Highwoods Properties Inc (HIW) 2016 Q4 法說會逐字稿

Good morning and welcome to Highwoods Property Conference Call.

(Operator Instructions)

As a reminder this conference is being recorded Wednesday, February 8, 2017. I would now like to turn the conference over to Brendan Maiorana, please go ahead sir.

Thank you and good morning. I am Brendan Maiorana, Senior Vice President, Finance and Investor Relations. Joining me on the call this morning are Ed Fritsch, President and Chief Executive Officer, Ted Klinck, Chief Operating and Investment Officer and Mark Mulhern, Chief Financial Officer.

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're 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 to Ed, a quick reminder that any forward-looking statements made during today's call are subject to the 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 will now turn the call to Ed.

Thanks Brendan and good morning. Over the past few years the macro economic conditions have been fairly consistent. While there has been some volatility, historically low interest rates, and a virtual absence of inflation has led to a steady cadence of modest economic growth.

All the while, new supply has been restricted in the office sector and Cap rates for BBD office steadily declined. That environment generally led to a steady performance across our markets as occupancies and rents have improved.

As we roll into 2017, we see the potential for a change in the trajectory of macro economic factors. This would include the scale of economic growth, inflation, interest rates, tax reform, and the regulatory environment. It's difficult to predict what impact these variables may have on the overall US economy; good, bad, or indifferent. Regardless we believe Highwoods is well-positioned for the following reasons.

First, the demographic trends across our footprint are strong. Our markets have population growth, roughly double the national average. High-performing job growth, driven by the business friendly environment in our right-to-work states and a highly desirable quality of life with below-average cost of living.

Second, strong fundamentals across our markets and an approved portfolio will continue to drive organic growth. Third, office construction across our markets remains limited and even if lending loosens up the sustained march in the rise of construction costs continues to drive first-generation rents upward; which is likely to keep bridle on new supply.

Fourth, we have $371 million of development; which is 91% pre-leased on a dollar weighted basis that is projected to stabilize by the end of 2018. Fifth, we have acquired $511 million of value added properties over the past 16 months that were collectively 77% occupied with known move-outs at closing. Over the next few years, these assets continue to offer significant NOI upside from lease-up to stabilization.

Sixth, even though interest rates have ticked up modestly of late, we still have some high coupon debt maturities over the next 14 months that offer the opportunity for us to reduce our average interest rate. And the seventh and final reason, is our balance sheet. It has never been stronger, with the debt to EBITDA ratio at 4.8 times and leverage including preferreds at 35%.

If pricing for assets becomes more attractive, than we feel good about using our current balance sheet capacity. While we intend to continue growing on a leverage-neutral basis; we estimate that we can fully fund the remainder of our development pipeline, plus invest another $400 million in development and or acquisitions without issuing any equity or garnering proceeds from dispositions, all the while maintaining a debt to EBITDA ratio below 5.5 times.

Now turning to 2016; a significant year for Highwoods. We had $892 million of capital recycling investing activity and raised $246 million on our ATM program. These efforts not only simplified our operations and improved our portfolio but further transformed our balance sheet. Since the end of 2015, our leverage is down over 1,000 basis points and debt to EBITDA is down 1.3 times.

We believe our strategic execution in 2016 sets us up for steady earnings and cash flow growth over the next few years. In the fourth quarter, we declared a special dividend, a first for Highwoods of $0.80 per share that was paid in early January. Yesterday, we announced a 3.5% increase in our common dividend. Our regular quarterly dividend is now $0.44 per share compared to our prior $0.425.

Forecasted cash flow growth from our operating portfolio and continued strong cash flow from our development deliveries, combined with an increase in our taxable income, made us comfortable with this increase. As you may recall, we did not cut our dividend during the great recession or thereafter. Given the multitude of investment options available to us and our commitment to maintaining a strong balance sheet, we continue to believe that it is important and prudent to take a balanced view on excess cash flow, including investing in our operating properties and development pipeline, reducing debt to further bolster our dry powder, and taking a conservative view of the amount of our regular dividend.

Now, our Q4 and full-year 2016 results. We delivered FFO of $0.82 per share for Q4 and $3.28 per share for the full year. Q4 included a modest land sale gain. Same property NOI growth remains strong at 5.8% for Q4 and 5.2% for 2016; above the high-end of our original guidance outlook.

Occupancy also entered the year strong at 93.1%. We leased 726,000 of second-gen office space in Q4 and 3.4 million square feet for the year. 2016 leasing volume was down versus the past few years, as we had less available space and our lease rollover schedule was low.

Rent growth was a solid 13.9% on a GAAP basis in Q4, and 15% for 2016. And cash rent growth was a positive 3% for the quarter and a positive 2.2% for the year. In short, the financial and operating performance of the Company has been healthy and the backdrop of our markets is upbeat.

