Parkway Properties' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 6.13 | About: Parkway Properties (PKY)

Parkway Properties Inc. (NYSE:PKY)

Q2 2013 Earnings Conference Call

August 06, 2013 9:00 am ET

Executives

James R. Heistand - President and Chief Executive Officer

David O'Reilly - Executive Vice President, Chief Investment Officer and Chief Financial Officer

M. Jayson Lipsey - Executive Vice President and Chief Operating Officer

Jeremy Dorsett - Executive Vice President, General Counsel

Analysts

Young Ku - Wells Fargo

John W. Guinee - Stifel Nicolaus

Richard Anderson - BMO Capital Markets

James Feldman - Bank of America

Alexander Goldfarb - Sandler O'Neill

David Rodgers - Robert W. Baird

Craig Mailman - KeyBanc

Operator

Greetings and welcome to the Parkway Properties, Inc Second Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jeremy Dorsett, Executive Vice President and General Counsel. Thank you, sir, you may begin.

Jeremy Dorsett

Good morning, and welcome to Parkway’s second quarter 2013 earnings call. With us today are Jim Heistand, President and Chief Executive Officer; David O’Reilly, Chief Financial Officer and Chief Investment Officer; and Jayson Lipsey, Chief Operating Officer.

Before we begin, I would like to direct you to our website at pky.com, where you can download our second quarter earnings press release and the supplemental information package. The earnings release and the supplemental package both include a reconciliation of non-GAAP financial measures that we will be discussing today to the most directly comparable GAAP financial measures.

Certain statements made today that are not in the present tense or that discuss the Company’s expectations are forward-looking statements within the meaning of the federal securities laws. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that these expectations will be achieved. Please see the forward-looking statements disclaimer in Parkway’s second quarter earnings press release for factors that could cause material differences between forward-looking statements and actual results.

I will now turn the call over to Jim.

James R. Heistand

Good morning and thank you for joining us today. We introduced our new strategy to you a year and a half ago which outlined our plan to transition the Company into one of the top performing office REITs in the Sunbelt. This plan consisted of a targeted investment approach, a revamped operational strategy and a more flexible and conservative financial strategy. We spent the majority of 2012 and early 2013 repositioning the portfolio to acquisitions and dispositions. Since the end of 2011, we have sold $717 million in non-core assets and have acquired $1.1 billion high quality well located assets in targeted submarkets throughout the Sunbelt. The properties we acquired consist of a combination of core plus and value added investments that were all part of the overall strategy of gaining scale in submarkets that we expect to outperform their broader respective markets.

We also implemented specific leasing strategies at each asset and recently shifted our focus to unlocking the value that we felt existed at each recently acquired properties. I am proud to report that we have made significant progress on this front over the past several months. Since the end of the first quarter we have signed over 1 million square feet of new leases. The average rent for this leasing activity was well above our historical averages and we are now practically fully leased in some of our key targeted submarkets which Jayson will discuss in more detail.

During the second quarter, we had an 84.7% customer retention rate, renewal rates were 6.5% above the expiring rental rates and the average rental rate for our leasing activity was above $28 per square foot which is the highest quarterly average in the history of the Company. We believe that this continued improvement in results further validates the investment, operational and financial strategies that were implemented a year and a half ago.

Given the leasing progress we have made, our plan is to continue to drive value through growth in our existing portfolio. We expect to see additional rent growth in most of our markets and believe that we will have the ability to further increase rent for our properties in the submarkets where we have limited vacant space available. We will also continue to look for value-add acquisition opportunities to complement the asset that have recently shifted from value-add to core or core plus investments. The competition has increased and values are rising but we still believe there are opportunities to grow within certain of our existing submarkets and other submarkets where we are currently not located.

I also wanted to address our recent announcements that we were closing our office in Jackson, Mississippi. We plan to consolidate and move the accounting, HR, IT, and technical services functions that are currently being operated in Jackson to Orlando and Jacksonville, Florida. We estimate that the total cost of this transition will be approximately $3.7 million, so we expect to achieve long-term G&A savings following the transition in 2014 and beyond. This was not an easy decision given the talented and hard working group we have in Jackson and I am grateful for their efforts in working through the Company's repositioning over the past couple of years. We expect that by the end of the fourth quarter a smooth transition will be complete.

This past year, we've accomplished a number of objectives that we believe greatly improve the performance of the Company and create long-term shareholder value. We now have a strong management team in place at the corporate level and in our regional markets, we have a new compensation plan that aligns the interest of our employees with our shareholders, we no longer have expensive preferred equity on our balance sheet and we have successfully repositioned the Company to be a top performer in our market. Unfortunately some of these items have resulted in one-time charges that have impacted our current FFO such as the preferred redemption cost, which is a non-GAAP adjustment, and the cost of relocating our Jackson office. It is our belief that the majority of these major one-time adjustments will be behind us by the end of this year and we expect to see the full benefits of these changes in 2014 and beyond.

I will now turn the call over to David for an update on our recent investment activity.

David O'Reilly

Thank you, Jim. During the second quarter we completed the purchase of an approximate 75% interest in the US Airways building in Tempe, Arizona for $41.8 million. The US Airways building is a 225,000 square foot office property, it is located adjacent to Parkway's Hayden Ferry Lakeside and Tempe Gateway assets. The property is fully leased to US Airways through April of 2024 and US Airways retained an approximate 25% interest in the investment.

Shortly after quarter end, we completed the sale of Waterstone and Meridian in Atlanta, and the Bank of America Plaza in Nashville. The two Atlanta assets are less than 100,000 square feet each and are located in submarkets that do not fit within Parkway's current investment strategy. The assets sold for a combined $10 million and Parkway has recorded $4.6 million impairment loss during the second quarter related to these sales.

