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Edited Transcript of HIW earnings conference call or presentation 5-Feb-20 4:00pm GMT

Q4 2019 Highwoods Properties Inc Earnings Call

Raleigh Feb 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Highwoods Properties Inc earnings conference call or presentation Wednesday, February 5, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brendan C. Maiorana

Highwoods Properties, Inc. - EVP of Finance

* 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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* Adam Joel Gabalski

Morgan Stanley, Research Division - Research Associate

* Blaine Matthew Heck

Wells Fargo Securities, LLC, Research Division - Senior Equity 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

* 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 earnings call. (Operator Instructions) As a reminder, this conference is being recorded Wednesday, February 5, 2020.

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 [2]

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Thank you, operator, and good morning. Joining me on the call this morning are Ted Klinck, our Chief Executive Officer; Brian Leary, our Chief Operating Officer; and Mark Mulhern, our 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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Thanks, Brendan, and good morning. 2019 was an eventful and productive year for Highwoods. We ended the year strong with impressive fourth quarter leasing results and FFO at the high end of our outlook. Our team is laser-focused on executing our market rotation plan, increasing occupancy and rents in the portfolio and finding additional opportunities to further strengthen cash flow and drive our long-term growth.

Our markets continue to outperform national averages across a wide array of economic and real estate metrics. Population and office-using job growth is driving demand for office space in our BBDs. To that end, in ULI's 2020 emerging trends in real estate, 3 of our cities were listed in the top 4 nationally for markets to watch, and 6 of our 8 were included in the top 11. There is great momentum across our portfolio footprint as we continue to see numerous corporate relocations into our markets.

2019 included a lot of positive activity, namely: entering Charlotte with the $436 million acquisition of Bank of America Tower, making significant progress toward our planned exits of Greensboro and Memphis, backfilling a significant portion of 11000 Weston and 5332 Avion, announcing $150 million of development and placing in service $300 million of development that were a combined 99% leased. We accomplished this while transitioning the CEO and COO roles and posting strong leasing and portfolio fundamentals. We're pleased with this momentum as we start 2020.

Turning to our 2019 results. We delivered FFO of $3.33 per share. As you know, our results were impacted by the balance sheet write-offs associated with Laser Spine's sudden closure in the first quarter and the onetime costs from our market rotation plan. These -- excluding these items, our FFO and same-property NOI growth would have been in the upper half of the outlook range we provided at the beginning of 2019.

During the year, we leased 3.9 million square feet of second-gen office space, including 1.3 million square feet of new leases, with combined GAAP rent growth of 18.5% and cash rent growth of 4.7%, all while keeping leasing cost consistent with prior trends. Same-property cash NOI growth was up 1.3% or 2.8% excluding the impact of LSI. This compares to our original outlook of positive 2.0% to 3.0%.

We announced 3 spec development projects totaling $150 million. As we disclosed in last night's press release, GlenLake Seven is now 100% pre-leased and will stabilize 3 quarters ahead of pro forma. Our $500 million development pipeline is now 77% pre-leased. We also placed 5 developments in service, comprising 900,000 square feet, representing $300 million of investment that are a combined 99% occupied. These projects were 52% pre-leased when announced. Development continues to be a key growth engine for our company.

Turning to our market rotation plan. We've completed $323 million or roughly 75% of Phase 1 dispositions so far, including the pending $40 million sale of The Knollwood. We remain on track to complete Phase 1 in the second quarter. We've used these proceeds to pay down debt associated with the fourth quarter acquisition of Bank of America Tower in Charlotte, an asset in a high-growth market with upside through leasing -- through lease-up and expansion potential.

As we stated in August when we first announced our plan, we expected Phase 1 to be initially FFO neutral and cash flow accretive. Based on our 2020 outlook and execution thus far, we're on track with our initial expectations. Our balance sheet remains in excellent shape, and we have ample liquidity to fund our growth prospects, including continued investment in our development pipeline.

Turning to Q4. We delivered FFO of $0.91 per share, a 5.4% year-over-year increase. Our leasing performance was excellent. We leased 1.2 million square feet of second-gen office space with GAAP rent growth of 19.8% and cash rent growth of 6.1%. We accomplished this volume of leasing with net effective rents of $18.17 per square foot, 14% higher than our prior 5-quarter average. This includes backfilling half of 5332 Avion and renewing and expanding our largest remaining exploration through 2022, 160,000 square feet with MedSolutions in Nashville. We ended the quarter with portfolio occupancy of 92.2%, towards the upper end of our outlook of 91.7% to 92.3%.

The volume of work accomplished in 2019 sets us up well for the next several years. We expect cash flow to further strengthen as we move forward, bolstered by improving rents, development deliveries and the impact of our market rotation plan. As a result, we've increased our dividend for the fourth consecutive year to an annualized rate of $1.92 per share. Since the beginning of 2017, our dividend is up 13%.

