Highwoods Properties, Inc.
Q1 2008 Earnings Call Transcript

Published: 2 May 2008

[Operator:]

Good morning. At this time I would like to welcome everyone to the Highwoods Properties First Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). I will now turn the call over to Tabitha Zane. Mrs. Zane you may begin.

[Tabitha Zane:]

Thank you and good morning everyone. If anyone has not received a copy of yesterdays press release or supplemental, please visit our website at www.highwoods.com or call 919-431-1529 and we will email a copy to you. Before we begin, I would like to remind you that this call will include forward-looking statements concerning the companies operations and financial condition, including estimates and affect of asset dispositions and acquisitions, the cost and timing of development projects, roll-over rent, occupancy, revenue trends and so forth. Such statements are subject to various risks and uncertainties. Actual results could materially differ from those currently anticipated due to a number of factors, including those identified at the bottom of yesterdays' release and those identified in the company's annual report on Form 10-K for the year ended December 31, 2007, and subsequent reports filed with the SEC. The company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. During this call, we will also discuss non-GAAP financial measures such as FFO and NOI. Definitions of FFO and NOI and an explanation of management's view of the usefulness and risks of FFO and NOI can be found towards the bottom of yesterday's release, and are also available on the Investor Relations section of the web at www.highwoods.com. I'll now turn the call over to Ed Fritsch.

[Ed Fritsch:]

Good morning and thank you for joining us today. Terry is out with a flu. And despite his insisting on being here today, I pulled away and told him to stay home, drink chicken soup and keep his fever to himself. But Dan Clemmens, our CAO is pinch-hitting for Terry and Mike Harris, our COO is on the call with us. I am pleased to report that 2008 is progressing well. FFO for the quarter was $0.71 per share, and FFO from core operations increased 17% year-over-year. In the first quarter, we experienced solid leasing activity, added one more project to our creative and well-leased development pipeline, and expanded an existing development project. Also, on April 3, we acquired through a 25% joint venture, an office park in a strategic Raleigh location at a 9.2% unlevered return which includes our anticipated management and leasing fees. We have raised the lower end of our 2008 FFO guidance by $0.04 to $2.60 per diluted share, while the upper end remains unchanged at $2.72 per diluted share. We remain comfortable with our year-end occupancy forecast between 92% and 93%. During the first quarter, we leased just shy of 1 million square feet of first and second generation space. Occupancy increase 50 basis points from a year ago, but did drop sequentially and as we had forecasted. In March, we announced plans to develop Highwoods River Point, a $10.4 million, 200,000 square foot industrial building in the northwest Atlanta. We have pre-leased 100,000 square feet of this project to Beverage House and we have good activity on the remaining space. This is the first building to be built on this recently acquired well-located 122 acre industrial track. This track will support approximately 1.3 million square feet of industrial space in total. We also announced in March that the FAA is doubling the size of the Build-to-Suit awarded to us last June from 50,000 square feet to 100,000 square feet. This project is located in the Highwoods dominated Tradeport and opposite industrial park adjacent to Atlanta International Airport, and is being built on land we already own. As many of you know, Tradeport is a strategic infill location that is becoming increasingly important as traffic in America's busiest airport continues to grow. We currently own 622,000 square feet of Tradeport, including three office and five industrial buildings. Four development projects were placed in service this quarter

[Mike Harris:]

