Highwoods Properties Inc (HIW) 2016 Q1 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 April 27, 2016.

I would now like to turn the conference over to Mr. Mark Mulhern. Please go ahead, sir.

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

I'll now turn the call over to Ed.

Thank you, Mark. Good morning, everyone and thank you for joining us. On our first quarter call in February, we noted the disconnect between the positive fundamentals of our business and a negative tone on Wall Street. A struggling Dow Jones and declining 10-year treasury yields were factors driving that negative tone. What a difference 10 weeks makes. In that short time frame Wall Street is now reflecting a more positive tone that is consistent with the fundamentals of our business. The Dow is back up around 18, the 10-year treasury has stabilized, and investor sentiment across most asset classes has improved.

Aside from this, some fear that pending CMBS maturities over the next couple of years have the potential to overwhelm the supply of replacement capital. This talked-about fear reminds us of how a high volume of defaults had been forecasted in the 2010-2012 window, creating a "once-in-a-lifetime" opportunity to acquire on the cheap, which obviously didn't happen. We understand the CMBS market has stabilized somewhat in the past few weeks and that life companies, domestic banks and debt funds continue to have strong appetites for loans collateralized by US commercial real estate. We're not going to speculate on the volatility of the CMBS market except for a few observations as it relates to us. One, we have not detected any impact on the bread and butter of our business. Two, we have historically not been users of CMBS debt, and we continue to receive attractive quotes and terms from our traditional debt capital channels. And three, with leverage at 38.4% and debt-to-EBITDA ratio of 5.4 turns, we believe our balance sheet is well positioned to weather dislocations in the broader capital markets. The key factors that underpin the positive outlook of our business continue to apply. The jobs picture remains positive, markets continue to experience positive net absorption, construction costs are keeping a bridle on development and rents continue to rise.

During the first quarter, we leased over 900,000 square feet of second gen office space with robust GAAP rent growth of 9.7%, strong net effective rents of $14.54 per square foot and an average term of 6.5 years. Compared to last year's first quarter, we grew same store cash NOI by 3.7% and increased occupancy 80 bps, ending the quarter at 92.7%. We are pleased to have delivered FFO of $0.82 per share during the quarter. This includes a $0.015 of land sale gains and $0.02 in term fees.

We are pleased to have successfully closed on the sale of our retail-centric Country Club Plaza assets on March 1 for $660 million, which blends to a 4.7% cap rate. We used $420 million of the proceeds to repay short-term debt incurred on September 30, when we acquired Monarch Tower and Monarch Plaza in Buckhead and SunTrust Financial Center in CBD Tampa, buildings which we expect will stabilize in the 7 plus% range.

In addition to strengthening our BBD office presence and capturing accretive growth in earnings and cash flow, we simplified our business model, reduced our annual G&A spend, and drove our leverage ratio to 38.4%. The remaining $230 million of net sales proceeds were placed in escrow. As you know, our preference is to redeploy these escrow proceeds to acquire BBD located buildings in our existing markets, as well as add to our inventory of infill land for future development.

We will stay true to our mantra of being disciplined allocators of capital. The decision on how much we will use to acquire assets, pay down in debt and/or return in the form of special dividend will play out within the next four months.

Since March 1st, we have invested $9 million of the escrowed proceeds to acquire 14 acres of development land on which we will build up to 216,000 square feet in Brentwood, one of Nashville's BBDs, where we currently own 1.5 million square feet that is 98.3% occupied. This is the last remaining raw development parcel in Maryland Farms.

Turning to development, we delivered the $56 million headquarters and surgical center for Laser Spine Institute in the Westshore submarket of Tampa and will deliver another $404 million of currently 81% pre-leased office development over the next six quarters. These deliveries, encompassing 1.1 million square feet, provide meaningful NOI upside and cash flow stability.

We continue to chase additional development deals, mostly on Company-owned land, and remain comfortable with our guidance of $100 million to $200 million of 2016 announcements. We expect stabilized GAAP yields to continue to average north of 8%. With regard to dispositions, we continue to have a well-defined pipeline of non-core assets at various stages of marketing. This of course includes our two remaining wholly-owned office buildings in Kansas City, one of which is under contract. We are comfortable maintaining our disposition outlook for 2016. Year-to-date, we have sold $17 million of non-core assets in addition to the $660 million Plaza sale.

