Highwoods Properties, Inc. (HIW) Q3 2010 Earnings Report, Transcript and Summary

Welcome to the Highwoods Properties Third Quarter Conference Call. (Operator Instructions) As a reminder, this conference is being recorded Friday, October 29, 2010. I would now like to turn the conference over to Ms. Tabitha Zane. Please go ahead.

Thank you and good morning everybody. On the call today are Ed Fritsch, President and Chief Executive Officer; Terry Stevens, Chief Financial Officer; and Mike Harris, Chief Operating 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 call for the 2011. 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 disposition and acquisitions; the cost and timing of development projects; the terms and timings of anticipated financings, joint ventures, rollover rents, 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 yesterday's release and those identified in the company's Annual Report on Form 10-K for the year ended December 31, 2009, 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 the 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. Thank you. And I'll now turn the call over to Ed Fritsch.

Thanks Tabitha. Good morning and thank you everyone for joining us today. We had a solid quarter on a number of fronts and 2010 and is proving to be a good year for our company. At the outset of the year we forecasted FFO to be 231 to 249 per share. Through the year we've tightened guidance to the range of 244 to 246 with the midpoint increasing from 240 at the start of the year to 245 and this includes the dilative impact of the non core sales we closed earlier this year. Our team has performed well in a number of sectors, particularly with respect to leasing volume, cost control and portfolio improvement. Our operating fundamentals, while still clearly challenging have been somewhat better than we originally anticipated. Leasing volume was again strong with 1.4 million square feet leased in the quarter and for the first time in three years we leased over a million square feet of second gen office space in a single quarter. Total office leasing for the first nine months of 2010 was respectable at 2.8 million square feet, compared to 1.8 million square feet for the first nine months of 2009, a 56% increase. Over the same comparative period we've seen our average lease term increase lease term increase by 34%. In some cases we're clearly investing higher NTI's but the spin is in sync with the level of credit and term. Office occupancy across our portfolio continues to outperform our markets by a substantial margin. Overall, a solid operating performance in the face of a challenging economic environment which unfortunately is likely to persist well into 2011. We don't see fundamentals worsening but we remain uncertain as to when we'll see meaningful broad based improvement. Turning to investment activity, during the third quarter we announced two deals totaling $110 million that should generate 9% plus average cash returns. This activity included the $53 million July acquisition of Crescent Center, a 336,000 square foot class A office building in Memphis. Subsequent to closing we've invested 1 million of the 2.3 million we earmarked for building improvements as we advertise the grounds and buildings. In August, we won a $57 million builder suite headquarters to be constructed on the Country club plaza in Kansas City. This is a terrific opportunity for us to develop a class A 192,000 square foot building in a core infill location that will serve as the new headquarters for Polsinelli Shughart, a large and highly respected national law firm with more than 500 attorneys in 14 cities. This project is subjecting to resuming. When completed we will own or have an interest in 1.6 million square feet of office space in the Plaza submarket. We're also adding a second office project to our redevelopment pipeline, Highwood Center 2 in Atlanta. Earlier this month we signed a long term lease with the GSA for the entire building, 60,000 square feet for the U.S customs and border protection agency. This $11.5 million project will involve a substantial renovation and upgrade of the property is expected to generate an 8.5% stabilized cash return over the term. It will also bring our percentage of annualized revenues derived from government leases to 11.6%, a percentage that has nearly doubled over the past five years. Highwoods Center II will be taken out of service and added to our re-development pipeline in the fourth quarter of this year. We continue to pursue a number of build to suite opportunities; our proven track record is a developer. Our Coraline inventory and our ability to undertake a project without financing contingencies provides us with a competitive advantages. Our sense is with regard to acquisitions our sense is that owners of higher quality assets now seem to be more willing to consider transactions. We are seeing an increasing number of offering memorandums. We are focused on pursuing broker deals as well as our leveraging our market knowledge in many local context to initiate off market discussions. Volume is up but keep in mind that this is in comparison to a very quite period, with regard to dispositions while we have a specific list of non-core assets that we plan to market as our guidance reflects we do not anticipate any additional dispositions during the remainder of 2010. As a remainder we have completed a $120 million of dispositions this year including the sale of our interest and our Des Moines joint venture as well as an office park in Winston-Salem and industrial park in Greensboro. Looking ahead as we have customarily done we expect to provide FFO guidance for 2011 when we release our fourth quarter results. Leasing remains job one, our team is winning deals, we are taking advantage of our balance sheet to gain market share, pursue build to suite prospects and chase targeted acquisition opportunities to offering memorandums and off market deals. Given that we have all heard so much this earning season already, I am not sure that I won't sound like Bill Murray's Groundhog Day when I say it remains a tough economic environment and we don't see this movie ending soon. With the sustained absence of job growth and elusive consumer confidence, we found a morsel of encouragement at corporations across many industries are reporting strong earnings and increasingly healthier balance sheets. It has to be only a matter of time before confidence returns and companies begin deploying their capital to grow their businesses. After all these Mongol war chests of cash aren't earning shareholders any money. Mike will now cover fundamentals in more depth. Michael?

