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Edited Transcript of HIW earnings conference call or presentation 26-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Highwoods Properties Inc Earnings Call

Raleigh May 4, 2017 (Thomson StreetEvents) -- Edited Transcript of Highwoods Properties Inc earnings conference call or presentation Wednesday, April 26, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brendan Maiorana

Highwoods Properties, Inc. - Vice President of Finance and Investor Relations

* Edward J. Fritsch

Highwoods Properties, Inc. - CEO, President and Director

* Mark F. Mulhern

Highwoods Properties, Inc. - CFO and EVP

* Theodore J. Klinck

Highwoods Properties, Inc. - Chief Operating & Investment Officer and EVP

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Conference Call Participants

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* David Bryan Rodgers

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

* Emmanuel Korchman

Citigroup Inc, Research Division - VP and Senior Analyst

* Erin Thomas Aslakson

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP

* James Colin Feldman

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

* Joseph Edward Reagan

Green Street Advisors, LLC, Research Division - Senior Analyst

* Richard C. Schiller

Robert W. Baird & Co. Incorporated, Research Division - Junior 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 on today's date, April 26, 2017. It is now my pleasure to turn the conference over to Mr. Brendan Maiorana. Please go ahead.

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Brendan Maiorana, Highwoods Properties, Inc. - Vice President of Finance and Investor Relations [2]

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Thanks, and good morning. I'm Brendan Maiorana, Senior Vice President, Finance and Investor Relations. Joining me on the call this morning are Ed Fritsch, President and Chief Executive Officer; Ted Klinck, Chief Operating and Investment Officer; and Mark Mulhern, Chief Financial Officer. As is our custom, today's prepared remarks have been posted on the web. If any of you have not received yesterday's earnings release or supplemental, they're both available on the IR section of our website at highwoods.com. On today's call, our review will include non-GAAP measures, such as FFO, NOI and EBITDA. Also, the release in supplemental includes a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Before I turn the call to Ed, a quick reminder that any forward-looking statements made during today's call are subject to the risks and uncertainties, and these are discussed at length in our annual and quarterly SEC filings. As you know, actual events and results can differ materially from these forward-looking statements. The company does not undertake a duty to update any forward-looking statements. I'll now turn the call to Ed.

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Edward J. Fritsch, Highwoods Properties, Inc. - CEO, President and Director [3]

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Thanks, Brendan, and good morning, everyone. Business conditions remain good for our customers and prospects and for Highwoods. We continue to see steady demand for our well-located BBD office product as many office users continue to grow their businesses in a prudent need-based manner. The overriding economic question continues to be how long will this expansion last or the proverbial what inning are we in. We'll leave picking the inning or the length of the game to others, but the slow, steady cadence of positive economic growth has given us an economic cycle in longer duration than most prior cycles. Therefore, we expect more of that, and the key drivers that support this belief are the solid fundamentals that remain in place such as Southeast population and job growth continue to significantly outpace the national average. Our footprint continues to enjoy business-friendly environments, our markets continue to experience positive net absorption, new supply remains limited. And finally, rents continue to rise. Further, the capital markets remain healthy for our customers and for us. While interest rates have trended up since the U.S. 10-year bottomed out at 1.4% last summer, they still remain well below long-term averages. While the consensus forecast indicates a modest increase in long-term rates going forward, even if the forecast becomes reality, borrowing rates should still be relatively low. This healthy capital markets environment continues to support the outlook for our business.

First, our view is customers and prospects are generally comfortable about growing their businesses, whether it's an existing customer needing to expand or build-to-suit prospects looking to relocate and/or consolidate multiple locations into one modern-day facility. Second, our access to capital, as demonstrated by ongoing support from our equity and fixed income investors and banking partners, bolsters our growth initiatives, particularly in funding our development pipeline.

Turning to the first quarter. We delivered a clean $0.80 of FFO per share. This is a solid year-over-year increase in our core performance with significantly lower average leverage. With this strong start to the year, combined with sound business conditions expected for the remainder of the year, we increased the low end of our FFO outlook despite a $0.01 of dilution from a disposition that wasn't previously included in our forecast. In addition, we raised our outlook for same property NOI growth by 25 bps. In short, we are delivering higher core FFO per share with improved portfolio quality, a stronger balance sheet and a further simplified platform.

