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Highwoods Properties, Inc. (NYSE:HIW)

Q4 2008 Earnings Call

February 12, 2009 11:00 AM ET

Executives

Tabitha Zane - Vice President, Investor Relations

Edward J. Fritsch - President and Chief Executive Officer

Michael E. Harris - Executive Vice President and Chief Operating Officer

Terry L. Stevens - Senior Vice President and Chief Financial Officer

Analysts

Cedric Lachance - Green Street Advisors, Inc.

James Feldman - UBS

Operator

Good morning and welcome to Fourth Quarter Conference Call. During the presentation, all participants will be in listen-only mode. After which, we'll conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to Tabitha Zane. Please go ahead, ma'am.

Tabitha Zane

Thank you, and good morning. On the call today are Ed Fritsch, President and Chief Executive Officer; Terry Stevens, Chief Financial Officer; and Mike Harris, Chief Operating Officer. If anyone has not received a copy of yesterday's press release or the supplemental, please visit our website at www.highwoods.com or call 919-431-1529 and we will e-mail copies to you.

Before we begin, I would like to remind you that this call will include forward-looking statements concerning the company's operations and financial condition, including estimates and effects of asset dispositions and acquisitions, the cost and timing of development projects, rollover rents, occupancy, revenue trends, and so forth. Such statements are subject to various risks and uncertainties. Actual results could materially diff from those currently anticipated due to a number of factors, including those identified at the bottom of yesterday's release and those identifying in the company's annual report on Form 10-K for the year ended December 31, 2007 and subsequent reports filled with the SEC. The company assumes no obligation to update or supplement forward-looking statements to become untrue because of subsequent events.

During this call, we will also discuss non-GAAP financial measures such as FFO and NOI. Definitions of FFO and NOI and an explanation of management view of the usefulness and risk of FFO and NOI can be found towards the bottom of yesterday's release. And are also available on the Investor Relations section of the web at highwood.com.

I'll now turn the call over to Ed Fritsch.

Edward J. Fritsch

Good morning, and thank you for joining us today. I'll start by providing a brief review of 2008 and our outlook for 2009. Then after Mike and Terry have concluded their remarks, I'll have a few closing words about how we view the world today and how we are adapting to this change challenging economic environment.

2008 was another year of solid accomplishments for Highwoods. Full year FFO with $2.78 per share excluding a fourth quarter impairment charge related to certain non-core assets in Winston-Salem.

FFO from core operations was $2.67, up 11% from 2007. A strong performance was due to same property NOI growth, NOI from new developments, lower G&A, lower interest expense and less preferred dividends. We're also pleased to announce that Moody's recently affirmed its rating on our debt and upgraded our outlook from stable to positive.

In addition, in 2008 we leased 4.7 million square feet of first and second generation space, ended the year with 91% occupancy, delivered $201 million of development including RBC Plaza to 33-story mixed use building in Raleigh that is 93% leased, sold $57 million of non-core properties with an average age of 26 years and 86% average occupancy, sold 45 acres of non-core land, acquired $43 million of non-core office buildings, including the PennMarc building on popular avenue in Memphis and a 25% JV interest in the forum, a 635,000 square foot office park in a core Raleigh submarket, completed the sale of 65 RBC Plaza condominiums for $27.4 million of proceeds and a 4.3 million gain to Highwood and raised a $195 million due in equity offering of 5.5 million shares.

Two properties are placed in service this quarter, Enterprise II of 418,000 square foot industrial building in Greensboro that is 91% leased and Baycenter 1, a 208,000 square foot office building in Tampa that is 88% leased.

Our current development pipeline which includes projects still under construction as well as those that have delivered but not yet stabilized stands at $260 million, only 56 million of which remains to be funded.

In 2009, we will deliver $93 million of development, including two builder suites for the Federal Government, FAA in Atlanta and FBI in Jackson. Dispositions in the fourth quarter consisted of three non-core office buildings in Nashville, encompassing a 193,000 square feet for gross proceeds of $20.9 million. These buildings were on average 30 years old and 83.7% occupied.

