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spk00: 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.
spk09: 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.
spk02: 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?
spk05: Thank you, Ted, and good morning, everyone. While leasing volume was lower in the third quarter than the second, we did see a sequential increase in activity levels. During the quarter, we signed 660,000 square feet of second-generation leases with gap rent spreads of a positive 12.5%, cash rent growth of 5%, and net effective rents that were 7% above our prior five-quarter average. just short of the record set in the fourth quarter of 2019. With regard to new leasing, activity picked up in the third quarter with 190,000 square feet of new deals and 8,000 square feet of expansion. The renewal of the Federal Aviation Administration in Atlanta during the quarter finalized our last remaining expiration over 100,000 square feet during the next two-plus years. With this renewal in hand, we now have only 18% of our portfolio expiring over the next nine quarters, which is down over 500 basis points compared to this point a year ago in our long-term historical average. As Ted discussed, rent relief deals held steady at 1.2% of our annual revenues. With inbound relief requests slowing to a trickle, we're focused on rent collections and creative solutions for customers with needs-based requests. To that end, and as a testament to the quality of our customers, our collections are strong with 99.7% of all rents collected in the third quarter and for the month of October. As we mentioned in the press release, we also converted a small number of leases from fixed rent to percentage rent. These few leases were done for customers whose businesses have been severely impacted by social distancing measures, and we preserve the potential to receive full rent over the life of the lease. Let's now drill down and take a closer look at our markets where activity has picked up since Labor Day. Across the board, and specifically in Tampa, Raleigh, Nashville, and Atlanta, tours are up. New requests for proposals have come in, and we are seeing inbound interest from out-of-town prospects looking to grow or relocate to our markets. To this end, 25% of new deals in the quarter are new to market, coming from the West Coast, Midwest, and the Northeast. We've consistently touted our BBD location strategy, which contains a mix of highly amenitized urban and suburban locations across our footprint. We've seen validation of this strategy in the superlatives provided in the recently released 2021 Emerging Trends in Real Estate report, published annually by ULI and PricewaterhouseCoopers. Four of our markets place in the top six, including our hometown of Raleigh, where we own and operate close to 5 million square feet, coming in at number one. As one might expect, and consistent with previous recessions, the availability of subleased space is increasing. However, in our portfolio, subleased space remains steady in Q3. Price discovery on rents is limited due to the low volume and high proportion of short-term renewals. But for the moment, face rates are holding steady, while we do expect downward pressure on net effective rents as concessions increase. Vacancy increase continues. basis points across our markets for the quarter. As Ted mentioned, we haven't seen work-from-home policies have a big impact on customer leasing decisions. Specifically, in 2020, we've had seven customers ranging inside from 1,200 square feet to 4,300 square feet who did not renew leases in favor of working from home. And several of these indicated this decision may be temporary. We believe the characteristics that made our market centers of growth prior to the pandemic are receiving increased attention as organizations and individuals reevaluate their geographic plans and preferences. Anecdotal evidence suggests the attractiveness of our markets could be an accelerant for inbound relocations for corporate users and individuals. Our highly amenitized BBDs are generating significant interest where less dense workplaces and plentiful parking are welcome alternatives for many customers. To Charlotte, where after five years straight of positive quarterly absorption, the market recorded its first negative quarter in Q3. With the footnote that rents are up 3% and major inbound announcements such as Centene's a million square feet and 3,000 new job announcements are just now getting going. while construction on major new offices for Honeywell, LendingTree, Duke Energy, and the Lowe's Global Technology Center are still finishing up. Markedly different from the previous recession, Charlotte is now recognized as a growing and stable tech hub, exemplified by its number one ranking atop Robert Charles Lesser Company's and CapRidge's STEM Job Growth Index. In good company on the same index at number five for growth, And with an already established global reputation as a tech hub, the Raleigh market posted a positive net absorption in the third quarter. Our portfolio there held firm, and we signed 167,000 square feet. Let's now go down to the home of the Stanley Cup winners, the World Series competitors, and at the very least, Super Bowl hosters in Tampa, where rents have increased 4% year over year, and the market saw over 200,000 square feet of inbound inquiries from out-of-market prospects this quarter. Labeled a boom market and a member of the Super Sun Belt by ULI's report, Tampa is highlighted as a metro area with less exposure to industries most affected by COVID-19, in addition to its low cost of living and business-friendly government. Our talented Tampa team was busy in the third quarter. The team signed 80,000 square feet of leases and toured several prospects through Avion and Midtown Tampa, where the mixed-use development is racing towards delivery next year. and where our new 150,000-square-foot office building is rising directly above an REI, next door to Whole Foods and luxury apartments, and down the block from Shake Shack and two new hotels. In closing, we wouldn't be where we are today without the tireless dedication of our amazing team. From every maintenance tech, property manager, and leasing agent, each Highwoods colleague has their individual excellence in the pursuit of superlative results. By developing, leasing, operating, and maintaining our own portfolio, we do so as stewards entrusted with creating and sustaining the ideal environment for our customers to thrive in. Doing so in normal times is exceptional. Doing so throughout a pandemic is is extraordinary. To each and every one of them, we sincerely say thank you. Now let me hand it over to Mark.
