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Highwoods Properties Inc (NYSE:HIW)
Q3 2019 Earnings Call
Oct 23, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Highwoods Properties Conference Call. Afterwards we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, October 23rd, 2019.

I would now like to turn the conference over to Brendan Maiorana. Please go ahead, Mr Maiorana.

Brendan Maiorana -- Executive Vice President, Finance & Investor Relations

Thank you, operator and good morning everyone. Joining me on the call this morning are Ted Klinck, Chief Executive Officer; Brian Leary, Chief Operating 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 Ted.

Ted Klinck -- President, Chief Executive Officer and Director

Thank you, Brendan, and good morning everyone. It was a busy quarter for us. We had transitions in the CEO and COO roles, announced our market rotation plan to enter Charlotte and exit Greensboro and Memphis, broke ground on our $38 million Virginia Springs II development in Nashville, completed a $400 million bond offering and atop of all this posted excellent leasing activity and delivered strong financial results.

At the beginning of last month, our long-standing CEO, Ed Fritsch retired. Ed has been a phenomenal leader and mentor for many of us at Highwoods. Ed may be gone from the day to day role at Highwoods, but his legacy remains firmly in place throughout our company and the strategic plan that has served us well over the years will continue to guide the company. The four tenets [Phonetic] of the plan are to continuously improve the portfolio with a focus on key infill BBDs, maintain a strong balance sheet, retain and attract unmatched commercial real estate professionals and communicate clearly and transparently with our investors and other stakeholders.

Consistent with our strategy, we announced the market rotation plan in August. This is our exit from Greensboro and Memphis and entry into Charlotte with the purchase of Bank of America Tower at Legacy Union. Once completed, the market rotation will improve the overall quality of our portfolio, further strengthen our cash flows, all the while, be leverage neutral. Also during the quarter we issued $400 million of 10-year bonds at an effective rate of 3.24%. Our balance sheet continues to be very strong with our debt-to-EBITDAre ratio at 4.9 times. Nothing borrowed under our line and $117 million of cash on hand at quarter-end.

We also had a strong quarter operationally and financially. Sequential occupancy, improved 70 basis points for the office portfolio and 50 basis points overall to 91.4% with the most significant gains in Atlanta and Raleigh were two largest markets by square footage. We leased 939,000 square feet including 367,000 square feet of new leases, at GAAP rent spreads of positive 19.4%, cash rent spreads of positive 5.6% and with a weighted average term of 6.7 years. We backfilled 144,000 square feet at 11000 Weston in Raleigh and renewed our largest 2021 expiration, 176,000 square feet in Tampa.

Subsequent to quarter end we also renewed and expanded our second largest 2021 expiration, 133,000 square feet in Nashville. We delivered FFO per share of $0.83 which was impacted by $0.05 of costs primarily relating to our market rotation plan equating to normalized FFO of $0.88. Given our third quarter performance and solid outlook for the fourth quarter, we have revised and narrowed our 2019 FFO per share outlook to $3.31 to $3.33.

Midpoint is down $0.03 from our prior outlook and after excluding the $0.05 of market rotation costs were up $0.02 on an apples-to-apples basis. The low end of our year-end occupancy outlook is up 20 basis points from our prior outlook to 91.7% with the high end at 92.3% implying 60 basis points of additional occupancy growth by year-end at the midpoint. At this time, our year-end occupancy outlook assumes no backfill at 5332 Avion, a 176,000 square feet property in Tampa's Westshore submarket formerly occupied by Laser Spine Institute.

We continue to have dialog with medical users, but it is becoming increasingly likely that we will convert three medical floors to traditional office. We have multiple strong office prospects to backfill a substantial portion of this building. As we stated before, we estimate market office rents for billing of 5332 Avion's quality to be approximately in line with Laser Spine's rent. While we have completed architectural drawings and have detailed cost projections, we don't want to provide specifics on our cost or rent expectations at this time, given ongoing negotiations with prospects.

Our development program continues to deliver strong results. In the quarter, we placed in service 5000 CentreGreen in Raleigh, which is a 100% leased. Our total investment is $41 million for this 170,000 square feet multi-customer building. As a reminder, we started 5000 CentreGreen, 100% spec in 2016. In August, we announced Virginia Springs II, they had a $38 million, 111,000 square foot spec project in Brentwood, one of Nashville's BBDs. As you may remember, we placed Virginia Springs 1 in service in the first quarter of 2019 at 100% occupancy, six quarters ahead of our pro forma. At GlenLake Seven in Raleigh we're 44% pre-leased and have strong prospects for the remaining availability and we still have a year before estimated completion in two years before projected stabilization.

Our overall development pipeline is $500 million in a 73% pre-leased. We've announced $150 million of development year-to-date and we continue to see good interest for build-to-suits and large anchor prospects that could drive further announcements. Longer term, we have a well located land bank that can support $2 billion of future development.

Turning to the market rotation plan. In August, we announced the plan would happen in two phases. Phase one includes the planned acquisition of BOA Tower in Charlotte, the disposition of assets in Greensboro and Memphis totalling approximate purchase price of BOA Tower and the closing of our Greensboro and Memphis offices. We're on track to complete phase one by mid 2020. Phase two with no preset timetable for completion includes the sale of our remaining properties in Greensboro and Memphis.

We are scheduled to take ownership of BOA Tower on November 14 and are very excited about our entry into Charlotte and our long-term potential in the Queen City. In terms of the planned exit of Greensboro and Memphis, we're in the market with all Phase one properties. We remain confident in our pricing expectations and that we will complete phase one and return our conservative leverage metrics to current levels by mid 2020.

As a reminder, upon completion, we believe, Phase one will result in increased cash flows and CAD to be roughly FFO neutral. Plus there is additional upside with future lease-up at BOA Tower.

