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TIER REIT Inc  (NYSE:TIER)
Q4 2018 Earnings Conference Call
Feb. 12, 2019, 11:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Greetings, and welcome to the TIER REIT Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Telisa Schelin. Thank you. You may begin.

Telisa Webb Schelin -- Chief Legal Officer, Executive Vice President and Secretary

Welcome to the TIER REIT Fourth Quarter 2018 Earnings Call. I'm Telisa Schelin, Chief Legal Officer for the Company.

Before we begin, please note that statements made during this call that are not historical may be deemed forward-looking statements that are subject to risk and uncertainties, which are discussed at length in our annual and quarterly SEC filings. Future events and actual results, financial or otherwise, may differ materially from these forward-looking statements, which we assume no obligation to update or revise as a result of new information, future events or otherwise.

Additionally, we may refer to certain non-GAAP financial measures. You can find a reconciliation of these to the most directly comparable GAAP numbers in our earnings release or our quarterly supplemental package on the Investor Relations page of our website at tierreit.com.

I'll now turn the call over to Scott Fordham, the Chief Executive Officer of TIER REIT.

Scott W. Fordham -- Chief Executive Officer and Director

Thank you, Telisa. Good morning and welcome to our fourth quarter 2018 earnings conference call. In addition to Telisa, with me in the room today are Dallas Lucas, President and Chief Operating Officer; Bill Reister, Chief Investment Officer; and Jim Sharp, Chief Financial Officer, along with other members of our management team.

To begin, I am pleased with our 2018 results as well as our team's accomplishments during the year, our business strategy for 2018 included the following four key objectives; one, optimize value in select investments and redeploy capital to create additional value; two, expand our active development pipeline; three, extend the portfolio's weighted average in-place lease term, and increase occupancy in the Houston market to drive sustained cash flow growth; and four, reduce leverage and extend our weighted average debt maturities.

We accomplished our 2018 objectives, most notably we sourced capital through the disposition of five non-core properties and issued approximately $138 million of equity under our ATM programs. Sourcing this capital allowed us to reduce our leverage and increase our liquidity, supporting our ability to create significant value through our development program. We selectively acquired strategic assets, including Domain Point 1 and 2 and the buyout of our partner's interest in Domain 8, which expanded our redevelopment opportunities within the domain by approximately 1 million square feet, simplified our structure by exiting a joint venture and gave us direct access to fast growing tenants who have expanded further with us in the Domain.

We delivered our Third + Shoal and Domain 11 development projects to tenants for space build out. These buildings comprise approximately 700,000 square feet in total and are 99% leased overall with a 100% of the office space leased. We furthered our development program by commencing construction of two additional projects in Austin, including Domain 12 and Domain 10. In May of last year, we commenced construction of our 320,000 square foot Domain 12 project and subsequently announced leasing for the entirety of the building to an expanding Fortune 100 Domain tenant.

Domain 12 is scheduled to deliver in the fourth quarter of 2019. In October, we commenced construction of our 300,000 square foot domain 10 project, representing our fifth development in Austin in approximately 36 months. In yesterday's release, we announced that the project, which is scheduled to deliver in the second quarter of 2020, is currently 60% leased, including 145,000 square feet leased to another expanding Fortune 100 Domain tenant.

We estimate our stabilized cash yield on cost for Domain 10 and Domain 12 will each approximate 9%. On our five Austin developments completed or in process, assuming a fully stabilized Domain 10, we estimate that we will have created approximately $285 million of value or in excess of $5 per share over the last three years on these developments.

As we advance our strategy into 2019 and thereafter, we are focused on further enhancing our competitive position with the goal of increasing our scale, reducing leverage, delivering additional cash flow growth and beginning to rebalance our portfolio concentration across our target growth markets.

With respect to the specific path of growth or pace of growth, we will be thoughtful and proceed in a manner that reinforces our focused investment strategy of owning and operating best-in-class office properties within Tier 1 submarkets in our target markets.