spk03: Thanks, Brian. In the third quarter, we delivered net income of $40.3 million, or 39 cents per share, and FFO of $91.7 million, or 86 cents per share. As Ted mentioned, the quarter included a debt extinguishment charge and non-cash straight-line credit losses, which reduced FFO by $0.05 per share. Neither of these items were included in our prior FFO outlook. Excluding these two items, our FFO would have been $0.91 per share, which compares favorably to $0.88 per share in last year's third quarter. also after excluding one-time items associated with the market rotation plan from a year ago. To put this in context, Clean FFO is up about 3.5% year-over-year, with leverage essentially unchanged. While we've entered Charlotte with a trophy building, exited the majority of our Greensboro and Memphis properties, and operated during a pandemic and severe recession. This growth was due to higher rents, reduced operating expenses, keeping tight control on G&A, and taking advantage of the debt markets to reduce interest expense. The macro environment remains challenging, but we've been pleased with our ability to adapt quickly and deliver strong financial results. Our balance sheet is in excellent shape. We issued $400 million of 10.5-year bonds with an interest rate of 2.65%. We used some of the proceeds to retire $150 million of our 2021 bonds early and repaid a $100 million term loan due in early 2022. After repaying the balance outstanding on our revolving line of credit and continuing to fund development, we ended the quarter with $119 million of cash on hand. Our net debt to adjusted EBITDAIR ratio was steady at five times, and our leverage ratio, including preferred stock, is 36.6%. We have $138 million left to spend to complete our development pipeline and no debt maturity until June 2021. The combination of more than $700 million of current liquidity and projected fourth quarter disposition proceeds puts us in a strong position to fund our remaining capital obligations while leaving us ample room for future growth opportunities without the need to raise additional capital. Turning to our outlook, we've updated our FFO range to $3.59 to $3.61 per share, This includes $6.5 million or $0.06 per share of dilution from the following items that weren't in our prior outlook. $3.7 million debt extinguishment charge, a $1.5 million non-cash straight-line rent credit losses, mostly due to conversion of leases from fixed rent to percentage rent, and $1.3 million net impact of lower FFO debt from fourth quarter dispositions. Excluding these items, our FFO outlook would have been up two and a half cents at the midpoint. Last quarter, we detailed a penny of dilution from items that weren't in our original FFO outlook. When adjusting for these non-operational or non-cash items that were not in our original outlook, the midpoint of our revised range would be a penny per share above the midpoint of our original FFO outlook that we provided in early February. Given the significant impact the pandemic and ensuing recession has had on the economy and our business, we believe our operating and financial results have been excellent. Last quarter we provided a list of projected impacts from the COVID-19 induced economic slow down with the primary takeaway that parking revenues were expected to be low for the remainder of the year, but this reduction would largely be offset by lower operating expenses. We didn't update this table in last evening's press release because our expectations are essentially unchanged. We also continue to expect cash flow to improve in the near term due to lower leasing capex. As Ted mentioned, we expect to close 123 million in dispositions before year end, which will bring 2020 dispositions to 151 million, excluding the 338 million of phase one market rotation dispositions we completed in the first quarter. We have maintained our original acquisition outlook of $0 to $200 million. We don't expect any development announcements this year and thus have eliminated this potential from our outlook. Finally, as you know, we will provide our 2021 outlook with our fourth quarter earnings release in early February. However, here are a few noteworthy items to highlight as we get close to the new year. We're fortunate as we have ample liquidity and low leverage to deploy capital into potential growth opportunities. Second, we're carrying more cash than normal on our balance sheet following our debt issuance in the third quarter, which will be dilutive in the near term but should normalize as we pay off the remainder of the 2021 bonds in April and fund development expenditures. Third, we expect $40 million of NOI from our development pipeline upon completion and stabilization. Most of this is secured through signed leases. Glen Lake 7 will deliver in early 2021, while the other projects in the pipeline are expected to contribute more substantially in 2022. Last, we've been able to quickly adapt to the current environment. by reducing OPEX to offset lower parking revenues. And while we expect OPEX will rise as portfolio utilization increases, we believe we'll be able to hold on to some of those savings, even as utilization levels recover. Looking forward, we continue to remain positive about the long-term outlook for Highwoods. Operator, we are now ready for your questions.
