Highwoods Properties, Inc. Q4 2009 Earnings Call Transcript

| About: Highwoods Properties (HIW)

Highwoods Properties, Inc. (NYSE:HIW)

Q4 2009 Earnings Call

February 11, 2010 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:

James Feldman - Banc of America Merrill Lynch

John Stewart - Green Street Advisors

Chris Caton - Morgan Stanley

Brendan Maiorana - Wells Fargo Securities

Joshua Attie – Citigroup

John Guinee - Stifel Nicolaus & Company, Inc

Dave Rodgers - RBC Capital Markets

Chris Lucas - Robert W. Baird & Co

Presentation:

Operator

Ladies and Gentlemen, thank you for standing by. Welcome to the Highwoods Properties Fourth Quarter and Year-end 2009 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. Good morning everybody. 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. Please note, in yesterday’s press release we have announced the planned dates and times for our financial releases and conference calls for the remainder of the year.

Also, following the conclusion of today’s conference call, we will post senior management’s former remarks on the investor relations section of our website under the presentations section.

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, the terms and timing of anticipated financings, joint ventures, rollover rents, occupancy, revenue trends, and so forth.

Such statements are subject to various risks and uncertainties. Actual results could materially differ from those currently anticipated due to a number of factors, including those identified at the bottom of yesterday's release and those identified in the company's annual report on Form 10-K for the year ended December 31, 2008 and subsequent reports filed 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's 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 www.highwood.com.

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

Edward Fritsch

Thank you Tabitha. Good morning and thank you for joining us today. During our October conference call, I talked about how we view the path to economic recovery by borrowing from Glenn Mueller's market cycle thesis, outlined four stages. The stage one being fear and uncertainty; stage 2, wait and see; stage 3, the early stage of a growth cycle; and stage 4, sustained confidence.

From what we've experienced over the past few months and represented in outlook for 2010, we believe that the world remains in stage 2, although let's call it stage 2 plus. There is widespread confidence that the sky isn't going to fall and that the world is indeed round. However, this past recession has resulted in most companies generating higher productivity from the reduced work force, which tempers the outlook for 2010 job growth across the U.S. We expect a gradual transition to stage 3 to begin in 2011.

2009 was a year of solid accomplishments Highwoods. At the outset of the year, we outlined a detailed liquidity plan designed to further enhance our financial flexibility and provide us with ample dry powder to grow our business.

I'm pleased to report that we achieved every one of our financing goals including a long waited upgrade for annuities. The plan included paying up $339 million of debt, closing on a new unsecured and secured loans totaling a $182 million, obtaining a new $400 million unsecured credit facility with a $50 million accordion and raising a $144 million through an equity offering.

We also sold $89 million of older non-core properties at an average of 8.5% cap rate including $20 million of that in the fourth quarter. The lion share was the very successful $62 million sale of the three community retail centers in Kansas City. These properties were on average 55 years old and the sale enabled us to avoid $3 million in near term CapEx.

In addition, we maintained our $1.70 cash dividend and generated $25 million of free cash flow. Throughout the year we continued to improve the quality of our portfolio and outperformed the local competition in each of our core markets.

FFO for 2009 was $2.61 per share, excluding gains on debt extinguishment and a fourth quarter impairment charge related to two non-core office parks and a non-core industrial park in the Triad.

During the year we placed a $169 million of 91% lease development in service and our wholly owned development pipeline now is $69 million and 48% pre-leased.

We are very pleased with our acquisition of the 4200, Cyprus Office building in West Shore Submarket of Tampa. Including planned improvement cost, our total investment in this asset was $24.7 million. The property is 93% occupied and currently generates annualized NOI of approximately $3.2 million.

Our 2010 outlook reflects our belief that the leasing environment will remain challenging and renewals will continue to dominate. Year-end occupancy in our wholly owned portfolio is projected to range between 87% and 89%. With a dip in occupancy in the first half then improving that was removed through the second half of the year.

We expect continued pressure on cash rents as customers maintain the upper hand in lease negotiations. G&A is forecasted to be lower in 2010 as compared to 2009 by 10% at the midpoint of our range.

In 2010, we are projecting between 50 and $200 million of acquisitions where we have the means to acquire more if opportunities arise, to-date we've seen few active targets. We have not reflected the impact of any acquisitions in our 2010 guidance.

We employ a discipline yet a nimble process in valuating potential acquisitions. When scoring an acquisitions opportunity, we evaluate many factors including does it enhance our franchise and improve the overall quality of our portfolio, is it a differentiated asset, what are the projected returns, what's the rent rolls compensation.

Our return is impart predicated on the answers to these and many other fundamental questions. Obviously if an acquisition is squarely bulls eye, our return hurdle will be different than for property that enhances our franchise but has some near term issues such as lease op or CapEx et cetera.

On the disposition front, we expect to sell between 50 and $150 million of older non-core assets including a number involved Winston-Salem properties, a market we remain committed to exiting.

Although development opportunities remain scares, we are pursuing a number of build-to-suit deals and have projected up to $50 million of development starts in 2010.

