Highwoods Properties Inc (HIW) 2014 Q4 法說會逐字稿

Good morning, and welcome to the Highwoods Properties conference call. During today's 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, February 11, 2015. And I would now like to turn the conference over to Ms. Tabitha Zane. Please go ahead.

Thank you and good morning. On the call today are Ed Fritsch, President and Chief Executive Officer, Mike Harris, Chief Operating Officer, and Mark Mulhern, 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 e-mail copies to you. Please know, in yesterday press release we have announced the dates for our 2015 financial releases and conference calls. Also we have already posted senior management's formal remarks on the Investor Relations section of our website under the Presentations section.

Before we begin, I would like to remind you that this call will include forward-looking statements concerning the Company's operations and financial conditions, including estimates and effects of asset dispositions and acquisitions, the cost of timing of development projects, the terms and timing of anticipated financings, 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 2014 Annual Report on Form 10-K. 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 views of the usefulness and risks of FFO and NOI can be found toward the bottom of yesterday's release, and are also available on the Investor Relations section of the web at Highwoods.com. I will now turn the call over to Ed Fritsch.

Good morning. Thank you for joining us. We had a busy and productive 2014 highlighted by significant additions to our development pipeline. Our scout look for 2015 amidst this positive economic environment, reflects continued steady customer demand forked BBD-located product, robust same property NOI growth prospects, and strong momentum from our well leased development deliveries and execution and the value-add acquisitions. Here's a look at our 2014 highlights which helped build a firm foundation for 2015. We delivered FFO of $2.91 per share, including $0.74 in the fourth quarter. Leased 5.5 million square feet of office, grew occupancy 200 basis points, and announced over $700 million of investment activity. Development is an important part of our growth and value proposition. In 2014 we expanded our already robust pipeline, by adding five projects totaling $347 million that are 92% pre-leased. The largest the $200 million headquarters building for Bridgestone Americas in Nashville, is a big win for our Company, and represents an excellent opportunity for us to expand our presence in Nashville's thriving downtown SoBro district, and is only a block from the Pinnacle at Symphony Place, where we grew occupancy from the 85% at acquisition to 98% in just 15 months.

In November we delivered a $56 million 100% pre-leased headquarters expansion for International Paper in Memphis. Our remaining development pipeline totals $493 million, encompassing 1.6 million square feet, and is 89% preleased. We are very pleased with the three value-add properties we acquired during 2014 totaling $165 million, and encompassing 686,000 square feet. One Bank of America Plaza in CBD Raleigh, Lincoln Plaza in CBD Orlando, and our JV partner's 50% interest in Innsbrook Center located in Innsbrook, Richmond's BBD. The combined occupancy of these three properties and acquisition was 82%. We expect to grow occupancy at these buildings akin to the 823 basis points of occupancy growth we have achieved, and the $584 million of BBD-located assets we acquired in 2013.

With respect to dispositions, we continue to cull our portfolio. In 2014, we sold $195 million of non-core assets encompassing nearly 2 million square feet in 35 buildings across seven markets, plus 44 acres of land. In keeping with our pledge to grow on a leverage neutral basis, we funded acquisitions and development with operating cash flow, proceeds from dispositions, and $104 million of new equity, ending the year with leverage at 41.7%.

Turning to 2015. Our markets are expected to continue to post numbers in terms of population growth, job growth, and positive net absorption. Second gen supply continues to tighten. We are seeing improved net effective leasing terms, and we enter 2015 with no large rollover exposures. The positive macroeconomic trends in our markets, and expectations of solid leasing combined with last year's leasing successes, will result in a robust same store cash NOI growth of 5.5% to 6.5% in 2015, as well as continued growth from our value-add acquisitions. Our results will be further bolstered by the $56 million 100% pre-leased development that delivered late last year, and another $178 million of currently 82% pre-leased development delivering over the course of this year. Given this, he expect solid 2015 FFO of $2.95 to $3.06 per share, and just to underscore what you know, our FFO outlook always excluded the impact of any unannounced acquisitions and dispositions.

Regarding expected investment activity for 2015, we will continue to pursue acquisitions of BBD-located buildings that make strategic sense for our Company, and where we believe we can achieve meaningful upside at appropriate investing spreads, given our assessment of the asset's risk profile. In the development arena, the strength of our current pipeline is an example of our versatility. Atop our current 1.6 million square foot development pipeline, we are having constructive conversations with additional prospects, and are optimistic we will add to our pipeline as the year progresses. In closing, 2015 marked the 10th anniversary of our strategic plan. The plan's core tenants, people, portfolio, communications, and balance sheet, continue to drive our Company's focus. I thank our Board for their continued engagement and support, and I also thank and applaud my coworkers, who seldom if ever accept individual credit or praise for their good work, and who continue to successfully execute on our plan. Mike.

