Highwoods Properties, Inc.
Q1 2013 Earnings Call Transcript

Published: 1 May 2013

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Highwoods Properties conference call. Now during this presentation, all participants’ lines will be in a listen-only mode. Afterwards, we will conduct a question and answer session. (Operator Instructions). A quick reminder, this conference is being recorded today, Wednesday, May 1, 2013. It is now my pleasure to turn the conference over to Tabitha Zane. Please go ahead.

[Tabitha Zane:]

Thank you and good morning. On the call today are Ed Fritsch, President and Chief Executive Officer; Mike Harris, Chief Operating Officer and Terry Stevens, Chief Financial Officer. If anyone has not received a copy of yesterday’s press release or the supplemental, please visit our website at www.highwoods.com, or call 919-431-1529 and we will e-mail copies to you. Please note, in yesterday’s Press Release we have announced the planned dates for our financial releases and conference calls for the remainder of 2013. Also, following the conclusion of today’s conference call, we will post senior management’s formal remarks on the Investor Relations Section of our website under the presentation section. Before we begin, I would like to remind you that this call will include forward-looking statements, concerning the Company’s operations and financial condition, including estimates and effects of asset dispositions and acquisitions; the cost and timing of development projects; the terms and timing of anticipated financings, joint ventures, rollover rents, occupancy, revenue and expense trends, and so forth. Such statements are subject to various risks and uncertainties. Actual results could materially differ from those currently anticipated due to a number of factors, including those identified at the bottom of yesterday’s release and those identified in the Company’s 2012 Annual Report on Form 10-K and subsequent SEC reports. The Company assumes no obligation to update or supplement forward looking statements that become untrue because of subsequent events. During this call, we will also discuss non-GAAP financial measures such as FFO and NOI. Definitions of FFO and NOI and an explanation of management’s view of the usefulness and risks of FFO and NOI can be found toward the bottom of yesterday’s release and are also available on the Investor Relations section of the web at highwoods.com. I’ll now turn the call over to Ed Fritsch.

[Ed Fritsch:]

Good morning everyone and thank you for joining us today. Well, economic indicators continue to shuffle towards improvement the equity markets replenished 401-K accounts and the housing market awakens from its long slumber, we, we being the American business public continued to await the arrival of a well-defined inflection point. One free of any government contrive crisis du jour. In fact, we were hoping for the inflection points arrival prior to today’s call with understanding that it too has been furloughed. We are pleased to reaffirm our 2013 FFO per share outlook of $2.68 to $2.81 per share, even with our deliberate 60 basis point reduction in leverage from 43.9% at year-end to 43.3% today. Our first quarter FFO results of $0.68 per share were solid, particularly given the G&A lumpiness noted in yesterday’s release. During the quarter released 1.2 million square feet of second generation space of which 795,000 was office within an average lease term of 6.1 years. Year-over-year total occupancy was up 40 basis points to 90.6% and same store cash NOI was up 3%. Turning to investment activity, during the quarter we announced $145 million of capital deployment with $89 million of immediately accretive acquisitions and 100% preleased $56 million build-to-suit. Combined these investments are expected to generate GAAP yields in excess of 9%. First quarter acquisitions included four office properties in the “best business districts” in Tampa and Greensboro. These immediately accretive acquisitions enhanced the Highwoods brand and our deal flow in both markets. The properties in Tampa, which were 86.8% leased at purchase created an opportunity for value creation through occupancy gross and cost savings as synergies are captured between the two buildings and with our immediately adjacent 4,200 Cypress. Highwoodtizing of these recently acquired assets is well underway and we will rebrand the quarter mile contiguous frontage these three properties have on both Cypress Street and I-275. We maintained our guidance of $200 million to $325 million and presently have $89 million of acquisitions in the bag. We are in discussions at various levels on multiple opportunities and remain confident with this range. Clearly, we have been more active on the acquisition front over the past four years as pricing has become more in-sync with the underwritten risk profile. We are pleased with our track record during this period having completed $785 million in office acquisitions, which are generating a 9% average GAAP yield. In addition, the weighted average occupancy of these assets has grown 600 basis points to 91.3%. Our team will remain disciplined and deliver with regard to underwritten and pricing in this tenacious pursuit of opportunities to deploy capital, both on and off market. We will remain loyal to the quality of the asset and its corresponding [rent] role and/or value creation opportunities. We will not get caught up in simply chasing the bid. Turning to development; signing the build-to-suit lease with International Paper, Memphis, for $56 million at 241,000 square foot Class A office building was another highlight in the quarter. This represents the expansion of the headquarters campus for a long-term customer. Our development pipeline is now $129 million and is 93% preleased. With $60 million in the bag, we are raising the lower-end of our guidance for development announcements from $75 million to $85 million with high-end remaining at $200 million. We have a sound [inaudible] prospects and forecasts signing additional build-to-suit leases as we moved through the year. On the disposition front, we sold three non-core office properties for $19 million in the first quarter. In addition, in April, we sold 862,000 square feet of industrial properties and 15 acres of industrial zone land for $43 million all at Atlanta. In light of the strong pricing environment in our Atlanta industrial portfolios healthy rent role, we [continued to have] determine that this is the [opportunity] time to sell the majority of our remaining Atlanta industrial assets. This would include 18 buildings encompassing 1.9 million square feet that are currently 94% leased. Accordingly, we raised our disposition guidance from $100 million to $150 million to a revised range of $125 to $175 million. In summary, overall it was a solid and active quarter and I applaud our team for their continued dedication and hard work. I’ll now turn it over to Mike to cover operations. Mike?

