Good morning, and welcome to 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. 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 today, August 3rd, 2016. Now, I would like to turn the conference over to Mr. Ed Fritsch. Please go ahead.
Good morning, and thank you for joining us this morning. Mark is out today with flu-like symptoms, and while he would much rather be here, we would much rather he stay at home, eat chicken soup, and keep his germs to himself. In the interim for Mark, Brendan Maiorana, our newly minted VP of Finance and Investor Relations, will pinch-hit for Mark, and he'll join Ted Klinck and I on the call. I welcome Brendan to our team and to his role as our Vice President of Finance and Investor Relations. As a reminder, he joined us three months ago and comes to us from Wells Fargo, where he spent the last 11 years covering office REITs as a sell-side analyst. We're thrilled to have him on the team as he brings a wealth of information and intellect, and as expected, Brendan has hit the ground running.
The rookie will now lead us off with our standard preliminary comments. Brendan?
Thanks, Ed. Good morning, everyone. I'm excited to be part of the Highwoods management team and to be here on the other side of the table. 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 IR section of our website at highwoods.com. On today's call, our review will include non-GAAP financial measures such as FFO and NOI. The release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Before I turn the call back to Ed, a quick reminder that any forward-looking statements made during today's call are subject to the risks and uncertainties, and these are discussed at length in our annual and quarterly 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 back to Ed.
Thanks, Brendan. There are four main factors we believe underpin our operating results. First is the steady-as-she-goes cadence of slow, yet positive growth of the U.S. economy, which has resulted in an elongated cycle that is currently stable and relatively healthy. Second is the bridle on new competitive office supply. This bridle helps us drive rent growth in our second-generation product and also benefits our development activity, given the lack of an abundance of competing projects. Third is the strength of our balance sheet and access to capital. Our balance sheet is as strong as it's ever been, and we have multiple arrows in the quiver to fund organic and external growth. Fourth, and most importantly, is the quality of our individual markets. Across the board, we are seeing good leasing activity with active showings and solid customer interest.
Positive job metrics and other relevant economic drivers in our markets generally continue to outperform national averages and are resulting in continued steady demand for our well-located BBD product. With this positive backdrop, we leased over 900,000 sq ft of second-generation office space during the second quarter, with very strong GAAP rent growth of positive 15.4%, cash rent growth of positive 3.0%, and an average term of 5.6 years. Compared to last year's second quarter, we grew same-store cash NOI by 4.5%, and same-property average occupancy was up by 60 basis points. We delivered FFO of $0.82 per share during the quarter, thanks in great part to the four key factors I highlighted earlier. As you know from our first quarter earnings release, $230 million of net sales proceeds were placed in escrow on March 1st after the sale of our retail-centric Country Club Plaza assets for $660 million.
Since March 1st, we have invested $9 million to acquire the last remaining raw development parcel in Nashville's Maryland Farms. This parcel can support up to 218,000 sq ft of office. As an aside, we currently own 1.1 million sq ft that is 98.9% occupied in this BBD. We also invested $18.5 million to acquire fee simple title to land underneath EQT Plaza in Pittsburgh. This acquisition eliminates a $1.1 million annual ground lease payment, and we expect to invest another $3.8 million of escrow proceeds to partially fund the $7.7 million planned acquisition of a development site that can support up to 292,000 sq ft of office in CBD Raleigh. This will leave us with just shy of $200 million remaining in escrow with the six-month 1031 exchange window closes on August 26th.
Our preference has been to redeploy all the escrow proceeds to acquire BBD-located assets in our existing markets while staying true to our goal of being disciplined allocators of capital. While we invested $31 million in land, we did not acquire any additional buildings, predominantly because we found pricing to be out of sync with our view of the risk-reward profile of the opportunities available to us during the narrow 1031 window. As a result, our plan is to use the remaining approximately $200 million to pay down debt and fund a future special cash dividend of at least $0.75 per share. Assuming that dividend at $0.75 per share, we will have used the Plaza proceeds to acquire $445 million of BBD-located value-add assets, pay down $130 million of debt, and return $75 million to our shareholders.