Thanks Ed. And good morning, everyone. As Ed mentioned we had a good quarter, leasing just under 1 million square feet of first and second generation space. As forecasted on our last call, occupancy did drop sequentially, primarily due to several industrial lease expirations and it may drop very slightly next quarter. However, we remain confident that occupancy will pick up later in the year, and by year-end '08 average occupancy should outperform '07. While not officially a first quarter net, we were very pleased to have recently extended our lease with PricewaterhouseCoopers in Tampa. As stated in our press release, PWC recently re-leased an additional 11,000 square feet and also agreed to extend the term of re-leases for 3012 square feet from mid-2010 to mid-2013. No concessions were made for the remainder of the original lease term and the three year extension was consummated with nominal TI of $4.12 per square foot and 4% annual escalators. This extension reduces our 2010 expiring annualized revenues as shown on page 19 of the supplemental from 13.8% to 11.8%. Looking at some data points for the quarter, average in-place cash rental rates across our portfolio was 4.6% from a year ago and average in-place cash rental across our office portfolio were up 4.3% from the same period a year ago. CapEx related to office leasing was $7.80 per square foot in the first quarter versus the five quarter average of $10.61 per square foot reflected on page 13 of our supplemental. In our top five office markets, construction as a percent of total market remain steady at 8%, although we have seen a modest increase in new construction in a few of our markets, which I will address in a moment. Raleigh, Richmond and Nashville all them pulled healthy net absorption for the quarter, while Tampa and Atlanta were negative. I will talk about each of those markets in detail. Starting with Atlanta, the office market ended the first quarter with an occupancy rate of 87% and negative net absorption of 368,000 square feet. Our Atlanta office portfolio is 88.6% occupied, which is down from the fourth quarter, due in part to the 246,000 square feet North Tower expiration, 91% of which was immediately back build including 23,000 square feet vacant. Tampa had negative net absorption of 805,000 square feet in the quarter and the market's overall office vacancy crept up 60 basis points to 13.2% as the local economy continues to read out unstable businesses, particularly those related to residential real estate. Year-over-year employment growth in Tampa was also negative. Reconstruction in some markets, such Westshore and east Tampa is also inflating, Tampa's overall vacancy rate with inventory outpacing absorption. This is more problematic in the east Tampa submarket where multiple spec office buildings are being delivered in a relatively close time frame. This should not have any significant impact on Highwoods, as our sole East Tampa presence is in Highwood Preserve where are 100% leased with no near term expirations. In Westshore, there is 550,000 square feet under construction and it is only minimally pre-leased. Most of these projects won't be available for occupancy until late this year and into '09. For Highwoods, this is somewhat of a silver lining. First our one development project in Westshore, Highwoods base center one delivered last year is already 85% leased with prospects for the remaining space. Second, there is a substantial gap between first and second generation rental rates, keeping second gen asking rates pretty firm and providing this with some inflation from competitors rating our existing customers to move to new development. Occupancy in our Tampa portfolio is a very healthy 94.7% and these current weak market conditions don't deter our long term belief in Tampa as a core market. While we reported positive absorption in this quarter, slightly over a 0.5 million square feet, occupancy in our early portfolio increased 370 basis points year-over-year but dropped sequentially, primarily as a result of GSK's 91,000 square feet lease expiration. We've already backed 79% of this space with a minimum leasing CapEx and no down time between leases. Raleigh continues to post strong employment growth with a 3.1% increase from March 2007. Overall new construction is higher than we'd like to see, the new product that we compete with is 3.7% of the market, but new starts have slowed dramatically. We have almost $160 million of development underway in Raleigh; that is 60% pre-leased and good prospects for a significant portion of the remaining space. Construction on RBC Plaza is proceeding very well, and RBC Bank is expected to move into its 130,000 square foot headquarters in late third quarter. The frame for the building's landmark top half was out in place last weekend and RBC Plaza is not the tallest building in Raleigh. Occupancy in our recent portfolio climbed to 93.5% at the end of the first quarter, a 100 basis point increase from the fourth quarter and 370 basis points better than 1Q, 2007. The regional market reported positive net absorption of 121,000 square feet in the quarter and occupancy in the overall market is 90% up 60 basis point from year-end and 270 basis points better than a year ago. The national market reported a solid growth with nearly 0.5 million square feet of office space absorbed in the quarter and office occupancy at 91.6%. Our national office portfolio continues to outperform the overall market with 95% occupancy and the healthcare and insurance industries are driving much of that markets growth. New construction in the Cool Springs submarket, one of the strongest performing submarkets in our system is around 350,000 square feet, including our 150,000 squarer foot Cool Springs School building which is scheduled to deliver late this year. Historically absorption with submarket has been about 335,000 square feet per year. Earlier this week we hosted a two-day meeting for all of our leasing representatives. These team presented an in-depth analysis of their markets and portfolios. While somewhat of a mixed bag, the overall tone was upbeat. Our leasing reps are still seeing decent activity and there has not been a lot of pushback on rental rates. Some are seeing a slight creep in concessions, usually in the form of a month or so of free rent or will request for turn key TI build up but this is not pervasive. Most of our leasing reps were with us in 2001 and when asked how this environment compares to several years ago, all agree there is no comparison. Here is why, first market conditions are not nearly as distressed as they were back then. Second, the quality of our portfolio is significantly better this go-round. As many of you may recall it was the lower quality poorly located C and B minus assets that took the brunt for the damage in the last economic downturn. In closing, let me say that while we very mindful that these are not the best of economic times, we like our position in our markets certainly relative to our competition. Our portfolio is well positioned to whether a storm should times worsen and we have highly seasoned division heads and a solid team of leasing and asset management professionals who understand what it takes to survive and thrive during uncertain market conditions. Dan?

