Highwoods Properties, Inc. (HIW) Q2 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Highwoods Properties Second Quarter Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, August 5, 2015. I would now like to turn the conference over to Ms. Tabitha Zane. Please go ahead. Ms. Zane.

Thank you, and good morning. On the call today are Ed Fritsch, President and Chief Executive Officer; Ted Klinck, Chief Investment Officer; and Mark Mulhern, 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 date for our third quarter 2015 financial releases and conference calls. Also, we have posted 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, 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 2014 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. Our company continues to benefit from sound business conditions that are resulting in steady demand for our well-located BBD product. While many of us often wish the pace of GDP growth was faster, this measured cadence may very well be leading to an even longer sustained expansion period rather than a live fast, die young scenario. Yesterday afternoon we reported FFO of $0.77 per share for the second quarter and 1.2 million square feet of office leasing. We grew same-store cash NOI 5.3% from a year ago and increased in-service occupancy 90 basis points sequentially. We are now projecting company-wide occupancy of 93% to 93.5% at year-end, raising the low-end by 50 basis points. A key highlight for the quarter was our execution in development. We announced our $107 million Riverwood 200 project and we placed $72 million of 100% leased development in service. The second MetLife building and the Biologics headquarters building, both in Raleigh. We are also pleased to announce two additions to our development pipeline: Seven Springs II in Nashville and Enterprise V in Greensboro. Seven Springs II, a 131,000 square foot office building with structured parking, will consume our last office pad in our Seven Springs project in Nashville’s highly popular, 97.7% occupied Brentwood submarket, one of the market’s BBDs. The total investment is expected to be $38.1 million, including the value of Company-owned land. We anticipate construction commencing next quarter with delivery in the second quarter of 2017 and stabilization in the third quarter of 2018. Our existing in-service Seven Springs portfolio is 100% leased. It consists of two office buildings encompassing 332,000 square feet plus 41,000 square feet of amenity retail. In addition, construction is well underway at Seven Springs West, a 203,000 square foot office building that is now 86% pre-leased to AIG and is scheduled for delivery in the third quarter of 2016. This quarter, we will commence development of Enterprise V, a 131,200 square foot industrial building for an anticipated total investment of $7.6 million. The building is projected to stabilize second quarter of 2017, a year after its 2Q 2016 delivery. This is another solid opportunity for us to put Company-owned land to work. In Enterprise Park, we have three existing buildings totaling 658,000 square feet that are 100% occupied. We have two more pad sites at Enterprise Park that can support 360,000 square feet of additional industrial development. Our Enterprise Park is in the airport submarket where industrial occupancy is 98%. Riverwood 200 in Atlanta, the other addition to our development pipeline subsequent to our April call, is a 299,000 square foot office building adjacent to our 94% occupied 503,000 square foot Riverwood 100 project. We announced this $107 million development in June with 39% pre-leasing and have grown pre-leasing to 66% in just two months’ time. Our current development pipeline is now $521 million and includes eight projects in six markets encompassing 1.6 million square feet that is 72% pre-leased. We continue to chase additional development opportunities, mostly on Company-owned land, and have raised the low-end of our guidance from $150 million to $200 million. We have left the high-end at $250 million unchanged. Looking ahead, we would expect stabilization GAAP yields to continue to average 8.5% to 9%. Turning to acquisitions, cap rates are rich and some assets, particularly stabilized assets without significant future upside, have traded at prices per pound out of sync with our view of their risk profile. However, we believe we can be successful in acquiring BBD-located buildings that enhance the quality of our portfolio at prices that offer upside, whether through lease-up, Highwood-tizing and/or harvesting operating efficiencies. We have left our guidance positions unchanged at $50 million to $300 million. Turning to dispositions, we’ve sold $32 million of non-core properties year-to-date. This includes a sale subsequent to the end of the second quarter where we sold a 102,000 square foot office building in Winston-Salem for $15.3 million. This property is 100% leased to U.S. Airways. We have a well-defined list of non-core assets in various stages of marketing and have left our disposition guidance unchanged at $100 million to $200 million. We continue to make significant progress in our War on Complexity, including reducing our exposure to joint ventures. During the quarter, we acquired our JV partner’s 77% interest of Eola Park Centre, a 168,000 square foot office building in Orlando, for a total investment of $22 million, 50% below estimated replacement cost. We now wholly own all the for-lease office buildings of size surrounding Lake Eola in CBD Orlando, a BBD. Another of our non-core joint ventures sold its two buildings and an adjacent small parcel of land in Atlanta, generating $9.8 million of proceeds for our 40% share. This transaction resulted in a land sale gain of about $1 million dollars in the second quarter. We expect to close-out two more relatively small non-core joint ventures later this year. Given this, by year-end 2015, we will have gone from a historic peak of 71 JV assets representing approximately 10% of our revenues to only 13 JV assets representing approximately 2.5% of our revenues. Turning to FFO, we have further tightened our 2015 per share outlook. We’ve raised the low-end by $0.03 to $3 and reduced the high end by $0.01 to $3.06. The midpoint of our range is now $3.03 per share. As we look ahead, we expect meaningful NOI upside over the next few years. Atop 909,000 square feet of 97% leased development, representing a total investment of $217 million delivered over the past three quarters, we have an additional 1.5 million square feet of already 71% pre-leased development, representing a total investment of $485 million, delivering over the next two years. Ted will now cover leasing highlights. Ted?

