Greetings, and welcome to the Highwoods Properties Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. I would now like to turn the conference over to Brendan Maiorana, Executive Vice President, Finance and Treasurer. Please go ahead.
Thank you, operator, and good morning. Joining me on the call this morning are Ted Klink, our Chief Executive Officer Brian Leary, our Chief Operating Officer and Mark Mulhern, our Chief Financial Officer. Forward looking statements made during today's call are subject to risks and uncertainties, which are discussed at length in this morning's press release as well as our SEC filings. As you know, actual events and results can differ materially from these forward looking statements, and the company does not undertake a duty to update any forward looking statements. One of the most significant factors that could cause actual outcomes to differ materially from our forward looking statements is the ongoing adverse effect of the COVID-nineteen pandemic on our financial condition, operating results and cash flows, our customers, the real estate market in which we operate, the global economy and the financial markets.
The extent to which the pandemic impacts us and our customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic and its ongoing impact on the U. S. Economy and potential changes in customer behavior, among others. With that, I'll now turn the call over to Ted.
Thank you, Brendan, and thank you all for joining us on such short notice. This morning, we announced an agreement to acquire a portfolio of office assets from preferred apartment communities for a total investment of 769,000,000 dollars We've already posted non refundable earnest money deposits totaling $50,000,000 and expect the acquisition will close in the 3rd quarter. We're excited about this transaction as we believe it improves our portfolio quality, increases our long term growth profile and provides immediate and ongoing financial benefits. The core portfolio is comprised of 4 Class A office assets, 2 in Charlotte and 2 in Raleigh, with a combined 1,600,000 square feet as well as a mixed use redevelopment site in Atlanta. The transaction includes 2 non core assets that have a combined estimated value of less than 12% of the total investment.
This transaction continues the path we set as a company many years ago with our strategic plan, which includes owning the highest quality buildings in the BVDs of our markets and maintaining a strong balance sheet. 1st, it provides scale with high quality differentiated office assets across some of the best BBDs in the Sunbelt. Upon closing, we will become the largest owner of Class A assets in the South Park submarket of Charlotte. We will increase our leading market share in downtown Raleigh, lean market share in downtown Raleigh, and we will enter the North Hills submarket of Raleigh. 2nd, this portfolio will enhance our long term growth prospects.
Rents are approximately 10% below market and Charlotte and Raleigh consistently rank as 2 of the top growth cities in the U. S. With long term economic and demographic trends that outpace national averages. We also expect to leverage synergies with our existing portfolio. And we plan to fund this transaction by selling non core assets with less upside.
3rd, the assets to be acquired complement our existing portfolio extremely well. We'll increase our share in Raleigh CBD to nearly 40% of the Class A stock, where we're already the largest landlord. Further, we will enter North Hills, which has long been on our wish list. North Hills is a vibrant mixed use DVD with 1,000,000 square feet of retail and restaurants, over 2,000 apartment units, 500 hotel rooms and 1,400,000 square feet of office. Office rents in North Hills are the highest in the city and there is limited vacancy.
In Charlotte, we will nearly double our presence to 1,600,000 square feet and enter the South Park BBD, which has also been on our wish list. In Atlanta, we will have an excellent redevelopment opportunity at Galleria 75, which is near our 800,000 square foot, 95% occupied Riverwood project. The Galleria 75 site can support up to 600,000 square feet of office development and 300 apartment units. 4th, the acquisition provides stable cash flow. The PAC team has done an excellent job operating these assets.
The strength of the customer roster is evidenced by the rent collections of greater than 99% since the onset of COVID-nineteen, which is comparable to our own performance. The weighted average lease term for the core assets is 7.3 years, further supporting our already strengthening cash flows. 5th and finally, we believe this transaction will have a favorable impact on our financial results in both the short and long term. After we complete the planned non core sales, we expect this portfolio rotation will be accretive to cash flow and roughly neutral to per share FFO with upside over the long term. We expect to fund this acquisition primarily by selling non core assets across several markets.
