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 Mr. Brendan Mayerana, Executive Vice President of Finance and Investor Relations.
Please go ahead.
Thank you, operator, and good morning. Joining me on the call this morning are Ed Fritsch, Chief Executive Officer Ted Klink, President Mark Mulhern, Chief Financial Officer and Brian Leary, Chief Operating Officer. As is our custom, we put out a press release last evening, an 8 ks and an investor presentation highlighting our market rotation plan. These are all available on the Investors section of our website at highwoods.com. You may have also seen this morning's release about backfilling another 98,000 square feet at 11,000 Weston, which is now over 80% leased, including a 46,000 square foot lease we announced last month.
Before I turn the call over to Ed, a quick reminder that forward looking statements made during today's call are subject to risks and uncertainties, which are discussed at length in our press release as well as our SEC filings. As you know, actual events and results can differ materially from these forward looking statements. The company does not undertake a duty to update any forward looking statements. Ed?
Thank you, Brendan, and good morning, everyone. Last evening, we announced a market rotation plan to enter Charlotte and exit Greensboro and Memphis. This plan aligns with the strategic plan we deployed in 2,005, which includes owning differentiated office assets in the BBDs of markets with highly attractive demographics, all the while maintaining our strong balance sheet. We are excited to catalyze this rotation with the planned acquisition of Bank of America Tower at Legacy Union in Charlotte's Uptown CBD. Charlotte has been at the top of our new market wish list for a long time, containing many of the characteristics we look for in markets.
It has economic and demographic trends that outperform national averages. It's a mid tier market where we can gain scale and market share and establish Highwoods brand recognition and is well within our current geographic footprint. In addition, Charlotte being in our home state, where we already have deep relationships, we believe we'll be presented with ample opportunities for growth via acquisition and development. Our planned 2 phase exit from Greensboro wasn't an easy decision for us. 1st and foremost, our team of 42 fellow Highwoods coworkers across both markets is second to none.
They've done an exceptional job and have helped drive value for shareholders through winning build to suits, hybridizing our portfolio, providing top shelf service to our customers and driving increased NOI. In addition, we have high quality BBD located properties in both markets that have been extraordinarily well maintained. The total anticipated investment in Bank of America Tower is $436,000,000 Currently, we have $50,000,000 of hard money on deposit towards the purchase of the building with a scheduled closing in November of this year. Initially, we expect to match fund the purchase price of Bank of America Tower by selling a select portfolio of assets in Greensboro and Memphis by mid-twenty 20, which we refer to as Phase 1. As part of Phase 1, we plan to close our division offices in both markets garnering meaningful G and A savings.
Phase 2 is the planned sale of the remaining assets in both cities. We do not have a preset timetable for Phase 2. We believe this market rotation plan is the right move for Highwoods for the following reasons. First, accretion. Upon completion of Phase 1, we anticipate increased cash flows in CAD and be roughly neutral to our current FFO run rate.
There is additional upside with future lease up at Bank of America. 2nd, leverage neutral. After selling Phase 1 properties, we expect our conservative leverage metrics will return to current levels, preserving our dry powder for future growth. Additionally, even though our leverage will temporarily move up following the acquisition of Bank of America Tower and before we begin receiving Phase 1 disposition proceeds, we still expect to operate within our stated comfort range of 4.5 to 5.5 turns debt to EBITDA. 3rd, improved portfolio quality.
We will realize higher in place office rents and portfolio mark to market, and we believe this market rotation will enhance our long term same property NOI growth prospects. 4th, improves property efficiency. We fully expect Greensboro and Memphis when we fully exit Greensboro and Memphis, we will have reduced our number of buildings by 61, a 36% reduction, and we will have reduced our number of leases by over 400, a 20% reduction. Further and perhaps most importantly, we expect our annual leasing and building improvement CapEx spend will be significantly reduced. 5th, simplifies our operations.
The reduced number of properties and customers will also enable us to realize G and A savings on a go forward basis. In addition, monetizing our industrial portfolio, which we believe we can exit on attractive terms, further simplifies our operations. And 6th, enhances our future growth outlook. We believe there will be an opportunity for additional investments in Charlotte. We also now have the benefit of Brian's experience, our newly appointed COO, who lived and worked in Charlotte for the past 5 years.
