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Edited Transcript of HIW earnings conference call or presentation 23-Oct-19 3:00pm GMT

Q3 2019 Highwoods Properties Inc Earnings Call

Raleigh Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Highwoods Properties Inc earnings conference call or presentation Wednesday, October 23, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brendan C. Maiorana

Highwoods Properties, Inc. - EVP of Finance & IR

* Brian M. Leary

Highwoods Properties, Inc. - Executive VP & COO

* Mark F. Mulhern

Highwoods Properties, Inc. - Executive VP & CFO

* Theodore J. Klinck

Highwoods Properties, Inc. - President, CEO & Director

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Conference Call Participants

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* Blaine Matthew Heck

Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst

* Daniel Ismail

Green Street Advisors, LLC, Research Division - Analyst of Office

* David Bryan Rodgers

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Emmanuel Korchman

Citigroup Inc, Research Division - VP and Senior Analyst

* James Colin Feldman

BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst

* John William Guinee

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Jonathan Michael Petersen

Jefferies LLC, Research Division - Equity Analyst

* Robert Chapman Stevenson

Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Highwoods Properties conference call. (Operator Instructions) As a reminder, this conference is being recorded, Wednesday, October 23, 2019.

I would now like to turn the conference over to Brendan Maiorana. Please go ahead, Mr. Maiorana.

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Brendan C. Maiorana, Highwoods Properties, Inc. - EVP of Finance & IR [2]

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Thank you, operator, and good morning, everyone. Joining me on the call this morning are Ted Klinck, Chief Executive Officer; Brian Leary, Chief Operating 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 Investors section of our website at highwoods.com.

On today's call, our review will include non-GAAP measures such as FFO, NOI and EBITDAre. Also the release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures.

Forward-looking statements made during today's call are subject to risks and uncertainties, which are discussed at length in our press releases as well as our 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 Ted.

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [3]

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Thank you, Brendan, and good morning, everyone. It was a busy quarter for us. We had transitions in the CEO and COO roles, announced our market rotation plan to enter Charlotte and exit Greensboro and Memphis, broke ground on our $38 million Virginia Springs II development in Nashville, completed a $400 million bond offering and on top of all this, posted excellent leasing activity and delivered strong financial results.

At the beginning of last month, our long-standing CEO, Ed Fritsch, retired. Ed has been a phenomenal leader and mentor for many of us at Highwoods. Ed may be gone from his day-to-day role at Highwoods, but his legacy remains firmly in place throughout our company, and the strategic plan that has served us well over the years will continue to guide the company. The 4 tenets of the plan are to continuously improve the portfolio with a focus on key infill BBDs, maintain a strong balance sheet, retain and attract unmatched commercial real estate professionals and communicate clearly and transparently with our investors and other stakeholders. Consistent with our strategy, we announced a market rotation plan in August. This is our exit from Greensboro in Memphis and entry into Charlotte with the purchase of Bank of America Tower, the Legacy Union. Once completed, the market rotation will improve the overall quality of our portfolio, further strengthen our cash flows, all the while being leverage-neutral.

Also during the quarter, we issued $400 million of 10-year bonds at an effective rate of 3.24%. Our balance sheet continues to be very strong with our debt-to-EBITDA ratio at 4.9x, nothing borrowed under our line and $117 million of cash on hand at quarter end.

We also had a strong quarter operationally and financially. Sequential occupancy improved 70 basis points for the office portfolio and 50 basis points overall to 91.4%, with the most significant gains in Atlanta and Raleigh, our 2 largest markets by square footage. We leased 939,000 square feet, including 367,000 square feet of new leases at GAAP rent spreads of positive 19.4%, cash rent spreads of positive 5.6% and with a weighted average term of 6.7 years. We backfilled 144,000 square feet at 11000 Weston in Raleigh and renewed our largest 2021 expiration, 176,000 square feet in Tampa. Subsequent to quarter end, we also renewed and expanded our second largest 2001 -- 2021 expiration, 133,000 square feet in Nashville.

We delivered FFO per share of $0.83, which was impacted by $0.05 of costs primarily relating to our market rotation plan, equating to normalized FFO of 86 -- $0.88. Given our third quarter performance and solid outlook for the fourth quarter, we have revised and narrowed our 2019 FFO per share outlook to $3.31 to $3.33. The midpoint is down $0.03 from our prior outlook, but after excluding the $0.05 of market rotation costs, we're up $0.02 on an apples-to-apples basis.

The low end of our year-end occupancy outlook is up 20 basis points from our prior outlook to 91.7% with the high end at 92.3%, implying 60 basis points of additional occupancy growth by year-end at the midpoint. At this time, our year-end occupancy outlook assumes no backfill at 5332 Avion, our 176,000 square foot property in Tampa's Westshore submarket, formerly occupied by Laser Spine Institute. We continue to have dialogue with medical users, but it is becoming increasingly likely that we will convert 3 medical floors to traditional office. We have multiple strong office prospects to backfill a substantial portion of this building. As we've stated before, we estimate market office rents for billing of 5332 Avion's quality to be approximately in line with Laser Spine's rent. While we have completed architectural drawings and have detailed cost projections, we don't want to provide specifics on our cost or rent expectations at this time given ongoing negotiations with prospects.

Our development program continues to deliver strong results. In the quarter, we placed in service 5000 CentreGreen in Raleigh, which is 100% leased. Our total investment is $41 million for this 170,000 square foot multi-customer building. As a reminder, we started 5000 CentreGreen 100% spec in 2016. In August, we announced Virginia Springs II, a $38 million 111,000 square foot spec project in Brentwood, one of Nashville's BBDs. As you may remember, we placed Virginia Springs I in service in the first quarter of 2019 at 100% occupancy, 6 quarters ahead of our pro forma.