During the quarter, we closed-out yet another joint venture investment Concourse in Greensboro. This 50-50 JV sold its two office buildings which encompass 118,000 square feet and an adjacent land parcel for $11 million. Only 2.2% of our revenues are generated by joint venture-owned properties.

In summary, our business remains strong. As of March 31, only 4.7% of our revenues were scheduled to expire by the end of this year. This is the lowest rollover exposure at this point of the year in over a decade for us. We continue to leverage our brand, our synergistic platform, and our focus on simplicity that hold the line on operating and G&A expenses, and with more fortified balance sheet and $221 million in escrow, we are positioned to create additional shareholder value.

We have reaffirmed our 2016 per share FFO outlook of $3.18 to $3.30 per share, which implies a midpoint of $3.24. As Mark will cover in more detail our FFO outlook for 2016 does include the range of possible uses of the $221 million in escrow. Otherwise, our guidance is consistent with our long-held past practice, whereby our FFO outlook does not include the effect of potential acquisitions and dispositions that may occur in the remainder of the year. Ted?

Thanks, Ed and good morning. As Ed noted, we had solid activity this quarter, leasing 902,000 square feet of second gen office space, and year-over-year asking rents continue to increase across all of our markets. Average in-place cash rental rates across our office portfolio were $23.38 per square foot, 3% higher than a year ago. Occupancy was 92.7% as of March 31, up 80 basis points year-over-year, although slightly down from year-end, due to that sale of the 96.9% occupied 1.3 million square foot Plaza, as well as two expected move-outs in Pittsburgh that I will discuss in just a minute. Given our market dynamics, we remain comfortable with our 2016 year end occupancy outlook of 92.5% to 93.5%.

For office leases signed in the first quarter, starting cash rents were basically flat at negative 0.2% and GAAP rents grew a robust 9.7%. Average term of 6.5 years, five months longer than the prior five-quarter average, and leasing CapEx was $17.65 per square foot, 13.6% lower than the prior five-quarter average. We are pleased with the economics we garnered, with net effective rents of $14.54 per square foot, 5.9% higher than the prior five-quarter average.

Turning to markets, our Atlanta portfolio was 92.1% occupied at quarter end, up 260 basis points year-over-year. During the quarter, we leased 251,000 square feet, including two long-term federal government renewals encompassing 212,000 square feet with the CDC in Century Center with very low leasing CapEx. We only have 198,000 square feet of remaining 2016 rollover exposure in Atlanta. This includes a previously disclosed 58,000 square foot, second quarter known move-out at Monarch in Buckhead that was factored into our acquisition underwriting.

We are very pleased with the operational performance of our 1.9 million square foot Buckhead portfolio. Year-over-year asking rents are up 10% on average. After backing out near-term moveouts at Monarch, move-outs known before the acquisition. Occupancy in our Buckhead portfolio grew 240 basis points from 86.4% at September 30 to 88.8% at March 31 and is projected to increase another 200 basis points by year-end.

Strong growth in Nashville continues. A 129,000 square feet of positive net absorption in the first quarter, the market's unemployment rate is 3.5%, 150 basis points below the national average. Direct market vacancy is 7.5%. Occupancy in our portfolio was 99.6% at quarter end, up 40 basis points sequentially and up 430 basis points year-over-year, and we have less than 100,000 square feet set to expire by year-end.

The construction of Seven Springs II, our 131,000 square foot office building with structured parking, is well underway. This $38.1 million development is 43% pre-leased, with completion scheduled for the second quarter of 2017 and stabilization in the third quarter of 2018. The volume of prospects is strong.

In Raleigh, office jobs grew 3.2%, a 100 basis points above the national average, and the office market posted yet another quarter of positive net absorption. We garnered very strong average GAAP rent growth of 18.7% on over 200,000 square feet of second gen office leases signed during the quarter. Occupancy in our Raleigh portfolio was 93% at quarter end, up 20 basis points from December 31 and 270 basis points year-over-year. Also, we are working with a sound prospect at GlenLake Five, which would bring leasing to 94% and stabilize the building well in advance of pro forma.

