Highwoods Properties, Inc. (HIW) Q2 2019 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, July 24, 2019. I would now like to turn the conference over to Brendan Maiorana. Please go ahead, Mr. Maiorana.

Thank you, operator, and good morning. Joining me on the call this morning are Ed Fritsch, Chief Executive Officer; Ted Klinck, President; 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 Investors section of our website at highwoods.com. On today's call, our review will include non-GAAP measures such as FFO, NOI and EBITDAre. Also, the release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Forward-looking statements made during today's call are subject to risks and uncertainties, which are discussed at length in our press releases as well as our SEC filings. As you know, actual events and results can differ materially from these forward-looking statements. 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 stated on many prior earnings calls throughout this cycle, fundamentals in our business remain healthy. Demand is stable from existing and prospective customers, while supply remains in check across our markets. This backdrop, combined with healthy market occupancy levels across our footprint, support continued rent growth. Long-term interest rates are back to hugging 2%, and capital continues to be readily available for credit-worthy borrowers. Based on what we're experiencing on the ground and evidenced in the metrics we reported last night, these "goldilocks" conditions are expected to continue, which we believe will support continued growth in NOI, additional high-quality development projects and increasing FFO and cash flow. Our 2Q financial results support the basis for this favorable outlook. We delivered FFO of $0.87 per share and leased 1.1 million square feet, including 329,000 square feet of new leases and 108,000 square feet of expansions. This healthy leasing volume was accompanied by strong economics, including GAAP rent spreads of plus 16.8%, cash rent spreads of plus 2.5% and net effective rents of $16.69 per square foot, 6% above our prior five quarter average. This volume of work supports our increased occupancy outlook for year-end. It also helped reduce our 2020 expirations, especially the 210,000 square foot renewal with Vanderbilt University Medical Center, our largest 2020 expiration. Given our second quarter performance and healthy outlook for the remainder of the year, we have revised our 2019 FFO outlook to $3.32 to $3.38 per share, representing a $0.01 increase at the midpoint. Occupancy declined 30 basis points sequentially to 90.9%. Most of the drop was attributable to temporary downtime on leased space where occupancy has yet to commence. As I mentioned, we expect occupancy to improve by the year-end. We increased our year-end outlook by 25 basis points at the midpoint. We lowered -- the lower end of our 91.5% is 60 basis points higher where we ended the second quarter, with the midpoint 100 basis points above our June 30 occupancy level. At this time, our year-end occupancy outlook assumes no backfill of the space vacated by Laser Spine at 5332 Avion, our 176,000 square foot property in Tampa's Westshore submarket. We continue to run parallel paths for the reletting of this building. The first path we are pursuing is a full building or a near full building, medical users. We continue to have dialogue with prospects who would use the medical FF&E already in the building. This path would require the least amount out-of-pocket cost for us and the shortest amount of downtime, though the number of prospects who need this much medical space is limited. Our second path is to convert the property to a traditional multi-customer office building. Here too, we have active interest from several prospects. We've priced out conversion of the common areas and have detailed projections for lease-up costs. We don't want to provide specifics on our cost projections at this time given ongoing negotiations with our prospects. Our plan is to fully vet the medical prospects to retain as much optionality as possible before pursuing a conversion to a single or multi-customer office building. Our development program continues to deliver strong results. In the quarter, we placed two properties in service that were 98.4% leased, had a total investment of $203 million and comprised 524,000 square feet. Riverwood 200, a $107 million, 300,000 square foot multi-customer development in Atlanta, which was 39% pre-leased when announced, is now 97% leased with top-of-the-market rents. In addition, we delivered a $96 million, 224,000 square foot 100% occupied U.S. headquarters for Mars Petcare in Nashville on schedule and on budget. In May, we announced Midtown One in Tampa in an 80-20 JV with the Bromley Companies. This $71 million, 150,000 square foot, 100% spec development is within the now underway 22-acre Midtown Tampa mixed-use project in the Westshore BBD. Bromley is the master developer for Midtown Tampa. The 390-unit multifamily portion will be developed by Crescent Communities. The 225-key dual branded Element and Aloft hotel is being developed by Concorde Hospitality. And the 220,000 square foot retail and restaurant portion is being developed by Casto, which is approximately 50% pre-leased and will be anchored by Whole Foods. All developers for Midtown Tampa are funded and committed on their portions of the project. Midtown One, the multi-family, hotel and substantially all of the