At GlenLake Seven in Raleigh, we're 44% pre-leased and have strong prospects through remaining availability, and we still have a year before estimated completion and 2 years before projected stabilization. Our overall development pipeline is $500 million and is 73% pre-leased. We've announced $150 million of development year-to-date, and we continue to see good interest for build-to-suits in large anchor prospects that could drive further announcements. Longer term, we have a well-located land bank that can support $2 billion of future development.

Turning to the market rotation plan. In August, we announced the plan would happen in 2 phases. Phase 1 includes the planned acquisition of BofA Tower in Charlotte, the disposition of assets in Greensboro and Memphis totaling the approximate purchase price of BofA Tower and the closing of our Greensboro and Memphis offices. We're on track to complete Phase 1 by mid-2020. Phase 2, with no preset timetable for completion, includes the sale of our remaining properties in Greensboro and Memphis. We're scheduled to take ownership of BofA Tower on November 14 and are very excited about our entry into Charlotte and our long-term potential in the Queen City.

In terms of the planned exit of Greensboro and Memphis, we're in the market with all Phase 1 properties. We remain confident in our pricing expectations and that we will complete Phase 1 and return our conservative leverage metrics to current levels by mid-2020. As a reminder, upon completion, we believe Phase 1 will result in increased cash flows and CAD and be roughly FFO-neutral, plus there is additional upside with future lease-up at BofA Tower.

Turning to the balance sheet. Our debt-to-EBITDA ratio at quarter end was 4.9x, under the midpoint of our stated comfort range of 4.5 to 5.5x. As a reminder, we have funded our development pipeline on a leverage-neutral basis without issuing shares on our ATM in over 2 years.

Overall, our portfolio is performing well, and we continue to focus on growing rents and occupancy and carefully managing OpEx. This positive trajectory, combined with a continued delivery of our highly pre-leased development pipeline and completion of our market rotation plan, should drive increased FFO and cash flows while maintaining a strong balance sheet with multiple avenues to fund additional growth. Brian?

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Brian M. Leary, Highwoods Properties, Inc. - Executive VP & COO [4]

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Thanks, Ted, and good morning. During the quarter, we had strong leasing performance. Second-generation office leasing volume was a robust 939,000 square feet, including 367,000 square feet of new leases, and we captured GAAP rent spreads of a positive 19.4%, and cash rent spreads of a positive 5.6%. While virtually all of our leases have annual rent bumps, we've consistently posted positive cash rent spreads.

Specifically, during 13 of the past 14 quarters, we've reported positive cash rent spreads and increased net effective rents by 18% over the same period. Our healthy leasing volume and strong rent economics support future growth in occupancy and NOI. In the third quarter, we posted same-property NOI growth of 0.5%, or up 1.9%, excluding 5332 Avion Park. Our portfolio occupancy increased 50 basis points sequentially to 91.4%. Our year-end occupancy outlook is now 91.7% to 92.3%, with a midpoint of 92%. Our improved year-end occupancy outlook is driven by a significant number of leases that have been signed but where occupancy has yet to commence. This outlook assumes no year-end occupancy for 5332 Avion.

We've made meaningful progress the past several quarters reducing near-term rollover risk. We have 23% of revenues expiring through 2021, which is approximately 200 basis points lower than the past several years. We expect our future rollover to diminish further as we complete the market rotation as Greensboro and Memphis carry a disproportionate share of our near-term roll, and the Bank of America Tower in Charlotte has a weighted average term of more than 14 years. In our typical review of expirations larger than 100,000 square feet, we have only 1 remaining in 2019, 2 in 2020 and 1 in 2021.

For 2019, we remain optimistic for renewal with the FAA, located in a 100,000 square foot build-to-suit building, immediately adjacent to Atlanta's Hartsfield-Jackson International Airport.

For 2020, the remaining expirations are both in Tampa and include a 138,000 square foot build-to-suit for the FBI and 116,000 square feet with T-Mobile. We anticipate a renewal with the FBI, while T-Mobile is a known move-out anticipated in the third quarter of 2020.

For 2021, we've renewed our largest remaining expiration, a 170,000 -- 176,000 square foot customer in Tampa. Subsequent to the quarter, we not only renewed our second-largest remaining 2021 expiration, 133,000 square feet in Nashville but expanded this customer by an additional 27,000 square feet as well.

Now to our markets, which have a common denominator of growth, low cost of living and conducting business, centers of higher education and innovation and low unemployment rates. In Atlanta, as reported by Jones Lang LaSalle, the market posted positive year-to-date net absorption of 550,000 square feet with Class A rents of $32 per square foot. We're tracking 5.4 million square feet of competitive office development underway, which is 25% pre-leased, half of which is in Midtown where we have no direct competitive product. Our Atlanta team signed 114,000 square feet of second-generation leases during the quarter with GAAP rent spreads of a positive 28%, while occupancy increased sequentially 130 basis points, ending the quarter at 89.7%.

Turning to Raleigh, where demographic trends continue to be strong, high demand and falling vacancy have driven average Class A rates up 9% year-over-year, while new office buildings in the urban core have asking rates of $40 a square foot or higher according to Avison Young. We're tracking approximately 1.4 million square feet of competitive construction, which is spread over 5 submarkets, is 48% pre-leased and represents 3.4% of competitive stock. Our Raleigh team signed 193,000 square feet of second-generation leases during the third quarter with robust GAAP rent spreads of a positive 37%. Portfolio occupancy improved 250 basis points sequentially to 88.6%, and we expect additional improvement by year-end as occupancy will commence on signed leases.

