Highwoods Properties, Inc. (HIW) Q4 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Highwoods Properties Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today Wednesday, February 8, 2012. I would now like to turn the conference over to Tabitha Zane. Please go ahead , ma'am.

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 email copies to you. Please note in yesterday's press release, we have announced the planned dates for our remaining 2012 financial releases and conference calls. 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 Presentations 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 the 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 2011 Annual Report on Form 10-K. 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 will now turn the call over to Ed Fritsch.

Good morning everyone. The overriding theme of uncertainty from 2011 seems destined to carry over into 2012. However some of our renewals are showing signs of modest improvement. Well everyone is grossly aware of the ongoing economic woes with stuff like unemployment and ginormous federal debt, convulsions in Europe, a totally dysfunctional tax code and Pandora's healthcare box and regulations heaped upon regulations, those woes are being somewhat moderated by some happier stuff like last Friday's job report, expected sustain low interest rates, higher personal income, at least for the employed, the stock market's recent Bull Run and 346 days until January 20, 2013, but who's counting. Hopefully time is slowly but surely becoming an ally and good will once again out weight bad and certainty will overcome uncertainty. Given all this, here is where we stand we remain committed to our strategic plan to build long-term shareholder value. This includes continuously improving our portfolio, staying committed to low leverage, investing in our people, being the landlord of choice, delivering knock-your-socks-off of customer service, tenaciously seeking acquisitions and tirelessly pursuing development opportunities. In 2011, we continued to make good progress and delivered full year FFO of $2.58 per share, $0.05 above the midpoint before including the contributions of PPG Place and Riverwood 100. During the year with these 4.3 million square feet of office, a 19% increase over 2010 and our weighted average office lease term was 5.6 years, the highest since our IPO. As you know, we creatively deployed $309 million of capital including our entry into Pittsburgh. Speaking of Pittsburgh, a number of you kindly attended our December PPG Place property tour and we hope you now have a better understanding of the market and our investment there. For those of you who are unable to attend, we would welcome giving you a tour at any time at your convenience. We also announced $72 million of development, which included $48.4 million Build-To-Suit development in Nashville. We're developing a 7-story, 203,000 square foot headquarters for LifePoint Hospitals and a 25,000 square feet of immediately adjacent free-standing spec amenity retail. The site is located on company-owned land in Brentwood, a vibrant submarket that was only 6% vacant at year-end. This development as the projected cash return of 9.5% and is a vivid example of our competitive advantage of owning key tracks of land and strong sub markets. 2011 development also included a non-core land sale disguised as a development project. We contributed a 15 acre non-core track valued at $2.4 million to a 50-50 JV with Northwood Ravin a multifamily development firm. The JV will develop a $25.8 million 215 unit apartment complex in Cary, North Carolina. We remain focused on identifying avenues where we can maximize the value of our non-core land and we believe this JV opportunity has the potential to generate a higher return than if we had sold the land outright. From a financing perspective we obtained a new $475 million line of credit and closed 2 term loans totaling $425 million all at favorable rates. In addition we paid off our $184 million, 7% secured loan. 2011 of course wasn't challenge free. Well better than 2010 cash rent growth for leases signed during the year was negative and lease concessions remained common. Also we're optimistic that more users would have pulled the trigger on build-to-suits and we'd hope to get more non-core dispositions out the door. For 2012 we are projecting FFO of 256 to 276 per share which represents 3% growth at the midpoint and includes $0.08 to $0.12 of anticipated dilution from potential dispositions and equity issuance. On the acquisitions front our disciplined strategy has worked well to-date and we continue to seek properties in in-fill sub-markets that enhance the overall quality of our portfolio and our right priced relative to the assets risk profile and our cost of capital. We predict closing on $100 million to $300 million of acquisitions in 2012. Some build-to-suit development discussions are active but customer decision making remains protracted and is difficult to know which discussions if any will result in a groundbreaking ceremony. We're predicting starting $50 million to $150 million of development this year. Our 2012 guidance includes $100 million to $150 million of non-core dispositions. We continue to call properties at of our portfolio that no longer fit our investment criteria due to concerns about market, age, location, quality and/or functionality. Like every year blocking, tackling is job 1. In addition in 2012 we will continue to focus on improving our portfolio, grabbing more market share and mining opportunities where we can accretively deploy capital to grow our business. Finally we are pleased to welcome Mark Mulhern to our Board of Directors. Mark is the CFO of Progress Energy a Fortune 250 utility with $10 billion in annual revenues. He obviously has an extensive financial background and deep experience in capital intensive industry. Our Board and our Senior Leadership team look forward to working with Mark and his active participation. I now turn the call over to Mike.