retail will be complete in 2021. We also have rights to partner with Bromley to build an additional 600,000 square feet in two future office buildings at this destined to be vibrant mixed-use development. Needless to say, we're excited about being involved in this project, Tampa's first sizable true mixed-use development. In Raleigh, we leased 5000 CentreGreen to 100%, 1 quarter ahead of projected stabilization date after starting this project 100% spec. Given all I just said about our development program, the only two projects in our current development pipeline with spec space are GlenLake Seven in Raleigh and Midtown One in Tampa, neither of which has gone vertical yet. In addition, both have well over two years before reaching pro forma stabilization dates, and we are pleased with the early level of interest on both projects. Our development pipeline is now $503 million and 80% pre-leased. As a reminder, our 2019 development announcements outlook is now $112 million to $375 million with GlenLake Seven and Midtown One making up the $112 million announced so far. We continue to have conversations with pre-lease prospects across several markets. This sustained level of interest leads us to believe the depth of demand should remain attractive, which, when combined with our strong land position, balance sheet and track record, positions us to capture some wins. Turning to non-core dispositions. Early in the second quarter, we sold MetroCenter in suburban Orlando, a two building, 183,000 square foot property for $32.5 million. Subsequent to quarter end, we sold Dogwood in Raleigh, a 42,000 square foot property for $4.7 million. We anticipate closing on a number of sales during the second half of the year and therefore, our 2019 outlook for noncore building dispositions remains $100 million to $150 million. Subsequent to quarter end, we also sold 53 acres of industrial land in Atlanta for $7.3 million and acquired a 0.7 acre office development site in CBD Raleigh for $6.6 million. We've kept our property acquisition outlook unchanged at $0 to $200 million. While very few high-quality properties in prime BBD locations have been available for sale, we continue to be tenacious in our search and evaluation of attractive on- and off-market opportunities while maintaining a commitment to prudent investing and portfolio enhancement. Moving to the balance sheet. We reported a debt-to-EBITDA ratio of 4.74 times, below the midpoint of our stated comfort range of 4.5 to 5.5 times, even while continuing to fund our development pipeline without issuing any shares on our ATM during the past two years. Overall, our portfolio is performing well with rents continuing to rise and occupancy is projected to increase by the end of the year. Our recently delivered and highly pre-leased development pipeline will help drive increased FFO and cash flow, and we have a land bank that can support approximately $2 billion of future development. We continue to have a disciplined approach and focus on capital recycling and portfolio improvement, which, combined with carefully managing OpEx, will result in improved operating metrics. Atop this, we have a strong balance sheet with multiple avenues to fund continued growth. Before I turn the call over to Ted, as you know, on July 1, we announced a series of management succession moves that I initiated. After 37 years with Highwoods, basically the entirety of my adult life, I will retire as CEO and Member of the Board effective September 1. Ted will assume the role of CEO and Director at that time. Ted and I have worked closely together since we recruited him as our Chief Investment Officer in 2012. Him potentially succeeding into my role was an aspect of our conversations back in 2012. His in-depth transaction experience, real estate intellect, leadership skills and industry contacts make for this to be a very smooth passing of the baton. Brendan, who we recruited in 2016, has been promoted to EVP of Finance and Investor Relations. Brendan has been a terrific add to our team, and he and Mark will continue to work together to communicate with our investors, preserve our fortress balance sheet and maintain ample liquidity to fund our growth on a leverage-neutral basis. We also recruited Brian Leary to be our next COO. Brian joined us last week from Crescent Communities, where he served as President of its commercial and mixed-use business unit. He will work closely with our divisions, which are led by a group of long-tenured, highly experienced real estate professionals having, on average, 30 years of commercial real estate experience. With his background in architecture and development, Brian is also well suited to work closely with the company's proven development team, led by Randy Robertson, our Senior VP of Development. In addition to these moves, Highwoods is extremely fortunate to have a broad and capable team comprised of really good people. I am fully confident the right platform is in place for Highwoods' continued success. I will dearly miss all those that I have gotten to work with here at Highwoods and across the industry, from Wall Street to NAREIT, from our customers to professional advisers, from our vendors to all of you on this call, thank you for listening, prodding, challenging, supporting and sharing your candor and expertise. The time is right for these moves. Highwoods is comprised of a wonderful collection of people, and I believe the company's best days have yet to come. Ted?

