Highwoods Properties, Inc. (HIW) Q1 2012 Earnings Report, Transcript and Summary

Good morning, everybody, and we apologize for the delay, there have been some technical difficulties. After we finish the formal remarks, the operator will come on and tell you how to -- how the Q&A session will be conducted. On the call today with us 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 the planned dates for our remaining 2012 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 timing 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 the yesterday’s release and those identified in the company’s 2011 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 the yesterday’s release and are also available on the Investor Relations section of the web at highwoods.com. I will now turn the call over to Ed Fritsch.

Good morning, everyone, and thank you for joining us today. The U.S. economy seems to have settled into a slow growth pattern that was so wildly forecasted. It is probably best described as a "2% Economy." We see a 2%-ish around numerous U.S. Economic factors. GDP growth, 10-year Treasury rates, office job growth, inflation, personal spending, personal income and even the FICO for payroll tax cut was 2%. Amidst this 2% economy, businesses are becoming modestly optimistic. Many have rightsized their cost structures, strengthened their balance sheet and stockpiled cash, so plodding along at 2% isn’t all bad, because while it is somewhat anemic, it is positive growth. Our focus at Highwoods is to continue to leverage the core tenants of our strategic client to outperform in the 2% economy. Given solid leasing and improving same property NOI growth, we expect 2012 FFO to be $2.60 to $2.76 per share at the midpoint. That equates to a 3.9% year-over-year increase. For the quarter, FFO were $0.70 per share, 15% higher than the first quarter of 2011. We signed 1.5 million square feet of second-gen space compared to 1.2 million square feet in the first quarter of 2011. We remain focused on replenishing the volume of dry powder on our balance sheet and returning to the lower-end of our conservative leveraged comfort zone of 42% to 48%, debt plus preferred as a percentage of adjusted assets. Since the beginning of the year, we have partially achieved this with total of $55.9 million from the sale of non-core dispositions and the issuance of common stock through our ATM. On the non-core disposition front, we remained focused on selling those assets we have identified as no longer fitting our investment criteria, due to submarket age, the building’s, not ours; location; quality; rent/roll and/or…

Thanks, Ed, and good morning. As Ed noted, leasing activity in our markets was strong. We were fortunate to sign 153 leases for 1.5 million square feet of space, 66% of this activity was office in the average terms of a solid 5.3 years. Office leasing increased 14% year-over-year and for the trailing 4 quarters we’ve leased 21% more office space than the same trailing 4 quarters a year ago. Occupancy in our wholly-owned portfolio increased 10 basis points year-over-year to 90.2%. On the same property basis, occupancy in our wholly-owned portfolio increased 80 basis points to 90.8%. Our office occupancy continues to substantively outperform our market by an average of 760 basis points. In the first quarter, we decreased our 2012 annualized revenue expiration exposure to about 350 basis points from 10.7% to 7.2%. Average in place cash rental rates across our portfolio was 1.5% from a year ago, cash rent growth for the home, 126 office leases signed this quarter declined 6%. GAAP rents on office leases signed this quarter increased 1.7%, as we continue to get 2% or 3% annual escalators in most leases. CapEx related to office leasing was $12.29 per square foot, the first quarter. This is below our 5-quarter average and well below the last 2 quarters, despite signing a greater percent of new versus renewal deals. Turning to our markets, our national portfolio remains one of our best performers. With the occupancy increasing to 94.6%, up 50 basis points from the fourth quarter and 510 basis points from the first quarter of 2011. The overall national market is also performing with positive net absorption and a vacancy rate at 11.2%, a 30 basis point improvement from the fourth quarter. Leasing in our Raleigh portfolio was sound at 222,000 square feet with an average…

