Parkway Properties' (PKY) CEO Jim Heistand on Q1 2014 Results - Earnings Call Transcript

May.13.14 | About: Parkway Properties (PKY)

Parkway Properties, Inc. (NYSE:PKY)

Q1 2014 Earnings Call

May 12, 2014 9:00 AM ET

Executives

Jeremy Dorsett – EVP and General Counsel

Jim Heistand – President and CEO

David O’Reilly – EVP, Chief Investment Officer and CFO

Jayson Lipsey – EVP and COO

Analysts

Craig Mailman – Keybanc Capital Markets

Jordan Sadler – Keybanc Capital Markets

Alex Goldfarb – Sandler O’Neill

Dave Rogers – Robert W. Baird

Young Ku – Wells Fargo

Michael Salinsky – RBC Capital Markets

Operator

Good morning and welcome to the Parkway Properties, Incorporated First Quarter 2014 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 is now my pleasure to introduce your host, Jeremy Dorsett, Executive Vice President and General Counsel. Thank you, Mr. Dorsett, you may begin.

Jeremy Dorsett

Good morning, and welcome to Parkway’s first quarter 2014 earnings call. With me today are Jim Heistand, the President and Chief Executive Officer; David O’Reilly, Chief Financial Officer and Chief Investment Officer; and Jayson 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 first quarter earnings press release and the supplemental information package. The earnings release and supplemental package both include a reconciliation of non-GAAP 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 these expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that these expectations will be achieved. Please see the forward-looking statements disclaimer in Parkway’s first quarter earnings press release for factors that could cause material differences between forward-looking statements and actual results.

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

Jim Heistand

Good morning and thank you for joining us today. We are extremely pleased with our first quarter results and believe they reflect all the hard work the team has put into successfully transforming Parkway.

I would like to step back for a moment and highlight important positive macro trends that we are seeing across our core markets. While the recent U.S. April job report was encouraging for the broader economy, we have been witnessing strong job growth across many Fund II market for sometime now.

Specifically, three year job growth across Parkway’s core markets has averaged 8.4% which is not only outpacing the national recovery by approximately 300 basis points, but has exceeded gains realized among many tier-1 markets.

Further, recent U.S. census data reported that among the top 15 major MSAs that realized the largest increases in domestic migration over the past seven years, seven were core Parkway markets led by Austin, Charlotte and Orlando.

We believe these trends are indicative of individuals seeking to be located in markets that offer a comprehensive amenity base, a low cost, well-educated workforce and a business-friendly economic environment. We believe that these trends will continue to favor many of our core markets across the – have a positive impact on office fundamentals and offer Parkway the opportunity to unlock additional value throughout our portfolio going forward.

In the first quarter, one of our key priorities was the integration and lease up of the seven assets acquired last year as part of the Thomas Properties merger. We have successfully commenced this process and our first quarter results reflect the positive contribution that these assets have already made as well improved performance from our existing portfolio.

Highlights in the quarter include, same-store recurring NOI increased by 2.9% on a GAAP basis and 5.2% on a cash basis compared to the same quarter a year ago. 41% of total leasing during the quarter was completed at assets acquired over the past 12 months highlighting the impact of our upgraded portfolios have on leasing velocity.

We’ve signed a 177,000 square feet of new leases at an average rate of $28.96 per square foot which was approximately 35% above what we signed new leases in the first quarter of last year and it’s the highest rate achieved on new leasing in the company’s history.

Quarter-to-date customer retention was 80.5%, quarter-over-quarter occupancy declined by only 40 basis points to 88.5% significantly better than the 100 basis point drop we previously forecast due to no move outs. Our lease percentage remains steady at 90.2%.

From an investment perspective we have maintained the disciplined strategy of being proactive in executing deals that we believe will strengthen our portfolio achieved critical mass in our target sub-markets and realized outside adjusted returns.

In early April, we acquired the Courvoisier Centre, a waterfront investment class asset located in the highly desirable Brickell sub-market of Miami. This is our second Miami acquisition during the six months.

We believe that current economic growth and limited supply of office assets in this market puts us in a great position to create long-term value of these assets. We are hosting a Miami property tour on May 21 and hope that you can attend to get a firs-hand look at these newly acquired assets.

We also recently completed the acquisition of One Orlando Center, a class-A high rise located in the Orlando CBD in an off-market transaction. In order to acquire this value-add asset, we had to work with the lender to simultaneously restructure the mortgage encumbering the property.