Thanks, Ed, and good morning. We had a strong operating performance during the quarter. Same-property NOI growth was up 3.1% even with average occupancy down 100 basis points year-over-year. Our robust leasing volume and strong rent economics support future growth in occupancy and NOI. Second-gen office leasing volume was 1.1 million square feet, including 329,000 square feet of new leases and 108,000 square feet of expansions. Atop the significant volume, rent economics were also stout. GAAP rent spreads were positive 16.8% and cash rent spreads were positive 2.5%, while net effective rents of $16.69 per square foot were 6% higher than our prior 5-quarter average. While virtually all of our leases have compounding annual escalators, we've consistently posted positive cash rent spreads. In fact, 12 of the past 13 quarters, we've reported positive cash rent spreads and over the same period increased net effective rents by 15% and in-place cash rents by 13%. As expected, portfolio occupancy dipped 30 basis points to 90.9% at the end of the quarter before our projected improvement later in the year. Our year-end occupancy outlook has increased to 91.5% to 92.3% with the midpoint of 91.9%, 100 basis points higher than where we ended the second quarter, and this assumes no year-end occupancy of 5332 Avion. Specifically, we expect occupancy to increase by approximately 300,000 square feet by the end of the year, and we have about 200,000 square feet of new leases signed on vacant space but where occupancy hasn't commenced. To be clear, we have forecasted renewals yet to be signed along with known move-outs, so there is additional speculative leasing to be completed, but we're confident about our year-end outlook. In addition to good activity on some of the vacant spaces in the portfolio, we're optimistic about the near-term expiration outlook. We made meaningful progress over the past several quarters reducing future near-term rollover risk, which leaves us with only 4% of revenues expiring for the remainder of 2019, and we made progress reducing our 2020 expirations. In our typical review of expirations larger than 100,000 square feet, we have only one remaining in 2019 and two in 2020. The FAA is in 100,000 square foot build-to-suit adjacent to the Atlanta airport and is scheduled to expire later this year. We remain confident in a renewal. For 2020, we renewed 210,000 square feet with Vanderbilt University Medical Center in Nashville in the quarter, which leaves us with only 138,000 square feet with the FBI, 116,000 square feet with T-Mobile, both in Tampa. We remain confident in renewal with the FBI, while T-Mobile is an expected move-out. Now to our markets. Atlanta posted positive year-to-date net absorption of 930,000 square feet, as reported by JLL, with overall asking rents of $30 per square foot and Class A at $32 per square foot. We're tracking 3.6 million square feet of multi-customer office development underway, which is 27% pre-leased. This represents 3% of total stock. Midtown has the most activity with around 2 million square feet under construction, while Buckhead has one 340,000 square foot project under construction. We signed 171,000 square feet of second-generation leases during the quarter with positive GAAP rent spreads of 17%. Occupancy was 88.4% at the end of the quarter, and as I mentioned earlier, we expect this to improve by the end of the year as occupancy commences on signed leases. As Ed mentioned, we placed Riverwood 200, our 300,000 square foot, $107 million multi-customer development, into service at 94% occupied, and we have leases in place that will bring occupancy to over 97% by early 2020. Based on our success at Riverwood 200, we're now marketing Riverwood 300, where we can build a 175,000 square foot office building. Turning to Raleigh. According to Avison Young, first-gen asking rates hit $40 per square foot during the quarter, a 7% year-over-year increase. Class A market occupancy ended the quarter at 90%. Currently, there is approximately 1.2 million square feet under construction spread over six submarkets that is 26% pre-leased, representing 2% of total stock. We signed 200,000 square feet of second-generation leases during the second quarter with healthy GAAP rent spreads of 22%. Our largest opportunity to increase occupancy is 178,000 square foot 11000 Weston building. We signed a lease for 46,000 square feet earlier this month, which will show up in our 3Q leasing stats, and we have a strong prospect for additional space in the building. Our Raleigh portfolio occupancy was 86.1% at the end of the second quarter, which was driven by lower temporary downtime between customers moving out and in to their space. Similar to Atlanta, we expect occupancy to improve by year-end as occupancy commences on signed leases. Nashville finished the second quarter with year-to-date net absorption of over 250,000 square feet as reported by Avison Young. Asking rates grew 2.7% year-over-year while overall vacancy remained flat. Class A vacancy decreased to 7.6%. We're tracking 2.5 million square feet under construction, which is 25% pre-leased and represents 6% of total stock. During the quarter, we signed 352,000 square feet of second-generation leases with GAAP rent spreads of 16.8%. As mentioned earlier, this included the 210,000 square foot renewal with Vanderbilt University Medical Center, our largest 2020 expiration. We also placed in service, with cash rent commencing, the 224,000 square foot, $96 million U.S. headquarters for Mars Petcare. Lastly, in Tampa, Class A rental rates increased 8.7% in the CBD and 11.3% in Westshore. 92% of our Tampa portfolio is located in these two BBDs. We're tracking 930,000 square feet of new construction in Westshore and the CBD, which is 41% pre-leased and represents about 3% of total stock. We signed 128,000 square feet of second-generation leases at GAAP rent spreads of 18%. We continue to focus on the T-Mobile space at Preserve V in North Tampa and Midtown One and 5332 Avion in Westshore. There are a number of differences among these 3 opportunities: geography, price point and timing. In conclusion, we had an excellent quarter of leasing with robust volume, healthy rent spreads and strong net effective rents. We're making good progress with future expirations and backfilling the few sizable vacancies in the second-generation portfolio. Our $503 million, 80% pre-leased, 1.2 million square foot development pipeline has only two projects with any availability and, in both cases, we are more than two years out before pro forma stabilization. The leasing environment remains healthy and is indicative of continued demand for quality, well-located first- and second-gen office product. Before I hand it over to Mark, I'd like to make a quick comment about Ed's retirements after 37 years at Highwoods. On behalf of our Board of Directors, management team and 445 coworkers, I say, thank you, Ed, for everything you've done for Highwoods. Thank you for your leadership, dedication, professionalism and passion for everything at Highwoods. Your presence will be missed, but you won't be forgotten. Mark?