Thanks Ed and good morning everyone. In the third quarter we signed 154 leases for 1.4 million square feet of first and second generation space, 79% of which was office. This compares to 913,000 square feet leased in the same quarter a year ago. Occupancy in our whole one portfolio declined 40 basis point from the second quarter to 88.9% and on that 100 basis points year-over-year, based on current projections we are very comfortable and the occupancy will be in within our forecasted range of 89% to 90%. Cash rent growth for office lease signed this quarter declined 8.3% and GAAP rent increased 3.1%. Even the phase of the economic head wins we will continue to garner annual escalators between 2.5 and 3% and virtually all of our leases. CapEx related offices was $16.65 per square foot in the third quarter, a reflection of longer weighted average lease term of 5.9 years. On a trailing four quarter basis the average weighted lease term was 5.7 years compared to an average weighted lease term of 4.0 years for the same trailing 12 month period last year. Our ability to fund TIs and lease commissions due to our strong balance sheet is well known in the marketplace and give us a competitive edge particularly in attractive customers away from other landlords. In some cases when the credit solid we are going to invest higher CapEx for more term and in this quarter no one or two deals skew this number. Looking across all of our markets to approximately 11 transactions totaling 441,000 square feet was significant tenant improvement commitments. In exchange the average lease term of these deals was 7.2 years and the credit quality of the customers was solid. We don't expect TIs to continue at this run rate but we won't shy away from opportunities to poach more customers from the competition. In the aggregate, our markets reported 872,000 square feet of positive net absorption. There is virtually no new development instruction in any of markets and sub leased space remains very low at approximately $1.5% of total market inventory. Our portfolios in Raleigh, Richmond, Memphis and Greenville all reported increased occupancy from the second quarter. The Raleigh market continues to be active and we've signed 33 leases in the quarter totaling 354,000 square feet. This compares to 133,000 square feet signed in the third quarter of 2009 and 229,000 square feet last quarter. Activity included two ten year deals totaling 217,000 square feet. One deal was for 163,000 square feet with Talecris Biotherapeutics with we announced in July. Talecris extended and expanded its lease and research comments by 40,000 square feet. The second transaction was a 53,000 square foot lease at CentreGreen Four and Cary with a multinational corporation that recently expanded into the Raleigh area. This lease is set to commence in December at which point our CentreGreen Office Park will be approximately 91% occupied. Our Nashville division delivered solid leasing results this quarter with our team signing 20 leases totaling 220,000 square feet of GAAP rent growth of 13.4%. Although occupancy in our Nashville portfolio did drop this quarter due to several larger lease explorations we do expect occupancy to improve slightly by year-end. While the Atlanta office market continues to suffer from an overdevelopment hangover, we are encouraged that the trend of negative net absorption is improving. Our Atlanta team leased 143,000 square feet office space, more than the previous two quarters combined. While occupancy in our office portfolio was down quarter-over-quarter we significantly outperformed the market as a whole by 830 basis points. The Tampa office market experienced positive net absorption of over $500,000 square feet, a second consecutive quarter this market has posted positive absorption. Market occupancy improved 120 basis points quarter-over-quarter but is still a weak 79%. Occupancy in our portfolio at quarter end was 89.5%, a drop from the second quarter due to several expected moveouts. It is a particularly difficult operating environment right now but we remain bullish on the market's long term prospects, especially the west shore submarket where the majority of our assets are located. We continue to bounce along the bottom in most of our markets. However there is a silver lining as there are no more late in the cycle development deliveries to further compound weak fundamentals. As we await the much anticipated and long overdue economic recovery, our leasing team is panning the payments and winning more than their fair share of deals. Terry?

