Highwoods Properties, Inc. (HIW) Q1 2016 Earnings Report, Transcript and Summary

Good morning and welcome to the 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, April 27, 2016. I would now like to turn the conference over to Mr. Mark Mulhem. Please go ahead, sir.

Good morning, everyone. Ed Fritsch and Ted Klinck are with me on the call today. As is our custom, today's prepared remarks have been posted on the Web. If any of you have not received yesterday's earnings release or supplemental, they are both available on the IR section of our website at highwoods.com. On today's call, our review will include non-GAAP measures such as FFO and NOI. Also the release and the supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Before I turn the call over to Ed, a quick reminder that any forward-looking statements made during today's call are subject to risks and uncertainties, and these are discussed at length in our Annual and Quarterly SEC filings. As you know, actual events and results can differ materially from these forward-looking statements. The Company does not undertake a duty to update any forward-looking statements. I'll now turn the call over to Ed.

Thank you, Mark. Good morning, everyone, and thank you for joining us. On our first quarter call in February, we noted the disconnect between the positive fundamentals of our business and the negative tone on Wall Street, a struggling Dow Jones, and declining 10-year treasury yields were factors driving that negative tone. What a difference 10 weeks makes. In that short timeframe, Wall Street is now reflecting a more positive tone that is consistent with the fundamentals of our business. The Dow was back up around 18,000. The 10-year treasury is stabilized, and investor sentiment across most asset classes has improved. Aside from this, some fear that pending CMBS maturities over the next couple of years have the potential to overwhelm the supply of replacement capital. This talked-about fear reminds us of how a high volume of defaults have been forecasted in the 2010-2012 window, creating a "once-in-a-lifetime opportunity" to acquire on the cheap, which obviously didn't happen. We understand the CMBS market has stabilized somewhat in the past few weeks, and that life companies, domestic banks and debt funds continue to have strong appetites for loans collateralized by U.S. commercial real estate. We're not going to speculate on the volatility of the CMBS market, except for a few observations as it relates to us: one, we have not detected any impact on the bread and butter of our business; two, we have historically not been users of CMBS debt, and we continue to receive attractive quotes and terms from our traditional debt capital channels; and three, with leverage at 38.4% and debt-to-EBITDA ratio of 5.4 times, we believe our balance sheet is well positioned to weather dislocations in the broader capital markets. The key factors that underpin the positive outlook of our business continue to apply. The jobs picture remains positive, markets continue to experience positive net absorption, construction costs are keeping a bridle on development, and rents continue to rise. During the first quarter, we leased over 900,000 square feet of second-gen office space with robust GAAP rent growth of 9.7%, strong net effective rents of $14.54 per square feet and an average term was 6.5 years. Compared to last year's first quarter, we grew same-store cash NOI by 3.7% and increase occupancy 80 bps ending the quarter at 92.7%. We are pleased to have delivered FFO of $0.82 per share during the quarter. This includes a $0.015 of landfill gains and $0.02 in term fees. We are pleased to have successfully closed on the sale of our retail-centric Country Club Plaza assets on March 1 for $660 million which blends to a 4.7% cap rate. We used $420 million of the proceeds to repay short-term debt incurred on September 30 when we acquired Monarch Tower and Monarch Plaza in Buckhead and SunTrust Financial Center in CBD Tampa, buildings which we expect will stabilize in the 7-plus percent range. In addition to strengthening our BBD office presence and capturing accretive growth in earnings and cash flow, we simplified our business model, reduced our annual G&A spend and drove our leverage ratio to 38.4%. The remaining $230 million of net sales proceeds were placed in escrow. As you know, our preference is to redeploy these escrow proceeds to acquire a BBD located buildings in our existing markets as well as add to our inventory of infill land for future development. We will stay true to our mantra of being disciplined allocators of capital. The decision on how much we will use to acquire assets, pay down in debt and/or return in the form of special dividend will play out within the next four months. Since March 1, we have invested $9 million of the escrow proceeds to acquire 14 acres of development land on which we will build up to 216,000 square feet in Brentwood, one of Nashville's BBDs where we currently own 1.5 million square feet that is 98.3% occupied. This is the last remaining raw development parcel in Maryland Farms. Turning to development, we delivered a $56 million headquarters and surgical center for Laser Spine Institute in the Westshore submarket of Tampa and will deliver another $404 million of currently 81% preleased office development over the next six quarters. These deliveries encompassing 1.1 million square feet provide meaningful NOI upside and cash flow stability. We continue to chase additional development deals, mostly on company on land and remain comfortable with our guidance of $100 million to $200 million 2016 announcements. We expect stabilized GAAP deals to continue to average north of 8%. With regard to dispositions, we continue to have a well-defined pipeline of noncore assets at various stages of marketing. This, of course, includes our two remaining wholly owned office buildings in Kansas City, one of which is under contract. We are comfortable maintaining our disposition outlook for 2016. Year-to-date, we have sold $17 million of noncore assets in addition to the $660 million Plaza sale. During the quarter, we closed out yet another joint venture investment, Concourse in Greensboro. This 50/50 JV sold its two office buildings which encompass 118,000 square feet and an adjacent land parcel for $11 million. Only 2.2% of our revenues are generated by joint venture-owned properties. In summary, our business remains strong. As of March 31, only 4.7% of our revenues were scheduled to expire by the end of this year. This is the lowest rollover exposure at this point of the year in over a decade for us. We continue to leverage our brand, our synergistic platform, and our focus on simplicity to hold the line on operating and G&A expenses. And with more fortified balance sheet and $221 million in escrow, we are positioned to create additional shareholder value. We have reaffirmed our 2016 per-share FFO outlook of $3.18 to $3.30 per share, which implies a midpoint of $3.24. As Mark will cover in more detail, our FFO outlook for 2016 does include the range of possible uses of the $221 million in escrow. Otherwise, our guidance is consistent with our long-held past practice, whereby our FFO outlook does not include the effect of potential acquisitions and dispositions that may occur in the remainder of the year. Ted?