Thanks Ed and good morning. I see lots of really good opportunities in our markets to further strengthen our position by capitalizing on tightening supply and growing demand to continue to push rents and increase occupancy. In addition, our strong balance sheet gives us a competitive edge. Our ten division leaders are charged with identifying new opportunities and their success is evident in our robust development platform. All of this gives me high confidence and optimism for Highwoods continued success. As Ed noted, we had solid leasing activity this quarter, a total of 1.2 million square feet, including 916,000 square feet of second gen space. Occupancy increased to 92.8%, up 90 basis points sequentially and 200 basis points year-over-year. Average in-place cash rental rates across our entire office portfolio grew 4.6% to $22.95 per square foot compared to a year ago. For office leases signed in the second quarter, cash rent declined to 3.7% while GAAP rent, a more meaningful measure, grew 9.3%. Net effective rent on second gen office leases signed was $12.64 per square foot per year and our five quarter average was $13.60, the highest in the Company’s history. Overall, our markets are strengthening and year-over-year asking rents are increasing 3% to 5%. Continued positive net absorption and corresponding vacancy declines are increasing bargaining power for landlords. In virtually all of our markets, rates needed to justify new construction are still 20% to 30% higher than second gen rates, keeping a bridle on spec development. Our strongest markets are Atlanta, Nashville and Raleigh, all three of which have reported office job growth over the past 12 months ahead of the national average of 2.1%. Atlanta has experienced 17 consecutive quarters of positive net absorption totaling 13.8 million square feet. Despite shrinking availability of space, especially Class A, there is only 600,000 square feet of available space in new construction, including the remaining 100,000 square feet available at our recently announced Riverwood 200 development. Occupancy in our Atlanta portfolio was 91.2% at quarter end, up 440 basis points year-over-year and 170 basis points sequentially, highlighted by our having grown occupancy at our 555,000 square foot One Alliance Center from 67% to 92% in just two years. We’ve also achieved solid occupancy growth at Glenlake North and South Towers, the two properties in the Central Perimeter submarket we acquired from a JV partner in August 2013. We’ve grown occupancy on this 505,000 square feet from 82% to 97% in just under two years. Nashville’s economy continues to be very strong. Moody’s Analytics describes Nashville’s population, employment and business relocations as surging. Throughout the first half of 2015, the Nashville office market absorbed 727,000 square feet, already more space than absorbed in any full year since 2007. The market’s overall occupancy rate has climbed to 91.9%, with Class A occupancy at 96.6%. Occupancy in our Nashville portfolio was 97.7% at quarter end, up 240 basis points sequentially. As Ed mentioned, given market dynamics and the performance of our portfolio, we are excited to launch Seven Springs II. The Raleigh office market continues to strengthen also, posting its ninth consecutive quarter of positive net absorption. It continues to garner a multitude of accolades with life sciences, bio pharma and information technology as key growth areas. Our Raleigh team had another active quarter, leasing 243,000 square feet of second gen space with average GAAP rent growth of 9.7%. We also increased leasing at our GlenLake V development from 53% last quarter to 81% today. The building is pro forma to reach stabilization in the second quarter of 2017. While Tampa has been a bit slower to the economic recovery party, market vacancy is at its lowest level since 2006. Net absorption in the first half of 2015 has already exceeded any full year since 2006. We grew occupancy in our Tampa portfolio 180 basis points sequentially, primarily as a result of two large customers moving to Tampa Bay Park. Our 100% pre-leased build-to-suit for Laser Spine Institute is proceeding well and we remain on track to deliver that development in the first quarter of next year. We are seeing good leasing activity and improving rental rates across all of our divisions. Our Southeastern markets are benefitting from job growth in a number of industries including high tech, pharma and business services. We feel confident occupancy in our portfolio will increase by year end as businesses and job growth continue to expand. Mark?