This transaction exemplified Parkway’s ability to source and execute deals that enable the company to acquire value-add assets in an attractive basis. With the One Orlando Center acquisition, Parkway now owns approximately 23% of the Class-A Orlando CBD market.

We’ve also commenced development in Hayden Ferry III in the Tempe submarket of Phoenix. Tempe has been one of our strongest sub-market with the existing portfolio is currently 97% leased and includes a waiting list of new tenants. We feel that current office fundamentals clearly support our decision to begin construction, especially given our low cost basis in the assets.

The development will be the final phase in our 785,000 square foot, Hayden Ferry master plan office community. And lastly we have continued to make progress in strengthening our balance sheet since first quarter, we completed an equity raise that generated proceeds of $205.5 million, which we used to pay down debt and fund subsequent acquisitions.

In April, we successfully amended our unsecured credit facilities providing us with greater flexibilities and lower pricing. We have started the year off on the right track and we are well positioned to have a successful 2014.

We will continue to be opportunistic and look to strengthen our portfolio within core sub-markets. And then with the current mark-to-market at the existing portfolio of 6.9%, there is still plenty of work to be done to unlock value and drive NOI growth.

I’ll now turn the call over to David to give an update on our investment activity during the quarter

David O’Reilly

Thank you, Jim. The team has worked tirelessly this quarter to continue our recent momentum and successfully adding value-add in core parts of assets to strengthen our portfolio. We completed in late January the acquisition of the JCB Center which consists of three Class-A office buildings filling 248,000 square feet located in the Deerwood submarket of Jacksonville Florida.

We acquired the properties for a gross purchase price of $33.3 million, which represents an implied cash cap rate of 8.3% and was fully funded using cash received from our recent public equity raise.

The acquisition complements our existing ownership in a submarket that continues to exhibit improving office fundamentals amid increased tenant demand from brack office operators of a number of prominent financial services fronts.

Additionally, as you’ll recall from our fourth quarter call, Parkway acquired through the merger with Thomas Properties an interest in a joint venture with CalSTRS and Madison International Realty. They gave us five assets all located in the central business district of Austin.

On January 24, Madison exercised its right to put its approximately 17% interest in the joint venture to Parkway for a purchase price of approximately $41.5 million. Subsequently, on February 4, CalSTRS exercised its option to purchase 60% of Madison’s former interest in a joint venture on the same terms as Parkway has purchased from Madison.

As a result of these transactions, Parkway’s interest in the Austin portfolio as of today is 40% with CalSTRS owning the remaining 60%. The price for these transactions represented an asset valuation that was approximately $117 million higher than the implied value of the real estate in merger closing, highlighting the attractive basis Parkway achieved in these assets through our merger.

During the first quarter, we completed the sale of Woodbranch in Houston and Mesa Corporate Center in Phoenix. These two assets sales provided total net proceeds of approximately $26 million. We recorded a gain on the sale of Woodbranch of approximately $10 million. In anticipation of the sale of Mesa, we recorded an impairment in the third quarter of 2013 and subsequently recorded a gain on the sale during the first quarter of this year of $489,000.

Subsequent to the end of the first quarter, we completed the acquisition of Courvoisier Centre a two-building Class-A office complex located in the Brickell submarket of Miami. The 346,000 square foot asset recently underwent a $10 million renovation and offers tenants exceptional 369 degree water views throughout the building. Courvoisier Centre has structured parking at 2.7 basis or 1000 which is one of the highest parking ratios in the Brickell submarket and nearly double the rate of many Miami CBD office buildings.

We acquired the asset for a gross purchase price of approximately $145.8 million, which represents a cash cap rate of 4.5%. The purchase was financed using available cash and borrowings under the company’s new seven year unsecured term loan.

The asset was 83.4% occupied at acquisition. Courvoisier offers Parkway great opportunity to gain further exposure to the Miami market. Continued economic growth in urbanization coupled with a flourishing cultural environment has led to increased demand for multinational companies to have a presence in the Miami CBD.

The recent foray of multifamily development in the Brickell submarket has limited the potential for new supply of office space and driven current market rates to exceed $40 per square foot. Courvoisier Centre is well positioned to benefit from the supply constrained Brickell submarket and we believe that we can drive outside revenue growth at the asset.

On April 14, we completed the acquisition of One Orlando Center and simultaneously restructured the existing mortgage on the asset. The 356,000 square foot Class-A building is located in the Orlando CBD and complements Parkway’s existing ownership of assets in the submarket. The asset was 81.3% occupied at acquisition and is expected to generate an initial full year cash NOI yield of 7%.