We believe that our opportunity to create additional value through development provides us with terrific momentum for continued growth. We have established four key objectives for our 2019 business strategy. First, we will seek to generate up to approximately $225 million in proceeds from planned dispositions during the year. Thus far, we have sold Eldridge Place, further reducing our presence in Houston and exposure to Energy tenants at a time when we believe this capital could be more efficiently allocated to create additional value through our build-to-core development program.

Additionally, as a result of significant capital looking for high quality properties in Austin, Texas, this week our Third + Shoal joint venture began marketing the property for sale. We believe the sale of the property would allow us to capitalize on the value created and use this attractive source of capital to fund expansion of our development pipeline, reduce leverage or rebalance the portfolio across our target markets. Second, we will review opportunities that complement our value creation through development with strategic acquisitions. We will continue to be selective, ensuring that acquired properties, if any, meet our quality and location requirements within our Tier 1 submarkets and that they further our goal of increasing scale and rebalancing our portfolio across our target markets.

Third, we will seek to add new projects to our pre-development pipeline by purchasing or controlling new land sites. We believe that by appropriately managing our land inventory, we may secure opportunities to create meaningful value for future development without over burdening the balance sheet with non-revenue producing assets. Four, as previously noted, development is an important component of our strategy, our key development and redevelopment sites have positioned us well to create value, such as the five recently completed or in-progress projects in Austin. With cash yields on cost in excess of 9%, we believe these projects in addition to creating significant value have also uniquely positioned us to benefit from predictable and sizable cash flow growth over the next five years supporting our expectations for future dividend increases.

Despite market volatility, the underlying real estate fundamentals remain strong in our target markets and with the continued tenant demand for space within the Domain, which includes a current pipeline of over 500,000 square feet of prospective tenants, we foresee the opportunity to create additional value through development in 2019. Our sites within the Domain can accommodate approximately 4 million square feet of additional mixed use development, including our fully designed and permitted Domain 9 site, which is our likely next near-term project.

As a reminder, we estimate that each 300,000 square foot building that we developed and leased at the Domain should add more than $1 per share to our net asset value based on current market conditions and our development metrics. Outside of Boston, our sites in the heart of Legacy Town Center in Dallas can accommodate approximately 600,000 square feet of office and we are actively pursuing appropriate pre-leasing for both Legacy Union Two and Legacy Union Three.

In summary, we continue to execute on our business plan in a disciplined manner provided accommodative market conditions persist. We will continue the prudent execution of our build-to-core program and by diligently working to achieve our near-term objectives, we believe we can create significant additional value and cash flow growth to continue delivering outsized stockholder returns.

With that, I will turn the call over to Jim.

James E. Sharp -- Chief Financial Officer and Treasurer

Thanks, Scott. Good morning, everyone. As Scott mentioned, during 2018 we accomplished our key objectives for the year, which led to strong financial results. Our FFO attributable to common stockholders excluding certain items for the fourth quarter 2018 was $23.1 million or $0.42 per diluted share as compared to $19.4 million or $0.40 per diluted share for the fourth quarter of 2017. For the full year 2018, our FFO attributable to common stockholders excluding certain items was $82.1 million or $1.61 per diluted share as compared to $75.1 million or $1.57 per diluted share for the full year 2017.

Our 2018 results came in $0.05 per diluted share above the high end of our previous guidance range because of a timing difference in the recognition of business interruption and other insurance proceeds related to Eldridge Place that were previously expected to be recognized in 2019. Regarding Eldridge Place, you saw in our press release last month that we were able to successfully close on the disposition of these properties. Leading up to the sale, we completed reconstruction of the building lobbies and updated our originally estimated insurance receivable, resulting in recognition of a non-cash hurricane related loss of $3 million to write off a portion of our outstanding insurance receivable due to lower estimated physical damages.

