Tabitha Zane – VP, IR and Corporate Communications Ed Fritsch – President and CEO Mike Harris – EVP and COO Terry Stevens – SVP and CFO.

Jamie Feldman – Bank of America Brendan Maiorana – Wells Fargo Dave Rodgers – Robert W. Baird Jed Regan – Green Street Advisors Vance Edelson – Morgan Stanley.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Highwoods Properties’ Second Quarter Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session.

(Operator instructions) As a reminder, this conference is being recorded, Wednesday, July 30, 2014. I would now like to turn the conference over to Tabitha Zane. Please go ahead..

Thank you and good morning everybody. On the call today are Ed Fritsch, President and Chief Executive Officer; Mike Harris, Chief Operating Officer; and Terry Stevens, Chief Financial Officer.

If anyone has not received a copy of yesterday’s press release or the supplemental, please visit our website at www.highwoods.com, or call (919) 431-1529, and we will e-mail copies to you. Please note, in yesterday’s press release we announced the date for our third quarter 2014 financial release and conference call.

Also, following the conclusion of today’s conference, we will post management’s formal remarks on the Investor Relations section of our website under the presentations section.

Before we begin, I would like to remind you that this call will include forward-looking statements concerning the company’s operations and financial condition, including estimates and effects of asset dispositions and acquisitions, the cost and timing of development projects, the terms and timing of anticipated financings, joint ventures, rollover rents, occupancy, revenue and expense trends, and so forth.

Such statements are subject to various risks and uncertainties. Actual results could materially differ from those currently anticipated due to a number of factors, including those identified at the bottom of yesterday’s release and those identified in the company’s 2013 Annual Report on Form 10-K and subsequent SEC reports.

The company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. During this call, we will also discuss non-GAAP financial measures, such as FFO and NOI.

Definitions of FFO and NOI and an explanation of management’s view of the usefulness and risks of FFO and NOI can be found toward the bottom of yesterday’s release, and are also available on the Investor Relations section of the web at highwoods.com. I’ll now turn the call over to Ed Fritsch..

Good morning, everyone, and thank you for joining us today. At the beginning of the year when we built our initial FFO outlook, it included our expectations for the U.S. economy with assumptions such as, one, the economy would continue its positive trajectory, albeit, void of a full-blown recovery.

Two, measured positive job growth would continue, albeit, without meaningful growth in real wages. And three, interest rates, while an influential wild card, we presume that they would remain in check. Now, seven months into the year, the economy is generally performing as we had expected.

Experts currently believe GDP growth in the last nine months of 2014 will be quite respectable. The economy has reported five consecutive months of over 200,000 jobs created, albeit, with fairly detectable real wage growth.

And much to the surprise of a vast number of economic pundits, interest rates are actually lower now than they were at the beginning of the year. While it’s hard to predict to what extent the current wave of global economic crises such as Ukraine, Gaza and Iraq will negatively impact our economy, we are pleased with the current U.S.

economic environment and the performance of our markets in particular. Office leasing clearly wins the second quarter game ball. Our leasing success underscores the strength of our portfolio and our markets. Also, year-over-year office employment growth in our markets is exceeding the national average.

While new construction remains at historic lows, the volume of available Class A office space continues to shrink and asking rents are increasing. We are pleased to report second quarter FFO results of $0.80 per share which includes $0.06 per share of land sale gains.

We have again raised the low end of our full year FFO outlook, this time from $2.86 to $2.88 per share. The high end remains unchanged at $2.94 resulting in a $0.01 increase at the midpoint to $2.91 per share.

As noted in yesterday’s press release, our updated FFO outlook includes our second quarter $0.06 land sale gain, offset by a $0.04 impact from our $300 million unsecured notes offering in late May and a $0.02 impact from yesterday’s disposition.

As a reminder, our outlook does not include any aspect of the impact of any potential dispositions, acquisitions or development announcements looking forward. In the second quarter, we leased 1.5 million square feet of office, 50% more than in our prior five quarter average of 1 million square feet and the average term was a robust 7.7 years.

As a result of this strong leasing, we have raised the low end of our yearend occupancy outlook 50 basis points, upping the midpoint to 92.2%. Leasing activity is also robust in the value add acquisitions we made last year which encompasses 3.4 million square feet. These buildings were, on average, 81.3% occupied at acquisition.

At the end of the second quarter now, occupancy was 87.5%, up 620 bps since acquisition. In addition, we expect these properties on aggregate to be over 80% occupied by the end of this year. On the acquisitions front, we maintain our acquisition outlook of $100 million to $300 million.