Thanks Ted. For the second quarter of 2015, we delivered FFO of $0.77 per share. When you adjust for land sale gains in the second quarters of 2015 and 2014, the comparison is $74 million of FFO in 2015, or $0.76 per share, versus $69 million of FFO in 2014 or $0.74 per share. That is a 7% increase year-over-year in dollars and a 3% increase in per share amounts. The primary FFO growth drivers are higher same property NOI due to increasing occupancy and contributions from value-add acquisitions and development deliveries, slightly offset by lost NOI from dispositions. Growth in same property cash NOI was 5.3% quarter-over-quarter. We have raised the low end of our guidance on same property cash NOI from 5.5% to 6% and left the high end at 6.5%. As Ed mentioned, we have tightened our FFO guidance to $3.00 to $3.06 per share. We also raised the low-end of the range on our development announcements from $150 million to $200 million and tightened our occupancy range to 93.0% to 93.5%, up 50 basis points on the low end. These all reflect the positive momentum we see in our markets and overall performance at Highwoods. Turning to the balance sheet, we have continued to grow the company on a leverage neutral basis with leverage at June 30, 2015 of 42.1% versus 42.4% in 2Q of last year. In the first six months of the year, we placed in service $125 million of development projects that are reflected on the balance sheet as changes between development in process and buildings and land. We paid off a $39 million secured loan in the quarter and expect to pay off two more secured loans totaling $113 million in the fourth quarter prior to their stated 2016 maturity dates. The weighted average coupon on those two loans is just under 7%. Our unencumbered NOI increased to 84% and will further increase to over 90% by year-end. Also, debt to EBITDA improved to 5.6 times at June 30. We also fortified our balance sheet by expanding our $225 million unsecured bank term loan to $350 million, extending the maturity by an additional year to June of 2020 and reducing the LIBOR borrowing spread from 175 basis points to 110 basis points. We very much appreciate the continued support of our bank group. During the second quarter, our partner in a non-core joint venture that owns a 205,000 square foot building in Tampa’s Rocky Point submarket exercised the buy/sell provision in the JV agreement. As a result, GAAP requires us to deconsolidate the joint venture and make an adjustment to the prior year balance sheet. This is why you see the words “as revised” in the caption for the 12/31/14 balance sheet. For more detail, see footnote 1 on Page 15 of our 10-Q. Before we take your questions, I want to underscore Ed’s point regarding execution on our development pipeline. The performance of our development/construction team on cost management, while delivering high quality product, has been outstanding. Among what has been recently delivered, what’s underway and the three new development opportunities Ed outlined, our robust development platform is truly an exciting part of our long-term growth plan. So operator, we are now ready to take your questions.

[Operator Instructions] And our first question will come from the line of Jamie Feldman from Bank of America. Please go ahead.

Great, thank you. This is Scott Freitag with Jamie. To start could you guys please just discuss your leasing projects or your leasing prospects for the projects in your development pipeline that make you feel comfortable building spec?

Sure. Good morning, Scott, this is Ed. When we look at the submarket as a total and what vacancy there, so it’s low single-digit vacancy in both submarkets were we proposed to just build Seven Springs II and Enterprise V. So giving low single-digit vacancy giving 100% occupancy virtually in our adjoining projects were a 100% at what else we own at Enterprise and the only vacancy that we have in Seven Springs is just the remaining floor AIG in that building is under construction. We've also have evidenced a very good momentum with what we've done at GlenLake V, we recently announced Riverwood and we moved within two months, we move pre-leasing there almost before we even put a shovel in the ground from high 30s to mid-60s. So we’ve evidenced good pre-leasing activity and the submarkets are robust and we think the timing is ideal and both of them are on company-owned lands of the incremental spend is even lower than in the total dollar amount shown.

Okay, thanks. And how is land bank situated that can be for future build-to-suit projects.

Well, build-to-suit or spec or partially pre-leased we have the capacity with our core acres to build a $1 billion worth of new product.

Okay. Could you also discuss your latest thoughts on the risk of new supply across the market?

Sure, we have said in the past that given the cost of new development that has played a bit of a governor on the amount of new construction that's coming out in any of the markets and obviously there is some other dynamics with regard to lending and demand et cetera. But given the gap between first and second-gen pricing for space, obviously driven by the cost of construction, there isn’t a whole lot. We have - in prior calls we’ve given a bit of a yellow flag for us to be cognizant of how much there is in Raleigh and Nashville and in the other markets it really isn't anywhere near a meaningful number. The vacant space in Nashville with the spec space is being built in Nashville is actually absorbed quite well and is only a 128,000 square feet of remaining underway spec space in that market. Raleigh is a little bit more there is - it’s about 55% to 60% pre-leased and we’re more mindful of that. We’re glad that we started GlenLake V, when we did. We started at 25% pre-leased we’re now in the 80s and we just recently delivered it. So our track record is good on that and markets as a whole we’re not seeing a significant amount of new development on spec development basis.

