Q3 2020 Highwoods Properties Inc Earnings Call
At that time, if you have a question. Please press the one followed by the four on your telephone.
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Reminder, this conference is being recorded Wednesday October 28, 2020, I would now like to turn the conference over to Bernie Marotta. Please go ahead Sir.
Thank you operator, and good morning, joining me on the call. This morning are Ted Klinck, our Chief Executive Officer, Brian Leary, Our Chief operating officer, and Mark Mulhern, Our Chief Financial Officer as is our custom today's prepared remarks have been posted on the web if any of you have not received yesterdays earnings release.
Or supplemental they're both available on the investors section of our website at Highwoods Dot com.
On today's call. Our review will include non-GAAP measures, such as at that though and Hawaii and EBIT. There also the release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures.
Forward looking statements made during today's call are subject to risks and uncertainties, which are discussed at length in our press releases as well as far as he filings as you know actual events and results can differ materially from these forward looking statements and the company does not undertake a duty to update any forward looking statements.
Currently one of the most significant factors that could cause actual outcomes to differ materially from our forward looking statements is the potential adverse effect other COVID-19, pandemic and federal state and local regulatory guidelines and private business actions to control it on our financial condition.
Operating results and cash flows our customers the real estate market in which we operate the global economy and financial markets, the extent to which the COVID-19 pandemic impacts us and our customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence including the scope.
Severity and duration of the pandemic and the resulting economic recession and potential changes in customer behavior among others.
With that I'll now turn the call over to Ted.
Thanks, Brendan and good morning, everyone.
Let me start by saying I Hope you are all well and your families are safe and healthy.
As mentioned on our last call the Highwoods teams across our markets. It's safe we returned to our offices.
Which is allowing us to reap the benefits of collaboration in our Companys unique culture.
Across our 27 million square foot portfolio.
From a utilization is approximately 25% on average.
Which has increased since the end of the summer.
But it was below our first co. Good revised the outlook we provided in April.
We don't expect the sizable increase in utilization until at least early 2021.
It remains difficult to predict the duration and severity of the current recession it.
When leasing activity will recover.
Why we're all hoping for a return to pre pandemic office fundamentals.
We're still well positioned in the current environment, given our lack of large customer expirations over the next few years.
Our ability to control Opex.
The built in growth for more highly pre leased development pipeline.
Plus we further strengthened our fortress balance sheet this quarter, but raising 400 million of 10, and a half year bonds at an attractive rate.
We have ample liquidity to fund the remaining spend on our development pipeline. It's.
We still have plenty of dry powder to capitalize on future growth opportunities.
In addition to having a high quality portfolio and strong balance sheet, our markets continue to benefit from positive demographic trends.
<unk> population and job growth.
To this end the urban land Institute recently published 2021 emerging trends in real estate report listed Raleigh is the number one market for overall real estate prospects.
Nashville came in at number three.
Charlotte number five.
See up a number six.
Lana number 11.
These five markets constitute more than 75% were in Hawaii.
We're seeing this national story of jobs and migrating to our footprint verified in the inquiries were receiving.
We posted numerous out of town prospects seeking space.
Ranging from large to small you.
Our partners at the various economic development agencies across our markets indicate a pipeline of out of town users seeking relocations continues to be robust.
On a related note the big elephant in the room for office landlords, because obviously the long term impact of work from home policies.
Brian will go into more detail about what we're seeing in our markets and while it's still early work from home is not yet had any meaningful impact on leasing decisions by existing customers or prospects.
Thus far Weve only experienced a few small customers who elected not to renew based on their plan to work from home.
Some of these may be temporary solutions.
In the third quarter, we delivered enough Oh 86 cents per share, which included a cumulative five cents impact from a debt extinguishment charge and non cash write off straight line rents due to the conversion of certain leases to fixed rent to persist two percentage rent.
Adjusting for these items or F. AFFO would have been 91 cents per share.
Solid performance given the challenging economic environment.
In addition to healthy AFFO or portfolio metrics were strong.
In place cash rents.
Were up 5.2% compared to a year ago.
Which helped drive same property cash NOI of 2.2% excuse.
Excluding the impact of temporary rent relief deals.