Obviously, the current wall of capital has resulted in a very competitive environment and cap rates have continued to compress. In our view, some assets, particularly stabilized assets without significant future upside have traded at prices per pound out of sync from our view of their risk profile.

We will stay true to our mantra of being disciplined allocators of capital. However, we do not believe that our discipline will preclude us from being successful in acquiring BBD-located buildings at prices that offer upside, whether through lease-up, Highwood-tizing and/or harvesting operating efficiencies.

Turning to dispositions, we remain focused on continuing the surgical calling of non-core non-differentiating assets from our portfolio. Given the current environment, we are seeing better pricing on our dispositions than originally anticipated.

Therefore, we raised the low end of our disposition guidance range from $100 million to $150 million and the high end remaining at $175 million. During the quarter, we disposed of 16 acres of land for total proceeds of $9.5 million, generating $6 million or $0.06 a share in total gains.

The land is located in the Atlanta Airport submarket which is more conducive for industrial. As you know, we exited the Atlanta industrial market last year and we are pleased to have garnered the proceeds – these proceeds with a very nice profit.

Also, as reported in yesterday’s release, we completed the sale of Research Commons, a non-core five building office park in Raleigh area, along with approximately 13 acres of adjacent land for $58.7 million and a gain of $11.7 million from the sale of the buildings.

Turning to development, our $227 million pipeline includes 950,000 square feet that is 86.7% pre-leased. We are in hot pursuit of additional predominantly pre-leased development opportunities and therefore we continue to expect to be closer to the high end of our 2014 development announcements outlook of $150 million.

A key advantage in our development process is our 429 acres of well-located, fully-entitled core land. As commonly known, multi-family projects across our footprint and beyond have consumed a substantial number of highly desired infill BBD sites. Given this, our land inventory has become even more valuable to the Highwoods story.

In closing, 2014 is shaping up to be a solid year for our Company. We are benefitting from a stable U.S. economic environment, particularly in the southeast, our higher quality, BBD located portfolio, and limited new supply.

We continue to further enhance our portfolio through non-core dispositions, additional forthcoming development announcements and hopefully success in the acquisitions area. Mike will now cover operations.

Mike?.

Thanks, Ed, and good morning. As Ed noted, leasing activity in our markets remains strong. In the second quarter we signed 139 office leases for 1.5 million square feet of second gen space and year-to-date, we’ve leased 2.6 million square feet of office.

Occupancy in our office portfolio increased 170 basis points from the first quarter to 90.2% at June 30. GAAP rent growth on office leases signed in the second quarter was positive 14.2%, and cash rent growth continues its positive trend.

For office leases signed in the quarter, cash rent growth was negative 1.3%, compared to negative 1.9% during the first quarter. Second quarter CapEx related to office leasing was $29.89 per square foot with an average lease term of 7.7 years.

The CapEx number was significantly skewed by one large relet, a 175,000 square foot, 15-year lease at 5405 Windward Parkway in Atlanta. Excluding this lease, CapEx would have been $22.00 per square foot with an average term of 6.7 years.

We are very pleased to have achieved net effective rents on second gen office leasing of $12.83 per square foot per year, 10% above the prior five-quarter average of $11.68 per square foot per year. Bottom line, while CapEx was higher, it was more than offset by upward-trending net effective rents.

Turning to our markets, Atlanta’s office market continues to strengthen with over 1 million square feet of net absorption in the second quarter. Atlanta has absorbed 5 million square feet over the past year and market vacancy has declined 12 quarters in a row.

Occupancy in our Atlanta portfolio increased 470 basis points sequentially, primarily as a result of the 175,000 square foot lease at 5405 Windward.

Moving to Nashville, to quote Moody’s Analytics with regards to the city’s growth in employment, quote, “Nashville’s economy is on a tear.” Net in-migration continues to be a strong positive for the city and, according to the Bureau of Labor Statistics, year-over-year office employment increased 2.7%, almost double the national average.

The market’s overall vacancy improved 70 basis points sequentially to 9.3%. In JLL’s second quarter Office Outlook for 48 U.S. office markets, only New York City had a lower vacancy rate. Occupancy in our Nashville portfolio was 94.2% at quarter end, up 370 basis points sequentially, and year-over-year asking rents are up 5%.

Quarter-end occupancy at The Pinnacle was 89.1%, a substantial increase over the 84.9% occupancy at acquisition last September, and we now forecast occupancy to be over 93% by year end. The Raleigh market continues to be a true star performer. Here are three examples.

First, it reported year-over-year office job growth of 4.5%, triple the national average. Second, it ranked number one in Forbes magazine’s 2014 list of the Best Places for Business and Careers. And third, a recent study prepared for the U.S.