We acquired the asset by making an $8 million equity investment that will be held in reserves and used upon leasing activity and multiple renovation projects. In addition to the equity investment, we restructured the existing $68.3 million mortgage into a new $54 million first mortgage and a $15.3 million B note. With the B note being subordinated to Parkway’s equity investment.

The new A note at $54 million reflects a per square foot basis of $134 and has a fixed interest rate of 5.9% and matures in May 2017 with an option to extend for an additional year.

Apartment sale or recapitalization of the asset, proceeds will first be repaid to the lender of the first mortgage. Second, to Parkway, up to its $8 million equity investment, third, to Parkway until we receive a 12% annual return on our equity investment, fourth, 60% to Parkway and 40% to the lender until the B note is repaid and finally all the remaining proceeds will go to Parkway.

We remain committed to the Orlando CBD submarket as recent trends in both population and job growth support our thesis at Orlando is poised to benefit from an office market recovery.

We also announced on April 14 the commencement of construction at Hayden Ferry III, a 261,000 square foot Class-A development in the Tempe submarket of Phoenix Arizona. We are excited to begin the final phase of Parkway’s 785,000 square foot master plan at Hayden Ferry office community as current office fundamentals in the Tempe submarket clearly validate our decision to begin construction.

Tempe’s diverse amenity base, the modern transportation system, and access to outdoor activities have attracted a young and highly educated workforce. As a result, demand for Class-A office space has been strong.

Parkway made its first investment into the Tempe submarket at June 2011 acquiring Hayden Ferry I. Since that time, rental rates to the property have increased 24% and overall vacancy levels for Class-A assets in the Tempe market have fallen to under 4%. Our local team has had success at leasing our current four building portfolio up to 97% and the addition of Hayden Ferry III will provide a best-in-class product to accommodate the waiting list of tenants that we currently have at Hayden Ferry I and II.

The Hayden Ferry assets are owned in our Fund II joint venture. We’ve signed an amendment to that JV that authorizes construction on the project and gives Parkway 70% interest in the development with our partner maintaining the remaining 30% interest.

We expect total cost of the development to be approximately $68.8 million and we intend to finance the project with a construction loan of approximately 65% of the total cost.

As a reminder, in 2012, we acquired the land, parking and attached retail building at Hayden Ferry III for approximately $18.2 million. Our basis provides us with a substantial construction cost advantage and we believe it should deliver a higher yield to Parkway than any other potential development.

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

Jayson Lipsey

Thanks, David. Since the beginning of the year, we’ve made great progress both integrating our recent acquisitions into the portfolio and executing our leasing strategy. Fundamentals remained very positive in our markets and we continue to have strong leasing demand for our properties. The assets we acquired from Thomas Properties performed very well during the first quarter and had a very positive impact on our leasing performance.

Let me share with you a few leasing highlights from the quarter. We completed 538,000 square feet of total leasing; this was executed at an average rental rate of $27.41 per square foot which represents an increase of 17.5% from the previous quarter.

New leasing activity was strong at 177,000 square feet at an average rental rate of $28.96 per square foot which is 10.1% higher than the previous quarter, as Jim mentioned, the strongest new leasing rate we have achieved in Parkway’s history.

The strong growth in rates reflect the fact that approximately 32.5% of new leasing velocity occurred within our recently acquired Austin portfolio. We completed 287,000 square feet of renewal leasing during the quarter at an average rate of $26.27 per square foot, which represent the positive cash renewal spread of 6.9% from the expiring rental rates. Our customer retention for the first quarter was 80.5%, an increase of 781 basis points from the first quarter of 2013.

I’d also like to highlight three large lease deals that we executed during the quarter. First, we completed a 39,000 square foot new lease at Phoenix Tower located in the Greenway Plaza submarket of Houston. The asset is currently 92.8% leased, compared to 83.6% occupied when we first acquired the asset in December of 2012.

Further, since the acquisition of the asset, we’ve created a positive cash spread of 39% on renewal leasing and total leasing has been executed at an average of $34.08 per square foot.

Second, we executed a 190,000 square foot renewal lease at the SteinMart building in downtown Jacksonville, a legacy Parkway asset. While the rate was notably lower compared to other renewals during the quarter, the leas is crucial as it locks in an anchored customer who provides stability to the asset for an 11 year lease term.

