Highwoods Properties Inc (HIW) 2017 Q3 法說會逐字稿

Good morning, and welcome to the Highwoods Properties Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded on the date October 25, 2017.

It is now my pleasure to turn the conference over to Brendan Maiorana, Senior Vice President, Finance and Investor Relations. Please go ahead, sir.

Thank you, operator. And good morning, everyone.

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 marks 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, NOI and EBITDA. 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'll now turn the call to Ed.

Thank you, Brendan. And good morning, everyone.

Since our last earnings call, the biggest news in the office business this side of the Atlantic has been Amazon's post of HQ2. While several of our cities have been mentioned by numerous pundits as contenders to land HQ2, we're not going to speculate on which metro area Jeff Bezos and his Amazon team may pick. However, we find their list of desired criteria a validation of our BBD strategy. We're thrilled to see Amazon's HQ2 grocery list, pun intended, of desired attributes so closely aligned with the characteristics of our BBD markets, which include access to well-educated workforce; growing population centers; a stable, business-friendly climate; high quality life; and attractive cost of living, among others. The unique manner and epic proportion of this posting is something all of us will pay close attention to as it unfolds. Regardless of what Amazon ultimately decides to do, the confidence they are showing in their long-term growth outlook with HQ2 can be viewed as a good story for the economy.

Shifting to Highwoods.

Fundamentals on the ground remained steady. We continued to see positive net absorption across our markets. New supply is highly pre-leased and less than 2% of total market, which mitigates the risks to office fundamentals. The backdrop of continued positive net absorption and modest supply has driven a steady increase in net effective rents.

Turning to the third quarter. We delivered $0.86 of FFO per share, about 4% higher than last year. The quarter included a little over $0.01 of land impairment charges related to a parcel that we no longer expect to develop, but this charge was mostly offset by a term fee. Our strong financial performance was driven by continued growth in same-property NOI, accretion from recently delivered development projects and lower interest expense. Given our positive results, we have increased our 2017 FFO outlook to $3.36 to $3.38 per share, which implies a $0.015 increase at the midpoint.

On the operational front, same-property cash NOI growth was positive 3.4% in Q3. We signed 1.1 million square feet of second-gen office leases with a GAAP rent spreads of positive 11.3%, while cash rent spreads were slightly negative at minus 0.9%. Strong fundamentals across our markets and the beneficial impact of annual escalators has led to our third consecutive -- our sixth consecutive quarter of positive double-digit GAAP rent spreads.

Our occupancy was 92.1% at the end of Q3, a dip from the end of the second quarter driven by previously disclosed known move-outs in Atlanta and Richmond. At the 211,000-square-foot former HCA space in Nashville, we're 46% relet and now have strong prospects for another 30%. In Richmond, we're already 77% relet on the 163,000 square feet that SCI vacated in the third quarter, and we have prospects for the balance of that space. In Buckhead, the 2 blocks encompassing 137,000 square feet returned to us in the third quarter by Morgan Stanley and Towers Watson have already been white-boxed and are well positioned to capture large user demand in a submarket where the availability of large contiguous blocks is limited.

Disposition activity was heavy during the quarter, as we closed $93 million of sales, including our share of a joint venture sale. Most of these sales closed late in the third quarter, and we expect an additional $44 million of building sales to close in Q4. As we previously disclosed, our Q3 and Q4 disposition activity will be about $0.02 per share dilutive to 2017 FFO, and virtually all of that will affect the fourth quarter. As a reminder, in keeping with our strategic plan, we routinely evaluate our portfolio for noncore properties and expect to continue to be regular recyclers of assets. At a weighted average disposition cap rate of approximately 7.5%, pricing for these noncore properties was reasonable. Following the JV sale we closed in Q3, we now receive only 1.5% of our revenues from joint ventures.

Regarding acquisitions, we continue to evaluate on- and off-market opportunities, with a focus on prudent investing. The acquisition market has been relatively quiet thus far in the year, and while modestly improved of late, the preponderance of recent for-sale assets has been lower quality than what we're seeking. There are a few opportunities we're monitoring, but at this point in the year, the likelihood of closing any acquisitions before the calendar flips is low. As a result, in our revised outlook table we are assuming no building acquisitions will close before year-end.