Conference of Mayors reports that the Raleigh metro area’s economy is expected to grow above 4% annually through 2020, the second best in the country. Occupancy in our Raleigh portfolio was 92.0% at quarter end.

We have $161 million of development underway in Raleigh, including the two-building, $110 million Global Technology & Operations Hub for MetLife and the $15 million headquarters for Biologics. Both of these projects are 100% pre-leased, are triple net leases, and are on schedule to deliver in the first half of 2015.

Our fourth Raleigh division development building, the $36 million GlenLake V project, is also scheduled to deliver by the end of the second quarter of 2015 and is 25% pre-leased. The Tampa economy continues to improve with year-over-year office job growth of 2.1%, compared to the national average of 1.5%.

Unemployment at June 30 was 6.2%, just 10 basis points shy of the national average and a 30 basis point improvement from the first quarter. Occupancy in our Tampa portfolio increased 200 basis points sequentially, primarily driven by the commencement of 78,000 square feet of leases at LakePointe One and Two.

We’ve now backfilled 183,000 square feet or 57% of the LakePointe space, and have strong prospects for another 15%. Looking at Kansas City, occupancy in our office and retail portfolio is a robust 95.2%, up 60 basis points from the first quarter.

At the end of August, Hall’s department store will vacate the 55,000 square feet it has occupied on the Country Club Plaza for 50 years. While Halls is consolidating their singular department store operation to a property it owns in a different submarket, they recently launched a new retail concept, HMK, and opened the first of its kind on the Plaza.

This upcoming department store vacancy is prime real estate within Country Club Plaza and provides Highwoods with a very exciting redevelopment and NOI-enhancing opportunity. We will be taking the Halls building out of service given the extensive nature of the repositioning of this asset.

The exterior panels will be removed and the building will be stripped back to its frame. The reconstruction will include a brand new façade and will be home to multiple new retail shops, restaurants and dramatically improved parking. The total cost for this true redevelopment are expected to approximate $17 million.

When stabilized, the annual NOI is projected to be triple the amount previously generated by Halls department store. In total, this dramatic repositioning will create value and an attractive return for our shareholders. In general, we are seeing good leasing activity and improving rental rates across all of our divisions.

Our divisions are poised to take advantage of this rising tide.

Terry?.

Thanks, Mike. Total FFO available for common shareholders this quarter was $74.6 million, up $13.6 million or 22%, from second quarter of 2013.

This increase was primarily driven by $8.3 million in higher NOI from acquisitions and recent developments placed in service, net of NOI from dispositions; $5.7 million in land sale gains, net of related impact to G&A; and $2.1 million in lower interest costs from lower average rates, slightly higher capitalized interest and net of the impact from higher outstanding debt balances, plus one-month’s impact from our bond offering, which closed in late May.

These three positive items were partly offset by $1.3 million lower FFO contribution from joint ventures mostly due to our JV buyouts in third quarter of 2013 and $0.5 million in higher G&A, mostly from salaries and benefits.

As a reminder, FFO and G&A amounts in our comments exclude property acquisition and debt extinguishment costs, which are disclosed in our press release. We recorded a nominal loss on debt extinguishment, including our share of a JV debt extinguishment, in the second quarter of 2014.

On a per share basis, FFO for the quarter was $0.80, $0.10 higher than second quarter 2013. The $13.6 million in higher FFO dollars was partly offset by higher shares outstanding this quarter, up 6.7 million to 93.3 million shares, or 7.7% from second quarter 2013 due mostly to equity issuances in the third quarter 2013.

Average leverage during the second quarter of 2014 was 42.0% as compared to 42.9% during the second quarter of 2013. As noted in our FFO outlook, we expect full year 2014 weighted average shares outstanding to be approximately 93.4 million. Second quarter FFO per share was $0.14 higher than the preceding first quarter.

This was due mainly to $0.061 from the land – to the net land sale gains, $0.049 in higher same property GAAP NOI from higher revenues and lower operating expenses as compared to the very harsh weather conditions in the first quarter.

$0.023 in lower G&A as first quarter routinely has higher long-term incentive compensation from retirement plan accounting as we discussed on last quarter’s call. And six-tenth of a cent in higher NOI from acquired properties and development.

Same property GAAP NOI this quarter was much improved over first quarter 2014 as this year solid leasing momentum is beginning to show in the sequential GAAP NOI statistics. Turning to the balance sheet, we expect the average leverage to hover around 42.5% throughout the year as we continue funding our net growth on a leverage neutral basis.

During the quarter, we prepaid two secured loans totaling $131 million. Subsequent to quarter end, we prepaid the $36.9 million secured loan and we have no remaining debt maturities in 2014.

