Highwoods Properties' CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.30.14 | About: Highwoods Properties (HIW)

Highwoods Properties Inc. (NYSE:HIW)

Q1 2014 Earnings Conference Call

April 30, 2014 11:00 AM ET

Executives

Tabitha Zane – VP, IR and Corporate Communications

Ed Fritsch – President and CEO

Mike Harris – EVP and COO

Terry Stevens – SVP and CFO

Analysts

Dave Rodgers – Robert W. Baird

Brendan Maiorana – Wells Fargo

Jill Slattery – Morgan Stanley

Jed Regan – Green Street Advisors

Jamie Feldman – Bank of America/Merrill Lynch

Michael Salinski – RBC Capital Markets

Emmanuel Korchman – Citi

John Guinee – Stifel Nicolaus

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Highland Properties Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded, Wednesday, April 30, 2014.

I would now like to turn the conference over to Tabitha Zane. Please go ahead.

Tabitha Zane

Thank you. Good morning everybody. And this is actually the Highwoods Properties Conference Call. On the call today are Ed Fritsch, President and Chief Executive Officer; Mike Harris, Chief Operating Officer; and Terry Stevens, Chief Financial 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 planned dates for the remainder of our 2014 quarterly financial releases and conference calls. Also, following the conclusion of today’s conference call, we will post senior management’s formal 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 timings of anticipated financings, joint ventures, rollover rents, occupancy, revenue and expense 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 2013 Annual Report on Form 10-K and subsequent SEC reports. The company assumes no obligation to update or supplement forward-looking statements that 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 risks of FFO and NOI can be found toward the bottom of yesterday’s release, and are also available on the Investor Relations section of the web at highwoods.com.

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

Ed Fritsch

Thank you, Tabitha. Good morning, everyone, and thank you for joining us today. At the beginning of the year, we noted our 2014 expectations namely; first, the U.S. economy would continue its positive trajectory, albeit, slower than we would all like. Second, measured positive growth would continue, albeit, at a choppy pace and without meaningful growth in real wages. And third, interest rates would be a wild card but our guess was any movement in 2014 would be relatively mild.

Now, four months into the year, the upshot is the story hasn’t changed, although there are two areas worth commenting on. First, even with this morning’s Commerce department’s extremely frigid first quarter GDP estimate of 0.1%, we believe full year GDP should still clear the 2% Mendoza Line.

Second, interest rate movement has been mild. In fact, rates have ticked down slightly. While interest rates remain a wild card threat, they have remained in check thus far in 2014. Given all of this, the economy is performing generally as expected with the exception of Old Man Winter having an unusually active and grumpy first quarter.

Our markets continue to benefit from the improving economy and available Class A space is becoming increasingly scarce. Our year-to-date leasing activity is robust as our team is doing an impressive job of attracting new customers to the Highwoods portfolio, validating our concentration on high-quality, BBD-located assets.

We are therefore pleased to raise the midpoint of our 2014 FFO outlook by $0.02. The range is now $2.86 to $2.94 with the midpoint of $2.90.

Our first quarter FFO results of $0.66 per share, as I mentioned, were impacted by Old Man Winter waking up on the wrong side of his igloo, as well as significantly higher first quarter G&A expenses related to how GAAP requires the bulk of our customary annual long-term equity grants to be booked in the first quarter.

Quarterly lumpiness aside, we are now more optimistic about 2014, than we were in February when we provided our initial 2014 outlook. During the quarter, we leased 1.4 million square feet of second generation space, of which 1.2 million was office, a 20% increase over 2013’s quarterly average. This leasing momentum has continued throughout April. In fact, with over 500,000 square feet of new second gen deals inked in April, we have relet more office space this month than in any quarter since the first quarter of 2001.

We’ve made substantial progress backfilling the larger vacancies in our same property portfolio. We have relet 97% of 5405 Windward, 75% of the LifePoint space that they vacated in January and 52% of the LakePointe One and Two space. Leasing activity also remains strong in the 13 office buildings encompassing 3.4 million square feet we acquired last year.

These buildings were on average 81.3% occupied at closing. At the end of the first quarter of 2014, occupancy was 86.3%, up 500 basis points. In addition, we expect these properties to be over 90% occupied by the end of this year.

As a result of all this leasing activity, we have increased the midpoint of our outlook for year-end occupancy by 50 basis points to 91.9%.

On the investment activity front, it’s been a quieter quarter. Acquisition activity for high-quality assets in our market has been slow thus far this year. Deal flow is starting to pick-up, but competition is fierce a.k.a. very expensive for the highest quality assets. Low cap rates are being supported by this limited supply of institutional product, continued low interest rates, readily available debt and a tremendous amount of sideline cash waiting to be deployed.

Given all this, we continue our pursuit of our wish list and we’re in conversations with a number of prospective sellers. We are maintaining our 2014 guidance at $100 million to $300 million for acquisitions. A positive aspect of this current environment is that investors who are flushed with cash are increasingly investing in mid-tier markets and we have a well defined pipeline of non-core assets in the market for sale. At this juncture, it appears likely we will be near the high end of our $100 million to $175 million disposition range.