Thanks, Ed and good morning everyone. As Ed noted 2011 was a year of strong leasing volume and longer terms. Looking at the fourth quarter occupancy in our wholly-owned portfolio increased 70 basis points from the third quarter to end the year at 90%. Office occupancy at year end was 89.2% up 50 basis points from the third quarter. As it has been for the past 7 years occupancy in our office portfolio remains considerably higher than the overall markets occupancy in each of our core markets. In our top 5 markets, we were outperforming the market by an average of 780 basis points. Absorption on our top 5 markets combined was positive every quarter in 2011 totaling 1.6 million square feet for the year. It was the first time we've had 4 consecutive quarters of positive net absorption since 2007. Every one of our markets also reported office job growth in the fourth quarter. Weighted average lease term in the fourth quarter for office lease assigned was 6.8 years and CapEx related to office leasing was $16.4 per square feet. Both metrics were heavily impacted by 2 large office deals, a 15 year 181,000 square foot lease renewal and expansion with locked in the Kansas City, and a tenure $105,000 square foot renewal with Dickie McCamey [ph] in Pittsburgh. These 2 deals combined will generate a total of $108 million of term rent. Without these 2 deals in the mix the weighted average lease term in the fourth quarter would have been 4.7 years and CapEx related to office leasing would have been $12.92 per square foot below our 5 quarter average. Looking at the full year, net effective rents for office leases signed in 2011 averaged $11.50 per square foot -- excuse me, $11.57 per square foot, a 14% increase from 2010 while cash rents for office leases signed this year declined on average 8.3%, we continue to secure annual rent escalations of between 2% and 3% for the vast majority of leases signed as evidence by GAAP rent which increased a healthy 2.6% in 2011 where office leases signed. Also on an annual basis offers TIs and losing commissions per year term were up 8.5% from 2010. Turning to the Kansas City and Pittsburgh deals I mentioned earlier, Lockton has extended its lease into 2030 and expanded by 10,000 square feet at Valencia Place Office Tower on the Country Club Plaza. The firm now leases 181,000 square feet, 72% of this building. We are pleased to renew a 105,000 square feet lease with Dickie McCamey securing them into PPG Place into 2025. Since our acquisition of PPG Place last September, occupancy has increased 110 basis points. Looking at a few of our other top office markets, our national portfolio is performing well, ending the year with 94.1% occupancy, a 160 basis point increase from the third quarter and a 420 basis point increase from year-end 2010. Our Nashville team continues to do a stellar job retaining and growing our customer base. Our Atlanta division had a good year as well, leasing 560,000 square feet of office space more than double the amount of office space we leased in 2010. We're keenly focused on backfilling the space AT&T is vacating at 2800 Century Center. As a reminder, we've already signed leases for 70,000 square feet of this space, which AT&T vacated at year-end so retaining work could begin. Our Atlanta team is working with several prospects to backfill the portion of the 151,000 square feet that AT&T is vacating on June 30. The Atlanta team has also done an impressive job Highwood-tising Riverwood 100. We recently signed a 25,000 square foot expansion with Aon Hewitt [ph] which now leases a total of 167,000 square feet through 2019. The Tampa market while still the challenge remains a solid performer for our company. Occupancy in our Tampa portfolio was 90.2% at year end up 20 basis points year-over-year and 90% basis points from third quarter. Our leasing team is now actively marketing the 319,000 square feet in Tampa Bay Park in the Westshore submarket, that PWC will be vacating in the second quarter of 2013. Prospects are showing we are increasing and lastly Time Warner signed a lease for 23,000 square feet. Large blocks of class A space in Westshore are scarce, and with no supply on the horizon. We have a distinct advantage in attracting larger users in the market. All in all, leasing volume in 2011 was very strong and terms were stable but concessions remained in some aspect of the most deals. Market fundamentals in terms of employment growth and absorptions are trending positive and we hope this turns well for 2012. Terry?