We believe that we have set the table for a solid outlook for the next several years. Our initial guidance for 2017 is an FFO range of $3.27 to $3.40 per share. At the midpoint, this equates to a year-over-year FFO growth of 3.6% stripping out 2016's land sale gains.

Our leverage reduction, during 2016, has reduced our near-term earnings outlook by at least $0.10 per share. We believe the trade-off is well worth the flexibility and investment capacity that this strategic transformation affords us. More importantly, given the high level of pre-leasing across our development pipeline, measured pace of scheduled development stabilization's over the next few years, and capacity to fully fund investments on our balance sheet, we are well-positioned to deliver solid FFO and cash flow growth over the next few years accompanied by a fortified dividend.

Mark will go over details in his remarks. But here are a few of the highlights underpinning our 2017 outlook. We expect same property NOI growth of 2.5% to 3.25% and year-end occupancy between 92.2% and 93.2%.

As an aside, we're focused on the backfill of the 206,000 square-foot HCA move outs that occurred on January 1. We've leased 8% of the space and have LOIs for an additional 31%. We don't expect much NOI from the backfill of the space during 2017, given the lag between lease signings and the commencement of rents but we feel good about our ability to get the space re-leased and this should be a good driver of growth in 2018.

We see few acquisition opportunities in the market at this point in time and therefore our 2017 outlook is $0 to $200 million. We continue to focus on improving the quality of our portfolio, not just through development and potential opportunistic acquisitions, but by cycling out of non-core assets. We project selling between $50 million and $150 million of non-core assets during 2017.

As far as development, our 2017 guidance outlook for announcements is $120 million to $220 million. Yesterday, in conjunction with our earnings release, we announced the development of 751 Corporate Center; a $22 million, 90,000 square-foot, 35% pre-leased office building, Raleigh Corporate Center. Our two existing Corporate Center buildings total 279,000 square feet and are 98% occupied.

We believe the spec component of this project will add needed inventory for our growing customers at Raleigh Corporate Center and the West Raleigh submarket, which is 92.2% occupied. Also in development, we are in advanced discussions with a new customer for an approximate $100 million, 100% pre-leased, build-to-suit, and we are in various stages of conversations regarding other potential development projects primarily on Highwoods own land.

Based on this strong activity, we feel very comfortable establishing the low-end of our development announcements outlook for 2017 at $120 million. Our development pipeline has increased to $541 million, encompassing 1.8 million square feet and is 78% pre-leased on a dollar weighted basis and 70% pre-leased on a square footage basis.

Before I turn the call over to Ted, I sincerely thank the Highwoods team for their enthusiastically and successful execution of our strategy during 2016. Ted?

Thanks Ed and good morning. As Ed noted, we had solid activity this quarter leasing 726,000 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 $24.12 per square-foot, nearly 3% higher than a year ago.

Office occupancy in our same property portfolio, was up 50 basis points compared to one year ago. And overall portfolio occupancy increased 40 basis points since the end of Q3. For office leases signed in the fourth quarter, starting cash rent increased 3.0%, our GAAP rent grew 13.9%. The average term was six years.

For all of 2016, we signed 3.4 million square feet of second-gen office leases with cash rent growth of positive 2.2%. The GAAP rents were up a robust 15.0%. Given the health of our markets, the team continues to push rents upward.

Turning to our operational guidance for the year, same property NOI growth guidance is 2.5% to 3.25%. Inclusive of the roughly 206,000 square-foot move out on January 1 from HCA. We continue to feel good about our ability to push rents higher and our asset management team has done a great job improving the efficiency of our portfolio and driving operating margins higher.

We expect occupancy to end the year between 92.2% and 93.2%. We don't provide guidance on rent spreads but we do feel good about the health of our markets and the ability to continue to garner improving rent economics in 2017.

Turning to our markets, while each city has it's own local market dynamics, it's own unique collection of BBDs, it's own set of opportunities and challenges, there is a common theme across our markets, in that our markets generally benefit from population growth and other demographics that consistently outperform national averages, affordability in a pro-business environment, growing in diverse economies, and high quality of life.

In Nashville, the strong growth continues. For Cushman and Wakefield there is over 1 million square feet of positive net absorption during 2016, including nearly 200,000 square feet in the fourth quarter.

The markets vacancy rate is 5.5% among the lowest in the country. The Class A vacancy rate is only 4.7% and occupancy in our portfolio was 99.6% at year-end. We've stated in the past, that we are watchful of that level of development activity in Nashville.

Cushman is tracking about 3 million square feet under construction, that is approximately 75% pre-leased. While there is some shadow space that will come to the market as these projects deliver, the continued strong pace of net absorption and on the ground demand that we see, suggests solid fundamentals across the city will continue.

We signed another customer at our Seven Springs West Development project and we're now 91% leased with strong prospects that bring us into the high-90's. Our Seven Springs Two project, were more than half pre-leased, six quarters before the projected stabilization.