Our $227 million development pipeline includes 950,000 square feet that is 86.4% pre-leased. These five projects are on schedule for delivery by mid-2015. We are in pursuit of a range of additional development projects, all of which would be predominantly well pre-leased. Our 2014 development outlook of $75 million to $150 million remains unchanged, includes the $15 million headquarter building for Biologics that we announced in January and we hope to be close to the high end of this guidance range.

Overall, the year has gotten off to a good start. Leasing has been robust. Interest in our non-core assets that we’ve put to market has been strong. And our underway development pipeline continues on track. We are pursuing a number of well-leased development opportunities. With the reletting of a good portion of our same store vacancies in the bag, our shareholders should see meaningful upside in Highwoods as we head into the next couple of years.

I’ll now turn over to Mike to cover operations. Mike?

Mike Harris

Thanks, Ed, and good morning. As Ed noted, leasing activity in our markets has and continues to be strong. During the first quarter, we signed 149 leases for 1.4 million square feet of second gen space. 1.2 million square feet was office with an average term of 5.5 years. Occupancy in our wholly owned portfolio decreased 70 basis points from the fourth quarter, primarily driven by our expansion and relocation of LifePoint Hospital Systems into a built-to-suit in Nashville.

Cash rent growth continues its positive trajectory. For the 132 office leases signed this quarter, cash rent growth was negative 1.9% compared to negative 5.6% and negative 5.4% in the third and fourth quarters of 2013. GAAP rent growth on office leases signed this quarter was positive 7.8%.

CapEx related to office leasing was $19.70 per square foot in the first quarter. It was skewed by one large deal, a 210,000 square foot renewal and long-term extension at our remaining Greenville property which is now in the market for sale. While a meaningful amount of CapEx was invested to secure this renewal, we will more than recoup this investment in the sales proceeds. Excluding this lease, CapEx related to office leasing would have been $16.55 per square foot.

Turning now to our markets. Atlanta’s office market is strengthening with 1.7 million square feet of net absorption in the first quarter. Atlanta has absorbed 5 million square feet over the past four quarters and market vacancy has declined 11 quarters in a row. Our Atlanta team did an outstanding job backfilling 5405 Windward. We go back 223, 000 square feet in October and we’ve already re-leased 97% of the space. Activity continues to be strong at One Alliance Center and we have improved occupancy over 1,400 basis points in just a little over nine months since acquisition.

Nashville continues to be a strong market and was rated The South’s Red Hot Town in the March 7th issue of Time Magazine. Unemployment at 5.6% is meaningfully better than the 6.7% national average, and year-over-year job growth was a solid 2.7%, 130 basis points better than the national average.

At Nashville, LifePoint vacated 145,000 square feet to move into the new 203,000 square foot built-to-suit we recently delivered. As a result, occupancy in our Nashville portfolio declined 470 basis points to 90.5%. The good news is we’ve already backfilled 75% of the space and have strong prospects for most of the remainder.

Year-over-year, Raleigh added over 18,000 office jobs, representing a robust 3.8% growth rate, almost three times the national average. Unemployment at the end of March was 5.1%, 24% better than the national average.

Occupancy in our Raleigh portfolio increased 60 basis points quarter-over-quarter and 180 basis points year-over-year. We have $160 million of development underway in Raleigh, most of which delivers in the first half of 2015.

The Tampa economy continues to improve. Unemployment at the end of March was 6.5%, 100 basis points better than March 2013 and year-over-year job growth was a solid 2.2%. We’re pleased to announce that over the past few weeks, we’ve signed three leases with new customers totaling 60,000 square feet at LakePointe One and Two. We’ve now relet 52% of the 319,000 square feet that was vacated last May and we have prospect for the majority of the remaining space.

Pittsburgh continues to be a solid performer for us. During the quarter, we signed 118,000 square feet of relets, renewals and expansions at PPG Place. Market occupancy was 90.1% demonstrating the strength of Pittsburgh’s diverse economy. Our Pittsburgh portfolio was 93.3% occupied at quarter end.

Overall, we were very pleased with the quarter. Our robust year-to-date leasing activity is a testament to the strength of our brand and our people. Terry?

Terry Stevens

Thanks Mike. Total FFO available for common shareholders this quarter was $61.2 million, up $3.4 million or 5.8% from first quarter of 2013. This increase primarily reflects $8.0 million in higher NOI from acquisitions and recent developments placed in service, net of NOI from dispositions including $1.1 million from fourth quarter dispositions, and $2.5 million in lower interest costs from lower average rates and slightly higher capitalized interest, partly offset by higher outstanding debt balances.

These positive items were partly offset by $4.2 million in lower GAAP same property NOI, which I’ll cover in more detail in a minute, $1.7 million in lower FFO contribution from joint ventures, mostly due to our acquisition of seven assets from two of our joint ventures in the third quarter of 2013, and $600,000 in higher G&A.

As a reminder, FFO and G&A amounts in my comments exclude property acquisition and debt extinguishment costs which are disclosed in a table in our press release. There were no such costs in first quarter 2014, but $700,000 in first quarter of 2013.