[Mike Harris:]

Thanks Ed and good morning. It was a solid quarter with same property cash NOI growing 3% year-over-year, an average in place cash rental rate across our office portfolio increasing a robust 4.8%, which in large part is a function of a higher quality portfolio in many of our markets best business districts. As Ed noted, [inaudible] leasing activity in our market was solid, showings were steady and deal velocity is good. We’re also seeing the timeframe for lease decision to accelerate a bit. Our top five office markets combined reported positive net absorption of 1.1 million square feet and occupancy in our office portfolio remains higher than the overall markets occupancy. We signed 147 leases for 1.2 million square feet of space, 795,000 of which was office and average office term for lease assigned was 6.1 years. Cash rent growth for the office lease assigned this quarter declined 11.5%, while GAAP rent increased 10-basis points. New deals represented nearly 37% of our office leasing activity versus the prior five quarter average of 29%. Leasing CapEx were elevated versus prior quarters is in sync with the typical spend when we were able to achieve such a high percentage of new leasing and greater than six years of lease term. A 47,000 square foot new lease in Pittsburgh also had a significant impact on leasing CapEx. However, we leased this long-term vacant space to a good customer for a term in excess of 15 years, so the deal is attractive as it stands on its own. Excluding this deal CapEx for renewals and new deals signed in the quarter would have been $17.53 per foot. We also signed 124,000 square feet in Greenville with leasing CapEx of $24.77 per foot. These leases better position us to ultimately [inaudible] this market and will help maximize our sales per proceeds. Our national portfolio continues to be our strongest performer with 95.6% occupancy and it has been over 94% since the end of 2011. Planning is well underway for the 68 acres of office development land that we recently acquired in a prime location at Nashville’s Cool Springs submarket. As a reminder our land is part of 145 acre mixed use high density development that in addition to office will include retail, hotel and residential. We are pleased that our rezoning request for height overlay aberrance was just approved allowing us to construct building as tall as 12-storeys, twice as high as the original zoning allowed. Our Pittsburg portfolio continues to prove itself to be a sound investment for our shareholders. Occupancy at quarter-end was above 91% and we have leases aimed to take occupancies at 93.3% by the end of the second quarter. As [in the side] a recent JLL report noted that the downturn Pittsburg office market enjoys one of the strongest occupancy levels in the country. In the Atlanta market, we continue to see positive net absorption and a slow but steady decline in office vacancy with regard to the 2,800 Century Center we continue to be on course to achieve 92% relap of the AT&T move out by year-end. With regard to Brentwood we are actively marketing this 223,000 square feet in advance of the expected move out by AT&T in October. Our plans for repositioning Brentwood are complete and we will commence work in and around the building as soon as the existing customer grants access to the space. In Tampa, we are pleased to have added 372,000 square feet of office product through the Meridian acquisition. We believe these additional buildings meaningfully enhance our market share in Tampa’s BBD. Also we’re receiving positive feedback from perspective customers regarding our well conceived plans to transform Tampa Bay Park into a more urban environment. We continue to work closely with our prospect pool as they evaluate various test fits and economic scenarios. Lastly, as [inaudible] this may sound we continue to benefit from having one of the few large blocks available space in all of west shore. Overall, leasing activity across our portfolio is steady and despite some larger lease expiration this year we expect occupancy at year-end to be north of 90%. Terry.

