Highwoods Properties, Inc. (HIW) Q4 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to Highwoods 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 today, Tuesday, February 11, 2014. I would now like to turn the conference over to, Ms. Tabitha Zane. Please go ahead, ma’am.

Thank you and good morning. 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 the planned dates for 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 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 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.

Good morning and thank you for joining us today. 2014 economic forecasts are out and as we digest and overlay them on what we see from the perspective of our industry and our markets, the upshot seems to be that the U.S. economy continues its positive trajectory, albeit at a pace less robust than liked; that measured job growth continues, however, it’s choppy and not yet accompanied by meaningful growth in wages; that interest rates remain core to crystal balling the economy’s future, however, given all the competing influences, their movement will likely be mild in 2014. And lastly, it’s obvious that the blame for the shallow economic trajectory emanates from the district. Unfortunately, the Jamaican bob-sled team has much better odds of winning gold in Sochi than Washington has in getting its act together in 2014. 2013 was a banner year for Highwoods. We delivered solid FFO of $2.84 per share, a 4% year-over-year increase and $0.03 above the high-end of our original guidance. We also completed over $1 billion of investment activity, exceeding the high end of our guidance for each investment category; acquisitions, dispositions and development. We acquired $549 million of high-quality office buildings encompassing 3.4 million square feet in our markets’ BBDs. In addition to significantly improving the quality of our portfolio, these acquisitions offer material upside, being on average, 81.3% occupied at closing. At year-end, occupancy for these assets was already up to 85.5% and we expect to grow occupancy in these assets to 90% by year end 2014. As a reminder, in 2011 and 2012 combined, we bought $605 million of BBD assets, encompassing 3.5 million square feet. Occupancy in these assets has increased from 86.5% at closing to 93.5% at year-end 2013. In 2013, we sold $286 million of non-core assets, including exiting the Atlanta industrial market and selling eight of our nine remaining office buildings in Greenville. We also announced $206 million of development starts and placed in service $51 million of 100% pre-leased development. Our pipeline is now $227 million and is 86% pre-leased. This includes the $15 million, 100% pre-leased build-to-suit for Biologics that we announced last month. We further fortified our balance sheet raising $295 million of equity and ending the year with leverage at 41.4%. We also increased unencumbered NOI to 77% and earned ratings upgrades from both Moody’s and S&P. Turning to operations, during the year we had a strong with 3.8 million square feet of second generation office space leased and we continued to garner longer lease terms. Our fourth quarter operating results were solid. We delivered $0.74 per share of FFO and leased 838,000 square feet of first and second generation office space, including 408,000 square feet of re-lets, our highest level of re-let activity since the second quarter of 2006. Average lease term exceeded six years, GAAP rent spreads were up a stout 8.5% and while cash rent spreads were negative 5.4%, they are moving in the right direction. Late in the fourth quarter, we sold $89 million of non-core assets including eight multi-tenant office buildings in Greenville, our remaining property in Pinellas County Florida, and our 50% share of a multi-family JV development in Raleigh. The multi-family sale, which is in the Weston PUD of our Raleigh division, was a good win for our shareholders. We contributed non-core land to a joint venture for a multi-family development, which resulted in a meaningful FFO gain for our company, five times the gain had we sold the land outright. The ongoing rapid absorption of multi-family in Weston underscores the evolution of the Weston PUD into a mixed-use, live, work, play environment, which enhances the value of our Weston-based office holdings. We currently own 745,000 square feet of office in Weston, which is 95.2% occupied, and have an additional 502,000 square feet under development that is 100% pre-leased, including our build-to-suit for Biologics; a new customer for Highwoods. Upon completion, we’ll have over 1.2 million square feet in one of the greater Raleigh area’s best BBDs. Turning to 2014, we believe our markets will outperform the national average in terms of job and population growth, and net absorption. Supply continues to tighten, particularly for large blocks of space and we anticipate seeing fewer concessions and improving rents for Class A office. We expect to benefit from these positive trends, which should result in a productive year for Highwoods with FFO of between $2.82 to $2.94 per share, excluding the net impact of any potential acquisitions and dispositions. As in 2013, we expect to be a net investor in 2014, continuing to build our presence in the BBDs and enhancing the quality of our portfolio through acquisitions, dispositions and development. We are forecasting $100 million to $300 million of acquisitions and $100 million to $175 million of non-core dispositions. We’re also forecasting $75 million to $150 million of development announcements this year. As large blocks of available Class A space in the BBDs continues to shrink, more companies are moving development higher on their list of viable options to consider. We will continue to remain disciplined allocators of capital and maintain our strong commitment to a conservative balance sheet. The collective good work of the last few years is improving our portfolio, acquiring value add BBD properties, exiting additional non-core assets and launching heavily pre-leased development, gives our company significant upside potential. As we backfill a few sizable same store vacancies, lease-up recent acquisitions and deliver our well-pre-leased development pipeline, our shareholders should see meaningful upside in HIW as we head into the next couple of years. In closing my comments, I applaud all of my co-workers for their efforts throughout 2013 and I thank our Board for their continued active support. Also on behalf of everyone at Highwoods, I express our collective gratitude to you, our shareholders, for your continued confidence in our company. Now I’ll turn it over to, Mike.

