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Parkway Properties, Inc. (NYSE:PKY)

Q4 2013 Results Earnings Conference Call

February 18, 2014 09:00 AM ET

Executives

Jeremy Dorsett - EVP and General Counsel

Jim Heistand - President and CEO

David O’Reilly - CFO and Chief Investment Officer

Jason Lipsey - Chief Operating Officer

Analysts

Jamie Feldman - Bank of America

Craig Mailman - KeyBanc

Josh Attie - Citigroup

Alexander Goldfarb - Sandler O’Neill

Dave Rodgers - Robert W. Baird

Rich Anderson - BMO Capital Markets

Brendan Maiorana - Wells Fargo

John Guinee - Stifel

Michael Salinsky - RBC Capital Markets

Operator

Good morning and welcome to the Parkway Properties Incorporated Fourth 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. As a reminder, this conference is being recorded.

It’s now my pleasure to introduce your host, Jeremy Dorsett, Executive Vice President and General Counsel. Mr. Dorsett, please begin.

Jeremy Dorsett

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

Before we begin, I would like to direct you to our website at pky.com, where you can download our fourth quarter earnings press release and the supplemental information package.

The earnings release and supplemental package both include a reconciliation of certain non-GAAP financial measures that will be discussed today to their 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 statement disclaimer in Parkway’s fourth quarter earnings press release for factors that could cause material differences between forward-looking statements and actual results.

With that, I’ll now turn the call over to Jim.

Jim Heistand

Good morning and thank you for joining us today. 2013 marked a busy and successful year for Parkway as we made significant progress executing on our stated strategy on building a portfolio pipe quality Class A assets in targeted submarkets throughout the Sunbelt. The was highlighted by included with the closing of our $1.2 billion merger with Thomas Properties Group where we acquired five assets in Downtown Austin and two assets in the Galleria and Westchase submarkets of Houston.

Since the deal closed in late December, we have been affectively integrating the assets and actively pushing our leasing strategies and business plans for these assets to capitalize on the growth opportunities that we believe exist at the property. The Thomas merger was the culmination of a strong year and repositioning Parkway.

During 2013 we acquired 16 assets for approximately $1.7 billion and sold six assets for approximately $100 million. In addition to significantly upgrading our portfolio, we realized strong leasing and operational performance from existing assets this year. We signed 2.4 million square feet of leases which equates to over 17% of our average portfolio size during 2013 and one of the strongest years of leasing volume in the company’s history.

For the year, our share of same store recurring cash NOI increased 8.2%. Our average in-place rents at the end of 2012 were $24.15 compared to today’s in-place rents of $27.65 or increase of $3.50 per square foot. With the addition, the Thomas Properties assets combined with improving fundamentals under our core markets, our mark-to-market of in place leases have turned positive at 8.3% compared to a negative 1.5% at the end of last year.

Our strong leasing activity led to solid quarter of financial results during the year. Our reported FFO for the full year was $0.90 per share. Our adjusted FFO which rose transaction cost related to the merger the cost associated with the transition of our back office function from Jackson, Mississippi to Florida and the redemption of our Series D preferred stock was $1.27 per share.

The outperformance in adjusted FFO relative to our guidance was principally attributable to core NOI outperformance. Occupancy at the end of the year was 88.9% which includes the recently acquired 7000 Central Park and the Thomas Properties assets. Excluding these acquisitions, our year-end occupancy was 89.3% which is within our stated outlook range.

Our customer retention for the full year was 73.3% not only was this 910 basis point improvement from the year ending 2012, it was a strongest year of retention we have had at Parkway since 2001. While assets are beginning to reflect improved fundamentals, we believe opportunities still exist in select sub-markets as we continue to be proactive and identify value add and core plus asset where we believe we can create value for our shareholders. Our recently announced investment in the Bank of America Center here Orlando and the acquisition of the JTB Center in Jacksonville demonstrate our convection in these two markets and we believe additional opportunities exist in our core remaining markets.

Although we have come a long way over the past two years, we believe there is still much to achieve and we are excited to begin the next leg of growth for Parkway. I will now turn the call over to David to give you an update on investment activity during the quarter.

David O’Reilly

Thank you, Jim. As we’ve previously announced we completed the Thomas Properties merger on December 19th. The stock per stock transaction was [valued] at $1.2 billion. For the seven assets we acquired the implied real estate value was $866 million or $266 per square foot and represents an implied cap rate of 6% on a cash basis and 8.1% on a GAAP basis. We own a 100% interest in CityWestPlace a 1.5 million square foot office complex located in the West Chase submarket of Houston as well as San Felipe Plaza, a 980,000 square foot office tower located in the Galleria submarket of Houston.

Parkway also acquired an indirect interest in a joint venture with Madison International Realty and this California State Teachers' Retirement System that resulted in a 33% interest in Frost Bank Tower, One Congress Plaza, One American Center, 300 West 6th Street and San Jacinto Center, all located in the Central business district of Austin. Since the merger closing Madison exercised its right to put, it's approximately [17%] interest in the joint venture to Parkway for a purchase price of approximately $41.5 million. Subsequently CalSTRS exercised its option to purchase up to 60% of Madison's former interest in the venture on the same terms as Parkway. As a result of these transactions which were completed earlier this month Parkway's interest in the Austin portfolio as of today is 40% with CalSTRS owning the remaining 60%.

The price for these transactions represented in asset valuation that was approximately $117 million higher than the implied value of the real estate at merger closing. Highlighting the attractive basis, Parkway achieved on these assets through our merger compared to current market pricing for these assets.

On November 5th Parkway and its joint venture partner foreclosed and took ownership of 7000 Central Park, a 415,000 square foot office building located in the Central Perimeter of Atlanta, Georgia. We have previously acquired a 40% common equity interest in a mortgage note secured by the asset. Our $45 million, investment was comprised of an investment of approximately $37 million for a preferred equity interest and $8 million for a 40% common equity interest.

On December 13th, we put a secured financing on the asset, totaling $30 million which was used to partially repay our preferred equity investment. The property is currently 74.8% occupied with a cash cap rate of 5%. We’re excited to own this value-add property and feel that it is well positioned to benefit from the strong office fundamentals being realized in the Central Perimeter Submarket.

On December 8th, we finally completed the acquisition of Lincoln Place, which is 140,000 square foot Class A office property located in the South Beach submarket of Miami. We have purchased the asset for a gross purchase price of $65.4 million which included the assumption of the $49.6 million existing first mortgage. This represents the full year cash cap rate of 6.8%. Lincoln Place is currently 100% leased to LNR Corporation, through June 2021 with no renewal or early termination options.