Thanks, Ed, and good morning. As Ed noted, we had solid activity this quarter, leasing 902,000 square feet of second-gen office space, and year-over-year asking rents continue to increase across all of our markets. Average in-place cash rental rents across our office portfolio were $23.48 per square foot, 3% higher than a year ago. Occupancy was 92.7% as of March 31, up 80 basis points year-over-year, although slightly down from year-end due to the sale of the 96.9% occupied, 1.3 million-square-foot plaza, as well as two expected move outs in Pittsburgh that I will discuss in just a minute. Given our market dynamics, we remain comfortable with our 2016 year-end occupancy outlook of 92.5% to 93.5%. For office leases signed in the first quarter, starting cash rents were basically flat at negative 0.2%, and GAAP rents grew a robust 9.7%. Average term was 6.5 years, five months longer than the prior five-quarter average. And leasing CapEx was $17.65 per square foot, 13.6% lower than the prior five-quarter average. We are pleased with the economics we garnered, with a net effective rents of $14.54 per square foot, 5.9% higher than the prior five-quarter average. Turning to markets. Our Atlanta portfolio was 92.1% occupied at quarter end, up 260 basis points year-over-year. During the quarter, we leased 251,000 square feet, including two long-term federal government renewals encompassing 212,000 square feet with the CDC in Century Center with very low-leasing CapEx. We only have 198,000 square feet of remaining 2016 rollover exposure in Atlanta. This includes a previously disclosed 58,000 square foot, second quarter known move out at Monarch in Buckhead that was factored into our acquisition underwriting. We are very pleased with the operational performance of our 1.9 million-square-foot Buckhead portfolio. Year-over-year asking rents are up 10% on average. After backing out near-term move-outs at Monarch, move-outs known before the acquisition. Occupancy in our Buckhead portfolio grew 240 basis points from 86.4% in September 30 to 88.8% at March 31 and is projected to increase another 200 basis points by year-end. Strong growth in Nashville continues. 129,000 square feet of positive net absorption in the first quarter. The market's unemployment rate is 3.5%, 150 basis points below the national average. Direct market vacancy is 7.5%. Occupancy in our portfolio is 99.6% at quarter-end, up 40 basis points sequentially and up 430 basis points year-over-year. And we have less than 100,000 square feet set to expire by year-end. The construction of Seven Springs II, our 131,000-square-foot office building with structured parking, is well under way. This $38.1 million development is 43% pre-leased, with completion scheduled for the second quarter of 2017 and stabilization in the third quarter of 2018. The volume of prospects is strong. In Raleigh, office jobs grew 3.2%, 100 basis points above the national average, and the office market posted yet another quarter of positive net absorption. We garnered very strong average GAAP rent growth of 18.7% on over 200,000 square feet of second-gen office leases signed during the quarter. Occupancy in our Raleigh portfolio was 93% at quarter end, up 20 basis points from December 31 and 270 basis points year-over-year. Also, we are working with a sound prospect to GlenLake Five which would bring leasing to 94% and stabilize the building well in advance pro forma. With CBD Pittsburgh, occupancy in our portfolio rolled down from 95.7% at year-end to 91.4% due to 96,000 square feet of anticipated move-outs at our 1.5 million-square-foot PPG Place. One customer, Highmark, a health insurer, consolidated into a building it owns and another customer, Ketchum, a marketing agency, relocated in a very different, low price point product. Pittsburgh's class A CBD market is a solid 94% occupied, and we have 175,000 square feet of strong backfill prospects with asking rent 5% to 7% higher than expiring rents. In conclusion, leasing volumes and the ability to push rents continue to be solid, reflecting positive momentum in our markets the demand for our well-located BBD office product. Even with no move-outs taking occupancy to the 92% range mid-year, occupancy will rebound and average occupancy for full-year 2016 is projected to be some 50 basis points higher than last year. Mark?