Our development program continues to be a meaningful driver of earnings, cash flow and NAV growth for our company. At $225 million of 82% pre-leased development starts encompassing 769,000 square feet announced thus far this year, we have already exceeded the high end of our original outlook of $220 million for 2017. We continue to see opportunities for highly pre-leased development projects. While it's always difficult to forecast if and when a sizable user will commit to a development, we're encouraged by the conversations and level of activity. Our overall development pipeline, spreading across 5 markets encompassing 1.5 million square feet, represents a total expected investment of $440 million and is 78% pre-lease on a dollar-weighted basis. At our $41 million 167,000-square-foot 5000 CentreGreen development project in Raleigh, shell construction is complete, and our first customers have begun to move in. We're now 46% pre-leased, up from 26% last quarter. And we have strong prospects for another 30% of the building, while we're still 2 years from pro forma stabilization. With nearly $400 million of development delivered in '17 that are on average 85% leased, we expect a meaningful increase in cash flow as these projects stabilize and cash rents commenced over the next several quarters. Again, development is a core competency for us and an ongoing engine of strengthening cash flow and earnings growth. The combination of strong operating fundamentals, a solid balance sheet and stabilization of well-pre-leased development projects sets the table for solid growth and cash flow for the next several years.

Ted?

Thanks, Ed. And good morning.

As Ed noted, we continue to see steady fundamentals across our markets. It's noteworthy that 6 of our 9 markets scored in Baird's top 10 public REIT markets in terms of office-using job growth in September. We've spoken often about the strong job growth in Atlanta, Nashville and Raleigh. It's nice to see Richmond, Tampa and Orlando also garnering accolades by being in the top 10. This report, plus many other regional forecasts, supports our view that steady fundamentals should continue for the foreseeable future.

Turning to the quarter. We had increased leasing volume with attractive economics. We leased 1.1 million square feet of second-gen space with an average term of 5.2 years. As Ed mentioned, GAAP rent spreads were positive 11.3%, the sixth consecutive quarter of double-digit increases. While our cash rent spreads were slightly negative after 5 consecutive quarters of positive spreads, the negative cash rent spread in Q3 was attributable to 2 renewals where we traded no TIs for a reduced face rate. Evidence of improving rents in the portfolio is reflected by our average in-place cash rents at quarter end which were 1.3% higher per occupied foot than a year ago. This includes our recently delivered 500,000-square-foot Bridgestone Americas tower, which is in our occupied square footage even though cash rent doesn't commence until the middle of the fourth quarter.

As previously forecasted, our portfolio experienced 3 sizable move-outs during Q3. Total portfolio occupancy was down 60 basis points compared to Q2, ending at 92.1%. Based on signed leases in hand, we anticipate a recovery late in the fourth quarter. Our year-end occupancy outlook remains unchanged at 92.2% to 93.2%.

Turning to our operational performance. We grew same-property cash NOI by 3.4%. A 50 basis point dip in average occupancy during the third quarter was more than offset by the contribution from annual rent escalators and leases commencing with higher cash rents. Our updated same-property outlook for the year is 3.75% to 4.25%. The midpoint of 4.0% is nearly 100 basis points higher than our original outlook.

Now to our markets. In Richmond, the market has experienced steady growth with office-using job growth during the quarter of 3.6%, more than twice the national average. According to Cushman & Wakefield, market vacancy was 7.5% at the end of the third quarter, down 150 basis points compared to the prior year. Average market asking rents increased 4.5% year-over-year. On last quarter's call, we mentioned already re-leasing 64% of the 163,000 square feet that SCI vacated in August. Our relet percentage is now up to 77%, and as Ed mentioned, we have prospects for the balance of the space. We signed 160,000 square feet of second-gen deals in Richmond during the quarter, with GAAP rent growth of 13.6%. Occupancy in our Richmond portfolio was 90.0% at September 30 and is expected to exceed 92% by year-end. Lastly, in Richmond we're on budget and on schedule to deliver our 100% pre-leased $29 million build-to-suit for Virginia Urology in Q3 '18.

Turning to Atlanta. In the last 4 quarters, Atlanta's office employment has been the strongest among the 10 largest metro areas in the country. As Ed mentioned, occupancy in our Atlanta portfolio was impacted by the previously disclosed known move-outs in Buckhead that occurred in the third quarter. We remain upbeat about Buckhead's long-term prospects, the quality and location of our assets and our ability to backfill these vacancies.