Turning to the balance sheet, our debt-to-EBITDAre ratio at quarter end was 4.9 times under the midpoint of our stated comfort range of 4.5 to 5.5 times. As a reminder, we have funded our development pipeline on a leverage neutral basis without issuing shares on our ATM in over two years.

Overall, our portfolio is performing well. We continue to focus on growing rents and occupancy and carefully managing opex. This positive trajectory combined with a continued delivery of our highly pre-leased development pipeline and completion of our market rotation plan should drive increased FFO in cash flows while maintaining a strong balance sheet with multiple avenues to fund additional growth.Brian?

Brian Leary -- Executive Vice President and Chief Operating Officer

Thanks, Ted, and good morning. During the quarter we had strong leasing performance. Second generation office leasing volume was a robust 939,000 square feet including 367,000 square feet of new leases and we captured GAAP rents spread of positive 19.4% and cash rent spreads of positive 5.6%. While virtually all of our leases had annual rent bumps, we have consistently posted positive cash rent spread. Specifically during 13 of the past 14 quarters, we've reported positive cash rent spreads and increased net effective rents by 18% over the same period.

Our healthy leasing volume and strong rent economics support future growth in occupancy and NOI. In the third quarter, we posted same property NOI growth of 0.5% or up 1.9% excluding 5332 Avion Park. Our portfolio occupancy increased 50 basis points sequentially to 91.4%. Our year-end occupancy outlook is now 91.7% to 92.3% with a midpoint of 92% . Our improved year-end occupancy outlook is driven by a significant number of leases that have been signed, but where occupancy has yet to commence. This outlook assumes no year-end occupancy for 5332 Avion. We've made meaningful progress in the past several quarters, reducing near term rollover risk.

We have 23% of revenues expiring through 2021, which is approximately 200 basis points lower than the past several years. We expect our future rollover to diminish further as we complete the market rotation as Greensboro and Memphis carry a disproportionate share of our near-term role and the Bank of America Tower in Charlotte, has a weighted average term of more than 14 [Phonetic] years. In our typical review of expirations larger than 100,000 square feet, we have only one remaining in 2019, two in 2020 and one in 2021. For 2019, we remain optimistic for a renewal with the FAA located in 100,000 square foot build-to-suit building immediately adjacent to Atlanta's Hartsville Jackson International Airport.

For 2020, the remaining expirations are both in Tampa and include a 138,000 square foot build-to-suit for the FBI and 116,000 square feet with T-Mobile. We anticipate a renewal with the FBI while T-Mobile is a known move-out anticipated in the third quarter of 2020. For 2021, we've renewed our largest remaining expiration, a 176,000 square foot customer in Tampa. Subsequent to the quarter, we not only renewed our second largest remaining 2021 expiration, a 133,000 square feet in Nashville but expanded this customer by an additional 27,000 square feet as well.

Now to our markets, which have a common denominator of growth, low cost of living in conducting business, centers of higher education and innovation and low unemployment rates. In Atlanta as reported by [Indecipherable] the market posted positive year-to-date net absorption of 550,000 square feet of Class A rents of $32 per square foot. We're tracking 5.4 million square feet of competitive office development under way, which is 25% pre-leased, half of which is in Midtown where we have no direct competitive product .

Our Atlanta team signed a 114,000 square feet of second-generation leases during the quarter with GAAP rent spreads of a positive 28% while occupancy increased sequentially 130 basis points ending the quarter at 89.7%.

Turning to Raleigh where demographic trends continue to be strong, high demand and falling vacancy have driven average Class A rates up 9% year-over-year while new office buildings in the urban core have asking rates of $40 a square foot or higher according to Avison Young.

We're tracking approximately 1.4 million square feet of competitive construction which is spread over 5 submarkets. It's 48% pre-lease and represents 3.4% of competitive stock. Our Raleigh team signed a 193,000 square feet of second-generation leases during the third quarter with robust GAAP rent spreads of a positive 37%. Portfolio occupancy improved 250 basis points sequentially to 88.6% and we expect additional improvement by year-end as occupancy will commence on signed leases.

On to Nashville where Cushman & Wakefield reported Music City has posted over 900,000 square feet of net absorption year-to-date. Overall office vacancy in the market ended the quarter at 10.6%. We're tracking 2.9 million square feet of competitive projects under construction, which are 23% pre-lease and represents 10.5% of competitive stock.

Our new supply is elevated, Nashville it's concentrated in the urban core, the CBD [Indecipherable] and Midtown BBDs where we have no meaningful role until 2025. As Ted noted, we started Virginia Springs II in Brentwood, a 111,000 square foot, $38 million multi-customer speculative project. We delivered Virginia Springs I, 100% leased in the first quarter of this year, six quarters ahead of our pro forma. Given the success of Virginia Springs I, limited competitive supply in Brentwood, and early indications of interest, we're confident to lease up prospects for Virginia Springs II. During the quarter, we signed 114,000 square feet of second-generation leases in Nashville with GAAP rent spreads of a positive 16.6% lesser [Phonetic] than Tampa where our team has been very busy.

Class A rental rates continue to increase in the CBD in Westshore submarkets. The BBDs is where the majority of our portfolio is located. According to CBRE, office rents increased 7.4% year-over-year and Class A occupancy in the Westshore and the CBD is a combined 92.6%. There, we're tracking 930,000 square feet of competitive construction in the Westshore and the CBD, which is 44% pre-leased and represents 3.6% of competitive stock. During the quarter, our team signed 264,000 square feet of second-generation leases at GAAP rent spreads of a positive 13%. Portfolio occupancy is 89.7%, which includes the full building vacancy at 5332 Avion. During the past 90 days we've advanced our architectural plans for the three floor repositioning of 5332 Avion Park. As a reminder, this building is adjacent to Tampa International Airport in the thriving Westshore submarket. Floors, four, five and six are moving ready for office users. Given the building's strong location, good bonds, ample parking ratio and strong interest from prospects, we are confident our team will release this building with healthy economics.