Okay, great. That’s it for me. Thanks guys.

Thanks, Scott.

And our next question has come from the line of Vance Edelson from Morgan Stanley. Please proceed with your question.

Terrific. Good morning. The focus on development in bringing more office capacity into your markets that suggests the degree of optimism that not only is the current economic up cycle going to continue for decent amount of time and you did mention that the sluggishness of it could suggest it will be sustained but it also suggests that we won't have a problem in the next recession whenever it comes with the greatest - the greater office square footage that's going to exist in your BBDs. And even if the new supply is sluggish now as you mention it still means we’re going to have more supply than we had going into the last downturn. So can you comment on that is there obsolescence for some of the stock or anything else that might mitigate this concern.

Yes, good morning, Vance. So two thoughts of the cup. One is each downturn that we've experienced in here going on 33 years I’ve seen a number of the downsides or down markets each have their own characteristics sometimes it's underemployment, sometimes it's oversupply, sometimes as the recession cause layoffs, sometimes its construction pricing. There is various things that influence each downturn I think the fact that there is such a limited amount of new speculative construction underway in these markets as I said to Scott restricted by the pricing of new development and the gap between first and second gen rents. I don't think that there will be a lot unless a lot of overabundance going into the next downturn when it comes and I also think that based on my opening comments in the cadence of the economic situation right now that is that the economy hasn’t roared to where join robust times which there are days where we can have chagrined over that, but bottom line is that the cadence of the economy right now is steady and is positive and I think a sharp downturn is unlikely and I think that there won't be a tremendous amount of overhang of new space that will be unleashed going into that.

Okay, that's fair. And Ed, mentioned the strong balance sheet given your competitive advantage so just following up on that when it comes to the competition and the funding of their own development especially among the more local players. Do you get the sense that banks are - are they getting more aggressive and giving them what they need so I guess the question is how does your own funding situation compared to that of the competition, if you could just spell out that advantage?

Sure and you touched on, most of our competition is local private developer and they may have other means with regard to institutional partners are lenders, but they have a more complicated capital stacked and us being able to work off of our credit facilities so that - what Ted was referencing when we get in front of prospects and more able to say we can fund this half of our credit facility and you're talking to the entire capital stacked when you talk to us we now have to bring others to the table. That’s a definite competitive advantage not only with the user, but also with the general contractors in the construction community so it’s a big positive for us. We feel like our access to continue to adequately and appropriately fund our development pipeline, our investors have been there for us and we continue to grow the company and leverage neutral basis. So we are in good shape on that. Specifically with regard to banks, clearly banks are looking at what's going on the market with regard to supply and demand, the pricing and capital, banks are very competitive from bank to bank, but they are also very cognizant of the delta between first gen market rates and that’s the prospect for losing the entire market. The prospect for first gen is those who are willing to pay off significantly for new gen space. So you have to be careful about that. And I think banks are very cognizant of that delta.

Okay, very helpful. And then last one from me just given that you straddle the office and industrial markets, if you could give us your perspective on the relative merits of each which maybe a way of asking would you like even more industrial exposure or is it really just going to remain a niche for you?

Yes, so just to put that in perspective we straddle, but nine toes are in office and the pink toe on weak foot is in the industrial so industrial is a very small part of our platform, it’s less than 2.5 million square feet and a small percent of revenues about 2% of total revenues. We sold out of all of our industrial in Atlanta over the last couple years, very good timing on getting out of that, now focus solely on only office in Atlanta. In Greensboro, therefore is the only market in which we have industrial and it's all concentrated in the airport submarket area. And we have development pads and we feel like we can continue to create value by developing on those development pads. As we mentioned in the comments after we deliver this 131,000 square feet of enterprise five, we have two more pads which now would support about 360,000 square feet of the submarket and industrial is low single-digits vacant. We feel and given the demographics of Greensboro for us to have both office and industrial, it serves as well. So it’s a small component, it’s a meaningful component for our Greensboro division, but it's a very small component for the company.

Okay, that’s great. Thanks Ed.

Thank you.

And our next question is come from the line of Tom Lesnick from Capital One Securities. Please proceed your question.

Thanks, good morning everyone. Ed just a quick question for you on development as we see the pipeline ripping up here. How do you thing about that is - in terms of risk do you view as a percent of enterprise value or the percent that's not pre-leased as a percent of enterprise value. How should we think about your risk tolerance there?