Thanks Ted. We've had a positive start to the year as indicated by our first quarter financial results. As Ed outlined, for the first quarter of 2016, we delivered FFO per share of $0.82, including $0.035 of land sale gains and term fees. The term fees were mostly from a customer that vacated 421 Fayetteville, formerly the Bank of America Plaza in CBD Raleigh this past December. This space was backfilled by Kimley-Horn's headquarters. After adjusting FFO for land sale gains and term fees, we grew FFO per share by a stout 11%. The adjusted FFO also include the impact of issuing 1.1 million shares of stock during the quarter, and our G&A cost being approximately $3 million higher in Q1 than the run rate for the next three quarters due to the routine first quarter expensing of the annual long-term equity grants. The primary FFO growth drivers for the quarter were contributions from value-add acquisitions particularly the Monarch and SunTrust acquisitions that we closed on September 30 of last year, higher same property NOI due to occupancy gains and higher rents and highly preleased developments coming on line. These positive drivers were offset by one month of lost NOI from closing the sale of Country Club Plaza on March 1. The GAAP income statement this quarter reflects the very significant book gain of $414 million or $4.17 per share on the sale of Country Club Plaza which is classified as discontinued operations. Turning to our balance sheet, we used Country Club Plaza net sale proceeds to pay off the $350 million bridge facility and pay down approximately $70 million on our line of credit. The remaining proceeds are being held in escrow, as Ed mentioned. Our quarter-end leverage ratio was 38.4%, and debt-to-EBITDA was 5.43 times. Setting aside how we use the escrow dollars, we will spend approximately $150 million on development in 2016, and we'll fund that through operating cash flow, ATM issuances, disposition proceeds, and borrowings on our line of credit. We do anticipate some financing activity in the second half of 2016 to reduce our line balance and prepare for a $380 million, 5.8% bond maturity in Q1 2017. We also obtained a $150 million of forward-starting swaps that effectively locks the underlying 10-year treasury at 1.9% with respect to forecasted debt issuance before the end of Q1 of next year. As Ed mentioned, we've reaffirmed our FFO outlook of $3.18 to $3.30 per share, which at the midpoint is a 5.2% increase over 2015. In dollars, the midpoint of that range for 2016 is $326 million versus $300 million in 2016, an 8.7% increase year-over-year. We are also forecasting 4% to 5% growth in same-property cash NOI for the full year. Our outlook includes various outcomes with respect to the $220 million of remaining escrowed fund. As Ed mentioned, our preference is to use those funds to acquire more BBD-located buildings and land. Other possible options include paying down debt and/or other general corporate purposes which could include paying out any remaining capital gains in the form of a special dividend. This range of outcomes has been factored into our 2016 FFO outlook. Otherwise, consistent with our past practice, we do not include the operational or funding impact from potential incremental investment activity until such transactions are announced. Two things to keep in mind regarding our FFO trajectory for 2016. The first item relates to the timing of the full reinvestment of the Country Club Plaza proceeds to replace a lost NOI from net disposition. With two-thirds of the proceeds invested in Sun Trust and Monarch, the remaining escrow to proceeds will likely not be redeployed until the second half of the year, therefore, impacting second quarter year-over-year FFO comparisons. We also have previously disclosed known move-outs that will likely result in 30 to 40 basis points of lower occupancy at the end of Q2 versus Q1. We are fortunate to have a solid FFO growth story for all of 2016. We want to be transparent around how lumpiness may impact the quarterly results. Operator, we are now ready for your questions.