Our top priority in 2010 leasing space, long-term our focus remains unchanged, discipline, and opportunistic, remain committed to owning the best asset in the best served markets and maintaining a strong and flexible balance sheet.

We will continue to provide excellent customer service network with brokers refine and execute on our acquisition wish list and actively market our builder suite development expertise. All built on the foundation of being good stewards of our shareholders capital.

Mike.

Michael Harris

Thanks Ed and good morning everyone. Leasing activity picked up slightly in the fourth quarter. We signed 117 first and second-generation leases totalling 1.3 million square feet, our second best quarter in 2009.

For the year, we signed 492 leases totalling 4.6 million square feet, which is respectable given the challenging economic environment. 74% of the leases signed in the fourth quarter were renewals. Many customers remained consumed with running their business on the heels of the recession, so expanding or relocating their offices is not a high priority.

Occupancy in our wholly owned portfolio increased 100 basis points from the third quarter to 88.8% with all three segments, office, industrial and retail reporting increased occupancy.

Occupancy and our office portfolio continues to be higher than the overall market occupancy in each of our core markets. This is a result of our strategic plan to cull out non-core asset and focus our portfolio into better sub markets, which were more resilient during economic downturns.

Additionally it is testament to our leasing team, who have been in charge with leaving no stone unturned in capturing more than our fair share of deals in the market. We also know that mini customers are looking more closely at their landlord’s ability to fund TIs and leasing commissions. This is a big advantage to Highwoods given our financial strength.

A number of our leasing metrics were heavily impacted this quarter by two large, long-term government leases. The larger of the two was a 280,000 square foot transaction in Atlanta with the Georgia Department of Revenue comprised of a 226,000 square foot renewal and a 54,000 square foot expansion. This government agency is consolidating their operations in our 1800 Century Center and the lease runs through to mid 2021.

The second lease is a new deal with a GSA and the Pamlico Building in Raleigh for 68,000 square feet. This lease runs through late 2019. As outlined in the press release, excluding these two transactions, our leasing CapEx was $8.39 per square foot and average term was 4.7 years both inline with or above quarter average.

Likewise, when excluding these two transactions cash rent growth on office lease assigned would have declined 4.9% and GAAP rents on office leases would signed would have increased 4.6% both an improvement from the third quarter.

Average in-place cash rental rates across our total portfolio rose 2.1% from a year ago and in our office portfolio they were up 2.3%. While leasing fundamentals and all of our markets remain challenging, we're hopeful that rents are stabilized and we expect they will remain flat in 2010.

There is little doubt that customer still have the upper hand and lease concessions including turnkey TIs will continue to be part of most relapse. Turning now to our markets, our heavy concentration in the best submarkets in both national and Memphis has served as well.

In national, we ended the year with 95.1% occupancy and occupancy in our Memphis portfolio was 91.5%. We leased 137,000 square feet in Raleigh on par with the third quarter in addition to the 68,000 square foot GSA lease, we also signed a 16,000 square foot first generation lease at CentreGreen bringing leasing at this development project to 92%.

Leasing activity has slowed somewhat in Tampa. However our occupancy at 90.9% continues to significantly outpace the market and new construction in that market is at a virtual standstill.

Available sublease space declined 40 basis points quarter-over-quarter to 1.3%. The rate of job losses slowed, and the residential housing market has experienced a slight improvement. However it's going to take several years of employment growth in Tampa to get commercial real estate back on track.

We leased slightly over 500,000 square feet in our industrial portfolio, a solid quarter. The majority of activity was in our Triad division, where we've signed 11 leases totaling 290,000 square feet. Despite this leasing volume, we expect occupancy in our 6.5 million square feet industrial portfolio to remain in the mid 80s throughout the year.

As Ed referenced, 2010 will be a challenging year for landlords. We’re fortunate to have cycle tested division heads, seasoned leasing agents, well located properties, and a strong balance sheet caters to this period. Terry?

Terry Stevens

Thanks Mike. We’re pleased with our financial results for the fourth quarter and the full year. Excluding a $13.5 million impairment charge, FFO for the quarter was $45.2 million or $0.60 per share. For full year 2009, FFO excluding impairments and gains on debt extinguishment was $187.9 million or $2.61 per share, which compares to $175.9 million or $2.70 per share for full year 2008.

Reduction in FFO per share is mostly due to dilution from our liquidity transaction specifically higher shares outstanding from our equity raises in September of 2008 and in May 2009, lower NOI from $82 million in property dispositions during 2009 and $182 million from new unsecured and secured loans in 2009.

Average shares outstanding were 72.1 million in 2009 up 13.5% from 63.5 million average shares in 2008. Total revenues from continuing operations were down seven tenth of a million dollar this quarter or 0.6% compared to the fourth quarter last year. Revenues from same properties were down 4.3% due mostly to a 3.4% reduction in average same property occupancy compared to fourth quarter last year.

The lower same property revenues were offset by 32% increase in revenues from development and other properties not yet in the same property pool. For the full year revenues from continuing operations were up $3.7 million or 0.8% compared to 2008.