Amen to that. Thanks, Ted. We delivered net income of $39.4 million or $0.38 a share, and FFO of $93.1 million or $0.87 a share. FFO per share was flat year-over-year, although last year's second quarter included $1.9 million final installment of the Fidelity restoration fee and full contribution -- NOI contribution from Laser Spine. Fortunately, our growth has offset these two items, which illustrates the healthy fundamentals of our business. Other than $0.005 of impairment charges on a noncore land parcel in Memphis, the quarter was clean from a reported FFO perspective. There was a gain on disposition from the sale of MetroCenter, which was not included in FFO, and there were no meaningful term fees. Compared to the first quarter and adjusting for the credit losses and write-offs associated with Laser Spine's sudden closure, the sequential drivers of the improvement in FFO were: higher NOI by a little less than $5 million. This was driven by higher average rents, improved operating margins and contribution from development deliveries, primarily MetLife III and Mars Petcare; lower G&A by a little less than $3 million. As you know from prior years, this is the normal annual pattern for us as we typically have higher expense in Q1 from long-term equity grants each year. We expect G&A to be roughly steady from Q2 levels over the remainder of the year. These items were partially offset by higher net interest expense attributable to reduced capitalized interest following the delivery and stabilization of development projects and slightly higher miscellaneous other expenses. We adjusted our 2019 FFO outlook to $3.32 to $3.38 per share, implying a $0.01 increase in the midpoint to $3.35 a share. The normal seasonal pattern for operating expenses traditionally results in the third quarter being the lowest operating margin quarter of the year. In addition, there were some operating expenses we originally forecasted for the second quarter that will actually occur in the third quarter. Occupancy at September 30 will likely be similar to June 30 with improvement by the end of the year as both Ed and Ted mentioned. We kept our outlook unchanged for acquisitions and dispositions. And as you know, we don't include the impact of any future acquisitions or dispositions in our FFO outlook. We kept our same-property cash NOI growth outlook for the year at plus 0.5% to plus 1.5%. As a reminder, this outlook includes the negative impact associated with Laser Spine's closure. Excluding 5332 Avion, same-property cash NOI would be 150 basis points higher. We increased the straight-line rental income outlook by a little over $1 million. This largely coincides with our improved year-end occupancy outlook as more occupancy is expected to commence before year-end, where its meaningful cash flow contribution isn't expected until 2020. With net debt-to-EBITDAre of 4.74 turns and leverage of 35.9%, our balance sheet remains in excellent shape. The contribution of MetLife III and Mars Petcare during the quarter helped drive our net debt-to-EBITDAre ratio lower in the quarter. Our strong leverage metrics put us towards the lower end of our stated comfort range of 4.5 to 5.5 times net debt-to-EBITDAre. With the additional of Midtown One in Tampa, we have $310 million left to fund on our $503 million development pipeline. We have ample flexibility to fund our development pipeline and additional growth opportunities and stay well within our stated comfort range. Further, we have no debt maturities until the middle of 2021, and therefore, can be opportunistic raising additional capital to increase liquidity and further improve our maturity ladder. We expect to continue to fund our business on a leverage-neutral basis. However, even if we were to fund the remainder of the development pipeline without any ATM issuance or noncore dispositions, we estimate, upon stabilization of the development, our net debt-to-EBITDAre would rise less than half a turn from current levels. As a reminder, we've been able to keep our leverage metrics in the lower half of our stated comfort range while continuing to fund the development pipeline and issuing no shares on the ATM during the past eight quarters. Before we take your questions, one other item to note. As we've signaled for the past few years, our free cash flow continues to strengthen with the delivery of our well pre-leased development pipeline and consistent performance of our same-store portfolio. While timing will impact our cash flow in any given quarter or year, we feel very good about the long-term cash flow trajectory for the company. Operator, we are now ready for your questions.