Our plan is to sell $500,000,000 to $600,000,000 by mid-twenty 22, roughly half of which we expect to close by year end 2021. We have a proven track record in deploying this playbook, opportunistically using our balance sheet for attractive investments as they arise, and then subsequently returning our balance sheet to pre acquisition metrics to reload our dry powder. For example, in August 2019, we announced our market rotation plan to enter Charlotte and exit Greensboro and Memphis. We completed Phase 1 of that plan by April 2020 within 7 months by completing $420,000,000 of dispositions. In fact, since the completion of Phase 1, we have sold over $180,000,000 of additional non core assets.
Our non core disposition plan associated with this planned acquisition is also consistent with our long term strategy of continuous portfolio improvement, albeit on an accelerated timeline. Our investment team has been hard at work preparing to launch the marketing of many of these assets. Before I turn the call over to Brian, I want to express my gratitude to the entire team at PAC who have worked so collaboratively alongside us in this transaction. They've been great to work with and we look forward to closing the transaction. Now I'll turn the call over to Brian.
Thank you, Ted, and good morning, everyone. As Ted mentioned, this transaction adds 2 high barrier to entry BBDs to our portfolio and bolsters our leading position in downtown Raleigh. As you know, Charlotte has long been a priority for us and our reentry in the fall of 2019 was a result of a deliberate and patient exercise that culminated in the acquisition of the 841,000 Square Foot Bank of America Tower in Uptown Charlotte. From our perspective, Charlotte currently has 3 BBDs in Uptown, South End and South Park with each having a unique set of superlatives. From the soaring corporate towers of Uptown Skyline, Charlotte's gritty and growing South End Warehouse District, to South Park's high end address where over 4,000,000 square feet of office space set amid the region's best shops and restaurants and adjacent to some of Charlotte's finest neighborhoods.
These 3 BBDs are enjoying strong occupancy, rent growth and inbound activity. Charlotte's story is a growth story. In 2020, the Queen City surpassed the city of San Francisco with regard to population and CBRE is estimating an additional 5% to 10% growth in population by the year 2025. Young and talented people are moving to Charlotte for jobs, many in finance and tech. Long recognized as a global financial center, second only to New York City in the United States, Charlotte's financial services sector has further grown and diversified in the last few years, and the sector's demand and consumption of technology within and across their lines of business has elevated Charlotte into the number one position nationally for tech job growth for CBRE, CompTIA and Forrester.
South Park, where Capitol Towers and Moorcroft Center are located, is a supply constrained BBD landlocked by Executive Housing, with most of the commercial land already developed and with no new construction underway. Acquiring 5 of the 8 best and newest office buildings in South Park is core to our long term plan in Charlotte. The acquisition of these tremendous South Park buildings, whose collective 770,000 square feet or 97% leased, will also mark the first addition of an award winning brewery to the Highwoods portfolio, a request we're hearing more of as we endeavor to create the best workplaces across our footprint. With the highest quality consumer roster in the DVD and with an average WALT of 7.8 years across all 5 office buildings, we're bullish about our pending investment in South Park. We're also enthusiastic about the opportunity to bolster our hometown Raleigh presence with an entry into the highest of barriers to entry BBD in North Hills and to add another skyline shaping tower to our downtown portfolio.
North Hills is an exceptional and highly curated live, work and play district with some of the region's finest Class A office space, achieving rents 30% higher than the metro average. The 16 storey Cap Trust Tower is in the heart of North Hills and is adjacent to the Capital Grille, a 2 level Harris Teeter grocery store and the AC by Marriott and Hyatt House Hotels. It's 300,000 square feet, which is 98% leased, sits atop embedded parking, includes Yard House as well as local favorite, the Cowfish Restaurant. With the acquisition of 150 Fayetteville Downtown, Highwoods will control 38% of Raleigh's CBD Class A office market, stretching from the state capital to the Duke Energy Center for the Performing Arts. 150 Fayetteville, which encompasses 560,000 Square Feet, will take its place in the portfolio next to the high was developed mixed use PNC Plaza as 2 of Raleigh's most signature towers.
In closing, with in place rents below market and with new and renewal leasing occurring during the pandemic at top of market rates, there is additional upside as leases roll. Mark?