Cash NOI from all continuing operations was up 0.5% in the fourth quarter compared to last year to give a positive impact from our fourth quarter acquisition of the 4200 Cyprus building in Tampa and from development properties partly offset by 2.8% decline in same property cash NOI.

Cash NOI exclude straight line rents and lease termination fees. For the full year total cash NOI from all continuing operations was up 1.4%. Same property cash NOI for the fourth quarter and for the full year were both down 2.8%. While revenues in the same property portfolio were down from lower occupancies operating expenses in both the fourth quarter and full year were also down due to our continuing efforts to reduce operating cost across our entire portfolio.

This reduction in operating expense was achieved despite increases in utility rates and higher real estate taxes. Kudos to our asset management team for holding the line on operating expense while still maintaining superior customer service.

G&A for the quarter was $700,000 higher than fourth quarter 2008, excluding a $1.5 million defect from the market value change for deferred compensation liabilities which is fully offset by corresponding increase in other income G&A was down $800,000 primarily from lower salaries and fringe benefit cost from headcount reductions earlier in the year and lower dead deal cost partly offset by lower capitalized overhead.

The company is fully hedged on its deferred compensation liabilities but the offsetting effects flow through two separate line items in the income statement as required by GAPP.

For the full year G&A was lower by $1.4 million, the decrease was caused by $2.5 million lower dead deal cost, $4.2 million in lower salaries, benefits and incentive compensating and $1.0 million in lower other cost currently offset by $3.6 million in deferred compensation market value changes and by $2.7 million in lower capitalized G&A.

Net interest expense this quarter was down $2.1 million compared to last year largely due to approximately $120 million in lower average debt balances. This reduction was partly offset by $800,000 in lower capitalize interest.

On a full year basis, interest expense was down $11.6 million due to lower debt outstanding and lower average rates on that debt offset by lower capitalized interest. Deferred dividends for the full year were lower by $3.1 million as a result of our retirement of $53.8 million of preferred stock in September of 2008.

The favorable impacts on total FFO per share from the reductions in interest expense and preferred dividends was offset by the higher number of common shares outstanding. We expect interest expense to be higher in next year from higher spread and fees on our new credit facility, projected increases in LIBOR, which will increase the cost of our floating rate debt and from lower capitalized interest.

In December we closed on a new 38-month, $400 million revolving credit facility with a syndicate of 12 banks. The co-book lenders were BofA Merrill and Wells Fargo. The facility has a $50 million accordion feature that we can exercise subject to future bank commitments.

There are no borrowings currently outstanding on the new facility, which bears interest and LIBOR plus 2.9%. There is no LIBOR forfeiture in our facility and the annual facility fees are 0.6% per year. Other terms and covenants are largely unchanged from our previous facility.

Our balance sheet is in great shape as we have no debt maturities in 2010 and only a $137.5 million maturing in 2011, which is a bank term loan. This assumes that we do exercise our unilateral right to extend our $70 million security construction facility from December of 2010 to December 2012. This facility currently has $42 million outstanding.

We also issued our initial guidance for 2010 at $2.31 to $2.49 per share. The key assumptions underlining the guidance were also included in our release.

Operator we’re now ready for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from James Feldman - Banc of America Merrill Lynch.

James Feldman - Banc of America Merrill Lynch

Terry, I was hoping you could let us know what your 2010 guidance range I mean in terms of AFFO and dividend coverage?

Terry Stevens

For AFFO, we expect to be tighter than this year where we had approximately $25 million of free cash flow after paying all the common dividend. So we do expect that to come down next year but still be in the positive range. We haven't put out an exact estimate on that number however but it will be lower than 20, our 2009.

James Feldman - Banc of America Merrill Lynch

Okay, so slightly above the current dividend?

Terry Stevens

It will be above the current – yes, it will, but less than $25 million above.

James Feldman - Banc of America Merrill Lynch

I guess big picture for anyone there, we're trying to figure out when cash flows for the business could bottom. Do you have a sense, is that a 2010 event I mean is that like a, it's not a particular quarter but do you think that could happen on a quarterly basis in 2010, do you think 2011 full of lower year?

Edward Fritsch

My view that would be that there's a blend of I think rents will continue to be tough this year and CapEx will continue to be tough this year and CapEx will continue to be tough this year. But then as thing begin to reverse and we get some lift in rents and we at least get a piece of the baton in negotiations with regard to TIs, some of that will soften but as we build back occupancy, we'll be outlaying more cash. So it could be in 2011 as we and others build occupancy and incur the expenses to do that.

James Feldman - Banc of America Merrill Lynch

Okay, and then finally on the acquisition market, you included some acquisitions in guidance, can you give us a sense of what kind of yield do you think you can get? And then what gives you conviction that you can get that level of acquisitions done given the amount of competition we’re seeing out there?

Edward Fritsch

As you know, we've got a pretty active or energized detailed wish list. We mentioned in our prepared remarks that we haven't seen a lot of activity in what we think attractive assets that we'd like to own. We've talked about pricing our bids at a number above our weighted average cost of capital. If the acquisition is right in bulls' eye, then the spread will be more nominal than it would be if it were a greater spread.

