Highwoods Properties - Earnings Call - Q2 2016
August 3, 2016
Transcript
Speaker 0
Good morning, and welcome to Highwoods 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 today, 08/03/2016. And now I would like to turn the conference over to Mr.
Ed Fridge. Please go ahead.
Speaker 1
Good morning and thank you for joining us this morning. Mark is out today with flu like symptoms. And while he would much rather be here, we would much rather he stay at home, eat chicken soup and keep his germs to himself. In the interim, Mark for Mark, Brendan Mararana, our newly minted VP of Finance and Investor Relations will pinch hit for Mark and he'll join Ted Klink and I on the call. I welcome Brendan to our team and to his role as our Vice President of Finance and Investor Relations.
As a reminder, he joined us three months ago and comes to us from Wells Fargo, where he spent the last eleven years covering office REITs as a sell side analyst. We are thrilled to have him on the team as he brings a wealth of information and intellect and as expected, Brendan has hit the ground running. The rookie will now lead us off with our standard preliminary comments. Brendan? Thanks, Ed.
Good morning, everyone. I'm excited to
Speaker 2
be part of the Highwoods management team and to be here on the other side of the table. 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're both available on the IR section of our website at highwoods.com. On today's call, our review will include non GAAP financial 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 back to Ed, a quick reminder that any forward looking statements made during today's call are subject to the 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 back
Speaker 1
to Ed. Thanks, Brendan. There are four main factors we believe underpin our operating results. First is the steady as she goes cadence of slow yet positive growth of The U. S.
Economy, which has resulted in an elongated cycle that is currently stable and relatively healthy. Second is the bridle on new competitive office supply. This bridle helps us drive rent growth in our second generation product and also benefits our development activity given the lack of an abundance of competing projects. Third is the strength of our balance sheet and access to capital. Our balance sheet is as strong as it's ever been and we have multiple arrows in the quiver to fund organic and external growth.
Fourth and most importantly is the quality of our individual markets. Across the board, we are seeing good leasing activity with active showings and solid customer interest. Positive job metrics and other relevant economic drivers in our markets generally continue to outperform national averages and are resulting in continued steady demand for our well located BBD product. With this positive backdrop, we leased over 900,000 square feet of second generation office space during the second quarter with very strong GAAP rent growth of positive 15.4%, cash rent growth of positive 3% and an average term of five point six years. Compared to last year's second quarter, we grew same store cash NOI by 4.5% and same property average occupancy was up by 60 bps.
We delivered FFO of $0.82 per share during the quarter, thanks in great part to the four key factors I highlighted earlier. As you know from our first quarter earnings release, dollars $230,000,000 of net sales proceeds were placed in escrow on March 1 after the sale of our retail centric Country Club Plaza assets for $660,000,000 Since March 1, we have invested $9,000,000 to acquire the last remaining raw development parcel in Nashville's Maryland Farms. This parcel can support up to 218,000 square feet of office. As an aside, we currently own 1,100,000 square feet that is 98.9% occupied in this BBD. We also invested $18,500,000 to acquire Fee Simple Title to land underneath EQT Plaza in Pittsburgh.
Eliminates a $1,100,000 annual ground lease payment. EQT And we expect to invest another $3,800,000 of escrow proceeds to partially fund the $7,700,000 planned acquisition of a development site that can support up to 292,000 square feet of office in CBD Raleigh. This will leave us with just shy of $200,000,000 remaining in escrow with the six month tenthirty one exchange window closes on August 26. Our preference has been to redeploy all the escrow proceeds to acquire BBD located assets in our existing markets, while staying true to our goal of being disciplined allocators of capital. While we invested $31,000,000 in land, we did not acquire any additional buildings predominantly because we found pricing to be out of sync with our view of the risk reward profile of the opportunities available to us during the narrow tenthirty one window.
As a result, our plan is to use the remaining approximately $200,000,000 to pay down debt and fund a future special cash dividend of at least $0.75 per share. Assuming that dividend at $0.75 per share, we will have used the Plaza proceeds to acquire $445,000,000 of BBD located value add assets, pay down $130,000,000 of debt and return $75,000,000 to our shareholders. While this will close the book on the Country Club Plaza sale and the use of proceeds, we obviously continue to seek opportunities to acquire BBD located assets at prices that offer attractive investment returns and significant future upside. We are essentially maintaining our 2016 outlook for up to 100,000,000 of additional acquisitions. Turning to dispositions, we recently sold two of our four remaining assets in Kansas City.