Thanks, Mike, and good morning. We are pleased with our financial and operating results for the quarter. The $0.70 in FFO per share was $0.09 better than the first quarter of 2011, primarily due to $0.09 in higher NOI contribution from acquisitions and development projects, $0.05 in higher same property GAAP NOI due to 60 basis points in higher average occupancy, 2.5% lower OpEx in large part from lower utilities and snow removal costs from the milder winter and the effects of prior year negative camp true-ups recorded in the first quarter 2011. And also $0.014 in lower preferred dividends from the June 2011 redemption of our remaining Series B preferred stock. These positive changes were partially offset by $0.025 in higher G&A, caused mostly by cost of living increases, higher healthcare premiums and higher short and long-term incentive compensation, $0.016 cents in higher net interest expense as a result of debt incurred to finance acquisitions and developments and the preferred stock redemption, partly offset by lower average interest rates, $0.008 from higher shares outstanding, mainly shares sold under our ATM program and $0.007 in lost NOI from dispositions. Sequentially, the $0.70 of FFO per share was the same amount as fourth quarter 2011, but with some fully offsetting effects namely $0.04 in higher NOI from 20 basis points higher average occupancy, negative true-ups in the fourth quarter of 2011 and lower OpEx this quarter, mostly in repairs and maintenance. The NOI increase was offset by $0.025 in higher G&A due mostly to the timing of employer taxes and long-term incentive costs, which are typically higher in the first quarter, $0.008 from higher interest cost, mostly from paying down our 1.74% credit facility with the proceeds from our 3.58%, $225 million term loan and $0.007 from lower land sell gains…

[Operator Instructions] And our first question comes from James Feldman of Bank of America.

The first question would just be, can you guys talk about economics of deals and concessions and kind of how things feel across your different markets this quarter versus prior quarters?

Just painting with the quarter -- the painting with the roller, there’s not a dramatic change this quarter over last quarter. The last few quarters have been -- really the last 5 quarters have been pretty robust with regard to total activity. Probably the biggest change that we’ve been able to note over a little bit longer than quarter-to-quarter has been the volume of term that we’ve been able to garner in leases, and you see that in our leasing page in the supplemental, the term this quarter was 5.3 years. So we’re continuing to get substantial term on the office side. We really haven’t done the full shift from turnkey to TI allowances, but there is more that coming and the volume remains sound.

I think gross was starting to see a little bit of subsiding on the level of free rent as well that’s being requested and we’re able to command as the market’s starting to tighten up, particularly on larger blocks of space.

And then, just thinking about the pipeline of leasing demands and we comparing some other office companies and Tech and Media that are really driving the ship, what do you guys seeing across your markets?

I’m sorry, Jamie, what’s driving the ship?

Well, Tech and Media tenants growing seem to be, certainly CBD names the biggest drivers of demand, how are your markets different?

Well, certainly Tech has been component of it. We’ve also seen across-the-board, the companies like financial services, clinical trials, clinical research has been very substantial to us. Healthcare has been important driver for us and continues to show promising opportunities. It’s been pretty steady out with the financial services, the insurance. Some legal firms emerging, so we’re seeing some downplay in that. Energy, the [indiscernible] that we spoke about in Pittsburgh is certainly meaningful there.

Okay. And then a question for Terry, after raising capital on the ATM, what are your thoughts on leveraging today?

We’re making progress on the de-leveraging that we’ve talked about, that we still have the $0.08 to $0.12 range as part of the guidance that we put out in February and still maintain that assumption. So we have made some progress on that with the ATM that we were able to get out in the first quarter and early in April. We also have 2 dispositions close this year, the Neptune Apartments in the first quarter and then here in April, we close another building in Pinellas County, Florida. So we were also making some progress on the disposition side. I would say, we still have some wood to chop to get all that done that we’d planned to do this year, but we have a good start.

And Jamie, we remain comfortable with our disposition guidance for the year.

Okay. And then finally, what was Highwoods’ actual spent for the acquisition during the quarter -- the JV that you bought out?

The purchase price for 100% was our $26.3 million that we talked about, but we already owned almost 23% through our interest in the joint venture. So effectively, you can think about this as we paid about $20 million to acquire the 77% that we didn’t already own.

And we included $300,000 for CapEx, near term.

Our next question comes from Rob Stevenson of Macquarie.