In last night's earnings release, we provided our initial 2020 FFO outlook of $3.60 to $3.72 per share. As I mentioned earlier, 2019 was impacted by some unusual items. But even when excluding these, 2020 FFO growth is up more than 4.5% at the midpoint. Our outlook includes same-property cash NOI growth of 3.25% to 4.25% and year-end occupancy of 91.0% to 92.3%.

As highlighted in the press release, the anticipated impact of Phase 1 dispositions is included in our 2020 FFO outlook. Our outlook for additional dispositions is $100 million to $150 million. As is our custom, these have not been included in our FFO outlook.

Our acquisition outlook has a low end of 0 and a placeholder of $200 million at the high end. Our development announcement outlook is $100 million to $250 million. We're having conversations with several large anchor prospects and have spec projects on the drawing board where we see continued demand for new products. This gives us confidence that we will likely add more projects to our development pipeline in 2020.

In closing, I applaud our team for their dedication and focus throughout 2019. As I mentioned earlier, it was an eventful year for Highwoods. And throughout, our team has remained focused on leasing space and achieving strong rent growth, controlling operating expenses, finding high-quality development projects that provide attractive risk-adjusted returns and recycling assets consistent with our effort to continuously improve portfolio quality.

We enter 2020 with a solid foundation and the ingredients for improved growth over the next few years. Our balance sheet is in excellent shape with ample room to fund future growth plans. Our $500 million development pipeline will deliver and stabilize through 2022, and we have organic upside potential in our portfolio through rent and occupancy 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, everyone. We finished the year strong and capped off a solid year of growth from our leasing teams in the fourth quarter. Second-generation office leasing volume was over 1.2 million square feet, including 398,000 square feet of new leases, our highest quarterly new leasing volume since mid-2014. And we captured GAAP rent spreads of a positive 19.8% and cash rent spreads of a positive 6.1%.

Our high-quality, BBD-located portfolio has enabled our leasing team to drive rents higher. However, even more impressive is the consistent improvement in net effective rents. This quarter was especially noteworthy with net effective rents of $18.17 per square foot, 14% above our prior 5-quarter average. These healthy lease economics are showing up in our financial metrics, where we expect strong 2020 same-property NOI growth with even occupancy projected to be consistent year-over-year.

In the fourth quarter, we posted same-property NOI growth of 1.1%, or up 2.6% excluding 5332 Avion in Tampa. Our portfolio occupancy increased 80 basis points sequentially to 92.2%, finishing the year towards the upper end of our 91.7% to 92.3% range. The biggest gains in sequential occupancy were in Tampa and Raleigh. Included in year-end occupancy is 92,000 square feet with Fanatics at 5332 Avion in Tampa. Cheers to our Tampa team for getting some solid points on the Board so far at 5332. We're underway converting the 3 lower floors to traditional office at 5332 Avion, where we believe it will be one of the top office buildings in the Westshore submarket.

In Raleigh, there were several medium-sized users that drove the improvement in year-end occupancy without getting the benefit of 98,000 square feet at 11000 Weston that was signed but where occupancy hadn't yet commenced by year-end.

Reducing our near-term rollover risk is a constant focus, and our hard work in this space during 2019 will pay dividends in 2020 and beyond. We only have 29% of revenues expiring through 2022, which is approximately 500 basis points lower than the average at this point during the past 3 years. And we expect our future rollover to diminish even further as we complete the market rotation plan with Greensboro and Memphis carrying a disproportionate share of our near-term roll.

Specifically, and as Ted mentioned earlier, in the fourth quarter, we renewed 133,000 square feet with MedSolutions, a 2021 expiration, and expanded them by an additional 27,000 square feet. We also renewed 91,000 square feet with Marsh in Atlanta, which included a downsize of 32,000 square feet, but where expiring rents were well below market. And after renewing MetLife in Tampa and Vanderbilt in Nashville earlier in 2019 and signing a 238,000 square foot extension with the state of Georgia early in 2020, we're left with only 3 expirations greater than 100,000 square feet through 2022.

As we mentioned previously, we expect T-Mobile to vacate 116,000 square feet in Tampa in the middle of 2020. The other 2 expirations are GSA leases: one in Atlanta, where we have the FAA in a 100,000 square feet where they remain in holdover status as we work on terms of renewal; and the other in Tampa, where we have the FBI in a 138,000 square foot build-to-suit building and where we're working towards a long-term renewal.

From here, let's drill down on our markets where office fundamentals remain strong, driven by a common thread of robust demographic trends, population, job and wage growth, low cost of living and conducting business and serving as centers of higher education and innovation.

In Atlanta, as reported by CBRE, the market posted positive net absorption of 726,000 square feet in the fourth quarter and 1.7 million square feet for the year, with average Class A rents across the market up 4.5% year-over-year. We're tracking 5.9 million square feet of competitive office development underway, which is 57% pre-leased, over half of which is in Midtown and where we have no direct exposure.

Our Atlanta team signed 176,000 square feet of second-generation leases during the quarter with GAAP rent spreads of a positive 13%, while occupancy was essentially unchanged, ending the quarter at 89.8%.