Thanks, Ed. Good morning everyone. 2013 was another productive year for Highwoods in both leasing and capital activity. The mix of acquisitions and dispositions that Ed noted, had a negative impact on year-end occupancy, however, they further enhanced the quality of our portfolio. In addition, the value-add acquisitions have created significant lease-up opportunities. In 2013, we signed 566 office leases representing 4.6 million square feet of first and second gen space. The average term for second gen office leases signed in 2013 was a strong 5.7 years. Looking at the fourth quarter, we leased 791,000 square feet of office, over half of which were new deals. New deal square footage was almost 40% higher than our five-quarter average. This significantly greater percentage of new deals resulted in higher than normal office leasing CapEx of $19.95 per square foot. We did garner an average term of 6.1 years for office leases signed during the quarter, also above our five-quarter average. All of our markets reported positive office absorption in the fourth quarter and over the past year, these same markets combined have benefited from 8.3 million square feet of net office absorption and very little competitive construction. Asking rents are up year-over-year, in virtually all of our markets, anywhere from 2% to 5%. Turning to our markets, Atlanta is benefitting from a better job market and lack of new supply. The market absorbed 1.4 million square feet of space in the fourth quarter. Increasing demand, limited supply and a notable lack of large blocks of Class A office space bodes well for our leasing prospects this year. In the six months since acquiring One Alliance Center, we have increased its occupancy from 67% to 81%. The scheduled October 1 expiration at 5405 Windward accounted for the entire difference in fourth quarter same-store occupancy compared to the third quarter. The repositioning improvements at Windward that Ed described on our last call, have now been completed, including the addition of a buzz generating 3,000 gallon aquarium in the new collaborative lobby that recently aired as an episode on Discovery Channel’s TV show Tanked. We have strong prospects for over half of the space, and as a reminder, we define strong prospects as companies that have toured the space multiple times, test fits are underway and we’ve exchanged economic terms. The Tampa market is also experiencing good growth, and was recently ranked by JLL in the top 5% of the fastest growing metro areas in the country. We are pleased to have signed a long-term lease for 31,000 square feet at LakePointe and are focused on re-letting the remaining 213,000 square feet of vacancy. We currently have strong prospects for an additional 30,000 square feet and prospects for another 135,000 square feet. Raleigh’s office market continues its steep trajectory driven by solid job growth in technology, financial services, biotech and clinical research organizations. We’re pleased to have re-let 100% of the 4301 Research Commons laboratory/office building. This property is part of a five building non-core office park that we are currently marketing for sale. As expected, we are garnering strong activity at the 1.3 million square feet we acquired in CBD Orlando in July at 82% occupancy. The streamlined leasing process from these now being wholly-owned, has helped us capitalize on the improving market and occupancy has already grown to 84.6%. The Nashville market continues to be strong as evidenced by year-end unemployment of 5.5% versus the national average of 6.7%. In addition, Nashville was recently dubbed a standout performer by Wells Fargo. Our Nashville portfolio is performing well with occupancy at 95.2%. We are pleased to have placed the 100% pre-leased, 203,000 square foot LifePoint Headquarters development in service in December. We’ve already re-let 9% of the 147,000 square feet LifePoint has vacated. This space is in the Maryland Farms Brentwood submarket which is consistently one of the tightest and most desirable submarkets in Nashville. We just got the space back last month and we already have a substantial pool of prospects. Activity at The Pinnacle has been good. In the four months since acquiring this asset we have increased occupancy from 84.9% to 87.2% at year-end. 2013 was a solid year for our company and we’re optimistic 2014 will be as well. Our markets continue to strengthen and the outlook is for more economic growth and job creation. Terry?