Thanks Ed, and good morning everyone. Our operating performance was once again strong in 2014. We leased 4.5 million square feet of second gen office, with an average term of 6.2 years, up from 5.7 years in 2013. GAAP rent growth on office leases signed was over 10%, up from 5% in 2013. Net effective rents on second gen office leasing were $13 per square foot per year, 9% above 2013 average, and year end occupancy was 91.9%, up 200 basis point from year end 2013. In the fourth quarter cash rent growth on office leases signed was positive 1%. Cap rent growth on office leases signed was a strong 15%, on an average term of 5.5 years. Net effective rents on second gen office leasing were $13.70 per square foot per year, and same store cash NOI before term fees was up a robust 4.5%. As shown in our 2015 outlook we expect this growth trend to continue. Our ability to push net effective rents is enhanced by the shrinking supply of second gen space in our markets, and the continuing wide gap between first and second gen rents.

Turning to our markets, Raleigh continues to be one of our strongest, and was recently ranked by Forbes magazine as the fourth fastest growing city in the US. The Raleigh economy is being fueled by technology, healthcare and professional services, and the region added over 21,000 jobs in 2014, driving unemployment below 5% for the first time since the Great Recession. Our Raleigh portfolio is performing well, with asking rents up 5% from a year ago. Our $110 million build to suit for MetLife is on schedule. Building 1 will deliver on February 15, and Building 2 on April 15. Glenlake 5 our multi-customer development will deliver this quarter, and is now 42% pre-leased. We have leases out for signatures that will bring leasing up to 56%. The Pittsburgh office market reported another solid year with rising asking rents, declining vacancy and positive net absorption. And the CBD Class A vacancy is 5.3%, and asking rates up 5% year-over-year. Occupancy in our Pittsburgh portfolio is 94.6%. Up 160 basis point year-over-year, and average remaining lease term is 6.1 years. During the quarter, it was announced that US Steel will be relocating within downtown. They will vacate approximately 400,000 square feet in the UPMC Building into a build to suit on the former Igloo site this is slated for 2018.

Atlanta's office market is benefiting from continued meaningful job growth and little new supply. The market absorbed 1.4 million square feet of space in the fourth quarter, and almost 5 million square feet in all of 2014. The Atlanta economy continues to strengthen, and remains an attractive location for firms looking to relocate in the Southeast, as evidenced by Mercedes-Benz recent announcement it is moving its headquarters from New Jersey to what will be company-owned offices. At year end our Atlanta portfolio was 88.3% occupied, up 610 basis points from a year ago, and asking rents up 5% year-over-year. We expect continued occupancy improvement in 2015 driven by leasing and value-add acquisitions, such as Glenlake North and South and One Alliance Center. The Florida economy continues to improve. In Tampa and Orlando unemployment is declining, and both markets had positive net absorption for the fourth quarter and full year. For example in Orlando, occupancy has grown 450 basis points from the 1.3 million square feet we acquired from our JV partner in 2013. Our markets continue to strengthen, and outlook is for more economic growth and job creation. Sustained demand and a wide delta between first and second gen rents bodes well for our leasing prospects this year. Mark.

Thanks Mike. For the fourth quarter we reported FFO of $0.74 per share in line with last year's fourth quarter. In dollars, fourth quarter FFO was $70.5 million in 2014, versus $69 million in 2013, or 2.2% higher. For the full year of 2014, we reported FFO of $2.91 per share, 2.5% higher than 2013's full year FFO per share. Again in dollars, our FFO for 2014 was $272.6 million, versus $252 million in 2013, or an 8% increase over last year. Other than carving out $319,000 of acquisition costs in the fourth quarter, and $873,000 of acquisition and debt extinguishment costs for the full year, these FFO numbers are consistent with the NAREIT FFO white paper. The primary FFO growth drivers in both the quarter and the full year primarily relate to acquisitions and development, partially offset by dispositions. Also, 2014 interest expense was $6.9 million lower than 2013. Reduced interest rates and higher capitalized interest more than offset the slight increase in overall debt.

Turning to the balance sheet the changes from December 31, 2013 primarily relate to development in process, where as of year end 2014 we have invested $206 million. This is comprised of eight projects in various stages of development including International Paper in Memphis, MetLife in Raleigh, and Bridgestone Americas in Nashville making up the largest components of the $206 million. We raised $104 million of equity in 2014 through our ATM programs. This combined with operating cash flow and proceeds from dispositions enabled us to grow the Company while maintaining our strong balance sheet on a leverage-neutral basis.