Turning to Raleigh, where it was recently ranked as the second best market to watch in the United States in ULI's Emerging Trends report, high demand and following vacancy of driven Class A rates up 4.7% year-over-year and new office buildings in the urban core now have asking rates of $40 per square foot or higher according to Avison Young. We're tracking approximately 2.1 million square feet of competitive construction, which is spread over 5 submarkets, is 38% pre-leased and represents 5.1% of competitive stock. Our Raleigh team signed 184,000 square feet of second-generation leases during the fourth quarter with healthy GAAP rent spreads of a positive 31%. Portfolio occupancy improved 150 basis points sequentially to finish the year at 90.1%.

Additionally, our Raleigh team has pre-leased 100% of GlenLake Seven, our $41 million, 126,000 square foot development project. We're pleased this building will stabilize in the first quarter of 2021, 3 quarters ahead of pro forma. For color, the last 3 spec projects started in Raleigh, 5000 CentreGreen, 751 Corporate Center and now GlenLake Seven are all now 99% plus leased.

Finally, to the home of next year's Super Bowl in Tampa, where Class A rental rates continue to increase in the CBD and Westshore submarkets. The BBD is where the majority of our portfolio is located. According to Cushman & Wakefield, office rents increased 5.6% year-over-year and Class A occupancy in Westshore and the CBD is a combined 89.5%. We're tracking 1.1 million square feet of competitive construction in Westshore in the CBD, which is 33% pre-leased and represents 4.2% of competitive stock.

During the quarter, our team signed 347,000 square feet of second-generation leases with GAAP rent spreads of a positive 22%. Portfolio occupancy improved 350 basis points sequentially to 93.2%, which benefited from the Fanatics lease at 5332 Avion. At 5332 Avion, we're underway with the lower 3-floor repositioning to prepare the balance of the building for traditional office users. As a reminder, our standard development practice is to design properties, including build-to-suits, to provide long-term, multicustomer office flexibility. We believe the Fanatics lease validates the flexibility we purposely include in all of our developments.

To wrap up, I couldn't be proud of the results our team delivered with another excellent quarter of leasing with robust volume and strong net effective rents. We've advanced our goals with regard to future rollover and entered 2020 with a lower 3-year forward expiration total than we've had entering any of the past several years. The leasing environment remains healthy across our markets in BBDs for the high-quality and well-located workplace options our portfolio provides.

Finally, our $500 million development pipeline is 77% pre-leased with good interest in the 2 projects with spec space remaining, and where we're poised to capture growth as the projects in the pipeline deliver in 2021 and 2022. Mark?

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

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Thanks, Brian. As Ted outlined, 2019 was an active and productive year for our company. We delivered FFO of $3.33 per share at the high end of our revised outlook. As you know, there were $0.17 of unusual items in 2019 that impacted FFO. Most notably, the nonoperational balance sheet write-offs associated with Laser Spine's sudden closure in the first quarter and the costs associated with the market rotation plan. Excluding these items, our FFO would have been right at the midpoint of our original outlook. And this includes 10 months of lost NOI from Laser Spine as well as the dilutive impact from the sale of MetroCenter in Q2, which, together, reduced 2019 FFO by $0.06 per share.

In the fourth quarter, we delivered net income of $0.58 per share and FFO of $0.91 per share. As expected, we recorded $0.03 per share of NOI due to the November 14 acquisition of Bank of America Tower, which was offset by $0.02 a share of additional interest expense for the prefunding and funding of the acquisition, and $0.01 of additional accrued severance costs associated with the planned closures of our offices in Greensboro and Memphis.

In last night's release, we provided our initial 2020 FFO outlook of $3.60 to $3.72 per share. At the midpoint, FFO is up approximately 10% year-over-year.

Excluding the onetime items that impacted 2019, our 2020 outlook still implies 4.6% year-over-year growth at the midpoint.

As we mentioned in August when we announced our market rotation plan, we expected Phase 1 to be initially FFO neutral and cash flow accretive. While there is still work to be done to complete Phase 1, we're on track to meet our overall initial expectations and we're confident there is significant long-term growth potential for us at BofA Tower and in Charlotte, overall.

In addition to our FFO outlook, some other items that were included in our 2020 outlook: same-property NOI growth of positive 3.25% to 4.25%, year-end occupancy of 91% to 92.3%, straight-line rent of $32 million to $34 million and G&A of $40 million to $42 million, and then average shares outstanding of 106.6 million to 107.6 million.

So a couple of items to note regarding our 2020 outlook. First, there aren't significant changes expected to our same-property pool other than the addition of a few development properties that were placed in service and exclusion of the Phase 1 dispositions, which weren't projected to have a meaningful impact on same-property numbers.