Thanks, Brian. I'll start by walking you through the funding plan for the acquisition. We disclosed total anticipated investment of $769,000,000 which includes an estimated value for the non core assets of less than 12% of the total investment. The transaction includes the assumption of secured loans relating to the core assets estimated to be recorded at fair value of $403,000,000 $28,000,000 of planned near term building improvements. This leaves approximately $250,000,000 of cash required to fund the remainder of the purchase price, and we have already deposited $50,000,000 of earnest money.
The remaining $200,000,000 will be funded through a 6 month unsecured bridge facility that we expect to obtain from JPMorgan. This bridge facility, which can be extended for an additional 6 months, will have terms comparable to our $750,000,000 revolving credit facility. We currently have $170,000,000 outstanding on our revolver after the scheduled repayment last week of the remaining $150,000,000 of 2021 bonds and funding of the $50,000,000 earnest money deposit for this acquisition. As Ted mentioned, we plan to sell $500,000,000 to $600,000,000 of non core properties to return our balance sheet metrics to pre acquisition levels. We expect approximately $250,000,000 of sales to qualify for 1031 exchanges and expect those sales to close by year end 2021.
The remaining sales are expected to close by mid-twenty 22. Immediately following the planned acquisition, leverage will be temporarily elevated prior to the receipt of meaningful non core disposition proceeds. This is a typical strategy for Hywoods, utilize our balance sheet capacity when investment opportunities arise and then subsequently return our balance sheet to pre investment levels to replenish our flexibility and dry powder for future growth. Without any core non core dispositions, we estimate debt to EBITDAre would be in the low 6s by mid-twenty 22. While not our plan, we believe this would still be within the parameters to maintain our credit ratings at current levels.
In our press release this morning, we disclosed year 1 projected cash NOI of 38,000,000 dollars and GAAP NOI of $42,700,000 These amounts exclude $1,200,000 of annual NOI from Galleria 75 that will be classified as development and therefore will be excluded in our calculation of FFO. For the 4 core office buildings, we estimate a year 1 GAAP cap rate of 6.5% and a cash cap rate of 5.7 percent on a fully invested basis. Of note, these cap rates include $16,000,000 of estimated mark to market on the assumed debt, dollars 28,000,000 of planned building improvements and expenses. In addition, 1st year cash NOI includes approximately $2,000,000 of free rent, which when added back equates to an adjusted cash cap rate of 6.1%. Upon completion of our non core disposition plan by mid-twenty 22, we expect to return our balance sheet metrics to pre acquisition levels.
At that point, we believe our FFO run rate will be roughly unchanged, while we expect accretion to our cash flows that we have. Said another way, if we hold all other assumptions for the company unchanged and only isolate impacts from the acquisition of the core properties and non core asset sales, there should be no meaningful impact to what our FFO would otherwise be. Prior to completion of our non core asset sales, our FFO progression is likely to be bumpy and somewhat dependent on the pace and timing of the non core dispositions. Finally, the financial impacts of these planned investment activities were obviously not included in our 20.21 per share FFO outlook published on February 9. While we will provide an updated 2021 FFO outlook as part of our Q1 earnings release next Tuesday, April 27.
We do not intend to update our FFO outlook to reflect the financial impact of these planned investment activities until the closing of the acquisition. Operator, we're now ready for your
questions. Thank Our first question comes from Elvis Rodriguez with Bank of America. Please proceed.
Good morning, gentlemen. Just a couple of questions on the transaction. 1, are there any big move outs in value of the non core assets, so ARMOUR and any NOI that could get you to that 6.5%. So anything you can share to help us think through that math would be helpful. Thank you.
Hey, Elvis, it's Ted. Really, in terms of big move outs, no. It's a pretty solid portfolio. No major customers moving out at all. I think the largest might be a 15,000 footer that we know of in the next year or so.
So it's a pretty stable portfolio.
Elvis, it's Brendan. So just with respect to the value on the non core and the impact on the earnings FFO projection, the FFO neutral that we talked about, we really had assumed that we those non core assets, armor yards and the mezz loan, just have no impact on our financial results. So whether or not we hold those for a short period of time, we would assume that over time we would not hold those assets. So we're really talking about the FFO impact from the acquisition of the 4 core office buildings, the redevelopment property Galleria 75 and the corresponding non core asset sales of existing Highwoods assets between $500,000,000 $600,000,000
And Alex, let me this is Ted. Let me correct my statement. We do have a known move out in 2024 of about 42,000 square feet that I was reminded of, but still a few years out.
