Highwoods Properties Inc (HIW) 2015 Q4 法說會逐字稿

Good morning and welcome to the Highwoods Properties conference call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded today, Monday, February 15, 2016. I would now like to turn the conference over to Mr. Mark Mulhern, please go ahead Mr. Mulhern.

Good morning everyone, this is Mark Mulhern. Ed Fritsch and Ted Klinck are with me on the call today. As is our custom, today's prepared remarks have been posted on our website.

If any of you have not received yesterday's earnings release or supplemental, they are both available on the IR section of our website at www.highwoods.com. On today's call, our review will include non-GAAP measures such as FFO and NOI, also the release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Before I turn the call over to Ed, a quick reminder that any forward-looking statements made during today's call are subject to risks and uncertainties, and these are discussed at length in our annual and quarterly SEC filings.

As you know, actual events and results can differ materially from these forward-looking statements. The Company does not undertake a duty to update any forward-looking statements. Now I will turn the call over to Ed.

Thank you, Mark, good morning everyone and thank you for joining us. In 2015, volatility described Wall Street and that remains so in 2016. The Dow Jones is hugging 16, the ten year US Treasury is in the high 1s not the low 2s. Europeans are paying banks for the privilege of holding their cash, oil prices have dropped below $30 for the first time since the New Hampshire primary -- the 2004 New Hampshire primary.

Our view however, is continuing turbulence on Wall Street and the unknowns in the political arena are not materially impacting the bread-and-butter of our business. Out here in BBD USA, we believe the fundamentals of leasing office space and our footprint are good, and should remain relatively positive in 2016. The jobs picture continues to improve, markets are experiencing net positive absorption, construction costs are keeping a bridle on development and rents are rising. As demonstrated by our 2015 performance and our 2016 outlook, on both the operational front and the capital investment front, we believe fundamentals are, and will continue to be, positive and should not be meaningfully impacted by what's going on up on Wall Street or on the road to the White House.

During the fourth quarter, we leased over 1 million square feet of second-generation office space, with robust GAAP rent growth of 10.6% and an average term of 6.9 years. Compared to last year's fourth quarter, we grew same-store cash NOI by 4.4%, and increased occupancy 120 bps, ending the year at 93.1%. We are pleased to have delivered FFO of $0.82 per share during the quarter, including $0.01 of land sale gains. Our results were strong for the full year 2015 as well. Growing same property cash NOI by a robust 6.7%, and delivering strong FFO growth of 6.2%.

We believe we have set the table for another solid year in 2016. We are very pleased to have selected Taubman Centers and The Macerich Company from a deep pool of high-quality bidders as the buyer of our retail-centric Country Club Plaza assets in Kansas City for $660 million, which blends to a 4.7% cap rate. The Taubman Macerich partnership has been excellent to work with throughout this process. Their business acumen, communications and efforts have been extremely proactive and absolutely top drawer. We're also very appreciative of the work done by Eastdil Secured, the exclusive listing broker, in conducting a fair, expeditious and transparent process in the marketing of the Plaza assets on behalf of our Company.

Closing this transaction, which is scheduled for March 1, is the next important step in our strategic initiative to capture accretive growth in earnings and cash flow, by selling the Plaza at a meaningfully lower cap rate than the expected 7%-plus stabilized returns on our recent BBD office tower acquisitions. Plus, the sale will simplify our business model, reduce our annual G&A spend and lower our leverage ratio to under 40%. A further upside to selling the Plaza at such an economically opportune time, is we will have $220 million of dry powder in escrow pending reinvestment in an additional 1031 exchanges and/or for general corporate purposes.

Our preference is to redeploy these escrow proceeds to acquire BBD located assets at prices that offer upside through lease up, rent growth, Highwoodtizing, and or operating efficiencies, as well as add to our inventory of infill land for future development. Our $449 million of acquisitions during 2015, including Monarch Tower and Monarch Plaza in Buckhead, Atlanta and SunTrust Financial Centre in CBD Tampa, further bolstered our proven track record of harvesting value through our acquisition activity. We acquired all three of these buildings on September 30. By year-end 2016, within 15 months of our ownership, we expect to grow occupancy by 500 bps at Monarch Center and by 800 bps at SunTrust Financial Centre, with still more room for future occupancy growth.