Onto Nashville, where Cushman & Wakefield reported Music City has posted over 900,000 square feet of net absorption year-to-date. Overall office vacancy in the market ended the quarter at 10.6%. We're tracking 2.9 million square feet of competitive projects under construction, which are 23% pre-leased and represent 10.5% of competitive stock. While new supply is elevated in Nashville, it's concentrated in the urban core, the CBD, Gulch and Midtown BBDs where we have no meaningful roll until 2025.

As Ted noted, we started Virginia Springs II in Brentwood, a 111,000 square foot, $38 million multi-customer speculative project. We delivered Virginia Springs I 100% leased in the first quarter of this year, 6 quarters ahead of our pro forma. Given success of Virginia Springs I, limited competitive supply in Brentwood and early indications of interest, we're confident in the lease-up prospects for Virginia Springs II. During the quarter, we signed 114,000 square feet of second-generation leases in Nashville with GAAP rent spreads of a positive 16.6%.

Lastly to Tampa, where our team has been very busy. Class A rental rates continue to increase in the CBD and Westshore submarkets, the BBDs where the majority of our portfolio is located. According to CBRE, office rents increased 7.4% year-over-year, and Class A occupancy in the Westshore and CBD is a combined 92.6%. There, we're tracking 930,000 square feet of competitive construction in the Westshore and the CBD, which is 44% pre-leased and represents 3.6% of competitive stock.

During the quarter, our team signed 264,000 square feet of second-generation leases at GAAP rent spreads of a positive 13%. Portfolio occupancy is 89.7%, which includes the full building vacancy at 5332 Avion. During the past 90 days, we've advanced our architectural plans for the 3 floor repositioning of 5332 Avion Park.

As a reminder, this building is adjacent to Tampa International Airport in the thriving Westshore submarket. Floors 4, 5 and 6 are move-in ready for office users. Given the building's strong location, good bones, ample parking ratio and strong interest from prospects, we are confident our team will re-lease this building with healthy economics.

In conclusion, our team delivered an excellent quarter of leasing with healthy spreads and strong net effective rents. We've made significant progress with future expirations and backfilling the few remaining sizable vacancies in the second-generation portfolio. Our $500 million, 73% pre-leased, 1.2 million square foot development pipeline has 3 projects with availability, all of which are at least out 2 years from pro forma stabilization. The leasing environment remains healthy, and we expect continued demand for quality, well-located first- and second-generation office product in our BBDs.

Mark?

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Mark F. Mulhern, Highwoods Properties, Inc. - Executive VP & CFO [5]

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Thanks, Brian. We delivered net income of $27.9 million or $0.27 per share and FFO of $88.2 million or $0.83 per share. As Ted mentioned, excluding $0.05 per share of items relating primarily to the market rotation plan, FFO per share would have been $0.88. This compares favorably to the $0.86 per share we reported last year, which included 5 months of rent from Fidelity at 11000 Weston and full NOI contribution from Laser Spine. Fortunately, growth in the remainder of the business has offset these 2 items, which illustrates the diversified strength of the company and positions us well for additional growth given our solid leasing trends, including backfilling a majority of 11000 Weston.

Excluding the $0.05 of market rotation items, the quarter was clean from a reported FFO perspective, with no significant capital recycling activity or term fees. There was an unrelated $0.01 land sale gain that we felt was appropriate to net against the costs associated with the market rotation plan as none of these items were included in the 2019 FFO outlook we provided in our second quarter release. The total of these items comprises the $0.05 impact discussed previously.

We revised and narrowed our 2019 FFO outlook to $3.31 to $3.33 per share. The $0.03 reduction at the midpoint is driven by the $0.05 per share net impact from items relating to the market rotation plan, offset by $0.02 per share of improvement in the business. Our updated per share outlook imputes to $0.90 cents in 4Q at the midpoint. As we detailed in last night's press release, we estimate $0.03 of NOI from BofA Tower in 4Q, which will be offset by $0.02 a share of additional interest expense for the pre-funding and funding of the acquisition and $0.01 of additional accrued severance costs. Sequential growth in the fourth quarter will be driven by higher revenue due to improved occupancy and the normal seasonal pattern of operating margin improvement from the third quarter to the fourth quarter.

Our outlook for acquisitions and dispositions is driven by the market rotation plan. As you know, our typical practice is not to include the impact of any future acquisitions or dispositions in our FFO outlook. This is the case with our updated outlook, except we have included expected NOI from BofA Tower, which is now scheduled to close on November 14. As Ted mentioned, all of the properties contemplated for sale in Greensboro and Memphis as part of Phase 1 are now in the market. We expect most of the Phase 1 sales to close by the end of the first quarter and remain confident in our timeline to complete Phase 1 by mid-2020.

As you may have seen in last night's release, we now anticipate closing both division offices around January 31, 2020. As a result, the anticipated incremental onetime severance costs of closing the offices, which total $2.4 million in the aggregate, are required to be accrued from our original announcement date of August 21 through January 31 of 2020. $400,000 was recorded in the third quarter, $1.5 million will be recorded in the fourth quarter and the remaining $0.5 million will be recorded in the first quarter of 2020.

We kept our same-property cash NOI outlook -- growth outlook for the year at plus 0.5% to plus 1.5%. This outlook includes the negative impact associated with Laser Spine's sudden closure in the first quarter. Excluding 5332 Avion, same-property cash NOI would be approximately 150 basis points higher. We increased the straight-line rental income outlook by $1.75 million primarily due to the acquisition of BofA Tower. Our higher G&A outlook is obviously related to the onetime severance and retirement costs.