[Dan Clemmens:]

Thanks Mike. And good morning, everyone. As Ed noted in his opening remarks, we had a good first quarter. FFO per share was $0.71 compared to $0.65 in the fourth quarter of 2007 and $0.91 in the first quarter of 2007. First quarter 2007 included $0.26 of land sale gains, $0.07 from an insurance settlement gain, and $0.01 of lease termination fees. First quarter 2008 had $0.03 of lease termination fees, letting out these items, FFO from core-operations was $0.68 per share this quarter compared to $0.58 in the first quarter of 2007, a 17% increase. FFO from core-operations in the fourth quarter 2007 was $0.64, so we had solid growth over year-over-year and sequentially. This growth trend in core-FFO is primarily the result of the impact of $201 million of development deliveries in 2007, occupancy growth and higher average rents. Total revenues from continuing operations in the first quarter were up $8.7 million, or 8%, compared to the same period in 2007. $2.5 million dollars of this increase relates to same properties, and the reminder comes primarily from development properties delivered in 2007. Total same property cash NOI, excluding straight line rents and termination fees, was up 2.8% from the first quarter of 2007 and up 3.2% from the fourth quarter of 2007. The increase in the fourth quarter was primarily due to seasonality trends in operating expenses which tend to be lower in the first quarter than the rest of the year. We were very pleased with our operating NOI margin, excluding term fee income for all properties increased from 64.2% in the first quarter 2007 to 65.3% this quarter. These improvements are primarily the result of higher revenues and higher average occupancy. In addition, we are benefiting from the lower operating costs, associated with a younger and higher quality portfolio. G&A for the first quarter of 2008 was lower by about $1.2 million, compared to the same quarter in 2007, or $0.02 per share. We had a positive effect related to the decrease in the deferred compensation liability, but this was fully offset by the mark-to-market adjustment on the related investment accounts, it is included in other income. Compared to a year ago, we also have more debt deal and accounting expenses, and lower marketing expenses on the RBC condos. We are still forecasting net G&A to be in the $40 million to $42 million range for full year 2008, flat over 2007. Net interest expense was up about $600,000 this quarter, or $0.01 per share compared to 2007. Capitalized interest was $400,000 higher this quarter, which favorably impacted net interest expense, and our weighted average rates were much lower this quarter. These favorable effects were offset by higher average debt balances, due to funding our development pipeline in 62 million of preferred stock retirements last year. This quarter, we paid off $100 million of 7.8% bonds at maturity on February 1st, using proceeds from a new three year $137.5 million floating rate loan, which bears interest at LIBOR plus 110 basis points. The weighted average rate for all our debt was 5.88% at March 31, down from 6.6% a year ago, an 11% decrease. Preferred dividends were lower by $1.3 million this quarter compared to last year, as a result of the lower outstanding preferred stock balances. On the financing front, we are pleased to have no debt maturities for the remainder of 2008. In May 2009, our credit facility's initial three year term ends, but we have the unilateral right to extend this facility for an additional year on existing terms. In 2009, we'll have $50 million of 8.8% bonds maturing in January, and about a $115 million of low-levered secured loans at 7.8% rate, that mature in November. We currently have a $198 million available on our unsecured and $80 million available on our secured revolving construction facilities. Given the $278 million in funding availability, combine with the proceeds from additional plant dispositions and potential capital sources, we are well positioned to fund approximately $150 million of development costs that remain to be funded as of March 31. And take advantage of other investment opportunities, as they arise. We were CAD positive in the first quarter and expect to be CAD positive for the full year. As noted in yesterday's release we raised the low end of our FFO guidance by $0.04 to $2.60, this is primarily due in approximately equal parts, to having already achieved the low end of our termination fee assumption, the FFO contribution from The Forum acquisition and somewhat lower interest expense from lower floating rates than we originally anticipated. Operator we are now ready to take your questions.

[Operator:]

(Operator Instructions) Your first question comes from the Chris Haley.