Turning to Atlanta, we've continued to generate strong rents across our portfolio, where we posted GAAP rent growth of 16% on signed deals in Q4. We're seeing a steady interest in our nearly 2 million square-foot Buckhead concentration of towers at Alliance Center and Monarch Center.

We expect to see occupancy in our Buckhead portfolio dip in the third quarter as there are some larger customer move outs but fortunately rents are about 10% below market and we are encouraged that there are limited large blocks of high-quality space. Our Riverwood 200 project is scheduled to deliver in the middle of the year.

Pro forma to stabilized in Q2 2019 but we're already 73% pre-leased. In Raleigh, rents continue to move steadily higher. Per Avison Young, Class A rents increased 5.6% year-over-year in Raleigh and vacancy dropped 200 basis points to 8.1%.

New supply in Raleigh is modestly higher than some of our other markets where there has been a little new supply. There is 2.1 million square feet under construction that is 42% pre-leased and that compares to net absorption of 1.2 million square feet in 2016. We believe the level of new supply is meeting market demand.

Further, the construction is spread out across several submarkets. At 5000 CentreGreen, we have an LOI for 26% of the building and a list of strong prospects. At Charter Square, the Raleigh CBD acquisition that we closed in September 2016, we have leases in hand that will take occupancy up 1,000 basis points from closing to 79%.

We believe that having three downtown office towers with rental rates across the Class A spectrum will forge us flexibility with existing and prospective customers. In Tampa, we have seen solid activity of late. Our portfolio is 90.9% occupied up 350 basis points since the end of 2015.

We're finishing up our Highwoodtizing efforts at SunTrust Financial Center, where we've already moved occupancy to 88%. We are encouraged with the level of activity we're seeing across our Tampa portfolio. In conclusion, leasing volumes continue to be solid, reflecting positive momentum in our markets and demand for our well located, BBD office products.

With the previously disclosed known move outs by HCA and a few other near-term expirations, we expect occupancy will dip to the low 92%s during the early and middle part of the year, before rebounding towards year-end. Mark?

Thanks Ted. As Ed outlined, 2016 was a successful and active year for the Company. Our operational performance exceeded the high-end of our expectations across most metrics. Same property NOI growth was strong at the high-end of our upwardly revised range. Rent growth and occupancy continue to be solid.

As Ed described, we were active on the capital recycling front. We used a portion of the proceeds from our dispositions, principally from the sales of Country Club Plaza assets, plus issuance on the ATM to invest in our development pipeline and measurably reduce leverage.

Our leverage metrics are now substantially stronger and the balance sheet is in great shape. We have the flexibility to fund our current development pipeline and other growth initiatives through a variety of sources.

Turning to 2016 for the fourth quarter, we delivered net income of $0.25 per share and FFO of $0.82 per share. Our FFO was flat compared to Q4 2015 on a per share basis. As you may recall we had elevated leverage in Q4 2015 and we had a full quarter of NOI from the SunTrust and Monarch acquisitions, while the closing of the sales of our Country Club Plaza assets did not occur until March 2016.

In the short-term, we funded the acquisitions of SunTrust and Monarch with a bridge loan and capacity on our credit facility, low interest-rate money. We also had 5.1 million more weighted average diluted shares outstanding during the fourth quarter of 2016 compared to 2015. Overall, delivering the same FFO per share in Q4 2016 as compared to Q4 2015 with an even better portfolio and a substantially lower risk balance sheet was a great result for our Company.

Our 2016 FFO of $3.28 per share, is at the higher end of our original outlook of $3.18 to $3.30 per share, despite not fully reinvesting all the proceeds from the sales of Country Club Plaza assets and using the leftover proceeds to further de-lever and fund a special dividend and issuing $250 million in new equity through the sale of 5.1 million shares under the ATM.

On a year-over-year basis, the primary drivers of the 6.5% FFO per share growth were same property GAAP NOI growth of 5.2%, due to higher rents and higher average occupancy, contributions from value-add acquisitions particularly the Monarch Center and SunTrust acquisitions, and highly pre-leased developments that came on line.

Turning to 2017, we provided our initial FFO outlook of $3.27 to $3.40 per share. At the midpoint, our growth is 3.6% excluding 2016's land sale gains that we don't forecast in 2017.

To help with the modeling, I want to provide a role forward of our FFO outlook. Q4 2016 FFO was $0.81 a share when you exclude a modest land sale gain. Annualizing Q4's run rate and adjusting for the higher G&A costs of $0.03 per share that we routinely incur in Q1 every year related to incentive compensation, would imply $3.21 per share as a starting point.

Then there are some known moving parts that will affect 2017. First the deducts; the HCA move out on January 1 is expected to reduce 2017 FFO by about $0.04 per share. Other income and FFO from JVs is expected to be $0.02 per share lower in 2017.