In conclusion, our team delivered an excellent quarter of leasing with healthy spreads and strong net effective rents. We've made significant progress with future expirations and backfilling the few remaining sizable vacancies in the second-generation portfolio. Our $500 million, 73% pre-leased 1.2 million square foot development pipeline has three projects with availability, all of which are at least out two years from pro forma stabilization. The leasing environment remains healthy and we expect continued demand for quality, well-located, first and second generation office product in our BBDs. Mark?

Mark Mulhern -- Executive Vice President and Chief Financial Officer

Thanks, Brian. We delivered net income of $27.9 million or $0.27 per share and FFO of $88.2 million or $0.83 per share. As Ted mentioned, excluding $0.05 per share of items relating primarily to the market rotation plan, FFO per share would have been $0.88. This compares favorably to the $0.86 per share we reported last year, which included five months of rent from Fidelity at 11000 Weston and full NOI contribution from Laser Spine. Fortunately, growth in the remainder of the business has offset these two items, which illustrates the diversified strength of the company and positions us well for additional growth given our solid leasing trends including backfilling the majority of 11000 Weston.

Excluding the $0.05 of market rotation items, the quarter was clean from a reported FFO perspective with no significant capital recycling activity or term fees. There was an unrelated $0.01 land sale gain that we felt was appropriate to net against the costs associated with the market rotation plan as none of these items were included in the 2019 FFO outlook we provided in our second quarter release. The total of these items comprises the $0.05 impact discussed previously.

We revised and narrowed our 2019 FFO outlook to $3.31 to $3.33 per share. The $0.03 reduction at the midpoint is driven by the $0.05 per share net impact from items relating to the market rotation plan offset by $0.02 per share of improvement in the business. Our updated per share outlook imputes to $0.90 in 4Q at the midpoint. As we detailed in last night's press release, we estimate $0.03 of NOI from BOA Tower in 4Q, which will be offset by $0.02 a share of additional interest expense for the pre-funding and funding of the acquisition and $0.01 of additional accrued severance costs.

Sequential growth in the fourth quarter will be driven by higher revenue due to improved occupancy and the normal seasonal pattern of operating margin improvement from the third quarter to the fourth quarter. Our outlook for acquisitions and dispositions is driven by the market rotation plan. As you know our typical practice is not to include the impact of any future acquisitions or dispositions in our FFO outlook. This is the case with our updated outlook except we have included expected NOI from BOA Tower, which is now scheduled to close on November 14. As Ted mentioned, all the properties contemplated for sale in Greensboro and Memphis as part of phase one are now in the market. We expect most of the phase one sales to close by the end of the first quarter and remain confident in our timeline to complete phase one by mid 2020.

As you may have seen in last night's release, we now anticipate closing both division offices around January 31st, 2020. As a result, the anticipated incremental one-time severance costs of closing the offices, which totaled $2.4 million in the aggregate are required to be accrued from our original announcement date of August 21st through January 31st of 2020. $400,000 was recorded in the third quarter, $1.5 million will be recorded in the fourth quarter and the remaining $0.5 million will be recorded in the first quarter of 2020.

We kept our same property cash NOI outlook -- growth outlook for the year at plus 0.5% to plus 1.5%. This outlook includes the negative impact associated with Laser Spine's sudden closure in the first quarter. Excluding 5332 Avion, same property cash NOI would be approximately 150 basis points higher. We increased the straight-line rental income outlook by $1.75 million primarily due to the acquisition of BOA Tower. Our higher G&A outlook is obviously related to the one-time severance and retirement costs. With net debt-to-EBITDAre of 4.9 times and leverage of 37.4% plus nothing outstanding on our $600 million line of credit and $117 million of cash on hand, our balance sheet is in excellent shape.

We issued $400 million of 10-year unsecured notes during the quarter with an effective rate of 3.24%. We now have no debt maturities until mid 2021, a weighted average maturity of 6.7 years and only $250 million of floating rate debt. We have ample liquidity to fund the BOA Tower purchase in Q4, and as a reminder, given we've already funded a $50 million deposit, we have an additional $386 million left to fund the total $436 million purchase price. Our debt-to-EBITDAre will be temporarily elevated at year-end, but still within our target range of 4.5 to 5.5 times as there will be a timing mismatch between the closing of BOA Tower and the closing of the phase one sales.

Upon completion of phase one, our balance sheet metrics will return to the middle of our target ranges. This will provide ample flexibility to stay comfortably inside our 4.5 to 5.5 times range, as we continue to fund our development pipeline even if we don't issue any shares under our ATM program or sell other non-core assets. With the announcement of Virginia Springs II we have $315 million left to fund on our $500 million development pipeline. Over the long term, our plan is to continue to fund our business on a leverage neutral basis.

Before we take your questions, as we have signaled, we expect our free cash flow to continue to strengthen with the delivery of our highly pre-leased development pipeline, consistent performance of our same-store portfolio and completion of the market rotation plan. While timing will impact our cash flow in any given quarter or year, we feel very good about the long-term cash flow trajectory for the company.

Operator, we are now ready for your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We have a question from Emmanuel Korchman with Citi. Please go ahead.

Emmanuel Korchman -- Citigroup Global Markets -- Analyst

Hey, good morning guys. Just in terms of the market rotation plan, I guess, a couple of questions. The first is, why now? Is there anything specific happening in those markets or others where you felt like this was the time to do it?