Yes, good question, Tom. This is run on the textbook, but I can't but I would say we look at it from all aspects you what it is as a percent of total enterprise. How does it play with regard to what's immediately available or we think coming online within the submarket. What we think our prospects are for lease in the building in the timing of when it was delivered to the time it would stabilize versus what's rolling within the market knowing our own portfolio, but within competitor buildings whether not on company-owned land we really look at it from many dimensions and we for example have on the shelf a design for new building for every division that were in, but were not going to pull the trigger on all of them and goes back we’re going to pull the trigger on those that we feel would do well. In on some of those we would have to have a certain amount of pre-leasing and others we feel comfortable being more spec. I think the Seven Springs II is a perfect example. I mean the submarket has been strong, in his strong low single-digits vacancy there are Seven Springs project this is self-serving of unabashed self-marketing but the Seven Springs project is done exceedingly well and it just makes more sense to build up building. So we look at it from all aspects our investors have been with us on this, last three quarters we've delivered four projects for over $200 million about a million square feet 97% leased and were 72% on the 0.5 billion plus that we have underway. So we think when we look at the vacancy rate of the vacancy amount - the amount of lease up time that we built into the pro forma we you know been successful on it and is really no reason to believe that what we have announced would be successful given all the parameters.

So Tom, its Mark. Just one more thing to add another rating agencies obviously pay attention to this to think our high degree of pre-leasing have given them good comfort here in terms of what we’re doing and that I would say that overall metrics of the company, the leverage metrics in the conservative nature of the balance sheets have been managed given people lot of company here so I think we actually have a lot of room especially when it comes to build to suites with high pre-leased.

Got it. And Mark just a follow-up on that, with the prospect of a rising rate environment here in the back half of 2015 that could potentially put pressure on stock valuations in the near-term. How are you thinking about you leverage levels in your comfortability with the development pipeline growing is there a limit to wish leverage to get before you kind have to take the [indiscernible].

Yes, Tom so you know we've established kind of bandwidth that were operating within in terms the leverage so in that 42% range, we kind of got and comfortable that we were able to - we have been able to grow the company on a leverage neutral basis here for some time that obviously entails using the ATM when it’s appropriate and keeping the right balance of equity year. I think given what's happening in the interest rate environment I do think obviously conventional wisdom would say you're going have some rising rates you're not sure that has a lot of impact us obviously were got a lot of fixed that in a fixed rate exposure in the portfolio. So I think it’s can be relatively modest in terms of our debt cost and then again you get a make a judgment on equity cost, but again were committed to maintaining that appropriate balance leverage and keeping the balance sheet in good shape.

Got it and then just turning to organic growth for a minute. How should we be thinking about you guys that obviously done a lot of leasing over the last 12 months or so? How should we be thinking about the free rent component rolling and how that impacts cash NOI over the next 12 months or so?

So obviously leasing terms the stronger the markets and the better our portfolio, the better the leasing term. So landlord’s right now have a pretty firm grasp on the negotiation, but on - there has been leasing that we've done. For example in this past quarter to help our rent roll with regard to assets that we want to sell, so we’ll more than make up any concessions we made to do the lease in the form of proceeds upon the disposition. But all leasing metrics have significantly improved as the markets have gotten better. Now given that we’re down to the last 7% or so of our portfolio it might be fair to say that is not the best 7%. So there will be some spaces that maybe don't have the view or access that we like it to have, where we may do some concessions in order to get it leased. But I think concessions nowadays would be really in the corner of less desirable space or space that we want to lease in order to better position for sale.

Got it. And then just turning to the expense side of the equation for a second are you guys any significant property tax pressure in any of your markets right now.

So you know we obviously pay close attention to this, it’s one of our largest expenditures and we have had in certain states, some reevaluation and some disputes with or you know some negotiation with the property tax folks. But nothing of any consequence when you look across the portfolio I would not call it a material risk.

And Tom, just one footnote to that. So that you know we have one and half people who are dedicated to property taxes not taxes in general. But specifically real estate property taxes that's all they do and they are extremely good at it and they have good tenure with us, so they have a great institutional knowledge and familiarity with the counties and the municipalities within which we work. So it's not just lip service that we pay attention to it, it's one and have people dedicated to it and that’s all they did.

Great, thanks, guys. That’s all I got.

Thanks, Tom.

And our next question is coming from the line of Manny Coachman with Citigroup. Please proceed with your question.

Good morning, everyone.

Good morning, Manny.

Ed, that you mentioned in prepared remarks do you maintain the $50 million to $300 million of acquisition guidance. Can you give us an idea of how much you are actually looking at, so where does that place you in the very wide range?