The Bank of America Plaza is a 436,000 square foot office tower located in the central business district of Nashville. The asset is currently 93% occupied but a large tenant will be vacating later this year and there are a couple of large leases expiring over the next three years including Bank of America. It is our belief that we can find a better use for our capital than to hold the asset through these move-outs and expirations. Parkway received approximately $40.8 million in net proceeds from the sales and we expect to record an $11.9 million gain from this sale during the third quarter.

We remain under contract to purchase Lincoln Place in Miami, Florida. We still expect this to close by the end of the third quarter as soon as we have completed the assumption process for the in place mortgage. This acquisition will result in the issuance of 900,000 operating partnership units to the seller as we have previously discussed.

And finally, we are in the early planning stages of developing a Class A+ office property, totaling approximately 261,000 square feet located adjacent to our Hayden Ferry Lakeside assets in Tempe. We have made significant progress reducing our assets in the Tempe submarket and we are no longer able to fully accommodate the leasing demands, we continue to see our assets there. We are taking the necessary steps in advance to be able to move quickly through the construction process. Permits are already in place and the parking garage that will accommodate the building is already developed, so we expect to have a competitive advantage compared to other development sites in the area.

I'll now turn the call over to Jayson to give an update on operations.

M. Jayson Lipsey

Thanks David. This year we focused on executing the leasing strategies we implemented at our recently acquired assets. As Jim mentioned earlier, we signed over 1 million square feet of leases since the end of the first quarter, nearly 40% of this leasing with the assets acquired during or since the fourth quarter of last year. At the end of the quarter, our occupancy was 89.9% and we were 90.6% leased. If you recall, our occupancy in October of last year was 89.6% but dropped to 88% at the end of the year due to the purchase of several value-add investments. So in less than a year, we surpassed our previous occupancy level prior to acquiring these value-add investments.

Given this progress, I want to give an update on our performance at some of our value-add and core-plus investments acquired since November of last year; Phoenix Tower in Houston was 83.6% occupied upon acquisition, it is now 87.2% leased; Tower Place 200 at Atlanta was 82.8% occupied upon acquisition, it is now 92.4% leased; Westshore Corporate Center in Tampa was 77.7% occupied upon on acquisition, it is now 87.8% leased; and Tempe Gateway in Phoenix ws 73.9% occupied upon acquisition, it is now 85.9% leased.

This leasing momentum has positioned us to be nearly fully leased in several of our key targeted submarkets. Our Buckhead portfolio in Atlanta is currently 96.4% leased; our Tempe portfolio in Phoenix is currently 95.2% leased; our Westshore portfolio in Tampa is currently 93.3% leased; our Deerwood portfolio in Jacksonville is currently 93.8% leased; and our overall Houston portfolio is currently 95.2% leased.

Additionally, the economics of our second quarter leasing activity are some of the best we've achieved in the history of the Company. The average rental rate for leases signed during the quarter were over $28 per square foot which is $3 per square foot higher than the average of our prior two quarters and over $7.40 higher than the average of the two quarters prior to that.

Capital costs of this leasing activity were modestly higher than last quarter which was an uncharacteristically low quarter, but given the rental rates we achieved, the net effect of rates were much better than last quarter and the net present value of these leases were highest achieved in the history of the Company.

In addition to our new and expansion leasing activity, we continue to have a high-volume of renewal leasing. We signed 399,000 square feet of renewals during the quarter with a customer retention rate of 84.7% and the rental rate for these renewals represented a 6.5% increase over the expiring rates which is based on the starting unabated cash rental rate forf the renewals compared to the expiring gross rental rate including escalations for the expiring lease.

Our leasing progress over the past several quarters and the market rent growth we have seen at our properties has led to an improving embedded growth ratio for our in-place leases. In aggregate, we crossed the mark this quarter to a positive embedded growth as our market rents are now slightly exceeding our average in-place rents.

Let me provide a few examples of our recent leasing activity which we believe to be transformative for our Company. Last quarter our Buckhead portfolio was only 87.1% leased, with the majority of our vacancy at Capital City Plaza and our recently acquired value-add investment Tower Place 200. Since then, PulteGroup has decided to relocate its headquarters to Capital City Plaza and signed a 101,000 square foot 16 year non-cancelable lease that will commence in June of next year. Also at Capital City Plaza, [indiscernible] Georgia expanded by 29,000 square feet. These two leases changed Capital City Plaza from 77.7% leased last quarter to 98.8% leased today. Next, at Tower Place 200, Georgia State University executed a renewal on its 61,000 square foot existing space and is now standing by 74,000 square feet over the next 17 months. Tower place 200 was 82.7% leased last quarter and is now 92.4% leased.

In Tempe, we successfully worked with LifeLock to accommodate its expansion needs. During this process, we triggered a right of first refusal with Silicon Valley Bank on 26,000 square feet at Hayden Ferry Lakeside I. Silicon Valley Bank exercised its option to take this space last quarter when their expansion commenced in July. Ultimately, we were able to move a couple of tenants to our neighboring Tempe buildings in order to accommodate LifeLock's 51,000 square foot renewal and 23,000 square foot expansion which expire in 2025. We do not have enough space to accommodate all the leasing demand we have in Tempe which gives us confidence in our ability to lease the Hayden Ferry Lakeside III development.