With net debt-to-EBITDAre of 4.9x and leverage of 37.4%, plus nothing outstanding on our $600 million line of credit and $117 million of cash on hand, our balance sheet is in excellent shape. We issued $400 million of 10-year unsecured notes during the quarter with an effective rate of 3.24%. We now have no debt maturities until mid-2021, a weighted average maturity of 6.7 years and only $250 million of floating-rate debt.

We have ample liquidity to fund the BofA Tower purchase in Q4. And as a reminder, given we've already funded a $50 million deposit, we have an additional $386 million left to fund the total $436 million purchase price. Our debt-to-EBITDAre will be temporarily elevated at year-end, but still within our target range of 4.5 to 5.5x, as there will be a timing mismatch between the closing of BofA Tower and the closing of the Phase 1 sales.

Upon completion of Phase 1, our balance sheet metrics will return to the middle of our target ranges. This will provide ample flexibility to stay comfortably inside our 4 to 5 -- 4.5 to 5.5x range as we continue to fund our development pipeline, even if we don't issue any shares under our ATM program or sell other noncore assets.

With the announcement of Virginia Springs II, we have $315 million left to fund on our $500 million development pipeline. Over the long term, our plan is to continue to fund our business on a leverage-neutral basis.

Before we take your questions, as we have signaled, we expect our free cash flow to continue to strengthen with the delivery of our highly pre-leased development pipeline, consistent performance of our same-store portfolio and completion of the market rotation plan. While timing will impact our cash flow in any given quarter or year, we feel very good about the long-term cash flow trajectory for the company.

Operator, we are now ready for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question from Emmanuel Korchman with Citi.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [2]

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Just in terms of the market rotation plan, I guess, a couple of questions. The first is, why now? Is there anything specific happening in those markets or others where you felt like this was the time to do it?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [3]

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Hi, Manny, it's Ted. Well, look, obviously, market rotation is driven by the asset we found in Charlotte, and this is -- again, Charlotte has been at the top of our new market wish list for a really long time. We've been spending a lot of time there, have chased different opportunities, and we thought this what sort of a bull's-eye in terms of what we are looking for. So from an acquisition standpoint, entering Charlotte was one of our strategic goals. And so in terms of -- obviously, now in terms of funding it, we -- Greensboro -- with the industrial portfolio, we think it's just an ideal time to maximize the value generated there, obviously, being one of our smaller markets. So we saw this as an opportunity to buy a new asset and then rotate out of slower-growing markets into a higher-growth market. So it's really asset-driven on the buy as well as just an opportune time to sell some of our other slower-growth assets in the slower-growth markets.

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Brendan C. Maiorana, Highwoods Properties, Inc. - EVP of Finance & IR [4]

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And Manny, it's Brendan. Just to add onto that a little bit, specifically with respect to the financial outlook. As Ted mentioned, the opportunity to cycle into Charlotte and the opportunity with BofA Tower at Legacy Union was a big driver of that. I think if the question is, why exit Memphis and Greensboro now regardless of whether or not you've found an opportunity to recycle that capital into another acquisition. I think we've looked at those opportunities over time. It's highly disruptive if we just sell those assets given the tax gains that we have there to both FFO and cash flow of the company. And so we wanted to be opportunistic to find the right timing to recycle some of those proceeds into a good growth opportunity.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [5]

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And I think in your prepared remarks, you guys mentioned that there's a disproportion amount of near-term lease rolls in those markets. How is that impacting the marketing process?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [6]

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Well, I think in terms -- the comment was primarily based just in general, in those markets, we've -- over time, it's not just -- at this point in time, there's a disproportionate amount. It's just over time, our average lease term in those markets is below -- significantly below the company average. So that's just a function of the actual market we're in that has short-term leases.

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Operator [7]

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We have a question from Jamie Feldman with Bank of America Merrill Lynch.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [8]

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Can you talk more about the appetite for the assets there? It sounded like you're pretty confident you'll get the sales done. But maybe a little bit more color on the depth of buyer pool and timing?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [9]

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Sure. Jamie, it's -- all the Phase 1 assets are officially in the market now, but they are at various stages. So we've sort of trickled them out over the last 60 days. So it's still early. But I will tell you, I think we feel pretty confident just based on the broker opinions of value we got as we were analyzing this and the initial feedback of the assets that were early out in the market. I think we're confident in our ability to execute really at the prices that we originally anticipated. And time will tell. I think as you'll see, we did up our dispo guidance at the high end. We included the entire market rotation plan in the dispo guidance. But having said that, we anticipate a majority of the Phase 1 assets will close in the first quarter of next year. We may get a couple this quarter depending on when we finally get pricing in and all that. But we do feel pretty good just based on what we've seen so far.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [10]

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Okay. And then how much and how soon do you expect to grow more in Charlotte?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [11]

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Yes. It's a good question. So we closed -- as we've said, we closed November 14. We have had people in that market. We're spending a lot of time there looking at both acquisitions as well as land development opportunities. So I guess the answer is as quick as it makes sense for us, but we are looking at the development fairly closely and obviously, development takes time to build up. So we definitely plan on growing it, and we'll just see where the opportunities come. We're not going to force anything by any stretch.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [12]

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Okay. And then can you talk about the demand profile for the LSI building? It sounds like you think there's pretty good demand for office users, but maybe some more thoughts on timing there. And then how soon could you actually have those converted 3 floors ready for office leasing?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [13]

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Yes. So as I said in my prepared remarks, obviously, it looks increasingly like we're going to convert the 3 floors that are currently medical to office. As we said, floors 4, 5 and 6 are all ready to go. So the last couple of calls, we've mentioned we've been dancing with a medical user, and we're still doing that. It's just going a lot slower than we thought. As a result, we've really increased our tour activity on marketing for the office side. So right now, we've got prospects both full building and partial building users. And in terms of the timing, as you know, decisions with these larger customers, it's very binary. If we land a large one, I think there's a good chance we can get occupancy and cash rent quicker. But if we end up doing it floor by floor, it's just going to be a grind and take longer. So we're hopeful. We've got some very good discussions going on, but still too early to tell which way it's going to go from an office standpoint.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [14]

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Okay. But how long do you think the build-out takes or the conversion takes before it's even occupied -- can be occupied as office...