In CBD Pittsburgh, occupancy in our portfolio rolled down from 95.7% at year-end to 91.4%, due to 96,000 square feet of anticipated move-outs at our 1.5 million square foot PPG Place. One customer, Highmark, a health insurer, consolidated into a building it owns and another customer, Ketchum, a marketing agency, relocated into a very different low price-point product. Pittsburgh's Class A CBD market is a solid 94% occupied and we have 175,000 square feet of strong backfill prospects with asking rents 5% to 7% higher than expiring rents. In conclusion, leasing volumes and the ability to push rents continue to be solid, reflecting positive momentum in our markets, the demand for our well-located BBD office product. Even with known move-outs taking occupancy to the 92% range mid-year, occupancy will rebound and average occupancy for full year 2016 is projected to be some 50 basis points higher than last year. Mark?

Thanks Ted. We've had a positive start to the year as indicated by our first quarter financial results. As Ed outlined, for the first quarter of 2016, we delivered FFO per share of $0.82, including $0.035 cents of land sale gains and term fees. The term fees were mostly from a customer that vacated 421 Fayetteville, it's formerly the Bank of America Plaza in CBD Raleigh this past December. This space was backfilled by Kimley Horn's headquarters.

After adjusting FFO for land sale gains and term fees, we grew FFO per share by a stout 11%. The adjusted FFO also includes the impact of issuing 1.1 million shares of stock during the quarter and our G&A costs being approximately $3 million higher in Q1 than the run rate for the next three quarters due to the routine first quarter expensing of the annual long-term equity grants.

The primary FFO growth drivers for the quarter were contributions from value-add acquisitions, particularly the Monarch and SunTrust acquisitions that we closed on September 30 of last year. Higher same property NOI due to occupancy gains and higher rents; and highly pre-leased developments coming on line. These positive drivers were offset by one month of lost NOI from closing the sale of Country Club Plaza on March 1.

The GAAP income statement this quarter reflects the very significant book gain of $414 million, or $4.17 per share, on the sale of Country Club Plaza, which is classified as discontinued operations.

Turning to our balance sheet, we used Country Club Plaza net sale proceeds to pay off the $350 million bridge facility and pay down approximately $70 million on our line of credit. The remaining proceeds are being held in escrow as Ed mentioned. Our quarter end leverage ratio was 38.4% and debt-to-EBITDA was 5.43 times. Setting aside how we use the escrow dollars, we will spend approximately $150 million on development in 2016, and we'll fund that through operating cash flow, ATM issuances, disposition proceeds and borrowings on our line of credit. We do anticipate some financing activity in the second half of 2016 to reduce our line balance and prepare for a $380 million, 5.88% bond maturity in Q1 2017. We also obtained $150 million of forward-starting swaps that effectively lock the underlying 10-year treasury at 1.9% with respect to forecasted debt issuance before the end of Q1 of next year.

As Ed mentioned, we've reaffirmed our 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 that range for 2016 is $326 million versus $300 million in 2015, an 8.7% increase year-over-year. We are also forecasting 4% to 5% growth in same property cash NOI for the full year. Our outlook includes various outcomes with respect to the $220 million (sic - see press release, "221 million") of remaining escrowed funds.

As Ed mentioned 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 any remaining capital gains in the form of a special dividend. This range of outcomes has been factored into our 2016 FFO outlook. Otherwise, consistent with our past practice, we do not include the operational or funding impact from potential incremental investment activity until such transactions are announced.

Two things to keep in mind regarding our FFO trajectory for 2016. The first item relates to the timing of the full reinvestment of the Country Club Plaza proceeds to replace the lost NOI from that disposition. With two-thirds of the proceeds invested in SunTrust and Monarch, the remaining escrowed proceeds will likely not be redeployed until the second half of the year, therefore impacting second quarter year-over-year FFO comparisons. We also have previously disclosed known moveouts that will likely result in 30 basis points to 40 basis points of lower occupancy at the end of Q2 versus Q1. We are fortunate to have a solid FFO growth story for all of 2016, we want to be transparent around how lumpiness may impact the quarterly results.

