Highwoods Properties, Inc. (HIW) Q4 2017 Earnings Report, Transcript and Summary

Good morning, and welcome to the Highwoods Properties Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded, Wednesday, February 7, 2018. I would now like to turn the conference over to Brendan Maiorana. Please go ahead, sir.

Thank you, and good morning, everyone. Joining me on the call this morning are Ed Fritsch, President and Chief Executive Officer; Ted Klinck, Chief Operating and Investment Officer; and Mark Mulhern, Chief Financial Officer. 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're 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, NOI and EBITDA. Also, the release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Before I turn the call to Ed, a quick reminder that any forward-looking statements made during today's call are subject to the 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 to Ed.

Thank you, Brendan, and good morning, everyone. As we've all witnessed, it's been a volatile start to the year in the financial markets. The Dow increased 1,000 points faster than any time in history and then dropped more than 1,100 points in a single session earlier this week, the largest point drop in a single day. Interest rates have also experienced sizable fluctuations. The U.S. 10-year yield increased 40 basis points from the start of December to yesterday's close. REIT stocks have bounced around as well, with the RMZ down almost 10% through yesterday's close. With all the volatilities surrounding the financial markets, it's easy to get swept up in the headlines. However, conditions in BBD office land remains steady. In short, here are several reasons to be update -- to be upbeat about the outlook for Highwoods. Economic growth nationally has been steady to increasing. And across our Southeastern markets, we've seen continued job growth, and real estate fundamentals remain healthy. In particular, Nashville, Raleigh, Atlanta and our Florida markets continue to post some of the highest job growth and population growth rates across the nation, and there are no yellow flags suggesting these trends are going to reverse anytime soon. Second, our BBD locations continue to outperform their broader markets with occupancy on average 350 bps, above their broader market averages, and rents on average 4% higher. Third, new supply remains measured across our markets. Steady increases in construction costs and a measured lending environment for speculative projects gives us comfort that we're not likely to see a rise in the volume of speculative development in 2018. Fourth, we have a $440 million development pipeline that is 78% pre-leased. This pipeline will provide strong cash flow and FFO upon delivery and stabilization over the next two years. Fifth, our land bank can support over $1.5 billion of additional office development, and we continue to have conversations with additional pre-leased and build-to-suit prospects. Sixth, our balance sheet is in excellent shape, with debt-to-EBITDA at less than 5x and no meaningful maturities until 2020 except for a $200 million maturity this April that has a 7.5% coupon. Seventh, and finally, we are well positioned to grow our cash flows moving forward. Last quarter, we briefly spoke about Amazon's HQ2. As we all know, Amazon has slashed the list of 238 cities that submitted bids by 92% to Amazon's final 20. We're proud 4 of our 9 markets, including more than 60% of our revenue, have exposure to the final 20 list. It is affirming to see Amazon recognize Atlanta, Nashville, Pittsburgh and Raleigh all have deep tech worker talent pools, along with many other highly attractive economic and quality-of-life attributes. Turning to our results. 2017 was a strong year for our company. First, we are well above target for nearly all of our operating metrics. Our FFO was $3.39 per share, towards the high end of our original guidance of $3.27 to $3.40 despite $0.02 of dilution from dispositions. As you know, our practice is not to include the effect of future dispositions and acquisitions in our original FFO forecast. Similar to our FFO performance, our same-property NOI growth was plus 4.1%, above the high end of our original outlook of 2.5% to 3.25%. We view this as particularly strong as it comes on the heels of a plus 5.2% growth in '16 and a 6.7% growth in 2015. The 3-year average of more than 5% underscores the healthy fundamentals across our portfolio. We achieved rent spreads on second-gen office leases of plus 1.6% on a cash basis and plus 14.7% on a GAAP basis, all while keeping leasing costs in line with expectations. Second, we delivered $394 million of development, and we're able to replenish our development pipeline with $225 million of new development announcements. Our development arm continues to be a key driver of growth for our company. Third, we continue to cull our portfolio with the sale of $150 million of noncore properties. Fourth, we improved the balance sheet with several refinancings and recast our credit facility with an increased capacity and reduced our borrowing spread. In Q4, we delivered FFO of $0.84 per share including $0.01 from a land sale gain. Our same-property cash NOI growth during the quarter was plus 2.2%, which includes a full quarter impact of Q3 '17 move-outs in Atlanta and Richmond. We leased a robust 1 million square feet of second-gen office at positive cash rent spreads of 2.6% and GAAP rent spreads of plus 16.8% with a weighted average term of 7.2 years. Portfolio occupancy finished the year at 92.9%. As a result of our continued strengthening cash flow, bolstered by improving rents and $394 million of development deliveries in 2016 -- 2017, we increased our dividend 5.1% to an annualized rate of $1.85 per share. As you know, we didn't cut our dividend during the great financial crisis or thereafter. When evaluating the dividend, we balance our needs for capital reinvestment in the portfolio and our taxable income levels, and we feel confident the increased dividend in 2018 won't diminish our coverage ratios. As a reminder, this increase follows on the heels of our 3.5% increase in 2017 and our $0.80 per share special dividend in 2016. As you saw last evening in our earnings release, we provided our initial 2018 outlook. Our FFO outlook is essentially flat with 2017 at the midpoint, which is below the growth rates we've delivered over the past few years. This is largely attributable to dilution from dispositions late in 2017 and a lack of corresponding acquisitions. In addition, our FFO outlook does include the pending sale of Highwoods Tower Two in Raleigh, which was announced last October and will close in 2Q '18. A few of the other major items in our outlook includes same-property cash, NOI growth of plus 1% to plus 2%. And while this is below the 3-year average of more than 5%, high growth should occur as occupancy stabilizes. Our disposition outlook is $61 million to $136 million, similar to our original range in 2017. We already have $31 million under contract with the aforementioned Highwoods Tower Two in Raleigh. Our acquisition outlook has a low end of 0, and we have a placeholder of $200 million at the high end. This range may sound familiar since it's the same as our original guidance in 2017. We didn't acquire any buildings last year. And while there's a lot of capital dressed out and on the sidelines ready to go into BBD locations, there are very few opportunities available. We announced last evening the acquisition of 2 development parcels in the Gulch district in CBD Nashville using $50.3 million of 1031 exchange proceeds. One parcel is 5.4 acres, and the other is 3.6 acres, and there are zoned and entitled for more than 1.2 million square feet of office development and street-level retail. As a reminder, we've monetized a meaningful amount of our land bank during the past several years through a robust development program. We believe having an attractive inventory of land for potential build-to-suit and other development projects is an important ingredient to the success of our development platform. Lastly, our development announcement outlook of $100 million to $350 million. We continue to have conversations with build-to-suit and other anchor prospects. Last evening, we announced we're in advanced negotiations with Asurion regarding a potential $252 million 479,000 square-foot build-to-suit in the Gulch district in CBD Nashville on the 5.4-acre parcel we just acquired. We're excited to be working with Asurion, a prospective new customer for Highwoods, on the visioning of this important project as we move towards a mutually beneficial agreement. And I'll turn the call over to Ted.