On a per share basis, FFO for the quarter was $0.66, $0.02 lower than first quarter of 2013 as the increase in FFO dollars was offset by higher shares outstanding. Weighted average shares outstanding this quarter were $93.0 million, up $8.2 million or 9.6% from first quarter 2013 due to equity issuances during 2013. Average leverage during the first quarter of this year at 41.6% was 2.1% lower than the 43.7% in the first quarter of last year.

As noted in our FFO outlook, we expect full year 2014 weighted diluted shares outstanding to be approximately $93.4 million.

First quarter FFO was $0.08 lower than the preceding fourth quarter of 2013. This was due mainly to $0.034 from our share of JV merchant build in the fourth quarter, $0.012 lower NOI from fourth quarter dispositions, $0.027 lower same property GAAP NOI and $0.017 higher G&A which actually consists of $0.035 attributable to the GAAP accounting for retirement plan this quarter, offset by $0.018 in lower short-term incentive comp and other cost savings in the first quarter.

These reductions in FFO were partly offset by $0.012 in higher NOI from acquired properties and developments and $0.006 in lower interest.

As I mentioned, same property GAAP NOI was $4.2 million lower versus first quarter 2013. $3.5 million of the change was due to the well discussed move-outs we had in May, October and January including space LifePoint vacated this quarter in Nashville when they moved into their new headquarters building we delivered for them.

These move-outs reduced average occupancy in the same property pool by 3.0% this quarter offset by 1.5% occupancy growth in the remainder of the same property pool by 3.0% this quarter, offset by 1.5% occupancy growth in the remainder of the same property pool. We are very pleased to have recently relet significant portions of those vacated spaces, as Ed and Mike have already discussed. These new customers will mostly take occupancy in the second half of 2014 and first quarter of 2015.

Compared to first quarter last year, we had $0.01 per share in higher snow removal and utility costs, net of CAM recoveries caused by the harsher than normal winter. We also had $700,000 of higher bad debt expense on billed and cumulative straight line rent receivables, over half of which is attributable to a single customer. We have a strong prospect for that customer and expect to re-lease the space with little downtime.

Excluding properties with the well discussed move-outs and excluding the unexpected winter impact, we had positive cash NOI growth of 3.5% in the rest of the same property pool. Given solid year-to-date leasing, we remain comfortable with our forecast for full year growth in same property cash NOI of about 0.5% to 1.5%.

G&A this quarter was $600,000 higher than first quarter last year. As I mentioned during our February conference call and as we noted in the press release, first quarter G&A is typically impacted disproportionately by the GAAP requirement to expense long-term equity incentive grants on the March 1 grant date for employees who have met eligibility requirements under our retirement plan.

Full year 2014 long-term equity compensation expense will be approximately $6.7 million, slightly lower than full year 2013. Since $4.3 million of the $6.7 million was expensed in the first quarter, the G&A run rate for the next three quarters will be significantly lower. And we remain comfortable with our G&A outlook of $34 million to $35.5 million for 2014. At the outlook midpoint, full year G&A should be about $600,000 lower year-over-year.

Turning to the balance sheet, we expect average occupancy to hover around 42% throughout the year, as we continue funding our net growth on a leverage-neutral basis. On April 1, we used our credit facility to pay off $124 million secured loan. We have only $7 million of secured debt and no unsecured debt maturing in the remainder of 2014, and only $77 million of secured debt maturing in 2015 and $161 million in secured debt maturing in 2016.

We are also pleased to have received an upgrade this quarter from Fitch ratings to BBB flat and stable outlook. All three agencies are at the same ratings level.

As Ed mentioned, given our strong year-to-date leasing, we were pleased to raise the bottom end of our 2014 outlook by $0.04. And we now expect full year FFO of $2.86 to $2.94 per share, which at the midpoint is a $0.02 increase from our original guidance.

Our full year FFO outlook reflects actual first quarter results including the harsh winter impact and the GAAP accounting or GAAP retirement plan effect. And as a remainder, while we disclose our expected ranges for acquisitions, dispositions and new development activity in 2014, we do not include any impact from such investment activity in the FFO outlook until such transactions close. This is consistent with our past practice.

Operator, we are now ready for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Dave Rodgers with Baird. Please go ahead.

Dave Rodgers – Robert W. Baird

Yes, good morning. Ed, wanted to follow-up on one of your early questions, maybe some officiousness [ph] in it, but the 2% Mendoza Line for GDP is – is that kind of an indicator that you guys use internally to think about kind of where business activity might be, and that’s kind of what gives you confidence about the built-to-suit pipeline etcetera, or am I reading too much into that?

Ed Fritsch

No, I think it’s fair, but it’s just part of a mosaic. We also look at how housing is doing, interest rates, how showings are going, how we’re able to negotiate transactions, the absorption, unemployment, population growth. So it’s an important part of the mosaic but it’s not a single indicator.

Dave Rodgers – Robert W. Baird

Okay. And switching maybe to your built-to-suit activity. It sounds like the expected development starts to be at the higher end of the range for the year, if I heard that correctly. Talk about the built-to-suit and development starts that you are seeing? I mean are these projects more like LifePoint, where there is an end market move and an upgrade, more like maybe a MetLife or we’re seeing more kind of net new expansion to the markets? And are you seeing more multi-market discussions, negotiations, where corporate relocations are becoming a bigger part of those discussions?