[Chris Haley:]

Good morning. I am Chris Haley from Wachovia. Wanted to ask a question about the leasing assumptions, as part of guidance, Mike where do you stand in terms of your aggregate leasing assumptions for the full year 2008, to reach the low-end and high-end? And how would that compared to the aggregate leasing recorded during the 2007 year? Just trying to compare the two in terms of how much of a delta there is.

[Mike Harris:]

Okay. Chris first of all I want to make sure I understand the question. You want to understand for the balance of 2008 to reach our guidance. What we're expecting to do from here in terms of assumptions, and you're talking about make sure again renewals versus new leasing etcetera.

[Chris Haley:]

Well just the aggregate of renewal and new leasing Mike, and put those together for the remaining three quarters plus what was done in the first quarter. So that would be the aggregate 2008 calendar versus the aggregate amount in 2007. Are you expecting your velocity to be higher or lower but what magnitude in 2008 versus 2007?

[Mike Harris:]

Chris I think it would be about 80% of '07 and '07 total 2nd Jan was about 5.04 million. We think that somewhere around the 80% range would get us there. We anticipate to hover around this occupancy level of mid 90% for the middle part of this year, and then given the activity that we have to end the year up, basically where we ended up last year or maybe a little bit higher depending on some spec leasing. But overall the average occupancy should be at or better than what our average occupancy was for calendar year 2007.

[Chris Haley:]

Okay. And Mike was there any feedback between industrial versus office from your officer meeting.

[Mike Harris:]

No it was - actually they were both upbeat. Remember our industrial is principally in the Triad, principally Greensboro and Atlanta. And I think they both felt that activity was good. I think on the office front as we discussed, there's a certain amount of spec activity we're looking for, for the last half of the year. We have a call every month with our leasing folks. Every leasing agent comes in and gives us a reforecast on their leasing assumptions, and thus far we're seeing it looking pretty good.

[Chris Haley:]

And last question is, I noticed in one of your recent investor presentation you said there were three NCAA final four basketball teams noted. Is this implying that you are looking to go to the fourth market, UCLA?

[Ed Fritsch:]

No, they went out of the tournament pretty early like another one of the four team more closer to us.

[Mike Harris:]

Complements of our Memphis division which is also performing well by the way.

[Chris Haley:]

Thank you.

[Ed Fritsch:]

Thanks Chris.

[Operator:]

Your next question comes from the line of John Guinee with Stifel Nicolaus.

[John Guinee:]

Hi. Nice job guys.

[Mike Harris:]

Thank you.

[John Guinee:]

Question. Your G&A as a percent of the income tends to be consistently pretty high relative to your peer group. Are you aware of any accounting treatments that you do that are different than the immediate peer group?

[Ed Fritsch:]

To put everything, in perspective to --.

[Dan Clemmens:]

John this is Dan, I'll take that question. And I can tell you that based on having looked at some of our peers as well, I am looking at some of their financial information but, I don't believe there is any difference between what we do and that of our peers, in terms of accounting treatments.

[John Guinee:]

(inaudible) 90%.

[Ed Fritsch:]

And I think John that what's driving it is predominantly our pursuit of these GSA transactions. It's a high stakes game, the cost to pursue those transactions is high, but the reward when you win them is high given the quality of the credit, the length of the lease and the stability of the product given they are likely to stay, come renewal time. So I think that's, that's probably a significant differentiator as the dollars that we invest to pursue those cost and then obviously you can't win them all, and when we hit a dead deal it certainly has an impact on G&A. and we may also allocate less OpEx but our margin after G&A is certainly in the ballpark with our peers.

[John Guinee:]

Got you. Okay second question really quick. Any movement on land pricing in your markets?

[Ed Fritsch:]

We have not seen that. I think in the land that we have an interest in, we follow it to some degree, but more on the periphery that land which is more conducive, large tracks for single family residential development and we understand that moves downwards. But land that we are in pursuit of for office industrial development, we haven't.

[John Guinee:]

Great, thank you.

[Ed Fritsch:]

You are welcome.

[Operator:]

(Operator Instructions). Your next question comes from the line of David Cohen.

[David Cohen:]

Can you just talk about the Country Club Plaza occupancy; it looked like it declined in the retail portfolio to 200 basis points. Was the lease termination fees related to that asset and what are you seeing in stock closures and bankruptcy there?