We took a $32.8 million non-cash impairment charge in the fourth quarter related to non-core assets in Winston-Salem, including 11 office buildings that are on average, 55% occupied and 23 years old. This market has high vacancy, negative absorption and limited opportunities for meaningful growth. For these strategic reasons, our plan continues to be to sell our remaining assets in Winston-Salem.

Despite a horrific residential market nationwide, since the first RBC condo units were sealed on October 13th, we have generated $30.5 million of growth proceeds to the sale of 73 units. Buyers unfortunately have defaulted on 53 units, forfeiting $1.4 million of earnest money deposits and 13 units remained on the contract.

The RBC condos are very unique product in Raleigh and the traffic buying of potential buyers is encouraging. Our '09 guidance assumes we closed half of the remaining units this year and the other half in 2010.

Terry will discuss our balance sheet but just to heads up that we exercise our option to extend our $450 million credit facility for one year. It now matures in May of 2010.

Mike?

Michael E. Harris

Thanks Ed, and good morning everyone. As we announced two weeks ago leasing activity in the fourth quarter were solid. 156 leases were signed, totaling 1.2 million square feet of second generation space, 71% of which was office. This is inline with our five quarter average of second generation leasing.

Occupancy in our office portfolio continues to be higher than the overall market's occupancy in each of our markets would be exception of Winston-Salem. We believe this is principally due to our efforts over the past four years to concentrate our properties in the best submarkets within each division. This has been accomplished through a combination of calling out non-core assets and developing intel projects, resulting in a higher performance for Highwoods.

Our leasing agents are actively communicating our financial strength to existing customers, brokers and prospects. In this unique economic environment this is a distinct advantage for Highwoods as we've seen some competitors face funding issues for TIs and lease commissions.

Several brokers have told us to pay a only showing their client space owned and operated by financially solid firms. Brokers are not going to risk the chance that their clients get left holding the bag on unfulfilled TI obligations, notable want to get stepped on their commission.

We are aggressively pursuing all deals. It is worth noting that average in place cash in '08 compared to a year ago were up 5.6% across our total portfolio and were up 5.3% in our office portfolio.

Our cash flow growth for office leases signed this quarter declined 2.9%. Cap rents for office leases signed in the quarter were up 9.7%. 81% of the office leases signed in the fourth quarter or renewals keeping a lid on leasing CapEx, which was $9.72 per square foot in the fourth quarter below our 2008 guidance of $10 to $12 per square foot.

We have many positives stats to report, but there is no doubt the leasing environment is weakening. According to total written (ph) net absorption are top five office markets was 427,000 square feet compared to over 3 million square feet a year ago. Customers are asking and in some cases getting more concessions and flexibility in their lease terms.

Office sublease space and our markets is creeping up, but it is still less than 2% of total square footage. One silver lining to the capital crunch is that we don't expect subleased space to be as big and competitive factor as it has been in previous downturns. Just go around we do not have the same widespread over consumption of space, plus sub-landlords and sub-tenants are both extremely reluctant to spend their own capital to retrofit subleased space.

Another positive from operating in a capital constrained market, I think there were no new for-lease office starts in our markets in the fourth quarter. Our projected 2009 drop in occupancy is driven primarily from industrial move outs in Greensboro for which we have some viable prospects. As you know while the impact of industrial move out has subtended to occupancy, the impact of NOI is proportionally much less as compared to an office move out.

While the leasing environment is tough, deals are getting done and as we noted in our third quarter call, most customers are choosing to renew, sit tight and ride out the storm. As an example one customer recently renewed two leases totaling a 105,000 square feet for a five year term and expanded by 7,000 square feet. While cash rent declined 7.3%, cap rate increased 5% and the TI was only $1.50 per square foot.

In summary, we're optimistic our portfolio will continue to outperform in the market. We are aggressively going after every deal and emphasizing our staying power. Terry?