Turning to development, we delivered $162 million of 97% leased office development in 2015, and we will develop another $115 million of development - currently 92% pre-leased - development in 2016. These 2015 and 2016 deliveries provide meaningful NOI upside and cash flow stability and will boost our FFO this year and beyond. Foundation work is well underway at Seven Springs II, our 131,000 square foot office development with structured parking in Nashville's highly desirable Brentwood sub-market. Having announced this project 100% spec in August of 2015 we are excited to now have pre-leased 43% of the building which is scheduled to be completed in 2Q 2017, stabilized in 3Q 2018. Our current in-service Seven Springs project which consists of two office buildings encompassing 332,000 square feet plus 41,000 square feet of retail is 91% leased.

Speaking of highly occupied BBDs, yesterday we announced we will develop Centregreen Three, an office building in Weston, one of Raleigh area's BBDs. Our 1.3 million square foot portfolio in the mixed-use Weston PUD is 98% occupied, and houses a number of customers who are growing and in need of additional office space. Centregreen Three will be a 167,000 square foot office building with structured parking. The total investment for Centregreen Three is expected to be $40.9 million, including the value of Company owned land. We anticipate construction commencing next quarter, with delivery in 3Q 2017 and stabilization in 3Q 2019. With this announcement, our current development pipeline now totals $546 million, encompassing 1.8 million square feet and is 70% pre-leased.

We continue to focus on improving the quality of our portfolio, not just through acquisitions and development, but also by cycling out of non-core assets. We project selling another $100 million to $200 million of non-core assets during 2016 and this is in addition to the $660 million Plaza sale. Finally, we've introduced our 2016 per share FFO outlook of $3.18 to $3.30 per share. The midpoint of our range would result in another year of strong FFO growth of over 5%. This growth is primarily attributed to sound fundamentals in our same-store portfolio, where we project 4% to 5% growth in cash NOI, the full-year impact of developments delivered in 2015 as well as additional developments that we'll deliver over the course of 2016 and continued NOI upside from our value-add acquisitions.

As Mark will cover in more detail, our FFO outlook does include the effect of selling the Plaza assets as expected, is to happen on March 1 and the range of possible uses of the $220 million of dry powder to be held in escrow after closing. Otherwise, consistent with our long-held past practice, our FFO outlook does not include the effect of potential acquisitions and dispositions that may occur in the year.

Before turning the call over to Ted to cover operational highlights, I have two quick shoutouts. First to NAREIT and second to our Kansas City team. As you know, NAREIT serves an important role as the REIT industry's voice among policymakers, the investment community, the media and numerous other important audiences.

Two long-pursued NAREIT initiatives came to fruition in 2016. First, stock exchange listed equity REITs and real estate companies will now have their own headline sector in the global industry classification system after the market closes on August 31. Equity REITs and real estate companies having their own GICS headline sector further validates REIT-based real estate investment as an attractive asset class, and should draw even more investor support and attention.

Second, the FIRPTA reforms passed as part of December 2015's tax extenders bill should further encourage foreign investment in listed REITs by exempting foreign pension funds from FIRPTA and increasing the ceiling for all other investors from 5% to 10%. Both of these important initiatives are the result of years of hard work by NAREIT staff and members. With a strong dose of appreciation and gratitude, we tip our hat to Steve Wechsler and the rest of his very capable team at NAREIT.

Finally, words cannot properly express our appreciation and admiration for Glenn Stevenson and our entire, highly dedicated team in Kansas City. On behalf of everyone at Highwoods, we sincerely thank them for their focus and their commitment throughout our 17-plus year ownership of the Country Club Plaza, and especially during this process. We wish them all the very best and we will forever have a deep sense of gratitude for their service throughout the tenure of our ownership.

Ted?