On the operational front, we posted strong same property cash NOI growth. Cash rent spreads on signed leases were positive 4.4%, and GAAP rent spreads were positive 16.6%. Net effective rents were $15.28 per square foot, more than 10% above our prior 5-quarter average.

As expected, our occupancy dropped from year-end, primarily driven by HCA's move out in Nashville on January 1. We've made decent progress with the backfill of their space, signing 37% of the space and having a strong prospect for another 7%.

Disposition and acquisition activity was quiet in the first quarter. On dispositions, we sold a single customer somewhat specialized building in East Memphis for $13 million. We have additional non-core properties in various stages of marketing that would put us towards the high end of our $50 million to $150 million outlook, reinvesting non-core disposition proceeds into our accretive development pipeline remains a core component of our strategic plan.

On acquisitions, we kept our outlook unchanged at $0 million to $200 million as there isn't a lot of institutional quality assets on the market right now. For the few assets that we've seen in the market, pricing for BBD-located Class A office properties remains competitive with initial cap rates carrying a 5 handle. We continue to evaluate on and off market opportunities with a focus on prudent investing.

We had a very active quarter with our development program. We placed $96 million of 93% leased development in service during the quarter. In addition, we announced $126 million of new projects this quarter, which are 86% preleased. Further, we signed a total of 398,000 square feet of first gen leases. Our development pipeline now encompasses 1.8 million square feet, with a total anticipated investment of $549 million and is 83% preleased on a dollar-weighted basis.

The largest of our first quarter development announcements is the $96 million, 224,000 square foot U.S. headquarters for Mars Petcare at Ovation in Nashville. After an extensive process of master planning, rezoning and constructing the projects infrastructure, this is a terrific announcement to kick off our planned 1.4 million square foot office portion of Ovation. We're excited that a large internationally-recognized brand with such strong financials has chosen Ovation for its U.S. headquarters. We're flattered to be working with the good people at Mars Petcare and their endorsement of Ovation should further heighten the attractiveness of the project to potential users.

We placed 2 buildings in service during the quarter. First is Seven Springs West in Nashville, a $59 million seven-story, multi-customer building in our 707,000-square foot, Seven Springs complex. This building is 91% leased, and we are working with a strong prospect that will take us to 95%.

Second is GlenLake Five in Raleigh, a $37 million multi-customer building that is 96% leased.

On April 7, we hosted a topping out celebration at our 34-story Bridgestone Americas headquarters building in Nashville. Vertical construction is nearing substantial completion and infill is well underway. We are now in the process of turning over lower level floors to our customer for FF&E installations.

At Riverwood 200 in Atlanta, we're now at 79% preleased, with more than 2 years until pro forma stabilization. This $107 million project will deliver next quarter.

At 5000 CentreGreen in Raleigh, the building is taking shape, which has driven an increase in prospect activity, as evidenced by our 43,000 square feet of leasing during the quarter. This building is now 26% preleased, and we have a strong prospect for another 13%. As a reminder, we are pro forming the building to stabilize in the third quarter of 2019.

We continue to see a steady pipeline of potential build-to-suit and/or anchor customers for development projects. While it's always difficult to forecast if and when a sizable user will commit to a development, we're very comfortable with our outlook of $126 million to $220 million of announcements and the continued replenishment of our development pipeline. Development continues to be a core competency for us and an ongoing engine of strengthening cash flow and earnings growth. The combination of strong operating fundamentals, additional savings for more maturing high-coupon debt, a strong balance sheet and scheduled delivery of development projects sets the table for continued growth in our earnings, cash flow and NAV over the next several years. Ted?

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Theodore J. Klinck, Highwoods Properties, Inc. - Chief Operating & Investment Officer and EVP [4]

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Thanks, Ed. Good morning. As Ed noted, we had solid activity this quarter with strong leasing economics. We leased 715,000 square feet of second gen office space, and year-over-year asking rents continue to increase. Average in-place cash rental rates across our office portfolio grew to $24.40 per square foot, 4.4% higher than a year ago.