Terry L. Stevens

Thanks Mike. As Ed and Mike noted, we are pleased with our financial and operating results for the fourth quarter and full year of 2008.

Fourth quarter FFO per share before impairment charges taken on certain non-core assets in Winston-Salem was $0.68 per share, which compares to $0.65 in the fourth quarter of 2007. Core FFO was $0.63 per share for the quarter and $2.67 for the full year. Full year core FFO was up $0.27 from 2007 or 11.3%.

As a reminder, 2007 core FFO was 9% higher than 2006. The increase in 2009 full year core FFO resulted primarily from the impact of well-leased development projects coming on line, growth and average occupancy and lower cost on our debt and preferred capital, partly offset by higher diluted shares outstanding from our 195 million common stock offering last September.

Core FFO in the fourth quarter was down compared to third quarter as we had forecasted on last quarter's call primarily due to dilutions from the common offering and from higher property operating expenses in the quarter, largely repairs and other costs.

Total revenues from continuing operations were up $4 million this quarter or 3.6% compared to the same period of 2007. For the full year, revenues from continuing operations were up 32.6 million, of which 24.5 million came from developing properties that were completed but not yet included in the same property portfolio. Remaining 8 million increase came from the same property portfolio.

Same property cash NOI which excludes straight line rents and termination fees was up eight tenth of a percent for the fourth quarter compared to the same quarter in 2007.

As we discussed on our last call, we typically have higher operating expenses in the second half of the year due to seasonality, which is primarily why same property NOI growth in the third and fourth quarters was lower than the first and second quarters of this year. These higher operating expenses include certain plan, repair, maintenance and utilities. For full year, same property cash NOI was up 2.3% over 2007.

G&A for the quarter was approximately $1.5 million lower or $0.02 per share than the same quarter in 2007. The primary reasons were nearly $1 million from lower deferred compensation expense, which is fully offset by decrease in other income and about 800,000 from lower audit and legal expenses. These reductions were partly offset by the 2008 cost of living increases implemented earlier in the year and higher healthcare costs.

G&A for full year 2008 is lower than last year by $3.5 million or $0.06 per share, of which $2.5 million is related to deferred compensation expense, again fully offset by a decrease in other income. G&A for 2008 also benefited from lower audit, legal and consulting fees. As noted in the guidance section of our press release, we expect G&A to be even lower in 2009.

Net interest expense this quarter was down $1.7 million or $0.03 per share compared to last year due to lower average debt balances resulting from pay down using proceeds, rates and our common offering and from the lower average interest rates in the quarter, partly offset by lower capitalized interest.

Preferred dividends were lower by $1.2 million or $0.02 per share this quarter compared to last year, as a result of our retirement of 53.8 million of preferred stock in September. The per share impact from the significant reductions in interest expense and preferred dividends in the fourth quarter was more than offset by the higher number of shares outstanding in the fourth quarter from the September equity offering. On a net basis, the equity offering was about $0.02 per share dilutive in the fourth quarter.

As Ed mentioned, we recorded a $32.8 million impairment in the fourth quarter related to non-core assets in Winston-Salem including $400,000 for a land parcel. Under the NAREIT definition of FFO, building impairments are included in FFO while building gains are excluded. We had 18.6 million of gains from building sales in 2008 and 46 million of gains in 2007, none of which were reflected in FFO.

Since most of you are familiar with impairment accounting for real estate assets, I won't go into too much detail on the GAAP accounting rules. The punch line is that all REITs are required to regularly assess their assets for impairment. If the undiscounted estimated future cash flows coupled with the anticipated exit proceeds are less than netbook value, then the basis of the building must be written down to estimated current fair value. Fair value can be based on appraisals, sales comps and other estimates.

The impairments recorded under Winston-Salem assets occurred because of the increased uncertainty over projected cash flows for these assets resulting from current economic conditions, coupled with shorter holding periods, given our desire to exit this market.