On December 23rd, we acquired our partner’s 70% interest in the Bank of America Center which was previously owned in our Fund II joint venture. The purchase price was $52.5 million for the 70% we acquired and we assume the remainder of the existing mortgage secured by the property. This implies an initial year cash NOI yield of 6.3%. The Bank of America Center which serves as our headquarters is a landmark asset in the Orlando CBD. With current occupancy of only 80.6% we believe this asset is well positioned to benefit from many growth in the CBD submarket, which we believe is currently only in the early stages of recovery.

We also continue the disposition of non-core assets in the fourth quarter with the sale of Lakewood II, a 123,000 square foot asset in Atlanta for gross purchase price of $10.6 million and a cash cap rate of 4.1%. Additionally, we completed the sale of Carmel Crossing, a 326,000 square foot asset in Charlotte for a gross price of $37.5 million and an 8% cash cap rate. Both of these assets were held in our Fund II portfolio with Parkway owning a 30% interest in each. The combined asset sales generated total net proceeds of $10.2 million. Additionally, the sale of Lakewood resulted in the gain of $5.9 million of which $1.8 million is Parkway share. And the sale of Carmel Crossing resulted in the gain of $14.6 million of which $4.4 million was Parkway share.

While it was a busy fourth quarter, the team is not slowed down at all heading into 2014. On January 30th, we completed in an off-market transaction, the acquisition of the JTB Center, which consists of three Class A office buildings located in the Deerwood submarket of Jacksonville, Florida.

We acquired the properties for gross purchase price of $33.3 million, which represents a cash cap rate of 8.3%, and was fully funded using cash received from our January public equity raise. The acquisition adds to our total ownership of the Deerwood submarket, which now stands at 1.3 million square feet.

The Deerwood submarket is benefited from the growing presence and relocations of back office operations of a number of prominent financial services firms including Bank of America, Deutsche Bank, and P&C.

According to CBRE research, strong leasing activity in the Deerwood submarket has led to total vacancy among the 8.2% as of the end of the fourth quarter. Lastly, in early January, we completed the sale of Woodbranch in Houston, Texas and Mesa Corporate Center in Phoenix, Arizona.

Woodbranch branch, a 109,000 square foot asset in Houston sold for a gross purchase price of $15 million, which represents a cash cap rate of 8.6%. Mesa Corporate Center, a 106,000 square foot asset in Phoenix, sold for gross purchase price of $13.2 million or cash cap rate of 5.4%.

These two asset sales provided total net proceeds of approximately $26 million. We expect to record a gain on the sale of Woodbranch of approximately $10 million during the first quarter of 2014. We recorded an impairment charge for Mesa Corporate Center last quarter in anticipation of the sale and we expect to record a gain on the sale of $489,000 during the first quarter 2014.

I will now turn the call over to Jason to give us an update on operations.

Jason Lipsey

Thanks David. We continue to see strong fundamentals across the number of our core markets which yielded positive performance for our portfolio in the fourth quarter. The Sunbelt continues to benefit from population and office using employment growth. For example Charlotte, the Bureau of Labor Statistics reported that Charlotte experienced the strongest employment growth of any major MSA in 2013 as the city’s unemployment rate declined from 9.4% to 6.6% over the past 12 months.

Atlanta, Cushman & Wakefield reported that there have been approximately 84,000 office using jobs created in Atlanta since February of 2010, driving the unemployment rate for the MSA to 6.8%. Florida, Pew Research recently reported that it expects Florida to create 176,000 new jobs in 2014, which represents 2.3% employment growth and would rank the state number five in projected employment gains.

Austin, the Milken Institute’s report on the top performing cities in the United States for 2013, which measures job creation and sustainability ranked Austin the number one city in the country.

Houston, Jones Lang LaSalle reported the Houston market absorbed 4.5 million square feet in 2013 with the Galleria, Westchase and Greenway submarket representing approximately 20% of total absorption. And finally Phoenix, according to CoStar, Phoenix ranked Number 10 in the United States for year-over-year increases in occupancy. Specifically continued corporate relocations have led to increased demand of office space in our Tempe submarket of Phoenix. CBRE reported that vacancy levels for Class A office assets in Tempe are 3.8% as of year-end.

Further, we continue to have success in implementing our operational strategy on recently acquired assets which are not yet included in our same store pool. I would like to highlight a few.

Tempe Gateway in Phoenix was 77% occupied upon acquisition; it is now 93% leased. Tower Place 200 in Atlanta was 82.7% occupied upon acquisition; it is now 91.9% leased. Phoenix Tower was 83.6% occupied upon acquisition; it is now 87.5% leased. Not only have we successfully upgraded our portfolio in integrated recent acquisitions, we’ve remained focused on driving strong results within our same store portfolio.

During the fourth quarter, Parkway share of same store recurring NOI increased 1.2% on a GAAP basis and 4.5% on a cash basis compared to the same quarter of the prior year. Our GAAP NOI margin also improved during the quarter to 62% which is an increase of 160 basis points year-over-year.

We finished the quarter at 88.9% occupied. This occupancy figure includes our value-add investment in 7000 Central Park and the 4.9 million square feet of Houston and Austin assets that we acquired from the Thomas Properties merger. Excluding these assets, our fourth quarter ending occupancy was 89.3% which is within our year-end occupancy guidance range of 89% to 89.5%.

Additionally, our lease percentage at the end of the fourth quarter was 90.2% which is 80 basis points higher from year-over-year levels. Excluding the Thomas Properties and 7000 [Central Park,] assets our lease percentage at the end of the quarter was 90.9%.

Our customer retention for the fourth quarter was 76.7%, representing an increase of 781 basis points from the fourth quarter of 2012. Customer retention for the year ended 2013 was 73.3%. As Jim mentioned, this was our best performance since 2001. I believe our customer retention is driven largely by our improved portfolio as well as our proactive approach to managing our expirations. Only 9.8% and 8.8% of our portfolio expires during 2014 and 2015 respectively.

During the fourth quarter, we signed a total of 572,000 square feet of leases at an average rental rate of $23.32. On the renewal leasing side, we completed 394,000 square feet of leasing at an average rental rate of $23.10, which represented a positive renewal spread of 6.6%.

While rental rates for this leasing activity were lower than recent quarters on an absolute basis, the rental rates are a function of where this leasing activity occurred within our portfolio. One primary driver of the lower average rents was the short term renewal of Nabors Corporate Services at One- Commerce Green in Houston for 225,000 square feet.

Nabors had a five year renewal option that expired at the end of 2013. We’re still in discussions with them regarding a long-term renewal and this two months extension through February 2015 was given in exchange for extending their renewal option through end of February 2014. Additionally, we signed a 30,000 square foot 9 year new lease at our river place south property in Downtown Jacksonville. While the market rates for this legacy Parkway asset are much lower than our overall portfolio average, this was an attractive long-term lease that provides stability for this asset. Lease was signed with no free rent and only $3.54 per square foot per year of capital cost.