This will close the book on the Country Club Plaza sale and the use of proceeds, we obviously continue to seek opportunities to acquire BBD-located assets at prices that offer attractive investment returns and significant future upside. We are essentially maintaining our 2016 outlook for up to $100 million of additional acquisitions. Turning to dispositions, we recently sold two of our four remaining assets in Kansas City. First, we sold one of our two remaining wholly owned office buildings for $14.2 million. Second, subsequent to the quarter end, we closed out yet another joint venture investment, the Plaza West office building, generating $4.1 million of proceeds for our 12.5% share. Today, only 2% of our revenues are generated by joint venture-owned properties. We are comfortable maintaining our disposition outlook for 2016 of $760 million-$860 million.
Year to date, we have sold $695 million of non-core assets, obviously inclusive of the $660 million Plaza sale. With regard to development, our current $482 million, 74% pre-leased office pipeline will provide meaningful NOI upside, cash flow stability, and FFO growth as it stabilizes over the next three years. In addition, we continue to chase development opportunities and are pleased to report that we have agreed upon terms with a new customer for a $30 million, 100% pre-lease build to suit on company-owned land, which we expect to announce in full before the end of this quarter. We remain comfortable with our guidance of $100 million-$200 million of 2016 development announcements. Lastly, turning to FFO, we have tightened our 2016 per share outlook. We raised the lower end by $0.02 from $3.18-$3.20, and we reduced the high end by $0.02 from $3.30-$3.28.
The midpoint of our range continues to be $3.24 per share, representing a 5.2% growth over 2015. A very solid operating performance atop an even strengthened balance sheet. With leverage at 37.5% and with debt to EBITDA ratio of 5.1 turns, we are well-positioned to capitalize on future acquisitions and development opportunities. I turn it over to Ted.
Thanks, Ed, and good morning. As Ed noted, we had solid activity this quarter, signing 907,000 square feet of second-gen office space, which was in line with recent quarterly averages. We continue to see steady activity from our bread-and-butter midsize customer base. As a reminder, our average lease size is approximately 12,000 square feet, and we only have 58 leases for greater than 75,000 square feet. Further, year-over-year asking rents continue to increase across all of our markets. Average in-place cash rental rates across our office portfolio were $23.80 per square foot, 3.7% higher than a year ago. Occupancy was 92.5% as of June 30th, which was down modestly from the end of the first quarter, entirely due to the previously disclosed "known near-term move-outs" at recently acquired assets.
We've reduced the high end of our 2016 year-end occupancy guidance by 30 basis points, with our current forecast of 92.5%-93.2%. Reduction of the top end is attributable to a couple of larger deals we had projected to start late in the year, now being forecast for early 2017. For office leases signed in the second quarter, starting cash rents were up 3% compared to expiring rents, and GAAP rents grew a robust 15.4%. Leasing CapEx was $3.18 per square foot per lease year. Our lease payback ratio, or leasing CapEx over cash term rent, was 14.5% in Q2, which was impacted by a higher proportion of new leases compared to recent quarters. Turning to our markets, we continue to see strong demographics benefiting fundamentals in our BBD locations.
This is driven by a high quality of life, well-educated workforce, a disproportionate share of population growth, and low business tax environment. As an example, a recent study by LinkedIn and Trulia ranked Pittsburgh as the number one city in its Graduate Opportunity Index. In short, there's an attractive and compelling mosaic of reasons which continues to drive businesses to choose to relocate and/or expand in our footprint. As Ed highlighted, development as a whole has been moderate across our markets. Projects under construction account for only 1.1% of existing stock across all of our markets and 1.4% across our top 5 markets. This is approximately half of the prior peak. Construction costs continue to escalate and are north of $400 per square foot in our urban sub-markets, inclusive of land and structured parking.
Despite the positive backdrop of market fundamentals, we don't expect a meaningful uptick in new construction. The outlier to moderate new supply is Nashville, where exceptionally strong market activity spurred new construction. According to CoStar, there's 3.5 million square feet under construction or about 6.5% of existing stock. This level sounds daunting for Nashville, but there are mitigating factors that make us hopeful that strong operating fundamentals will prevail. First, 850,000 square feet or 25% of Nashville's new construction is ours and is 87% leased. Second, the pre-leased rate on Nashville's overall construction pipeline is approximately 70%, and the market is over 95%. Finally, scheduled deliveries are below the rate of recent net absorption. Sticking with Nashville, the market continued to post positive fundamentals during the quarter. The market's unemployment rate is 3%, 190 basis points better than the national average.