We are very pleased and appreciative of the robust support shown by investors for our opportunistic seven-year bond offering in May which we upsized to $300 million and priced with an effective yield of 3.36%. Our prior FFO outlook for 2014 assumed heavier usage over line of credit and the potential bank term loan.

While the difference to FFO per share in 2014 is about $0.04, this opportunistic deal significantly fortified our balance sheet and extended our maturity ladder. As I’ve mentioned, a revised FFO outlook is 288 to 294 per share which represents a $0.01 increase at the midpoint.

While we disclose our expected ranges for acquisition, disposition and new development announcements for full year 2014, we do not include any impact from such investment activity in our FFO per share outlook until such transactions close. This is consistent with past practice. Operator, we’re now ready for questions..

Thank you very much. (Operator instructions) And let’s proceed with our first question. It’s from the line of Jamie Feldman from Bank of America. Go right ahead..

Great. Thank you and good morning..

Good morning, Jamie..

I guess looking at your supplemental and the leasing spread, you have pretty wide diversions across the different markets. Some of the markets you mentioned is that your better [ph] markets were definitely the strongest.

But can you talk a little bit more about whether this quarter is kind of representative of what we should see going forward or was it more lease-specific and how we should be thinking about leasing spreads and market-to-market going forward..

Well I think the volume was a bit extraordinary, obviously in part driven by the fact that we had some of the large blocks of space to backfill and we met with successful nodes faster than the expected and implement that it impacted the volume of leasing that we did.

But on the market-to-market, we think it’s fairly representative, we think that cash for rent growth has continued to improve. We continue to get annual escalators 2% to 3% in 99% of the leases that we execute. And so I think that when you look at our core buildings that are in BBDs that it’s a representative quarter..

Okay. And then what are you seeing on the incentive side? It looks like market rents are going up.

What about concessions?.

I think the whole package, Jamie, holistically is getting better whether it be concessions, turnkey TIs versus TI allowances, annual kickers, things that are on the margin that typically don’t show in the supplemental like after our HABC and signage and disproportionate parking ratios, et cetera.

I think across the board as new construction stays at 20% plus premium to second gen and new construction remains relatively idle, that all the metrics with regard to the various aspects of a lease negotiation should continue to improve..

Okay.

And then you had mentioned potentially development starts moving towards the high-end of your guidance range, can you talk a little bit more about the projects you are potentially working on and how that lines up with your land bank?.

No to the first part. Yes to the second part. But as soon as we have something to say obviously we’ll say it. Given the verbiage that we carefully chose for the analyst – for the script, we have a fairly level comfort. As they say it’s not over until the fat lady sings. But the microphone is plugged in and on and the stage is prepared.

So we feel fairly confident that we have some announcements to make. And the announcements will predominantly be on company on land if we’re successful..

Okay. And then finally, a question for Terry.

Can you just walk us through your thoughts on capital needs and financing sources over the next 12 or 18 months?.

Sure, Jamie. It obviously depends on the relative mix of dispositions and acquisitions. And to the extent that the acquisitions and development draws exceed the recycled capital from selling assets, we would finance that leverage neutral as we’ve consistently said now. And we have the ATM in place for bringing in smaller quantities of equity.

And that’s perfect for development draws if we have a really big deal and needed to raise equity quicker, we could go out and do an offering similarly to what we did last year. Our leverage currently is on the low side of kind of the rating or the leverage level that we want to operate in.

So we have a little bit of runway where we sit here today on our leverage as well. So we feel very comfortable with the future financing ability that capital markets are wide open for virtually all forms of capital right now.

So it’s not going to be an issue of getting it and just a matter of letting our – the developments and the acquisitions and dispositions kind of lay out during the rest of the year. We’re also just as an aside, we’re also very pleased with the bond offering that we did in May as I mentioned in my former remarks and that really set us up well.

From a liquidity perspective, it allowed us to pave the line down and give us lots of liquidity on the line. The impact of that bond deal, as you know, is not in the original or the guidance that we issued back in April. We hadn’t made a decision or anything like that yet.

But when the – we saw interest rates beginning to come down, spreads would continue to tighten up at that time and we made the decision toward the end of May to pull the trigger on a bond deal and that is probably why the impact on our guidance this year was the $0.04 from that financing transaction that we didn’t have in the April guidance..

Okay, that’s very helpful. Thank you..

Thank you..

Thank you very much. Let’s proceed to our next question. It’s from the line of Brendan Maiorana from Wells Fargo. Go right ahead..

Thanks. Good morning..

Good morning..