Ted Klinck -- President, Chief Executive Officer and Director

Hi, Manny, it's Ted. Well, look, obviously market rotation, it is driven by the asset we found in Charlotte. And this is again -- Charlotte, has been at the top of our new market wish list for a really long time, we've been spending a lot of time there, we've chased different opportunities and we thought this was sort of a bull'seye, in terms of what we're looking for. So from an acquisition standpoint. You know, entering Charlotte was one of our strategic goals, and so in terms of obviously -- now in terms of funding it, we -- Greensboro was a -- with industrial portfolio, we think it's just an ideal time to maximize the value generated there, obviously being one of our smaller markets, so we saw this as an opportunity to buy a new asset and rotate out of slower growing markets into a higher growth market. So it's really asset driven on the buy as well as just an opportune time to sell some of our other slower growth assets in the slower growth markets.

Brendan Maiorana -- Executive Vice President, Finance & Investor Relations

And Manny, it's Brendan. Just to add on to that a little bit, specifically with respect to the financial outlook. As Ted mentioned, the opportunity to cycle into Charlotte and the opportunity with BOA Tower at Legacy Union was a big driver of that. I think if the question is, why exit Memphis and Greensboro now, regardless of whether or not you've found an opportunity to recycle that capital into another acquisition, I think we've looked at those opportunities over time. It's highly disruptive if we just sell those assets given the tax gains that we have there to both FFO and cash flow of the company. And so we wanted to be opportunistic to find the right timing to recycle some of those proceeds into a good growth opportunity.

Emmanuel Korchman -- Citigroup Global Markets -- Analyst

Thanks, Brendan. And I think in your prepared remarks, you guys mentioned that there is a disproportion amount of near-term lease roles in those markets. How is that impacting the marketing process?

Ted Klinck -- President, Chief Executive Officer and Director

I think in terms of the comment was primarily based just in general in those markets, we've over time -- it's not just at this point in time there is a disproportionate amount, it's just over time. Our average lease term in those markets is below -- significantly below the company average. So that's just a function of the actual market we're in that has short-term leases.

Emmanuel Korchman -- Citigroup Global Markets -- Analyst

Thanks everyone.

Ted Klinck -- President, Chief Executive Officer and Director

Thanks, Manny.

Operator

We have a question from Jamie Feldman with Bank of America Merrill Lynch, please go ahead.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Thanks. Can you talk more about the appetite for the assets there, it sounded like you're pretty confident you'll get the sales done, but maybe a little bit more color on the depth of buyer pool and timing?

Ted Klinck -- President, Chief Executive Officer and Director

Sure. Jamie, it's -- all the phase one assets are officially in the market now, but they are at various stages. So we've sort of trickled them out over the last 60 days. So, it's still early, but I will tell you, I think we feel pretty confident just based on the broker opinions of value we got as we are analyzing this and the initial feedback of the assets that were early out in the market. I think we're confident in our ability to execute really at the prices that we originally anticipated, and time will tell. I think you'll see we did up our dispose [Phonetic] guidance at the high end, we included the entire market rotation plan in the dispose guidance.

But having said that, we anticipate a majority of the phase one assets will close in the first quarter of next year. We may get a couple this quarter depending on when we finally get pricing in and all that, but we do feel pretty good just based on what we've seen so far.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Okay. And then how much [Indecipherable] and how soon do you expect to grow more in Charlotte?

Ted Klinck -- President, Chief Executive Officer and Director

Yeah, it's a good question. So we close, as you know, as we've said, we close November 14th. We have had people in that market. We're spending a lot of time there looking at both acquisitions as well as land development opportunities. So I guess the answer is as quick as it makes sense for us, but we are looking at the development fairly closely and obviously development takes time to build up. So we definitely plan on growing it modestly where the opportunities come, we're not going to force anything by any stretch.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Okay. And then can you talk about the demand profile for the LSI building? It sounds like you think there's pretty good demand for office users, but maybe some more thoughts on timing there. And then how soon could you actually have those converted three floors ready for office leasing?

Ted Klinck -- President, Chief Executive Officer and Director

Yeah. So as we said in our prepared remarks. Obviously it looks increasingly like we're going to convert the three floors that are currently medical to office, as we've said, floors four, five and six are already to go. So the last couple of calls, we've mentioned, we've been dancing with a medical user, but we're still doing that. It's just going a lot slower than we thought. As a result, we've really increased our tour activity, our marketing for the office site. So right now, we've got prospects both full-building and partial-building users. And in terms of the timing, as you know, decisions with these larger customers, it's very binary. If we land a large one, I think there's a good chance we could get occupancy and cash rent quicker, but if we end up doing a floor by floor it's going to be a grind and take longer. So we're hopeful. We've got some very good discussions going on, but still too early to tell which way it's going to go from an office standpoint.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Okay. But how long do you think the build out would take so the conversion take before it's even [Indecipherable] occupied as office?

Ted Klinck -- President, Chief Executive Officer and Director

Yeah. I think it's three or four months probably, no more than six. But I think we can get done quicker than that.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Okay. And then I saw you guys took down your development starts outlook for the year, at least the high end. Can you talk about that and is there anything changed in terms of the build-to-suit, you're looking at?

Ted Klinck -- President, Chief Executive Officer and Director

I don't think anything has changed, I just think certainly, it's always -- we've got several discussions going on. It's just hard to predict the timing on when new development is going to hit and given that there's just two months left this year, we just thought it appropriate to bring down the high end of the guidance.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Okay, thank you.

Ted Klinck -- President, Chief Executive Officer and Director

Thank you, Jamie.

Operator

We have a question from Blaine Heck with Wells Fargo. Please go ahead.

Blaine Heck -- Wells Fargo -- Analyst

Thanks, good morning. I'll start with Mark and Brendan. Year-to-date cash, same-store NOI, I think it's plus 1.3%. And Mark as you said, you've got operating margins that are usually better in Q4 than Q3. And you're expecting continued occupancy growth. So I guess we're kind of surprised guidance was an increase. Are there any specific headwinds in same-store growth and in Q4 that we should keep in mind that might have kept you at that same same-store NOI guidance?

