Q2 2021 Highwoods Properties Inc Earnings Call
Good morning, and welcome to the Hi Woods properties earnings call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the 1 followed by the 4 on your telephone.
And if at any time during the conference you need to reach and operator.
Press Star Zero.
And as a reminder, this conference is being recorded Wednesday July 28, 2021, I would now like to turn the conference over to Mr. Brendan Maiorana. Please go ahead.
Thank you operator, and good morning, joining me on the call. This morning are Ted.
Please.
<unk> Executive Officer, Brian Leary, our Chief operating officer, and Mark Mulhern, Our Chief Financial Officer assets. Our custom today's prepared remarks have been posted on the web if any of you have not received yesterday's earnings release or supplemental they're both available on the investors section of our website.
Claim and I would start com on today's call. Our review will include non-GAAP measures such as F. O N O Y and EBIT there 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.
And how to the risks and uncertainties, including the ongoing adverse effect of the COVID-19 pandemic on our financial condition and operating results. These risks and uncertainties are discussed at length in our press releases as well as our SEC filings as you know actual events and results can differ materially from.
Subject, where we're looking statements and the company does not undertake a duty to update forward looking statements with that I'll now turn the call over to Ted.
Brendan and good morning, let.
And let me start by saying, we continue to see an increase and more normalized activity across our portfolio and markets.
From these and it remains difficult to predict the progression of the pandemic and economic recovery, particularly given the concerns over variance the leasing and parking for both recovering nicely.
Utilization rates have risen throughout the second quarter core.
Currently around 40% across our portfolio.
Folio.
Up from 30% last quarter.
Based on discussions with our customers, we expect a meaningful increase and your utilization after labor day.
As I mentioned on our last call leasing activity and the first quarter was relatively solid, especially for new deals.
This trend accelerated during the second quarter as we signed 899000 square feet of second Gen leases, our highest total since the fourth quarter of 2019 and.
And included 323000 square feet of new deals.
This is above our long term average.
<unk> of 250000 square feet for new leases.
We signed 52 new deals.
Also above our long term average and our highest quarterly count from new leases since 2014.
Obviously, the strong leasing activity and the quarter hasn't yet shown up on our occupancy stats.
Where we ended the quarter at 89, 5% across the entire portfolio.
This leasing will benefit us in future quarters, as our new customers move in.
With the improving macro environment, especially in our markets, we're optimistic going forward.
Rents.
Signed leases continue to be a little softer than they were pre pandemic, but.
But we believe are holding up reasonably well considering the challenges over the past 18 months.
For the 899000 square feet of second Gen leases signed during the quarter rent.
Rent spreads were down slightly at negative.
0.6% on a cash basis.
And up 8.9% on a GAAP basis.
Overall since the start of the pandemic net effective rents across our markets are down on average 5% to 10%.
Primarily as a result of higher concessions.
On Fortunately net effective rents have stabilized and the first half of the year.
Further we continue to see and migration to higher quality buildings with well capitalized owners, which plays to our strengths.
Our results, we delivered <unk> 93 per.
Sure and the second quarter.
Our same property cash NOI growth was very strong and 11, 1%.
Which benefited from the payment of temporary rent deferrals agreed to during the first months from the pandemic.
Excluding these repayments same property cash NOI growth was.
It still has been a robust 5.3%.
And as illustrated in last Night's release, we have updated our 2021 <unk> outlook to $3.62 to.
To $3.73 per share.
Up 7.5 cents at the midpoint.
And our prior outlook.
At the midpoint 3 to 4 cents of the increase is due to our improved operational outlook and 4 cents is from the anticipated net impact of our planned investment activity, which consists of the pack acquisition and.
And the sale of and.
And additional $207 million to $257 million of existing non core assets by year end.
In addition to the increase and our F. F. O outlook. We also raised our same property cash NOI growth outlook to $4 to 5 to 5.5%.
Sent up 50 basis points at the midpoint.
And we have increased the low end of our occupancy outlook.
Our new range is 89.5 to 91, 5%.
Moving to investments as you all know we have agreed to acquire a portfolio of office assets from pack.
And accelerate the sale of $5 million to $600 million of non core assets by mid 2022.
And we're excited about doubling our presence and Charlotte and entering the same.
Baby D.
Adding to our leading position and downtown Raleigh.
And entering the North Hills, Bvd and Raleigh.
We closed 1 disposition and the quarter.
Hundred percent leased preserves 7 property and north Tampa for gross proceeds of $43 million.
We have numerous other non core properties in various stages of the marketing process.
Our disposition plan is tracking our expectations both.
In terms of pricing and timing.
And we believe we are well positioned to meet our target of $250 million to $300 million of noncore sales by the end of 2021 and.
Including the $43 million already closed.
As I mentioned, while we are highly focused on closing.
And the portfolio acquisition from pack and executing on our non core disposition plan and we continue to assess additional investment opportunities.
Outsized job growth and population growth continue to fuel interest and sunbelt sunbelt markets, which has caused pricing for high quality assets.
