Highwoods Properties - Earnings Call - Q1 2016

Transcript

Speaker 0

Good morning, and welcome to the Highwood Properties Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. As a reminder, this conference is being recorded April 2736. I would now like to turn the conference over to Mr.

Mark Mulhern. Please go ahead, sir.

Speaker 1

Good morning, everyone. Ed Fritsch and Ted Klink are with me on the call today. As is our custom, today's prepared remarks have been posted on the web. If any of you have not received yesterday's earnings release or supplemental, they are both available on the IR section of our website at highwoods.com. On today's call, our review will include non GAAP measures such as FFO and NOI.

Also, the release and supplemental include a reconciliation of these non GAAP measures to the most directly comparable GAAP financial measures. Before I turn the call over to Ed, a quick reminder that any forward looking statements made during today's call are subject to risks and uncertainties, and these are discussed at length in our annual and quarterly SEC filings. As you know, actual events and results can differ materially from these forward looking statements. The company does not undertake a duty to update any forward looking statements. I'll now turn the call over to Ed.

Speaker 2

Thank you, Mark. Good morning, everyone, and thank you for joining us. On our first quarter call in February, we noted the disconnect between the positive fundamentals of our business and a negative tone on Wall Street. A struggling Dow Jones and declining ten year treasury yields were factors driving that negative tone. What a difference ten weeks makes.

In that short timeframe, Wall Street is now reflecting a more positive tone that is consistent with the fundamentals of our business. The Dow is back up around 18. The ten year treasury has stabilized and investor sentiment across most asset classes has improved. Aside from this, some fear that pending CMBS maturities over the next couple of years have the potential to overwhelm the supply of replacement capital. This talked about fear reminds us of how a high volume of defaults had been forecasted in the twenty ten, twenty twelve window creating a once in a lifetime opportunity to acquire on the cheap, which obviously didn't happen.

We understand the CMBS market has stabilized somewhat in the past few weeks and that life companies, domestic banks and debt funds continue to have strong appetites for loans collateralized by U. S. Commercial real estate. We're not going to speculate on the volatility of the CMBS market except for a few observations as it relates to us. One, we have not detected any impact on the bread and butter of our business.

Two, we have historically not been users of CMBS debt and we continue to receive attractive quotes and terms from our traditional debt capital channels. And three, with leverage at 38.4 and debt to EBITDA ratio of 5.4 turns, we believe our balance sheet is well positioned to weather dislocations in the broader capital markets. The key factors that underpin the positive outlook of our business continue to apply. The jobs picture remains positive. Markets continue to experience positive net absorption.

Construction costs are keeping a bridle on development and rents continue to rise. During the first quarter, we leased over 900,000 square feet of second gen office space with robust GAAP rent growth of 9.7%, strong net effective rents of 14.54 per square foot and an average term of six point five years. Compared to last year's first quarter, we grew same store cash NOI by 3.7% and increased occupancy 80 bps ending the quarter at 92.7%. We are pleased to have delivered FFO of $0.82 per share during the quarter. This includes a penny and a half of land sale gains and 2 pennies in term fees.

We are pleased to have successfully closed on the sale of our retail centric Country Club Plaza assets on March 1 for $660,000,000 which blends to a 4.7% cap rate. We used $420,000,000 of the proceeds to repay short term debt incurred on September 30 when we acquired Monarch Tower and Monarch Plaza in Buckhead and SunTrust Financial Center in CBD Tampa, buildings which we expect will stabilize in the seven plus percent range. In addition to strengthening our BBD office presence and capturing accretive growth in earnings and cash flow, we simplified our business model, reduced our annual G and A spend and drove our leverage ratio to 38.4. The remaining $230,000,000 of net sales proceeds were placed in escrow. As you know, our preference is to redeploy these escrow proceeds to acquire BBD located buildings in our existing markets as well as add to our inventory of infill land for future development.