Like let's say there were some leased up opportunities there or there were some CapEx issues then we would have a much wider spread. But what we want to be careful about is to not put out exactly what our WAC -- anybody can compute our WAC, what we don't want to put is what our margin above WAC would be, because those bidding against us for an asset and prospective sellers would know what we would be pricing.

But we’re sticking to the criteria that I outlined in my script with regard to how would underwrite or classify a target for us. We have seen a couple of packages in the market. We feel that there maybe some more that will come towards the middle or later part of the year that we could play on.

Terry Stevens

And Jamie this is Terry, just to clarify, one thing we said in the -- leading to the guidance section in the press release was that the range that we gave of $2.31 to $2.49 for next year, does not include any impact from dispositions or acquisitions.

Even though we have a view that we can achieve some of those during the year, we didn’t put any impact for those in the guidance. So everything else that is reflected in -- under the assumptions that you see are in that range of guidance for next year.

Edward Fritsch

And Jamie what we tether the upper end of our guidance was, dry powder available today in order to keep our own internal debt metrics where we think that they need to be, so to maintain debt levels that are appropriate in our view and that’s how we drove the 200, we don’t necessarily have bid that for $200 million for the acquisitions today.

Operator

Our next question comes from John Stewart - Green Street Advisors.

John Stewart - Green Street Advisors

Sticking with acquisitions for a moment, Ed can you maybe touch on the Tampa acquisition in particular, I know there is some near term rollover so maybe the yield comes down a bit, but what does the stabilized yield look like and how did you source that? Was it an off-market deal and what can you tell us about that transaction?

Edward Fritsch

It was a marketed deal. We had a package on it and we bid on it with what we understood to be other cash buyers and we were trying to have really leveraged the fact that we were cash buyer and differentiate ourselves form others but we understand that there were some other cash buyers.

I think one of things that enabled us to win it with a volume of due diligence that we put into our bid before we even bid, they saw the volume at time that we spent at the asset making sure that we dialed in our best, as best we can.

This nominal role, there is some rule that becomes meaningful in later years like 2013, 2014 but near term there is not much role. So the going in cap was like an 12 6 and we set that over the first five years based on our conservative underwriting that we would still be well north of 10.

John Stewart - Green Street Advisors

So I guess, was that just a one off deal a moment in time that you don’t expect to be able to source anything else like that this year.

Edward Fritsch

Well I wouldn’t want to say never but we haven’t seen, we haven’t seen that thus far, we have seen a few packages, we don’t know how they will play out, we’ve put our bid in on a couple and will just have to see how they play out.

I do think that we are very pleased with how we ended up with a 4200 building. I guess – to clarify, I just, your expectation to be able to replicate that in large magnitude is suspect.

John Stewart - Green Street Advisors

How about on the disposition side, do the impairments set the stage for getting out of Winston-Salem this year and can you also clarify, I think one of the charges was on Greensboro asset. Is the entire Piedmont Triad market on the block?

Edward Fritsch

Yeah, good question. I appreciate you asking that John so we can clarify. Winston-Salem, we said in April of 2007 that we like to get out of it. Our presence there is dramatically lower today than it was when we started.

We had hoped to get out in a one-fell swoop closing, but we weren’t successful in that. So we have sold one-off assets pretty methodically since we’ve tried to get out of it. But yes, we want to get out Winston-Salem in total.

With regards to Greensboro, no, we’d like to stay there. The asset there we took the impairment on is a five building complex called Chimney Rock and they are older non-core industrial assets in the Greensboro market that we’d like to exist.

John Stewart - Green Street Advisors

And then maybe lastly Mike I know you touched on some of the leasing deals during the quarter, but could be give us just a little bit of additional color in terms of the outlook or activity on the ground particularly in Raleigh and Atlanta, what do you see over the course of 2010?

Michael Harris

Sure John. As I mentioned, we believe that ‘10 is going to continue to be a fairly flat market for us from a rental standpoint. We’re hopeful as it were kind of trudging on the bottom here for a period of time and as Ed mentioned hopefully get some, some lift. This clearly goes back to job growth as you know in our markets and we have seen some job contraction in the South East and largely because people flocked in here to seek jobs.

So, oddly enough, some of our unemployment is come from people coming into our markets including Atlanta and Raleigh looking for jobs, which has spiked that. So I would expect that leasing activity itself will be -- I would say fair.

We still seeing a good number of tire kickers in the market is still taking a little bit longer to get a deal done but there's movement, its just not totally frozen this time a year ago I think there was a deer in the headlight syndrome, when people weren't sure what's going to Lehman collapse, financial market collapse et cetera.

So we're seeing activity, we had an all hands leasing conference call last week and it was little bit of mixed results but I think that all in all our brokers were saying, hey we're starting to see deals, the quality of the deals themselves in terms of what it cost us to get new deal, it's a little more to pry a tenant lose from an incumbent landlord, good for our retention but little tougher to get somebody out of a building unless they're looking to either expand or contract they can't do so in place.