Going forward, it's anticipated we'll receive additional insurance proceeds, including a claim for the loss of value attributable to the storm, the amount and timing of which are currently undetermined. Our same-store cash NOI results, excluding Eldridge Place, reflect a growth of 8.7% over 2017, driven primarily by several leases that commenced in 2017 moving from the free rent phase to the cash pay rent phase. We're excluding our Eldridge Place properties because they had an outsized positive impact due to timing differences between abatement of rents and a collection of business interruption and other insurance proceeds.

Eldridge Place is included, the same-store cash NOI growth increased 10.6% compared to 2017. Last night's release introduced our 2019 full-year FFO guidance with Nareit-defined FFO in a range of $1.40 to $1.48 per diluted share based on 54.7 million weighted average shares outstanding. We also anticipate same-store NOI growth in 2019 of 0.5% to 1.5% and same-store cash NOI growth of 2.5% to 3.5%. Our same-store results reflect the impact of two known 2019 lease expirations, 84,000 square feet from Bank of America at BofA Plaza and 106,000 square feet from HUD at Burnett Plaza.

However, as Dallas will also mention later on in the call, approximately 74,000 square feet of the expiring HUD space has already been leased to a new tenant. Our guidance is based on several key assumptions. First property dispositions, including the recent sale of Eldridge Place, which we anticipate will range from $78 million to $225 million. Second potential acquisitions, which we assume will range from $0 to $200 million. Third, general and administrative expense is anticipated to decrease slightly in 2019 compared to 2018 ranging between $20.5 million and $21.5 million.

Finally, we anticipate occupancy of between 90.5% and 92.5% at the end of 2019. As Scott mentioned, development is an important component of our strategy and the proceeds generated from the properties that we've sold, combined with the nearly $138 million of equity we raised in 2018 have reduced our net debt to 6.1 times our development adjusted EBITDA and positions our balance sheet to fully fund our current and near-term prospective development activities. Further, as a result of our dispositions, including the recent sale of Eldridge Place earlier than we originally anticipated, we expect earnings to trough in the first half of 2019 prior to the four fully leased newly delivered development properties providing robust NOI growth beginning in 2020 and ramping up thereafter.

This concludes my remarks. I encourage you to review our supplemental information package that was filed last night for more complete details on our financial results and 2019 guidance. I will now turn the call over to Dallas.

Dallas E. Lucas -- President and Chief Operating Officer

Thanks, Jim, and good morning everyone. At year-end, our operating portfolio occupancy was 90.3%, including Third + Shoal and Domain 11 that delivered to tenants essentially 100% leased. Excluding Eldridge Place, which was sold last month, our overall portfolio occupancy was approximately 93% at year-end. On a pro forma basis reflecting the sale of Eldridge Place and stabilization of developments in process, our weighted average remaining lease term for the operating portfolio is 6.5 years, with over 50% of our total portfolio rental revenues coming from credit and credit equivalent tenants. Likewise, on a similar pro forma basis, Austin represents nearly 60% of our NOI with a weighted average remaining lease term for the Austin portfolio of approximately 7.3 years. Including our in-process developments, TIER is the largest public or private owner of office space in Austin. Leasing fundamentals across most of our key markets are still solid while the Houston Class A office market experienced positive net absorption for the second consecutive quarter, continuing its long path toward market stabilization.

We anticipate our target markets will continue to significantly outperform the nation in terms of population and job growth, while potentially seeing increased benefits from continued migration of companies from higher cost and less business friendly states. As an example, during the quarter Honeywell announced the relocation of its headquarters from New Jersey to Charlotte and McKesson announced the relocation of its headquarters from San Francisco to Dallas.

And finally, as a punctuation to the view that this migration pattern could accelerate, a recent study conducted by Spectrum Relocation Solutions, mentioned in both the Wall Street Journal and Forbes, highlight a number of reasons why many companies are leaving California. The study noted that Texas is the number one relocation destination for companies to party in the Golden State with Austin as the most preferred city and Dallas and Denver ranking in the Top 10.

Looking forward, while we have no major lease expirations until 2020, we have a meaningful mark-to-market opportunity during 2019 at our 95.6% leased BofA Plaza building in Charlotte, where Bank of America will vacate a total of 84,000 square feet during the year with expiring rents 36% below market rent. As well as in Austin, where an aggregate of 158,000 square feet will be expiring at our Terrace and Domain point properties with expiring rents 28% below current market rents.