Hey guys. Terry, I just want to follow up on guidance. So just very high level simplistically thinking about it, I think you’re right, FFO average for the back half of the year would be sort of $0.72 or $0.73.

Is that just, let’s strip out the land sale gain, take the dilution from the asset sale and that I think your margins tend to be weaker in Q3 than Q2 and that margin decline would kind of be offset be the occupancy gains that you expect by year-end..

That’s right. We have done a lot of leasing as you’ve known as we talk about it in the first quarters. That will begin to start taking occupancy. Some already has but there is a lot ramp up on the occupancy side of that as the next two quarters unfolds. So that’s exactly what I would say..

Okay. All right, that’s helpful. And then just at the international paper development that moved into Q4, but assuming that that probably is sort of slated towards the end of the year. So probably not likely to have a big impact in terms of ‘14 FFO..

It has a modest impact, you know, that not that much..

Okay. All right, great. Thanks. And then just last one on guidance. I assume the land portion of the rally sale, there’s no gain or loss associated with that. So that’s an –.

That’s exactly right, Brendan. The research common sale that Ed talked about did include 13 acres of developed land, 3.75 million of the purchase price was allocated by the buyer to the land portion of that transaction. And that gave us basically a breakeven transaction on the land. All of the gain nearly 12 million relates to the buildings..

Okay, great. So with Ed of Mike, I was looking back over the past 10 years. And you’ve actually – you’d never put up plus 14% GAAP rent spreads.

And even over the trailing fourth quarters, your plus 10% which is higher than you’ve ever done over a trailing fourth quarter basis over the past 10 years, how much is the – and I think Ed, you mentioned in response to Jamie’s question, you feel like where your portfolio is marketing rents now, it’s pretty a reasonable level going forward.

How much of this improvement in terms of where rent spreads are shaking out now? Do you think it is the improvement that you guys have done in the portfolio versus where your markets are today versus maybe where they’ve been historically at least over the past 10 years..

Yes, Jim [ph], this is Ed. And Mike, feel free to jump in. But I think that would be tough to do kind of separating salt from sand. We think both contribute to it.

We think that we term that we secured, the average weighted term that we secured this quarter obviously influenced – the 7.7 years obviously influenced the GAAP rent growth because we have the tickers built in. And the longer the term, the bigger that GAAP number is going to be.

So I don’t think that the 7.7 years is the trend and I’m not sure that’s what Jamie was asking. I think he was saying overall, market-to-market. But given the distortion in the amount of term there, we are continuing to push for more term and I think the benefits of that are showing up in our expiration schedule.

So as we sit here today in July and looking at 2015 expirations, we’re just over 10% and the same thing for 2016. So those numbers historically just given your look back over 10 years, it had been in the 15%, 18%, 19% range. So the benefits are coming.

But I think for us, to maintain 7.7 years on the quarterly basis is not likely and it’s in part driven by those large blocks that we had to fill that we no longer have..

Yes, particularly, I mean with – I talked about the Atlanta transaction which is a large transaction on the right and that was a 15-year transaction. The other large transaction in that same building was 11-year transaction, Brendan. So we’ve got net good cash and GAAP rent growth in that transaction.

And as we continue to talk about our escalations that we’re able to get, market by market or we’re able to get them as the market improves, we like to push this up to the – close to the 3% if we can. So I think all of that goes into the bucket to contribute to that better GAAP rent growth.

14.2%, I think it would be hard to say we could get better every quarter, but certainly the trend is moving up..

Yes, and that’s helpful. I guess what I was sort of trying to derive at is if you felt like it was a lot because of some of the repositioning of the portfolio and a lot of the acquisitions that you’ve done over the past several years, if that was sort of driving better rent economics.

Does that make you feel like maybe you want to get more aggressive in terms of buying those types of assets because it does seem like maybe that’s not what’s driving the rent economics to be better? But if it were, it seems like maybe that would cause to think about being more aggressive those types of assets. I’m not sure if that’s the case or not..

I think that’s fair. I think part of the reason that is has improved is that we have made acquisitions along the lines of what you gave in a way of an MO. But I think that now – and this has really changed just within the last 90 to 150 days. It just seems to be even more frothy. So what was aggressive a year ago, maybe seen as somewhat timid today.

And so we have to be careful on how we define aggressive and how we underwrite so that we can be a little bit more aggressive on our underwriting but is it then keeping with how rapidly more aggressive pricing seems to have become. And so yes, we are – our underwriting is a little bit more aggressive than it was a year, a year and a half ago.

But it may not be keeping up with the aggressiveness of the way some others are seeing the risk profile and even more aggressive underwriting.

Does that make sense?.