Ed Fritsch

I think it’s slightly more weighted towards consolidation and expansion of existing with some MetLife-type activity, but not as much as consolidation and expansion within a market or to an upgrade of quality of space and location.

Dave Rodgers – Robert W. Baird

Okay. Last question maybe for Mike. Just wanted to talk a little bit more about Tampa. It sounds like good activity at LakePointe. One, could you give us a sense of the types of tenants that are incrementally taking space there, average size of activity, and then maybe what they read through is for the T-Mobile space, it’s now vacant. I know that was the Lakeside building, but the old T-Mobile space?

Mike Harris

Sure, Dave. Of the activity we’ve had, I would say financial services, legal, accounting have been part of the Group that have looked at the backfill so far and are continuing. We have a little bit of healthcare as well, because of the proximity of Tampa Bay Park to the hospital which is literally about pitching wedge away, so getting interest from that sector as well.

As to the Lakeside building, as we meant on the last call, we are substantially into making improvements to that property. T-Mobile vacated at the end of the year. We’ve really been working hard to get that project back with some exterior and interior improvements, landscaping etcetera. That’s not slowing us down from obviously showing the space. Dan Woodward and Laurie Alden down in our market there are actively on this and building up a prospect list for it.

Dave Rodgers – Robert W. Baird

All right, great. Thank you.

Mike Harris

Sure.

Ed Fritsch

Thanks Dave.

Operator

And our next question comes from the line of Brendan Maiorana with Wells Fargo. Please proceed.

Brendan Maiorana – Wells Fargo

Thanks. And Mike, maybe just staying with Tampa for a second. I think you mentioned that you’ve got nice prospects for the balance of the space. Do you think that those are something that is likely to hit in the balance of this year, or is it something where these are deals that maybe take a little bit longer and you may not get that space put to bed until maybe next year?

Mike Harris

Well Brendan, it seems like every deal takes longer than we would like. The 52% that we’ve backfilled now has been obviously slower than we would prefer, but it’s still the decision making process. And these are fairly large blocks. The larger the deal, the longer it’s taking for the decisions. And they are mostly regional or national. So you get decision that’s working not only the local folks that are interested in the space, but their hire ups in another market who might make the decision, long story.

I do think we’ll be able to hit some legs [ph] in the later part of this year, but also think that we could expect some of this to bleed over into ‘15 to finish that out.

Brendan Maiorana – Wells Fargo

Yes. So I guess if I look at your year-end occupancy guidance, there is a spread of about 125 basis points. So it’s not that wide, but maybe what are some of the things that would push you towards the high end of that? Is it backfilling some of the space in Tampa? And it seems like you made great progress elsewhere in the portfolio. So I don’t think there are that many other large holes left to fill.

Mike Harris

Well, there is the Tampa space obviously. We also have the backfill of the space that’s going into LifePoint to backfill the buildings that they vacated as we announced with a customer that’s moving out of one space out of 58,000 square feet into close to 90,000 feet over there. So we’ll have to backfill that.

And given that it’s in the Brentwood submarket which is very strong, Brendan, we think that there is a good possibility we could get some traction on that space as well.

Ed Fritsch

Brendan, just want to put note. I think as you look at our guidance, the timing we’ve – basically what enabled us to get comfortable in raising the guidance is predicated heavily on what’s inked-in in the bag. And so the occupancy number at year-end that you wisely brought up, obviously it’s important that we hit that range, and we feel relatively comfortable that we will. But it won’t have nearly as meaningful an impact on FFO, because it will be late in the season.

So just want to get you comfortable that the amount of spec leasing that we had in order to achieve these numbers is very consistent with our historic run rate.

Brendan Maiorana – Wells Fargo

Yes. And I guess, so just to follow-up on that or maybe add to that point, I think I can’t remember if it was Ed or Mike who mentioned that most of the – a lot of the leasing that you’ve done is hitting late in the year and then also in 2015. So if we think about the guidance for the remainder of this year, just the straight math is almost $0.75 a quarter of FFO, or just the average for the remaining three quarters. I presume that that’s got an upward sloping trajectory. And then if I heard the comments correctly about occupancy in early ‘15 that you’ve signed but hasn’t yet commenced, commences in early ‘15. I gather that there is a pretty good slope early in ‘15 as well.

Ed Fritsch

That’s a very accurate gathering. And then I would just put note to that, that we would also have the development projects delivering in the first half of ‘15 for added FFO.

Brendan Maiorana – Wells Fargo

Sure, great. Okay. And then just last question. Just a housekeeping question. It looked like the lease term for HCA changed in the supplemental by only a few months. So I wasn’t sure if that was just maybe something that was a quirk in the supplemental, or if they actually just did a very short-term extension?

Ed Fritsch

They actually did a short-term extension, Brendan. They are in several buildings with us. They have announced that they are considering a built-to-suit alternative in that market. They haven’t quite come out and said where it is, when it is but they came to us and asked for an extension on there. So it was really to accommodate this very large and good customer.

Brendan Maiorana – Wells Fargo

Okay. So just to give them more time to figure out what they may do with their built-to-suit?