Thanks Mike and good morning. Our financial and operating results for the third quarter were solid with FFO of $0.58 per diluted share excluding the effects of expense property acquisition costs and a small debt extinguishment charge. This compares to $0.62 per share in the third quarter of 2009 and $0.65 per share in the preceding second quarter of 2010. Core FFO which we define to exclude lease termination fees, debt extinguishment gains and losses, property impairments and property acquisition costs and so forth was $0.56 per share for the third quarter compared to $0.60 per share in the third quarter of 2009 and $0.62 per share in the preceding second quarter of 2010. The $0.58 of FFO per share this quarter was $0.04 lower than the third quarter of 2009 primarily due to $1.03 and lower same property GAAP NOI, $2.09 of lower NOI from sales in the second quarter of non-core properties and non-core JV interests, $2.06 and higher interest expense and $1.04 from a favorable legal settlement in 2009. These were offset by a $2.04 of additional NOI from recently acquired properties, $0.01 of additional NOI from development and other properties not yet in the same property pool and about a $0.50 in lower G&A. Total revenues from continuing operations were up 2.9 million this quarter or 2.6% compared to the third quarter of last year, $5 million came from acquisitions and developments not yet in same properties offset by 2 million and lower same property revenues. The decrease in same property revenues was mostly from lower recovery income due to $1 million in lower same property operating expense at this quarter compared to the third quarter of last year and the small refinement to our expected recovery rate for the year. Sequentially same property operating expenses were up $3.2 million in the third quarter compared to the second quarter nearly all of which was from utilities. As we've experienced every year operating expenses are highest in the third quarter compared to the rest of the year due to typical seasonality. Fourth quarter same property operating expenses is normally declined significantly from the third quarter and we expect that again this year. G&A for the quarter was approximately $600,000 lower than third quarter of 2009. This was due to 450,000 lower market adjustment to existing deferred compensation liabilities which is – the effect of which is fully offset in another income that we have discussed on prior calls and 400,000 in various cost savings offset by 250,000 of acquisition cost. Sequentially G&A was $1.9 million higher than the preceding second quarter mostly due to non-FFO market adjustments on the very compensation liabilities of 700,000, 800,000 and estimated short and long term incentive compensation and 200,000 in acquisition cost from the Crescent Center transaction. Net interest expense this quarter was up $2 million compared to last year due mostly 400,000 from the loan assumed in the Crescent Center acquisition, 800,000 in lower capitalized interest from fewer development projects and 500,000 higher fees related to the $400,000 million credit facility we closed in late 2009. Sequentially, the $400,000 increase in interest expense in the third quarter compared to the second quarter was due to the Crescent Center assumed loan. Our balance sheet remains in great shape; we have nothing outstanding under our $400,000 million credit facility and have $21 million of cash at the end of the quarter. With respect to CAD we said on our last call that we expect to have a deposit of negative line for the rest of the year and next year. Nothing has changed that expectation at this point. Finally as Ed noted we narrowed the range over 2010 full year FFO guidance to $2.44 to $2.46 per share from 240 to 248 per share. While we don't provide quarterly guidance, our revised full year 2010 FFO guidance implies that we anticipate fourth quarter results in $0.61 to $0.63 per share. Operator, we are now ready for questions.

(Operator Instructions). Our first question comes from the line of Jamie Feldman from Bank of America Merrill Lynch. Please proceed.

Hi, good morning. This is Andrew Lee. I'm here with Jamie Feldman. Just wanted to ask you if I can go back to your comments earlier, how are you seeing increased offerings in terms of acquisition but what are you seeing on the bidding side? How is competition there?

We used the term on our last quarter call, scarcity premium. We're still seeing that in a number of deals where the volume of deals that are in the market still remains thin and based on the number of capable buyers, we're seeing some degree of premium being offered for certain deals. The volume is up. As real capital analytics stated it is three times higher than the low which was in the second quarter of '09 but still 7.5 times lower than the high which as we all know is second quarter of '07.

And what's your sense for where cap rates are heading?

We see them continuing to tighten. There is a fair amount of money obviously on the sidelines to invest. Debt is inexpensive. So I think that there are capable buyers that are bidding on marketed deals and we're certainly not.

Great. And if could switch gears, if I think -- if I look out to next year and how should we -- regarding your expiration schedule have you -- as you start to have the conversations with your tenants, how many of these leases have already been taken care off? Can we get just like a general sense and what does -- really think spreads look like for those?

Well we haven't given out guidance obviously for 2011. We've been working on leases that expire in 2011 for more than six quarters now. As you may recall we've seen the brokerage community reach into future years to try and negotiate and recast new deals well below their expirations. So there has been an unusual amount of activity in forward expiring deals over the past year and a half to two years as we've often talked about. A specific number is to -- how many of them have been scotched, I don't have that at hand but we certainly show in our supplemental on page 19 what percent still needs to be addressed.

Okay. Thank you.

Your welcome.

Our next question comes from Michael Billerman from Citigroup. Please proceed.

Hey, good morning guys. This is David Shamus here with Michael. I was wondering if you could update us on the status of your bill decision in Kansas City. It sounds like there has been some controversy there. So wondering if its completely finalized and if you could just give us a little bit of color, it would be great.