Yes, I know. That’s very helpful. It’s just you mentioned kind of 90 to 120 days, it seems like maybe things have ratcheted up even more.

Any sense of maybe where cap rates have moved over that timeframe?.

Yes, I think that the compression is pretty obvious. It’s most evident in the CBD or the BBD infill property that has embedded parking, et cetera. We’ve seen those numbers in a couple of cases be high eights, I’m sorry, high fives. So it’s broken the 6%. We think that’s a very aggressive number even for a trophy asset.

But where we’ve seen it, it’s been even confused by the fact that the buildings have some heavy concentration of a single customer and/or there’s some really unique specialized uses within the product. So for good stuff, we’re seeing high sevens to, I’m sorry, high sixes to low sevens.

For the trophy buildings, we’ve seen it now break six down into the fives..

Okay. Okay, now that’s great color. Thanks..

Sure. Thanks, Brendan..

Thank you very much. We’ll get to our next question. It’s from the line of Dave Rodgers with Robert Baird. Come right ahead..

Yes, good morning. A question on the development pipeline. Again, it sounds like for the second half of the year, Ed, that you guys have obviously some very specific projects that you hopefully will be able to announce.

But I guess, more broadly, are you seeing a swell of development negotiations that could carry on into 2015 as well? And I guess as part of that, even successful with relocation, are you seeing kind of outgrowing space or simply just looking for upgrades in the market.

Maybe a little more color around what those discussions are involving?.

Sure. A couple of good points you made there. And I may not take them in exact order you presented them.

But as the markets continue to tighten because business is decent and because of the absence of new spec development because of the pricing gap between first and second gen being anywhere from 20% to 30%, we think that those who are in need of space to your other point about businesses are growing, and that’s obviously we’ve captured that in the almost 1 million square feet that we have underway now, built-to-suits are now becoming much more part of the dialog because of necessity.

I think if we just go back a year or two ago, built-to-suits were part of the dialog.

But part of it was in the necessity but part of it was also a desire to consolidate from multiple locations into one, a relocation from one region to another or an understanding that they’re paying a premium because that’s what they want to do to change their culture, their personally, their MO-ed or their personality to their client base, employee retention, recruitment, et cetera.

Now given how markets are becoming tighter and particularly when you look at Class A space in the better location that’s even tighter and a necessity built-to-suit through becoming more of a conversation, more part of the conversation, not solely because there are still second gen blocks that are available, just not nearly as many.

And then the last thing I’d want to touch on is your word, swell. I don’t see a swell of it, I see a good living can be made on it, but I don’t see a well of it. That may come, but I think that given the time it takes to deliver that second gen ranch will grow and contracted that 20% to 30% GAAP to something materially less than that.

And then there will be the delta between 1st in June, and then we’ll start to see more first gen..

That’s helpful. Thanks. Maybe on the asset sales too. You talked about I think in your opening comment that a better pricing than you thought maybe going into the year. Was that better pricing specific to those assets? And I didn’t hear of addressed this.

But specific to those assets, do you think if you came out with additional properties over the course of the next year or two that pricing is just materially improving for some of that older product..

Door number two..

All right, fair enough.

And last maybe on Tampa, you made some comments about it but can you go into maybe a little bit more detail in and around Tampa where you still have some availability to lease and then kind of the activity that you’re seeing in that market?.

Sure. Just kind of holistic then to micro, we see Tampa improving. It’s a little bit late to the party and it certainly suffered more than some other markets given its dependency on the housing industry and all the services that support that. But Tampa has made the largest forward jump on the recovery clock, if you will, that JLL publishes.

So it’s coming. It’s just late to the party. More specifically on the backfill for the PWC space, the 319,000 square feet at LakePointe One and Two. So we sit today and we’re 57% backfilled and we expect to be north of 70% aimed by the end of the year. So we’re seeing decent movement on that.

It hasn’t been as rapid as what we’ve seen in Nashville or Atlanta. But in both Nashville and Atlanta, it moved exceedingly fast. We had assumed some of those backfills will take greater than two years and it took less to up to one. Nashville a lot faster; 5405 in Atlanta did exceedingly well.

So I think we’re in pretty good shape with these large backfills and I think that Tampa is coming into its own..

Dave, this time last year, six months ago, we were taking a swing at some potential homeruns, some big blocks that didn’t really materialize in the market and then Dan Woodward and his group down in Tampa done a good job hitting solid singles and doubles with the transactions in the 15,000 square feet to 30,000 square feet, which we like because it does create some diversity of tenancy that goes in those buildings which really helps a staggered lease terms, good credits.

So it’s taking a little bit longer but I think generally we’re pleased with what we’re seeing now that we have velocity..