Edward Fritsch

John this is Ed, just to put a few notes in addition what Mike said, I reviewed my notes last night from that call that Mike referenced that we hosted last week and the common theme across all the presentations made by the various directors of leasing into the divisions was that there's more activities, there's more showings, there are more RFEs but does not translating into more leasing that there seems to be lot of shopping against renewal proposals driven by tenant broker churn.

Then to -- just a self serving comment one of the directors at leasing have thought made a comment that tenant brokers are focused more than ever on who the landlord are, who their landlord would be and others are churned in and say that they're seeing that and hearing that particularly where leases don't stop for some period of time in the second piece of the commission is further out.

So our focus are fully engaged in touting our financial plan with regard to being able to renew and to win market share from the competition.

Operator

Your next question comes from Chris Caton - Morgan Stanley.

Chris Caton - Morgan Stanley

Mike, I appreciate the comments on Raleigh. Specific question there is how is the team doing on back filling some of the spaces that was vacated to fill up RBC tower, so I just – like GlenLake or on Glenwood Av?

Michael Harris

Actually Chris the biggest space vacated by RBC was here in tower 2, which is in Highwoods office center and there’s actually some good activity in that park right now. You never know till I get them signed, but couple of pretty good size prospects that we’re working there and that’s very encouraging.

The other space that was vacated was by a Pointer store with 3600 Glenwood Avenue and there’s likewise some activity in that building. Nothing signed, but I would say compared to a quarter ago, two quarter ago, we’re seeing better activity.

And just as a reminder again, RBC actually kept 28,000 square feet in that tower. So they didn't totally vacate it and we had back filled a part of Pointer space with a financial services company shortly after Pointer left.

So I think we’re little bit encouraged certainly on the tower 2 space in recent weeks, that activity has picked up. We just hope we can now get them across the line and to sign the leases.

Edward Fritsch

And Chris we also took the 3600 building, the Pointer’s (inaudible) and we gutted it, so we took it back to shell condition that we – you're not working with the 20 plus year old second gen space there, we also redid the lobby. So I think we are very well positioned, it's a great street address, long term they’re good buildings.

Chris Caton - Morgan Stanley

Yeah, absolutely. So I think you've a couple of floors there, so the strategy would be to do full floor or you still holding on to that full floor given their requirements you see in the market or you got a plan where you might chop that up?

Edward Fritsch

That’s right, it’s a three story building and Ameriprise went into the first floor and we are hopeful that we have single tenant users for floors two and three, and so yeah we have decided to go ahead given Ameriprise was about 10 or 12,000 square feet, they want on the first floor.

Operator

(Operator Instructions). Our next question comes from Brendan Maiorana - Wells Fargo Securities.

Brendan Maiorana - Wells Fargo Securities

So, Terry on the guidance, just trying to reconcile your same store NOI guidance is down 2.5 to 3.5, it seems like the occupancy is only going to be down roughly about 100 basis points overall, because you are fairly steady throughout the year.

And you mentioned that you’ve been taking some operating cost out of the business, I know rents will be down a little bit on new leasing activity but just I would you’re your in-place cash rent bumps are going to offset that. So I’m struggling to kind of figure out why same store NOI would be down quite that much?

Terry Stevens

I think Brandon, by year-end we expect to get our occupancy back to the 87% to 89% range that we listed in our assumptions. We do expect occupancy during the middle of the year to be a little bit lower. So I think on average, the average occupancy year-over-year will be a little lower perhaps than what you were using, that maybe part of the difference.

And also having gotten lot of our expense down dramatically in 2009, you start pumping, I think a lot, not all but a lot of the maybe easier changes to make have been reflected, it will be a little harder to get the same percentage decreases on operating expense in 10' over 09'.

So we've already made a lot of progress. So those are probably two factors that might account for a little bit different view than what you had.

Brendan Maiorana - Wells Fargo Securities

In terms of the CapEx during the quarter, was the CapEx for the two large deals that were signed during the quarter, is that been reflected in the amount of CapEx dollars that were spent during the quarter?

Terry Stevens

The CapEx that was committed that you saw on page 13 of the supplemental will not get spent or incurred until next year sometime. So those were not in the fourth quarter CapEx numbers that appeared on the page 2 of the supplemental.

Those CapEx numbers on a quarterly basis tend to be somewhat lumpy and I went back and looked at the level of commitments that we’ve done over the years and the CapEx is tracking on an annual basis pretty close to the commitments.

We committed for example $32 million in CapEx during all of 09' and we spent in leasing capital just about $30 million in 09' even though its on a lag basis, its at least one to two quarters lagged between what you commit and when you get it smacked.

And some aspects of your commitment might not get incurred for a year or two later because part of its leasing commissions and if you are doing early renewals some of the spend is pushed out of ways.

But I think by enlarge the incurred cost are tracking generally the committed levels and but by quarter it can vary a lot. And then finally, the building improvement part of the CapEx does tend to be a little bit weighted toward the back end of the year.

Late summer and fall are good times to get a lot of the BI work done, a lot of that involves, exterior work. And so that if those things do tend to bunch up in the second half of the year and you see that in the data this year as well.

