Highwoods Properties, Inc.

Good morning, and welcome to the Highwoods Properties Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded Wednesday, April 29th. I would now like to turn the conference over to Brendan Mehrana, Executive Vice President of Finance. Please go ahead, Mr. Mayorana.

Thank you, Operator, and good morning. Joining me on the call this morning are Ted Klink, our Chief Executive Officer, Brian Leary, our Chief Operating Officer, and Mark Mulhern, our 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 EBITDAIR. 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, 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 potential adverse effect of the COVID-19 pandemic and federal, state, and or local regulatory guidelines to control it 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 COVID-19 pandemic impacts us and our customers will depend on our future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity, and duration of the pandemic, the direct and indirect economic effects of the pandemic and containment measures, and potential changes in customer behavior, among others. With that, I'll now turn the call over to Ted.

Thanks, Brendan, and good morning, everyone. Let me first start by saying I hope you are all well and your families are safe and healthy. This has been an incredibly challenging six weeks for our country and for our economy, but we are grateful for the effort of all Americans, especially our first responders, the nurses, doctors, and other healthcare workers who have rallied around those affected by the COVID-19 pandemic. Before I turn to the pandemic's impact on the economy and our business, I would first like to update everyone on our financial results for the first quarter. We delivered FFO of 93 cents per share, the highest in our company's history, and same property cash NOI of 4%. We leased 893,000 square feet of second-gen office space with gap rent growth of 13.6%, and cash rent growth of 6%. Average in-place office cash rents grew 6.2% per square foot year over year. Development continues to be a growth driver for Highwoods. Our 1.2 million square foot development pipeline represents a $500 million investment that is 77% pre-leased and 50% funded. We are pleased to report construction work on our four in-process projects, Glen Lake 7 in Raleigh, Virginia Springs 2 in Nashville, Midtown 1 in Tampa, and Asurion in Nashville, has continued throughout the pandemic. We remain on budget and on schedule for the varying completion dates later this year and throughout 2021. Our pipeline is projected to generate more than $40 million of NOI upon completion and stabilization, less than $5 million of which will be generated in 2020. During the quarter, we completed the first phase of our plan to exit the Greensboro and Memphis markets and reinvest that capital into the high-growth market of Charlotte with the acquisition of Bank of America Tower. All told, we sold 332,000 square feet in Memphis for $89.6 million during the fourth quarter of 2019 and 3.6 million square feet in Greensboro and Memphis for 338.4 million during the first quarter. These sales garnered a blended 6.8% cap rate using 2020 GAAP NOI compared to the 6.4% cap rate for the acquisition of B of A Tower, which will deliver strong cash flow for many years to come with its excellent roster of credit-worthy customers. As projected, our acquisition of Bank of America Tower and phase one of our Greensboro and Memphis market exits, coupled with G&A savings, is neutral to our FFO run rate and accretive to our cash flow run rate. Now, turning to the COVID-19 pandemic. The unprecedented nationwide efforts to slow the spread of the COVID-19 virus has obviously had a significant impact on the U.S. economy. It is still too early to predict how deep and how long it will take U.S. businesses to recover from the severe dislocations caused by the effective shutdown of large segments of our economy. Even with our strong first quarter performance, we believe it is likely our financial results for the remainder of 2020 will be adversely impacted by the COVID-19 pandemic. Given the fluidity of the pandemic and its uncertain impact on economic activity, potential lost rents from customer defaults and non-cash straight-line write-offs are too speculative to project. As a result, Our updated FFO per share outlook of $3.55 to $3.68 excludes any potential losses. All of our buildings and parking facilities have remained open and are available to our customers throughout the pandemic. Obviously, usage of our assets has been significantly lower than normal in April and is expected to remain low in May and June before gradually increasing in the third and fourth quarters. Fortunately, lower variable expenses, such as utilities and janitorial, will partially offset a corresponding decline in parking revenues. We expect the net impact on 2020 FFO from these items to be flat to down a few pennies. While still early, we believe spec leasing will be slower than originally anticipated, although partially offset by higher renewal activity. We currently estimate