[Ed Fritsch:]

We haven't received any lease termination fees, whatsoever from them in this quarter. The change in occupancy was about 200 bps which equates to about 26,000 square feet. So there are number of smaller lease explorations. We have strong backfilled prospects with long term leases and substantial increase in rents.

[Mike Harris:]

Actually, one of the, biggest products base has already been backfilled, we actually signed an agreement with customer lease. So, that's already been taken care.

[David Cohen:]

Okay, and so where did the term fee get generated from?

[Ed Fritsch:]

The term fee was generated here in Raleigh where burrows welcome occupied a building called 4301 in research common out in the Research Triangle Park and they were brought up by GSK. GSK, we knew, they were going to move out of that space, contract back to their company and campus. The lease provided that they restore the building back to its original condition at the time of lease expiration. So, we received compensation from them, they have made up 1.8 of the 1.9 in termination fees that we had for the quarter.

[David Cohen:]

Okay great.

[Ed Fritsch:]

David just one foot note to that, obviously we didn't restore it back to its original condition in 1989, and in fact we were fortunate to back-fill 70% of that space, with no down time and in as is condition to University of North Carolina.

[David Cohen:]

Okay. You talked about increasing supply in Westshore market in Tampa? You had a building Base Center II, that we going to Base Center I. What are the plans now?

[Ed Fritsch:]

We have the building pad ready, the utilities, infrastructure are in place for that sister building, which is approximately 209,000 square feet, somewhere in a $43 million to $45 million investment. We right now have got that fully designed, but we don't have any plans on pulling the trigger on that. We are holding it for some substantial pre-leasing. We understand or we know well that Metlife and Crescent have both started there approximate 250,000 square feet buildings. We understand that Rubinstein has put his on hold and will not start it at this point in time, based on scuttlebutt. But the Phase I has done extraordinary well, the are rental rates that we've been able to secure there have been above market, but we will hold on Phase II until we have significant pre-leasing.

[Mike Harris:]

And also, understand David that of the two spec projects that Ed mentioned, that there is some scuttlebutt that there is pretty good lease activity on at least one of those building so that would release some of the pressure of that supply.

[David Cohen:]

How much in safe requirements do you think there is in the market, how many buildings could current demand fill?

[Ed Fritsch:]

The Westshore absorption per year is somewhere around 350,000 to 400,000 square feet a year.

[David Cohen:]

Okay. And there is 500,000 just on the market right now?

[Ed Fritsch:]

It's underway David. One of the buildings is scheduled to deliver by late '08 and the other building is scheduled to deliver in '09.

[Mike Harris:]

So, that is 550.000 among those two buildings.

[David Cohen:]

Okay. And just final question on The Forum acquisition, why did you decide to do that deal? What's, you are going from an initial Cap of 9.2 to stabilized 7.4, so you are obviously loosing some type of leasing or can you just give us some more color on why you did that deal and what's going on in terms of the yields?

[Ed Fritsch:]

Sure and, I just want to correct and probably too strong word to use but, what's occurring there is that the joint-venture performance first year stabilized yield will be 7.4. The return to Highwoods as a 25% joint-venture partner, out of the gate is a 9.25, because we're receiving fees on the management of that project. So we're not going to erode from a 9.2 down to a 7.4. The Highwoods position in that is going to be at a 9.25. And in fact we have opportunity if our occupancy improves from 90% up towards 92%, 93%, our return would even enhance. So, there is very little role in that project, and less than 10% between now and the end of 2010 and about 25% in the first five years. So the role exposure is less than what we have in our typical portfolio. They're great buildings, we brought below replacement cost. There is some upside in the mark-to-market. So, I think overall it's a very good play for us, and there is no way that Highwoods interest is slated to role down to anything less than where we are now unless something catastrophic were to occur.

[David Cohen:]

Okay. I miss read it. And was that a marketed deal or was that an off-market transaction?

[Ed Fritsch:]

CB Richard Ellis, their Atlanta office put a five pound glossy pack together and proudly marketed it, we were fortunate that it was in our backyard, where we were able to tell the buyer through the broker that, we would waive any due diligence requirements with regard to the market or the submarket which the competition was unable to do. It is our understanding that we weren't high bid, but given the credibility of what we have put together in the way of being able to close and the timing of close, put us in the driver seat in that. We delivered. It's very narrow period of time from when the offering went out and closing which I think is just a good example of our being able to properly dispense our dry powder in being opportunistic.