Now, I'll provide an update on what we're seeing in several of our primary markets. Leasing activity in Austin is strong as evidenced by a recently reported lease of an entire 790,000 square foot building to be constructed in the CBD. Direct Class A vacancy rate throughout Austin rose to 10.7% at year-end as a result of absorbing approximately 1 million square feet of new deliveries during the quarter, including our Third + Shoal and Domain 11 properties.

Class A asking rents continue to climb, increasing another 6% for the quarter. Excluding build-to-suits and pre-leased buildings, there was only 2.2 million square feet of multi-tenant projects under construction citywide at the end of the year. As Scott mentioned, tenant demand at the Domain remains elevated with good leasing activity for the remaining available space at Domain 10.

Additionally, we are in discussions with prospective tenants for Domain 9, which will likely be our next near-term development project in Austin. Investment demand for best-in-class office properties within Austin remains strong, as Scott mentioned, we and our partners are marketing Third + Shoal for sale, with potential for us to capitalize on the value created.

Additionally, we anticipate that we may see near-term third-party asset sales within the Domain that may surpass our expectations evaluation. In Houston, total Class A office vacancy declined to 24.3% at year-end citywide, while sublease inventory shrunk by over 300,000 square feet to 8.4 million square feet. As mentioned earlier, the Houston office market registered positive net absorption for the second consecutive quarter continuing its long path toward recovery.

We are currently well positioned with our remaining Houston property BriarLake Plaza, where we are approximately 85% leased with no major expirations until 2024. We are seeing an increase in leasing activity at the property and are optimistic we can achieve occupancy gains during the year as the market continues to recover. In Dallas/Fort Worth, the direct Class A vacancy rate decreased to 17.5% at year-end, while Class A rental rates increased over 2% in the quarter. Excluding build-to-suit and fully pre-leased buildings, construction activity declined again this quarter to 1.9 million square feet under development.

As Jim mentioned, we executed a lease that will backfill most of the space that HUD is scheduled to vacate at our Burnett Plaza property during the year. This eliminates our only significant lease expiration in the Dallas/Fort Worth market through 2022. And finally, in Charlotte, the direct Class A vacancy rate in the CBD at quarter end was 12.9%, while Class A rental rates stayed flat during the quarter. There is approximately 2.1 million square feet currently under construction in the CBD, of which approximately 69% is pre-leased.

With minimal available space in our BofA Plaza building, our 2019 focus is on backfilling the 84,000 square feet that Bank of America will vacate during the year. And based on current leasing activity, we are optimistic that we can make good progress toward this goal. Finally last week, BB&T and SunTrust Bank announced the planned relocation of their combined company headquarters to Charlotte, which solidifies Charlotte as the second largest financial center in the US and may provide further demand for office space in the city.

BB&T's existing Charlotte operations are located one block from BofA Plaza. As we look forward, we believe we're ideally positioned to continue creating significant shareholder value and further enhance the Company's ability to generate sizable cash flow growth over the next few years. Key factors to this success include the following. Strong tenant demand and ongoing rent growth in Austin should enable us to continue generating outsized development yields at the Domain. We are positioned to fully fund our in-process and near-term development pipeline. We have no major lease expirations until late 2020. We have significant mark-to-market potential in Charlotte and Austin. We expect to add to our land inventory in 2019 in our Tier 1 submarkets.

And finally, we can sell assets at a gain on a tax-efficient basis through carry-forward losses. That concludes our prepared remarks. Operator, we will now take questions from our sell-side analysts.

Questions and Answers:

Operator

Great, thank you. (Operator Instructions) Our first question is from Mitch Germain from JMP Securities. Please go ahead.

Mitch Germain -- JMP Securities -- Analyst

Good morning and congrats on the year.

Scott W. Fordham -- Chief Executive Officer and Director

Thanks, Mitch. Good morning.