Michael Harris

This is Mike. The DOR release, which is the larger transaction impact, they are just in the process of really comparing plans for this. So that, that process could protract out well over the year and it’s a large transaction with 280,000 square feet to go in and do all the work they asked. I don’t think we really start to seeing those dollars coming until second half of the year.

Brendan Maiorana - Wells Fargo Securities

Right. I mean the dollars that you guys have committed and it just your earlier comment say you expect to be AFFO, your AFFO coverage on the dividend should be positive for the year, that’s including all of the CapEx dollars from those two deals being met in 2010 or (Multiple Speakers)?

Terry Stevens

It does and we the amount of CapEx that we expect to spend in 2010 is definitely higher that what you see on -- that we did spend in 2009. So, but even reflecting that we -- as I said earlier to Jamie’s question, we do expect the end of the year cap positive.

Brendan Maiorana - Wells Fargo Securities

And then, last one on the CapEx side. Are there any markets where you are seeing more lease concession pressure than some of the other ones? We’ve heard from some of your competitors that Atlanta and Richmond have been a little bit soft. Are you guys seeing that, can you give us sense by market where there maybe some softness?

Terry Stevens

It’s kind of hard, what pool do you jump in and get water? I mean we’re seeing concessions across the board I don’t know that anyone particular is tougher because some of it's just driven by what we have in a way of mix of space and the quality of the building and the quality of the lease that we're trying to rely, but we probably are seeing competition offer up more concessions in Raleigh and Richmond than in any of the other markets we are in.

Edward Fritsch

Yes, Atlanta would be coming in third and then from there it seems to be less. We just build supply in demand and largely result of there was Raleigh delivered a fair amount of new developments back into '09 and that's creating some more concession, pressure there.

Brendan Maiorana - Wells Fargo Securities

Then just lastly for Ed or whoever I guess, when you're doing your underwriting for acquisition opportunity and you think about – I'm not sure exactly what your timeframe is but I'm assuming as like a five or ten year underwriting.

Have you looked at what the exit value is on a per square foot basis as you were kind of thinking about investing in properties and compared that to where the values may have been on a per square foot basis at the peak?

Edward Fritsch

Brendan obviously we don't, as we've said in many case is that we really don't run, I mean we didn't do a IR computation, but there's so many data points that go into an IR calculation but it's all driven by the exit cap rate which is difficult to project, in our mind ten years out.

So we typically just look at what the building would bring to us in a way raising the quality of what we have in the market and then what the likelihood that building would be one of the last to de-lease and one of the best re-lease going through a downturn.

So we look at on a long-term hold and suddenly we look at what the price per square foot would be the day we'd sell it 10 years out versus the day that we buy. And we are looking at price per square foot going in today versus what we would consider a today replacement cost and how it compares on a cap rate both first year and through the first five years on average. But we’re pretty conservative in the way that we underwrite these assets.

Brendan Maiorana - Wells Fargo Securities

So just in terms of percentage – I guess in terms of your underwriting from spread above your WAC, is that suggesting then that you're underwriting to kind of the current year cash flow or cash flow once it stabilizes above your WAC, if you're not really looking so much with the exit valley.

Edward Fritsch

Yeah, we'd look at first year and then we'll look how it runs – how it looks for the first five years and then depending on what the rent roll – let's say hypothetically there’s a big move out and 6.5 years into it, then we'll look at it over the 7 year term, so we can understand the implications of our underwriting for that large role because we want to be conservative on that.

So I think a fair amount of it is dependant upon what the rent roll says with regard to expirations. The goal is to create value and add an asset that’s better than the average of what we own today.

Operator

Your next question comes from Joshua Attie – Citigroup.

Joshua Attie – Citigroup

Hey it's Joshua Attie with Michael. I have two questions; first one, sorry if you said this already, but can you explain what’s driving the G&A lower in 2010 versus 2009?

Terry Stevens

This is Terry Josh, just a couple of things driving G&A down. Salaries and benefit cost are definitely part of it because we have reduced our head count and worked hard to get the shop as lean as we can. Incentive comp, bonus and long-term incentive is also down this year over last year.

Another big component, our debt deal cost, those are costs where we incur free development or other cost relative to deals that we are chasing and if we don’t get them and no one can bat a thousand on those things. We have to write-off those investments at that time that alone was down $2.5 million in ’09 compared to the amount that we had in ’08.

Going in the other direction, we are, since we are to have less development in process, we are capitalizing less of our G&A, that’s for the year is about $2.7 million and higher net G&A, because we are just capitalizing less of what we are incurring.

And finally the biggest item is, is this non-cash change in the value of our deferred compensation liabilities and I mentioned that in my script as well that we have deferred comp liabilities and we have deferred comp assets, so we are fully hedged but both of them have to mark-to-market and as value of those securities go up or down we get gains and losses on the portfolio of assets and we get losses and gains on the amount of our deferred comp liabilities.

Those things flow through G&A and they flow through other income, but in opposite directions. No net bottom line, but it creates volatility in those two line items. That difference was $3.6 million for the year. So G&A was higher, which makes sense, because during 2009 the stock market was strong and the value of the securities went up and so none of the deferred comp liabilities went up.