Office occupancy in our same property portfolio was up 10 basis points compared to one year ago. While the overall portfolio occupancy dropped 40 basis points since the end of 2016, driven by the move out of HCA, partially offset by additional leasing in the portfolio. For office leases signed in the fourth quarter, starting cash rent increased 4.4% while GAAP rent grew 16.6%. Importantly, net effective rents, which includes the full load for OpEx, TIs, leasing commissions and free rent were $15.28 per square foot, or more than 10% higher than our prior 5 quarter average. The average term was 5.3 years, and while this is down modestly from our recent trend, it was driven lower by 3 fairly sizable shorter-term renewables.

Turning to our operational performance in the quarter. We grew same property cash NOI by 5.5% compared to a year ago. This growth was driven by higher rents on new deals signed annual in-place rent bumps and unusually low operating expenses. While we expect NOI growth will moderate in the subsequent quarters as operating expenses normalize, the strong start to Q1 and solid outlook for the remainder of the year cause this to increase our same property NOI outlook to 2.75% to 3.5%.

We ended the quarter at 92.7% occupancy. We have good customer and prospect activity. But as we mentioned on our last call, we have some upcoming known moveouts in Buckhead and Richmond. And therefore, we expect occupancy to dip to around 92% in Q2 and Q3 to recover in Q4. Based on the current pipeline of leasing activity, we remain comfortable with our year-end occupancy projection of 92.2% to 93.2%. We don't provide guidance on rent economics and feel good about the health of our markets and the ability to continue to garner improving net effective rents.

Now turning to our markets. While there's always some noise in the quarterly stabs, the outlook from rents in absorption across our footprint continues to be positive. With the past few years, Tampa and Orlando's job growth have consistently ranked high versus national average. Although recovery in the Florida office markets has been slower than our other Southeastern cities, Tampa is picking up steam, and Orlando is showing promise.

Our occupancy in Tampa is now 92%, up 370 basis points over the past 12 months with continued solid customer and prospect activity. According to JLL, asking rents across the city were up 3.9% over the past 12 months and vacancy is down 240 basis points.

With no new speculative office construction, we expect solid fundamentals to continue.

In comparison to our other markets, our occupancy in Orlando at 87.7% has lagged, but we're seeing improved activity and we forecast occupancy to clip 89% by year-end.

The bright side of our little occupancy in Orlando is that it represents a meaningful opportunity for internal growth.

In Raleigh, rents continue to move steadily higher. Per Avison Young, Class A rents increased 3.8% year-over-year. Further, vacancy dropped 160 basis points to 8% in the first quarter; and the first quarter net absorption totaled 535,000 square feet.

New supply in Raleigh is higher than most of our other markets at 2.1 million square feet. But at 4% -- a 4.8% of total inventory, 39% preleased and spread across several sub-markets, we believe new supply is basically in sync with demand.

In our portfolio, we signed 80,000 square feet of second-gen deals in the quarter, with GAAP rent growth of 22.5%. Our quarter-end occupancy was 92.5% and we project occupancy to move higher during the balance of the year.

At Charter Square, the 65% occupied building we acquired in the CBD Raleigh last September, we signed leases and LOIs that'll take occupancy to 82%.

Turning to Atlanta. First and foremost, the collapse of the small section of I-85 has been national news. While an unfortunate event, the commutes to and from our buildings have been largely unaffected. The currently disclosed outside date for completion is June 15, with heavy incentives to finish earlier.

In our portfolio, we continue to generate strong rents as evidenced by GAAP rent spreads of positive 16.7% on signed deals in Q1. As we noted on the last call, we expect occupancy in Atlanta to dip in the middle of the year as there are 2 larger customers moving out in Buckhead. We anticipate releasing the space at rental rates 10-plus percent higher than expiring rates.

Our Riverwood 200 project is scheduled to deliver at the end of Q2. We're now 79% preleased, up 600 basis points during the quarter and we perform stabilization in Q2 2019.

In Nashville, leasing activity and the rents continue to be strong. The market's vacancy rate is 6.9%, well below the 10-year historical average of 9.7%. Class A average asking rents increased 4% quarter-over-quarter. Occupancy in our portfolio was 94% -- 94.2% at the end of the quarter, down from 99.6% at the end of the year, driven by the HCA move out. But we expect occupancy to improve in subsequent quarters.

As we stated in the past, we keep a watchful eye on development activity in Nashville. We're tracking about 2.5 million square feet or roughly 5% of stock under construction that is approximately 2/3 preleased. A market study demand suggests the remainder of this product will be appropriately absorbed.