Thanks Mike and good morning. We were pleased with our financial and operating results for the fourth quarter and full year. The $0.70 of FFO per share this quarter was $0.07 better on a net basis from the fourth quarter of 2010 primarily due to $0.06 from acquisitions and development projects mainly our September acquisitions in Pittsburgh in Atlanta and the April acquisition of medical office building in Raleigh, $0.03 from the early payoff on October 3rd of $184 million 7% secured loan, $0.01 from the June redemption of a remaining Series B preferred stock and $0.01 in lower G&A. These were partially offset by $0.005 effect from higher shares outstanding, $0.005 from the third quarter of 2011 dispositions and about $0.025 in lower same property GAAP NOI. This same property decline was largely due to fourth quarter 2010 CAM income accruals being too high which as you may recall we adjusted during our Annual CAM true-up process in first quarter of 2011. Fourth quarter 2010 also had lower than normal bad debts, utility expenses and real estate taxes, the latter from prior period tax appeal wins. Full year FFO was $2.58 per share up $0.12 on a net basis over 2010 primarily due to $0.12 from acquisitions and development projects, $0.02 in lower interest expense mostly from paying off the $184 million secured loan that I referenced earlier offset by lower capitalized interest, $0.03 from a merchant build gain in the third quarter, $0.02 in lower preferred stock dividends and $0.015 in lower G&A excluding property acquisition costs. These were partly offset by $0.03 in lower same property GAAP NOI mostly caused by the same factors that impacted the fourth quarter, $0.03 from the impact of dispositions in 2010 and 2011 including the second quarter 2010 sale of our interest in the Des Moines joint ventures, and $0.02 from higher shares outstanding. Sequentially fourth quarter FFO was $0.05 higher on a net basis in the third quarter primarily due to $0.04 in FFO from the September acquisitions, $0.03 from lower interest on the secured loan payoff, and $0.01 in higher deal cost in the third quarter. These positive effects on a sequential results were partly offset by the $0.03 merchant build gain in the third quarter. Turning to the balance sheet, we had a productive year in extending our maturities by adding a 5 year term loan in February and a 7 year term loan that closed just after year end. And by recasting our credit facility in late July for 4 years plus a 1 year extension option and at lower cost and paying off early the $184 million loan. These transactions also lowered the weighted average rate on outstanding debt from 5.74% to 4.97%, a 77 basis point reduction in 1 year. The 4.97% rate reflects the new 7-year term loan, which we closed on January 11 and swap to a fixed rate of 3.58%. Given that we in effect fixed the rate on the new term loan, we now have $389 million of floating rate debt or only 20% of total debt. We currently have $343 million of availability on our revolving credit facility not counting the $75 million accordion and we only have $73 million of debt maturing this year, all in the fourth quarter. With respect to CAD we did end up $6 million negative for the full year primarily due to leasing CapEx associated with the long-term locked in and Dickie McCamey fourth quarter renewals that Mike referenced and the timing of other TIs and building improvements that were incurred in the fourth quarter. We do expect to recover about $3 million of fourth quarter leasing CapEx from the planned sale of 2 non-core assets in Orlando we referenced last quarter. We currently expect 2012 to be CAD neutral to slightly positive. We issued 2012 FFO guidance of $2.56 to $2.76 per share and the key underlying assumptions. Same property cash NOI growth is expected to be positive given that much of the 2011 same property straight line rent will turn into cash rent in 2012. As in the past our guidance assumes no impact from potential acquisitions. But this year we did include $0.08 to $0.12 of anticipated dilution from projected non-core dispositions and equity issuances. Operator we are now ready for questions.

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

Just I was hoping you could talk a little bit more about kind of where you think we are in recovery or stabilization across your markets. If you're thinking about your largest markets in terms of the sectors that are driving growth ,kind of which ones are recovering faster, which ones you think have kind of the best outlook over the next 12 or 24 months and why?

Sure. It just broadly from a holistic perspective we conduct a pretty thorough evaluation of where our markets are where the economy is. And the report that our analyst in-house generated for this quarter, the headline they put on it was best report since 2007. And again speaking broadly we show that we had all of our markets gain jobs, all of our markets were better this quarter than last quarter. It was a 4 consecutive quarters that we had positive absorption on average in our top 5 markets. And it was a quarter that showed the most robust important employment growth going forward based upon Reece's [ph] forecast. Specifically with regard to various industries what we've seen in the growth were in as been, clinical research, energy, engineering, financial services, healthcare and technology. And the contractions continue to be on the home building side and anything related to that, advertising, PR marketing type firms.

Okay. And then can you talk a little bit about your assumptions for cap rates or yields on either the develop -- on the developments, sales and dispositions, I'm sorry, dispositions and acquisitions?

Sure. We don't see much change in that as we've mentioned in prior quarters. It's really a tale of 2 cities where the institutional quality trophy assets that are relatively well stabilized are garnering very attractive cap rates, low 7s to mid 6s and then the real non-core assets that have occupancy issues as well as functionality issues are really suffering with being unable to get out of the door at decent cap rates.

Our next question comes from the line of Chris Caton from Morgan Stanley.

Maybe could you follow-up on that -- could you talk a little bit about which strategies you're interested in terms of your acquisition guidance, what type of assets you're looking at and how those are surfacing?