First, we sold one of our two remaining wholly owned office buildings for $14,200,000 Second, subsequent to the quarter end, we closed out yet another joint venture investment, the Plaza West office building, generating $4,100,000 of proceeds for our 12.5% share. Today, only 2% of our revenues are generated by joint venture owned properties. We are comfortable maintaining our disposition outlook for 2016 of $760,000,000 to $860,000,000 Year to date, we have sold $695,000,000 of non core assets, obviously inclusive of the $660,000,000 Plaza sale. With regard to development, our current $482,000,000 74% pre leased office pipeline will provide meaningful NOI upside, cash flow stability and FFO growth as it stabilizes over the next three years. In addition, we continue to chase development opportunities and are pleased to report that we have agreed upon terms with a new customer for a $30,000,000 100% pre lease build to suit on company owned land, which we expect to announce in full before the end of this quarter.
We remain comfortable with our guidance of 100,000,000 to $200,000,000 of twenty sixteen development announcements. Lastly, turning to FFO, we have tightened our twenty sixteen per share outlook. We raised the lower end by $02 from $3.18 to $3.2 and we reduced the high end by $02 from $3.3 to $3.28 The midpoint of our range continues to be $3.24 per share, representing a 5.2% growth over 2015, a very solid operating performance, a top and even strengthened balance sheet. With leverage at 37.5% and with debt to EBITDA ratio of 5.1 turns, we are well positioned to capitalize on future acquisitions and development opportunities. Now I'll turn it over to Ted.
Speaker 3
Thanks, Ed, and good morning. As Ed noted, we had solid activity this quarter, signing 907,000 square feet of second gen office space, which was in line with recent quarterly averages. We continue to see steady activity from our bread and butter midsized customer base. As a reminder, our average lease size is approximately 12,000 square feet, and we only have 58 leases for greater than 75,000 square feet. Further, year over year asking rents continue to increase across all of our markets.
Average in place cash rental rates across our office portfolio were $23.8 per square foot, 3.7% higher than a year ago. Occupancy was 92.5% as of June 30, which was down modestly from the end of the first quarter entirely due to the previously disclosed known near term move outs and recently acquired assets. We've reduced the high end of our twenty sixteen year end occupancy guidance by 30 basis points with our current forecast of 92.5% to 93.2%. Reduction of the top end is attributable to a couple of larger deals we had projected to start late in the year, now being forecast for early twenty seventeen. For office leases signed in the second quarter, starting cash rents were up 3% compared to expiring rents and GAAP rents grew a robust 15.4%.
Leasing CapEx was $3.18 per square foot per lease year. Our lease payback ratio or leasing CapEx over cash term rent was 14.5% in Q2, which was impacted by a higher proportion of new leases compared to recent quarters. Turning to our markets. We continue to see strong demographics benefiting fundamentals in our BBD locations. This is driven by a high quality of life, well educated workforce, a disproportionate share of population growth and low business tax environment.
As an example, a recent study by LinkedIn and Trulia ranked Pittsburgh as the number one city in its College Graduate Opportunity Index. In short, there's an attractive and compelling mosaic of reasons, which continues to drive businesses to choose to relocate and or expand in our footprint. As Ed highlighted, development as a whole has been moderate across our markets. Projects under construction account for only 1.1% of existing stock across all of our markets and 1.4% across our top five markets. This is approximately half of the prior peak.
Construction costs continue to escalate and are north of $400 per square foot in our urban submarkets, inclusive of land and structured parking. And despite the positive backdrop of market fundamentals, we don't expect a meaningful uptick in new construction. The outlier to moderate new supply is Nashville, where exceptionally strong market activity spurred new construction. According to CoStar, there's 3,500,000 square feet under construction or about 6.5% of existing stock. This level sounds daunting for Nashville, but there are mitigating factors that make us hopeful that strong operating fundamentals will prevail.
First, 850,000 square feet or 25% of Nashville's new construction is ours and is 87% leased. Second, the pre leased rate on Nashville's overall construction
Speaker 0
pipeline is approximately 70%, and the market is over 95%. Finally, scheduled deliveries are below the rate of recent net absorption. Second,
Speaker 3
Sticking with Nashville, the market continued to post positive fundamentals during the quarter. The market's unemployment rate is 3%, 190 basis points better than the national average. There was 205,000 square feet of positive net absorption. Occupancy in our in service portfolio was 99%. And for leases signed during the quarter, we posted 31% GAAP rent growth.