Second, 5332 Avion is included in the same-property pool. While we'll record GAAP revenue from Fanatics in 2020, we currently anticipate no cash NOI from 5332 Avion in 2020. Third, our occupancy is negatively impacted by 30 basis points from the Phase 1 dispositions. And thus, we expect occupancy will drop in the first quarter following the sale of the 94.2% occupied industrial portfolio. Fourth, our straight-line rent is expected to be higher in 2020 compared to 2019 primarily due to leases at BofA Tower and Fanatics at 5332 Avion.

Fifth, Our G&A outlook includes $700,000 of severance expense in Q1 2020 associated with the closing of the Greensboro and Memphis offices. Sixth, deliveries from our development pipeline aren't projected to contribute significantly to earnings in 2020 as our current $500 million pipeline will not deliver and stabilize until 2021 and 2022. Seventh, and finally, we have no major financings planned for 2020 as our balance sheet is in excellent shape.

In summary, we project solid growth in 2020, driven primarily from organic growth in our operating portfolio. This highlights the healthy fundamentals across our business coupled with a higher-quality portfolio and mix of markets that positions us for stronger and more sustainable growth over the long term.

Last night, we also announced an increase in our annualized dividend from $1.90 to $1.92 per share. When evaluating the dividend, we balance our cash flow outlook, needs for capital reinvestment in the portfolio and our taxable income levels. The market rotation plan and our development pipeline will continue to contribute to our strengthening longer-term cash flow profile.

Our leverage levels increased at year-end following the acquisition of BofA Tower and prior to receipt of the majority of proceeds from Phase 1 of the market rotation plan. However, even with temporarily elevated leverage, our balance sheet was in excellent shape at year-end with debt-to-EBITDA of 5.2x. After receiving proceeds from last week's industrial sale, our credit facility balance is currently $34 million, down from $221 million at year-end. We expect another $40 million in proceeds from the sale of The Knollwood plus additional proceeds as we complete the remainder of Phase 1.

After issuing $750 million of long-term unsecured notes in 2019, our maturity ladder is in great shape and we have less than $300 million of floating rate debt outstanding. We haven't issued any shares on the ATM since the second quarter of 2017.

We're committed to grow within our targeted debt-to-EBITDA operating range of 4.5x to 5.5x and have the flexibility to fund the remaining $277 million on our development pipeline without the prerequisite of issuing shares. We remain confident in our ability to fund our growth initiatives and maintain a strong balance sheet.

Finally, as you may have noticed, we made some routine SEC filings yesterday and this morning. Under SEC rules S-3 shelf registration statements sunset every 3 years. It's been 3 years since our last shelf filing. As a result, last evening, we filed a new S-3 with the SEC. This was a joint shelf filing by the REIT and the operating partnership that registers an indeterminate number of debt securities, preferred stock and common stock for future capital markets transactions.

With this new shelf in place, we also needed to refresh our ATM program, which we filed via Form 424(b) this morning. This new program allows us to raise from time to time up to $300 million of common equity at market prices less 1.5% discount. As you know, keeping an ATM program in place is one of the many arrows we like to keep in our capital raising quiver.

Operator, we 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) Our first question is from the line of John Guinee with Stifel.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [2]

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Great. One question. I kept hearing that the asset recycling was going to be FFO neutral, but AFFO or cash flow accretive. So I'm a little surprised to see that you chose to raise your dividend by only 1%. Any thought process there? Can you expand on that a bit?

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Mark F. Mulhern, Highwoods Properties, Inc. - Executive VP & CFO [3]

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Yes. John, it's Mark Mulhern. As you know, the CapEx was a little higher over the last couple of quarters. So we have high confidence that the cash flow profile of the company is going to continue to improve with development deliveries and with some of the leasing activities that we've done. We try to keep it close to in line with our taxable income. And so balancing all of those things, we felt like that was an appropriate move to make and we continue to evaluate it as we go forward.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [4]

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Yes. But I thought the whole deal was that CapEx was going to come down.

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

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Yes. We believe it will. I mean obviously, we're just completing the sales of those assets, so the CapEx decline will happen as we go forward, no question.

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Operator [6]

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Our next question is from the line of Jamie Feldman with Bank of America.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [7]

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So we've had a couple of management teams comment on how business feels today versus this time last year. I'm just curious to get your thoughts. You had a very good quarter. You had some nice leasing spreads. It seems like supply is picking up in your markets. Maybe just kind of big picture thoughts on that comparison.

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [8]

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Sure. Jamie, it's Ted. I think our business fundamentals feel really good. We have -- with our boots on the ground, our local teams, we have fairly frequent calls to understand where activity is, how tour activity is. We monitor sublease space expansion. So -- and I'd say compared to last year, it's equally as good. We felt pretty good last year. So our demand really across all of our markets and submarkets continue to be good tour activity. We're seeing a lot of inbound new companies moving. Our markets are benefiting from a lot of job growth. So compared to last year, I'd say it's right on par.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [9]

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And are there certain markets that feel different than this time last year?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [10]

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Not materially, where I think I'd call one out. And I think demand just is really good across the board.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [11]

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Okay. Okay. And then I know you didn't include Phase 2 asset sales in your guidance. But to the extent you get them done during the year, how do we think about the potential earnings impact? Or do you think you might match fund that with acquisitions? I know you've got acquisitions not in your guidance, but in your potential guidance. How should we think about those moving pieces?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [12]

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Sure. I'll start, maybe Brendan can jump in. In terms of just Phase 2 -- obviously, we feel good about Phase 1 completing the last 25% within the time frame we mentioned, hopefully, in the second quarter. We still feel good about that.