Thanks, Michael. Total FFO available for common shareholders this quarter was $69.0 million, up $12.7 million, or 22.6% from fourth quarter of 2012. This increase primarily reflects $10.4 million higher NOI from JV buyouts and other acquisitions, net of dispositions; $3.2 million from our share of a JV merchant build gain, net of income taxes, and $1.6 million in lower interest costs from lower average rates and higher capitalized interest, partly offset by higher outstanding debt balances. These positive items were partly offset by $1.2 million lower FFO contribution from joint ventures, mostly due to our acquisition of seven assets from two of our JV’s in third quarter, $800,000 in higher G&A, and $400,000 in lower GAAP same property NOI. As a reminder, FFO and G&A amounts exclude property acquisition and debt extinguishment costs, which are disclosed in a table in our press release. On a per share basis, FFO for the quarter was $0.74, $0.06 better than fourth quarter 2012 and $0.03 better than third quarter 2013. Weighted average shares outstanding this quarter were 93.0 million, up 10.0 million or 12%, from fourth quarter 2012 due to issuance of shares under our ATM program and our August equity offering. We have not issued any ATM shares since before the August offering. As noted in our FFO outlook, we expect full year 2014 weighted diluted shares outstanding to be 93.4 million, which includes some modest ATM issuances to fund our accretive development pipeline. Same property GAAP NOI was $400,000, or 0.5% [ph], lower this quarter compared to last year. Cash NOI without term fees was $1.1 million or 1.5% lower, reflecting 0.3% lower average occupancy in the same property pool, largely from the October lease expiration at 5405 Windward in Atlanta and the May expiration at LakePointe in Tampa. Excluding Windward and LakePointe, the rest of the same property pool performed well in the fourth quarter, with GAAP and cash NOI growth of 3.0% and 2.3% respectively. On a full year basis, the rest of the same property pool had annual GAAP and cash NOI growth of 1.7% and 3.5% growth, respectively. G&A this quarter was $9.1 million, or $800,000 higher than fourth quarter 2012 mostly due to modest salary merit increases and higher health care premiums. We also recorded higher deferred compensation expense, which is fully offset by higher other income. So no bottom-line impact on FFO. Turning to the balance sheet, during 2013, we had approximately $300 million of net investment funding, excluding recurring CapEx. We also raised $295 million of common equity through our ATM and the August offering. With these activities, we ended the year with leverage at 41.4%. In the fourth quarter, we recast our $475 million revolving credit facility and $200 million term loan. Along with other debt refinancings and debt assumptions on acquisitions, the weighted average interest rate on our debt is down to 4.3% or 12% lower at year-end, versus a year ago. So despite slightly higher debt balances as we’ve grown the company, our interest expense was actually $1.6 million lower, quarter-over-quarter and $3.4 million lower year-over-year. We have provided our initial 2014 FFO outlook at $2.82 to $2.94 per share, which at the mid-point is a 2.9% increase from 2013 without including the one-time, 3.16 cent merchant build gain in 2013. As a reminder, while we forecast expected ranges for acquisition, disposition and development activity, we do not include any impact from such investment activity in our FFO outlook until such transactions close. This is consistent with our past practice. The outlook also assumes that our $133 million of 2014 debt maturities will be refinanced with either unsecured bank debt or secured debt, at rates ranging from 1.8% to 4.0%, depending on the term and type of replacement debt. While we do not give quarterly FFO outlooks, as you may remember, under GAAP certain annual long-term equity grants must be expensed at the grant date, rather than over the normal three to four year vesting period, for employees who have met the age and service eligibility requirements under the company’s retirement plan. As a result, first quarter G&A is typically higher than subsequent quarters because the company’s annual equity grants are customarily made in March. In addition, fourth quarter 2013 results included $1.1 million of NOI from dispositions that closed late in the quarter. Finally, as you may have noticed, we made some routine SEC filings yesterday and this morning. Under SEC rules, S-3 shelf registration statements sunset every three years. It has been three years since our last shelf filing and as a result, last evening, we filed two new S-3s with the SEC. The first was a joint shelf filing by the REIT and the Operating Partnership that registers an indeterminate number of debt securities, preferred stock, and common stock for future capital markets transactions. With this new shelf in place, we also needed to refresh our ATM program, which we filed via Form 424(b) this morning. This new program allows us to sell from time to time, up to 250 million of common equity at market prices less 1.5% discount. As you know, keeping an ATM program in place is one of the many arrows we like to keep in our capital-raising quiver. The second S-3 filed last evening registered the resale of common stock underlying outstanding OP Units. This allows long-standing limited partners the continuing flexibility to redeem their OP Units in exchange for freely tradable stock. Most of our OP Units were issued in transactions that closed more than a decade ago. Operator, we are now ready for questions.

[Operator Instructions]. And our first 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 if you could provide a little bit more color on the guidance in terms of – if you think about the largest moving pieces in the portfolio, the four big vacancies that happened this year and hit last year. And then also the largest acquisitions you’ve done over the last year, can you talk a little bit more about what you’re assuming for each of those?

Yeah, Jamie I can and Terry will give you a little more color on it. With regard to the acquisitions, we’ve moved the occupancy on them fairly substantially. So, if you take what we bought from 2011 through year-end ‘13, it’s right at 7 million square feet. And at the time of purchase, it was 84.0% leased at the end of 12/31/13, we had moved it to 89.5% and we’re projective it to be 92 plus at year-end ‘14. So that’s for the acquisitions. On the four expirations that you mentioned, I’ll take them one at a time. At LakePointe One and Two, we have just signed a lease that we got 31,000 square feet of that inked. So, we now have just right at 200,000 square feet yet to lease there. We have strong prospects for another 30,000 square feet to 40,000 square feet there and then prospects for another 130,000 beyond that and Terry and can give you some feel for how much of that we factored in the guidance. On 5405, which we just completed the repositioning on the end of the year as we did at LakePointe One and Two, we have strong prospects for over half that space. We really just now have finished their dramatic repositioning of that building both interior and exterior. So, Jim and Mike are both fairly upbeat about the prospects there. And then the other two Lakeside, we just got back we’re going to invest about $2.5 million redoing that lobby. So, we’ll lose about six months of time as far as making that into a warzone, because it’s a single-tenant building now that will be doing some dramatic changes on in the lobby in the entrance ways. And then at the two LifePoint buildings or over the two multi-tenant buildings at LifePoint coming out that went into their headquarters building that we built for them. We’ve leased about 13,000 square feet of that already and we just got it back at the end of January. And we have about 100,000 square feet to 135,000 square feet of prospects for that space, and remind you that, that submarket is less than 4% vacant. And we have very nominal improvements we’ll make there so, we need to make there.

