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 the question-and-answer session [Operator Instructions]. As a reminder, this conference is being recorded, July 25, 2018. I would now like to turn the conference over to Brendan Maiorana, Senior Vice President, Finance and Investor Relations. Please go ahead.

Thank you. 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 you have not received yesterday's earnings release or supplemental, they're both available on the Investors section of our Web site at highwoods.com. On today's call, our review will include non-GAAP measures, such as FFO, NOI and EBITDAer. 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 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.

Thank you, Brendan and good morning everyone. Macroeconomics conditions remained healthy nationally and across our Southeastern footprint. Employment gains, including office using jobs, have been strong across the country and generally even better in our markets. GDP growth has accelerated as of late, and many economists expect 2Q ’18 to be a breakout quarter from the stead yet somewhat modest growth experienced most of the cycle. We continue to see healthy demand for our well located BBD office product from current customers and prospects. During the past few years, we've often been asked our opinion on what inning are we in or how long will this cycle last. As we stated before, we’ll leave these predictions on the length of the cycle to others. But for now, the steady cadence of positive economic activity supports business growth from our customers and prospects. The many drivers supporting our upbeat outlook include Southeast population and job growth, which are significantly outpacing the national average, supported by business friendly environments, high quality life and affordability. In addition, our markets continue to experience positive net absorption. On average, new supply remains modest and finally rents continue to rise. This healthy macroeconomic outlook and strong demographic drivers across our footprint help drive strong leasing during the quarter and supports positive outlook for our operations. In addition to delivering $0.87 of FFO per share, we leased over 1.1 million square feet of second generation office space, including 189,000 square feet of relapse and approximately 100,000 square feet of expansions. In addition to the solid volume, our leasing metrics were strong. We posted GAAP growth of 18.2%, while cash rents spreads have remained healthy, including this quarter’s positive 2.3% growth. Further, we were successful generating longer term leases at a weighted average of 6.8 years and we…

Thanks, Ed and good morning. Overall, the demand we’re seeing across portfolio makes us upbeat about our leasing prospects for next several quarters. As Ed mentioned, we’ve taken care of several large expirations from our 2019 list and we’ve renewed a large 2020 expiration. Out of the five 2019 expirations greater than 1,000 square feet, we've now renewed two of them, UMA and AT&T. And in addition, closed the sale of Tower Two where IMC is located. Further, we feel confident about landing a renewal with the FAA, especially given the building’s proximity to the Atlanta Airport. At this juncture, T-Mobile is the only large 2019 expiration that we’re unsure about. We expect to get a better sense about their renewal likelihood by year-end. In addition, showing up many of our large future expirations, we also made meaningful progress elsewhere in our portfolio that we believe will materialize in signed leases in the latter half of the year. Now, turning to our quarterly stats, we beat our prior five quarter average on several fronts; we leased over 1.1 million square feet of second gen office space, a 30% beat; the average dollar weighted term was 6.8 years compared to 6 years; GAAP rent spreads were positive 18.2%, 230 basis points higher; and net effective rents were $15.24 per square foot or 2.2% better. Our 2Q same property cash NOI growth was negative 1.1%. Our same property average occupancy was down 140 basis points compared to last year. Of note, ramp in our same property pool was flat even though occupancy was down, driven by solid cash rent spreads we've achieved over the past many quarters and the healthy annually compounding rent bumps we have on nearly all of our leases. Occupancy is projected to bottom in 3Q as we've now…

Thanks Ted. In 2Q, we delivered net income of $50.7 million or $0.49 per share and FFO of $92.2 million or $0.87 per share. The quarter included $0.05 of land sale gains, which were essentially offset by dead deal costs related to development projects we are no longer pursuing. There were no meaningful term fees in the quarter. But as I mentioned last quarter, we did recognize the final $1.9 million portion of the Fidelity restoration fee. Compared to the first quarter, the sequential drivers of the nearly $1.5 million FFO increase were lower G&A by a little over $2 million. As you will recall, this is the normal annual pattern for us as we have increased expense in 1Q from long-term equity grants each year. Modestly lower interest expense due to repayment of $200 million bond with an interest rate of 7.5%. These were partially offset by lower NOI by $1.9 million, driven by lower average occupancy, lower term fees and modestly higher operating expenses. With net debt to EBITDAre of 4.65 turns and leverage of 35.3%, our balance sheet remains in excellent shape. Our strong leverage metrics put us towards the lower end of our stated comfort range of 4.5 to 5.5 times net debt to EBITDAre, and we have significant liquidity to fund our growth initiatives. With the addition of the Asurion headquarters built-to-suit to our development pipeline, we now have $368 million left to fund on our $725 million pipeline. We continue our plan to fund our business on a leverage neutral basis. However, even if we were to fund the remainder of the development pipeline without any ATM issuance or non-core dispositions, we estimate upon stabilization of the development pipeline, our net debt to EBITDAre would rise only half a turn from current levels. During…

Thank you [Operator Instructions]. Our first question comes from the line of Manny Korchman with Citi. Your line is open, please go ahead.