We ended the year with leverage of 41.7% and our debt to EBITDA ratio comfortably under 6 times. We have provided our initial 2015 FFO outlook of $2.95 to $3.06, which at the midpoint is a 6% increase from 2014, when you exclude the 2014 land sale gains of $0.07. In dollars, the midpoint of our FFO range for 2015 is $292 million, versus $273 million in 2014, a 7% increase year-over-year. As a reminder while we forecast expected ranges for acquisition disposition and development activity, we do not include the operational or funding impact from any potential investment activity in our FFO outlook until such transactions are announced. This is consistent with past practice. Our FFO outlook for 2015 is also consistent with the NAREIT FFO White Paper. Therefore, going forward we will not exclude unusual charges or credits, such as debt extinguishment losses or gains and property acquisition covers in our headline FFO. We will obviously continue to clearly quantify any such items in future earnings releases.

Two things to keep in mind regarding the trajectory of our 2015 FFO outlook. First, G&A in the first quarter is expected to be about $3 million higher than the run rate for the subsequent quarters, because the Company's annual equity grants are customarily made in March. As you may remember, under GAAP, certain annual long-term equity grants must be expensed at the grant date, rather than over the normal multi-year vesting period, for employees who have met the age and service eligibility requirements under the Company's long standing retirement plan. Second, as Ed mentioned, we have $178 million of development delivering over the course of the year, which will mostly impact our second half results.

In terms of our financing plans for 2015, we have three secured loans all bearing interest above 6% that we can pay off this year prior to their stated maturity dates. One for $39 million is prepayable at par at the end of the second quarter, and two totalling $114 million are prepayable at par late in the fourth quarter. We expect to refinance those obligations on an unsecured basis, providing us more overall flexibility and lowering the effective interest rates. Gains and losses related to these early debt extinguishments, the net effect of which will be nominal, are included in our overall FFO outlook for 2015. In 2015, we will continue our commitment to grow on a leverage-neutral basis, and stay within our leveraged comfort zone of 40% to 45%. To that end, we provided a range of expected weighted average fully diluted shares outstanding, rather than pinpointing an exact weighted average estimate as in prior years. Operator, now we are ready for your questions.

Thank you. (Operator Instructions). Our first question is from the line of Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.

Great, thanks and good morning.

Good morning Jamie.

Good morning. So focusing on the guidance, can you talk a little bit about the probability of the acquisitions and dispositions and the development starts, and then expected yields?

Sure. With regard to the volume in each of those categories, obviously acquisitions and development varied to some degree. Development as I said in my prepared comments were in what we believe to be constructive and positive conversations with a number of users regarding a number of projects. We announce them as soon as they are executed, and it would be our hope that we would have some announcements before the end of the first half of the year.

On acquisitions, we are looking at a number of things. We still find acquisition pricing where cap rates have compressed to be relatively expensive. I think we were very pleased with what we were able to acquire in 2014, and expect some good value-add there as we move occupancy and push rents. Some of the acquisitions it depends on what actually comes to market, and on the dispositions as we said in the past we have at no time in the past 10 years have we sold an asset to meet some debt obligation or financing obligation. That we work those predicated upon lease renewals and how they underwrite. I think that we will control that, and we feel very comfortable with the range we have given on all three of these.

Okay. I guess for the dispositions specifically, do you have a cap rate baked into your guidance?

No, we don't put acquisitions, unannounced acquisitions or developments or dispositions in our guidance. We exclude that. Always have. I'm sorry.

I knew that. If I could strike that question from the record, I would appreciate it.

A retraction.

Yes.

And Jamie, with regard to yields, on the development we said in the scripted remarks that we average a GAAP yield of 9%. And we don't get much more specific on that, because obviously we are in competition on a number of these build to suits and projects, so we don't give specific numbers, but I think it is good information for you all to know that we are around a 9% GAAP on average for our development pipeline. And on acquisitions, we have seen cap rates compress as you all have in the capital markets. The volumes continue to increase successively over the last four years on a national basis, and within the Southeast footprint while cap rates are compressed. We don't expect cap rates to move much from where they are now. There were tight margins on some of these projects that are coming to market and being sold.

Okay. And then just following up on the developments. If you were to compare your pipeline of potential developments, potential signings at this time last year, would you say it is larger or smaller, or about the same?

Oh. I would say that the bread box is about the same, but what actually delivers and signs just depends on how those conversations go. Bridgestone was a big win. And a lot of those don't come along on that scale year after year, but we do have substantive conversations with others, but not on that same lump sum scale of the $200 million right now.

We had two years in a row between MetLife and Bridgestone where he would had almost kind of career opportunities that came around. Hard to project those.

Okay. All right, great. Thank you.

You are welcome.

Our next question is from the line of Dave Rodgers with Baird. Please go ahead.

