Highwoods Properties - Earnings Call - Q3 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, Wednesday, October 2636. I would now like to turn the conference over to Brendan Mayorana.

Please go ahead, Mr. Mayorana.

Speaker 1

Thank you, operator, and good morning, everyone. Joining me on the call this morning are Ed Fritsch, our President and CEO Ted Klink, our Chief Operating and Investment Officer and Mark Mullerhorn, our Chief Financial Officer. 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 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 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 to Ed.

Speaker 2

Thanks, Brendan. Good morning and thank you for joining us today. During the summer and early fall, there have been a number of events grabbing the attention of our nation and the capital markets. Most notably the Brexit vote in The UK and the U. S.

Elections. When we hosted our second quarter call in early August, it was a few weeks after the Brexit vote and the yield on the ten year was around 1.5 and the RMZ was at 12.8. Since then, The U. S. Ten year yield has risen to around 1.75 and the RMZ index has dropped approximately 10%.

Despite the volatility and headline news, the underlying fundamentals of our business remain steady and healthy. The slow yet steady cadence of The U. S. Economy continues to paint a positive jobs picture. Our footprint continues to experience positive net absorption and favorable pro growth demographics.

Construction costs continue to keep a bridle on development and market rents continue to rise. With this backdrop, we are pleased to report a solid operational performance for the third quarter. Our FFO grew 7.7% per share compared to 3Q twenty fifteen, including a $03 net impact from land sale gains and acquisition expenses. Excluding those one time items, we delivered 4% FFO per share growth. This solid FFO growth comes atop an even further fortified balance sheet.

Specifically, when compared to June 30, before we announced our plan to exit Country Club Plaza, we had driven leverage from 42% to 35% and driven our debt to EBITDA from 5.5 times to 4.8 times. On the operational side, we leased 867,000 square feet of second generation office space during the third quarter with very strong GAAP rent growth of positive 20.7%, cash rent growth of positive 3.1% and an average lease term of seven point two years. Compared to last year's third quarter, we grew same property cash NOI by 6.6% and same property average occupancy was up 80 basis points. We increased our same property cash NOI guidance for the year. We now expect to deliver about 5% growth for 2016, which is at the high end of our original expectations.

Turning to investment activity, we announced a $29,000,000 100% pre lease build to suit for Virginia Urology's new headquarters and MOB facility. This development monetizes 8.4 acres of company owned land and will be a sound addition to our Richmond portfolio. Our development pipeline now totals an investment of $519,000,000 and is 71% pre leased based on square footage and 79% pre leased on a dollar weighted basis. We expect to stabilize $370,000,000 of our current pipeline by the 2018. These developments will provide meaningful FFO and cash flow growth as they deliver over the next few years.

In addition, we're continuing to host a number of potential build to suit conversations. We also acquired Charter Square in Downtown Raleigh for a total investment of $83,500,000 We expect to achieve a stabilized yield of greater than 7%. Delivered in 2015 for a number of reasons, we believe Charter Square is a strategic complement to our CBD Raleigh portfolio. First, it further strengthens our position as the dominant landlord Second, Charter Square provides us with a price point between our PNC Plaza and 1 City Plaza. Third, it gives us inventory downtown where the rest of our portfolio is currently 89% occupied and will grow to 94% by year end based on leases already signed.

Fourth, we now have increased flexibility with our customers across our downtown portfolio and parking garages. Our entire 913,000 square foot CBD portfolio is 100% unencumbered by debt or JV partners and therefore 100% fungible. Turning to dispositions. We sold a non core 14.8 acre land parcel in Tampa to a residential developer for gross proceeds of $6,800,000 which garnered us a net gain of $3,900,000 Year to date, we have sold $7.00 $2,000,000 of non core assets. And while we initially planned our disposition volume to be even higher, timing has caused us to push additionally forecasted sales into 2017.

Our sense is there has been a separation in the pricing trajectory between high quality assets in core markets and commodity assets in non BBD locations without compelling underwriting. However, there doesn't appear to be any let up in pricing for core assets and strong locations. And while there are fewer bidders in the race, the ones that remain are extremely well capitalized. Turning to FFO, we have updated our 2016 per share outlook. We've raised the low end from 3.2 to $3.26 and maintain the high end at $3.28 Adjusting for the net $0.3 gain booked in the quarter, our core FFO guidance midpoint remains unchanged on an even stronger balance sheet with lower leverage and ample liquidity as we wrap up 2016 and move into calendar year 2017.