[Terry Stevens:]

Thanks Mike. Total FFO available for common shareholders this quarter was $57.8 million, up $4.4 million from first quarter of 2012. This increase primarily reflects $4.2 million higher NOI from acquisitions net of dispositions. 800,000 in lower interest expense from lower average debt outstanding, lower rates and more capitalized interest, probably, offset by 400,000 and higher G&A and 400,000 in lower interest income. As a reminder FFO per share and G&A amounts exclude property acquisitions, cost and debt extinguishment cost, which amounts are disclosed in a table in our press release. On a per share basis FFO for the quarter was $0.68, $0.02 lower than first quarter of 2012 and the same as the fourth quarter. First quarter 2012 FFO benefited by approximately $0.05 per share because our leverage including preferred was north of 47% then after the PPG Place and Riverwood acquisitions in September 2011. As you recall in 2012 we reduced leverage through our ATM program and non-core dispositions and by July 2012 we were back to the 43.7% level we had prior to the 2011 acquisitions. Same property cash NOI was up 2.2 million or 3.0% in the quarter compared to first quarter 2012 driven by [seven-tenth of a percent] growth in average same property occupancy and by the conversion of straight line rental income into cash rents. Same property GAAP NOI was down [four-tenth of a percent] due to 1.7 million lower straight line rents and 800,000 lower lease termination fees. Straight line rental income in the same property pool is expected to be $6.6 million lower for the full year 2013, compared to 2012. G&A excluding 500,000 in expensed acquisition cost and 300,000 in deferred compensation mark-to-market adjustments was $9.8 million this quarter or 500,000 higher than the first quarter 2012. The net increase was driven mostly by higher long-term equity based compensation modest [ranking filed, salary merit] increases and higher healthcare premiums partly offset by lower annual incentive comp. As we’ve commented in the past the deferred comp mark-to-market adjustments are fully offset in other income and have no bottom-line effect. As noted in the press release, first quarter G&A was disproportionately impacted by the GAAP requirement to expand some of our long-term equity incentive grants on the March 1 grant date rather than over the vesting periods. This is due to certain officers meeting or approaching eligibility under our retirement plan. This effect also occurred in the first quarter of 2012 that was $1 million larger in the first quarter of 2013. However, for full year 2013 long-term equity compensation will be approximately $750,000 lower than full year 2012. As such the G&A run rate for the next three quarters will be significantly lower than the first quarter and we remain comfortable with our original G&A outlook assumption of $32 million to $34 million for the full year. Turning to the balance sheet we ended the quarter with leverage unchanged from year-end even with 85 million of acquisition and development spending net of disposition proceeds. Our debt plus preferred as a percent of gross book assets was 43.9% and debt to annualized EBITDA was 5.86 times. Since quarter end, we have lowered the leverage even further to 43.3% as a result of the April dispositions. In February, we paid off early $35 million unsecured bank term loan at par. In addition, we expect to pay-off two secured loans later this year; $116.1 million, 5.75% loan and the $67.5 million, 5.12% loan, which become pre-payable at par on September 1st and October 1st respectively. Once these two loans are paid off our unencumbered NOI should increase from the current 68.7% to over 77% providing even further balance sheet flexibility. In the first quarter, we issued 1.3 million common shares under our ATM program for $46.0 million in net proceeds. This morning we reloaded our ATM program as we like to have multiple avenues regularly available to fund our capital deployment activity on a leverage neutral basis. Lastly, we reaffirmed our 2013 FFO outlook of $2.68 to $2.81 per share, an updated certain of the specific guidance assumptions. Operator, we are now ready for questions.

[Operator:]

(Operator Instruction). Our first question comes from the line of Jamie Feldman with Bank of America Merrill Lynch. Please go ahead with your question.