Brendan Maiorana -- Executive Vice President, Finance & Investor Relations

Yeah, hey, Blaine, it's Brendan. So I guess, first thing I would mention is, we had a comparable ramp in terms of occupancy in Q4 of last year. So from with respect to the occupancy ramp Q3 to Q4 in 2019, it's comparable in terms of that ramp that we had in 2020, I mean, I'm sorry in 2018. We also had lower straight-line rent expense in 2018, both in Q3 and Q4 versus our expectations for Q4 for 2019. So there is a little bit of a headwind with respect to the straight line outlook in Q4 versus the prior year quarter.

So I'd say those are probably the majority of the headwinds in terms of the outlook for Q4 relative to raising the guidance range. The other aspect is, there is only a quarter and so to raise the range for one quarter's worth of activity, I think is a little bit challenging and then the last thing I'll mention is, if you look at where we were in the quarter this year, in the third quarter of this year on a cash and a GAAP basis, typically, our cash NOI on a same-store basis is higher than GAAP because of the development assets that are in the same-store pool, which are flat from a GAAP basis, but have growth each year from the rent bumps that are in there.

In this quarter, we were lower on a cash basis, than we were on a GAAP basis, which generally signals that there can be some expected drivers of cash NOI growth over the subsequent quarters.

Blaine Heck -- Wells Fargo -- Analyst

Great, that's very helpful. Switching gears, and just to follow up on Jamie's Charlotte question, when do you decide to become active on the acquisition side? Do you guys have an opportunity or first look at acquiring the adjacent buildings to Bank of America Tower in Legacy Union or do you think you'll focus elsewhere in that market?

Ted Klinck -- President, Chief Executive Officer and Director

Sure. We do not have a right -- first right on the other additional buildings. That doesn't mean we won't look at them, but we don't have any contractual rights at all. So in terms of where we're going to grow, I think CBD Uptown is still one of our preferred markets as is South End and South Park. I think our primary, our Midtown is sort of another submarket that we're looking at. So really, those are the three or four submarkets we're spending time on.

Blaine Heck -- Wells Fargo -- Analyst

Okay, that's helpful. And then last one for me. Ted, you've seen co-working come into your markets in a bigger way in the last two to three years. Clearly, WeWork has been a hot topic in the press recently. Can you talk about whether the transparency into WeWork's numbers have changed how you guys view them and other co-working tenants number one as a tenant within your portfolio and number two, as a driver of demand within the markets and maybe any risk, you guys see going forward, given the rapid expansion we've seen?

Ted Klinck -- President, Chief Executive Officer and Director

Sure. Lots of questions in there, so may come back, if I miss one or two. In terms of the co-working, I do want to mention, we don't have any exposure to WeWork. Our exposure just as a reminder is six leases, it's less than 1% of revenues. So we've sort of over the last couple of years, sort of dipped our toe into the water, in terms of the co-working and have not done the WeWork, again we chose to go with other operators. But just given the headlines, what I do think, landlords are going to be more cautious, probably in the near-term, just given all the headlines, they're going to closely evaluate the risk profile and sort of what credit enhancement, I think, they're getting, which is really no different than what we've done throughout the last four or five years that we've signed these leases we focused on.

If you --we have our property managers and folks walk through all of our current leases and all of ours looked like they're operating very well. They are full. So I think we feel comfortable with what we have. So I think we're feeling pretty good. In terms of just co-working and flexible space, I think that the term is migrating from co-working to flexible office space, just as the enterprise business is becoming more a bigger part of of it. I just think it's here to stay. And I think over time the flexible space market is going to continue to grow. I think companies want space quicker and they want more flexible terms. So we constantly look at that as we roll out our spec suites program, we're looking to do a sort of a co-working light-type model as well. That would be -- we won't have a lot of amenities that won't be manned and all that, but we may put out snacks or whatever, but, so we're working on that. We just think that the way office space is being used is changing and landlords need to make sure we're providing the right kind of space that our customers want.

Blaine Heck -- Wells Fargo -- Analyst

Great, thanks for the commentary.

Ted Klinck -- President, Chief Executive Officer and Director

Thank you.

Operator

We have a question from Rob Stevenson with Janney Montgomery Scott. Please go ahead.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Good morning, guys. The development pipeline is currently Raleigh, Nashville, Tampa and that's where the bulk of your land bank is. How much competing new supply are you seeing in these markets that are going to be coming online in 2020 and 2021 competing with your buildings, other than Asurion, which is already leased?

Ted Klinck -- President, Chief Executive Officer and Director

Sure. I think there's a couple of submarkets that we watch more closely than others. Most of our markets where we feel comfortable to supply, meeting demand, the ones that for the most part stick out that we're watching very closely is really downtown Nashville. There are significant new supply coming on, really, over the next, call it 24 months or so. So CBD Nashville is one, what gives us sort of ambient [Phonetic] at night is we don't have any meaningful rollover downtown Nashville until 2025. So assuming demand stays about where it is today, the new construction should deliver and hopefully get leased up in time before we have any rollover.

So, but we are watching it without a doubt. Obviously there's a lot in Charlotte front, as you look at percentage of stock. That's a new one that's on our radar. The nice thing about that is 91% pre-leased. There are three million square feet or so. So a large percentage of stock but highly pre-leased pipeline. And we look at Midtown Atlanta, and Midtown Atlanta has a significant amount of new construction as well under way. It doesn't compete directly, we don't have anything that competes directly with Midtown Atlanta. But there is a fair amount of product coming online.