There was 205,000 square feet of positive net absorption. Occupancy in our in-service portfolio was 99%, and for leases signed during the quarter, we posted 31% GAAP rent growth. Our Atlanta portfolio was 91.2% occupied at quarter end, which was down 90 basis points from March 31st, entirely attributable to a previously disclosed 58,000 square foot known near-term move-out at Monarch in Buckhead that was factored into our acquisition underwriting. At Monarch, we are now 85% leased, up from 80% upon acquisition, and we are ahead of underwriting on rents and lease up. After backing out known near-term move-outs at Monarch, occupancy in our 1.9 million square foot four-building Buckhead portfolio grew nearly 500 basis points from 86.4% at September 30th last year to 91.2% at June 30th. As hoped, owning four contiguous unencumbered Class A office towers is paying leasing and operating dividends. Rents in Atlanta continue to accelerate.
Year-over-year asking rents are up 10% on average. New speculative construction in Atlanta remains limited, representing only about 1.5% of existing Class A stock. In CBD Pittsburgh, occupancy in our portfolio was steady sequentially from Q1. We expect occupancy to increase meaningfully by year-end, potentially as much as 250 basis points, depending on the exact commencement of certain customers hovering around year-end. Pittsburgh's Class A CBD market is a solid 94% occupied. Asking rents are 5%-7% higher than expiring rents. We continue to see steady rent growth, and we have a list of strong prospects for most of our vacant space. During the quarter, occupancy in our Tampa portfolio increased 60 basis points to 88.9%. We are expecting additional gains in the second half of 2016 that should bring year-end occupancy to 90%.
We are working on backfilling space at Lakeside in Tampa Bay Park and have recently seen an increase in prospect activity. At SunTrust Financial Center in the CBD, our $9.1 million Highwoodtizing efforts are well underway. With regard to leasing, we are ahead of our underwriting assumptions, and we expect to increase occupancy by 700 basis points from acquisition to year-end 2016. In conclusion, steady leasing volumes and the ability to push rents reflect positive momentum in our markets and demand for our well-located CBD office product. Brendan?
Thanks, Ted. As Ed outlined, we delivered net income of $0.32 per share, an 18.5% increase year-over-year, and FFO of $0.82 per share, a 6.5% increase year-over-year. The primary drivers of our solid operational results this quarter were same property cash NOI growth of 4.5% year-over-year due to higher rents and higher average occupancy, contributions from value add acquisitions, particularly the Monarch and SunTrust acquisitions we closed on September 30th, 2015, and highly pre-leased developments coming online. These positive drivers were slightly offset by lost NOI from dispositions, including our retail-dominated Country Club Plaza assets and the impact of issuing 1 million shares of stock through the ATM. Turning to our balance sheet, our quarter-end leverage ratio was 37.5%, and debt to EBITDA was 5.1 times, our strongest thus far.
In late August, we expect to utilize the roughly $200 million of remaining escrow dollars to pay down outstanding amounts on our revolving line of credit. This quarter, we also executed a 67-month unsecured term loan facility with three banks for $150 million at LIBOR plus 110 basis points that comes due in 2022, a year in which we have no other maturities. We expect to begin drawing on that facility in September of this year. We also paid off $43.7 million of 7.5% secured debt, increasing our unencumbered NOI to a very stout 92.8%. We have no remaining debt maturities in 2016.
We continue to fund our active development pipeline, be opportunistic with respect to potential acquisitions, and pay a special cash dividend of at least $0.75 per share, we have multiple options to fund our liquidity needs with operating cash flow, disposition proceeds, debt capacity, and equity issuances. Overall, we have a strong platform to cost effectively fund our business. As Ed mentioned, we've revised our 2016 FFO outlook to $3.20 to $3.28 per share, which is unchanged at the midpoint and represents a 5.2% increase over 2015. There are some moving pieces in our updated guidance range that I will provide some color on. First, we've eliminated the potential for any additional acquisitions from the remaining CCP 1031 proceeds into our range of potential FFO outcomes.