Excluding the SteinMart lease, the rental rate on first quarter renewal leasing would have increased $5.18 to $31.45 per square foot and the rental rate on total leasing for the quarter would have increased $2.46 to $29.87 per square foot. These adjusted results would have represented the highest total and renewal leasing rates achieved in Parkway’s history.

Lastly, we completed a 37,000 square foot new lease at 7000 Central Park located in the central perimeter submarket of Atlanta. With this new lease, we’ve backfilled the large vacant space and have begun stabilize its value-add asset which we purchased late last year.

Leasing activity during the quarter was done at an average cost per square foot of $4.40, while total leasing costs were higher than the previous quarter; it was primarily driven by leasing mix and as a result of higher lease rates generating larger broker commissions.

Notwithstanding, our concession ratio on first quarter leasing was 16.1%, which is below our trailing four quarters concession ratio average. In addition to the value we are creating at our newly acquired assets, our same-store portfolio continues to experience healthy growth.

During the first quarter, our share of same-store recurring NOI increased 2.9% on a GAAP basis and 5.2% on a cash basis compared to the same quarter of the prior year.

Additionally, I want to confirm that we are still actively engaged in negotiations with neighbors regarding their 225,000 square foot renewal at One Thomas agreement leasing.

And lastly, our occupancy at the end of the quarter was 88.5% and we are currently 90.2% leased. As we communicated in the call last quarter, we anticipated that known move outs concentrated within our Houston and Austin portfolios would decrease occupancy by approximately 100 basis points.

As a result of our strong first quarter leasing velocity however, we were able to mitigate the impact of the move outs and experienced only a 40 basis point decline in occupancy from the previous quarter.

We expect that the combination of our upgraded collection of assets and favorable leasing conditions will enable us to backfill vacancies and benefit from the positive mark-to-market that exists throughout the portfolio.

Given our first quarter leasing performance and considering leasing prospects for the remainder of the year, we are increasing year end occupancy guidance to 89.5% to 90.5%. This range includes the recent acquisition of Courvoisier Centre and One Orlando Center which have a combined occupancy of 82.2% and will reduce overall portfolio occupancy by 25 basis points.

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

David O’Reilly

Thank you, Jayson. We completed the first quarter with FFO of $0.34 per share. Our first quarter results include the negative impact of one-time charges totaling $2.7 million, primarily related to the completed merger with Thomas Properties. Excluding these non-recurring items, our first quarter recurring FFO was $0.37 per share. Our FAD during the first quarter was $0.23 per share. We have provided a reconciliation of FFO, recurring FFO and FAD to net income on page nine of the supplemental report.

Subsequent to the end of the quarter, we amended our existing unsecured credit facility. The amendment increased the size of our revolving credit facility to $250 million and consolidated our two existing unsecured term loans into a five year tranche totaling $250 million and a seven year tranche totaling $100 million.

We believe that our merger as a premier Sunbelt office REIT enabled us to achieve better pricing including a 30 basis point improvement in credit spread and much more financial flexibility.

Our net debt-to-EBITDA at the end of the quarter was 5.9 times, excluding the impact of a $2.1 million non-recurring realignment charge related to the Thomas Properties merger, our net debt-to-EBITDA multiple closed the quarter at 5.6 times, which is the full turnover at the end of 2013 and well within our stated range of 5.5 to 6.5 times. The improvement was driven by our recent public equity raise which reduced debt levels and core EBITDA outperformance.

Note, our recent acquisitions and associated borrowing will increase this metric into the second quarter. Based on our results during the first quarter and our revised projections for the remainder of the year, we are updating our FFO outlook to a range of $1.32 to $1.40 per share for calendar year 2014.

Please note that this guidance is based on reported FFO and includes a negative impact of a one-time G&A cost of approximately $3.2 million to $3 million related to the employment of former Thomas employees who are on to assist with the transition following the merger last year.

Excluding this one-time expense and other non-recurring items such as lease termination fees and acquisition costs, all of which are expected to total approximately $4.1 million to $4.6 million. Our recurring FFO outlook range is $1.36 to $1.44 per share.

We have provided updated guidance ranges for the underlying assumptions related to our FFO outlook in our first quarter earnings release. But there are few changes in line items worth noting.

First, the increase in our cash NOI assumption is attributable both our recently announced acquisition of One Orlando Center and Courvoisier Centre as well as core portfolio outperformance driven by both our first quarter leasing results and our leasing expectations for the remainder of 2014. Further, G&A expenses are primarily higher as a result of stock-based compensation expense from the recent March grants as well as higher acquisition costs related to our recent acquisition.