You guys have talked extensively about AT&T in the past and I think we’ve also talked about PWCoopers as another sort of decent sized tenant that’s rolling in the near term. Is there anybody else in the sort of ‘13, early ‘14 rolls that sort of is in your top 10, 20 tenants, size-wise or is most of the rollover the next, call it, 18 months plus, mostly smaller tenant?

The PWC role is a 2013 date. They would be out as of May 1 of 2013. So we’re a year out from that. The next largest that we would have as a potential expiration would be AT&T in the fourth quarter of next year in another large block of space they have of around 200,000 square feet.

And that’s in Atlanta as well?

Correct.

Okay. And then, can you talk a little bit about what the appetite you’re seeing from potential tenants to do build-to-suits versus just moving into already constructed space?

Sure. I mentioned in my scripted remarks that we are talking with a lot of different entities. I hate to quote a number, but I can tell you it’s in excess of a dozen about potential projects, but it does remain a very protracted process from going from the conversation to actual execution as we witness with the Life Point deal where we had been in conversation with them about a build-to-suit for over 3 years, before we were able to start digging footings there, which we did this past week. So there is a lot of conversation, there is interest, there’s still obviously, cost deltas to go from second gen space into first gen, that’s somewhat meaningful, 20-plus percent. But I think that as the larger blocks become consumed of the institutional quality space, the well-conceived development projects in our markets that there will -- those conversations will become more active and more we’ll make decisions to go and pull the trigger.

Are you seeing, given the availability of land in some of your markets, are you seeing the private guys who have been sitting on land and looking to monetize them, are you seeing them be rational still, in terms of what they’re willing to do on build-to-suits or you started to see a few irrational deals out there that keep you scratching your head?

Well, it’s hard to define rational nowadays, but we are seeing, we basically see our 4 buildings in our footprint that are speculative in nature of size. One is in Cool Springs in Nashville, about 175,000 square feet, they’re coaxially in Durham, North Carolina. And then there is one for only about 70,000 square feet in the suburban submarket in Pittsburgh. So not a meaningful amount but there is some of it beginning to happen, which obviously we haven’t seen in over the last 4 years.

And Rob, the developer on the Cool Springs building, we know them well our good competitors and they are pretty rational in their approach things and there are not many markets, they can just by have a Cool Springs just one of those were marketed just very hot and probably would make some sense.

Okay and then lastly, sorry if I missed it. What do you guys have under contract or letter of intent to both buy and sell today?

Yes, you didn’t miss it. We typically don’t disclose the transactions until we reach the closing day. We found that public disclosure that typically comes back around in the negotiations, we end up negotiating with ourselves. So we typically don’t disclose that until the horse is the barn depending on whether we’re selling or buying, but there is meaningful activity is as we underscored, we’re still comfortable with our guidance for 2012 on both of those fronts Rob. Rob, just one clarification, I know that you asked and I mentioned AT&T in Atlanta. I just want to be sure you said expirations, but not move outs, just want to clarify that we have no indications from them, they will be leaving that space.

No, I just wanted to figure out like what of the major tenants was up for expiration versus a bunch of small space accounting for the big role in ’13.

Okay. Just want to be sure I properly communicated.

Our next question comes from Brendan Maiorana of Wells Fargo.

I wanted to may be just get your sense of -- it sounds like your view of the economy is largely unchanged from a quarter ago and it’s a slow growth kind of environment. How do you going to view the potential for value add acquisitions, given what sounds like some good success you had in the first 6 months with Riverwood 100 and PPG place getting some lease up there. How was your appetite for value-add acquisitions relative to more stable deal which seem like pricing is pretty higher at these levels and maybe can you compare that to development and your view on new development as well?