Good morning. Maybe start with Mike a question with regard to leasing. I think in the fourth quarter leasing activity had slowed a little bit in terms of new leasing, but the economics were really strong. I guess as we look into 2015, a two part question, one, what are you seeing kind of off the bat, in terms of leasing activity in 2015, the demand for space?And the second is, do you have guidance for leasing spreads, we are talking about overall economics in 2015 on leases?

Sure Dave. I would say lease activity as we are just now getting to 2015 is very good. We are seeing the opportunity to start pushing rents. Actually started a while back. But we are in BBD sub markets which really helps there. There are clearly less options today for the tenants as supply is shrinking, so that gives us hopefully a little better pricing power. But we are also talking about a portfolio that is pushing now 92% leased, so we have less inventory to deal with. So from a pure volume standpoint it makes it a little bit difficult, we are down to only 8% of the portfolio. I think we are encouraged. I think that we had a meeting back in the fall with all of our leasing directors, and I think to a person they were all encouraged by what they expected to see in 2015.

And then the second part with regard to leasing spreads or broader economics?

Sure. Well, we are seeing better leasing spreads as you can see we had net positive cash growth this quarter. Can't say that is necessarily a trend because that gets to be a little bit lumpy, but we are still getting good bumps and seeing our bumps increasing in some markets and sub markets. Less turn key deals, more allowances which helps us try to control the CapEx spend. All-in-all I would say that we believe the decent spreads will continue to improve.

Ed, maybe one on the follow-up with regard to acquisitions. Any decent amount of that acquisition guidance include taking down some additional land? And how are you looking at land acquisitions with the development pipeline ramping for this year?

We have a little component of land, or about four different tracts that we are in talks with. I don't believe that all four would close in 2015, but I would sum it up by saying it is a nominal amount of the 50 to 300.

Okay. That's a good. And then finally, maybe a question for Mark. I know you talked about your 2015 debt maturities and secured maturities, have you thought about reaching out to 2016, and then I think you have got an unsecured bond that is pretty high cost out in 2018. I don't know if it is worth going out that far, given where spreads are today. Have you thought about that, and what have do you think about doing in 2015 more aggressively?

Dave. What you heard in the script was we have got three things we think we can do and prepay early effectively in 2015. So they are on the maturity schedule. A couple of them in 2016. We are pulling some things forward, where it makes economic sense for us. Obviously have been encouraged by lower rates here. I know we have got a small pickup here, but by and large with rates where they are we are pretty comfortable with our debt portfolio. We look at all of these things and we look at them in economic terms about the cost of going early. So we will continue that as we go forward in 2015.

All right. Great. Thank you.

Sure.

Thanks, Dave.

Our next question is from the line of Jed Reagan with Green Street Advisors. Please go ahead.

Good morning, guys. Wonder if you can give an update on the supply picture in your markets, and whether you feel like development pipelines are getting into a concern zone in any locations at all?

I guess there are two markets where it is higher than what we would like to see. Nashville and Raleigh. There are a few spec projects, or have spec components in both of those markets, Raleigh more so than Nashville. I don't think that there are any red flags, but I do think that we need to be cognizant of the amount of space that is coming online next year, predominantly next year in both of those markets. They are not heavily concentrated in any one submarket, so they don't necessarily compete prospect for prospect, but when you add it up I think those are two markets where we are paying particular attention to it, and elsewhere we are really not seeing it. Also just underscore that there continues to be pressure on construction pricing both labor and materials, and I think that gap between second and first gen will continue to be somewhat of a regulator or governor on the volume of construction that comes online that spec component.

Okay. That's helpful. And you talked last time about another 25 to 50 bips of cap rate compression in your markets. Wondering if you can specify what you have been seeing more recently, any movements, particularly with the interest rate decline, are you seeing a similar type move, has it been sort of flattish, maybe just a little bit on that?

If you look at market data published by various entities, and you kind of mix it all together, it looks like the cap rates for 2014 were sub-6% in the CBDs, and about 7% in the suburbs on a national basis. And that is not too dissimilar to what we are seeing in the Southeast. It is has compressed 30 to 50 bips depending on how you look at it year-over-year 2014 over 2013, and there might be some compression on that going into 2015, but we don't see much at all. The volume is going to be interesting going forward, because we think a lot of what has traded, is in hands that is not likely to trade it again in the near term, so it will be interesting to see what actually comes to market in 2015.

Is there a better bid these days for kind of the lower quality non-core stuff would you say?

