HIW
#Thank you, <UNK>.
Good morning, everyone and thank you for joining us.
On our first quarter call in February, we noted the disconnect between the positive fundamentals of our business and a negative tone on Wall Street.
A struggling Dow Jones and declining 10-year treasury yields were factors driving that negative tone.
What a difference 10 weeks makes.
In that short time frame Wall Street is now reflecting a more positive tone that is consistent with the fundamentals of our business.
The Dow is back up around 18, the 10-year treasury has stabilized, and investor sentiment across most asset classes has improved.
Aside from this, some fear that pending CMBS maturities over the next couple of years have the potential to overwhelm the supply of replacement capital.
This talked-about fear reminds us of how a high volume of defaults had been forecasted in the 2010-2012 window, creating a "once-in-a-lifetime" opportunity to acquire on the cheap, which obviously didn\
Thanks, <UNK> and good morning.
As <UNK> noted, we had solid activity this quarter, leasing 902,000 square feet of second gen office space, and year-over-year asking rents continue to increase across all of our markets.
Average in-place cash rental rates across our office portfolio were $23.38 per square foot, 3% higher than a year ago.
Occupancy was 92.7% as of March 31, up 80 basis points year-over-year, although slightly down from year-end, due to that sale of the 96.9% occupied 1.3 million square foot Plaza, as well as two expected move-outs in Pittsburgh that I will discuss in just a minute.
Given our market dynamics, we remain comfortable with our 2016 year end occupancy outlook of 92.5% to 93.5%.
For office leases signed in the first quarter, starting cash rents were basically flat at negative 0.2% and GAAP rents grew a robust 9.7%.
Average term of 6.5 years, five months longer than the prior five-quarter average, and leasing CapEx was $17.65 per square foot, 13.6% lower than the prior five-quarter average.
We are pleased with the economics we garnered, with net effective rents of $14.54 per square foot, 5.9% higher than the prior five-quarter average.
Turning to markets, our Atlanta portfolio was 92.1% occupied at quarter end, up 260 basis points year-over-year.
During the quarter, we leased 251,000 square feet, including two long-term federal government renewals encompassing 212,000 square feet with the CDC in Century Center with very low leasing CapEx.
We only have 198,000 square feet of remaining 2016 rollover exposure in Atlanta.
This includes a previously disclosed 58,000 square foot, second quarter known move-out at Monarch in Buckhead that was factored into our acquisition underwriting.
We are very pleased with the operational performance of our 1.9 million square foot Buckhead portfolio.
Year-over-year asking rents are up 10% on average.
After backing out near-term moveouts at Monarch, move-outs known before the acquisition.
Occupancy in our Buckhead portfolio grew 240 basis points from 86.4% at September 30 to 88.8% at March 31 and is projected to increase another 200 basis points by year-end.
Strong growth in Nashville continues.
A 129,000 square feet of positive net absorption in the first quarter, the market's unemployment rate is 3.5%, 150 basis points below the national average.
Direct market vacancy is 7.5%.
Occupancy in our portfolio was 99.6% at quarter end, up 40 basis points sequentially and up 430 basis points year-over-year, and we have less than 100,000 square feet set to expire by year-end.
The construction of Seven Springs II, our 131,000 square foot office building with structured parking, is well underway.
This $38.1 million development is 43% pre-leased, with completion scheduled for the second quarter of 2017 and stabilization in the third quarter of 2018.
The volume of prospects is strong.
In Raleigh, office jobs grew 3.2%, a 100 basis points above the national average, and the office market posted yet another quarter of positive net absorption.
We garnered very strong average GAAP rent growth of 18.7% on over 200,000 square feet of second gen office leases signed during the quarter.
Occupancy in our Raleigh portfolio was 93% at quarter end, up 20 basis points from December 31 and 270 basis points year-over-year.
Also, we are working with a sound prospect at GlenLake Five, which would bring leasing to 94% and stabilize the building well in advance of pro forma.
In CBD Pittsburgh, occupancy in our portfolio rolled down from 95.7% at year-end to 91.4%, due to 96,000 square feet of anticipated move-outs at our 1.5 million square foot PPG Place.
One customer, Highmark, a health insurer, consolidated into a building it owns and another customer, Ketchum, a marketing agency, relocated into a very different low price-point product.
Pittsburgh's Class A CBD market is a solid 94% occupied and we have 175,000 square feet of strong backfill prospects with asking rents 5% to 7% higher than expiring rents.
In conclusion, leasing volumes and the ability to push rents continue to be solid, reflecting positive momentum in our markets, the demand for our well-located BBD office product.