Yes. I think that in order to do a value-add that, we would need to be mighty comfortable with the submarket. And going all the way back to what we bought in December of ‘10 with the Independence Park in Tampa, that was a 116 square feet, that was 100% vacant, but we’re also able to acquire 30-some acres of land and 7 months later, we were at 100% lease. So it just happens to be in the best submarket of Tampa. So I think that there’s a lot of factors that need to go into it as far as pricing. What we think the vibrancy of the submarket is, where we think our opportunities to advertise the asset fall. We’re looking at value-add deals, but we’re not committed to just simply run a single course on value-add. We’re certainly looking at all across the board what our opportunities may be. We are finding though, that on the more institutional quality stabilized assets that the pricing is getting a bit frightening for us, maybe, use Rob’s terms, scratching our heads on some of that, as they reach in to the low-to-mid-6s on some deals that we’re learning about.

I think we just need to also clarify, our perception of value-add is still a very well located classic building that may have some vacancy, but it’s not -- value-add can be everything from a C building to B building and that’s not the arena that we’re looking for.

Right. We’d still like to be in adherence with our stated rule of, whatever we buy, it should lift the overall quality of the portfolio.

And have you guys found that value-added properties have -- the bid for those or the asset value for value-added properties has accelerated to the same degree as, say, the core properties that are stabilized?

We haven’t, because most of the value-adds aren’t of the institutional quality that the core assets are. It’s a product that’s, in particular to the left of what we consider institutional quality.

And some of the players for those assets, the institutions that are looking to stabilize, they’re just not in the value-add gain. So they just haven’t come to markets yet.

Sure. And then, Mike, I think you guys -- you talked about a couple of the big expiration. I think you also have -- it’s not on the huge expiration, but I think there’s maybe 80,000 or 90,000 square feet in Raleigh that’s moving out, I think, it’s UNC that’s moving out of a lab space building in the second quarter?

That’s correct. Research Commons.

Is that lab space rents or is that more a typical of office rents, which should be lower and what are the prospects like, for -- potentially back filling that base?

Well, it’s a mixed bag in that particular building. It was a building that was originally developed for Glaxo, so it’s probably on the order of 2/3 of lab space and 1/3 of traditional office. So obviously, we’d love to find this single user that would come in that would like that mix, but no doubt that building is a challenge for us as we go back and look at it, because it’s basically 15-year lab space, so we’re putting together a pretty extensive marketing plan for this, working with consultants on lab space. Skip Hill and his group in Raleigh have been reaching out to a lot of the locals that are in that arena today and in fact, we are even touring the building this Friday to get a better handle on it. So I think it’s a building that, it’s clearly on our radar for looking at potentially even considering some repositioning.

Sure. Okay. That’s helpful. And then just had a couple for Terry. First, the transaction buying 11000 Weston Parkway, is it -- do you get a lift when you compare the cap rate relative to the amount of the loan pay-off with respect to earnings?

Yes. We do, Brendan, good question. The cap rate on that was probably in the mid-9s and the loan, which was 500 over LIBOR is about 5.25%. So just maybe around 4%, little over 4% spread on the effective $20 million that we acquired. So that’ll be a lift going forward.

Okay. And are you expected to get repaid on the -- at the maturity which on the balance, which I guess would be in June?

The JV is working on a few other properties, evaluating whether they should be sold or not and as the way the loan is structured, any proceeds from asset sales in that joint-venture, whether they are assets that secure our loan or any other assets that might be sold, go first to pay down the loan. So we have basically almost a cash sweep on asset sales until the loan is repaid and the loan is only -- is now down to $13 million. So we would expect that it would be paid maybe by the second quarter, but it’s so well secured that if we need to extend it again for another 3 months or so, that’s not going to be an issue for us. But I think we would certainly expect by the end of the year that it would be paid down.

Are there other properties within the venture of that or properties that are secured by your loan that would be attractive [ph]?

There were 4 assets, as I recall that we used to secure the loan originally, the one that we just acquired was 1 of the 4. So there are still a few other loans in there and the LTV on the loan is low. So we feel totally comfortable on -- there is no credit exposure from our perspective and we were just glad that we were able to provide flexible financing for the partnership when they needed that because it was a little bit tough to get something that with the flexibility in the third party market and we were prepared to step in last year when we did that in April of 2011.

