Good morning, and welcome to the Highwoods Properties Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded on today's date April 26, 2017. It is now my pleasure to turn the conference over to Mr. Brendan Maiorana. Please go ahead.

Thanks and good morning. I am Brendan Maiorana, Senior Vice President, Finance and Investor Relations. Joining me on the call this morning are Ed Fritsch, President and Chief Executive Officer; Ted Klinck, Chief Operating and Investment Officer; and Mark Mulhern, 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 IR section of our website at highwoods.com. On today's call, our review will include non-GAAP measures such as FFO, NOI and EBITDA. Also, the release and supplemental include the reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Before I turn the call to Ed, a quick reminder that any forward-looking statements made during today's call are subject to the risks and uncertainties, and these are discussed at length in our annual and quarterly SEC filings. As you know, actual events and results can differ materially from these forward-looking statements. The company does not undertake a duty to update any forward-looking statements. I'll now turn the call to Ed.

Thanks Brendan, and good morning everyone. Business conditions remain good for our customers and prospects and for Highwoods. We continue to see steady demand for our well-located BBD office product as many office users continue to grow their businesses in a prudent need-based manner. The overriding economic question continues to be, how long will this expansion last or the proverbial, what inning are we in? We'll leave picking the inning or the length of the game to others, but the slow, steady cadence of positive economic growth has given us an economic cycle a longer duration than most prior cycles. Therefore, we expect more at bats and the key drivers that support this belief are the solid fundamentals that remain in place, such as: southeast population and job growth continue to significantly outpace the national average; our footprint continues to enjoy business friendly environments; our markets continue to experience positive net absorption; new supply remains limited and finally rents continue to rise. Further, the capital markets remain healthy for our customers and for us. While interest rates have trended up since the U.S. ten-year bottomed out at 1.4% last summer, they still remain well below long-term averages. While the consensus forecast indicates a modest increase in long-term rates going forward, even if the forecast becomes reality, borrowing rates should still be relatively low. This healthy capital markets environment continues to support the outlook for our business. First, our view is customers and prospects are generally comfortable about growing their businesses, whether it's an existing customer needing to expand or a build-to-suit prospect looking to relocate and/or consolidate multiple locations into one modern-day facility. Second, our access to capital as demonstrated by ongoing support from our equity and fixed income investors and banking partners, bolsters our growth initiatives, particularly in funding…

Thanks Ed. Good morning. As Ed noted, we had solid activity this quarter with strong leasing economics. We leased 715,000 square feet of second gen office space, and year-over-year asking rents continue to increase. Average in-place cash rental rates across our office portfolio grew to $24.40 per square foot, 4.4% higher than a year ago. Office occupancy in our same property portfolio was up 10 basis points compared to one year ago, while overall portfolio occupancy dropped 40 basis points since the end of 2016, driven by the move-out of HCA, partially offset by additional leasing in the portfolio. For office leases signed in the fourth quarter, starting cash rent increased 4.4% while GAAP rent grew 16.6%. Importantly, net effective rents, which include the full load for OpEx, TIs, leasing commissions and free rent were $15.28 per square foot, or more than 10% higher than our prior five quarter average. The average term was 5.3 years, and while this is down modestly from our recent trend, it was driven lower by three fairly sizable shorter term renewals. Turning to our operational performance in the quarter, we grew same property cash NOI by 5.5% compared to a year ago. This growth was driven by higher rents on new deals signed, annual in-place rent bumps, and unusually low operating expenses. While we expect NOI growth will moderate in subsequent quarters as operating expenses normalize, the strong start in Q1 and solid outlook for the remainder of the year caused us to increase our same property NOI outlook to 2.75% to 3.5%. We ended the quarter at 92.7% occupancy. We have good customer and prospect activity, but as we mentioned on our last call we have some upcoming known move-outs in Buckhead and Richmond, and therefore we expect occupancy to dip to around…

