Q3 2019 Earnings Call
Good morning, and welcome to the Highwoods properties conference call. During the presentation, all participants will be in listen only mode.
Afterwards, we will conduct a question answer session.
John do you have a question. Please press the one that qualify the four on your telephone.
If at any time during the conference you need to reach an operator, Please press star zero.
As a reminder, this conference is being recorded Wednesday October 20, Threerd 2019, I would now like to turn the conference over them Brendan There. Please go ahead Mr. Amir.
Thank you operator, and good morning, everyone.
Joining me on the call. This morning, our Ted Klinck, Chief Executive Officer, Brian Leary, Chief operating Officer, and Mark Mulhern, Chief Financial Officer as is our custom today's prepared remarks had been posted on the web if any of you have not receive yesterday's earnings release, where supplemental they're both available on the.
Investors section of our web site at Highwoods Dot com.
On today's call. Our review will include non-GAAP measures, such as F., though and Hawaii and EBIT. There also the release and supplemental include a reconciliation of these non-GAAP measures. So the most directly comparable GAAP financial measures.
We're 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 FCC filings as you know actual events and results can differ materially from these forward looking statements. The company does not undertake no duty to update any forward.
I'll now turn the call to Ted.
Thank you Brenda and good morning, everyone. It was a busy quarter for US we had transitions in the CEO and COO roles announced or market rotation plan to enter Charlotte, an exit Greensborough and Memphis.
Broke ground on or $38 million, Virginia Springs to development Nashville.
Completed a 400 million dollar bond offering in a top of all this posted excellent leasing activity and delivered strong financial results.
At the beginning of last month or longstanding CEO Ed Fritsch retired.
It has been phenomenal leader and mentor for many of us at a high would.
It may be going from his day to day road Highwoods, but as legacy remains firmly in place throughout our company.
The strategic plan that hits that has served us well over the years well continue to God the company.
Fourq tenets of the plan or to continuously improve the portfolio with a focus on key infill bbds.
Maintained a strong balance sheet.
Retain and attract unmatched commercial real estate professionals.
Communicate clearly in transparently with our investors and other stakeholders.
Consistent with our strategy, we announced the market rotation playing in August .
This is our exit from Greensboro in Memphis entry into Charlotte with the purchase of Bank of America Tower, the legacy Union.
Once completed the market rotation will improve the overall quality work portfolio further strengthen our cash flows all the while being leveraged neutral.
Also during the quarter, we issued $400 million 10 year bond at an effective rate 3.24%.
Our balance sheet continues to be very strong with our debt to EBITDA ratio at 4.9 times.
Nothing borrowed under our line.
$117 million of cash on hand at quarter end.
We also had a strong quarter operationally and financially.
So <unk> sequential occupancy improved 70 basis points for the office portfolio 50 basis points overall to 91.4% with the most significant gains in Atlanta, and Raleigh for two largest markets by square footage.
<unk> 939000 square feet, including 367000 square feet, new leases the gap rent spreads with positive 19.4%.
Cash rent spreads of positive 5.6%.
With a weighted average term of 6.7 years.
We backfill the hundred 44000 square feet and 11000 Weston in Raleigh, and renewed our largest 2021 exploration.
176000 square feet in Tampa.
Subsequent to quarter end, we also renewed and expanded our second largest 2001 export 2021 exploration well hundred and 33000 square feet in Nashville.
We delivered Elfa AFFO per share of 83 cents, which was impacted by five cents of costs, primarily relating to our market rotation plan.
Equating to normalized FFO of 86 88 cents.
Given our third quarter performance installed outlook for the fourth quarter. We have revised in there are 2019 F AFFO per share outlooks to $3.31 to $3.33.
The midpoint is down three cents from a prior outlook.
But after excluding the five cents of market rotation costs were up two cents on an apples to apples basis.
The long end of our yearend occupancy outlook is up 20 basis points from our prior outlook to 91.7%.
With a high end at 92.3%.
Point 60 basis points of additional occupancy growth by year end at the midpoint.
At this time, our yearend occupancy outlook assumes no backfill that 53 30 to 80 on 400, and 676000 square foot property and Tampa's West shore Submarket, formerly occupied by laser spine Institute.
We continue to have dialogue with medical users, but is becoming increasingly likely we will convert three medical floors to traditional office.
We have multiple strong office prospects to backfill a substantial portion of this building.
As we stated before we asked we estimate market office rents for building a 53 30 to 80 on quality to be approximately in line laser spines rent.
Well, we have completed architectural drawings and have detailed cost projections, we don't want to provide specifics on our cost or rent expectations. At this time given ongoing negotiations with prospects.
Our development program continues to deliver strong results.
In the quarter, we placed in service 5000, Centregreen in Raleigh, which was 100% leased.
Our total investment is $41 million for this 170000 square foot multi customer building.
As a reminder, we started 5000 centregreen, 100% spec in 2016.
In August , we announced Virginia Springs too.
<unk>, a $38 million hundred 11000 square foot spec project in Brentwood, one of Nashvilles Bbds.
As you May remember, we placed Virginia Springs, one in service in the first quarter of 2019 at 100% occupancy.
Six quarters ahead of our pro forma.
Hi, Glenn like seven in Raleigh were 44% Preleased and have strong prospects remain availability and we still have a year before estimated completion.
