Highwoods Properties Inc (HIW) 2015 Q2 法說會逐字稿

Good morning and welcome to the Highwoods Properties Second Quarter Conference Call. (Operator Instructions) I would now like to turn the conference over to Ms. Tabitha Zane. Please, go ahead, Ms. Zane.

Thank you and good morning. On the call today are Ed Fritsch, President and Chief Executive Officer, Ted Klinck, Chief Investment 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 email copies to you.

Please note, in yesterday's press release we have announced the date for our third quarter 2015 financial release and conference call. 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 condition, including estimates and effects of asset dispositions and acquisitions, the cost and timing of development projects, the terms and timing of our 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 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 of yesterday's release and are also available on the Investor Relations section of the web at Highwoods.com. I'll now turn the call over to Ed Fritsch.

Good morning. And thank you for joining us. Our company continues to benefit from sound business conditions that are resulting in steady demand for our well-located BBD product. While many of us often wish the pace of GDP growth was faster, this measured cadence may very well be leading to an even longer sustained expansion period rather than a live fast, die young scenario.

Yesterday afternoon we reported FFO of $0.77 per share for the second quarter and 1.2 million square feet of office leasing. We grew same store cash NOI 5.3% from a year ago and increased in-service occupancy 90 basis points sequentially. We are now projecting company-wide occupancy of 93% to 93.5% at yearend, raising the low end by 50 basis points.

A key highlight for the quarter was our execution in development. We announced our $107 million Riverwood 200 project and we placed $72 million of 100% leased development in service, the second MetLife building, and the Biologics headquarters building, both in Raleigh. We are pleased to announce two additions to our development pipeline, Seven Springs II in Nashville and Enterprise V in Greensboro.

Seven Springs II, a 131,000 square foot office building with structured parking, will consume our last office pad in our Seven Springs project in Nashville's highly popular 97.7% occupied Brentwood submarket, one of the market's BBDs. The total investment is expected to be $38.1 million, including the value of company-owned land. We anticipate construction commencing next quarter with delivery in the second quarter of 2017 and stabilization in the third quarter of 2018.

Our existing in-service Seven Springs portfolio is 100% leased. It consists of two office buildings encompassing 332,000 square feet plus 41,000 square feet of amenity retail. In addition, construction is well underway at Seven Springs West, a 203,000 square foot office building that is now 86% leased to AIG and is scheduled for delivery in the third quarter of 2016.

This quarter, we will commence development of Enterprise V, a 131,200 square foot industrial building for an anticipated total investment of $7.6 million. The building is projected to stabilize in the second quarter of 2017, a year after its 2Q '16 delivery. This is another solid opportunity for us to put company-owned land to work.

In Enterprise Park, we have three existing buildings totaling 658,000 square feet that are 100% occupied. We have two more pad sites at Enterprise Park that can support 360,000 square feet of additional industrial development. Our Enterprise Park is in the airport submarket where industrial occupancy is 98%.

Riverwood 200 in Atlanta, the other addition to our development pipeline subsequent to our April call is a 299,000 square foot office building adjacent to our 94% occupied 503,000 square foot Riverwood 100 project. We announced this $107 million development in June with 39% preleasing and have grown preleasing to 66% in just two months' time.

Our current development pipeline is now $521 million and includes eight projects in six markets encompassing 1.6 million square feet that is 72% preleased. We continued to chase additional development opportunities, mostly on company-owned land, and have raised the low end of our guidance from $150 million to $200 million. We have left the high end at $250 million unchanged. Looking ahead, we would expect stabilization of GAAP yields to continue to average 8.5% to 9.0%.

Turning to acquisitions, cap rates are rich and some assets, particularly stabilized assets without significant future upside, have traded at prices per pound out of sync from our view of their risk profile. However, we believe we can be successful in acquiring BBD-located buildings that enhance the quality of our portfolio at prices that offer upside, whether through lease up, Highwood-tizing and/or harvesting operating efficiencies. We have left our guidance for acquisitions unchanged at $50 million to $300 million.

Turning to dispositions, we've sold $32 million of non-core properties year to date. This includes a sale subsequent to the end of the second quarter where we sold a 102,000 square foot office building in Winston-Salem for $15.3 million. This property is 100% leased to US Airways. We have a well defined list of non-core assets in various stages of marketing and have left our disposition guidance unchanged at $100 million to $200 million.

We continue to make significant progress in our war on complexity, including reducing our exposure to joint ventures. During the quarter, we acquired our JV partner's 77% interest of Eola Park Centre, a 168,000 square foot office building in Orlando, for a total investment of $22 million, 50% below estimated replacement cost. We now wholly own all the for-lease office buildings of size surrounding Lake Eola in CBD Orlando, a BBD.