So in summary, we do not see our leasing activity during the quarter as a downward trend in markets for our properties but rather a function of where the leasing activity occurred. I’d also point out that our concession ratio measured by capital cost per square foot per year divided by average rental rates improved significantly from the prior quarter.

Looking ahead to 2014, we anticipate that we’ll see an initial drop in occupancy during the first quarter due to several known move-outs including approximately 48,000 square feet of temporary space that we used to accommodate customers awaiting the build out of their permanent space. Additionally, a large portion of the know move-outs during the first half of the year are at assets located in Houston and Austin. We believe that the strong economic environment in both markets presents a strong opportunity to backfill vacant space at attractive market rates. Additionally, occupancy figures will be impacted by the disposition of Woodbranch and Mesa Corporate Center, both of which were highly leased assets. However, we’re confident in our ability to drive occupancy gains within our current portfolio during the second half of 2014. Therefore, we’re comfortable providing a portfolio occupancy guidance range of 89% to 98% for year-end 2014.

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

David O’Reilly

Thanks so much Jason. We completed the quarter with FFO of $0.15 per share. Our fourth quarter results included negative impact of one-time charges totaling $11.7 million primarily related to the completed merger with Thomas Properties and the closing of the company’s Jackson office and other one-time items. Excluding these non-recurring items, our fourth quarter recurring FFO was $0.31 per share. Our FAD during the fourth quarter was $0.17 per share. We have provided a reconciliation of FFO, recurring FFO and FAD to net income on page nine of the supplemental report.

Our full year FFO was $0.90 per share compared to our previously disclosed outlook range of $0.79 to $0.84 per share. Our reported FFO for the full year, similar to the fourth quarter includes a number of one-time charges totaling $24 million or $0.36 per share. Excluding the three previously mentioned one-time charges of our preferred redemption, closing of the Jackson office and expenses related to Thomas Property merger, our adjusted FFO was $1.27 per share. Excluding all non-recurring items, our full year recurring FFO was $1.26 per share. Lastly our FAD for the full was $0.86 per share.

As Jim mentioned, the outperformance in adjusted FFO for the year compared to our guidance was primarily attributable to core NOI outperformance that was driven by same-store NOI increase and an increase in our renewal rental rates. The transaction cost related to the merger came in below our previously guided range due to a combination of achieving considerable cost savings, as well as the delay of some cost into the first quarter of 2014, which is included in our 2014 guidance.

Our net debt to EBITDA at the end of the quarter was 6.7 times. Excluding the impact of $850,000 and non-recurring realignment charges related to the closing of our Jackson office, our net debt to EBITDA multiple closed the quarter at 6.6 times. Please note that this ratio does not take into account the proceeds received from our recently completed equity offering.

The equity raise generated total net proceeds of approximately $205.5 million, which we used to fully repay our line of credit with the remainder adding to our cash on hand. These proceeds will be used upon future acquisitions.

Turing to 2014 guidance, we are providing an initial 2014, FFO outlook range of $1.24 to $1.32 per share. Additionally, in an effort to provide further transparency, we are providing a 2014 recurring FFO outlook range of $1.27 to $1.35.

We have kept the number of the former Thomas Properties’ employees on a temporary basis to assist with the transition. We anticipate that non-recurring G&A cost associated with this transition period will equate to approximately $3.3 million during the first half of the year.

The recurring outlook excludes the impact of these costs and other non-recurring items, all of which total approximately $2.9 million to $3.4 million. We have again provided detailed assumptions that support these FFO outlook ranges in our fourth quarter earnings press release.

There are few assumptions that I would like to highlight for you. First, our 2014 FFO outlook includes the impact of all the previously announced investments and dispositions year-to-date. This includes and assumes 40% ownership interest in the Austin portfolio starting in February.

Second, I would point out that our GAAP adjustments for straight line rent and the mark-to-market in-place leases is expected to be significantly higher than prior years as a result of the merger. If you recall, there is a significant amount of embedded growth opportunities within the assets as current market rates are significantly higher than in-place rents.

Third, the capital expenditure range we provided are reflected of the budgeted and leasing activities that we anticipate will drive our occupancy through a range of 89% to 90% by the end of the year and create substantial long-term value for our shareholders. It also includes some carryover of capital cost related to the large amount of leasing activity that was completed in 2013.

Lastly, our FFO outlook includes the impact of the recently announced secondary offering of 11.8 million shares, resulting in a weighted average outstanding share count of 104 million for the year.

As has been our past practice, we have not assumed in our outlook any additional investments or dispositions other than those already announced nor any potential capital markets activity. And we’ll provide an update to our outlook should a material event occur that would change our stated ranges.

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

Question-and-Answer Session

Operator

Thank you. At this time, we will be conducting a question-and-answer session. (Operator Instructions). Our first question today is coming from Jamie Feldman from Bank of America. Please proceed with your question.

Jamie Feldman - Bank of America

Great, thank you. Good morning.

Jim Heistand

Good morning Jamie.

Jamie Feldman - Bank of America

Hi, there. I guess starting with the guidance, can you just talk a little bit about what do you think your cash same-store NOI growth will be next year?

David O’Reilly

Jamie, we haven't provided guidance on cash same-store NOI growth or GAAP same-store only because our same-store for 2014 is roughly only about half of our portfolio given how much of the portfolio has been acquired or sold during this current year. So, I'm not sure it's a real meaningful measure.

To the extent that we were able to put a little bit more meat on those bones, as Jason alluded to in his prepared remarks, there are few smaller, but still known move outs within the first half of the year. And that will set us back a little bit in occupancy early on, but we expect to make that all back up and then in some by the end of the year.

So, if I were to kind of directionally point you there, I'd say that we would be flat to potentially modestly down early and then significantly positive for the second half of the year. But again, that's not such a small percentage of our portfolio, I'm not sure it’s coming out to be meaningful in terms of modeling.

Jamie Feldman - Bank of America

Okay, great. And then I guess following up on that, can you talk a little bit about how you did think about your occupancy growth in the back half of the year. Did you set a pretty low bar, is there any kind of stretch leasing you guys have to assume to guess your estimate?

Jim Heistand

Jamie, this is Jim. One thing to make note as we said time and time again, during the first year that we acquired an asset we showed a little to no lease up. And if you think about we’ve added 5.4 million square feet between the 7,000 building in Atlanta and the buildings in Austin and Houston. And as we’ve always done, we’ve assumed very little to no lease up in that first 12 month.

Now having said that as you saw in prepared remarks last year, number of the assets we’ve purchased that have value-added we get significant leasing during that period of time. So, we’ve been consistent in everything that we acquire to kind of give that first year. It takes time to get your hands around a property to make your entry into the market especially with these assets. So that’s been consistent and how we’ve looked at it.

