Preferred Apartment Communities, Inc. (HIW) Earnings Call Transcript & Summary

Greetings, and welcome to the Highwoods Properties Conference Call. [Operator Instructions] I would now like to turn the conference over to Brendan Maiorana, Executive Vice President, Finance and Treasurer. Please go ahead.

Thank you, operator, and good morning. Joining me on the call this morning are Ted Klinck, our Chief Executive Officer; Brian Leary, our Chief Operating Officer; and Mark Mulhern, our Chief Financial Officer. Forward-looking statements made during today's call are subject to risks and uncertainties, which are discussed at length in this morning's press release as well as our SEC filings. As you know, actual events and results can differ materially from these forward-looking statements, and the company does not undertake a duty to update any forward-looking statements. One of the most significant factors that could cause actual outcomes to differ materially from our forward-looking statements is the ongoing adverse effect of the COVID-19 pandemic on our financial condition, operating results and cash flows, our customers, the real estate market in which we operate, the global economy and the financial markets. The extent to which the pandemic impacts us and our customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic and its ongoing impact on the U.S. economy and potential changes in customer behavior, among others. With that, I'll now turn the call over to Ted.

Thank you, Brendan, and thank you all for joining us on such short notice. This morning, we announced an agreement to acquire a portfolio of office assets from Preferred Apartment Communities for a total investment of $769 million. We have already posted nonrefundable earnest money deposits totaling $50 million. and expect the acquisition will close in the third quarter. We're excited about this transaction as we believe it improves our portfolio quality, increases our long-term growth profile, and provides immediate and ongoing financial benefits. The core portfolio is comprised of 4 Class A office assets, 2 in Charlotte and 2 in Raleigh, with a combined 1.6 million square feet as well as a mixed-use redevelopment site in Atlanta. The transaction includes 2 noncore assets that have a combined estimated value of less than 12% of the total investment. This transaction continues the path we set as a company many years ago with our strategic plan, which includes owning the highest quality buildings in the BBDs of our markets and maintaining a strong balance sheet. First, it provides scale with high-quality differentiated office assets across some of the best BBDs in the Sun Belt. Upon closing, we will become the largest owner of Class A assets in the South Park submarket of Charlotte. We will increase our lead market share in Downtown Raleigh, and we'll enter the North Hill submarket of Raleigh. Second, this portfolio will enhance our long-term growth prospects. Rents are approximately 10% below market and Charlotte and Raleigh consistently ranked as 2 of the top growth cities in the U.S. with long-term economic and demographic trends that outpaced national averages. We also expect to leverage synergies with our existing portfolio. And we plan to fund this transaction by selling noncore assets with less upside. Third, the assets to be acquired complement our existing portfolio extremely well. We'll increase our share in Raleigh's CBD to nearly 40% of the Class A stock where we're already the largest landlord. Further, we will enter North Hills, which has long been on our wish list. North Hills is a vibrant mixed-use BBD with 1 million square feet of retail and restaurants over 2,000 apartment units, 500 hotel rooms and 1.4 million square feet of office. Office rents in North Hills are the highest in the city, and there is limited vacancy. In Charlotte, we will nearly double our presence to 1.6 million square feet and enter the South Park BBD, which has also been on our wish list. In Atlanta, we'll have an excellent redevelopment opportunity at Galleria 75, which is near our 800,000 square foot 95% occupied Riverwood project. The Galleria 75 site can support up to 600,000 square feet of office development and 300 apartment units. Fourth, the acquisition provides stable cash flow, the PAC team has done an excellent job operating these assets. The strength of the customer roster is evidenced by the rent collections of greater than 99% since the onset of COVID-19, which is comparable to our own performance. The weighted average lease term for the core assets is 7.3 years, further supporting our already strengthening cash flows. Fifth and finally, we believe this transaction will have a favorable impact on our financial results in both the short and long term. After we complete the planned noncore sales, we expect this portfolio rotation will be accretive to cash flow and roughly neutral to per share FFO, with upside over the long term. We expect to fund this acquisition primarily by selling noncore assets across several markets. Our plan is to sell $500 million to $600 million by mid-2022 and roughly half of which we expect to close by year-end 2021. We have a proven track record in deploying this playbook, opportunistically using our balance sheet for attractive investments as they arise, and then subsequently returning our balance sheet to pre-acquisition metrics to reload our dry powder. For example, in August 2019, we announced our market rotation plan to enter Charlotte and exit Greensboro and Memphis. We completed Phase 1 of that plan by April 2020 within 7 months by completing $420 million of dispositions. In fact, since the completion of Phase 1, we have sold over $180 million of additional noncore assets. Our noncore disposition plan associated with this planned acquisition is also consistent with our long-term strategy of continuous portfolio improvement, albeit on an accelerated time line. Our investment team has been hard at work preparing to launch for the marketing of many of these assets. Before I turn the call over to Brian, I want to express my gratitude to the entire team at PAC, who have worked so collaboratively alongside us in this transaction. They've been great to work with, and we look forward to closing the transaction. Now I'll turn the call over to Brian.