<unk> and the <unk> of our markets to remain competitive.
Rest assured we will continue to be disciplined allocators of capital and <unk>.
Seek only those opportunities that we believe provide healthy risk adjusted returns.
Turning to the <unk>.
Development.
Our pipeline is 3.
<unk> hundred $94 million and 78% pre leased.
Our 285 million of Sherry and project and Nashville is on track.
Budget and will deliver in the fourth quarter.
And Virginia Springs to our recently delivered project and the Brentwood Bvd of Nashville, We signed 2 leases.
Leases totaling 20000 square feet during the quarter.
It brings the lease rate to 50%.
5 quarters ahead of pro forma stabilization and.
We have strong interest and additional space.
Finally at our office project and Midtown Tampa, while we didn't find any leases during the quarter.
Strong interest from a number of prospects and remain confident and the long term outlook for the development.
The overall Midtown and mixed use project is just now finishing up with additional retailers opening by the day.
There is growing energy around the project whether from prospective office users.
We have new residents.
Our customer.
Customer shopping and dining.
In addition, we are starting to see increased interest from perspective build to suit and anchor customers.
We believe this is another sign of a return to healthy office fundamentals across our markets.
We have up to $250 million of potential development announcements and our 2021 outlook.
The land bank that can support more than $2 billion of future development and.
And we hope to announce new projects later in the year.
2 other items before I turn the call over to Brian.
First we announced a 50 cent quarterly dividend last evening, which equates to an annualized amount of $2 per share.
This represents an increase of 4.2% over the prior amount is our fifth dividend increase since the start of 2017.
We've long stated that our cash.
Cash flow continues to strengthen.
Which provides strong dividend coverage, even with our higher payout.
Second as we also announced last evening Mark plans to retire at the end of this year.
Mark has been and exceptional contributor to the high woods over the past decade first as a board member.
<unk> and second is our CFO.
I know half of the entire heart entire Highwood family and I say it has been our privilege to work alongside Mark.
And remarks stewardship, we have maintained a fortress balance sheet continued our long standing practice of candor and transparency and further strengthened.
Streamlined our already strong financial reporting and accounting processes.
We wish Mark and his wife, Kelly and the rest of the mall her and family the best as he promotes himself into retirement.
I'm thrilled that Brendan will assume the CFO role pronged upon Mark's departure.
And as you all know Brendan has been a key contributor to our leadership team since his first day at high Woods and May of 2016, and he has been deeply involved and all of our strategic investment and financing activities.
We expect a seamless transition.
Brian.
Thank you Ted.
And good morning, everyone.
With 2 quarters behind us and it's become apparent that the portfolio resiliency. We highlighted last quarter is proving their able foundation from which our team is delivering solid results.
Our markets are open for business, our customers have returned or are returning to the office and most customers see their workplace.
Places and important tool and delivering results.
There are signs across the portfolio that give us optimism pitcher.
From an office utilization rates and Orlando that have climbed over 60% and <unk>.
Cash flow Nashville Airport, surpassing 2019 passenger levels.
And 1 of our downtown Pittsburgh restaurants and.
<unk> sales, 20% higher than at the same time and 2019.
Couple these anecdotal signs of life with major job announcements made since the start of the pandemic and represent 50000, new jobs and over $7 billion of direct investment.
And there is an undeniable momentum and a return of optimistic sentiment permeating.
And our markets.
With regard to our customers who married at a rent deferral and during the depths of the pandemic over 80% has been repaid on schedule.
And those restaurants repaying debt percentage rent the majority should be back and the black early next year.
But these needs based accommodations playing out as underwritten and this is hopefully.
At this time, we need to discuss this subject on our call.
And just had highlighted leased and accelerated in the second quarter with Raleigh, Atlanta, Nashville, and Richmond, representing 75% of our total volume.
Occupancy was relatively flat sequentially and in the quarter at 89, 5% and our state.
<unk> last quarter, we expect occupancy to remain steady throughout the third.
Given our strong leasing activity and positive overall market fundamentals. We are confident this will improve in future quarters as reflected in the midpoint of our updated year end occupancy outlook.
Now to our markets after weather.
And the land of pandemic, Atlanta, Charlotte and Raleigh posted positive net absorption for the quarter.
He led the pack this quarter with 321000 square feet signed.
Occupancy and Raleigh decreased slightly from last quarter to quarter, ending at 96% with market rents up 4% and office employment growth.
Growth up 4.5% both on a year over year basis.
And all of this is before the impact of recent announcements by Google and Apple that will add thousands of new jobs to the market.
And Nashville, we signed 106000 square feet and ended the quarter at 94, 1% occupied.
And whether our 111000 square foot, Virginia Springs, II development project is now 50% pre leased and we have solid interest and the balance.
This project is scheduled to stabilize and the third quarter of 2022.
We remain on schedule and on budget with assurance Global headquarters and look forward to placing this 285 million dollar assets.
And your service and the fourth quarter.
As noted earlier music city is back and business with travelers outpacing 2019 levels, including 350000 downtown for the fourth of July.