Thanks Ted. We have had a positive start to the year as indicated by our first quarter financial results. As Ed outlined, we delivered FFO of $0.80 per share. Last year's first quarter FFO of $0.82 included $0.03 of land sale gains and term fees, and another $0.02 from owning Country Club Plaza for 60 days with 45% overall leverage. Adjusted for the unusual items and temporary high leverage in last year's first quarter, we delivered strong core FFO growth this quarter. The increase was driven by higher rents across the portfolio, lower operating expenses and added NOI from development that came online. Turning to our balance sheet and financing activities, we ended the quarter with leverage of 36.2% and debt-to-EBITDA of 5.05 turns. These metrics are up modestly from the end of the year, which is largely attributable to the payment of the $0.80 per share special dividend in January. We remain in the middle of our stated comfort range of 4.5 to 5.5 times debt-to-EBITDA and are well positioned to fund our growth initiatives. We raised $300 million in a 10-year bond deal in March that was priced to yield 4.04%. The effective interest rate of the bonds is 3.78% after factoring in a $7.3 million gain from our prior hedge of $150 million of the underlying treasury at 1.90%. Those proceeds were used to pay off a $380 million maturity with an effective interest rate of 5.88%. We also expanded a five-year unsecured bank term loan by another $50 million at LIBOR plus 110 basis points. We had two financing transactions after quarter-end. The first is a new $100 million secured loan that closed earlier this week. The loan has a twelve-year term with a 4.0% coupon and is secured by our Pinnacle building in Nashville. Those…

Thank you. [Operator Instruction] And our first question comes from the line of Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question.

Thank you. Good morning.

Good morning, Jamie.

I guess, going back to your comments on – I know, you mentioned Raleigh in Nashville, you talked about supply there. But can you give a little bit more color in terms of, I guess the test were if supply starting to hit the market is rent growth? Maybe talk to us about your thoughts on rent growth across the markets going forward? And I think in other markets we're seeing a differentiation in the types of demand supply, whether it's tower or more low-rise. Maybe can you talk to us about that across your markets, like where is the tenant demand just as we can frame, you know how to think about the risk over the next couple of years?

Sure. I'll start Jamie. So, on rent growth we are not seeing much change from what we've talked about in the last 18 to 24 months where we continue to see on average, 3% to 5% in rent growth per year with some hot spots worth better than 10% to 15%, another's worth on the lower end. But I'll say on the blended basis across the portfolio, we are still comfortable with the 3% to 5%. On the new construction rents, we continue to see a significant gap between the costs of first gen space versus second gen space, obviously driven by construction dollars. Then with regards to demand type, it really comes down to the prospect is. We're in conversation with a solid handful of suspects/ prospects for development projects and it's a blend, some of it is tower, CBD, urban, and other is specifically more very suburban type campus environment. So, it really comes down to the type of customer. Bridgestone, as you know is a monumental defining trophy asset in the core of SoBro of downtown Nashville, while Mars Petcare and MetLife has been somewhat the antithesis, so they're trying to create their own campus in a more relaxed setting.

Okay. And then, I guess, thinking specifically about market, you had mentioned still a pretty good pipeline of potential development starts or anchors for development. Are there certain markets they're more focused on than others?

Well, right now our development pipeline represents 1.8 million square feet, nine buildings in five different markets, the handful to full handful of conversations that I referenced are across six different markets. So, we continue to see potential developments pretty much across the footprint.

Okay. And then finally, we saw the news about Coke laying off a good chunk of its sales force employee base. Can you talk about any early implications on the Atlanta market, and maybe just help us think through what markets might be impacted?

Hi Jamie, it's Ted. Part of the statistics of this quarterly absorption numbers in Atlanta did take a hit a little bit with Coca-Cola. They are consolidated out of the building in the northwest sub market down to existing both owned and leased space. So, there was a couple of 100 thousand feet. Other than that, I think that's northwest submarket. Other than that, I am not sure it's going to be a whole lot more impact lease that we've seen early on that we can tell. A lot of their staff is in their owned headquarters building, as well as a long-term lease they've got downtown. So, I am not sure there is going to be a ton other impact in the Atlanta market.