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [15]

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I think it's 3 or 4 months probably, no more than 6. But I think we can get it done quicker than that.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [16]

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Okay. And then I saw you guys took down your development starts outlook for the year, at least the high end. Can you talk about that? And is there -- has anything changed in terms of the build-to-suits you're looking at?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [17]

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I don't think anything has changed. I just think -- certainly, it's always -- we've got several discussions going on. It's just hard to predict the timing of when the development is going to hit. And given that there's just 2 months left this year, we just thought it was appropriate to bring down the high end of the guidance.

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Operator [18]

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We have a question from Blaine Heck with Wells Fargo.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [19]

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I'll start with Mark and Brendan. Year-to-date cash for same-store NOI, I think, is plus 1.3%. And Mark, as you've said, you've got operating margins that are usually better in Q4 than Q3, and you're expecting continued occupancy growth. So I guess we're kind of surprised guidance wasn't increased. Are there any specific headwinds in same-store growth in Q4 that we should keep in mind that might have kept you at that same-store NOI guidance?

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Brendan C. Maiorana, Highwoods Properties, Inc. - EVP of Finance & IR [20]

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Yes. Blaine, it's Brendan. So I guess first thing I would mention is we had a comparable ramp in terms of occupancy in Q4 of last year. So from -- with respect to the occupancy ramp Q3 to Q4 in 2019, it's comparable in terms of this ramp that we had in 2020 -- I mean I'm sorry in 2018. We also had lower straight-line rent expense in 2018, both in Q3 and Q4 versus our expectations for Q4 for 2019. So there's a little bit of a headwind with respect to the straight-line outlook in Q4 versus the prior year quarter. And so I'd say those are probably the majority of the headwinds in terms of the outlook for Q4 relative to raising the guidance range. The other aspect is, there's only a quarter and so to raise the range for 1 quarter's worth of activity, I think, is a little bit challenging. And then the last thing I'll mention is, if you look at where we were in the quarter this year -- in the third quarter of this year on a cash and a GAAP basis, typically, our cash NOI on a same-store basis is higher than GAAP because of the development assets that are in the same-store pool which are flat from a GAAP basis, but have growth each year from the rent bumps that are in there. In this quarter, we were lower on a cash basis than we were on a GAAP basis, which generally signals that there can be some expected drivers of cash NOI growth over the subsequent quarters.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [21]

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Great. That's very helpful. Switching gears and just to follow up on Jamie's Charlotte question. When do you guys do decide to become active on the acquisition side? Do you guys have an opportunity or first look at acquiring the adjacent buildings to Bank of America Tower in Legacy Union? Or do you think you'll focus elsewhere in that market?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [22]

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Sure. We do not have a right -- first right on the other additional buildings. That doesn't mean we won't look at them, but we don't have any contractual rights at all. So in terms of where we're going to grow, I think CBD Uptown is still one of our preferred markets as is south end and South Park, I think our primary Midtown is sort of another submarket that we're looking at. So really, those are the 3 or 4 submarkets that we're spending time on.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [23]

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Okay. That's helpful. And then last one for me. Ted, you've seen co-working come into your market in a bigger way in the last 2 to 3 years. Clearly, WeWork has been a hot topic in the press recently. Can you talk about whether the transparency into WeWork's numbers has changed how you guys view them and other co-working tenants, number one, as a tenant within your portfolio? And number two, as a driver of demand within the market. And then maybe any risk you guys see going forward given the rapid expansion we've seen?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [24]

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Sure. Lots of questions in there, so I may come back if I miss 1 or 2. In terms of the co-working, I do want to mention, we don't have any exposure to WeWork. Our exposure, just as a reminder, is 6 leases, it's less than 1% of revenues. So we've sort of, over the last couple of years, sort of dipped our toe into the water in terms of the co-working and have not done the WeWork. Again, we chose to go with other operators. But just given the headlines, look, I do think landlords are going to be more cautious, probably in the near term, just given all the headlines. They're going to closely evaluate the risk profile and sort of what credit enhancement I think they're getting, which is really no different than what we've done throughout the last 4 or 5 years when we sign these leases we've focused on. If you -- we have our property managers and folks who walk through all of our current leases. And all of ours look like they're operating very well, they're full. So I think we feel comfortable with what we have. So I think we're feeling pretty good. In terms of just co-working in flexible space, I think the term is migrating from co-working to flexible office space but just as the enterprise business is in -- is becoming more a bigger part of it. I just think it's here to stay. And I think over time, the flexible space market is going to continue to grow. I think companies want space quicker and they want more flexible terms. So we constantly look at that as we roll out our spec suite program. We're looking at doing a sort of a co-working light-type model as well, that would be -- it won't have a lot of amenities, it won't be manned and all that but we may put out snacks or whatever. But -- so we're working on that. We just think that the way office space is being used is changing, and landlords need to make sure we're providing the right kind of space that our customers want.