Great, thank you..

Thanks, Dave..

Thank you. And we’ll get our next question from the line of Jed Regan with Green Street Advisors. Go right ahead..

Good morning, guys. Just wondering if you looked at the Cousins acquisition in Charlotte and if your thesis [ph] on that market has evolved at all in the recent quarters and maybe just also what kind of look through you think the trade might suggest for your portfolio..

Yes, hi Jed, this is Ed. As you all know, we look at anything that’s generally in our backyard. And that may be from Texas up to D.C. that we think could be a viable asset for Highwoods to own. And that certainly includes Charlotte and we certainly took a good look at that building.

We decided for us it wasn’t something that we could aggressively underwrite. But that doesn’t mean it’s not the right thing for our friends in Atlanta. I mean every company has their own philosophy and tactics, so I’m not in risk [indiscernible], so I’m not being negative on what they did, I’m just answering your question.

Yes, we looked at it and we decided not to aggressively pursue it. To the latter part of your question about how it – what the implications are for the rest of our portfolio, I think it goes back to my comments earlier with regard to cap rate compression.

We’re seeing cap rate compression continue and the better location, the better the asset, the more it’s contracted. The more that there’s a value add to opportunistic assets, the less it’s contracted. So I think that when –.

Okay, great. So actually you –.

I’m sorry..

Go ahead..

When you all and others look at NAV, you put together a mosaic of data points. And certainly a third ought to be part of that mosaic..

Okay, right.

Just to be clear though, for the right opportunity maybe you would consider making a move in Charlotte?.

Oh, yes. We looked at – yes, we look at Charlotte. There are some things there that we would need to be comfortable with, but yes, we look at Charlotte along with a few other markets that we’re not presently in..

Okay, great. On another market, Atlanta, it sounds like there’s a private competitor now building on spec and Buckhead and perhaps another developer lined up behind them.

Just wondering how concerned you are about that supply and if you think it could dampen fundamentals and then maybe just kind of a broader review of if there’s any supply coming online in other markets that’s of concern at all?.

Broader answer first. We’re not having to take Ambien about anything that we’re hearing about that may or is coming out of the ground. So we don’t have a heightened level of concern anywhere. Atlanta construction as a percent of market is currently less than a half a percent.

If the project you talk about comes out, which all indicators are that it will, there’s a dramatic – underscore, dramatic price difference between it and what we experience in our two buildings next door. So we see that as beneficial to what we would be able to do with, quote-unquote, neighboring rents.

And given the average weighted lease term that we have in place in that those two properties and that million square feet, the new building would have to sit for a long time where they would have to pay some monumental biopsies in order to move customers from those two locations into the new building in addition to the upside – the delta in the rent spread of where we sit to where we think they need to be in order to be successful in renting that building..

Okay. Thank you for that. And you guys had talked previously about pushing rents kind of in the 2% to 5% range across your markets and just wondering with some of the strength you’re seeing recently if that range has moved up in any locations..

I think on average, we’re comfortable with the 2% to 5%. In the at a glance that we put up, we reflected almost literally by market what we expect to see.

And I think that if you take a blend of the assets that we hold in each market, and so that’s blending everything from the quality of Two Alliance to Century Center which is a different price stratification, I think we’re comfortable with that number. And we don’t see it leaping but we see it to be – year-over-year, it should continue to get better..

And I think submarket by submarket within one [ph], we may say that it’s two to five in a particular market. But a strong BBD submarket, we may find a building that has low inventory we might – and even higher than five on a particular building. But on average across this, I think the range is still good..

And like you know, Jed, we experience greater than 20% rent growth in the relet of 5405. So to Mike’s point, it’s really building by building, submarket by submarket. But I think the 5% in general – the 3% to 5% in general is good when you just look across the entire footprint..

Okay, great. And just last one for me if I may. It looks like the back half of the year could be pretty busy for you guys on external growth if guidance is any indication.

And on the acquisition side, just wondering what the opportunity set is looking like and based on some of your comments about pricing getting pretty aggressive, if you think it’s likely that that acquisition guidance ends up closer to the low end of your range or where you kind of actually get to that is..

Well, we tightened the range a little bit, so I think that’s as far as we probably want to go on what we want to say about that. I would want to underscore that on development announcements, obviously we wouldn’t get any FFO benefit from them immediately. We’ve got the construction period to go through on that.

Given that we did say that we would be near or we expect to be closer to the high end rather than the low end of our dispose, obviously there’s an impact there from a dilution perspective but we think the pricing is very good. The development yields stay attractive but we don’t get that money in day one.