In conclusion, while we have some backfill opportunities ahead of us, leasing volumes continue to be solid, reflecting positive momentum in our markets and demand for our well-located BBD office product. Mark?

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Mark F. Mulhern, Highwoods Properties, Inc. - CFO and EVP [5]

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Thanks, Ted. We've had a positive start to the year, as indicated by our first quarter financial results. As Ed outlined, we delivered FFO of $0.80 per share. Last year's first quarter FFO of $0.82 included $0.03 of land sale gains and term fees and another $0.02 from owning Country Club Plaza for 60 days with 45% overall leverage. Adjusted for the unusual items and temporary higher leverage in last year's first quarter, we delivered strong core FFO growth this quarter. The increase was driven by higher rents across the portfolio, lower operating expenses and added NOI for development to came online.

Turning to our balance sheet and financing activities. We ended the quarter with leverage of 36.2% and debt-to-EBITDA of 5.05x. These metrics are up modestly from the end of the year, which is largely attributable to the payment of the $0.80 per share special dividend in January. We remain in the middle of our stated comfort range of 4.5x to 5.5x debt-to-EBITDA and are well-positioned to fund our growth initiatives.

We raised $300 million and a 10-year bond deal in March that was priced to yield 4.04%. The effective interest rate of the bonds is 3.78% after factoring in a $7.3 million gain from our prior hedge of $150 million of the underlying treasury at 1.9%. Those proceeds were used to pay off a $380 million maturity with an effective interest rate of 5.88%.

We also expanded a 5-year unsecured bank loan -- bank term loan by another $50 million at LIBOR plus 110 basis points. We had 2 financing transactions after quarter end. The first is a new $100 million secured loan that closed earlier this week. The loan has a 12-year term, with a 4.0% coupon and is secured by our Pinnacle building in Nashville. Those proceeds will be used next Monday to pay off $108 million maturing secured loan on the PPG buildings in Pittsburgh, with an effective interest rate of 4.2%. This refinancing extends out our maturity ladder at a competitive fixed rate while improving our unencumbered NOI to 95%.

Second, also this week, we obtained $150 million of forward starting swaps that lock the underlying 10-year treasury at 2.44% and advanced our potential financing before May 15 of 2018. As Ed mentioned, we tightened our FFO outlook to $3.29 to $3.40 per share, and increased our range of growth in same property cash NOI by 25 basis points for the full year. In keeping with our long-standing practice, the revised FFO outlook includes a $0.01 per share of dilution from the sale of a property in Memphis that wasn't previously included in our outlook.

It's worth considering a couple of modeling items, in addition to the scheduled development deliveries and movement in our operating portfolio NOI. First, we will receive approximately $8 million in early possession rent from Bridgestone in Q2 and Q3, ahead of the scheduled completion of their U.S. headquarters building in Nashville late in Q3.

Second, we will receive interest expense savings from the bond refinancing completed late in the first quarter. Our Q1 same property cash NOI growth was 5.5%, primarily driven by higher rents and lower operating costs. We project a more normalized pattern of operating expenses for the remainder of 2017, which should put our same property cash NOI growth for the year inside our upwardly revised range of 2.75% to 3.5%.

Before we take your questions, a few other items to note. Our first quarter G&A costs are approximately $3 million higher than the run rate for the next 3 quarters due to the routine first quarter expensing of annual long-term equity grants. The GAAP income statement for Q1 2016 reflects the very significant booking of approximately $420 million or $4.22 per share, primarily driven from the sale of our Country Club Plaza assets, distorting the year-over-year net income comparison. And finally, as Ed noted, we expect to be in the mid-to high end of outlook on dispositions. And consistent with our past practice, we do not include in our outlook the FFO impact from potential acquisitions or dispositions until such transactions are announced. So 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) And our first question comes from the line of 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 [2]

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I guess, going back to your comments on -- I know you mentioned Raleigh, Nashville, you talked about supply there. But can you give a little bit more color in terms of, I guess, the test where our supply starting to hit the market is rent growth. Maybe talk to us about your thoughts on rent growth across the markets going forward? And I think in other markets, we're seeing differentiation in the types of demand for supply, whether it's tower or more low rise. Maybe can you talk to us about that across your markets like where is the tenant demand, just as we can frame how to think about the risk over the next couple of years?

