Highwoods Properties, Inc.

Good morning and welcome to the Highwoods Properties fourth quarter 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, February 10, 2021. I would now like to turn the conference over to Brendan Mayorana. Please go ahead, Mr. Mayorana.

Thank you, Operator, and good morning, everyone. 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 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.

Thanks, Brendan, and good morning, everyone. Let me start by saying I hope you are all well and your families continue to be safe and healthy. Our buildings have remained open throughout the pandemic with protocols in place to keep our customers and their guests as safe as possible. Across our entire portfolio, we estimate utilization is now 25 to 30% on average, up slightly from the end of last year as we've seen a modest increase during the past couple of weeks. In general, while it's difficult to draw trends across markets or submarkets, there is higher utilization by small and medium-sized companies than larger companies. We aren't assuming a meaningful increase in utilization in our portfolio until the second half of the year. As mentioned on our last call, the HyWoods teams across our markets have safely returned to the office, and we've heard from many of our customers who are eager for their full return. As I mentioned last quarter, it remains difficult to predict the duration and the severity of the current recession and when leasing activity will recover. Overall leasing volume dipped in the fourth quarter. However, new leasing volume was relatively steady at 160,000 square feet. While below our long-term quarterly average, new leasing volume was well above the low experienced during the pandemic. We signed fewer renewals during the quarter, partly due to low lease expirations. At year end, we only had 8% of our revenues expiring in 2021 and 8.3% in 2022. This two-year cumulative expiration total is among the lowest in our history. So far this year, we are seeing some modest green shoots with regard to prospective leasing activity. Since January 1st, we've already signed 100,000 square feet of new leases. We continue to be optimistic about the long-term population and job trends in our markets. Small and large users from outside of our footprint continue to seek office space in our markets, with some of our new leasing activity already in 2021 attributable to out-of-town users. Turning to our results. We reported 2020 FFO of $3.58 per share. While our performance was impacted by the economic disruption caused by the pandemic, we were able to deliver per share FFO, excluding one-time charges, in line with our original expectations of $3.60 to $3.72. Our ability to control expenses maintain strong rent collections of over 99%, keep our buildings open safely, and continue to advance our development projects on time and on budget is a testament to the tenacity and the dedication of the entire Highwoods team. Our fourth quarter FFO was 87 cents per share, including a two-cent severance charge that was not in our outlook. Cash rent spreads were flat, down from the mid-single digits over the past several quarters. The sequential drop was attributable to a few short-term deals where we provided aggressive economics to support occupancy, which had an outsized impact on our quarterly stats, given the below average volume. Occupancy held steady from the third quarter to the end of the year at 90.3%. same property cash NOI growth was a solid 3.7% or 1.6% excluding the impact of temporary rent deferrals. As an aside, to date we've already been repaid on more than 60% of the temporary rent deferrals granted earlier in the pandemic. The positive same store result was achieved even though average occupancy was down 130 basis points year over year, as our average in-place rents were up 4.6%. Higher rents combined with tight control and operating expenses were more than enough to offset lower year-over-year occupancy. Turning to investments, we sold 129.7 million of non-core properties in the fourth quarter, all in Greensboro and Memphis. We now have only one office property in Memphis and four office buildings in one park in Greensboro. Subsequent to year end, we sold 100,000 square foot building in Atlanta for $30.7 million that is 100% leased to the FAA. This was our only building in the airport sub market in Atlanta. We delivered this build to suit in 2009 for a total cost of $18.2 million. which further illustrates the value creation from our development activities. We're planning to market additional non-core properties as we continue to strategically prune our portfolio and improve the overall quality. We didn't close any acquisitions in 2020, but in January of this year, we acquired our joint venture partners 75% interest in the 636,000 square foot Forum Office portfolio in Raleigh for $131.3 million. We have planned highwitizing that will increase our investment to $138.4 million. We're bullish on the long-term upside for these assets, given the wide array of walkable amenities, proximity to executive housing, and easy access to Raleigh's major thoroughfares. We continue to evaluate additional acquisition opportunities. Even after the forum purchase, We have plenty of balance sheet capacity with zero drawn on our revolving line of credit and $100 million of cash on hand. However, pricing remains competitive for the few high-quality buildings that have come to market since the pandemic started. Rest assured, we'll remain disciplined allocators of capital and seek properties that we believe will deliver appropriate risk-adjusted returns over the long term for our shareholders. Our 1.2 million square foot, 503 million, 79% pre-lease development pipeline remains on budget and on schedule. To date, we funded 79% and expect to spend the most of the remaining 104 million by the end of 2021. Our pipeline will provide over 40 million of annual NOI upon stabilization. only $8 million of which is scheduled to be recognized in 2021. Now to our 2021 FFO outlook of $3.50 to $3.66 per share. In 2020, we were able to offset lower parking revenue and rents by reducing OpEx. We assume utilization across our portfolio will remain low in the first half of this year, and gradually increase over the third and fourth quarters. We expect higher utilization will cause operating expenses to increase, while we're assuming parking revenues will be slower to recover. At the midpoint of our per share outlook, we assume net operating expenses will be six cents higher than last year, while parking revenues will only improve by one cent. Over time, we expect parking revenues will fully recover the $0.07 drop we experienced in 2020. Same property cash and Y growth is projected to grow 3% to 5% in 2021. Our outlook for dispositions in 2021 is $100 million to $150 million, in addition to the $30.7 million sale of the FAA building completed in January. Our acquisition outlook is $0 to $200 million, which is in addition to the forum acquisition. We have a placeholder for development announcements of $0 to $250 million. We continue to have conversations with Build-A-Suit and pre-lease prospects, but expect to be measured with regard to 2021 development commitments. Before I turn the call over to Brian, I'd like to reiterate the strong financial and operating performance we delivered in the midst of an unprecedented economic environment. Since the start of the pandemic, we've collected 99.9% of rents, sold 291 million of non-core properties, kept our 503,079% pre-lease development pipeline on time and on budget, and maintained a strong balance sheet with leverage of 36% and a debt to EBITDA ratio of five times. Even with the ongoing economic disruption caused by the pandemic, we still expect FFO per share to be higher in 2021 compared to a normalized 2019, the last full year before the pandemic. Plus, we have significant embedded growth potential as our development pipeline delivers and stabilizes, parking revenues recover, and occupancy improves. We're cognizant of the near-term challenges ahead, but we're confident we have the ingredients to drive sustainable growth over the long term. Brian?