Another of our non-core joint ventures sold its two buildings and an adjacent small parcel of land in Atlanta, generating $9.8 million of proceeds for our 40% share. This transaction resulted in a land sale gain of about $1 million in the second quarter. We expect to closeout two more relatively small non-core joint ventures later this year. Given this, by yearend 2015, we will have gone from a historic peak of 71 JV assets representing approximately 10% of our revenues to only 13 JV assets representing approximately 2.5% of our revenues.

Turning to FFO, we have further tightened our 2015 per share outlook. We've raised the low end by $0.03 to $3.00 and reduced the high end by $0.01 to $3.06. The midpoint of our range is now $3.03 per share. As we look ahead, we expect meaningful NOI upside over the next few years. Atop the 909,000 square feet of 97% lease development, representing a total investment of $217 million delivered over the last three quarters, we have an additional 1.5 million square feet of already 71% preleased development, representing a total investment of $485 million, delivering over the next two years.

Ted will now cover leasing highlights. Ted?

Thanks, Ed. And good morning. I see lots of really good opportunities in our market to further strengthen our position by capitalizing on tightening supply and growing demand to continue to push rents and increase occupancy. In addition, our strong balance sheet gives us a competitive edge. Our ten division leaders are charged with identifying new opportunities and their success is evident in our robust development platform. All of this gives me high confidence and optimism for Highwoods continued success.

As Ed noted, we had solid leasing activity this quarter, a total of 1.2 million square feet, including 916,000 square feet of second gen space. Occupancy increased to 92.8%, up 90 basis points sequentially and 200 basis points year over year. 4 Average in place cash rental rates across our entire office portfolio grew 4.6% to $22.95 per square foot compared to a year ago.

For office leases signed in the second quarter, cash rent declined 3.7% while GAAP rent, a more meaningful measure, grew 9.3%. Net effective rent on second gen office leases signed was $12.64 per square foot per year and our five quarter average was $13.60, the highest in the company's history. Overall, our markets are strengthening and year over year asking rents are increasing 3% to 5%. Continued positive net absorption and corresponding vacancy declines are increasing bargaining power for landlords.

In virtually all of our markets, rates needed to justify new construction are still 20% to 30% higher than second gen rates, keeping a bridle on spec development. Our strongest markets are Atlanta, Nashville, and Raleigh, all three of which have reported office job growth over the past 12 months ahead of the national average of 2.1%.

Atlanta has experienced 17 consecutive quarters of positive net absorption totaling 13.8 million square feet. Despite shrinking availability of space, especially Class A, there is only 600,000 square feet of available space in new construction, including the remaining 100,000 square feet available at our recently announced Riverwood 200 development. Occupancy in our Atlanta portfolio was 91.2% at quarter end, up 440 basis points year over year and 170 basis points sequentially, highlighted by our having grown occupancy at our 555,000 square foot One Alliance Center from 67% to 92% in just two years.

We've also achieved solid occupancy growth at GlenLake North and South Towers, the two properties in the Central Perimeter submarket we acquired from a JV partner in August 2013. We've grown occupancy on this 505,000 square feet from 82% to 97% in just under two years.

Nashville's economy continues to be very strong. Moody's Analytics describes Nashville's population, employment, and business relocations as surging. Throughout the first half of 2015, the Nashville office market absorbed 727,000 square feet, already more space than absorbed in any full year since 2007. The market's overall occupancy rate has climbed to 91.9%, with Class A occupancy at 96.6%. Occupancy in our Nashville portfolio was 97.7% at quarter end, up 240 basis points sequentially. As Ed mentioned, given the market dynamics and the performance of our portfolio, we are excited to launch Seven Springs II.

The Raleigh office market continues to strengthen, posting its ninth consecutive quarter of positive net absorption. It continues to garner a multitude of accolades with life sciences, bio pharma, and information technology as key growth areas. Our Raleigh team had another active quarter, leasing 243,000 square feet of second gen space with average GAAP rent growth of 9.7%. We also increased leasing at our GlenLake V development from 53% last quarter to 81% today. The building is pro forma to reach stabilization in the second quarter 2017.

While Tampa has been a bit slower to the economic recovery party, market vacancy is at its lowest level since 2006. Net absorption in the first half of 2015 has already exceeded any full year since 2006. We grew occupancy in our Tampa portfolio 180 basis points sequentially, primarily as a result of two large customers moving to Tampa Bay Park. Our 100% preleased build-to-suit for Laser Spine Institute is proceeding well and we remain on track to deliver that development in the first quarter of next year.