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Edward J. Fritsch, Highwoods Properties, Inc. - CEO, President and Director [3]

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Sure. I'll start, Jamie. So on rent growth, we're not seeing much change from what we've talked about in the last 18 to 24 months where we continue to see, on average, 3% to 5% in rent growth per year, with some hotspots where it's better than 10% to 15%. And now it's worth on the lower end. But I'd say, on blended basis across the portfolio, we're still comfortable with the 3% to 5%. On the new construction rents, we continue to see a significant gap between the cost of first gen space versus second-gen space. Obviously, driven by construction dollars. Then with regard to demand type, it really comes down to who the prospect is. We're in conversation with a solid handful of suspects/prospects for development projects. And it's a blend, some of it is towers, CBD, urban and other is specifically more of a suburban type campus environment. So it really comes down to the type of customer. Bridgestone, as you know, is a monumental defining trophy asset in the core of SoBro downtown Nashville. While Mars Petcare and MetLife have been somewhat the antithesis, so that they are trying to create their own campus in a more relaxed setting.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [4]

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Okay. And then I guess, thinking specifically about markets. You've mentioned still a pretty good pipeline of potential development starts or anchors for development. Are there certain markets that are more focused on than others?

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Edward J. Fritsch, Highwoods Properties, Inc. - CEO, President and Director [5]

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Well, right now our development pipeline represents 1.8 million square feet, 9 buildings in 5 different markets. The handful, the full handful of conversations that I referenced are across 6 different markets. So we continue to see potential developments pretty much across the footprint.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [6]

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Okay, and then finally, as we saw the news about Coke laying off a good chunk of its sales -- its employee base, can you talk about any early implications on the Atlanta market and maybe just help us think through what sub-markets might be impacted?

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Theodore J. Klinck, Highwoods Properties, Inc. - Chief Operating & Investment Officer and EVP [7]

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Jamie, it's Ted. Part of the statistics that quarterly absorption numbers in Atlanta did take a hit a little bit with Coca-Cola. They consolidated out of a building in the Northwest submarket down to existing both owned and leased space. So that was a couple hundred thousand feet. Other than that, I think that's enough the Northwest submarket. Other than that, I'm not sure there's going to be a whole lot more impact, at least that we've seen early on, that we can tell. A lot of their staff is in their owned headquarters building as well as a long-term lease they've got downtown. So I'm not sure there's going to be at turn at impact in the Atlanta market.

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Operator [8]

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Our next question comes from the line of Emmanuel Korchman with Citigroup.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [9]

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Just wondering if you could help me understand how you think about disposition targets in the current environment. Is it asset where you can sort of tap at the high dollar margin and realize extra proceeds or is it the weaker assets you think you're going to have upward growth or more moveouts or somewhere in between?

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Edward J. Fritsch, Highwoods Properties, Inc. - CEO, President and Director [10]

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Manny, it's Ed. It's much more the latter, door #2. We have continued to stay focused on selling from the bottom of the portfolio. So we routinely maintain runs on all of our portfolio and we force rank buildings and we look at buildings that we feel are of lesser quality and not in the BBDs. And so that's exactly what we have in the marketplace today. So as you know, we closed one building thus far this year. We have another dozen buildings in the market that we're testing. And we expect, as I said in my comments, to be closer to the upper end of our disposition guidance than the lower end, but it's much more the latter type of space. And just as a footnote reminder, we've -- we haven't sold any assets because we need the proceeds in order to meet some expiring debt instrument or some other obligation that's strictly from portfolio strategic purposes.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [11]

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Great. And then a question maybe for Mark. Just if we dig into the 25-basis point increase in same-store expectations, was that just a benefit of leases rolling better than you expected in the 1Q, or are you seeing something else throughout the year that gives you more confidence in boosting it? And the second part to that, how much cushion is there for additional increases for the year?