Two years before projected stabilization.
Our overall development pipeline is $500 million in a 73% preleased.
We've announced $150 million of development year to date, we continue to see good interest for build to suits and large ankle anchor prospects that could drive further announcements.
Longer term, we have a well located land bank that can support $2 billion a future development.
Turning to the market rotation plan.
In August we announced plan would happen in two phases.
Phase one includes the planned acquisition to be are they tower in Charlotte.
The disposition of assets in Greensboro in Memphis totally approximate purchase price a b of a tower.
The closing of our Greensborough and Memphis offices.
We're on track to complete phase one by mid 2020.
Phase two with no preset timetable for completion.
The sale of our remaining properties in Greensboro in Memphis.
We are scheduled to take ownership of B of a tower on November 14th and are very excited about our entry into Charlotte and our long term potential in the Queen City.
In terms of the planned exit of Greensborough, and Memphis, where in the market with all phase one properties.
We remain confident in our pricing expectations and that we will complete phase one return or conservative leverage metrics to current levels by mid 2020.
As a reminder, upon completion, we believe phase one will result in increased cash flows inc. and can be.
To be roughly AFFO neutral.
Plus there is additional upside with future lease up b of a tower.
Turning to the balance sheet, our debt to EBITDA ratio at quarter end was 4.9 times.
Under the midpoint of our stated comfort range 4.5 to 5.5 times.
As a reminder, we have funded our development pipeline when a leverage neutral basis without issuing shares on or ATM in over two years.
Overall, our portfolio is performing well, we continue to focus on growing rents and occupancy and carefully managing opex.
This positive trajectory combined with a continued delivery are highly pre leased development pipeline.
Completion of our market rotation plan should drive increased f. AFFO in cash flows while maintaining strong balance sheet with multiple avenues to fund additional growth Brian .
Thanks, Ted and good morning.
During the quarter, we had strong leasing performance second generation office leasing volume was a robust 939000 square feet, including 367000 square feet of new leases, we captured GAAP rent spreads have a positive 19.4% and cash rent spread to the positive 5.6%.
Well virtually all of our leases have annual rent bumps, we've consistently posted positive cash rent spreads specifically during 13 of the past 14 quarters, we've reported positive cash rent spreads and increase net effective rents by 18% over the same period.
Our healthy leasing volume and strong rent economic support future growth in occupancy and NOI.
And the third quarter, we posted same property NOI growth of 0.5% are up 1.9%, excluding 53 32 avian park.
Our portfolio occupancy increased 50 basis points sequentially to 91.4%.
Our yearend occupancy outlook is now 91.7% to 92.3% with a midpoint of 92%.
Our improved yearend occupancy outlook is driven by a significant number of leases that have been sign but where occupancy has yet to commence this outlook assumes no yearend occupancy for 53 30 to 80 on.
We've made meaningful progress the past several quarters, reducing near term rollover risk.
We have 23% of revenues expiring through 2021, which is approximately 200 basis points lower than the past several years.
We expect our future rollover to diminish further as we complete the market rotation as Greensborough and Memphis carry a disproportionate share of our near term role and the bank of America Tower in Charlotte has a weighted average term of more than 14 years.
And our typical review of exploration is larger than 100000 square feet. We have only one remaining in 2019.
Two and 2020 and one in 2021.
For 2019, we remain optimistic for renewal with the F. <unk> located in 100000 square foot build to suit building immediately adjacent to Atlanta is Hartsfield Jackson International Airport.
For 2020, the remaining expirations are both in Tampa and include a 138000 square foot build to suit for the FBI and 116000 square feet with T mobile.
We anticipate a renewal with the FBI law T. Mobile is a known move out anticipated in the third quarter of 2020.
For 2021, we renewed our largest remaining expiration.
A 170000 76000 square foot customer and Tampa.
Subsequent to the quarter, we not only renewed our second largest remaining 2021 exploration well hundred 33000 square feet in Nashville, but expanded this customer by an additional 27000 square feet as well.
Now to our markets, which have a common denominator of growth low cost of living in conducting business centers of higher education, and innovation and low unemployment rates.
In Atlanta as reported by Jones Lang Lasalle the market posted positive year to date net absorption of 550000 square feet with class a rents of $32 per square foot.
Tracking 5.4 million square feet of competitive office development underway, which is 25% preleased half of which isn't mid town, where we have no direct competitive product.
Our Atlanta team signed a 114000 square feet of second generation leases during the quarter with GAAP rent spreads have a positive 28%, while occupancy increase sequentially 130 basis points and in the quarter at 89.7%.
Turning to Raleigh, we're demographic trends continue to be strong high demand and finally vacancy have driven average class a rates up 9% year over year, while new office buildings in the urban core have asking rates, a $40 a square foot or higher accordion Davidson young.
We're tracking approximately 1.4 million square feet of competitive construction, which is spread over five submarkets is 48% prelease and represents 3.4% of competitive saw.
Our Raleigh team signed 193000 square feet of second generation leases during the third quarter with robust gap rent spreads.
Positive 37%.
Portfolio occupancy improved 250 basis points sequentially to 88.6% and we expect additional improvement by year end. This occupancy will commence on signed leases.
On to Nashville, where Cushman and Wakefield reported music City has posted over 900000 square feet of net absorption year to date.