Turning to financing in capital markets. Last month we paid off 50 million of our bonds using our credit facility and this month we extended the maturity date of our credit facility to May 2010. As a result, we now have remaining loan maturities in 2009 totaling just $118 million, a 109 million of which is a low leveraged secured loan, bearing interest at 7.8% that will mature in November 2009. We plan to refinance this mortgage either with the existing lender or a combination of lenders.

We are well positioned with 61% of our NOI stream unencumbered by secured loans. This large pool of unencumbered assets is a significant financing and credit strength of the company. Secured debt is available but at less attractive terms than a year ago.

We currently have 263 million of unused capacity on the credit facility. On page eight of the supplemental is a list to the banks that participate in the facility, their aggregate commitments and outstanding borrowings as of year end. We are in the early stages of working with our lead bank about strategies regarding the extension or renewal of this facility prior to the May 2010 maturity.

In addition, we recently obtained a term sheet for a new $20 million three year unsecured loan that we expect to close by early second quarter. We also have 43 million of unused capacity on a secured construction facility which matures in December 2010, but can be extended for up to two additional years that are option. This facility is currently being used to fund our two active GSA development projects.

So given our current 306 million of unused capacity on our faculties combined with proceeds we expect from future dispositions, new secured and unsecured loans, our free cash flow and other potential capital sources were well positioned to handle our 2009 maturities and funded development pipeline.

Finally a few comments about our 2009 FFO guidance, which is $2.53 to $2.72 per share. The mid-point of the range is just over 5% lower than last year's adjusted FFO of $2.78 per share and 2008 was a very strong year for the company.

It's important keep in mind that 2009 guidance also includes 12 to $0.18 per share in dilution from expected property sales and debt financings that we are pursuing in order to enhance our liquidity. Without this projected dilution, our FFO guidance range would have been $2.65 to $2.90 per share. Ed?

Edward J. Fritsch

Thanks Terry. All this recognize that we're operating in a challenging environment and will take some time before the economy begins to recover.

Highwoods is fortunate to have manageable debt maturities, a right size line of inventory, free cash flow, respectable leasing activity and a manageable development pipeline that is a continuing source of new FFO. Two key goals for 2009 are to preserve cash and tightly manage operating expenses in G&A.

Officers will not receive base pay increases in '09. Discretionary spending has been significantly curtailed. We are negotiating rate cuts with our vendors, speculative developments is off the table and financial institutes returns must be very compelling first to consider using our dry powder for builder suites, for acquisitions at this time.

Terry outlined the options available to us for continuing to maintain a strong balance sheet. One option, a number of rates have chosen relates to dividend policy. If there are dividend, reduction or stock dividend, many of you had voiced your opinions on this topic, some negative and some positive.

While it is prudent to never rule out anything that may at some point be in the company's best long-term interest, its management and the Board's preference to maintain our dividend and its current level and to continue to pay a 100% of it in cash.

Right now, our focus is on leasing, customer retention, expense management and the preservation of capital. Long-term, our focus remains unchanged, disciplined and opportunistic. We strive to own the best assets in the best served markets and maintain a strong and flexible balance sheet. We remain committed to transparent, consistent and timely communications in good times and in bad and we expect to emerge from this cycle poised for growth.

Our team is energized and cycle tested and we continued to be disciplined in our decision making and goods towards of our shareholder's money.

Operator, we now welcome any questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). And our first question comes from the line of Cedric Lachance with Green Street Advisors. Please go ahead.

Cedric Lachance - Green Street Advisors, Inc.

Thanks. Just on Winston-Salem, can you.. how many is the portfolio and what's the resulting value per foot after a year impairment charge? Can you guys here me?

Edward Fritsch

Yeah. Cedric, its Ed. Yeah, you have to do the math on the resulting value, the whole portfolio is 1.4 million square feet.

Cedric Lachance - Green Street Advisors, Inc.

And what's the values of portfolio now?

Edward Fritsch

Of what we've impaired or the portfolio as a whole in the triad?

Cedric Lachance - Green Street Advisors, Inc.

You've only impaired some the Winston-Salem assets, right?