Before I turn the call over to Mark, I want to memorialize my respect and admiration for our coworkers in Greensboro and Memphis. Ted and I met with all of them yesterday to reveal our plan. Their professional reaction to the news was humbling. Their superb work throughout the years will always be held in the highest regard, and it's been a privilege and an honor to work with them. Now I'll turn the call over to Mark.
Thanks, Ed, and good morning, everyone. I will walk you through the planned timeline. As Ed mentioned, we have deposited $50,000,000 of earnest money for the planned acquisition of Bank of America Tower. The remainder of the total investment, $386,000,000 is not due until closing, which is scheduled for November. We plan to close our offices in Greensboro and Memphis as part of Phase 1.
We will incur severance costs for the Highwoods employees affected by the office closures and had begun accruing these costs in the Q3. The severance and other related costs will impact our 2019 G and A by $3,000,000 to 4,000,000 This was not in our previous FFO outlook published on July 23. In addition, because we will now classify all of our assets in Greensboro and Memphis as non core, we anticipate recording land impairment charges of $2,500,000 to $4,000,000 relating to land held for office development in Greensboro during the Q3. After Phase 1, remaining owned assets in Greensboro and Memphis will be 3rd party managed and leased, which will provide us flexibility around the timing of the Phase 2 sales. Once the Phase 1 asset sales are complete, we will return to our conservative leverage metrics to current levels and we will realize G and A savings.
At this point, we believe our FFO run rate will be roughly unchanged, while we expect accretion to our cash flows and CAD. Said another way, if we hold all other assumptions for the company unchanged and only isolate impacts from the completion of Phase 1 of this market rotation plan, then there should be no meaningful impact to what our FFO would otherwise be. Based on our projected FFO impact associated with Phase 1, we have provided the ingredients ascertain approximate value ranges for assets we will likely sell in Phase 1. The assets in Phase 1 are anticipated to be among the highest tax gain and easiest to underwrite of our assets in Greensboro and Memphis in order to facilitate meeting the 1031 exchange timeline and maximize tax efficiencies. Since the acquisition of Bank of America Tower is planned for November, it will give us until May 2020 to close dispositions and still qualify for 1031 exchanges.
With respect to our planned Phase II dispositions, we believe valuations will be roughly in line with historical pricing on non core properties sold during the past several years. In other words, we believe the monetization of Phase II assets will be very much in line with our normal course noncore disposition program. Turning to the balance sheet. We have several capital sources to initially fund the acquisition of Bank of America Tower. In addition to our planned dispositions, we currently have $450,000,000 of capacity on our credit facility after posting our $50,000,000 deposit and with an accordion feature for an additional $400,000,000 Longer term, we expect to match fund the acquisition with Phase 1 disposition proceeds.
Immediately following the planned acquisition of Bank of America Tower, we expect leverage to be temporarily elevated pending receipt of meaningful disposition proceeds that are expected no later than mid-twenty 20. Even if we funded the acquisition of Bank of America Tower without disposition proceeds, it would not push us above our stated debt to EBITDAre comfort range of 4.5 times to 5.5 times on an apples to apples basis. Upon receipt of the Phase 1 disposition proceeds, our conservative balance sheet metrics will return to current levels, preserving dry powder for future growth. I will now turn the call over to Ted.
Thanks, Mark, and good morning, everyone. We are very excited about our planned acquisition of Bank of America Tower and Legacy Union and our entrance into Charlotte, clearly a bull's eye market. BofA Tower is 841,000 Square Feet and is now being completed. Its targeted LEED Gold building will have an array of amenities, including food and beverage options, a fitness center, conference facilities, a 2,300 square foot lobby video wall. We will own 2 75 parking spaces in the adjoining parking deck and the building has perpetual rights to more than 2,500 additional spaces in the adjacent central parking deck.
This 3 per 1,000 parking ratio positions us to be very competitive. The building is 90% leased with a high quality rent roll, including BofA in 600,000 square feet. Obviously 90% leased, we believe there is upside. The weighted average term is 14.5 years, which provides us excellent cash flow and ballast. Bank of America Tower is well located in the heart of Uptown's growth, serves as a gateway to the dynamic South End District and has direct access to I-two seventy seven.