[Operator Instructions] Our first question comes from John Guinee with Stifel.

Great. Nice quarter. Ed, I think you were one of the best CEOs in the business and even a better person, and I personally am really going to miss you. I hope you and your family have a great few more decades, and you get everything done in life you wanted to get done. No questions for me.

Thank you so much, John. Very kind.

The next question comes from Manny Korchman with Citi.

Ed, so I also wanted to wish you congratulations on your retirement. Everything you've done for the company and growing the company and building the team, but also the stuff you've done for the industry as well as for the investors and the analysts in terms of the constituencies, I think, is going to be missed. And I sort of want to know who's going to inherit the book of Edisms and all the creativity that you had. So a book really does exist? That's great. But who's going to have the all the creativity with all the customer events and all those marketing materials and the company culture that you've built, who's going to take that baton internally to keep that spirit alive?

Well, first, of course, I appreciate John's comments and yours as well. I've been very fortunate to be able to be here for this tenure. We -- very little, if anything, at Highwoods is done by any one individual. And the decisions that we make, whether it be a marketing pitch to a perspective build-to-suit user or the pricing on something that we're going to buy or sell or build, it's a very collaborative environment and lots of people pour in sweetener into the coffee here. And so we're very fortunate that there is no one individual that brings that to the table. It's truly a collaborative team effort. We're the furthest thing you would imagine from a dictatorship or autocratic environment. So I'm fully confident that the creativity and the intellect and the drive and the dedication is here in huge amounts.

And then, Ed, you'd mentioned, when you recruited Ted a number of years ago that the discussion about potentially taking over was part of that. And I guess, as Ted takes over, Ted, is there any differences in terms of how you want to run the company or anything strategically that you have on mind that would be different from how things have been occurring in the past?

Manny, really, the answer is -- short answer is no. I mean we've had a well-defined strategy. It's been in place for a long time. I think the company is going to continue to evolve, but I don't expect any significant changes going forward. We've got a great team, great strategy. We're going to keep doing the same thing.

Guys, it's Manny, here with Michael. We like team work here too. Mark, it looks like the entirety of the guidance lift was driven by higher GAAP or straight-line rents. You mentioned that was on leasing or I guess this got accelerated into 2019. Is there anything specific there that you can highlight or maybe expiration renewed or didn't expire that you felt would?

Well, Nashville, obviously, we did the Vanderbilt lease early, so that was a contributor. But you're right. I mean I think the rise in guidance was just overall good rent growth and some timing of expenses as well. So you heard us talk about we probably had some expenses that shifted into Q3 versus Q2. And so that would be the kind of primary driver. Brendan is going to add something to this.

Manny, what I would say is just Ted's comments talked about a couple of hundred thousand square feet of leases that are signed but haven't yet commenced on vacant space. So I think that number has moved up relative to what we talked about after the first quarter. So I think that's probably the biggest driver and that's helping drive the improved occupancy outlook by year-end. And candidly, those leases carry some free rent in 2019, which is driving that straight-line number up. So your observation is correct that most of the FFO drive in -- increase in 2019 is attributable to straight-line rent. However, that will translate into cash as we move into 2020. So we feel good about the ability to lease that space up, be in better position in terms of portfolio occupancy at the end of the year and then what that does in terms of the run rate as we go forward.

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

I will let others try to continue to make Ed tear up over there, but a couple of questions. In terms of the expected stabilized yield on the current development pipeline, where are you guys pegging that these days? And what's your hurdle rate on the new development starts going forward?

We've been pretty steady with 8-plus percent GAAP rate return on our development pipeline. It's been that for some time, Rob, and we're still able to pro forma and achieve that.

Okay. And so from -- in terms of looking forward, I mean, is the cost basis in the land that you guys control such that, that continues? Does that require rates needing to maintain current levels or increase to go further? Just trying to think about it in terms of land bank and future starts versus where you guys have been over the last few years.

Well, the land bank certainly is of an aid to us, but I think it's more of an aid to where we can get in front of a prospect and say, look, we have a -- we fee simple title on piece land that has utilities and infrastructure and it's ready to go. So we get more of an advantage of having that plus our balance sheet and track record as opposed to a cost advantage, although in some cases it is a modest cost advantage. But it's much more the latter of what you said. It's the rising rental rates that have had to be in sync in order to achieve those returns. But obviously, all developers are experiencing the same with regard to the construction price. And so I think this rise in first-gen market rates has continued to be in sync with the rise in construction cost.

Okay. And then given the elevated CapEx and TIs this quarter, given your occupancy and your leasing -- aggressive leasing goals, how long before you guys expect to return to a more normalized level for the portfolio?

So Rob, I guess, what I would say is, if you look at the -- I think you're probably referring to the TIs that we expensed via the CAD statement. So if you look at that number, you're right. Your observation is correct. That number is elevated. And if you think about what we've expensed year-to-date versus what we've committed, we've expensed, between TIs and leasing commissions, about $58 million in the first two quarters of the year. In terms of our commitments, those numbers are about $42 million or $43 million. So there's normally some level of timing, which has an impact there. What we would expect going forward is that the level of commitments will equal out with the level of expense in any given quarter or over the year. So those things should normalize, which, I think, as Mark alluded to in his prepared remarks, makes us pretty confident about the cash flow outlook going forward. So I think if you look at the level of commitments on a quarter-to-quarter kind of basis, I think over the past many quarters, that is a good run rate in terms of what we would expect to expense via the CAD statement in any given quarter or year.

Okay. And then lastly for me. In terms of dispositions for the remainder of the year, are you guys currently marketing stuff now? Or is it likely depending on where you fall in your range driven by people approaching you?

Good question, Rob. So we have completed the 37 that we've talked about. We have another 41 on the contract that gets us to 78. Based on what we're working on now and proposing to put in market, we see achieving the high end of our guidance to be the right mark. Obviously, it'll be later in the year, so there won't be a significant amount of dilution affiliated with that, but later in the year.