Thanks, Ed, and good morning. As Ed noted, we had solid activity this quarter, leasing over 1 million square feet of second-gen office space and year-over-year asking rents continue to increase. Average in-place cash rental rates across our office portfolio grew to $23.49 per square foot, 5.5% higher than a year ago.

Occupancy in our same property office portfolio is 92.9% at year-end, up 40 basis points from September 30, and up 150 basis points year-over-year. Overall occupancy was up 50 basis points from September 30. For office leases signed in the fourth quarter, starting cash rent declined 2.5% while GAAP rent grew a robust 10.6%. Average term was 6.9 years, or 19% higher than the prior five quarter average.

Turning to our markets, ULI's recently published Emerging Trends In Real Estate ranked Atlanta fifth, Nashville seventh and Raleigh 11th on a list of the top US markets for commercial real estate heading into 2016. In 2015, office job growth exceeded 3% in each of these cities, substantially exceeding the national average of 2.1%.

The ULI study also commented positively on several of our other markets, suggesting upward trending Pittsburgh as possibly the future Nashville, and highlighting Orlando and Tampa as noticeably improving markets. While each city has its own local dynamics, its own unique collection of BBDs and its own set of unique opportunities and challenges, there is a common theme across our markets. And that our markets generally benefit from population growth and other demographics that consistently outperform national averages, affordability and a pro-business environment, growing and diverse economies and quality of life. Simply stated, places where people love to live and work.

Turning to Atlanta, the market reported yet another quarter of positive net absorption - the 18th in a row. Our Atlanta portfolio is 92.4% occupied at quarter end, up 410 basis points year-over-year, and 110 basis points since September 30. Demand for Monarch Tower and Monarch Plaza, which total 896,000 square feet, have been very strong since we acquired the buildings on September 30. In just four months we have signed renewals and re-lets for 43,000 square feet at Monarch.

Strong growth continues in Nashville -- 385,000 square feet of positive net absorption in the fourth quarter, the market's unemployment rate is 4.2%, 110 basis points lower than the national average, and, occupancy in our portfolio was 99.2% at year-end, up 20 basis points sequentially and up 280 basis points year-over-year. We have a signed LOI for most of the remaining 29,000 square feet of space available in our 203,000 square foot Seven Springs West development project. In addition, as Ed mentioned, we're thrilled to have already pre-leased 43% of the 131,000 square foot Seven Springs II project to a healthcare company, which will be a new customer for Highwoods.

Forbes magazine just ranked Raleigh number five on a list of America's Next Boom Towns, saying the city has emerged as a tech hotspot. In Raleigh, the office market posted its 11th consecutive quarter of positive net absorption and we garnered very strong average GAAP rent growth of 16.7% on second-gen office leases signed during the quarter. Occupancy in our Raleigh portfolio was 92.8% at quarter end, up 120 basis points from September 30, and 270 basis points year-over-year.

We just completed our Highwoodtizing of One Bank of America Plaza, the 17 story, 374,000 square foot office building in CBD Raleigh that we acquired in September 2014. We significantly repositioned the building by dramatically expanding the volume and scale of the lobby, re-facing the first three floors, adding a ten story entry-defining curtainwall, modernizing the elevators and rebranding the multi-customer building as 421 Fayetteville. Our Highwoodtizing efforts have already reaped benefits, as we have signed 180,000 square feet since closing, with cash rents 11.6% higher than average in-place cash rents at the time of acquisition.

In Richmond, where we have a dominant position in Innsbrook, the market's leading BBD, we leased 107,000 square feet with a very stout GAAP rent growth of 16.6% and average term of 11.9 years. This includes a substantial renewal of the corporate headquarters of Hamilton Beach, a long-term Highwoods customer.

In conclusion, leasing volumes continue to be solid, reflecting positive momentum in our markets and demand for a well-located BBD office product. With the previously disclosed known moveouts in SunTrust Financial Center and Monarch Center, and a few other near-term expirations, we expect occupancy will dip to the 92% range during the first half of the year, and rebound towards 93% or better by year end. Mark?

