Good morning, welcome to the Highwoods Properties conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question and answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded October 24th, 2018. I will now turn the conference over to Mr. Brendan Maiorana. Please go ahead, Mr. Brendan Maiorana.
Thank you operator, good morning. Joining me on the call this morning are Ed Fritsch, President and Chief Executive Officer, Ted Klinck, Chief Operating and Investment Officer, and Mark Mulhern, Chief Financial Officer. As is our custom, today's prepared remarks have been posted on the web. If any of you have not received yesterday's earnings release or supplemental, they're both available on the investors section of our website at highwoods.com. On today's call, our review will include non-GAAP measures such as FFO, NOI, and EBITDARE. Also, the release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Forward-looking statements made during today's call are subject to risks and uncertainties, which are discussed at length in our press releases 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. I'll now turn the call to Ed.
Thank you, Brendan, good morning, everyone. While interest rates have increased and REIT stock prices have contracted, economic indicators remain sound, and fundamentals in our business remain healthy, with rising rents and steady demand from existing customers and new prospects. As you know, we've worked hard to have built a fortress-like balance sheet. While lowering leverage has modestly reduced near-term earnings growth, we have arrows in our quiver to fund our development pipeline without meaningfully impacting our balance sheet metrics or triggering a prerequisite to issue additional shares. Turning to the third quarter, we delivered FFO of $0.86 per share and leased 884,000 sq ft of second-gen office space, including 278,000 sq ft of relets. In addition to solid leasing volume, we also posted strong leasing metrics. In the third quarter, we garnered GAAP rent spreads of plus 18.5% and cash rent spreads of plus 3.2%.
Net effective rents on leases signed in the quarter were roughly in line with our recent five-quarter average. Furthermore, in five years' time, we've increased net effective rents by more than 25%. Given our strong leasing metrics, in-place cash rents are up 4.9% compared to a year ago. As anticipated, with Fidelity's known move-out of 178,000 square feet from the 11000 Weston Parkway in our Raleigh division, our occupancy declined 50 basis points to 91.3%. Excluding this move-out, occupancy would've increased 10 basis points. As reflected in our outlook, we expect occupancy to improve by year-end. We continued to generate growth with our development program. Since our last earnings call, we've notched over 115,000 square feet of first-gen leasing, which represents more than half of the remaining spec space in our development pipeline.
The strongest move in the quarter was at Virginia Springs I in Nashville, where we're now 100% pre-leased, up from 38% last quarter. This strong leasing has accelerated this development project's projected stabilization date by six whole quarters ahead of the original pro forma, from the third quarter of 2020 to the first quarter of 2019. Similarly, given our strong demand, we fully anticipate accelerating the stabilization of 751 Corporate Center in Raleigh six or seven quarters ahead of our original pro forma. We placed two development projects in service representing a total investment of $67 million and encompassing 223,000 square feet. First, our $29 million, 87,000 square foot, 100% leased, build-to-suit headquarters and ambulatory service center for Virginia Urology in Richmond. Second, Seven Springs II in Nashville, a $38 million 136,000 square foot project that is 74% leased.
After placing these two projects in service, our development pipeline is now $658 million and 96% pre-leased. This pipeline will provide meaningful cash flow as it delivers over the next few years. As a reminder, we have $190 million of 100% pre-leased development delivering in 2019. These projects are Virginia Springs I in Nashville, which I mentioned, will now be delivered and placed in service in the first quarter of 2019. Our third building at MetLife Global Technology Campus in Raleigh, which is on track to deliver in the second quarter of 2019. Mars Petcare's U.S. headquarters in Nashville, which is scheduled to deliver and be placed in service in the third quarter of 2019. With regard to construction costs, we continue to see them rise at approximately one-half a percent per month. In line with the clip we've been experiencing over the past few years.
As you know, we are largely insulated from cost increases in our current development pipeline, given our build-to-suit projects are open book, and we have GMP contracts in place for our multi-customer development projects. During the past several years, demand for new space has remained strong despite higher rents. In addition, we continue to have conversations with a number of sizable pre-lease prospects across several potential development projects. This sustained level of interest leads us to believe the depth of demand should remain attractive as construction costs and rents continue to rise. As a reminder, our initial 2018 development announcement outlook was $100 million-$350 million. With our $285 million Asurion build-to-suit announcement, we surpassed our original midpoint by $60 million. Turning to building dispositions, our current 2018 outlook is $80 million-$120 million, with $31 million closed thus far.