There has been a recent flurry of activity in this immediate area, including new headquarters for Ally Financial and Honeywell, new offices for Regions Bank and Deloitte, a new Whole Foods and Duke Energy's recently announced build to suit. Finally, Bank of America Tower is 2 blocks from the Lynx Blue Line, Charlotte's 19 mile light rail. On average, Class A full service asking rents in Uptown were $35 per square foot, asking rents of Bank of America Tower and the competitive set of properties are $40 per square foot. According to CBRE, Charlotte has posted 26 consecutive quarters of rent growth for a cumulative increase of 44%, accelerating to 8.6% during the past 12 months. 2019 net absorption has been nearly 1,000,000 square feet through June 30, a record amount for the first half of the year for Charlotte.
As Ed mentioned, it was a difficult decision for us to plan our exit from Greensboro and Memphis, given our 42 long tenured and dedicated teammates. The teams there have done an excellent job over the years and are widely recognized as leaders in their markets. We have high quality portfolios in both markets where there is a demonstrated track record of above market occupancy, consistent NOI, attractive BBD locations in properties that have been well maintained. These include our industrial and MOB properties in Greensboro and our office portfolio in Memphis that is entirely concentrated along the Poplar corridor, the best location in the market. In addition, our Memphis portfolio includes our 2014 build to suit for International Paper's headquarters expansion.
In conclusion, upon completion of Phase 1, we will have entered a high growth market with the opportunity to grow enhanced the overall quality of our already attractive BBD located office portfolio, further bolstered our already strengthening cash flows with roughly no impact to our current FFO run rate returned our conservative balance sheet metrics to current levels and further simplified our business. In other words, our planned market rotation fits squarely within our strategic plan, which continues to guide everything we do and will further strengthen our platform, position us for continued growth and deliver meaningful and sustained returns over the long term for our shareholders. Operator, we're now ready for questions.
Thank Our first question comes from the line of Blake Hecht of Wells Fargo. Please go ahead with your question.
Hey, guys. Good morning. Can you just talk a little bit more about the sales? I guess, what gives you confidence that there's going to be the demand from investors to support those sales? And maybe what's your pricing sensitivity on those sales?
So if you don't get a specific price, would you rethink any of those sales?
Good morning, Blaine. It's Ed. So obviously, we have a pool to pick from and that we've divided into Phase 1 and Phase 2, and we've been a little abstract on what's in each phase. And we're at work right now on getting BOVs on these various assets. And as Mark said in his scripted remarks that we'll focus on those that have the most significant tax gain and are the easiest to run underwrite at the outset.
So as we mentioned, International Paper IV, we recently delivered that Class A building in a build to suit mode, and it's a single customer. So new building, so there's not much to talk about with regard to CapEx needs and due diligence, single lease to underwrite, household name with regard to credit, etcetera. So, we feel those things that we've been able to identify that do have the highest gains and the easiest to underwrite, like IP4 or the industrial portfolio, that there is demand there. The number of unsolicited calls that we've received for both the industrial portfolio, the medical buildings that we own in Greensboro, IP Forks and others, adds to our comfort level on us being able to transact on these at attractive numbers and in the appropriate time when.
Blaine, it's Brendan. So I just I wanted to follow-up on in terms of the pricing sensitivity that you mentioned. So what we know is the NOI in the Phase 1. So let's just say that, that NOI will be out the door upon completion of those sales. So the pricing sensitivity really comes down to a function of how much we get in proceeds and the pay down of debt.
So as we mentioned, we expect to roughly match fund that. Should there be changes to pricing in the sense that it falls a little bit lower or higher than what we expect? We've got to be from a bracket range to be different by, let's call it, roughly a penny a share on annual FFO, a little less than 10% either up or down has an impact of approximately $0.01 per share on an annual basis. So I think that gives you some sense of sensitivity on pricing.
Okay. Yes, that's helpful. Just second question, obviously,
this is
a large transaction that gives you a decent footprint in the Charlotte market. And Ed, you kind of touched on this, but can you talk a little bit more about your plans for growth in the market? Are there other acquisitions that you guys are pursuing at this point? And should we expect more core deals or focus now on value add or development opportunities going forward?