Thank you. That's very helpful. And then just one more for me. On the asset sale range of the $500,000,000 to 6 $100,000,000 if you do on the lower end of that range, is that due to the same assets or selling less assets? And if it's the same assets, does that mean that there's a chance this could be near term dilutive once everything closes?
Yes, Elvis, it's Brendan again. It could be either of those 2. So there's certainly a number of assets in there. So it could be that there's just less assets. There's also a little bit of, as you alluded to, price sensitivity that's in there.
So there's a range. So to the extent that prices came in a little bit lower what we're estimating, there could be a little bit of headwinds in terms of the accretion numbers that we're talking about on cash and FFO. But I don't think it would be anything meaningful to change the rough parameters of the financial impact that we laid out.
Okay. Thank you.
Our next question comes from Rob Stevenson with Janney. Please proceed.
Good morning, guys. Can you talk about what the timing is for the Atlanta redevelopment? Is that something that you're going to do? Are you going to sell off the apartment portion? What's the thought process there?
Sure. Hey, Rob, it's Ted. Really, I'd say no time soon. We've PAC had done a great job looking at various redevelopment scenarios and different plans, what would optimize the site. So upon closing, we're going to dig in further and figure out what makes sense for the market.
We clearly will sell off the apartment site to another apartment developer, potentially packed as well on that. So again, to be determined. The building does have a lot of short term leases. We'll be able to get to that redevelopment pretty quick in the event the market warrants a development project. Ryan, do you think that?
I might just add is we'll have the Catchers Mid open. Riverwood assets are less than a quarter mile away and are basically full. So as that submarket continues to receive inbound interest, we'll make sure we're positioned to take advantage of any opportunity there. But this is front and center on the interstate at the interchange, too. So it's a great spot.
Okay. And then what are you guys thinking the price per square foot is of the 4 core assets? And how does that compare to market pricing as well as new construction costs in those submarkets?
Yes. I think in terms of the price, we think it's definitely below replacement costs, Rob, if that's what you're asking. It's probably in that 10% or so on average below replacement costs. Okay. And then last one
for me. You talked about it a little bit, but the mezz loan at 8 West, what's the value there? When does that get paid back? And is there any purchase opportunity on the underlying asset that comes with this loan?
Sure. I think the book balance at year end was like $11,900,000 I think has got a maturity into 2022 with some extension options as well. So we still got some time. There's a recently delivered building, so they're in lease up right now. And then again, that's we consider that non core just because it's not a natural fit for obviously the rest of our portfolio.
So I guess there's a chance you could own it at the end of the day, but I think that's unlikely for us.
Okay. So of the roughly $90,000,000 of allocation to the non core assets, the armored yards would really be the major part of that. And obviously, if they sell that to somebody else rather than to you, that part of the funding needs goes away as well.
Yes, that's correct, Rob. And just to be clear, we didn't include the financial impact of holding the 8 West Mezz Loan or ARMOUR yards in those in the financial parameters that we laid out. So I just want to be clear about that. So to the extent that we did end up holding those longer term, I don't think it would have a significant impact on the financial projections that we provided, but those were stripped out assuming that we do not hold those assets long term.
Okay. But I mean just in terms of that, I mean if Armor Yards is, call it, roughly $75,000,000 or something like that, you don't actually have to buy that than that $75,000,000 less of funding needs that you wind up having essentially, right?
Yes. That's
correct.
Our next question comes from Blaine Heck with Wells Fargo. Please proceed.
Great. Thanks. Good morning. Just a follow-up on valuation on the 4 core properties. You guys announced the 5.7 percent cash cap rate, 6.5 percent on a GAAP basis and we're calculating about $4.25 a square foot including the CapEx.
Is there any discount here relative to where you think these assets might have traded prior to the pandemic? And just further, do you have cap rates or price per square foot maybe broken out by city, what you paid for Charlotte assets versus what you paid in Raleigh?