Operator, we're now ready for your questions.

(Operator Instructions) Dave Rodgers, Baird.

Yes, good morning guys. Maybe start with the ATM activity in the quarter. I guess, just from a perspective of capital needs and sources and uses and kind of the rationale to get that done so quickly in the year, given all the proceeds that you have coming in?

Sure, Dave, it's Mark. So, as you know, we have committed to growing the Company on a leverage neutral basis, I think, you heard us describe, we anticipate about $150 million or so of development expenditures during the year. We just took advantage of share price and were able to raise at an attractive level and we think that it's just a proven way to kind of run the Company and continue. Obviously, what we said was our preference is to put those escrow funds to work and so we just felt like that was an important thing to get done given the dynamics of the economy here.

Great. Thanks, Mark, for that. And then maybe Ed or Ted talk a little bit about the activity and the demand to start new development, you've been pretty cautious about starting any speculative development. So just curious on kind of your thoughts about the demand around new projects going forward. And what that might do, I guess, the development starts this year?

Yes. So, our guidance is out there and we reaffirmed our 100 to 200 of starts. And Dave, we typically have projects in the size of $40 million to $50 million. So think of that in terms of two to four or five total announcements for the year. We do have the 5,000 CentreGreen project that we announced at the beginning of the year, which is in the low $40 million. As markets continue to tighten and those who are interested in relocating or expanding and need significant sized footprints, obviously new development becomes a prominent part of what their options are. We have plenty of company-owned land and obviously the balance sheet in order to accommodate that. We're currently in conversations with six different customers who would predominantly pre-lease or totally pre-lease a building. They're in different stages of conversation, chances of them all happening are slim, but chances of some of them happening are relatively strong, and we think that the price of construction continues to keep a bridle on, there being a significant amount of speculative construction done across the markets by an array of developers.

You made that comment in your prepared comments as well, is there anything more you can elaborate on there in terms of just construction costs and the increases that you're seeing and how impactful those have been to you as well?

Yes. So obviously it not only impacts new development, but construction costs play a role in re-leasing as well as we re-tenant spaces. We continue to see about a 0.5% increase per month in total construction pricing. Just as a reminder, it didn't abate during the Great Recession. So, this has compounded for quite some time. So clearly it's an expensive option, but there are still those who are seeking a single customer type building, and you build-to-suit, and the only way to get it in the tightening market in many cases is going to be a build-to-suit. We have seen some prospects that we've been in conversation with that once they've seen the pricing from us and some of our peers, they've decided to just double down and stay where they are, but there are still plenty that are talking about the possibility of going into something new. We've always said it's a very protracted process, because there are a number of options that they can pursue and at different pricing points, but it's safe to say that they're all 15% to 30% more expensive than if they were to stay put.

That's helpful. Thanks. And I guess last question for me, just talk about and maybe this is for Ted, talk a little bit about the demand that you're seeing in the Florida market, heard your comment on Atlanta, Nashville, Raleigh, Pittsburgh, but I was curious about Florida, and if you're seeing any kind of rebound and activity there?

Yeah, Dave. Look, I think it's definitely been behind, the recovery has been slower than our other markets, but I think we continue to see vacancy rates for Class A properties certainly in Tampa, they're now in the single digits. So, we do have asking rents that are up 4%, 5%, demand remains steady. I think the local economy continues to grow, so I think it's just a matter of time that we're going to see some acceleration of leasing, new leasing and all that in Tampa. In terms of Orlando, really a similar story, little slow to recover, Class A CBD vacancy rate is around 10%, so it's continued to improve, asking rents were up 4%, 5%, not a lot of large blocks of space. So, again while it has been slow to recover, we do think with the projected job growth in the next 12 months, that's going to continue to improve.

Dave, just stapling your last two questions together, I would just point to the LSI delivery. So, that's a good 100% pre-leased $56 million project that we've just delivered in Tampa. So not a lot of existing options available for them and they chose to build-to-suit.

Great, thank you all.