Overall office vacancy in the market ended the quarter at 10.6%.
We're tracking 2.9 million square feet of competitive projects under construction, which are 23% preleasing represent 10.5% of competitive stock.
By new supply is elevated Nashville, it's concentrated in the urban core the CBD Gulch, Midtown Bbds, where we have no meaningful role until 2025.
As Ted noted, we started Virginia springs to in Brentwood, a 111000 square foot $38 million multi customer speculative project.
We delivered Virginia Springs, one 100% leased in the first quarter. This year six quarters ahead of our pro forma.
Given the success of Virginia Springs, one limited competitive supply in Brentwood and early indications of interest we're confident in the lease up prospects, Virginia Springs too.
During the quarter, we signed 114000 square feet of second generation leases in Nashville, with GAAP rent spreads have a positive 16.6%.
Lastly, the Tampa, where our team has been very busy.
Class a rental rates continue to increase in the CBD in west shore Submarkets, the bbds, but the majority of our portfolio is located.
According to CB Ari office rents increased 7.4% year over year and class a occupancy in the west shore in CBD as a combined 92.6%.
There were tracking 930000 square feet of competitive construction in the west shore and the CBD, which is 44% preleasing represents 3.6% of competitive stock.
During the quarter, our team signed at 264000 square feet of second generation leases at gap rent spreads have a positive 13%.
Portfolio occupancy is 89.7%, which includes the full building vacancy at 53 30 to 80 on.
During the past 90 days, we've advanced ARX <unk> architectural plans for the three four repositioning a 53 32 Avi on park.
As a reminder, this building is adjacent to tamper International airport in the thriving west shore Submarket floors for five and six are moving ready for office users.
Given the building strong location, good bones ample parking ratio and strong interest from prospects. We are confident our team were released this building with healthy economics.
In conclusion.
Our team delivered an excellent quarter, Italy seen with healthy spreads and strong net effective rents.
We've made significant progress with future expirations and Backfilling. The few remaining sizable vacancies in the second generation portfolio.
Our 500 million dollar, 73% Preleased 1.2 million square foot development pipeline has three projects with availability all of which are at least out two years from pro forma stabilization.
The leasing environment remains healthy and we expect continued demand for quality well located first and second generation office product and our Bbds Mark.
Thanks, Brian we delivered net income of 27.9 million or 27 cents per share and at that both 88.2 million or 83 cents per share.
As Ted mentioned, excluding five cents per share of items relating primarily to the market rotation plan at the FFO per share would have been 88 cents.
This compares favorably to the 86 cents per share we reported last year, which included five months of rent from Fidelity had 11000, Weston and full and alike contribution from laser spine.
Fortunately growth in the remainder of the business has offset these two items, which illustrates the diversified strength of the company and positions us well for additional growth given our solid leasing trends, including Backfilling. The majority of 11000 Weston.
Excluding the five cents of market rotation items the quarter was clean from a reported AFFO perspective, with no significant capital recycling recycling activity or term fees. There was an unrelated one cent land sale gain that we felt was appropriate to net against the costs associated.
With the market rotation plan.
As none of these items were included in the 2019 at that FFO outlook, we provided in our second quarter release [noise].
Total of these items comprises the five cent impact discussed previously.
We revised and narrowed our 2019 at that FFO outlook to $3 and 31 to $3.33 per share.
The three cents reduction at the midpoint is driven by the five cents per share net impact from items relating to the market rotation plan offset by two cents per share of improvement in the business.
Our updated per share outlook Imputes to 90 cents in Fourq you at the midpoint.
As we detailed in last Night's press release, we estimate three cents event alive from B B of a tower in for Q, which will be offset by two cents a share of additional interest expense for the prefunding and funding of the acquisition and one cent of additional accrued severance.
Costs.
Sequential growth in the fourth quarter will be driven by higher revenue due to improved occupancy and the normal seasonal pattern of operating margin improvement from the third quarter to the fourth quarter.
Our outlook for acquisitions and dispositions is driven by the market rotation plan.
As you know our typical practice is not to include the impact of any future acquisitions or dispositions in our FFO outlook.
The case with our updated outlook, except we have included expected ally from B of a tower, which is now scheduled to close on November 14th.
As Ted mentioned, all the properties contemplated for sale in Greensboro, and Memphis as part of Phase one are now in the market.
We expect most of the phase one sales to close by the end of the first quarter and remain confident in our timeline to complete phase one by mid 2020.
As you may have seen in last nights release, we now anticipate closing both division offices around January 31st 2020.
As a result, the anticipated incremental onetime severance costs of closing the offices, which totaled 2.4 million in the aggregate I required to be a crude from our original announcement date of August 21st through January 30, Onest of 2020.
400000 was recorded in the third quarter 1.5 million will be recorded in the fourth quarter and the remaining half a million will be recorded in the first quarter of 2020.
We kept our same property cash NOI outlook growth outlook for the year at plus 0.5, plus 1.5%. This outlook includes the negative impact associated with laser spines sudden closure in the first quarter.
Excluding 53 32, Avi on same property cash NOI would be approximately 150 basis points higher.
We increased the straight line rental income outlook by 1.75 million, primarily due to the acquisition of B of a tower.
Hi are higher Gionee outlook is obviously related to the onetime severance and retirement costs.