With regard to Phase 2, we've got broker opinions of value on a majority of the assets. We've had several inbound calls from interested parties. So we are in discussions on a few of those assets, but we don't have a timetable. Now having said that, our disposition guidance we put out there is $100 million to $150 million. And I would tell you, a majority of that is going to be likely going to be Phase 2 assets. So right now, in terms of the timing, again, we don't have any assets on the market. We are in discussions. So it will be several months at the earliest before, I think, you'd see any activity.

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Brendan C. Maiorana, Highwoods Properties, Inc. - EVP of Finance [13]

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Yes. Jamie, the only thing I'd add to that is that $100 million to $150 million of dispositions that are not included in the FFO outlook is pretty typical for us. And then we also have an acquisition range of 0 to $200 million, which also is not included in that FFO outlook.

So as your question suggested, I mean it does depend a little bit on where things ultimately shake out with respect to dispositions and acquisitions. But included within the parameters of the outlook range is roughly match funded between acquisitions and dispositions.

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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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And do you think you could do that FFO neutral, if you do match fund?

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Brendan C. Maiorana, Highwoods Properties, Inc. - EVP of Finance [15]

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I think it depends. I mean certainly, I guess, as you look at the acquisitions that we've done over the past -- I mean we've only done one over the past 4 years at this point. That cap rate was lower than the disposition cap rates for our typical $100 million to $150 million of sales per year. But I think as we exhibited with the market rotation plan, we found creative ways to make that roughly FFO neutral. So I think there's -- I guess, I'd say it probably depends.

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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 just finally for me, can you talk about the Pittsburgh and Richmond land you acquired in the quarter? And is this some of the land that might fall into the bucket of interest from build-to-suits already? Or is this kind of longer-term hold?

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Brian M. Leary, Highwoods Properties, Inc. - Executive VP & COO [17]

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Jamie, Brian Leary here. Great question, and I'm glad you asked it. So take Richmond first. The Richmond acquisition was 8.8 acres of land that kind of catalyzes and unleashes the 9-acre surrounding that we've owned for quite some time. So you're looking at about an 18-acre mixed-use master plan that can be kind of unleashed and support the 1.5 million square feet of occupied office that we have around it in the Innsbrook market there.

And so based on our initial kind of master planning, we can get about 900 multifamily units in the plan, another 300,000 square feet of office, a couple of hundred hotel keys and some retail to really create a strong mixed-use environment that we would most likely master develop and have partners and other folks come in who do that for a living. And there's been tremendous interest in inbound on that. So that's where the Richmond story is. So it does actually allow us to land and present 2 build-to-suit sites right on Interstate 295 in a way that we can't right now.

To Pittsburgh, this is a very interesting acquisition in the East Liberty, high barrier-to-entry market. It's down the corner from where Google has a major presence and Philips is building out a build-to-suit. It's across the street from a brand-new Target, Warby Parker, Ace Hotel, Whole Foods and Bonobos as well. So it's a very interesting market. It's for a small opportunity, but we're really bullish on it because of the tremendous tech growth in the neighborhood, including locally minted unicorn, Duolingo.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [18]

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And how soon would you start on either of those projects?

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Brian M. Leary, Highwoods Properties, Inc. - Executive VP & COO [19]

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So on the Pittsburgh one, we're going through designs and pricing. So we'll have some flexibility to do that at our own timetable. And with regard to Richmond, it's really a master planning process. And so I think through the end of the year, we'll finish that work and then be talking to inbound interested parties to help us with the mix of uses during that time.

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Operator [20]

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We have a follow-up question from John Guinee with Stifel.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [21]

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Two questions. One, you sort of half answered already. What's -- on Pittsburgh and Richmond, what's your -- by the time you're entitled and you got your master plan all figured out, what's your basis per square foot for the [pad-ready dirt]?

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

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John, thanks for the question. A couple of things, and I'm glad you triggered a thought I didn't answer before. The East Liberty Pittsburgh location with regard to entitlement, it is basically fully entitled, which is a pretty big thing to have in Pittsburgh. And so in that case, just from an -- buildable FAR foot, you're probably into the mid- to high 30s for -- where we're thinking for that building. And then if you look at the land foot basis on Richmond, it's really low. It's about $8 and change. That's just not even including the additional 9 acres. It's catalyzing that we've had for some time with a pretty low basis. So good points there. And if I started adding the FAR value of the vertical development, obviously, it flipped out positive. It's quite a number. So a little early to kind of nail that down as we go through our process, but we really love the entry points.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [23]

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Okay. And then Mark or Brendan, regarding raising equity via the ATM, what was the top tick when you raised equity last in 2016 and '17? Do you know where you topped out? And where do you think it's appropriate to raise equity on the next go around, meaning 2020?