Even with known move-outs taking occupancy to the 92% range mid-year, occupancy will rebound and average occupancy for full year 2016 is projected to be some 50 basis points higher than last year.
<UNK>.
Yes.
So, our guidance is out there and we reaffirmed our 100 to 200 of starts.
And <UNK>, we typically have projects in the size of $40 million to $50 million.
So think of that in terms of two to four or five total announcements for the year.
We do have the 5,000 CentreGreen project that we announced at the beginning of the year, which is in the low $40 million.
As markets continue to tighten and those who are interested in relocating or expanding and need significant sized footprints, obviously new development becomes a prominent part of what their options are.
We have plenty of company-owned land and obviously the balance sheet in order to accommodate that.
We're currently in conversations with six different customers who would predominantly pre-lease or totally pre-lease a building.
They're in different stages of conversation, chances of them all happening are slim, but chances of some of them happening are relatively strong, and we think that the price of construction continues to keep a bridle on, there being a significant amount of speculative construction done across the markets by an array of developers.
Yes.
So obviously it not only impacts new development, but construction costs play a role in re-leasing as well as we re-tenant spaces.
We continue to see about a 0.5% increase per month in total construction pricing.
Just as a reminder, it didn't abate during the Great Recession.
So, this has compounded for quite some time.
So clearly it's an expensive option, but there are still those who are seeking a single customer type building, and you build-to-suit, and the only way to get it in the tightening market in many cases is going to be a build-to-suit.
We have seen some prospects that we've been in conversation with that once they've seen the pricing from us and some of our peers, they've decided to just double down and stay where they are, but there are still plenty that are talking about the possibility of going into something new.
We've always said it's a very protracted process, because there are a number of options that they can pursue and at different pricing points, but it's safe to say that they're all 15% to 30% more expensive than if they were to stay put.
Yeah, <UNK>.
Look, I think it's definitely been behind, the recovery has been slower than our other markets, but I think we continue to see vacancy rates for Class A properties certainly in Tampa, they're now in the single digits.
So, we do have asking rents that are up 4%, 5%, demand remains steady.
I think the local economy continues to grow, so I think it's just a matter of time that we're going to see some acceleration of leasing, new leasing and all that in Tampa.
In terms of Orlando, really a similar story, little slow to recover, Class A CBD vacancy rate is around 10%, so it's continued to improve, asking rents were up 4%, 5%, not a lot of large blocks of space.
So, again while it has been slow to recover, we do think with the projected job growth in the next 12 months, that's going to continue to improve.
Hey, Jamie.
This is <UNK>.
I'll start, we are very bullish on Pittsburgh.
Our occupancy there, when we started, it was in the low 80's% and Andy and his team got it into mid-90s% and have held it there.
Over the quarter ---+ quarter-over-quarter, we've dropped 4.3% and it was basically due to the two customers that <UNK> outlined in his script with Highmark and Ketchum.
In the re-leasing of those, we expect north of 5% increase in rents and Andy currently has a pretty healthy list of about 175,000 square feet of prospects and anticipates about half of that will hit before year-end and the other half in the first half of next year.
So, we feel pretty confident about the backfill, the volume of prospects, the ability to push rents.
Also as <UNK> said in his scripted remarks, CBD Class A markets 94%.
So the downtown market really hasn't seen an impact from the energy industry.
Now if you go out into some of the suburbs, that has been a little bit more evident there, but the downtown market is not.
In addition, we've been able to further energize the ground floor and some of the below grade area at PPG complex with restaurants and activities, so it's a better positioned asset today with those additional amenities and another large restaurant Craft Brewery coming on board on this year.
So, we feel with the increase in energy on that ground floor, the volume of prospects that we have to backfill the space and the upside in rent, and then just the overall health of the downtown market, we remain bullish on it.
Yes, I'll start and then maybe toss it over to <UNK>.
We think Jamie that there is a little bit of a disconnect between how some may perceive where cap rates are.
So, we have now underwritten in excess of $1 billion as we evaluate various opportunities to deploy the remaining third of the proceeds from the CCP sale.
We haven't seen any movement in cap rate.
I know that there has been some that's been written that even in the gateway cities that they've seen 25 bps to 50 bps relief if you're the buyer in cap rates, but we haven't seen that.
And we've market-tested that in our underwritings and we've seen it in the things that we had pursued and had conversations about whether it be off market or broadly marketed.
We just haven't seen any reduction in the volume of interest both in pricing and number of bidders for institutional quality better located assets within the BBDs that we're pursuing.
So, maybe just a little bit of a ---+ because I know there's been plenty written that there is a perception and maybe it's tied to what's going on in San Francisco, maybe it's tied to what's going on in New York.