Hey, Boyd, this is Ted. I'll take a shot at that. Look, this was a marketed deal, right? So I think the market spoke in terms of the pricing. And we haven't for high quality assets throughout the pandemic, we really didn't see any diminution of value in those trades.
And really, in terms of breaking out city by city, we don't have that. It's really a portfolio overall yield.
Okay. That's fair. And then can you just give us any more color on the proposed dispositions? I'm assuming obviously the remainder of Memphis and Greensboro assets are included and obviously the non core assets from this portfolio. But can you give us any detail on the rest of what you guys are going to look to sell?
Are there any specific submarkets you guys are targeting or some sort of group of assets or is it kind of a mix throughout the portfolio? And maybe how should we think about pricing on those dispositions? Do you have any expectation of the cap rate range or price per square foot?
Sure. And just to be clear, the non core assets that are part of this transaction are not in that $500,000,000 to $600,000,000 Just want to make sure everyone's clear on that. In terms of the portfolio we're going to be selling, again, it's just an acceleration of what we've typically done, that $100,000,000 to $150,000,000 per year. The assets are going to be sprinkled throughout several markets, but I'd say the overwhelming majority are going to be in Tampa, Atlanta, Richmond and Raleigh, those four markets. And then obviously, as you said, the remaining buildings in Greensboro and Memphis.
It's a mix of both single tenant assets with strong credit, long lease term, along with other assets that are just in our non core bucket that are less upside and not core to our long term strategy. In terms of the way we feel, I think we've got broker valuations on most of these assets already. One's already in the market, has been awarded, and we're ready to launch several others. So it's going to happen over the next, obviously, few quarters. In terms of pricing, I think when you group the whole $500,000,000 to $600,000,000 it's going to be roughly a 7% GAAP cap rate.
Great. Thank you, guys.
Our next question comes from David Rodgers with Baird. Please proceed.
Yes. Good morning, everybody. I guess, I wanted to talk about the rate on the portfolio. You guys gave a lot of good details about it, but I guess when I was looking at say the NOI margin, it looked like it was in the low to mid-70s, typically a little higher. I know you guys have a little lower taxes down in North Carolina.
But is there any tax abatements or anything we should be thinking about in the portfolio? And then maybe when does that free rent begin to burn off that you mentioned the $2,000,000 in year 1? Is that a long term or does that burn off at the beginning of year 2?
Sure, Dave. It's Ted. I'll start and Brendan or Mark might want to jump in. No, there's no tax abatements on all this. You did hit on it.
The operating expenses in North Carolina, both Raleigh and Charlotte are lower than really most of our other markets. In terms of the free rent, it's roughly $2,000,000 That's going to burn off most of it in the next in the 1st year, right? Maybe a little bit sprinkles into the 2nd year, but it's largely this year on recent leases that they've signed during the pandemic. So, it should get burned off reasonably quick.
Dave, Dave, we did just factor in tax reassessments in our underwriting. So as you know, we're thorough in what we do in terms of underwriting. We did have some assumed reassessments in the tax numbers, just so you're aware of that.
Okay. Thank you for that. On the cap rate on the sales, you did say 7% on the GAAP cap rate. From a cash cap rate perspective, I guess, how do you anticipate kind of getting it to that, let's say, 61%, what I guess get you neutral to what you're buying today? So I guess do you think that you can sell something as low as below 6s today to kind of match fund?
Yes, Dave, it's Brendan. Really, so what we talked about is cash flow accretion, right? So it's not necessarily that the cash cap rates are at parity. It's really when you take into account the CapEx load between leasing and building improvements on the disposition portfolio compared to the acquisition portfolio where we see a benefit on the acquisition portfolio. So I think that doesn't hit the cap rate necessarily on a cash basis, but on an economic basis, I think that's where we feel like the acquisition portfolio stacks up very favorably against the pool of disposition assets.
So AFFO, then that's fair. That's a good point. I guess last, would you talk maybe Brian or Ted a little bit more about value add acquisitions and your comfort? Obviously, this has a long walled and so it makes sense in an environment where maybe some people are still concerned about work from home. You did mention that in your prepared comments.