At Phoenix Tower in Houston, we signed 105,000 square foot renewal to Permian Mud Service which extends its lease through 2023 along with a 25,000 square foot expansion that commences later this year. The starting gross rental rate for the expansion space is more than $8 per square foot above the current rate for the existing space, and the renewal rate in 2018 is more than $10 per square foot higher than their current rate. Phoenix Tower has increased from 85.9% leased last quarter to 87.2% leased today and market rents for the building are approximately 7% to 8% higher than when we acquired the property in December of last year.

I'd like to note that we do expect our occupancy to decline during the third quarter due to Helix vacating 94,000 square feet at 400 North Belt in Houston and K&L Gates contracting by 49,000 square feet at Hearst Tower in Charlotte as we had previously announced. These two leases combined represent just over 1% of our current portfolio size. However, based on our leasing progress during the first half of the year, we're increasing our guidance for year-end occupancy by 100 basis points to a range of 88.5% to 89.5%.

I'll now turn the call over to Dave to discuss our financial results.

David O'Reilly

Thank you, Jayson. We completed the second quarter with FFO of $0.22 per share. This includes the one-time non-cash charge related to our preferred stock redemption totaling $6.6 million. Excluded in this charge and other nonrecurring items are recurring FFO of $0.32 per share. Our FAD during the second quarter was $0.28 per share. We have provided a reconciliation of FFO, recurring FFO and FAD to net income on Page 9 of the supplemental report.

We ended the quarter with net debt to EBITDA of 6.2 times. This metric increased during the second quarter due to additional borrowings used to fund the purchase of the US Airways building and to redeem the Company's 8% Series C preferred stock. Our leverage has since been slightly reduced as we used net proceeds from the sale of the office properties that closed in July to repay amounts outstanding on our credit facility.

During the quarter, we closed $120 million unsecured term loan with a five-year term. The proceeds from this term loan were used to reduce amounts outstanding on our credit facility and effectively lock in a low interest rate for the next five years while maintaining flexibility in our balance sheet. Simultaneous with the closing of this term loan, we also paid off two first mortgages totaling $54.7 million secured by our properties at Cypress Center in Tampa and Nascar Plaza in Charlotte. These two mortgages were scheduled to mature in 2016 and we were able to roll the swaps associated with these mortgages into a new swap for the term loan with having to pay the cost to unwind those swaps. The new $120 million floating to fixed interest rate swap locks LIBOR at 1.5% and results in an initial all-in interest rate of 3.1%.

We also completed two loan modifications during the second quarter. At Corporate Center IV and International Plaza in Tampa, we modified the loan to increase the debt balance by $13.5 million. Additionally we modified the mortgage of Hayden Ferry Lakeside II in Tempe to remove the accelerated amortization structure and the loan payments are now interest-only through February of 2015.

We are updating our guidance for calendar year 2013 to reflect our results during the first half of the year, the impact of our office closing in Jackson, and the recently announced sale of three non-core assets. Our revised outlook range for FFO is $1 to $1.10 per share. Note that this annual guidance includes a one-time non-cash charge related to the preferred stock redemption totaling $6.6 million or $0.10 per share and the one-time cost related to the office relocation totaling $3.7 million or $0.06 per share. Removing these one-time items, our FFO outlook range would have been $1.16 to $1.26 per share.

We have provided updated guidance ranges for the underlying assumptions related to our FFO outlook in our second quarter earnings release. As is our common practice, we have not assumed in our outlook any additional investments or dispositions other than those announced nor any potential capital markets activity and we will provide updates to our outlook should a material event occur that would change those stated ranges.

That concludes our prepared remarks and we are now happy to open the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Young Ku with Wells Fargo. Please proceed with your question.

Young Ku - Wells Fargo

Great, thank you. First off, I just want to ask, could you just provide additional details regarding the Hayden Ferry land parcel development and what kind of cost and what kind of yields you guys are expecting?

David O'Reilly

This is David. I don't know that we're able to give you kind of a firm cost or yield guess as we're still in the early evaluation stages of this project. We setup a construction of tenants and we are getting ready to move forward but we are still in discussions with a number of the tenants that are currently in our biddings in the market, with our partners in Texas, and it's a process that we haven't efficiently launched yet and don't have the details to speak to. What we do know is that we are effectively out of space in our four buildings in Tempe. We have a tremendous amount of demand from both the tenants that we have there already as well as other tenants look to come into the Tempe market, and we feel that because we have the land at such a great basis and the garage is already built for the project, we have a significant advantage to be a first mover in that market when the time is right in terms of the new development. So while we're excited about the opportunity, it's not a done deal yet and we're not ready to get into the details in terms of total costs and yields because there is still a lot of work yet to do.

James R. Heistand

This is Jim Heistand. As we've seen the market rents move in that fairly materially since we've owned the assets there, it is our opinion – as you know we are not developers by nature but at this point in time we think the returns that we will generate from this given our lower basis in that property and the increasing rental rates, in our view for our stake on our development is it would have to be a double-digit unlevered return so as to take the time.

Young Ku - Wells Fargo

Okay that's helpful. And then Jim, you provided a pretty good leasing update details regarding the acquisitions and the leasing progress you made, but you didn't really talk about Charlotte, so I was wondering if you can provide some color regarding kind of leasing prospects for 525 and the Nascar coverage?

M. Jayson Lipsey

Sure, this is Jason. I think first [as bonus] (ph), we continue to see good fundamental dynamics in Charlotte CBD in terms of the vacancy levels we're seeing in the market. I think secondly we're seeing very good tour activity at those two buildings. The Charlotte CBD market continues to be very active in terms the real prospects that are touring the market and I think that we're still well within the downtime that we projected when we underwrote in all those buildings. So we're still very optimistic in our potential and ability to lease those buildings and I'm not seeing anything in the marketplace that suggest otherwise.