We continue to expect a number of non-core asset sales to occur before year-end. We've kept our acquisition outlook unchanged at $0-$200 million. For the few assets that have been in the market, pricing for BBD-located Class A office properties remains highly competitive, with cap rates in the mid-fives to low sixes. We continue to evaluate on and off-market opportunities with a commitment to prudent investing. In summary, strong leasing activity in our operating portfolio and continued focus on disciplined capital recycling, combined with carefully managed operating expenses, a strong balance sheet, and a very highly pre-leased development pipeline, sets the table for growth in our cash flow and NAV over the next several years. Ted?
Thanks, Ed, and good morning. We continue to see strong demand for our well-located BBD products. We've already made very good progress on our 2019 expirations. From the list of five 2019 expirations greater than 100,000 square feet, we've taken care of three. UMA and AT&T through renewals, and INC by selling Highwoods Tower II at attractive terms to a user. This leaves the FAA and T-Mobile. We're confident in the probability the FAA will renew its 100,000 square foot lease given its location and their sole occupancy in the building. Regarding T-Mobile, they're not prepared to make a decision yet, and their 116,000 square foot lease doesn't expire until the end of November 2019. We're paying attention to supply levels across our footprint.
While there has been a modest increase in development activity, supply remains below prior peak levels, net absorption has been healthy, which has broadly enabled the markets to remain at equilibrium. I'll touch more on Nashville and Raleigh, where development has been more notable, when I turn to the market overviews. Solid fundamentals underscore that strong market demographics continue to appeal to businesses seeking to relocate to our footprint. Now turning to our quarterly stats. We leased 884,000 square feet of second-gen office space, including 278,000 square feet of new leases. The new deal volume was approximately 30% higher than our prior five-quarter average, while GAAP rent spreads were robust at 18.5%, and cash rent spreads were healthy at positive 3.2%.
Evidence of our strong leasing performance working its way into the portfolio can be observed by our average in-place cash rents at quarter end, which were 4.9% higher than a year ago. Our third quarter same-property cash NOI was positive 1.4%, despite lower average occupancy compared to last year. The decline in occupancy was more than offset by contributions from annual rent escalators and leases commencing with higher cash rents. Our updated year-end occupancy outlook is 91.5%-92%. This range implies a midpoint of 91.75%, down 25 basis points from the midpoint of our original outlook. The decline in the midpoint is almost solely attributable to the unforeseen bankruptcy of a 62,000 square foot industrial user in Greensboro. At the end of the quarter, our industrial portfolio was 95.5% occupied, so we feel good about our ability to backfill this block.
We anticipate occupancy improving in the fourth quarter, driven largely by signed leases that are scheduled to commence before year-end. Now to our markets. The Atlanta market's net absorption in the third quarter was 175,000 sq ft, as reported by CBRE. This result is particularly strong considering two high-profile move-outs. State Farm vacated 185,000 sq ft in Central Perimeter as they continue their consolidation into their owned campus. AT&T vacated 300,000 sq ft in Midtown and Buckhead. We do not believe any of this space is competitive to our nearly two-million-square-foot Buckhead portfolio. During the quarter, there was 2.2 million sq ft of office under construction across Atlanta, or approximately 1.6% of stock. Midtown accounted for more than half of the development, while nothing was underway at the end of the quarter in Buckhead.
We signed 109,000 sq ft of second-gen leases during the quarter, with strong GAAP rent spreads of 29.5% and a healthy average term of 7.6 years. The quarter included meaningful progress in our Buckhead portfolio. Half of the 109,000 sq ft were relets signed in Buckhead. We've agreed to terms for an additional 86,000 sq ft. We look forward to executing those deals before year-end. Raleigh saw 162,000 sq ft of positive Class A net absorption during the quarter, as reported by Avison Young. This takes the year-to-date figure to positive 710,000 sq ft, while Class A asking rates have increased 5% year-over-year. We estimate there are 3 million sq ft of office under construction in Raleigh, or 4.5% of total stock. We're narrowing that perspective to our competitive set. The percentage of new supply is less than 2% of stock and is approximately 50% pre-leased.