Ed Fritsch

Yes.

Brendan Maiorana – Wells Fargo

Okay. Thank you.

Ed Fritsch

Sure.

Mike Harris

Thanks Brendan.

Operator

(Operator Instructions) And our next question comes from the line of Vance Edelson with Morgan Stanley. Please go ahead.

Jill Slattery – Morgan Stanley

Hi. This is actually Jill Slattery on for Vance. Can you comment on your uptake for asset recycling, and do you have any pipeline in terms of potential acquisition targets or existing buildings you might consider shedding? Thanks.

Ed Fritsch

Sure, Jill. Well, we give guidance in both of those categories. We clearly tie this – it’s just our methodology that we tie our guidance to specific street addresses. We don’t do it just based on where we feel that the current market environment stands. So when we put together our guidance, we base it on specific street addresses and what we think the pricing would be that we would acquire these assets for, and what we think the odds of that happening and then we interpolate from there to put out our guidance.

So the answer on the acquisitions is last year we did $549 million total acquisitions. This year our guidance is $100 million to $300 million. We have specific street addresses. Whether we’ll be successful on those or not, time will tell, but is specific.

On the disposition side, our guidance for this year is $100 million to $175 million. And yes, we have specific street addresses for that as well. In fact, a goodly portion of that is in the market at the present time listed with investment brokers and different stages in the evaluation and marketing process.

Jill Slattery – Morgan Stanley

Okay, thanks.

Ed Fritsch

You’re welcome.

Operator

And our next question comes from the line of Michael Knott with Green Street Advisors. Please proceed.

Jed Regan – Green Street Advisors

Good morning guys. Jed Regan here with Michael. You talked about the fierce competition for core assets in your markets. So I’m just wondering if you’re seeing any noticeable changes in cap rates or asset values in your market so far this year.

Ed Fritsch

Yes, hi Jed. We have seen some movement for I guess the highest quality assets that have come to market. So I would – in short I would say, yes. If I had to scale it, I would say 50 to 75 bps worth.

Jed Regan – Green Street Advisors

And on a cap rate basis?

Ed Fritsch

Yes sir.

Jed Regan – Green Street Advisors

Okay, that’s helpful. And then are you seeing rent growth trends moving at all in any of your markets or is it 2% to 5% range you kind of outlined in the last few quarters. Is that still a pretty betting line?

Ed Fritsch

Yes sir. What we gave you in our last at a glance is what your – I think remembering the 2% to 5% year-over-year asking rate increases is pretty consistent.

Jed Regan – Green Street Advisors

Okay. And then I guess a related question. Where do you think mark-to-market rents in your portfolio stands today?

Ed Fritsch

We do such a measurable job of avoiding that question. You would never gone through a whole portfolio. I do think that if we look at what’s expiring between now and the end of next year, that we would expect to be flat to slightly up and maybe to slightly down. It just depends on what rolls in the timing of relets or renewals. We still have the annual kickers in all of our leases that get us better than 2% annually. And we do have a relatively nominal amount of large exposures between now and the end of ‘15.

In fact, we don’t have – but two leases that are just over $1 million in revenues for the remainder of this year. And then just I think its two leases next year that are more than $2 million in annual revenues. And both of those have fairly decent probability of renewal.

Jed Regan – Green Street Advisors

Okay. And then just in terms of some of the recent leasing activity just some of the larger chunks you announced. Just curious, how the economics for some of those leases ended up coming in relative to kind of your initial expectations. You talked about for instance, a possible 10% to 15% market at Windward. We’re just wondering on kind of how those ended up coming in?

Ed Fritsch

Yes. On Windward, we came in actually about better than 20% better with in-place versus what has expired. So we enjoyed better than 20% rent growth there. At the LifePoint backfill that we’ve done thus far, about 3% to 5%. And on the LakePointe, as we have forecasted, it was going to be high-teens to low-20s roll down on that.

Jed Regan – Green Street Advisors

Okay, that’s helpful. And just last one, if I may. It looks like Country Club Plaza lost a bit of occupancy last quarter. And just wondering if you can comment quickly on that change, and if you’re seeing any softening at that asset and maybe where sales productivity metrics are there today?

Ed Fritsch

Yes. Mike will give specifics, but globally, we don’t see a significant softening. I think that obviously weather hit retail. And Country Club Plaza, while its mixed use office and retail for us, obviously had some impact on the retail side, but the three specific deals that most caused the roll down in occupancy, Mike you want to share?

Mike Harris

Sure. Jed, basically there were three transactions. One was a non move-out, Pottery Barn out of 10,000 square feet there. And thanks to good efforts of our folks in leasing of Kansas City out there, we’re able to quickly backfill that with another Williams and Sonoma concept less down. So we’ll have like 4.5 months of downtime on that. So that’s a quick backfill and good save by the team out there.

The other was Brooks Brothers, which had actually opened a store in South Johnson County and we have good prospects for that. Other one is a smaller. So it really was not a huge number. The biggest being the Pottery Barn. So we’re still very bullish on the activity out there and feel like we’ll get those backfilled soon.