spk00: Thank you. If you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. One moment, please, for the first question.
spk01: Thank you. The first question comes from Brendan Finn of Wells Fargo. Please go ahead.
spk07: Hey guys, thanks for taking my questions. I wanted to follow up on your commentary about the level of cash that you're carrying on the balance sheet, since it's significantly more than what you normally have. You mentioned that it was going to be dilutive in the near term, but can you just give us a little more detail in terms of the deployment of that cash, and then if you can maybe quantify, I guess, the level of dilution, which I assume will be seen in Q4 and then again in Q1-21. Okay.
spk09: Yeah. Hey, Brendan. It's Brendan Mayerana. Maybe I'll take that one. So first, I think I'd just say that I think we were really pleased with the execution of the $400 million bond offering, 10 and a half year bond offering that we did. So I think we're pleased with that decision to issue those bonds in August. But you are correct. We're carrying more cash now on the balance sheet, about $120 million, as Mark mentioned. And then we've got another, you know, call it roughly $125 million that will come in the door through the disposition. So, you know, out of that, call it $240 to $250 million of cash. There's not a lot of near-term uses of that other than spending on the development pipeline. So it does carry... near-term dilution, which we put into our outlook for the fourth quarter. And really that dilution, while it's a headwind in terms of cash flow and FFO for a couple of quarters, that will go away largely in the second quarter as there's the April bond maturity, those June 2021 bonds we can pay early with no prepayment penalty in April. And at that point, then I think the headwind from carrying that excess cash really becomes a tailwind as those bonds carry a higher interest rate than what we'll be replacing them with. But, you know, kind of specific to your question, I'd say in terms of our updated FFO outlook. It's about a penny in kind of the fourth quarter is the drag that we're taking from carrying the excess cash in the fourth quarter, which is in addition to the penny that we mentioned for the disposition of the fourth quarter.
spk07: Okay, thanks. That's very helpful. I just wanted to switch gears quickly to volume. It looks like your new leasing volume doubled or more than doubled from last Q2. So I guess I was wondering if there's any specific tenant groups or geographies that really drove that figure higher this quarter. And were these leasing conversations that began before the pandemic and then were initially put on pause and then resumed this quarter? Or were these primarily discussions that began after the onset of the pandemic?
spk02: Hi, Brendan. This is Ted. So the first question in terms of the industry groups, I think the most activity we had this quarter was really healthcare, government, law firms, and financial services firms. And, you know, from a market standpoint, I think most new activity was Nashville, Raleigh, and Orlando. In terms of the conversation, I'd say it's probably a little bit of both. But, you know, things have just, with the pandemic, it's slowed down decision-making and But in general, it's probably both, but a majority of that's probably happened since summertime, so since the onset of the pandemic. But, you know, activities just picked up really post-Labor Day, even more tours in virtually all of our markets. Like, obviously, you've got the forced expirations you've got to deal with, but I think just new tenant tours in general have really picked up, you know, in the last month or so.
spk05: And Brendan, this is Brian. Your specific question around Raleigh, we have both within the portfolio and in the market seen new activity with regard to life science, gene therapy, other kind of software-based therapeutic companies. One that's in the portfolio is opening an office in Raleigh. It'll join their offices in Boston and San Francisco. That is new since the pandemic, and they'll be moving into the space soon. So that was a A quick one. Sounds good.
spk07: Thanks, guys.
spk01: Thank you. Our next question comes from Manny Korschman of Citi. Please go ahead.