I'd also add that I think we've had very good success with Hearst Tower. We announced in our leasing update that we renewed Pricewaterhouse at Hearst Tower which was a fantastically done deal and I think it also coincides well with our strategy to contract and renew K&L Gates which we talked about a couple of quarters ago. It's been our experience that PWC has the propensity to leave buildings when they are an existing space, it doesn't necessarily need [indiscernible] anymore. So we were actually able to keep them largely because we created the K&L Gates vacancy and we were able to move PWC up in the building which enabled us to keep them which has been a fantastic credit and a very good economics. So I think in general we are pleased with how things are progressing in Charlotte and we're still optimistic that we'll be able to execute well, especially at 525 and Nascar.

Young Ku - Wells Fargo

Okay, thanks Jayson. And one last, the 94,000 Helix space in North Belt, any progress or update there?

M. Jayson Lipsey

I think the first thing is we've just got that space back, and so there's been an occupancy until very recently. I think when we made the decision to move them out of the building, we did it largely because of our ability to get rates up from call it $13 to $14 gross to somewhere in the low 20s. So I think we've recently executed leasing activity in the building that certainly supports our theory on that leasing. So that gives me a lot of comfort.

In terms of the activity we're seeing, we are working on deals for the building during the early stages of the process and so as a result have a .lower profitability then certainly the done deal but I think that the activity we're seeing coupled with our ability to actualize the rate growth that we projected I think we're going to get there at 400 North Belt.

James R. Heistand

I think the biggest thing for us is that the conformation that the market rents that the anticipated to backfill that space are what we are seeing in negotiations we are having and are consistent with our original basis, so it's not like we have taken a space back and now we're looking at prospects that don't support the lease rates in place which is why we terminated the lease.

Operator

Our next question comes from the line of Joshua Attie with Citi. Please proceed with your question.

Unidentified Analyst

This is Kevin [indiscernible] with Josh. We just first wanted to know what are your thoughts on potential raise in the dividend here given the reasonably low AF book payout ratio of 7% and a growing earnings stream?

David O'Reilly

As you know we've increased the dividend twice, we look at it every quarter, we do our forecast, and I think let me say this generally, I think the portfolio that we own right now is giving even the kind of rental rates and much lower spread between FFO and FAD, it's our opinion that over time the company will continue to raise its dividend, I can't predict to exactly how much that will be or when that will be, but I think we have already demonstrated the ability to do it and I think the metrics in terms of leasing we're accomplishing right now suggest that we have the ability to do that going forward.

Unidentified Analyst

Okay, thanks. And then just moving to the acquisition pipeline, can you just maybe discuss if you're looking at new markets or are you focusing on the existing markets and also have you seen any change in pricing in the approximate markets over the last couple of months?

James R. Heistand

A couple of it. I mean we obviously are still focused on our strategy in the submarket which we've identified and we are being very proactive in all those submarkets. As we mentioned to you before, we are restarting our first acquisition in the South Florida market with the LNR property in the South Beach, so we are looking at opportunities in that market. We've also mentioned Austin and so we've been continuing to look for opportunities in those markets. But I think right now generally most of the activities that we are dealing with are pretty consistent within the same submarkets we're already in. I will say to you that there's probably isn't as much available right now as there might have been in terms of these actual things that are pushed there and there is definitely more capital coming into our markets. Having said that, obviously with the fundamentals we're showing in our properties, people are noticing that has more capital coming into the market, but having said that, we still have a very robust pipeline of acquisition opportunities and I think for the market place it's nice to be able to demonstrate that we were successful and actually executing on the value add opportunities we did buy. So we'll continue to look for both the value add, the core and the core plus as we go forward but we're certainly not in a shortage of opportunities for us to continue to acquire.

Operator

Our next question comes from the line of John Guinee with Stifel. Please proceed with your question.

John W. Guinee - Stifel Nicolaus

I've got two questions for you guys. The first one is my understanding is Phoenix Tower is right next to Greenway Plaza which just traded a little bit ago, any thoughts on that particular submarket relative to the primary galleria submarket and your ability to maintain market share and grow rents in that location?

James R. Heistand

I will tell you John we very much like that submarket, I'd give you an example. When we bought Phoenix Tower, we underwrote market rents of $18.50 triple net in place for [interim 14] (ph) and the expansion that Jayson articulated was a $22 net, so literally $3.50 higher than what our original projections were only six, seven months ago. So, we like the dynamics of that submarket very much, I mean we were one of the interested parties in processing the rest of the Greenway Plaza, that's how much we like it, and I think that [indiscernible] did a great job by executing on that property. The dynamics there we think are very robust and we were positive on it. We were looking at alternative cities besides [for worth] (ph) to go with the Greenway Plaza acquisition, as you know is a large portfolio, but we are very, very bullish on that submarket and there is no doubt in my mind based upon that trade that the valuation of our Phoenix Tower has substantially increased.

John W. Guinee - Stifel Nicolaus

Okay, that was your first softball, here is your second softball. Clearly the urban and highly amenitised location strategy that you've got embarked on last year has worked really well, your in-place rents are some percentage below replacement cost rents if you look at it on a gross or net basis, do you have any sense in your primary markets for how much rents have to escalate in order for new development to kick in?

M. Jayson Lipsey

This is Jayson. I think it varies from market to market clearly, but I'd say on average we think that there's probably another 20% or so of rental rate growth before new development on new construction is justified, and so I think that we are optimistic that we still got a little ways to run. I'd say that in most of our markets with the exception of Houston, we are seeing no new construction or very little new construction and I think that that's having the effect of taking a lot of large blocks of vacancy off the market which is helping us improve the economics of the leases we're able to execute. So then directing to your question, I would say probably on average another 20% or so.