Thank you, Ted, and good morning, everyone. As Ted mentioned, this transaction adds 2 high barrier-to-entry BBDs to our portfolio and bolsters our leading position in Downtown Raleigh. As you know, Charlotte has long been a priority for us and our reentry in the fall of 2019 was a result of a deliberate and patient exercise that culminated in the acquisition of the 841,000 square foot Bank of America Tower in Uptown Charlotte. From our perspective, Charlotte currently has 3 BBDs in Uptown, South End and South Park, with each having a unique set of superlatives. From the soaring corporate towers of Uptown Skyline to Charlotte's gritty and growing South end Warehouse District, the South Park's high-end address were over 4 million square feet of office space set amid the region's best shops and restaurants and adjacent to some of Charlotte's finest neighborhoods. These 3 BBDs are enjoying strong occupancy, rent growth and inbound activity. Charlotte's story is a growth story. In 2020, the Queen City surpassed a city of San Francisco with regard to population and CBRE is estimating an additional 5% to 10% growth in population by the year 2025. Young and talented people are moving to Charlotte for jobs, many in finance and tech. Long recognized as a global financial center, second only to New York City in the United States, Charlotte's financial services sector has further grown and diversified in the last few years and the sector's demand and consumption of technology within and across their lines of business, has elevated Charlotte into the #1 position nationally for tech job growth for CBRE, CompTIA and Forrester. South Park, where Capital Towers and Morrocroft Centre are located is a supply-constrained BBD land locked by executive housing, with most of the commercial land already developed and with no new construction underway. Acquiring 5 of the 8 best and newest office buildings in South Park is core to our long-term plan in Charlotte. The acquisition of these tremendous South Park buildings whose collected 770,000 square feet are 97% leased will also mark the first addition of an award-winning brewery to the Highwood's portfolio. A request we're hearing more of as we endeavor to create the best workplaces across our footprint. With the highest quality consumer roster in the BBD and with an average WALT of 7.8 years across all 5 office buildings, we're bullish about our pending investment in South Park. We're also enthusiastic about the opportunity to bolster our hometown Raleigh presence with an entry into the highest of barriers to entry BBD in North Hills and to add another skyline shaping tower to our downtown portfolio. North Hills is an exceptional and highly curated live, work and play district with some of the region's finest Class A office space, achieving rents 30% higher than the Metro average. The 16-story CAPTRUST Tower is in the heart of North Hills and is adjacent to the Capital Grille a 2-level Harris Teeter grocery store and the AC by Marriott and Hyatt House hotels. It's 300,000 square feet, which is 98% leased, sit atop embedded parking includes Yard House as well as local favorite the calf fish restaurant. With the acquisition of 150 Fayetteville Downtown, Highwoods will control 38% of Raleigh's CBD Class A office market, stretching from the state capital to the Duke Energy Center for the Performing Arts. 150 Fayetteville, which encompasses 560,000 square feet will take its place in the portfolio next to the Highwoods developed mixed-use PNC Plaza as 2 of Raleigh most signature towers. In closing, with in-place rents below market, and with new and renewal leasing occurring during the pandemic at top of market rates, there is additional upside as leases roll. Mark?