Even with average occupancy down.
This performance was consistent with last quarter's 2.4%.
As expected occupancy dipped sequentially to 90.2% driven predominantly by T mobile's expiration in Tampa.
We expect occupancy to hold from around 90%.
Fourth quarter.
We leased 660000 square feet of second Gen office space with GAAP rent growth of 12.5% cash rent growth of 5.0%.
And this was done with limited leasing capex.
Which drove net effective rents, 7.2% higher than our prior five quarter average.
New leasing volume rebounded to 190000 square feet.
And while still below our normal quarterly volume 200000 to 250000 square feet.
We're encouraged by the sequential uptick in improved level of prospect activity over the past month.
Since the start of the pandemic or monthly rent collections have been consistently strong.
We we collect a 99.7% of our rents in the third quarter and have collected 99.7% of October rents.
Temporary rent deferrals equate to 1.2% of annual revenues.
Unchanged from last quarter.
And repayments are occurring on schedule.
To date, we've received repayment of approximately 25% of total deferrals.
And remain on track to be largely repaid by the end of 2021.
Turning to investments.
We've made significant progress on phase two of our market rotation plan to exit Greensboro and Memphis.
We closed $23 million of the dispositions early in the third quarter.
We disclosed in our second quarter earnings release.
We expect $128 million of dispositions in the fourth quarter.
These sales will bring phase.
Phase two dispositions 251 million for the year at prices that are in line with our pre pandemic expectations.
As reflected in our updated F. outlook. These sales will be dilutive in the near term as we carry excess cash on our balance sheet.
We're confident we'll be able to replace this income because we redeploy the proceeds.
On the acquisition side for the few high quality buildings that have come to market since the pandemic started.
Pricing has been very competitive.
Especially for buildings with high occupancy.
Limited near term lease roll creditworthy customers.
We are actively looking for opportunities to deploy capital.
Which is why we've kept our 2020 acquisition outlook range unchanged zero to 200 million.
However, well stay to true to our mantra of being disciplined allocators of capital and only seek opportunities where risk adjusted returns make sense for our shareholders.
Our 1.2 million square foot 503 million dollar development pipeline remains on budget and on schedule.
We funded 73% to date, we expect to fund most of the remaining 138 million by the end of next year.
Since our last call Weve signed leases at both of our spec projects.
One at Midtown West in Tampa.
And the other at Virginia Springs, two in Nashville.
These deals bring our overall pre leased rate to 79%.
In addition to the sign leases, we have seen increased prospect activity. Both these projects in the past several weeks.
Three other projects in our development pipeline are fully pre leased and on schedule to meet their delivery dates.
Upon stabilization or pipeline will provide more than $40 million of in Hawaii, which more than 32 million is already secured through sign leases.
New build to suit and anchor prelease conversations have slowed down compared to pre pandemic levels.
We don't expect any new project announcements this year and therefore, we took the possibility of new development announcements out of our updated 2020 outlook.
However, we're still having conversations with prospects that could lead to build to suits are highly pre leased development announcements in 2021.
Now to our updated 2000, 20-F O FFO outlook of $3.59 to $3.61 per share.
As I mentioned earlier, we incurred five cents of expenses this quarter due to debt extinguishment charges and non cash straight line rent write offs.
In addition, fourth quarter dispositions will be dilutive by a penny per share.
These items, which negatively impact our full year results by six cents in the aggregate well not in our approach or prior outlook of 359 to 368.
Excluding these items the midpoint of our updated range is up two and a half cents compared to the last quarter.
As a reminder, potential lost rents from customer defaults and non cash straight line credit losses for the remainder of 2022 spec in speculative to project.
Finally, our performance in the past few quarters demonstrates our ability to quickly adapt to changing macro conditions through reduced opex meeting customers needs flexible and creatively solutions.
Plus our limited lease expirations puts us in good position to mitigate the impact from the recession.
We also have built in growth from our development pipeline and have a balance sheet with plenty of capacity to pursue additional growth opportunities.
We're cognizant of the near term challenges facing us from the current environment. We're confident we have the ingredients to drive sustainable growth over the long term Brian.
Thank you Chad and good morning, everyone.