[David Cohen:]

Did you want to do that as a wholly owned or did you bring in the partner at some point or was it always going to be the joint-venture.

[Ed Fritsch:]

We brought the partner in, at the get go and we received the package.

[David Cohen:]

Great. Thank you.

[Ed Fritsch:]

And David, just a clarification. That partner is DLF, and we have a very broad partnership platform for them in three others cities, four including Raleigh. So it is a large platform and we were able to replicate documents etc, so the long-standing relationship is working well.

[David Cohen:]

Okay. Thank you.

[Ed Fritsch:]

Thank you.

[Operator:]

Your next question comes from the line of Wilkes Graham.

[Wilkes Graham:]

Hey guys. Ed, I think I recall you saying at the investor day down at (inaudible) that over the past couple of years, this is probably a little dated now that, you would look at $2 billion of product to acquire and had only bought $51 million. Obviously transaction volumes are down, but I am just curious how much product there is out there relative to what you have seen in the past. And are IRRs getting any closer to your hurdles, so where you think you could start acquiring wholly-owned acquisitions, either later this year or early in '09. Just want to get your thoughts on kind of how you view the acquisition market out there.

[Dan Clemmens:]

Well, there is certainly fewer large packages that are being presented, for the same reason that we believe, that Winston-Salem didn't go when it went. We still see a fair number of smaller packages. In the fourth quarter of '07, there were a few large deals done, and the North Park deal in Atlanta was fairly substantial, and a few others that we've tracked. When I say substantial, I mean over a $100 million - $125 million. But what we're seeing is a larger volume or a larger percentage of transactions now are one -- collections of one, two, three, four buildings. So what we're looking at is, how can we be strategic like the exercise that we were able to consummate at The Forum. I think cap rates have been based on what we've been able to track, and what we're provided in the way of market data from Capital Analytics, is that the cap rates used are still hovering in the same exact range that we have our office cap rates in our NAV page in the supplemental.

[Wilkes Graham:]

Okay. Thank you.

[Dan Clemmens:]

Thanks Wilkes.

[Operator:]

Your next question comes from the line of Jamie Feldman.

[James Feldman:]

Thank you very much. So if we look at some of the broker data from the first quarter of '08, particularly CB Richard Ellis, it looks like there were pretty dramatic vacancy increases in Nashville, Orlando and Tampa. Can you talk a little bit about maybe what those are and why your portfolio has been able to outperform or why that's really not a cause of concern?

[Mike Harris:]

Jamie, this is Mike. First of all, let's address Nashville. Nashville, which you probably saw was new product that had come on the market in the Cool Springs Crescent had delivered a building last quarter with minimal occupancy there. We know that, I think it was my script I think it was 500,000 square feet under construction there, including our 150,000 square feet. So you got to come out there, there is some construction in downtown Nashville as well that's partially leased to a major Law Firm and a Bank.

[Ed Fritsch:]

And if you bifurcate CBD from suburbs to CBD is where the hit occurred.

[Mike Harris:]

Correct and that's where also by the way most of - there is a tremendous amount of residential development in Western towards downtown and that's getting to build everybody on the residential end, but we are not in that play. In Orlando if you look it would really be two markets, it would be CBD where you had one project that actually was both as condo development came back and basically the developer went bust. So some of those units came on the market in an auction. And then you've got out and call it in South Orlando if you would, there is some projects out there in Millenium Mall which delivered that, I think, Duke actually one building out there that was a pure spec building and they are just getting going on their occupancy. I'm sorry and what was the other market we were up.

[Ed Fritsch:]

At Tampa

[Mike Harris:]

As I discussed in Tampa what you really got is two markets where it's really getting very competitive. East Tampa which is up and down the I-75 corridor, there are a number of spec buildings that were just delivered or it will be delivered and we expected to get pretty bloody out there before so just too much as to partition too few deals. We feel very insulate with our Highwoods Preserve product one. We are at the North end of that submarket. We're 100% leased, and I think that our closest exploration is like 2014. So we don't see any point coming after our tenants up there. Westshore as Ed pointed out again, the new product that's in Westshore, they are going to be looking at asking rates somewhere in the low to mid 30's for this product, where the second gen space is going to be looking at rates somewhere in the mid-20s. So I think that it would be, there would be a lot of concessions for them to get back where one of our existing tenants would look to migrate over there.

[James Feldman:]

Okay. And [full] disclosure. It just shows that Raleigh did tick down 80 basis points so that's it. Alright thank you very much.