Thanks, Brian. I'll start by walking you through the funding plan for the acquisition. We disclosed a total anticipated investment of $769 million, which includes an estimated value for the noncore assets of less than 12% of the total investment. The transaction includes the assumption of secured loans relating to the core assets estimated to be recorded at fair value of $403 million. and $28 million of planned near-term building improvements. This leaves approximately $250 million of cash required to fund the remainder of the purchase price, and we have already deposited $50 million of earnest money. The remaining $200 million will be funded through a 6-month unsecured bridge facility that we expect to obtain from JPMorgan. This bridge facility, which can be extended for an additional 6 months, will have terms comparable to our $750 million revolving credit facility. We currently have $170 million outstanding on our revolver after the scheduled repayment last week of the remaining $150 million of 2021 bonds and funding of the $50 million earnest money deposit for this acquisition. As Ted mentioned, we plan to sell $500 million to $600 million of noncore properties to return our balance sheet metrics to pre-acquisition levels. We expect approximately $250 million of sales to qualify for 1031 exchanges and expect those sales to close by year-end 2021. The remaining sales are expected to close by mid-2022. Immediately following the planned acquisition, leverage will be temporarily elevated prior to the receipt of meaningful noncore disposition proceeds. This is a typical strategy for Highwoods utilize our balance sheet capacity when investment opportunities arise and then subsequently return our balance sheet to pre-investment levels to replenish our flexibility and dry powder for future growth. Without any core -- noncore dispositions, we estimate debt-to-EBITDAR would be in the low 6s by mid-2022. While not our plan, we believe this would still be within the parameters to maintain our credit ratings at current levels. In our press release this morning, we disclosed year 1 projected cash NOI of $38 million and GAAP NOI of $42.7 million. These amounts exclude $1.2 million of annual NOI from GALLERIA 75 that will be classified as development, and therefore, will be excluded in our calculation of FFO. For the 4 core office buildings, we estimate a year 1 GAAP cap rate of 6.5% and a cash cap rate of 5.7% on a fully invested basis. Of note, these cap rates include $16 million of estimated mark-to-market on the assumed debt, $28 million of planned building improvements and $5 million of transaction expenses. In addition, first year cash NOI includes approximately $2 million of free rent, which when added back equates to an adjusted cash cap rate of 6.1%. Upon completion of our noncore disposition plan by mid-2022, we expect to return our balance sheet metrics to pre-acquisition levels. At that point, we believe our FFO run rate will be roughly unchanged, while we expect accretion to our cash flows and CAD. Said another way, if we hold all other assumptions for the company unchanged and only isolate impacts from the acquisition of the core properties and noncore asset sales, there should be no meaningful impact to what our FFO would otherwise be. Prior to completion of our noncore asset sales, our FFO progression is likely to be bumpy and somewhat dependent on the pace and timing of the noncore dispositions Finally, the financial impacts of these planned investment activities were obviously not included in our 2021 per share FFO outlook published on February 9. While we will provide an updated 2021 FFO outlook as part of our first quarter earnings release next Tuesday, April 27. We do not intend to update our FFO outlook to reflect the financial impact of these planned investment activities until the closing of the acquisition. Operator, we're now ready for your questions.

Our first question comes from Elvis Rodriguez with Bank of America.

Just a couple of questions on the transaction. One, are there any big move-outs in the portfolio that you're acquiring? And then two, there seems to be a lot of moving pieces around the value of the noncore assets, so Armor and any NOI that could get you to that 6.5%. So anything you can share to help us think through that math would be helpful.

Elvis, it's Ted. Really in terms of big move outs, no. It's a pretty solid portfolio. No major customers moving out at all. I think the largest might be a 15000-footer that we know of in the next year or so. So it's a pretty stable portfolio.