Thanks, Ted. We had a strong fourth quarter and a very positive full year. For the fourth quarter of 2015, we delivered FFO per share of $0.82, including $0.01 of land sale gains. The year-over-year comparison is $81 million of FFO in fourth quarter of 2015, or $0.82 a share, versus $70 million of FFO in 2014 or $0.74 a share. That's a 16% increase year-over-year in dollars and an 11% increase in per share amounts.

The primary FFO growth drivers for the quarter were higher same property NOI due to higher occupancy and higher rents. Contributions from our value-add acquisitions, particularly the Monarch and SunTrust acquisitions that we closed on September 30 that were temporarily financed with low-cost floating-rate debt and developments coming on line, slightly offset by lost NOI from dispositions. For the full-year, we delivered FFO of $3.08 per share, reflecting continued, solid operating performance of our properties as well as the positive impact of development deliveries and our acquisitions. We are also pleased with the performance of our same property pool, delivering 6.7% year-over-year growth in cash NOI and exceeding the high-end of our original outlook.

Turning to the balance sheet, we ended the year with leverage of 44.9% and our debt to EBITDA ratio was 6.1 times. This includes the $350 million bridge facility used to temporarily fund the acquisitions, which we will pay off on March 1 with proceeds from the sale of Country Club Plaza. As you know, we've been generally operating within a targeted leverage range of 40% to 45%, as measured by the ratio of total debt and preferred stock to gross book value.

The Plaza Assets, which are under contract for $660 million, have a gross book value of $372 million. Using the contracted sales price, rather than gross book value, our leverage would have been 2% lower at year end. In our conservative nature, we believe it is appropriate to adjust our target leverage range to reflect this difference. So going forward, our plan will be to operate within a target leverage range of 38% to 43%. After the Plaza transaction closes, our leverage will be in the 38% to 39% range, and our debt to EBITDA ratio will be comfortably below 6 times.

We utilized the ATM in the fourth quarter to issue 744,000 shares at an average sales price of $43.54 per share and raised $32 million, continuing our commitment to fund our growth on a leverage-neutral basis. You may have noticed we filed a form 424-B and related 8-K this morning with the SEC to refresh our ATM program. This new program allows us to sell from time to time up to $250 million of common equity at market prices. As you know, keeping an ATM program in place is one of the many arrows we like to keep in our capital raising quiver.

As Ed mentioned, we have provided our initial 2016 FFO outlook of $3.18 to $3.30 per share. Which at the midpoint is a 5.2% increase over 2015. In dollars, the midpoint of our range for 2016 is $321 million versus $299 million in 2015, a 7.2% increase year-over-year.

We are also forecasting a strong 4% to 5% growth in same property cash NOI. The primary FFO growth drivers for 2016 will be contributions from the SunTrust and Monarch acquisitions, the impact of 2015 and 2016 development deliveries, and higher same property NOI from higher average rents. These positive drivers will obviously be partially offset by lost NOI from the sale of the Plaza.

This year's outlook includes various outcomes with respect to the $220 million of escrowed funds that will remain after the reverse 1031 funds are released from escrow upon the sale of the Plaza. Our preference is to use those funds to acquire more BBD-located buildings and land. Other possible options include paying down debt, and or other general corporate purposes, which could include paying out remaining capital gains in the form of a special dividend. All of those possible outcomes have been factored into the range of our 2016 FFO outlook.

In the lower section of our guidance table, we have given 2016 guidance around acquisitions, dispositions and development, that are above and beyond the already announced activity related to the Plaza. And consistent with our practice, we do not include the operational or funding impact from the potential incremental investment activity in our FFO outlook until such transactions are announced. The nuance of the Plaza sale being announced but not yet closed, caused us to make this distinction and provide clarity around our outlook for 2016.

Two things to keep in mind regarding the trajectory of our 2016 FFO outlook. First, as is typical this time of year, G&A in our first quarter is expected to be about $3.6 million higher than the run rate for subsequent quarters because the Company's annual equity grants are customarily made in March. And 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 $115 million of 92% pre-leased office development, delivering over the course of the year. Which will mostly impact our second-half results.