We recorded higher other income in 2015 and 2016 from a third-party fee development project that wrapped up late in 2016 and we anticipate lower occupancy in one of our few remaining JVs. Higher average share count for the year in 2017 compared to 4Q 2016, is expected to reduce FFO by approximately $0.02 per share.

Now the additions; interest expense should be approximately $0.05 lower, as we have an opportunity to refinance a $380 million bond maturity in March that has an effective rate of 5.88% with lower cost debt. Our GAAP NOI growth from our Q4 2016 same property pool, is expected to add about $0.06 per share, excluding the impact from HCA.

And then increased NOI from development properties should add around $0.10 per share net of the change in capitalized interest. I want to highlight that we expect $304 million of development projects to stabilize in 2017.

Our highly pre-leased development pipeline is a strong driver of value creation and stable cash flow for our Company and was a key consideration in the decision to increase our quarterly dividend. The largest project, our $200 million headquarters for Bridgestone Americas in Nashville, will deliver at the end of Q3 2017. As an aside, GAAP requires us to begin recording straight-line rent due to early possession by Bridgestone Americas before delivery; this will aggregate $7.8 million over the second and third quarters of 2017.

Turning to our financing plans, on March 15, 2017 we have the $380 million bond maturity that I referred to earlier. As a reminder, early in 2016 we locked in the 10-year treasury at 190 basis points on $150 million of principal. This hedge provides us partial protection against the recent rise in the 10-year treasury rates.

With plenty of availability on our revolver and other access to capital, we have substantial flexibility to be opportunistic on this upcoming maturity. We also anticipate refinancing approximately $100 million of secured notes with an effective rate of 4.22% that mature in November 2017 and are pre-payable without penalty starting in May.

Finally, as you may have noticed, we made some routine SEC filings yesterday and this morning. Under SEC rules, F-3 shelf registration statements sunset every three years. It has been three years since our last shelf filing.

As a result, last evening we filed a new F-3 with the SEC. This was a joint shelf filing by the REIT and the operating partnership that registers an indeterminate amount number of debt securities, preferred stock, and common stock for future capital markets transactions.

With this new shelf in place, we also needed to refresh our ATM program, which we filed the form via 424b this morning. This new program allows us to raise, from time to time, up to $300 million of common equity at market prices less a 1.5% discount.

As you know, keeping an ATM program in place is one of the many arrows we like to keep in our capital raising quiver. Operator, we're now ready for your questions.

(Operator Instructions)

Manny Korchman, Citigroup.

Good morning everyone. Ed, in light of your comments earlier in the call about an uncertain backdrop, how do you underwrite both development and potential new acquisitions with that backdrop in place?

Honestly, there is a whole cadre of things that we look at. On the development side, it's what's the submarket, what's the product, what's the demand, what's the vacancy, how much pre-lease? I think that our underwriting has been on-point to conservative across-the-board.

We've been fortunate that a lot of what we've done from a development perspective has been ballasted by build to suit or heavily pre-leased development. And so I would think that gives us a comfort level that we're underwriting it to where we think we will deliver and stabilize over the long-term taking into consideration where we think the world is going and we are fortunate on a substantial amount of the development that it is done on an open-book basis. So, we have a fixed return based on what it ultimately costs to deliver the product.

And then sticking on yields for a second. I know you don't like to discuss that. Are you seeing any meaningful change or shift between what you can get on a build-to-suit versus a spec and in general have you seen any compression in the yields you are able to get?

Yes, good question and just to clarify why we have that dislike, we are routinely in a half a dozen or more conversations about development and we feel like we are too candid with those numbers that they could work against us, so we would rather price each project based on the project itself and the customer profile and the credit risk, et cetera.

But to the broader question, they're clearly credit driven when it's a build-to-suit deal. We evaluate the customer, it's likelihood to grow, what specialties or absence of specialties we would have in the particular building, and the length of the term versus on a more speculative building, we're going to have some gap of 150 to 200 bps on that depending on how much pre-leasing we have versus how much speculative that we have.

So for example, 5000 CentreGreen, we started that 100% speculative, so we had more conservative underwriting because we didn't have any knowns to it. Whereas 751 we have one-third of it knocked out, so we have some input on that and we also look at the scale. CentreGreen 166, 751, 90, those kinds of things.

Thanks very much, Ed.

Jamie Feldman, BofA Merrill Lynch.

Hi thanks and good morning. So, you talked about construction in each of your markets and higher construction costs moving rents higher. As we look ahead to 2017, do you think we'll see a better pace of rent growth than we saw across your markets in 2016? How are you thinking about it? What might we see in your better population growth markets when it comes to rent growth?

Jamie, I think it would be fair to say that it will be close to a mirror image of it. That they will move in sync. We see a continued movement in the 3% to 5% range for asking rents, we also see continued movement in construction pricing.