Elvis, it's Brendan. So just -- and with respect to the value on the noncore and the impact on the earnings FFO projection, the FFO neutral that we talked about, we really had assumed that we -- those noncore assets, Armor Yards and the Mezz Loan just have no impact on our financial results. So whether or not we hold those for a short period of time, we have assumed that over time, we would not hold those assets. So we're really talking about the FFO impact from the acquisition of the 4 core office buildings, the redevelopment property, GALLERIA 75 and the corresponding noncore asset sales of existing Highwoods assets between $500 million and $600 million.

And Elvis, let me add. This is Ted. Let me correct my statement. We do have a known move out in 2024 of about 42,000 square feet that I was reminded of, that's still a few years out.

That's very helpful. And then just 1 more for me. On the asset sale range of the $500 million to $600 million, if you do on the lower end of that range, is that due to the same assets or selling less assets And if it's the same assets, does that mean that there's a chance this could be near-term dilutive once everything closes?

Yes, Elvis, it's Brendan again. It could be either of those 2. So there's certainly a number of assets in there. So it could be that there's just less assets. There's also a little bit of, as you alluded to, price sensitivity that's in there. It's -- so there's a range. So to the extent that prices came in a little bit lower than what we're estimating There could be a little bit of headwinds in terms of the accretion numbers that we're talking about on cash and FFO. But I don't think it would be anything meaningful to change the rough parameters of the financial impact that we laid out.

Our next question comes from Rob Stevenson with Janney.

Can you talk about the -- what the timing is for the Atlanta redevelopment? Is that something that you're going to do? Are you going to sell off the apartment portion? What's the thought process there?

Sure. Rob, it's Ted. Really, I'd say no time soon. We've -- PAC has done a great job looking at various redevelopment scenarios and different plans, what would optimize the site. So upon closing, we're going to dig in further and figure out what makes sense for the market. We clearly will sell off the apartment side to another apartment developer potentially packed as well on that. So again, to be determined. This billing does have a lot of short-term leases. So we'll be able to get to that redevelopment pretty quick in the event the market warrants a development project. Brian, is there anything to add ?

I might just add is we'll have the catches made open our Riverwood assets are less than a quarter mile away and are basically full. So as that submarket continues to receive inbound interest, we'll make sure we're positioned to take advantage of any opportunity there. But this is front and center on the interstate at the interchange, too. So it's a great spot.

Okay. And then what are you guys thinking the price per square footage of the 4 core assets? And how does that compare to market pricing as well as new construction costs in those submarkets?

Yes. I think in terms of the price, it's -- we think it's definitely below replacement costs. Rob, if that's what you're asking. It's probably in that 10% or so on average below replacement costs.

Okay. And then last 1 for me. You talked about it a little bit, but the Mezz Loan at 8West. What's the value there? When does that get paid back? And is there any purchase opportunity on the underlying asset that comes with this loan?

Sure. I think the book balance at year-end was like $11.9 million, I think, has got a maturity into 2022 with some extension options as well. So we still got some time. There's recently delivered buildings so they're in lease-up right now. And then again, that's -- we consider that noncore just because it's not a natural fit for obviously the rest of our portfolio. So I guess there's a chance you could own it at the end of the day, but I think that's unlikely for us.

Okay. So of the roughly $90 million of allocation to the noncore assets, the Armour Yards would really be the major part of that. And obviously, if they sell that to somebody else rather than to you, that part of the funding needs goes away as well.

Yes, that's correct, Rob. And just to be clear, we didn't include the financial impact of holding the 8West Mezz Loan or Armour Yards in those -- in the financial parameters that we laid out. So I just want to be clear about that. So to the extent that we did end up holding those longer term, I don't think it would have a significant impact on the financial projections that we provided. But those were stripped out, assuming that we do not hold those assets long term.

Okay. But I mean, just in terms of that, I mean, if armor yards is call it roughly $75 million or something like that, you don't actually have to buy the net $75 less million of funding needs that you wind up having. Essentially, right?

Yes, that's correct.

Our next question comes from Blaine Heck with Wells Fargo.

Just a follow-up on valuation on the 4 core properties. You guys announced the 5.7% cash cap rate, 6.5% on a GAAP basis. And we're calculating about $425 a square foot, including the CapEx. Is there any discount here relative to where you think these assets might have traded prior to the pandemic? And Just further, do you have cap rates or price per square foot may be broken out by Citi, what you paid for Charlotte assets versus what you paid in Raleigh.