spk06: Hey, good morning, everyone. Maybe we could just talk about the out-of-market tenants that are looking at your portfolio. Could you help us understand how much of that is new incremental space versus – moves out of other markets. And as they talk to you, are they taking a targeted strategy and saying, we want to be in Raleigh or we want to be in, you know, Richmond or wherever that might be? Or are they just saying, we're thinking about leaving New Jersey and we'd like to be in the Sun Belt? You know, show us what you've got.
spk02: Yeah, great question. I think the answer there is probably both as well. I think you've got some companies that are going to open up new offices. They'll be relocating from some of these markets, as well as you've got some companies that are just opening up a regional office. It'd be new to market, but it's just a regional office versus moving a significant operation, just picking up and moving down to our markets. In terms of what markets are looking at, look, I think a lot of them are looking at, and this really hasn't changed from the last several years, just the trend, is, you know, they're looking to move to lower-cost cities with great workforce, low-tax markets, high quality of life. So I think we're seeing that just continue. Some of the inbounds are both multi-market. We've got to compete against other markets in the southeast. and then others have already picked the market when we get the RFP. So it's really a little bit of everything that you mentioned.
spk05: Just adding to that, too, is you're seeing some into the markets, new organizations starting with a toe in the water, if you will, kind of getting a landing point on the beach. We're also seeing, to Ted's point, kind of sometimes under code names from an economic development standpoint, the same prospect showing up in similar markets. So we may look at something in Raleigh that's also looking at Tampa, looking at Richmond or Nashville. So those aren't necessarily some of the same folks that were before, but we are seeing acceleration, as Ted mentioned, of folks who were already spending some time in the markets. But there are some new folks, again, particularly around the kind of life science and tech markets. Here in the Raleigh area, the inbounds from California are a noted uptick as well.
spk06: And are they looking at primarily new space, and how much of that is driving your acquisition decisions or volumes?
spk05: Well, I think some of them are doing it fairly quickly and making decisions to get into space. In some cases, that might not be new space. That might be a spec suite that we've created or space as is with plans for expansion. So the previously mentioned kind of therapeutic company that we signed that was opening out of, say, Boston and San Francisco, their initial need might be close to 10,000 square feet but they project over the next few years a real growth plan. And so we're seeing a lot of that, I think, in the inbounds is to get a beachhead to a new market that they don't have experience with, but they've been looking at and with an opportunity for growing. So to your specific question on new space versus existing space, I think one thing we are seeing is as folks come out of higher dense, more expensive markets, say in the Northeast, Midwest, or California, this office space and even the new space is a really good deal in these markets. So if you go back to some of the things we've talked about previously on calls, 1% of an organization's annual fixed cost is usually around utilities, 9% is around real estate, and 90% around people. And so playing around the margins on the 9% to deliver a significant improvement to their 90% are value propositions that we're hearing from customers coming inbound.
spk03: Thanks, guys.
spk01: Thank you. The next question comes from Dave Rogers of Baird. Please go ahead.
spk08: Yeah, good morning. Brian and Ted, you guys talked a lot about prospect lists during your prepared comments, and I was wondering if you can dovetail the comments that you've had to many and others. along with the same lines of is there any evidence in the activity in your portfolio of kind of utilization differences, whether it be, you know, in Buckhead or whether it be in suburban Tampa, trying to get a sense of, you know, a parking utilization by metro, by asset type, and do you see any differences as these tenants are kind of looking from other markets or as your prospect list grows? Is there a clear distinguishing factor in what those tenants want today?
spk05: Great question, Dave. And the good thing is we are kind of monitoring daily utilization of the buildings and the parking. And so those buildings that you drive right up to the door, walk in and walk up, have been pretty busy. Again, we're running about 25% of physical utilization. One thing just to kind of note as you look at all of our suburban BBDs, Every one of those locations, submarkets, and school districts now have a return to school in the classroom plan that's going on in one form or the other. And while that hasn't resulted in a whipsaw of everyone being back in the office 100%, 100% of the time, we do believe that return to school is a good tailwind to return to work.
spk02: The only thing I would add is I think we're seeing a lot more smaller customers virtually in all of our markets come back versus the larger customers. The national companies and all that are sort of holding their workforces at home for the meantime. So smaller customers are coming back versus the larger.
spk08: And maybe just to drill down on that one comment Brian said is the drive-up, walk-up assets are performing better from a utilization standpoint. Is Is there a notable difference?