Operator, we are now ready for your questions.

Thank you.

(Operator Instructions)

Jamie Feldman, Bank of America.

Thank you. Good morning.

Morning.

Just thinking about the proceeds from CCP sale, I guess the first question is, how much is the taxable gain if you were to pay a special dividend? And then, secondly, can you just talk about what you think is out there, in terms of both places you'd want to buy land and where you'd want to grow the portfolio?

Jamie, it's Mark.

On the special dividend question, the capital gains -- we're going to do reverse 1031s. We laid out in the table about $430 million to the Monarch and SunTrust properties that we closed in September 30 and then we'll have that remainder left over. It's hard to say exactly what the capital gains are going to be -- these are all, they're all separate parcels, so I can't tell you exactly. But it's in the $100 million range kind of number, in terms of what might be qualified for the special dividend.

And Jamie, this is Ed.

For the second part of your question, we think we've got lots of options, we're looking at a lot of different things. We're looking mostly in-market, at product that we think would be additive to our strategy and it includes some components of land. Our land bank is about half of what it was from ten years ago. We put a fair amount of land, about 240 acres, into service and built 4.5 million square feet on it. We think this would be an opportune time to do a little bit of replenishing on the land side. So we're looking at a few parcels here and there. So we think lots of options; we're underwriting a lot of things. We're underwriting a little bit more than $500 million worth of assets, plus some land right now to evaluate.

Manny Korchman, Citi.

Maybe we can spend some time talking about the buyer pool, both for the Kansas City assets as well as the other planned dispositions you guys have lined up for the year?

Well, I think it's premature on the second part, as far as us being able to give you good visibility on what we'll do later on in the year, Manny. We only have a nominal amount that's in-market right now, about $15 million, and then we're working on books for another $60 million to $100 million worth. But as far as the process with Country Club Plaza, which again, we think Eastdil did a yeoman's job on -- just a tremendous amount of interest. The interest was eclectic and broad and we were fortunate that many of the prospective buyers were highly qualified and well-positioned to move and move quickly and without a lot of question marks.

And then, mark -- again this might be a little premature -- the cap rate? Expectations on the sales that you have planned?

On dispositions, you mean?

Yes.

I think it just varies by market. It just depends on what we ultimately bring to market. As Ed said, we're preparing some things. Obviously, the rent rolls are important and the markets are important, so I'd hesitate to really give you any specificity around that.

Thanks, guys.

Thank you.

Tom Lesnick, Capital One Securities.

Good morning, guys.

Just real quickly on Raleigh -- obviously, GlenLake Five is still about 88% leased and not stabilized, but you guys went ahead with the new development in Raleigh. Since that's your home market, I was just wondering if you can comment on the leasing momentum in that market right now, and what gives you confidence in your ability to lease a new development up quickly?

Hey, Tom, it's Ed.

A few things -- one is, we have other buildings on the ground there that are virtually 100% leased. We started GlenLake Five at 25% pre-leased; we moved it up to 88% over this past quarter. And our pro forma projects us to have it stabilized five quarters from now -- six quarters from now, second quarter of 2017. So to get another five percentage points of occupancy over four quarters, five quarters, of time is, we think, a very achievable task. We think that the building's done well as far as quality of the rent roll and how it's leased up. Its performance certainly gives us comfort to do more, specifically to CentreGreen, since it's in the same basic geographic area.

We have the overall market -- the Cary market -- 7.7 million square feet at 7.5% vacant, so it's strong. We own 1.3 million square feet within Weston, and we're 98% there. We have four buildings on the ground in CentreGreen that total just shy of 400,000 square feet; they're 100% leased. We've got customers in the Weston development that are growing and in need of space. The strategy we used at GlenLake -- either we build another product and capture their growth, or we begin to lose customers. We think GlenLake's proving out quite well, and we have high confidence that CentreGreen Three will do the same.