Blaine, it's Ted. I'll take a shot at that. Look, this was a marketed deal, right? So I think the market spoke in terms of the pricing. And we haven't -- for high-quality assets throughout the pandemic, we really didn't see any diminution of value in those trades. And really, in terms of breaking up city by city, we don't have that. It's really a portfolio overall yield.

Okay. That's fair. And then can you just give us any more color on the proposed disposition? I'm assuming, obviously, the remainder of Memphis and Greensboro assets are included and obviously, the noncore assets from this portfolio. But can you give us any detail on the rest of what you guys are going to look to sell? Are there any specific submarkets you guys are targeting or some sort of group of assets? Or is it kind of a mix throughout the portfolio? And maybe how should we think about pricing on those dispositions? Do you have any expectation of the cap rate range or price per square foot?

Sure. And just to be clear, the noncore assets that are part of this transaction are not in that $500 million to $600 million. Just want to make sure everyone's clear on that. In terms of the portfolio we're going to be selling, again, it's just an acceleration of what we've typically done that $100 million to $150 million per year. The assets are going to be sprinkled throughout several markets. But I'd say the overwhelming majority are going to be in Tampa, Atlanta, Richmond and Raleigh those 4 markets. And then obviously, as you said, the remaining buildings in Greensboro and Memphis. It's a mix of both single tenant assets with strong credit, long lease term, along with other assets that are just in our noncore bucket that are less upside and not core to our long-term strategy. In terms of the way we feel, I think we've got broker valuations on most of these assets already. One is already in the market has been awarded, and we're ready to launch several others. So It's going to happen over the next, obviously, few quarters. In terms of pricing, I think when you group the whole $500 million to $600 million, it's going to be roughly a 7% GAAP cap rate.

Our next question comes from David Rodgers with Baird.

I guess I wanted to talk about the rate on the portfolio. You guys gave a lot of good details about it. But I guess when I was looking at, say, the NOI margin, it looked like it was in low to mid-70s, typically a little higher. I know you guys have a little lower taxes down in North Carolina. But Is there any tax abatements or anything we should be thinking about in the portfolio? And then maybe when does that free rent begin to burn off that you mentioned the $2 million in year 1? Is that a long term? Or does that burn off at the beginning of year 2.

Sure, Dave. It's Ted. I'll start and Brendan or Mark might want to jump in. No, there's no tax abatements on all this. You did hit on it, the operating expenses in North Carolina, both Raleigh and Charlotte are lower than really most of our other markets. In terms of the free rent, it's roughly $2 million, that's going to burn off -- most of it in the next -- in the first year. right, unless maybe a little bit sprinkles into the second year, but it's largely this year on recent leases that they've signed during the pandemic. So it should get burned off reasonably quick.

Dave, we did just factor in tax reassessments in our underwriting. So as you know, we're thorough in what we do in terms of underwriting, we did have some assumed reassessments in the tax numbers, just so you're aware of that.

Okay. On the cap rate on the sales, you did say 7% on the GAAP cap rate. From a cash cap rate perspective, I guess, how do you anticipate kind of getting it to that, let's say, 6.1%, would I guess, get you neutral to what you're buying today? So I guess, do you think that you can sell something as low as the low 6s today to kind of match fund?

Yes, Dave, it's Brendan. Really, so what we talked about is cash flow accretion, right? So it's not necessarily that the cash cap rates are at parity. It's really when you take into account the CapEx load between leasing and building improvements on the disposition portfolio compared to the acquisition portfolio. Where we see a benefit on the acquisition portfolio. So I think that doesn't hit the cap rate necessarily on a cash basis, but on an economic basis, I think that's where we feel like the acquisition portfolio stacks up very favorably against the pool of disposition assets.

So AFFO, then that's fair. That's a good point. I guess last, would you talk maybe Brian or Ted, a little bit more about value-add acquisitions and your comfort. Obviously, this has a long wall and so it makes sense in an environment where maybe some people are still concerned about work from home. You did mention that in your prepared comments. But I guess, talk about how you would view and what the potential pipeline would be for value-add transactions and underwriting more vacancy in today's environment and how comfortable you would be doing something like that.