I think that the volume of prospects that we see for what we are looking to sell is pretty steady. What we get to see is the result of our dispositions. We haven't seen a change in volume of prospective buyers over the last say two quarters. It remains to be heavily focused on local and regional entities, small private equity firms, and occasionally we will see a nontraded REIT. I think that audience for our dispositions is relatively unchanged in the last couple of quarters. On the acquisition side, I think we are seeing on the competition front for what we would like to buy, no real new players but just more of the same type of players, so from pension funds to institutions to large private equity funds, nontraded REITs, even locals that are backed by others. So it seems to be the volume of capital that are pursuing quality assets continues to be very strong.

Okay. Great. Thanks.

Yes, sir.

Our next question is from the line of Brendan Maiorana with Wells Fargo. Please go ahead.

Thanks. Good morning. Mike or Ed, I think this year seems like it is set up pretty well for you guys from an occupancy standpoint. My recollection is, you don't have any major tenant roll, or at least roll that is at risk for move out. So your guidance is sort of up 50 basis points to up 150 occupancy from the beginning of the year to the end of the year. How should we sort of think about the goal posts of getting to those occupancy ranges, and do you think maybe you could with the portfolio that you now have, that you could even push at or above the high end of that range longer term?

Yes, good morning, Brendan. I think that the guidance that we have put out, just is self-evident. We think it is very doable, otherwise we wouldn't have put it out there. Where we ended the year for 2014 was on the low end of what we had guided towards, and I think actually it may have been a question from you the prior quarter, about how we felt about that and my response was it just depends on the timing of when a lease will commence, because we felt like we had the leases in hand, we just haven established start dates. So those leases have come together, and so we feel very good about what we have been able to backfill, along with what he would have been able to lease in our acquisition value-add pool. So I think all of that has come nicely together, and as a result, we have a high level of comfort in the 92,500 to 93,500 for year end 2015. We will still have leases roll and it will be lumpy from quarter to quarter. We have got 70,000-some square feet of industrial leases rolling in the Triad in first quarter. It will move from quarter to quarter, but we feel very comfortable we will get to the 92,5000 to 93,500 and we will look at 2016 guidance after that. But there is reason to believe if the world holds together as it is today economically, that would be range that we would be able to sustain.

Okay. That's very helpful. Maybe just following on to that, Mike you mentioned Pittsburgh US Steel moving out. I know that building isn't that close to PPG Place or EQT where you guys have your buildings there, but is there any concern that maybe fundamentals in Pittsburgh will slow down from their move out, or do you still feel like the market dynamics in Pittsburgh feel pretty strong?

I think it still feels good for us. First of all, US Steel is going to be moving out of the UPMC Building, that transaction probably won't occur until 2018. The space that they will be vacating has got some challenges. Require them to go in and do asbestos abatement, ADA compliance, et cetera, so it could drag even further than that. I do believe that and we are at primarily with EQT and PPG Place in the south end of Pittsburgh, CBD which we like we think if there is a better location within there, we think the south end is a better place to be. So I think that fundamentally we still think it is good, but again, that transaction looming out there, three or four years out, we have our eye on it. I will say that. And clearly Andy Wisniewdki and his team are taking a good look at locking down our customers there while we can.

Mike, maybe one more for you. Healthways has been in the news maybe there is corporate transaction, I think they hired an advisor or something like that. A big tenant of yours, and you have a lot of time left on the lease. Do they have any cancellation options or anything like that in the lease that they have with you in Nashville?

No, this have over eight years left on that lease. It is firm term, no early termination options, and they are in the Cool Springs submarket which is very strong. We feel like at this point it is secure.

Okay, great. And then just last one, Mark, does development spending that you expect to do in 2015, do you have a rough estimate of what that is likely to be?

Brendan if you recall what I said in my remarks, we spent about $206 million we have that on the balance sheet in the development progress, so think about the math. We had a $550 million development pipeline, so if you take $200 million off of $550 million, that is $350 million left. I think we will spend somewhere in the neighborhood of half of that, or something like that in 2015, as we get started and get going on Bridgestone here, and finish up the two MetLife buildings, and deliver some of the other buildings in the pipeline. That is a rough estimate.

Great. Thank you.

Thanks, Brendan.

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

Good morning. Thanks for taking my questions. I just wanted to talk about the ability to prepay a few of those pieces of debt this year. I mean given the pretty significant drop in interest rates over the last few months, have you guys thought at all about entering a forward contract to lock in the rate, and take away uncertainty given that you have known needs this year?

We have. Let me just tell you what I would say about all of that. If you think about the mixing bowl of options that we have to finance the Company, think about dispositions so you saw our guidance on dispositions, some of that timing wise, we can't predict all of that. So we will have some proceeds from dispositions. We have given you some indication that we will still utilize the ATM for equity as we need it. That is another source of capital. Obviously we have got operating cash flow. On the maturities what I would say is we balance all of the time the cost of the debt compared to what we are trying to achieve in terms of delivering on FFO, and doing all of that. And then you look at the premiums to refinance early. We are constantly analyzing that, and looking at it, and have regular dialogue about rates, so that is kind of how I would think about it. We have pointed you to the three items that we think we will get done in 2015. We will consider and look always at the portfolio, and see if there is anything that is attractive to us.