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Mark F. Mulhern, Highwoods Properties, Inc. - CFO and EVP [12]

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Yes, Manny, good question. We, obviously, posted a good number for the first quarter at 5.5%, which reflected some seasonal cost savings in our minds. We have very favorable weather in the first quarter. We didn't have any snow removal of any consequence to those contributed to maybe outsized 5.5% number for the year. But we -- based on some of that, our expectation is going forward, we did adjust guidance upwards. We know we've been, obviously, carefully watching it and paying attention and managing operating expenses as best we can but we've had good rent growth and good comparison. So we're comfortable with that number. We'll see as we get further into it if we got more outside but right now that's kind of where we are expecting to land in that range.

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Operator [13]

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

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [14]

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Are you seeing any changes in terms of overseas buyer demands in your markets? And is that impacting asset pricing at all?

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Edward J. Fritsch, Highwoods Properties, Inc. - CEO, President and Director [15]

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No. I think the biggest change that we've seen is just the depth of the buyer pool is more shallow. But there is no shortage of capable cash flow buyers.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [16]

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Okay. And you talked in the past about focusing on markets with strong demographics and job growth. Are any of your existing markets showing trendlines, where you think about maybe moving at different direction and no longer meeting your expectations. And then I guess, on the flipside, are there any markets that are emerging on your radar that kind of do you meet those requirements that are of interest?

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Edward J. Fritsch, Highwoods Properties, Inc. - CEO, President and Director [17]

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So we feel that the markets that we're in continue to do well. Richmond and Memphis aren't in Nashville and Atlanta, but they're very good for our diversification. They've been very steady providers. We continue to see development opportunities that came to the 100% preleased built-to-suit we're doing for Virginia Urology. So we like to turn those as you know they're very good numbers, 6, 7, 8 batters and they continue to provide us, I think, with very good diversity, not only geographically where we don't have any city right now that represents more than 19% of total revenues. But also from a customer base and industry base. So the simple -- my long answer now boiled down toward will be no. And then on -- as far as other markets that we look at, we make routine of looking at other markets and the same 3 sophomoric criteria. We're not going to go into one of the 66 Gateway markets because we can't establish, in our view, good branded market position there. We want to go into a new market that would be relative proximity to our existing footprint. And then third, comment that you made, demographics that typically outperform national averages. So we routinely look for opportunities so we can find an opportunity that's upscale and justifies us going into that market and we're in the BBD and whether our development and acquisition growth opportunities to grow once we get in, akin to what we've been able to do in Pittsburgh.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [18]

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Okay, that's helpful because and maybe just last one for me. Just looking at the Ovation project now, kind of Mars Petcare lined up, sort of looking at the phasing beyond that. I mean should we think about that as sort of a 3- to 5-year type of phase out, or is that more of a 10-plus year phase out on the office? And then when do the other property types start to kick in?

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Edward J. Fritsch, Highwoods Properties, Inc. - CEO, President and Director [19]

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Yes. That's a good question. It really depends. We decided early on that we didn't want to launch that with a spec project. And so we've invested significant time, as I mentioned in my comments, with master planning and laying it out and then going for the rezoning and we're on the cost now of completing all the infrastructure with regard to the Duck banks for all the data and fiber and utilities and the spine roads and curb and gutter, entrances, all of that is nearing completion. And so we're thrilled to kick it off with somebody of Mars' quality. How the other gets consumed will in part depend on how we meet success with pursuing other significant anchor customers or build-to-suit prospects. But we're not in the mode of launching a spec building out there. So I would say it's -- the evidence of 1.4 million square feet that -- I kind of take one end of your question and tie it to the other and I'd say in the 5- to 10-year range, just depending on how the absorption goes. And then the other product, they're refining their designs for the residential, the hotel and the retail and we would hope that they would commence their portion of it sometime within the next 12 months.

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Operator [20]

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(Operator Instructions) Our next question comes from the line of Richard Schiller with Robert W. Baird.

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Richard C. Schiller, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [21]

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I wanted to see all the activities going in backfilling the HCA space and maybe a (inaudible) as well and Buckhead with towers Watson and Morgan Stanley leaving?

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Edward J. Fritsch, Highwoods Properties, Inc. - CEO, President and Director [22]

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Ted?