Mitch Germain -- JMP Securities -- Analyst

I'm just curious about Domain 10, obviously you guys have done some good leasing there. Is it possible that you are warehousing the remaining space there for potentially one of the tenants that is leased? Or is the remaining 40% out in the market right now?

Scott W. Fordham -- Chief Executive Officer and Director

The 40% is out in the market right now. We're very excited, we finally get to build a multi-tenant building in the Domain. If you go back and you think about where we were a year ago, about this time a year ago, we were talking about 100,000 square feet that was interested in getting into the Domain and then that grew to a bit over 1 million square feet by about May. We've leased about 500,000 square feet between Domain 12 and Domain 10 and now we have a bit over 500,000 square feet of prospects to go into the Domains. We feel really good about the leasing prospects.

Mitch Germain -- JMP Securities -- Analyst

And if I look at those prospects, are they a similar industry classification as to where your demand has been so far?

Scott W. Fordham -- Chief Executive Officer and Director

It's really a mix, I mean, we've got technology, we've got professional and financial services, we've got co-working that would love to be in there. So it's really a mix of the tenant base.

Mitch Germain -- JMP Securities -- Analyst

Great. I guess you're looking to kind of build up your land inventory and I'm curious is there something that you've got your eye on like, is there some sort of a deal that we should be expecting soon or it's just really more of a broader statement as to how you want to move forward with your strategy over the course of the year?

Scott W. Fordham -- Chief Executive Officer and Director

Yeah, I think our strategy incorporates owning key land sites, so that when development -- when the time is right to develop, that we've got the opportunity to do that. I can tell you for years we've been working relationships that could result in us controlling key land sites in the area. So we're constantly looking, obviously, land prices have gotten pretty expensive. So we're also very thoughtful about the location as well as the price and does it make sense, whether it's current cycle development or whether it's a next cycle development. So we're always looking, and it's just a matter of whether we think it's the right deal for us to go ahead and move forward with.

Mitch Germain -- JMP Securities -- Analyst

Got you. Last one from me, maybe for Jim, take me from the -- what gets you to the low end of guidance, to what gets you to the high end of guidance please.

James E. Sharp -- Chief Financial Officer and Treasurer

So, a lot of it's going to be the timing of when we have the sales occur, so if you know Scott mentioned we're in the market with Third + Shoal, if that happens quickly, then we're going to be a little toward lower end and if it happens a little bit later in the year, then that will push us a little bit higher.

Mitch Germain -- JMP Securities -- Analyst

Thank you, guys.

Scott W. Fordham -- Chief Executive Officer and Director

Thanks, Mitch.

Operator

Our next question is from Anthony Paolone from JPMorgan. Please go ahead.

Anthony Paolone -- JPMorgan -- Analyst

Yeah, thanks, good morning. On the acquisition pipeline, can you just talk about just what you're seeing there and your confidence level that you'll be able to actually do something on that front this year and whether you think that will be a new or existing market for you?

Scott W. Fordham -- Chief Executive Officer and Director

Yeah, I will tell you that the acquisition number that we've put in our guidance is a bit of a placeholder. Over the next 24 to 36 months, we are focused on really four things. I would say, one is moderately increasing our scale. Two, is continuing to move our leverage in the right direction. Three, we'd like to continue to increase the cash flow to support the dividend increases that we would expect in the future as the development comes online, and finally to make progress toward diversifying our market concentration. So as we're thinking about investing. I would tell you that development is still our primary focus. We've been able to create significant value through that, but if we identify an acquisition opportunity that helps us really achieve these medium term goals and positions the Company to create value over the long-term, then we'll look at it.

So today a bit of a placeholder, but we are focused on it. In terms of where it would be located, I would tell you that we're focused on the diversifying piece of what I just mentioned. And so we'd like to do it outside of Austin. I can tell you, it won't be in Houston. So one of our other target markets.

Anthony Paolone -- JPMorgan -- Analyst

Okay. And then assuming Third + Shoal gets sold, do you have anything else for sale in 2019?