Okay. Thanks, guys. And Ed, you will be missed.

Thanks so much, Rob. I'll miss it as well.

Our next question comes from Blaine Heck with Wells Fargo.

Mark or Brendan, I just wanted to touch a little bit on same-store NOI. As you guys mentioned, you had a benefit this quarter from some expenses being pushed into the third quarter. Should we expect that to cause a meaningful dip in same-store in Q3? And are there any other nuances that could affect the quarterly kind of cadence as we lookout throughout the second half of the year?

Blaine, it's Brendan. I would say beyond -- so normally, our normal seasonal pattern, as you go from Q2 to Q3, is we tend to drop about 130 to 140 basis points in terms of operating margin. That's just long-term trend for us. Last year, that dip was more shallow than that. And as you correctly point out, there were some operating expenses that we expected to incur in Q2 that we now expect to incur in Q3. So if you take that comment, maybe that means that the operating margin in Q3 would dip a little bit more than the normal seasonal pattern that we've incurred. So there's a little bit of movement margin between the second quarter and third quarter. So that's an aspect of it. In addition to that, last year, if you'll recall, we took five months of rent from Fidelity in the third quarter as they paid the entirety of the remainder of their term in the third quarter, which was an expiration of November 30. So we recorded all of that in our third quarter '18 same-store numbers, and we'll comp against that in the third quarter of this year as well. So those couple of items create a little bit more headwind as we think about the third quarter versus what we did in the second quarter for 2019.

Okay. That's helpful. Ted, can you just give a little bit more color on T-Mobile? I think you guys talked about having a prospect there for half the space when T-Mobile is out in April next year. Is that still in discussion? And how would you characterize interest in the rest of the space?

Sure. So what we may end up doing with T-Mobile, they may end up staying a little longer than they otherwise would have, so maybe three months or so. In terms of the prospects, the one we've -- we're talking about last quarter, it's sort of gone quiet. I don't think they've landed anywhere. But -- so right now those discussions have sort of gone on hold for us. No real other active prospects on that right now. So we're hopeful we can get T-Mobile staying there a little bit longer and then give us a little bit more time.

Okay. Great. Ed, last quarter, you talked about a handful of prospects for potential development spread across some of your major markets. Can you or Ted give us an update on where those negotiations stand? And whether you think it's likely you guys have another development announcement by the end of the year?

So I do anticipate that we would still have activity and that's why we maintain the range of the $112 million to $375 million. We added the $12 million to properly cover what we have announced to date between GlenLake Seven and Midtown One. But we anticipate getting lucky. It's not done until it's done. But that's why we maintain that guidance and hope that some of these conversations that are ongoing in a number of markets would mature into an award.

Okay. Great. Ed, congrats on a great career, and enjoy your retirement.

Thanks so much, Blaine.

Our next question comes from Jamie Feldman with Bank of America Merrill Lynch.

Congratulations to Ed, Ted, Brian and Brendan. Ed, best of luck in the next chapter, and we're glad we get to spend some time with you on your home turf not that long ago to see all you've accomplished, but thank you.

Thank you, Jamie.

So I guess, just focusing on the LSI space. You had mentioned a couple of conversations for full building medical user. Can you just talk more about the depth of that pool? And then how long do you guys wait before you do decide to take this -- the next route?

Yes. Great question, Jamie. So you're right. We are in conversation with some prospects about them taking it, not both, obviously, one or the other of those that we're talking as a full building or near full building, as I said in my prepared remarks. And so those conversations are going on. We want to fully exhaust those to see if that's something that we can consummate before we would make the decision to go ahead and convert the building. And given the quality of those conversations at this juncture, we want to continue to run those rabbits. We haven't wanted to put any deadlines on ourselves because it depends on the twists and turns of the conversations that we're having with these other opportunities. So we want to just fully vet those. Our best estimate right now that we would be able to do that within the next 60 days, plus or minus. If we are unsuccessful in reaching agreement with either of those, then we would very likely make the decision to go ahead and convert the building to a multi-customer environment. And then if we did that, we would anticipate being -- of a decision sometime in October. And then we do have a good handful of full to full plus floor users from the office side, and we're kind of slow-walking those conversations right now as we vet these other two. But certainly, we're hosting tours and maintaining contact with those who have expressed interest on the office side if these others don't play out.

That's helpful. Do you -- is there enough traditional office use to fill the whole building? Or not yet, not really?

Well, we have a handful of prospects that -- it just depends on how much at all that would make. So it's early in the process with them given that they know that our primary interest is leasing the building to a single user for the medical use. But the demand in Tampa is obviously very good, and we would anticipate being able to fill the building up with the office users once we've made the decision and then went full-bore in the pursuit of those suspects and prospects.