Thanks. And then I guess over the last few years you guys have been able to underwrite pretty healthy yields on your developments. Going forward, how are you seeing construction costs among land, materials and labor trending, and how is that really translated through on your underwriting? Should we expect any compression there?

We said that we are continuing to average a 9 GAAP on our development projects. We haven't seen land move as much as we have seen labor and commodities, it is averaging about a 0.5% per month increase. A number of our projects are open book, so we are protected on that. We try not to give too much detail on how we price this, because we are in an open competitive bid process on a number of these, and we don't want to disclose too much that could be used against us as we chase some of these development projects.

Okay, that's fair. And I guess my last question is a two-parter. First I guess how should we be thinking about leasing CapEx for 2015? And then obviously you guys have a very strong dividend track record, but today how are you and the Board thinking about the dividend going forward, and is there say a target AFFO payout level you would like to reach before thinking about an increase?

The first part is with regard to leasing CapEx while we see very good fundamentals, I don't want you to leave the call with the impression that our leasing agents are not having to leave their desk because the phone calls coming in for people wanting to lease space keep them from even going to lunch. We still have to get up and take a shower and get after it every morning to do leasing. But what we are able to do is we are doing more and more deals that have TI allowances rather than turnkey. We are doing less with regard to concessions, particularly concessions that are on the margins and not necessarily show up all of the time in the supplemental. We are still seeing customers be very deliberate about how they take down space. It is not gone back to where I need 35 so I will lease 50 to protect myself on expansion. They are being deliberate about space programming, but they are moving in a less protracted manner towards a decision. We think leasing CapEx we have seen it come in a little bit. As we have more control in the negotiations, and fewer turnkey and more TI allowances. On the dividend, we were CAD positive for 2014. He expect that number to significantly move up, or potential to significantly move in 2015 over what we experienced in 2014, so that will make the fourth year in a row we have been CAD positive. We look at it obviously each quarter, and we have been able to use some this of free cash flow to help fund our development pipeline, which we think is a very good use of proceeds, particularly given how well pre-leased our development pipeline has been, and we think will continue to be. We would like to just be comfortable that there is enough consistency in that, and sustain free cash flow to the point where we would make a change in the dividend that would have some meaning.

All right. Great. Thanks again. Nice year.

Thanks, Tom.

Thanks.

Our next question is from the line of Manuel [Carchman] with Citi. Please go ahead.

I'm here with Michael as well. Ed, if we think about the 9% yields that you guys quote, and if we look at the deliveries completed in 2014 and will be completed in 2015, how do we think about the stabilized yields versus sort of the year one going in yields on those?

This is a GAAP yield that 9. Is that what you are asking, Manny? What is the GAAP? Because everything that will deliver in 2015 is 100% pre-leased. What we delivered in 2014 was 100% pre-leased. So there is no lease up time. All of the leases are long-term no outs, and they each have an annual escalator in them, and that is what we factor in to that, to give you that average, net weighted average 9 for what is in our pipeline right now.

Okay. And then if we look at sort of the large build to suit landscape akin to the MetLifes and Bridgestones of the world, can you talk about what the landscape is like for those types of tenants looking for space, and sort of how much if you want to call lead time that you have in those kind of projects? Bridgestone, for example, was a two year type project, or did that come together quickly? And just what you, however comfortable you with are talking about what you are participating in or looking at right now?

The first part of the question, just in general always have to look at those things as multi year projects from first conversation to the announcement. These companies are very deliberate about how they go about looking for, and both of those were potential relocations. I guess even the Bridgestone is, in that it has moved from the Airport submarket to SoBro, MetLife the project that we are building for them, it will serve the Americas, so theoretically they could have landed anywhere within the Americas to do that work. There is a lot of work that goes on before we even start talking about what the building elevation is going look like, and how all of that is going to come together. What is the Governor going to do with tax incentives, what does the employment pool look like, what is the cost of business. It is traditionally a multi year project, because there are so many factors to evaluate as CEOs and Boards and investors make decisions on what community and geographic area to go to, before you even start to delve into, now that I have decided on these, or narrowed it to these let's say three markets, now I need to understand what is available within those three markets, and they look at the universities, and employment pool, and who the developers and, and what sites, et cetera, and then there is the process to go through on that. And then once they lean towards one, then there is another exercise that you go through, with regard to lease negotiation, and how the building would look, form, and function.