Well leasing volume was lower in the third quarter than the second we did see a sequential increase in activity levels.
During the quarter, we signed 660000 square feet of second generation leases with GAAP rents spreads have a positive 12.5% cash.
Cash rent growth of 5% and net effective rents that were 7% above our prior five quarter average just short of the record set in the fourth quarter of 2019.
With regard to new leasing activity picked up in the third quarter with 190000 square feet of new deals and 8000 square feet of expansion.
The renewal of the Federal Aviation administration in Atlanta during the quarter finalized our last remaining expiration over 100000 square feet. During the next two plus years.
With this renewal in hand, we now have only 18% of our portfolio expiring over the next nine quarters, which is down over 500 basis points compared to this point a year ago and our long term historical average.
As Terry discussed rent relief deals held steady at 1.2%.
Our annual revenues.
With inbound relief requests slowing to a trickle are focused on rent collections and creative solutions for customers with needs base request.
To that end and is a testament to the quality of our customers. Our collections are strong with 99.7% of all rents collected in the third quarter and for the month of October.
As we mentioned in the press release, we also converted a small number of leases from fixed rent to percentage rent. These.
These few leases were done for customers, whose businesses had been severely impacted by social distancing measures and we preserve the potential to receive full rent over the life of the lease.
Let's now drill down and take a closer look at our markets where activity has picked up since labor day across.
Across the board and specifically in Tampa, Raleigh, Nashville, and Atlanta tours are up.
New request for proposals have come in and we are seeing inbound interest from out of town prospects looking to grow or relocate to our markets.
To this end, 25% of new deals in the quarter, our new to market.
I mean from the West Coast Midwest and the northeast.
We've consistently touted our BBD location strategy, which contains a mixed of highly amenitized urban and suburban locations across our footprint.
We've seen validation of the strategy and the superlatives provided in the recently released 2021 emerging trends in real estate report published annually by you align pricewaterhousecoopers.
Four of our markets placed in the top six including our hometown of Raleigh, where we own and operate close to 5 million square feet coming in at number one.
As one might expect and consistent with previous recessions the availability of sublease space is increasing however in our portfolio sublease space remained steady in Q3.
Price discovery on rents is limited due to the low volume and high proportion of short term renewals, but for the moment face rates are holding steady while we do expect downward pressure on net effective rents as concessions increase.
You can see increased 20 basis points across our markets for the quarter.
As Ted mentioned, we haven't seen work from home policies have a big impact on customer leasing decisions.
Specifically in 2020, we've had seven customers ranging in size from 1200 square feet of 4300 square feet, who did not renew leases in favor of working from home.
And several of these indicated this decision may be temporary.
We believe the characteristics that made our market centers of growth prior to the pandemic are receiving increased attention as organizations and individuals reevaluate their geographic plans and preferences.
Anecdotal evidence suggests the attractiveness of our markets could be an accelerant for inbound relocations for corporate users and individuals.
Our highly amenitized bbds are generating significant interest were less dense workplaces and plentiful parking or welcome alternatives for many customers.
Charlotte, where after five years straight a positive quarterly absorption the market recorded its first negative quarter in Q3 with the footnote that rents are up 3% and major inbound announcements such as 17 million square feet and 3000, new job announcements are just now getting going.
Well construction on major new offices for Honeywell, Lendingtree, Duke energy and the loads Global Technology Center are still finishing up.
Markedly different from the previous recession, Charlotte is now recognized as a growing and stable tech hub exemplified by its number one ranking atop Robert Charles Lessor companies and cap rate just stem job growth index.
And good company on the same index at number five for growth and with an already established global reputation as a tech hub the Raleigh market posted positive net absorption in the third quarter.
Our portfolio, they're held firm and we signed 167000 square feet.
Let's now go down to the home of the Stanley Cup winners the World series competitors at the very least Super Bowl Hosters, and Tampa, where rents have increased 4% year over year. The market saw over 200000 square feet of inbound inquiries from out of market prospects this quarter.
Labeled a boom market and a member of the Super Sunbelt by utilize report.
Tampa as highlighted as a metro area with less exposure to industries. Most affected by COVID-19. In addition to its low cost of living and business friendly government.