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Theodore J. Klinck, Highwoods Properties, Inc. - Chief Operating & Investment Officer and EVP [23]

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Sure. So HCA, just a reminder, they left January 1 this year, about 211,000 feet. So far, we've signed 78,000 feet or about 39% of the space, and we have strong prospects for another 14,000 feet or about 7%. So we feel pretty good and where we are just 4 months into the vacancy. One of the buildings, it came out of 2 buildings, one of them were pretty much complete with our hybridizing, we're doing some common area rehab and the other building's sort of right in the middle of it, so we still have some work to do. But I think we're comfortable in thinking we can get at least 50% relet by the end of this year. In terms of Buckhead, just a reminder, the 2 Towers Watson and Morgan Stanley, our Towers Watson is about 75,000 feet and they're leaving August 31. We'll get that space back ready in the beginning of September. They're leaving as a result of really a merger and consolidation over into another submarket. But so we're just starting to show that space. We still got about 5 or 6 months until that comes back to us. And Morgan Stanley leaves August 1. So we still got a few months there as well. Very similar, both buildings, good spaces in both buildings, but we're just on the front end of starting to show the space.

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Richard C. Schiller, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [24]

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Great. Thank you. That's helpful. We also heard you guys have some listed assets for sale in Memphis and Raleigh, do you have any comments there? And what's the activity on the sales there?

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Edward J. Fritsch, Highwoods Properties, Inc. - CEO, President and Director [25]

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This is Ed, we do -- as I mentioned in the prior answer, we do have product about a dozen buildings in total in the March of the day in Memphis, Raleigh and Orlando. In Orlando, it's a joint venture interest that we have. So those are in the markets. We prefer not to speak to our expectations with regard to pricing because we don't want to influence how the bidding may go, but we have a fairly high level of confidence that we'll be able to close these assets somewhere in midyear range, early third quarter.

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Operator [26]

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We have another question from the line of 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 [27]

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I think you guys have talked about also an expiration in Richmond at the end of the year. Can you address that? And then also just as we can get to 2018, any known big moveouts?

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Edward J. Fritsch, Highwoods Properties, Inc. - CEO, President and Director [28]

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Ted?

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Theodore J. Klinck, Highwoods Properties, Inc. - Chief Operating & Investment Officer and EVP [29]

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Yes. In Richmond, it's FCI, it's about 163,000 square feet and we'll get back August 1, Jamie. We've already relet 63,000 feet of that, or 39%, as well as we have strong prospects for another 5,000 or 3%. So pretty much high confidence that we're in the low 40s percent released on that already.

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Edward J. Fritsch, Highwoods Properties, Inc. - CEO, President and Director [30]

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And then Jamie, just as a footnote, in Innsbrook, we have 1.4 million square feet, that's 94.2% occupied. And then Innsbrook is all is 90% occupied. So it's not -- we continue to think it's the best submarket within all of Richmond.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [31]

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Okay. Is that August of 2017 or 2018?

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Edward J. Fritsch, Highwoods Properties, Inc. - CEO, President and Director [32]

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That's this year...

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Theodore J. Klinck, Highwoods Properties, Inc. - Chief Operating & Investment Officer and EVP [33]

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2017.

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Edward J. Fritsch, Highwoods Properties, Inc. - CEO, President and Director [34]

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Yes this year.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [35]

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2017 okay. And in terms of any 2018, no known moveouts?

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Edward J. Fritsch, Highwoods Properties, Inc. - CEO, President and Director [36]

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Yes. The largest -- there's known for 2018 is 51,000 square feet in Atlanta.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [37]

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Okay. And then can you just talk generally about Buckhead, just demand there with some moveouts and looks like some availability? Just how Buckhead -- prices have been -- rents have been rising, just how is that market holding up competitively versus other sub-markets in the city.

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Theodore J. Klinck, Highwoods Properties, Inc. - Chief Operating & Investment Officer and EVP [38]

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Jamie, Buckhead continues -- we still see good demand in Buckhead. Certainly, with the delivery of Three Alliance, they're leasing that up to about 50%. But our guys are still very active, good activity. We don't have any strong prospects yet for either towers, [Paran] or Morgan Stanley, but there just aren't a lot of good blocks of space. These building blocks are both mid-building, they got great views, so we feel very confident we're going to be able to release those in a reasonable amount of time. But continuously good activity, good tours. So we like Buckhead and continue to perform pretty well.