Ted? Thanks, Ed,

Speaker 3

and good morning. As Ed noted, the fundamentals across our portfolio are healthy. We leased 867,000 square feet in a second gen office and saw strong rent spreads of positive 20.7% on a GAAP basis and positive 3.1% on a cash basis. Average in place rental rates were $24.22 per square foot, which is 3.7% higher than a year ago. And we continue to see asking rents move higher across our markets.

Occupancy was 92.7% as of September 30, up 20 basis points since June 30, despite the negative 20 basis point impact from the acquisition of Charter Square. The impact from Charter Square is the sole reason for the reduction in our year end occupancy guidance, which is now forecast between 92.393%. As I noted earlier, we had strong rent growth on leases signed during the quarter, and the weighted average term was seven point two years, well above our prior five quarter average of five point eight years. Leasing CapEx was high at $3.7 per square foot per year, largely due to a higher proportion of new leases and 168,000 square foot long term renewal in Atlanta. New leases accounted for 31.5% of our total volume, above the prior May average of 25.9%.

Turning to our markets. We continue to see strong demographics, steady job growth and limited spec development support healthy fundamentals. Activity improved in Tampa during the third quarter. We moved occupancy up 190 basis points to 90.8%. Atop this momentum, we expect to drive occupancy in Tampa meaningfully higher next year due to signed leases that have not yet commenced, dollars 9,100,000.0 highwoodizing efforts currently underway at SunTrust Financial Center and limited lease roll in 2017.

In Nashville, the market continues to have strong fundamentals. Exceptionally low market vacancy of under 5% has driven the construction pipeline to 3,600,000 square feet. However, 75% of the pipeline is already pre leased. Based on pre leasing, the projected delivery schedule and net absorption trends, we do not expect the current level of development to undermine the overall health of the market. Our $297,000,000 848,000 square foot development pipeline in Nashville is 89% pre leased.

At our 131,000 square foot 7 Springs II project, we signed another lease during the quarter and are now 52% pre leased with two years remaining until pro form a stabilization. Our 203,000 square foot 7 Springs West project is 86% pre leased. We have the Top Floor available and have seen increased interest of late. Our remaining Nashville development is the $200,000,000 514,000 square foot 100% pre leased headquarters build to suit for Bridgestone Americas. With respect to our in service Nashville portfolio, we remain essentially full at 99.5% occupancy.

We'll need to backfill 204,000 square feet in roughly equal parts in two separate submarkets that HCA will vacate on January 1, as previously disclosed. We are currently working with over 50,000 square feet of active prospects. Given the two buildings are well located office assets, coupled with strong underlying economy and very limited second gen market supply, we are confident in our ability to backfill these spaces at attractive terms in a reasonable period of time. In Raleigh, we had an active quarter where we signed 185,000 square feet of second gen leases. As Ed noted, we acquired Charter Square in the CBD.

This building is on Fayetteville Street in the core of downtown, offering synergies to our PNC Plaza and 1 City Plaza, also located on Fayetteville Street. At One City Plaza, with leases in hand, we project occupancy to be in the high 80s before year end. Strong leasing activity at 1 City Plaza combined with limited availability of large blocks of Class A space bodes well for the lease up of the 66,000 square feet of contiguous availability at Charter Square. At Glenlake V, our 166,000 square foot multi customer office development project, we signed another customer during the quarter and we're now 94% leased. This project will stabilize in Q1 twenty seventeen, one quarter ahead of expectations.

We spoke last quarter about an LOI that we had with a customer for approximately 20% of our 167,000 square foot Center Green 3 development. That customer has decided to stay in their current space. However, we have a very active prospect list, a number of which we expect to convert to sign leases once the building is further along. In conclusion, with healthy fundamentals across our markets as a backdrop, we were able to drive strong rent and NOI growth this quarter and year to date. Limited construction, lack of sizable blocks of quality second gen space, a steady stream of showings, leasing volumes and the ability to push rents.