Our talented Tampa team was busy in the third quarter. The team signed 80000 square feet of leases and towards several prospects to avianca and mid town Tampa.
Where the mixed use development is racing towards delivery next year, and where our new 150000 square foot office building is rising directly above in our <unk>.
Next door to whole foods, and luxury apartments and down the block from shake Shack in two new hotels.
In closing, we wouldn't be where we are today without the tireless dedication of our amazing team.
From every maintenance tech property manager and leasing agent each highwoods colleague as their individual excellence and the pursuit of superlative results.
Developing leasing operating and maintaining our own portfolio, we do so as stewards and trusted with creating and sustaining the ideal environment for our customers to drive in.
Doing so in normal times exceptional.
Doing so throughout a pandemic is extraordinary.
To each and every one of them, we sincerely say thank you.
Now, let me hand, it over to Mark.
Thanks, Brian in the third quarter, we delivered net income of 40.3 million or 39 cents per share it.
FFO of 91.7 million or 86 cents per share.
As Ted mentioned the quarter included a debt extinguishment charge and noncash straight line credit losses, which reduced FFO by five cents per share.
Neither of these items were included in our prior FFO outlook.
Excluding these two items, our AFFO would have been 91 cents per share.
Which compares favorably to 88 cents per share in last year's third quarter also after excluding onetime items associated with the market rotation plan from a year ago.
To put this in context clean AFFO is up about 3.5% year over year with leverage essentially unchanged.
While weve entered Charlotte with a trophy building.
Exited the majority of our Greensborough and Memphis properties and operated during a pandemic and severe recession.
This growth was due to higher rents reduced operating expenses, keeping tight control on GNS, Jay and taking advantage of the debt markets to reduced interest expense.
The macro environment remains challenging, but we've been pleased with our ability to adapt quickly and deliver strong financial results.
Our balance sheet is in excellent shape we.
We issued 400 million at 10, and a half year bonds with an interest rate of 2.65%.
We use some of the proceeds to retire 150 million of our 2021 bonds early and.
And repaid a $100 million term loan due in early 2022.
After repaying the balance outstanding on our revolving line of credit and continuing to fund development. We ended the quarter with 119 million of cash on hand.
Our net debt to adjusted EBIT Dare ratio was steady at five times.
And our leverage ratio, including preferred stock is 36.6%.
We have 138 million left to spend to complete our development pipeline and no debt maturities until June 2021.
The combination of more than 700 million of current liquidity and projected fourth quarter disposition proceeds puts us in a strong position to fund our remaining capital obligations, while leaving us ample room for future growth opportunities without the need to raise additional capital.
Turning to our outlook, we've updated our FFO range to 359 to $3.61 per share.
This includes 6.5 million or six cents per share of dilution from the following items that weren't in our prior outlook.
$3.7 million debt extinguishment charge away.
Our $1.5 million or non cash straight line rent credit losses, mostly due to conversion of leases from fixed rent to percentage rent.
And $1.3 million net impact of lower F, though from fourth quarter dispositions.
Excluding these items, our FFO outlook would have been up two and a half cents at the midpoint.
Last quarter, we detailed a penny of dilution from items that weren't in our original ethanol outlook when adjusting for these non operational or non cash items that were not in our original outlook at mid point of our revised range would be a penny per share above the midpoint of our original.
FFO outlook that we provided in early February.
Given the significant impact the pandemic and ensuing recession has had on the economy and our business. We believe our operating and financial results have been excellent.
Last quarter, we provided a list of projected impacts from the COVID-19 induced economic slowdown might slow down with the primary takeaway that parking revenues were expected to be low for the remainder of the year, but this reduction would largely be offset by lower operating expenses.
We didn't update this table in last evening's press release, because our expectations are essentially unchanged. We also continue to expect cash flow to improve in the near term due to lower leasing capex.
As Ted mentioned, we expect to close $123 million in dispositions before year end, which will bring 2020 dispositions 251 million.
Excluding the 338 million of phase one market rotation dispositions, we completed in the first quarter.
We have men maintained our original acquisition outlook of zero to 200 million.