We have also launched some in other markets -- the building, the Seven Springs II building that we announced -- we announced in August; it was 0% pre-leased and we're 43% now. We're just finishing up the foundations of the building.

I think there's a good track record there.

Got it. Appreciate that insight.

Just quickly on Orlando -- obviously that market has been late to recover this cycle and is lagging some of your other markets in occupancy. And hasn't really shown too much improvement over the last four quarters. I'm just wondering how you think about that market long term, and your plans with some of your land and developing opportunities there?

We're bullish on that. Both Orlando and Tampa have been a little bit late coming to the party with regard to the recovery. With regard to Orlando specifically, we're CBD-focused there. We like the assets that we own. If you look at the demographic information that is published by various sources, whether it be rent growth or expansion, the numbers are good. And we think that we also have some work that's underway. For example, in the Landmark's building if you go into the lobby right now, it's a war zone and we're doing some significant Highwoodtizing there as well. The pricing at which we bought our partners out -- we think it's a very attractive basis for us. We have a very good team on the ground, led by Steve Garrity, so we have no big worries about Orlando. We think it's just a little bit slow in coming.

Ted, do you have anything to add to that?

No, look -- we are consolidating now, the suburbs over time. We're in a couple of different sub-markets now. We think the CBD is where you want to be in Orlando, so it's a good core set market for us. I think we certainly expect it to pick up over the next 12 months.

Got it. Appreciate the color. Thank you.

Thanks, Tom.

Brendan Maiorana, Wells Fargo.

Thanks, good morning.

First, Ted -- you mentioned occupancy down to 92% in the first half of the year from 93.2% where you ended it. Is that attributable to the known moveouts at Monarch and SunTrust? Or were there some other customers that were planning on vacating early in the year?

Those are the two biggest components of it. But obviously, there's various other smaller guys that add up a little bit. But the two biggest components both at Monarch and SunTrust.

Okay, great.

And then, Mark -- just mechanics of the guidance -- with respect to the $220 million that will be held in escrow, is it fair to assume either -- if you go down of paying down debt or investment of those proceeds into new acquisitions, would that be something that would be slated middle part of the year or back half of the year, as opposed to something that would contribute to earnings or lower interest expense around the time that you got the proceeds?

No, Brendan, you got it right. It's going to be the back half of the year.

The way this works is, we close on March 1; we have until April 15 to identify properties, and then we have until September 1, I guess, to close on the identified acquisitions in our guidance. What we've done is -- we could have gone down one of two paths, right? We could have assumed that we were going to buy something which we, again, can make some assumptions about timing and cap rates. The other assumption is, we don't find anything to buy, and we would break the escrow, take that money and pay down debt. And you're right, that would be a back half of the year decision. And then if we had to face the prospects of a special dividend that would obviously be very late in the year. There are some potential interest savings as a result of that, and those two scenarios really are very close in terms of numbers.

Okay, great.

And you mentioned your leverage goes down; I think you probably get to 38% post-closing of Country Club Plaza. There's about $325 million left to spend on the development pipeline. How does that -- what do you think the spend is likely to look like in 2016, versus the remainder of that, which I guess would be predominantly in 2017?

Yes, so the pipeline, as you know, is pretty robust. We've got obviously the Bridgestone, the biggest piece of the pipeline, delivering in 2017. I would say it is in the $100 million, $150 million range in terms of development spending that we would have in 2016. And again, we've got a lot of flexibility with respect to both the line of credit that we have available. And as you know, we have the ATM available to us as well. I think we're in reasonably good shape on being able to finish all that and keep leverage where it is.

Right. I guess it looks like your dispositions, at least at kind of the midpoint of the guidance -- outside of the Plaza you'd be a net seller, relative to the acquisitions?

That's correct.

Okay. All right, great. Thanks.

Thanks, Brendan.

(Operator Instructions)

David Rodgers, Baird.

Good morning, guys. This is Dick Shaw here with Dave.