Jason Lipsey

And Jamie, this is Jason, I’ll add a little bit of color to sort of what we’re projecting in terms of our occupancy during the year. As I mentioned in my prepared remarks, we are expecting our occupancy go down in the first quarter driven largely by no move outs that we acquired as part of the Thomas portfolio, in fact just under a point of occupancy is rolling out of Houston and the Austin properties. But we remain optimistic that we’re going to have opportunity to continue to drive occupancy gains within the portfolio. We just think it’s probably going to happen in the second half of the year as we have some opportunity to continue to build our leasing pipeline and get leases done. But as you know, it takes several months to get a lease done and then to build it out before able to take occupancy. And so, I think that all the fundamentals remain good. We just have a lot of work to do in terms of continuing to execute on our leasing strategy.

Jamie Feldman - Bank of America

Okay, great. Thank you, guys.

Jim Heistand

Thanks Jamie.

Operator

Thank you. Our next question is coming from Craig Mailman from KeyBanc. Please proceed with your question.

Craig Mailman - KeyBanc

Hey guys. Just a follow-up on the occupancy. Jim you said about 100 basis points of down drafts. So should we be thinking that 88.9 goes to 87.9 by the end of the first quarter than you are at 150 basis points ramp for the rest of the year you get to the mid-point?

Jim Heistand

Yes, I think so a couple of things. That's the fair way to think about it, but one caveat I’d say is that we are selling couple of assets in the first quarter, which are also have the negative impact on occupancy. And so we’re going to have some incremental new start. So even though we’re losing a point that doesn’t mean we’re not going to commence any leases, but I think that our projections are about a point down in the first quarter from where we are today.

Craig Mailman - KeyBanc

Okay. That's helpful. And then just looking to the wholly owned property, I mean you guys have about I think seven assets that are 80% or below occupied, could you just maybe talk about some of the traction you are seeing at some other bigger spaces?

Jim Heistand

Yes that's a great question. So as we think about where we can really move the needle in terms of occupancy, it is isolated to some of these buildings that are in the 80% range or below. The first building I mentioned is 400 North Belt which is in Houston, we've talked about that building a lot on these calls. We've got about 200,000 square feet of deals in the pipeline of 400 North Belt today.

Not those are in lease stocks yet but there are -- we’ve got some good momentum there. I think that I’m pleased with our progress there in more sort of where I expected us to be in the process. So I think that we've got opportunity of 400 North Belt. I think our new building in San Felipe Plaza, which is in the Galleria of Houston is a fantastic building. That buildings in the mid 80s and we've got, even though we've only owned it for a brief period of time some very good momentum at that building.

We've got a lot of opportunity in Austin. And in Austin there are three buildings in particular that we had some leasing opportunities, specifically One American and we have made a lot of progress in the last six weeks or so at building the pipeline of One American and where we believe that we will be able to get some leasing traction in all five buildings in Austin.

As you move further to the east, we get into Jacksonville, ready to place out is approximately 65% occupied today, so that does not include the 30,000 square feet, the deal that we signed, which will significantly increase occupancy of that building and stabilizes it. We have also made a lot of progress the buildings like Cap City with the recent Pulte Headquarters relocation. That building is substantially higher leased and is occupied. And so as Pulte takes occupancy that will drive occupancy gains within our Atlanta portfolio.

And then finally in Charlotte, we’ve got some moving parts of horse power associated with the K&L Gates renewal and contraction. We talked about that a fair amount. That space is largely incumbent right now because PWC is building out their room space and so I think that will be able to continue to push occupancy there as soon as we get the space actually available for lease at horse power.

And then finally I mentioned 525 North Tryon. We have got a lot of opportunity at this building, but we continue to build our pipeline there, we are looking at the yields of 525 and my expectation is that we will strike a couple this years. So in between sort of the tenders are building, I just mentioned, I think we’ve got good momentum and good opportunity.

Craig Mailman - KeyBanc

That color is very helpful. And just quickly on neighbors. I think (inaudible) unchanged, kind of how does that compare to market?

Jim Heistand

No, I think our view is that’s marginally below market, not a ton but a little bit. That building I think has always performed well over the years, but the challenge we’ve had has been mostly a large use of building. And so as we think about neighbor is and our strategy with the building we are very focused on renewing them for a long-term renewal which we have not been able to achieve in the past. And so that’s our focus, I think we are in the midst of negotiations and I think given the negotiations is probably all it’s appropriate to say right now.

Craig Mailman - KeyBanc

Great, thank you.

Operator

Thank you. Our next question is coming from Josh Attie from Citigroup. Please proceed with your question.

Josh Attie - Citigroup

Thanks good morning. You mentioned 80.3% mark-to-market on the portfolio. Can you give us a sense of your ability to realize some of that over the next couple of years, maybe which markets it’s in and what the mark-to-market is on what’s actually rolling in the next few years?

Jim Heistand

Yes, Josh if you look at page 27 of our supplemental it shows our expirations by year. And so I think if you look at 2014 in particular, our expiring rates are a good bit below our market rents now it’s not on a corner square footage, but I think there is opportunity in 2014. In 2015 we are showing a slight roll down, as well as in 2016. But when you get into sort of the last the later years is where there is a lot of opportunity.

There are couple exceptions to this. One is the stat of rental lease which is at CityWestPlace in Houston. That lease represents us pretty significant amount embedded growth potential and portfolio and that starts in 2015; beginning in ‘15 predominantly in ’16.

There are also things that we are trying to do proactively, as we look at expirations that take place in 2015 and in 2016 there are opportunities to work with some of those customers today and so marked into market and exchange or things that they may want. So I think that we are always looking for opportunities to accelerate this embedded growth opportunity.

David O’Reilly

And if something that you have seen from time and time again George, it’s similar to 400 North Belt. If there is an opportunity to take a rent up [5 box storey] to point at North Belt to $10, we are willing to take that risk to lease up, since we believe in our team and our ability to execute and to realize that value creating as we think it's in the long term interest for shareholders, despite the fact it might create a short term temporary occupancy [blink].

Josh Attie - Citigroup

And can you just discuss kind of market to say is that 8% kind of spread evenly across the market share or are there some markets that really contribute disproportionately there?

Jim Heistand

Well, there are couple of markets, where there is a ton of potential. I would say that the two biggest markets are really Houston and Austin and much of which is driven by our recent acquisition of Thomas. I think that, if you see the increase for last quarter or this quarter some of it is driven by market rent growth, but a lot of it is driven by a change in dynamic within our portfolio.

So, Houston and Austin have a lot of potential. And then beyond that, I think one building in (inaudible) got a lot of potential is our Lincoln Place building in Miami, where there is a pretty significant and better growth opportunity.

And then finally, I think in Phoenix, specifically in our Hayden Ferry buildings, the market has improved so significantly in that submarket that and those buildings Hayden Ferry I, II, Tempe Gateway in the U.S. Air building, we view some real upside potential.

Josh Attie - Citigroup

Can you tell us what the mark-to-market in Houston and Austin versus kind of the rest of the portfolio.