Okay. All right. Thank you.

Thanks Jamie.

Our next question comes from the line of Emmanuel Korchman with Citigroup. Please proceed with your question.

Hi guys, good morning. Just wondering if you could help me understand how you think about disposition targets in the current environment? Is it assets where you can sort of tap at the high dollar margin and really is extra proceeds or is that the weaker asset you think are going to have upward growth or more out to somewhere in between?

Hi Emmanuel, it's Ted. It's much more the latter door number two. We have continued to stay focused on selling from the bottom of the portfolio. So we routinely maintain August runs on all of our portfolio, and we force rank buildings and we look at buildings that we feel are of lesser quality and not in the BBDs. And so that's exactly what we have in the marketplace today. So as you know, we closed one building this far this year. We have another dozen buildings in the markets that we are testing and we expect as I said my comments to be closer to the upper end of our disposition guidance than the lower end, but it's much more the latter type of space. And just as a footnote reminder, we haven't sold any assets, because we need to proceeds in order to meet some expiring debt instruments or some other obligation, it's strictly from portfolio strategic purposes.

And then, a question maybe for Mark, just if we dig into the 25 basis point increase in same store expectations, was that just a benefit of leases rolling better than you expected in 1Q or are you seeing something else throughout the years that gives you more confidence in boosting it? And then a second part to that, how much cushions is there for additional increases for the year?

Emmanuel, good question. We obviously posted a good number for the first quarter of 5.5% which reflected some seasonal cost savings in our minds. We have very favorable weather. In the first quarter, we didn't have any snow removal of any consequence, so those contributed to the maybe outsized 5.5% number for the year. But based on some of that, our expectation is going forward, we did just guidance upwards. We were obviously carefully watching it and paying attention and managing operating expenses best we can, but we had good rent growth and good comparison. So, I mean we are comfortable that number will see as we get further into it if we get more upside, but right now that's kind of where we're expecting to land in that range.

Thanks guys.

Our next question comes from the line of Jed Reagan with Green Street Advisors. Please proceed with your question.

Good morning guys.

Hi, Jed.

Are you seeing any changes in terms of overseas buyer demands in your markets and is that impacting asset pricing at all?

No. I think the biggest change that we've seen is just the depth of the buyer pool is more shallow but there is no shortage of capable cash flush buyers.

Okay. And you talked in the past about focusing on markets with strong demographics and job growth, are any of your existing markets showing trend lines where you think about maybe moving at different direction and no longer meet your expectations? And then I guess, on the flip side there are other markets that are emerging on your radar that kind of do meet those requirements that have interest?

So, we feel like the markets that we're in continue to do well. The Richmond and Memphis aren't Nashville and Atlanta, but they are very good for our diversification. They've been very steady providers and we continued to see development opportunities akin to the 100% pre-leased build-to-suit we are doing for Virginia Urology. So, we like to term those as you know they are very good number 6, 7, 8 batters, and they continue to provide us I think with very good diversity, not only geographically where we don't have any city right now that represents more than 19% of total revenues, but also from a customer base and industry base. So the simple answer – my long answer never bowl, the word would be to be no. And then, as far as other markets that we look at, we make routine of looking at other markets and the same three sophomoric criteria. We are not going to go into a one of the sexy six gateway markets because we can establish in our view good brand and market position there. We want to go into a new market that would be even relative proximity to our existing footprint. And in third, the comment that you made, you know demographics that typically outperform national averages. So, we routinely look for opportunities so we can find an opportunity that's up scale and justifies us going into that that market, and where in the BBD and what are our development and acquisition growth opportunities to grow once we get in, akin to what we've been able to do in Pittsburgh.

Okay. That's helpful. And maybe just last one for me, just looking at the Ovation project now kind of its Mars Petcare lined up. Certainly looking at the phasing beyond that, should we think about that as a sort of a three to five-year type of phase out or is that more 10-plus year phase out on the office, and then one of other property type starts to kick in?