Hi, good morning. It's Ted. Really, it's both. We think certainly we've as you all know, Charlotte has probably been at the top of our list for market entry for a long time. So we're very knowledgeable in the market, the submarkets and all that.
So we fully expect to be able to grow via development as well as some value add acquisitions going forward.
Okay, that's helpful. Last one quickly, how much of the $436,000,000 purchase price was allocated to the parking structure?
Hey Blaine, it's Brendan. So I guess, I mean, there's what we own is 275 parking spots, right? And then we have rights to an additional over 2,500 parking spots at the adjacent garage. So the 275,000,000 isn't a meaningful amount of the 841,000 square foot building footprint. So I'd say that that's not a significant number.
Okay. Thanks guys.
Thank you. Our next question comes from the line of Rob Stevenson from Janney. Please go ahead with your question.
Good morning, guys. Mark or Brendan, any severance or other Memphis Greensboro charges going to leak into 2020 at this point or is it all going to be in the 3rd and 4th quarters of this year?
Yes, Rob, it's Mark. We amortize over the period, so there'll be a little leakage into 2020, maybe 400,000 ish kind of number that will show up in January of 2020 as well. Okay.
And then near term, I understand there's some G and A savings, but are you guys just likely to spend the Memphis, Greensboro, Greensboro G and A on Charlotte going forward? Not obviously right away with just one asset there, but when you get to 2 to 3 years out, I mean,
I guess what I'm asking is the G
and A savings short lived while you ramp up Charlotte and then the Charlotte G and A will wind up pretty much equating to or possibly even exceeding Memphis, Greensboro at some point?
Yes. Hey, Rob, it's Ed. A couple of things. These assets, we have 62 buildings in total across this portfolio. We have 2 division leads.
So obviously, we would only have 1 division lead when we're up and fully running in Charlotte. But I think it's also, as we've always defined, noncore assets. They're heavily people intensive, maintenance intensive and CapEx intensive. And given that the average age of the buildings, the 62 buildings that we'll sell is 20 plus years. We need to think about it in terms of, as an example, we're going from over 73 acres of roofs to 1 acre.
We're going from over well over 100 acres of asphalt to none. So the type of portfolio will be much less people intensive. And so we don't anticipate that we would turn around and be in the same position we are with the amount of G and A we have, maintaining this type of building in a more spread out demographic area of buildings of that vintage.
Okay. And then last one for me. So roughly, call it, 430 or 440 of Phase 1 asset sales. What's the magnitude of what's remaining? Not asking down to the dollar, but incrementally, is it $50,000,000 $100,000,000 $150 $1,000,000 or what's the rough value of all of your Memphis, Greensboro assets at this point or the NOI coming off of those two markets?
You gave the rental the revenue, but not the NOI.
Yes, Rob. So, I don't think we want to disclose kind of value overall, but I think what I would point you to is, either in the 10 ks or the Q, in the segment information, we provide the GAAP NOI by segment. And so if you look at the totality of Memphis and Greensboro, there's about $49,000,000 of GAAP NOI, both for 2018 and kind of that run rate in the Q that we in our Q for the Q2. So you can apply the various cap rates to kind of come out with an estimate of value, but I think that probably gives you a pretty good base to start to ascertain overall value for those 2 divisions. And Rob,
the reason Brendan is being appropriately coy on that, obviously, if we're putting these buildings to market, we'd rather not we have our estimates, of course, and we're getting additional BOVs from brokerage houses, but we'd rather not put the number out there and see where the market posts it.
Okay. Thanks guys. Appreciate it.
Thanks Rob.
Thank you. Our next question comes from the line of Vikram Malhotra from Morgan Stanley. Please go ahead with your question.
Thank you. Could you give a bit
more color on sort of how the Charlotte deal specific deal came about?
And
just maybe clarify for us the in place going in cap rate versus where you see it stabilize?
Sure, Vikram. It's Ted. In terms of how it came about, again, Charlotte has been at the top of our wish list market for several years now. So, we spent a lot of time down there canvassing the market, making sure we understand who owns the buildings, what submarkets we're most attracted to be in. So we've sort of been hanging around the hoop for a long time.