[Operator Instructions] Our next question comes from Dave Rodgers of RBC.

Let me have it from Ed -- Ed or Mike. Maybe you could chat a little bit about the decision making or characterize decision-making among your small tenants. It sounds like our larger tenants are kind of being finally forced into making longer term existing commitments, longer term build-to-suit commitment. But talk about the decision-making process for some of these smaller tenants. Do they have more competitive options today? Are your competitors on the landlord side finding more capital to do deals?

I think that the second part of your question. Clearly, there is more capital to do deals. There aren’t, there’s not that distress that we all thought would emerge. Now some of it has and certainly they were brokers who would only do deals with the better landlords to ensure that the build-outs would occur in commissions would get paid. I think that a number of the smaller users -- the 5,000 to 10,000 square foot footprint, have taken advantage of a little bit of apply to quality, moving to better quality space and a lot of that’s already transpired into the vacancy in the market when you look at the overall vacancy stat, it’s disproportionate to the lower class assets then it is to the higher class assets and I think that we’ll find more of the 5,000 to 10,000 square footers basically staying put as the opportunities come up with at lease rollover because they’ve already seized the opportunity to move to a higher grade building.

And Dave, we’ve really -- because that 5,000 to 10,000 square foot block of space tends to be a little more of our commodity in most markets, just one more options. Our folks, particularly our leasing property management folks have gotten their arms around our customers and done a good job. I think we’re very high retention percentage of this quarter, which was I think evidence of that initiative.

And then on the build-to-suit side, I don’t know if you kind of give a range for build-to-suit yields, and I know it’s always kind of a dangerous game, but I mean maybe a better question is, are you seeing added pressure to build-to-suit yields as you think about them today, just given we’re all in debt costs are or in the availability of capital?

From the customer? From the user?

Well from the -- yes, well, or your development perspective, where you would be rolling to develop toward using added pressure to your own ability to generate returns off development.

Okay -- aggregate everything that we’ve done from a development perspective since January of ‘05, we’ve averaged just above a 9. And I would say that that’s not a guideline that we would stray from very much at all. Obviously, credits, specialty use, location, flexibility being able to multi-tenant, all those things still factor into it, but I would say we wouldn’t stray far.

Our next question comes from Michael Knott of Green Street Advisors.

It’s Jed Reagan here with Michael. Can you talk a little bit about Pittsburgh? How would you grade yourself on that market so far and does the experience there make you more or less eager to initiate expansion to other new markets?

Two things come to mind. One is, everybody on the management team has consumed the Primanti sandwich and survived it. That’s a good thing. Then second is, yes, we’re enamored with the city. We have found, probably the most surprising factor, not to suggest that we had a different perception going in, but the quality of the people that we work with, whether it’d be a customer, a vendor, a broker, a contractor an elected official, the work ethic and the integrity has just been really refreshing. We, obviously, have been able to move the needle on what we bought. We have cut significant opportunities out of the operating expense side, while enhancing services and we’ve had a good leasing. We’re getting very close to reaching agreement to have a division Vice President to oversee the division to -- be committed to it on a daily basis. So yes, we -- overall, our experience has turned out to be as good or better than we had anticipated.

Okay, great. And how much would you say, you’re seeing in terms of tenants looking to get more efficient with their space use on a per employee basis, just kind of across your markets?

I think that everybody is being sensitive to that. And we’re seeing that, in particular on the efforts that being put forth on those who were considering or evaluating a build-to-suit. The number of test fits that customers are putting themselves through to be sure that they have the adjacencies and the efficiencies and the functionality tying into what they wanted to be has been -- you -- at a level that I haven’t seen in 30 years of doing this. I think that with regard to the concept of taking everybody from 10x12 or 14x16 offices into a giant cube land is probably more chatter than fact, the analogy I have used for this is back in 1974, I remember cars were in line to get gas and the amount that they could acquire was limited. So everybody projected that it would just be a matter of short time before people would be in Toyota Corollas and Honda Accords, but if you’re here and you look out of our window, you would see just as many Forerunners, Tahoes, Yukons, F 150s in the parking lot now at gas at $3.70 a gallon. So I don’t think that in the $20 to $24 rent world that change making a substantial change in the customer’s use of space from 200, 250 down to 150, 175. Really isn’t that meaningful to the bottom line and we’re not seeing a lot of that except for in a few cases where it has been mandated by an office, typically out of the Northeast.