There is also a big component of this are the incentives that are being offered by the various jurisdictions, and those really weigh heavily on the competition from market to market. Quite often as we have talked about the spread between new construction costs and existing, those incentives really play into very heavily where they land.

That is what I meant by, in the conversations with the Governors. It is usually what are they getting off the Governor's letterhead, and how that plays into their decision. I'm not saying that the most aggressive letterhead means that is where they are going, but it is a part of the early component of the negotiations, or the evaluation. On the second part, we continue to see companies that are looking to move, and I think Mercedes is the most recent vivid example. Them coming out of New Jersey, and making the decision to go into Atlanta, Georgia. It will be a company-owned building, but still it is a migration of a household name into our footprint.

Thanks for that color.

Sure.

(Operator Instructions). The next question is from the line of Vance Edelson with Morgan Stanley.

Thanks a lot, good morning. First all just bigger picture on acquisitions and dispositions, you were marginally a net seller in 2014, it could go either way this year, and a log of that is beyond your control, but If you had it your way, would you like to see Highwoods as a net seller, given where cap rates are likely to be this year, and are you comfortable with that concept, or would you really like to see the Company grow through acquisitions, and is that to you a more favorable outcome when we think about 2015, than Highwoods is a net buyer?

Good morning. I would say in 2014, yes, we sold more than we bought. But not by a significant margin. And we certainly chased more in the acquisitions than we bought. So I think that we would like to be more of a net buyer than a net seller. We have made dramatic improvements in the portfolio over prior years in our dispositions. We also announced almost $350 million of development in 2014. So I think that has to factor into a significant degree on maybe I'm taking liberties with how you asked the question, but maybe I see it as we were last year I saw us as a net investor, as opposed to a net divester. Given the fact that we did over $0.5 billion of acquisitions and development, and only sold $183 million. We will continue to cull from the bottom of our portfolio, and as I mentioned in an earlier response, we will do that predicated on how the building underwrites for us, and how we see the appetite in the marketplace to sell those, and we will continue to work that. And I think if we own 100 buildings, we will always look at how can we buy or build more buildings like numbers one through ten, and now how do we get out of buildings 90 through 100?

Okay. Makes sense. And then speaking of the bottom of the portfolio, can you bring us up to date on the non-core land holdings, almost 100 acres there. Is this a good time to be monetizing that, or do you think you get a higher price down the road?

We have been doing that. I think that is a regulated amount, too, as we work with some of that, in rezoning and putting it to the market for alternate uses other than office, which is how most of this is selling. So we have been involved in some this rezoning. We have been successful in the past of converting some of our noncore land, for use for multifamily, and in some cases, we have actually contributed the land, and become a JV partner with no debt exposure, and an equity investor by way of contributing the land, and then selling the project at stabilization rates, and more than doubling our money. The lands that we have sold in the past has gone from apartments, hotels, et cetera, and we are continuing to work our way out of that portfolio. But we don't see any incentive to do a blue light special, and try to get it all out in 2015. We would rather invest a little sweat equity, find the right people, and be involved in rezonings to maximize the value of that.

Got it. And then lastly, tenant strength by vertical and the relative demand from newer types of tenants versus traditionals like law firms. You mentioned some of what is driving Raleigh in the prepared remarks, but across the broader portfolio, what are you seeing in terms of the changing makeup of the inbound interest that you are getting right now?

Not a dramatic change in Raleigh we mentioned and we see clinical research and pharmaceuticals and biosciences and financial services, healthcare, technology, certainly insurance. Bridgestone is a retailer in R&D. We really haven't seen a dramatic change in the makeup of which companies are looking for space. I think the fortunate thing is that we are in markets that are very well diversified with regard to economy, that we are not in markets that are heavily dependent on any one industry. And I think our portfolio also mirrors that fairly well, and that we don't have any division that represents greater than 15.3% of revenues, and we don't have any customer other than the federal government that represents more than 2% of revenues. So I think the diversity of the economies that we are in, are well reflected in the diversity of how we receive revenues by city, and by customer.

Okay. That's great. I will leave it there. Thanks.

Thanks, Vance.

Our next question is from the line of Tayo Okusanya with Jefferies. Please go ahead.

This is Charles, standing in for Tayo. Thanks for taking the questions. Most of mine have one answered so far, so just keep it real quick. I apologize if you had already said, but in the guidance do you include term fees for 2015?

We do not. Historically, we have broken out term fees for you. The term fees that we would anticipate are in our 2015 guidance. We just haven't put them out specifically because they are relatively de minimis.

That is helpful.

Charles, sorry add to that. You made a good catch there. We have in prior years in guidance we have shown that. We just think it is such a de minimis number at this juncture it is really noise. So we culled that out the guidance table.