So we had heard this was coming to market and it came to market early in the springtime. So we've been sort of pursuing it since that time. So it was a marketed deal. Certainly, we talked to the developer before it came to market and all that. So it's just been high on our list from the get go and it gave us really getting into this building gave us immediate scale in our top markets.
So, we saw it as an attractive opportunity.
So Vikram, with respect to the going in cap rates, stabilized cap rate question that you asked there, so we provided information in the press release, which I know you saw. So when you look at the $22,900,000 of NOI on a cash basis year 1 adjusting for the free rent and auto rent related credits or the $27,400,000 of GAAP NOI that kind of puts you on a cash basis in the low fives, on a GAAP basis in the low 6s. Ted mentioned that asking rents at Bank of America Tower are around $40 a square foot. We think there's lease up there. So you can figure out kind of how much additional NOI that we would expect to get as we bring this to stabilization.
But we'd say it'd be in the I think on a cash basis in the mid-five mid to high-5s from a stabilized basis depending on how much lease up there is, and then probably a corresponding increase on a GAAP basis as well.
Okay, great. Thank you.
Thank you. Our next question comes from the line of John Guinee from Stifel. Please go ahead with your question.
Great. I have a bunch of really quick ones, which means really quick answers. So you guys like the Carolina Panthers. Do you like the Steelers?
Yes, yes.
Titan. Okay.
The Buck.
All right.
All right. 2nd, just building on Blaine's question, the 2,500 space is perpetual right. Does that mean that you have no economic interest in that parking, but that you have a 500 year right to use the parking?
Correct. Okay. It's less than 500 years, but no economics, yes.
Okay. Is this BofA moving out of Hearst Tower and where the big building up the street where Truist Financial is moving in? Is that the essence of this deal?
Good morning, John. Brian Leary here. It's you're on it. It includes Hearst. It includes Bank of America Plaza and some inbounds from outside of the Charlotte market.
These are all client facing teammates of Bank of America, Merrill Lynch and U. S. Trust.
Okay. Mark, you had you got to remember, we're not as smart. We don't pay as much attention as you do to your company and your financials. Can you give us a little more color as to what you think the run rate is? I'm not sure whether it's $0.86 $0.88 or $0.90 a quarter when you discuss run rate.
And then can you also give a little more color on what a core cap rate is and a non core cap rate is? Because again, we don't keep track of that.
Sure, John. I'm sure Brendan will add to this. But either way I would think about it is obviously we had some anomalies with LSI and that impacted FFO for 2019. So you got to kind of adjust for those. But you're right, we've been kind of running in that.
If you look at what our run rate has been in the quarters, it's kind of in that $0.88 to $0.89 kind of number. And I think obviously going forward, you can make some assumptions about what that is. There is obviously consensus number out there for 'nineteen. We are obviously stepping carefully here because we are not giving guidance for 'nineteen at this point in time, but I think you get the general idea of kind of where the FFO is headed. And then on, I guess, the non core cap rates, I think historically, again, we're not we're being careful here because we've got things out in the market.
But we've sold non core assets here over the last 4 or 5 years, somewhere in the neighborhood of $100,000,000 to $150,000,000 a year. And we've been in the kind of, I would say, in the 7 to 8 range in terms of cap rates on the non core assets that we sold over that period of time.
John, so it's Brendan. So I just I want to be clear in terms of timeline and outlook with the statements that we made around FFO, approximately FFO neutral. So I think what we want to be clear about is there's likely to be noise in the numbers as we get through the completion of Phase 1. So some of that is going to show up in 2019 as we disclosed in the press release last evening with additional one time G and A charges and some land impairment. And then the numbers will be a little bit noisy as there's some mismatch between the planned acquisition, timing of the planned acquisition of BofA Tower relative to those disposition assets.
But I think what we were trying to convey is once we get through that by, let's call it, roughly the middle of 2020, then if we hold all the other assumptions for the company consistent with where they are today, we don't think that that FFO run rate once we get to the completion of Phase 1 should be any different than what it is today. So I hope that kind of clears it up. And if there we can take it offline if you got some really detailed questions about it, but I think that should give you a sense of what we think. So a little bit of noise in the near term, but ultimately once we get past that, we think we're still on that same glide path we were or that we are currently.