And on the jobs front positive momentum continues and the city, where Oracle has now closed on approximately 60 acres for $1 billion campus.
Asset and where they plan to hire over 8500, new office using employees.
And Amazon has commenced construction on the second tower for their operations Center of excellence assigned they expect to continue hiring workers and the city to fulfill their 5000 job goal there.
Moving on to Atlanta and were up our team signed.
150000 square feet of leases and the quarter year.
Year over year office employment growth was 6.1%.
Higher than the national average of 5.5%.
And the Atlanta market experienced positive net absorption on the quarter, while market rents dipped slightly down less than 1% year over year.
And over not to be outdone by its bigger rivals Richmond leased over 98000 square feet for the quarter and is off to a great start and the third quarter with interest from tech and insurance and construction prospects.
Overall, we're encouraged by the strong new leasing activity our team delivered and the first half of the year and we're off to a solid start early in.
And the third quarter with several new leases already signed and good prospect activity across our markets.
It's close.
Our markets and portfolio continue to not only show their resilience, but our centers for activity and growth.
While we readily and now acknowledge.
That how and.
There are people can and will work has been influenced by the forced experiment and we've all been subject to these past 18 months.
We are more enthusiastic than ever and about the power of place and cultivating talent and culture.
<unk> problems and achieving great things at.
And just through our workplaces.
Place, making efforts and we enable our customers and their teams to achieve together what they cannot apart.
And because of this we remain bullish on the days ahead.
Art.
Thanks, Brian and the second quarter, we delivered net income of $59.3 million or 50.
And where cents per share.
And <unk> of $99.5 million or <unk> 93 per share and increase from 91 and the first quarter.
The quarter included the $43 million sale of preserve 7 which did not have much of an impact on our financial results since.
7 didn't close until late in June and.
In other words this was a relatively clean quarter without unusual items.
Our results benefited from a full quarter contribution of the forum, where we acquired our partner's 75% interest for $138 million incremental investment and Jan.
And <unk>.
And included a full quarter of NOI from our Glen Lake 7 development.
As a reminder, Glen Lake 7 as our $44 million 125000 square foot development and Raleigh that is 100% leased and was delivered in March.
In addition, we had.
January our same property.
NOI growth.
Combination of these items approximately <unk> from a net investment activity and 1 cent from higher same property income drove the 2 said sequential increase in the quarter.
Our balance sheet is in excellent shape.
And April we used cash on hand, plus borrowings on our revolver to repay at par and the remaining 150 million of notes that had an effect Australia of 336% 2 months earlier than the stated June 2021 maturity.
We funded.
$55 million of earnest money deposits for the planned acquisition of office assets.
And the second quarter and deposit it another 5 million subsequent to quarter and.
This leaves approximately $200 million of cash required to initially fund the remaining cash portion of the purchase.
Funded price.
We have multiple sources of available liquidity to satisfy this obligation.
Including a 6 month unsecured $200 million bridge facility that we expect to obtain from J P. Morgan.
Nearly $600 million and remaining capacity on our 750 million.
Our revolver and 43 million of 10, and 31 exchange funds held in escrow from preserve 7.
Said differently once we close the pack acquisition, we will still have plenty of liquidity available for potential future opportunities.
Further we are 87% funded.
Funding on our $394 million development pipeline, which leaves roughly $50 million remaining to fully fund the 3 remaining projects and we have no debt maturities until November 2022.
During the quarter, we issued a modest amount of shares.
Shares on the ATM at an average price of $46.11 per share for net proceeds of $6.8 million.
This is our first issuance since second quarter of 2017.
<unk> ATM issuances remain 1 of the many arrows in our quiver.
And we continue to believe our and efficient and measured way to fund incremental investments, particularly our development pipeline on them.
A leverage neutral basis.
Turning to our expert expectations for the rest of the year, we've updated our 2021 and <unk> outlook.
$3.62 to $3.73 per share with the midpoint up 7 and a half cent since April and up 9 and half cents at the midpoint from our original 2021outlook provided in February.
Rolling forward from our prior outlook and April we have increase.
Kris the midpoint, 3 and a half cents on an apples to apples basis or up 6 cents at the low end and <unk> at the high end.
This improved operational outlook is driven by higher same property NOI and increased contribution from development properties.
In addition.
The updated F. O outlook includes the anticipated impact from the planned acquisition from pack and our plan to accelerate noncore dispositions of $250 million to $300 million by the end of the year, including the sale of preserve 7 and that closed and the second quarter.
This net.
Investment activity is this is expected to have a 2 cent to 6 and positive impact on 2020.1 F F O b.
And the high and low ends of the range are largely dependent on the timing of the pack acquisition and.
And planned dispositions.
And.
In addition to our improved 2021 F. O outlook. We also increased our same property cash NOI growth outlook to a range of $4.2 5% to 5.5% that's up 50 basis points at the midpoint.
Since the pandemic we've regularly commented on.
Net and revenues and while we're still tracking well below 2019 levels, we have seen an uptick and parking over the past couple of months contributing to our improving outlook.