Right, and just to make sure you know that we made it in our prepared remarks, we are next year 2015 we will be in compliance with the NAREIT White Paper on FFO, so we made some distinctions in my comments about that. So expect that.

Okay. Okay. That is helpful, thank you. Next question then as I think about the development starts that you had guided here to 2015, I look at 2014, I look at 2014's actual starts that you had, I mean you were significantly above the guidance that you projected for 2014, granted a lot of that had to do with the Bridgestone project, and I'm just kind of thinking as we go into 2015, do you have a sort of a sense of potential that development pipeline, or that development start might be exceeded again, by say, more of these lumpier projects?Thank you.

Charles, I think that what I would say is that we are comfortable with the guidance that we put out. If we are fortunate to beat it, we will be the first with ones to tout that. Rest assured that we put a lot of time and thought into both the low and high end of all components guidance that we release, and we think that they are all very reasonable ranges. None of them will we achieve if we don't get up and work hard together as a team. But we think that certainly the low end is doable, and we think that the high end is not shooting blindfolded from half court. We think that they are achievable but some things are going to have to happen in our favor to hit that, and in the past we have exceeded the high end and more has come together than what we had anticipated, or thought was high odds of happening when we first initiate guidance.

Okay. Ha is helpful. I guess just lastly on that, just trying to make sure on this. As the environment competitive environment for development gotten a little bit more aggressive over the past year, that would keep you from saying that guidance could be exceeded?

There is no new competition this year that we didn't have last year or the year before, or the year before that. I think that I'm going to try and not sprain my own elbow patting ourselves on the back here. But our land portfolio our balance sheet, our people, our track record put us in position to compete. By no means does it put us in position to win every one of these deals, but we are certainly we think strong competitors in the development arena. But we haven't seen new competition enter the fray as we pursued deals in 2015, that we didn't compete against successfully and unsuccessfully in 2012, 2013, and 2014.

I appreciate the color, guys. I will jump off now. Thank you.

Thanks, Charles.

Our next question is from the line of John Guinee with Stifel.

Ed, let me congratulate you on hitting on all eight cylinders, while keeping G&A in check, and actually increasing I think your land held for development by $30 million year-over-year, if I'm reading it correctly.

Thanks, John.

One question though is, what is a blue light special?

(laughter) Sorry, that is a reference to a merchant which I'm sure you never crossed their thresh hold.

I know and neither have you. When is the last time you have actually been in a Kmart? Serious questions. Did I hear in the dialogue that you are actually going to present a NAREIT defined FFO next quarter?

We are, John. We are trying to comply with the White Paper. We have traditionally left out acquisition costs and debt extinguishment, we built that into the guidance and intend to comply with the White Papers as closely as we can.

Good, good. Is your acquisition range of $50 million to $300 million so wide if that totally a function of whether you are successful on the king and queen building or Concourse one and two up in the perimeter submarket of Atlanta?

No.

Great. This is a great answer, Ed. (laughter)

A little too wordy, but no.

You don't want to expand on that, do you?

No.

Thanks a lot.

Thanks, John.

Our next question is from the line of Michael Salinsky with RBC Capital Markets.

I will keep it brief here, just in name of time. Just going back to the question, the lease term fees you are including in there, and moving to the NAREIT definition, as there any land sale gains, merchant sale gains, or anything else like that in the numbers we should be aware of at this point?

I think we articulated the $0.07 of land sale gains we had in 2014, so rounds just to about $0.07. Next year, again, we will be, even though we are going to this FFO NAREIT definition, we will be clear about anything that is unusual. Obviously as Ed said, we have got some potential land sales that may or may not result in gains or losses, but we will definitely spell that out for you in all of our public disclosures.

Okay. That is helpful. And then just second, obviously good visibility on 2015, real good organic growth there. Just preliminary thoughts on 2016 at this point, just in terms of any vacates we should be aware of?

Let's see. HCA in 2017 is really the only one of size that we are staying close to. HCA is in a multiple number of spaces with us, and they are doing a company-owned project in Nashville, so we expect to get a fair amount of space back from them. And then we have Syniverse in the fourth quarter of 2016, which is 199,000 square feet, and that is in Tampa, and that one is too early to call.

Okay. That is helpful. Then finally touching back on the disposition plans. Are we looking at much the same, similar to what we saw last year, just cleaning up some of the markets, or maybe plans to do a little more value harvesting?

No, at door number one.

Door number one. Fair enough. Thanks, guys.

Thank you, Mark.

There are no other questions at this time. I will turn it over to Mr. Fritsch.

Thank you Operator, and thank you everybody for dialing in. As always, we are available for any questions you may have. Please don't hesitate to give us a holler. Thanks.

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.