Sure. And I mentioned in the prepared markets that subject to, that resuming that process will take a couple of more quarters. We expect it to be completed by the latter part of first quarter. We have received some good constructive input from some of the residents there. We feel very good about this project, it's a terrific win for Kansas City to be able to attract this headquarters and keep the headquarters in Kansas City as opposed to lose it to some cities that have heavily competed for it. We have been responsive to the input that we have heard with regard some design aspects that some of the community would like to see incorporated into the project and we have basically modified the design what we believe that we have overcome the primary objections.

Is there a Plan B in case the site doesn't get the re-zonal approval for different site location?

There is not, we feel good about the prospects for this. We do actually have another side basically it's like it play a buoyancy of that we are initially proposed personally David, but they were – this was their preferred site. They want to stay on the plaza and we feel like at the end of the day what we are winning out on this, we go great support from the City Council folks who had spoken too about this the job creation, the Mayor there is just a lot of positive things in the business community. There is a very best of minority out there that folks that have expressed in personal in maintaining the plaza and feel this project but we think when it's all said and done and as Ed said the cooperative mirror constructive comments for new design that this project will go forward.

Hey David keep in mind that there is hardly anybody who has more interest in this being successful for the plaza and not just the building. We are not going to put ourselves in the position to being able to beat at chess and win a $50 million plus build a suite at the expense of a near $0.5 billion investment in the project in 12 or 13 blocks that surrounds us. So, we are keenly interested in this being a win-win.

Great and then just looking at your Orlando statistics there, looks like occupancy felt some around 92 just under 85 or 20% in that programs. Just wondering if that's general market conditions or just one time expected move outs

That's really a one time transactions, holding on portfolios it's fairly small because a large percentage of JV properties there and this is the result of one pretty large customer out in our metro last area vacating project. We already got some traction to back throwing it, part of that. So that's fairly isolated to that one project.

Keep in mind David, it's only, we only make 416,000 square foot wholly owned in Orlando most of our ownership there is joint venture.

And that's about a 70,000 square foot move out coming out of that one portfolio.

Okay great and then just last question, looks like your same store NOI guidance came down a little bit from last quarter but it sounds generally based on your prepared remarks leasing velocity has been good. Things are looking a little bit better so what specifically is driving that decrease?

Just that it makes a deal that was in the quarter with certain explorations and keep in mind when we provide others numbers we reach ultimately back to the last exploration whether the space has been empty or vacant more than year or not and the deal comparison includes the accelerators. So, we have dropped a little bit based on the mix that was within the quarter but as Mike stated in this scripted comments we continue to be able to secure annual escalators in the deals that we do and they are between 2.5 and 3% and we consistently get those on new deal signed even in this tough environment. So, we may have a negative in the 2.5% to 3.5% range up on signing. We see that we call back to that pretty quickly

Great, thanks a lot guys.

Thank you David.

Our next question comes from the line of Brendan Maiorana from Wells Fargo. Please proceed.

Thanks, good morning. So I think this is probably my first question, probably for Mike or Ed, I look at your occupancy status on kind of a same property basis, the current properties and that has moved down a little bit consistently over the past several quarters. But I think you guys have made the case that commodity space is suffering more. I think your properties would be higher on the quality scale. But Mike you mentioned that absorption was positive by 872,000 square feet in your market this quarter. So that moved up and your occupancy moved down. Is there a reason why there is a disconnect there?

This is Mike Brendan. I think if you look at it -- there are several markets. I think we have four - five divisions where we had this occupancy drop and they were specific to a few large deals. In Tampa we had tenants that came out of space. One was a fair and large consolidation within the market. One was a tenant that really probably should have been in a back office space to begin with and they relocated out to a converted grocery store. So that was the nature of that. Nashville was another market where we had a year -- we just had three tenants. One was in the building related business that eventually just went out of the market totally. So I think this was more unique to this specific properties, not more systemic to our portfolio. We believe with the quality raise that we have done through dispositions over the years, we are in much better shape this time around to absorb this than we would have been had we not disposed of those.

And Brendan, remember we remain comfortable with our year end occupancy guidance of 89% to 90%.

And also remember even though our portfolio continues to be in the top five markets over 700 basis points greater than the market and across markets almost 600 bips over the market. So we're still well outperforming the market in general.

So if we look at that market and lets say as you guys discussed that we're in a tough environment and the market -- lets say are -- call it roughly sideways over the next year or so, you guys are paying more for CapEx for certain deals which sounds like that makes sense. Should we see your occupancy -- if we're in a flat market should we see your occupancy move up because you've got -- call it better -- probably spaced than the market average?