And finally, we have increased our portfolio occupancy range by 50 basis points to 89.5% to 90.5%. As is our practice, we have not assumed in our outlook any additional investments or dispositions other than those announced or any potential capital markets activities. And we will provide updates for our outlook should materials on occurred that would change our stated ranges.

That concludes our prepared remarks. I would like to remind everyone once again of Miami Investor Tour on May 21 where we hopefully will see a lot of you there next week. And we are now happy to open up the line for any questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Craig Mailman with Keybanc. Please proceed with your question.

Craig Mailman – Keybanc Capital Markets

Good morning guys. Jordan Sadler is also with me as well. Jayson, maybe could you just give us an update on where the leasing rate expectations can be for the end of the year?

Jim Heistand

Well, I think that, you mean in terms of the leasing activities for the balance?

Craig Mailman – Keybanc Capital Markets

Just the lease rate you guys, the 90% you guys are at now, kind of where does the trend to correlate to the 89.5% to 90.5% occupancy?

Jim Heistand

Well, I think that, probably the best proxy for that is we typically are 1 to 2 points ahead of our occupancy at any given point in time. So, it’s my expectation that that would continue, Craig, that we probably be 1 point to two on a percentage lease basis ahead of our occupancy at any given point of time.

Craig Mailman – Keybanc Capital Markets

Okay, that’s helpful, then could you just – it seems like, leasing is going well enough, and just curious where you are seeing the best activity in the portfolio now?

Jim Heistand

Yes, so, we are seeing very strong activity, I would say, in the vast majority of our buildings right now. We are seeing really great activity in Texas. So, in both Houston and Austin, we’ve got very strong leasing pipelines, at Austin in particular, we are seeing great progress at One American Center at 300 West 6th Street at Frost and San Jacinto. We are also seeing great pre-leasing activity at Hayden Ferry Lakeside III.

As we formally announced that we are starting, I think that that has given the market a lot of excitement and our pipeline has had a significant increase in activity in a very brief period of time. But outside of Texas and Phoenix, we are also seeing great activity in Atlanta.

We don’t have much space left leased in Buckhead but we are seeing great activity in central perimeter, specifically at 7000 Central Park. We are also seeing great activity continuing in Jacksonville with our large corporate customers who continue to have an expansion need.

In Miami that we’ve only own Courvoisier for a brief period of time. We’ve already seen the pipeline fill up as we are excited about our prospect there. In Orlando, which has really trailed in the recovery has started to pick up. We saw good positive net absorption numbers in the first quarter for downtown Orlando and our pipeline start to fill up. So I would say, generally Craig, that across the board we feel good about where the pipeline is headed.

Craig Mailman – Keybanc Capital Markets

Okay, and then on Hayden Ferry III, where is that pre-leased?

Jim Heistand

Right now, we are at about 10% pre-leased. Clearly, our pipeline is much larger than that.

Craig Mailman – Keybanc Capital Markets

Okay. And then I know the acquisition you are going to be drag here as you guys bumped occupancy by 50 BPS, but maybe really the quotient is 75 and you add in the drag in the acquisitions, but, given where you guys are seeing the pipeline now – does the high end of that 90 or the high end of the range seem more likely the target at this point?

Jim Heistand

Well, I think, clearly, it’s in our ambition to do our best and to outperform anyway we possibly can. We think that guidance range is appropriate right now. But, if we had incremental good news throughout the year, we will more than gladly update it.

Craig Mailman – Keybanc Capital Markets

Okay. And then just one last one, the 16% mark-to-market you guys are showing in the lease roll for 2014, is all of that baked into guidance?

Jim Heistand

Yes.

Craig Mailman – Keybanc Capital Markets

Okay, thank you.

Operator

And our next question comes from the line of Alexander Goldfarb with Sandler O’Neill. Please go ahead with your question.

Alexander Goldfarb – Sandler O’Neill

Good morning and thank you. Just a few questions here. Maybe this is a lot you run off and discussed, that's where you have a lot of ground to make up as well as pretty healthy releasing spread or mark-to-market I should say.

But if we look into how the – your portfolio 90% leased, presumably, you want to get to like a 95% level, how much of the leasing do you think is going to be linear where it’s just leasing up existing vacancy whereas versus how much of it should we think that we are going to see sort of ups and downs as you are letting space expire, restacking and then leasing it back up.

And as I say a lot of it have to do run-offs because that’s where there is a lot of upside in vacancy, but just making in general about your portfolio over the next year or so, how much is going to be linear versus how much is going to continue to be letting the space go empty so that you can restack to maximize the releasing?

