed.

Mike Harris: This is Mike. I don't mean to dip over into Mark's world but I have to look at accounting 101 back 45 years ago. This is a reminder for the purpose of determining GAAP rents when the 10 tenant takes position if they're doing their own TI, at that point in time we start GAAP rents versus if we do the TI work, it goes with the normal lease commencement date. So we talk about early possession, that's what we're alluding to.

Ed Fritsch: So that process mirrors what Brendan, what you and others see frequently on the retail side where a merchant comes in, takes possession of the space and buildings out their own store. It's been long deemed that that's when GAAP rent needs to begin and we have a couple of customer who have done that.

Brendan Maiorana: Sure. Okay. Thanks a lot, guys.

Ed Fritsch: Sure thing.

Operator: Our next question comes from the line of Tom Lesnick with Capital One Securities. Please go ahead.

Tom Lesnick: Hi, good morning, guys. I just wanted to follow up on Jed's question earlier on cap rate compression and capital flows. I think you mentioned that you had seen about 25 to 50 basis points over the last 90 days or so. By market are you seeing more compression in some markets relative to others?

Ed Fritsch: Tom, I would say that there's not enough data points for us to give you a sounds answer on that. We haven't seen institutional quality assets trade before the time period we're talking about versus within the time period we're talking about in enough markets to tell you that that's happening. Our window into that is deals that we've chased, what comes out in real capital analytics and deals that we've sold and we've sold different quality assets than what we've either chased and/or acquired. But there haven't been enough trades on both sides of that timeline for us to tell you that it varies significantly from market-to-market but we can through common sense, I guess, say that markets like Atlanta, Nashville, and Raleigh are warmer than some of the other markets that we're in. And so it's fair to expect that the compression would be more noticeable if institutional quality assets were to come to market in those three cities.

Tom Lesnick: All right. That's fair. I appreciate that color. My other question just had to do with the lending side of things. Are you guys seeing any trends recently in the life insurance secured market whether it be covenants or pricing?

Ed Fritsch: Well, we really haven't but that doesn't mean it's not happening. We have been working hard for a number of years to reduce the amount of secured debt we have on our assets and I think we had in our script maybe yours, Mark, that we're now, like, only 18, 17, 18% of our NOI is encumbered. We'd prefer not to have secured debt on our portfolio in that it gives us more flexibility to do the things that we want to do. We recognize that secured debt is part of the mosaic of a capital stack. But given the upgrades that we've enjoyed by the rating agencies and given the flexibility it gives us and given the significant reduction in paperwork and the fact that it really makes the leasing agents, the broker's life easier in that they're not having to try to market a lease instrument that's burdened with lender language and lender approval rights. We just see it as the right track to stay on. So we are and not involved very much in the secured debt arena.

Mike Harris: At the recent (inaudible) conference in New York there was a lot of discussion about the secured lenders and that you're seeing a return to some pretty aggressive pricing, things like interest on loans that were prevalent back in '06 and up into '07. Very aggressive, higher LTBs. So I think it is getting extremely competitive in that market but Ed said it's just not the arena we want to go in.

Tom Lesnick: Understand. Appreciate that color. Thanks, guys.

Ed Fritsch: Sure, Tom.

Operator: Our next question comes from the line of Steve Manaker with Oppenheimer. Please with ahead.

Steve Manaker: Thanks, good morning.

Quick question on Raleigh. In the space that you had tenants move out, were those markets above or below current rent levels?

Mike Harris: I'm sorry, what was the question?

Ed Fritsch: The two customers that we had move out in the Raleigh portfolio which would have been Citrix and the one at Center Green, I would say that they were flat.

Steve Manaker: Great. Thank you so much.

Ed Fritsch: Sure.

Operator: (Operator Instructions). Our next question comes from the line of Jim Sullivan with Cowen, please go ahead.

Jim Sullivan: Thank you, good morning. Ed I'm curious how you would characterize the changes in demand across your markets over the last two or three years or so and I have two specific questions. When you review your discussions with tenants around lease expirations, are you seeing more tenants looking to down size or upsized today and secondly, to what extend are you markets benefiting from new tenants who are looking to relocate into the markets from outside the region?