I think that's fair but it all depends on what happens with certain key renewals in 2011 and not a lot get into 2011 guidance but I think just in the genre what you're talking about -- some key renewals, whether they ink up or not or if they downsize or not, if they expand or not. There are just some sizable ones still out here that we're working on that will help dictate that but I would think that what your premise is that we would subscribe to that and I think its also buoyed by the fact that these late in the cycle development deliveries just simply wont be a factor in calendar year 2011.

And you tend a flight to quality in a market like this where customers have an opportunity to step up in class a bit. Yes you to have to pay to move them to get there but they have an opportunity to get into class A space and at a pretty good rate and we just have to be mindful that there is a limit as to how much we're willing to pay to gain that occupancy.

And to your comment Brendan, our occupancy projection for this year up some from where we started.

Sure, okay and maybe if we can make to the build to suite transactions that you guys announced during the quarter. The Kansas City deal is about $300,000 a square foot, the deal with the GSA in Atlanta in the airports sub-market is around $190 a square foot both of those from a basis standpoint seem like they are pretty high. Why are you comfortable in building projects at that cost per square foot even though the yield seem like they are relatively attractive based on acquisition opportunities.

The yield is indeed attractive, there is no doubt that the yields are for a strong, the GSA as we have done the build to suites over the past five years. We know that they are expensive as they have certain requirements but we get a very long term lease, we get a very high propensity for renewal and we get theoretically the best credit you can get. So we think that those factors offset anything that we would do “specialize” the building and we've tried to make them as generic as we can but again given credit and terms the propensity renewal is justified. Within in Country Club Plaza the very long term lease, we think that there is probably not a better infield mixed use development in the country with regard the integrity of that entire project and be able to leverage some existing parking and put a 100% free lease building at a very attractive return makes good sense to us. So, if 20 plus years from now and when that lease expires we can't just buy the investment, I think that we will regret, but I can't imagine that being the case. We also have -- in Kansas City remember that when this is a law firm, law firms didn't have fairly high TIs which are baked into that price. We also have Kansas City union's shop down. So typically you have higher construction per foot where you've got more union to deal with.

Sure and then for Terry just in the Q4 guidance if we look at kind of the $0.04 delta between your mid-point of Q4 versus what you did in Q3. Is all of that really going to be driven by reduced operating expenses or is there something else that's driving the number up in Q4.

About three quarters of it is reduced OpEx, there is should have little bit lower G&A in the fourth quarter compared to the third and some acquired properties still kicking in some additional NOI in the fourth quarter compared to the third quarter. It will be offset a little bit by interest expenses will be higher and those are the basic changes we are brining from third to fourth quarter in our outlook.

Okay. All right. Thank you.

Our next question comes from the line of Dave Rodgers from RBC Capital Markets. Please proceed.

Hey good morning, Ed question for you on you're the acquisition pipeline, what you have been underwriting. I know you have your wish list, it's out there and you continue to look at those every quarter. But if we put those aside what type of level if you can quantify now versus six months ago, what you might be looking at whether you are looking at value add versus core, how many of those are coming across your debt. If you could put the color around both that will be great.

Sure we are seeing more stabilized assets and value add assets come to the market. We have probably underwritten in the last three to five months about a $1 billion worth of assets and maybe half of that is still seriously in play. The half that went away, either it was pulled back off the market or it simply hasn't traded because the sellers haven't made decisions on what they want to do. All we've been outbid which has been more the minority of the half that's gone. The other half, they were in the mix and were at different stages of conversations and the sellers are at different stages of contemplation on what they want to do. I've seen some come to market where think of it like an option where they have an unstated reserve on it and you're seeing what they would be able to attract in the way of sales price before they decide for certain whether or not they're going to cut lose with a free simple title. We continue to leverage our operating partnership units as a potential competitive advantage because even though the ability to bid with no financing contingencies is attractive to our prospective sellers. We're not alone in the room the room anymore and being able to tell that we can bid net of any financing contingencies.

Thanks for that. And then with respect to -- the leasing is the equation. I know you had a superior capital position to our competitors out there and that's allowed you to win and push that occupancy above market where you usually are. As capital rolls down hill lets say, when do you expect to see more of that competition come online there? We're already seeing where -- quality owners or cash restricted owners all finding sources of capital albeit more aggressively.

We haven't seen the low end find more sources of capital. In fact we've seen some of them get toe tagged but they are class B minus and down assets that simply don't seem to be able to find the capital and some of them are turning over the keys and then once they are in that purgatory of ownership I think its even easier for us to compete to co-call if we can pull some of that higher credit customers of those buildings. In the middle traunch if you will, we're seeing some but we're still not seeing a dramatic up tick in their ability to source capital, to go out and fund significant TIs and commissions.