Sure. I think that what we accomplished in 2011 may, Chris, be the answer to your question. We feel like our investment for example, in Pittsburgh that -- this is a self-serving comment. But I think that we were successful in hitting them where they aim and that we were able to acquire a true institutional quality crown jewel asset well below replacement cost with upside in it and at a very attractive price. We have projected cash yields in the 9s and GAAP in the 10s and we bought it, 10 percentage points below what the average occupancy is for Class A assets in that market. In Riverwood that we also closed on in September this past year, the occupancy when we bought it was 87%, we expect to be able to push that occupancy 5 or 6 percentage points, we have some good things working already now. So that was an opportunity to again buy an asset that was well below our replacement cost. Maybe a -- on the other end of the spectrum, we bought Independence Park in Florida in December 2010 and by third quarter of 2011, we had it 100% leased and it was a building that was 100% vacant at purchase. But we think that we moderated our risk in that, it was only a 116,000 square foot building. We do have as we've also discussed in the past, what we call wish list that are driven by each division. So each one of our very capable division had -- it has a specific wish list of assets that they would like to own in their existing markets that they are pursuing. Some of them if they trade for example like the SunTrust Tower in Downtown, Orlando, trade at a number, well beyond how we underwrote it or what we think is the appropriate risk profile, we'll pass on. And we'll stick to our mantra of being patient and deliberate. But if we have an opportunity to acquire like we did PPG Place the Riverwood 100, well we're seizing those and we are chasing as much that's off market that's on-market. That's actually a long answer.

That's very detailed. I appreciate it. So but it sounds like -- it sounds like both kind of value-added in stabilize but maybe leaning more towards stabilize? And then I'm sorry does you want to...

Well I just think on acres like PPG Place is probably a tweener in that barbell that you just outlined. So at 81.2 purchase there is -- is not – it's not all value-add but there is a significant component of value-add but I think that we mitigated a huge downside risk in that it wasn't like SunTrust its only 70% leased it was 81% leased.

And then just on PPG Place with the leasing program clearly underway can you talk a little bit about how rents are meeting with your initial expectations and how kind of occupancy and take-up are meeting up with your initial expectations?

Sure. We had said in the past I think on the October call that we expected maybe it was the September call 3% to 5% rent growth after the first year and that we expected to achieve 91.5% leased at stabilization in 2014. Mike talked at length in the last call about the DCK lease, which we did within the first month of acquisition. And then we also just closed the Dickie McCamey renewal, which didn't add occupancy but certainly solidified a core 100,000 square foot customer into PPG Place for an extended period of time under some attractive terms. So we've got a number of things working and we are -- we remain very comfortable with what we have forecasted with regard to the 9% cash mid-10s GAAP and 91.5 by 2014.

Chris this is Mike. As we discussed earlier the CBD district market particularly in the Class A space continued to be tight in the single-digit vacancy. So with our vacancy in PPG Place we believe we're still sitting somewhat in the catbird seat to take advantage of larger deals that are out there right now.

And we have done some things, Chris, that we think will help generate additional interest in the assets and that we've – we're redoing some of the common areas and some of the spaces that were vacant and were long-term vacant. We've gone in and gut it and made them much more presentable for the leasing people to show.

And I'm up there at Paramount, Chris, up there almost every other week and had opportunity to meet some of our customers and we're getting good kudos for the things that we've done. The customers like it. They have seen a difference and we believe that will pay us good dividends as the word spreads around Pittsburgh that Highwoods is a player in that market.

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

I just wanted to start with guidance a little bit and drill down on some of the assumptions. If I look at, if you guys -- you don't include the acquisition disposition, the capital recycling activity in the numbers but you do have the dilution from anticipated equity issuance? And if I look at acquisition guidance and disposition guidance it's still up on a net basis by 75 million and thinking back to your comments after the PPG acquisition and Riverwood 100 you wanted to keep kind of leverage neutral after that. So does your equity issuance outlook include increasing your net investment activity in 2012 plus the net investment activity that you did in '11?

Yes, great question, Brendan. So, you're dead on right about what we said after the 9/16 call when we closed on both Riverwood and PPG on the same day that we want to stay leverage neutral. So, we have said in our strategic plan and we started this back in '05 we said that we really redline at 50% and we defined debt as debt plus preferred as a percent of total assets. So, we've said -- we were well above 50% in the company's history it's our goal to not touch that the third rail again so 50% is redline bright mark for us. So what we've also said is that we would like to operate within a band of 42% to 48% of that same metric debt plus preferred as a percent of total asset. So, we'll flow in between the 42 and 48 depending on the timing of dispositions, of timing of acquisitions, paying pay applications for development projects. At the end of the second quarter of '11 pre-acquisition in Atlanta and Pittsburgh that metric was right around 44% post closing that metric moved up to like to 47%. So the numbers that we show in our guidance the 8% to 12% -- $0.08 to $0.12 is what will get us back to the predeployment of capital for those acquisitions back in the 44% range. As we are able to attract more builder suit development and more acquisitions that will be additive to the numbers that we provided.