Ed Fritsch: Okay. So two silos there, Jim. The first part with regard to just a general consensus on when we meet with the a prospect or a customer and they're either looking to renew with us or relocate out of brand "X" to move into a Highwoods building, are they taking less space than they were previously in. We're seeing that in a couple of industries. Law firms and accounting, some in finance seem to be the situation, but I would say the preponderance of the prospects whether it be an existing customer for renewal or someone moving in, we're seeing business growth. We are seeing adding head count. We're seeing good competition for qualified, well educated people in our backyards. And that's not every building in the portfolio.

But I would say the preponderance are at a point where they're adding head count. Now there's a long conversation to be had about me space versus we space and we continue to see the we space on the contracting side. The me space on the contracting side. What's allocated to you or I as an employee and we're continuing to see an expansion on the we space which is the conference room collaborative, the now Starbucks looking break room, those allocations continue to grow and we see it to be pretty much a wash unless it's dramatic redo of the example I give you before of a law firm going to a new law firm.

As far as the benefit of migration into the southeast, statistically where there's the bureau of labor statistics or if you follow Mayflower moving companies published statistics, it's to the good. MetLife is a perfect example of that with the 427,000 square feet that we're building for them. They're hiring locally and it's pure new net absorption. International papers headquarters expansion that we're doing for them, obviously with the word expansion in there, that's pure benefit to the local market. I would say that the world isn't great and our brokers are able to just sit at the phone and take orders, but I will say that if you're willing to get after it seems to be that there's good business to be had out there and we're in the business of taking advantage of that.

Mike Harris: Jim, this is Mike. One last bit of color. For the better part of the first part of the recovery, call it '11, '12, there was an absorption of shadow space that customers had as a hangover from the recession and they grew into it. They're now out of that.

They're now into true expansion space and I think we're definitely seeing in most of over leases that are coming through, expansion options being exercised and growing with the exception of the few industries that Ed talked about but where you've had some consolidation of law firms and restacking based upon how technology has changed your businesses.

Ed Fritsch: If we look at the profile file, Jim, of the 1.3% million square feet that we have underway today, it's expansion.

Mike Harris: Yep.

Jim Sullivan: Okay. And shifting the focus to the supply side. Ed, I understood you to say in your prepared comments that you lowered your hurdle for development yields. Where are those hurdles today?

Ed Fritsch: No, I didn't say that.

Jim Sullivan: Okay.

Ed Fritsch: I don't recall saying that. I mentioned on acquisitions, that we had softened our hurdles to some degree but not on development.

Jim Sullivan: So what would the spread be between acquisitions and development then?

Ed Fritsch: So what we have said on development in the past is that we have tied it to the developments we've started over the past ten years and we have and said that pool of developments has averaged a nine cash. What we said in our script for this call is we took the more current pool which is the $349 million and we say that on a weighted average, it's approximately a 9-gap. We're seeing in the marketplace anywhere from mid 5s to low 7s on acquisitions.

Jim Sullivan: Okay. And then finally for me, in which of your markets, if any, are you seeing or expect some spec office construction that might impact your view on rent growth potential or occupancy rates in those markets?

Ed Fritsch: So Jim, good question. It's no surprise as I mentioned in a response to an earlier question, we're seeing trades and we're seeing good activity and more growth in landlord-favored leasing fundamental terms in markets like Atlanta, Raleigh and Nashville. And in fact that's where we're seeing the development occur on somewhat of a spec basis. So there are a few buildings in Raleigh, there's a significant building in Buckhead that's going up, pure spec and there's some buildings in Nashville both down in Cool Springs and in the Gulch that are going up. And I'm reminding somebody who has probably forgot more about real estate than I know so I would expect that but just as a reminder, the Delta between first gen and second gen rents, I would submit is the widest it's been in quite some time if not during my 32-year career here at Highwoods.