Okay. That's helpful. And then, Mark you had commented on how your 2016 year-end FFO turned out at the high-end of your range versus your original guidance. When we think about your 2017 guidance what would you say are the key moving pieces that could push you to the higher end or lower end?

Yes Jamie, we laid out a little bit of this in the remarks about what key issues, the development deliveries are a big part of 2017 with Bridgestone delivering and some of the others delivering. We also as you know have some vacancy still in some of the value-add acquisitions we made at SunTrust and Monarch, so there's some potential upside there and HCA getting filled quicker than we expect could have some positive impact for us as well. So those would be the main things I would talk about.

Okay. And then for HCA, is there any possibility you would get GAAP NOI this year? Or probably not?

Hi Jamie. It's Ted Klinck. I do think we're going to get some GAAP NOI this year. If you look at the 206,000 square feet they vacated January 1, we've signed roughly 16,000-feet or 8% of the space already and that will start here in the next several months towards mid-year.

And we have strong prospects for another, call it 65,000-feet or so, 31%. Between signed and strong prospects that we think will commence at various parts of the year are heavily weighted towards the strong prospects, will be towards the back-end of the year but will kick in and take occupancy and start the GAAP rent.

That just substantiates what Mark said. If we are successful on the strong prospects, that could be one of the things that pushes us higher on that guidance.

Okay. And then you had a dividend bump in the fourth quarter. When you think about your guidance and taxable net income for 2017, how do you think about -- what are you thinking for AFFO and do you think you'll have to push it again?

Yes, Jamie, the dividend as you know there is a number of factors that go into that decision. We are anticipating growing and strengthening cash flow in the business as the developments deliver, so that was a factor. We're monitoring the taxable income and we've had steady increase in taxable income over time.

One of the reasons we are here is we've had such steady growth over time that the lines have crossed effectively between our taxable income and our dividend payout. I think we'll be careful and balanced around the cash flow needs of the business, and investing in the buildings, and making sure that we've got a sustainable dividend policy in place and that's what we did here. But we will continue to evaluate that as we go forward.

Okay. All right. Thank you.

David Rodgers, Robert W. Baird & Company, Inc.

Yes, good morning. Ted, maybe start with you in regard to your comments about Buckhead losing some occupancy there in the third quarter. And maybe just ask you to comment a little bit more broadly on competition you might be seeing at Three Alliance or the overall state of that market and where that vacancy is coming from?

Sure, Dave. So the vacancy is coming from a couple of larger customers. One in Monarch Tower that is leaving about 60,000-feet in the end of July. Then about a 75,000-footer in Alliance in August, that one of them is moving half the 60,000-footer -- it's subleased half their space so 30,000-feet or is consolidating offices in another Buckhead building and the other 30,000 feet that were subleases are actually moving to Three Alliance. I will come back to that in a minute.

Then the other 75,000-footer we're losing is consolidating, as they had a merger. It was Towers Watson. They merged last year, they are consolidating into their other space they had in Central Perimeter. They had a termination option for the exercise, so we will be losing them in the third quarter.

But in terms of Buckhead overall, I think the last couple of months of 2016, right around the election, tour activity had slowed a little bit but we're seeing that pick back up, as we've turned the page into the new year. It is great space that we're losing and we feel great that there aren't a lot of big blocks of space available. We're still very bullish on getting this backfilled in due time and feel like again it's good space and the market still remains active.

And Dave, I would add to that, that the rents that are expiring are 10%-plus below market, so we have some upside opportunity there. And then just in general, our space at One and Two Alliance is 20% to 35% what's in place below what the asking is.

At Three Alliance and then at Monarch Tower Place -- Monarch Place and Monarch Tower, we are about 30% in-place rents versus what they are asking is at Three Alliance. There is a significant delta to be captured there or a burden there if they were to move but it still leaves us room to push rents on renewals but not to that level and they have a better deal.

Okay. Thank you for that. And then maybe just going back to Nashville. You did talk about some potential pre-leasing activity at Seven Springs II and you kind of commented on HCA but the stats in the market are overall pretty good but very definitely feeling some kind of slowdown, are you seeing that in rents at all or is this just a little bit of turnover that you're just working through.

Dave, it's Ted. I think the markets remains strong. I think we feel heavy either signed or strong prospects for 39% of the space five or six weeks after HCA has moved out. I think that bodes well for the space we have.

The market is -- still continues to be one of the lowest vacancy rates in the country in the low mid-single digits today. The market is still continuing to grow. Our prospects are strong and I think we still very bullish. Even the development pipeline, which has helped push up rates, it's like 75% pre-leased. So there will be some space to backfill but the development pipelines very high pre-leasing and it should bode well for the overall market.