We will stay true to our mantra of being disciplined allocators of capital. The decision on how much we will use to acquire assets, pay down in debt and or return in the form of special dividend will play out within the next four months. Since March 1, we have invested $9,000,000 of the escrow proceeds to acquire 14 acres of development land on which we will build up to 216,000 square feet in Brentwood, one of Nashville's BBDs where we currently own 1,500,000 square feet that is 98.3 occupied. This is the last remaining raw development parcel in Maryland Farms. Turning to development, we delivered the $56,000,000 headquarters and surgical center Institute in the Westshore submarket of Tampa and will deliver another $4.00 $4,000,000 of currently 81% pre leased office development over the next six quarters.

These deliveries encompassing 1,100,000 square feet provide meaningful NOI upside and cash flow stability. We continue to chase additional development deals, mostly on company owned land and remain comfortable with our guidance of 100,000,000 to 200,000,000 of twenty sixteen announcements. We expect stabilized GAAP yields to continue to average north of 8%. With regard to dispositions, we continue to have a well defined pipeline of non core assets at various stages of marketing. This of course includes our two remaining wholly owned office buildings in Kansas City, one of which is under contract.

We are comfortable maintaining our disposition outlook for 2016. Year to date, we have sold $17,000,000 of non core assets in addition to the $660,000,000 Plaza sale. During the quarter, we closed out yet another joint venture investment, Concourse in Greensboro. This fifty-fifty JV sold its two office buildings, which encompass 118,000 square feet and an adjacent land parcel for $11,000,000 Only 2.2% of our revenues are generated by joint venture owned properties. In summary, our business remains strong.

As of March 31, only 4.7% of our revenues were scheduled to expire by the end of this year. This is the lowest rollover exposure at this point of the year in over a decade for us. We continue to leverage our brand, our synergistic platform and our focus on simplicity to hold the line on operating and G and A expenses. And with more four to five balance sheet and $221,000,000 in escrow, we are positioned to create additional shareholder value. We have reaffirmed our twenty sixteen per share FFO outlook of $3.18 to $3.3 per share, which implies a midpoint of $3.24 As Mark will cover in more detail, our FFO outlook for 2016 does include the range of possible uses of the $221,000,000 in escrow.

Otherwise, our guidance is consistent with our long held past practice whereby our FFO outlook does not include the effect of potential acquisitions and dispositions that may occur in the remainder of the year. Ted? Thanks,

Speaker 1

Ed,

Speaker 3

and good morning. As Ed noted, we had solid activity this quarter, leasing 902,000 square feet of second gen office space and year over year asking rents continue to increase across all of our markets. Average in place cash rental rates across our office portfolio were 23.38 per square foot, 3% higher than a year ago. Occupancy was 92.7% as of March 31, up 80 basis points year over year, although slightly down from year end due to the sale of the 96.9% occupied 1,300,000 square foot Plaza, as well as two expected move outs in Pittsburgh that I will discuss in just a minute. Given our market dynamics, we remain comfortable with our twenty sixteen year end occupancy outlook of 92.5% to 93.5%.

For office leases signed in the first quarter, starting cash rents were basically flat at negative 0.2% and GAAP rents grew a robust 9.7%. Average term was six point five years, five months longer than the prior five quarter average. And leasing CapEx was $17.65 per square foot, 13.6% lower than the prior five quarter average. We are pleased with the economics we garnered with net effective rents of $14.54 per square foot, 5.9% higher than the prior five quarter average. Turning to markets.

Our Atlanta portfolio was 92.1% occupied at quarter end, up two sixty basis points year over year. During the quarter, we leased 251,000 square feet, including two long term federal government renewals encompassing 212,000 square feet with the CDC and Century Center with very low leasing CapEx. We only have 198,000 square feet of remaining twenty sixteen rollover exposure in Atlanta. This includes a previously disclosed 58,000 square foot second quarter known move out at Monarch and Buckhead that was factored into our acquisition underwriting. We are very pleased with the operational performance of our 1,900,000 square foot Buckhead portfolio.