David O'Reilly

One thing to note John too, you're beginning to see some fairly material increase in the cost of construction as well. So when we talk about that 20% today it's hard to say when developments begin to occur two or three years from now, what that delta will be but across the board if you talk to anybody in the construction industry both the time to complete the project and the material costs have increased dramatically over this last year.

James R. Heistand

And as Jayson mentioned, it varies from market to market and we mentioned earlier in our prepared remarks we are contemplating the construction at Tempe, I think that is unique as I don't believe that rents today in Tempe despite the fact that they've grown $6 to $8 since our first acquisition in June of 11, yet justify new construction other than the fact we already have a garage fill as almost as your basis in the land that we are saving somewhere between $40 and $55 per foot of construction costs by not having to build the garage and we have plans and permits in place and now that advantage allows us to contemplate developments sooner than others as we don't think rents would justify a new construction in Tempe, if not for that advantage we have John.

M. Jayson Lipsey

We probably had 15% to 20% cost advantage by having the patented garage already built and the plans and permits are in place.

John W. Guinee - Stifel Nicolaus

Or you could just sell the development rights and book a great profit?

James R. Heistand

I look at it in a different way. I think given where the market is right now, I think building that third building, I'm not a developer by nature but the message from that market is supportive and I think if you look at the five building package we would own there after that new building is built, I think that would create a lot more value for the company.

Operator

Our next question comes from the line of Richard Anderson with BMO Capital Markets. Please proceed with your question.

Richard Anderson - BMO Capital Markets

So first question is if you can give the mechanics of the last two quarters your same store cash NOI grew at a faster pace than your GAAP NOI, is that just an occupancy gain function or is it an issue of you getting into the second half of your lease terms and hence your straight-line rent adjustment is backwards, what are the reasons for the cash growth be higher in the GAAP and how will that materialize in the future?

David O'Reilly

If you go back to a year ago today, on our call we spoke about having a disproportionate amount of free rent in the portfolio in straight-line rent adjustment, as a result of both the new leases signed, new acquisitions acquired, and some midterm free rent that was in the number of the leases across the portfolio.

James R. Heistand

That we inherited.

David O'Reilly

Those have now kind of flushed out of the system and when we look back and compare our GAAP adjustment this quarter are significantly lower since those phenomenon are now behind us.

Richard Anderson - BMO Capital Markets

Okay, so you will go back to more kind of typical sort of comp between GAAP and cash next year?

David O'Reilly

Yes, in effect if you get to the supplemental, Rich, 6/30/12, our straight-line rent number was 3.3 million and that came down in the third quarter to 1.3 million. So I think that is largely the driver of the same-store GAAP adjustment.

Richard Anderson - BMO Capital Markets

Next question is so you did 6.5% on renewal rents, you did 85% retention, your rental rates in leasing are $3 more, or whatever the number was, $28 than previous, really great numbers but to what extent should we be considering these recurrable in the future or was this just one kind of quarter that was particularly good?

David O'Reilly

I think it was a good quarter there's no doubt about it, and I think that we were able to do a significant amount of leasing and add the value add buildings with a reasonable purchase which helped dramatically. I think that one thing that I would point out is that we did crossed a mark on the positive embedded growth which hasn't happened in a long time. I don't think we project 6.5% going forward Rich although it is largely positive. As it relates to customer retention, we're definitely not projecting that customer retention for the second half of the year, largely based on the aforementioned move-outs of Helix and K&L Gates, and so I think that we are very optimistic in the ability of our buildings to continue performing well and outperforming. I don't think that I will project these kind of numbers through the second half of the year largely because of these new launched things in our portfolio but we do think over time that we're going to continue to increase rents, we are going to continue to increase occupancy and be able to maintain customer retention portfolio.

M. Jayson Lipsey

But one thing Rich to make note, I mean if you look at the portfolio today, and so while these rental rates are higher, I mean the properties we own basically are being able to generate higher rental rates. I think with the higher rental rates, the margins are better, the CapEx, the TI ratio relative to the rental rates are better, and so I think as the predominance of the portfolio is the stuff that we've added lately and the stuff that we will continue to buy going forward, I mean that's the kind of company we want to become as we go on. So I think we've made meaningful steps into it but there's more to go but we're not buying buildings that have $17 and $18 rents and $25 and $30 [indiscernible], we're buying buildings better.

Richard Anderson - BMO Capital Markets

Are you buying rents though with the capital cost averaging $4.78 this quarter or do you think that number will end more on a long-term basis?

James R. Heistand

I think it all boils down to the net effect of rent, and as Jayson mentioned in his prepared comments, it's the highest in the history of the company. And yes, capital came up from $3.42 to $4.78 or about $1.40 this past quarter but rental rates came up over $3. And that is a trade that we like, especially given the increased term and you're getting over 5.5 years of average term which is much higher than what we got last quarter.

M. Jayson Lipsey

I think I'll just add to that, Rich, I mean we are concerned about creating value at our buildings and our view is that if it's possible to [indiscernible] capital to get several dollars on rent, that's a really good trade-off and so I think that we're very pleased with the value that these leases have created at each of this buildings where they are done. So I think that we are pleased with the way the lease economics are progressing.

Richard Anderson - BMO Capital Markets

Your stock is down 4.5%, that doesn't make any sense at all, alright I'd just like to point that out on the call here.

James R. Heistand

This is something that I don't look.

Richard Anderson - BMO Capital Markets

So the Jackson closing, is that I assume is a third quarter event, the cost associated there?

David O'Reilly

That's correct Rich.

Richard Anderson - BMO Capital Markets

All of it, $3.7 million in the third quarter?