Yes, I think the question everybody has really is $49,000,000 of outgoing GAAP NOI and $27,000,000 of income and GAAP NOI, is that 50 basis points dilutive or 200 basis points dilutive? So,
so that there's
Acquisition versus disposition.
Yes. So, the Phase 1 expected dispositions are we would say there's probably more than 50 basis points, but less than 100 between the cap rate for BofA Tower. And then I think as Mark mentioned, the Phase 2 assets are very much in line with the non core dispositions that where we've been transacting over the past couple of years, which is, let's call it, sort of high 7s to low 8s from a cap rate basis. So I think that should give you a pretty good sense. And our view on the Phase 2 is that is very much in line with what we've been doing as a normal course for the company.
So we've generally been selling about $150,000,000 to $150,000,000 to $150,000,000 of non core assets per year. We would expect to continue to do that with the Phase 2 assets being a high proportion of those non core sales once we get completed with Phase 1.
And then the last question is, how does someone come up with how is there a land impairment in the Southeast? Have you been capitalizing a lot of costs into that land? I mean, it seems strange or is it just really tough land?
Yes. So John, we have some land in Greensboro that we had held for office development that you had some costs, historical costs into it that we don't necessarily believe that that's going to be the use for that property. We we have to evaluate that now and that's how we get to the land impairment.
So John, as you know, on all our pieces of development land, we basically have fully designed concepts so that our folks in the divisions have something to present as they meet with chambers of commerce and economic Boards and brokers, etcetera. So we had fully designed plans on those sites. Great.
All right. Hey, thank you very much.
Thanks, John.
Thank you. Our next question comes from the line of Dave Rogers of Baird. Please go ahead with your question.
Yes, good morning guys. Missed the first couple of minutes of the call and I apologize if you addressed it. But as you look over the last couple of years, the number of trophy assets have obviously traded in the Charlotte market, why is now kind of the right time to make the trade? Was it did it have to do with BofA tenancy? How did you view that?
And why is now the right time?
Hey, Dave, it's Ted. Well, as I mentioned earlier on the call, I mean, Charlotte has been at the top of our list for a while. Certainly, we have bid on other assets over the last few years. So, it's not for a lack of effort on our part. So, we've chased other assets.
We didn't get them for one reason or another in terms of just didn't meet our underwriting and return thresholds. So, I think this one, we like the scale of it. We've been watching it get developed. We like the tenancy. We like a lot of the other things we've talked about today.
So, this isn't the only one we chase by any stretch, but we just happen to be successful on this one. And again, it gives us great scale. So that's the other thing we like about it.
I thought I read somewhere that there was some land associated around that particular asset that you acquired. Are there more development you could potentially look at or that could potentially be competitive in the future there?
Sure. There is some remaining land around this building. Obviously, we're not in those deals for the additional land. Honeywell just got announced their corporate headquarters is relocating to a site that's just behind legacy Union. And so what the remaining couple of pads, we don't know the uses yet.
The zoning is pretty flexible. So it could be office, could be hotel, could be apartments. Those still to be determined development on those last couple of pads.
And then maybe for Brendan or Mark, do you guys have 2 separate things. One is the recurring Q and A savings net of closing 2 offices and opening 1. And the second would be, do you have an estimate for recurring CapEx to be caught over the last 12 or 18 months in Greensboro from a second AFFO adjustment perspective?
Yes, Dave, it's Brendan. So I'd say from a G and A perspective, in rough numbers, maybe call it 5% sort of G and A to net G and A savings would be probably a reasonable guidepost of what we would expect associated with the exit of Memphis and Greensboro and entry into Charlotte. In terms of the CapEx savings, so broadly across the portfolio, on a second generation basis, our CapEx spend between leasing CapEx, TIs and leasing commissions and building improvements is approximately 30% of NOI. So if you took 30% on Phase 1, if you take sort of 30% of the exit NOI, and I think we've probably given you enough ingredients to kind of roughly get to those numbers, that's the level of CapEx savings that we would expect. And given that BofA tower is new, it's well leased up, don't expect any meaningful CapEx spend on that for a very extended period of time.
Okay. Thank
you. Thank you. At this present time, there are no additional questions. 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 us with any questions you may have. And then again, also a reminder that the press release has an active link to IR deck that could be helpful as well. Thank you.
That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.