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Mark F. Mulhern, Highwoods Properties, Inc. - Executive VP & CFO [24]

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Yes. John, I don't have that number right at my fingertips, but it's in the $51 -- very close to $52, so just under $52 is the way I would have thought about it. We obviously filed the shelf and authorize a new ATM. We'd like to have that flexibility. I wouldn't necessarily make a call on price. We've been able to fund all the BofA acquisition with disposition proceeds and kind of have been able to keep the balance sheet in really good shape. So we're not itching to do something here on the ATM, but we like to have the flexibility. And if it makes sense, if we have an opportunity, we've got a chance to fund. We have $277 million left to fund on the development pipeline, which we have plenty of capacity to do here. So again, we're trying to just make sure we have all our options open.

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Operator [25]

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Our next question is from the line of Blaine Heck with Wells Fargo.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [26]

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Maybe another one for Mark or Brendan, I just wanted to touch a little bit more on same-store guidance. I wanted to see if you could dig into some of the major drivers. As Brian, I think, mentioned, there's not much of an uplift in the occupancy implied in the year-end occupancy guidance number. So I guess can you just give some detail on whether that 3.75% midpoint is driven mostly by an uplift in rents? Is there any expense moderation in there? Or is there some component of burn-off of free rent that's playing a big role?

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Brendan C. Maiorana, Highwoods Properties, Inc. - EVP of Finance [27]

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Yes. Blaine, it's Brendan. It's a good question. So overall, at the midpoint, as you mentioned, up 3.75% is included in the guidance. Within that number is average occupancy that is down a little bit. That is predominantly driven by the remaining Phase 2 assets in Memphis. So excluding those average occupancy within the same-store pool would be up a little bit. And probably for the core 8 markets, excluding the residual Phase 2 assets, we think that same-property growth would probably be up 25 to 50 basis point higher than the range that we provided last night. Really, it's being driven by revenue growth overall.

So our revenue growth is up probably around 4% on the overall pool. Expenses are up a little bit more than that, so it's not an expense-driven metric for this year. That same-property growth is being driven more by top line. We've got expenses that are probably up on balance around 4.5% and taxes are the biggest driver of that overall increase. So we think it shows a lot of health within the business. And the positive leasing fundamentals that we've been reporting over the past many quarters, we think, are showing up in that same-property growth. And there's -- I think you also asked a little bit about straight-line rent. It's helping a little bit.

So the cash number we would expect to be a little bit better than the GAAP number for 2020. But that's pretty typical for us. I wouldn't say that that's a major driver of the underlying same-property guidance that we provided.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [28]

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Okay. Got it. That's very helpful. And then switching gears over to kind of earnings and FFO, and it's kind of a follow-up on earlier question. How should we think about the FFO cadence this year given that you guys have so many moving pieces? You've got the NOI from Phase 1 dispositions that will be going away as you get those sales done. You have -- possibly even have additional sales throughout the rest of the year. And you've got some G&A headwinds in the first quarter, but you also have -- on the other side, you have some upside from a full quarter of BofA Tower, maybe a little upside from development deliveries and leasing throughout the year. How do all those drivers interact with each other? And can you give us any sort of an idea of where does that quarterly FFO inflection point or bottom occur?

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Mark F. Mulhern, Highwoods Properties, Inc. - Executive VP & CFO [29]

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So Blaine, just -- I'll start and Brendan can chime in and add color if we need to. So our FFO guidance, we expect obviously just as you described, a little G&A increase in the first quarter the way we treat our incentive payments. And we think that's -- some of that's going to get offset by some of the -- still having some of the Phase 2 assets contributing. So we actually expect that FFO is going to be on an upward trajectory towards the back half of the year. Our typical OpEx -- highest quarter for OpEx is in Q3, but we do expect some upward trend in FFO as we get towards the end of the year. And that's kind of in our -- incorporated in our guidance.

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Operator [30]

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Our next question is from the line of 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 [31]

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Can you talk about where pricing has come out on the completed Memphis Greensboro dispositions thus far versus your expectations heading into the process?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [32]

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Sure. In terms of where we are so far, we closed 2 buildings. We announced about $90 million of sales in the fourth quarter. That was roughly a 6.6% cash and GAAP yield and then the industrial portfolio combined with The Knollwood, which is going to close here in the next couple of weeks, that's really a combined 6.1% cash and GAAP as well. So we've been very pleased with Phase 1 thus far. Certainly, it's met our expectations.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [33]

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Okay. And then once Knollwood closes, what's the rough dollar volume remaining on the total market exit between Memphis and Greensboro?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [34]

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So as a reminder, we still do have remaining 25% of Phase 1 to get done. So it's somewhere in that probably mid-300s, something like that.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [35]