Okay. That’s helpful. And lastly just want to, if you could talk a little bit about how the Cary acquisition compares to the rest your Raleigh Durham portfolio in terms of things like quality, location, tenancy?

Well, the developer has the superb reputation and we built it. So it’s the building is akin to same architect that we used for build -- construction in our Creekstone Park, Sidus and other places, good floor plates. We have the adjacent land to grow another 150,000 square feet, so we’re very pleased with it; ample parking, 4-story open atrium with [indiscernible] rails and the [indiscernible], it’s all good.

Our next question comes from Chris Caton of Morgan Stanley.

I wanted a follow-up on used space and talked about build-to-suits, how are those, what are users looking at when they’re making decision in the current environment to go with a build-to-suit, rather than existing availability? Is there anything on the latest design trends that different from the existing base of availability?

Well, just the fact that it’s new and you can have -- you start from scratch, So some that are looking at it or driven by a consolidation. So coming out of 3 different buildings and consolidating into one and garnering those G&A efficiencies help offset an increase in rent going from second gen to first gen. Also some are doing it for their statement to their employees, their prospective employees, their customers in the community that they want a specific look and feel for their space that helps with retention, attraction and business. But as far as just the overall product itself, other than doing things today that are more green than you typically would have done a number of years back, there is really not a dramatic change in the design of the footprint.

I think with the PWC deal that we talked about in Tampa and their move in to a build-to-suit in Tampa, it was exactly what Ed described where they came out of 319, they are going into 250 and they’re actually keeping, or actually adding body. So they are making a little bit more dips used and they’ve changed their template for that use, but they really couldn’t work with that existing structure to do that. Otherwise, it was economically probably more likely for them to stay where they were.

But Chris, there still needs to be a very deliberate decision to pay up for first gen space. So you’ve got to have some compelling aspect or it’s just not that meaningful to your bottom line in a mid-tier market.

Yes. And then on the new markets that you’ve talked about in the past. I guess, Pittsburgh was different from your existing mortgage in certain ways and so as you look at new markets, are they going to be more akin to your existing markets in terms of in the Southeast or are you not looking at new markets as much as you may have been?

Well, we’re continuing to evaluate other markets, we have done things like looking at Washington DC. We’ve been looking that market for a considerable amount of time, but we just can’t sign anything compelling. We feel like Pittsburgh has a lot in common with our other markets other than the fact that it’s North of the Mason-Dixon line. It’s closer to our home office than Atlanta is and us, and this is unabashed, shameless self-promotion for Highwoods, but I think that we really "hit ‘em where they ain’t" by being able to go in there and buy something for less than $0.50 on the replacement square foot and have upside to go from 81, up 10 or more percentage points in occupancy and streamline the OpEx. But we will continue to look in other markets, but the proximity needs to make sense. The demographics needs to make sense. And then the -- obviously the particularly street address or bricks and stick need to make sense. So we’re not going to catapult out into Portland or Honolulu, just -- the proximity needs to be basically like what we’ve done with Pittsburgh to home.

I guess sort of trying to ask is, are you trying to "hit them again where they ain’t," or do you have willingness to go into a different market which maybe it has a little bit more competition, maybe not DC because of pricing but maybe other major markets that are kind of close to either South Florida or elsewhere farther to the West?