But I guess talk about how you would view and what the potential pipeline would be for value add transactions and underwriting more vacancy in today's environment and how comfortable you would be doing something like that?
Sure, Dave. I can start if Brian wants to jump in. Look, as we've always said, Brian alluded to the catcher's, we're always out looking for every acquisition that's out there, every opportunity. We've got a well vetted and quarterly updated wish list that we're following. So, we'll absolutely take vacancy in buildings we want to own.
It's markets that are in our backyard. We understand the deal flow where the tours are occurring, where they're not and the activity that's out there. So, to the extent that we've got conviction on the asset, conviction on the market, the submarket and the long term prospects that we're seeing again in our buildings where we have boots on the ground in virtually all of our markets. So to the extent we feel comfortable with what's going on in terms of leasing activity, and if we can get a price right, that's the key. So you got to feel comfortable about the market, the building, the submarket, but also you got to feel comfortable that you can price in the current market.
And if you can get attractive yields on a risk adjusted basis, we're bullish on acquiring more assets on the value add side.
Okay, great. Thank you.
Our next question comes from Omatyya Okusanya with Mizuho. Please proceed.
Yes. Good afternoon, everyone. So just a quick clarification on the FFO accretion expected from the transaction. So when we take a look at $42,700,000 GAAP NOI, a 7% cap rate on 550 of dispositions, about $38,500,000 loss on NOI. I know you're picking up about $15,000,000 of additional interest expense, We kind of end up with a math that shows FFO dilution of about $0.07 to $0.10 So I guess we're trying to figure out what we're missing here.
Tayo, it's Brendan. So yes, your math is right on the NOI coming in the door. So $42,700,000 coming in the door and right on NOI going out the door, so the $38,500,000 that goes out the door. So there is movement in terms of what's going to happen with the proceeds that come in the door to pay off existing debt. So I think that might be the piece that you are missing.
So really, we're going to take the proceeds from the dispositions and pay off debt now. We're assuming debt, so there's going to be other debt that we pay off. So that's where you kind of get that savings. And that's and then there's a little bit of additional debt that we will take on to fund this transaction. And that kind of makes up the difference between that 42.7% and the 38.5% in terms of annual interest expense.
But we will as we get proceeds in the door, we will pay off some of the existing debt that we have on the balance sheet.
So the idea is you're going to pay a higher coupon debt and that's going to kind of make it more comfortable neutral.
That's right. And it will be a little bit noisy over the next several quarters and probably through the middle of next year, as we kind of get the balance sheet all normalized and kind of optimized from a debt stack perspective. So it will be a little bit choppy in the interim, but once we get through all that, that's where we get to call it about neutral on FFO and accretive on cash flow.
Got you. Okay. And then one other quick one. Armor Yards, I mean is that an asset that you guys really would prefer to own or you're kind of agnostic if PAC sells it to someone else?
Yes, I think the latter. Armor Yards, it's a really cool asset. It's a very attractive asset, creative office, but it's just not a natural fit with the rest of our portfolio, specifically in Atlanta as well. Just don't have a lot of that adaptive reuse stuff, but it is a good asset. And if we end up buying it, we'd be fine with that.
Got you. Okay. Thank you.
Our next question comes from Manny Korchman with Citi. Please proceed.
Hey, good morning, everyone. Did you guys think hard about doing some common equity here instead of accelerating the disposition program?
Manny, I can start. Look, I think it's from the beginning on this, it's really conceived as a portfolio rotation and upgrade, not too dissimilar to our market rotation plan we did in August 2019. So all the financial impacts we've outlined, it doesn't contemplate issuing any equity. But having said that, look, it's always one of the arrows we have in our quiver. So if it makes sense, we can always do that.
But we didn't do this transaction contemplating equity issuance.
And then Ted, you talked about the acceleration of those dispositions from your I think you said $100,000,000 to $150,000,000 sort of typical pace. Should we still anticipate that kind of pace on top of this? Or is this a true acceleration? And then unless you have a better use or sort of a marked use for proceeds that dispositions may pause?