In addition to solid F F O our cash flows continue to strengthen.
Something that we have often highlighted but where it's.
And partly materializing and our reported results.
Our expectation for continued cash flow growth is being driven primarily by delivery of our development projects and continuous recycling out of older more capex intensive properties Inc.
And to newer more capital efficient properties.
As Ted mentioned this improved cash flow outlook helped drive our decision to increase the quarterly dividend for 2% to an annualized rate of $2 per share.
Yeah.
And finally, thanks to all of you on the phone for your patience and support and my time here and high Woods.
I hope to see many of you before I go at the end of the year.
As you all know Brendan is exceptionally well prepared for this role and will serve all highway stitch once well.
The future here with Ted Brian and brand and at the helm is very bright and I wish them all the best.
Operator, we are now ready for your questions.
Thank you we will now begin the question and answer session. If you would like to register for a question press. The 1 followed by the 4 on your telephone.
You'll hear at 3.2 and prompt to acknowledge and request.
If you.
Your question has been answered and you liked withdraw your registration press. The 1 followed by the 3.1 name and police force first question.
Our first question comes from the line of Manny Korchman with Citi. Please proceed with your question.
Hey.
Good morning, everyone.
Brendan maybe it'd be helpful. Just so we can figure out what the trajectory is going forward here. If we could talk about sort of where you are at least 3 days versus your occupied rate and.
And what are you seeing any difference there and then the spread between those 2 versus history.
Yeah.
Yeah, Hey, good morning.
Yes, that's a good question so I think we.
We don't report lease rate, but what I would say and our lease rate is higher now than on the spread between our leased rate and our occupied rate is wider now than what it historically has been and a lot of the leasing that we did and.
Second quarter is showing up and that lease rate and gives us that gave us the confidence to increase the occupancy range for a year and so I think you are.
And we're seeing it and the leased rate.
We don't report that number, but thats driving a lot of the confidence that we had to move that year and occupancy.
And the circuit up 50 basis points, and the midpoint and 100 basis points at the low and so it is all that leasing activity is materializing and that outlook. It just didn't show up and the second quarter numbers.
Great and then the other question I had was just on the Atlanta market.
It's been slow to recover occupancy there just what are you seeing the butter market and adjusted the timing thing or are you a little bit more worried about Atlanta.
Hi, Manny, it's pad and I'll start and maybe Brian can jump in yeah look I think.
And some explorations.
And then and our Buckhead.
Assets over the last few quarters or whatever but we're still bullish very incredibly bullish on Atlanta job growth. There has been very strong obviously, you had a pretty broad based as well the technology companies get a lot of headlines, but there's been many more inbounds. So it's competitive market right. Now there is you know there is and elevated.
The weighted vacancy, but we feel very confident long term, we have the right assets and we're and the right sub markets.
Manny Brian here not much to add other than you know Atlanta is the biggest of all of the markets is probably the most complex in terms of the kind of the bvd's within it and many of those could stand on their own kind of nationally and so we.
We are seeing tremendous growth and.
Some of the bigger movers that we've seen even into.
And kind of the central perimeter on tech and they're just now kind of moving in and turning the lights on and so.
It's kind of a rule of thumb on economic development, 1 job at a minimum creates another job and I'm not saying, they're all unnecessary office occupying but we definitely do like.
And from Atlanta does have and some great things going forward and we do see things improving there.
Thank you all.
Thank you for your question.
Next we have a question from the line of Jamie Feldman with Bank of America. Please go ahead Sir.
Thank you first congratulations Mark and Brendan we're going to Miss you and REIT land, but.
Part of the thing what comes next to you and.
And Brandon I'll do a great job.
Thank you, though I guess.
Alright, sorry go ahead no. Thanks, I appreciate it and look forward to catching up before I go.
Really appreciate it.
Absolutely.
And we've seen some of your peers.
And the office market talk more about being more willing to step into the value add acquisition market here.
And just what are your thoughts on you said you have a good amount of capital you could put to work I mean, how willing are you now.
And they're going in and start buying some vacancy across your markets.
And we're absolutely looking at everything that's on the market, our parents and sharpen where underwriting from different.
And that are out there so again, what's been nice and be able to see the activity. We're seeing on the market just happened the boots on the ground with our.
And local leasing teams 3 and.
The momentum and the activity and the market gives you more confidence and if we wanted to go out and buy the vacancy. So we continue to work on.
And we update on a quarterly basis and.
And it's a we're open for business and we can find the right opportunity that's priced appropriately from our standpoint.
Okay and.
And I guess, along the same lines I mean, now that you're starting to see the signs of coming out of the pandemic do you think about your market exposure heading in versus where it is today or maybe where you think you want it to be.
Given some of the changes you have seen in terms of tenant demand and and where you're seeing more growth and others and do.
He interest and changing your portfolio exposure at this point.
Sure well you know when we close vortex when we will have doubled really gone from zero to 6 or 7% and Charlotte over about 18 month period of time, Inc.
Dublin and with the acquisition of Vortex, and we're thrilled to death.