[Jamie Feldman:]

Great. Thanks. I guess the first question. You know, given your news this morning and how the stocks were enacting today, can you just talk about your thoughts on ATM issuance versus overnight issuance when it comes to raising capital?

[Terry Stevens:]

Yes. This is Terry. We would like to have multiple sources to finance our growth on a leverage neutral basis as I mentioned. We have the ATM, which is a very cost effective play and great for smaller needs. You know, if you don’t need to have a large raise all at one-time. We also have dispositions and as you heard we are looking to exit the most of the remaining Atlanta industrial which will provide some additional [recycled] equity. So we have a number of sources and the use of proceeds that we have influences the timing and the type of equity that we raised. So we are aware of all those types of ways to raise equity and would use them in the way that we would think would be most appropriate for the use of proceeds at hand.

[Jamie Feldman:]

Okay. And I guess just doing the fundamentals you announced the build-to-suit this quarter. Can you talk a little bit more about your development pipeline and maybe where we may start to see things pick up or just how deep is the pipeline at this point?

[Ed Fritsch:]

Jamie, this is Ed. We are in conversations with many prospects all at different stages. We have been saying for sometime all those conversations are protracted and we were pleased with the speed at which the International Paper transaction occurred. It was basically 18 months from when we first started talking with them about it to inking that deal and it’s a solid deal. So we feel like we are off to a very good start for the year with that 100% preleased. And like I said, [inaudible] with multiple other genuine users, it just comes down to them actually pulling the trigger.

[Jamie Feldman:]

Okay. And then I guess just bigger picture on the fundamentals. Do you think about this quarter versus last quarter in your largest markets kind of where would you gauge the strength and the recovery versus three quarters ago?

[Ed Fritsch:]

Yes. I think we are somewhat better. Yes, we are not dramatically better but I think the word I used to my opening comments that we have shuffled towards improvement is a fair descriptor. I think that as we get deeper into the portfolio, obviously, we have some lower quality space or tougher spaces to lease, but we continue to improve the portfolio through dispositions, acquisitions and development. So we think that, that will continue to work in our favor. In summary, it’s somewhat improved, but there is still some challenges out there. I think some of the things that occurred outside of the same store sales impact the numbers. For example, the sale of industrial will have a negative impact on our occupancy. We have up to lower end of that guidance based on what we see in the way of leasing velocity. We did some aggressive leasing import in our Greenville portfolio to better position pieces of that portfolio for sale and that it impacted some of our rent role down number or we decided to do a lease on a long-term vacant space in one of the buildings that we bought in Pittsburg. As Mike mentioned in his comments we got more 15 years on a term with good credit, but there were some significant TI involved in that because it had been vacant for such a long period of time and we really needed to get it and start over. So there are things I think that we do like that where the deal certainly has merit, as it stands on its own, but it impacts the [optics] of some of these numbers, but it’s just good real estate operating in our view.

[Jamie Feldman:]

Okay. Thank you.

[Ed Fritsch:]

Sure, Jamie.

[Operator:]

Our next question comes from the line of Dave Rogers with Robert W. Baird. Please go ahead with your question.

[Dave Rogers:]

Yes. Good morning Ed, as always appreciated your opening remarks. I think maybe first in terms of macro on deployment and use of in source of proceeds you maintained guidance on acquisitions, development. It looks maybe it’s coming in a little bit better, but you did increase disposition guidance. Is that more of a tactical strategy kind of where you are right now and just kind of what’s coming your way or is there something more strategic we should read through to those modest changes?

[Ed Fritsch:]

No. Thanks for your comments. I don’t think there is any writing between the lines on this. I think the most substantive of the three buckets that you touched on Dave would be on the dispositions. We saw some very attractive pricing on the industrial assets that we put to market and that was compelling enough for us to go ahead and make the decision it. We feel like now is the time to see what happens with virtually all of the remaining industrial portfolio that we have in Atlanta. So I think strategically that’s the most substantive thing within those three buckets. The other is just that we continue to feel comfortable with the ranges that we established at the beginning of the year.

[Dave Rogers:]

On the build-to-suit activity. Is that mostly coming on Highwoods owned land?

[Ed Fritsch:]

Yes.