Ed Fritsch

And we are – as you know, we’ve talked in the past about the Halls Department Store coming out. We’re deep into the redesign of that building and how we’re going to re-tenant it. And we think we’ll have some really positive news on how that will go once we’re able to reveal our plans and how our prospecting is going, but we’re expecting some significant rent growth in what we’ll invest in the repositioning of the Halls building that we’ll now call, 211 Nichols.

Mike Harris

And that will happen just so you know, in August as when they will basically come out, will start the redevelopment process and really lease that will start sooner but it will likely be second quarter of ‘15, we bring it back into service and hopefully with some really good customers in that project.

Jed Regan – Green Street Advisors

Thanks for all the color guys. I appreciate it.

Ed Fritsch

Sure sir.

Operator

And our next question comes from the line of Jamie Feldman with Bank of America/Merrill Lynch. Please go ahead.

Jamie Feldman – Bank of America/Merrill Lynch

Great. Thank you, and good morning. I was hoping you guys could talk a little bit more about just what the corporate relocation pipeline looks like right now, whether things have picked up or falling off a little bit this quarter? And then in terms of which markets, and then how that lines up with your land bank and maybe built-to-suit potential?

Ed Fritsch

Sure. Jamie I think it’s hard to measure that quarter-by-quarter. It just doesn’t move fast enough. From the time that a corporation starts to come up with a concept that they are going to evaluate relocating, usually it starts out with multi-states and even more cities and even more developers. And lots of conversation with behind the scenes with economic development departments that are municipal employees, conversations with governors etcetera trying to get their arms around what incentives, if any, would be a battle for them if they were to relocate.

At the same time, they typically deploy another team that goes in and understands the demographics of the market with regard to population growth, how well educated is the employment base, how readily available is the employment base, what are their areas of expertise etcetera. And then they start to get a sense for what opportunities are available from developers.

And so it’s really not a process that I think anybody can say, you have really changed this quarter over last quarter just because it’s such a protracted process that these entities go through.

Given all that, I can say that the activity in the number of conversations remains encouraging. A conversation doesn’t mean that deal is going to be add. We’ve certainly seen in the past where entities have undertaken very onerous exercises only to go back to their governor with letters from other governors that up the earning [ph] for their own governor to keep them in stay. But we would say that there are a number of these conversations ongoing in a number of the markets that we’re in. And it’s encouraging that development has now become one of the things that is prominent in the reconsideration with corporate relocations as opposed to going into Class A space that was just not yet leased from having been delivered late in the cycle.

I think that we have an attractive pool of land that would support over $1 billion of new development. It’s on titled, infrastructure is in place. We have concept drawings for the major parcels of land that we have, so that are division heads and leasing personnel are well armed with what they can show in the way of concepts of what we could do as we enter into conversations, whether it be through the municipality or the tenant rep broker who is representing the user.

So I’d say that, the activity is good, but I would be cautious about trying to measure it quarter-over-quarter.

Mike Harris

I would say, Jamie, that of the transactions we’re actively pursuing at this time, our existing land positions are in the mix on all of these, which is good. So our land inventory there is serving as well.

Jamie Feldman – Bank of America/Merrill Lynch

Okay, very helpful. And then can you talk a little bit about supply, and where you think you might start to see supply take up? I know we’ve been hearing more and more from brokers that, both in Central Perimeter and I think Tishman was talking about Buckhead getting starting in Alliance. What do you guys think across your markets and then I guess specifically on Atlanta is the risk?

Ed Fritsch

Well, we’re obviously hearing those types of conversations. I think the most significant is in Cool Springs where Franklin Park is underway with about 225,000 square foot building that we understand to be predominantly on spec. Then, if we move to Raleigh, there is a building downtown that is started this past month, that’s – is it Mike like 200…

Mike Harris

225,000. Actually, the Franklin Park was actually 250,000. Charter Square is 225,000 square feet.

Ed Fritsch

The Charter Square is downtown, that’s Prudential’s money. They started last month. They are 41% pre-leased in the downtown market. And then in Buckhead, we have heard rumblings about Three Alliance, but I think what we’ve seen thus far in the Buckhead market has been more conversation, broker talk than any actual shovels in the ground. Pittsburgh is holding tight. Tampa is holding tight. Richmond is holding tight.

Mike Harris

I think as you’d expect that the three very strong markets we’ve talked about, Atlanta, Nashville, Raleigh is where you see the activity. There is a building with some spec vacancy that’s going in, called the Gulch area in downtown Nashville that’s underway, which is somewhat to be expected with Raleigh.

Obviously we have around I think like five, it has some spec component to it. And then we just talk about Atlanta here.

Ed Fritsch

And the Gulch is 60% pre-leased.

Mike Harris

60% pre-leased. So those are really only markets where you see any meaningful activity that’s going on.

Ed Fritsch

I would say there is obviously little more activity now, Jamie, than a year ago, but I would say that is still very guarded. And the cost of construction, regardless of the Buckhead activity, is still – it’s very expensive.

So anybody who is going to go into first gen new space to redevelop needs to be buckled up for rate increase. It needs to be part of their business objective that they are willing to pay a higher level. And I think that’s in part what drives a lot of the new development to be heavily pre-leased.