Tampa has delivered on its long-awaited reawakening during the last 12-plus months. According to JLL, asking rents in Tampa are up 6.1% during the past year, while vacancy is down 140 basis points. With no spec construction and a lack of large available spaces across the market, we continue to see strong growth in our portfolio. Our quarter-end occupancy was 94.1%, up 330 basis points year-over-year. We signed 130,000 square feet of second-gen leases in the quarter, with GAAP rent growth of 15.5%.

In Raleigh, the office market continues to benefit from strong economic growth and access to a talented workforce. Per Avison Young, Class A rents were up 5% year-over-year and Q3 net absorption was over 300,000 square feet. While there is 1.7 million square feet under construction spread out across 7 submarkets, we believe approximately 800,000 square feet is competitive to our BBD-located portfolio and is 50% pre-leased. Our in-service Raleigh portfolio is 93.9% occupied, up 60 basis points from Q2. We posted solid GAAP rent spreads of positive 16.4% in Q3, the ninth consecutive quarter of double-digit positive GAAP rent spreads. As we mentioned a few calls ago, one of our 2018 potential exposures is an approximate 175,000-square-foot lease in Cary's Weston submarket of Raleigh that is scheduled to expire at the end of November 2018. While still early, in the event the customer does not renew, we would be entitled to a meaningful fee. Our 1.2 million-square-foot in-service portfolio in Weston is 100% occupied. We should know more by year-end.

Finally, in Nashville, leasing activity and rents remained strong. Per Cushman & Wakefield, Class A vacancy is aligned with overall market vacancy at 7.8%. New construction is 2.3 million square feet, down from 3.5 million square feet in 2016; and is 50% pre-leased. With vacancy low and job growth steadily in the top 10 nationally, we don't view new supply as a major risk to Nashville's fundamentals. Our portfolio occupancy is 95.8%, up 10 basis points from Q2. And we posted solid GAAP rent spreads during the quarter of positive 16.7%.

In conclusion, strong demographic trends, population and job growth, combined with low current vacancy and limited speculative development, support healthy fundamentals across our markets.

Mark?

Thanks, Ted.

We delivered third quarter net income of $57 million or $0.55 per share, which included $19.8 million of gains from property dispositions which are not included in FFO. Our FFO for the quarter was $91 million or $0.86 per share, a 3.9% increase year-over-year. As Ed noted, we received $0.01 of net termination fees, primarily from Towers Watson in Atlanta, which was more than offset by $0.015 of impairment primarily for land in the Southwind submarket that we recently exited in Memphis. These 2 items essentially offset one another, making our reported FFO of $0.86 a relatively clean number.

As Ed mentioned, we are pleased with our third quarter operational performance. We delivered same-property cash NOI growth of 3.4%, with average occupancy 50 basis points lower compared to last year. The improvement in cash NOI is driven by healthy contractual annual rent bumps on nearly all of our leases, leases commencing where we achieved solid growth on rent spreads and the burnoff of free rent on several leases.

Turning to our balance sheet and financing activities. We ended the quarter with leverage of 34.7% and debt-to-EBITDA of 4.5 turns. While we are committed to grow generally on a leverage-neutral basis, we have the flexibility of funding the remaining $226 million of spending on our current development pipeline without the issuance of new equity and still maintaining debt-to-EBITDA around the midpoint of our stated comfort range of 4.5 to 5.5x.

We had several important financing transactions close after the end of the quarter. First, we recast our revolving credit facility. Our new facility has a capacity of $600 million. That's up from $475 million. And we reduced the LIBOR spread from 110 to 100 basis points. We believe the $600 million size works well for our company. It provides us enough liquidity to fund near-term financing needs and serves as a short-term backstop if tapping the capital markets is not prudent. Second, we extended our $200 million term loan from January 2019 to November 2022 and reduced the LIBOR borrowing spread from 120 to 110 basis points. Third, we paid down $125 million of our $350 million term loan which matures in June of 2020 and bears interest at a LIBOR spread of 110 basis points. We had strong receptions from the lenders in our bank group and thank them for their continued support of our company.