Okay got it, okay great. And then with respect to guidance, is that an apples-to-apples comparison due on your occupancy outlook with -- so to end the year at the midpoint of the expectations call it 90.5%, does that compare apples-to-apples to 90.0 at the end of 11, through up 50 basis points at the midpoint?

That's correct. Then assume any acquisitions in it and the only thing that would impact there, because the development of LifePoint that won't deliver this calendar year, so won't change a numerator, denominator. The only thing that will impact it will be dispositions or acquisitions. So we will address those as they come. If we sell properties that are 100% leased obviously, it will have an impact versus if we sell properties that are less than the 90% lease. The same thing with the acquisition side.

Right. Just given that you've got PPG that -- it sounds like things are trending well and that's a low occupied building. You've done a lot of very good progress in Riverwood 100 and as you guys talked about with the quarter being the best quarter since 2007 in terms of expectations, is this just conservatism on your part, only going up 50 basis points at the midpoint and if you kind of, is that more maybe what the expectations were towards the latter part of 2011 and given what appears to be some improving fundamentals, it's just being conservative or do you think that's kind of a real-time snapshot of what the expectations are for '12?

Well, we're trying to provide forecast that are accurate to the best of our knowledge, I think to say that, do we run the company on the edge of the envelope or conservatively, I think it's more the latter than the former. But I wouldn't want you to take that comment and automatically add 2.5 percentage points to what we say yearend is. So just 2 quick reminders one is we do have the AT&T move out in 2800 Century Center which they were in 221,000 square feet as you know. They moved out of approximately 70,000 square feet of that by the end of the year which enabled us to backfill north of Grumman and Yancy [ph] into -- those build outs are now underway. But we'll still get a 151,000, 152,000 square feet back from them at the end of June. So that will be -- clearly impact this year. We have some prospects for that but it is a substantive hole in the backfill, even though we've done about 1/3 of it thus far.

Okay, sure. And then just last quick one for Terry, if I could. The same-store numbers if I look sequentially from the third quarter to the fourth quarter. The revenues went down and I don't think the same-store pool changed. I don't think you guys sold anything in the quarter and there was nothing held for sale. Is there a reason why those revenue numbers would go down sequentially?

Not anything too big, but there were a couple of things Brendan. Bad debt expense sequentially, quarter was up a little bit which caused -- we run bad debts through revenue. So that was a part of the reason you see that drop and when we did the year-end CAM accruals this year for '11, that were trued up in the fourth quarter and truing up that the prior quarters, they were a little bit of tightening and reduction there which contributed to that and some odd ball things here and there. But those were the 2 primary things that you're seeing there. Hey, Brendan. Just going back to Ed's comment on the balance sheet, the just to be clear the $0.08 to $0.12 dilution that we've talked about to get stand to the pre-Pittsburgh leverage level, that will come from some combination of planned dispositions and/or equity. It's a combined number not all equity, I just want to make sure that was clear.

So that's a combined number?

It's a combined effect from either selling non-core assets and/or issuing new comment during 2012.

Okay, all right. Maybe we can follow-up on that one offline, and I had a couple of other ones.

Our next question comes from the line of Caitlin Burrows of Credit Suisse.

We were just wondering, what was the yield on your LifePoint build-to-suite and do you plan to do any additional build-to-suits in the future?

Our track record has been that we've delivered right at 9 plus on cash for our build-to-suits for the last 6 or 7 years. We're certainly on course with that with what we've announced in our guidance for this year on a development is.

$50 million.

$50 million to $100 million, 150 million, yes $50 million to $150 million Caitlin.

Our next question comes from the line of Joshua Attie of Citi.

I just had a question on the guidance, could you just clarify how much dispositions and acquisitions and the equity issuance is included in the guidance, because I know you said the $0.08 to $0.12 is the combination of equity and sales. So is that the -- does that include the entire 100 to 150 of sales?

Josh, this is probably enough fair analogy, but if you've ever driven a heavy piece of equipment, it's track driven. You have one shifted for the left track and one shifted for the right track, when you keep and go and see, go in one direction, if you push harder on the left it turns left, and vice versa, so we've got disposed in one end and equity issuance in the other and our goal is to get back to that 44%. So if we start having slippage on dispositions we might hit the equity handle a little bit harder vice versa, so the idea is to continue to call our portfolio by selling non-core assets. If we're more successful than that then we expect to be, we won't raise as much equity, so we will push hard in one and not the other. And if we have trouble getting dispositions out the door, but we still want to get back to this commitment to our shareholders being leveraged neutral, we will push the other lever.