We are seeing good leasing activity and improving rental rates across all of our divisions. Our Southeastern markets are benefitting from job growth in a number of industries, including high tech, pharma, and business services. We feel confident occupancy in our portfolio will increase by yearend as businesses and job growth continue to expand.

Mark?

Thanks, Ted.

For the second quarter of 2015, we delivered FFO of $0.77 per share. When you adjust for land sale gains in the second quarters of 2015 and 2014, the comparison is $74 million of FFO in 2015 or $0.76 per share versus $69 million of FFO in 2014 or $0.74 per share. That is a 7% increase year over year in dollars and a 3% increase in per share amounts.

The primary FFO growth drivers are higher same property NOI due to increasing occupancy and contributions from value-added acquisitions and development deliveries slightly offset by lost NOI from dispositions. Growth in same property cash NOI was 5.3% quarter over quarter. We have raised the low end of our guidance on same property cash NOI from 5.5% to 6% and left the high end at 6.5%.

As Ed mentioned, we have tightened our FFO guidance to $3.00 to $3.06 per share. We also raised the low end of the range on our development announcements from $150 million to $200 million and tightened our occupancy range to 93% to 93.5%, up 50 basis points on the low end. These all reflect the positive momentum we see in our markets and overall performance at Highwoods.

Turning to our balance sheet, we have continued to grow the company on a leverage neutral basis with leverage at June 30, 2015 of 42.1% versus 42.4% in the 2Q of last year. In the first six months of the year, we have placed in service $125 million of development projects that are reflected on the balance sheet as changes between development in process and buildings and land.

We paid off a $39 million secured loan in the quarter and expect to pay off two more secured loans totaling $113 million in the fourth quarter prior to their stated 2016 maturity dates. The weighted average coupon on those two loans is just under 7%. Our unencumbered NOI increased to 84% and will further increase to over 90% by yearend. Also, our debt to EBITDA improved to 5.6 times at June 30.

We also fortified our balance sheet by expanding our $225 million unsecured bank term loan to $350 million, extending the maturity by an additional year to June of 2020 and reducing the LIBOR borrowing spread from 175 basis points to 110 basis points. We very much appreciate the continued support of our bank group.

During the second quarter, our partner in a non-core joint venture that owns a 205,000 square foot building in Tampa's Rocky Point submarket exercised the buy-sell provision in the JV agreement. As a result, GAAP requires us to deconsolidate that joint venture and make an adjustment to the prior year balance sheet. This is why you see the words as revised in the caption for the 12-31-14 balance sheet. For more details, you can see footnote 1 on page 15 of our 10-Q.

Before we take your questions, I want to underscore Ed's point regarding execution on our development pipeline. The performance of our development/construction team on cost management, while delivering high quality product, has been outstanding. Among what has been recently delivered, what's underway, and the three new development opportunities Ed outlined, our robust development platform is truly an exciting part of our long-term growth plan.

Operator, we are now ready to take your questions.

(Operator Instructions) Jamie Feldman, Bank of America.

Great. Thank you. This is Scott Freitag here with Jamie. To start, could you guys please just discuss your leasing prospects for the projects in your development pipeline that make you feel comfortable building spec?

Sure. Good morning, Scott. This is Ed. We looked at the submarket as a total and what vacancy there so it's low single digit vacancy in both submarkets where we proposed to build Seven Springs II and Enterprise V. So, giving low single digit vacancy, giving 100% occupancy virtually in our adjoining projects, we're 100% of what else we own at Enterprise and the only vacancy that we have in Seven Springs is the remaining floor at AIG and that building is under construction.

We also have evidenced a very good momentum with what we've done at GlenLake V. We recently announced Riverwood and we moved within two months, we moved preleasing there almost before we even put a shovel in the ground from high 30s to mid-60s. So, we've evidenced good preleasing activity and the submarkets are robust and we think the timing is ideal and both of them are on company-owned land so the incremental spend is even lower than the total dollar amount shown.

Thanks. How is you land situated for future build-to-suit projects?

Well, build-to-suit or spec or partially preleased, we have the capacity with our core acreage to build $1 billion worth of new product.

Okay. Could you also discuss your latest thoughts on the risk of new supplier across your markets?

Sure. We have said in the past that given the cost of new development, that has played a bit of a governor on the amount of new construction that's coming out in any of the markets and obviously there are some other dynamics with regards to lending and demand, et cetera. But given the gap between first and second gen pricing for space, obviously driven by the cost of construction, there isn't a whole lot. In prior we've given a bit of a yellow flag for us to be cognizant of how much there is in Raleigh and Nashville and in the other markets it really isn't anywhere near a meaningful number.