Second, our revised guidance includes dilution from dispositions and acquisition costs from deals that closed since our last earnings call that otherwise reduce FFO by $0.01. Third, our balance sheet outlook has changed. Our leverage is lower, and the guidance for average shares outstanding has moved up slightly, having a near-term dilutive impact to FFO. Fourth and finally, even though our same-store cash NOI guidance is unchanged at 4%-5%, we're driving higher FFO through better than expected performance on our non-same-store pool. We're pleased that our FFO guidance midpoint is unchanged, even with the meaningfully lower leverage and the elimination of additional 1031 funded acquisitions. One final thing to keep in mind regarding our FFO trajectory for the remainder of 2016. Is typical, we expect to have meaningfully higher OpEx from seasonal utility costs and increased repairs and maintenance in the third quarter.
Operator, we are now ready for questions.
Thank you very much. Ladies and gentlemen, if you would like to register a question over the phone lines, please press one four on your telephone keypad. You will hear a three-tone prompt to acknowledge your request. If your question's already been answered and you'd like to withdraw your registration, you may press one three. If you are using a speakerphone, please lift your handset before entering a request. Once again, ladies and gentlemen, for any phone questions, please press one four on your telephone keypads now. One moment please for the first question. Our first question comes in line of James Feldman, Bank of America. Please go ahead.
Thank you. Good morning.
Morning, Jamie.
I guess just starting out, do you guys mind talking about the expirations you do see ahead in 2016 and even 2017, and maybe an update on HCA and how that backfilling is going?
The largest we have is HCA, they have a number of leases with us. The lion's share of it falls in two leases of approximately the same size, about 103,000 sq ft in two different buildings in Nashville. 3322 in the West End, and then Ramparts in Maryland Farms, Brentwood. Both leases expire in January, and the closer we're getting to that expiration, the more activity we've had. We've had some very good showings of late for different pieces and parts of that. Activity is good, and we remain 99% occupied in Nashville. If we were going to get space back, that would be the place to get it.
Beyond that, Jamie, the next largest exposure we have would be in Richmond, where we have a company that's expiring in about 160,000 sq ft, of which we've already relet about 60,000, 65,000 sq ft of that space. That doesn't expire until later in the year in 2017.
Our next question comes in line of Manny Korchman with Citi. Please go ahead.
You guys, good morning.
Good morning.
If we think about the acquisition environment and the fact that you didn't acquire anything, can you just give us more color as to whether it was pricing, quality, geography, something else that prevented you from finding suitable deals out there?
Yes. You, in part, answered your question.
I gave you lots of options.
Thank you. It's a number of things. Obviously, we can only make so much come to market within the 1031 window. That which sellers posted for sale and offering memorandums were published, and then there was a cadre of others that where we approached owners and talked to them about being sellers. Really, one of three things occurred or a multitude of things. It's either their pricing was too high, so the risk-reward profile was out of sync in our perspective of it. Second is that there were certainly in our perception, a fewer total count of bidders, but still very, very capable bidders that were able to write a check for the asset. We didn't find meaningful upside through our typical venues, such as Highwoodtizing, increasing rents, being able to push occupancy, operating synergies, et cetera.
I guess another rationale would be that there may have been some extraneous complexities that we felt would have eroded our return. We did underwrite a number of things, and for those reasons, one or more didn't come together. Of what we looked at, more didn't trade than traded.
Great. Thanks, Ed.
You're welcome.
The next question comes in line of Dave Rodgers with Baird. Please go ahead.
Yep. Maybe two questions, Ed or Ted, you can comment on it. As a follow-up to what Manny had said, I guess, any fundamental concerns that you were seeing, market rent growth, time in terms of getting leases done with customers that maybe made you back off on some deals? I guess it's somewhat related, so I'll throw it into the same question, is with regard to your development guidance. I guess update us on where you stand and how those conversations look as well. You reiterated guidance of $100 million-$200 million in starts and kind of how you expect to come into that range in the second half of the year.
Okay. Ted will take the first half. I'll go second.
Sure, Dave. In terms of just fundamental changes, really, we're not at all. If you look at our fundamentals, I think we feel still steady customer demand in our markets, good tour activity from both existing customer for expansions, potential new customers. Certainly, some markets are stronger than others. We continue to see good, steady customer demand. Again, we spent a lot of time on acquisitions and certainly underwrote a lot. Nothing underlying from a customer demand standpoint.