We don't expect any development announcements this year and thus have eliminated this potential from our outlook.
Finally, as you know we will provide our 2021 outlook with our fourth quarter earnings release in early February.
However, here are a few noteworthy items to highlight as we get close to the new year.
First we're fortunate as we have ample liquidity and low leverage to deploy capital into potential growth opportunities.
Second we're carrying more cash than normal on our balance sheet. Following our debt issuance in the third quarter, which will be dilutive in the near term, but should normalize as we pay off the remainder of the 2021 bonds in April and fund development expenditures.
Third we expect $40 million of NN life from our development pipeline upon completion and stabilization.
Most of this is secured two signed leases.
Glenlake seven will deliver in early 2021, while the other projects in the pipeline are expected to contribute more substantially in 2022.
Last we have been able to quickly adapt to the current environment by reducing opex to offset lower parking revenues and while we expect opex will rise as portfolio utilization utilization increases.
We believe we'll be able to hold on to some of those savings even as usual the utilization levels recover.
Looking forward, we continue to remain positive about the long term outlook for Highwoods.
Operator, we're now ready for your questions.
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Thank you. The first question comes from Brendan Fin of Wells Fargo. Please go ahead.
Hey, guys. Thanks for taking my questions.
I wanted to start up on your commentary about the level of cash that you're carrying on the balance sheet.
Since this is significantly more than what you normally.
You mentioned that it was going to be dilutive in the near term, but can you just give us a little more detail in terms of the deployment of that and.
And then.
You can maybe quantify I guess the level of dilution, which I assume will be seen in Q4, and then again in Q1 was 21.
Yeah, Hey, Brendan it's Brendan Maiorana, maybe I'll take that one so.
First I think I'd, just say that I think we were really pleased with the execution of the $400 million bond offering 10, and a half year bond offering that we did so I think we're pleased with that decision to issue those bonds in August but you are correct. We're carrying more cash now on the balance sheet about $120 million as Mark mentioned and then we've got.
Got another call it roughly 125 million that will come in the door through the dispositions so out of that call it $240 million to $250 million of of cash there's not a lot of near term uses of that other than spending on the development pipeline. So it does.
Kerry near term dilution, which we.
Put in into our outlook for the fourth quarter and really that dilution, while it's a headwind in terms of cash flow and so for a couple of quarters that will go away largely in the second quarter as there's the April bond maturity. Those June 2021 bonds, we can pay.
Early with no prepayment penalty in April and at that point, then I think the headwind from I'm carrying that excess cash really becomes a tailwind as those bonds carry a higher interest rate than what will be replacing them with but you know kind of specific to your question I'd say in terms of our.
David FFO outlook, it's about a penny in in kind of the fourth quarter is the drag that we're taking from from carrying the excess cash in the fourth quarter, which is in addition to that the penny that we mentioned for the for the disposition of the fourth quarter.
Okay. Thanks, that's very helpful.
Just wanted to switch gears quickly to you as well.
And it looks like your new leasing volume doubled or more than doubled from Q.
Q2, So I guess I was wondering if there is any specific tenant groups or.
Geography that really drove that speaker higher this quarter and I'm with you leasing conversations that began before the pandemic and then were initially put on pause and then resumed this quarter or were these primarily discussions that began after the onset of the thing.
Hi, Brendan this is Ted So first question in terms of the industry groups are the most activity. We had this quarter was really healthcare government law firms and financial services firms.
From a market standpoint, I think most new activity was Nashville, Raleigh and Orlando.
In terms of the conversation, let's say, so probably a little bit of both but things have just with a pandemic it slowed down decision, making but.
General that's probably both but the majority of that's probably happened since summer time.
So since the onset of the pandemic, but to so.
Activity just picked up really post labor day even.
More to worse in virtually all of our markets like we're obviously you've got the forced expirations you've got to deal with so I think just new tenant tumors in general so really picked up in the last month or so.
And Brandon This is Brian your specific question around Raleigh, we have both within the portfolio and in the market.
Seeing new activity with regard to life Science gene therapy.
They're kind of software based therapeutic companies one that's in the portfolio is opening an office in Raleigh joined their offices in Boston and San Francisco that is new since the pandemic and they'll be moving into space. Soon so that was a a quick one.