All of this leads us to believe our well located BBD office product will continue to deliver strong NOI growth. Mark? Thanks, Ted. As Ed outlined, we delivered net income of $0.32 per share and FFO of $0.82 per share.

Speaker 4

Sequentially, excluding the $03 net from land sale gains and acquisition expenses, the $0.79 of FFO per share in the third quarter was $03 lower than 2016 largely due to $02 and lower GAAP NOI caused mostly by our typical seasonally higher electricity expenses in the third quarter and a penny from higher shares outstanding net of lower interest costs. On a year over year basis, the primary drivers of the 7.7% FFO per share growth where same property cash NOI growth of 6.6% year over year due to higher rents and higher average occupancy. Contributions from value added acquisitions, particularly the Monarch and SunTrust acquisitions we closed on 09/30/2015 and highly pre leased developments that came online. These positive drivers were partially offset by the impact of issuing 3,600,000.0 shares year to date through the ATM. As referenced earlier, we had a net $03 per share impact from unusual items in the quarter, a $3,900,000 land sale gain in Tampa and acquisition costs of approximately $750,000 Turning to our balance sheet, our quarter end leverage ratio was 34.6% and debt to EBITDA was 4.8 times.

These balance sheet metrics are the strongest in our history. In late August, we broke escrow on the remaining proceeds from the Country Club Plaza sale and utilize those funds to reduce our revolving line of credit, which had an outstanding balance of $28,000,000 at the end of the quarter, leaving us $447,000,000 of capacity. In September, we drew $75,000,000 of the $150,000,000 capacity on an unsecured term loan facility. We plan to draw the remaining $75,000,000 in the fourth quarter. The loan fits well in our current debt maturity ladder as it doesn't mature until 2022, a year in which we have nothing else coming due.

Also, we have no remaining debt maturities in 2016. As we highlighted during past calls, on March 1537, we have a $380,000,000 bond maturity with an interest rate of 5.88%. As a reminder, early this year, we locked in the ten year treasury at 190 basis points on $150,000,000 Our current plan is to come to the bond market in early twenty seventeen, but we're still evaluating the timing, amount and tenor of any offering. We have multiple options to fund our liquidity needs. These include operating cash flow, disposition proceeds, credit facility availability, additional debt capacity and equity issuance.

Overall, we have a strong platform to cost effectively fund our business. We are pleased that our revised 2016 FFO outlook of $3.26 to $3.28 per share is towards the high end of our original guidance of $3.18 to $3.3 per share despite not fully investing all the proceeds from the sale of Country Club Plaza assets and issuing $180,000,000 in new equity through the sale of 3,600,000.0 shares under the ATM. To put this in context, if we kept the share count estimate unchanged from our original guidance, our full year FFO outlook would be approximately $05 per share higher. Finally, as you know, we will provide 2017 guidance during our fourth quarter call, but I want to provide a reminder about our development pipeline and funding plan. We expect $3.00 $4,000,000 of development projects to stabilize in 2017.

The largest project, our $200,000,000 headquarters for Bridgestone Americas in Nashville will not deliver until late in Q3 twenty seventeen. Our plan is to continue to fund our development expenditures on a leverage neutral basis. And while this is a prudent long term funding strategy, it will continue to have a dilutive near term impact to FFO. We continue to feel upbeat about our business, the combination of a well leased development pipeline with attractive stabilized yields and a strong balance sheet with some additional opportunities for interest rate savings provides the pathway for our low risk growth outlook. Operator, we are now ready for your questions.

Speaker 5

And our first question comes from the line of Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.

Speaker 6

Great. Thank you and good morning.

Speaker 2

Good morning.

Speaker 7

Can you

Speaker 6

please talk more about the Raleigh acquisition, underwriting competition for the deal and what gives you confidence on getting it leased up? And then also other types of deals that may be out there, you guys have done a good job doing value add acquisitions. Should we just continue to see you do that?