Dave, on the development side, we didn't change guidance for 2016. We're still $100 million to $200 million. We have the $41 million that's announced, and just as a reminder, these are announcements, not starts. We had in my prepared remarks, I referenced a $30 million build to suit transaction that we have agreed upon terms on. We expect to fully announce before the end of this quarter. That gets us to about $70 million on the $100 million to $200 million. We have a little bit more than a half a dozen proposals out in the market right now. Various projects, various markets of various sizes. They range from, say, $10 million to $90 million. Our typical average is in the $45 million to $50 million, and if you did a simple average of these, it would be about the same.
We feel quite comfortable with the guidance that we have out.
Great. Thank you.
You're welcome.
Our next question comes in line of Tom Lesnick, Capital One Securities. Please go ahead.
Hi, good morning. Thanks for taking my question. It looks like you guys have been replenishing the land bank here a little bit as of late. I guess two parts. One, is there a limit as to the size of the land bank that you're willing to go, and where your comfort range is? I guess second, I noticed there was a half a million dollar acquisition, land acquisition, expense, that's expected to be incurred in 3Q. I was just wondering if you could comment on that at all.
Sure. In reverse order, the half a million, Tom, is just a transfer tax for the parcel that we acquired in Pittsburgh, which was the land underlying EQT Plaza, which we bought in December of 2012. We obviously ended the land lease, so we mitigated $1.1 million of annual land lease payments for the ownership of that land. We'll pay that transfer tax, and that's what you saw. On the other side, with regard to just replenishing the land bank, we've dramatically reduced that over time. If you looked at the trend for the past 10 years or so, the volume of land that we have is significantly small, and it's gone out the door in two conduits. One is we've identified non-core land, and we've sold well over $130 million worth of that. It's probably higher.
Other is land that we've put into service. Most of our development that we have delivered and have underway are on company-owned land. This is just us being opportunistic to bring select parcels back in so that we continue to have the raw material that we want to quote projects when they consider our backyards.
All right, thanks Ed, appreciate it.
You're welcome, Tom.
Our next question comes to the line of Jed Reagan with Green Street Advisors. Please go ahead.
Hey, guys. I guess related to that, what's the game plan at the downtown Raleigh site? How quickly do you think you may break ground there, and could that go forward on a spec basis?
Yeah. Hey, Jed. It's really no different than any other parcel that we own. What we do as just standard operating procedure is, we arm ourselves with conceptual drawings and massing site plans for what we can do on a site. Not all sites are just single footprint developments. Some are your multi-building pads like Glenlake here in Raleigh, for example, where you can put a number of buildings on, or CentreGreen, et cetera. What we do is, with our land inventory, we help prospects and development people who work for the state or the county or the city envision what we would have to offer on that site. We have conceptuals for most of the prime sites that we own. As far as whether or not we would start something, it all depends on what the then current circumstances are.
Not only for that specific geographic location, but for what we have across the entire portfolio. If we have a number of spec projects within the portfolio, we may not start one that might be equally deserving, but just getting to the table later than the others, because we want to keep in check what we have total exposure for the company as a whole. That's how we decide. I think we gave a good rationale, for example, when we started the 5000 CentreGreen building, and that we have all the buildings within CentreGreen are 100% occupied, and then within the Weston PUD, where we have over 1 million sq ft, we're 98%-99% occupied. We explained that we were going to start that building because either we or Brand X were going to capture the expansion of our existing customer base.
The land that we're in pursuit of in Raleigh is no dissimilar from land that we own in downtown Orlando or the land that we own besides SunTrust in downtown Tampa or other places where we've tied up land.
Are you seeing any interest in that CentreGreen project at the moment?
I'm sorry, we what?
Are you seeing some interest in the CentreGreen project, speaking of that?
Yes. We just started scratching the earth there three weeks ago, and we have an LOI out for 20% of the building.
Okay. How is just kind of overall fundamentals in Raleigh, maybe talk a little about the dynamics between urban versus suburban demand in that market, and then how you're feeling about the supply picture there?