Sounds good thanks, guys.
Thank you.
Our next question comes from Manny Korchman of Citi. Please go ahead.
Hey, good morning, everyone. Tom maybe you could just talk about the.
Out of market tenants that are looking at your portfolio.
Could you help us understand how much of that is new incremental space versus.
Moves out of other markets and as they talk to you are they taking a targeted strategy and saying we want to be in.
Raleigh, or we want to be in.
Whoa, Richmond, or wherever it wherever that might be or they just saying, we're thinking about leaving new jersey, and we'd like to be in a in the sunbelt.
Show Us what you've got.
Yeah, Great question I think the answer there is probably both as well I think you've got some companies that are going to open up new offices, there will be relocating from some of these markets as.
Well you've got some companies are just opening up a regional office would be a new new to market, but its just a regional office versus moving a significant a significant operation just picking up and moving down to our market.
In terms of what markets are looking how to look I think a lot of them are looking out and that's really haven't changed from the last several years. Just the trend is the move looking to move to lower cost cities with great workforce low tax markets high quality of life. So I think we're seeing.
I'd just continue some of the.
In bounds or both multi market, we've got to compete against other markets in the southeast and then others have already picked the market when we get the RFP. So it's really a little bit of everything that you mentioned.
Just adding <unk>.
Got it so just adding to that too is you are seeing some into the markets new order.
Organization, starting with a toe in the water. If you will kind of getting a landing point on the beach. We're also seem to Teds point kind of sometimes under code names from an economic development standpoint, the same prospects showing up in similar markets. So we may look at something in Raleigh. That's also looking at Tampa looking at Richmond or Nashville. So.
Those aren't necessarily the some of the same folks up before but we are seeing acceleration as Ted mentioned folks who were already.
Spending some time in the markets, but there are some new folks again, particularly around the kind of life science and tech.
Here in the Raleigh area, the inbounds from California.
Our noted uptick as well.
And are they looking at primarily new space and how much of that is driving your acquisition decisions or volumes.
Well I think some of them are doing it fairly quickly and making decisions to get into space in some cases that might not be new space that might be a spec suite that we've created or space as is with plans for expansion. So the previously mentioned kind of therapeutic company.
That we signed that was opening out of say Boston and San Francisco their initial need might be close to 10000 square feet, but they project over the next few years, a real growth plan and so we're seeing a lot of that I think in the inbounds is to get a beach head to a new market that they don't have experienced reps, but they've been looking at.
And with an opportunity for for growing so to your specific question on new space versus existing space. I think one thing we are seeing as folks come out of higher dense more expensive market say in the northeast Midwest or California.
This office space and even the new space is a really good to heal in these markets. So if you go back to some of the things we've talked about previously on calls what percent of organizations annual fixed cost is usually around utilities, 9% is around real estate and 90% around people and so.
Playing around the margins on the 9% to deliver a significant improvement to their 90% our value propositions that we're hearing from customers coming inbound.
Thanks, guys.
Thank you.
The next question comes from Dave Rodgers of Baird. Please go ahead.
Yes. Good morning, Brian had you guys talked a lot about prospect list. During your prepared comments and I was wondering if you can dovetail the comment that you had to many and others.
Along with the same lines of is there any evidence in the activity in your portfolio of kind of utilization differences, whether it be you know in buckhead or whether it'd be in suburban Tampa trying to get a sense of you know a parking utilization by metro by asset type and do you see any differences as these tenants are kind of looking from other markets or is your prospect.
List grows is there is there a clear distinguishing factor in what those tenants want today.
Great question, Dave and the good thing is we are kind of monitoring daily utilization of the buildings and the parking and so those buildings that you drive right up to the door walk in and walk up have been pretty busy.
Again, we're running about 25% of physical utilization one thing just to kind of note as you look at all of our suburban B Bbds I'm every one of those locations Submarkets and school districts now have a return to school in the classroom a plan thats going on in one form or the other and Wow.
Now that Hasnt resulted in a whipsaw, everyone being back in the office, 100%, 100% of time we.
We do believe that return to school has a good.
Tailwind to return to work.