the net impact on 2020 FFO to be two to four cents per share lower. As Brian mentioned on our last call, we entered 2020 in a strong position with regard to our rollover exposure. During the first quarter, we de-risked our future rollover exposure even more with our leasing success, leaving us with only 6.8% of revenue expiring during the remainder of 2020. in our lowest cumulative three-year forward rollover exposure in 20 years. With regard to the pandemic's impact on our customer base, we have long emphasized the importance of having significant customer, geographic, and industry diversification. Currently, as a percentage of our revenues, no market accounts for more than 20%. No customer, other than the federal government, accounts for more than 4%. and no industry category accounts for more than 25%. Brian will go into more detail about customers that have requested some form of rent relief and our process for managing those requests, but I will highlight a few points. First, to date, we have collected 96% of our contractually required rents for April. Second, customers who we currently believe have some merit for temporary relief represent about 10% of our revenues. Many of these are restaurants, amenity retailers, small healthcare practices, and flexible office providers. In some cases, we have agreed to defer, but not abate, the payment of rent for a limited period of time. In other cases, we have agreed to abate rent as a consideration for a lease term extension. To date, we have agreed to grant temporary rent deferrals that represent approximately 1% of our annualized revenues. Third, we have received requests from creditworthy customers who have made what many in the industry are referring to as opportunistic rent relief requests. Our view is these customers' contractual rent obligations do not merit temporary relief. The company is not currently aware of any customer-specific facts or circumstances that indicate a likelihood of any material losses at this point during the second quarter. Turning to our balance sheet, with cash on hand, full availability under our $600 million credit facility, and no debt maturities until June 2021, we believe we have ample liquidity. To be prudent, We have delayed certain BI projects originally planned for this year, including some lobby and restroom upgrades. Plus, with our expectation that spec leasing will flow, we currently expect lower leasing capex for the rest of 2020. The big question for everyone is where does the economy go from here? We don't know, but in the near term, we are focused on, first, maintaining our liquidity and fortress balance sheet. Second, keeping our buildings open and fully operational. Third, keeping our development projects on time and on budget. Fourth, working with customers to creatively design mutually beneficial solutions that maintain their long-term tenancy without significant financial impact on Highwoods. Fifth, minimizing all expenses to the greatest extent feasible without sacrificing operating performance or leasing opportunities. And sixth, capturing as many renewals and relets as possible, given this uncertain environment. Even during the stay-at-home orders, there continues to be some interest for back-filling available space. The volume of showings has obviously slowed during the past four to six weeks, but activity has not gone to zero. And we are cautiously optimistic that demand will begin to rebound as the economy reopens. In the long run, given the strength of our balance sheet, we believe we are well positioned to capitalize on any opportunities created by this economic disruption. For now, we are pencils down on potential acquisitions, although we continue to have discussions regarding a limited number of potential build-to-suits. Rest assured, Once the economy reopens and we have a better sense for customer demand, rents, valuations, and our own cost of capital in order to resume underwriting deals, we will be opportunistic, but stay true to our mantra of being disciplined capital allocators. Before I turn the call over to Brian, I'd like to say a few words about our incredible teammates here at Highwoods. We are pleased to report that the few employees and dependents of ours who have tested positive for COVID-19 have fully recovered. Since mid-March, we have actively encouraged and supported employees who can work from home to do so. Employees who cannot work from home, such as maintenance and HVAC technicians, have collaborated with each other in our respective local leadership teams to handle essential property-related tasks. We continue to be amazed by the collegiality, the dedication, and the tenacity that our coworkers have been exhibiting every single day during this pandemic. Whether on the front lines, keeping our buildings open and well-maintained, or working from home, keeping our business running smoothly, including closing our books, filing our 10-Q, and preparing for this call. Our coworkers have continued to personify the Highwood standard of excellence with everything they do, and we sincerely thank them for our efforts. Brian?