This is a good question. It really depends. We decided early on that we didn't want to launch that with the spec project. And so, we've invested significant time as I mentioned in my comments with master planning and laying it out, and then going for the rezoning and we're on the cusp now of completing all the infrastructure with regard to the Dutch [ph] banks for all the data and fiber and utilities and the spine roads and carbon gutter, entrances all that is nearing completion. And so, we're thrilled to kick it off with somebody of Morris quality. How the other gets consumed, will in part depend on how we meet success with pursuing other significant anchor customers or build-to-suit prospects, but we are not in the mode of launching a spec building out there. So, I would say, given it's a 1.4 million square feet, that'd be in – it kind of take one end if your question and tie it to the other and I say in the five to 10-year range, just depending on how the absorption goes. And then, the other product that they're refining their designs for the residential, the hotel and the retail, and we would hope that they would commence their portion of it sometime within the next 12 months.

Great. Thanks very much.

Thanks Jed.

[Operator Instruction]. Our next question comes from the line of Richard Schiller with Robert W. Baird. Please proceed with your question.

Good morning guys. I noticed here the activity is gone on back filling the HCA space and maybe at Monarch as well and Buckhead with Towers Watson and Morgan Stanley leaving?

Sure. So HCA, just a reminder, they left January 1 this year about 211,000 feet. So far we've signed 78,000 feet or about 39% of the space. We have strong prospects for another 14,000 feet or about 7%. So, we feel pretty good on where we are, just four months into the vacancy. One of the buildings that came out of two buildings, one of them were pretty much complete with our advertising, we're doing some common area rehab and the other building sort of right in the middle of it, and we still have some work to do. But I think we are comfortable in thinking we can get a lease 50% re-let by the end of this year. In terms of Buckhead, just to remind you the two Towers Watson and Morgan Stanley. Towers Watson is about 75,000 feet and they are leaving August 31, we'll get that space back very beginning in September. Their leave is a result of really merger and consolidation over into another submarket. So we just started to show that space. We still got about five or six months until that comes back to us, and Morgan Stanley leaves August 1. So we still got a few months there as well. Very similar in both buildings, good spaces in both buildings, but we are just on the front end of starting to show this space.

Great. Thank you. That's helpful. We also heard you guys have some list of assets for sale in Memphis and Raleigh. Do you have any comments there and what's the activity on the sales there?

Hi, Rich, it's Ed. We do, as I mentioned in prior answer, we do have product about a dozen buildings in total in the market today in Memphis, Raleigh and Orlando. In Orlando it's a joint venture interest that we have. So those are in the market, we prefer not to speak to our expectations with regard the pricing as we don't want influence how the bidding may go, but we have a fairly high level of confidence that we'll be able to close these assets somewhere in mid-year range, early third quarter.

Okay, great. Thank you.

You're welcome.

We have another question from the line of Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.

Great. Thank you. I think you guys have talked about also an expiration in Richmond at the end of the year. Can you address that? And then also just as we think you head to 2018 any known big move out?

In Richmond its SCI, it's about 163,000 square feet and we'll get back August 1, Jamie. We've already re-let 63,000 feet of that or 39%. There is well we have a strong prospect for another 5,000 or 3%, so pretty much think we high confidence that we're in the low forties percent re-leased on that already.

And then Jamie, there is a footnote, in Inchbrook we have 1.4 million square feet, it's 94.2% occupied. And then Inchbrook as a whole is 90% occupied, so we continue to think it's the best submarket within all Richmond.

Okay. Is that August of 2017 or 2018?

Yeah, this year.

2017, okay. And then in terms of any 2018 no move outs?

The largest there is known for 2018 is 51,000 square feet in Atlanta.

Okay. And then can you just talk generally about Buckhead just demand there with some move outs and its look like some availability. Just how – prices, if rents have been rising, just how is that market holding up competitively versus others sub markets in the city?