The only thing I would add is I think we're seeing a lot more smaller customers.
Finally in all of our markets come back versus the larger customers.
The national companies and all that are also sort of hold their workforces.
At home for the for the meantime, so smaller customers come back versus the larger.
And maybe just to drill down on that one comment Brian said is the drive up walk up assets are performing better from a utilization standpoint. It is there a notable difference.
Well, if you look at the general portfolio and you look at.
Say take camp. Our for example, we're well we're still developing Midtown Tampa and it is a suburban.
But urban kind of a place that we're trading I don't know if I would say its remotely measurable if I could tell you X more are out there but.
But those places where you are driving up walking in we do have the activating it also might probably a little bit to Teds point about the size of some of these customers that are in there. So we have a a greater diversity of the tenant or customer mix in those buildings and so I think that's maybe part of the underlying.
An aspect as well.
Okay I appreciate that and then Ted you guys talked about opportunities and using the balance sheet. The cash on hand to take advantage of opportunities I guess, if you were to think about what opportunities you expect to see.
It doesn't sound like you'll pursue some of the higher prices core deals, but do you expect to do more on the land side will you find some kind of broken developments in process I mean, what do you expect to see it kind of how do you noted the right time to really lean into that.
Sure.
We're sort of looking at everything that comes out we're looking at whether its with core assets the value add assets as well as Lance the sort of hit on all three components I do think we're starting to see some price discovery.
This several transactions that came out in the springtime and subsequently were pulled as a result.
As a result of co that they're now back on the market, we've seen probably a handful a trade in the last call.
Call. It 60 days or so there is a few more that are under contract.
So weve looked at those and look we do with any acquisition, we look at a risk reward and make sure. It hits our return requirements for the way, we look at it and given that the current environment and all that so we look at everything we've got our wish list that we continue to hone virtually every quarter. Those wish list include both existing.
Assets. They also include developments that are under construction and then obviously we're pursuing land.
And it's just it's our natural it's our it's our raw material. If you will for development. So we're always looking to reflect land we're looking.
Looking to upgrade that so we're looking at that as well so I don't know exactly what's going to hit but we're looking at all those opportunities you mentioned.
All right. Thank you.
Thank you.
The next question comes from Jamie Feldman of Bank of America. Please go ahead.
Thank you.
I appreciate all the color on how your markets rank.
In terms of kind of future growth, but if you look at the stats. They also show some of the largest development pipelines as a percentage of total stock can.
Can you talk about.
These projects in your markets and how they are impacting.
The lease space in demand for your assets specifically.
Sure, Jamie I think it sort of depends by market and Submarket.
And a lot of obviously take for example in downtown Nashville downtown National really what's being delivered there is a majority of whats under construction in Nashville is in the CBD, our CBD assets really don't have any expirations until 2025, so were we.
Right now, we're not competing not all against any of that new New development. If you go down to Brentwood Cool springs were competing a little bit but the differential in rate is still pretty substantial then.
Then you go to Rollie Rollie development is really spread out among six different sub markets and a lot of that again is wont be delivered for a while and it's significantly different rental rates, what a lot of our assets are in Raleigh. The.
In mid town or.
Atlanta, Midtown Atlanta has got a majority of the.
New development going on and we don't have any.
Exposure in Midtown Atlanta, now Midtown does compete a little bit with bucket. So we do have some competition there.
And right now again, it's it's a different sub markets and all that and different price points as well. So we're watching the deliveries were competing on some deals.
But it's not you know it's.
It's not like we're competing against all the new development in all of our Submarkets.
Okay, and just to somebody so you would say Midtown.
When you had to pick that was the most.
That would probably be it.
Yes, yes, yes.
The same time on Midtown This is Brian Jamie Youve seen Google go into the building.
Doesn't it started some spec availability and kind of the word on the street is that's taken on the balance of the building Scott Microsoft taking two buildings that were started from a spec standpoint in Midtown Atlanta too. So I would I would also argue while Atlanta as we know has a history of being a and aggressive kind of speculative place.
Tom Wolfe wrote a whole book about it right. It's also showing that.
They are filling up their buildings and there they are winning when they're competing I think market to market.