Thank you. [Operator Instructions] And the first question comes from the line of Dave Rodgers from Baird. Please proceed with your question.

Yeah. Good morning, guys. Maybe starting with the ATM activity in the quarter I guess just from a perspective of capital needs and sources and uses and kind of the rationale to get that done so quickly in the year, given all the proceeds they have coming in.

Sure, Dave. It's Mark. So, as you know, we have committed to growing the company on a leveraged neutral basis. I think you heard us describe we anticipate about $150 million or so of development expenditures during the year. We just took advantage of share price, and we were able to raise an attractive level. And we think that it's just a prudent way to kind of run the company and continue. Obviously, what we said was our preferences to put those escrow funds to work. And so, we just felt like that was an important thing to get done given the dynamics of the economy here.

Great. Thanks Mark, for that. And then, maybe Ed or Ted, talk a little bit about the activity and the demand to start new development. You've been pretty cautious about starting any speculative development. So, just curious on kind of your thoughts about the demand around new projects going forward and what that might do. I guess the development starts this year.

Yes. So, our guidance is out there and we reaffirmed our 100 to 200 of starts. Dave, you know that we typically have projects in the size of $40 million to $50 million. So, think of that in terms of two to four or five total announcements for the year. We do have the 5,000 [indiscernible] green projects that we announced at the beginning of the year which is in the low $40 million. As Mark has continued to tighten and those who are interested in relocating or expanding and needs significant sized footprints, obviously new development becomes a prominent part of what their options are. We have plenty of company on land and obviously the balance sheet in order to accommodate that. We're currently in conversations with six different customers who would predominantly prelease or totally prelease a building. They're in different stages of conversation. Chances of them all happening are slim, but chances of some of them happening are relatively strong and we think that the price of construction continues to keep [indiscernible] on their being a significant amount of speculative construction done across the markets by an array of developers.

You made that comment in your prepared comments as well. Is there anything more you can elaborate on there? In terms of just construction cost and the increases that you're seeing and how impactful those have been to you as well?

Yeah. So, obviously, it not only impacts new development but construction cost play a role in releasing as well as we re-tenant spaces. We continue to see about a half of percent increase per month in total construction pricing just as a reminder it didn't abate. They're on a great recession so, this is compounded for quite some time. So, clearly, it's an expensive option, but there's still those who are seeking single customer type building build to suit and the only way to get it in the tightening market in many cases is going to be a build to suit. We have seen some prospects that we've been in conversation with that once they have seen the pricing for must and some of our peers they've decided to just double down and stay where they are but there's still point that talking about the possibility of going into something new. We've always said it's a very protracted process because there are a number of options that they can pursue and at different pricing points, but it's safe to say that they're all 15% to 30% more expensive than if they were to stay put.

That's helpful. Thanks. And I think last question for me. Just talk about and maybe this is for Ted, talk a little bit about the demand that you're seeing in the Florida markets. I heard your comment on Atlanta, Nashville, Raleigh, and Pittsburgh. But I'm curious about on Florida and if you're seeing any kind of rebound and activity there...

Hi, Dave. Look, I think it's definitely been behind. The recovery has been slower than our other markets, but I think we continue to see vacancy rates that were class A properties and certainly in Tampa, they're now in the single digits. So, we do have asking rents that are up 4% or 5%. Demand, remains steady. I think the local economy continues to grow. So, I think it's just a matter of time that we're going to see some acceleration on leasing - new leasing and all that in Tampa. In terms of Orlando, really similar story, was slow to recover. Class A CBD vacancy rate is around 10%. So, it continued to improve. Asking rents were up 4% or 5%. Not a lot of large blocks of space. So, again, while it's been slow to recover, we do think with the projected job growth in the next 12 months it's going to continue to improve.

Dave, [indiscernible] on your last two questions. Together, I would just point to the LSI delivery. That's a good 100% pre-lease $56 million project that we just delivered in Tampa. So, not a lot of existing options available for them and they chose to build-to-suit.