Jim Heistand

Absolutely. If you look on page 27, we've broken out our mark-to-market by market. So, to give an example we are calling the market in Houston about just under 34 box and in in-places just under 27 box.

Josh Attie - Citigroup

Okay, thanks. And then just lastly the cash rental spreads in the quarter. I know you mentioned renewals were up 6.5%. Can you tell us what the total cash spreads were including new leases?

Jim Heistand

I don’t think I understand the question. When you said cash spreads I mean I think that’s what we’ve reported compared to….

Josh Attie - Citigroup

I thought that it was just the renewal number I didn’t realize it was all the leasing that was done.

David O’Reilly

That is correct.

Josh Attie - Citigroup

Do you mean on everything?

Jim Heistand

Yes. Just the renewal leasing number and rental rate Josh on page 13 of the supplemental was 2,310 the total leasing for the quarter across all leasing volume new renewals and expansions with 2,332. So slightly higher than the 6% that was quoted in the prepared remarks.

Josh Attie - Citigroup

Okay. Thank you.

Operator

Thank you. Our next question today is coming from Alexander Goldfarb from Sandler O’Neill. Please proceed with your question.

Alexander Goldfarb - Sandler O’Neill

Good morning.

Jim Heistand

Hey Alex.

Alexander Goldfarb - Sandler O’Neill

Hey how are you. I just want to take the mark-to-market question a different way. Pretty good built in mark-to-market but what should we expect over the next few quarters as you guys are quoting the other releasing spreads. Should it be like the 12% that the mark-to-market is in ‘14 or is it going to be something less because of whatever short-term leasing or just by the nature of leasing that never quite matches up what the overall mark-to-market missing?

David O’Reilly

Well I think Alex, a couple of things. I think the first the amount of all we have in 2014 is not all that significant it’s under 10% and I think that we’re going to be, we’re largely going to have a couple of deals that are going to drive our mark. And specifically we’ve got a few deals that are large deals that maybe under market for example. And so I don’t think that I would imply that that’s going to be the rate in 2014. The other impact that we’re going to have is we’re going to start doing renewals in ‘15 and ‘16 expirations. And so those deals are largely going to drive what the market is going to be that reported in 2014. So I don’t think I’d look at just ‘14 and imply that that’s what it’s going to be for the year.

Alexander Goldfarb - Sandler O’Neill

Okay. But if I look at ‘15, like that the 8%, so I guess theoretically we should be looking at something, if I can, 6% plus would be reasonable?

Jason Lipsey

I think in reality, it’s going to be a blend of the next few years is probably the best way to think about it, because again we’re working as hard as we can to get out beyond ‘14 to keep the stable expiration profile that we've got now. And so, I don’t think ‘14 is the best metric to use probably the next few years.

Alexander Goldfarb - Sandler O’Neill

Okay. Did you address Tempe, the getting underway with the third building?

Jim Heistand

No. So, we’re in a very similar spot that where we have been on the past call. I would say Alex in our mind it’s not a matter of if, it’s a matter of when. We’re still working, as you know we own that in a joint venture with Texas teachers, and we’re still working on the pre-leasing thresholds to actually go vertical on the construction there.

We feel really good about our prospects and we feel like it will be -- within the next several months that we’ll have a little bit more color to give you there.

Alexander Goldfarb - Sandler O’Neill

But you still anticipate a ‘14 start or it could be something it moves to ‘15?

Jim Heistand

No, we believe that we will start that in 2014. I don’t know exactly which month or which quarter yet, but that's going to be a ‘14 start.

Alexander Goldfarb - Sandler O’Neill

Okay. Hopefully it’s not the height of the heat of the summer. Just a final question is still on Tempe. Now that US Air or American has closed, is there any additional color that you’ve gotten from them on the use of the building or this is going to be something that they are going to take maybe a year or two to figure out?

Jason Lipsey

We've been very proactive in meeting with them and we want to understand their needs so that we can help them anyway possible. The sense that we gotten is that they are very focused on figuring out things like which gates to keep at airports and not necessarily their office using demand at this point. So, we’ve not gotten really any clear direction in terms of what they like to do.

Jim Heistand

I think the good news there Alex is when we acquired that building last year, we were calling US Air’s in-place rate at market. And that market has moved so quickly that that is now couple of dollars below market. And as we said at the time, we would love to entertain a longer term renewal and even take back some space from US Air to the extent that was their need. But their termination options and all are nothing option and there is still been time left on that before they have to exercise if they want.

Jason Lipsey

Plus the opportunity to purchase their 25% as well.

Jim Heistand

Exactly. And as you may recall, they are a 25% joint venture partner in that building.

Alexander Goldfarb - Sandler O’Neill

Right. So it sounds like what you are saying is probably run the clock all the way until they have to make a decision?

Jim Heistand

I don’t think they really looked at it. To Jason’s comments, I think this is not the highest priority for them right now and they haven’t gotten around to it. We have been trying to push as best we can to be helpful and we are collaboratively with them, they are addressing for a long term solution but they are not ready to engage on their side just yet.

Alexander Goldfarb - Sandler O’Neill

Okay, great. Thank you.

Jim Heistand

Thank you.

Operator

Thank you. Our next question is coming from Dave Rodgers with Robert W. Baird. Please proceed with your question.

Dave Rodgers - Robert W. Baird

Yes. Good morning, guys. I was hoping, maybe we could get a little bit more color on the acquisition pipeline from you, either Jim or David, in terms of you talked a little bit more about value add. How are the deals in the market changing, are they going to get more complicated in terms of maybe having [accepted] with BPs preferred equity? Should we expect to see more of that from you this year, any more color on the pipeline? Thanks.

Jim Heistand

I think we do see the pipeline, I think we have demonstrated over the last two years, we continue to find opportunities. I do think to your point, they could be a little bit more complicated. I think you could see us do more of that preferred equity BPs joint venture with the special servicer to the extent we can get assets that provide value. So, while the market has moved up in terms of valuation, I think we are continuing to find opportunities; we may have to be more creative to get those done at a basis that we think makes sense. But if you look at what we had to do here lately, we had to buy the whole company of Thomas Properties to end up with 10 buildings and same thing with our building at Atlanta with C-III as a special servicer. We were able to get in that off market with great the upside in that asset and a great basis.

So, we continue to scalar and don’t forget, we’ve targeted very specifically each assets we would own in these submarkets, we continue to knock on doors and opportunities come up that we can’t proceed today but we’ve got a pretty good universe of properties we would to own over the next three years. So it’s hard to say when those will come to fruition, but we are out being very proactive to fund.

Dave Rodgers - Robert W. Baird

Are you able to quantify at all Jim kind of the depth of that pipeline today maybe versus where it’s been historically?