Jamie I think I would add would be in the guidance for FFO for the year, we are expecting to make good progress on re-leasing the vacancies based upon the good levels of prospects that Ed just summarized. But, there will be some delay between even getting the leases signed and when they would go into occupancy and begin to put FFO points on the board, so to speak. So, it is a ramp up during the year and even by the end of the year, we would not be back to the same level of FFO from those properties from what we have when they were still fully occupied. So we’ll take some time to get them into occupancy, but as we go into ‘15, I know we didn’t give guidance on ‘15, but we’re expecting that the leasing that we’re doing in ‘14 will even hit in a bigger way in ‘15 versus ‘14. So long way of saying it’s going to ramp up during the year, light in the first couple of quarters to put more dollars in as we get into the second half in fourth quarter and then getting closer to full run rate in ‘15. Jamie Feldman – Bank of America/Merrill Lynch: Thank you.

Is that a long enough answer Jamie? Jamie Feldman – Bank of America/Merrill Lynch: It is. But I guess what I’m trying to figure out is how high a bar did you set for yourself to get to your guidance? Because you talk about strong prospects, you talk about prospects and I completely get it even if you sign something in ‘14 it probably doesn’t matter until ‘15 which helps your growth rate in ‘15. But I just want to see internally how much risk did you guys take in the guidance in getting stuff done?

I think it’s – We don’t want to write a check we can’t cash. We once heard somebody [inaudible] us and we certainly haven’t set a bar that we have we’re going to pull a groin muscle on trying to get over. I think that the bar that we’ve set is manageable in our typical conservative nature. Jamie Feldman – Bank of America/Merrill Lynch: Okay. And then can you just talk also about in ‘14 your expirations? What are your largest expirations? And just as you think about your portfolio, are there any larger expirations to come as we’ve seen over the last 12 month?

The short answer to that is no we don’t have large expirations to deal with in that magnitude at all. In fact, the 2014, LakePointe is set and again that’s a customer that we grew revenues in occupancy or footprints substantially on by delivering their headquarters building and the spaces that they are coming out of are in the submarket is less than 4% vacant. We don’t have another expiration of size until really fourth quarter of ‘15 and we feel that that customer has a high probability of renewing impart because of where the building is and its geographic location is important to them. Aside from the fact that we’re a really good landlord, but I think the geography of that is very important to them. So, really the next largest of size is well under 100,000 square feet. Jamie Feldman – Bank of America/Merrill Lynch: Okay, great. Thank you very much.

Thank you, Jamie.

And our next question comes from the line of Josh Attie with Citi. Please go ahead. Josh Attie – Citi: Thanks. Good morning. Can you talk about the pipeline of build-to-suit opportunities? May be how much activity you’re tracking in dollars and how much the pipeline could potentially grow over the next 12 months? It’s 215 million today and I guess if you execute on things that are close, just trying to get a sense of how much activity there is?

Sure. Thanks, Josh. The guidance we obviously post is 75 million to 150 million for the year. We’re working with quite a few customers, we have a number of conversations ongoing as we’ve said in the past and it still holds true, that remains a difficult arena to project how many will sign and when they will sign. We feel our land inventory is crucial to a number of these conversations. We’re in conversations across six or seven markets. We feel like the guidance that we’ve provided of the 75 to 150 is a very fair number to look at. It’s just tough to say who’s going to sign and who’s not, but we’re doing schematics and exchanging lease terms etcetera for a number of perspective customers. And I think what aids is that, as the number of large blocks of Class A space continues to contract, the ability or the opportunity to for us to deliver to build-to-suit continues to increase. There is very little sizeable large blocks of available Class A space and I think Biologics that we announced a few weeks ago is a very good example of that where we have the opportunity to build them a 75,000 square foot, 100% pre-leased building, because it’s very difficult to find a block that size of Class A space available in the market. Josh Attie – Citi: Thanks. That’s helpful. And can you also talked a little bit about yields. I think you mentioned in context of funding development through the ATM program that we’re getting attractive yields. And without talking of any project individually, you can just talk generally about how yields are trending in the development pipeline?

Sure, and I appreciate the way you worded that because, we don’t like to publish the yields, because that puts at a disadvantage when we’re out trying to build-to-suit and negotiate other development projects. But we can tell you that we continue to, on average, from the development pipeline that we’ve started at the start of the strategic plan through the day, we average right at a 9% year one cash yields. And then we have typical escalators anywhere from 2% to 3% in each of those lease instruments. Josh Attie – Citi: And does that factor in the values of land at a market value?

It does. So where we build on our own land, it attributes the incremental spend is really an additional 70 bps to 80 bps better, because we don’t obviously have to go out and buy land that’s already on the books. So, we get another 70 bps to 80 bps of incremental benefit. In addition Josh, I think it’s important to note that, the majority of the transactions that we’re doing that are build-to-suits are open book deals. So, we get a return on what the spend turns out to be. So, if either it changes made during the construction process etcetera, our yield is on whatever cost to develop at the end of the day. Josh Attie – Citi: Okay. Thank you very much.

Thank you, Josh.