Mark, maybe thinking about the trajectory of earnings into 3Q, you mentioned occupancy being lower and also margin being lower. So I guess the question how much lower will -- I recognize you don’t give further guidance. But how much lower will 3Q FFO be versus 2Q?

So I think you’re right, we don’t give quarterly guidance but here's a couple of things to think about. So Mark mentioned that the $1.9 million restoration fee that we recognized in the second quarter with Fidelity that was the last quarter that we recognized that, so that will go away. That will be partially offset by the extra two months of rent that we’ll recognize in the third quarter for Fidelity's natural lease expiration at 11,000 Weston. So the net impact on Fidelity between the second quarter and the third quarter sequentially is probably in rough numbers between $1 million and $1.5 million less in the third quarter attributable to the restoration fee offset by those couple of months of extra rent. And then in addition to that, if you think about our normal quarterly revenue number of, let's call it broad strokes, $180 million of revenue. Typically, our third quarter on a sequential basis compared to the second quarter, is about 100 to 125 basis points lower with respect to operating margins, so that's probably another, let’s call it, $2 million. So I think, all else equal, just those two items could probably give you a pretty good sense of sequential pattern between the second and third quarter that we could expect.

Ed, maybe one for you, you spoke about difficult acquisition environment. What about on the land side of things, what opportunities are you seeing out there by land. You were successful, recently Nashville and then got the build-to-suits done quickly. Are those the types of deals you’re looking to replicate or what are the land opportunities that are you looking at?

Yes, we are looking for land opportunities. And just to put that in context Manny. Today, we have about $135 million worth of land, $105 million of which is core. Since the last five years or so, we placed in service about $85 million and sold about $50 million, and bought about $91 million. So net-net, we’re down about $45 million worth of land. The $105 million that we have now will support about $1.7 billion in development, just shy of 5 million square feet if we use an average of $350 a square foot to build. So given the productivity of the development pipeline, we've obviously consumed a goodly amount. And we have a multitude of discussions going on today across many of our divisions, looking to replenish some of the land that we've been able to place in service. So we’re sticking with a heavy focus on our BBDs. It will be a cadenced amount. We’re not going to go all whole hog on land. But we think it's important to have that ingredient when we get in front of perspective customers, particularly build-to-suits to be able to have the land entitled fee simple on hand when we’re making our presentation.

Our next question comes from the line of Jamie Feldman with Bank of America Merrill Lynch. Your line is open. Please go ahead.

Can you talk more about the expense, the year-over-year increase in same-store expenses, and whether you think that will remain elevated? Or if there’s some opportunity to maybe get some of that back towards the end of the year?

We’ve had little higher property taxes than normal. We’ve had some assessments in some of the jurisdictions that have been a little higher than we maybe forecast. Utilities bounced around a little bit as well. We start out with a little cold in the early part of the year. So I think it's timing more than anything. We do expect a little higher, just on a forecasted basis, a little higher year-over-year on operating expenditures for ’18 compared to ‘17. But yes, most of it is property taxes and utilities in terms of the big items.

And then if labor -- higher labor costs playing into it all, or not really?

Not really.

And then it looks like you guys made great progress on your ’19 expirations and even some of the big larger vacancies. Can you talk more about the FBI in Atlanta and then just plans to get the Fidelity space ready to lease? I think you’ve said in the past you’re looking at mid-2020 to have it re-let. I’m just curious for an update.

So FBI, which is 137,000 square feet in a multi-customer building that we call 2635, FBI moved out in February. And so we've been Highwoodtizing building. They've been there for since 1992, so an extended period of time. So we’re recasting amenities, redoing the lobby restrooms, parking just everything that it needs after such a long tenancy. And we hope to have those complete by the end of third quarter. So to-date we’re 28% re-let on that. We’re using the building, which is a sister image of this building across the street 2800, which is the same size, design, et cetera, as a model. And you may remember a number years ago AT&T came out of that building, in total, and it took us two years to backfilling. So using that same timeline we’re about 25% of the way through it. And obviously, there’s been a huge volume of construction ongoing in it and we’re about 28%. So we’re 25% of the way through and 28% re-let at this point in time using the same timeline. Then just one of the footnotes, Jamie, in Century Center we have 1.4 million square feet and we’re 95% occupied sans the 2635 building. And then the Fidelity building, which we call 11,000 Weston, in the Weston submarket another comparatives to what I just gave you for Century Center. We have 1.2 million square feet that’s 97% occupied. This building has been occupied consistently over the last 20 years. So we just got it back to 1st of July and we’re doing all the things that we would typically do to a building that's now 20 years old. So as soon as we got it back, we commenced with replacement of HVAC, roof, wet seal the building, parking lot work, the typical things that we do. The dollar amount that we are expanding is basically in line with the restoration fee of $4.8 million that we received from Fidelity. We’ll have all this work done by the end of the year, if not before. And we have a multitude of prospects ranging from 25% of the building to 100% of the building.