The vacant space in Nashville or the spec space that is being built in Nashville has actually absorbed quite well. And there's only 128,000 square feet of remaining underway spec space in that market. Raleigh is a little bit more. It's about 55%, 60% preleased and we're more mindful of that. We're glad that we stared GlenLake V when we did. We started at 25% preleased. We're now in the 80s and we just recently delivered it. So, our track record is good on that and the market as a whole we're not seeing a significant amount of new development on a speculative basis.

Okay. Great. That's it for me. Thanks, guys.

Thanks, Scott.

Vance Edelson, Morgan Stanley.

Terrific. Good morning. The focus on development and bringing more office capacity into your markets, that suggests a degree of optimism that not only is the current economic up cycle going to continue for a decent amount of time and you did mention that the sluggishness of it could suggest it will be sustained. But it also suggests that we won't have a problem in the next recession, whenever it comes, with the greater office square footage that's going to exist in your BBDs and even if the new supply is sluggish now as you mentioned, it still means we're going to have more supply than we had going into the last downturn. So, can you comment on that? Is there obsolescence for some of the stock or anything else that might mitigate this concern?

Yeah. Good morning, Vance. Two thoughts off the cuff. One is each downturn that we've experienced and I'm here going on 33 years so I've seen a number of downsides or down markets. They each have their own characteristics. Sometimes it's underemployment, sometimes it's oversupply, sometimes it's a recession and caused lay offs. Sometimes it's construction pricing.

There's various things that influence each downturn. I think the fact that there is such a limited amount of new speculative construction underway in these markets, as I said to Scott, restricted by the pricing of new development and the gap between first and second gen rents, I don't think that there will be a lot of over abundance going into the next downturn when it comes.

And I also think that based on my opening comments and the cadence of the economic situation right now that the economy hasn't just roared to where we're enjoying robust times which there are days where we kind of have chagrins over that but the bottom line is the cadence of the economy right now is steady. And it's positive. I think a sharp downturn is unlikely. I think there won't be a tremendous amount of overhang, of new space that will be unleashed going into that.

Okay. That's fair. And Ted mentioned the strong balance sheet giving you competitive advantage. So, just following up on that, when it comes to the competition and the funding of their own development, especially among the more local players, do you get the sense that banks -- are they getting more aggressive in giving them what they need? So, I guess the question is how does your own funding situation compare to that of the competition? If you could just spell out that advantage?

Sure. And you touched on it. Most of our competition is local, private developer. And they may have other means with regards to institutional partners or lenders but they have a more complicated capital stack than us being able to work off of our credit facilities.

So, what Ted was referencing when we get in front of prospects and we're able to say we can fund this off of our credit facility and you're talking to the entire capital stack when you talk to us, we don't have to bring others to the table, that's a definitely competitive advantage, not only with the user but also with the general contractors and the construction community.

So, it's a big positive for us. We feel like our access to continue to adequately and appropriately fund our development pipeline, our investors have been there for us and we continue to grow the company on a leveraged, neutral basis, so we're in good shape on that. Specifically with regard to banks, clearly banks are looking at what's going on in the market with regards to supply and demand, the pricing of capital.

Banks are very competitive from bank to bank but they're also very cognizant of the delta between first and gen market rates and the prospect pool isn't the entire market. The prospect pool for first gen is those who are willing to pay up significantly for new gen space. So, you have to be careful about that. And I think banks are very cognizant of that delta.

Okay. Very helpful. And then last one from me, just given that you straddle the office and industrial markets, if you could give us your perspective on the relative merits of each which may be a way of asking would you like even more industrial exposure or is it really just going to remain a niche for you?

Yes. Just to put that in perspective, we straddle it but nine toes are in office and the pinky toe on your weak foot is in the industrial. Industrial is a very small part of our platform. It's less than 2.5 million square feet and a small percent of revenues, about 2% of total revenues. We solid out of all our industrial in Atlanta over the last couple of years, very good timing on getting out of that and now focus solely on the office in Atlanta.

In Greensboro therefore is the only market in which we have industrial and it's all concentrated in the airport submarket area and we have development pads and we feel like we can continue to create value by developing on those development pads. As we mentioned in the comments, after we delivered this 131,000 square feet at Entertainment V we have two more pads that would support about 360,000 square feet.

The submarket in industrial is low single digits vacant. We feel that given the demographics of Greensboro, for us to have both office and industrial, it serves us well. So, it's a small component. It's a meaningful component for our Greensboro division but it's a very small component for the company.

Okay. That's great. Thanks, Ed.

Thank you, Vance.

Tom Lesnick, Capital One Securities.

Thanks. Good morning, everyone. Ed, just a quick question for you on development. As we see the pipeline ramping up here, how do you think about that in terms of risk? Do you view it as a percent of enterprise value? Or the percent that's not preleased as a percent of enterprise value? How should we think about your risk tolerance there?