Jim Heistand

Hey Dave, I mean I couldn’t quantify what we did last year at $1.8 billion; it’s hard to say, it’s impossible to say. All I can say is that we are looking at a number of things but the hit rate, you just never can predict. I think what’s important for us is to be out looking and to be ready when those opportunities come about. It’s amazing how often something will come up but as you can guys see us end at the end of this quarter, we’ll take your price. So we got to be primed to be able to take advantage of those when they come about but it’s impossible to predict how many we’ll get in the year.

David O’Reilly

I think it’s fair to say that it’s consistent in terms of the dollar volume that’s on our pipeline today as it was on a big win average basis for last year.

Dave Rodgers - Robert W. Baird

That’s helpful. Thank you. And then one last question I guess on development that you already spoke at Tempe. But what about the rest of the markets that do you anticipate maybe getting anything started underway in Houston or other markets during 2014 or should we not expect to see anything else there?

Jim Heistand

Well, we own; we have a pad next to CityWest that there is a lot of interest in that pad. I wouldn't anticipate anything starting this year, but it's a possibility; I mean it’s a larger user market. We could get somebody who would want to do a build to suit, but we're not proactively looking to start with a nominal pre-leasing as we are in Tempe right now. That's our major focus in terms of development.

Dave Rodgers - Robert W. Baird

Alright. Thank you.

Operator

Thank you. Our next question is coming from Rich Anderson from BMO Capital Markets. Please proceed with your question.

Rich Anderson - BMO Capital Markets

Thanks. Good morning everybody. Just want to make sure the mark-to-market, that's a cash number at 8%, right?

Jim Heistand

Yes.

Rich Anderson - BMO Capital Markets

Okay. Jason, you went through your markets and you -- I guess Florida is now a city, the way you phrased it. But I wondered if you can kind of bifurcate the State of Florida in terms of the good, the bad that you -- as you see it today?

Jason Lipsey

Sure. So, I think the way I’d characterize the city of Florida as you put it up, Florida is definitely a state, we are in four in markets in Florida, Jacksonville, Orlando, Tampa and South Florida, which we kind of lump together as a market.

Let me start with Jacksonville. So, Dave mentioned in his prepared remarks and it’s true that we’ve had significant activity in Jacksonville. I think what we’ve seen is large financial institutions specifically fire type industries be very active in that market. And so we’ve had a lot of positive activity within our portfolio in Jacksonville, specifically in the Deerwood submarket. And I remain very encouraged by the activity, the level of activity in Jacksonville.

Continuing south to Orlando, I think Orlando is probably one of our slower markets today. And I think what we’re seeing in Orlando is the residential recovery is just beginning to take hold in Orlando. And this is a market that benefits significantly from users associated with incremental progress in the residential markets. And so, we’re just beginning to see users like architects, title companies, attorneys start to think about taking more space. And so while Orlando is probably much earlier in the recovery than our other markets, we’re starting to see very positive signs.

Tampa has performed well for several quarters now. And we continue to see very good activity in Tampa. Our portfolio has performed well there; all of our properties are in the west shore submarket which is the best performing submarket of Tampa. And then finally, South Florida, while we really only own one project in Miami and one project, very small project in Ft. Lauderdale, we continue to be very interested in the fundamentals in South Florida. The amount of capital that’s flooding into that market specifically from South and Central America has created some very dynamic things in that market. And so, we continue to target acquisition opportunities there and would be very excited about the opportunity to operate down there.

Rich Anderson - BMO Capital Markets

Okay. And then bigger picture maybe for Jim or anybody, but I looked at your guidance for 2014 versus 2013, you have $65 million more recurring NOI, $20 million more straight line rent, $35 million more interest expense, I mean you’re a vastly different company this year versus last. Do you think that based on the pipeline that you’re seeing that we could see orders of magnitude difference in 2015? I mean could it be that dramatic of a change for Parkway on a year-over-year basis again or do you think it starts to slow despite the pipeline that you see?

Jim Heistand

Well Rich, all I can say is it could. We’re not forecasting that we’re not -- I didn’t forecast but it could. As I said, I think it’s a function of being proactive, kind of lot of people, we go on the road and talk to people about how do we find some of the opportunities we do? It’s by being proactive; it’s by going out there -- this portfolio that could be their single asset.

Again, we don’t know for sure if somebody will meet our price or the timing could work, but we’re out there constantly looking. And I will say this, from [Barclays’] perspective; I think the opportunities that are being brought to us especially considering the Thomas merger and acquisition which as you know there were interested parties in getting that done.

I think what we've been able to close and physically get done I think is in effect creating additional pipeline for us, the credibility that that provides us. So I can’t predict it, I just know that A, we’re not going to grow just for the sake of the growth. If we can find opportunities where we can create that value then we’re going to pursue them. So it’s hard to quantify for you, but that has much possibility to do with this year as what happened last year.

Rich Anderson - BMO Capital Markets

So when I look at the track record of FFO per share over the last three years including your outlook for 2014 it’s been basically flat based on how you measure it, a lot of moving parts and what not, but in the 127, 130 range. So, what point does that break out in your opinion? I mean I guess I said it differently, to what degree do you need more equity, what's the drive counter for 2014 such that in fact you could see a per share growth in FFO this year versus last?

David O’Reilly

All right, two parts. Let me just say that I agree with everything you’ve said, but one of the things that I’ve looked at when I come in here is we’ve told people and told investors, we told analysts that what we’re looking to do is to own assets that are going to be worth more in three to five years. And I can say with absolute certainty, all the assets that we've acquired are worth more today than what we pay for.

So, what we are doing is we are accumulating a portfolio and a set of assets that has the capabilities that continuing to grow in valuations. But you are right, as we continue to [expand] and raise money that FFO guidance has been not that big of a range than what we’ve first started.

Jim Heistand

I think there is a little misconception in terms of this year’s guidance, which I actually would like David to kind of give the detail on it if I could, but just a moment.

David O’Reilly

Yes. A couple of things which I would add to that is, two years ago when we were in the 120s of FFO, we were 7.5 net debt and preferred EBITDA and 35% of our FFO is coming from management fee income. And you compare the quality of the FFO, the cash flow, the underlying asset of today’s guidance versus two years ago was significantly lower leverage, no debt maturities and much less leased well, fewer cash outlays relative to FFO and FFO to FAD ratio is significantly higher and a positive mark-to-market versus a tremendously negative mark-to-market across the portfolio, we feel much better.

Now with that said, there has been a number of comments around relative to guidance, relative to expectations. I think when you back out expectations, the consensus and remove those that had not up for our January equity rates. And later on top of that two things, one, we announced today the sale of two assets for about $28 million at the cap rate that we announced would be about $0.02 less of FFO this year based on those asset sale.

And we are sitting on over $100 million of cash in our balance sheet that we think we can put to use hopefully in the next several months. But as we always done and as we will continue to do we don’t guidance with acquisitions out there because of timing and yield of those acquisitions are just much too difficult to project or predict accurately. So we prefer to give the kind of run rate of where our earnings is as of today.