Scott W. Fordham -- Chief Executive Officer and Director

In our guidance, we've got the Woodcrest project, if that was to sell in 2019, it would be at the very end of the year. So no real impact on earnings this year. I would expect that, that project is more likely to sell next year. So I think right now, we feel pretty comfortable getting the Eldridge Place project sold as well as Third + Shoal and then we'll just see if -- we're always looking out for that institutional buyer that wants to go into Cherry Hill, New Jersey, but there's not a lot of them, projects really always for sale.

Anthony Paolone -- JPMorgan -- Analyst

Okay. And then if we look at Domain 9, what's sort of the gating issue with starting that this year, is it further lease up at 10 or pre-lease for 9. How are you thinking about just what it should go in there?

Scott W. Fordham -- Chief Executive Officer and Director

Really, it comes down to the pipeline of prospective tenants for the rest of 10 as well as 9. We'd certainly like to see more of this space in 10 leased. But with the pipeline of tenants that we have, we feel very confident that we're going to move forward and be very successful with that project. But we're always looking at the market, I mean, we've seen the music stopped before and we don't want to be out there with a development project right as the music stops without a pipeline of tenants to fill it up. So I can tell you the fundamentals that we're seeing in Austin today continue to be robust. The pipeline continues to be very strong and so I think if it continues this way, we should be in good position to start that project likely sometime before mid-summer.

Anthony Paolone -- JPMorgan -- Analyst

Okay. And then beyond Domain 9 and staying within the Domain, does their start to become like a lag between being able to do something at Domain Point than some of the other parcels because they get a little bit more complex or if the demand really keeps going, we can see going into 2020 another building in Domain?

James E. Sharp -- Chief Financial Officer and Treasurer

Yeah, we've mentioned, it's been a while now, but we mentioned on one of our prior calls that we were going full steam ahead on design for both Domain Point and D&G. So as a result, we're in pretty good shape to move forward with those projects. And so I think if we were to have the demand to start on one of those projects, we'll be ready.

Anthony Paolone -- JPMorgan -- Analyst

Okay and then just last question, where are market rents at this point for legacy or how close are the market rents there to being able to make a development deal pencil out?

James E. Sharp -- Chief Financial Officer and Treasurer

I think that we've been achieving this 9 plus initial cash-on-cash yield on our development projects, the ones in Austin, obviously. In legacy, I think that that would be closer to a mid-8 and I think the market rents are there to support that at this point in time. There are some large requirements in the market for North Dallas, whether one of those deals will allow us to achieve the 40% to 50% pre-lease that we will need to see to go. We don't know, but we feel just based upon what we're seeing in terms of the tenant requirement, we think that in 2019, there could be a real possibility for us to do something in legacy as well.

Anthony Paolone -- JPMorgan -- Analyst

Okay, thank you.

Scott W. Fordham -- Chief Executive Officer and Director

Thanks, Tony.

Operator

Our next question is from John Kim from BMO Capital Markets. Please go ahead.

John P. Kim -- BMO Capital Markets -- Analyst

Thank you. I wanted to ask your decision to sell Third + Shoal, I realize you can crystallize a lot of value, but the asset is or will be high yielding, it seems like investors value your Austin exposure and this really is your only downtown asset. So I'm wondering why this is now top the priority list of all the assets that you may be able to sell?

Scott W. Fordham -- Chief Executive Officer and Director

Yeah, I think -- Good morning, John. In terms of Third + Shoal, we feel like the pricing on that asset is going to be at a level where we should be a seller rather than a buyer and rather than taking out our partners. We think that, like you said, we will be able to crystallize a lot of value on that particular project. And as we think about the portfolio longer term, we are focused on diversifying our market concentration. We love the Austin market, as we mentioned in our script, with our developments coming online. We are the largest office owner in Austin, but I think diversifying that to some degree is good, and crystallizing that value is good and I think just the decision between us and our joint venture partners was to move forward with the sale of that asset. We think it would be very successful.