And our next question comes from the line of Vance Edelson with Morgan Stanley. Please go ahead. Vance Edelson – Morgan Stanley: Great. Thanks and good morning. So following up on recent question, when you think about your competitive positioning and your ability to respond quickly to new office demand either with existing space or using the land bank, which markets do you think you are most strongly positioned in relative to other players which markets do you think you’d face greater competition?

Well Vance, I think this is going to sound smart I don’t mean for it to, but I think we have these big blocks of vacancies where we have the advantage of capturing them just because like in west shore there is not another block of 100,000 square feet that’s readily available. So, I think we have, if you call it disadvantage on the competition because we have it. So in the second gen, where we have these large blocks of space yes, but if we’re going to other markets like Pittsburgh where we have good occupancy Kansas City other places, there we don’t have the opportunity to do a 200,000 square feet in any one place or a 100,000 any one block. And then if you look at where our land bank is, obviously that’s where we feel like we have a good advantage and then the level of activity in our best markets like Raleigh, Nashville, Atlanta, seem to be where we have more of the development opportunities. Vance Edelson – Morgan Stanley: Okay. Fair enough. And then on the land bank may be just share with us some of the signs you’re watching for before making the decision to go ahead on spec places like which is like Bay Center II in Tampa. Any targets in terms of leasing commitments or is the construction lead time such that you really just need to use your judgment and anticipate on when to break ground?

Yeah, good question. I think it’s all predicated on specifically the submarket and what we would build. For example at GlenLake in Raleigh where we decided to pull the trigger on a building that’s 25% pre-leased, everything else that we own and that park that we own, is a 100% occupied. So, we needed to create some space for our existing customers to grow in. We’re able to secure a 25% pre-lease it’s in a wonderful BBD and so for us it made good sense to go and pull a trigger on that and we’ll soon start having to steel up. We’ve done a lot of in-ground work on that, but it’s 2015 before it delivers, so we have a lot of time to do additional prospecting. We just need to study the submarket, see who the probable customers are who are rolling expirations dates in and the time around that we’d be able to deliver the building and what the nuances of that particular submarket are at this point in time. So, we’re clearly studying that, but we’re also making sure that we don’t deliver a thorough of spec space in our portfolio and we’re very fortunate to be mid-80s pre-leased that’s very pretty sizeable development pipeline that we have underway right now.

Vance this is Mike. You also mentioned since you mentioned Bay Center in Tampa just a reminder what the large block that we have that LakePointe One and Two and Lakeside. We’re able to market that space at competitive rates relative to what a new spec office building would be with new construction. So, that’s a competitive advantage for us and that also tends to be a little bit of impediment for someone to come out with a lot of spec space until we’re able to absorb that space. Vance Edelson – Morgan Stanley: Okay. Thanks for that. And then one more question if I may, could you share some thoughts in your remaining industrial ownership as it’s already pre-well leased. Do you view that as indicating fewer growth opportunities ahead so it’s a candidate for further sales or do you think that the high occupancy means that real pricing power is around the corner, so you want to hold on for that?

Yeah, Vance we think that we obviously now we’re down to where we have to about 2.5 million square feet of industrial in the Triad division mostly Greensburg actually. We have one 200,000 square foot building left in Atlanta and we called that at a portfolio that we sold last year for very specific upside reasons. We feel with regard to the land that surrounds the building and what’s going on in that immediate submarket. But we still have land that we can build industrial product on and we feel like in Greensburg, that given the scale that market that the combination of office and industrial gives us a significant advantage as far as market share and deal flow given the size of that market. So, we’re very happy with the Greensburg and our position there and we think we do have rent growth potential and developmental potential in that market.

And our development land in Greensburg was up principally enterprise park is very well located in proximity to the airport, to get some good activity just look at there right now. So, as Ed said, I think we feel pretty good about that going forward. Vance Edelson – Morgan Stanley: Terrific. Thank you.

Thanks, Vance.

[Operator Instructions]. And our next question comes from the line of Dave Rodgers with Robert W. Baird. Please go ahead. David Rodgers – Robert W. Baird: Yeah may be for Ed or for Ted either one or both. May be talk a little bit more on the acquisitions side and may be more broadly what’s in the pipeline today and what would you be interested in broadly? Are there more value-add deals still to come to market or are you going to be stabilized growth plays give us a color of kind of what you’re thinking about and how you play that in recovery?

Sure Dave as you know we have a wishlist by division of what we would like to own and we also invest a fair amount of time and shoe leather to look at other markets that we would consider going into that would make sense for us. As we look at 2014, we gave guidance that’s in line with what we’ve done over the last three years so we feel like it’s in sync. But we don’t expect the pool of prospects to be as deep forward distress assets so for example we bought Pinnacle and One Alliance from the vendor. So that was 300 million and the two that we bought from lenders. So we expect that activity to be much more shallow than what it’s been in the past. As far as cap rates, we’re seeing low to mid sevens for decent assets and we’re seeing mid sixes for better institutional quality trophy assets. We think that the volume of competition that’s chasing assets right now has seemed to have increased from what it was in the last say 24, 36 months. So that’s a factor and if we feel like the pricing is getting at sync with the risk profile, we’ll back away from the table and we’ve done that. So I think it’s very competitive for the best assets, less distressed but we do have a wish list of properties that we’re looking at, we’re in conversations with and we’ll hopefully fall well within the guidance range that we’ve provided. David Rodgers – Robert W. Baird: May be for Mike. Mike you talked about more in migration, into the market and we’re operating at Tampa and Bristol Myers moving down there. Are you seeing more evidence of that I mean obviously the build-to-suit pipeline that some of it but can you talk about may be just in the straight up leasing of the existing assets?