So I don’t think what we are looking at, today is any different than all - all that we look at, we’ve said in the past and we would say again anything that becomes available within our footprint or markets that we would consider going into, we pay close attention to it. So all the activity that you see for example reported in real capital analytics, we've looked at it. It’s good for us to look at our options see what's out there and also to use what's trading within the market as the benchmark against own portfolio. So we kept the range because we continue to look at things that either or in the market or maybe coming to market and what are opportunities to buy something that may have some leasing upside or some operating upside or some advertising upside. So we feel like keep maintaining the range of $50 million to $300 million given that we still have the second half of the year is appropriate.

And then on the development yields, you guys quoted 8.5% to 9% in the release last night time. Where would that be on a sort of going in cash basis, if you don’t mind sharing?

We do mind sharing. I am sorry, Manny. We are in discussion on at least a half dozen projects right now. And we feel like it would work against the companies interest, if we disclose specifically that number, you know each conversation has its own nuances with regard to the creditworthiness of the prospect especially utility of the site or whether its own company-owned land or not. So we feel like the number that we give in the gap and the weighted-average of being 8.5% to 9% is gives you some numbers that you can model around. But it doesn't hurt us in negotiations with our prospects and customers?

All right. Thanks.

Sure, thank you.

Our next question comes from the line of Brendan Maiorana with Wells Fargo. Please proceed with your question.

Thanks. Good morning. Hi, Ed. So it looks like you guys have really good traction at Seven Springs, you moved up the leasing and the stabilization data on Seven Springs West and just does the - does that submarket in Brentwood compete with Cool springs and how do you think about the space that you're probably likely to get back from HCA I think in 2017. Is that competitive with Seven Springs to the development project you announced?

Yes, so two parts to park so one is let’s just say roughly speaking downtown go about halfway to Cool Springs in Brentwood and then go to Cool Springs and so there's 20 miles from downtown to the heart of Franklin Cool Springs area and let’s say Brentwood Seven Springs is roughly in between. So there is some overlapping prospect, but that’s not the 100% brand means overlapping prospects between what Cool Springs would offer versus Brentwood. Let’s call it 25% we’d look at both. And then with regard to HCA once expiring is a piece of that about 10% or so that we think is going to stay and then when you break out the other two parts it’s about 40% in Western, 40% Brentwood, and the remaining 20% in Cool Springs. So I think we have look at it in that part so only 40% of what we would get back from HCA would be in the Cool Springs competitive set. I'm sorry in the Seven Springs competitive set another 40 in the Cool Springs area.

Brendan, this is Ted. The only other two things I would add submarket right now is low single-digits so really is very little leasable space, it’s available in the market and then we also looked at really the two holes we had last year for the last 18 months or so life point and tractor supply we backfill those and really quick order we backfill some of the space before the customer even moved out. So I think we feel very good about the space we’re getting back as it relates to the overall market.

And is the price point of what you're getting it back different from kind of new construction rents that you would be targeting for Seven Springs 2?

It is.

Okay, that's helpful. And then Mark wanted maybe look at FFO growth versus AFFO growth sort of going forward. I think we can kind of figure out the FFO growth from sort of the big moving pieces that are there, but given that portfolio is 93% occupied now I think you guys expected to be at that level or little bit higher by the end of the year. How should we think about maybe the TIs and maintenance CapEx. Could that start to move down in 2016 or 2017 versus kind of the run rate that it's been at over the past few years?

Yes, Brendan if you look at Page 2 of the supplemental where you can do the math effectively on our cash available for distribution when you go through the dividends in the CapEx you can see that we have had pretty steady rate of TI capital investment and leasing commission and your point I think you're asking about is as we get further leased up here we have less exposure, the markets are more competitive is that just described that maybe those CapEx numbers will come down. I mean our expectation is that those numbers should decrease over time. The other element to consider is I do think the development deliveries we will potentially spend, we should spend less capital on brand-new building that we put into service over time. So I do think that number should improve whether it’s 2016, 2017 how dramatic that different gets. I think it’s a timing issue; we obviously have Bridgestone, the big development items delivering in 2017. So we’ll continue to monitor that, we’re obviously paying attention to the capital we spend on those buildings, but I think that's a reasonable expectation that number should get wider over time.

Just one footnote to that, when you look at what we spend leasing CapEx of TI and leasing commission per year of term on a relet versus a renewal, the renewal on average for the last four years and by the year and then total weighted average for the period is about half. So if we move towards more renewals versus relapse your thesis holds.