I see and then are the acquisitions of 100 to 300 included in the FFO guidance or not?

They are not.

And on the dispositions could you talk about the profile of what you might be selling in terms of either how highly occupied it might be or what the disposition cap rate might be?

Well I don't want to say too much about disposition cap rate because you will have these in the market, so we don't want to find ourselves bidding against ourselves because we know how widely distributed our transcript -- it will vary, what we want to do is we don't want to sell muscle, so we are not going to sell what we consider core to the portfolio, but if there are buildings that have specialized use that are in a non-core submarket within a market, that have functional obsolescence, or have long-term CapEx issues or bad plates or its under part, those types of things, that's what we want to call out, those assets that can't differentiate themselves from the competition.

And just to give us a sense of what the run rate is after the de-leveraging the $0.08 to $0.12 impact is that spreads throughout the year in your guidance or is the de-leveraging front-end loaded?

Josh this is Terry. It's a little bit front-end loaded so it's not exactly spread evenly. I would say it is front-end to some extent not all in the fourth, first quarter but a little bit more in the first half than second half.

Okay. And if I could ask a separate question in your prepared remarks you talked about selling piece of land and to do a multifamily joint venture and that being a better return longer term than just selling land. How much more of that do you think that you could do is that a one-off transaction or is there more that and how big a piece of your investor capital could that eventually be?

We own about 590 acres of land in total. Of that, about 60 acres we considered to be non-core. I don't think that there is a lot of opportunity to sell the land for alternate purposes like this one is. A couple of years ago we did the same thing in a joining site also in Western and we sold it before that were stabilized and we doubled the return that we would have achieved, had we just sold the land outright. So there is not a tremendous amount of opportunity to continue to convert the end use of the track of land for what we have what we have left which will be about 55 acres of non-core.

Okay. And if I ask you one more question when you think about acquisitions what's your appetite to expand within Florida outside of Tampa Westshore to some of the other South Florida markets?

Nominal.

Our next question comes from the lines of John Guinee from Stifel.

Oh, I'm sorry about that, we are looking back over the last 4 or 5 years on your FFO and your FAD versus your dividend and the essence of the business is, it looks to us like you run about a $0.90 to $1 or share annual deduct to get from FFO to AFFO. And then you got -- your paying about a $1.70 dividend and one way or another my guess is you need to get your AFFO or your CAD up to $2.10 in order to feel you're in a position to increase the dividend, is that in the cards either through FFO growth or TI and leasing commission, reductions to get yourself in a position to raise the dividend anytime in the next 3 or 4 years?

Well, it's tough to tell. Certainly it's a goal of the company to do that. I think within the next 2 years, I would suspect that our dividend would be constant at $1.70 per annum that it is now. To make conjectures to what it would be 3 to 4 years out is – that's tough but it's certainly -- it certainly a goal that we would want. We would want to achieve. I do you think that in work we've been consistent with our dividend throughout this downturn most of your peers since the fall of '08 have either, reduced or dramatically cut their dividend to some degree and another. And we haven't had to do that. So I think there needs to be some recognition of, the fact that we've maintained throughout this trial. And I think our yield today is fairly attractive in comparison to our peers. So I think steady for the next 2 and then after that is just tell from sitting here today in February.

I think John, the pendulum just hadn't quite swung back to the point where from a leasing CapEx standpoint that we're in a position that says that we can command as if deals are really low TI deals to garden new activity. So I think for the next couple of years we're going to be probably be in that same boat.

Our next question comes from the line of Michael Knott with Green Street Advisors.

Terry, just wondering if -- if you or Mike just elaborate a little bit on the same property NOI growth expectation for 2012. At the midpoint I think you're kind of around 2% little less in terms of growth for next year. Basically you provided the guidance for occupancy, but what else is going on in there in terms of maybe operating expenses or rent bumps or roll ups or down that you're kind of thinking about?

Couple of things Michael, the -- I did mention in my prepared remarks that we do see fair amount of the same-store straight-line rent that we had this year will start to burn off and turn into cash rent next year. That's going to be a big help. Another thing is the composition of the same property pool changes a little bit next year, because we reset the pool for those assets that will be in for the entirety of the 2 years. And some of the buildings that will go into the pool next year showing some growth. There are some like the developments Independence Park comes in and I believe 1 or 2 others I think there is 4 in total that changed, so there is some pick up from there as well. We do continue to work hard on our expenses we've done a lot to hold down OpEx over the years I think we'll continue to see some benefit there and may be some slight occupancy growth as well in the same property portfolio.