We signed 233,000 sq ft of second-gen leases during the third quarter, with a weighted average term of 7.5 years. This includes the 105,000 sq ft AT&T renewal I mentioned earlier. GAAP rent spreads were a solid 17.4%. We're pleased to see continued strong demand for first and second-gen space in Raleigh. Lastly, as reported by CBRE, Nashville posted positive net absorption of 151,000 sq ft during the quarter and 460,000 sq ft year-to-date. We're tracking a little over 3 million sq ft under construction, which is roughly 30% pre-leased. Approximately 70% of this total is in the urban submarkets, where we have 1.6 million sq ft in our operating and development portfolio, but we have essentially no vacancy or any meaningful lease expirations until 2025. The remaining amount under construction is spread out from Brentwood to Cool Springs.
We continue to feel good about our national portfolio, with our ability to maintain strong occupancy and capture improving rents. We ended the quarter with occupancy of 92.7% across our 4.2 million sq ft operating portfolio. We signed 78,000 sq ft of second-gen leases at GAAP rent spreads of 21.9% during the quarter. In conclusion, our strong leasing results and current level of activity indicate that demand remains healthy. Consistent net absorption across the broader markets has kept occupancy levels steady as new supply delivers. Continued demand for our well-located BBD product keeps us upbeat that we'll be able to continue reducing future expiration risk while leasing up pockets of vacancy. Mark?
Thanks, Ted. In the third quarter, we delivered net income of $33.2 million, or $0.32 per share, and FFO of $91.6 million or $0.86 per share. The quarter was clean other than the accelerated $1.3 million rent payment from Fidelity at 11000 Weston in our Raleigh division, which was their normal quarterly rent plus half a million for their October and November rent. Rolling forward from second quarter FFO of $0.87 per share, the major change was the final recognition of the restoration fee from Fidelity in the second quarter of $1.9 million. This was partially offset by their aforementioned extra two months of rent recorded in the third quarter. We saw the normal seasonal increase in utility costs in the third quarter. This was partially offset by lower repair and maintenance expense.
We reported same-property cash NOI growth of 1.4%, with average occupancy 200 basis points lower compared to last year. Included in same-property growth is the $1.3 million accelerated rent payment from Fidelity. This is classified as a termination fee in the press release and in the table on page four in our supplemental package. As you know, we typically exclude termination fees from our calculation of same-property NOI growth. Because the payment was to satisfy their full original obligation under the lease, it was appropriate to include their accelerated payment in same-property NOI. Our same-property NOI growth in 2018 does not include recognition of their restoration fee. Eliminating the extra two months of rent received from Fidelity in the third quarter and adjusting for their impact on our reported occupancy, same-property NOI would have increased 0.9%, with average occupancy down 140 basis points.
Higher same-property cash NOI was driven by healthy annual bumps on nearly all leases and solid growth on second-gen leasing, partially offset by higher straight-line rent. Turning to our balance sheet, we ended the quarter with leverage of 35.5% and net debt to EBITDA of 4.77 times. We haven't issued any shares on the ATM since the second quarter last year. We are committed to grow within our target debt to EBITDA operating range of four and a half to five and a half times, and have the flexibility to fund the remaining $325 million on our current development pipeline, without the prerequisite of issuing shares or selling assets. As we mentioned last quarter, we obtained $150 million of forward-starting swaps that lock the underlying 10-year Treasury at 2.905% in advance of a potential financing before July 2019.
We don't have any debt maturities until our $225 million term loan matures in June of 2020. As a reminder, the 1.68% LIBOR hedge on that term loan expires in January 2019. Other than this term loan, we have no debt maturities until 2021, and our maturity schedule is well-laddered. As Ed mentioned, we updated our FFO outlook to $3.42 to $3.45 per share. At the midpoint, this is $0.015 above our previous outlook and $0.025 above our original outlook. We also updated our same property cash NOI outlook to +0.8% to 1.2%. Last quarter, I mentioned we expected to trend towards the low end of our original outlook of +1% to +2%.