Yes, it's a great question, Manny. Look, the way we look at it, we consistently rank our portfolio, whether it's what are the prospects for the buildings, the submarkets, where we see an activity in our portfolio on a leasing basis. So it's a regular exercise that we go through really on an annual basis. So we're always looking to upgrade. So I would think we're going to continue the cadence of dispositions over time.
That's it for me. Thank you.
Thanks, Benny.
Our next question comes from Michael Lewis with Twist Securities. Please proceed.
Thank you. You answered my question about the pre pandemic pricing versus post pandemic. But I wanted to ask a little more about that. I think it's a little surprising that there wouldn't be much movement at all. And does that have to do with the way do you view the risk maybe hasn't changed as much as I think a lot of people in the market are questioning the work from home risk and how that's kind of changed things in the office space?
Or does it have more to do with this specific portfolio where I know you have a lot of lease term left? So I guess just a question about how you're underwriting that risk and thinking about it and has it changed things a lot or not? It sounds like I'm just still not.
Yes, let me try and address both those. Again, as it relates to price discovery during the pandemic and we've seen multiple trades of obviously single tenant buildings, but also multiple trades of high quality multi tenant assets in the Sunbelt, primarily in Raleigh, Charlotte, Nashville. But we believe, again, this pricing stands up well compared to those others, whether it's the initial yield favorable, below market rents. The average this portfolio is a little bit less, but it's more than made up for in the cap rate. And that's even layering in $28,000,000 of hybridizing CapEx.
So I just think there's a lot of investor interest for the best quality assets. That's why pricing has held up firm. Our view on in terms of the work from home risk and all that, look, in our markets, it's a few things. Long term, our markets are going to continue to grow. And I wake up every day glad to be in the Southeast thrilled with the job growth that we've continued to see throughout the pandemic.
And then when we look at this so our Sunbelt markets, we think, are less susceptible to work from home. And then when you look at this specific portfolio, just the nature of the customer base, we believe is less susceptible to work from home risk. And I think that came out, it was very evident in the customer interviews we did. We did an inordinate amount of customer interviews, not only the big customers, but went all the way down to the small customers so we could get a representative sample across the portfolio and industry wide. And what we've seen is the power of the workplace has in many ways been reinforced during the pandemic and that's what we heard on the customer interviews and that's also what we're hearing, Michael, with our existing customers and our existing portfolio.
So we feel very comfortable with that. Then if you layer on just the quality of these assets, one thing we have seen is a flight to quality. And some of the leasing that's gotten done in this portfolio during the pandemic has been fantastic and it just represents the type of assets we want to own long term.
Great. And then lastly, if I may, I noticed at the end of your press release, you mentioned $250,000,000 that could be 1031 eligible. I don't know what you expect for gains or anything on all of the dispositions. But is there any reason to think that you might have gains that necessitate a dividend or anything like that?
Hey, Michael, it's Brendan. It's possible. It depends on how pricing plays out, timing plays out, tax strategies, all that kind of stuff that's there. So we did factor a possibility of that in those financial projections that are in there. But I think that's to be determined and would be down the line and likely would be a result of the sales that we expect to occur in the first quarter in the first half of twenty twenty two.
2. We have a follow-up from Aldis Rodriguez with Bank of
Elvis, it's Mark. No, no plans there. Obviously, the make calls are prohibited. These are life insurance mortgages. So the prepayment penalty on those would be fairly steep.
So we don't anticipate that and haven't factored that in any of our numbers.
Are you able to share what those prepayment penalties would be or since you're not even contemplating, you're not going to share?
Yes, probably not. I mean these are long dated. I mean if you look at the maturities on a lot of them, they're fairly far out. So you can just assume I got 28, 29, some in the 30s in terms of when they mature. So the math is just prohibitive.
Thanks, Mark. I appreciate it.
You're welcome. Gentlemen, there are no further questions at this time. Please continue with your presentation or closing remarks.
Thank you, operator, and thank you everybody for dialing in. As always, please feel free to call if you have any follow-up questions you have. Also, as a reminder, the press release has an active link to the IR deck that may be helpful as well. And we look to speaking with everyone on the quarterly earnings call next week. Thanks again.
That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day everyone.