David O'Reilly

That's correct.

Richard Anderson - BMO Capital Markets

Okay. Just a couple of more. You have of full-page plus of capital market events in your press release today, and I'm curious a lot of work going on, do you think you're going to kind of have that level of activity in terms of balance sheet and capital markets for the time being or do you think you're getting to a point where you don't have as much work to do here and there?

M. Jayson Lipsey

I don't know if I would characterize this past quarter as work to do, these were actually capital market activities that were just great opportunities for us. We're lucky that there are banks out there that want to continue to lend us money, the term loan markets remains active and we were able to push out some 16 maturities in five years, go from secured to unsecured, do it in a way where we could mitigate friction cost by basically rolling swaps over, not having to unwind them, and creating what I think is more flexibility in our balance sheet and just taking advantage of a wonderful opportunity rather than having just chop a lot of wood in terms of debt refinancings and maturities that are [indiscernible].

James R. Heistand

But I think overall, Rich, we certainly can be much more proactive, I mean as I mentioned in my prepared remarks, we've gone through a lot of the transformation, the disposition, the reorganization, we're deleveraging, and so I think as the company looks forward now, I mean we are focused on having a pristine balance sheet, we're focused on creating more value in the assets we own and buying more assets that are going to create value and we've been doing that in addition to a number of other transformative things that we don't have to deal with anymore.

Richard Anderson - BMO Capital Markets

Okay, last question, so you disposed a few assets after the end of the second quarter, doesn't that imply, I mean you're not going to sit on cash or the deleveraging that happens from those transactions, doesn't that imply assuming you put those proceeds to work, additional upside to your guidance in the second half of the year?

David O'Reilly

We are able to redeploy those proceeds into value add acquisitions or into any acquisitions at all. I think that we will continue to invest in assets that will create long-term NAV accretion and long-term cash flow accretion to the company, as you know from following the Company since the past couple of years. Those acquisitions that we execute may not be near-term earnings accretive, and [indiscernible] what we acquired last year were, but the long-term value creation is there and I think this leasing that Jayson and his team are able to execute this past quarter really demonstrates our ability to create value through management handling. So to answer your question here, we're not going to be just sitting on the money, we're looking to redeploy the capital.

Richard Anderson - BMO Capital Markets

Okay and by the way, the occupancy, [indiscernible] occupancy decline is third quarter from the Houston and Charlotte vacancies would be about what?

M. Jayson Lipsey

1%.

Richard Anderson - BMO Capital Markets

1%. Thanks very much.

Operator

Our next question comes from the line of James Feldman with Bank of America. Please proceed with your question.

James Feldman - Bank of America

I was hoping you could provide a little more color on the guidance change, just kind of walk us through, I know when you back up the charges, reflected down about $0.04, but if you look at your guidance assumptions, you've got higher occupancy, you've got a couple of other moving pieces, lease termination fees,, can you just walk us through in pennies per share, what the moving pieces were?

David O'Reilly

Absolutely, Jim. It's a great question and we probably should have put a little bit more color on that in our prepared remarks. Our guidance last quarter as we revised it was $1.10 to $1.20 and our new guidance is $1 to $1.10 of FFO for the full-year. That decline is driven largely by the relocation of our Jackson office which was about $0.06 per share, other G&A increases driven by acquisition cost associated with those that we've announced in Miami [indiscernible] as well as an increase in our non-cash stock compensation plan purely as a result of starting to expense that plan when we received shareholder vote in May and the share price that we were trading at was over $19 and not where it is today. So that led to slightly increased cost there.

In addition on that, our dispositions that we recently announced on this call and spoke about created another $0.03 to $0.04 of FFO decline. That's offset by core outperformance and NOI outperformance of about $0.01 to $0.02 and if you add all those up together, you've got about a $0.10 change, again largely driven by $0.06 of the Jackson office, $0.02 of other G&A, $0.03 to $0.04 of dispositions and the $0.01 to $0.02 of positive increases as a result of the leasing and the renewal activities that Jayson and his team executed.

James Feldman - Bank of America

Okay and then also if you think about the leasing you've done, how do we think about 2014 and the NOI still to come on line?

David O'Reilly

I think the potential is there, I mean most of the big leases that we've announced don't commence until the latter part of the fourth quarter or sometime in early 2014, and so I think that while we've announced good moves in terms of leasing, really we won't see any impact as much of that until 2014.

James Feldman - Bank of America

Okay, so is there like a dollar amount to think about?

David O'Reilly

No, I think this will really be reflected in our 2014 guidance.

Operator

Our next question comes from the line of Alexander Goldfarb with Sandler O'Neill. Please proceed with your question.

Alexander Goldfarb - Sandler O'Neill

Just some really quick questions here, just hearing what you have to say about Tempe, presumably you guys would have a fair amount of the deal pre-leased before you start construction, as per your comments then, but just want to get that formally on the record?

James R. Heistand

I think Alex if our comments meant to stress anything it was it's very early in the process and the amount of pre-leasing or what pre-leasing we require could range significantly and we're working with our partners, as you know the other two Hayden Ferry assets are into Texas [indiscernible] land to try to establish exactly what those criteria will be. I think given the performance of our assets, and I will say from the affordability here that in the 90s on a percentage of basis as Jayson mentioned in his remarks, we are very bullish. And since they are our first acquisition in Tempe, over several hundred thousand square feet growth and if we add any sort of continuation to that trend whatsoever, the building would be full before done. So I think we are very bullish on the market and we haven't given kind of any specific guidelines in terms of pre-leasing but I think that our performance and our activity and what we are feeling with our time on the ground, is there's a lot more confidence to do it at a lower number than we otherwise would.