Year over year asking rents are up 10% on average. After backing out near term move outs at Monarch, move outs known before the acquisition, occupancy in our Buckhead portfolio grew two forty basis points from 86.4% at September 30 to 88.8% at March 31 and is projected to increase another 200 basis points by year end. Strong growth in Nashville continues. 129,000 square feet of positive net absorption in the first quarter. The market's unemployment rate is 3.5%, 150 basis points below the national average.

Direct market vacancy is 7.5%. Occupancy in our portfolio is 99.6 at quarter end, up 40 basis points sequentially and up four thirty basis points year over year. And we have less than 100,000 square feet set to expire by year end. The construction of 7 Springs II, our 131,000 square foot office building with structured parking is well underway. This $38,100,000 development is 43% pre leased with completion scheduled for the 2017 and stabilization in the 2018.

The volume of prospects is strong. In Raleigh, office jobs grew 3.2%, 100 basis points above the national average and the office market posted yet another quarter of positive net absorption. We garnered very strong average GAAP rent growth of 18.7% on over 200,000 square feet of second gen office leases signed during the quarter. Occupancy in our Raleigh portfolio was 93% at quarter end, up 20 basis points from December 31 and two seventy basis points year over year. Also, we are working with a sound prospect at Glenlake V, which would bring leasing to 94 and stabilize the building well in advanced pro form a.

In CBD Pittsburgh, occupancy in our portfolio rolled down from 95.7% at year end to 91.4% due to 96,000 square feet of anticipated move outs at our 1,500,000 square foot PPG place. One customer, Highmark, a health insurer, consolidated into a building it owns and another customer, Ketchum, a marketing agency relocated into a very different low price point product. Pittsburgh's Class A CBD market is a solid 94% occupied and we have 175,000 square feet of strong backfill prospects with asking rents 5% to 7% higher than expiring rents. In conclusion, leasing volumes and the ability to push rents continue to be solid, reflecting positive momentum in our markets and demand for our well located BBD office product. Even with node move outs taking occupancy to the 92% range mid year, occupancy will rebound and average occupancy for the full year 2016 is projected to be some 50 basis points higher than last year.

Speaker 1

Mark? Thanks, Ted. We've had a positive start to the year as indicated by our first quarter financial results. As Ed outlined, for the 2016, we delivered FFO per share of $0.82 including $0.00 $35 of land sale gains and term fees. The term fees were mostly from a customer that vacated 421 Fayetteville, formerly the Bank of America Plaza and CBD Raleigh this past December.

This space was backfilled by Kinley Horn's headquarters. After adjusting FFO for land sale gains and term fees, we grew FFO per share by a stout 11%. The adjusted FFO also includes the impact of issuing 1,100,000.0 shares of stock during the quarter and our G and A costs being approximately $3,000,000 higher in Q1 than the run rate for the next three quarters due to the routine first quarter expensing of the annual long term equity grants. The primary FFO growth drivers for the quarter were contributions from value add acquisitions, particularly the Monarch and SunTrust acquisitions that we closed on September 30, higher same property NOI due to occupancy gains and higher rents and highly pre leased developments coming online. These positive drivers were offset by one month of lost NOI from closing the sale of Country Club Plaza on March 1.

The GAAP income statement this quarter reflects the very significant book gain of $414,000,000 or $4.17 per share on the sale of Country Club Plaza, which is classified as discontinued operations. Turning to our balance sheet. We used Country Club Plaza net sale proceeds to pay off the $350,000,000 bridge facility and pay down approximately $70,000,000 on our line of credit. The remaining proceeds are being held in escrow, as Ed mentioned. Our quarter end leverage ratio was 38.4% and debt to EBITDA was 5.43x.