But then we also had a lot more other income based upon the value of the securities. So it’s a lot of noise on that particular point but the bottom line is we are just working hard to lower all of our operating cost including G&A.

Joshua Attie – Citigroup

It seems like, that your guidance assumes occupancy losses early in the year and occupancy gains later in the year. How much of visibility do you have on those gains, are they based known lease signings or what you have under negotiation?

Edward Fritsch

It’s a mix Josh, some of it is spec leasing and some of it are transactions that we feel are fairly confident about, some of which are signed and some aren’t.

Michael Harris

And its, Michel speaking, and you should get paid for (inaudible), it’s a rather little bit of humor.

Joshua Attie – Citigroup

Just on the government side, I know that you went there, and it's like talking about these two government leases, which obviously impacted the least. I'm just wondering does that change all your thinking, I mean you've been pushing a lot of build-to-suit activity towards government tendency and increasing the government tendency overall.

But I guess if the spreads were that bad and you have to spend that much CapEx to get these governments (inaudible), is there, is it not all this cracked up to be.

Edward Fritsch

So are you saying our government is not all its cracked up to be.

Joshua Attie – Citigroup

It says I have a hard bargain.

Edward Fritsch

I think that, one of the ways to look at that, we inserted a little table on page 4 of our press release that showed with and without as reported and without. But if you take the average term, average release term as reported was 7.6 years excluding the two government leases at 4.7.

If you divide that into the line above, the tenant improvements per square foot, it comes out within a penny, it’s a $1.78 as reported and excluding the two government releases, it’s a $1.786. So if the additional term, yeah the dollars are more, but the additional term it’s within a half a penny of being in line with the private sector leases.

Terry Stevens

And also Michael one thing most of these government transactions there was no outside broker involved there. So a little bit more commitment in leasing CapEx is appropriate because we rather have that money going back in our space if you would so that, when it comes down to renewal or for whatever reason they bake it at least we’ve got some hard assets in there that we pay for. So that’s actually a plus for those two transactions.

Joshua Attie – Citigroup

And then just on the G&A that the acquisition, now you have to expense all the cost related to deal flow. How much is actually embedded in 2010 G&A versus what was expense in 2009?

Edward Fritsch

Yeah, zero Michael in 2010. We didn’t include any assumptions in our 2010 guidance for acquisitions. So there is -- there is no built in accretion for anything that we would buy and we would just deal with that on a deal-by-deal basis, but we did provide in the guidance that we would hope to buy between 50 and $200 million.

Joshua Attie – Citigroup

So if you hit the high end, so the high-end of guidance includes $200 million of acquisition that does not include the write off or the cost to get them?

Edward Fritsch

No, no I’m sorry. We said that we would hope to do between 50 and 200, but we have not included any benefit or any negative impacts of making any acquisitions in 2010 in our range of 231 to 249. So there is no hit to G&A for expenses and there is no benefit to revenue for NOI.

Joshua Attie – Citigroup

Is that the same thing in the dispositions?

Edward Fritsch

Yes, that's correct.

Joshua Attie – Citigroup

So even though when the guidance table says dispositions and acquisition, the effects of those are not within the guidance range.

Edward Fritsch

That's correct and we state that in the release.

Operator

Your next question comes from John Guinee - Stifel Nicolaus & Company, Inc.

John Guinee - Stifel Nicolaus & Company, Inc.

You got about $5 million of assets held for sale net on your balance sheet, is that – I'm assuming that net of leverage?

Edward Fritsch

Yeah, correct.

John Guinee - Stifel Nicolaus & Company, Inc.

What does that net mean? Terry I guess. For net of depreciation? I'm not sure.

Terry Stevens

It's probably net of accumulated depreciation, that’s exactly what it means.

John Guinee - Stifel Nicolaus & Company, Inc.

Okay, how many square feet of assets you have for sale right now both wholly owned and joint venture?

Terry Stevens

In that particular line item or stuff that we’re trying to sell?

John Guinee - Stifel Nicolaus & Company, Inc.

The latter, trying to sell?

Edward Fritsch

Well, it's everything in Winston. The total amount is somewhere around 600,000 square feet. That would also include down that Chimney Rock that I referenced earlier that’s another 800,000 square foot of older industrial.

John Guinee - Stifel Nicolaus & Company, Inc.

Okay, and then the last question can you describe and update with what’s going on Des Moines? As I recall, you're effectively a lender there.

Edward Fritsch

Yes, we’re a passive investor.

John Guinee - Stifel Nicolaus & Company, Inc

In definite term or how does that come together?

Edward Fritsch

It came about through the J. C. Nichols acquisition in July of 1998 and when they were the passive investor and we just assumed their role. Along the way, we did true up some of the partnerships because they weren't all fifty-fifty period pursuit.

So we did that and over the past 12 years, it's been very beneficial to us. But it's certainly something that we look at because we don't have people on the ground there, and we don't have brand recognition there whatsoever in fact the Highwoods name is little known. So we've made a lot of money there but certainly it's not core for us and that it's not a Highwoods brand at a Highwoods operated division.