Edward Fritsch

Well, no. It's a subset of the Winston-Salem assets. Its 11 buildings, just not the entire portfolio.

Cedric Lachance - Green Street Advisors, Inc.

Okay. And so as a resulting value preferred on what's been impaired?

Edward Fritsch

On what's been impaired, blended it's probably around $50 and so referred.

Cedric Lachance - Green Street Advisors, Inc.

Okay. In regards to the occupancy guidance for next year, do you have any specific tenants that you know are not going to be vacating or is it your best guess as to what's going to happen?

Edward Fritsch

Well, we've talked with all the customers that will allow us to talk with them. We do know of a number that we expect to vacate, some of which we've backfilled as we announced. For example the EMI lease in Nashville, we expected them to leave. They ended up staying. Qualcomm in Raleigh for about 50,000 square feet. So there are a number that are in the forecast, but we also have some of the space that's been relayed.

Michael Harris

This... most significant impact Cedric would be on the industrial space that we know or have good reasonably will be vacating in, principally in Greensboro it is pointed out in my script of remarks. We believe the impact on in allies is not significant given this industrial versus office. And it represents about almost 250 debts of occupancy just with those industrial vacancies.

Cedric Lachance - Green Street Advisors, Inc.

Okay. And what is there in the industrial business that is so negative going forward? Is it related uniquely to tenants you have or is there anything else?

Edward Fritsch

It's mostly related to the residential industry where our materials are being stored for distribution in warehouses.

Cedric Lachance - Green Street Advisors, Inc.

Okay. And in regards to land values and you've over time provided your estimated market value for the land parcels. It seems they not really have changed much of late, and when you see that it is holding rent values when it seems that most property values are declining fairly rapidly?

Edward Fritsch

We think that in what we've seen, obviously we haven't seen much land trade that's for our product type. We have traditionally been at the low end of values that we've disclosed. But the property type that we've seen the most dramatic move on for the for land there has been large single family track residential as opposed to core infield sights, which is... what our focus is. So we're... we would want to own land and where we own land on the, there that which we consider core. We really haven't seen much movement on that Cedric.

Cedric Lachance - Green Street Advisors, Inc.

Okay. Maybe just one final question on the RBC condos. And I thought you had generally avoided speculators there. So what led to such a large number of people in the closing on the unit?

Edward Fritsch

Yeah, it wasn't necessarily speculator driven, it was home owner driven whose part in life has changed from where they were back when put these under contract in July of 2007. Now, there is still a good volume of traffic going through. On last weekend we had north of 40, the weekend before we had north of 50. People come through the model units. We have 13 that are under contract now, and our guidance reflects that we would anticipate closing that half of what we have left this year and then the other half in 2010.

We're still probably little shamelessly proud of having done almost $31 million worth of sales. As I mentioned in the script in the face of... you're probably one of the worst real estate markets that most of us have experienced. So I think that underscores the $31 million that it is the unique product and that the community still has an interest in them.

Cedric Lachance - Green Street Advisors, Inc.

And where is pricing on units that you are selling to the overseas those that you sold early in the project slides.

Edward Fritsch

No, we're still on a average over $400,000 a unit.

Cedric Lachance - Green Street Advisors, Inc.

Okay. So your pricing hasn't really changed?

Edward Fritsch

It has not, not significantly if at all.

Cedric Lachance - Green Street Advisors, Inc.

Okay. Thank you.

Edward Fritsch

Thank you.

Operator

(Operator Instructions). Our next question comes from the line of David Lewinsky (ph) with Robert W. Baird & Co. Please go ahead.

Unidentified Analyst

Hey everybody. Just a couple of quick questions. On the secured debt that you guys are seeking, what do you guys seeing on that environment in terms of rate, LTV and debt service coverage ratios?

Terry Stevens

David, this is Terry. We mostly got in some bids in on one building that we're look seeking to put fixed-rate financing. The LTVs are probably in the high 50s at best. And the rates are in I would say the mid-7s, four or five to ten year money. Clearly that's lot different than want it had been.