Mike Harris

We’ve been saying for quarters now the disparity between second gen, what’s offered out there versus the build-to-suit is wide. It’s narrowing a little bit as we see market rents starting to grow, but it’s principally going to take the build-to-suit folks that come in, that are primarily looking either relocation or they’re consolidating in some specs, shrinking their space needs to justify going into higher rate space, but that’s what’s really driving right now.

Jamie Feldman – Bank of America/Merrill Lynch

And so when you met the projects you mentioned, do you think those have any impact on market recovery at this point in terms of slowing rent growth or challenge against your existing portfolio or we’re not quite there yet?

Ed Fritsch

I would say in general, no. It’s just not enough of it. And where it’s happening, there are markets that – or submarkets that are quite well healed.

Jamie Feldman – Bank of America/Merrill Lynch

Great. So I guess the positive is if they are asking higher rents, so that means your existing portfolio rents could be rising?

Ed Fritsch

Should raise the tide. Correct.

Jamie Feldman – Bank of America/Merrill Lynch

Yes. Okay, all right. Thank you.

Ed Fritsch

Thanks Jamie.

Mike Harris

Thanks Jamie.

Operator

And our next question comes from the line of Michael Salinski with RBC Capital Markets. Please go ahead.

Michael Salinski – RBC Capital Markets

Good afternoon guys. Just a first question related to funding. Obviously you guys have debt maturities there, and when you think about the built-to-suit. The plan to fund loss [ph] that was dispositioned at this point or how should we be thinking about financing investment at this point?

Terry Stevens

Hi Mike, this is Terry. Yes, as we said we expect to return high end of our disposition range. So that will be recycled capital back in that we can use for the development funding. We do have some increase in the shares outstanding in our guidance to $93.4 million, that I mentioned in my call comments includes some shares issued during the year from the ATM, as well to keep our leverage neutral as we grow the company. So it’s a mix of recycled capital, a little bit of ATM. And if necessary, a little bit of other debt, just to keep things in balance.

Michael Salinski – RBC Capital Markets

In terms of timing on the dispositions, should we expect anything to close in the second quarter as most of that is back-half loaded?

Terry Stevens

I think there could be a couple in the second quarter and then the balance would come in third and fourth.

Michael Salinski – RBC Capital Markets

Okay. That’s helpful. You talked a little bit about supply just in the couple of the markets and also about built-to-suit and tenant demand there. Can you talk about just the competition you’re seeing from other developers looking to get into the market? And are you seeing any compression in build-to-suit required deals or the spec construction?

Ed Fritsch

Well, as we just outlined with Jamie, we’re seeing some in scattered places that we haven’t seen an onslaught of new spec development. It continues to be very expensive to do. It’s a risky business in today’s environment given the cost of it and the job growth still is not unabated from what it would typically be in normal economic times.

I also think that for new developers to come into market, it’s a bit difficult to compete against landlords that have brand recognition, a well located land bank that’s well entitled and a balance sheet that can basically come to the table without having to bring a third party in a way of a banker.

Mike Harris

And Mike, I think as time to time as we pursue these and bid for these, as Ed mentioned, our balance sheet is a strong selling point as we just basically picture. This is two part of transaction between Highwoods and the customer without necessarily the requirement of a secured window in the middle of that, resonates very well with those folks.

So that’s been good. In terms of compression, it depends on the credit of every deal. And when you’re looking at Fortune 50 companies, clearly they are trying to bargain for the best deal they can using their credit in term to get the best deals they can. We prefer to do it open book transaction whenever possible, whereas basically project cost, time to yield and more times in that, we’re negotiating yield versus anything else.

Michael Salinski – RBC Capital Markets

And then just as my follow-up question there. I realize there is a small market for you, Orlando, but can you just talk about what you’re seeing in that market and the leasing prospects kind of in the back half of the year?

Ed Fritsch

Sure. As you may know, I think last July I believe it was that we bought out our partnerships interest in five CBD buildings in Orlando. It was approximately 1.3 million square feet. When we bought them, they were 82% occupied. We’ve seen some good movement on the leasing.

We think Orlando has been a market that’s been little bit slow in coming back in comparison to other markets in our overall footprint, but statistically it’s clear that downtown activity is picking up a bit. And that while Orlando has been a little bit late to the party, we’ve certainly seen demographics that are suggesting that the timing of our buyout of this 1.3 million square feet should prove to be quite profitable.

Mike Harris

And truthfully, we don’t have many large blocks of space there. So we’re basically doing a little bit of backfilling kind of the Cinderella slipper size spaces to go in there, but activity is definitely up. Our land mark project which as Ed mentioned we acquired we’re seeing some pretty good deals over there. And then with the Cap Plaza Two building, we got little place to lease there, but activity as well.

Michael Salinski – RBC Capital Markets

Appreciate the color. Thanks guys.

Mike Harris

Sure.

Operator

And our next question comes from the line of Emmanuel Korchman with Citi. Please go ahead.

Emmanuel Korchman – Citi

Good morning guys.

Ed Fritsch

Good morning.

Emmanuel Korchman – Citi

Could you just remind us if we look out at your development pipeline and the stuff that’s not currently in progress. How much of that’s going to be built-to-suit versus more spec?