Good question, Tom. This is right out of the textbook but I can't but help say we look at it from all aspects. What it is as a percent of total enterprise, how does it play with regards to what's immediately available or we think is coming online within the submarket, what we think our prospects are for leasing the building and the timing of when it would deliver to the time it would stabilize versus what's rolling within the market, not only in our own portfolio but within competitor buildings, whether or not it's on company-owned land.

We really look at it from many dimensions and we for example have on the shelf a design for a new building for every division that we're in but we're not going to pull the trigger on all of them and go spec. We're going to pull the trigger on those that we feel would do well and some of those we would have to have a certain amount of preleasing and others we feel comfortable being more spec.

I think the Seven Springs II is a perfect example. I mean, the submarket has been strong and is strong, low single digits vacancy. Our Seven Springs project is just a self-serving, unabashed, self-marketing, but the Seven Springs project has done exceedingly well and it just makes a world of sense to build that building. So, we look at it from all aspects. Our investors have been with us on this. In the last three quarters we've delivered four projects for over $200 million, about 1 million square feet, it's 97% leased.

And we're 72% on the half of 1 billion plus that we have underway. So, we think when we look at the vacancy rate, the vacancy amount, the amount of lease up time that we built into the pro forma, we've been successful on it and there's really no reason to believe that what we have announced won't be successful given all the parameters.

Tom, it's Mark. Just one more thing to add. The rating agencies obviously pay attention to this two. I think our high degree of preleasing has given them good comfort here in terms of what we're doing and then I would say the overall metrics of the company, the leveraged metrics and the conservative nature that the balance sheet's been managed has given people a lot of comfort here. So, I think we actually have a lot of room, especially when it comes to build to suits with high preleasing.

Got it. And, Mark, just to follow up on that, with the prospect of a rising rate environment here in the back half of '15, that could potentially put pressure on stock valuations in the near-term. How are you thinking about leveraged levels and your comfort with the development in the pipeline growing? Is there a limit to which leverage could get before you have to take the foot off the gas pedal so to speak?

Yeah, Tom. So, you know we've established kind of a bandwidth that we're operating within in terms of leverage. So, in that 42% range we've kind of gotten comfortable with that and we've been able to grow the company on a leverage neutral basis here for some time. That obviously entails using the ATM when it's appropriate and keeping the right balance of equity here. I think given what's happening in the interest rate environment, I do think obviously conventional wisdom would say you're going to have some rise in rates here. I'm not sure that has a lot of impact to us. Obviously we've got a lot of fixed debt in our fixed rate exposure in the portfolio. So, I think it's going to be relatively modest in terms of our debt cost. And then again you've got to make a judgment on equity costs. But again we're committed to maintaining that appropriate balance of leverage and keeping the balance sheet in good shape.

Got it. And then just turning to organic growth for a minute, how should we be thinking about -- you guys have obviously done a lot of leasing over the last 12 months or so. How should we be thinking about the free rent component roll in and how that impacts cash NOI over the next 12 months or so?

Obviously the leasing terms, the stronger the markets, the better our portfolio, the better the leasing terms. Landlords right now have a pretty firm grasp on the negotiation baton. There has been leasing that we've done for example in this past quarter to help our rent roll with regards to assets that we want to sell. So, we'll more than make up any concessions we've made to do the lease in the form of proceeds upon the disposition.

But all leasing metrics have significantly improved as the markets have gotten better. Now, given that we're down to the last 7% or so of our portfolio, it might be fair to say that it's not the best 7%. So, there will be some spaces that maybe don't have the view or the access that we'd like it to have where we may do some concession in order to get it leased. But I think concessions nowadays would be really in the corner of less desirable space or a space that we want to lease in order to better position for sale.

Got it. And then just turning to the expense side of the equation for a second, are you guys seeing any significant property tax pressure in any of your markets right now?

We obviously pay close attention to this. It's one of our largest expenditures and we have had in certain states some reevaluation and some disputes with -- or some negotiation with the property tax folks but nothing of any consequence when you look across the portfolio. I would not call it a material risk.

Tom, just one quick note to that, so you know we have 1.5 people who are dedicated to property taxes. Not taxes in general but specifically real estate property taxes. That's all they do and they're extremely good at it and they have good tenure with us. So, they have great institutional knowledge and familiarity with the counties and municipalities within which we work. So, it's not just lip service that we pay attention to it, it's 1.5 people dedicated to it and that's all they do.

All right. Thanks, guys. That's all I've got.

Thanks, Tom.

Manny Coachman, Citigroup.