Looking forward, we have only one significant debt maturity between now and June of 2020, namely a $200 million bond with a 7.5% coupon that matures in April 2018. We are looking forward to the interest savings opportunity we expect from refinancing this 7.5% bond. As you may recall, we obtained $150 million of forward-starting swaps that effectively lock the underlying 10-year treasury at 2.44% with respect to a forecasted debt issuance before May 15 of next year. Assuming we refinance the April '18 bond, 2018 bond, with a long-term bond, we would have no significant debt maturities for 2 years. And our maturity schedule would be well laddered, with flexibility to fill-in medium-dated maturities if we need to raise additional capital.

As Ed mentioned, we updated our FFO outlook to $3.36 to $3.38 per share. The revised midpoint of $3.37 per share is a $0.015 increase from the previous midpoint and $0.035 above the midpoint of our original outlook or $0.065 above when you exclude -- excluding dispositions that weren't contemplated in our original range. As we noted last quarter, we expect approximately $0.02 of dilution in the fourth quarter from dispositions completed late in the third quarter, plus expected closings in Q4. The improved outlook is predominantly driven by better-than-expected operational performance partially offset by slightly higher G&A.

Taking the $2.55 per share of FFO that we've reported year-to-date, our imputed outlook for Q4 is $0.81 to $0.83 per share. There are several fourth quarter items that I'll walk you through to help you understand our revised full year outlook. First, we expect the $0.02 per share of dilution from dispositions. Second, we will incur about $0.0075 lower FFO from the acceleration of amortization of fees associated with the credit facility recast and term loan extension. Third, lower JV fee income will reduce FFO by about $0.0075. And lastly, lower NOI driven primarily by lower average occupancy will reduce FFO by $0.005.

So before we take your questions, I'd like to reinforce a point that Ed made earlier. Year-to-date, we've delivered $394 million of developments that are on average 85% pre-leased. Due to pro forma lease-up periods and the impact of early possession revenue recognition, the cash NOI from these properties was negligible during Q3, but they were solid GAAP NOI contributors. As these burn off, cash flow from these properties obviously increases meaningfully. A significant portion of that increase in cash flow occurs in 2018. The ongoing execution and delivery of our development projects strengthens our cash flow in 2018 and beyond.

So operator, we're now ready for your questions.

(Operator Instructions) And our first question comes from the line of James Feldman with Bank of America Merrill Lynch.

I guess, Mark, sticking with your last comment, can you just talk about the magnitude of the kind of cash NOI that'll be coming online in '18 that's not in the GAAP numbers?

Yes, Jamie. So obviously, Bridgestone, the biggest driver of those dollars. It's around -- again rough numbers, around $20 million or so of cash increased year-over-year when you compare '16 to -- or '17 to '18.

Okay. And then, I guess, sticking on a similar topic, just as we think about '18 and same-store growth, you guys have had a lot of moving pieces in the portfolio this year, move-outs that you're making good progress on leasing, but can you just give us, like, the building blocks as we think about kind of either '18 or -- well, same-store growth and then earnings growth, of like how things will ramp up over the quarters?

Jamie, it's Brendan. So I think, as you think about same-store growth just generically, I'd tell you there is 5 main components that would drive those numbers. The first would be the rent bump that we get in virtually all the leases that we have in place. The second are rent spreads that we get both on what we've signed this year and then what we'll do next year. The third would be operating expenses. Fourth item is probably, I'd say, the conversion of GAAP to cash rent, if you're thinking about cash same-store NOI growth. And the fifth item would be occupancy. So I think those are kind of the main building blocks. And the rent bumps, there's really probably not a lot of change between any given year. Rent spreads, I think those bounce around a little bit, but we've been fairly consistent on the last number of quarters. OpEx, we probably would say, is generally something that I think we've been fairly consistent on a year-to-year basis. And then from an occupancy perspective, I think that's to be determined as we go forward over the next few quarters. We've talked about some of the expirations that we have, but we've also mentioned some of the progress that we've made. So I think it's just a combination of how well and how quickly we backfill some of the expirations. So I think that probably gives you the building blocks to how to think about same store, but it's a little bit early to get into specifics with respect over the next few quarters.

Okay. And then just finally for me. I know you've pushed -- you reduced your acquisition guidance. Is that -- are you still working on a potential close in the early part of '18? Or are these deals that are off the table?

We're looking at a number of things for '18, but we just think that the chances of getting anything closed prior to year-end '17 are very slim.