Thanks, Dave.

James Feldman, Bank of America.

Great, thanks. Can you talk a little bit more about the Pittsburgh market, I mean obviously we've seen some bankruptcies from oil related and energy related companies, but just as you guys are on the ground it sounds like you feel pretty good about your potential to backfill, just what are the risks for that market and across the different sub-markets that may be competitive. How are you guys thinking about it?

Hey, Jamie. This is Ed. I'll start, we are very bullish on Pittsburgh. Our occupancy there, when we started, it was in the low 80's% and Andy and his team got it into mid-90s% and have held it there. Over the quarter -- quarter-over-quarter, we've dropped 4.3% and it was basically due to the two customers that Ted outlined in his script with Highmark and Ketchum. In the re-leasing of those, we expect north of 5% increase in rents and Andy currently has a pretty healthy list of about 175,000 square feet of prospects and anticipates about half of that will hit before year-end and the other half in the first half of next year. So, we feel pretty confident about the backfill, the volume of prospects, the ability to push rents.

Also as Ted said in his scripted remarks, CBD Class A markets 94%. So the downtown market really hasn't seen an impact from the energy industry. Now if you go out into some of the suburbs, that has been a little bit more evident there, but the downtown market is not. In addition, we've been able to further energize the ground floor and some of the below grade area at PPG complex with restaurants and activities, so it's a better positioned asset today with those additional amenities and another large restaurant Craft Brewery coming on board on this year. So, we feel with the increase in energy on that ground floor, the volume of prospects that we have to backfill the space and the upside in rent, and then just the overall health of the downtown market, we remain bullish on it.

Okay. And then as you think about the options to redeploy the additional proceeds of Country Club Plaza, can you give us some color maybe how the acquisition and disposition markets have changed over the last six months. And in terms of the investments you might be looking at more stabilized or value-add, just kind of what's out there and where the opportunities might be opening up?

Yes, I'll start and then maybe toss it over to Ted. We think Jamie that there is a little bit of a disconnect between how some may perceive where cap rates are. So, we have now underwritten in excess of $1 billion as we evaluate various opportunities to deploy the remaining third of the proceeds from the CCP sale. We haven't seen any movement in cap rate. I know that there has been some that's been written that even in the gateway cities that they've seen 25 bps to 50 bps relief if you're the buyer in cap rates, but we haven't seen that.

And we've market-tested that in our underwritings and we've seen it in the things that we had pursued and had conversations about whether it be off market or broadly marketed. We just haven't seen any reduction in the volume of interest both in pricing and number of bidders for institutional quality better located assets within the BBDs that we're pursuing. So, maybe just a little bit of a -- because I know there's been plenty written that there is a perception and maybe it's tied to what's going on in San Francisco, maybe it's tied to what's going on in New York. But we haven't seen that inflection.

So, there are ample opportunities there and those opportunities, which we're pursuing are also being aggressively pursued by others, and so no expected relief in those cap rates.

Okay. Are you pursuing more fully leased or value-add?

Yes, both genres are on the prospect list to varying degrees. Yes, it covers both.

Okay, and then finally, looking at your top tenants list, you've got HCA and SunTrust on the horizon as within the next year-and-a-half. Just thinking about those leases or just any other large renewals or large expirations. I know you guys mentioned some on the call, but can you address any early discussions with those tenants or any others that we should be thinking about?

Sure with regard to HCA, we've talked about this publicly a number of times, where they are going into a building in downtown. So, they have multiple lease instruments with us, there are three of them which expire in the first quarter of 2017 that total about 235,000 square feet, those leases are basically in two different buildings; they are each of about 103,000 square feet, we have a 62,000 square foot prospect for one of those which equates to about 60% of the space that they would give up in Brentwood, but it's early and would remind everybody that our Weston, where the other building is, we're 100% occupied and in Brentwood where we have 1.5 million square feet, we are 98.3% occupied. We really see good opportunity to re-lease these spaces in a relatively short period of time. If we're going to get space back, these would be the two places to get it, and we have plenty of notice and Brian, Jimmy and Jeff our team there are focused on this and as an aside, as Jimmy and Jeff try to figure out how to make a living, being 90% occupied in their portfolio, obviously they're investing a lot of their efforts to backfill those two spaces.