I think when you adjust those items, the guidance that we are stating today is one that we think that is appropriate for the company given where we are today and gives FFO per share of a much higher quality with lower leverage and less risk than that of two or three years ago.

Jim Heistand

And one other thing Rich, I will be real specific with you. The portfolio we have today if you look at where does -- as you mentioned at what point this kind of stabilizing to read that FFO valuation, if you were to take just this pool of assets we have today, I will tell you that our view is by 2016 this portfolio stabilizes.

Rich Anderson - BMO Capital Markets

Okay, that’s good. I am not questioning the need for a long-term fix, I am just -- was just asking the question. I think it’s out there, but thank you very much, I appreciate it.

Jim Heistand

Thanks Rich.

Operator

Thank you. Our next question is coming from Brendan Maiorana from Wells Fargo. Please proceed with your question.

Brendan Maiorana - Wells Fargo

Yes thanks. Good morning.

Jim Heistand

Hi Brendan.

Brendan Maiorana - Wells Fargo

Hi guys. So Jason just a really quick point of clarification, Halliburton expires at the end of the year, I presume from your comments that the year-end occupancy is the lag between Halliburton lease expiration and when Statoil takes over that space that’s not in your vacancy forecast at the end of the year, correct?

Jason Lipsey

That’s right, yes. So they expire 1231 that will impact our occupancies in 1/1/15. And so our 1231 ‘41 occupancy has Halliburton in occupancy.

Brendan Maiorana - Wells Fargo

Right, okay great. David, can you maybe just give us kind of a sense of with all the movement in the portfolio that happened thus far in Q1 kind of what your run rate of NOI looks like relative to the guidance of $186 million to $191 million of cash NOI for the year, kind of what’s the run rate as we stand today?

David O’Reilly

I think that is a good run rate and there have been a lot of moving pieces, but so many of the moving pieces settled in at the end of December with the closing of the merger or in very early January with the closing of the two asset sale, the Woodbranch and Mesa.

In addition, the adjustment in the ownership of Austin was really finalized earlier this month in February, which took us -- we initially went from 33% to 50% and then back down to 40%. I think that guidance range in terms of our run rate is [darn] should be closed given that most of those changes have occurred early, very early in the year.

Brendan Maiorana - Wells Fargo

Okay. So, but I think kind of just going back to some questions earlier in the queue about the occupancy dip and then the pick back up later in the year. I mean is the -- like that run rate should probably be lower early and then higher as we go later in the year. Is that, that was kind of more what I was trying to as opposed to the overall give and take in the asset recycling?

David O’Reilly

That's absolutely correct.

Brendan Maiorana - Wells Fargo

Okay. I was just going to ask about the Cap City, the Cap City lease I think takes effect in Q2, but was there some free rent associated with that or just as we think about next year with the big pick up in Statoil that should happen mid part of the year and then Cap City is that NOI growth that’s kind of baked in for ‘15 as we would think about that?

Jim Heistand

Yes. I think on a GAAP basis, you're going to see the impact of both of these, but on a cash basis, there is pre-rents associated with that lease and that will -- I don't think we’ll have any real cash NOI from that property until 2015.

Brendan Maiorana - Wells Fargo

Okay, great.

Jim Heistand

A point on Statoil, the Statoil NOI growth will hit partially in 2015 on a cash basis and entirely on 50 on a cash basis.

Brendan Maiorana - Wells Fargo

Right okay, that's helpful. David, the Woodbranch sales and cap rate seems a little bit higher relatively to what, at least what I was thinking I think you mentioned in the [8.6]. I know you still feel like you’ve got some non-core assets that are in the portfolio that probably get marketed at some point over the next 12 or 24 months. Was there something anomalous in the NOI or in the lease that maybe drove the cap rate on Woodbranch a little bit higher? And how should we think about the value and the magnitude of the non-core stuff that remains in the portfolio?

David O’Reilly

On Woodbranch specifically, it is a little bit higher cap rate than we would have thought is well, but I think a lot of that is attributable to the short-term nature of the underwriting leases of the asset. The amount of capital that will need to go in and the risk around the leasing partially led to that. On the same token the much lower cap rate of Mesa than probably many were expecting, I think were attributable to the Jason’s team being on the lease that up would a lot of stability for a longer period of time.

In terms of those remaining non-core assets, really only the true non-core assets we have are Memphis and Jackson and those are very small percentages of the portfolio, three percentage. And our longer term plans around Philadelphia, but that really revolves around a large lease that we need to be put to bed before we’re able to market that.

There are some other assets in Houston that we may look to exit overtime, but that is the absolute minority of the properties there and we’re talking order of magnitude 10% or 15% of our Houston portfolio in total.

Brendan Maiorana - Wells Fargo

Okay. That’s helpful. And just last one, Jason you mentioned the concession ratio it was pretty low in the quarter, which was nice to see, but it sounded like you did have maybe some shorter term leases that were there some shorter term renewals probably no CapEx. Is that something that we should probably expect moves back higher as you go throughout 2014 maybe in the kind of 20% range is where you think like you were tracking earlier just because of more normalized leasing quarter or year?

Jason Lipsey

I think that’s a fair observation, Brendon. I wouldn’t infer from this quarter that this is a run-rate by any means. I think one thing I would note is that though our concession ratios may go up a little bit as we work our longer term strong credit leases that create a lot of value to our properties, we are seeing a very strong trend of increasing NPVs among our leases, which is a metric we use as a proxy of value. I think the other thing I’d note is that the rates for our portfolio overall are going up significantly, largely with the addition of Houston and Austin properties, which have very, very high gross rental rates.

And so I think that as I think about those markets in particular TIs are pretty constant across most of our markets. And so as we build the portfolio with higher gross rental rates, that will naturally drive our concession rates down overall. So, I think that we’re seeing a little bit of a dynamic where the mix of the leasing we’re doing is driving changes from quarter-to-quarter, but I think the trend for our portfolio overall is an encouraging one to me.

Brendan Maiorana - Wells Fargo

Okay. Alright, thanks guys.

Jason Lipsey

Thank you.

Operator

Thank you. Our next question today is coming from John Guinee from Stifel. Please proceed with your questions.

John Guinee - Stifel

Great. Not to -- one quick clarification. Did you adjust or did you discuss BMC Software at all, Jason?

Jason Lipsey

I did not, John.

John Guinee - Stifel

What's going on there? And these get the cancellation option if that's going to happen?

Jason Lipsey

Well, the cancellation option I think kicks in 2015, June 2015. But like most of our customers, we’re trying to take a much more proactive approach to this lease. I think as we’ve talked about before, we see CityWest as a big opportunity to try to figure out how to get at embedded growth potential of that project as quickly as possible.

