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, July 29, 2020. I would now like to turn the conference over to Brendan Mayorana. Please go ahead.

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. Currently, 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 local regulatory guidelines and private business actions 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 future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity, and duration of the pandemic and the resulting economic recession, 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 start by saying I hope you are all well and your families are safe and healthy. We are pleased to report that our employees are healthy and that we have safely returned to all of our offices. To ensure our coworkers feel safe and productive while in the office, We have implemented a rotation schedule, giving everyone ample opportunity to comfortably practice social distancing. This helps us achieve our twin objectives, which are to prioritize the health and safety of our employees and realize the benefits of sharing our company's unique culture together in the workplace. Obviously, this has been an incredibly challenging time for our country and our economy. It remains difficult to predict the duration and severity of the COVID-19 pandemic and its overall impact on economic activity. We believe we are well positioned operationally to handle the near-term effects of this downturn, given our lack of large customer explorations over the next few years in our substantially pre-leased development pipeline. Plus, we continue to maintain a fortress balance sheet of ample available liquidity to fund leasing capital expenditures in our development pipeline while having dry powder to capitalize on future growth opportunities. In addition to having a high-quality portfolio and strong balance sheet, we are well-positioned given our geographic footprint. The Southeast continues to benefit from positive demographic trends, both population and job growth. Some notable office-using job announcements in our markets have occurred even in the midst of the pandemic. These include the Fortune 50 company Centene announcing a 6,000-job, $1 billion East Coast headquarters in Charlotte, Microsoft with 1,500 new jobs in Atlanta, and publicly traded software company Bandwidth in Raleigh with 1,200 new jobs and a planned new headquarters campus. These announcements illustrate the long-term attractiveness of our markets and support the notion that companies still value a collaborative, in-person environment to foster creativity and strengthen company culture. In the second quarter, we delivered FFO of 93 cents per share, which equals our first quarter results. Further, the second quarter reflected a full quarter of lost NOI from $338 million of property sold in the first quarter. Our financial results were excellent, especially considering the challenging economic conditions. In addition to strong FFO, our portfolio metrics were solid, with occupancy of 91.1%, up 20 basis points sequentially, same property cash NOI growth 2.4%, excluding the impact of temporary rent deferrals, and in-place cash rents of 5.1% year over year. We leased 821,000 square feet of second-gen office space with gap rent growth of 13.6% and cash rent growth of 5.5%. And this was done with limited leasing CapEx, which drove net effective rents 7.6% higher than our prior five-quarter average. We stated last quarter it was too difficult to predict where the economy would go from here, and we still feel like predicting the shape of the economic recovery is speculative, so we are maintaining our focus on the following items that we believe best position us in the near term. maintaining liquidity and a strong balance sheet, keeping our buildings fully open and operational, keeping our development projects on time and on budget, working with customers to maintain occupancy and timely rent payments, minimizing operating expenses without sacrificing operating performance or leasing opportunities, and capturing as many renewals and relets as possible given this uncertain environment. We've reported our rent collection figures each month since the start of the pandemic, which have been strong at 99% every month, including July. Temporary rent deferrals equate to 1.2% of annual revenues, up modestly since our first quarter call. Importantly, new rent relief requests have dropped off significantly since mid-May. We have long emphasized the importance of having significant customer, geographic, and industry diversification across our portfolio. No market accounts for more than 20% of revenues, no customer other than federal government accounts for more than 4%, and no industry category accounts for more than 25%. This diversification is serving us well in this uncertain macroeconomic environment. Turning to our updated 2020 FFO outlook, given the fluidity of the pandemic and its impact on economic activity, potential lost rents from customer defaults and non-cash straight-line write-offs are still too speculative to project. As a result, our updated FFO per share outlook of $3.59 to $3.68, which is up four cents per share at the low end excludes any such potential losses. All of our buildings and parking facilities have remained open and available to our customers throughout the pandemic. Obviously, usage of our assets was significantly lower than normal in the second quarter. As expected, parking revenue was negatively impacted, but we were able to offset this with lower operating expenses. We now expect building usage in the third and fourth quarters to remain low, which is reflected in our updated outlook. In early July, we sold two non-core properties in Memphis for $23.3 million. These properties were a combined 89% occupying and were sold at a low sevens cap rate based on projected 2020 gap NOI. We have another $72 million of properties under contract that are scheduled to close later this year. These dispositions comprise the low end of our outlook of $95 million, and we have other non-core dispositions in various stages of the sale process that could bring us to the high end of our outlook. Development continues to be a growth driver for Highwoods. Our 1.2 million square foot development pipeline represents a $503 million investment. that is 77% pre-leased and 60% funded. 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 with these projects. As a reminder, our pipeline is projected to generate more than $40 million of annual NOI upon completion and stabilization, less than $5 million of which will be generated in 2020. New build-a-suit and anchor pre-lease conversations have slowed down compared to pre-pandemic levels, but there still are inquiries and activity from prospects. We remain hopeful we will be able to secure additional highly pre-leased development opportunities during the next several quarters. Before I turn the call over to Brian, I'd like to say a few words about our incredible teammates here at Highwoods. We greatly appreciate the hard work and dedication that our coworkers have exhibited every day since our normal daily routines and lives were disrupted by the pandemic. Their outstanding performance has shown through in our financial results in the second quarter, but it is also evident in so many areas also. whether working tirelessly to maintain building operations, adapting to new processes to seamlessly file our 10-Q, adapting to virtual leasing tours, or countless other examples. We couldn't be more proud of our team, and we sincerely thank them for our efforts. Brian?