And then just a final one for Mark or Brendan, I think in your comments you had said you were trending towards the lower end of the range. It sounds like that's just on cash same store. Is that FFO or that was just the same store comment?

No, Jamie, that was just on same store. You obviously saw the negative 1.1 for the quarter. So I just think right now, looking at our forecast, we’re thinking we’re going to be towards the lower end of the guidance on same store that was not due to the FFO.

Our next question comes from the line of Blaine Heck with Wells Fargo. Your line is open, please go ahead.

Ed, you mentioned strong activity at the Buckhead vacancies. At this point, given the interest you’re seeing, do you think it's a fair expectation to see the rest of that space leased by the end of the year? Or do you think some of that leasing could extend into 2019?

Yes, I think it would extend into 2019. So we mentioned that we have about 300,000 square feet there that’s vacant. And I think we’ve had a lot of focus on the Morgan Stanley and Towers Watson move out that totaled about 135,000 square feet. So we’re now about a third re-leased on that. We have good prospects for another third of that but I think to say that we would be -- have rent paying by the end of this year on all that space, I don't think it will be that quick. We have seen good progress, you and I now have said, but I think January 1st for all that to be re-let is a little bit quick.

I was thinking just more on the execution side rather than rent paying, but that’s fair. And then I just wanted to touch on the AT&T renewal, you guys got that for the quarter. Can you guys give any more color on that lease, in particular the new term and/or mark-to-market?

Basically they renewed for a five-year term and the rent went up about 3%, and they took it as is, so no TI.

And then lastly, Ted, a couple of your markets has seen pretty significant supply over the last few years. And thus far, I think the demand has been strong enough to absorb the new construction. But it seems as though, Nashville and Raleigh, in particular have a lot under-construction as compared to stock and potential projects also in the pipeline. So given where we are in the cycle, do either of those markets -- were you guys on the supply side looking forward?

Certainly, we’re watching it. And as we have the last couple years, we've taken the historical absorption, tracked that back for several years through the cycles. And I think right now we feel -- while there’s an elevated level of new construction, there is a lot of continuing tenant demand for new space. And based on the absorption we’ve seen, we think demand is tracking with the new supply. So again we’ll continue to keep an eye on it but I think we feel market is still in pretty good shape.

Our next question comes from the line of Robert Stevenson with Janney Montgomery Scott. Your line is now open, please go ahead.

Can you talk about how much upper pressure you’re seeing these days in terms of tenant improvements per square foot? Is the growth just all material labor costs or the tenants pushing that as well these days?

So obviously, there is couple things happening there with regard to us being able to capture longer term leases, and I think this quarter is a very good example of that. So what we typically paid pretty close attention to Rob is what our payback percentage is. And over the long run, we’ve typically been between 12% and 15% on that. This quarter we’re just below, just a tad below 13%. So we've seen that -- I guess to sum it up, we’ve been able to capture term and rents and think that offset the increased demand for TI dollars.

And then related to that, when you look back at your leasing over the last few years, are you seeing any meaningful changes in the square footage per employee that tenants are utilizing across your portfolio or in any of your markets or assets specifically?

That's a long -- that’s a six pack conversation, because there are lots of opinions on that. But what we've seen is -- we won't drag this out too long. But it goes back to the, me versus we space. And the me space that I specifically get in most situations is less than what I occupied in prior years. But the amount we space is dramatically expanding with regard to specifically designated areas for meetings and lots of other things, as far as collaborative areas and in open areas where people can get together and meet and collaborate outside of the confines of a conference room and a more of a casual, more of a den type-setting as opposed to a formal boardroom type-setting. And we’ve carefully studied this that we feel like the overall demised premise isn’t dramatically changed at all when you add in the expanded break rooms and me space, offsetting the contraction in the we space versus the space that’s allocated just to the individual. Does that make any sense to you, Rob?

And then one last quick one for Mark, 10 years pushing back towards 3%. How are you thinking about longer term debt these days? And anything driving you to something sooner rather than later? You guys have that hole in your maturity schedule in 24, 25, 26, you guys thinking at this point about seven year debt on or just wait until the $202 million or $225 million 2020 debt is addressable and put five year money on it that time?