Setting aside how we use the escrow dollars, we will spend approximately $150,000,000 on development in 2016, and we'll fund that through operating cash flow, ATM issuances, disposition proceeds and borrowings on our line of credit. We do anticipate some financing activity in the 2016 to reduce our line balance and prepare for a $380,000,000 5.88% bond maturity in Q1 twenty seventeen. We also obtained $150,000,000 of forward starting swaps that effectively lock the underlying ten year treasury at 1.9% with respect to forecasted debt issuance before the end of Q1 of next year. As Ed mentioned, we've reaffirmed our FFO outlook of $3.18 to $3.3 per share, which at the midpoint is a 5.2% increase over 2015. In dollars, the midpoint of that range for 2016 is $326,000,000 versus $300,000,000 in 2015, an 8.7% increase year over year.

We are also forecasting 4% to 5% growth in same property cash NOI for the full year. Our outlook includes various outcomes with respect to the $220,000,000 of remaining escrowed funds. As Ed mentioned, our preference is to use those funds to acquire more BBD located buildings and land. Other possible options include paying down debt and or other general corporate purposes, which could include paying out any remaining capital gains in the form of a special dividend. This range of outcomes has been factored into our 2016 FFO outlook.

Otherwise, consistent with our past practice, we do not include the operational or funding impact from potential incremental investment activity until such transactions are announced. Two things to keep in mind regarding our FFO trajectory for 2016. The first item relates to the timing of the full reinvestment of the Country Club Plaza proceeds to replace the lost NOI from that disposition. With two thirds of the proceeds invested in SunTrust and Monarch, the remaining escrowed proceeds will likely not be redeployed until the second half of the year, therefore impacting second quarter year over year FFO comparisons. We also have previously disclosed known move outs that will likely result in thirty forty basis points of lower occupancy at the end of Q2 versus Q1.

We are fortunate to have a solid FFO growth story for all of 16, but want to be transparent around how lumpiness may impact the quarterly results. Operator, we are now ready for your questions.

Speaker 4

And our first question comes from the line of Dave Rodgers from Baird. Please proceed with your question.

Speaker 5

Yes. Good morning, Maybe start with the ATM activity in the quarter, I guess, just from a perspective of capital needs and sources and uses and kind of the rationale to get that done so quickly in the year given all the proceeds they have coming in?

Speaker 1

Sure, Dave. It's Mark. So as you know, we have committed to growing the company on a leverage neutral basis. I think you heard us describe, we anticipate about $150,000,000 or so of development expenditures during the year. We just took advantage of share price and we're able to raise attractive level.

And we think that it's just a prudent way to kind of run the company and continue. Obviously, what we said was our preference is to put those escrow funds to work. And so we just felt like that was an important thing to get done given the dynamics of the economy here.

Speaker 5

Great. Thanks Mark for that. And then maybe Ed or Ted talk a little bit about the activity and the demand to start new development. You've been pretty cautious about starting any speculative development. So just curious on kind of your thoughts about the demand around new projects going forward and what that might do, I guess, to development starts this year?

Speaker 2

Yes. So our guidance is out there, and we reaffirmed our 100 to 200 of starts. Dave, know that we typically have projects in the size of 40,000,000 to $50,000,000 So think of that in terms of two to four to five total announcements for the year. We do have the 5,000 Centigrain project that we announced at the beginning of the year, which is in the low $40,000,000 As markets continue to tighten and those who are interested in relocating or expanding and need significant sized footprints, obviously, new development becomes a prominent part of what their options are. We have plenty of company owned land and obviously the balance sheet in order to accommodate that.

We're currently in conversations with six different customers who would predominantly pre lease or totally pre lease a building. They're in different stages of conversation. Chances of them all happening are slim, but chances of some of them happening relatively strong. And we think that the price of construction continues to keep a bridle on there being a significant amount of speculative construction done across the markets by an array of developers.

Speaker 5

And Ed, you made that comment in your prepared comments as well. Is there anything more you can elaborate on there in terms of just construction costs and the increases that you're seeing and how impactful those have been to you as well?