And at Seven Springs Two, we started that building 100% spec and we are over the midway point on that, at 52% and then we continued to have good showings, good prospects to bolster that and it's not scheduled to stabilize until the latter part of 2018.

All right. Fair point. Thanks.

Jed Reagan, Green Street Advisors.

Hi, morning. Just curious if you've seen any noticeable change in leasing tempo or tenants mindsets since the election at all?

You know Jed, as I mentioned, I think there was some slowdown leading up to the election and maybe in the few weeks after, but we continue to -- talking to our leasing agents, we had a national leasing meeting down in Tampa a couple of weeks ago and I think across-the-board we remain very bullish on our markets.

I think tour activity has picked up either just before the holidays but certainly in January. So, our markets -- I think all of our leasing agents feel really good about the continued demand we are seeing. Eight of our markets finished above 90% and I think we feel good about moving that up.

Would you say that January tempo gets you back to that incremental or higher than what you saw say this time last year? Does that get you back to a steady pace with earlier in 2016?

I think a steady pace (multiple speakers). I think it's a steady pace Jed. I think it's -- virtually everybody's bullish. We're seeing more companies grow than contract, and I think it bodes well. Again, our markets have a great supply-demand dynamics right now. Not a lot of new construction, jobs are still being created. So I think that bodes well for us.

And Jed, we haven't seen any inflection in conversations that we are having for build-to-suit development projects. There wasn't any moratorium of negotiations, conversations, advancement in those, right before or subsequent to the election.

Okay, that's helpful. I think you have a larger move-out later this year in Richmond, curious if you could provide any color on the backfill process there? And looking out to 2018 if there is any larger expected move-outs that you are starting to plan for.

In Richmond, it is SCI Services that comes out, so we will get that space back. It's about 160,000 square feet, in August of this year. We've re-let a little bit more than 60,000 square feet of that, as we sit today so, let's call it 40% is already backfilled and then we don't have anything in our guidance for any additional space leased and generating in 2017.

And then looking at 2018 the only two customers of scale that we have that are up for expiration, one is in the Raleigh market at about 175,000 square feet and one is in Atlanta of about 130,000 square feet. We feel it is too early on one of those and the other one is an FBI project where they are moving to a build-to-suit for them so we will get that space back in February 2018 from them. (Multiple speakers) after that, there's nothing is bigger than 75,000 square feet.

And that was the Atlanta one?

That's the Atlanta one, yes, sir.

Okay. And just last one for me. Do you have a sense of where you might end up the year 2017 in terms of debt to EBITDA and is sub five times a level you hope to maintain longer-term or is the 5.5 times you mentioned [more it].

Yes Jed, it's Mark. As you'd know we made great progress this year on leverage in the debt to EBITDA metrics. We were 4.78 times at the end of the year here.

Our forecast, and again we don't give the anticipation even though we give ranges on acquisitions, dispositions, and development, we don't include any of that in any of the FFO numbers or anything like that. Our forecast would tell you we will be right in the high-4's, just under 5, if all those things hold steady at the end of 2017.

In terms of a target, we've thought about the 4.5 to 5.5 EBITDA number as a target range for us. As you know we're about 4.8 right now and we would anticipate basically growing the Company on a leverage-neutral basis but consistent with the way we've talked about it previously, so I would say we will be in those ranges.

Okay. Great. Thanks very much.

Jon Petersen, Jefferies.

Great. Thanks. Actually just following up on the talking about leverage, probably a question for Mark. You raised about $70 million through the ATM in the quarter, with leverage already being pretty low in the third quarter, can you talk about your motivations for raising the money through the ATM?

Yes, couple of things. We continue to fund the development pipeline and we've got a very strong pre-leased development pipeline so we keep, again consistent with the leverage-neutral comment, we keep that in line. We have the Charter Square acquisition in Raleigh on the second half of the year. Some of that played into our thinking around raising those funds in the fourth quarter.

Okay. And then with leverage down quite a bit from where you were at this point last year, can you talk about how you think about your cost to capital for new -- whether it's new development or whether new acquisitions, do you view your cost of capital lower today than you did a year, or is it the same?

Jon, we keep very close tabs on this. We look at our capital stack and we use -- we've had a tick up here in rates, clearly in short-term rates and in the 10-year, so I would say just on that basis we probably have a little higher cost capital today then we had a year ago.

But we have a mixing bowl of options in the capital stack and try to balance them all but it's an important metric for us when we're quoting spreads and pricing deals. But that's how I would view it today.

Jon, I would add to that, that from a competitive perspective as we compete for development projects; our primary competitor is a local private developer and then some institutions that are represented by local developers et cetera. I think we are -- even given Mark's answer with he thinks it's a little higher now.

I think we are greater advantaged today then we were just a year ago, us versus the competition on the private and institutional side, as we compete for transactions because the spread of our cost of capital versus theirs has improved and the economics that we can put in front of a prospect are certainly more attractive than others. And it also puts us in a position where we can affirm that we don't have any financing contingencies when we go for a build-to-suit.