Operator

Your next question comes from Dave Rodgers - RBC Capital Markets.

Dave Rodgers - RBC Capital Markets

Really just last question for me that we've got left here is you talked about the activity on the acquisition you made in Tampa in the competitive all-cash buyers. Give us an update on the trend for your dispositions?

What’s the activity like, obviously pricing is not related to be, given the impairments but what does the activity look like, the likelihood that you'll continue to be or maybe continue to offer some sort of stellar financing on those assets? And do you think you can get out of those this year?

Edward Fritsch

Yeah, great question Dave because it's really what we are bidding on is different it's not a candid to all to what we’re trying to sell, we’re trying to continue to sell out of the non-core, non-differentiating assets. So there are more tertiary markets, and more tertiary assets.

Now for us again just as a reminder it’s a strategic move for us to sell these not a financial move, but we do want to get out of them. So we have put some into market and we have offered some seller financing.

But the activity is a prospect activity on this, I am going to hate I said this publically because it’ll come back to haunt me when we look at this, but certainly not that of which it would for the level of activity and the quality of buyers with regard to financial call that we saw in the competition for the Tampa asset.

These are more neither smaller, more local driven deals.

Terry Stevens

This would be a value add type situation to somebody versus optimistic versus core that we are looking at.

Dave Rodgers - RBC Capital Markets

You are getting enough activity where that you think you can make the transaction or effective transaction this year?

Edward Fritsch

Yeah, as long as you let me keep that word think in there, it’s all, we are certainly making efforts, it remains to be seen, but we are in conversations with prospective buyers. But I had to keep that word think in there, so it’s our expectation to get out of these by year-end.

Dave Rodgers - RBC Capital Markets

And those are not tied to the acquisitions, both the acquisition and dispositions are mutually exclusive this year?

Edward Fritsch

That’s correct and up to the $200 million, after that we would have to do something else to fund and still keep our own internal guidelines with regard to debt metrics.

Operator

Our last question comes from Chris Lucas - Robert W. Baird & Co.

Chris Lucas - Robert W. Baird & Co.

Terry just a quick question detail, do you guys have snow removal leakage in the fourth quarter and if so how much?

Terry Stevens

Snow removal, it was very modest in the fourth quarter, we did have a little bit more actual cost, but yeah the recoveries got most of that back so it was really very, very modest overall.

Terry Stevens

We do have some Chris obviously for the first quarter, we'll have some.

Edward Fritsch

Our total contract services OpEx was down pretty significantly. So we had mitigated a good bit of that, any increase we (inaudible) by other production in the contract services as Terry mentioned for the year.

Terry Stevens

Yes, we were only about $250,000 higher in 09' than prior year.

Chris Lucas - Robert W. Baird & Co.

Then Ed, on the wish-list can you remind us what the sort of relatives breakout between office, industrial, and retail component mixes of that overall wish list.

Edward Fritsch

Yes, I think it will be fair to say Chris it is, that it's virtually 100% office. We wouldn’t necessarily ignore industrial activities in Atlanta and Greensboro but you can expect our overall percent of revenues driven from office to grow as we work through those.

Chris Lucas - Robert W. Baird & Co.

You’ve been very proactive in commenting on the value of your balance sheet in this environment relative to whether it would be acquisition or tenant activities. I guess I'm wondering if where at a point in the process extending pretend where poaching tenants becomes a more active opportunity. How many of that.

Edward Fritsch

Sure, in our view in the current environment we are seeing very little migration in the markets like for example we are thrilled that Research In Motion RIM, the folk who, the technology backers to Blackberry are coming to Raleigh, Garmin the handheld GPSs are coming to Raleigh, and then Deutsche Bank came to Raleigh, all net positive absorption but there is, is not enough of that, its really we can grow market share.

So the only way to grow market share.

So the only way to grow market share today is recognize that, if we have 25% of the market, 3 out of 4 people we meet our prospects and they’re leasing space from a competitor.

So it’s our hope to grow market share by doing exactly what do you say and put it away from the competition. Now we need three forces when we do that, the probability renewal is there, now the competition is there and then the customer or the prospect at that point in time is still has to tend to make a move.

But we are pushing that hard in particularly with any RFP that comes out in the market and we, as I mentioned in the past we are now having a larger number of brokers express a lot of interest in understanding our commission process.

Chris Lucas - Robert W. Baird & Co.

You’ve got two – there have been rumors I guess two relatively large re-locations looking actually many of your markets. Any senses to what the status of those are and if you are competing if you feel like you’re in the competitive mix with those, my understanding maybe Radio Shack.

Edward Fritsch

Yeah, I don’t -- I don’t know the names of the customers I just know project names, but we haven’t heard much on them lately.

Operator

There are no further questions at this time.

Edward Fritsch,

Okay, I'll just thank everybody and also I want to let everybody know that we will file our 2009 10-K after today’s market close for any additional detail that you may want and of course always feel free to give to us a call.

Thank you very much.

Operator

Ladies and Gentlemen that does conclude the conference call for today we thank you for your participation and as such you please disconnect your lines. Have a great day everybody.

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