[Dave Rogers:]

Okay. And then, I guess my last question and it would go back to maybe some of the comments that Mike made and I think where he was going with his comments about strategic leasing and transactions that were executed during the quarter, but I guess as you just look back over the last six to eight quarters, the actual margin on the new leases and something we’ve discussed before has continued to [inaudible] for the last couple of years.

[Ed Fritsch:]

We have such a bifurcation of assets in some of the leasing that we are doing. So we will get to a building that’s 96% leased and either 4% that’s left is a tough space to lease and so we decide to go ahead and do some attractive terms to get it knock out. On others as I mentioned in my response to Jamie, we are doing a leasing so that we can better position the building for sale. We have one building where we have a owner, user, investor that’s interested in acquiring the building and they would prefer there to be less occupancy than occupancy. So that had an impact on our thinking and how it would impact the occupancy but it is a sale that we want to [inaudible] make it to the non-core building. So I think that we have a mix across the board. If you look at our six largest building today versus the six largest buildings we owned five or six years ago, it’s a difference set, a higher profile and higher quality asset and so we are spending a little bit more in TI but we are typically getting a longer lease term commensurate with the TI spend.

[Mike Harris:]

Dave, this is Mike, just a further comment on that. The lumpiness also depends quarter-over-quarter, so this is where we have concentration of deals for example, and some of our divisions we have operating expenses that are running in the low $5 per foot. You have other markets where, Atlanta, Pittsburg where you are up north of $10 a foot, that obviously can have some impact as you get down to your [inaudible]. And then, this quarter we were pleased to have a high percentage of new deals which we talked in the past. The new deals generally command a higher TI commissions, leasing CapEx in general. Also, reflecting in this quarter was the longer term for the deal we did in Pittsburg. So it really will change quarter-to-quarter on where the leases are transpired if there was a concentration. And then as Ed said, just the space by space when we get down in some divisions where we are short of inventory. We are basically kind of filling the Cinderella slippers so to speak.

[Terry Stevens:]

Hey, Dave. This is Terry. One other thing to add, if you look at the overall NOI margin across the entire company, GAAP-NOI divided by total GAAP revenues. That ratio is holding and actually going up a little bit. It was 63.5% in fiscal ‘11. 63.7 in ‘12 and here in the first quarter of ‘13 was 64.3, so we are not saying the margin erosion than the actual consolidated numbers across company.

[Dave Rogers:]

Alright, that’s very helpful. Thanks everyone.

[Terry Stevens:]

Thanks Dave.

[Operator:]

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

[Brendan Maiorana:]

Thanks. Good morning. So how far along are you guys in the process for selling the remainder of the Atlanta industrial portfolio?

[Ed Fritsch:]

We are putting the books together now.

[Brendan Maiorana:]

Okay. And given that you had nice pricing on the first couple portions of it. Does that change your thinking with respect to triad industrial portfolio as well as that could be a candidate?

[Ed Fritsch:]

Yes, excellent question. It doesn’t, which doesn’t make it still a good question. It doesn’t because the return that we have been able to garner on our triad industrial assets has been significantly better than what we have garnered in Atlanta. And in addition to that looking at it from the other end of the telescope, the size of the Greensboro market is such that we believe that the brand recognition, the deal flow that we are in to have both industrial and office is very important to our franchise there.

[Brendan Maiorana:]

Okay. And then, it’s sort of the last big of the region that I would think of with candidates and I think you mentioned too was Greensville – you guys mentioned that you got one of the big leases there which seem to impact your overall metrics. So what’s the update in terms of the outlook for potential disposition or marketing of that portfolio or portion of it?

[Ed Fritsch:]

Yes, another good question. So just to level set, it’s about 900,000 square feet that we own there that’s about 83.5% occupied or about 2.6% of our total revenues. What we are looking at Brendan there is breaking that portfolio up rather than mass collecting it and putting all other buildings to market at one point time. There is a total of eight buildings that we’ll probably break it up and parcel out those buildings. So our target is to sell about a third of it this year and then continue to [award] the leasing on the remaining two-thirds and work away out of that.

[Brendan Maiorana:]

So it’s [one-third] you are selling is sort of above 90% occupied or high occupancy level?

[Ed Fritsch:]

Yes, 93.