The reduction is primarily due to several sizable renewals signed even earlier than we hoped that have a free rent component and were not included in our original outlook. As you've seen in our revised outlook, our straight-line rent forecast increased $6 million at the midpoint compared to our original outlook, mostly relating to our same property pool. Taking the $2.58 a share of FFO that we've reported year to date, our imputed outlook for the fourth quarter is $0.84-$0.87 per share. In the interim, there are some items I would like to highlight. First, as Ed mentioned, we are scheduled to deliver $195 million of 100% pre-leased development over the course of 2019.
We estimate the 2019 FFO accretion inclusive of the burn-off of capitalized interest and reflective of the staged takedown of MetLife's third building will be approximately $0.04-$0.05 per share. Second, I mentioned earlier the potential for a fixed-rate debt financing prior to July 2019. Given the maturity of the 1.68% LIBOR hedge in January 2019, we would likely use the proceeds to refinance our $225 million bank term loan and reduce our line of credit balance. With the Treasury lock in place and the U.S. 10-Year hovering in the low threes, the all-in interest rate on a new debt financing would likely be in the mid-fours. Under this scenario, the full-year impact of such a refinancing would be somewhere around $0.05 per share compared to our fourth quarter 2018 run rate. Third, we currently have a little over $500 million of floating rate debt.
While this is modest relative to our overall asset base, any increase in LIBOR would drive our interest expense higher. Last, like other REITs with in-house leasing teams, starting in 2019, we will be required under GAAP to expense certain leasing-related costs for non-commissioned employees. Based on 2018 projections and prior year actuals, we estimate the annual FFO dilution from this accounting change in 2019 will be approximately $2.5 million or $0.025 per share and will appear in G&A. Looking forward, as we've signaled the past few years, our free cash flow continues to strengthen, and we expect this to continue with the delivery of our highly pre-leased $658 million development pipeline. While the timing will impact our cash flow in any given quarter, we feel very good about the long-term cash flow trajectory for the company.
Operator, we are now ready for your questions.
Thank you. Ladies and gentlemen, if you would like to register for a question at this time, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and would like to withdraw your registration, please press the one followed by the three. If you're using a speakerphone, please lift your handset before entering your request. Once again, ladies and gentlemen, to register for a question, please press the one followed by the four on your telephone. One moment please for the first question. Our first question is from the line of Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.
Great. Thanks, and good morning. I was hoping you guys can give more specific details just on the largest vacant blocks you're trying to lease, in Buckhead, FBI Atlanta, Fidelity, FCI, and any others I might be missing.
Sure, Jamie, I don't think you missed any. Just take them in the order that you gave them. In Buckhead, we were a third relet on that on our last call, and that's how we sit at the end of third quarter. Two-thirds of that will be relet. It's now inked by the end of the year. We've made very good progress on that since our last call. We've also made very good progress on SCI. It was 76% at last report, and we've leased an additional 20%, we're now 96% relet on that. At FBI, we're 32% relet. We have another 6% that is a strong prospect, that would put us at 38%. As you know, we undertook some heavy Highwoodtizing there, and that FBI had been in the space, and it's a multi-customer building, since 1992.
That Highwoodtizing now is 90+% complete. The building is pretty well cleaned up. We're punching it out now and be commissioned next month, we'll be in good shape there for showings. 11000 Weston, where Fidelity vacated early, but as you know, paid rent through November of 2018. We are also Highwoodtizing that building, where we received just shy of $5 million from them in restoration fees. It's a well-positioned building right beside the MetLife Global Technology Campus. We're repositioning all the mechanical, roof, parking lot, et cetera, and that will be commissioned end of this month, early next month. We have prospects for that building that we've done showings for from anywhere from 25%-100% of the building.
Okay. Thank you.
Sure.
I guess, Mark, your thoughts on the big movers in 2019 were helpful, but I guess when we think about it from a same-store perspective, I thought this was a pretty confusing same-store quarter. Can you just help us think through the drivers of same-store growth for next year or internal growth?
Yeah, Jamie.
A lot of the things you talked about were more external in investment.
Jamie, I'm going to let Brendan do it because he's steeped in the numbers, he's got a good explanation for how that all hangs together.