Thanks, Ed, and good morning. As Ed noted, fundamentals across our Southeastern footprint remain healthy. We continue to see strong job growth, business-friendly conditions and high quality of life driving solid demand for office space. According to Forbes, 4 of our 6 states rank in the top 10 best states for business. And of note, North Carolina took first place on the list, moving up one spot from 2016. This ranking evaluates states based on cost to do business, labor supply, regulatory environment, economic climate, growth prospects and quality of life. Turning to our stats for the quarter. We leased 1 million square feet of second-gen office space, with an average term of 7.2 years. GAAP rent spreads were positive 16.8%, beating our previous 5-quarter average of 15.5%. It also represents the seventh consecutive quarter of double-digit increases. We garnered positive 2.6% cash rent spreads, 50 basis points better than our 5-quarter average. We continue to push rents throughout the portfolio. Average in-place cash rents were 4.3% higher at quarter-end compared to a year ago. Our Q4 same-property cash NOI growth was positive 2.2% despite average occupancy being down 90 basis points compared to the prior year. This growth was driven by annual bumps on nearly all of our leases and solid rent spreads on commenced leases. As we mentioned during our third quarter call, we anticipated an occupancy recovery in the late fourth quarter. We are pleased by the 80-basis point increase from the third quarter to end the year at 92.9%. The largest drivers were in Richmond, where a team has backfilled a meaningful portion of the 163,000 square foot former SCI space; and in Orlando, where we're seeing improved activity across our portfolio. The sale of 254,000 square feet, including our last wholly-owned building in Kansas City and building in Raleigh to a user, BB&T, contributed 20 basis points of the sequential improvement. Turning to 2018 occupancy. Our two largest known move-outs are the FBI in Atlanta on January 31; and Fidelity in Raleigh, which we now know will vacate on July 1. We expect occupancy to move down in the first half of the year and then recover in the back half of the year to around 92%, the midpoint of our outlook by year-end. Now to our markets. According to Avison Young, Raleigh-Durham's overall vacancy rate at the end of 2017 was 12.7%, down 30 basis points since the third quarter. Total fourth quarter net absorption was approximately 381,000 square feet, a slightly accelerated pace from the 1.25 million square feet absorbed in all of 2017. The forecast for 2018 is another solid year of demand and healthy fundamentals. Throughout our Raleigh portfolio, we continue to generate strong rents as evidenced by GAAP rent spreads of 29.6% on signed deals in Q4. This marks the 10th consecutive quarter of double-digit positive GAAP rent spreads. Our in-service Raleigh portfolio is 94.7% occupied, up 200 basis points year-over-year. Additionally, we have a strong prospect for 20% of our 167,000 square foot, 46% leased, 5000 CentreGreen development in Cary's Weston submarket. We continue to feel confident about reaching stabilization on or before our Q3 '19 pro forma date. As noted above, Fidelity will give back 178,000 square feet. We mentioned the last quarter, the lease expiration is November 30. However, the customer will return the space to us on July 1 while prepaying full rent. This gives us extra time to market the space while receiving full economics under the original lease terms. In addition to the nondiscounted prepaid rent we are to receive on June 30, they have already paid a restoration fee of $4.8 million. Fidelity's rent is approximately 10% below market, and our remaining in-service portfolio of 1 million square feet in the Weston submarket is 100% occupied. In Nashville, according to Cushman & Wakefield, the market's 2017 construction completions increased office inventory by approximately 2 million square feet. As a result, overall occupancy increased from 5.4% to 8.5% year-over-year, and Class A vacancy increased from 4.7% to 9.6%. At Q4 2017, there was 1.7 million square feet of 43% pre-leased office under construction, well below the 2.8 million square feet under construction at year-end 2016. Given Nashville's continued level of attractiveness, both from an economic and quality-of-life perspective, we expect the market will appropriately absorb the new product. At year-end, our portfolio occupancy was 95.7%, and we posted solid GAAP rent spreads in Q4 of positive 25.3%. As discussed on recent calls, our Florida markets are seeing positive growth signs. Orlando ranked seventh out of 200 cities on the Milken Institute's recently published index of the best-performing large cities in the United States, which evaluates metro areas on a relative growth. It's also worthy to note 6 of the top 25 metros were in the state of Florida. Based on data from the Bureau of Labor Statistics, total office employment growth grew 3.1% year-over-year, which was the highest in all of our nine markets. Orlando leasing fundamentals were also tightening. Net absorption in 2017 was approximately 900,000 square feet, which represents an increase of 53% year-over-year. Our Orlando portfolio was 90.1% occupied at the end of 2017, up 190 basis points from last year. Further, we reported positive 12.8% GAAP rent spreads on deals signed during the quarter. We look forward to seeing further growth in Orlando portfolio throughout 2018. In Atlanta, business conditions also remain healthy. According to the Department of Labor, Atlanta produced 2.1% job growth in 2017, beating the national rate of 1.4%. Atlanta's unemployment rate is in line with the national average of 4.2%, down 60 basis points from a year ago. Class A vacancy decreased 20 basis points quarter-over-quarter to 15.6%. Net absorption was approximately 380,000 square feet in Q4, the highest quarter of the year. We had a strong leasing stats in Q4, with 366,000 square feet of signed deals, with an average term of 9 years. This includes a large 10-year renewal with the CDC. GAAP rent spreads were solid at positive 15%. The relet progress on approximately 137,000 square feet of known move-outs in our Buckhead portfolio has been slower than expected. We have full confidence in the positioning of this space, given its quality and location. Occupancy across our Atlanta portfolio is projected to be down as we absorb the FBI move-out I mentioned earlier. We have already backfilled 28% of this 137,000 square feet we got back last week, and we're seeing steady interest from prospects. In conclusion, demand across our markets is healthy. There's limited risk from new supply, and the forecast is upbeat. We remain confident in meeting our development pipeline pro forma stabilization dates and backfilling some of our larger vacancies. Mark?