[Ed Fritsch:]

Sure.

[Operator:]

You do have a follow-up question from the line of John Guinee.

[John Guinee:]

Stop me if this has already been answered, but can you refresh us on your strategy on your [8.8] -- [5.8] preferred shares that are outstanding now? I think they're callable at any time.

[Ed Fritsch:]

The 8% are, John, that we still I think have 52.5 million that's callable. But that's at a flat 8. The 8 and [5.8] is not callable until 2027, and the amount that we have left on that is you remember Dan. I think it's about $82 million, $82.5 million, somewhere in that range. So we have brought some of that in. I think we brought in about $25 million of that when a broker connected us with somebody who held those and wanted to get out, and we were able to buy them back right at par or right around par. So what we'll do is we'll monitor the 8 and [5.8]. If there is, someone has an interest in getting out of those and we can buy them close to par than depending on our drive powder we may make that decision. The 8% we'll call those in based on how our proceeds go from dispositions.

[John Guinee:]

Great, thank you.

[Ed Fritsch:]

Thanks John.

[Operator:]

You have another follow-up question from the line of David Cohen.

[David Cohen:]

Hey, I just wanted to follow-up on the FAA development in Atlanta, it looks like you pushed back the stabilization about a year, I think. Can you discuss that?

[Ed Fritsch:]

Sure, the FAA expanded their FFO by a 100%. The original deal that we had done was 50,000 square foot build-to-suit in our Tradeport Park adjacent to Hartsfield. And they doubled the requirement to 100,000 square feet. So that, hence pushed out the delivery date, and also obviously goosed the return for us, because we are doing it on company owned land.

[Mike Harris:]

And we are in fact ready to go on to 50,000, when they said, stop, we need to double it, so we don't mind delaying the delivery for that kind of growth.

[Ed Fritsch:]

And it obviously required some engineering and architectural time, so it has taken us 12 months to build an additional 50,000.

[Mike Harris:]

We are still getting the full time on the lease from the new delivery date.

[David Cohen:]

Okay. That's helpful. And on the RBC plaza, there is no additional lease up, sounds like there is activity. Can you tell me, how much is under negotiation that could potentially close over the next couple of quarters?

[Ed Fritsch:]

We have had showings for more space than we have space, there are discussions ongoing, but I would put them in discussions/negotiations for more space than we have space. So, the stabilization date on that isn't until 15 months or 18 months after delivery. It's in the supplemental, so we have plenty of time built in the pro forma. We feel like the volume of interest in that is significant. As Mike mentioned in his script, the steels workers are setting the structure for that spire, really makes it even all the more distinctive on our sky lines. I have no concerns about that project within our portfolio. And also on the residential side, we are still 100% under (inaudible) agreements with the non-refundable money.

[Mike Harris:]

And David, in the negotiation/discussions that we are having, the run rates that we are quoting are at or above where we are performed. So, this seems to be holding steady there.

[David Cohen:]

Given where we are in kind of the economy right now, how firm are you planning to be, I guess, on those rents and how much wiggle room do you think there will be in and how are the tenants kind of responding, is there some sticker shock right now?

[Ed Fritsch:]

I think that any new competitive product, as Mike mentioned in Westshore, for example this new product that is asking well north of $30 and we are not there. I think that given where we are in our asking rates and given the uniqueness of this product, there hasn't been any new office space of size build downtown since October 1991. So, we are sitting out there with brand new product, that's extremely attractive. And I feel that we are quite comfortable with where we are on it.

[David Cohen:]

Thanks.

[Ed Fritsch:]

Time will tell but discussions are strong.

[David Cohen:]

Thank you.

[Ed Fritsch:]

Thanks David.

[Operator:]

I am showing that there are no further questions at this time.

[Ed Fritsch:]

Okay. I will like to thank everyone for being on the call. And if there is any question that anybody held back on perchance, because Terry wasn't here. He should be back riding high in the saddle next week. We just didn't want him here, pulling George Bush and throwing up during the dinner, during the analyst call. The fun out there is that stenographer would be with that. So, he will be here early in the week, so feel free to call now with any questions you have or Terry will be available next week. Thanks so much.

[Mike Harris:]

Thanks.

[Operator:]

Thank you, ladies and gentleman, this concludes Highwoods Properties first quarters results conference call. You may now disconnect.