Banks are the, the lenders are requiring amortization in the loans, interest only which we were able to secure in the past is really not on the table on fixed-rate debt right now. Can't really give you an exact answer on the debt service coverage, but therefore lower leverage, if you can meet the leverage pastures, you are meeting whatever the lenders are requiring on the debt service at this time.

Unidentified Analyst

Okay. And then, due to refinance the mature and secure debt, is there any risk of an equity gap or more positively an opportunity for a cash out?

Terry Stevens

The loan becomes comes due at the end of November is fairly low leveraged. We estimate below 50% at this time using current estimates of value. So there could be a possibility for a small cash out not much. And uncertainly I see a very minimal risk for having first time deferralative (ph) equity in at this point.

Unidentified Analyst

Okay. And then going back to Winston-Salem portfolio, are you guys, is that being marketed right or you guys kind of holding off on that?

Terry Stevens

Yes to both. We had announced in '07 that we would expected to get out of Winston-Salem and then things didn't come together the way that we had hoped. So, we since undertaken an effort to get out of it rather than a portfolio as a whole, maybe one straight address at a time. So we have 100% exited any of the industrial that we owned in the Winston-Salem market. And now we're striving to exit the remaining which is all office. We sold one or two, but we've got quite a ways to go and we're working on that.

Unidentified Analyst

Okay. And --

Edward Fritsch

You won't believe it's a market to exit.

Unidentified Analyst

Okay, great. And then a couple of quick questions regarding your JVs, what is the appetite of your partners to put additional capital and for a new opportunities?

Edward Fritsch

I would say that it's moderate to good. We've had conversations with all of our JV partners over the last 60 days, particularly to be sure that the credit strength is equal to what we believe to be. And we're very comfortable with the credit strength of our JV partners. And more than one of them have mentioned that they want to continue to pursue opportunities with us in the marketplace, particularly if distressed sellers of high quality assets hit the market.

Unidentified Analyst

Okay. And is there specific cap rate or pricing metrics that they and you guys look for there, those types of opportunities?

Edward Fritsch

No, I think that it's driven first by the quality asset and then we look at the pricing after, but there haven't been guidelines that have been established for that.

Unidentified Analyst

Okay. And then lastly what kind of market conditions would cause or you guys have to take impairments on this JVs, is that cap rates at a certain level in the market or occupancy declines?

Terry Stevens

This is Terry again. We did look as part of our impairment processes at end of the fourth quarter at our JV investments as well. And none of those required impairment at this time. So it would take further declines in future cash flows of some size before we would face any kind of significant impairments in our JV assets. But that was looked at careful at year end when we did the others.

Unidentified Analyst

Okay, great. Thanks.

Edward Fritsch

Thank you.

Operator

(Operator Instructions). And our next question comes from the line of Jamie Feldman with UBS. Please proceed.

James Feldman - UBS

Thank you very much. I was hoping you could talk or speak generally in terms of kind of where you think we might be in the cycle in terms of business closures and bankruptcies in your markets? I assume we're probably at the pretty early stages, just wanted to get your views.

Edward Fritsch

Jamie, its Ed. I think it's very difficult thing to predict. We haven't seen any material degradation in accounts receivables. We have gotten some calls from customers wanting to talk about extending blends in some potential for rent relief, but it hasn't been widespread and we really haven't done much of that at all. We... subleased space is still... no, I am just going to tell tales of what would indicate some of this widespread bankruptcies.

We haven't seen a dramatic increase in sublease space in the market. It's still less than 2% of market and back during worse times it would push 5%. We haven't seen a dramatic reduction in the use of space, so I think that you may very well be right that bankruptcies haven't bottomed out yet. But we at this point in time haven't seen a clutter of them to come through our door. I do expect that we'll see a few and we've put some conservatives meant to our guidance for '09 to protect ourselves. We don't have specific names for those that we'd expect to go. But we'll I guess I can't do what your thinking is, we'd expect to see some of that in 2009.