Good morning, everyone.

Good morning, Manny.

Ed, you mentioned in your prepared remarks that you maintain the $50 million to $300 million of acquisition guidance. Can you give us an idea of how much you're actively looking at and sort of where does that place you in that very wide range?

I don't think what we're looking at today is any different than all that we look at. We've said in the past and we'll say again, anything that becomes available within our footprint or markets that we would consider going into, we pay close attention to it. So, all the activity that you see for example reported in real capital analytics, we've looked at it. It's good for us to look at our options, see what's out there, and also to use what's trading within the market as a benchmark against our own portfolio.

So, we kept the range because we continue to look at things that either are in the market or may be coming to market and where our opportunities to buy something that may have some leasing upside or some operating upside or some Highwood-tizing upside. So, we feel like maintaining the range of $50 million to $300 million, given that we still have the second half of the year is appropriate.

And then on the development yields, you guys quoted 8.5% to 9% in the release last night. Where would that be on a sort of going in cash basis if you don't mind sharing?

We do mind sharing. I'm sorry, Manny. We're in discussion on at least half a dozen projects right now and we feel like it would work against the company's interest if we disclosed specifically that number. Each conversation has its own nuances with regards to the credit worthiness of the prospect, the special utility, the site, whether it's on company-owned land or not. So, we feel like the number that we give in the gap and the weighted average of being 8.5% to 9% I think gives you some numbers that you can model around but it doesn't hurt us in negotiations with our prospects and customers.

Great. Thanks.

Sure. Thank you.

Brandon Maiorana, Wells Fargo.

Good morning. So, it looks like you guys have really good traction at Seven Springs. You moved up the leasing and the stabilization data on Seven Springs West. Just does that submarket in Brentwood compete with Cool Springs? And how do you think about the space that you're probably likely to get back from HCA I think in '17? Is that competitive with Seven Springs to the development project you announced?

Two parts. One is let's just say roughly speaking downtown, go about halfway to Cool Springs and you're in Brentwood and then go to Cool Springs. There's 20 miles from core of downtown to the heart of Franklin, Cool Springs area. Let's say Brentwood, Seven Springs is roughly in between. So, there is some overlap in prospects but there's not 100% by any means overlap in prospects between what Cool Springs would offer versus Brentwood. Let's call it 25%. We'd look at both.

And then with regard to HCA, of what's expiring, there's a piece of that, about 10% or so that we think is going to stay. And then when you break out the other two parts it's about 40% in West End, 40% Brentwood, and then the remaining 20% in Cool Springs. So, I think we have to look at it in that part. So, only 40% of what we would get back from HCA would be in the Cool Springs competitive -- I'm sorry, in the Seven Springs competitive set, another 40% in the Cool Springs area.

Brandon, this is Ted. The only other two things I add is the submarket right now is low single digits so there really is very little leasable space that's available in the market. And then we also looked at really the two holes we had last year or the last 18 months or so, LifePoint and Tractor Supply. We back filled those in really quick order. We back filled some of the space before the customer even moved out. So, I think we feel very good about the space we're getting back as it relates to the overall market.

Is the price point of what you're going to get back different from kind of new construction rents that you'd be targeting for Seven Springs II?

It is.

Okay. That's helpful. And then, Mark, I wanted to maybe look at FFO growth versus AFFO growth sort of going forward. I think we can kind of figure out FFO growth from sort of the big moving pieces that are there but given that portfolio is 93% occupied now, I think you guys expect it to be at that level or a little bit higher by the end of the year, how should we think about maybe the TIs and maintenance CapEx? Could that start to move down in '16 or '17 versus kind of the run rate that it's been at over the past few years?

If you look at page 2 of the supplemental where you can do the math effectively on our cash available for distribution, you know when you go through the dividends and the CapEx, you can see that we have had a pretty steady rate of TI capital investment and leasing commission and your point, I think you're asking about is as we get further leased up here, we have less exposure, the markets are more competitive, does that just describe, maybe those CapEx numbers will come down.

Our expectations is that those numbers should decrease over time. The other element to consider is I do think with the development deliveries we will potentially -- we should spend less capital on brand new buildings that we put into service over time. So, I do think that number should improve. Whether it's '16, '17, how dramatic that difference gets, I think is a timing issue.

We obviously have Bridgestone, the big development items delivering in '17. So, we'll continue to monitor that and we're obviously paying attention to the capital we spend on those buildings. But I think that's a reasonable expectation. That number should get wider over time.

Just to add one footnote to that, when you look at what we spend, leasing CapEx, so TI and leasing commission per year of term on a relet versus a renewal, the renewal on average for the last four years, by year and then total weighted average for the period is about half. So, if we move towards more renewals versus relets, your thesis holds.