First of all, I think the in-migration we kind of consider our top markets are all good but markets such as Nashville, Raleigh, Atlanta is where we’re seeing most of the migration from the standpoint of corporate relocations. This is something that we saw back in the early 2000s when the Sun Belt was the recipient of that. So that’s starting to pick back up. I think Tampa we hope will also be recipient of that. There have been a couple of situations where there are, the economic development arm of say Hillsborough County has identified prospects for this. Of course it could be competing cities where there it might be Tampa versus Dallas versus or whatever. So Tampa seems to be in the mix on a lot of these. So that’s very encouraging for us that we’ll see some activity and again we’ll be recipient of that in our blocks down there because that really provide a pricing standpoint. We should be the most competitive and actually with the location being in the west shore area also be poised to do that. David Rodgers – Robert W. Baird: Last question may be for Terry. Just want to go back to your comments in the prepared remarks about did you sat secured debt? I didn’t know if you misspoke or I heard that right and I guess talk about how you used secured debt that kind of constructive financing or straight out portfolio and how you thinking about using secured debt as

What I was talking about we have 133 million of secured debt maturing in ‘14 and we haven’t made a decision of how we’ll handle that but it will come in one or two flavors most likely. Either be we’ll refinance it back into the secured market or we could take it out with unsecured and most likely that would be in the form of – some form of bank term loan financings. So we haven’t made the decision but just want to give you some sense that we have those two options and we’re thinking about those I gave a range of rates the lowest rate that we could finance if we just put those loans on our line in the short run and that would be in the mid ones all in or if you went back longer term secured you could closer to 4% if you want to take it out closer to seven or 10 years so it’s not a huge amount of debt to begin with, it’s only 133 million on 5 billion balance sheet. But just to give you a sense of what we were assuming for the range of the FFO guidance. David Rodgers – Robert W. Baird: Okay. That’s helpful. Thank you.

Sure.

Thanks, Dave.

And our next question comes from the line of Brendan Maiorana with Wells Fargo. Please go ahead. Brendan Maiorana – Wells Fargo: Thanks. Good morning.

Good morning. Brendan Maiorana – Wells Fargo: Ed, just a question on development and may be Mike mentioned good in migration in Nashville, Raleigh and Atlanta. Are you seeing signs or is there a rumbling that new construction, new supply is likely to pick up in some of those markets and may be those three specifically but in any other markets? Any color on that would be helpful.

Sure. I think there is fair to say that there is rumbling I’m not sure how much of that we’ll see. I do think that those who do it it’s going to be important to be early to do it and our view is that there won’t be a lot of it that there is not enough confidence that the markets would be able to withstand a significant amount of spec space any one of those or any one that we’re in and I’m not sure that’s not true countrywide that the markets and the level of uncertainty just aren’t going to withstand a tremendous amount of onslaught of spec development. But we obviously have brought some to market in Raleigh there has been rumblings about it in Atlanta and Nashville but we haven’t seen a whole lot of it happen. There is one project out in Cool Springs which is about 20 minutes south of Nashville in that submarket. There is been others in the press in Atlanta but we haven’t seen anybody turning any dirt there. So it’s really nominal in scale at this point and our view is that if it does start we don’t expect that there will be a tremendous amount of it. Brendan Maiorana – Wells Fargo: Okay. That’s helpful. And I guess it’s just I know you guys gave a lot of good detail in terms of the prospects for some of the big vacancies in the portfolio. Can you may be shed a little bit color on at LakePointe I think you previously said you thought had a pretty good prospect or a couple of prospects to get some little more traction by year end of ‘13 was that a deal that fell out of the pipeline did they go somewhere else did they go to a competitor or did they just not materialized at all?

Yeah door number three, it didn’t materialize. We had an agreement on business terms. We had done some test fits and we did not lose it to a competitor the entity made a decision not to execute on the expansion. And so that’s what happened with that and we disclosed that when we put our press release on December 20, when we talked about some dispositions we had achieved and then we tried to provide you with some comfort by saying yeah we lost that but we were successful in 100% re-let of the 4301 building which was a good deal to get executed. If by no means, at these buildings now we didn’t have that one ring of a prospect it’s disappointing that it went away like I said we signed 31,000 we have another 30,000 or 40,000 of strong prospects and we have over a 100,000 square feet of other prospects. So, it wasn’t four or five prospects that totaled up to a 100,000 that all chose to go to [inaudible] or do something different. Brendan Maiorana – Wells Fargo: Yeah that’s helpful. And then at Windward I think we’ve spoken last conference call that there was I’m not sure if there was a single product sector or two for about 125 it sounds like there is still at least eight of that strong prospects for 125 just any sense is it kind of your building and one other or is there a dozen other buildings that are competitive with this tenant or tenants that are looking at space?

Yeah that one’s more door number one, limited number of options that they are considering down to we feel we’re absolutely on the hunt on that wouldn’t you say Mike?