Our Atlanta portfolio was 91.2% occupied at quarter end, which was down 90 basis points from March 31, entirely attributable to a previously disclosed 58,000 square foot known near term move out at Monarch and Buckhead that was factored into our acquisition underwriting. At Monarch, we are now 85% leased, up from 80% upon acquisition, and we're ahead of underwriting on rents and lease up. After backing out known near term move outs at Monarch, occupancy in our 1,900,000 square foot four building Buckhead portfolio grew nearly 500 basis points from 86.4% at September to 91.2% at June 30. As hoped, owning four contiguous, unencumbered Class A office towers is paying leasing and operating dividends. Rents in Atlanta continued to accelerate.
Year over year asking rents were up 10% on average. New speculative construction in Atlanta remains limited, representing only about 1.5% of existing Class A stock. In Pittsburgh, in CBD Pittsburgh, occupancy in our portfolio was steady sequentially from Q1. We expect occupancy to increase meaningfully by year end, potentially as much as two fifty basis points depending on the exact commencement of certain customers hovering around year end. Pittsburgh's Class A CBD market is a solid 94% occupied.
Asking rents are 5% to 7% higher than expiring rents. We continue to see steady rent growth and we have a list of strong prospects for most of our vacant space. During the quarter, occupancy in our Tampa portfolio increased 60 basis points to 88.9%. We're expecting additional gains in the 2016 that should bring year end occupancy to 90%. We're working on backfilling space at Lakeside and Tampa Bay Park and have recently seen an increase in prospect activity.
At SunTrust Financial Center in the CBD, our $9,100,000 hybridizing efforts are well underway. With regard to leasing, we're ahead of our underwriting assumptions, and we expect to increase occupancy by 700 basis points from acquisition to year end 2016. In conclusion, steady leasing volumes and the ability to push rents reflect positive momentum in our markets and demand for our well located BBD office product. Brendan?
Speaker 2
Thanks, Ted. As Ed outlined, we delivered net income of $0.32 per share, an 18.5% increase year over year and FFO of $0.82 per share, a 6.5% increase year over year. The primary drivers of our solid operational results this quarter were same property cash NOI growth of 4.5% year over year due to higher rents and higher average occupancy contributions from value add acquisitions, particularly the Monarch and SunTrust acquisitions we closed on September 3035, and highly pre leased developments coming online. These positive drivers were slightly offset by lost NOI from dispositions, including our retail dominated Country Club Plaza assets and the impact of issuing 1,000,000 shares of stock through the ATM. Turning to our balance sheet.
Our quarter end leverage ratio was 37.5% and debt to EBITDA was 5.1x, our strongest thus far. In late August, we expect to utilize the roughly $200,000,000 of remaining escrow dollars to pay down outstanding amounts on our revolving line of credit. This quarter, we also executed a sixty seven month unsecured term loan facility with three banks for $150,000,000 at LIBOR plus 110 basis points that comes due in 2022, a year in which we have no other maturities. We expect to begin drawing on that facility in September. We also paid off $43,700,000 of 7.5% secured debt, increasing our unencumbered NOI to a very stout 92.8.
We have no remaining debt maturities in 2016. As we continue to fund our active development pipeline, be opportunistic with respect to potential acquisitions and pay a special cash dividend of at least $0.75 per share, we have multiple options to fund our liquidity needs with operating cash flow, disposition proceeds, debt capacity and equity issuances. Overall, we have a strong platform to cost effectively fund our business. As Ed mentioned, we've revised our 2016 FFO outlook to $3.2 to $3.28 per share, which is unchanged at the midpoint and represents a 5.2% increase over 2015. There are some moving pieces in our updated guidance range that I'll provide some color on.