I think this customer represents one of those opportunities. And so, I am less focused on termination option right now and more focused on figuring how we can engage them and figure how to create value of properties.

John Guinee - Stifel

Do they give their notice in June ‘15 or do they give their notice 15 months prior which is April ‘14?

Jason Lipsey

Yes, it’s 15 months prior to June ‘15.

John Guinee - Stifel

Okay, so you are in active discussion now then I guess.

Jason Lipsey

We have approached them and we are in discussions with them.

John Guinee - Stifel

Got you. Okay. Then the next question is what’s happening and this is a little bit beating a dead horse, but what ends up happening as you know you’ve got a few levers when you are in a situation where you are which is in terms of leasing and in terms of term versus tenant improvements versus free rents versus lease termination options, extension options et cetera. How willing are you to just give turnkey build outs to get the occupancy up, and get the face rent up or are you tightfisted with your TI dollars?

Jim Heistand

John, I’ll let Jason get a little more specific but just let’s be clear. When we’re looking at this, we are not looking at it in the context of the overall company metrics; we are looking at it, what lease structure is going to create the most value at asset, right. We run our analysis if we did destructor, there is a value in our Argus runs, the value of the asset will be X, if we do this it will be X plus. So that’s how we look at it, very asset specific. And I’ll let Jason kind of give you some more detail on how we’d look at it.

Jason Lipsey

I completely agree with that. I think as we’ve said many, many times; our goal is to create long term shareholder value. And the way that we believe you do that is by building a portfolio that has NOI growth potential over a long period of time. And so I think while each lease is its own individual decision in terms of creating value added specific asset, my bias generally is to structure leases with customers that have great credit that we know are going to be long-term growing customers within our portfolio. And I think in this market, I think I am a little bit more willing to trade DI if I can get great rates and great rental rate growth within the lease structure. I think that’s the thing that at least at our view creates more value over time.

Jim Heistand

But again, it’s a function of the credit of the tenant with particularly asset with the rest of the world in the building. I mean there is a million variables that go into it to make sure you are creating the most value of the asset.

John Guinee - Stifel

Got you. Thank you.

Operator

Thank you. Our next question is coming from Michael Salinsky from RBC Capital Markets. Please proceed with your question.

Michael Salinsky - RBC Capital Markets

Good morning guys. Just a couple of quick follow-ups. As you mentioned several vacates in Austin and Houston in the first half, can you just give us a sense of what your time-line is for re-leasing those and also just given the expirations how far are those below markets, given the overall markets, I am asking specifically about the vacates?

Jason Lipsey

Yes, those known move-outs are really isolated for two deals, one they own in Austin which is about 88,000 square feet and one large one Houston which is a 42,000 square feet. I think that these were known move-outs when we were underwriting the properties because of that we did not project any lease up for those spaces. But I think my view of those rates is that both of those customers are under market relative to our view of market rates.

Michael Salinsky - RBC Capital Markets

Okay, that’s helpful. Second, I think Dave talked -- asked question about your acquisition pipeline, just can you give us a sense of the overall mix today, portfolio versus one-off opportunities and also are you seeing more value add opportunities versus core, just trying to get a sense of what the composition kind of looks like?

David O’Reilly

I would say the vast majority of what we are looking at right now are one-off opportunities. There are fewer portfolios in the market and our pipeline does not include any major transformative mergers all of Thomas from last quarter right now it’s purely one off asset deals. I'd say in those one off deals, there is a very even mix between those that are core deals, either core plus that are in kind of the 80s occupancy with a little bit upside and those are the really more value-add 60% to 70% leased with a lot of room to create value.

Michael Salinsky - RBC Capital Markets

Okay, that's helpful.

Jim Heistand

And I think you said…

Jason Lipsey

And you can also see us do kind of a similar transaction that what we did in Atlanta on the [Q3] deal as well.

Michael Salinsky - RBC Capital Markets

Was that preferred equity?

Jason Lipsey

A [variable] deal.

Michael Salinsky - RBC Capital Markets

Then final question, can you just talk a little bit about what you see in terms of competition in Austin and Houston, obviously you refer though quite a bit about the new supply coming online there. Do you see in that, you've seen any pressure from that? And then just as we think about recycling in ‘14, I realize you guys don’t include it in guidance, but how much you’re marketing currently right now in terms of additional asset sales?

Jason Lipsey

Well, I'll take the construction part portion of the question first, Mike. I think in Houston, I think that there is actually a slight decline in deliveries in the fourth quarter relative to prior quarters. I think in the fourth quarter there was about 750,000 square feet of product delivered, 81% of those preleased.

Now there is a pretty significant pipeline of new construction in the markets, about 14 million square feet, but that 14 million square feet is 67% prelease according to CBD. And so, I think the development is Houston is largely driven by the fundamentals in Houston which continue to be very, very good. And so in terms of the impact that we've seen within our portfolio in Houston, frankly we've not seen an impact, in fact there is just a lot of transaction volume right now which we're well in the midst of and we’re encouraged by our leasing pipeline. I think that -- so I think today I think we’re comfortable with where we can go on Houston and our ability to continue to perform in that market.

Austin CBD has about 750,000 square feet of construction taking place right now. I think that is going to put some pressure on the market overtime, but the great news about Austin is that we have the best portfolio Downtown. We’ve got scale. It’s our view that we can meet essentially every perspective users’ space need in Downtown Austin, which is exactly what our strategy is of building scale in each of our targeted submarkets. And one of the trends that we’re seeing in Austin right now which is very encouraging is we are seeing a lot of new entrants into the market. These are users that have not historically head office space in Austin have targeted it because of its great demographics and its employment base. And so I think that we believe we’re well positioned in Austin.

David O’Reilly

And then in terms of asset recycling, Mike, I would say that we haven’t project anything nor we included that in guidance, it would not be crazy to see us do between 50 and 75 or even at the upper-end of $100 million of asset sales this year. We’re really -- we do not speak about kind of assets that we have in the market or currently marketing until we have the signed contract to the hard deposit. So I don’t want to get into that right now, but I think the volume of what we’re looking to sell very near-term is lower than that. And there are some assets that we’re hoping to stabilize over the course of this year that we could look to and close it.

Michael Salinsky - RBC Capital Markets

Thank you. I appreciate the color guys. Thank you.

Jim Heistand

Thank you.

Operator

Thank you. We’ve reached the end of our question-and-answer session. I’d like to turn the floor back over to management any further or closing comments.

Jim Heistand

Now listen, thank you all for joining us today. One thing I do want to make note, if you think about organizationally how much work this team has done both the merger, the transition of the accounting, IT and Human Resources from Jackson, equity raise the last three months, I mean this team has worked extremely hard in many cases seven days a week to get this thing all taken care of. So just a little bit of I know is how hard your team is working for you. So thank you for joining us today and we look forward to seeing you all soon.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. And have a wonderful day. We thank you for your participation today.

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