Great. Thank you all.

Thanks, Dave.

Thanks, Dave.

And our next question comes from the line of James Feldman from Bank of America. Please proceed with your question.

Great. Thanks. Can you talk a little bit more about the district markets? I mean, obviously we've seen bankruptcies from oil-related and energy-related companies. But as you guys are on the ground or it sounds like you feel pretty good about your potential to back fill, but just what are the risk of that market and across the different submarkets that may be competitive? How are you guys thinking about it?

Hey, Jaime. This is Ed. I'll start. We're very bullish on Pittsburgh, our occupancy there. When we start it, it was in the low 80s and Annie and his team got into mid 90s and they've held it there. Over the quarter-over-quarter, we dropped 4.3% and it was basically due to the two customers that Ted outlined in his script with Highmark and Ketchum. In the releasing of those, we expect north of 5% increase in rents and Annie currently has a pretty healthy list of about 175,000 square feet of prospects and anticipates about half of that will hit before year-end and the other half in the first half of next year. So, we feel pretty confident about the backfill, the buying of prospects, the ability to push rent. Also as Ted said in his scripted remarks, the CBD Class A market is 94%. So, the downtown market really hasn't seen an impact from the energy industry. Now, if you go out into some of the suburbs that has been a little bit more evident there. But the downtown market is not. In addition, we've been able to further energize the ground floor and some of the below-grade area at PPG complex with restaurants and activities. So, it's a better-positioned asset today with those additional amenities and another large restaurant, craft brewery coming on board on this year. So we feel with the increase in energy on that ground floor, the volume of prospects that we have to backfill the space and the upsize of rent, and then just the overall health of the downtown market, we remain bullish on it.

Okay. And then if you think about the actions to redeploy the additional proceeds of Country Club Plaza, can you give us some color maybe how the acquisition and disposition markets have changed over the last six months? And in terms of the investments you might be looking at more stabilized or value add, just kind of what's out there and where the opportunities might be opening up?

Yes. I'll start and then maybe toss it over to Ted. We think, Jamie, that there's a little bit of a disconnect between how some may perceive where cap rates are. So we have now underwritten in excess of $1 billion as we evaluate various opportunities to deploy the remaining third of the proceeds from the CCP sale. We haven't seen any movement in cap rate. And I know that there has been - some has been written and even in the gateway cities that they've seen 25 to 50 bps re-leased if you're the buyer in cap rates, but we haven't seen that. And we market-tested that in our underwritings, and we've seen it in the things that we have pursued and had conversations about whether it'd be off market or broadly marketed. We just haven't seen any reduction in the volume of interests both in pricing and number of bidders for institutional quality, better located assets within the BBDs that we're pursuing. So, maybe just a little bit of - because I know there's been plenty written that there's a perception and maybe it's tied to what's going on in San Francisco, maybe it's tied to what's going on in New York. But we haven't seen that inflection. So, there are ample opportunities there, and those opportunities which we're pursuing are also being aggressively pursued by others. And so, no expected release in those cap rates.

Okay. And are you pursuing more for release of value add?

Yes. It's...

On the above.

Yeah. Both genres are on the prospect list to varying degrees. Yeah. it covers both.

Okay. And then finally, looking at your top tenants list, you've got HCA and Sun Trust from the Horizon as within the next year and a half. Just thinking about those leases or just any other large renewals or large expirations. I know you can't mention some on the call. But can you address any early discussions with those tenants or any others that we should be thinking about?

Sure. With regard to HCA, we talked about this publicly in a number of times where they are going in to a building in downtown. So, they have multiple lease instruments with this. There are three of them which expire in the first quarter of 2017 that total about 235,000 square feet. For want those leases are basely in two different buildings. One, there is about 103,000 square feet. We have a 62,000 square foot prospect for one of those, which equates about 60% of the space that they would give up in Brentwood. But it's early and we remind everybody that our west end where the other building is were 100% occupied and in Brentwood where we have 1.5 million square feet were 98.3% occupied. We really see good opportunity to release these spaces in a relatively short period of time. If we want to get space back, these would be the two places to get it and we have plenty of notice and Bryan, Jimmy, and Jeff, our team there are focused on this. And as in the side - as Jimmy and Jeff try to figure out how to make a living be a 90% occupied in their portfolio obviously, they're investing a lot of their efforts to backfill those two spaces. And the other is just that we only have 4.7% of revenues that will expire between now and year end. So, I think that you give us ample opportunity to focus on this bigger box that would be coming to us first of next year. The only other thing that I would add to that is the value-added spaces because when we announced the acquisition of SunTrust and Monarch in September of last year, we noted that there were some known early move outs and those were defined by us as customers who would be moving out within 12 months of acquisition without a given notice and we knew about. And there's clearly opportunity for leasing and upside there and we're seeing some momentum on all three of those buildings.