Jamie, Buckhead continues. We still see a good demand in Buckhead, certainly with delivery of Three Alliance, their lease met up about 50%, but our guys are still very active, good activity. We don't have any strong prospects yet for either Towers Perrin or Morgan Stanley, but they're just aren't in a lot of good blocks of space. These building blocks about mid building, they got great views. So we feel very confident. We're going to be able to re-lease those in a reasonable amount of time, but continue to see good activity, good tours. So we like Buckhead and continued to perform pretty well.

Jamie, I want to amend my answers to your prior question. I forgot that the FBI has an expiration date that's 2019, but they can vacate in 2018 and we expect them to do that. So that's 135,000 square feet in Atlanta next year.

In Atlanta, okay.

Right.

With submarkets?

Yes, it's in Century Center, so well inside the loop are right on 85.

Okay. And then where are you pricing your vacancy in Buckhead versus Three Alliance?

We tend the 15% below. If they're on a gross basis, most of the leases are going to be net, but if you grow for that, low 40s and we're going to be in high 30s.

Okay. All right. Thank you.

We also have another question from the line of Richard Schiller with Robert W. Baird. Please proceed with your question.

Hi guys, its Dave Rodgers. For Ed and Ted, I guess I want to ask a question that no one asked and where to put words in your mouth. If you were to bifurcate the new development side of the equation, the build-to-suit product that you've been very successful with and kind of the underlying existing portfolio, if you looked at that existing portfolio, do you feel that there is kind of a plateauing affect happening broadly across the markets that it seems like that a little bit, but I don't want to kind of read too much into it if we just have a temporary slowdown, and kind of love your comments and expand on that a little bit if you could?

If I understand your question right, Dave, I think these build-to-suits that we've been able to win have been very meaningful high credit, large footprints, brand new product and clearly cash accretive, that's one of the most attractive aspects of them with the long-term leases. And in virtually every instance we've been able to do it on Highwoods land that we've been able to place in service. So the gain or the return that we are able to get on the incremental spend is heightened by another 75 bps or so as a result of on that. But I do think that we've had a good blend also where we've had some – we've decided to do something spec or some anchor customer in it to provide us some inventory and then it's leased up fairly well. For example Riverwood 200, that's nearly 300,000 square feet and we started a third pre-leased and now we're looking at 80. Seven Springs we started at zero and now we're beyond the halfway point on that. 5000 CentreGreen we started at zero, we're now at 26% and looking at 40. So, I think it's been a fairly good blend for us to add inventory in modest chunks as well as winning some meaningful high credit sizable footprints. As far as the handful that we're looking at going forward, it mirrors that MO right there. We have some sizable high credit build-to-suit as well as some others that would be an anchor customer that would give us some spec space in the submarket where we have limited amount of vacancy. With regard to us on the organic portfolio growth, I think that we continue to have opportunities there with our existing customer base. Business is as we said in our comments is good. We haven't seen anybody starting to pull up stakes because they think the game is about to end.

[Operator Instructions]. Our next question comes from the line Erin Aslakson with Stifel. Please proceed with you question.

So the 2018 FBI expiration, do you think that will lead to a redevelopment of more than just the currently occupied asset there at Century Center. I recall you guys have essentially been banking some land there for a while?

That's good memory Erin. So, two things, The FBI building, we will – if they've been in there for long time, so it's a perfect advertising candidate and drawings are well underway and pricing has begun on that. So, yes, there will be – that building will be repositioned, outlaw the building directly across from it which is a mirror image of it where AT&T came out a number of years ago. We repositioned and it leased up very well. With regard to the – there are four buildings in Century Center that are low-rise partly stick building and at some point in time, really we keep those buildings because of the land. It's attractive location, it's good infill and we would offer those as a build-to-suit candidate, if and when we got successful on that.

[Operator Instructions]. There appear to be no further questions over the telephone line at this time.

Thank you operator and thanks everyone for dialing in. Of course, as always if you have any additional questions, please don't hesitate to give us a call. Thank you.