Okay. And then shifting gears to Midtown One, it's kind of a unique project given that it's part of a larger mixed-use project. When you think about the development pipeline going forward, do you see more of those types of opportunities? And if that's the case, how do you think about your land bank and where it sits versus the prospects of those kinds of investments?

Sure. This is Ted. We are certainly looking at different opportunities in various markets. I think it's just part of the way the whole office market is changing. I think as we look at changing office demands, companies are increasingly looking at how we amenitized office space and their workers want cool space and they can walk to lunch, walk to amenities. So we are looking at that in most of our markets. In terms of our land bank, we were always looking at -- just like we rank our buildings, we always are looking at our land bank as well to see what is in the right location, what other land we need to supplement that for. So really, that's -- there's no change there that we're always looking at it. But I would say, going forward, if we can get in some of these middle of some mixed-use type projects that would be a goal of ours.

Okay. And when you think about -- and you guys are constantly talking about a handful of projects, are any of those other similar kind of mixed-use where you'd be part of a larger project? Or are they more stand-alone build-to-suits?

Really, it's both. We've got conversations along both scenarios.

Our next question comes from Dave Rodgers with Baird.

Ted, wanted to start with you, if I can. Just one more on Tampa because we haven't talked enough about it, I guess. I wanted to ask about the three different kind of submarkets those buildings are in. And you're clearly seeing demand in one location and then it sounded like maybe T-Mobile not as much. So I guess, what's driving the unique demand in each location that doesn't sound like maybe it's overlapping from one to the next? And just to see if there is demand, et cetera?

Sure, Dave. As we talked about, I mentioned in the prepared remarks, it's really geography, price point and timing that differentiates the three opportunities. Starting with T-Mobile, as you alluded to, it's really -- it's more suburban location along the I-75 corridor in the northern part of Tampa. It's more of a back-office location. And look, I think I wouldn't read too much into the lack of demand or prospects up there yet. We've still got two months or so before we get that back and maybe longer if we extend T-Mobile on short term. So that market is still strong for us overall, so -- but it is more of a back-office lower price point versus the other two deals, which are in the Westshore. So regarding those, I think those are more price point and timing. And the difference in those, 5332 is going to be priced 10% to 15% lower than Midtown Tampa as well as its availability now versus Midtown Tampa, we've barely scratched the surface in terms of starting construction, though it won't be delivered till 2021. So we would hope we can get 5332 backfilled and leased up before then.

Great. That's helpful. And then maybe on Buckhead. You talked about new construction underway in Buckhead and Atlanta. Can you maybe talk about price point there? What you would anticipate anyway versus kind of where you guys are at? And how well positioned do you feel against new competition there?

Sure. So Buckhead, there's really just one building under construction at Buckhead. It's over across the street of Phipps Plaza that Simon's doing as part of a redevelopment on a portion of their mall. 340,000 square feet or so. They're starting it all spec. Asking rates are in the low 50s. So we think, versus our One and Two Alliance and really all of our Buckhead assets are closer to low 40s. So there's a pretty large delta from a price-point standpoint. So we feel pretty good that we should be able to compete against that building.

Okay. That's helpful. And lastly for Ed, congratulations on really having building a great team and a great company. And if nothing else, you should be rewarded for that. So congratulations. Good luck.

Thanks so much, Dave.

Our next question comes from Jon Petersen with Jefferies.

Great. I would certainly echo all the things that have been said about Ed. Thanks, Ed, for all your help over the years.

Thanks, Jon.

Yes. So in Nashville, it's one of the places that Amazon's going to. I think they recently signed, I think, it's about 500,000 square foot office lease in that market. I know you guys own some land not too far away. Just curious if you have any update on maybe conversations you're having with other potential tenants out there that might be looking at the Nashville market more now that Amazon has a bigger presence there?

Yes. There's no doubt that having Amazon in the hood is a good thing. I think that Nashville and the state of Tennessee has done a phenomenal job in their recruitment of business. And it seems like with each good name that comes to the market, it begets the next good name that comes to the market. So with Amazon's announcement of the 5,000 people coming there and what they'll takedown initially, it's nothing more than rumors now, but certainly lots of rumors flying that, that number could be growing by a material amount based on the fallout in Long Island City. And then our two -- our project called 1100 Broadway, it's really two towers on a single platform. The large would support 670,000 square feet and the smaller one would support 463,000 square feet for about 1.1 million plus. We've obviously presented either or both of these towers to a number of prospects. I think the proximity to where we are with the build-to-suit we have underway with Asurion. The other infrastructure improvements that are being made by the city of Nashville in the immediate area and then, of course, the development that not only Amazon is going into Nashville Yards, but also the neighboring hotel and entertainment areas is just land in excellent location, and we're very optimistic that it will serve us well.

Do you think -- I think in the past, you've talked about how that land was probably earmarked for the next economic cycle. But I guess given how long this one is lasting and how strong things are going in Nashville, is there a possibility of something happening there over the next few years? Or is this still further out?