Sure. With Raleigh, not dissimilar again to a lot of the mid-tier sized cities within our footprint and elsewhere. The canvas downtown Raleigh is very different than it was 10, 12 years ago. It's really an added sub-market that didn't exist with the same vitality that it has today a dozen years ago or any year prior back to a long time. Certainly there are many people living down Raleigh that weren't there before. The amenity base is infilled nicely. There was a recent announcement of a grocery store that I think that helps define that it is a long-term viability place for people to live. That supports the office side, the downtown market has become part of the menu of choices that users have, but not to the demise of the suburbs.
There are still, obviously, plenty of great locations in the suburbs that users would prefer to be as opposed to being downtown. I think a pinnacle example of that is our conversations with MetLife when they came to town they were considering our area, they ended up locating their nearly half a million square feet out in the suburbs as opposed to downtown. It really comes down to choice, with the vitality and the infrastructure that we have downtown, we just have an additional sub-market to offer prospective users.
Thanks. That's helpful. Then just one more from me. You guys are trading at a pretty healthy premium to NAV these days, it seems like you enjoy a superior cost of capital to a number of your peers on the public and private side. How do you think about that in the context of external growth, does it make you want to be a little bit more aggressive in terms of pursuing new acquisitions or developments?
I think that we want to continue to be the best stewards we can understand all the arrows that are in our quiver leverage them to the best benefit of the shareholder, while still being our traditional conservative selves. That's how we came to the conclusion with these dollars that remain from the unused escrowed proceeds from CCP. I think that, as an example, our being able to use the ATM to fund our development pipeline has been a great instrument for us, to be able to do it at these numbers has been a very good thing for the company, particularly given with the volume of pre-lease we have and the girth of the overall development pipeline and the prospects that we have to continue to grow that.
I also think that this has enabled us to further unencumber our existing portfolio to have basically 93% of our NOI unencumbered gives us significant flexibility as well.
Great. Makes sense. Thank you.
Thanks, Jed.
Ladies and gentlemen, as a reminder, if you'd like to register a question, please press one four on your telephone keypads, 4 if you'd like to register a question. Our next question comes the line of Kyle McGrady with Stifel. Please go ahead.
Oh, great. Thank you. John Guinee here. First, I guess, Brendan, welcome aboard officially. If you were sitting in our seat, what really difficult question would you come up with and recommend?
Thanks, John. I'm sure that you'll easily come up with some difficult questions, I think it was a pretty straightforward quarter, there's not a lot of stuff that you wouldn't have seen last night in the release.
All right. Okay. This is a kind of a good job. Big picture question. Average lease, 12,000 sq ft, only 58 leases over 75,000 sq ft. Do you have a preference, or can you talk through the pluses and minuses for being in the large lease corporate leasing business and the costs associated with re-tenanting those, but the benefits due to good credit, et cetera? Versus being in the sub 5,000 sq ft lease, mostly paint and carpet versus moving demising walls, et cetera. Do you have a preference as you're looking at assets and as you're running your business?
John, I'll start with that. First is that we do have a preference, we have a preference that there's a good diversification and mix of that. Not dissimilar to the fact that we don't have any customer that represents more than 2%, 2.5% of revenues other than the federal government. We don't have a market that represents more than 19%, 20% of revenues. We have a diversification. We also look at it by SIC code, we don't have an overweighting in that either. The 58 leases that represent 75,000 sq ft or more are about a third, less than a third, about 30% of our total annualized revenues. We think that it's good to have a mix, that's what we look at. When we looked at, I'll use the MetLife example again.
When we looked at that, we looked at their credit, Fortune 500, all the aspects of the company, and that they've been around since the Earth cooled, et cetera. We thought it was a very good thing to add into our corporate mix. Not being overexposed to any one customer is an important aspect of what we look at. In fact, we asked the board years ago to edict to us that if we ever have a customer that would represent more than 3% of revenues, that we would present that with a comprehensive business case as to why we would pursue that lease or lease instruments.
How about the actual cost to re-lease when you're dealing with big multi-floor tenants versus the cost of sort of sub 5,000 sq ft local businesses and the ability to push rents in one versus the other?