Speaker 2

Sure. Jamie, I'll start and maybe Ted, you may want to add on. But it's a basically new building that was delivered in 2015, so that was appealing to us. As I mentioned in my script, there are a number of synergistic benefits to us owning that building in concert with PNC Plaza and One City Plaza as it fortifies our position of being the largest landlord now in Downtown Raleigh. I also want to underscore that we don't have any debt or JV partners.

So all the space is fungible. Being able to move customers from one building or parking, etcetera, from one place to the other has no punitive effect on a lender or a partner in any way. We've had very good success with the lease up at One City Plaza since we bought it. And that gave us additional insight into the downtown market because, as you know, we were very fortunate on PNC Plaza to be 100% within a year less than a year of delivery. So having the insight of the volume of interest at 1 City Plaza certainly encouraged us with regard to Charter Square.

With regard to underwriting, we were our usual conservative selves. We projected to stabilize a couple of years out from now. The space that's available is obviously first gen and it's all contiguous, which we think is attractive and we conservatively underwrote the lease terms on that. I think the position in being downtown with that in addition to the track of land that we bought, the fact that all three of these are on the main street, the main thoroughfare that goes through downtown called Fayetteville Street, we think is beneficial as well.

Speaker 6

And what are your long term demand prospects in Raleigh? Mean, I I know you guys have done a good job buying there. How do you see that market over the next multiple years?

Speaker 2

As far as user demand?

Speaker 6

User demand, correct.

Speaker 2

Yes. Well, one of the greatest things about Raleigh is that it's a very highly diversified community from a business perspective. There's state government here that drives a lot. There are the two public universities and then a small college in Durham that clearly drive the economy. There's Research Triangle Park that is a contributor to the engine here.

Financial services technology, CROs, clinical research organizations has been a hotbed here. So the diversification of the economy has long been one of the finest attributes Raleigh has atop its quality of living with regard to cost of living, population growth, access to vacation resorts, beach two hours, mountains three hours, etcetera. So we think that given that mosaic that Raleigh has earned lots of accolades across many different dimensions and will continue to do so and don't see any reason why that would let up and why it wouldn't stay one of the more attractive mid tier markets in America for years to come.

Speaker 6

Okay. And then maybe talk about the value add acquisition pipeline and prospects you may have?

Speaker 2

Jamie, was your last point? Did I miss it on the last question that we don't have a team in series and Cleveland does?

Speaker 6

You don't have a team that's up one nothing in the

Speaker 0

series. So

Speaker 6

I guess thinking about just the value add pipeline of acquisitions, robust is that? Was this just you happen to have capital still from the dispositions you've done?

Speaker 2

Yes. So there are a number of opportunities that are on our radar screen. I think the number of blips on ours and others is not as many as it was a couple of years ago because a lot of the Tier one trophy assets have traded into hands that are likely to hold on to them for some period of time. But akin to what we found in Charter Square and others that we found like Monarch and SunTrust, etcetera, we still have a few opportunities that we continue to look at and evaluate.

Speaker 6

Okay. And then the last question for me. Just as you think about 2017, do you have a sense of your mark to market? I mean, you've seen leasing spreads improve and be pretty positive here. Do you think that continues into next year?

Speaker 2

I don't see any reason why it wouldn't unless the economy just went upside down because new construction isn't going to jettison off and tank the market. Just economic demographics continued to be at a slow cadence, but a slow but positive cadence. We continue to see solid population growth. All the things we've talked about with regard to affordability and right to work states, etcetera, in the past that make the Southeast footprint be an advantageous place to be, I don't think any of that's going away. So unless something very significant on a nationwide basis causes some significant disruption, I don't see why we wouldn't expect the trends that we've experienced in the last two years to continue into 2017.

Speaker 6

Okay. All right. Great. And thanks for the Indian side. Always appreciate the support.

Speaker 2

Thanks, Jamie.

Speaker 5

Our next question comes from the line of Dave Rodgers with Baird. Please go ahead.

Speaker 8

Yes. Good morning, guys. And similarly appreciate the Indian support. But

Speaker 4

I wanted to ask

Speaker 8

Ed or Ed a question on development build to suit activity. Maybe characterize not necessarily starts for this year, which obviously you've given guidance to, but characterize the demand for that continued move to the Southeast from new tenants relocating, etcetera. And maybe how that compares to twelve or twenty four months ago. Any thoughts around that?