[Brendan Maiorana:]

Yes. Okay, great. And then, I had a question for Mike. I appreciate the update on 2,800 Century Center you mentioned that you still target 92% occupancy, I think by the end of the year. LakePointe One and Two, I think you had previously mentioned targeting kind of 40% by year-end. Is that still a fair target that you are looking for there?

[Mike Harris:]

For lease activity Brendan, yes, we have strong prospects for that project in somewhere I think around 160,000 square feet for those that I would suspect will be late ‘13 executions, whether it will actually take occupancy then. There more likely going to be 14 occupancy.

[Ed Fritsch:]

Yes, so Brendan, just what we said on the last call is that, we expect to design about 100,000 this year. So if you take that it’s about a third of the total vacancy and then added to the 24 or so percent, so that put us just about 50% inked by the end of the year. That’s our forecast.

[Brendan Maiorana:]

Fair enough. Sure. Yes. And then, just last one if I could. AT&T, we know you have got the move out as we have talked about the launch at [inaudible], which I think is 223,000 square feet, but they are listed in the [Cypress] about 580,000 square feet with average expiration of nine months. So that puts probably 350,000 square feet give or take with maybe call it a year expiration and I was unsure where the remainder of those expiries are in the likelihood of renewal.

[Terry Stevens:]

They vary Brendan from market to market and we feel pretty stable about where we will be with those renewals based on the use in the space, so we have call centers. We have advertising. We have operation support. We have the global real estate. We have sales and marketing. We have accounting, so all different types of uses in the various buildings that they lease from us. And they are in eight markets of ours and so the major exposures that we have with them, we feel like we’ve identified.

[Brendan Maiorana:]

Okay. Well, I am just glad there’s not another one because I don’t think I could keep it straight.

[Terry Stevens:]

Yes. I used to never change from AT&T to Verizon for my cell phone.

[Brendan Maiorana:]

Alright, thanks guys.

[Terry Stevens:]

Thanks Brendan.

[Operator:]

(Operator Instructions). Our next question comes from the line of Michael Knott with Greenstreet Advisors. Please go ahead with your question.

[Jed Regan:]

Good morning guys. It’s Jed Regan here with Michael. Can you just talk about how the Atlanta assets you still compared to the rest of the Atlanta industrial portfolio in terms of quality location, lease term, that sort of thing. Would you say what you sold is pretty representative of what you have left in terms of quality?

[Terry Stevens:]

Yes. The word I use [inaudible] comparable.

[Jed Regan:]

Okay. Alright, thanks. And just as far as cash releasing spreads that came in quite a bit lower than recent levels. Should we think of that as a decent betting line for the rest of the year or is that more kind of anomaly this quarter?

[Ed Fritsch:]

I think that it would based on what we feel the year will go, we feel like it’s on the low end that if you are going to bet you may want to capture that range, but I think that the other end of it would be better than the number we see for this quarter.

[Jed Regan:]

Okay. So sort of mark-to-market on your portfolio that you indicate in the last quarter that’s still reasonable expectation?

[Ed Fritsch:]

Yes, sir, for what’s rolling.

[Jed Regan:]

Okay. And last one, you talked on previous calls, how the slow housing recovery was kind of impairment to getting corporate relocations to your [inaudible] market. Now that housing is picking up a bit are you seeing an increase flow or sort of in migration into your markets or is it too early to pick up on that trend?

[Ed Fritsch:]

No, I think that’s fair that we think that the improvement in the housing I think I had said in my comments coming out of its long [inaudible]. You’d make the southeast – puts us back in the position being able to capture corporate relocations as people are able to sell their houses elsewhere.

[Jed Regan:]

Okay. So there is signs of life on that front and A leading to B?

[Ed Fritsch:]

I think that’s fair. A leading to B and some of the B comes in pockets and some of it comes through economic development partners, chambers of commerce, etcetera, coming through with brown paper wrap prospects and so we don’t always know what part of the country they are coming from. We just know that it’s relocation.

[Terry Stevens:]

And Jed, just as an example that the build-to-suit for example, it was not just a consolidation of operations within Memphis. There was some relocation into that market which has freed up a little bit when they made an acquisition and they were able to pull that trigger when they felt like they could bring [inaudible]. So that’s hopeful that we see as widespread and starting to be more of the mindset of corporate America.