Yeah I think and they’re actually now I guess three what we consider good prospects Brendan for actually more space than we have so we’re hope we’re going to have that tough task of which ones do we pick as we can’t do all three and that would be an amiable situation. But they are largely disappearing particularly up at the North Fulton submarket where this is there was an announcement last week about a project that’s nearby that a company committed to it more than we had and we didn’t adequate space to handle it anyway. But that took that big block of space off the market that was one that we were constantly competing with. So all in all, we feel pretty good that number of options are getting down to one of two or one of three and what the improvements that we talked about and in my scripts and Ed’s talked about, we’re getting really good reads from the folks who walk through it. So I think we feel pretty good about that space. Brendan Maiorana – Wells Fargo: Okay that’s great. Just last one for Terry. The average shares for the year I’m not sure exactly what the timing is to kind of get to the average but if I sort of assumed may be your convention it looks like maybe you got a little less than a million share of the ATM that you would issue. That’s probably somewhere around 30 million or 35 million kind of equity coming into the door relative to the full development pipeline is about 175 to finish the current development pipeline I’m not sure exactly what’s budget is for spend during 2014 but is it fair to make that leverage may be move up a little bit as we go throughout the year based on your current guidance plan because your leverage is probably towards the low end of your comfort range?

That’s fair. I think your math is pretty good Brendan. We do have Brendan Maiorana – Wells Fargo: I’m a Carolina Grad.

Okay. We do have some ATM proceeds coming during the year. I think the 93.4% is about 400,000 higher than where we were right at the end of the year so we’re averaging in 400 over the course of the year. And we did end up the year at low leverage as we mentioned 44.4%. We probably I think planned to bring up slightly during the year. I think your point is valid, but we’re going to stay very comfortably within our comfort zone and our average leverage during ‘14 should be little bit less than our average leverage was in ‘13 but up a little bit from where we ended the year. Brendan Maiorana – Wells Fargo: Okay. Okay, great. Thanks Ed we can cheer together tomorrow night.

Amen to that.

Hey Brendan quick follow on comment on your question about the competing subset. The space that I alluded to is basically off the market it was 360,000 square feet. So that’s pretty much gone. So that was a nice chalk to take a submarket. And also I apologize I think my script alluded to as Wells Fargo had a little speech slip there sorry about that. Brendan Maiorana – Wells Fargo: All right. Thanks guys.

Thanks, Brendan.

And our next question comes from the line of Kyle McGrady with Stifel Nicolaus.

Hi. It’s actually Aaron from Stifel. Question for you just in terms of CapEx and it looks like it’s coming back up again as you guys alluded to in your comments. Considering all the move outs that you guys had last year and all the new assets that you brought on were not stabilized. How would you expect CapEx to trend on a per square foot basis for this year and how does that relate to your dividend coverage?

This is Ed, Aaron. We think that– we ended the year 2013 with 10.5 million cash positive. We expect to be in that range or twice that amount in 2014. So we really don’t have any concern. We’re going to be – we expect to be in that same zip code or better in 2014 than we were in ‘14.

This is Terry, Aaron. What I would also add is that when we look ahead to ‘15 when we have the development projects beginning to deliver, they have virtually no recovering CapEx for years, it’s just pure cash flow increase. So, the coverage is getting increasingly better. The 10.5 that Ed mentioned was better than last year and we’re expecting ‘14 to be somewhat better than ‘13 and ‘15 to be better than ‘14. So all of that is trending in the right direction.

Also Aaron, as we look at the upgrades we’ve made in the portfolio, we’re getting obviously higher quality portfolio, higher quality tenants. We’re also looking for giving longer lease terms because typically little bit higher CapEx. This quarter, as we pointed out, there were a couple of transactions that skewed that number but for those transactions we would have been down more in line with the range of where we would we’re in our five quarter average. But I think if there is a trend it’s largely because we’re trying to get more term which is good and also the quality of assets that takes the higher improvements.

Hey Aaron just one quick note on that. We’re actually succeeding in doing that. You’re getting longer term I think if – when we look at it, when we rolled out our strategic plan, we said that one of our goals were to get longer lease terms. And when we go back and look at what was in our supplemental when we ended ‘04 and lost the plan, we had 15.5% or more expiring in some years and now you look at our expiration table and the highest number if 12.4% and that’s in 2017. So we’ve clearly made good progress on the length of lease term that we’ve gotten and I think that will start to show in volumes because we can’t do the same volume because we don’t have the same number of deals that are rolling on a per annum basis.

Right, right. And then could you just discuss in terms of the leases, the re-leases you have to do in the portfolio the big vacancies which ones are going to be second gen versus first gen?

It’s all second gen if I follow your question.

It would all be second gen.

Can you restate your question?

We could have some that’s possibly first gen for example in Pinnacle but most of ours is a big block in second gen.

Were you referring Aaron to the vacancies that we have? Can you restate the question?

Yes, I’m referring to the larger vacancies like Windward for instance. A lot of work at the assets but is that a second gen or first gen?

No we always considered that. We consider anything that it had a customer and before in other words unless it’s first time we’re building up the space since the general contract has delivered it whether we just bought it or we just owned it since we built it for 15 years, any space where we’re building out after a customer’s been in that space, we define that as second gen. It’s only first gen when it’s truly first gen and that’s when the general contractors has completed the building. So that includes acquired vacancy or same store vacancy, it’s second gen.

