Highwoods Properties, Inc.

Good morning and welcome to the Highwoods Properties earning 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 one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded Wednesday, October 28, 2020. I would now like to turn the conference over to Brennan Marrano. Please go ahead, sir.

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. As mentioned on our last call, the Highwoods teams across our markets have safely returned to our offices which is allowing us to reap the benefits of collaboration in our company's unique culture. Across our 27 million square foot portfolio, we estimate utilization is approximately 25% on average, which has increased since the end of the summer, but is below our first COVID revised outlook we provided in April. We don't expect a sizable increase in utilization until at least early 2021. It remains difficult to predict the duration and severity of the current recession and when leasing activity will recover. While we're all hoping for a return to pre-pandemic office fundamentals, we're still well positioned in the current environment given our lack of large customer explorations over the next few years, our ability to control OPEX, and the built-in growth from our highly pre-leased development pipeline. Plus, we further strengthened our fortress balance sheet this quarter by raising 400 million of 10 and a half year bonds at an attractive rate. We have ample liquidity to fund the remaining spend on our development pipeline and still have plenty of dry powder to capitalize on future growth opportunities. In addition to having a high-quality portfolio and strong balance sheet, our markets continue to benefit from positive demographic trends, both population and job growth. To this end, the Urban Land Institute's recently published 2021 Emerging Trends in Real Estate report listed Raleigh as a number one market for overall real estate prospects. Nashville came in at number three, Charlotte number five, Tampa number six, and Atlanta number 11. These five markets constitute more than 75% of our NOI. We're seeing this national story of jobs migrating to our footprint verified in the inquiries we're receiving. We've hosted numerous out-of-town prospects seeking space, ranging from large to small, and our partners at the various economic development agencies across our markets indicate the pipeline of out-of-town users seeking relocations continues to be robust. On a related note, the big elephant in the room for office landlords is obviously the long-term impact of work-from-home policies. Brian will go into more detail about what we're seeing in our markets. And while it's still early, Work from home has not yet had any meaningful impact on leasing decisions by existing customers or prospects. Thus far, we've only experienced a few small customers who elected not to renew based on their plan to work from home. And some of these may be temporary solutions. In the third quarter, we delivered FFO of 86 cents per share. which included a cumulative $0.05 impact from a debt extinguishment charge and non-cash write-offs of straight-line rent due to the conversion of certain leases from fixed rent to percentage rent. Adjusting for these items, our FFO would have been $0.91 per share, a solid performance given the challenging economic environment. In addition to healthy FFO, our portfolio metrics were strong. In-place cash rents are up 5.2% compared to a year ago, which helped drive same-property cash NOI of 2.2%, excluding the impact of temporary rent relief deals, even with average occupancy down. This performance was consistent with last quarter's 2.4%, As expected, occupancy dipped sequentially to 90.2 percent, driven predominantly by T-Mobile's expiration in Tampa. We expect occupancy to hold firm around 90 percent in the fourth quarter. We leased 660,000 square feet of second-gen office space with gap rent growth of 12.5 percent and cash rent growth of 5.0 percent. And this was done with limited leasing capex, which drove net effective rent 7.2% higher than our prior five-quarter average. New leasing volume rebounded to 190,000 square feet. And while still below our normal quarterly volume of 200,000 to 250,000 square feet, we're encouraged by the sequential uptick in improved level of prospect activity over the past months. Since the start of the pandemic, our monthly rent collections have been consistently strong. We collected 99.7% of our rents in the third quarter and have collected 99.7% of October rents. Temporary rent deferrals equate to 1.2% of annual revenues unchanged from last quarter, and repayments are occurring on schedule. To date, we've received repayment of approximately 25% of total deferrals and remain on track to be largely repaid by the end of 2021. Turning to investments, we have made significant progress on phase two of our market rotation plan to exit Greensboro and Memphis. We closed $23 million of dispositions early in the third quarter that we disclosed in our second quarter earnings release, and we expect $128 million of dispositions in the fourth quarter. These sales will bring phase two dispositions to $151 million for the year at prices that are in line with our pre-pandemic expectations. As reflected in our updated FFO outlook, these sales will be dilutive in the near term, as we carry excess cash on our balance sheet, but we're confident we'll be able to replace this income as we redeploy the proceeds. On the acquisition side, for the few high-quality buildings that have come to market since the pandemic started, pricing has been very competitive, especially for buildings with high occupancy, limited near-term lease role, and credit-worthy customers. We're actively looking for opportunities to deploy capital, which is why we've kept our 2020 acquisition outlook range unchanged at zero to 200 million. However, we'll stay true to our mantra of being disciplined allocators of capital and only seek opportunities where risk-adjusted returns make sense for our shareholders. Our 1.2 million square foot $503 million development pipeline remains on budget and on schedule. We funded 73% to date and expect to fund most of the remaining $138 million by the end of next year. Since our last call, we've signed leases at both of our SPEC projects, one at Midtown West in Tampa and the other at Virginia Springs II in Nashville. These deals bring our overall pre-leased rate to 79%. In addition to the signed leases, we have seen increased prospect activity of both these projects in the past several weeks. The three other projects in our development pipeline are fully pre-leased and on schedule to meet their delivery dates. Upon stabilization, our pipeline will provide more than $40 million of NOI of which more than 32 million is already secured through signed leases. New build-to-suit and anchor pre-lease conversations have slowed down compared to pre-pandemic levels. We don't expect any new project announcements this year, and therefore we took the possibility of new development announcements out of our updated 2020 outlook. However, we're still having conversations with prospects that could lead to build-a-suits or highly pre-leased development announcements in 2021. Now to our updated 2020 FFO outlook of $3.59 to $3.61 per share. As I mentioned earlier, we incurred $0.05 of expenses this quarter due to debt extinguishment charges and non-cash straight-line rent write-offs. In addition, fourth quarter dispositions will be dilutive by a penny per share. These items, which negatively impact our full year results by six cents in the aggregate, were not in our prior outlook of 359 to 368. Excluding these items, the midpoint of our updated range is up two and a half cents compared to the last quarter. As a reminder, potential lost rents from customer defaults and non-cash straight-line credit losses for the remainder of 2020 are too speculative to project. Finally, our performance in the past few quarters demonstrates our ability to quickly adapt to changing macro conditions through reduced OPEX and meeting customers' needs with flexible and creative lease solutions. Plus, our limited lease expirations puts us in good position to mitigate the impact from the recession. We also have built-in growth from our development pipeline and have a balance sheet with plenty of capacity to pursue additional growth opportunities. We're cognizant of the near-term challenges facing us from the current environment, but we're confident we have the ingredients to drive sustainable growth over the long term. Brian?