Debt with the activities were seeing and Charlotte So that's.
We like that exposure and we think there can be more exposure over time, obviously, what we've done to date has been acquisitions, we do want to do development over time as well.
But we are so I think that other than that.
And I think we like the Raleigh exposure and we like Atlanta, and we like Nashville as well. So we're seeing the most activity is where we've got the most exposure. So I think our market mix right. Now is there's pretty good many Brian here 1 of the other things we're doing and so we look at the existing portfolio and opportunities for those kind of value add is an opportunity to bring and the mix of.
<unk> uses to leverage existing parking or structured parking.
And with hotel and residential units and we have that we've gone through some resilience. During this time to enable us to do that and so we see that kind of to your question on the.
And the mix, we do see a talent is really that.
That currency that all of our customers are so focused on and so they're communicating and ask that their workplace is kind of core to their culture and core to creating this compelling <unk>.
And of growth and bringing on people back.
So that's part of the look when we take a look at the existing portfolio and opportunities to add and Jamie.
And just to round out and maybe to make all of them and to answer your question.
It's Brendan what I would say and I think certainly expect a continued rotation of assets throughout the portfolio as we typically have I mean, the preferred transaction or the debt market rotation plan those are obviously.
And at large ones are similar to that Kansas City.
And with with purchasing monarch and Suntrust, a few years ago, but the normal cadence of non core dispositions of $100 million to $150 million a year with recycling that and.
Additional growth opportunities I think you should expect that to continue and I would say the pace of that rotate.
Rotation is unlikely to change going forward.
Okay.
And then as you look ahead to your exploration even through 'twenty..2 are there any large known move outs at this point that we need to be thinking about.
Sure not really the largest 1 we have $3.22.
In December 'twenty, 2 it's a 62000 square foot exploration.
And we do know, they're vacating and after that it's.
And then.
I'd say.
Less than 10 full floors, even when I'm actually we've got a 50 on.
And it's mid next year and then it's from 25 and.
So not a lot of big exploration and the next 18 months.
Okay and.
And then do you have.
There's a couple of and.
Unsecured bank term loans expiring at the end of the year or at least that.
The swap Burns off I'm, just curious what your thoughts on and financing.
And third in there.
Well Jamie.
Jamie Yes, the swap Burns off and January that's right, but the natural maturity on that loan is not until November of 'twenty, 2 but I think what's likely and I know we talked about this and April with the expected disposition proceeds to help fund the preferred acquisition.
Some of those because we can pay the terminals off.
And without penalty and early the likelihood is as we get those disposition proceeds in the door first use of those and probably the 2021 proceeds will be to pay.
Pay down the line and the acquisition bridge loan and.
And then the additional proceeds which likely are to come in the door and and the first half of 'twenty 2 probably assuming we don't have anything outstanding on the line, which is probably likely would be used debt pay down those term loans.
Both of them.
Yes, I mean it depends.
And on on obviously, the amount of proceeds that come and the door, but those would both be b.
<unk> and could be there I think ultimately what we said when we announced the acquisition is it probably will take into the third quarter of 2022, maybe even in the fourth quarter.
Quarter to kind of get the debt stack to be normalized because there is a little bit of a challenge of when some of the debt rolls and to be optimized. So I think there'll be a little bit of noise and sort of that debt stack as we move throughout 2022, but I think ultimately as we get and the second half of the year it should be that should get to us.
A pretty normalized rate, that's where we think we will have on the disposition proceeds and the door obviously.
As we mentioned and the acquisition, which should have closed sometime in the third quarter here and then and then our balance sheet should be back to normalized levels by <unk>.
Sometime in the and the third.
From next year.
Okay, Alright, great. Thank you.
Thank you for your question Sir.
Continuing on our next question comes from the line of Rob Stevenson with Janney. Please go ahead Sir.
Good morning, guys can you talk a little bit about.
Third quarter, what Youre seeing on the development side are you getting close to any development starts or could we see the pipeline essentially go to zero and assure you and completes and the fourth quarter.
How should we be thinking about that.
Sure.
Obviously, our outlook for the year zero to $2.50.
We've got multiple conversations.
And on right now and multiple markets, both build to suit and pre leased.
And what would be a pre leased development starts.
So I think we're making good progress these things just take time and we've been in discussions with.
Several for a long time, but.
And I'm hopeful and we can be in a position.
And I'm going on.
From announcements later this year.
And then.
And just maybe to pile on we are seeing a number of customers.
This is kind of definitely talk on my own book, but they see the workplace as a core component of.
Their culture and Craig.
Creating a new <unk>.
<unk> is an important.
Component to compete against the couch or the other competitor for the talent and so we've seen that pick up of companies looking at maybe moving to new buildings, new space and so that's part of that inbound development interest.
And I guess the other question there on.
On the development side is given your commentary about where effective rents are.
Down.
Where from where they were I mean, how would the yield on a development start that you do today, given where market pricing is compare to pre pandemic or you're looking at a slightly lower or.
Or given escalators and everything else that you think that the development same development would.