Okay. Great. Thank you.

Thanks, Jamie.

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

Hey, good morning, guys. Just taking on Nashville, you mentioned the Brentwood land acquisition there. Can you talk about the game plan there just in terms of timing for that potential development and any actions or conversations that might be going on with perspective tenants? And then, just related to that, given how tight that market is these days, just in Nashville overall, are you going to be able to accelerate the rent growth here you're pushing for in that market?

I'll do the development and, Ted, maybe you can hit on the rent. With regard to development, Jed, we announced Seven Springs II which is 131,000 square feet. And we announced that 100% spec. And shortly thereafter, Brian and team were able to secure a 43% user with a healthcare company. And so, that was a positive. And we also have more prospects looking at that building today, another 20-some thousands of vibrant prospects, I would say. So, it's early. We just poured a 34th floor. It's moving along, on schedule, and I think to have started 100% spec, be it 43 now and have others that are interested in the building. We've only poured up to the fourth floor. I'm pretty comfortable with that. Regarding the [indiscernible] Springs, we were excited to be able to bring that parcel of land into our portfolio as it was truly the last raw piece of development land available in Maryland Farms. We can get up to 216,000, 218,000 square feet in two different buildings there. And so, we are working through the process of necessary municipal approvals to plot the builds. If we were to go after it fast track. The earliest is we could have a building sealed and online would basically be the end of 2017 to very - maybe first quarter of 2018. So, we're now putting together the final touches on the elevations and the typical floor plates and the side planning, et cetera. But it just recently came in. So, when until we and it locked up that we decided to invest significant dollars on the design aspect. But that's coming along very nicely. And right here in short order, our national team will be armed with all the semigloss images that they need to have to be up marketing that. Ted, on the ramp?

And Joe, in terms of just the market in general, I mean, I think it's national continues to be our strongest market. We're seeing continued strong demand across many industries. Rents in general are a record highs, the Nashville today and at the same time vacancies at a record low. I think first quarter was the fifth consecutive quarter vacancies hit a new record low. So, that's enable us to really push rents. I think - we wish we had more space to lease and more rollover occurring. But what little we have, we've been able to really push rents on a cash basis and obviously on a GAAP basis.

And remind the order of magnitude, how much you're pushing for these days?

I think rents gone up certainly asking rents over 10% in the last probably even six to nine months. So, it's pretty strong.

Okay. That's helpful. And you guys mentioned it sounds like you're seeing values holding up for better quality products in your markets. Are you seeing any evidence of asset prices are [indiscernible] softening for lower quality markets or riskier assets?

Not materially. I mean, I think we'll see a decent activity really in all of our markets, and most of our product types both A and even the B, then like the Bs are slower as you would expect, maybe slower to recover in terms of leasing. But we're seeing that be steady. And the number of leases we're doing has remained steady over the last five or six quarters, and that's across our entire portfolio. So haven't really seen any softness to speak of.

I was thinking more on the asset pricing side of things and kind of overall valuations. Anything there as far as softening just with the recent market volatility for kind of riskier or lower-quality stuff?

Still on the leasing, I got it. Look, I think overall maybe on a lower quality assets, pricing has - I think they priced fewer betters, and maybe there is - has been a little bit of pricing pullback, as buyers are doing some price discovery maybe on the B quality assets. But we just haven't seen on the trophy side.

And I think the CMBS, Jed, more follows the lower end than the higher end, and that could be part of that explanation that the fears that are out there or the wonderment that circles CMBS, it may be influencing that easing of cap rates on the lower end of the spectrum, and therefore not touching the top end.

That make sense. And then do you have a feel for sort of quantifying the amount of change you've seen so far, or is it there's not been enough out there to draw any conclusions yet?