Okay. So Pinnacle would also be second gen?

Unless that’s the one case where if the space is never been built out since the general contractor delivered the show, then it’s first gen. and so Pinnacle would be the only place that has some of that that I can think of. Two lines a little bit but not much. But Windward, LakePointe, LifePoint backfills that’s all second gen for us and anything in One Alliance or Meridian or PBG when we re-tenant it, for us it’s second gen.

Okay. Excellent. Thank you guys.

Thanks, Aaron.

And our next question comes from the line of Michael Knott with Green Street Advisors. Please go ahead. Michael Knott – Green Street Advisors: Hey good morning everybody. Ed on your comment about not pulling your groin muscle on reaching your full year guidance number just be careful now [inaudible] carry you want to deal with that. Question for you on your 4Q leasing volume looks like it slowed a little bit, is that any indication something that you’re seeing or just more timing and may be seasonality?

I think it’s couple things Michael, one is that I commented to Aaron on with regard to where we have been successful in getting longer lease terms. So if you look at the December 31, ‘04 supplemental for lease expirations and how much we had a percent of annual revenues expiring in a year, we had two years that were 15.6, the coming year and the year after that. If you look at that same table in our most recent supplemental that we published last night, the highest number is 12.4. And so we’re clearly getting longer leased terms so that would attribute to the volume. The other is I do think that there was some seasonality in what occurred in fourth quarter. And to try and give context to that as an example we’re just shy now of the 50% mark let’s say of first quarter 2014. And we’ve already inked 75% of what we inked in all of fourth quarter of ‘13. Michael Knott – Green Street Advisors: Okay. That’s helpful. Appreciate it. And then just thinking about market rent growth in your various markets looking ahead to 2014. Mike I think you might have mentioned I’m just curious if you guys can talk a little bit about where you think you might be able to push rents and just may be the magnitude of what your markets might see in 2014?

Yeah I think I mentioned Michael 2% to 5% depending on which markets we’re looking at. And I would say that the obvious ones are ones that we alluded to vis-à-vis Nashville, Raleigh, Atlanta possibly Pittsburgh because you got a very tight downtown market there where we hope to have the opportunity to push rents. And even our other markets, the worst case they’re flat, not down. So I think that I would say at least half our markets will be looking to try to push the envelope to the high end of that range as the competitive subset basically with the new construction stays on the sidelines and things get tight we’re able to do this. Even when you start seeing few markets like Nashville, which Ed mentioned where you got the two spec projects one in Downtown and one in Cold Springs, their asking rates are substantially higher than second gen rates. So that actually allows us to push our rents a little bit more where you have that because we’ve got room to push it and still be competitive against that. Michael Knott – Green Street Advisors: But just to be clear, the 2% to 5% is sort of an average encompassing most of your markets or is the 2% to 5% kind of for the best markets?

I would say that the 2% to 3% would be like Orlando, Atlanta, Pittsburgh and 3% to 5% would be more Nashville, Raleigh, Richmond, Tampa and then Kansas City retail a better number all the way around. Michael Knott – Green Street Advisors: Okay. And just one your operating expenses for 2013 full year same-store I think they were flat. Just curious in make a couple comments on your expense control are you seeing any pressure there looking forward? I know part of that gets reimbursed, but just curious the flat seems pretty good outcome compared to a lot of your competitors?

Well, we once we again applaud our folks out in the field for doing a great job, Michael of holding expenses. I think that it’s pressured this year, we’ll be looking at things like snow removal. We had a pretty tough winter along for January, February. So, we still should be within our forecast bordering a really bad second half of February to March, but that’s one number that can have a little bit of driver of course the worst to those markets is Kansas City where we have the highest level of recovery from a camp standpoint. So hopefully that will be less impact. There is some question about utility expenses particularly with EPA starting to shutdown coal fire plants and what impact that may have on utility expenses going forward, but this year, we feel like we’re going to be pretty good.

Yeah we feel we are well within even the vortex and the ice and 285 coming out of parking lot all of it, we have taken all of that into consideration. We’ve looked at the storm that’s coming. We still feel that we’re well within the norm of what our operating budget is for 2014. Michael Knott – Green Street Advisors: Okay. Thanks. And then just last one for me, you guys have done quite a few acquisitions in Buckhead here lately and we understand that one of your public competitors kind of challenge historically challenged building on the for sale market. Just curious if that’s on the wish list?

Well we look at everything that comes to market Michael. And so we rather not publish our wish list because we feel like that creates competition in some places and may tip our hand. So I guess our best answer to that is in any of the submarkets that we’re in we look at anything that comes to market to either pursue it or understand it. Michael Knott – Green Street Advisors: Okay. But you’re not necessarily a full on Buckhead couple of acquisitions that you’ve done there now?

We still like it. It’s a great market and I guess some of this is a question of was the problem the operator’s owners versus the market. That’s something we feel like we do a better job than others. Michael Knott – Green Street Advisors: Thank you. Thanks.

Thanks, Michael.

Thank you, Michael.

And there are no further questions at this time.

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