I think the -- on the operating expenses further comments there Michael we had great traction for the last 2 or 3 years as we brought on, we talked about the impact of our VP of Asset Management, the work that he has done it's been very helpful to us. And so a lot of that low hanging fruit have been taken out now we're really getting into the weeds to try to find opportunities particularly in areas like energy management. And we've made significant investment in our properties in the past we'll continue to do so that will have great payback there. Things that are difficult for us to predict or primarily where tax is. Those are lumpy they just depend on the cycle when we get up a reassessment or whatever. So I think that it will be difficult to achieve the same level of operating expense benefit that we have in the past but we never stop looking for those opportunities.

And then on rent roll-downs, is it fair to expect kind of a mid-single digit kind of roll down and is that if that's right is that sort of representative of the entire portfolio at this point in terms of the mark-to-market?

That's fair.

Yes I think that's fair. I mean we've talked about in the past and it's been pretty widely discussed.

The only footnote I put on that, Michael, is I'm not sure it's fair for the entire portfolio because we are turning to be on the dawn of some deals that were done in tough times, so any deal that was signed late '08, '09, as they start to come to us I think we won't see as much in the way of a downturn because some of those are really done under difficult situations.

Yes, it is. It's the one that were done in '06, '07, before things crashed, and remember we get those annual escalations at compound that come through and cam expense faster. So those are the tough ones to overcome from retro standpoint.

Right. And just the last question on that what kind of rent bumps are you guys getting these days?

We traditionally see between 2% and 3%, we certainly do a fair number of deals at 3. I think our average right now across the board is about 2.7%.

And that's what you are getting now or is that representative of what's in place across the entire portfolio or is it about the same?

Yes, that's what's in place now if you look at the portfolio and it's fairly consistent with that we are able to achieve in deals. But, one of the fortunate things as we still have yet to see deals where it's really -- we are not able to achieve rent bumps during the term.

I think our market, our division, VPs and our relations folks who have a great job of kind of setting the standard for Highwoods when you come to us. That's just an expectation in the market that we are going to be requesting and getting that level.

And it's fair to say that the brokers know that their commission is predicated upon contractual gross rents over the terms. So the escalator is something that helps serve them a little bit too.

[Operator Instructions] Our next question comes from the line of Dave Rodgers with RBC Capital.

So I guess following up on comment you made which was specifically about asset sales and I think maybe parsing out it seems like the capital markets are certainly more active on the very high quality credit tenant side. You have done a couple of deals lately. You have got very good long-term assets, like the RBC Plaza asset down in Raleigh. What keeps you from selling those besides just maybe the quality? And do you react to the capital markets at all where those are the easier assets to sell and look to maybe replace them later and sell the lower quality stuff at a better point and time? How do you balance what is core to Highwoods and what is adjusting core market?

Yes now 2 quick thoughts. One is that you are in no rush to get back to this 44% that I said before. We want to be sure we were patient and deliberate and that we do that in the right manner. So to take something that we consider core that long-term will be core or that -- like the building you mentioned. In our view, although it maybe bias we think that, that asset will always differentiate itself from what's – what's in CBD today, that we'll always have an opportunity to be in the deal flow to lease that building and add in a -- add attractive terms. So we wouldn't want to flip out of something that we think is muscle just in order to hit this 44%. We are going to get there one way or the other but we want to be sure that we are patient and deliberate and disciplined about the way we go about that whether it would be through dispositions or actuary issuance. There is a concentration that we want to have so that we are in the deal flow. If we flipped out of key assets the more of those that you flip out of the more you are taken out of the deal flow because the brokers in town don't know you to have the better assets that their customers will want to get a good look at and a quote from. So we see ourselves more as strategic operators as opposed to the financial engineering of continuously buy build flip, buy build flip. We'd rather have a stable of the best assets in the better sub markets so that we can routinely be in the deal flow for any deals that are out in the marketplace.

And this question may have been asked and answered and I apologize if I missed it, do you see a big difference between the pricing, let's say on the bottom half of your core assets to the top half of your noncore assets?

Yes like a barbell, yes. Very distinctive and not just for us, but as we look at what others are achieving whether it would be on the right weight or the left weight. It's the delta in between is the Grand Canyon.

Selling that top portion of the non-core assets remains the best execution for Highwoods today.

Yes and what we're selling though we don't think that it's -- in our mind we've culled the grid out of the bottom of the barrel years ago. So there is now like we're trying to sell 25 year old flex space out of our portfolio today. We did a fair amount of that cleaning up already, so we don't think that this is a total clean up job of getting rid of things that are stick built and things that are flex space. For us it's just more constructive pruning as opposed to an overall portfolio clean up.