Historically Midtown and Buckhead where most of our product is, they don't compete that often, occasionally they do. But we feel pretty comfortable again that we're insulated from Midtown new construction for the most part. Then lastly it'd be Raleigh, I think more CBD, overall Raleigh, we've looked at, but really Raleigh continues to be incredibly strong market, we think supply is meeting demand and that, so we think it's not a huge risk there.

Other than that our markets feel pretty good. Tampa has got about one million square feet, we're tracking and it's 45% pre-leased. So we feel pretty good about that as well.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Okay. And are you seeing any significant enough demand to start projects on your land in Richmond, Orlando and Atlanta at this point in the cycle?

Ted Klinck -- President, Chief Executive Officer and Director

Richmond, we've pitched a couple of build-to-suit deals but there is still a pretty high rent differential needed relative to in-place rents to what you need. So I think we want to see that narrow some before we start a project there. Atlanta, we're certainly out marketing our Riverwood 300 site. We had a lot of success with Riverwood 200. So we've got a building design that our Atlanta folks are out pitching for prospects and we'd love to be able to do something there if we find a prospect. Then in Orlando, same in Orlando. There's always been really one new delivery in Orlando and the CBD, which is our primary market where we have the land, its delivering and almost full. So we're very active in marketing that as well, made several initial pitches on that. So we'd love to get something done, if we can.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Okay. And then if I look at the trailing six or eight quarters of building improvements, tenant improvements and lease commissions as a bucket, they've been elevated for quite a while now. When you think about the road ahead with Laser Spine, T-Mobile and various other leasing and retenanting ahead and then factor in the sale of part of the Greensboro and Memphis portfolio, how should we be thinking about this going forward. Is there a normalization of those lines coming or is a trailing six to eight quarters pretty much likely to be the new normal as we extrapolate into 2020 and 2021?

Mark Mulhern -- Executive Vice President and Chief Financial Officer

Yeah, Rob, it's Mark. Obviously, we've seen higher costs. So there has been a trend upwards there, but we did have some and as Ted has gone through here in his prepared remarks, especially and Brian. We have gotten some of the expirations out of the way, the upcoming expiration. So 11000 Weston probably cost us a little more than to refill and do than maybe has historically, so I wouldn't say it's a new trend. I think you mentioned T-Mobile and some of Laser Spine activity, I think that we're optimistic that we can have good economics on those retenanting opportunity. So I would say that probably a little lower going forward than we have maybe in the last six quarters or eight quarters.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Okay. And then last one for me. I mean, given that we're almost to November 1st, I mean the FAA expiring this year. I mean, what's the, I mean, what could they possibly do? I mean, when they have already needed to sign a lease in order to move out for '19 expiration at this point, is that or is it just waiting for government bureaucracy to sign the lease or is there something more involved there?

Ted Klinck -- President, Chief Executive Officer and Director

No, it's largely what you just said it's -- deal with the government's just been slow. We remain incredibly confident that that's going to get done. It's just taken certainly a lot longer than we had hoped, but not totally unusual dealing with the government leases. So we still feel very confident, the FAA is going to get done.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Okay. Because it's not like it's two guys in a pickup truck that'd move them. Right?

Ted Klinck -- President, Chief Executive Officer and Director

It's exactly right.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

All right guys. Thank you. Appreciate it.

Operator

And we have a question from John Guinee with Stifel. Please go ahead.

John Guinee -- Stifel Nicolaus -- Analyst

Great, thank you. Let me ask the obvious rip the Band aid off question. Until you guys get the Memphis and Greensboro sold, until you get the Laser Spine leased up, people are just going to continue to ask and ask and ask about this, and what you need to get to as a position where you can direct people toward your development delivering in 2022, good lease economics, good balance sheet. Have you ever thought about just ripping off the Band aid and getting out of all these pesky little deals?

Ted Klinck -- President, Chief Executive Officer and Director

John, I think specifically thinking about Laser -- the Laser Spine 5332. Certainly we've had offers on vacant buildings. But I'll tell you, if you haven't seen that building, it is a high-quality asset. So, we think we can continue to create value on that, it's a building that we'd love to have in our portfolio. So really no desire on that building to do it. We like it, it's likely a long-term hold for us, once we get it leased up.

In terms of just the Memphis stuff and all that, look, we're going to continue to grind through it. I think we feel very confident in what our plan is, that they're going to take a little bit of time, but hopefully two quarters from now we'll have answer to that both on 5332 and in the market rotation plan. So it's just going to take some time, but no need to really do a fire sale in our opinion.

John Guinee -- Stifel Nicolaus -- Analyst

Great. All right. Good luck.

Ted Klinck -- President, Chief Executive Officer and Director

Thank you.

Operator

We have a question from Dave Rodgers with Baird. Please go ahead.

David Rodgers -- RW Baird -- Analyst

Hey guys, just a couple of quick follow-ups for me. At Avion, just to get a little bit into your thought process. Would you begin to convert those floors before you had an office lease in hand or do you feel confident enough to kind of continue with the way the building is until you have something that you're holding onto?

Ted Klinck -- President, Chief Executive Officer and Director

Yeah, good question. We're likely going to be pulling a permit just to speed up the time as we go down the parallel path with a different user. So we could, but as long as the medical guys still lingering around and which they are, had conversations as recently as, I think, last Friday with them, but we don't see a need to start that, but we will. We've got drawings done, plans done and we're just --all we need is to pull a permit and start so which is something we'll probably likely at least pull a permit here soon.

David Rodgers -- RW Baird -- Analyst

Would replacement go beyond Avion building if it was just straight office today?

Brian Leary -- Executive Vice President and Chief Operating Officer

Hey there, Dave. Brian Leary here. If you had to buy that and build it from scratch, you're getting close to $450 a foot in that submarket and so we still like the position where we're at to release it at favorable economics below replacement.