Speaker 2

Well, significant moves coming out of other areas of the country here have always been pretty cadence. I mean, it's not like there's been a gold rush to the Southeast for corporate relocations. And so they've been special when they've occurred, and they've been significant when they've happened. And MetLife, I think, is a perfect example of that. Just under 500,000 square feet, 2,000 plus jobs and very meaningful to the local economy no matter who the developer was.

So those come along. But we see build to suits come in a variety of aspects. And organic growth is a big part of that. And also, as we what we've seen akin to a number of the build to suits that we've done over the last three to five years, it's where a company has grown and ends up in multiple locations within a market and wants to get everybody under one roof. And so we achieved that, for example, with LifePoint in Nashville.

We are witnessing that with Bridgestone in Nashville as well. Vergini urology's recent announcement was a simple expansion from them because business is good. So I would say more of the business that we've done has been organic growth as opposed to migration, but the migration certainly is supplemented in a meaningful but minority way.

Speaker 8

And how do those discussions how does that feel to you today versus a year or two years ago in terms of that overall set of conversations you're having?

Speaker 2

I think it's not very different from what they've been. Again, the experience we had with Bridgestone, for example, where there were multi not just in multiple locations, but multiple states consolidating into one to get under one roof versus MetLife where it was basically a new business expansion for them with a new focus on how they were going to go about providing that level of service and doing that aspect of their business with the global ops center. We're in conversations with others who have similar desires. We've always said it's a very protracted process. It typically has a fair amount of contingency tied to economic incentives that come from the municipality, state government, etcetera.

But I think that given that our typical development is in the plus or minus $50,000,000 range, and we continue to secure those on a fairly consistent basis. And we're in half a dozen conversations right now at various stages of discussions as far as early to late. I don't think it's dramatically different than where we've been over the last couple of years.

Speaker 3

Dave, this is Ted. The only thing I would add to what Ed said is it's not necessarily on the development side, but just from a demand side is in Atlanta, sort of Midtown Atlanta and Buckhead are becoming sort of an innovation hub for a lot of technology companies and IT companies that are moving to the market. I mean, just in the last six months, we've had several announcements from Honeywell, KPMG, GE's IT division. So it's becoming a high-tech corridor. Again, all of those users are going into existing buildings, but it's just a demand generator that we've seen accelerate in the last several quarters.

Speaker 8

That's helpful. Then Ted, maybe two follow ups for you. One on the HCA space, it sounds like the backfill could take a little bit longer. Is this just an issue of maybe more supply coming to Nashville or the idea that maybe tenants that have been expanding and would want that much space have already kind of done a build to suit? And then I guess maybe a second question would just be talk about concessions, maybe in the top four markets and how that compares to kind of overall rent growth, what

Speaker 9

that's doing to net effective? Thanks.

Speaker 3

Sure. In terms of HCA, obviously, as you know, we get it back as we mentioned in our prepared remarks, we get it back January 1. We've got active discussions going on for over 50,000 square feet that we feel pretty confident about. And look, I do think it's going to take some time. If you look at Nashville, we said it's, again, the lowest vacancy rate in the country, which has spurred a lot of new construction.

But again, we don't think as the tenants move into the new development, we'll be vacating certainly second gen office buildings. We don't think that's going to disrupt the market much. But without a doubt, it just it'll create additional competition. But again, at 4.7% or 4.6% vacant, the market is going to still remain very healthy. The demand drivers we've continued to see remain strong in Nashville.

So we continue to think the market is going to be very strong going forward. It just may take a little bit more time to do it. In terms of the concessions, I think concessions are staying reasonably consistent. There's very little free rent in several of our markets. Other markets maybe have reduced from a couple of years ago, it might have been a month per year free to maybe it's a half a month or even less.

So I don't think you see that changing in any of our markets. Again, the health remains strong and concessions remain in check.

Speaker 2

And Dave, I would just add on the HCA, just a reminder that as we said in the script that we're getting that space back in two different the majority of it in two different buildings and two different submarkets. So I think that helps our re leasing prospects for that. And both of the submarkets are strong BBDs.

Speaker 8

Great. Thanks, guys.