We're seeing anywhere from 20 to 30% differential between what you can lease second gen space for versus what would you have to lease first gen space for. We continue to see construction pricing rise at about half a percent per month. So that's meaningful. So, construction pricing is rising, and we are seeing an increase in second gen but that gap is still substantial between second and first gen. My point on that is that the prospect pool for first gen is probably has painted on the deck no diving because it's not quite that deep. Not everybody who leases space in the market is willing to undertake a 20% to 30% increase in occupancy cost to being class A. Some will, obviously because if there weren't some, nobody would be driving a BMW an Audi or a Mercedes. But it's not the full anybody who's leasing space is fodder for somebody who's building spec development.

Mike Harris: I think some of the companies that are looking at first gen space that would take that leap are looking at how are they making it more efficient so they maybe would be looking at downsizing going into a true class A plus opportunity, higher rent per-square-foot but less-square-foot so they can justify from that. They're also seeing it being used an as a recruiting pool because there's a big competition for talent out there and a lot of companies say we have to have new digs in order to attract the talent.

Jim Sullivan: I think it's fair to conclude at this point in time the spec construction that you're beginning to see you don't think will impede the rent growth potential you feel you have coming in the next couple years.

Ed Fritsch: I think it will help lift it. Because if you go out shopping you'll see what the price of the first gen is and you won't feel so bad paying 5% to 10% more for what you've got.

Jim Sullivan: That's great. Thanks, Ed.

Ed Fritsch: Thanks, Jim.

Operator: Our next question, comes from the line of John Guinee from Stifle. Please go ahead.

John Guinee: John Guinee here. When was the BofA Plaza building in Raleigh built?

Ed Fritsch: 28 years ago.

John Guinee: And just out of curiosity again, are these punch-out windows an issue for you guys in this kind of market? It looks a little like a hospital.

Ed Fritsch: No. We see the facade of that building to be an opportunity in fact. I'm sorry, it was built in '86, John. No, we think that there's plenty of Highwood-tizing opportunity on that building starting with the approach to the building, the lobby area, and we think that there's some things that can be done on the facade of that building with regard to creating curtain wall, etc. How much of that is to be decided but we allocated about $4.5 million of purchase price to making improvements and those studies are well underway.

John Guinee: So, you will change the punch outs to a curtain wall?

Ed Fritsch: You could. You wouldn't do the entire building. Or we wouldn't but there's certainly opportunities to do that.

John Guinee: Gotcha. Okay. This is more of an accounting question but notice that you have spoken aggressively about a great time to be a seller and maybe not a great time to be a buyer but then your disposition range for 2014 is very tight where your acquisition range essentially for the rest of the year is between zero and $210 million. Do you have 1031 exchange requirements on the recent dispositions regarding taxable income issues, or is the wide range in acquisitions between now and the end of the year of zero to $210 million just to give yourselves flexibility?

Ed Fritsch: Well, flexibility but we wouldn't keep that range if we didn't have street addresses that we were in pursuit of. On the disposition side, John, I think it's much more in our control and we know what we have under contract right now which is about $13 million worth of dispose which would get us to the revised high end of our disposition guidance. So given we know the exact state of those negotiations and what money's hard and who the perspective buyer is, it's a much more predictable side of the business. On the acquisition side, we submit a bid, you submit a bid, Mike submits a bid, we don't have quite the inter on that. And so you don't know until the broker or the seller calls and says it's been awarded to you or been awarded to another company. So we're in the hunt on some things and we don't know whether we'll do $208 million worth.

John Guinee: Are there taxable gains, taxable income issues on this that would almost necessitate an acquisition in the next six months?

Ed Fritsch: Sorry, say that again?

John Guinee: Are taxable gains or taxable income issues that would necessitate any acquisitions in the next couple of quarters?

Ed Fritsch: No.

John Guinee: Oh, great. Thank you.

Ed Fritsch: Sure.

Operator: And there are no further questions on the phone lines. I'll turn the presentation back over to you.

Ed Fritsch: Thank you, everyone. Appreciate your time on the call and as always if you have any follow-up questions, don't hesitate to holler. Thank you.

Operator: 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.