I guess what I'm asking is, the ones that you thought you were going to do in '17, are those still on the table?

Some yes, some no and some added. [Does that make sense]?

Okay. Yes, all right.

(inaudible)

The pool that makes up the [200] is different and -- but we are certainly looking at a number of things right now.

Our next question comes from the line of Manny Korchman with Citi.

Ed, just going back to sort of the conversation you had about Amazon but not specifically about Amazon. If we think about the other build-to-suits that you've been approached with, do you see tenants sort of using the Amazon approach of let's get cities to bid, let's look sort of nationally or maybe even globally, and then wherever we get the best deal we'll go? Or is it more targeted than that?

I would say this, that it's always been a part of the process for decades, but I would say that it's not the sole driver. The first step of the Amazon tango and what we see in a lot of explorations that are multistate covered, a significant component of that is what would be on the governor's letterhead. So that plays into the mosaic of the decision process, but then other things quickly come into play, like available and capable employment pool and infrastructure and sites pricing, cost of living, right to work et cetera coming behind those. But that's usually that the first aspect of these multistate searches include a significant component of what the tax incentives would be.

Great. And then switching to developments for a second. We've heard from, I guess, you guys and also peers that construction costs have been going up. I guess significantly is the right word. Have you seen pressure on your yields because of those rising construction costs?

Well, I think that's been a big piece of what has held speculative construction at bay in this cycle. There's been a limited amount of that and has it been because banks have withheld? Or it's because we've finally learned our lesson and not built ourselves into a recession through overdevelopment? Or is it been that pricing has continued to climb? And in fact, they climbed even during the recession. There wasn't any abatement during the recession. It shifted from commodities to talent, back to talent and a little bit off the commodities, but it's continued to increase over the last 10 years at a pretty steady pace. So I think the gap between what it costs to go into first-gen space versus second-gen space illustrates that, and I think that's what's kept a lot of new construction at bay. And obviously it's not only new construction, but it's woven its way into [BI] and TI spending. And I don't know how much, if any, impact these named storms will have, but you have to think that they have certain componentry of construction, maybe not -- maybe it's a different level of tradesperson, but some of the commodities will certainly be in hot demand for a short period of time in restoring Houston and Florida and the Keys.

So would you feel comfortable sort of at least helping us quantify how much yield pressure you may be seeing on your either in-process or future developments?

Well, I really think it comes down to, are you willing to step up for the new building? And so the gap between first and second gen, let's call it 25%. And I could argue 20%. And I could argue as much as 35%, depending on where we are. And I think it's more just a matter of the customer having the need, for whatever reason, to go into new space. Either it doesn't exist or they want to consolidate multiple locations into one to garner efficiencies and synergies. Do they want to create a new image of to -- that they want to present to their employment pools and to their clients and the community? Or do they want to restack and they're willing to pay up for that? So to me, it's really the construction pricing going up, let's say, on average 5% to 6% per round. I don't think that's really going to drive a difference in that decision if the spaces that they're -- they want to upgrade.

Our next question comes from the line of Dave Rodgers with Baird.

Ted, I wanted to just (inaudible) a question maybe big picture for you. It looks like your overall lease economics have settled into a nice spot here. You did talk about your cash spreads earlier, and so appreciate that detail, but I guess, as you look at your overall volume on leasing, overall economics on leasing settling into a pretty narrow range, do you feel like that's where the market is? Are we kind of at a top point in terms of lease economics and volume, the discussions you're having? Kind of give a little bit more color on that, if you would.

Sure, Dave. Look, I think our lease economics continue to, again like you said, sort of hang in a pretty tight range quarter by quarter. We're seeing a little bit of pressure on TI, but we think we're getting a commensurate increase in rental rates to go with that. I think the supply and demand fundamentals are strong. As Ed mentioned, construction is not out of control, so -- and we're seeing slow, steady job growth. So demand has been steady or showing they're steady across our markets. So I think, hopefully, things can stay where they are. And a couple of trends we are seeing is we have mentioned 2 no-TI deals. There is some sticker shock in some of our markets with customers. So we've done many more than just the 2 that I mentioned on the prepared remarks that flipped us to a negative cash, but there are some customers that are saying, "Just give me the lowest rate, and I'll put in my own TI," or, "I'll take the space as is." So we have seen more of those lately on some markets than we've seen in the past.