Speaker 2

Thanks, Dave.

Speaker 5

Our next question comes from the line of Jed Ragan with Green Street Advisors. Please go ahead.

Speaker 10

Hey, good morning guys. So it looks like you've got another $130,000,000 or so of potential developments that could get announced this year. Should we think of that as one bigger deal or a few smaller deals? And then if those don't materialize for this year, is that just a matter of them kind of sliding a little bit timing wise?

Speaker 2

Yes. Jed, I would say I would stick with our norm being in the 45 to $50,000,000 range is how they've come. And certainly, there's the range goes from $8,000,000 to $200,000,000 But I think the norm falls more in the $50,000,000 range, and that's what I would think of for going between now and the conversations that we're in that may hit between now and at the end of the year. It is I think your point is good. It is difficult to predict when these things will pop out of the oven.

It is a protracted process because you never fully understand what the company has to go through internally in order to get such a significant decision approved and released. So I think that we were pretty deliberate in deciding to keep the 200,000,000 we're hopeful that if it doesn't hit in 2016 that it certainly would in 2017 as you referenced.

Speaker 10

Okay. Thanks. And know you touched on this a little bit at the outset. You guys lowered your disposition guidance for the year by $100,000,000 or so. Is there should we read much through on the pricing environment for the assets you're looking to sell?

Or was that really just nothing more than a timing issue?

Speaker 2

Well, I would have to say it's a little bit of both honestly. Some of it is timing and renewals coming together and bids coming together and BOVs coming together, etcetera. But also some of it is that the while the buyer pool, the profile of that for noncore assets has remained unchanged, there has been some movement in their ability to get financing at their historic underwriting parameters. So the underwriting has changed a bit and the availability of debt has changed. So pricing levels may have moved a tad, but not a whole lot.

The same pool of interest seems to be there that was there. And we feel like those that we haven't gotten closed in 2016 will likely get closed in the 2017. Unfortunately, we don't have I'm sorry, go ahead.

Speaker 10

After you.

Speaker 2

We don't have a gun to our head on any of this. We've never sold anything simply to meet some maturing debt instrument or have some other dire need for the cash. It's been because we wanted to exit the asset. So we don't have a gun to our head on any of that.

Speaker 10

Anything you're tempted to pull off the market or it's just things are taking a little bit longer?

Speaker 2

Well, I think if we get something that comes back and we're totally dissatisfied with, then we would pull it off the market because we don't have to sell it. So I think that it's part of our disciplined conservative approach that we would enact that if we felt that we could do better at a different point in time under different circumstances. But we still have the mandate to ourselves to continue to improve the portfolio over time and doing that involves selling from the bottom.

Speaker 10

Okay. Thanks. And just last one for me. It looks like you guys are running at some of your lowest leverage levels in some years. And just wondering if that signals a shift to a more conservative approach to how you're managing things or if you're just kind of at the lower end of a more typical range today?

Speaker 2

Well, we heard on the beach that it's good to be low with debt. So we I think it's more of a business objective. And I hate to go back twelve years, but when we announced our strategic plan twelve years ago, the balance sheet was an important aspect of what we were wanting to accomplish as far as continuing to improve the overall aspects of the balance sheet. And we've been chipping away at that. There hasn't been any monumental move.

I think we made very good progress on it that laid the foundation for where we stand today between 2005 and late two thousand and seven, early 'eight, when we sold a fair amount and then used virtually all of those proceeds to pay down debt with virtually no acquisitions. So I think that laid the groundwork for where we are today. We have just continued to sock some away to continue to reduce the numbers to make the debt metrics more and more appealing as we proceeded. And I think that's a very deliberate approach and one we'll continue to follow.

Speaker 4

And Jed, it's Mark. Just to add one thing. We do have a little bit of an anomaly here in Q3 at end of Q3 and probably we'll have that end of Q4 where we use those escrow proceeds to pay down our revolver. So our numbers probably look a little bit better than they would have otherwise been and that may be temporary in some respects. I don't think we're going way back in terms of having higher leverage in the future, but I think we will we potentially have a little tick up here is when we pay the special dividend in January.

So I just don't want you to think that these are low numbers and they're going lower. They're probably staying in the same vicinity, that's kind of what we're at least having our plans.