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Operator [25]

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We have a question from Rob Stevenson with Janney Montgomery Scott.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [26]

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The development pipeline is currently Raleigh, Nashville, Tampa and that's where the bulk of your land bank is. How much competing new supply you're thinking in these markets that are going to be coming online in 2020 and 2021 competing with your buildings other than Asurion which is already leased?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [27]

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Sure. I think there's a couple submarkets that we watch more closely than others. Most of our markets were -- where we feel comfortable, the supply is meeting demand. The ones that, for the most part, stick out that we're watching very closely is really downtown Nashville. So there's significant new supply coming on really over the next, call it, 24 months or so. So CBD Nashville is one what gives us an Ambien at night is we don't have any meaningful rollover in downtown Nashville until 2025. So assuming demand stays about where it is today, the new construction should deliver and hopefully get leased up in time before we have any rollovers. So -- but we are watching it without a doubt. Obviously, there's a lot in Charlotte. As you look at percentage of stock, that's a new one that's on our radar. The nice thing about that it's 91% pre-leased, there are 3 million square feet or so. So a large percentage of stock but highly pre-leased pipeline. Then we look at Midtown Atlanta, and Midtown Atlanta has a significant amount of new construction as well underway. It doesn't compete directly -- we don't have anything that competes directly with Midtown Atlanta, but there is a fair amount of product coming on line. Historically, Midtown and Buckhead, where most of our product is, they don't compete that often. Occasionally, they do. But we feel pretty comfortable again that we're insulated from Midtown new construction for the most part. Then lastly be Raleigh, I think more CBD -- overall, Raleigh, we've looked at, but really Raleigh continues to be an incredibly strong market. We think supply is meeting demand and that's why we think it's not a huge risk there. Other than that, our markets feel pretty good. Tampa's got about 1 million square feet we're tracking and it's 45% pre-leased, so we feel pretty good about that as well.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [28]

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Okay. And are you seeing any significant enough demand to start projects on your land in Richmond, Orlando and Atlanta at this point in the cycle?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [29]

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Richmond, we've pitched a couple of build-to-suit deals, but there's still a pretty high rent differential needed relative to in-place rents to what you need. So I think we want to see that narrow some before we start a project there. Atlanta, we're certainly out marketing our Riverwood 300 site. We had a lot of success with Riverwood 200. So we've got a building designed that our Atlanta folks are out pitching for prospects, and we'd love to be able to do something there if we find a prospect. Then in Orlando, same in Orlando. There's only been really 1 new delivery in Orlando in CBD, which is our primary market, where we have the land. It's delivered and almost full. So we're very active and marketing that as well, made several initial pitches on that. So we'd love to get something done if we can.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [30]

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Okay. And then if I look at the trailing 6 or 8 quarters of building improvement, tenant improvements and lease commissions as a bucket, they've been elevated for quite a while now. When you think about the road ahead with Laser Spine, T-Mobile and various other leasing and re-tenanting ahead and then factor in the sale of part of the Greensboro and Memphis portfolio, how should we be thinking about this going forward? Is there a normalization to those lines coming? Or is the trailing 6 to 8 quarters pretty much likely to be the new normal as we extrapolate into 2020 and 2021?

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Mark F. Mulhern, Highwoods Properties, Inc. - Executive VP & CFO [31]

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Yes. Rob, it's Mark. Obviously, we've seen higher costs, so there has been a trend upwards there. But we did have some -- and as Ted has gone through here in his prepared remarks especially and Brian, we have gotten some of the expirations out of the way, the upcoming expirations. So 11000 Weston probably cost us a little more than -- to refill and do than maybe has historically. So I wouldn't say it's a new trend. I think you mentioned T-Mobile and some of the Laser Spine activity, I think we're optimistic that we can have good economics on those re-tenanting opportunities. So I would say that it's probably a little lower going forward than we have maybe in the last 6 quarters or 8 quarters.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [32]

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Okay. And then last one for me. I mean given that we're almost to November 1, I mean, the FAA is expiring this year, I mean what's the -- I mean what could they possibly do? I mean wouldn't they have already needed to sign a lease in order to move out for a '19 expiration at this point? Is that -- or is it just waiting for government bureaucracy to sign the lease? Or is there something more involved there?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [33]

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No. It's largely what you just said. It's -- deal with the government has just been slow. We remain incredibly confident that that's going to get done. It's just taken certainly a lot longer than we had hoped, but not totally unusual dealing with the government leases. So we still feel very confident the FAA is going to get done.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [34]

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Okay. Because it's not like that they could -- it's 2 guys and a pickup truck that will move them, right?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [35]

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It's exactly right.

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Operator [36]

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And we have a question from John Guinee with Stifel.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [37]

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Let me ask the obvious rip-the-bandaid-off question. Until you guys get Memphis and Greensboro sold, until you get Laser Spine leased up, people are just going to continue to ask and ask and ask about this. And what you need to get to is a position where you can direct people towards your development delivery in 2022, good lease economics, good balance sheet. Have you ever thought about just ripping off the bandaid and getting out of all these pesky little deals?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [38]

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John, I think, specifically thinking about the Laser Spine 5332, certainly, we've had offers on vacant buildings. But I'll tell you, if you haven't seen that building, it is a high-quality asset. So we think we can continue to create value on that. It's a building we love to have in our portfolio. So really no desire on that building to do it. We like it. It's likely a long-term hold for us once we get it leased up. In terms of just the Memphis stuff and all that, look, we're going to continue to grind through, and I think we feel very confident in what our plan is. It is going to take a little bit of time, but hopefully 2 quarters from now, we'll have answered that both on 5332 and the market rotation plan. So it's just going to take some time, but no need to really do a fire sale in our opinion.