Great. And then maybe a specific question on leasing. The space in Buckhead that you talked about white-boxing. [Do you need to put] any early activity there? I realize that, that was just vacated this quarter, but any thoughts around what the activity on -- might be on that space?

Continue to show it. We have weekly showings. We have a call with our Atlanta team really on weekly basis, but at this point really there's nothing to talk about. I can't say we have any strong prospects, but we're actively showing the space.

Great. Last for me, maybe to Mark, on the higher G&A. If you mentioned it in your comments, I'd certainly missed it, but any pursuit costs written off in there such as compensation? Or anything in the G&A number that went up for guidance that we should be aware of?

Yes, Dave, the pursuit costs will be very small, but the majority of that is the higher incentive comp.

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

Great. 2 questions. First, Brendan, how much free rent is in 3Q? You talked a lot about your sources and uses of GAAP versus cash on your development, but how much free rent is in 3Q that we should think about to get a good NAV?

So John, Mark mentioned in response to an earlier question, mentioned, you know, the cash flow that's coming online with respect to the development projects. So I think he mentioned somewhere, call it rough numbers in the -- on an annualized basis, maybe there's $20 million or so that sort of flows in over time kind of 2018 versus '17. That's a rough number. So we could get back to you with maybe some more specifics, but I think that's a reasonable way to think about the amount of free rent that's associated with many of the development projects.

So is it safe to say that, within your $9-plus million of straight-line deduct, $5 million of that was free rent?

I think that from, say -- yes, I would call it not -- I would say that there -- that's a reasonable ballpark for GAAP rent versus cash rent. So it's not really a concession, but there's a lot of early possession rent that's in there. So a non-cash rent.

Okay. And then the second, you guys do a fabulous job of your leasing statistics. And it's -- and I think you quote sort of negative or usually relatively flat mark to market on cash and low double digits on GAAP. And some people might present that or think that's good, but when you're spending $3.50 per square foot per year to go flat cash to cash and [10] up GAAP to GAAP, that looks to me or that feels to me like very weak or very miserable. Am I missing something?

Well, John, I think, when we look at our payback percentage, which is in our supplemental, we're looking at we're getting paid back, it only takes about 13% of rent. 13.5% of our rent stream over the term, to get paid back our capital. So I think those metrics really aren't too bad if you look at our -- as compared to some of our competitors. I mean, when we look at our lease deals, we look at a few things: obviously, net effective rents, which take into account all the CapEx we're spending. And I think, as long as we're growing net effective rents, we also look at obviously we're creating value. We do think we're creating value on the incremental capital investment. Some cases when -- we may be willing to spend a little bit more if we lock-in a customer on long-term basis or there's an asset we're getting ready to sell, but I -- net-net, our -- we think our economics aren't too bad.

Our next question comes from the line of Jed Reagan with Green Street.

Can you give any color on how the recent asset sales in Memphis and Raleigh just compare to your overall portfolios in those markets in terms of average rents, location, building age, that sort of thing?

Sure. So in Memphis really it's a tale of 2 cities there. There's the Poplar corridor, and then there's not Poplar corridor. And so with the sale of the Southwind assets, the $7 billion we had there, we're now solely concentrated in the Poplar corridor, which is by far the best BBD in Memphis. And there are more institutional-quality buildings on Poplar versus what were basically 3- and 4-story brick-and-glass buildings in Southwind's. And then in Raleigh, same situation. This is a collection of 3 buildings that actually, if you line them up next to the Southwind's building, all 10 of them would look very much alike. And they're in the west side of Raleigh. So the quality was low. The rents were lower. And it was just our traditional efforts to recycle out of lower-quality noncore assets and use that money to fund developments and acquisitions.

That's helpful. And can you share a cap rate for kind of each individual portfolio? I know you gave the aggregate but kind of within Memphis and within Raleigh.

Yes, it's about a tie between the two. And what we have in the Q that we have also mentioned for closing before year-end, the $44 million, it would also be in the same zip code of the 7.5%.

Okay, great, appreciate that. You guys mentioned a potential lease exposure on Cary. And then you've got the FBI move-out which you talked about in Atlanta previously. Any other sizable, known or possible move-outs next year, even into '19, if you have that kind of early visibility?