Speaker 2

Yes. So obviously, not only impacts new development, but construction costs play a role in re leasing as well as we re tenant spaces. We continue to see about 0.5% increase per month in total construction pricing. Just as a reminder, it didn't abate during the Great Recession. So this is compounded for quite some time.

So clearly, it's an expensive option. But there are still those who are seeking a single customer type building, a build to suit. And the only way to get it in the tightening market in many cases is going to be a build to suit. We've seen some prospects that we've been in conversation with that once they've seen the pricing from us and some of our peers, they've decided to just double down and stay where they are. But there's still plenty that are talking about the possibility of going into something new.

We've always said it's a very protracted process because there are a number of options that they can pursue and at different pricing points. But it's safe to say that they're all 15% to 30% more expensive than if they were to stay put.

Speaker 5

That's helpful, Ed. Thanks. And I guess last question for me. Just talk about and maybe this is for Ted, talk a little bit about the demand that you're seeing in the Florida markets. Heard your comments on Atlanta, Nashville, Raleigh, Pittsburgh, was curious about on Florida and if you're seeing any kind of rebound in activity

Speaker 3

Yes, Dave. Look, I think it's definitely been behind. The recovery has been slower than our other markets. But I think we continue to see vacancy rates for Class A properties. Certainly in Tampa, they're now in the single digits.

So we do have asking rents that are up 4% or 5%. Demand remains steady. I think the local economy continues to grow. So I think it's just a matter of time that we're going see some acceleration in the leasing, new leasing and all that in Tampa. In terms of Orlando, really similar story, a little slower to recover.

Class A CBD vacancy rate is around 10%. That's so it's continued to improve. Asking rents are up four or 5%, not a lot of large blocks of space. So again, while it's been slower to recover, we do think with the projected job growth in the next twelve months, it's going to continue to improve.

Speaker 2

Yes, Dave, just stapling your last two questions together, I would just point to the LSI delivery. So that's a good 100% pre leased $56,000,000 project that we just delivered in Tampa. So not a lot of existing options available for them and they chose to build to suit.

Speaker 5

And

Speaker 4

our next questions come from the line of James Feldman from Bank of America.

Speaker 6

Can you talk a little bit more about the Pittsburgh market? I mean, obviously, we've seen some bankruptcies from oil related and energy related companies. But just as you guys are on the ground, it sounds like you feel pretty good about your potential to backfill. But just what are the risks to that market and across the different submarkets that may be competitive? How are you guys thinking about it?

Speaker 2

Jamie, this is Ed. I'll start. We're very bullish on Pittsburgh. Our occupancy there, when we started, was in the low 80s, and Andy and his team got into mid-90s and held it there. Over the quarter, quarter over quarter, we dropped 4.3% and it was basically due to the two customers that Ted outlined in his script with Highmark and Ketchum.

In the releasing of those, we expect north of 5% increase in rents. And Annie currently has a pretty healthy list of about 175,000 square feet of prospects and anticipates about half of that will hit before year end and the other half in the first half of next year. So we feel pretty confident about the back fill, the volume of prospects, the ability to push rent. Also, as Ted said in the scripted remarks, the CBD Class A market is 94%. So the downtown market really hasn't seen an impact from the energy industry.

Now if you go out into some of the suburbs, that has been a little bit more evident there, but the downtown market is not. In addition, we've been able to further energize the Ground Floor and some of the below grade area at PPG Complex with restaurants and activities. So it's a better positioned asset today with those additional amenities and another large restaurant craft brewery coming on board on this year. So we feel with the increase in energy on that Ground Floor, the volume of prospects that we have to backfill the space and the upside in rent and then just the overall health of the downtown market, we remain bullish on it.

Speaker 6

Okay. And then as you think about the options to redeploy the additional proceeds from Country Club Plaza, can you give us some color maybe how the acquisition and disposition markets have changed over the last six months? And in terms of the investments you might be looking at, more stabilized or value add, just kind of what's out there and what may where the opportunities might be opening up?