Good morning, Jamie. You're right, it is kind of a confusing quarter from the numbers for same-store in the third quarter. I think if we look at the overall year-to-date numbers through the nine months, we adjust for Fidelity Investments in terms of the extra couple of months that we got year-to-date, adjust them out of kind of the revenue and out of the occupancy impact. Let's also just adjust for the straight-line headwinds that we're encountering in 2018. What we'd find is that year-to-date, our cash NOI growth would be up about 1.3%, with occupancy down about 1.2%. I think if we didn't have the occupancy headwinds, I think you could see that cash NOI in 2018 would be up, call it in the mid 2s.
I think that relationship in terms of what we do with respect to annual bumps across all our leases, where we've been signing cash rents. I think with no occupancy headwind or tailwind, I think that's probably a good long-term guide in terms of how to think about top line. Just with respect to 2019, I don't think we're in position to talk about specifics on occupancy or straight-line rent adjustments or any impact that OpEx might have. We'll do that in February. I think that should give you a good longer-term sense of where trends are happening in the portfolio.
Thank you. That's helpful. Last question from me. Just you had mentioned potential conversations for more build-to-suit. Can you just give more color around those?
We have traditionally said, almost routinely on these calls, that we are in conversation with about a handful of prospects, and where we are in those conversations varies from early introductions to test fits. We are basically pricing well over $300 million worth of development right now, about 775,000 square feet, roughly. It's a protracted process on all of these, as we've witnessed in the past. We feel, given the volume of conversations that we have ongoing with regard to overall demand, that we'll be able to continue to replenish our development pipeline, which today is pretty stout and very well pre-leased.
Okay. Thank you.
Sure. Thanks, Jamie.
Our next question comes from the line of Blaine Heck with Wells Fargo. Please go ahead.
Thanks. Good morning. Ted, you touched on this a little bit in your prepared remarks. I was just reading about the continued wave of speculative office construction in Raleigh, with properties under development being leased up at a solid clip and developers continuing to start new projects. I guess two-part question. Number 1, does any of the newer supply concern you at this point? Is any of it directly competitive with your space downtown, where you might have expirations coming up? Then Number 2, maybe more for Ed, just kind of to play devil's advocate. You guys have done great with your development pipeline this cycle.
Given the strength you've seen in growth and demand, are there any markets you think that you could maybe be leaving some money on the table, not being a little more aggressive in starting projects with lower pre-leasing than you typically have?
I'll take the first part. In terms of Raleigh, as we mentioned, it's about 3 million sq ft or so, that's spread out across six different sub-markets and is approximately 50% pre-leased. That'll get delivered over the next, call it 18-24 months, probably. Drilling down, our competitive set, it's really closer to 1.2 million sq ft, and that's also a little bit more than 50% pre-leased. I think right now, really the new construction is meeting the demand, if you look at the historical absorption in Raleigh. We feel like it's sort of matching up pretty well. In terms of downtown competitive space, there's two buildings in the CBD under construction, both reasonably small buildings, and one's 65% pre-leased or so, the other's about 85%. Not a lot of spec space, nor do we have a lot of expirations downtown in the near term.
Really not overly concerned right now. It seems to be keeping pace with demand.
Blaine, I'll take the second part of that, and thank you for the comment about the development program that we have. I think when we look back at some of the things that we've started and we think about where pre-leasing was on 5000 CentreGreen, GlenLake Five, Riverwood 200, Virginia Springs One, et cetera. There were heavy spec components of those buildings, with Riverwood 200 being the largest. We were less than a third pre-leased when we first announced that building. We're going to meet or beat pro forma stabilization on that. I think we've been well cadenced on how we've balanced buildings that have heavy spec component versus build to suit. I don't know that we've missed dollars of opportunity.
I think that we've been very deliberate about how we've gone about this, and I think that there's no reason to believe that we wouldn't continue to maintain the methodology that we've had in the past, where we can put together a smaller scale development that has some meaningful spec component to a build to suit and be well balanced with how we're managing the risk aspect of that, particularly given how successful we've been on those that have had spec space and us being able to, across the board on average, beat our pro forma stabilization dates.
Great. That's very helpful. Lastly, CapEx per square foot and concessions were a little higher this quarter. Can you guys just talk about any trends you guys are seeing in your markets with respect to TIs and free rent?