M. Jayson Lipsey

Alex, I would tell you just from a development standpoint here, I wouldn't want to be waiting for one large 50% tenant because I just don't like that size of the tenant in the property. I rather have more of a mix in terms of multiple tenants than not and I think if you wait for that larger tenant you tend to get too much away for that tenant, so to the extent we move forward, it would be some pre-leasing but it wouldn't be something that would be material and not be probably 50% or 75% of the property. And we think in development, timing is everything

Alexander Goldfarb - Sandler O'Neill

sAnd then the next question is for Jayson, your retention this quarter is sort of off the charts and it's been trending upward over the past year, specially when you have rent renewals, presumably it's a pretty competitive market, people trying to steal tenants, just sort of curious, what you guys big picture, not fielding by building, but big picture, have you changed anything in your communication to the folks in the field of how to approach the leasing or what do you think is driving this and then what should we expect over the next few quarters, should we expect this level of retention and rent growth or is this quarter sort of an anomaly?

James R. Heistand

I'm going to let Jayson speak to the rent growth and some of the other parts to it but I think as we've said all along, you can be a great operator but if you don't have great assets and great locations, you're going to have a tough time, and I think really what this says is the properties that we do own now are in high demand, they are well located, they are high-quality, and I think as we've said before you're just going to like the quality, so I think that's just been a function of the recovery of the markets that we are in and the quality of the assets and locations of the assets that we have, so it's kind of all coming together. I never expect to have a year average of 80% something that would be an anomaly. But do I think it's going to be much higher than our historical averages, absolutely.

M. Jayson Lipsey

I agree with Jim, Alex, I think historically one of the things that's been very challenging for our company is that our buildings were competing purely on economics and I think that has always driven a lower retention because we don't win economically then you lose customer attention. So I think that I completely agree with Jim that when you've got the best buildings in the best submarkets and there's the slight quality trend that we're seeing in the markets today, it makes our buildings more valuable. As to kind of customer retention looking forward, I think that we are expecting a low 3Q retention driven primarily by Helix and K&L the terms of which will expire in the third quarter, but I do think that kind of long-term, our customer retention should be better than it has historically been because our portfolio is better.

And then one other thing I'd add is that we are very focused on providing the absolute [indiscernible] customer service available to the [indiscernible] in this industry. I think that at the end of the day, what our customers expect from the highest quality portfolio is the highest quality of service and I think that our service reinforces the value we are trying to create for the tenants we needed.

James R. Heistand

Yes but one other thing too Alex, it's not just renewing tenants, I mean one of the things that I think we tried throughout the organization is, so everybody understands, we want to create value at these assets. So we're not just going to renew a tenant or sign a new lease just to gain some kind of immediate near-term benefit occupancy or retention, we're really looking on how to structure these leases, looking at expiration compared to the rest of the expiration in near buildings, it's a mixture of whatever we do for leasing we are going to create value long-term, not just short-term.

Alexander Goldfarb - Sandler O'Neill

Okay, that's helpful, and this is the final question is for David. Maybe you mentioned this earlier but the loan modification Hayden II where you no longer have to pay the principal that saves you about $2.5 million a year, did you guys have to give anything up or you just have so many banks competing for you that your existing lender was happy to just do that for free?

David O'Reilly

A couple of things. I think for these loan modifications, you mentioned Hayden already, there is also loan modification at IC IV in Tampa where when that loan was put on the building was 70% occupied and now it's full and it was just inefficiently leveraged and we had a balance sheet lender that was willing to work with us and we are very grateful that they were and allowed us to rework a new loan structure, they gave us incremental proceed which made that financing much most efficient and appropriately to the market. In Tempe, what we were able to do is basically go into garage as additional collateral which really didn't cost us anything and in exchange we were able to as you highlighted out paid about $2.5 million of cash flow in the near-term.

Operator

(Operator Instructions) Our next question comes from the line of David Rodgers with Robert W. Baird. Please proceed with your question.

David Rodgers - Robert W. Baird

Jim I know you want to continue to downsizing the non-core asset part of the portfolio, you've done that nicely am it just sounds like there's more on the way during the second half of the year even beyond what happened in July, I guess could you maybe characterize the timing for those and if there's remaining lease or activity that you want undertake, and then maybe more broadly, you talked earlier in your comments about more and more capital kind of coming into these secondary CBDs, and more activity for the assets, does it make you kind of rethink what goes on that list and how you start to recycle capital more aggressively over the next couple of years from a returns focus perspective?

James R. Heistand

I mean we look at assets twice a year every year just to see where can we optimize the value. I don't think we've got a lot of near-term additional kind of non-core assets to sell but like this one, these are all fairly small assets, so we will do that now and then but in terms of as we go forward, I mean as we just talked about, we still have a pretty good spread between where we think rents can go versus where they are today, so I wouldn't be in a rush to be selling some of the high-quality stuff that we bought in the near-term, we want to realize that extra value but we do evaluate each of our assets twice a year and come up with a business plan in terms of those assets in terms of how we lease them going forward.

Capital has come in but I will tell you we're in such a better position to kind of get more than our share of the opportunity we want to purchase going forward because basically a year, year and a half ago, people could look at our balance sheet and we didn't have much capacity or credibility in the marketplace, and while we were not successful, and acquiring a big chunk of that present portfolio which the stuff they were looking at would have been over about $1.3 billion, the fact that we were able to be competitive in that environment we wouldn't even been considered a year ago.

So I think the company is well-positioned to take advantage of the opportunities and we still got a pretty good run rate on the high-quality assets we own before we do start to sell any of those, but if we thought we'd maximize value and the market was appropriate, we will do just that.