Just a quick balance sheet question. You guys have a $350 million bridge facility you mentioned you're going to pay off with the proceeds. You've marked $430 million of debt to repay from the dispositions of Monarch and SunTrust. What's the note payable that will pay off the bridge -- that $80 million difference?

Dick, it's Mark.

That will be on the line. So in other words, we fund our development generally by borrowing short-term off the line, and then when it gets to [per tio] levels we will term out. I would just assume that the bridge loan of $350 million gets paid off, and the excess would go towards reducing borrowings on the line of credit.

Okay, great. Thanks.

And then switching over to dispositions -- in which markets are your remaining non-core assets located that you want to dispose of?

It's a little eclectic. We've got smatterings here and there. What we're working on right now is in Atlanta and in Greensboro. Then we have some other projects that we're working on. As you know, we have some additional assets in Kansas City that weren't part of the offering memorandum, so we're looking at the right positioning of those from a rent roll perspective, and then the right time to dispose of those. Then we have some other just miscellaneous assets in Raleigh, Florida, et cetera.

Okay, great. Thanks a lot, guys.

Thank you.

Jed Reagan, Green Street Advisors.

Good morning, guys.

We've heard a few office REITs talking about leasing pipeline slowing down so far this year, or expected to slow down later this year. I know you touched briefly on that in your opening remarks. Any more color on what you're seeing on the ground year-to-date? And are there any sign of tenants taking a pause in your markets?

We haven't seen any dramatic movement on that, Jed; the fundamentals are fairly good. Some markets obviously stronger than others, but volumes of showings that we have are good. We're in earnest pitching five development projects -- who knows if any of them will come to fruition? But all five are in-market growth, which we think is another good telltale. All in all we haven't seen any deliberate pause on that front.

Okay, thanks.

And then maybe somewhat related -- on the capital market side of things, are you seeing any changes in the size of bidding [tents], or pricing for assets in your market? Just getting some of the global headwinds or more choppiness? Borrowing cost on the debt side?

This is Ted.

So far this year we haven't -- the deal flow in general has been slow, so there hasn't been a whole lot of price discovery. But I think, in general, from what we're seeing from late last year and early this year in a few other markets, the trophy assets -- the pricing remains very strong and there is still a deep and diversified buyer pool. But when you get beyond the absolute AAs in trophies, I think price is still good but the buyer pool maybe thins out a little bit, not as deep. And as a result probably takes a little longer to get deals done. I think lower quality assets require leverage. I do think the debt markets are still very liquid today.

So again -- not as deep as the trophy assets but still plenty of buyers out there.

And plenty of capital.

Plenty of capital.

On that lower quality side, are you seeing a change in that thin bidding tent? Or is that consistent with what you've been seeing, relative to the high barrier to the higher quality?

I think it's been fairly consistent. I don't think we've seen a big change on that. Again, we haven't had deals out in the market for the last few months. We've been working on CCP, so really haven't had a lot of data points to check that. But as we talked to other market participants, whether it be private buyers or brokers, I don't think we're seeing a huge change yet.

Okay, fair enough. Thank you.

Thanks, Jed.

Jamie Feldman, Bank of America.

Jamie?

Just a follow-up from the last question: in terms of any change in the cycle here, you talked about growing your land bank, starting new speculative development and gave a pretty bullish outlook at the beginning of the call versus some of the other markets around the country where people might be more concerned. Can you just talk about how you're thinking about running your business, given what we do see out there on the macro side? And how you think -- maybe some of the risk mitigation you might be putting into place?

Sure. So, we continue to run what we consider a fairly conservative shop. We think stand up doubles is a good day and that's kind of what we shoot for. We're not going for the fence every time we go to the plate. I think we are making good use of the capital that we have, by having a lot of capital activity and at the same time reducing our overall debtload. We think the use of the 4.7% money that we generated from the Plaza -- anything above 4.7% is accretive.

On the land bank -- its just standing back and saying, we put 240 acres into play and we've been fortunate that we've won some significant awards as a result of having a mosaic that's appealing to the user, inclusive of some good land position. So we're not looking out. Our goal isn't to own all the land that abuts ours, but there are some parcels that we want to own that we think would be good to bring in. So to me, that's just replenishing at a modest level.