Speaker 2

Yes, I'll start and then maybe toss it over to Ted. We think, Jamie, that there's a little bit of a disconnect between how some may perceive where cap rates are. So we have now underwritten in excess of $1,000,000,000 as we evaluate various opportunities to deploy the remaining third of the proceeds from the CCP sale. We haven't seen any movement in cap rate. And I know that there has been some that's been written that even in the gateway cities that they've seen 25 to 50 bps relief if you're the buyer in cap rates, but we haven't seen that.

And we've market tested that in our underwritings and we've seen it in the things that we pursued and had conversations about whether it'd be off market or broadly marketed. We just haven't seen any reduction in the volume of interest, both in pricing and number of bidders for institutional quality, better located assets within the BBDs that we're pursuing. So maybe just a little bit of a because I know there's been plenty written that there's the perception and maybe it's tied to what's going on in San Francisco, maybe it's tied to what's going on in New York, but we haven't seen that inflection. So there are ample opportunities there. And it is those opportunities which we're pursuing are also being aggressively pursued by others.

And so no expected release in those cap rates.

Speaker 6

Okay. And are you pursuing more fully leased or value add?

Speaker 4

Yes.

Speaker 2

Both genres are on the prospect list to varying degrees. Yes, it's just it covers both.

Speaker 6

Okay. And then finally, looking at your top tenants list, you've got HCA and SunTrust on the horizon as within the next year and a half. Just thinking about those leases or just any other large renewals expirations? I know you guys mentioned some on the call, but can you address any early discussions with those tenants or any others that we should be thinking about?

Speaker 2

Sure. With regard to HCA, we've talked about this publicly a number of times where they are going into a building in downtown. So they have multiple lease instruments with us. The there are three of them, which expire in the 2017 that total about 235,000 square feet. For one those leases are basically in two different buildings.

One, they're each about 103,000 square feet. We have a 62,000 square foot prospect for one of those, which equates to about 60% of the space that they would give up in Brentwood. But it's early and would remind everybody that our West End where the other building is, we're 100% occupied and in Brentwood where we have 1,500,000 square feet, we're 98.3% occupied. We really see good opportunity to re lease these spaces in a relatively short period of time. If we're going to get space back, these would be the two places to get it and we have plenty of notice.

And Brian, Jimmy and Jeff, our team there are focused on this. And as an aside, as Jimmy and Jeff try to figure out how to make a living being 90% occupied in their portfolio, obviously, they're investing a lot of their efforts to backfill those two spaces. And then the other is just that we only have 4.7% of revenues that will expire between now and year end. So I think that just gives us ample opportunity to focus on these bigger blocks that would be coming to us first of next year. The only other thing that I would add to that is the value add spaces because when we announced the acquisition of SunTrust and Monarch in September, we noted that there were some known early move outs and those were defined by us as customers who would be moving out within twelve months of acquisition that had given notice and we knew about.

And there's clearly opportunity for leasing and upside there and we're seeing some momentum on all three of those buildings.

Speaker 6

Okay, great. Thank you.

Speaker 2

Thanks, Jamie.

Speaker 4

And our next questions come from the line of Jed Regan from Green Street Advisors. Please proceed with your question.

Speaker 7

Hey, good morning guys. Just sticking on Nashville, you mentioned the Brentwood land acquisition there. Can you talk about the game plan there just in terms of timing for that potential development and any active conversations that might be going on with prospective tenants? And then just related to that, given how tight that market is these days, just Nashville overall, have you been able to accelerate the rent growth you're pushing for in that market?

Speaker 2

Well, I'll do the development and Ted maybe you can hit on the rent. With regard to development, Jed, we announced 7 Springs II, which is 131,000 square feet. We announced it 100% spec and shortly thereafter, Brian and team were able to secure a 43% user with a healthcare company. And so that was a positive. And we also have more prospects looking at that building today, another 20 some thousand of vibrant prospects, I would say.