Thanks, Ted. As Ed outlined, 2017 was a successful and active year for our company. Our operational performance exceeded the high end of our expectations across most metrics. Same-property cash NOI growth of 4.1% was strong, exceeding the high end of our original forecasted range due to solid rent growth and relatively stable occupancy. 2017 was the third consecutive year of strong same-property cash NOI growth, a top 6.7% in 2015 and 5.2% in 2016. Additionally, for those of you who follow the industrial REIT sector, we believe our same-property growth methodology is mostly in line with the new calculation methodology of the industrial REITs, although we're slightly more conservative with the timing of when development properties are included in our same-property pool. As Ed also described, we were active on the investment activity front. We placed in service $394 million from our development pipeline, announced $225 million of new developments and disposed of $150 million of noncore assets, all while maintaining our strong balance sheet with leverage of 35% and debt-to-EBITDA of 4.7x. For the fourth quarter, we delivered net income of $0.55 per share and FFO of $0.84 per share. The unusual items to note in Q4 were approximately $900,000 of debt extinguishment cost related to recasting and extending our credit facility and a term loan; a land sale gain of approximately $1 million related to the sale of Highwoods Tower One in Raleigh; and income included in other rents of approximately $1 million related to the amortization of the $4.8 million restoration fee we received from Fidelity in Raleigh. The remainder of the restoration fee will be recorded as other rents in 2018. Our 2017 FFO of $3.39 per share is at the high end of our original outlook of $3.27 to $3.40 per share, even with $0.02 of dilution from dispositions that was not in our original guidance. The stronger performance was largely driven by better-than-expected NOI growth. On a year-over-year basis, the primary drivers of the 3.3% FFO per share growth were same-property GAAP NOI growth of 2.1% year-over-year due to higher rents and strong operating expense control and highly pre-leased developments that came online, offset slightly by dilution from dispositions that primarily closed in the fourth quarter. We provided our initial 2018 FFO outlook of $3.35 to $3.47 per share. At the midpoint, FFO is essentially flat year-over-year as it reflects a full year of dilution from dispositions completed in the second half of 2017. In addition, we have headwinds in occupancy from known move-outs we have discussed that are factored into our guidance. Our same-property cash NOI growth guidance of a positive 1% to 2% reflects those occupancy headwinds. Specifically, we expect 2018 average occupancy in our same-property pool to be down approximately 150 basis points compared to 2017. Given this year's occupancy challenges, after 3 strong years of successive growth, we believe our 2018 outlook is reasonable. We expect higher growth in the future as occupancy stabilizes. Last night, we also announced an increase in our annualized dividend from $1.76 per share to $1.85 per share, a 5.1% increase on top of last year's 3.5% increase. Our highly pre-leased development pipeline is a strong driver of value creation and stable cash flow for our company and was a key consideration in the decision to increase our dividend. We project our 2018 cash flow to continue to strengthen and have more than adequate coverage for the increased dividend. 2017 was an active year on the financing front. We issued a $300 million 10-year bond at 3.78%, replacing a 5.88% $380 million maturity last March. We obtained $100 million 12-year 4% secured loan, which is now our only secured loan on a wholly-owned property. We expanded and extended our credit facility from $475 million to $600 million now maturing in 2023, and we extended a $200 million 2019 term loan to 2022. Our financing plans for 2018 include refinancing at April 15 $200 million maturity that carries an effective interest rate of 7.5%. As a reminder, early in 2017, we locked in a 10-year treasury at 2.44% on $150 million of principal. This hedge provides us partial protection against rising treasury rates. With plenty of availability on our revolver and other access to capital, we have substantial flexibility to be opportunistic on this upcoming maturity. Finally, as you may have noticed, we made a couple of routine SEC filings this morning. These are simply to update the financial institutions that participate in our long-standing ATM program. As you know, we have not issued any shares under our ATM since the second quarter of last year. Operator, we are now ready for your questions.