Jayson Lipsey

Well, I think that, you will continue to see some chop within the portfolio largely because our focus is on creating value to the leasing and not necessarily just having a steady increase in occupancy.

A great example to that were K&L Gates in Charlotte, Helix in Houston, and I think there is always going to be an element of having to take back certain space to be able to create value through a broader execution, I think, even this quarter, we saw a little dip in occupancy due to certain pent spaces that we took back in places like PDP, 3344, Tower Place 200, all of which were done to accommodate large strategic leases like the PDP and like at Cap City.

But I do think Alex that we do have an opportunity to increase occupancy on a pure linear basis in places like Austin where we have great lots of vacancy, in places like Charlotte where we created great lots of vacancy through the PWC and K&L Gates restructure at 525 then at NASCAR. So, I think that, we are not shy about taking back base if it helps discrete value, but I think that there are plenty of places throughout the portfolio where we can continue to move the needle.

David O’Reilly

And I think Alex, we probably have done the majority of that already at a lot of the situations, as you know we drop the full basis point in occupancy by taking back some of that space and now that the – as we look at our leasing going forward, the opportunity to fill that up at the rents we anticipated is there.

So, while, to Jayson’s point that will still continue, the lion share of that pretty much has been done and you’ve got a very low rollover the next 24 months of the company.

Alexander Goldfarb – Sandler O’Neill

Okay, so as we think about option in particular, a lot of that is just available space that you guys could lease up. So there shouldn’t be any expirations that we need to be worry about slowing it down, it’s really just putting blocks at space, putting tenants in blocks of space in Austin?

Jim Heistand

I think, we have pretty consistent expiration in Austin and in the rest of the portfolio and we hope to have these fairly consistent renewal rates on that base as well. I think that the first quarter as we highlighted on our last call, Alex, we had a couple unknown move outs specific to Austin and also St. St Philippe in Houston that put us back a little bit this first quarter.

But I think Jayson and the operations team and our team in Houston and Austin have done a tremendous job backfilling that space significantly ahead of our expectations.

Alexander Goldfarb – Sandler O’Neill

Okay, and then switching to the leasing front, as far as renewals go, can you just give us a sense of color on the 80% renewals were people staying in their same space? Were they shrinking? Were they expanding? If you could just – we sort of know what’s going on in New York and some of the bigger coast activities which I was just curious what’s doing in your market?

Jim Heistand

Well, I think, Alex, over the last couple of quarters, there has been the very encouraging trend within our portfolio of expansion. And that’s on the heels of a couple of years of rightsizing, contraction, and eliminating shadow space and so I think that the expansions within the portfolios are encouraging.

I think this quarter in particular, much of the 80% renewal rate was driven by the large strategic renewals by and large, that’s a very small contraction on that one. So they did – give back just a little bit of space.

I think that, part of the reason we are able to outperform our occupancy projections for the first quarter was because one of the large expirations in Austin where we actually able to go direct with a few of the sub-tenants in the space with we were necessarily counting on and which accounts to the benefit of retention.

So, I think in general, the trends are good from a corporate office user standpoint in that where people seem to have absorbed most of the shadow space within their portfolios and they are actually now expanding again.

Alexander Goldfarb – Sandler O’Neill

Okay, and just the final question is, you guys have been pretty good or actually very good on the acquisition front as far as using legacy relationships and finding financially upside down deals to take advantage of, do you still see a pretty healthy pipeline of these sorts of opportunities or are we sort of coming to the end of this opportunity in which case it’s hunting for against more regular straight up deals?

Jim Heistand

Well, I think, there is no doubt Alex, that there is less of those than there were before. I still think there are opportunities in that space but it’s not what it was a year or two or three ago.

However, we are still finding opportunities that kind of complement especially in the sub-markets where we already got dominant. I still think there is opportunity for us to add that and I think if we own four buildings and there is a fifth, even if it’s a marketed transaction that maybe able for us to kind of add more value than somebody who is buying a single asset.

But in general, without a doubt, what capital is coming to our markets, basically because I believe the fundamentals will continue to improve, so, it’s more challenging to find opportunities that give us the returns we want, but it’s not that there aren’t any out there, there still are that we will continue to work hard and find them when we can.

Alexander Goldfarb – Sandler O’Neill

Okay, thanks a lot.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of Dave Rogers with Robert W. Baird. Please proceed with your question.