David Rodgers -- RW Baird -- Analyst

Okay, that's helpful. Ted, I want to go back to your comments. You talked about the $2 billion of potential development on the land that you own. Would you continue to hold all of that land I guess similar to the question you got from Rob earlier. And then maybe can you drive down the path, a little bit more kind of the activity of the discussions you are having on the land that you own and related to beyond '19 starts?

Ted Klinck -- President, Chief Executive Officer and Director

Sure. In terms of our land, I mean it's -- our process of evaluating the land is very similar to what we do with our buildings. We're always going to look and make sure we've got the right land, if we don't for -- if for some reason, it's -- we decide if there is a higher and better use for multifamily, we're going to sell it. So over the last several years we've sold land that at one point was core land that we've sold for hotel uses, multifamily uses. So we are not wed or married to any land by any stretch. We sell some land, we'll rotate in to better land for mixed-use developments or whatever.

So we're constantly looking at it, you saw we sold some this quarter as well, that some of which could have been office uses. So not wed to it. We're going to continually evaluate our land. In terms of development prospects, we've got, like I said, more than a handful of discussions going on, couple of build-to-suit opportunities, one of which isn't having chosen the city yet. So we've pitched a lot of these multi-market deals. So we'll see where they land, so it's just too hard to tell right now. But at the same time, we're also pitching pre-lease, just be a decent pre-lease for a spec building to be partially pre-lease when we start. And we've got a handful of those on land that we own.

So I think virtually all of our pitches that we've made or are making are on owned land, it's no -- in no land we have tied up, that we don't control, so just having land that we control is incredibly important for these pitches. So again, nothing we're ready to report by any stretch, but we like the amount of activity we have.

David Rodgers -- RW Baird -- Analyst

Great. And then maybe last on the Raleigh CBD, I think I just heard you mention maybe it's an area where you have seen some more supply, you bought a plot there, I think, recently as well and so that would give you kind of two different development sites in the Raleigh CBD and maybe just give us a sense of the two separate projects there that you could pursue on those land parcels and kind of how you think about that.

Ted Klinck -- President, Chief Executive Officer and Director

Sure. So we've got two parcels that you said. Actually one -- so two parcels, one in the center of CBD, the second was in what's called a warehouse district, so which is off roughly less than a six or seven blocks away or so. So we think it's two totally different products that we can build there as we can have, as you said, two different options for users. One building in the CBD is we can build up to about 300,000 feet. The other ones closer to 200,000 feet and maybe a little more of a creative type office, but both of those. The second one that's in the warehouse district, were actually part of assemblage that we're putting together as we've closed on one piece, we have another piece that we need under contract that will be closed here in -- here shortly.

So we like both positions and I think we can deliver two different products for our potential customers.

David Rodgers -- RW Baird -- Analyst

Great. Thanks Ted.

Operator

We have a question from Jon Petersen with Jefferies. Please go ahead.

Jonathan Petersen -- Jefferies & Company, Inc. -- Analyst

Great, thanks. On the -- coming back to the market rotation plan when you were looking at new markets enter, are there other markets you looked at besides Charlotte?

Ted Klinck -- President, Chief Executive Officer and Director

Sure. I mean we've got certainly a list of markets that we spend time in, some of the Texas markets, most recently as well actually for a fairly long time we've spent time in Austin and Dallas and spent time over the years in Houston. I think that we've decided Houston is not a market we want to go into. But it's other markets that are very similar to the ones we're in, in the Sunbelt.

Jonathan Petersen -- Jefferies & Company, Inc. -- Analyst

Okay. Is there anything we should think about in terms of timing, I mean do you have an appetite to expand the footprint of the company overall?

Ted Klinck -- President, Chief Executive Officer and Director

I think it depends on the opportunity. I think we've, again, we spend a lot of time in Charlotte chasing things before we're able to get in and find the right entry point. So it's just our normal course of business and normal part of our strategy is to continually evaluate other markets. Again, we want to be in markets where the demographics outperform national averages. So suffice it to say we have wish list assets in most of our target markets that we constantly -- we know who own them, who own the assets, we know what their typical hold period is and we're staying in touch with those on an ongoing basis just as a normal course of business.

Jonathan Petersen -- Jefferies & Company, Inc. -- Analyst

Got you. And then in terms of your two government leases coming out, the FAA and the FBI. I guess how should we think about where those rents are versus market or probably more likely where you guys will renew them. Should we expect any significant movement up or down on those renewals?

Ted Klinck -- President, Chief Executive Officer and Director

Yeah, good question. We think both of them are going to be roughly flat.

Jonathan Petersen -- Jefferies & Company, Inc. -- Analyst

And then with -- one last one, with how much interest rates have moved down in the past few months, have you seen any change? You guys are obviously active in the acquisition and disposition market, have you seen any change in terms of cap rates and the buyer pool?

Ted Klinck -- President, Chief Executive Officer and Director

You know, we -- if you think about the buyer pool for our non-core assets, I think the number of buyers is probably down a little bit from, call it, three or four years ago, but there's certainly enough of a market, not buyer pool, deepen a buyer pool to make a market at our expected pricing. I do think interest rates have probably helped buoy the market a little bit. Again, we're still in process and we'll see how the market rotation is, but the debt financing, there's abundant of equity capital, the end debt capital out there are certainly at low rates, so it should be buoying the market a little bit.

Jonathan Petersen -- Jefferies & Company, Inc. -- Analyst

Great, thank you for the color.

Operator

And we have a question from Daniel Ismail with Green Street Advisors. Please go ahead.

Daniel Ismail -- Green Street Advisors -- Analyst

Great. Thanks, guys. I think there was a comment earlier on the cost of backfilling a few pieces being higher than expected. How much of that is a function of just rising construction cost versus any meaningful changes in tenant concessions?