[Operator Instructions]. Our first question comes from the line of Jamie Feldman with Bank of America Merrill Lynch.

I'm hoping you guys could talk about the Buckhead expirations and your prospects to release those. And then also, as you think about the -- largely, since you mentioned the FBI, SCI, what's included in the guidance in terms of getting those backfilled?

Jamie, it's Ted. From Buckhead, certainly on our backfill, that's been the slower one of the bunch we've got. But our view is that land is still continuing strong -- still seeing strong economic growth, still well above the national average. Buckhead's got great -- it's great space within Alliance and Monarch. So we're still very optimistic and confident. Activity starting to pick up first quarter. So certainly, we expect to get some progress done this year. There's nothing eminent, but we've got some strong prospects for some of the space in One Alliance.

Jamie, I would just -- to follow up with respect to your question what's baked in the guidance. Just because of the leasing plan and how this flows through FFO, I would say there is not a meaningful amount of FFO contribution that we have baked into our guidance with respect to 2018 from the space in Buckhead.

Jamie, just to tack on, is that there are prospects. We don't want you to think it's just crickets. Jim and his team are showing the space. We have decent shots, for example, at a sizable backfill for most of the Towers Watson space. The FBI, which we just got back the 1st of February, is 28% relet now. We have prospects to double that. So there is activity on these spaces.

Okay. So you're saying all of the largest vacancies, you're really -- there's nothing really impacting your '18 guidance. So if you got something done sooner, that could push numbers higher? Or it probably wouldn't have a GAAP impact in 2018 regardless?

I think it's more of the latter. So I wouldn't suggest that with respect to the occupancy forecast that we put out there that, that's the case. But I think just because of the timing that we would expect and contribution late in the year, I don't think it's likely to have a meaningful or a significant impact with respect to FFO and GAAP NOI. But I do think that there could be some movement with respect to the year-end occupancy target that we put out there.

Okay. And then a similar question on the development pipeline and the buildings that are completed but not yet stabilized. Maybe just an update on leasing progress there. And maybe just talk about, are your expectation was that they wouldn't be occupied or fully leased before completion, but maybe just talk about the dynamics of those markets and how long it typically takes to lease space once constructed.

Sure, Jamie, so I'll just give you some numbers. So 5 of our 8 in development pipeline our -- of our office size, there's one industrial, so calling that out, so 5 of the eight projects have some spec component. Those 5 in total equal 800,000 square feet of the 1.3 million of the total pipeline. So 800,000 represents the 5 buildings that have some spec component. To get those to 95% leased across the board, we would have to lease 288,000 square feet. The average stabilization date on this is seven quarters from now, so third quarter of '19. And we're presently working with over 200,000 square feet of prospects. So we feel very comfortable, given those numbers, that we will meet our pro forma stabilization dates.

Okay. Great. And then last question for me is just thoughts on rent growth across your markets. Maybe on average, what do you think you'll see in 2018?