Be roughly similar how should we be thinking about that as well.
So Rob Brian again, great Great question from from our perspective, there is really kind of 2 ways to mitigate the escalation and kind of preserve yield.
Just to highlight.
And we do see Escalations on costs kind of across the board we're actively completing.
Some complicated big projects across multiple markets right now so we have real time pricing with our gcs and sales which is super helpful. So we're getting good information.
First and foremost we believe.
And cost escalation as a function of supply chain inefficiency and delays everything from kind of commodity raw materials going through the system to even just HVAC units being delivered so we look we're looking forward to that leveling out as goods and materials began moving through the system.
That being said, we don't see it going down.
A lot of that and I loved it and see a construction price really go down and but we haven't really seen that over.
Last decades.
Tongue and cheek. The good thing is were not building anything on award.
And so we're really looking at more of the more sophisticated and kind of material providers and gcs, who come back debt to cost containment on preserving yield and a.
And it looks a price enough napkins right now because many poss and theyre soft cost spend and <unk>.
Keep going back to the GC community updated pricing.
And with less visibility and to actually what we've rebuilt and when and when we built.
And <unk> and subs have quite a lot of cushion and contingency in there. So what we've done and we've continued to advance design.
A lot of we found that greater certainty equals greater pricing visibility and then some way of savings so.
So we're actively finishing that.
As you move closer to get visibility there now on the revenue side back to suddenly have already mentioned the quality of the workplace is being recognized as a key considering.
You shouldn't and competing in and retaining talent and so I think some of you before we've had to listen to me talk about this thing called the 190.90, well Jones Lang Lasalle used it a little differently, John Zang sauces, and typical organizations can spend $3 a foot on utilities $30 a foot.
On rent and 300.
Hundred dollars a foot on people and so what we're seeing and is that that workplace at $30 a foot if it's a key contributor to maintain.
Deferred or attracting that 300 a foot.
Companies are happening and.
So for new product for highly monetized talent supportive workplace, making worse.
We're seeing that the market will pay for it and so we're kind of attacking and 2 way sorry for the long answer.
No that's helpful and.
And then Mark you talked in your prepared comments about parking still tracking below 2019 levels, where argue actually parking today.
Most recent month or.
Quarter track.
Tracking on parking and other occupancy dependent revenue versus pre pandemic.
Yes, Brent and I give you more specifics on the exact numbers, but what I would say as you know we've had.
Talking 40% kind of occupancy and the buildings and spread across markets with maybe some of some of the <unk>.
Mahler tenants coming in sooner.
Sooner than the larger companies, but we've had pretty good transient parking and some of the markets Orlando in particular has had really good performance there. So.
I would say, we're kind of on track to where we originally forecasted and get out.
Ill.
And give you some numbers sure yeah, Rob So we've done on parking revenue, we've done $10 million year to date, and we probably think it will be that will accelerate a little bit and the second half of the year because of the trends that Mark mentioned, so let's call. It maybe in the second half of the year kind of 11 million and puts us at and 21 million and for the year.
And that compares to our original 2020 budget was about $26 million. So we're still down call it $5 million and down about 20% on parking revenue, we do like the trends that we're seeing and we're hopeful that those things will fully recover as we get kind of over.
For several quarters, but it's still it's still a little bit of a.
Still a little bit of a laugh there versus where we were a year and a half ago and Rob Brian and Mike just add a little additional color just on the op side.
<unk> markets, where our parking and support special events say Orlando next to the Doctor Phillips Performing Arts Center and.
The next Bill they had 350000 people for July 4th and Pittsburg that has <unk>.
Coming back to the Plaza there.
And is driving transient parking and a way that might've been been hired and we might have had in 2019. So.
And so we're feeling.
Optimistic there.
And are there any notable expense savings that you are still realizing from from not having tenants back at full occupancy that are going to dissipate as we go forward that will offset some of those parking revenue gains.
Yes, there is some of that so I think you probably can't see that.
And 19 and the.
Trends of what we've got both if you look at kind of what we've done year to date from a same store perspective, and both from kind of and <unk> perspective, now off in the third quarter for US is a seasonal low just because operating expenses tend to be higher and then layer on.
That repopulation of the office buildings, which will also drive opex up a little bit and there will be some of that now what we have said is we still think the latent growth and parking revenue returning back to normal versus kind of getting opex back to normal is still a net positive for us at both normalized.
But we will we do expect to see a little bit of pressure on opex as we move throughout the year as folks make their way back into their offices.
Okay, and then last 1 from me, what's the current expected timing for closing the preferred Department acquisition.
And we're getting close.
Wise.
It's a big transaction very involved lots of moving pieces.
So we're pleased on the wide closings going.
And it's obviously done so we're on track to meet the.
Meet the timeline, we've outlined and very confident is going to close there is a soft loan assumptions, we got to get done.
Close we feel good about it close along the timeline we set.
And that 1 asset that they were trying to market that you may or may not acquire is that at this point likely to be acquired by you guys or is that likely to be sold elsewhere.
It is currently being marketed for sale.