So it's early. Just poured the Third or Fourth Floor. It's moving along on schedule. And I think to have started 100% spec, be it 43% now and have others that are interested in the building, we've only poured up to the Fourth Floor, I'm very comfortable with that. Regarding Virginia Springs, we're very excited to be able to bring that parcel of land into our portfolio as it was truly the last raw piece of development land available in Maryland Farms.

We can get up to 2 and 16,000, 218,000 square feet in two different buildings there. And so we're working through the process of the necessary municipal approvals to plot the buildings. If we were to go after it fast track, the earliest we could have a building CO ed and online would basically be the end of 'seventeen to very maybe first quarter 'eighteen. So we're now putting together the final touches on the elevations and the typical floor plates and the site planning, etcetera. But it just recently came in.

So it wasn't until we had it locked up that we decided to invest significant dollars on the design aspect. But that's coming along very nicely. And right here in short order, our Nashville team will be armed with all the semi gloss images that they need to have to be up marketing that. Ted, on the rent?

Speaker 3

Yes. Jed, in terms of just the market in general, I mean, I think it's Nashville continues to be our strongest market. We're seeing continued strong demand across many industries. Rents in general are record highs in Nashville today and at the same time, vacancies at a record low. I think first quarter was the fifth consecutive quarter that the vacancy had hit a new record low.

So that's enabled us to really push rents. I think we wish we had more space to lease and more rollover occurring. But what little we have, we've been able to really push rents on a cash basis and obviously on a GAAP basis.

Speaker 7

Remind me order of magnitude how much you're pushing for these days?

Speaker 3

I think rents have gone up certainly asking rents over 10% in the last probably even six to nine months. So it's pretty strong.

Speaker 7

Okay. That's helpful. And you guys mentioned, it sounds like you're seeing values holding up for better quality product in your markets. Are you seeing any evidence of asset prices or bidding tense softening for lower quality markets or riskier assets?

Speaker 3

Not materially. I mean, think we're seeing decent activity really in all of our markets and most of our product types, both A and even the Bs. I think the Bs were slower, as you would expect, maybe slower to recover in terms of leasing, but we're seeing that be steady. And the number of leases we're doing has remained steady over the last five or six quarters, and that's across our entire portfolio. So haven't really seen any softness to speak of.

Speaker 7

I was thinking more on the asset pricing side of things and kind of overall valuations. Anything there as far as softening just with the recent market volatility kind of riskier Still or lower quality

Speaker 3

in the leasing. It. Look, I think overall, maybe on the lower quality assets, pricing has made I think there are probably fewer bidders. And maybe there is has been a little bit of pricing pullback as buyers are doing some price discovery maybe on the B quality assets, but we

Speaker 2

just haven't seen on the trophy side. And I think the CMBS, Jed, more follows the lower end than the higher end, and that could be part of that explanation that the fears that are out there or the wonderment that circles CMBS, it may be influencing that easing of cap rates on the lower end of spectrum, which and therefore not touching the top end.

Speaker 7

That makes sense. And I mean, do you have a feel for sort of quantifying the amount of change you've seen so far? Is there just not been enough out there to draw any conclusions yet?

Speaker 3

Yes. I just don't think there's been enough trades out there to really enough data points to determine that.

Speaker 4

And our next questions come from the line of Sumeet Sharma from Morgan Stanley. Please proceed with your question. Hi, Mark. Hi, Sumeet.

Speaker 8

Quick question about some of your twenty seventeen expiration, the $380,000,000 that is the unsecured debt that's coming to you. I guess trying to understand how should we view the strategy that you're going to take? Are you going to swap it with another tranche? And what sort of spread are you looking at? Maybe early to look at this, but just wondering if there's a possibility for prepayment in this year?

Speaker 1

Yes. So you're talking about the maturity that's, I think, around 04/01/2017, it's a point 88%, dollars $380,000,000 maturity.