Speaker 10

Great. Thanks a lot guys. Appreciate it.

Speaker 2

Thanks Jed.

Speaker 5

Our next question comes from the line of Tom Olasnik with Capital One Securities. Please go ahead.

Speaker 11

Hi, this is Ryan Weinman here with Tom. So this quarter looks like you guys bought and sold some land. Could you just maybe talk a little bit about what your guys' view on land investment is going forward? And if there are any markets in which you guys plan on buying or culling your land portfolio?

Speaker 2

Sure. First of all, I would want to point to how much land we've put in service through our development efforts over the past years. So our land portfolio as a whole is dramatically contracted over the last ten years in that we've sold a fair amount of non core akin to the 14.8 acres that we sold in Tampa this quarter that was better suited for residential than it was for office. We've also decided that land is an important component when we chase certain build to suits. I think that the land that we own for the MetLife deal, for example, is very compelling to them when we stapled it together with our track development track record and balance sheet, etcetera.

So we're being very surgical in how we go about evaluating land acquisition opportunities, but we think it's important that we have some amount of raw material at the ready that we can present to those who are considering relocations into the markets or expansions or where new product is needed. So it's a surgical approach. We are very conscientious of how much land we have on the balance sheet. We understand that it doesn't generate any cash while it sits there. But we think it's also very important to have certain strategic pieces as we compete for build to suit projects.

One thing I just want to add to that, Ryan, we also don't just buy it, stick a full by painted piece of plywood on it and say, call us if you need it. We're very deliberate about programming the space as far as conceptualizing what the product would look like, doing elevations, understanding what the floor plates would be, what parking we could offer. And then we arm our in house leasing people with that marketing material so that we can be proactively communicating to economic development personnel and the brokerage community not only that we own the land, but what they can easily envision what would be on that land and they know we're there with the balance sheet to be able to make it happen.

Speaker 11

All right. Great. Thank you very much.

Speaker 2

Sure.

Speaker 5

Our next question comes from the line of Barry Oxford with D. A. Davidson. Please go ahead.

Speaker 7

Great. Thanks, guys. When we going forward and we look at cap rates in your different markets, Raleigh, Atlanta, Orlando, Tampa, and you look at your potential acquisition pipeline, where are you seeing cap rates? And what are maybe some of the more attractive markets that you guys are looking at maybe to put additional dollars in 2017?

Speaker 3

Hey, Barry. This is Ted. Look, I think from a cap rate perspective, obviously, we're chasing most of the product we're chasing is the higher quality urban infill, BBD assets, the cap rates are clearly lower than on suburban product. I think it just varies by market. I think Atlanta is probably in our markets the lowest cap rate, Atlanta and Nashville.

We're hoping to stabilize acquisitions in somewhere in the high 6s, mid to high 6s to seven. And then if you move to Pittsburgh or Raleigh, I think cap rates are maybe slightly higher than that. But I think that gives you the range somewhere between mid-6s to low-7s on a stabilized basis. Again, maybe a little bit lower going in, but with the growth, you stabilize it in that range.

Speaker 7

So would you guys be looking to add maybe more in Pittsburgh and the Florida markets and not so much in Nashville and Atlanta or not necessarily?

Speaker 2

Yes. I don't think we're oversaturated in any one market. And I think we're we have exhibited a rotation in some of the markets. So if we felt like we were owning too high a percentage of market share that we would rotate from lower quality to higher quality. So in the markets that we're in, we're looking at real estate.

And so it would be very as if you came to that market and our division lead there was giving you a market tour, Is there a building that he would like to show you that doesn't have a Highwoods logo on it today? Then it's on our wish list. So we have active wish list for the markets that we're in across the board.

Speaker 7

So you're not 100% cap rate driven?

Speaker 2

Never.

Speaker 7

Right. Got it. Thanks guys.

Speaker 2

Sure, Barry.

Speaker 5

Our next question comes from the line of Tom Catherwood with BTIG. Please go ahead.

Speaker 9

Thanks. Good morning. Ted, I wanted to follow-up just on Dave's previous question about concessions. You made a comment at the end of your answer. You said concessions remain in check.