spk05: Well, if you look at the general portfolio and you look at, say, take Tampa, for example, while we're still developing midtown Tampa, and it is a suburban but urban kind of place that we're creating, I don't know if I would say it's remotely measurable. If I could tell you, X more are out there. But those places where you are driving up, walking in. We do have the activity. I think it also might correlate a little bit to Ted's point about the size of some of these customers that are in there. So we have a greater diversity of the tenant or customer mix in those buildings. And so I think that's maybe part of the underlying aspect as well.
spk08: Okay, I appreciate that. And then, Ted, you guys talked about opportunities and using the balance sheet, the cash on hand, to take advantage of opportunities. I guess, you know, if you were to think about what opportunities you expect to see, it doesn't sound like you'll pursue some of the higher-priced core deals, but do you expect to do more on the land side? Will you find some kind of broken developments in process? I mean, what do you expect to see and kind of how do you know is the right time to really lean into that aspect?
spk02: Sure. You know, we're sort of looking at everything that comes out. We're looking at whether it's the core assets, the value-add assets, as well as land. So you sort of hit on all three components. I do think, you know, we're starting to see some price discovery. There's several transactions that came out in the springtime and subsequently were pulled as a result of COVID. They're now back on the market. We've seen probably a handful of trade in the last, you know, call it 60 days or so, and there's a few more that are under contract. So we've looked at those, and look, as we do with any acquisition, we look at a risk-reward and make sure it hits our return requirements for the way we look at it, and given the current environment and all that. So we look at everything. We've got our wish list that we continue to hone virtually every quarter. Those wish lists include both existing assets, they also include developments that are under construction, and then obviously we're pursuing land. Land is just, you know, it's our natural, it's our raw material, if you will, for development. So we're always looking to recycle land. We're looking to upgrade that, so we're looking at that as well. So don't know exactly what's going to hit, but we're looking at all those opportunities you mentioned.
spk06: All right. Thank you. Thank you.
spk01: Thank you. The next question comes from Jamie Feldman of Bank of America. Please go ahead.
spk04: Thank you. I appreciate all the color on how your markets rank in terms of kind of future growth. But if you look at the stats, they also show some of the largest development pipelines as a percentage of total stock. Can you talk about those projects in your markets and how they're impacting your ability to lease space and demand for your assets specifically? Sure.
spk02: Sure, Jamie, I think it sort of depends by market and sub-market. And a lot of, you know, obviously, take for example downtown Nashville. Downtown Nashville, really what's being delivered there is a majority of what's under construction in Nashville is in the CBD. Our CBD assets really don't have any expirations until 2025, so we're, right now, we're not competing at all against any of that new development. If you go down to Brentwood or Cool Springs, we're competing a little bit, but the differential in rate is still pretty substantial. Then you go to Raleigh. I think Raleigh's development is really spread out among six different submarkets, and a lot of that, again, won't be delivered for a while, and it's significantly different rental rates than what a lot of our assets are in Raleigh. In Midtown, you know, or Atlanta, Midtown Atlanta's got a majority of the... new development going on, and we don't have any exposure in Midtown Atlanta. Now, Midtown does compete a little bit with Buckhead, so we do have some competition there. And right now, again, it's different submarkets and all that and different price points as well. So we're watching the deliveries. We're competing on some deals, but it's not like we're competing against all the new development in all of our submarkets.
spk04: Okay, and just to summarize, so you would say Midtown, you know, if there was one you had to pick that was the most competitive, that would probably be it?
spk05: Yes, yeah. At the same time on Midtown, this is Brian, Jamie, you know, you've seen Google go into, you know, a building that started with some spec availability and kind of the word on the street is that's taken the balance of the building. You've got Microsoft taking two buildings. That started from a spec standpoint in Midtown Atlanta, too, so... I would also argue while Atlanta, as we know, has a history of being an aggressive kind of speculative place, Tom Wolfe wrote a whole book about it, right? It's also showing that they're filling up their buildings and they're winning when they're competing, I think, market to market.
spk04: Okay, that's helpful. And then I guess back to the investment sales market. So the sales that you've announced for the fourth quarter, Was there any repricing on those or any renegotiation? And then also, just what are your thoughts on how much prices have moved for assets?