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Okay. And then you guys are always good about talking about the 100,000 square foot move-outs. Any incremental known move-outs of note in the, sort of, 50,000 to 100,000 square foot range sitting here today that may have higher rents and have an impact on you guys?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [36]

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Sure. So let me just run down maybe the 2020's, and the first 3 we've talked about now for a few quarters. First is the FAA, which is actually in holdover now. They expired last year third or fourth quarter. They're on month-to-month. We're still confident we're going to get a renewal done with those guys. It's right at 100,000 feet. And we've got T-Mobile that's going to be vacating 116,000 feet at the end of the second quarter. And we've got prospects there for a couple of full floor users, but very early. We just -- we're touring. So just starting to talk to those guys. And then on the FBI is -- towards in the fourth quarter about 138,000 feet, and we feel pretty confident.

We're in discussions with those guys as well, and think we're going to get a long-term renewal out of the FBI. So your question after that, we've got about an 85,000 square foot customer that expires at the end of the first quarter, and we feel very confident that's going to be a renewal. We're deep in negotiations there. So we feel good about that. And then after that, we drop down to about a 68,000 foot customer that is very close to being renewed as well. So we feel very comfortable with both those. And then after that, it drops down to 61,000 and that's a vacate with a customer that we just -- we moved to another building and downsized them a little bit, and we have some pretty good prospects to backfill half of that already. So after that, we're really sub -- we do have one more 54,000 foot. We've already backfilled half of that. So we think we've taken care of a lot of the big ones and we feel good about them.

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Operator [37]

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Our next question is from the line of Adam Gabalski with Morgan Stanley.

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Adam Joel Gabalski, Morgan Stanley, Research Division - Research Associate [38]

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Just wanted to get your thoughts on any incremental opportunities for growth in Charlotte. Now as the market rotation plan is a little further underway, what kind of deals you're seeing in the market? What your appetite is for getting a little bit more aggressive in pursuing something?

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Brian M. Leary, Highwoods Properties, Inc. - Executive VP & COO [39]

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Adam, Brian Leary here. Thanks for the question on the Queen City. I'm also the de facto kind of division lead on Charlotte at the moment. So we've been spending a lot of time -- quality time in Charlotte with our friends and partners there, and feel optimistic that kind of a multipronged approach with regard to land development acquisitions is going to bear fruit. We believe through that there's opportunities to source off-market and be aggressive if we need to, but I think it's got a great story across multiple submarkets in Charlotte.

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Adam Joel Gabalski, Morgan Stanley, Research Division - Research Associate [40]

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Got it. And then just one more. You mentioned previously that you're starting to develop sort of spec suites to give small tenants an alternative to coworking. Just kind of wanted to get your latest thoughts on that project and how you think it's playing out?

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

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Sure. This is Ted. It's playing out really well. So a couple of years ago, we made a concerted effort to start a spec suite program really in all of our markets. And to date, we've built out -- I think it's a little over 100,000 square feet of spec suites. And we track how long -- how vacant -- how long were the space vacant prior to building it out and how long after we built it out, and the metrics from a velocity standpoint have been very attractive to us. So it's a program that's working. Certainly, we're pulling some of those customers out of existing coworking spaces as well as just capturing demand that they want an immediate plug-and-play with modern space. So our spec suite program is working pretty well.

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Operator [42]

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The next question is from the line of Manny Korchman with Citi.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [43]

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Ted, I believe in your prepared remarks, you talked about kicking off some new developments. If you had to guess today what markets will those new developments be in?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [44]

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Sure. I think -- we've got right now more than a handful of very active discussions going on. We've made pitches for both build-to-suit full building users as well as partial building users. And we've made those pitches, I think, in 4 different markets, multiple pitches in a couple of the markets. So right now, it's sort of hard to tell. Sometimes these discussions can go on for a long time. So we don't know exactly when something may hit or even if it's going to hit at all. So again, 4 of our markets we've got active discussions going on, and it just depends on sort of the timing of the customer.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [45]

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If all 4 of those were to hit, would you be outside of the range that you gave in guidance? Or does that include the possibility for all of those starts?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [46]

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Well, very rarely we hit all of our pitches. I mean it's -- some of these things are multi -- well, at least one of them is multicity still. So if we hit all of them, I think we'd be outside our guidance. But again, that's sort of typical for us. We've got -- always got a lot of active discussions going on, and we haven't been 100% probably ever.