Sure, Dave. I can start and if Brian wants to jump in. Look, as we've always said, we -- Brian alluded to the catcher man, we're always out looking for every acquisition that's out there, every opportunity. We've got a well vetted and quarterly updated wish list that we're following. So We'll absolutely take vacancy in buildings we want to own. It's markets that are in our backyard. We understand the deal flow, where the tours are occurring, where they're not and the activity that's out there. So the -- to the extent that we've got conviction on the asset, conviction on the market, the submarket and the long-term prospects. We're seeing, again, in our buildings, where we have boots on the ground in virtually all of our markets. So to the extent we feel comfortable with what's going on in terms of leasing activity. And if we can get it priced right, that's the key. So you got to feel comfortable about the market, the building the submarket, but also you got to be able to have comfortably -- you can price in the current of market. And if you can get attractive yields on a risk-adjusted basis, we're bullish on acquiring more assets on the value-add side.

[Operator Instructions] Our next question comes from Omotayo Okusanya with Mizuho.

Yes. So just a quick clarification on the FFO accretion expected from the transaction. So when we take a look at 42.7 million GAAP NOI, a 7% cap rate on 5.50% of dispositions is about $38.5 million loss on NOI. I know you're picking up about $15 million of additional interest expense, we kind of end up with a math that shows FFO dilution of about $0.07 to $0.10. So I guess we're trying to figure out what we're missing here.

Tayo, it's Brendan. So yes, your math is right on the NOI coming in the door, so $42.7 million coming in the door and right on the NOI going out the door, so the $38.5 million that goes out the door, So there is movement in terms of what's going to happen with the proceeds that come in the door to pay off existing debt. So I think that might be the piece that you are missing. So really, we're going to take the proceeds from the dispositions and pay off debt now. We're assuming debt, so there's going to be other debt that we pay off. So that's where you kind of get that savings. And that's -- and then there's a little bit of additional debt that we will take on to fund this transaction, and that kind of makes up the difference between that $42.7 million and the $38.5 million in terms of annual interest expense. But we will -- as we get proceeds in the door, we will pay off some of the existing debt that we have on the balance sheet.

So the ideas is you are going to pay off a higher coupon debt and that's going to kind of make it more FFO neutral.

That's right. And it will be a little bit noisy over the next several quarters and probably through the middle of next year as we kind of get the balance sheet all normalize and kind of optimize from a debt stack perspective. So it will be a little bit choppy in the interim. But once we get through all that, that's where we get to, call it, about neutral on FFO and accretive on cash flow.

Got you. Okay. And then 1 other quick one. Armour Yards, I mean is that an asset that you guys really would prefer to own or you're kind of agnostic if PAC sells it to someone else?

Yes. So I think the latter Armour Yards, it's a really cool asset. It's a very attractive asset, creative office, but it's just not a natural fit with the rest of our portfolio, specifically in Atlanta as well. We just don't have a lot of that adaptive reuse stuff, but it is a good asset. And if we end up buying it, we'd be fine with that.

Our next question comes from Manny Korchman with Citi.

Did you guys think hard about doing some common equity here instead of accelerating the disposition program?

Manny, I can start. Look, I think it's -- from the beginning on this, it's really conceived as a portfolio rotation and upgrade, not too dissimilar to our market rotation plan we did in August '19. So all the financial impacts we've outlined, it doesn't contemplate issuing any equity. But having said that, look, it's always one of the arrows we have in our quiver. So if it makes sense, we can always do that. But it wasn't -- we didn't do this transaction contemplating equity issuance.

And then, Ted, you talked about the acceleration of those dispositions from your -- I think you said $100 million to $150 million sort of typical pace. Should we still anticipate that kind of pace on top of this? Or is this a true acceleration? And then unless you have a better use or sort of a marked use for proceeds that dispositions may pause.