Not really, other than what we mentioned on the call, in the prepared comments. That really capsulizes it. As we look at '19, we have 5 leases there that are for 100,000 square feet or more. We feel really good about 4 of them, and it's a bit early on the fifth.

Okay, perfect. And maybe just the last one for me. With WeWork and others, obviously coworking is on the rise nationally, including some of your markets. I'm just kind of curious on how you're thinking about that movement. I mean, are you likely to sign more leases with some of those companies? Are you looking to experiment with maybe your -- with flex leasing, more flex leasing or potentially a coworking concept of your own?

Well, we've done a little bit of both, Jed. We've certainly signed leases with some. So we've had Regus for a long time. And I know they're kind of like the older version, and they are making their conversions towards more of a modern day. We've signed a couple of leases with Industrious. So we've put our toe in it, but we're monitoring very closely how much exposure we would have to that type of space. It's certainly of interest and we read about it. And the Lord & Taylor announcement was of interest, I think, to the entire office community; and we'll see how it goes. And obviously, what everybody else is also wondering is how will this type of industry do in a downturn since they haven't been through one of those yet. So it will be interesting to see that level of performance. And then the second part of your question: We have early on a -- we've created plug-and-play spaces. What we haven't done is man it with the concierge and the granola bars, but as far as the actual build-out of the space, we have done suites of that type in urban settings that have proven to be fairly successful as drawing somebody in. And we've actually seen some significant growth-additive spaces into direct leases of -- on a larger scale.

And you're willing to do kind of more flexible terms on those types of deals?

Yes. And it's a modest amount of space. And really it's plug-and-play type of space. We haven't put significant capital into it, and what we hope we do is we grow a customer out of it.

All right. Is there a thought of doing more of that over time? Or you kind of like the amount you've done, so far.

I think we'll continue to do it at a modest level. I don't think it would ever become a significant component of our annualized revenue, not in the nearer term, anyway.

So 5%-ish, maybe a little less.

I would say less, but yes, I think that's a fair cap. We will put a tickler in here, if we reach 5%, to address it on -- in prepared remarks.

(Operator Instructions) Our next question comes from the line of Michael Lewis with SunTrust.

My first question is kind of a two-parter on the increase in the same-store NOI guidance. I was wondering if the dispositions had any impact, the changing pool. And then the second piece, it looks like the other miscellaneous operating revenues is higher than I think I've seen it. Could you just remind me what's in that and maybe what's a good run rate for modeling?

Sure, Michael. Let's say, on your first question, I think, on the fluctuation between the quarters, the dispositions have a little impact. [In other words], they probably helped a little bit in Q3 and will be a little negative in Q4 -- I'm sorry. I had that flipped around -- a slight negative in Q4. But so the way I think about that, though, is from our guidance at the beginning of the year to the end really no significant impact. In other words they net out the impacts in Q3 and Q4, so no real impact as -- on a whole. And then on the other revenue side of things, one of the things that has shown up here that's been positive for us that's maybe better than we anticipated is some upside in parking. We've taken control of some of the parking garages in different cities and managed the parking on our own. We have gotten some in terms of that. And then we alluded to some JV fees as having some impact on the same-store numbers for this year as well.

Okay. My second question: I think you said that, if you lose that 175,000-square-foot tenant in the middle of '18, you're entitled to a fee. I was wondering if you could just give a little more color on that. Is that actually like an early term? And could -- maybe if you could comment on how big are we talking about.

Yes, Michael, it's Ed. No, it's late '18. I think we get it back in November if they were to move out. It's just it's early to say. It would be a meaningful-sized fee. I can't quantify the size of the bread box right now, but it would be meaningful in scale. But it's just a bit early on us for us to quantify that more.

Okay, understood. And my last one is about maybe you could talk a little about the challenges of redeploying proceeds into 1031s. And is it too early to think that maybe there might be a special next year?

Yes, I think -- listen. I think it's a little too early on that. Obviously, we have put some of these dollars into 1031s and are interested in utilizing that if we can, but I think it's a little too early to comment on that at this point.

There are no further questions at this time. I will now turn the call back to Mr. Fritsch.

Thanks, everyone, for dialing in. And as always, don't hesitate to call us with any follow-up questions.

Thank you, operator.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.