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Operator [47]

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(Operator Instructions) The next question is from the line from Jamie Feldman with Bank of America.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [48]

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Very strong leasing spreads in the quarter. Can you talk about your outlook for this year? And then just maybe just the mark-to-market of the portfolio today?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [49]

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Sure. Jamie, it's Ted. I think our mark-to-market is -- we try not to say it, but it's -- we're definitely under market as we continue to go through this cycle. We're optimistic that just the discussions we have, the activity we have that we're going to be able to capture the continued increase in market rents over the next year. So I think we've got roughly 10% of our customers expiring. And we should be able to capture, we think, pretty healthy spreads going forward as well, similar to what we've done in the last several quarters.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [50]

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Okay. And then I think when you talked about the different markets, it sounds like kind of 4%, 4.5% rent growth pretty typical in your markets this past year. What do you think that looks like for 2020?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [51]

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Yes. I'd put them maybe in 2 different buckets. The higher end might be even 6% or 7% in the last 12 months or 6% to 8% even at Raleigh, Nashville, Tampa, Charlotte and Atlanta. And then on the lower end, call it, 2% to 3%, it was probably Pittsburgh, Orlando and Richmond. And I think that's probably a fair barometer for the next 12 months.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [52]

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Okay. And then just in terms of large blocks you have left to lease, can you just talk us through the leasing pipeline?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [53]

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Sure. The largest block is going to be backfilling T-Mobile at the end of the second quarter, and I briefly touched on that. We've had a couple of full floor prospects. I wouldn't say strong prospects yet, but they've toured the space, and we're in early discussions. After that, it's the last 3 floors of 5332 Avion. Very similar there. I mean we're in process of white boxing the lower 3 floors right now as well as doing tours of the building. So that's about 90,000 feet or so. And then after that, it's really a few 50s and a couple of floors, obviously, on are development. We've got 2 buildings, still a lot of spec space, Virginia Springs II and Midtown Tampa.

In those buildings, we still got over a year until -- Virginia Springs, I think, delivers later this year and Midtown Tampa next year. So we still got some runway to get some activity there, and we're seeing good prospects on both of those. We just got to convert them to leases.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [54]

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Okay. And then last, now that you have some visibility on the final plan at Avion, what do you think the total cost -- CapEx cost to reposition those floors and get them leased up will be?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [55]

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Just on the capital, again, we're still -- so while we've got -- we're pricing it, I think some of it depends on the -- there's a variability just on what the prospect or the user needs. If you've toured the building, it does have a staircase right in the front. So if we can get somebody to take the first couple of floors, we'll save money by not having to take out the grand staircase. There is an extra elevator at the end of the building that depending on a potential user that may or may not want. And then there's some extra HVAC as well on one of the floors that may or may not stay. So there's a little bit of a range there, but I'll tell you the CapEx between white boxing and improving the -- some of the building is probably $3 million to $4 million in that range.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [56]

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Including the conversion from medical to office?

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [57]

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Correct.

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Brendan C. Maiorana, Highwoods Properties, Inc. - EVP of Finance [58]

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Yes. That is -- yes, Jamie, that is the conversion from sort of medical to office, right? And then I think from a TI and leasing commission, leasing capital perspective, I think you have probably a pretty good handle in terms of what those costs would be. And with -- obviously, we've got a little over half the building leased, and then we'll do deals that will -- we would expect would be in line with market for the balance.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [59]

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What are market TIs right now?

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Brian M. Leary, Highwoods Properties, Inc. - Executive VP & COO [60]

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Jamie, market TIs, we're probably looking at up to $35 to $50 a foot depending on the rental rate we can get.

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [61]

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Generally, $5 per year of lease years is for a new lease.

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Operator [62]

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We have a follow-up question from Blaine Heck with Wells Fargo.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [63]

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Just 1 more probably for Brian. Atlanta seen an influx of supply over the last couple of years and there seems to be a decent amount of potential speculative construction that's teed up to go. I think most of it has been concentrated in the Midtown market so far, which is not where your properties are. But are you guys concerned at all with the amount of construction affecting the overall rent growth potential within the market as a whole? Or do you see enough kind of demand to keep rents moving up?

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Brian M. Leary, Highwoods Properties, Inc. - Executive VP & COO [64]

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Blaine, great question. It's interesting we were actually talking about Atlanta specifically. As you probably know, Ted and I both lived there for a good period of our career and have been following it very closely with our team in Atlanta. So while most of the new growth is in Midtown, you're starting to see some of those big moves and speculative moves be rewarded by occupancy as the likes of Google continues to expand there. And if you saw the headline as even yesterday, Macy's announced 400 jobs that they're relocating out of San Francisco into Midtown's Atlantic Station into the T3 building there.

So we were talking about just kind of occupancy or vacancy, if you will, has been so much static, but rents continue to grow, I think, for the best located, walkable office products. So we're sitting back obviously feeling really good about where we are in Buckhead and continue to kind of tell a little different story there from a Buckhead standpoint. Obviously, looking very closely at Midtown, love all the fundamentals. But I think we're fairly optimistic about what's happening in Atlanta where rents continue to grow and people continue to move there by the truckload.

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Operator [65]

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And there are no other questions at this time. I'd like to turn the call back to you.

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Theodore J. Klinck, Highwoods Properties, Inc. - President, CEO & Director [66]

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Well, thanks, everybody, for joining us this morning. If you have any follow-up questions, we're here and available. If not, we'll talk to you next quarter. Thank you.

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Operator [67]

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