And then the other is just that we only have 4.7% of revenues that will expire between now and year-end. So, I think that just gives us ample opportunity to focus on these bigger blocks that would be coming to us first of next year. The only other thing that I would add to that is the value-add spaces, because when we announced the acquisition of SunTrust and Monarch in September of last year, we noted that there were some known early moveouts and those were defined by us as customers who would be moving out within 12 months of acquisition that have given notice and we knew about. And there's clearly opportunity for leasing and upside there and we're seeing some momentum on all three of those buildings.

Okay, great. Thank you.

Thanks, Jamie.

Jed Reagan, Green Street Advisors.

Hey, good morning guys. And just sticking on Nashville, you mentioned the Brentwood land acquisition there. Can you talk about the game plan there, just in terms of timing for that [in terms of]development and any active conversations that might be going on with prospective tenants. And just related to that, given how tight that market is these days, just Nashville overall, have you been able to accelerate, the rent growth you're pushing for in that market?

Mark, I'll do the development and Ted, maybe you can hit on the rent. With regard to development Jed, we announced Seven Springs II, which is a 131,000 square feet, and we announced 100% spec and shortly thereafter Brian and team were able to secure a 43% user with a healthcare company, and so that was a positive and we also have more prospects looking at that building today, another twenty some thousand of vibrant prospects I would say.

So, it's early where we just poured the third or fourth floor, it's moving along on schedule. And I think, have started a 100% spec, be it 43% now, and have others that are interested in the building, we've only poured up to the fourth floor, very comfortable with that. Regarding Virginia Springs, we are very excited to be able to bring that parcel of land into our portfolio as it was truly the last raw piece of development land available in Maryland Farms. We can get up to 216,000, 218,000 square feet in two different buildings there.

And so, we are working through the process of the necessary municipal approvals to plot the buildings. If we were to go after at fast track, the earliest we could have a building COed and online would basically be the end of 2017 to very -- maybe first quarter 2018. So, we're now putting together the final touches on the elevations in a typical flow plates and the site planning et cetera. But it just recently came in, so it wasn't until we kind of locked up that we decided to invest significant dollars on the design aspect, but that's coming along very nicely and right here in short order our Nashville team will be armed with all the semi-gloss images that they need to have to be out marketing that. Ted, on the rent?

Jed, in terms of just the market in general. I mean, I think Nashville continues to be our strongest market, we're seeing continued strong demand across many industries, rents in general are record highs in Nashville today, and at the same time vacancies at a record low. I think first quarter was the fifth consecutive quarter that the vacancy has hit a new record low. So that's enabled us to really push rents. I think, we wish we had more space to lease and more rollover occurring, but what little we have, we've been able to really push rents on a cash basis and obviously on a GAAP basis.

And remind me order of magnitude, how much you're pushing for these days?

I think rents have gone up certainly -- asking rents over 10% in the last probably even six to nine months. So it's pretty strong.

Okay, that's helpful. And you guys mentioned, it sounds like you're seeing values holding up for better quality products in your markets. Are you seeing any evidence of asset prices or bidding trends softening for lower quality markets or riskier assets?

Not materially, I mean, I think we're seeing decent activity really in all of our markets and most of our product types, both A and even the Bs. I think the Bs were slower as you would expect, maybe slower to recover in terms of leasing, but we're seeing that be steady. And the number of leases we're doing has remained steady over the last five or six quarters and that's across our entire portfolio. So, haven't really seen any softness to speak of.

Just I was thinking more on the asset pricing side of things and kind of overall valuations, anything there as far as softening just with the recent market volatility for kind of riskier, lower quality ...?

In terms of leasing. I got it. Look, I think overall, maybe on the lower quality assets, pricing has made, I think they probably fewer bidders and maybe there has been a little bit of pricing pull back as buyers are doing some price discovery, maybe on the B quality assets, but we just haven't seen them on the trophy side.

