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. And as a reminder, this conference is being recorded Wednesday, July 28, 2021. I would now like to turn the conference over to Mr. Brandon Marrana. 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. 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 and including the ongoing adverse effect of the COVID-19 pandemic on our financial condition and operating results. These risks and uncertainties 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 forward-looking statements. With that, I'll now turn the call over to Ted.

Thanks, Brendan, and good morning. Let me start by saying we continue to see an increase in more normalized activity across our portfolio and markets. It remains difficult to predict the progression of the pandemic and economic recovery, particularly given the concerns over variance. The leasing and parking are both recovering nicely. Utilization rates have risen throughout the second quarter and are currently around 40% across our portfolio. up from 30% last quarter. Based on discussions with our customers, we expect a meaningful increase in utilization after Labor Day. As I mentioned on our last call, leasing activity in the first quarter was relatively solid, especially for new deals. This trend accelerated during the second quarter as we signed 899,000 square feet of second-gen leases. our highest total since the fourth quarter of 2019, and included 323,000 square feet of new deals. This is above our long-term average of 250,000 square feet for new leases. We signed 52 new deals, also above our long-term average, and our highest quarterly count of new leases since 2014. Obviously, the strong leasing activity in the quarter hasn't yet shown up in our occupancy stats, where we ended the quarter at 89.5% across the entire portfolio. This leasing will benefit us in future quarters as our new customers move in. With the improving macro environment, especially in our markets, we're optimistic going forward. Rents on signed leases continue to be a little softer than they were pre-pandemic. but we believe are holding up reasonably well considering the challenges over the past 18 months. For the 899,000 square feet of second gen leases signed during the quarter, rent spreads were down slightly at negative 0.6% on a cash basis, while up 8.9% on a gap basis. Overall, since the start of the pandemic, net effective rents across our markets are down on average five to 10%, primarily as a result of higher concessions. Fortunately, net effective rents have stabilized in the first half of the year. Further, we continue to see a migration to higher quality buildings with well-capitalized owners, which plays to our strengths. Our results. We delivered FFO of 93 cents per share in the second quarter. our same property cash NOI growth was very strong at 11.1%, which benefited from the payment of temporary rent deferrals agreed to during the first months of the pandemic. Excluding these repayments, same property cash NOI growth would still have been a robust 5.3%. As illustrated in last night's release, we have updated our 2021 FFO outlook to $3.62 to $3.73 per share, up seven and a half cents at the midpoint from our prior outlook. At the midpoint, three to four cents of the increase is due to our improved operational outlook, and four cents is from the anticipated net impact of our planned investment activity, which consists of the PAC acquisition and the sale of an additional 207 to 257 million of existing non-core assets by year end. In addition to the increase in our FFO outlook, we also raised our same property cash NOI growth outlook to 4.25 to 5.5%, up 50 basis points at the midpoint, and we have increased the low end of our occupancy outlook Our new range is 89.5 to 91.5%. Moving to investments. As you all know, we have agreed to acquire a portfolio of office assets from PAC and accelerate the sale of five to 600 million of non-core assets by mid-2022. We're excited about doubling our presence in Charlotte and entering the South Bay BD, adding to our leading position in downtown Raleigh, and entering the North Hills BBD in Raleigh. We closed one disposition in the quarter, 100% lease preserves seven property in North Tampa for gross proceeds of 43 million. We have numerous other non-core properties in various stages of the marketing process. Our disposition plan is tracking our expectations, both in terms of pricing and timing, And we believe we are well positioned to meet our target of 250 to 300 million of non-core sales by the end of 2021, including the 43 million already closed. As I mentioned, while we are highly focused on closing the portfolio acquisition from PAC and executing on our non-core disposition plan, we continue to assess additional investment opportunities. Outsized job growth and population growth continue to fuel interest in Sunbelt markets, which has caused pricing for high-quality assets in the BBDs of our markets to remain competitive. Rest assured, we will continue to be disciplined allocators of capital and seek only those opportunities that we believe provide healthy, risk-adjusted returns. Turning to development. Our pipeline is 394 million and 78% pre-leased. Our 285 million Asurion project in Nashville is on budget and will deliver in the fourth quarter. At Virginia Springs, too, our recently delivered project in the Brentwood BBD of Nashville, we signed two leases towing 20,000 square feet during the quarter, which brings the lease rate to 50%. five quarters ahead of pro forma stabilization, and we have strong interest in additional space. Finally, at our office project in Midtown Tampa, while we didn't find any leases during the quarter, we have strong interest from the number of prospects and remain confident in the long-term outlook for the development. The overall Midtown mixed-use project is just now finishing up with additional retailers opening by the day. There is growing energy around the project, whether from prospective office users, new residents, hotels, or customers shopping and dining. In addition, we are starting to see increased interest from prospective build-to-suit and anchor customers. We believe this is another sign of a return to healthy office fundamentals across our markets. We have up to 250 million of potential development announcements in our 2021 outlook, have a land bank that can support more than $2 billion of future development, and we hope to announce new projects later in the year. Two other items before I turn the call over to Brian. First, we announced a 50-cent quarterly dividend last evening, which equates to an annualized amount of $2 per share. This represents an increase of 4.2% over the prior amount, is our fifth dividend increase since the start of 2017. We've long stated that our cash flow continues to strengthen, which provides strong dividend coverage, even with our higher payout. Second, as we also announced last evening, Mark plans to retire at the end of this year. Mark has been an exceptional contributor to the Highwoods over the past decade, first as a board member and second as our CFO. I know I speak on behalf of the entire Highwoods family, and I say it has been our privilege to work alongside Mark. Under Mark's stewardship, we have maintained a fortress balance sheet, continued our longstanding practice of candor and transparency, and further strengthened and streamlined our already strong financial reporting and accounting processes. We wish Mark, his wife Kelly, and the rest of the Mulhern family the best as he promotes himself into retirement. I'm thrilled that Brendan will assume the CFO role upon Mark's departure. As you all know, Brendan has been a key contributor to our leadership team since his first day at Highwoods in May of 2016, and he has been deeply involved in all of our strategic investment and financing activities. We expect a seamless transition. Brian?