Yes and I was looking at that because it looks like over the past three or four years I think your new lease have been about a third of the total and I think historically you guys tend to run sort of 25% to 30% so it seem like that should be the case. The other aspect maybe just the straight line ran or free rent is there as you leased up it seems like your overall straight-line rent adjustment as a percent of revenue is been running in sort of that 3.5% range over the past couple of years and that higher than it's been historically, is that something that that we would expect to come down maybe some of the development projects you get past the free rent period and this lease up sort of stabilizes.

Now I would expect that Brendan and I mean that makes logical sense to me and again as we get into these you know with about 7% or so the space left a lease you would think those numbers would improve as well.

Okay great thanks guys.

Thank you.

And our next question is come from the line of Jed Reagan with Green Street Advisors. Please proceed your question.

Hey, good morning guys.

Hey, Jed.

So the cash releasing spreads kind of fell back into negative territory last quarter and I know that metric can bounce around quite a bit, but just wonder if there any specific larger leases are may be kind of market mix that might of driven that decline and whether we should think about that 2Q result is sort of a fair run rate for the back half the year?

Yes, hey Jed, Ed I think that there wasn't anyone big lease the drove that as I mentioned in early response there was some leasing that we did during the quarter that is in buildings that we are hosting for sale. So non-core buildings will we did some leasing in order to elevate NOI we get paid well on the proceeds that. So that goes into the mix also wish that there was a unified definition for cash rent growth how that measured across the industry, because I think the math is different from some companies to other companies. But that's while we focus so heavily on the gap because you hardly ever sign a lease that doesn't have some annual escalator in the mid-to-upper 2% and that the compounds annually over the term.

Okay thanks. And can you just remind us about any larger move outs here expecting the next called 12 months to 24 months and how leasing prospects are looking for those spaces I know you touch briefly on HCA maybe there anywhere else?

Yes, the biggest upcoming yet would be one in Tampa where we have it 100% of relet that's about 70,000 square feet after that it drops you under 70,000 square feet. So we the next one after that I guess would be fourth quarter of 16 with the center versus lease also in Tampa which we’ve talked about in the past and they have to two five-year renewal options and discussions are underway with them.

Okay that’s helpful. And then when you think about future disposition so you could use help fund development. Do you think about selling a full or partial stake in your one of the more sort of trophy caliber type of building that you’ve stabilized seriously like [indiscernible] kind of what you're better BBD kind of in-fill of type of buildings?

We think about but not for own the aspects of the JV as I said in my prepared remarks. JVs have purposes and will do JVs but we dramatically reduce our exposure JVs because of the complexity that's inherent with that given different balance sheets and capital stacks and the fact that the property is 99.9% of the time, but collateralized with some loan and it creates complexity in reporting an operating were not able to have a fee simple ownership so we can’t move customers from building-to-building without having some punitive impact on a partner. And there's certain aspects of the financial engineering that comes with joint venture partners. Again we will use them when we need to put we've been very deliberate about reducing our exposure to JVs. Our revenues from JVs are down some 80% from five, ten years ago. So we see these higher quality assets that we've been able to stabilize that still have upside. We think there will some of the last assets that de-lease in the next downturn. And would be some of the assets it would re-lease to quickest in the upside. So we think they are very good ballast, it’s a long answer to your short question, but you know what not long.

Okay. So, I would say - also does a little bit lot of appeal outside [indiscernible]

For example we packaged together three GSA buildings a year or two ago and got a great cap rate on it and sold those for strategic reasons. But I think they would have to be strategic reasons for because, fortunately I think the our shareholder equity investors and the banks have been there for us with regard to funding growth through development and acquisitions and hopefully that won't change going forward.

Should I also think we have an inventory of assets that we think could be candidates for disposition that you know is big enough to fill our appetite for dispositions at least in the near-term, is how I would characterize it.

Yes, that makes sense. And I guess just to follow up on the JV piece of it. I mean do you feel like there is the buyer demand there from a you know let’s say a sovereign wealth type of funds to kind of pursue a structure like that, if you wanted to or those types of folks sniffing around your markets, obviously we know there, they’re in the New York’s and the Boston’s. But do you think there would be demand there?

Hi, Jed, it’s Ted. Yes, look I think we have seen sovereign wealth and other foreign investors, come into our market in the last couple years, certainly to certain degree may be priced out off or don't like the price in the Gateway market. So we have seen come down to Atlanta investing in assets, we know they are poking around Nashville, Raleigh and another markets. So we have started to see that last 24 months.

Great. Thanks, everyone.

Thanks, Jed.

Thanks, Jed.

[Operator Instructions] And our next question is coming from the line of Dave Rodgers with Robert W. Baird Advisors. Please proceed.