We don't need a JV partner, we don't need [mezz debt], and we have a lower cost of capital which inures to their benefit.

I think maybe you just answered it but my question -- irregardless of where interest rates have actually moved, do you feel like you can be a little more aggressive I guess in the acquisition market because you have the ability to lever up?

We think we can be more compelling, if that's fair, to shift aggressive to compelling because aggressive and Highwoods doesn't exactly sync up (laughter). We will go after it with vigor. But I think that we can have more compelling economics and a more likely story about when we can start, when we can deliver, as opposed to maybe some of our competition as we compete for build-to-suits.

Jon, and I do think the point you are asking about, Ed talked about in his prepared remarks, I do think that we feel like we are in a position where we've got a lot of flexibility and we are prepared for opportunities. But we're also prepared for downside, so we've -- in our minds we have the balance sheet in a place where we can react to a number of different scenarios and really be in solid shape.

Yes, that makes sense. Just one more question, probably for Ted, but the total leasing costs over the last couple of quarters seem a little bit elevated even when you adjust them per square foot, per year. It looks to be spread across tenant improvements and leasing commissions.

Honestly something we've seen across the lot of office REITs, it feels like leasing CapEX is up a little bit. Is there any trends in the industry right now over the last couple quarters that is causing those numbers to rise? It doesn't quite make sense since you are seeing occupancies near all-time highs.

John, if it's all right I will start and then maybe Ted will close on that but just a couple of thoughts about that. We watch this closely. As we've talked about, what has kept the bridle on new development is in part the rise of construction pricing. That translates also over into TI and BI work. It's some of the same tool belts and same materials and same suppliers and trades, et cetera. Just the absolute cost of construction is higher than it was.

And also I just think in the transformation of our portfolio to higher quality assets, it just portends to nicer build-outs. As a result of that though, we've also had an increase in coinvesting by our customers. Meaning we'll fund so much but if they want it nicer than that, they are going to have to co-invest with us. And we have clearly seen an increase in that trend.

And then a couple of side benefits to this is that with the higher quality assets carrying along with it the higher construction and re-leasing CapEx cost, we are getting better credit. So we're having a higher profile credit customer and our ARs over the past five or six years are down 40% from what they were and we attribute that to an approved portfolio with a better clientele.

We also are benefiting from higher net-effective rents, which are up some 20% or so over the last five years as well. That's my view Ted. Anything to add.

No, I think that's it. We're seeing companies as a -- the whole recruiting and retention of employees that are wanting to change the workspaces and all that so we're just as we -- even on hitting some on renewals, companies are wanting to change the format of their space and they layout and just gets more expensive. Again, thankfully we are able to share some of that cost but it is driving some of the TI costs up.

And I guess commissions as well. The higher the rents go, the higher the commissions as well. And that's (multiple speakers).

Appreciate the color. Thank you.

Michael Lewis, SunTrust.

Hello, thank you. So you're starting a development with 35% pre-leasing and I think it's pretty easy to see how you got comfortable there with two nearby buildings that are well leased and you know the tenants. Maybe absent a specific situation like that, how do you think about the rest of your markets in terms of starts with 35% pre-leasing or less? Are there markets where you would still be comfortable doing that? Or do you think we're far enough in the cycle that even if we see other developers building buildings with low pre-leasing, maybe that should give us pause and be a sign of concern?

I think it is all that actually. (Laughter) so when we put together our investment deck, you've just covered like 13 of the 30 pages. We look at that. What is the competitive set, where are they, where they pre-leased, how would they compete with this, what is their profile versus what our profile would be?

I also think, Michael, we have to look in whole, and so it's as if nine people are working out of the same checking account. We need to watch that register fairly carefully and so we might be able to write a couple of big checks in a few places but we need to be sure we are carefully tracking the aggregate amount of speculative space that we are proposing as a Company, not just within that market, within that division, within that submarket.

So, we look at all those aspects about, what's the competition doing, what are -- some of these submarkets for example are 2% to 3% vacant and so to be able to come out of the gate one-third pre-leased and not doing 0.5 million square feet that is tied to so many other things and economics, I think that's all part of what would take into consideration when we make a decision whether or not to pull the trigger or not.

Thanks. And I wanted to ask you the classic high cap rate market versus low cap rate. If all else equal if the 10-year creeps up and on a day like today, maybe it's not so obvious that it will, do you think cap rates are more likely to hold in, in say Atlanta or a market like Pittsburgh or Memphis, a higher cap rate market that maybe has more spread?

Again, I hate to give you the same kind of answer, it's the mosaic of things. It's not just the market but it's also -- has to be the product. So a trophy product in Pittsburgh, a trophy product in Atlanta, versus a non-trophy, non-core, a non-differentiating asset, a commodity-type product, so in our view, when we look at cap rates and talk about trends and where things are going, we really look at it in both the ways that you described.