I think it all depends on the circumstances of the day, right? If we had that big exposure in March of 2009, it would be different, we feel, than if we had that exposure in August of 2016. What we try to do is we try to do the best deal we can do that day. It's no different than when you borrow money from the bank or issue bonds, et cetera. You do what you need to do with the arrows that are available to you, and you try to do the best you can with the circumstances of the day.
When we do a lease, we do, and I think we've shown to you our in-house built software tool that we call Lease Link, which enables our in-house brokers and division heads and folks here in Raleigh to look real time at each lease proposal and how it compares to budget. We look at NER, we look at NPV, we look at % of budget, we look at payback, et cetera. We do that on every deal. Every deal has a completed Lease Link, and we evaluate those. On a more global perspective, we also maintain an asset report card where we do routine updates of the Argus run on all of our assets. Of course, that helps us decide what's core and non-core.
There's a comprehensive report card that we maintain through the routine updates of the Argus run, as well as the hard look that we take at each deal, whether it be for 100,000 sq ft or 2,000 sq ft through our Lease Link process.
Great. Thank you.
Thanks, John.
Our next question comes from the line of James Feldman, Bank of America. Please go ahead.
Thanks. Just a quick follow-up. You guys have talked about rent growth across your markets continuing. Can you just give us maybe some numbers around the % growth you're seeing year-over-year? Is that truly across all markets? Just trying to get a sense of where you think we are in this cycle.
Yeah, Jamie. Look, I think we're seeing it across all markets. It varies by market. Certainly our stronger markets, Nashville, Atlanta, Raleigh, are seeing the highest rent growth. I'd say, year-over-year, it's certainly 5-plus. Atlanta's on the very high end of that, along with Nashville. The next grouping, most of our other markets, I'd tell you, are probably in that 2%-5% range. We're seeing it across all markets, just varies. One thing that's helping drive it, obviously, and we mentioned in our remarks, is just a lack of new construction. There's not a lot of spaces for a new product for customers to go to, it's enabling existing landlords to push rents.
Okay. It's probably a broad question, where do you think you are in construction costs versus rents that would justify new construction? I mean, is there still material upside in all these markets?
Varies by market again. Certainly Nashville, I think we're seeing we're at cost-justified rents for the most part. Atlanta, you're getting there for the trophy assets. After that, we're still probably, most of our other markets, we're still anywhere from 10% to, I'd say, 25% below a cost-justified rent for high quality new construction versus high quality existing product.
Okay. In this quarter, I know from the broker reports that Atlanta had a slower leasing quarter. Are you seeing any leasing slowdown? Or maybe these are just quarterly pockets of slowing?
Not really. I think there's always a summer slowdown. There's a lot of guys on vacation and all that, and some
Some of the brokers and all that. We haven't seen it. I think activity remains good. Showings are still active. We continue to get good leasing activity in Buckhead. No, we still feel good about Atlanta.
Okay. Nice job, Brendan. Thanks, everyone.
Thanks. Thanks, Jamie.
The next question comes to the line of Manny Korchman, Citi. Please go ahead.
Hey, guys. Just one quick follow-up. If we think about Nashville and your prepared remarks about both upcoming supply, potential big vacates, do the vacates sort of play into the prepared remarks? Are you already assuming those are vacates, or is there still the chance that they renew? Just how much more sort of risk can that market take before rents give up a little bit?
Yeah. No, Manny, the vacate of size that we have that we addressed is HCA. They have a build to suit underway. It appears from casual observance of it that it should be delivered on time. They're definitely moving out. That's what we said, the closer we get to their expiration in January of 2017, the more activity you'll see there.
Good. Thanks.
Sure.
Our last question comes in the line of Tom Lesnick, Capital One Securities. Please go ahead.
Hey, just one follow-up from me. Just curious, now that you guys have acquired the land from underneath EQT, what was the total going-in yield on that asset, inclusive of the land? Do you know that offhand?
Well, yeah, mid fives. We paid $18.5 million, and our annual rental rate was $1.1 million currently.
Okay. Appreciate that. I'll follow up offline. Thanks.
Gentlemen, there are no other questions at the moment.
Okay. Thank you, everyone. As always, please don't hesitate to give us a call if you have any questions. Thank you.
Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation. Have a great rest of the day, everyone. You may disconnect your line.