spk02: Sure. So for our specific sales, the large majority of the buildings, there was no change in pricing from pre-COVID. There was a small adjustment, I think it's sort of mid-single digits on one of the buildings, I think is all it was. So really very nominal difference. The way we've seen pricing so far, what's come out, you know, for the high-quality assets, core buildings that have long-term leases, high-credit customers, there's really little or no change in pricing is what we've seen. Plenty of capital chasing those deals on what you might call a value-add property that's got some near-term rollover or maybe some existing vacancy properties. I think pricing has adjusted downward just because buyers are putting more conservative underwriting assumptions on the lease up or the rollover. So maybe those are down 5% to 10%, maybe 5% to 15% depending on the building, the market, sub-market, and all that.
spk04: Okay. And then finally, you'd mentioned some small tenants that did move out to save money and work from home. Can you give more color on those types of leases? And do you think that, you know, do you think you'll continue to see that? And what kind of impact did that even have on occupancy?
spk05: So it's a good question, Brian, here to answer this one. As noted in the remarks, those were, you know, basically 1,200 square feet to the largest was 4,300 square feet. The 4,300 with a 4,000-square-footer was a small law firm. and they are going to be working remotely and coming back. They basically said, we're going to sit this quarter out, I mean quarter like from a game standpoint, but they absolutely will be coming back. So to the extent that you have those that may be rolling, again, small customers who can kind of do that, who don't have to be in front or connected to their own customers, I think you'll continue to see that, but it's such a small amount from the overall portfolio. I think we feel pretty good about going into that. Brendan?
spk09: Yeah, Jamie, I think in the quarter, it was probably about a 10 basis point impact in terms of occupancy. So it was pretty modest in the quarter.
spk04: Okay. I mean, I guess the question is, do you think that remains a 10 basis point impact until things get better? Or is this, these are ones that have been talking about it since the beginning and finally decided?
spk09: Yeah, it's good. I mean, it's hard to know. It's still early in this process, and we're evaluating that. So we'll see. I mean, sort of disaggregating work from home with the recession impact and everything else, I think it's hard to know specifically what all of those moving parts do. But, you know, obviously it's a The overall leasing environment is certainly more challenged now than it was a year ago, so we'll see where that is. But I think our evidence to date is that the customers who have expirations The work from home has been, you know, at least has been modest thus far.
spk05: Another thing we've done has been fairly proactive to all of those that are coming up in the next few years, these smaller ones. Most of them to a person prefer to keep their office as a moment of pride and a place where they do work and where they continue to nurture the culture of each of these organizations. And so what we end up doing is we are looking at some shorter-term renewals that allow them to stay in the space. And as we do that, we can give a little bit of concession based on term that they'll commit to renewing to kind of get them and bridge them through this period. So we've actually had a lot of success doing that, more so than folks just assigned to kind of work off their laptop on the couch.
spk02: The only other thing I would say is, you know, five of the seven that have elected to work from remote all happened before June 30th. So it was really in the earlier part of the COVID. And we've only had two since June 30th do that. Now again, our leasing activity, tour activity for these small guys has been really good. So it'll be interesting to see how it plays out. I still think it's early, but I do think just the deal flow we've seen on smaller users has been very positive.
spk04: Okay. And then how are you feeling on dividend coverage? and sensitivity to that.
spk03: So, Jamie, it's Mark. You know, obviously you see the CapEx numbers down, leasing CapEx TI, CapEx down. So we're probably, you know, obviously have better cash flow coverage than we anticipated maybe coming into the year. So we feel pretty good about that. You know, with some of these dispositions, we expect our future CapEx to be lower over time. So I think we feel comfortable around coverage. Jamie, the only thing I would add to that is,
spk09: What you've seen thus far, if you look at the CAD page that we have versus the leasing page that we've had, we've expensed from a CAD perspective about $73 million of second-gen TI and leasing commissions. We've only committed this year under $39 million. So there's always a lag between the commitments and the expense. And because our commitments have been low, I think that signifies that going forward the cash flow outlook ought to improve a little bit or the coverage ought to improve a little bit as those commitments translate to expenses, you know, a couple quarters down the line.
spk04: Okay, great. Thank you.
spk01: Thank you. As a reminder, via the phone lines, you may press the 1 followed by the 4 on your telephone keypad to register a question or comment. Once again, that is the 1 followed by the 4. One moment, please. And we show no further questions at this time. We'll turn the call back over to our speakers.
spk02: Thanks, everyone, for being on the call this morning. If you have any follow-up questions, feel free to give us a call. And be safe and healthy. Thank you very much.
spk01: That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a good day.
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