[noise] with net debt to EBITDA air of 4.9 turns and leverage at 37.4% plus nothing outstanding on our 600 million dollar line of credit and $117 million cash on hand, our balance sheet is in excellent shape.
We issued 400 million a 10 year unsecured notes during the quarter with an effective rate of 3.24%.
We now have no debt maturities until mid 2021, a weighted average maturity of 6.7 years, and only $250 million floating rate debt.
We have ample liquidity to fund the be it a tower purchase in Q4, NAS very minor given we've already funded at $50 million deposit we have an additional 386 million left to fund the total 436 $6 million purchase price.
Our debt to EBITDA, there will be temporarily elevated at year end, but still within our target range of four and a half to five and a half times as there will be a timing mismatch between the closing of B of a tower and the closing of the phase one sales.
Upon completion of phase one our balance sheet metrics will return to the middle of our target ranges. This will provide ample flexibility to stay comfortably inside our four to five 4.5 to 5.5 times range as we continue to fund our development pipeline.
Even if we don't issue any shares under our ATM program or sell other noncore assets.
With the announcement of Virginia Springs, too, we have $315 million left to fund on our 500 million development pipeline.
Over the long term our plan is that can you continue to fund our business on a lever leveraged neutral basis.
Before we take your questions as we have signaled we expect our free cash flow to continue to strengthen with the delivery of are highly preleased development pipeline consistent performance of our same store portfolio and completion of the market rotation plan.
While timing will impact our cash flow in any given quarter year, we feel very good about the long term cash flow trajectory for the company.
Operator, we're now ready for your questions.
Thank you if youd like to respond to questions. Please press. The one followed by the four on your total you will hear a three tone promise to acknowledge your question.
If your question has been answered and you would like to withdraw Registrational. Please press the one followed by the three.
Once again, that's one fourth register for question.
We have a question from Emmanuel Korchman with Citi. Please go ahead.
Hey, good morning, guys.
Just just in terms of the market rotation plan I guess a couple of questions.
The first is why now.
AH you know is there anything specific happening those markets or others, where you felt like this was a time to do it.
Hey, Manny it's 10, well look obviously market rotation that is driven by or the asset we found in Charlotte and this was once again Charlotte has been at the top of our new market wish list for really long time, we've been spent a lot of time there of chase different opportunities.
When we thought this was sort of a bulls eye in terms of what we're looking for so from an acquisition standpoint, entering Charlotte was one of our strategic goals and so in terms of obviously now in terms of funding it.
We Greensboro with.
With industrial portfolio. We think is just an ideal time to maximize the value generated there I'm, obviously being one or smaller markets. So we saw this is an opportunity to buy a new asset.
And rotate out of slower growing markets into a higher growth market.
So it was really asset driven on the buy as well just an opportune time to sell some of our other slower growth assets in the slower growth markets.
And Manny, it's Brendan just to add onto that a little bit specifically with respect to the financial outlook.
As Ted mentioned, the opportunity to cycle into Charlotte and the the opportunity with B of a tower at legacy Union was it a big driver of that I think if the question is you know why exit Memphis in Greensboro, now regardless of whether or not you found an opportunity to recycle that capital into in into another acquisition.
And I think we've looked at those those opportunities over time, it's highly disruptive if we just sell those assets given the tax gains that we have there to both FFO and cash flow the company and so we wanted to be opportunistic to find the right timing to recycle some.
All of those proceeds into a good growth opportunity.
Thanks funded I think.
In Europe prepared remarks, you guys mentioned that there is a disproportion amount of near term lease role in those markets.
How is that impacting the marketing process.
Well I think in turns a comment was primarily based just in general and those markets Weve overtime. It's not just at this point in time, there's a disproportionate amount. It's just over time, our average lease term in those markets. This is below significantly below the company average. So that's just a function of the actual market we're in.
That has short term leases.
Okay. Thanks, everyone.
Thanks Manny.
We have a question from Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.
Thanks.
Talk more about the appetite for the assets there it sounded like you're pretty confident you'll get the sales Don but maybe a little bit more color on the depth of buyer pool and timing.
Sure a Jamie its you know all phase one assets are officially in the market now, but they are at various stages.
So we've sorted trickle them out over the last 60 day. So it's still early.
Well I will tell you I think we feel pretty confident just based on the broker opinions of value. We got as we were analyzing this beyond the initial feedback to the assets that were early out market I think we're up we're confident in our ability to execute really at the prices that we originally anticipated.
And you know time will tell I think.
You'll see we did not or disposed guidance at the high end. We included the entire market rotation plan in the Dispo guidance, but having said that we anticipate a majority of the phase one assets will close in the first quarter of next year, we may get a couple this quarter, depending on when when we finally get pricing and all that but Oh, we do feel.
Pretty good just based on what we've seen so far.
Okay, and then how much and how soon do you expect to grow more in Charlotte.
Yes. Good question. So we close as you as we said we closed November 14th we have had people in that market. We spend a lot of time, there I'm looking at both acquisitions as well as land development opportunity. So I guess the answer is as quick as it makes sense for us, but we are looking to the.
Development, Sir you know fairly closely obviously development takes time to.
To to build up so we definitely plan on growing it and we'll see where the opportunities come we're not going to force anything by any stretch.