Yes, it's a great question, Manny. Look, the way we look at it, we consistently rank our portfolio, whether it's 1 of the prospects for the buildings, the submarkets, where we see an activity in our portfolio on a leasing basis. So it's a regular exercise that we go through really on an annual basis. So we're always looking to upgrade. So I would think we're going to continue the cadence of dispositions over time.

Our next question comes from Michael Lewis with Truist Securities.

You answered my question about the pre-pandemic pricing versus post pandemic. But I wanted to ask a little more about that. I think it's a little surprising that there wouldn't be much movement at all. And does that have to do with the way -- do you view the risk maybe hasn't changed as much as I think a lot of people in the market are questioning the work from home risk and how that's kind of changed things in the office space. Or does it have more to do with this specific portfolio where I know you have a lot of lease term left. So I guess just a question about how you're underwriting that risk and thinking about it? And has it changed things a lot or not? It sounds like on this deal not?

Yes, let me try and address both those. Again, as it relates to price discovery during the pandemic, and we've seen multiple trades of obviously single-tenant buildings, but also multiple trades of high-quality, multi-tenant assets in the Sun Belt, primarily in Raleigh, Charlotte and Nashville. But we believe, again, this pricing stands up well compared to those others, whether it's the initial yields, favorable below-market rents. The average WALT on this portfolio is a little bit less, but it's more than made up for in the cap rate. Not even layering in $28 million of Highwoods' rising CapEx. So I just think there's a lot of investor interest for the best quality assets. That's why pricings held up firm. For our view on -- in terms of the work from home risk and all that. Look, in our markets, it's a few things. Long term, our markets are going to continue to grow, and I wake up every day. Glad to be in the Southeast. thrilled with the job growth that we continue to see throughout the pandemic. And then when we look at this -- so our Sun Belt markets, we think, are less susceptible to work from home. And then when you look at this specific portfolio, Just the nature of the customer base, we believe, is less susceptible to work from home risk. And I think that came out, it was very evident in the customer interviews we did. We did an inordinate amount of customer interviews, not only the big customers, but went all the way down to the small customers so we could get a representative sample across the portfolio and industry-wide. And what we've seen is the power of the workplace has, in many ways, been reinforced during the pandemic. And that's what we heard on the customer interviews. And that's also what we're hearing, Michael, in our -- with our existing customers, our existing portfolio. So we felt very comfortable with that. Then if you layer on just the quality of these assets. One thing we have seen is a flight to quality. And some of the leasing that's gotten done in this portfolio during the pandemic has been fantastic, and it just represents the type of assets we want to own long term.

Great. And then lastly, if I may. I noticed at the end of your press release, you mentioned $250 million that could be 1031 eligible. I don't know what you expect for gains or anything on all of the dispositions. But is there any reason to think that you might have gains that necessitate a dividend or anything like that?

Michael, it's Brendan. It's possible. It depends on how pricing plays out, timing plays out, tax strategies, all that kind of stuff that's there. So did factor a possibility of that in those financial projections that are in there, but I think that's to be determined and would be down the line and likely would be a result of the sales that we expect to occur in the quarter -- in the first half of 2022.

We have a follow-up from Elvis Rodriguez with Bank of America.

Just 1 more for me. Any plans to pay off the secured debt near term?

Elvis, it's Mark. No, no plans there. Obviously, the make holes are prohibited. These are life insurance mortgages. So the prepayment penalty on those would be fairly steep. So we don't anticipate them and haven't factored that in any of our numbers.

Are you able to share what those prepayment penalties would be? Or since you're not even contemplating you're not going to share?

Yes, probably not. I mean these are long dated. I mean if you look at the maturities on a lot of them, they're fairly far out. So you can just assume I got '28, '29, some in the '30s in terms of when they mature. So the math is just prohibitive.

Gentlemen, there are no further questions. At this time, please contain with your presentation or closing remarks.

Thank you, operator, and thank you, everybody, for dialing in. As always, please feel free to call if you have any follow-up questions you have. Also as a reminder, the press release has an active link to the IR deck that may be helpful as well. And we look forward to speaking with everyone on the quarterly earnings call next week. Thanks again.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.