Dave Rogers – Robert W. Baird

Again good morning guys. Maybe quick one for Jayson. I think you talked about the renewal in the SteinMart building in Jacksonville, when was that originally slated for expiration?

Jayson Lipsey

That was a 2016 expiration.

Dave Rogers – Robert W. Baird

2016, okay and I guess, that kind of led into my question, 2015 it looks like your big year of a roll down, I guess, can you talk about maybe kind of where those are coming from and with regard to – are those core non-core assets and kind of how you expect the outcome of those leases to be, are those going to be asset sales or a little more color on that would be helpful?

Jayson Lipsey

It is a great question. I think it’s probably a mixture of all of those things. Some of them are equal assets for example one of our large 2015 expirations is in Deerwood, with JPMorgan in Jacksonville. We’ve got a large expiration at Cyprus Center in Tampa with Albert Kelly we have a large expiration with Southwestern Energy in One Commerce Green in Houston.

So I think it’s sort of across the board. I think, some of those are assets where we feel like we have an opportunity to add long-term stability to the assets and then it may be ready to be harvested. In some cases they are long-term whole strategic assets and they just need to be renewed as part of the course of business. And so, I think in general, we feel good about our renewal probabilities for 2015. Really, the only move out at this point is Southwestern Energy at One Commerce Green.

Dave Rogers – Robert W. Baird

And I guess, with regard to that one then, obviously it’s a little bit early, but tell us a little bit about that building with regard to maybe capital that you need or how you got to reposition the asset?

Jim Heistand

Well, I think the building is in pretty good shape and their space in particular is in excellent shape. So, I think that, it’s in the greens submarket of Houston which has been a little bit slower relative to some of the other submarkets in Houston.

But in terms of re-leasing prospects, I think that space is in the sweet spot of what users are looking for that submarket which is a space in good condition. It’s well suited for a larger user and so I am optimistic that given our one way leading up to that move out next year, we are in good shape.

Dave Rogers – Robert W. Baird

The last question, maybe I am coming back to you again Jayson, with regard to your concession ratio, I think you said, 16.1%, does that include free rent and can you break out the free rent component separately?

Jayson Lipsey

When we report concession ratios, we don’t report free rent. We basically report the starting stage rate active free rend period expires. And so it’s not included in there. I would say as a general trend, we see free rent abating generally modestly, but generally, certain markets like Houston Texas that has little to no free rent for a very long period of time. And in other markets, it’s just starting to peel off but I would say on average a good rule of thumb is that we a one half to one month of free rent per year as we start.

Dave Rogers – Robert W. Baird

Thank you.

Operator

And our next question comes from the line of Young Ku with Wells Fargo. Please go ahead with your question.

Young Ku – Wells Fargo

Great, thank you. Maybe the question for Jayson, I knew that – but recently Charlotte and Orlando have been our poor markets like Orlando three to six months, I am wondering if you can provide some comments regarding your leasing opportunities in Charlotte?

Jayson Lipsey

Sure, I think that, right now for Frost which is our largest asset in downtown Charlotte, we are in the midst of what has been kind of a long-term strategy for that asset. If you’ll recall the first thing we did was we extended K&L Gates for a very long period of time and give back two floors.

Taking back those two floors enabled us to have the space to renew and relocate PWC. And so we are in the process right now of constructing PWC’s space at Frost Tower and we don’t yet have back the space that they currently in. And once we do, we will arguably have the three best vacant floors in the City of Charlotte for lease.

So, I think, we got very good prospects there. We continue to have a very good pipeline at. We are going to have some good deals right now that if we can get across the goal line it will be fantastic for the building. So, I would say for that building in particular prospects are good.

We’ve seen more activity at NASCAR recently than we have since we bought the building. And so the activity at NASCAR remains very, very good. 525 I think has been a little bit slower than we had the two buildings, but I would say probably in the past couple of months, we have seen the pipeline pick up. In particular we have had some very large tours at the building. Again it’s early in the process and those deals at this point are lower probability deals. But the activity we got in the pipeline is encouraging.

Young Ku – Wells Fargo

And that your year 2014 occupancy guidance doing any kind of incremental major lease in Charlotte?

Jayson Lipsey

I think that our year end occupancy guidance includes deals that we know about in Charlotte right now that are certain. It doesn’t – I think the fair characterization is that it doesn’t include a lot of upside at places like 525 we are at now. I think we have a very measured approach to our ability to really drag the needle.