Okay.
And then can you talk about the demand profile for the Alice I building. It sounds like you think there's pretty good demand for office users, but maybe some more thoughts on timing there and then how soon could you actually have those converted three floors ready for office leasing.
Yeah, So as I said in her prepared remarks, obviously it looks increasingly like we're going to convert the three floors that are currently medical to office as we've said for four or five and six are already to go.
So the last couple of calls we've mentioned, we've been dancing with a medical a user but we're we're still doing that is just going a lot slower than we thought as a result, we've really increased our tour activity our marketing for the office side. So right now we've got prospects, both full building and partial building users.
In terms of the timing.
As you know decisions with these larger customers, it's very binary if we lay into large when I think there's a good chance you know, we could get occupancy and cash rent a quicker, but if we end up doing a floor by floor she's going to be a grind and take take longer. So we're we're hopeful we've got some very good discussions going on.
But it's still too early to tell which way it's going to go from an office standpoint.
Okay, but how long do you think the build out takes the conversion take as far as Steven Okcupid I'd be I find it office I think it's three or four three or four months, probably no more than six but I think we can get done quicker than that.
Okay. Okay, and then I saw you guys took down your development starts outlet for the year at least the high end can you talk about that and if there is anything change in terms of a the build to suit you're looking at.
I don't think anything has changed I think certainly it's always we've got several discussions going on it's just hard to predict the timing of when new developments going ahead and given that the just two months left this year, we just thought as appropriate to bring down the high end of the guidance.
Okay. Thank you.
Thank you Jamie.
[noise], where the question from Blaine Heck with Wells Fargo. Please go ahead.
Thanks, Good morning, I'll start with Mark from Brendan.
Year to date cash same store NOI I think is plus 1.3% and Mark as you said you've got operating margins that are usually better in Q4 than Q3, and you're expecting continued occupancy growth. So I guess what are kind of surprise guidance with an increased are there any specific headwinds to same store growth in Q4 that.
We should keep in mind that might have kept you at that same same store NOI guidance.
Yeah, Hey, Blaine its Brendan so I guess first thing I would mention is we had a comparable ramp in terms of occupancy in Q4 of last year. So from with respect to the occupancy ramped Q3 to Q4 in 2019, it's comparable in terms of that ramp that we had in 2020 I mean.
I'm sorry in 2018.
We also had a lower straight line rent expense in 2018, both in Q3 in Q4 versus our expectations for Q4 for 2019, so theres a little bit of a headwind with respect to the straight line outlook in Q4 versus the prior year quarter.
So I'd say those are probably the majority of the the headwinds in terms of the outlook for Q4 relative to raising the guidance range. The other aspect is theres only a quarter and so to raise the range for one quarter's worth of activity I think is a little bit challenging.
In the last thing I'll mention is if you look at where we were in the quarter. It this year. It in the third quarter of this year on a cash and a GAAP basis typically our cash NOI on a same store basis is higher than gap because of the development assets that are in the same store pool, which are flat from a GAAP basis.
But I have growth each year from a rent bumps that are in there in this quarter, we were lower on a cash basis than we were on a GAAP basis, which generally signals that you know there can be some expected drivers of cash NOI growth over the subsequent quarters.
Great that's very helpful.
Switching gears and then just a follow up on Jamie's Charlotte question. You know when you do you decide to become active on the acquisition side do you guys have an opportunity or or first look at acquiring the adjacent building to bank of America tower and legacy Union or do you think you'll focus elsewhere in.
That market.
Sure we do not have <unk> rights first right on the other do additional buildings.
That doesn't mean, we won't look at them, but we don't have any contractual rights at all so in terms of where we're going to grow I think CBD Uptown is still one of our preferred markets as is south end and South Park I think our primary Midtown who's sort of sort of another submarket, where we're looking at.
So really those are the three or four submarkets were spending time on.
Okay. That's helpful. And then last one for me to you've seen co working come into your markets in a bigger way in the last two to three years. Clearly you know we work has been a hot topic in the press release recently.
Talk about whether the transparency into we works numbers, it's changed how you guys view them and other co working tenants number one as a tenant within your portfolio and number two as a driver of demand within the markets and and maybe any risk you guys see going forward given given the rapid expansion we've seen.
Sure a lot lots of questions in there so maybe come back to I, Miss one or two in terms of the co working or do you want to mentioned, we don't have any exposure to we work or exposure just as a reminder, is six leases less than 1% of revenues. So weve sort over the last couple of years sort of dipped.
Our toe into the water turned to the co working and have not done. The we work again, we chose to go with other operators.
But just given the headline work I do think landlords are going to be more cautious probably in the near term just given all the headlines.
They're going to close we evaluate the risk profile and sort of what credit.
Enhancement I think they're getting which was really no different than what we've done throughout the last four or five years of we signed these waves. We focused on if you we have our property managers and let's walk through all of our current.
Leases and you know are all of ours look like they're operating very well the full I'm. So I think we will feel comfortable with what we have.
So I think we're we're feeling pretty good in terms of just co working flexible space I think that the term is migrating from co working to flexible office space.
Just as the enterprise business is in is becoming more bigger part of relevant I just think of here to stay and I think overtime. The flexible space market is going to continue to grow I think companies want space quicker and we want more flexible terms. So we constantly look at that as we rollout our specs.