I think the way the processes go and it's going.
And so well so don't know for sure, but I think there's a good chance it won't be included.
Okay, Thanks, guys and congratulations Mark and Brendan.
Thanks, Rob.
Thank you for your question before we move on to the next question, we just like to remind everyone you'll see depressed the 1.
And pretty soon.
Sure.
Just a quick question.
And next we have a question from the line of Dave Rodgers with Baird. Please proceed with your question.
Yes, good morning, everybody Mark Thanks for all the help over the years, good luck and congrats Brendan well deserved recognition for all your hard work.
1 I wanted to start with Brian if I could on <unk>.
The leasing topics and maybe 2 specific questions on leasing and the first I would say is it seems like given the larger amount of leases that you signed a number of leases that theres maybe.
Bent towards smaller lease signings and do you think that's a function of what we expect to see going forward is that a function of your availability.
Any of the markets, you're leasing and if that's a possible takeaway and <unk>.
Question on leasing would be the terms and the leases are you seeing more.
Lease termination options from tenants or earlier lease termination options from tenants any changes and kind of how that is unfolding here in the near term.
Dave good.
Questions and thanks for asking a couple of things.
The bigger users kind of in general across the board. The bigger users are delaying a lot of their bigger decisions with regard to return to work space utilization and where they might be moving to or not so that's.
And we've kind of are you seeing that across the board.
Good.
Other than some of them looking at 2 or 3 years out about getting into a new building. There are generally kind of moving slower to understand gain and folks back. So that's first thing. So I don't know if it's necessarily.
And predictor of the future or if it is applicable to the entire portfolio.
So because we have a pretty good mix of small and medium and size and large size customers, but thats generally.
<unk> 2 term it's funny I thought you were going on 1 way and so I'm going to answer 1 thing you didn't ask this last quarter. It's interesting we saw a significant improvement and the actual length of term.
And of the deal. So we would quantify something of short term 2 years or less through the quarters of the pandemic, we probably had 28% to 30% of the deal churn being in that short term range only 9% this quarter. So we're <unk>.
Average and term now going into the third quarter looking north of 5 years.
Following longer which is great and we still have some folks kind of kicking the can because they need to make bigger decisions, but I think we're starting to see people being more confident and longer now to your specific question on termination options.
Suddenly, we really buy pretty hard because.
Most of these customers want a pretty good.
<unk> gained and Ti right and so from our perspective.
Theres, a certain amount of period and need.
And payers and air to Merit and that kind of Ti contribution so to the extent you're seeing any kind of.
And our nation options, they are probably 7 plus years.
And there's going to be a full reconciliation with regard.
Hard to unamortized Ti and commissions, but.
But not we're not seeing it too sure there are some customers who say they're their occupancy is tied to some kind of state contract or some other kind of major deal.
And so we definitely try to be partners as best we can but we definitely pushed.
Pushback as best.
And investment.
That's helpful. Thanks for that Brian maybe 1 for you on the non core asset sales I mean, since you've kind of talked about the noncore assets sales, let's say over the last 6 to 9 months.
And it all if pricing improved on those assets.
Yes day. So we've got as you know we've got a mix of assets.
And that we've got out and the market, we've closed $43 million, so far and others.
<unk> tenant on that.
Asset and we've got incredibly strong pricing on that so what we're seeing on the single tenant assets incredibly deep buyer pool.
And then very good price and so we've been very pleased and pricing and some.
Cases has exceeded our expectations and then we've got the more multi tenant or value add deals that may have some vacancy or whatever I said, so I would say that pricing has met our expectations the buyer pool, and there's a little a little less deep and theres still plenty of buyers out there to make a market. So I think.
So our programs right on track on timing and from a pricing perspective as well.
Alright, Thanks, Dan Brennan and maybe 1 last 1 for you I saw the adjusted cash same store NOI growth would have been just over 5% excluding the deferrals.
And maybe you can give some pieces to that because I was thinking.
And I think I saw it 200 basis point drop year over year and actual physical occupancy that should have offset the escalators.
And then the rent bumps and the last year or the <unk>.
Leasing spreads have been more flat so.
The big jump and the adjusted numbers seemed high so I don't know if there was something else burn off on the parking is part of that any any.
Any color you can kind of piece up to that 5% on a on a core basis.
Yeah, Dave that's a good question and just in general I think that.
And it goes to show just kind of the.
The movement.
And movement and the lumpiness by quarter, but in effect what.
What happened last year and.
And that in the first half of the year. If you recall, we had a lot of strong leasing activity that occurred in late 2019, those leases generally commence and the first half of 2020 and carried with them.
On free play.
And to it so we're kind of anniversarying against some of that which is being that different that you talked.
<unk> out.
And probably making the delta between kind of net cash and GAAP same store NOI growth wider and the first half of the year that will kind of normalize as we go into the second half of the year and even in the second half of the year, we've actually got a little bit of a headwind from the deferral payments.
And that we had in the third and fourth quarter of last year compared to this year. So all of those things are going to kind of balance out, but what I would probably point you to is last year. If we exclude the net deferral payments, we were up about 3% on our same store pool this year.