What we're also hearing Dave is from several brokers that the lesser capitalized companies are offering up to the prospects that they will -- they will take space and they may lower their rate significantly but the customers are just not wanting to use their capital to put back into leased space. That just migrates it back to us because we do have the capital and we're willing to do the deals, albeit we get paid for it with slightly higher rates than what these guys can do.

And keep in mind Dave, most of our competition is the local private operator.

Right, right. Okay great. Thanks for the color.

Our next question comes from the line of John Stewart from Green Street Advisors. Please proceed.

Thank you. Ed, just looking at the guidance, I noticed that you tweaked the various ranges for dispositions and developments but left high end of the acquisition range unchanged to $200 million. Can you give us a sense for what may potentially be in the pipeline that you expect to close in the fourth quarter?

Well I cant give too much color on that. We're in the hunt on some things, any combination of a couple of transactions that could come together. So we're not to a point where we can disclose anything. We're not to the point where I can say we got outbid or we got pulled off the market. Its just I think that we wouldn't have left the 200 out there if it wasn't possible. But I also want to man's expectations and I don't want you to think that we are right now in the process of collecting a (inaudible) certificates.

Got it and I know you haven't exactly published your wish list but if you stacked all of those properties and then waited them by markets where would it will be must be heavily weighted.

In our probably top five markets in the better sub-markets within those, I think we clearly be more heavily weighted. We are thrilled with our position as an example with market share now on popular avenue in Memphis. Wouldn't buy another building or two sure but we would be more interested in having maybe a more significant presence in some of the better CBDs in the markets that we are in as an example.

Okay and Mike I am sorry if I missed this in your comments but did you or can you speak to prospects for Triad Center?

Sure the Triad Center III in Memphis, we got a good level prospect John I would say that for at least if not more than half of the remaining space of the building and there is a team there working hard to get these – do you still have a little bit of the disconnect between first gen and second gen space obviously because the rates are -- (inaudible) rates are higher but now as Ed mentioned given our positional part or avenue we control a substantial amount of Class A space on the carter itself. So, any activity that market almost have to come to us and given the vacancy and our Class A space is pretty tied out there, Triad Center becomes almost a default choice of the sublease space. So good prospect forward, I would tell you again not that it we would be announcing in the next few weeks we are pretty pleased with what we are seeing.

And John put some numbers with that, we are basically in the process of pursuing again different stages of RFPs for about 75,000 square feet. The building in total was 148 and it's 24% lease at this point in time and there are more a financial services type companies than anything else.

And how are the yield expectations or how is it coming relative to pro-forma?

I think we are going to be a little off to where we performed and we have broken down this market just about the peak of the market and where we had projected to be. We did expect it to be some down turn as we started to see but I would suggest that because of the location, because of proper avenue we will still do better than the market per say classic space but I would say it will be all somewhat for relative to where we originally underwrite it. While we still have nine months though for stabilization period. Sure I mean it won't officially in the market in service for the third quarter of next year.

When you say a little bit you mean 50 bips or what are we talking?

It's really hard to say at this point because again it depends on where we shake out with these 75,000 square feet that is talked about. I would say maybe in the 25-50 bips would be more appropriate.

Okay and then just lastly when do you expect to be out of the rest of the condos that we see?

I think our conservative projection is year end next year, we've made a pretty good progress on those it's been slow but I think we are down to 26 units and two of those are under contracts.

That I think ….

It was 28 and two of the 28 were not on the contract.

Thanks guys.

You're welcome. Thanks John.

(Operator Instructions). Our next question comes from the line of Chris Caton from Morgan Stanley. Please proceed.

Thanks. Ed, could you talk for a minute about I guess going longer term at the bottom of the market in terms of rent versus maybe waiting for the market to start passing on a deal or trying to renegotiate the deal versus getting inflation? How are you thinking about your leasing strategies?

Yeah, I could give you a really long answer to that but bottom line is that if the credit is there, bird in the hand. That's basically been our tact on each deal. If the credit is there, we have the capital to do it. We have the options, we have fee simple tittles. So we can move customers around as they need to grow. That's really been our marching orders at this point in time but if the credit is not there, you're not going to see us take big risks with commissions and TIs for soft credit.

Chris, this is Mike. Ed and I have been collectively doing this for well over 15 years. It wont be a lot longer than that unfortunately but in this -- my experience has been you try to market -- time leases to hit the bottom of the market or top of market. It really plays out. So that said, if you've got a good credit to it and you can go on and get the escalators that we are getting, position good gap rents, you do take the bird in the hand.