Program, we're looking at doing it sort of a co working light type model as well, but to be we won't have a lot of amenity the won't be may end and all that but we may put out.
Snacks or whatever but so we're working on that we just like the way office space is being used is changing and landlords need to make sure. We're we're providing the right kind of space at our customers want.
Great. Thanks for the commentary.
Thank you.
But the question from Rob Stevenson with Janney Montgomery Scott Please click.
Hi, Good morning, guys. The development pipelines currently Raleigh, Nashville, Tampa, and that's where the bulk of your land bank is how much competing new supply are you seeing in these markets that are going to be coming online in 2020 in 2021 competing with your buildings other than Assureon, which has already leased.
Sure.
I think there's a couple sub markets that we watch more closely than others. Most of our markets where were we feel comfortable the supply of meeting demand the ones that for the most parts stick out there we're watching very closely there's really downtown Nashville.
Theres significant new supply coming on really over the next call it 24 months or so.
So CBD nationals, one what gives us the ambient at night as we don't have any meaningful a rollover downtown Nashville until 2025, so assuming demand.
Stays about where it is today, but the new construction should deliver and hopefully get leased up.
In time before we have any rollover, so, but we are watching that without a doubt obviously, there's a lot in Charlotte for if you look at percentage of stock that's a new when it's on our radar or the nice thing about that is 91% Preleased. There are 3 million square feet or so so large percentage of stock but highly.
Pre lease pipeline.
And we look at Midtown Atlanta, Midtown Atlanta has as a significant amount of new construction is well underway. It doesn't compete directly we don't have anything that competes directly Midtown Atlanta, but there is a fair amount of product coming online.
Starkly Midtown and bucket, where most of our product is are they don't compete or that often occasionally they do but but we feel pretty comfortable again that were inflated from Midtown new construction for the most part.
Then last we'd be Raleigh, I think more CBD overall Raleigh, we've looked at but really raleighs continues be incredibly strong market. We think supply of meeting demand in that so we think its oh, not a huge risk there other than that or markets feel pretty good Tampa has got about a million square feet, we're tracking and its 45% pre away.
So we feel pretty good about that as well.
Okay and are you seeing any significant enough demand to start projects on your land in Richmond, Orlando Atlanta at this point the cycle.
Richmond, Weve pinched, a couple of build to suit deals, but there's still a pretty high rent differential needed relative the in place rents to what you need. So I think we want to see that narrow some before we before we start a project there Atlanta, where we're certainly out marketing our river with three.
100 site.
Had a lot of success with Riverwood 200, So we've got a building design, but our Atlanta folks are out pitching for prospects and and we'd love to be able to do something there. If we find a prospect then in Orlando same in Orlando, There's only been really one new delivery and Orlando CBD, which is our primary market.
Well, we have the land.
Deliver an almost full so we're very active in marketing that as well made several several initial pitches on that so we'd love to get something done if we can.
Okay, and then if I look at you know the trailing six or eight quarters of building improvements tenant improvements in lease commissions as a bucket they've been elevated for quite a while now when you think about the road ahead with laser spying T mobile and various other leasing and re Tenanting ahead, and then factor in the sale of part of the Greensboro.
All in Memphis portfolio, how should we be thinking about this going forward is there a normalization to those lines coming or as a trailing six to eight quarters pretty much likely to be the new normal goes we extrapolate out into 2020 to 2021.
[noise], Yeah, Rob it's Mark obviously, we've seen higher cost. So there has been a trend upwards there, but we did have some and his team has gone through here in his prepared remarks, especially in Brian we have gotten some of the expirations out of the way the upcoming expiration, so 11000, west and probably cost us a little more.
And then you know to refill undue than then maybe has historically so I wouldn't say, it's a new trend I think you know you mentioned T mobile and some of the laser spine activity I think it we're optimistic that we can.
Have good economics on those re tenanting opportunities. So I would say that probably a little lower going forward than than we have and not maybe in the last six quarters or eight quarters.
Okay, and then last one for me I mean, given that we're almost at November 1st I mean, the FAA expiring. This year I mean, what's the ER I mean, what could they possibly do I mean wouldn't they have already needed to sign a lease in order to move out for a 19 exploration at this point is that.
Is it just waiting for government bureaucracy to sign the lease or is there something more involved there no. It's largely where you just said it's a deal with the government just been slow we remain incredibly confident but thats going to get done has just taken certainly a lot longer than we had hoped but not totally unusual dealing with the government leases. So we.
So feel very confident yes, a is going to get done.
Okay, because it's not like the ticket its two guys on a pickup truck and I'll move on right [laughter] exactly right.
Hey, guys. Thank you appreciate it.
And we have a question from John Gunn English types. So please go ahead.
Oh, great. Thank you.
Let me ask the obvious rip the band aid off question.
Until you guys get a Memphis and Greensborough sold until you get a laser spine leased up people are just going to continue to ask in asking to ask about this.
And what you need to get to as a physician where you can be direct people towards a develop delivering in 2022, good leasing economics good balance sheet.
Have you ever thought about just ripping off the band aid and getting out of all these pesky little deals.
John I think specifically thinking about laser laser spine 53, 32, certainly we've had offers on vacant buildings, but I'll tell you. If you if you haven't seen that building it as a high quality assets. We think we can continue to create value on that its a.