David Rodgers - Robert W. Baird

Now clearly you've done a great job with the balance sheet in improving the positioning for investments, I guess maybe in the same thing on the leasing side, maybe a slightly different way than the question that was asked earlier, the activity you have seen, any release of the pent-up demand in the markets do you think or I mean is this recurring activity that you're going to continue to see over the course of the next couple of quarters, it just sounds like activity is still pretty good but is that activity in the market going to continue at this pace or a little bit slower as you move forward you think?

M. Jayson Lipsey

Dave, I don't think that we are going to continue to put our press release as about doing 1 million square feet every four months.

James R. Heistand

And by the way on the press release, one of the reasons that we did that on wanted to talk about it there was so much noise in the market on the Pulte relocation to Atlanta, we were having a million questions coming from people and asking us what we thought in conjunction with some of this, so I thought it would be good to make that announcement. But today at this point, we're not going to sit here and project we'll do 1 million square feet a quarter. However, our markets are definitely recovering and if you look at how much of this stuff was expansion with existing tenants that are taking more space and prepared to pay higher rents, so we finally have seen a pretty substantial meaningful turnaround in the markets that we are in and I'd like to say more than this, in particularly in the submarkets, if you look at the submarkets we picked and look at what those vacancy rates are [indiscernible] to the overall markets, so if we are in Charlotte or if we are in Tempe, relative to the Phoenix market and relative to the overall Charlotte market, they can see the dynamics in those submarkets are far superior to the overall market, that has paid us dividends.

Operator

Our last question comes from the line of Craig Mailman with KeyBanc. Please proceed with your question.

Craig Mailman - KeyBanc

Just curious any update on the neighbors renewal?

M. Jayson Lipsey

None to provide today other than we're very focused on it and want in audit and in conversations and trying to figure out their needs.

James R. Heistand

One thing to make note, so some of these looking at PWC renewal, some of the other ones, I mean we continue to really work hard and pair back our kind of our expiring lease schedule going forward, the next 24 months, that is family nominal rate for the company historically.

Craig Mailman - KeyBanc

Are you guys still pretty well into taking back that space [indiscernible]?

James R. Heistand

I'm sorry, what's that Craig?

Craig Mailman - KeyBanc

Are you guys still willing to take back that space or kind of not taking back that space if they don't need you on REIT or would you want to keep them and negotiate at this point?

James R. Heistand

I don't think we have any reason to believe that we couldn't keep them at their market deed. So our expectation is that we'll continue to engage with them and that we'll strike a fair trade. I think that we do have a high attending of the building and the thing that the building will continue to perform well as it has just [indiscernible]. So I think our expectation at this point is that we'll have a meeting on the lines of fair market deal.

Craig Mailman - KeyBanc

Great. And then just turning to Jim, just soft here, you guys are still want to be a pretty big acquirer of value add and other assets, just curious your kind of view here on the potential for rising rates and how you guys internally or potentially tweaking your underwriting assumptions or rent growth assumptions just curious of your comments on that?

James R. Heistand

First of all, even with this modest rise in rent, I'll say from the beginning of the year from where we are now it hasn't been that much of an increase but we underwrite all of our deals on an unlevered basis because just historically even the rates today are still way below kind of 30 year averages. So we look at everything on an unlevered basis. But to the rank growth, what's nice especially in the markets that we are already in and seeing firsthand rental rates grow, rental rates don't tend to go generally 3% or 4% a year, they tend to slide over a period and either flat or decline, I think we're seeing in our market there is the opportunity to more of a spike in rent. So we underwrite it appropriately, as we said especially on the value add stuff, we assume no leasing in the first year and as the performance has shown that we have outperformed in that regard, so I don't think we've changed our underwriting standards at all just because there's an opportunity to continue to acquire.

But one of the things we always look at at the end of the day is when you look at it to determine the value you have to be very careful in terms of what that value is relative to the replacement cost, you can put all kind of different growth rates and cap rates et cetera, but if you end up with a replace five or 10 years from now, that's way above replacement cost then there's something wrong in your model.

Craig Mailman - KeyBanc

Do you actually look at the price of tenant exit or exit you have?

James R. Heistand

Certainly we increase the exit capital from where it is today, cap rate, but we also do a back check to make sure that we're not selling this at a point in time that would be much greater than what replacement cost of that would be, we look at replacement cost going in and we look at replacement cost going out.

Craig Mailman - KeyBanc

Okay, that's fair. And then just lastly, David, what do you feel as your dry powder today for future acquisitions?

David O'Reilly

We finished the quarter at 6.2 times on a net debt to EBITDA basis. The asset sales bring us down to about 6 times, even. And obviously none of this contemplates because we're using trailing EBITDA kind of the underlying NOI EBITDA growth as a result of a lot of displacing activity that we've been talking about throughout this call. But just based on today's metrics without any sort of increasing the NOI and EBITDA numbers, it's about $100 million to $125 million to get to the high end of that change at 6.5 times.

Operator

There are no further questions at this time. I'd like to turn the floor back over for any closing comments.

James R. Heistand

Again, we thank everybody and one thing I just want to reiterate that the company has gone through an awful lot of transformation but as we looked at it today, all of the kind of transformative work has been complete, we believe we have the right team in the field, we have the right executives at corporate, we own the right assets, and I think now our focus is primarily on growing the value in the assets we own and continue to find assets that are going to create value to the company and hopefully going forward we'll have less knowledge relative to these one-time items that we had to deal with through the Company's transformation in the past. So we appreciate everybody's participation and support and look forward to seeing you all soon. Thank you.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

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