And there are some things you get out of that as well Chris. You get a relationship. If we can establish a relationship with a customer like the one we talked about last quarter where we were able to poach 60,000 square feet from a competitor. They had a sizable lease with us, a sizable lease with the competitor. Now they are the sole landlord in the market. We're giving them signage on the interstate. It gives us a great opportunity to grow with the customer beyond just getting the net wash absorption. As the world turns around and begin to grow we want to be there as the landlord. And we continue to -- as we mentioned earlier to get these 2.5% to 3% annual kickers which we think is important when you look at a 5 to 10 year deal.

Have you -- maybe you cant do it at the bottom of the market but have you been able to push those kickers longer for your longest term deals. I'm trying to understand, are you getting a great deal or is that basically all just kind of market.

Well, put it this way. The customer obviously has to look at their own business plan but those who were representing the customer and the landlord, whether they be our in house brokers or the tenant rep brokers; if there is one involved, they all understand that the longer the deal, the more the rents, the higher the commission. So I'm confident that customers before they sign, they are shown the economic benefits. They are shown where we are in the market with regard to being able to lease quality space and the brokers know if they get a higher rate, better kickers longer term that the commission is going to be higher.

Got it. And then I have two more questions. One for Mike and maybe for Terry. Mike you talked about some of the moveouts -- recent moveouts. Can you tell me the down time there? Are you able turn around and market space right away or do you have to put some work into it.

Sure. Chris in some of these -- for example in Nashville -- its in one of the markets I mentioned. The building related entity moved out. They moved out. We had a little downtime of less than 90 days before we already signed the deal for back fill of a substantive part of that space. We could add -- I also mentioned the large tenant in Orlando. They are moving out of one building. Actually they are back fill part of an existing building. So we -- a sub-tenant is actually going to back fill part of that space and then we have in what I would say advance negotiations with a good part of that space. I would say we are pretty forward and right now to have good activity almost large move-outs. One building at Tampa we've just lost a pretty size tenant to a consolidation into another project. It's going to be a little more of a challenge because it's but to an entire building. So, we have to go give back and do some repositioning on that and that make take us a little bit more time. I would expect that could take us nine to 12 months to back fill that, that's a good size chunk of space about 35,000 square feet. So, all and all I would say we are pretty pleased with where we are for the back though of those space. Chris we do have very defined process though when the customer comes out of the space. We walk it with the maintenance tax, we walk with leasing agents and the property managers and the division head and the decision is made on what to do to that space so that we are not looking at a six months later and saying maybe we should get this. The space that needs to get it, it will get it, if it doesn't show well if it comes out like a rat maze we are going to go in there and get it. There are things just we need to do with regard to touch enough some walls, some patching and painting will do that but the space is going to show well. We're not going to have any cars on the lot that it's evident that a birdy camped out on it. Everything is going to be presented well and we are going into the shampoo and carpets and making sure that it's done but it's done in a very timely manner. They are at by mid-night and not before the next day we are in there evaluating what we need to do with this space and put a team on it.

And this is again where we are leveraging that strong balance sheet to be able to reinvest back into this properties and be able to remarket it is a big advantage because we do have some competitors where they have lost tenants and they don't have a capital to go back and those properties get very shop worn and tired. So, once again another place for us to seek a competitive advantage using our capital.

Thanks and then sorry just last question for Terry, you might have already covered this but I must admit it. I think you have a maturity in December for about $52 million. Is that something you are going to extend and then at a higher level. How do you think about balancing, I guess what is your interest rate outlook for balancing variables versus this exposure.

The maturity that you have seen the supplemental is our construction loan, it's the secured loan with a couple of different bank lenders. That loan has two one year maturity options which we planned to exercise and already have given notice for the first one year renewal. We pay the fee for the renewal in December and then it will roll from next December. The spread is 85 basis points over such a low rate loan that we definitely keep that place as long as we can. So we plan to roll that again next December to stretch it out for the full term. Just looking ahead the next year we only have one loan maturing in 2012, it's a bank unsecured term loan of a 137 million that matures in late February. We haven't made a final decision how to refinance that but a couple of different options but one is just rolled out back into the bank term loan market and that maybe probably more likely but we have haven't made a final decision on how we intend to reify that but the rate there is 1/10 over that will go up just to more to market next year when that roles. It should be probably be, I am guessing Chris maybe another 140 to 150 bips higher on cost when that rolls. In terms of our preference for fixed versus floating rate, I like having a small portion of our capital or debt stack in floating rate. Just think, go over the long run , its not a bad thing to have and I think my un-comfort zone starts to kick in at somewhere around maybe 15% or 20%. I don't think we've ever had it that high but we don't mind having a relatively small portion of our debt being floating.

Thank you.

Our next question comes from the line of Chris Lucas from Robert W. Baird. Please proceed.