The only the we'd love to have in our portfolio. So really no desire on that building to do it we like it it's a little likely a long term hold force once we get a leased up.
In terms of just Memphis stuff and then all that I look we're going to continue to grind through it I think we feel very confident in what our plan is it's going to take a little bit of time, but hopefully two quarters from now we'll have answered that both on 53 32 and in the market rotation plant. So it's just going to take some time, but.
No need to really do a fire sale in our opinion.
Great all right good luck.
Thank you.
The question from Dave Rodgers with Baird. Please go ahead.
Hey, guys. Just a couple of quick follow ups for me at avian just to get a little bit into your thought process would you begin to convert those floors. Before you had an office lease in hand, or do you feel confident enough to kind of continue with the way. The building is until you have something that you're holding onto.
Yes. Good question, we're likely going to be pulling a permit.
Just to speed up the time.
As we go down the parallel paths with a different users. So we could but as long as a medical guys still lingering around in which they are had conversations as recently as I think last Friday with them, but we don't see a need to start that but we will we've got drawings done plans done.
And we just we are when you pull a permit and start so which is somewhat probably likely at least pull the permit here soon.
Okay, well owner replacement got beyond maybe on building if it was just straight office today.
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Hey, their day, Brian Leary here, if you had to by that and built from scratch, you're getting close to 450, a foot and that submarket and so we still like that position, where we're at a to release it at favorable economics below replacement.
Okay. That's helpful. Ted I wanted to go back your comments you talked about the $2 billion potential development on the land that you own when do you continue to hold all of that land again similar to the question you got from Rob earlier, and then maybe you can you dive down the path a little bit more of kind of the activity of the discussion you are having on the land that you own in.
Related to be on 19 starts.
Sure in terms of our land to me, it's our process of evaluating the land is very similar to what we do with our buildings, we're always going to look and make sure. We got the right land. If we don't for if for some reason you know if we decide to there's a higher and better use for multifamily we're going to sell it so over the last several years weve.
Fold land that at one point was core land. So we've sold for hotel uses multifamily uses so we're not wed are married to any land by any stretch. We we sell some land will rotate in to better land for mixed use developments or whatever so we're constantly look at that you saw.
We sold some this this quarter as well that some of which could have been office users. So not wed to it we're going to continually evaluate our land turns of development prospects.
You know, we've got like I said more than a handful of discussions going on a couple build to suit.
Opportunities one of which.
Isn't having chosen the city yet so weve pitch a lot of these multi market deals will so we'll see where they landfills just too hard to tell right now, but the same time, we're also pitch and pre lease.
Just be a decent prelease for you for a spec building the be partially preleased when we start and we've got a handful of those on on land that we own. So I think virtually all of our pitches that we've made are making our are on owned land. It's no no way and we have tied up that we don't control. So just haven't land that we.
Control is incredibly important for these for these businesses. So we get nothing nothing we're ready to report by any stretch, but we like the amount of activity we have.
Great and then maybe last on on the Raleigh, CBD I think I just heard you mentioned, maybe it's an area where you have seen some more supply you bought a plot there I think recently as well and so that would give you kind of two different development sites in the Raleigh, CBD and maybe just give us a sense of the two separate projects. There that you could pursue on those that on those.
The land parcels and kind of how you think about that.
Sure.
So we've got two parcels that you said actually one of 'em. So two parcels ones in the center CBD.
The second within what's called the warehouse district, so which is off.
Roughly of less than a month, six or seven blocks away or so so we think its two totally different products that we can build there. So we have as you said two different options for users one building in the CV days, we can build up to about 300000 say the other ones closer to 200000 feet and maybe a little more of a creative.
Type office.
But both of those the second one that's in the warehouse district were actually part of assemblage. There were putting together. So we've closed on one piece we have another piece that we need under contract will be close and Oh here and here in the your shortly so.
We like both positions and.
I think we can deliver two different products for a potential customers.
Great. Thanks.
We have a question from Jon Petersen with Jefferies. Please go ahead.
Great. Thanks, I'm on the coming back to the market rotation plan. When you were looking at new markets enter where there are other markets you looked at besides Charlotte.
I'm sure I mean, we've got I certainly a list of markets. So we spend time in some of that Texas markets.
Most most recently.
Actually for fairly long time, we spend time in Austin and Dallas.
Time over the years in Houston, I think we've decided Houston is not a market we want to go into but it's other markets that are very similar to the ones were in the in the Sun belt.
Okay.
I think we should think about in terms of timing I mean, do you have an appetite to expand the footprint of the company overall.
I think it depends on the opportunity I think we've again, we spent a lot of time in Charlotte Chase them going before we're able to get in and find the right entry point. So it's just our normal course of business normal part of our strategy is to continually evaluate other markets again, we want to be in markets, where the demographics outperform national averages.
So suffice it to say we have wish list assets in most of our target markets that we constantly we under we know who own them who owns the assets we know what their hook typical hold period is.
And we're staying in touch with those you know on an ongoing basis just as a.
Or normal course of business.
Gotcha, and then a 10 year to government leases coming out the F and the FBI I guess, how should we think about where those rents are versus marketed or.
Probably more likely where it where you guys will renew them should we expect any significant movement up or down on those and we says yes. Good question. We think both of them are going to be roughly flat.