First, we've eliminated the potential for any additional acquisitions from the remaining CCP ten thirty one proceeds into our range of potential FFO outcomes. Second, our revised guidance includes dilution from dispositions and acquisition costs from deals that closed since our last earnings call that otherwise reduced FFO by $0 Third, our balance sheet outlook has changed. Our leverage is lower and the guidance for average shares outstanding has moved up slightly, having a near term dilutive impact to FFO. Fourth and finally, even though our same store cash NOI guidance is unchanged at 4% to 5%, we're driving higher FFO through better than expected performance on our non same store pool. We're pleased that our FFO guidance midpoint is unchanged even with the meaningfully lower leverage and the elimination of additional ten thirty one funded acquisitions.
One final thing to keep in mind regarding our FFO trajectory for the remainder of 2016. As is typical, we expect to have meaningfully higher OpEx from seasonal utility costs and increased repairs and maintenance in the third quarter. Operator, we are now ready for questions.
Speaker 0
Thank you very much. And our first question comes from the line of James Feldman, Bank of America. So
Speaker 4
I guess just starting out, do you guys mind talking about the expirations you do see ahead in 'sixteen and even 'seventeen? And maybe an update on HCA and how that backfilling is going?
Speaker 1
Yes. The largest we have is HCA. So we have a number of leases with us. The lion's share of it falls in two leases approximately the same size, about 103,000 square feet in two different buildings in Nashville, 3,322 in the West End and then ramparts in Merlin Farms, Brentwood. Both leases expire in January and the closer we're getting to that expiration, the more activity we've had.
So we've had some very good showings of late for different pieces and parts of that, but activity is good and we remain 99% occupied in Nashville.
Speaker 5
So if we were going
Speaker 1
to get space back, that would be
Speaker 0
the place to get it.
Speaker 1
Beyond that, Jamie, we don't have the next largest exposure we have would be in Richmond, where we have a company that's expiring in about 160,000 square feet of what of which we've already re let about 60,000, 65,000 square feet of that space. And that doesn't expire until later in the year in 2017.
Speaker 0
And our next question comes from the line of Omani Korchman with Citi. Please go ahead.
Speaker 5
Hey guys, good morning.
Speaker 1
Good morning. If we think about
Speaker 5
the acquisition environment and the fact that you didn't acquire anything, can you just give us more color as to whether it was pricing, quality, geography, something else that prevented you from finding suitable deals out there?
Speaker 1
Yes. You in part answered your question.
Speaker 6
So give you lots of options.
Speaker 1
Thank you. So it's a number of things. Obviously, can only make so much come to market within the tenthirty one window. So that which sellers posted for sale and offering memorandums were published. And then there was a cadre of others that where we approached owners and talked to them about being sellers.
So really one of three things occurred or a multitude of things. And it's either their pricing was too high, so the risk reward profile was out of sync in our perspective of it. Second is that there were certainly, in our perception, a fewer total count of bidders, but still very, very capable bidders that were able to write a check for the asset. Or we didn't find meaningful upside through our typical venues such as hybridizing, increasing rents, being able to push occupancy, operating synergies, etcetera. And I guess another rationale would be that there may have extraneous complexities that we felt would have eroded our return.
So we did underwrite a number of things. And for those reasons, one or more didn't come together. And of what we looked at, more didn't trade than traded.
Speaker 5
And
Speaker 0
the next question comes from the line of Dave Rodgers with Baird. Maybe
Speaker 7
two questions, Ed or Ted, you can comment on it. As a follow-up to what Manny had said, I guess, any fundamental concerns that you were seeing, market rent growth, time in terms of getting leases done with customers that maybe made you back off on some deals? And then I guess it's somewhat related, so I'll throw it into the same question, is with regard to your development guidance. I guess update us on where you stand and how those conversations look as well. And you reiterated guidance of 100,000,000 to $200,000,000 in starts and kind of how you expect to come into that range in the second half of the year.
Speaker 3
Ted will take the first half. I'll go Sure, Dave. In terms of just fundamental changes, really, we're not at all. If you look at our fundamentals, I think we feel still steady customer demand in our markets, good tour activity from both existing customer for expansions, potential new customers. Certainly, markets are stronger than others.
But we continue to see good steady customer demand. And again, we spent a lot of time on acquisitions and certainly underwrote a lot. So but nothing underlying from a customer demand standpoint. And then, Dave, on the development side, we didn't change guidance for 2016. We're still 100 to 200.
We have the 41,000,000
Speaker 1
that's announced. And just as a reminder, these are announcements, not starts. Also, we had in my prepared remarks, referenced a $30,000,000 build to suit transaction that we have agreed upon terms on. We expect to fully announce before the end of this quarter. So that gets us to about 70,000,000 on the 100,000,000 to 200 We have a little bit more than a half a dozen proposals out in the market right now, various projects, various markets of various sizes.