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Operator [39]

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We have a question from Dave Rodgers with Baird.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [40]

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Just a couple of quick follow-ups for me. At Avion, just to get a little bit into your thought process, would you begin to convert those floors before you had an office lease in hand? Or you feel confident enough to kind of continue with the way the building is until you have something that you're holding on to?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [41]

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Yes. Good question. We're likely going to be pulling a permit just to speed up the time as we go down the parallel paths with a different user. So we could. But as long as the medical guy is still lingering around, and which they are, had conversations with recently as I think last Friday, with them, but we don't see a need to start that, but we will. We've got drawings done, plans done, and we just -- all we need is to pull a permit and start, so -- which is something we'll probably -- likely at least pull a permit here soon.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [42]

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What would replacement cost beyond the Avion building if it was just straight office today?

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Brian M. Leary, Highwoods Properties, Inc. - Executive VP & COO [43]

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Dave, Brian Leary here. If you had to buy that and build it from scratch, you're getting close to 450 a foot in that submarket. And so we still like the position where we are at to re-lease it at favorable economics below replacement.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [44]

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Okay. That's helpful. Ted, I wanted to go back to your comments, you talked about the $2 billion of potential development on the land that you own. Would you continue to hold all of that land, I guess, similar to the question you got from Rob earlier. And then maybe can you drive down the path a little bit more of kind of the activity of the discussions you are having on the land that you own and related to beyond '19 starts?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [45]

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Sure. In terms of our land, I mean, it's -- our process of evaluating the land is very similar to what we do with our buildings. We're always going to look and make sure we've got the right land. If we don't for some reason, if it's -- we decide that there's a higher and better use for multifamily, we're going to sell it. So over the last several years, we've sold land that at one point was core land that we've sold for hotel uses, multifamily uses. So we are not wed or married to any land by any stretch. We sell some land, we'll rotate in to better land for mixed-use developments or whatever. So we are constantly looking at it. You saw we sold some this quarter as well that some of which could have been office uses. So not wed to it, we're going to continually evaluate our land. In terms of development prospects, we've got, like I said, more than a handful of discussions going on, couple of build-to-suit opportunities, one of which isn't -- haven't the chosen the city yet. So we've pitched a lot of these multimarket deals, so we'll see where they land. So it's just too hard to tell right now. At the same time, we are also pitching pre-lease, just be a decent pre-lease for a spec building that would be partially pre-leased when we start. And we've got a handful of those on land that we own. So I think virtually all of our pitches that we've made or are making are on owned land. It's no land we have tied up that we don't control. So just having land that we control is incredibly important for these pitches. So again, nothing we're ready to report by any stretch, but we like the amount of activity we have.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [46]

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Great. And then maybe last on the Raleigh CBD, I think I just heard you mentioned, maybe it's an area where you do have seen some more supply. You bought a plot there I think recently as well and so that would you give you kind of 2 different development sites in the Raleigh CBD. And maybe just give us a sense of the 2 separate projects there that you could pursue on those land parcels and kind of how you think about that?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [47]

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Sure. So we've got 2 parcels, as you said, actually 1 -- so 2 parcels, 1 is in the center CBD, second was in what's called the warehouse district, so -- which is off -- roughly less than 6 or 7 blocks away or so. So we think it's 2 totally different products that we can build there. So we have, as you said, 2 different options for users. One building in the CBD is we can build up to about 300,000 feet, the other one is closer to 200,000 feet and maybe a little more of a creative type office. But both of those -- the second one that's in the warehouse district were actually part of an assemblage that we're putting together. So we have closed on 1 piece, we have another piece that we need under contract and it will be closing here shortly. So we like both positions, and we think we can deliver 2 different products for our potential customers.

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Operator [48]

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We have a question from Jon Petersen with Jefferies.

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Jonathan Michael Petersen, Jefferies LLC, Research Division - Equity Analyst [49]

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On the -- coming back to the market rotation plan, when you were looking at new markets to enter, were there other markets you looked at besides Charlotte?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [50]

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Sure. I mean we've got certainly a list of markets that we spend time in, some of the Texas markets most recently as well -- actually for a fairly long time, we spent time in Austin and Dallas and spent time over the years in Houston, I think that we've decided Houston is not a market we want to go into. But it's other markets that are very similar to the ones we are in, in the Sun Belt.

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Jonathan Michael Petersen, Jefferies LLC, Research Division - Equity Analyst [51]

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Okay. Is that anything we should think about in terms of timing? I mean do you have an appetite to expand the footprint of the company overall?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [52]

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I think it depends on the opportunity. I think we've -- again, we spent a lot of time in Charlotte chasing things before we were able to get in and find the right entry point. So it's just our normal course of business. A normal part of our strategy is to continually evaluate other markets. Again, we want to be in markets where the demographics outperform national averages. So suffice it to say, we have a wish list of assets in most of our target markets that we constantly -- we know who own them, who owns the assets, we know what their typical hold period is, and we're staying in touch with those on an ongoing basis just as a normal course of business.

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Jonathan Michael Petersen, Jefferies LLC, Research Division - Equity Analyst [53]

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Got you. And then in terms of your 2 government leases coming up, the FAA and the FBI, I guess, how should we think about where those rents are versus market or probably more likely where you guys will renew them? Should we expect any significant movement up or down on those renewals?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [54]

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Yes. Good question. We think both of them are going to be roughly flat.