Yeah. I was looking at that. Because it looks like over the past three or four years I think your new leases have been about a third of the total and I think historically you guys tend to run sort of 25% to 30%. It seems like that should be the case. The other aspect, maybe just a straight line of free rent is there as you've leased up, it seems like your overall straight line rent adjustment as a percent of revenue has been running in sort of that 3.5% range over the past couple of years and that's higher than it's been historically. Is that something that we would expect to come down as maybe some of the development projects you get past the free rent period and this lease up sort of stabilizes.

I would expect that, Brandon. That makes logical sense to me and again as we get into these with about 7% or so of the space left to lease you would think those numbers would improve as well.

Great. Thanks, guys.

Thank you,.

Jed Reagan, Green Street Advisors.

Good morning, guys. So, the cash releasing spreads kind of fell back into negative territory last quarter. I know that metric can bounce around quite a bit but just wondering if there are any specific larger leases or maybe kind of market mix that might have driven that decline and whether we should think about that 2Q results as sort of a fair run rate for the back half of the year?

Hey, Jed. It's Ed. I think that there wasn't any one big lease that drove that. As I mentioned in a earlier response, there was some leasing that we did during the quarter that is in buildings that we are posting for sale. So, noncore buildings where we did some leasing in order to elevate NOI. And we'll get paid well on the proceeds for that. So, that goes into the mix. I also wish that there was a unified definition for cash rent growth and how that's measured across the industry because I think the math is different from some companies to other companies. That's why we focus so heavily on the GAAP because we hardly ever sign a lease that doesn't have some annual escalator in the mid to upper 2% and that compounds annually over the term.

Okay. Thanks. And can you just remind us about any larger move outs you're expecting over the next call it 12, 24 months and how leasing prospects are looking for those spaces. I know you touched briefly on HCA but maybe there or anywhere else?

Our biggest upcoming yet would be one in Tampa where we have it 100% relet. That's about 70,000 square feet. After that it drops under 70,000 square feet. The next one after that I guess would be fourth quarter of '16 with the Cineverse lease, also in Tampa which we've talked about in the past. They have two five year renewal options and discussions are underway with them.

Okay. That's helpful. And then when you think about future disposition candidates that you could use to help fund development, do you think about selling a full or partial stake in one of the more sort of trophy caliber type of buildings that you've stabilized here recently like a Pinnacle or a Alliance or one of your better BBD kind of infill type of buildings?

We'd think about it but not for long. The aspects of the JV as I said in my prepared remarks, JVs have purposes and we'll do JVs but we've dramatically reduced our exposure to JVs because of the complexity that's inherent with that, given different balance sheets and capital stacks and the fact that the property is 99.9% of the time collateralized with some loan and it creates complexity in reporting and operating. We're not able to have a fee simple ownership so we can't move customers from building to building without having some punitive impact on the partner. And there's certain aspects of the financial engineering that comes with joint venture partners.

Again, we will use them when we need to but we've been very deliberate about reducing our exposure to JVs and our revenues from JVs are done some 80% from five to ten years ago. So, we see these higher quality assets that we've been able to stabilize to still have upside. We think they'll be some of the last assets to de-lease in the next downturn and would be some of the assets that would release the quickest in the upside. So, we think they're very good ballast. That's a long answer to your short question but not a lot, not long.

And an outright sale also doesn't hold of appeal?

We've touch on it. For example we've packaged together three GSA buildings a year or two ago and got a great cap rate on that and sold those for strategic reasons. But I think they would have to be strategic reasons for it because fortunately I think the -- our shareholder equity investors and the banks have been there for us with regards to funding growth or development in acquisitions. Hopefully that won't change going forward.

Jed, I also think we have an inventory of assets that we think could be candidates for disposition that is big enough to fill our appetite for dispositions at least in the near-term is how I would characterize it.

That makes sense. And I guess just to follow up on the JV piece of it, do you feel there is the buyer demand there from a -- let's say a sovereign wealth type of fund to kind of pursue a structure like that if you wanted to even? Are those types of folks sniffing around your markets? Obviously we know they're in New York and Boston but do you think there would be demand there?

Hey, Jed, it's Ted. Yeah. Look, I think we have seen the sovereign wealth and other foreign investors come into our market in the last couple of years. Certainly they're to a certain degree maybe priced out of or don't like the price in the Gateway market so we have seen them come down to Atlanta and invest in assets. We know they're poking around Nashville, Raleigh, and other markets. So, we have started to see that in the last 24 months.

Great. Thanks, everyone.