Sure. With respect to the quarter for us, we had a significant amount of new leases done, about 30% higher new leasing versus renewals this quarter. I think that's largely what attributed to our slight tick up in CapEx this quarter. I think our payback ratio was still within our historical range. Now having said that, look, I do think there is some pressure on TIs through most of our markets. I think we've done a pretty good job managing that. We pay attention to net effective rents, and if we're going to give an extra bit of TI, we're going to get it back in rent. While there is some pressure on it, I think we've been able to manage it pretty well.
Great. Thanks, guys.
Thanks, Blaine.
Our next question comes from the line of Manny Korchman with Citigroup. Please go ahead.
Hey, guys. Good morning. This is Jill here with Manny. I'm just curious, what are some of the characteristics of the assets you're looking to sell by the end of the year? I know you said it's non-core, but which market type of asset and how you see the market for these assets selling today?
Hey, Jill. It's Ed. We have four buildings that are out in the market that we're working on. They're spread across Atlanta, Tampa, and Orlando. They're all what we define as non-core, which means that they're not in the sweet spot of the BBD where we'd like them to be. We do have very active interest on all of them, and we expect most to close, if not all, before year-end, hence where we have the top end of our guidance. They're very much in keeping with what our dispositions have been over the last several years.
Okay. You've always noted how cautious you'll remain on investing in this lower cap rate environment. What would be the plan for the proceeds? About $70 million to the midpoint, I think, right?
Correct. We would just pay down our line.
Okay. Great. Thanks, guys.
All right. Thanks, Jill.
Ladies and gentlemen, as a reminder, if you would like to register for a question at this time, please press the one followed by the four on your telephone. Our next question comes from the line of Dave Rogers from Baird. Please go ahead.
Yeah. Good morning, guys. I just wanted to follow up on a couple of different comments you made, I think, in your prepared comments and tie it back to kind of development and development spend and get your thoughts. Maybe, Ed, I'll ask you the question directly. I think in Mark's comments, he said you guys wouldn't really be selling substantially more assets, if I got that right. Ed, in your comments, you said you wouldn't sell equity or change the balance sheet. You got $325 million left to spend in development. Then I'll tie in the arrows and the quiver comment you made earlier, Ed. Give me a sense of, are you guys talking maybe some joint venture funding? It hasn't really been your way. Would you consider maybe more market sales versus just kind of non-core?
What's the best way to fund this development, especially if you're going to backfill the pipeline with another $300 million or $400 million as these current properties mature? If that made sense, I'd love your thoughts.
I'll take the first part of that, Dave. I think what we were saying was that in order to fund the remainder of what we have right now, that we could not issue any more stock and stay within our stated comfort range for our debt metrics. Given how much we've funded thus far, how much we have committed on our current development pipeline, that we would be able to do that. In addition, we could take on about another $300 million and still stay within our comfort zone. We were just really testing the limits of that, of how much could we do and still not be out of our long-stated comfort range for our debt metrics. Basically what it comes down to is funding the remainder of our current day commitments plus another $300 million.
Okay. I guess that maybe I'll follow up with that is, what's your comfort level in doing that versus staying at your current leverage or working lower, just kind of given where the environment is and how you see opportunities out there?
Yeah.
I think I'm sorry.
Yeah, Dave, it's Mark. Listen, I think as you know, our balance sheet's in really good shape. Our metrics compare very favorably to peers. We're in a really good spot with respect to kind of the right level of leverage on the balance sheet. We feel like we've got a lot of flexibility. Just to maybe put a finer point out, we didn't say never. I mean, I would still expect kind of a disposition level consistent with what we've done previously. We've been in the $100-ish, $150-ish a year kind of on dispositions. We still think that's probably in the cards going forward. I think we've got a lot of flexibility on the maturity ladder and just an ability to flex up if we need to relative to getting opportunities where we get real value.
Our highly pre-leased development pipeline delivering gives us improved cash flow. We feel like we're in a pretty good spot.
Okay, great. That answered the question. Thank you.
Sure.
Our next question comes from the line of John Guinee with Stifel. Please go ahead.
Great. Okay. Just a very, maybe not very smart question, Mark, when you were going through your FFO, the refinance on the debt, that's a $0.05 hit to FFO, correct?