[Jed Regan:]

Okay. Great. That’s helpful. Thank you.

[Ed Fritsch:]

Thanks Jed.

[Operator:]

Our next question comes from the line of John Guinea with Stifel. Please go ahead with your question.

[John Guinea:]

Hi. John Guinea. I popped on a little late. I would say, you may have answered this but if you talk to tip brokers in various markets what they will tell you is that 20% of the inventory is Class A space and have some pricing power. 60% of the inventory is fairly commodity in nature and 20% of the inventory is B minus C [inaudible] which is unleasable in this day and age. When you look at your 25 million square foot office portfolio, what do you think on a square foot basis is category one, category two and category three?

[Ed Fritsch:]

I would say that 70% is category A, 25% is category B and 5% is category C. And that 5% is really where we have assets, where we have more interest in the land than the asset itself and we are just waiting for the opportunity time to raise it and redevelop.

[John Guinea:]

Wonderful. Thank you.

[Ed Fritsch:]

Yes, sir.

[Operator:]

Our next question comes from the line of Michael Carroll with RBC Capital Markets. Please go ahead with your question.

[Michael Carroll:]

Yes, thanks. Hi, Ed. Those Greensboro assets that you purchased in the quarter, was that from CBL?

[Ed Fritsch:]

Yes, sir.

[Michael Carroll:]

And then, I believe they have some more properties in the area. Do those assets interest you too?

[Ed Fritsch:]

They are retail.

[Terry Stevens:]

[Inaudible] center is their primary retailer.

[Michael Carroll:]

Okay. How about the assets from around that area?

[Ed Fritsch:]

Not of anything that we would be interested in.

[Michael Carroll:]

Okay, great. And then for the remainder of the year, are those type of acquisitions that we should expect or do you have any other type of bigger deals in the pipeline that you are looking at?

[Ed Fritsch:]

Yes and yes. And just to qualify on the CBL a little bit more and then I will go back to the yes and yes. The part of the attraction for us to the two assets that we bought from them is that when they did their development, they were doing a kind of hand-in-hand with this office being near the retail, so we feel like part of what makes it in the BBD is its proximity to significant retail, but we don’t have any interest in buying that retail because it’s not [inaudible] retail. It’s really freestanding and separate from the buildings. And then the other office assets they have, well, those are really reason we are a little bit [cross-side] on those as those are much smaller buildings that we wouldn’t have an interest on. And then, as far as our acquisition pipeline, we are looking at some one-off building, but we are also looking some larger portfolios.

[Michael Carroll:]

Alright, thank you.

[Ed Fritsch:]

Sure.

[Operator:]

Our next question is a follow-up question from the line of Brendan Maiorana with Wells Fargo. Please go ahead with your question.

[Brendan Maiorana:]

Thanks. I had one more follow-up one for Terry. Terry, in the NAV page in the supplemental, the NOI posted as a GAAP, I think less straight line rent. It looks like there is a sizeable amount of free rent associated with the disposition in Atlanta for the industrial. Does that straight line rent number encompass free rent or is that actually just a sort of technical straight line GAAP rent?

[Terry Stevens:]

It’s the standard GAAP straight line rent that we back out of the total rental income from the properties that you see there on the NAV page, so it’s [inaudible] free rent projected in any of those buildings during 2013, because it’s a 2013 projected NOI number that we show there. We would have backed out any straight line rent that we would have projected that would cover that free rent period. So it is in essence the free rent would be to the extent it was straight line rent covering the free rent that would be backed out.

[Brendan Maiorana:]

Alright, okay. So the 17.5 on the industrial is the actual true cash amount of –

[Terry Stevens:]

That’s correct.

[Brendan Maiorana:]

NOI that you are going to get.

[Terry Stevens:]

Correct.

[Brendan Maiorana:]

Great. Thanks. That’s all I had.

[Ed Fritsch:]

Okay. Thanks Brendan.

[Operator:]

(Operator Instructions). Mr. Fritsch, there are no further questions at this time. I will now turn the call back to you.

[Ed Fritsch:]

Alright, thanks so much operator and thank you everyone for dialing in, as always if you have any additional questions please don’t hesitate to reach out to us. Thank you.

[Terry Stevens:]

Thank you.