Probably 2% to 5%, Jamie, and we continue to push, and it varies by market. But I think 2% to 5% is probably the range.

Our next question comes from the line of Rob Stevenson with Janney Montgomery Scott.

Just a follow-up on Jamie's question on the development pipeline. What are you guys expecting yield-wise on the $440 million at stabilization? And then what's likely on the $394 million of deliveries that you mentioned in the prepared comments on stabilization? Where should we be -- how should we be thinking about that from a stabilized yield perspective of those 2 buckets?

Hey, Rob. We are trying to shy away from giving specific by property, so I appreciate you using the word buckets. And the reason for that is we're in routinely in conversations chasing prospective anchor tenants or build-to-suit users. So we don't like to give it out by projects so that it puts us at a competitive disadvantage. But we're a strong 8% yield on GAAP across our development pipeline.

So that'd be roughly $850 million in terms of that bucket that you're talking about there on the 8%, full 40-plus to $394 million?

Yes, sir.

Okay. Perfect. And then, Ed or Ted, if you're ranking your markets based on 2018 operating fundamentals, what's in the top 3 and the bottom 3 today in terms of your outlook for '18?

Sure. I think Nashville, Raleigh and Tampa. Tampa has really come on strong. I put probably those three right there. Atlanta's probably right in the mix as well. Then on the bottom three, I mean, again, I think we're seeing activity on all of our markets, but probably Memphis would probably near the bottom. Really, that's the one that is probably slower than the rest. But other than that, we feel pretty good across the board.

And I think with -- every one of our markets sans Atlanta right now is enjoying occupancy with the nine-handle on it.

Okay. And then just lastly for me. Ed, I don't know when -- how recently the board made a decision on the dividend increase. But with the stock price back to where basically it was two years ago, how are you guys thinking about funding development versus potentially buying back some stock? And did buying back stock come into play instead of a dividend increase here? What was the sort of debate on the board there?

Great question, Rob. In anticipation of your good question, the board made the decision yesterday at 10 minutes after 1. So it is recent inputs, and obviously, it wasn't hey we wanted to have a conversation about dividend. We -- this is a routine topic at every board meeting. So we've been tracking data and cash flow, et cetera, quarter-after-quarter, and we routinely have 3-year projections on where we hope to be, et cetera. So the decision is fresh based on and inclusive of the volatility in the market and particularly within REIT land over the last 30, 45 days. With regard to stock buyback, Mark?

Yes, Rob. Just one more point on the dividend. We managed, obviously, the dividend level in relationship to our taxable income. The company has grown over time so the taxable income pretty much in line now with the dividend in terms of where it is level-wise. So that's a consideration in some. We obviously have to balance. With respect to the stock buyback, I think a couple of points. First of all, our balance sheet is in really, really good shape and we have a lot of flexibility across the board on sources of capital. Obviously, dispositions contribute to it, cash flow from the business, all those things. And for us, at least, we think we've got growth opportunities to invest in. So as an example, our current development pipeline still has about $200 million left to fund. If this Asurion thing comes together, we're going to have some funding needs there. So we believe we've got growth opportunities to invest in. So I wouldn't say never say never on the stock buyback, but it's not necessarily at this point high on our list.

Our next question comes from the line of Manny Korchman with Citigroup.

If we can turn to the deal in Nashville, a couple of quick questions. What gave you confidence to announce that before you had a lease in hand? I think it's a little bit outside of your typical MO. And a couple of other quick questions on the same deal. Was it a package for both land sites? And I think you talked it's 1.2 million square feet of entitlements. The first project is south of 0.5 million. So what happens with the rest of that square footage?

Manny, good questions. The decision to go and issue yesterday's release, which was both about the fact that we had invested the $50 million in land inventory in downtown Nashville along with the fact that we're in advanced negotiations with the prospect, was primarily customer-driven. Our prospect wanted to announce to their employee base that this is something that they are undertaking. And when you staple that together with the fact that we were buying the land, which was public, when we knew it'd be -- particularly be public since we were buying it from a newspaper, and then add on to that the natural conversations that occur with municipalities when business expansion is being considered. So their desire to communicate it to their employees and knowing that it would be out and we'd be buying the land and the conversations with the municipalities, we felt that it was appropriate to do that. And then you'll notice in the release, we're very specific about the fact that we don't have a signed agreement. We do have an agreed-upon LOI, and we're very optimistic. But your initial point is valid that we are early in how we typically do this. But given the other 4 points that I had outlined for you, we felt it was the appropriate thing to do. Because if we hadn't, I think many others would've controlled the message, and we wanted to give some clarity to it and partnership with our prospects. And then the second part of your question about the package is it was a light seller, so we bought the land from a common seller. And we have programmed this 5-plus acre site for this 479,000 square feet that we've drawn. And then the other site, we have the potential to do another 1 million square feet on that in total. We don't think we would go that big. So we dialed it back to a total of 1.2 million, and we would very likely do some type of comparative towers on the neighboring portion of the site.