Good morning everyone. Can you give us an update on the built-to-suit pipeline. I know you've announced a couple of wins but curious as to where the rest of the pipeline sits and what your thoughts are in terms of timing for knowing how the deals are going to work out.

Sure. I think I said on a call or two ago that we had seven projects that we were in a hunt on. One has been awarded, the Polsinelli deal in Kansas City. One has died which was the smallest of all of them. It was a $8 million - $9 million project down in Florida. And the others are still out there and as we've referenced three of the others are GSA transactions that we responded to the SFO on and we and others had hoped to hear by now but an announcement has been made thus far in any of those three projects. So I feel like we still have a very good quote on those total. Its just shy of -- its in the $175 million to $200 million range, about half a million square feet or so and we stay in the hunt on that. The GSA has not come back and asked anyone for clarification -- to our knowledge for clarification on bids etcetera. So we're just waiting for a decision from them. The deals are across a couple of markets. There are some others that I would call more suspects than prospects out there. Few -- three build-to-suits that are some what rumored but we haven't seen sophisticated RFP's on at this point in time.

Okay. And then listening to your comments about the acquisition landscape and it seems to me anyways that you're interpreting that the acquisition that appears to be wider that had been in prior quarters, is that fair to say?

Our net?

Yes, your net is widened somewhat.

As far as what we play our geography

Just it seemed to me in the past that you were more focused on what you could call your hit list and in today's comments you sort of broadened -- it seemed like you broadened that out to include other type deals?

Yeah, I think that what we are seeing right now, I notice deals that we continue to have in our scope. I'd say by the far the large majority are dead on with our targeted wish list. There are one or two others that we're looking at. They're not dramatic in scale. So I would say that what we're really pursuing is building addresses that were on our wish list that are actually now coming to market but we're still heavily focused on our bulls eye of trying to identify properties that have stabilized, rent rolls and we are well conceived about new projects.

Okay great. Thank you guys.

(Operator Instructions). We have a follow up question from Brendan Maiorana with Wells Fargo. Please proceed.

Thanks just a couple of quick ones probably for Terry. The condo sale gains in the quarter you guys did four transactions total gains were almost 0.5 million it was about 120,000 I think gains per unit. Is that a reasonable go forward run-rate that's about what we already have been doing?

Brendan you have picked up on an interesting event that happened in the quarter. What we do every quarter is evaluate where we stand our sales and our partner and that partner was inside '02 promoted return depending on the return that's left over after each of it get a 12% trough on our cash investments. And given that the time has stretched out a little bit from the very when we go back to the original expectations of sales. His promoted interest is coming down, that really helps our net gain. So when you add in effect to minority interest that we have for him and the outlined gain on the sales it resolved in that 0.5 million total gain process. So, it's a combination of what you might call cash gain on each transaction combined with an adjustment for the minority interest given that it's less likely as he is going to achieve what the partner is going to achieve from the those that we original have had expected.

Just from a general stand point because of the uniqueness of this product relative to the condos in the downtown Raleigh market we are very poised to be able to hold that pricing pretty good but it's still tough market down there. I think we want to make sure we maintain momentum down there so our sales team is been aggressive as they need to be but they are not just comparing apples to oranges but trying to sell our product to a lower mid-rise condo. So I think we could expect to see little discount just to make sure they stay in the game for the high end condos but it's not going to be a option type solution.

And just to clarify Brendan that result of that is just to the minority interest. The rate the total net gain in the third quarter will not be the same run rate you should think about going forward if we are selling two or three per quarter.

Sure that is very helpful. Thank you and then just lastly for Terry, can you just give us a sense of how much just development spending dollars you may do over the next four quarters or so. I think if I look at you're the schedule you have got around $13 million left to kind of complete the development pipeline and then you have the two build-to-suit transactions that you announced during the quarter?

We talked about Polsinelli and Ed mentioned on the call the other one is going to be added here in the fourth quarter down in Atlanta, that's also around $12 million. So it is probably roughly 24 million on the two re-development projects. Not a whole lot left on any of the other projects that we have started in the past and there is some, tenant build out cost and then Polsinelli Shughart in Kansas City. Construction there probably won't start at until.

We wouldn't see any payouts there until the third quarter or 2011.

Okay but you guys were on those expenditures dollars you will capitalizing the interest on that?

Once we start to spend yes we would.

Okay great. Thank you.

Thanks Brendan.

Mr. Fritsch, there are no further questions at this time. Please continue with your presentation or closing remarks.

Thanks Frank and we appreciate everybody dialing in. I just want to say that I will attend Citi's 2010 Global Property CEO Conference on March 13th to the 16th in Westin Diplomat, Hollywood, Florida. If you have any more questions with regard to the quarter or anything else, please give us a call. Thanks.