Yes. I just don't think there's been enough trades out there to really - enough data points to determine that.

Okay. fair enough. Thank you, guys.

Thanks, Jed.

And our next question comes from the line of Sumit Sharma from Morgan Stanley. Please proceed with your question.

Hi, Mark.

Hi, Sumit.

Quick question about some of your 2017 expirations, the $380 million that is the unsecured debt that's coming to you? I guess I'm trying to understand how should we view the strategy that you're going to take. Are you going to swap it with another tranche and what sort of spread are you looking at? Maybe early to look at this but just wondering if there's a possibility for prepayment in this year?

Yeah, Sumit. You're talking about the maturity that I think is around April 1st of 2017. It's 5.88%, $380 million maturity.

Correct.

I think we're likely to get it with probably a bond offering at some point. We probably will look at hedging where that makes sense as you heard [indiscernible] have already done swaps at $150 million at 1.9% Treasury. So, we're obviously monitoring and paying attention. I think what you're going to see is still kind of flat now than our maturity scheduled. So, we've got some holes in the maturity schedule when you look at it that will give some flexibility around doing that. I think we can obviously save some interest cost on that. So, we will approach that as we get into the second half of the year, and be prepared by the time it matures in the first quarter to have it filed.

Great. Thank you so much.

Sure.

The second question is around the - it's a rather small development, but just out of interest, is Enterprise 5 sitting, I think, in Raleigh or [indiscernible]? And the construction seems to be close to completion. So, wondering about any preleasing activity on the industrial given the state of the industrial market is pretty - still pretty bullish. And you also mentioned in the previous call that there's some 360,000 square feet of additional depth capacity there, any chance that you pull the trigger on that earlier? What sort of conditions you were looking to sort of start work on further industrial development as to say that?

Yes, [indiscernible]. Good question. One, the buildings are 131,000 square feet and it's in Greensboro, and it has now been completed. We have a number of prospects who are looking at the building and we actually have a sign instrument of intent with one customer for 100,000 square feet with the contingency and the depth we're working through Rick and Reggie and the team have had good showings. In fact, I wonder if they haven't called you before they plant the question. They have asked us if they can proceed with submitting a package for approval for them doing the next building based on the level of activity they had on this. We're going to wait and just to get a little bit more from preleasing on this before we would go to at the next building unless the next building comes with some amount of preleasing but small dollars. It's $7.6 million on this one. The other building would be in the same zip code with good activity and expect to certainly fall within pro forma ramps and stabilization dates.

Okay. Thank you so much. And apologies for getting the geographies wrong [indiscernible].

You were only off by about 80 miles, so no problem.

[Operator Instructions] And our next question comes from the line of Jon Petersen from Jefferies. Please proceed with your question.

Great. Thanks. I wanted to just quickly when in terms of guidance for same-store NOI, you, guys, were at 3.7% this quarter. I think your full year guidance was 4% to 5%, right? But you talked about the tenant moving out in the second quarter, so I would think that would have a negative impact. I'm just trying to understand what kind of puts and takes are and kind of maybe on a quarter-by-quarter trend like what's going to get us to that 4% to 5%. And am I right to assume it's going to be more negative or not negative but decelerating next quarter?

Yeah, Jon. It's Mark. I think there's a few things to think about here. Obviously, we have contractual bumps in the leases. We're getting increased rents in some of the markets, we got about percentage on average occupancy pick-up through the year that will come back to you. And it's probably back-end-loaded. So, third and fourth quarter should be stronger in our projection and model. We've had really good operating expense control, so our folks have done a really good job controlling operating expenses. And so, I think that's going to help us here. And we also have straight line rent that came as a result of free rent concessions that we made in some of the leasing that drove maybe the higher same-store numbers that kind of burned up. So, you're going to see a lower straight line rent number, especially in the second half of the year that will influence those numbers. So, we're comfortable with the guidance we've given a 4% to 5% same-store for 2016 and believe about strongly that that will happen again. Maybe it's a little back-end-loaded into the third and fourth quarters.

Okay. All right. That's helpful. That's all I got. Thanks

Thanks, Jon.

[Operator Instructions]

So, operator, no questions from that guy at Wells Fargo?

No, sir. There is no question.

Okay. Bye. I want to thank everybody for dialing in. Of course, if ever you have any additional questions, please give us a call. Thank you.

Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.