But we haven't seen that inflection.
So, there are ample opportunities there and those opportunities, which we're pursuing are also being aggressively pursued by others, and so no expected relief in those cap rates.
Yes, both genres are on the prospect list to varying degrees.
Yes, it covers both.
Sure with regard to HCA, we've talked about this publicly a number of times, where they are going into a building in downtown.
So, they have multiple lease instruments with us, there are three of them which expire in the first quarter of 2017 that total about 235,000 square feet, those leases are basically in two different buildings; they are each of about 103,000 square feet, we have a 62,000 square foot prospect for one of those which equates to about 60% of the space that they would give up in Brentwood, but it's early and would remind everybody that our Weston, where the other building is, we're 100% occupied and in Brentwood where we have 1.5 million square feet, we are 98.3% occupied.
We really see good opportunity to re-lease these spaces in a relatively short period of time.
If we're going to get space back, these would be the two places to get it, and we have plenty of notice and Brian, Jimmy and Jeff our team there are focused on this and as an aside, as Jimmy and Jeff try to figure out how to make a living, being 90% occupied in their portfolio, obviously they're investing a lot of their efforts to backfill those two spaces.
And then the other is just that we only have 4.7% of revenues that will expire between now and year-end.
So, I think that just gives us ample opportunity to focus on these bigger blocks that would be coming to us first of next year.
The only other thing that I would add to that is the value-add spaces, because when we announced the acquisition of SunTrust and Monarch in September of last year, we noted that there were some known early moveouts and those were defined by us as customers who would be moving out within 12 months of acquisition that have given notice and we knew about.
And there's clearly opportunity for leasing and upside there and we're seeing some momentum on all three of those buildings.
Thanks, Jamie.
<UNK>, I'll do the development and <UNK>, maybe you can hit on the rent.
With regard to development <UNK>, we announced Seven Springs II, which is a 131,000 square feet, and we announced 100% spec and shortly thereafter Brian and team were able to secure a 43% user with a healthcare company, and so that was a positive and we also have more prospects looking at that building today, another twenty some thousand of vibrant prospects I would say.
So, it's early where we just poured the third or fourth floor, it's moving along on schedule.
And I think, have started a 100% spec, be it 43% now, and have others that are interested in the building, we've only poured up to the fourth floor, very comfortable with that.
Regarding Virginia Springs, we are very excited to be able to bring that parcel of land into our portfolio as it was truly the last raw piece of development land available in Maryland Farms.
We can get up to 216,000, 218,000 square feet in two different buildings there.
And so, we are working through the process of the necessary municipal approvals to plot the buildings.
If we were to go after at fast track, the earliest we could have a building COed and online would basically be the end of 2017 to very ---+ maybe first quarter 2018.
So, we're now putting together the final touches on the elevations in a typical flow plates and the site planning et cetera.
But it just recently came in, so it wasn't until we kind of locked up that we decided to invest significant dollars on the design aspect, but that's coming along very nicely and right here in short order our Nashville team will be armed with all the semi-gloss images that they need to have to be out marketing that.
<UNK>, on the rent.
<UNK>, in terms of just the market in general.
I mean, I think Nashville continues to be our strongest market, we're seeing continued strong demand across many industries, rents in general are record highs in Nashville today, and at the same time vacancies at a record low.
I think first quarter was the fifth consecutive quarter that the vacancy has hit a new record low.
So that's enabled us to really push rents.
I think, we wish we had more space to lease and more rollover occurring, but what little we have, we've been able to really push rents on a cash basis and obviously on a GAAP basis.
I think rents have gone up certainly ---+ asking rents over 10% in the last probably even six to nine months.
So it's pretty strong.
Not materially, I mean, I think we're seeing decent activity really in all of our markets and most of our product types, both A and even the Bs.
I think the Bs were slower as you would expect, maybe slower to recover in terms of leasing, but we're seeing that be steady.
And the number of leases we're doing has remained steady over the last five or six quarters and that's across our entire portfolio.
So, haven't really seen any softness to speak of.
In terms of leasing.
I got it.
Look, I think overall, maybe on the lower quality assets, pricing has made, I think they probably fewer bidders and maybe there has been a little bit of pricing pull back as buyers are doing some price discovery, maybe on the B quality assets, but we just haven't seen them on the trophy side.
And I think the CMBS, <UNK> more follows the lower end than the higher end and that could be part of that explanation that the fears that are out there or the wonderment that circle CMBS, it may be influencing that easing of cap rates on the lower end of the spectrum, which therefore not touching the top end.
Yes, I just don't think there's been enough trades out there to really ---+ enough data points to determine that.