John P. Kim -- BMO Capital Markets -- Analyst

So you did contemplate either buying them out or allowing them to sell their stake and to the conclusion to get a better pricing.

Scott W. Fordham -- Chief Executive Officer and Director

Sure, Yeah, it comes down to, at a certain price we'd be a buyer and at a certain price, we would be a seller. But we think that the pricing is absolutely going to be at a level where we would be a seller.

Dallas E. Lucas -- President and Chief Operating Officer

And John, this is Dallas. If you recall, we had a similar situation at Domain 8, when Shorenstein want to monetize that asset and in that regard, we actually bought the asset or bought their interest out just given the -- they added influence to the project to control that asset and the underlying tenants in that project, which, obviously, one of them, we've announced Domain 12 as an expansion. So this was a different situation, and as you point out, we are only building in the CBD and so I think, as Scott mentioned, just price expectations are such that we're a seller, probably not a buyer.

Scott W. Fordham -- Chief Executive Officer and Director

And the last note I would add to that is, as you can see we've got a lot more opportunity to own real estate in Austin just through our development pipeline. We've talked about the 4 million square feet that we can do in the Domain. Now that's mixed-use, but a good portion of that would be office probably to the tune of about 75%. So we feel like that we can continue to create value, build our presence out in the Domain and then look to diversify the portfolio over time, and have more of a balanced portfolio across our target markets.

John P. Kim -- BMO Capital Markets -- Analyst

Okay. Scott you mentioned, you will not be looking to buy anything in Houston in the near term. Can you just give us your updated view if Houston is a core market for you?

Scott W. Fordham -- Chief Executive Officer and Director

Yeah, so I will tell you the BriarLake Plaza property that sits down there is best in class, it's in a good submarket and it really sets up better than Eldridge Place, certainly better than Eldridge Place to benefit from the recovery. But Houston is definitely reliant on energy, we've seen that, so we're not looking to expand our presence there. But right now, we're pretty comfortable with our position in our BriarLake Plaza projects.

John P. Kim -- BMO Capital Markets -- Analyst

A question in Charlotte with your BofA space, which sounds like it's well below market, you can get a mark-to-market on that. But can you just discuss how much CapEx you need to spend to redevelop the space? And how much downtime you expect before it gets occupied?

Scott W. Fordham -- Chief Executive Officer and Director

Well, first on the downtime, two floors they gave back the first year. So 42,000 square feet vacated to begin the year. We actually have good activity. We've agreed to terms and are going into leases for essentially almost a full floor tenant on one of the floors and have a good prospect for another sizable position in the remaining floor, actually 4.5. So it would go into account with the other two floors that are scheduled to give back on July 1st. But it is old space that they've had for quite a while, so we would anticipate the landlord(ph) work would be a factor into probably a sizable allowance, probably $70 a foot, $75 a foot to finish out that space.

John P. Kim -- BMO Capital Markets -- Analyst

And as far as occupancy, is that a 2020 event or 2021 or after?

Scott W. Fordham -- Chief Executive Officer and Director

Yeah, based on the activity we have right now, would be a '19 occupancy.

John P. Kim -- BMO Capital Markets -- Analyst

Thank you.

Scott W. Fordham -- Chief Executive Officer and Director

Thanks, John.

Operator

Our next question is from Rob Stevenson from Janney Montgomery Scott. Please go ahead.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Thanks, guys. Dallas, so if you are 93% occupied adjusting for Eldridge Place and you don't have to worry about the BP move out at Eldridge. Where is the incremental vacancy coming from in '19 the drops your guidance down to a midpoint of 91.5. Is it just BofA and timing, is there any other known move-outs at this point?

Scott W. Fordham -- Chief Executive Officer and Director

Yeah. BofA definitely is a factor and then again just the timing. When HUD actually vacates, which is not 100% certain, it's probably geared toward sometime this summer, but it could float a month or two, depend upon when they actually move out of their space. So there'll be downtime for us to do some landlord work before the tenant actually takes possession, the tenant that we've executed a lease for takes possession. So there could be a lag where they get back to space in the beginning of the fourth quarter, but we're not able to give the space back to the tenant until the first of 2020 as well as the timing to finally backfill the BofA space. Those are some of the contributors.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

All right. And then, Jim, how much of the FFO contribution is there from Third + Shoal in the '19 numbers?