But if I look back at kind of performance of the past three years, it looks like concessions peaked at the 2014 and have been steadily declining ever since then. Do you consider how do you kind of quantify saying that they're in check versus that trend of them kind of appearing to be contracting?

Speaker 3

Yes. Good question. My comment was really I don't see them going the other way. They have consistently. The market's improved over the last few years.

Concessions have, in fact, come down. And I guess I alluded to the question maybe are they going up or not? And really, they're not. I think concessions have remained well within the same range the last few quarters. So we feel good about the health of our markets.

Concessions remain similar to what they have been most of this year. So really, we're not seeing any change whatsoever. In fact, they're maybe even trending lower.

Speaker 9

Got you. Well, that kind of tied into Ed made the comment, obviously, about being able to push rents in most markets. And how do you strike that balance between pushing rents versus pushing concessions?

Speaker 3

Look, I think that's right. I mean, that's the exact balance we try and keep in mind when we're doing deals. So Nashville is a market we're not given concessions, right? There's very little to zero free rent. And then Atlanta, might be again, it's coming down to maybe zero five month per year.

So we're balancing that. It depends on the deal and the specific market. But concessions in general remain

Speaker 2

muted. And Tom, we always take into consideration not only the market and the other things on Ted's grocery list, but just what's the customer's credit level, what's the likelihood that they'll grow or expand with us over time. There's a mosaic of things that we take into consideration when we balance how much we would do in the way of concessions in order to attract them if we had to offer them up.

Speaker 9

Got it. I appreciate that. Sticking with rents, obviously, you've seen rent growth. Ed, you made the comment that new supply has been muted for a variety of reasons. But are there any of your markets where that rent growth is starting to get up to a level where it justifies new construction?

Speaker 2

Well, there's still a gap between second and first gen. I don't think we there might be spots, but there's not a market where second gen has now gotten within a hair of first gen. There's still a significant delta between first and second gen as construction prices, much to our chagrin, continue to escalate.

Speaker 9

Understood. And when you think about new supply, specifically with the site you acquired in Raleigh, you've got obviously a great position there. You have multiple price points. You have multiple size floor plates you can offer and multiple ages of buildings. How do you look at both the timing and the strategy for the new development site in Raleigh as it ties into the rest of your portfolio down there?

Speaker 2

Well, in the hopes that Skip Hill, our Raleigh division lead, is listening along with his leasing team, we'd like it to be 100% pre leased. But your question is a good one. Again, to use that same term, there's a mosaic of things that we take into consideration. And so for example, in Skip's division, we started Centigreen three midsummer, 100% on a speculative basis. It's in a setting where we have four existing buildings that are all 100% leased and then in a PUD that has over 1,300,000 square feet that's 97% pre leased all owned by us.

And so we have customers who are needing to grow. And if we don't capture them in Center Green 3, then they're going to go to Brand X. And so that's the mosaic for the rationale us starting that. And it's a 160,000 square foot building, not a 300,000 square foot building. But I think that we would have to take each situation into consideration before we decided if we were going to build it and at what level of spec we would build it, if any at all.

Speaker 9

Got it. That's it for me. Thanks guys.

Speaker 2

Thanks Tom.

Speaker 5

Our next question comes from the line of Manny Korchman with Citi. Please go ahead.

Speaker 11

Good morning, guys.

Speaker 2

Hey, Manny.

Speaker 11

Maybe if we just look at the Charter Square acquisition, in terms of timing, was the deal just not on the table earlier this year when you had the $10.31 proceeds put in place? Was that a deal you're working on and just didn't close on time?

Speaker 2

That's exactly right. At the time that we had to submit the list, which is roughly forty five days from closing of CCP, which we closed on March 1. So it had to be on the identified list, and it just wasn't in the queue at that point in time. You're exactly

Speaker 11

That it for me.

Speaker 5

Thank you.

Speaker 2

Okay. Thanks, Meny. There

Speaker 5

are no further questions at this time. I will now turn the call back to Mr. Mohan and the rest of the presenters.

Speaker 4

So thank you for your attention today. We appreciate it and look forward to talking to you next quarter. Thanks.

Speaker 5

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.