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Jonathan Michael Petersen, Jefferies LLC, Research Division - Equity Analyst [55]

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And then with -- one last one. With how much interest rates have moved down in the past few months, have you seen any change? You guys are obviously active in the acquisition and disposition market, have you seen any change in terms of cap rates and the buyer pool?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [56]

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We -- if you think about the buyer pool for our noncore assets, I think the number of buyers is probably down a little bit from, call it, 3 or 4 years ago. But there's certainly enough of a market -- enough buyer pool -- deep enough buyer pool to make a market at our expected pricing. I do think interest rates have probably helped buoy the market a little bit. Again, we're still in process. We'll see how the market rotation is. But the debt financing, there's an abundant of equity capital and debt capital out there certainly at low rates, so it should be buoying the market a little bit.

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Operator [57]

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And we have a question from Daniel Ismail with Green Street Advisors.

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Daniel Ismail, Green Street Advisors, LLC, Research Division - Analyst of Office [58]

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I think there was a comment earlier on the cost of backfilling a few pieces being higher than expected. How much of that is a function of just rising construction cost versus any meaningful changes in tenant concessions?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [59]

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Yes, I think it's -- really, we've got great term there. And so the biggest cause this quarter of the elevated TIs were 11000 Weston. If you back those out, I think we're pretty much in line with our historical average. But we did have just a mix of deals. As I think Brendan and Mark alluded to, we had significantly higher percentage of new leases this quarter versus renewals, so it makes the stats stick out a little bit, but we did get over a year longer term. So combined with new leasing mix and term is really what caught us -- caused the elevated levels.

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Brendan C. Maiorana, Highwoods Properties, Inc. - EVP of Finance & IR [60]

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Yes. Danny, the other thing I would mention is, and we've talked about this before, but we've continued to see like the net effectives really move up in a pretty significant way. So I think that that shows that while there is some level of higher TIs, we are getting that back with respect to higher rents and terms. So I think we generally have felt good that our net effective rents have moved up fairly significantly over the past few years, even while TIs have moved up on a per square foot basis.

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Daniel Ismail, Green Street Advisors, LLC, Research Division - Analyst of Office [61]

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And maybe just a follow-up on the land bank comments. Can you give a sort of a change in year-over-year, how much -- how many of those discussions you're having with potential build-to-suit tenants have been from out of town or tenants who are not currently in those markets versus that are -- those tenants that are currently in those markets?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [62]

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Yes. If I just took a swag it would probably half and half. Certainly, our markets are seeing a disproportionate amount of inbound traffic and all that. So we were constantly seeing new inbound calls and all that. But also it's both organic and new-to-market. So maybe half-and-half if you -- over a number of years.

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Daniel Ismail, Green Street Advisors, LLC, Research Division - Analyst of Office [63]

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And is that pretty typical with what you guys have noticed historically?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [64]

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Yes. I am just -- think -- I think so. I mean it's again, the activity is -- overall the good thing is the activity is good. I think that's probably been it over time.

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Operator [65]

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And we have a follow-up question from Jamie Feldman with Bank of America Merrill Lynch.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [66]

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Two quick follow-ups. One, do you think the leasing spreads you're seeing are sustainable?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [67]

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So we've had positive rent spreads in 13 of the last 14 quarters. Again, this quarter, Jamie, was buoyed as the TI costs and the capital costs of 11000 Weston. We had a 20% cash rent growth in both those leases, so -- which did help our cash rent growth. If you back those out, our capital would be in line and our cash rent growth would've been down a couple of hundred basis points, it would have been in that 3-ish range. So do I think we can continue with cash rent growth? Absolutely. 5.6% this quarter might be a little bit high.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [68]

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But I guess as you think about next year, like similar level of leasing spreads is probably reasonable?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [69]

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Yes. I think we continue to -- like our fundamentals in our markets are just really, really good. Our tour activity, tour persons, we have our leasing calls on a monthly basis. Tour activity is really good in the market. Our economic development groups in our markets are active as well, so both organic and inbound. So I think it's sustainable.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [70]

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Okay. And then you'd mentioned a couple of markets where you're thinking about supply or potentially excess supply. Are you seeing any submarkets in any of these markets where that's -- it's weighing on the ability to push rent?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [71]

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Not yet. A lot of it is still under construction. So we haven't seen a lot of deliveries that haven't leased up and delivered with a significant amount of vacancy. So I think the -- a lot of our markets are sub-10% vacancy as well. So it's still a landlord market in most of our markets. So we just haven't seen any signs yet.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [72]

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And what are -- I know in Atlanta, you guys flagged Midtown. But I know there's been some moves around in Central Perimeter too. Like is that a market that just seems excited as it's been or are you starting to see some weakness there or slow down there?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [73]

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Yes. So Central Perimeter -- good question. Central Perimeter, I think, activity is slow right now. And I think it's 2 things, one is there is a couple billion-dollar road improvement project that I think it's gone as well as it could, but it's clearly impacting the psyche of customers in that submarket. So I think that's contributed maybe to a slower activity there. As well as StateFarm is going to continually vacate, they're completing another couple buildings there, and they're going to be vacating space that they currently occupy, which is going to put some excess space on the market. So I do think that Central Perimeter could be softening some.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [74]

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Are there any other submarkets like that across your markets where you could see some kind of unique moves, putting some pressure on demand around the conditions?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [75]

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I mean -- just off top of my head, Jamie, maybe Cool Springs in Nashville a little bit. Nissan is a big occupier there. They've put a fair amount of space in the subleased market, and there' a couple of other subleases in the market. But I don't think that's materially impacting the market there, but I think that's one that we've got to watch as well.

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Operator [76]

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And there are no further questions at this time.

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [77]

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All righty. Well, thank you, all for your interest in Highwoods. And if you have any follow-up questions, please feel free to reach out. Thank you.

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Operator [78]

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That does conclude the call for today. We thank you for your participation and ask that you please disconnect your line.