They range from, say, dollars 10,000,000 to 90,000,000 Our typical average is in the 45,000,000 to $50,000,000 And if you did a simple average of these, it would be about the same. So we feel quite comfortable that with the guidance that we have out.
Speaker 2
Great. Thank you.
Speaker 6
You're welcome.
Speaker 0
And our next question comes from the line of Tom Lesnik, Capital One Securities. Please go ahead.
Speaker 6
Hi, good morning. Thanks for taking my question. It looks like you guys have been replenishing the land bank here a little bit as of late. I guess two parts. One, is there a limit as to the size of the land bank that you're willing to go and where your comfort range is?
And then I guess second, I noticed there was a 5,000,000 acquisition land acquisition expense that's expected to be incurred in 3Q. Was just wondering if you could comment on that at all.
Speaker 1
Sure. So in reverse order, $500,000 Tom, is just a transfer tax for the parcel that we acquired in Pittsburgh, which was the land underlying EQT Plaza, which we bought in December 2012. And so we obviously ended the land lease, so we mitigated $1,100,000 of annual land lease payments for the ownership of that land. So we'll pay that transfer tax and that's what you saw. On the other side, with regard to just replenishing the land bank, dramatically reduced that over time.
If you looked at the trend for the past ten years or so, the volume of land that we have is significantly small and it's gone out the door in two conduits. One is we've identified non core land and we've sold well over $130,000,000 worth of that. It's probably higher. And then other is land that we've put into service. Most of our development that we have delivered and have underway are on company owned land.
So this is just us being opportunistic to bring select parcels back in so that we continue to have the raw material that we want to quote projects when they consider our backyards.
Speaker 6
All right. Thanks, Ed. Appreciate it. You're welcome, Tom.
Speaker 0
And our next question comes from the line of Jud Reagan with Green Street Advisors. Please go ahead.
Speaker 8
Hey, guys. Good morning. So I guess related to that, what's the game plan at the Downtown Raleigh site? How quickly do you think you may break ground there? And could that go forward on a spec basis?
Speaker 1
Yes. Hi, Jed. So it's really no different than any other parcel that we own. What we do as just standard operating procedure is we arm ourselves with conceptual drawings and massing site plans for what we can do on a site. So not all sites are just single footprint developments.
Some are multi building pads like Glenlake here in Raleigh, for example, where you can put a number of buildings on or Center Green, etcetera. So what we do is with our land inventory, we help prospects and development people who work for the state of the county of the city envision what we would have to offer on that site. So we have conceptuals for most of the prime sites that we own. And then as far as whether or not we would start something, it all depends on what the then current circumstances are, not only for that specific geographic location, but for what we have across the entire portfolio. So if we have a number of spec projects within the portfolio, we might not start one that might be equally deserving, but just getting to the table later than the others because we want to keep in check what we have total exposure for the company as a whole.
So that's how we decide. And I think the we gave a good rationale, for example, when we started the 5000 Centigrene Building in that we have all the buildings within Centigrene are 100% occupied. And then within the Weston PUD, where we have over 1,000,000 square feet, we're 98%, 99% occupied. So we explained that we were going to start that building because either we or Brand X were going to capture the expansion of our existing customer base. So the land that we're in pursuit of in Raleigh is no dissimilar from land that we own in Downtown Orlando or the land that we own besides SunTrust in Downtown Tampa or other places where we've tied up land.
Speaker 8
Are you seeing any interest in that Center Green project at the moment?
Speaker 1
I'm sorry, we what?
Speaker 8
Are you seeing some interest in the Center Green project speaking of that?
Speaker 1
Yes. Yes. We just started that we just started scratching the earth there three weeks ago and we have an LOI out for 20% of the building.
Speaker 8
Okay. How is just kind of overall fundamentals in Raleigh? Maybe talk a little about the dynamics between urban versus suburban demand in that market and then how you're feeling about the supply picture there?
Speaker 1
Sure. So with Raleigh, it's not dissimilar again to a lot of the mid tier sized cities within our footprint and elsewhere. The canvas Downtown Raleigh is very different than it was ten, twelve years ago. So it's really an added submarket that didn't exist with the same vitality that it has today a dozen years ago or any year prior back to long time. So certainly, are many people living down Raleigh that weren't there before.