<unk> overall, which includes the net deferral is let's call it about 5%.
At the midpoint of the range do we have said the net deferral and repayment are going to add about 125 basis points to that so we're going to be in that 3.5% to 4% range, excluding the deferrals and I think that Ah.
Our guidance good.
Trend line over those couple of years and I think kind of shows generally what what we've.
Endeavor to kind of deliver on a same store basis and that sort of 2.5% to 4% range. I think is where we've said we feel like things are working well for the portfolio and Thats where.
That's what we would be if you look at that over a couple year period, which kind of negate some of the noise that happens from a quarter to quarter perspective.
Yes, I appreciate that thanks Brennan.
Thank you for your question.
And now we have a question from the line and victim Malhotra with Merck.
Please go ahead Sir.
Thanks, so much and.
And congratulations Mark and Brendan so.
And all the all the hard work.
I appreciate it.
Maybe just to clarify you talked about the 2.2.5% to 4% same store kind of run rate, which we're all used to.
Certainly.
And not looking for any specific guidance for 'twenty, 2 but given on the leasing debt.
Occurred and the uptick in new leasing specifically can you give us some sense of the.
And the trajectory or.
And anything we should be aware in terms of moving big moving pieces as we think about updating models for 'twenty 2.
Story, yes, obviously without <unk>.
Not prepared to provide kind of and outlook for 'twenty, 2 but just thinking about large moving pieces I guess, what I would say is there is and as we have.
Disclose in the updated 2021 outlook, we do expect year end occupancy to be higher.
And we thought at the beginning part of the year. So that was part of that move that generally should be a positive now I would caveat that a little bit with what I had just mentioned the Dave on the prior question often some of those those leases can include some level of free rent and things like that so there is there is there is often a lot of moving parts.
And then we are.
In the specific leases, but in general I think trend line on occupancy we feel like it's positive for the back half of 2020, 1 and that should translate into positive things as we think about 2022, there really isn't a lot in 'twenty 2 with respect to kind of the same store.
Store pool that is going to change at least as it where it stands now so I would say 'twenty 2 should be a pretty clean.
From a same store pool perspective, but certainly the occupancy trends and the back half of the year should should bode well as we go forward over the next several quarters.
Okay, and then just 1 more so.
And clearly the demand continues to pick up from Dec, the job growth pretty strong.
I'm just wondering if you look at Charlotte, particularly a market where youre looking to spend for the cyclic.
Cyclically Theres a lot of supply.
That's not free leads and hitting the market and I'm just wondering kind of.
And what Youre looking at across some of your key market.
Hey, Vikram, Brian here.
You may not know this 1 of the extra <unk> I get is the Charlotte Division lead.
So surely it's interesting you know they had a couple of million square feet under construction a few years ago.
And it ended up all being fully spoken for by the time. It came through there's another couple of million and kind of underway now and we look to the inbounds from out of market coming to Charlotte. So there was a us fully spec building under construction and the south and empty.
And maybe very minor leasing and then this past quarter USAA and ounces Theyre, taking basically 100000 square feet and moving and a bunch of people and they're from out of state.
Even right next door to us at legacy Union and Uptown.
Robin Hood.
<unk> come in and as leasing 50.
<unk> thousand square feet and so.
That's it.
Charlotte I think you do get some good chunks of occupancy from inbounds and companies growing so.
I think the other thing too is there's really a few theres really 3 submarkets.
And for class a offices, obviously uptown is still.
The largest to kind of a champion and a and heavier weighted if you will south and as the emerging.
Market right next to Uptown I mean, there are literally adjacent to each other and you can.
Across the Street and you and 1 of the other and then South Park. So it's a fairly constrained.
Market within those.
Those submarkets as well so I think we feel pretty good there international has been on the radar for a lot of development, 50% of all the development naturals and downtown.
A great deal of that was pre lease some things have started fully spec during the pandemic, which we haven't seen anywhere else. So that was interesting.
Interesting that there are folks I think it's still bullish enough on Nashville to capitalize kind of traditionally capitalized speculative development.
We don't have any role and downtown national and for 2025.
Feel really good about our development site surrounding we have multiple development sites surrounding assurance headquarters.
As well so.
Have eyes wide open on every deal that's on.
On a construction and that's in development, that's on the boards and on inbounds.
And right now demand is still strong.
Great. Thank you so much.
Thank you Sir for your question I'll now turn the presentation back to our presenters for their concluding remarks. Thank you.
Well. Thank you all for your interest and hardwoods and thank you for joining the call. Today. If you have any follow up questions. Please feel free to reach out to any 1 of us.
Thanks again.
Thank you and that does conclude the conference call 6 day, we thank you all see your participation and ask that you. Please disconnect. Your lines. Thank you once again have a wonderful day.
Okay.
[music].
Good day.
And.
Thanks.
[music].
And then.
Okay.
Yes.
And.
Yes.
So.
[music].
Okay.
Yes.
Hum.
[music].