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

I just wanted to follow-up on the Tampa market. One, I think the last time that we talked about PWC moving out it was unclear whether or not they were going to move out of the full 319,000 square feet, so it sounds like from the prepared remarks that they are in fact moving out of the full 319, is that correct?

That's -- I am going to ask my son questions like that, he says maybe. We are in conversation with them that we are working with them on keeping maybe as much as 20% of the space.

20% of the space. So I mean may be this is a hard question to answer then, but if I -- my understanding is they were going into a new building that was 250,000 square feet, do you know if their head count is staying the same, and is 250 would you be call it a reduction of 20% relative to the 319, like is that emblematic of the efficiency gains that a lot of your tenants would see by moving to -- from an older building to a newer building?

I would say that Pricewaterhouse has exhibited to be more of a contractor of space than other users that we've seen. We've seen them do this in a number of markets, not just in our product, but in others where they have taken on a philosophy that is dictating a change in a way that they lay out and consume their space. Just as a side note, not necessarily speaking to PWC, but what we hear from our customers were they get such mandates from corporate or the leaders of the partnership where they are taking partners out of -- out of nice offices that its certainly impacting their level of enjoyment of coming to work to go from what is traditionally been, a sizable office into some cute farm or some open space. And our view of that is that we haven't seen that happen dramatically across the Board, but we have seen PWC to be one off the entities that do that.

And just a reminder Brendan this, the PWC space that they will be vacating at Tampa Bay Park. This is a very unique office for PWC, because it's a training operation where they bring in folks from all over the world to train them and then they go back and then they do a lot of outsourcing in India and other places. And these folks come into Tampa to train, so they kind of created a template for this that it was -- it was just easier for them to go into this new building and get them in there versus trying to re-tenanting in our existing building. We made a great effort to try to keep them there, they love the building, but ultimately just came down to them, like they -- they needed to do this. The 60,000 square feet plus or minus that Ed is talking about would be spaces not necessarily conducive to going over to that space. And I think that's a good testament to Tampa Bay Park that they would consider staying there.

And I would also keep in mind Brendan that in odd markets where rental rates are let's just say between $20 and $30, this decision of contraction doesn't have near the impact on the bottom-line that if they were to do it in Midtown, New York where rental rates are $120. There is a very different decision to be made here and the analogy that I often use is that back in 1974 we had a gas crisis and everybody was in line, everybody was saying that they are going to get out of their F-150's and their Bronco's and get into Honda's. And if you walked out our office right now looked at the window there are plenty Tahoes, Suburbans, F150s, Silverados still in the parking lot even though gas has gone on from $0.53 to $3.40.

Yes, I know that.

The change from a 16x18 office down to a cube, does it really garner enough whether it would drive somebody to that in our markets.

Yes, understood. I appreciate the color. And then just a couple of more if I could follow up on this asset and the Tampa market. One, kind of where do you think that your rents are in place relative to where markets are, is that kind of that I think as you are talking with Michael Knott maybe that kind of down 5 to 10, is that reasonable for this market. And then 2, how do you think you compare relative to the competitive set, are there larger tenants that are seeking space in the Tampa market and are there larger blocks that are available in the market or a significant amount in the Westshore market?

It's clearly one of the market advantages that we have is that, we will have a large block of space that a lot of our competition in the new development can offer any more.

Buyer account, Brendan, I wish where submarket there was only one block of – let's call it 40,000 square feet of contiguous space, a Class A space in that whole submarket. It's a pretty large submarket, so clearly us having this large amount of space in Lake Point One and Two in Tampa Bay Park, it is, it's a silver lining to have because there are some larger users out there obviously we have talked about the Time Warner transaction and that was a competition between multiple markets, Atlanta, Tampa, Tampa went out and for the sheer fact that we've had that inventory available and we were able to work with PWC to release any color of encumbrance as they had on that space and we hope that Time Warner will be a larger growth company for us there in that building.

Okay, great. And then just lastly I mean TI should we assume kind of a typical like $20, $25 or something like that and nothing like out of the ordinary?

Yes I think it depends between the 2 buildings that they occupy the LakePoint Two is the newer building has a little new template, probably could expect a little less theater retrofit that than LakePoint One, which is more of the early 90s or about it. So we clearly will have that as part of our playbook to go and start working on that space when they come to vacate.

And Brendan just to put an context there occupancy in the 2 buildings is roughly the same right about a 160,000 square feet. And the common area is the LakePoint Two are in great shape, so we'll only do some esthetic things and modernize the elevators in LakePoint One.

There are no further questions at this time. I'll the conference back to you.

Thank you, everyone. Appreciate your interest and time and listening in. As always, if you have any follow-up questions, please don't hesitate to give us a call. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you very much for joining, and ask that you please disconnect your lines.