Okay.
And then with.
Just one last one with.
How much interest rates have moved down.
In the past few months everything a change you guys are obviously active in the acquisition disposition market anything change in terms of cap rates.
And the the the buyer pool.
You know we.
If you think about the buyer pool for our noncore assets I think the the number of buyers is probably down a little bit from call it three or four years ago.
But there certainly enough of a market neuf buyer pool, deepen a buyer pool to make a market at our expected pricing I do think interest rates are probably helped buoy the market a little bit again, we're still in process, we'll see how the market rotation is but the debt financing there is abundant of equity capital and debt capital out there certainly alone.
Right, so that should be building in the market a little bit.
Great. Thanks for the color.
Yes.
And we have question from Daniel Israel with Green Street Advisors. Please go ahead.
Great. Thanks has I think there was a common earlier on the cost of back filling a few pieces being higher than expected how much of that how much of that as a function of just rising construction cost versus any meaningful changes and I'd kind of concessions.
Yeah, I think it's really we got great term there and so.
The biggest caused this quarter of the elevated the elevated T.I.s were 11000 Weston if you back those out I think we're pretty much in line with our historical average, but we did have just the mix of deals because I think Brendan and Mark alluded to.
We had significantly higher percentage of new leases this quarter versus renewals, so it makes and stats.
Stick out a little bit, but we didn't get over a year longer term. So combined with new leasing mix and term is really what part is called the elevated levels.
Yeah, Danny the other thing I would mention as and we talked about this before but we have continued to see like the net effect is really move up in a pretty significant way. So I think that that shows that well while there is some level of higher T.I.s, we're getting that back with respect to higher rents and terms I think we.
Generally have felt good that our net effective rents have moved up fairly significantly over the past few years, even while T.I.s have moved up on a per square foot basis.
And then maybe just to follow follow up on the Landbank comments.
Can you give a.
Sort of a change in a year over year, how much how many of those discussions you're having with potential build to suit tenants have been from out of town or tenants are not currently in those markets.
For us is better those tenants that are currently in those markets.
Yeah, Hi, just took us swagger would probably be half and half.
Certainly our markets are seeing a disproportionate amount of inbound traffic and all that so we were constantly seeing new inbound calls and all that but but also our it's both organic and new to market, So maybe half and half if you.
Over over a number of years.
And is that pretty typical with a weighted guys I've noticed historically.
I'm just thinking I think so I mean, it's a again the activity overall the good thing of activity is good.
I think that's probably been it overtime.
Okay, that's helpful and test.
And we have a follow up question from Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.
Just two quick follow ups one.
Do you think the leasing spreads you're seeing are sustainable.
So we've had positive rent spreads in 13 and last 14 quarters.
Again this this quarter, Jamie was buoyed as the T.I. costs in the capital cost and 11000 Weston we had a 20%.
Cash rent growth in both those leases, so which did help our cash rent growth. If you back those out or capital would be in line in our cash rate growth would've been down a couple of hundred basis points or would have been.
In that three ish range. So do I think we can continue with cash rent growth absolutely 5.6, this quarter might be a little bit high.
But I guess as you think about next year like similar level of leasing spreads is probably reasonable.
Yeah, I think we continue to.
Our fundamentals in our markets are just really really good our tour activity.
To a person as we have our leasing calls on a monthly basis tour activity is really good in the market economic development groups in our markets are active as well so both organic and inbound. So I think it's I think it's sustainable.
Okay, and then you had mentioned a couple of markets, where you're thinking about supply or exit potentially excess supply are you seeing any submarkets in any of these markets, where that's it's weighing on the ability to push rent.
Not yet a lot of it is still under construction. So we haven't seen a lot of deliveries, but haven't leased up and delivered with a significant amount of vacancy so I think the.
A lot of our markets or sub 10% vacancy as well so it's still a landlord market in most of our market. So we just haven't seen any any signs yet.
And what do I know in Atlanta, you guys flagged Midtown.
But I know there's been some moves around and central perimeter to like is that a market that just seems insight as it's been already starting to see some weakness there slow down there.
Yes, the central perimeter a good question central perimeter I think activity is slow right now and I think it's two two things one is there's a couple billion dollar road improvement project that I.
I think it's going as well as it could but but it's clearly impacting.
The psyche of customers in that sub markets. So I think that's contributed maybe to a a slower.
Activity, there as well as state farms going to continually vacate their completing another couple of buildings there they're going to be vacating spaces. They currently occupy which is going to put.
Some excess space when the market. So I do think that central perimeter could be softening some.
Are there any other submarkets like that across your markets, where you could see some kind of unique moves.
Putting some pressure on demand.
All right mission.
The top of my head Jamie.
Maybe cool Springs.
In Nashville, a little bit Nissan is a big occupier there.
Put a fair amount of space on the sublease market and there's a couple other subleases there in the market.
But I don't think that's materially impacting the market there, but I think that's one that one that we got to watch as well.
Okay.
Alright, great. Thank you.
Thank you.
And there are no further questions at this time.
All righty will thank you all for your interest in Highwoods. When if you have any follow up questions. Please feel free to reach out.
Thank you.
That does conclude the call for today, we thank you for your participation and that's how you. Please disconnect your lines.