Ed, and then just taking to maybe land or development for a second. What other markets are you currently -- or would you like to expand your land bank presence in?

Well, I'd go back to the question that Rob had asked Ted about best markets, so obviously, those that have the higher level of activity. And we feel strongly that we're advantaged if we get in front of you as a prospect and say that we have the balance sheet, the expertise, the track record, the vendor relationships and municipal relationships and zoned and entitled land that you have a higher comfort of level -- a higher comfort level that we'll be able to deliver. So we think that's an important component. So we would look to those more active markets, and we're routinely looking for land, particularly given how much land we have placed in service through our development pipeline. Over the last 5 years, we've placed well over 130 acres into service as a result of our development platform.

Our next question comes from the line of Dave Rodgers with Baird.

Ted, maybe I'll start with you. I had two asset-specific questions. First, Fidelity in Raleigh. Can you talk about your thoughts on downtime there? Any cost to re-lease that, whether you can re-lease that? Is it a single space? Or were you going to break that up? And then the second, maybe on the Ramparts building, HCA backfilling. I think you've finished that redevelopment in the fourth quarter. Just wondering on activity and traction there.

Sure. On Fidelity, as we've mentioned in our prepared remarks, they're going to vacate July 1. So we're actively planning for when they vacate so we can hit the ground running on investment of our capital to reposition the asset. We've already shown the building a few times. So I think the market's strong out there. The rest of our 1 million square feet or so at CentreGreen is 100% leased. So we feel confident about our ability to re-lease it. And whether it goes single tenant or multi-tenant, too early tell. I think we're all prospecting on both right now, and we'll make that call when it's appropriate. So I think we're going to spend the second half of this year Highwoodtizing and as well showing at both single users, multi-tenant users. And I think we'll have it relet by probably mid-2020, somewhere in that range, unless we hit the big single tenant user before that. And in terms of Ramparts, Ramparts, we went through a significant Highwoodtizing on that asset. HCA moved out right at a year ago, I guess, January of 2017. So we spent first half of last year doing a significant lobby, restroom renovation, corridors, and then putting a fair amount of capital into it. It looks great. I think we had -- we probably would have hoped we would have been a little bit further along on Ramparts. We've got -- lost a couple of prospects recently that decided to renew instead of move. But a little bit of a setback. But we're roughly on the entire HCA space, about 46%, a little bit below that on Ramparts. So the market's still strong. We're going to make more activity. We have strong prospects for another 10,000 feet or so right now. So we still feel confident. The building looks great, and the market's still strong.

Maybe one for Mark or Brendan. In terms of the remaining restoration fee, is that going to be amortized through November or June? And then the prepaid rent, is that a onetime in the second quarter? Or will that be kind of amortized into the third quarter as well?

Yes, Dave. The restoration fee actually gets amortized through their -- through the point that they vacate, so it will get -- put into income effectively and other rents through the first 6, 7 months of the year. And then on the prepaid rent, that again will kind of get leaked into the second half of the year.

Okay. That's helpful. And then maybe, Ed, just big picture on dispositions. You obviously have some in the guidance. Just given the comments about development, buying more land and obviously hopeful that the development pipeline can continue to be sizable, why not have a bigger disposition pipeline at this point in time, especially with those markets that might not be as strong for you?

Yes. Great question. We're -- obviously carefully watched the dispositions. And as you know, in the last X years, we haven't sold a single asset because we needed the proceeds to meet a maturity. We've done it more on the timing of the asset itself, so how much lease time do we have left and what the impacts of the current rent roll and conditions of building would do for us in a way of proceeds. Obviously, we also pay some attention to gains and the tax implications of those. I think we have been fairly cadenced at the volume that we've been selling. And we also keep in mind, obviously, the dilutive impact from that. But I think we've been fairly consistent over the last 8, 10 years on our process with that, trying to maximize proceeds through the timing of the rent roll as opposed to a specific day when we may need the money as a result of the sale other than Country Club Plaza.

[Operator Instructions]. Our next question comes from the line of John Guinee with Stifel.

I think that Highwoods is similar to a lot of REITs out there, a lot of development-oriented REITs out there, where a low-single-digit cash rent growth, low double-digit GAAP rent growth which you guys have had been very consistent. It does not do enough to cover $4 per square foot per year in leasing cost. What's happening, it appears to us, is that the development pipeline is not accretive enough to offset the natural erosion of the core portfolio. Is that accurate? And is there anything that can change this unfortunate phenomena?

John, it's Brendan. So what I would say is, I think, if you look at -- we stand for the year with respect to just overall cash flow from operations. We feel like the cash flow from operations is pretty healthy with respect to where we come out for the year vis-à-vis the dividend. And we think that, that's improving as we go into 2018 versus 2017. And as Mark mentioned in his script, we think the coverage ratios actually get a little bit better even with the increased dividend of a little over 5% that we announced last night. So I think overall, from a cash generation of the business, we think it's getting better. Certainly, as we think about the cost from a leasing perspective, our payback ratio or kind of the TI in leasing commissions as a percent of the rent, they average long term around 12% to 15% of that total rent. That's been pretty steady. And so we feel like a combination of pretty steady CapEx relative to rent levels and with improving cash flow from the development pipeline, we've got, we're in better financial standing going forward than maybe we have been over the past few years. So I think we feel pretty good about that.