Speaker 4

Correct.

Speaker 1

I think we're likely to get it with probably a bond offering at some point. We probably will look at hedging whether that makes sense. As you heard in my prepared remarks, we've already done swaps on $150,000,000 at 1.9% treasury. So we're obviously monitoring that and paying attention. I think what you're going to see us do is kind of flatten out our maturity schedule.

So we've got some holes in the maturity schedule and you look at it, that will give us some flexibility around doing that. I think we can obviously save some interest cost on that. So we will approach that as we get into the second half of the year and be prepared by the time it matures in first quarter to have it solved.

Speaker 8

Great. Thank you so much. The second question is around the it's a rather small development, but just out of interest. It's Enterprise V sitting, I think, in Raleigh or thereabouts. And the construction seems to be close to completion.

So wondering about any pre leasing activity on this industrial, given the state of the industrial market is pretty still pretty bullish. And you also mentioned in the previous call that there's some 360,000 square feet of additional dev capacity there. Any chance that you pulled the trigger on that earlier? Or what sort of conditions would you be looking to sort of start work on further industrial development, let's just say that?

Speaker 2

Yes, Smith, this is Ed. Good question. One is the building is 131,000 square feet and it's in Greens Boro and it has now been completed. We have a number of prospects who are looking at the building and we actually have a signed instrument of intent with one customer for 100,000 square feet with a contingency in it that we're working through. Rick and Reggie, the team there have had good showings.

In fact, I wonder if they haven't called you before this to plant the question. They have asked us if they can proceed with submitting a package for approval for them doing the next building based on the level of activity they have on this. We're going to wait and just get a little bit more firm pre leasing on this before we would go with the next building unless the next building comes with some amount of pre leasing. But small dollars, it's $7,600,000 on this one. The other building would be in the same zip code, but good activity and expect to certainly fall within pro form a rents and stabilization dates.

Speaker 8

Okay. Thank you so much. And apologies for getting the geographies wrong. And yes, it was a fine. You

Speaker 2

were only off by about 80 miles, so no problem.

Speaker 4

And our next questions come from the line of Jon Petersen from Jefferies. Please proceed with your question.

Speaker 9

Great, thanks. I wanted to just quickly in terms of guidance for same store NOI, you guys were at 3.7% this quarter. I think your full year guidance is 4% to 5%, right? But you talked about a tenant moving out in the second quarter, so I would think that would have a negative impact. Just trying to understand what the kind of puts and takes are that and kind of maybe on a quarter by quarter trend, like what's going get us to that 4% to 5%?

And am I right to assume it's going to be more negative or more not negative, but decelerating next quarter?

Speaker 1

Yes, John, it's Mark. I think there's a few things to think about here. Obviously, we have contractual bumps in the leases. We're getting increased rents in some of the markets. We've got about a percentage on average occupancy pickup through the year that will come back to you and it's probably back end loaded.

So third and fourth quarter should be stronger at least in our projection and model. We've had really good operating expense control. So our folks have done a really good job controlling operating expenses. And so I think that's going to help us here. We also have straight line rent that came as a result of concessions, free rent concessions that we made in some of the leasing that drove maybe the higher same store numbers, that's kind of burned off.

So you're going to see a lower straight line rent number, especially in the second half of the year that will influence those numbers. So we're comfortable with the guidance we've given of four to 5% same store for 2016 and believe strongly that will happen. Again, maybe it's a little back end loaded into the third and fourth quarters.

Speaker 9

Okay. All right. That's helpful. That's all I got. Thanks.

Thanks,

Speaker 2

So operator, no questions from that guy at Wells Fargo?

Speaker 4

No, sir. There's no question.

Speaker 2

All right. Well, thank you everybody for dialing in. Of course, if you have any other additional questions, please give us a call. Thank you.

Speaker 1

Thank you.

Speaker 4

And ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.