One, is it a trophy asset itself, was it a well conceived development project the day it was done? Then where is it and what is it? So I think we have to look at the aggregate of those things from geographic diversification to product diversification to pricing on that. And then clearly the better the location, the better the product, the more well conceived it was at the time that it was constructed, the more the cap rate is going to stick and the more the interest there is going to be; maybe not number of buyers but certainly number of capable buyers.

Great. Thank you.

Tom Lesnick, Capital One.

Hi, good morning. Most of my questions have been answered so just a couple of quick ones. On same store, with the range of 2.5% to 3.25%. I know you talked about HCA in the context of the per share impact to 2017 guidance but looking at that range if you were to strip out HCA what would that range look like?

You would add 1%.

1%. Okay. And then across the rest of your markets outside Nashville, which markets do you see accelerating year-over-year versus decelerating?

I think clearly we feel comfortable, continue to feel comfortable about Atlanta, Raleigh. We've routinely said Atlanta, Raleigh, Nashville top-three markets. Pittsburgh not too far behind that. We've said and we've all seen that the Florida markets have trailed and been a little bit slow to the come back party on this recovery but we're seeing now both statistically and what research firms have put out and forecasted rent growth, absorption et cetera, very positive demographics.

And when we look across the screen, actually the Florida markets are boasting some of the best forecasted demographics across our footprint and we're certainly seeing that now happening in Tampa and we're hopeful that Orlando is not far behind. But Tampa, the team there has really put points on the board, our investment in SunTrust we think the timing was very good on that. We're about to wrap up a multi-million-dollar Highwoodtizing of that 0.5 million square foot tower and the statistics there have just been excellent and we think Orlando is not far behind on that.

Appreciate that color Ed. And then Mark, maybe one for you, really more of a housekeeping question but it looked like the fee income line and the amortization of lease incentives line on the revenue detail on page 5 of the supplemental, went away this quarter. Just wondering was that entirely due to this third-party development contract going away or what are some of the moving pieces behind that?

Yes Tom, I saw that in your note and I appreciate it. We were just cleaning up that page, so it comported with the 10-K so really no change in method or anything that drove that. We just consolidated some lines on page 5 again those numbers square up exactly with what is in the 10-K.

All right. That's very helpful. Congrats again on increasing the dividend.

Thanks Tom. Appreciate it.

John Guinee, Stifel.

Great. Thank you very much. Mark, I was noticing that when you did an excellent job of articulating the 2017 FFO, that the negatives were front loaded and the positives were back loaded. And off the quick math I'm doing it looks like $3.30 could be $0.75 in the first quarter, $0.80 in the second quarter, $0.85 in the third, and $0.90 in the fourth quarter. Does that sound appropriate?

Yes, John, I don't have the quarterly numbers handy. We don't give that granularity but I do think your comments are right. In other words, we do have a little higher G&A in Q1 then related to incentive compensation so that's right.

I would anticipate the Q1 number being a little lower. The development deliveries are a little backend loaded. Some of the interest rate savings that happens, happens not in the first quarter but in the following three quarters. So yes, I think that's probably a fair presentation although Brendan's pointing to me like wait a second, I have something to say so here you go (laughter).

We put the detail in the press release about the -- the one thing that I would note is that we do have the early possession rent that we're going to get from Bridgestone so just that -- that commences in Q2. I think your trajectory is accurate in terms of lower in the first quarter as we typically are but you might want to factor that in to the magnitude of the changes as the subsequent quarters go on.

And my second question what I've got Brendan on the line here, and I'm looking at page 13 and you do a great job of really explaining the math on your leasing. And the problem is, is that $14 net rents over $4 a square foot per year in re-leasing costs and a 2% to 3% cash rent increase and 13% to 15% GAAP rate increase, no matter which way you do the math, there is no value being created there. Is that a too critical a statement?

So John, so the $14, I think you know this but that's inclusive of the deduction for the TIs and leasing commissions on a per square foot per year basis right, so that's after that number. I think as Ed pointed out, over the last five years or so we've grown net effective rents about 20% across the portfolio so we feel good about our ability to continue to move those net effective rents inclusive of the TIs, leasing commissions, and operating expenses up over time. And so I think what we've done is a pretty good job of keeping the capital costs on leases relatively in check, while still moving the rents up both on a cash basis and a GAAP basis.

And Brendan, is there any other question you want me to answer, ask that you can answer really well?

I think to sum up his last answer, yes. It was. (Laughter)

Thanks a lot.

Thank you and we have no more questions. I will turn the conference back to you Mr. Fritsch.

Thank you everyone for your time today. As always, if you have any follow-up questions, don't hesitate to give us a holler. 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 line.