And, John, I guess I would footnote Brendan's comments with the development. The scale of those buildings is, on average, significantly greater than the average size in our portfolio. And the average size of our portfolio is significantly larger than the average size of what we're selling. And the CapEx needs for the smaller, older buildings versus what we need from a brand-new building that's been delivered is a dramatically different profile. So theoretically, the $394 million that we've delivered just this past year won't have CapEx needs for the next 10-plus years, whereas the dispositions of $150 million we did last year were heavy CapEx-intensive on an ongoing basis.

Our next question comes from the line of Jed Reagan with Green Street Advisors.

Can you just talk on the Nashville development? A couple of questions there. Can you offer any color on when you think the LOI might get converted to a signed lease timing-wise? Any visibility there?

Yes. We would hope that, that would happen. We'd be here 2 quarters from now being able to report that -- the outcome of that to you.

Okay. Great. And I know you're building to around $525 a foot, which I think is quite a bit higher than where I think it's traded in Nashville historically. I mean, do you think someone could pay $600 or $700 a foot for a build-to-suit like this once it's stabilized to generate an attractive development margin? And how do you think about monetizing some of these developments, either it'd be an outright right sale or a JV sale once you created a lot of that value upfront?

So a couple of comments. One is you're exactly right. The cost per square foot is higher. They've all been creeping higher, obviously. If you look at the trajectory of our development in others and sales over the last dozen years, it's a pretty straight line up. So probably, the best comparative is the most recent deal that we had announced of size, which was down at Ovation, which is about 0.25 million square feet and just shy of $100 a square foot less. But this is an urban setting, so the FAR for the land is 4x what it is in the suburban setting embedded versus a bifurcated structured parking feature, and then the pricing of this is some 2-plus years out. So I think if you look at what the trophy assets that are selling for today, that there is material value creation here at the time that we would deliver it several years from now. So we're very comfortable without outside of some hugely unexpected disruptive external macro event. And so I think we're very comfortable with it. Then with regard to selling versus holding, we have been a build to own, a develop the whole, not a merchant builder. We've built some very good customer relationships that way who have -- folks who have come back and, in turn, expanded their footprint with us through the development platform. MetLife is probably the most vivid example of that. So we think the strengthening cash flow story that we get from this is a very strong positive for us. And so value creation, yes, it's more expensive, but it's going to be more expensive a year from now and even more expensive 2 years from now. That's been the steady trajectory of all the components where you have a development project.

Okay. That's helpful. And maybe related to that, I know you're pretty careful about showing your hand in terms of development yield. But maybe just generally speaking, how much of a yield premium do you think is required for taking spec development risk versus having a build-to-suit? So if you've got 2 projects that are ultimately seven cap, assets stabilized, I mean how much of a yield premium would you shoot for in the -- on the spec versus pre-leased?

Yes. So we really haven't done a -- I guess maybe CentreGreen, we started pure spec. A few things. I guess one is just the scale of it, right? So the development that we've done has been build-to-suit. For the majority of them, they've been larger, and we've been smaller on those which have the spec component in total scale, square footage and dollars. So I would say that we're somewhere in the $75 to $100-plus depending on how much pre-leased. So if we're a 1/3 pre-leased, it may be different, and then depending on what's going on in the mosaic around that immediate BBD for where we're deciding to sell to develop that. So $75 to $100 would be the short answer.

$75 to $100 for a 30% pre-leased versus 100% pre-release.

Correct. And just underlining that the scale of it would probably be about 40% of what we've been doing with regard to the -- or less. Let's say, 1/3 to 50% less than what we've done for Mars, MetLife, Bridgestone, this proposal, et cetera.

Yes, Jed, the other thing I'd add is really hard to kind of -- and I know we're talking generalities here. But you look at the credit of the build-to-suit opportunity, you look at what's around us, and Ed talked about our CentreGreen. We own a lot of property in that market and have high leasing percentage. So it's all about confidence and how quickly you're going to get to stabilized returns.

Okay. Great. And maybe just one more from me. Some of your peers have talked about seeing more tenant optimism and better leasing activity recently, given better economic indicators and the tax reform package. Are you seeing that in your portfolio in terms of any noticeable recent shifts or reacceleration incentives?

Jed, it's Ted. I think we're really seeing pretty good demand really across all of our markets. So I think, obviously, it varies by market and submarket to the degree. But some have maybe picked up a little bit since the Tax Reform Act. But sometimes, there's a winter slowdown or fourth quarter slowdown anyway. So I don't know if we can attribute it to tax reform. I think most of our leasing reps are -- they're busy. They're doing a lot of tours, showing a lot of space. So I think it just feels really good right now.

Our next question comes from the line of Michael Lewis with SunTrust.