The volume of spec development that we're doing has been very calculated. It's ballasted with some highly pre-leased, good credit developments, so we don't think that we're going way out on the spectrum with the amount of spec development that we have. It's been in small and deliberate doses.

We continue to invest a fair amount of time and effort and creativity in repositioning buildings akin to how we did the 421 Fayetteville building that used to be called Bank of America. And we've done this with a dozen other buildings that are leading to higher rents. So, for example, in the 421 building, we've done about 100,000 square feet of leasing there at rents that are 11% higher than what was in place before. So we'll continue to do that.

We're not going too deep into any one category, and we're being conservative about how we do it, and that's all been leverage-neutral to de-levering.

Okay, that's helpful. Thank you.

Thanks, Jamie.

John Guinee, Stifel.

John Guinee, how are you?

Morning, John.

First, I'm assuming the front cover of the supplemental with Country Club Plaza is a tribute to Glenn and his team?

Correct. It looks like a picture, but Glenn actually painted that.

Well, he is a very talented person, as is his team, so I am sure you will miss him.

Dearly.

So this is actually a question for Mark.

And I don't know if you have this handy or you could guess -- but if you answer with authority, we'll believe you. You guys have been pretty consistent, $0.15 to $0.20 FFO growth per share, 5% or 6% per annum; and there's a handful of levers that make that work. The ones that come to mind right now are -- you guys have a very low cost of equity capital. You've been accessing your ATM. You are bringing down your debt costs; you're delivering development; you're having some rental rate growth, some same-store NOI increases; and you're also doing some asset recycling. If you were to look at those different drivers that help you with that 5% to 6% annual FFO growth, is one of them dominant? And a couple of them not really relevant? Or how would you look at -- when you're figuring out what really matters, Mark, what does matter the most?

John, it's a really good summary that you gave; and I would say a couple things. I'd also add to that equation, operating expenses. Our operating folks, or asset management folks, who have done just an outstanding job of managing costs, getting the contract services where they need to be, just paying attention to the whole equation. But if you look at it just broadly, obviously the development deliveries have helped us a bunch, right? When you think about just having that additional NOI from the developments coming in and layering in, and multiple years -- I think that's an important thing.

The other thing that's really helped is the value-add acquisition. When you look at our same property number, which was a pretty strong 6.7% for the year, a lot of that goes back to the acquisitions we made in 2013 and the occupancy we've being able to add, and the rent growth we've been able to add. Our guys in the field have been out hustling and doing a good job of raising occupancy, raising rents, and we've obviously watched it on the cost side as well. And those are the general flavors of what I would say is most important to what we've done.

Ed may have a different opinion.

I would just add a footnote, that I think all of them are reliant on the foundation of a good balance sheet. So in order to do a lot of the things that, Mark and you just enumerated -- without the strength of the balance sheet I think it would be a tougher sell. So for us to get in front of a Fortune 100 prospective customer and pitch to them our ability to build them a building, us being able to do it without any financing contingencies and being able to evidence that to them, is essential. Us being on a call and doing a buyer interview with a broker on behalf of their seller, to be able to have our first step forward be the balance sheet and give them comfort that we have the ability to close, I think is important. And that trickles all the way through to us meeting with a customer who leases 15,000 square feet and they know that when that centrifugal chiller goes we have the money to do it and that will happen and it's all predicated on the balance sheet.

So I think all the things that you enumerated make up the list, but it all stands on the foundation of a healthy balance sheet with a good maturity ladder.

Great answer. I'll catch you off-line, Mark, because my back of the envelope is -- roughly half of it just comes from lower interest cost. But we'll talk off-line.

Sure.

Thanks a lot.

Thanks, John.

Thanks.

And, gentlemen, there are no further questions at this time.

Thank you, everyone. If you have any additional questions, don't hesitate to give us a call. Thank you.

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation. Have a great rest of the day, everyone. You may disconnect your line.