Hi, thanks, guys. This is [indiscernible] with Dave Rodgers. I wanted to turn the attention to Riverwood 200, how was leasing activity been since the quarter end at 66.2% and do you guys any competition with Tishman Speyer’s three alliance building?

Yes, good question. Again self-serving on the batch marketing year, but we’re pretty proud of what we've been able to do with moving pre-leasing on that from announcement to the time we put the first shovel in the ground. We’re just now starting that project into almost double the pre-leasing in just a couple months where we’re pleased with that. More potent to your question yes there are prospects that we’re talking with, this building will be done for couple of years. So we feel very comfortable there is some geographic distance between these two buildings, they’re in two different submarkets. So there is not a tremendous amount of overlap between prospects that would consider Riverwood 200 versus the three alliance building. So we’ve got two years before delivery to lease the remaining third of this building and then we pro form it more time after that to stabilization, so we feel very comfortable with this.

Sure makes sense. Are there any concerns on construction and material costs as other Atlanta developments are going up?

So we’re always concerned about that because we’re buying it for whether just to relet our 5,000 square foot space so to build a new building. Those of us in the real estate market are buying that stuff you almost daily, if not daily. So we pay close attention to it. And is part of the prior answer that you know construction prices continue to escalate and that’s negative in that that makes it more expensive. And it’s a - I guess a positive in that to provide some sort of governor on how much spec space would actually come out of the ground because it's so expensive. And since it’s expensive there is a significant gap between first and second-gen rents. And as a result of that gap you can consider the entire office leasing pools prospects for first gen spaces because of that premium.

Right, it makes sense. Thanks a lot Ed.

Sure, thank you.

And our next question comes from the line of John Guinee with Stifel. Please proceed with your question.

Thank you. Okay, Ed, live fast, die hard. You think a lot of questions here about your development pipeline you guys are really bullish, a lot of question. You think the reason that the development is constrained in the Southeast is because Duke is no longer in the office development business?

No, we have great respect for Danny and his team. Yes I think that there's no one company that influences the Southeast with regard to supply and demand and I think that this is a volume of pre-leasing I want to be sure we keep in sync what we have in the way of spec leasing. We've got over half a billion in our pipeline and only 28% of it is back and a lot of it's not delivering for another two years so really this is not your freewheeling gunslinging spec development. It’s very cadence then it comes on the heels of having evidence that we have been able to deliver development pipeline. So I want to be sure that get out of sync with where we are.

I mean Mark, correct me if I’m wrong I might have mentioned this in your prepared remarks, it looks like it didn't access your ATM for the first time in a handful of quarters, is that correct?

Yeah, John to a very, very modest ecstatic I think we raised a couple million dollars in the ATM in the quarter that's correct. We kind of frontloaded, if you remember in the first quarter we raised about $40 million or so in the ATM and now we had plans for the year somewhere maybe double that number. So that’s kind of where we are, we are obviously taking advantage of high prices in the first quarter. So we’ll continue to monitor, we are obviously committed again to this kind of leverage neutral philosophy.

And then disposition Ed, I'm looking at the pictures here I guess was done in the first quarter, couple of the buildings done, built 33 years ago when Ed Fritsch first got in the business single-story, brick paneled, recess windows, selling them for about 48 bucks. How many square feet of this sort of product that would have left in their portfolio?

Normal amount I mean we've gotten rid of billions of dollars of it then I don't know I can’t put a square footage on it right now, but we certainly haven’t gauged by market so there's more of it for example in Greensboro then there is in Atlanta, we consider the bottom portion of the deck to be on the 5% to 8% range right now. We still need to sell half of the portfolio. I think the teams made tremendous progress on what we’ve sold and yes do we have steel frame, brick and glass buildings in submarkets like Brentwood, Maryland Farms absolutely, but they are doing really well. So we’ve called off a lot of the portfolio and we have some more to do and that's what Mark referenced, but we don’t have - we are not a company whose portfolio is dominated by two-story brick and glass buildings.

Great, and last question just for - so your [indiscernible] Pittsburgh don't feel left out, can you talk a bit about Pittsburgh just a little bit?

Sure, Anne and the team have continued to do it tremendously good job up there, we have a site tied up were pre-marketing to see if we can find some prospects and customers for a site that we've tied up and we've done some schematic design work on a building that we call SouthSide Works or in the SouthSide Works area. The pirates are in the hunt for the wildcard so things are good.

Great. Thank you.

Thank you, John.

And so I see there is no further question at this time. I’ll now turn the call back to you.

Okay. Thank you Hussein and thank you everyone for dialing in as always if you have any questions please don’t hesitate to give us a call. Thank you.