My first question, you've been able to use either stock to fund leverage-neutral growth. I was just wondering with the stock price, where it is now. It looks like you're very close to a $250 million build-to-suit. You've got $100 million to $350 million of potential announcements. I was just wondering how you go about funding that if the equity market isn't there for you. Do you think it spurs you to do more asset sales? Or how -- where is kind of your comfort level on where you'd be willing to take your leverage?

Yes, Michael, it's Mark. As you've heard us talk about this before. We have kind of a mixing bowl, in my mind, of sources of capital here, and some of it obviously cash flow from the business. But you're right, we have historically used the ATM to kind of keep our leverage in line. One of the advantages we have of where we've gotten to from a balance sheet and a leverage and an EBITDA coverage perspective, I think we got a lot of flexibility. As I said earlier, we've got about just roughly $200 million left to fund on the current development pipeline. We also had some 1031 proceeds we were able to deploy on the purchase of the land in Nashville. So I think we legitimately have flexibility to take leverage up, if that's the course of action we decide to do. We also, I think, have a lot of flexibility in dispositions. It's our guidance for 2018 in disposition. So we will have some proceeds from those as well. So I think, again, I think we've got a lot of flexibility to be able to deal with maybe a lower share price at this point.

And then lastly from me. I don't know if it's useful to do kind of a postmortem on the three Alliance deal. You guys obviously showed some discipline by not chasing a record price. But I'm wondering if how you think this might change your competitive position with the assets you own there, if at all, and if you think it says anything about Atlanta or if this really was kind of a unique deal.

Well, clearly, there is some disappointment, Michael because we had talked about it, owning One and Two Alliance and then to have Monarch Tower in place. So it's really a -- we see it as almost a 5-building complex that's all interconnected. So it was certainly our hope that we would own that. And we did -- in our view, we aggressively pursued it, but it just got beyond our reach. And we're not commenting -- negatively commenting or positively on what somebody else would deem to be an appropriate investment for them, but it just clearly got beyond our reach. But I don't -- I think the fact that it's going -- it's highly likely going to stay in their hands for an extended period of time. So it's patient, long-term money. We would think that they would do the right things with regard to upkeep and maintaining the asset. And given that it's basically at or soon to be fully stabilized, that aspect or the competitive nature of it really comes out of the equation and for a goodly period of time because as you know, first-gen leases have a lease term that runs beyond the norm. So from a competitive in the trenches day to day, we just don't see it to be a negative other than we'd like to own it.

Our next question comes from the line of Chris Lucas with Capital One Securities.

Just a couple of quick questions, Ed, if I could. Just on the cost of capital. I guess I was just curious with how or if it's impacted the required yield on your future development deals at this point or whether or not the move has been significant enough.

We've made no phone calls to the people that were in -- the peoples that we're in conversation with about potential development deals to say we need to alter our side of the transaction. I think given our balance sheet, given our cash flows, et cetera, and the environment that we're comfortable to continue to pursue it. We're not ignoring how our equity is priced today, but I don't think this gets us to the point where we're only going to be open for business for an hour a day. We need to aggressively pursue, but we are cognizant of moving parameters.

Okay. And then on the Asurion deal, you talked about how you sort of forecast out rising construction costs as you think about the value creation part of the conversation there. But I guess I'm just wondering on the exit cap rate. When you think about evaluating the value creation opportunity, are you forecasting out an exit cap rate? And what sort of thoughts have you made about that, given the sort of volatility we've had so far this year?

Yes. We always do, Chris, right? So when -- before we do any development project, obviously, depending on scale, it goes through management committee, it goes through a subset committee of our board called the investment committee. And then if it's of ample size, it goes to the full board. And it's a very comprehensive deck, and we look at it no different than ESPN looks at the replay across the goal line from 22 different directions to ensure whether it was a TD or not. And so of course, it includes some conjecture as to what we think both the present day and our future day exit cap rate would be. That gets us comfortable that we have, indeed, created an appropriate level of value for the amount of risk that we're suggesting we would take on behalf of the shareholders. So I'd rather not say what those numbers are. But I would say, and I think everybody at the table on the call with me here would attest that it stays in our conservative built, and the margin is certainly attractive.

Okay. And then last question for me just as it relates to the guidance on the development announcements. The swing factor here is whether or not Asurion gets done or not. It's just that kind of how to read the $100 million to $350 million range.

That's right. It's binary, right? It's on or off. And so we, again, want to underscore the adjectives and the statement in the press release that we don't have an inked lease agreement, and that it is a proposed deal. And they have been very good to work with, and we've been working with them for well over a year. It was a competitive process, and so they've had an opportunity to get to evaluate us from many different angles over a material period of time. But we're not there yet just because of where we are in the process. So you're exactly right. That's the $250 million that's binary in there.

There are no further questions at this time.

All right. Thank you, operator. And again, thank you, everybody, for being on the call. As always, if you have any questions, please don't hesitate to give us a call. 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. Have a great day, everyone.