The amenity base is infilled nicely. There's a recent announcement of a grocery store that will I think that helps define that it is a long term viability for a place for people to live, and that supports the office side. So the downtown market has become part of the menu of choices that users have, but not to the demise of the suburbs. There are still obviously plenty of great locations in the suburbs that users would prefer to be as opposed to being downtown. I think a pinnacle example of that is our conversations with MetLife when they came to town and they were considering our area, and they ended up locating their nearly 5,000,000 square feet out in the suburbs as opposed to downtown.
So it really comes down to choice. And with the vitality and the infrastructure that we have downtown, we just have an additional submarket to offer prospective users.
Speaker 8
Thanks. That's helpful. And then just one more for me. So you guys are trading at pretty healthy premium to NAV these days and it seems like you enjoy a superior cost of capital to a number of your peers on the public and private side. How do you think about that in the context of external growth?
And does it make you want to be a little bit more aggressive in terms of pursuing new acquisitions or developments?
Speaker 1
Well, I think that we want to continue to be the best stewards we can and understand all the arrows that are in our quiver and leverage them to the best benefit of the shareholder while still being our traditional conservative selves. And that's how we came to the conclusion with these dollars that remain from proceeds from CCP. I think that as an example, our being able to use the ATM to fund our development pipeline has been a great instrument for us and to be able to do it at these numbers has been a very good thing for the company, particularly given with the volume of pre lease we have and the girth of the overall development pipeline and the prospects that we have to continue to grow that. I also think that this has enabled us to further unencumber our existing portfolio to have basically 93% of our NOI unencumbered gives us significant flexibility as well.
Speaker 8
Great. Makes sense. Thank you.
Speaker 1
Thanks, Ed.
Speaker 0
Our next question comes from line of Kyle McGrady with Stifel. Please go ahead.
Speaker 9
Thank you. John Guinee here. First, I guess, Brendan, welcome aboard officially. If you were sitting in RC, what really difficult question would you come up with and recommend?
Speaker 2
Thanks, John. I'm sure that you'll easily come up with some difficult questions, but I think it was a pretty straightforward quarter. So there's not a lot of stuff that would sort of be that wouldn't that you wouldn't have seen last night in the release.
Speaker 9
All right. Okay. This is kind of a good job. Big picture question. Average lease 12,000 square feet, only 58 leases over 75,000 square feet.
Do you have a preference? Or can you talk through the pluses and minuses for being in the large lease, corporate leasing business and the costs associated with re tenanting those, but the benefits due to good credit, etcetera, versus being in the sub-five thousand square foot lease, mostly paint and carpet versus moving, demising walls, etcetera. Do you have a preference as you're looking at assets and as you're running your business?
Speaker 1
So John, I'll start with that. First is that we do have a preference, and we have a preference that there's a good diversification and mix of that. So not dissimilar to the fact that we don't have any customer that represents more than two percent, 2.5% of revenues other than the federal government, and we don't have a market that represents more than 19%, 20% of revenues. And we don't have a have a diversification. We also look at it by SIC codes, so we don't have an overweighting in that either.
So the 58 leases that represent 75,000 square feet or more are about a third less than a third, about 30% of our total annualized revenues. We think that it's good to have a mix, and that's what we look at. So when we looked at I'll use the MetLife example again. When we looked at that, we looked at their credit, Fortune 500, all the aspects of the company that they've been around since the earth cooled, etcetera, we thought it was a very good thing to add into our corporate mix. So not being overexposed to any one customer is an important aspect of what we look at.
And in fact, we asked the Board years ago to edict us that if we ever have a customer that would represent more than 3% of revenues, that we would present that with a comprehensive business case as to why we would pursue that lease release instruments.
Speaker 9
Okay. But how about the actual cost to release when you're dealing with big multi floor tenants versus the cost of sort of sub-five thousand square foot local businesses and the ability to push rents in one versus the other?
Speaker 1
So I think it all depends on the circumstances of the day, right? So if we were if we had that big exposure in March, it would be different, we feel, than if we had that exposure in August 2016. And so what we try to do is we try to do the best deal we can do that day. It's no different when borrow money from the bank or issue bonds, etcetera. You do what you need to do with the hours that are available to you, and you try to do the best you can with the circumstances of the day.