Okay. That's helpful.
And then I guess back to the investment sales market. So the.
Sales that you've announced for the fourth quarter.
Is there any repricing on those or any renegotiation and then also just what are your thoughts on how much prices have moved for assets.
Sure so for our specific sales.
A large majority of the buildings there was no change in pricing from pre cobot. There was a small adjustment I think it sort of mid single digits on a.
On one of the buildings I think it was all that was so really very nominal difference from what we've seen pricing. So far what's come out you know for the high quality assets core buildings that have long term leases high credit customers really little or no change in pricing is what we've seen plenty of capital chasing those deals.
On what you might call a value add property, that's got some near term rollover or maybe some existing vacancy I think pricing has adjusted downward just because buyers are putting more conservative underwriting assumptions on the lease up where the rollover. So maybe those are down 5% to 10% maybe five to 15, depending on the bill.
Will be in the market, so mark and all that.
Okay.
And then finally Youd mentioned some small tenant.
To save money on works.
Can you give more color on those types of leases and do you think that.
You'll continue to see that what kind of impacted that even have an occupancy.
So it's a good it's a good question Brian here to answer this one.
As noted in the remarks, those were basically 1200 square feet to the largest was 4300 square feet at 40, 304000 square footer was a small law firm.
And they are going to be working remotely and coming back. They basically said, we're going to sit this quarter out I mean quarter like from a game standpoint, you know and they absolutely coming or will be coming back. So to the extent that you have those that may be rolling again small customers, who can we kind of do that who don't have to be in.
Front are connected to their own customers I think you'll continue to see that but it's such a small amount from the overall portfolio I think we feel.
Pretty good about going into that Brendan.
Yeah, Jamie I think in the quarter. It was probably about a 10 basis point impact in terms of occupancy. So it was pretty modest in the quarter.
Okay. I mean I guess the question is do you think that.
Remains a 10 basis point in fact until things get better.
These are ones that have been talking about it since the beginning.
Finally decided.
Yeah. It's good question I mean, it's hard to know it's still early in this process and we're evaluating that so well.
We'll see I mean sort of Disaggregating work from home with the recession impact and everything else I think it's hard to know specifically what all of those moving parts do but you know obviously its a.
You that the overall leasing environment is certainly more challenged now than it was a year ago. So we'll see where that is but I think our evidenced to date is that the you know the customers who have expirations. The work from home has been you know at least has been modest thus far another thing we've done has been fairly proactive too.
All of those that are coming up in the next few years the smaller ones.
Most of them.
Person prefer to keep their office as a moment of pride in a place where they do work and where they continue to nurture the culture of each of these organizations and so what we end up doing is we are looking at some shorter term renewals that allow them to stay in this space and and as we do that we can give a little bit of a.
Concession based on term that they'll commit to renewing to kind of get them and bridged them through this period. So we've actually had a lot of success doing that.
More so than folks just assigned to kind of work off the laptop on the couch.
The other thing I would say of five of the seven that have.
Wanted to work from remote all happen before June Thirtyth, who is really in the in the earlier part of the coated and we've only had two since June thirtyth do that now again.
Our leasing activity to recovery for the small guys has been really good. So it will be interesting to see how it plays out I still think it's early but I do think just the deal flow. We've seen on smaller users has been very positive.
Okay, and then how are you feeling on dividend coverage.
Sensitivity to that.
So Jamie its Mark you know, obviously, you see the Capex numbers down leasing Capex Ti capex down so we're probably.
Obviously have better cash flow coverage than we anticipated maybe coming into the year. So feel pretty good about that you know with some of these dispositions are we expect our future capex to be lower over time, So I think we feel comfortable around coverage.
Jamie the only thing I would add to that is what you've seen thus far if you look at the CAD page that we have versus the leasing page that we've had we've expensed from a cat perspective about $73 million of second Gen Ti and leasing commissions, we've only committed this year under $39 million. So.
So there's always a lag between the commitments and the expense and because our commitments have been low I think that signifies that going forward the cash flow outlook ought to improve a little bit or the coverage ought to improve a little bit as those commitments translate to expenses you know a couple of quarters down the line.
Okay, great. Thank you.
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