We did see a few bankruptcies late last year on the retail side, having Kansas City with sharper image in function junction. And obviously keep an eye on the retail world, but lesser serving than office.

James Feldman - UBS

Thank you. I guess another way to ask is do you think businesses in your region of the country have kind of adapted their business structure already to kind of the changed economy or are still at the early stages of fixing things and so kind of scrambling?

Edward Fritsch

I think it would be fair to say that most every business decision maker today is scrambling. We hear the word uncertainty in virtually every conversation we have almost regardless of the nature of the business. And I don't think in any... I don't think that there are many industries or businesses that aren't intimidated to some degree by the current status of the economy.

Michael Harris

I think we'd also have given the our average customers relatively small, they tend to be more nimble and are able to adjust our business plans all that better. The larger national tenants obviously they have to look at countrywide or global wide whether its layoffs or changing their business model, takes a lot of for them to return that battleship than the smaller tenants that are core.

James Feldman - UBS

Okay, that's very helpful. And then, I think on the last couple of calls, you talked about potentials for opportunistic buying. Can you give an update of kind of how that looks right now?

Edward Fritsch

Yeah, not different at all from last time we talked. I think we're closer to them potentially hitting the market, but we still yet to see a genuine material amount to stress sellers with quality assets in the markets. And we need to get some more insight into where our refinancings are before we would dive into that head first.

We are actively monitoring the assets, the status of the assets that we'd like to own in each of our markets. And each of our division heads has that as a top three agenda item for 2009. To-date we haven't seen those come to market which quite frankly works well for us timing wise because right now that Terry has a number of things underway from a financing perspective. If we can get that put to bed, we'd have a little better sense of other volume and dry power that we would have to deploy.

Michael Harris

And lot of the assets, particularly the trophies that we would be interested in, they were financed back a few two years ago with CMBS and no one knows but tour. And that's one there is going to be somewhat in the damn reckoning for them and possibly an opportunity for us.

Edward Fritsch

And we expect Jamie, given the dry power that we would be able to develop that we would be very specific and very disciplined about how we would put that to work.

James Feldman - UBS

Okay. And then finally, can you talk a little bit how your pretty good capital position is giving you any kind of advantage versus competition in the market releases and how you are approaching maybe TIs or concessions as a result and what kind of advantage is giving you?

Edward Fritsch

Sure. We have messaged through our brokers to exists in customers, from prospective customers that as Mike said in his script that we have the ability to finance not only the broker commission but to build out.

And so if they want to bring a prospect to us or if we have a customer that needs a retrofit or relocation within our portfolio that we can clearly accommodate that. And in fact I also as Mike mentioned that there are brokers in the community who now have narrowed the scope of landlords to which they'll bring a prospect so that they themselves don't get hung out on the Commission or that their customer doesn't get hung out with a slowdown or the absence of a delivery on the TI.

So, I think that that's an important competitive advantage for us preponderance of our competitors are the local private developers. And we are hearing and seeing real signs of some, clearly not the majority, but some that are struggling and are getting the message out that they will be glad to do the lease but they need to be extraordinarily frugal with regards to the allowance that they had for the TI and the Commissions which I think is a distinct advantage.

I also think that the absence of these dollars would mean that the MO of sublease space in this current downturn will be different that prior because the sub-landlord, as Michael labeled them in his comments said, simply is it going to be in a position or want to fund a significant TI. And given the absence of those dollars debt space is less of a competitors, competitive set this time than it was last time, where the rental rates were heavily discounted plus dollars were allocated for a full market commissions and full market TIs.

James Feldman - UBS

Okay. Thank you very much.

Michael Harris

Thanks Jamie.

Michael Harris

Thanks Jamie.

Operator

And we have no further questions at this time. I'd like to turn the call back to you, sir.

Edward Fritsch

Okay, fine thanks. Thank you everybody. And as always if you have any questions whatsoever please don't hesitate to contact us. Thank you.

Operator

And ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation. And ask you to disconnect your lines.

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