And I think the CMBS, Jed more follows the lower end than the higher end and that could be part of that explanation that the fears that are out there or the wonderment that circle CMBS, it may be influencing that easing of cap rates on the lower end of the spectrum, which therefore not touching the top end.

That makes sense and do you have a feel for sort of quantifying the amount of change you've seen so far or is just not been enough out there to draw any conclusions yet?

Yes, I just don't think there's been enough trades out there to really -- enough data points to determine that.

Sumit Sharma, Morgan Stanley.

Hi, Mark. I have a quick question about some of your 2017 expiration, $380 million, that is the unsecured debt that's coming due. I guess, trying to understand how should we view the strategy that you're going to take, are you going to swap it with another tranche and what sort of spread are you looking at, maybe early to look at this, but just wondering if there is a possibility for prepayment in this year?

Yes, so you're talking about the maturity, that's I think around April 1 of 2017. It's a 5.88%, $380 million maturity, I think we're likely to get it with probably a bond offering at some point, we probably will look at hedging whether that makes sense, as you've heard in my prepared remarks, we've already done swaps on $150 million at 1.9% treasury. So, we're obviously monitoring and paying attention. I think, what you're going to see us do is kind of flatten out our maturity schedule. So, we've got some holes in the maturity schedule when you look at it and that will give us some flexibility around doing that, I think we can obviously save some interest cost on that. So, we will approach that as we get into the second half of the year and be prepared, by the time it matures in the first quarter to have it solved.

Great, thank you so much.

The second question is around the -- it's a rather small development, but just out of interest, it's Enterprise V sitting, I think in Raleigh or thereabout, and the construction seems to be close to completion. So wondering about any pre-leasing activity around on this given the state of the industrial market is pretty -- still pretty bullish, and you also mentioned in previous call that there some 360,000 square feet of additional capacity there, any chance that you would pull the trigger on that earlier or what sort of conditions would you be looking to sort of start work on further industrial development there to say that?

Sumit, this is a good question, one is the building is 131,000 square feet and it's in Greensboro and it has now been completed. We have a number of prospects who are looking at the building and we actually have a signed instrument of intent with one customer for 100,000 square feet with a contingency and that we're working through. Rick and Reggie, the team there, have had good showings, in fact I wonder they haven't called you before this to plant the question, they have asked us if they can proceed with submitting a package for approval for them doing the next building based on the level of activity they had on this. We're going to wait and just get a little bit more firm pre-leasing on this, before we would go with the next building unless the next building comes with some amount of pre-leasing. But small dollars, it's $7.6 million on this one and the other building would be in the same zip code, but a good activity and expect to certainly fall within pro forma rents and stabilization dates.

Hey, thank you so much and apologies for getting the geographies wrong. And yes, --.

You are only out by about 80 miles. So, no problem.

(Operator Instructions) Jonathan Petersen, Jefferies.

Great, thanks. I wanted to just quickly in terms of guidance for same-store NOI. You guys were at 3.7% this quarter. I think your full-year guidance is 4% to 5% right, but you talked about a tenant moving out in the second quarter. So, I would think that would have a negative impact. Just trying to understand what kind of puts and takes are there, and kind of maybe on a quarter-by-quarter trend like what's going to get us to that 4% to 5%, and am I right to assume it is going to be more negative or not negative, but decelerating next quarter?

John, it's Mark. I think there're a few things to think about here, obviously we have contractual bumps in the leases. We're getting increased rents in some of the markets. We got about a percentage on average occupancy pickup through the year that will come back to you and it's probably back-end loaded, so third and fourth quarter should be stronger in our projection and model. We've had really good operating expense control. So, our folks have done a really good job, controlling operating expenses and so I think that's going to help us here. We also have straight line rent that came as a result of concessions, free rent concessions that we made in some of the leasing that drove maybe the higher same-store numbers that's kind of burned off, so you're going to see a lower straight-line rent number especially in the second half of the year that will influence those numbers. So, we're comfortable with the guidance we've given of 4% to 5% same-store for 2016 and believe strongly that that will happen again, maybe it's a little back-end loaded into the third and fourth quarters.

(Operator Instructions)

So, operator no questions from that guy at Wells Fargo?

No sir, there is no question.

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