Ed Fritsch

As we said in the comment, we’ll be predominantly pre-leased.

Emmanuel Korchman – Citi

Great. And then looking at Nashville for a second. If we look at the tenant that – the current tenant that expanded and went into the former LifePoint space. Do you have any backfill prospects for their current or former space, however you want to look at that?

Ed Fritsch

We have some [indiscernible] class prospects, but we don’t have any strong prospects at this point in time.

Mike Harris

And a remainder, they will only be vacating to come over to that space until September. So we’re just now really getting into the marketing of this, but our leasing team down there is already working pretty hard at it and I think that we expect again, given where it is, strong submarket in Brentwood and Maryland Farms that we will see prospects, good prospects.

Ed Fritsch

And Emmanuel just as a remainder, my point was in two different locations with us. So we’ve signed round out about 110,000 square feet of the 145,000. We do have strong prospects for another 28,000 square feet of that space. So just to expand on your question, that we have got the 28,000 square foot prospect for some of the additional space that they came out in another building that totaled the 145,000 square foot.

Emmanuel Korchman – Citi

Got it. Perfect. Thank you guys.

Ed Fritsch

Sure, Manny.

Operator

And we have a follow-up question from the line of Michael Knott with Green Street Advisors. Please go ahead.

Jed Regan – Green Street Advisors

Hi guys. Jed Regan here again. Ed, you talked about the 50 basis points to 70 basis points of cap rate compression year-to-date. It sounds like that would be kind of more for the best assets in your markets. So just wondering if you could sort of bracket the kind of cap rate changes you’ve – maybe you’re seeing for, call it more the average asset in the marketplace or your portfolio or even below average type of an asset, you’ve seen any movement on those type of buildings?

Ed Fritsch

I’d say that the below is just getting the benefit of – they are being so much cash. So maybe the overall quality of the deal is a little bit better, but I would say, it’d be difficult to measure a movement in the cap rate. I think there is a direct correlation between the quality of the asset and how prices have moved, so basically you’ve nailed it with what you said.

The Class AA, if you will, that’s a term some people use, that’s enjoyed the most move. And on the lower the non-core, non-differentiating asset, I’d say that it hasn’t really enjoyed any movement at all other than the deal terms as a whole with regard to due diligence period, earnest money, quality of our capital stack is somewhat improved given the volume of activity.

It would be interesting to see if some of these Class AA assets actually trade above or well above replacement costs.

Jed Regan – Green Street Advisors

Yes, we’ll be interested to see that as well. Okay, thanks so much.

Ed Fritsch

Yes sir.

Mike Harris

Thank you.

Operator

And we have a question from the line of John Guinee with Stifel. Please go ahead.

John Guinee – Stifel Nicolaus

All right, thank you.

Ed Fritsch

Hi Guinee.

John Guinee – Stifel Nicolaus

How are you? Just wanted the – you guys are doing great on the top line. FFO is looking stellar, congratulations. And the Achilles’ heel though in the suburban office world, the whole office world is CapEx. So a couple of these painful questions. First, I was just looking at the retail statistics. Over the last five quarters tended improvement dollars are 40 bucks a square. What exactly are you providing for $40 a square foot to the tenants in Kansas City? And then second question is your base building, you’re non-incremental revenue generating CapEx etcetera, is about $21 million a quarter run rate, but that excludes properties under redevelopment and a few other things. What’s that $21 million number if you include properties under redevelopment and capital spend prior to 12 months from the date of sale etcetera?

Ed Fritsch

So Mike you want to do the white box for…

Mike Harris

Sure. I’ll handle the Kansas City, the retail question, John. As you’re aware, our retail is principally at Country Club Plaza which is 90-plus years old. You have a number of these – when you have these tenant rollovers, you have some cases in very un-equated systems, electrical, mechanical, etcetera. So what we call TI for these are often times white box costs that are bringing it up to a level where the customer can then come and spend their money. So there is some of that which would really be categorized white box on those TI.

And as a remainder, these customers are putting substantial of the dollars of their own in this on top of ours. And we’re also getting longer term leases, triple-net leases with great CAM recovery. So they’re all very well justified.

Terry you want to…

John Guinee – Stifel Nicolaus

Okay. And then I guess on going to Page 2 here on your $21 million of quarter run rate on base building second generation TIs etcetera. If you included everything you exclude in footnote three, what kind of number is that $21 million?

Terry Stevens

I don’t have that off the top of my head, John, but it’s probably another at least $10 million or so just given the first gens spending and some of the white box stuff that Mike mentioned, some of the redevelopment projects like we did at LakePointe on an annual basis. So it is higher than $22 million obviously. We don’t have that handy. I can get it for you and maybe give you a call offline.

John Guinee – Stifel Nicolaus

Perfect. Thank you very much.

Terry Stevens

Sure.

Operator

Pardon me. Mr. Fritsch, I’m showing no further questions. So I’ll turn the call back to you.

Ed Fritsch

Okay. Thank you, ma’am. As always we appreciate everybody’s time and interest on the call. And please don’t hesitate to call us with any additional inquiries. Thank you so much.

Operator

Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day.

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