And then on the acquisitions, we left guidance the same and we’re continuing to pursue things. But we also need to be sure that we’re identifying assets where we believe that there’s upside, whether it be through operating efficiencies, leasing up or Highwood-tizing.

And I think that as I said in my scripted remarks, we’ve had terrific success on being able to achieve additional leasing on value add properties and I think gave an example in the script of the 3.4 million square feet we bought last year and how we’ve moved it well over 600 bps already and expect it to move even more before the end of the year.

So our underwriting, as I mentioned, earlier to Brendan or Dave that we’re more aggressive on that. We’re just not – we’ll find out if our aggressiveness on that is keeping up with the aggressiveness of the market and the pricing of it..

Okay, great. That’s helpful, thank you..

Sure, thanks, Jed..

(Operator instructions) And we’ll proceed to our next question from the line of Vance Edelson from Morgan Stanley. Go right ahead..

Hi, thanks for taking the questions. I have just a few.

First, given the state of competition out there for acquisitions which sounds like it may have picked up some more in your market, who are you typically bidding against? Are there any new categories of entrants and is it the same cast of characters that you’ll be looking to sell to as you work toward this year’s disposition guidance?.

So in backwards order, no, it’s not traditionally the same set because we’re selling from the bottom of the deck and buying/adding to the top of the deck. So it’s a little bit different. A lot of it depends on the deal itself but I can attest that the breadth of competition that’s bidding for high quality assets is eclectic.

We’re seeing everything from publicly traded REITs to non-traded REITs to institutional money, sovereign money. It’s quite a collection and it’s not any one sector of investor. When we go to selling, we’re also seeing a wide variety but it’s not exactly the same cast of characters character to character. More about –.

Okay..

There’s an insertion – some of them are there but there’s also the insertion of local buyers, some small regional funds, et cetera..

Great, okay. And then I joined the call a little late, so I might have missed it.

But with the trends in asking rents generally improving, could you comment on the likely future direction of TIs and LCs over the next several quarters?.

Yes, Vance. The way that we answered that earlier was just the deal as a whole is improving.

So whether it’s something on the margins, for example, disproportional amount of parking or building signage or after hours HBAC to the next category of TI allowances versus turnkey to annual kickers, whether it be 1.5% or 3% amount of free rent, whether it be one month per year or half a month per year, the whole mosaic is improving.

It’s improving not at an exceedingly rapid rate, but certainly one that’s definable. And so we see that across the board, the different metrics that make up a lease transaction are improving..

Okay, got it..

Vance, this is Mike. Just one quick add to that. As we’re seeing somewhat TI construction cost going up a bit and tenants asking for this CapEx where there’s an allowance for turnkey, we’re able to accommodate. But when we do that, we ask for more term. When we get more term, obviously we’re getting better GAAP rents.

So it all kind of tends to feed off of each other. So that’s I think part of what’s going to be indicative of the trend going forward..

Okay, that’s helpful. And then just a random question on one vertical. Could you comment on how the law firms on your tenant roster are doing? Some of your peers have given mixed signals.

Would you say the law firm prospects are generally improving with the broader economy or is there anything else at work there?.

Well, I would say that – two things with regard to the law firms. Obviously, with regard to how they consume space, there’s the old model and the new model. So that’s the first thing that we look at with regard to a law firm, are they in a new model space or an old.

And the old, the biggest differentiator other than the library is the fact that lawyers historically were heavily dependent on an admin to construct and put them in a position to make it deliverable to the client. Whereas today, the attorney does that themselves with cut and paste in computers, et cetera.

So there’s still some dependency but nowhere near the amount to get the deliverable out the door. The buildout of it, the new or the old. Second is we do see continued movement of attorneys from one firm to another and some consolidation of firms. So it should not be ignored. It’s an important aspect of dealing with law firms.

And then third, I think it’s fair to say that as the economy gets better and business gets better that there are more deals for them to be involved in and more issues for them to be involved in, et cetera. So it’s not a sector that we have concern about. We’re seeing some firms hiring while others are merging or having to contract.

But all in all, I think that it’s not a business sector that we’re losing any sleep over..

And law firms are using space whether it’s new space, new format as a recruiting tool. They have these young guys and not dissimilar from tech firms and others. They are creating an environment for their younger lawyers. So we’ve seen a little bit of that as they started to renovate their space..

Okay, makes sense. Thanks, guys..

Sure. Thanks, Vance..

Thank you very much. And we have no further questions at this time. Please continue with any closing remarks..

Okay. Thank you, operator, and thank you everybody for dialing in. As always, if you have any additional questions, please give us a holler. Thank you..

Thank you very much. Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. I ask you to please disconnect your lines. Have a good day, everyone..