So when we do a lease, we do and I think we've shown to you our in house built software tool that we call LeaseLink, which enables our in house brokers and division heads and folks here in Raleigh to look real time at each lease proposal and how it compares to budget. We look at NER. We look at NPV. We look at percent of budget. We look at payback, etcetera.
And so we do that on every deal. Every deal has a completed lease link and we evaluate those. But then on a more global perspective, we also maintain an asset report card where we do routine updates of the August run on all of our assets. And of course, that helps us decide what's core or noncore. So there's a comprehensive report card that we maintain through the routine updates of the Argus run as well as the hard look that we take at each deal, whether it be for 100,000 square feet or 2,000 square feet through our lease link process.
Speaker 9
Great. Thank you.
Speaker 1
Thanks, John.
Speaker 0
And our next question comes from the line of John Feldman, Bank of America. Just
Speaker 4
a quick follow-up. So you guys had talked about rent growth across your markets continuing. Can you just give us maybe some numbers around the percentage growth you're seeing year over year? And is that truly across all markets? Just trying to get a sense of where you think we are in the cycle.
Speaker 3
Yes, Jamie. Look, I think we're seeing it across all markets. It varies by market. Certainly, stronger markets, Nashville, Atlanta, Raleigh, are seeing the highest rent growth. I'd say year over year, it's certainly five plus.
Atlanta is on the very high end of that, along with Nashville. Then the next grouping, most of our other markets, I'd tell you, are probably in that 2% to 5% range. So we're seeing it across all markets, just varies. One thing that's helping drive it obviously is, and we mentioned in our remarks is just a lack of new construction. So not a lot of spaces for a new product for customers to go to, so it's enabling existing landlords to push rents.
Speaker 4
Okay. And it's probably it's a broad question, but where do you think you are in like construction costs versus rents that would justify new construction? I mean, is there still material upside in all these markets?
Speaker 3
Varies by market again. Certainly, Nashville, I think we're seeing we're at cost justified rents for the most part. Atlanta, you're getting there for the trophy assets. But after that, we're still probably most of our other markets, we're still anywhere from 10% to, I'd say, 25% below a cost justified rent for high quality new construction versus high quality existing product.
Speaker 4
Okay. And then this quarter, I know from the broker reports that Atlanta had a slower leasing quarter. Are you seeing any leasing slowdown? Or maybe these are just pockets of quarterly pockets of slowing?
Speaker 3
Not really. I think there's always a summer slowdown. There's a lot of guys on vacation and all that and some of the brokers and all that, but we haven't seen it. I think activity remains good. Showings are still active.
We continue to get good leasing activity in Buckhead. So no, we still feel good about Atlanta.
Speaker 4
Okay. And then nice job, Brendan. Thanks, everyone.
Speaker 0
And the next question comes from line of Manny Korchman, Citi.
Speaker 5
Just one quick follow-up. If we think about Nashville and your prepared remarks about both upcoming supply, potential big vacates, how does do the vacates sort of play into the prepared remarks? Are you already assuming those are vacates? Or is there still the chance that they renew? And just how much more sort of risk in that market take before rents give up a little bit?
Speaker 1
Yes. No, Manny, the vacate of size that we have that we addressed is HCA. So they have a build to suit underway. It It appears from casual observance of it that it should be delivered on time. So they're definitely moving out.
Speaker 0
That's what
Speaker 1
we said. The closer we get to their expiration in January 2017 and more activity we have.
Speaker 6
Great. Thanks. Sure.
Speaker 0
And our last question comes from the line of Tom Wesnik, Capital One Securities. Please go ahead.
Speaker 6
Hey, just one follow-up for me. Just curious now that you guys have acquired the land from underneath EQT, what was the total going in yield on that asset inclusive of the land. Do you know that offhand?
Speaker 1
Well, yes, mid-5s we paid $18,500,000 and our annual rental rate was $1,100,000 currently.
Speaker 6
I appreciate that. I'll follow-up last part. Thanks.
Speaker 0
And gentlemen, there are no other questions at the moment.
Speaker 1
Okay. Thank you, everyone. And as always, please don't hesitate to give us a call if you have any questions. Thank you.
Speaker 0
And ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation. Have a great rest of the day. Everyone, you may disconnect your line.