James E. Sharp -- Chief Financial Officer and Treasurer

Third + Shoal, the '19 numbers is -- like for the full year. it would be about $4.7 million.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Okay. And it's not -- it's sort of back half weighted, is it still or is it now at a point starting at the beginning of the year where it's roughly $1 million in change a quarter?

James E. Sharp -- Chief Financial Officer and Treasurer

It ramps up in the second half of the year, Rob, because the tenants are in free rent for the most part in the first half of the year. That free rent includes free OpEx, so when they get into the cash pay phase, when the free rent burns off, they'll start paying those OpEx. So you'll see a little more of that NOI in the second half of the year.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Okay. Is that like you got to sell it by the second half of the year, so that's the sort of major sort of thing from a modeling standpoint?

Scott W. Fordham -- Chief Executive Officer and Director

Yeah, in the $4.7 million I quoted you, that's just the NOI of the property, so obviously there is the interest cost of that as well that offsets.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Okay. And then how much of the -- call it a $180 million that's left to spend at Domain 10 and 12 has already been funded?

Scott W. Fordham -- Chief Executive Officer and Director

Yeah, so in terms of the funding that needs to happen, I believe it's on page 23 of our supplemental, we give total cost today plus estimated total cost. So it's really easy on page 23, Rob, to go to that page and see what's left.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Yeah, I mean that's where I get the $180 million number from, but I mean that doesn't assume -- that's to spend, but it doesn't. I mean, I guess the question winds up being is like, do you already have the financing already done for this. Because I guess the question, winds up being, so you've got the proceeds from the Eldridge Place sale and then just trying to figure out what you're going to do with any sale proceeds from Third + Shoal. Obviously, if you've got acquisitions then that's fine. But otherwise, does it go to fund, is there still more of the $180 million that needs to be funded at Domain 10 and 12? Or if you don't make any acquisitions and you sell Third + Shoal, is that basically cash on the balance sheet for any length of period of time?

Scott W. Fordham -- Chief Executive Officer and Director

So first of all, just in terms of the development cost, we do have some additional cost on Third + Shoal as well. So I think the total is about $215 million left to fund after the fourth quarter. But as we go forward, we do feel good about the funding that we have with the prospects that we have for future development, potentially Domain 9, we do anticipate that we could have some additional development. So we feel like the balance sheet is in pretty -- in really good shape to fund the development and progress as well as the next development project. But depending upon the timing, we could end up with some proceeds from Third + Shoal and then we would put those to work the best way we could and that may be repaying debt for a period of time. But just feeling good about future prospects in terms of putting that to work in the development pipeline.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Okay. Thanks, guys.

Scott W. Fordham -- Chief Executive Officer and Director

Thanks, Rob.

Operator

Thank you. This concludes the question-and-answer session. I'd like to turn the floor back to Mr. Fordham for any closing comments.

Scott W. Fordham -- Chief Executive Officer and Director

Well, thanks again for joining us today. We will be on the road over the next several weeks, including both the Wells Fargo Conference in New York and the Citibank Conference in Florida. So we hope to see many of you there. Thank you, again.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.

Duration: 43 minutes

Call participants:

Telisa Webb Schelin -- Chief Legal Officer, Executive Vice President and Secretary

Scott W. Fordham -- Chief Executive Officer and Director

James E. Sharp -- Chief Financial Officer and Treasurer

Dallas E. Lucas -- President and Chief Operating Officer

Mitch Germain -- JMP Securities -- Analyst

Anthony Paolone -- JPMorgan -- Analyst

John P. Kim -- BMO Capital Markets -- Analyst

Rob Stevenson -- Janney Montgomery Scott -- Analyst

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