Correct. If we were to do that's correct.
So you've got-
To get in, John, I'm sorry, I just want to clarify, that's to the kind of the fourth quarter run rate when you think about it. That's how I would compare it on a full year basis.
If I have a $0.04-$0.05 positive on development, $0.05 negative on debt, $0.025 negative on the capitalization shifting to expensing of leasing guys, another $0.02 on G&A natural increase, another $0.02 on the 4Q dispos. We're sort of way underwater before we get to same store NOI. What's same store NOI to the positive?
Again, I'm a little reluctant to give you specifics on 2019. I was trying to give you some things.
Whisper
Some things to think about relative to that. John, we have our usual bumps in all the leases, we'll still have some growth just naturally from the portfolio. I think you made some commentary about the development. We expect that to be a contributor, although, again, it's got some timing element to it as well in terms of when it comes in during the year. By and large, we're just trying to make sure people are calibrated with respect to how they're thinking about the go forward picture for the company.
John, I just wanted to add to that. In addition to the development, those are the development deliveries for 2019 that Mark spoke about. We had development deliveries in 2018 that are not fully stabilized that we expect where we have some additional leases which will commence and where we would project additional leasing to take place and get some NOI on that in 2019. It certainly wasn't a fulsome look with respect to kind of all the drivers of 2019, but I think it was a few things out there just to highlight that are some likely or known moves as you think about rolling from the fourth quarter into what your estimates or your model may suggest for 2019.
If I took that, Brendan, into account, which is essentially the timing on the lease up on 2018 and the timing on 2019, how would that improve FFO? Is that worth a penny or a nickel?
I think it depends a little bit on kind of leasing and things like that, but there's-
Really?
It's within that range, let's call it that.
Okay. Just back of the envelope, it looks to us as if your FAD number is sub 50 on average and your dividend's $0.46. Is that the right way to look at it and you're getting pretty close to dividend to FAD being on at parity, or am I doing bad numbers there?
I don't think you're doing bad numbers necessarily, but I do think some of it's timing relative to the way the CapEx has flowed. You'll see a little higher CapEx in the quarter. I guess Ted referred to some of the leasing we've done. We expect to continue kind of consistent with maybe the last few years of coverage.
Relative to the amount of CAD available after CapEx to fund the dividend. We expect to maintain that range even in the face of the dividends increases we've made in the last couple of years.
Great. Thank you very much.
Sure.
Ladies and gentlemen, as a reminder, to register for a question, please press the one followed by the four on your telephone. Our next question comes from the line of Scott Forrest with State Street Global Advisors. Please go ahead.
Hi. I wanted to go over again the potential supply. You talked about it before, refinancing of debt. Just to be clear, you had talked about the term loan maturing in 2020. You have a LIBOR lock in place until January of next year. You've talked about the Treasury lock. That's separate and apart from that in advance of a potential senior unsecured note financing. I've got those facts right, correct?
You do.
Okay. What we're looking at is potentially before, it looks like your timing for the last couple deals has been sometime in February. I'm not locking you down there at all, but the point is, you would be looking at potentially supply sometime early next year after your LIBOR lock goes away to refi the term loan ahead of its maturity, as well as clean up revolver balances, which you disclosed are about $184 million at quarter end. Is that what you're saying now?
Listen, what we tried to do is lay out the facts. As you know, I think we got a lot of flexibility on timing in what we do here.
Sure.
We really just wanted to lay out the facts that we have the Treasury lock in place. We've got some timing around that. We've also got this term loan that's got a LIBOR hedge that expires. As you properly note, we're spending dollars on the development pipeline as well. That's how I would think about it, just in general, in terms of sources and uses.
Okay. That helps. What you had talked about in terms of your leverage metrics, you like them where they are. Is it fair to assume that they're going to be managed in the current context of what you've reported?
Yeah. I think we've put that 4.5-5.5 debt-to-EBITDA metric out there as a target. We're obviously on the lower end of that at 4.77 at the end of the quarter. We're comfortable there. Again, we've got some flexibility and from timing-wise, those may bounce around a little bit from quarter to quarter. Again, given the dispositions we have, the flexibility we have on the debt side of the balance sheet, we're comfortable in those metrics.
Okay. Thank you.
You're welcome.
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