Young Ku – Wells Fargo

Okay, that's helpful. Thanks for that. And then, maybe just for you or David or Jayson, I am just wondering if you can provide some color regarding special needs of opportunities in that particular assets that you are going to (Inaudible)

David O’Reilly

It provides the – yes, we are really excited about the prospects we are leasing there and in the short time that we’ve started to implement our new leasing and operational strategy. We felt as this, even some of the market rents that we have thought at the time, we could push potentially a little bit higher.

I’ll let Jayson to provide some additional color on that, but one last thing I would say, that as you know, Young, with all of our new acquisitions, we don’t project any unknown net absorption in the first 12 months that we own an asset.

So I think it’s fair to say that we have a very little speculative leasing in that asset that we have embedded in our guidance right now for the first year of ownership of that asset. But I’ll let Jayson to give you the specific color, because I think he is looking very strong.

Jim Heistand

Yes, one thing, Young, this is Jim, the other thing too, it will be evidence for those who come on the tour next week was that the prior seller spent $10 million at a complete renovation of all of the common areas in the building and it turned out fantastic, but yet, they weren’t able to really view on new leasing around those improvements.

So now we are kind of working to what we think is an ideal situation where the improvements not finished and because of the finished improvements we now only think the activity will be strong, we’ll be able to push the kind of rates that we anticipate going forward.

Jayson Lipsey

Yes, in terms of the pipeline, I think that, we found that some of the space that we have in that building are smaller very desirable space, so if you have an opportunity to see them next week and I think that in terms of our opportunities, we are very optimistic that we are going to be able to drive incremental leasing and hopefully at the near term.

Young Ku – Wells Fargo

Okay, great, thanks guys.

Operator

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

Michael Salinsky – RBC Capital Markets

Good morning guys. Just going to – you talked about acquisitions at length, just on the recycling side can you give us an update where you stand there? How many assets, big marketing currently and then just as you move forward Hayden Ferry III I believe you have a parcel at City West, what’s the plan for that one, now just given the strength that you are seeing in Houston?

Jim Heistand

Absolutely, Mike. In terms of the asset recycling, we did dispose two assets this quarter. I think if we saw that similar type of volume for the rest of the year that would get us in aggregate including those that’s sold this first quarter around 50 or maybe just a little bit higher million dollars, that’s something that’s possible.

We haven’t projected any of that in our guidance, but that’s something that we continue to look for. The right opportunity at the right timing, at the right price. So I think its modest recycling activity for the rest of the year for us.

Michael Salinsky – RBC Capital Markets

Okay, that’s helpful and then the City West parcel?

Jim Heistand

City West, I mean, it’s a tremendous parcel. It has got great synergies with the rest of the campus and we are actively out there looking right now. It’s a different alternative there – available for that asset, whether it’s a build-to-suit, whether it’s a sale for someone who build their own asset or whether we find it very, very large anchor tenant to kick off the development there.

It’s a market in a submarket that is very hot. It has a lot of interest from very large users and something that I think, when we did the Thomas merger, we didn’t put a lot of near-term value potential on that parcel. We were much more consumed with understanding the actual building in both Austin and Houston and what it comes to our attention very quickly after closing is that that parcel is highly valuable and it has great synergies with the rest of the City West project.

Jayson Lipsey

Yes, sure Mike, and I think, that to the extent we did we did any development that’s much like in Hayden Ferry, we would bring in a AP developer to help us with the project as you know, we are not staffed internally to do development on a re-occurring basis.

Michael Salinsky – RBC Capital Markets

That’s helpful and then just my follow-up question. Given the progress, additional unsecured during the quarter, where do you stand with the rating agencies? What are you hearing and what’s the timeline there to kind of migrating to investment grade?

David O’Reilly

We are going to try to make a push into the second half of this year, but as we said in the past, Mike, the Thomas merger did push back a little bit, and we do have outside the amount of secured debt relative to our entire debt stack.

I think our ability to continue to find unencumbered acquisitions and to shrink the size of the secured debt relative to the size of our company, will be a key component for us as we start to engage real-time in that dialogue. But that’s something that we are targeting right now to push really starting in the third quarter along that path.

Michael Salinsky – RBC Capital Markets

Appreciate the color. Thanks, guys.

Operator

Thank you and we have no further questions at this time. I would like to turn the floor back to management for closing remarks.

Jim Heistand

Well, we appreciate everybody coming on the call and as we stated before, we certainly hope as many of you can come to Miami next week as possible, not just to see the assets, but to kind of understand the market dynamics that we are obviously doing very positively going forward. Thank you all. Again, I look forward to seeing you soon.

Operator

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

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