Ted Klinck -- President, Chief Executive Officer and Director

Yeah, I think it's really we got great term there and so the biggest cause this quarter of the elevated TIs were at 11000 Weston, if you back those out, I think we're pretty much in line with our historical average, but we did have just the mix of deals as I think Brendan and Mark alluded to, we had significantly higher percentage of new leases this quarter versus renewals, so make some stats stick out a little bit, but we did get over a year longer term. So combined with new leasing mix in term is really what caused the elevated levels.

Brendan Maiorana -- Executive Vice President, Finance & Investor Relations

Yeah, Danny. The other thing I would mention is, and we've talked about this before, but we've continued to see like the net effective really move up in a pretty significant way. So I think that, that shows that while there is some level of higher TIs, we're getting that back with respect to higher rents and terms. So I think we generally have felt good that our net effective rents have moved up fairly significantly over the past few years. Even while TIs have moved up on a per square foot basis.

Daniel Ismail -- Green Street Advisors -- Analyst

And then maybe just a follow-up on the the land bank comments, can you give a sort of a change in year-over-year, how much -- how many of those discussions you're having with potential build-to-suit tenants have been from out of town or tenants who are not currently in those markets versus those tenants that are currently in those markets?

Ted Klinck -- President, Chief Executive Officer and Director

Yeah, I just took a swag [Phonetic] it's probably half and half. Certainly, our markets are seeing a disproportionate amount of inbound traffic and all that so we were constantly seeing new inbound calls and all that, but -- but also it's both organic and new-to-market. So maybe half and half if you -- over a number of years.

Daniel Ismail -- Green Street Advisors -- Analyst

And is that pretty typical with what you guys have noticed historically?

Ted Klinck -- President, Chief Executive Officer and Director

Yeah, I'm just think -- I think so I mean it's -- again the activities -- overall, the good thing is the activity is good. I think that's probably been it over time.

Daniel Ismail -- Green Street Advisors -- Analyst

Okay, that's helpful. Thanks guys.

Operator

And we have a follow-up question from Jamie Feldman with Bank of America Merrill Lynch, please go ahead.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Just two quick follow-ups. One, do you think the leasing spreads, you're seeing are sustainable?

Ted Klinck -- President, Chief Executive Officer and Director

So we've had positive rent spreads in 13 of the last 14 quarters. Again this quarter, Jamie, was buoyed as the TI cost in the capital cost 11000 Weston, we had a 20% cash rent growth in both those leases. So, which did help our cash rent growth, if you back those out, our capital would be in line and our cash rent growth would have been down a couple of hundred basis points, so would have been in that three-ish range. So do I think we can continue with cash rent growth? Absolutely, 5.6 this quarter might be a little bit high.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

And I guess as you think about next year, like similar level of leasing spreads is probably reasonable?

Ted Klinck -- President, Chief Executive Officer and Director

Yeah, I think we continue to -- our fundamentals in our markets are just really, really good. Our tour activity to a person as we have our leasing calls on a monthly basis, tour activity is really good in the market. Our economic development groups in our markets are active as well, so both organic and inbound. So I think it's sustainable.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Okay. And then you had mentioned a couple of markets where you're thinking about supply or potentially excess supply. Are you seeing any submarkets in any of these markets where it's weighing on the ability to push rent?

Ted Klinck -- President, Chief Executive Officer and Director

Not yet. A lot of it is still under construction, so we haven't seen a lot of deliveries, but haven't leased up and delivered with a significant amount of vacancy. So I think a lot of our markets are sub 10% vacancy as well. So it's still a landlord market in most of our markets. So, we just haven't seen any signs yet.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

And what are -- I know in Atlanta, you guys flagged Midtown, but I know there has been some moves around in Central Perimeter too like, is that a market that just seems as a site as it's been, or you're starting to see some weakness there or slowdown there?

Ted Klinck -- President, Chief Executive Officer and Director

Yeah. So Central Perimeter, a good question. Central Perimeter, I think, activity is slow right now and I think it's two things. One is there is a couple of billion dollar road improvement project that I think it's gone as well as it could. But it's clearly impacting the psyche of customers in that sub-market. So I think that's contributed, maybe to a slower activity there as well as State Farm is going to continually vacate. They are completing another couple of buildings there, they're going to be vacating space that they currently occupy which is going to put some excess space on the market. So I do think that the Central Perimeter could be softening some.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Are there any other submarkets like that across your markets where you could see some kind of unique moves putting some pressure on demand or condition?

Ted Klinck -- President, Chief Executive Officer and Director

Off the top of my head, Jamie, maybe Cool Springs in Nashville, a little bit. Nissan is a big occupier there. They put a fair amount of space on the sublease market and there's a couple of other sub leases in the market, but I don't think that's materially impacting the market there. But I think that's one that we've got to watch as well.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Okay, all right, great. Thank you.

Ted Klinck -- President, Chief Executive Officer and Director

Thank you.

Operator

And there are no further questions at this time.

Ted Klinck -- President, Chief Executive Officer and Director

All right. We thank you all for your interest in Highwoods. And if you have any follow-up questions, please feel free to reach out. Thank you.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Brendan Maiorana -- Executive Vice President, Finance & Investor Relations

Ted Klinck -- President, Chief Executive Officer and Director

Brian Leary -- Executive Vice President and Chief Operating Officer

Mark Mulhern -- Executive Vice President and Chief Financial Officer

Emmanuel Korchman -- Citigroup Global Markets -- Analyst

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Blaine Heck -- Wells Fargo -- Analyst

Rob Stevenson -- Janney Montgomery Scott -- Analyst

John Guinee -- Stifel Nicolaus -- Analyst

David Rodgers -- RW Baird -- Analyst

Jonathan Petersen -- Jefferies & Company, Inc. -- Analyst

Daniel Ismail -- Green Street Advisors -- Analyst

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