I would say that, yes, everyday we’re trying to "hit them again where they ain’t," but some of that may be right here on our own backyard as opposed to having to go into a new market. If you had asked me 5, 6 -- 5 years ago, would we be in Pittsburgh in the Fall of 2011, I would have said, probably not, because it’s nothing but rust and molten steel and here we -- after educating ourselves on it, we got comfortable with the overall market and then we found a great opportunity with PPG place. So I hate the rule anything out other than a market that doesn’t have good demographics, a market that has -- is a big gateway city like New York, Chicago or Boston or LA, or a market that doesn’t have good proximity for us. But I think it’s important for us to evaluate opportunities that make sense, but we’re sure to want announce something and not be able to stand behind our commitment on it that is because the right move for our shareholders’ money to go into a city that doesn’t have the demographics and the upside that we’ve been able to evidence in Pittsburgh.

[Operator Instructions] And our next question is from Michael Bilerman of Citigroup.

It’s Josh Attie with Michael. How is the asset sale program trending versus your expectation in terms of timing and pricing, did the adjustment to guidance that all reflect slightly later timing of asset sales?

We’re still very comfortable with our guidance number Josh, I would say slightly all the way down, say like paper-thin, we still feel comfortable that we’ll be first half of the year. So it may have slowed little bit during the second quarter, but I don’t think that we see a significant move that would take us from second quarter to fourth quarter.

And how is the activity been on the assets that you’re looking to sell? It seems like demand for our higher yielding asset in secondary markets is picking up. Are you seeing that on the assets you’re looking to sell?

I think the activity is good, yes.

And could you remind us, where you stand on potentially selling the industrial assets?

Well, we haven’t committed to sell industrial assets. We, sticking with our mantra of no person, no process, no property is sacred, as part of our strategic plan. So we evaluate them all, but we haven’t made a commitment to sell out of industrial. It’s certainly something that we consider, but there is no update there.

Well, just can you remind us, how do you think about those assets in the context of the portfolio -- are they core assets that you want to hold on to long-term or is there something that needs to change those assets fundamentally, where you think value would be higher if you waited to sell them?

Well, in a number of the places we have additional pad size, where we can continue to build out the park that we either bought and further developed, or we developed ourselves from day one. So we’ll look at those and what’s our opportunity to build out of the park and then sell it or build out of the park and then keep it. But I wouldn’t, holistically, across the board say that that we would sell our 6 or so percent of revenues from industrial in a single day, but it certainly something that we look at.

Our next question comes from John Guinee of Stifel.

John Guinee here. Along those same lines at -- you’ve got a -- you have a great team out in Kansas City and you have, possibly, the best, somewhere the best retail centers in the Midwest. My guess is tax protection by now has burned off. My guess is, there’s a lot of people knocking on your door at plus or minus of 5 cap for that kind of real estate who can employ some national or international synergies. Is it time to sort of tighten up the portfolio in that regard?

Well, again, I go back to using this no person, no process, no property that’s sacred. I think the knocking here though, are customers at all the stores. The sales were up dramatically again, we’re up 8% sales year-to-date. And we continue to have robust leasing there. I’m not sure -- not to be argumentative, but I’m not sure that I subscribe to a national or international retail owner being able to leverage it, because it’s not one of the situations where we’re having to say, look, if your lease space in these other 3 malls, I’ll let you in this one in Vegas. This is where customers come to us and, given the uniqueness of it, we have a pretty good stable corral of prospects and existing customers, when the Tiffany’s of the world for example, decide they’re going to start with retail stores outside of New York, Kansas City is one of the first calls. So I’m not sure that I’m fully subscribing to -- that somebody could come in and dramatically do it better than we’ve done it from a leasing and sales per square foot perspective. On the tax side, a component of that burned off on the 10th anniversary, which was July of 2008. But we would still incur $120 million or so of a tax bill if we were to sell it. So what we would need to do is basically 1031 it in some form and that means we would need to find somewhere around $0.5 billion of assets that we dearly love because we would simply be moving the basis from more parkway to somewhere else.

Well, we were -- beauty is in the eye of the beholder and there are some awfully aggressive retail capital out there these days.

And Mr. Fritsch, I’ll turn the call back over to you sir for any closing remarks as there are no further questions at this time.

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