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Edward J. Fritsch, Highwoods Properties, Inc. - CEO, President and Director [39]

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Jamie, I want to amend my answer to your prior question. I forgot that the FBI has an expiration date that's 2019 but they can vacate in 2018 and we expect them to do that. So that's 135,000 square feet in Atlanta next year.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [40]

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Atlanta. Okay. What sub-market?

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Edward J. Fritsch, Highwoods Properties, Inc. - CEO, President and Director [41]

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It's in Century Center. So well inside the loop right on 85.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [42]

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Okay. And then where are you pricing your vacancy in Buckhead versus Three Alliance?

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Theodore J. Klinck, Highwoods Properties, Inc. - Chief Operating & Investment Officer and EVP [43]

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Probably 10% to 15% below. If they're on a gross basis, most of the leases are going to be net, but if you gross it up, they're low 40s. And we're going to be in the high 30s.

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Operator [44]

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We also have another question from the line of Richard Schiller with Robert W. Baird.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [45]

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It's Dave Rodgers. For Ed and Ted, I guess, I wanted to ask a question. I don't want to ask you in a way to put words in your mouth. If you were to bifurcate the new development side of the equation, the build-to-suit product that you've been very successful with and kind of the underlying existing portfolio, if you look at that existing portfolio, do you feel that there is kind of a plateauing effect happening broadly across the markets? It seems like that a little bit but I don't want to kind of read too much into it. If we just had kind of temporary slowdown and kind of love your comment and expand on that a little bit if you could.

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Edward J. Fritsch, Highwoods Properties, Inc. - CEO, President and Director [46]

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Yes. If I understand your question right, Dave. I think that you released built-to-suits that we've been able to win have been very meaningful, high credit, large footprints, brand new products and clearly got accretive, it's one of the most attractive aspects of them with the long-term leases in virtually every instance we've been able to do it on Highwoods lands that we've been able to place in service. So the gain or the return that we are able to get on the incremental spend is heightened by another 75 bps or so as a result of that. But I do think that we've had a good blend also where we've had some -- we've decided to do some things back or some anchor customer in it to provide us with some inventory, and then it's leased up fairly well. For example, Riverwood 200, that's nearly 300,000 square feet and we started the third preleased and now we're looking at 80%. Seven Springs, we started at 0% and now, we're beyond the halfway point on that. 5000 CentreGreen, we started at 0%, we're now at 26% and looking at 40%. So I think it's been a fairly good blend for us to add inventory in modest chunks, as well as winning some meaningful high credit sizable footprints. As far as the handful that we're looking at going forward, it's -- it mirrors that MO right there. If we have some sizable high credit build-to-suit, as well as some others that would be an anchor customer that would give us some spec space in the submarket where we have limited amount of vacancy. I don't -- with regard to us on -- or in the organic portfolio growth, I think that we continue to have opportunities there with our existing customer base. Business is as we said in our comments, is good. We haven't seen anybody starting to pull up stakes because they think that game is about to end.

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Operator [47]

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(Operator Instructions) Your next question comes from the line of Erin Aslakson with Stifel.

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Erin Thomas Aslakson, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP [48]

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So the 2018 FBI expiration, do you think that will lead to a redevelopment of portages that currently occupied asset there in Century Center. I recall you guys have essentially been banking some land there for a while?

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Edward J. Fritsch, Highwoods Properties, Inc. - CEO, President and Director [49]

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Yes, that's a good memory, Erin. So two things, the FBI build, and we will -- they've have been in there for a long time, it's a perfect Highwoods tide in candidate and drawings are well underway and pricing is begun on that. So yes, that will be -- that building will be repositioned, ALA, the building directly across from it, which is a mirror image of where AT&T came out a number of years ago. We repositioned it and then it leased up very well. With regard to the -- there are 4 buildings in Century Center that are low-rise, partially stick-built buildings. And at some point in time, really, we keep those buildings because of the land. It's attractive location, it's good infill. We would offer those us up as a build-to-suit candidate if and when we got successful on that.

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Operator [50]

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(Operator Instructions) There appear to be no more further questions over the telephone lines at this time.

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Edward J. Fritsch, Highwoods Properties, Inc. - CEO, President and Director [51]

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Thank you, operator, and thank you, everyone, for dialing in. Of course, as always, if you have additional questions, please don't hesitate to give us a call. Thank you.

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Operator [52]

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