I would say there's definitely a possibility, but I also want to maintain expectations. We all agree that we're in extra innings in this economic run. But with interest rates where they are and the indicators we continue to see and the U.S. being relatively safe haven in comparison to the global markets, there is no reason for you or we to not continue to be optimistic about Nashville, the Southeast and particularly this site.

Great. And then given where we're on the cycle, I think in the beginning, you used the term goldilocks in terms of, I think, capital availability and economic growth and whatnot. We've seen some M&A amongst some of your public peers in the Southeast markets. Kind of curious what your appetite is to go out and find some larger office portfolios to grow the scale of the company.

I think that our answer on that is pretty consistent along the board. We're constantly looking. We look for opportunities, whether it be single entity -- a single street address, a collection of buildings in a portfolio or a company. So we have been on that track for many, many years. We've done a lot of acquisitions over the years and something that we invest a significant amount of time studying. And if and when the right opportunity presents itself and we're able to make it pencil in and we think it's good, I think that we have the team and the balance sheet and the expertise to pursue it.

Great. And just one more. I'm kind of curious, Ed, at this point in the cycle, what you think full occupancy of your portfolio should be?

I'm glad you said should. I was going to say 90.9%. We think of equilibrium nowadays in the 92.5% to 93.5% range. And I think we're on a good trajectory right now based on where I think that we would be headed based on current leasing. So if we look at what's available in 2021 for future expirations, we already have very high probability that of the 432,000 square feet that's 100,000 square feet or more that's expiring in 2021, we have high probability on renewal for more than 90% of that square footage. So we feel, based on -- yes, we have T-Mobile and we have 5332, but if we're able to make this good prospect that Ted mentioned at 11000 Weston, give us some time on 3332 then T-Mobile really stands as the one that we would have to lease in and we have basically a year from now if we get the additional three months on that. So I think the trajectory going into 2020 and then continuing on into 2021 from a rollover perspective is exceedingly good. Rental rates continue to see a nice GAAP and cash appreciation and the development pipeline stays robust. All reasons to feel very good about it.

Our next question comes from Danny Ismail with Green Street Advisors.

Ed, I just wanted to echo to the comments on congratulating you on a great career and wishing all the best in the future.

Thanks so much, Danny. I appreciate that. You all have been mighty good to understand our story throughout the years, and we greatly appreciate that.

And just a few quick ones for me. We saw a few articles on changing ownership at the Ovation sites. Just curious if you can provide us any update on some of the moving pieces there.

Sure. It's Ted. So the lender foreclosed on the site back -- really around July 1 is when they took possession of it. So as we've probably talked to you guys about, we've been following it for the last several years as a former owner within default. So the lender has it. We -- certainly we've been in contact with them. They're working on their strategy and all that but we're staying certainly close to the situation. We're definitely engaged and following what's going on. So that's sort of where we are today. There's a lot of interest is what the lender is telling us. They believe it would be good complementary, good developers for the site. So we continue to stay in touch with them.

And Danny, just to underscore, this is a reminder, the total track is 143 acres. We own fee simple 66. So it's a clear line of demarcation between what we own free and clear versus what the lender now owns. But of the residual 70-plus acres, if you take our 66 of the 143, what went into foreclosure was about 35 of those acres. And so that's -- just to be clear, that's the component that Ted's speaking to.

Okay. That's helpful. And maybe just lastly on some of the suburban dispositions. I'm just curious as to some of the trends we're seeing in terms of fundamental -- divergences in fundamental performance between some of the more suburban assets and your BBD markets in terms of net effective rent growth and pricing in terms of GAAP rates?

Sure. We're continuing to see it. Certainly, it varies by market and submarket and even down to the building level. As a company, we track net effective rent growth virtually all the way down building by building. And we've consistently seen net effective rent growth on really throughout the majority of the buildings of our portfolio. I think the net effective rent growth has probably been a little slower on some of the suburban assets but it does continue to grow. The demand we see still robust out in our suburban product, not everybody wants to pay the freight and wants to be in the urban location. So suburban has continued to perform pretty well for us.

And in terms of pricing on the dispositions, no major changes from original underwriting in terms of proceeds?

Not really. There's still a -- there's probably consistent number of bidders that we've seen in the last two or three years, probably down from, call it, three or four years ago. But there's still plenty of bidders to make a market pricing staying right in line with what we expect.

And we think interest rates certainly help with the change of that, now the hugging of the two and some are suggesting a below two come first quarter. I think that certainly helps us on the sale of the non-core versus the pricing on trophy assets.

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

I don't have any questions, Ed. I just wanted to thank you for your help over the years and congratulate you on a wonderful career, and looking forward to continuing to work with the team as it moves forward.

Thanks so much, Chris. Appreciate your professionalism and your comments. Much appreciated.

There are no further questions at this time.

All right. Thank you, everyone. And as always, if you have any follow-up questions, please don't hesitate to give us a call. Thanks so much.

That does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your line. Have a great day, everyone.