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

Hi, thanks, guys. This is Dick Schiller here with Dave Rodgers. I wanted to turn the attention to Riverwood 200. How has leasing activity been since the quarter end at 66.2%? Do you guys see any competition with Tishman Speyer's Three Alliance building?

Good question. Again, self-serving, unabashed marketing here but we're pretty proud of what we've been able to do with moving preleasing on that from announcement to the time we put the first shovel in the ground. So, we're just now starting that project and to almost double the preleasing in just a couple of months. We're pleased with that. More pertinent to your question, yes, there are prospects that we're talking with. This building won't be done for a couple of years.

So, we feel very comfortable. There is some geographic distance between these two buildings. They're in two different submarkets so there's not a tremendous amount of overlap between prospects that would consider Riverwood 200 versus the Three Alliance building. So, we've got two years before delivery to lease the remaining third of this build and then we pro forma more time after that to stabilization so we feel very comfortable with this.

Sure. Makes sense. Are there any concerns on construction and material costs as other Atlanta developments are going up?

We're always concerned about that because we're buying for whether it's just to relet a 5,000 square foot space or to build a new building, those of us in the real estate market are buying that stuff almost daily if not daily. So, we pay close attention to it and it's part of a prior answer that construction prices continue to escalate and that's a negative in that it makes it more expensive and I guess it's a positive in that it provides some sort of governor on how much spec space would actually come out of the ground because it's so expensive and since it's expensive there's a significant gap between first and second gen rents and as a result of that gap you can't consider the entire office leasing pool as prospects for first gen space because of that premium.

Right. It makes sense. Thanks a lot, Ed.

Yes, sir, thank you.

John Guinee, Stifel.

Thank you. Okay. Ed, live fast, die young. (laughter) A lot of questions here about your development pipeline. You guys are really bullish. A lot of bearish questions. Do you think the reason that development is constrained in the Southeast is because Duke's no longer in the office development business?

No. We have great respect for Danny and his team. I think that there's no one company that influences the Southeast with regards to supply and demand and I think the volume of preleasing here, I want to be sure we keep in sync what we have in the way of spec leasing. We've got over $0.5 billion in our pipeline and only 28% of it is spec. And a lot of it's not delivering for another two years. So, really this is not freewheeling gun slinging rogue spec development. It's very cadenced and it comes on the heels of having evidence that we have been able to deliver a well leased development pipeline. So, I want to be sure it didn't get out of sync with where we are.

We know. Mark, it looks like --

And the live fast, die young was from Tabitha.

Correct me if I'm wrong, you might have mentioned this in the prepared remarks. It looks like you didn't access your ATM for the first time in a handful of quarters. Is that correct?

Yeah. John, to a very modest extent. I think we raised a couple million in the ATM in the quarter. That's correct. We kind of frontloaded, if you remember in the first quarter we raised about $40 million or so in the ATM and we had plans for the year somewhere maybe double that number. So, that's kind of where we are. We've obviously taken advantage of high prices in the first quarter. So, we'll continue to monitor it. We're obviously committed again to this kind of a leverage neutral philosophy.

And then dispositions, Ed, I'm looking at the pictures here. I guess it was done in the first quarter, a couple of buildings done, built 33 years ago when Ed Fritsch first got in the business. (laughter) Single story, brick paneled, recessed windows, selling them for about $48 a foot. How many square feet of this sort of product does Highwoods have left in their portfolio?

A nominal amount. We've gotten rid of billions of dollars of it. I don't know -- I can't put a square footage on it right now but it's -- we certainly have it gauged by market. There's more of it for example in Greensboro than there is in Atlanta. But we consider the bottom portion of the deck to be in the 5% to 8% range right now. It's not -- we still need to sell half the portfolio. I think the team's made tremendous progress on what we've sold and, yes, do we have steel framed, brick and glass building in submarkets like Brentwood, Maryland Farms? Absolutely. But they're doing really well. So, we've culled off a lot of the portfolio and we have some more to do. And that's what Mark referenced. We don't have -- we are not a company whose portfolio is dominated by two story brick and glass buildings.

Great. Then the last question, just for -- so your guys up in Pittsburgh don't feel left out, can you talk a bit about Pittsburgh, just a little bit?

Sure. Andy and the team have continued to do a tremendously good job up there. We have a site tied up and we're premarketing to see if we can find some prospects, customers for a site that we've tied up and we've done some schematic design work on a building that we call Southside Works. We're in the Southside Works area. The Pirates are on the hunt for the wild card. Things are good.

Great. Thank you.

Thank you, John.

Sir, there are no further questions at this time. I will now turn the call back to you.

Okay. Thank you, Jose. And thank you, everyone, for dialing in. As always, if you have any questions, please don't hesitate to give us a call. Thank you.

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.