It’s a great question. Obviously, we watch it, debate look at it carefully, all the time. I think you saw we put a swap in on just to build some flexibility into next year. We do have a LIBOR swap on the term loan, the $225 million term loan that expires in January of 2019. And we’re spending on the development pipeline where there is the chance that we are in the market before the 2020 maturity. But we look at it carefully and closely. Obviously, rates have bounced around. It’s depending on what you believe in listen to you don’t know if they’re going higher or staying where they are. We’ve had a little bit of low here and now we’re back, it looks like on the increase, but we’re paying attention to it. I wouldn't be surprised to see us in the market sometime in the next six to nine months or so.

[Operator Instructions] Our next question comes from the line of John Guinee with Stifel. Your line is open, please go ahead.

This is Aaron Wolf on for John. A quick question here is back to the land bank. Are you currently looking to replenish the Atlanta land bank given now that it’s 1,000 acre?

We are.

And my last question, you’ve been successful in developing build-to-suits in core markets. Is there any interest or talk of looking outside your core markets for build-to-suit opportunities?

We have found customers in the past outside of our market where they’ve had a positive experience with us and asked us to do something for them outside of market. We’ve worked with FedEx in Colorado. We’ve worked with the federal government in Alabama, Mississippi, and other states. So we have followed customers when they've asked us to be involved with the development project with them. So the answer to that is, yes, it’s the heavy focus of our business know we’re much more interested in expanding and rotating the portfolio in our existing core markets.

Our next question comes from the line of Alexei Siniakov with SunTrust. Your line is open, please go ahead.

This is Alexei Siniakov for Michael Lewis today. Two quick questions. First one is, could you please give a little more color on the Asurion build-to-suit, specifically why that project is now bigger in scale? And has anything else changed besides the square footage and the cost? Can we assume the yield is unaffected and in line with your other developments?

So I’ll do it in backwards order. The answer is yes, you can make that a safe assumption with regard to the yield that it is in line with what we've provided. They just needed more space as they refine their space programming and scope and that's what drove the expansion. So the building is comprised of two -- or the project is comprised of two buildings built upon a pad. The pad has embedded parking, some of it below grade some above grade, and then a super floor for the main level. And then one building is eight storey and one building is nine storey and the two different points above the main level, they connect by way of a connecting bridge. So we added a floor to each of those buildings, so that's what grew it from the 479,000 to the 571,000. The price per square foot, obviously, because we’re not putting anything more into the land and some other things, went down from 526 to 517 a foot. And I think that answers your question. But we’re really excited about it. This is a wonderful project for Highwoods. We’re very excited to be working with Asurion and that they chose us. And we think that the unique urban design that the good people at Hastings architecture came up with and we’ve worked with them on this, will be a true add for their urban setting downtown Nashville.

Okay, great. Thank you for those details. And then…

One other thing, obviously, we -- not obviously -- I just wanted to point it out. We did not change the parking count when we expanded the building. So the parking ratio is now at 3.5 per thousand.

And then my last question. I read an article that WeWork recently opened its fourth location in Atlanta. And they likely expect to grow to over 15 locations in a couple of years. Maybe you can talk a little about your views on co-working firms and tenants? Do you think their rapid growth increases from the amount of risk in the markets where they have a large presence?

Certainly, it’s growing. I think you're seeing both grow through both national and the regional, and the local players. And I think it’s playing out just as companies are exploring alternative work strategies to maximize their efficiencies, and collaboration, and certainly recruiting retention is important. So we’re watching it and we’ll see how it plays out. What I will say, we've had success in actually getting some customers taken out of those co-working types of group. So they went there for short period of time and they outgrew it, or they didn't like it or whatever. So I don't think it's for everybody but certainly it's something that’s a trend that’s growing, growing quick and it’s something we’re closely watching as well.

And we’ve done a few deals with Industrious, which is WeWork like but definitely have a different brand and a different tack. Probably one of the bigger differentiators is they typically take down space in smaller quantities than WeWork done. And we’ve done a few leases with them in our portfolios. So we have some exposure and experience with it, which we think has been positive for us to witness. But it’s certainly in a very small dose when you compare it to the scale of our portfolio.

[Operator Instructions] Our next question comes from the line of Dick Schiller with Robert W. Baird. Your line is now open, please go ahead.

A question on the development pipeline was. Was that 92% leased, I realize it’s increased in size and scale, but the leverage at the lower levels of your range. If you guys got that big project, let’s say another $250 million project. Would you guys do it, or are you still looking for something small you mentioned $50 million projects to stay within your development pipeline range?

So if we had a creditworthy 100% build-to-suit we’re heavy anchor user of that scale, absolutely, this is our core discipline is to develop. And if the economics were there, we would absolutely do it. The $100 million is just refining of guidance for 2018 based on what we've been able to achieve to-date with the $285 million and then just giving some forecast, revised forecast of what we think the upper end of that range could be by year-end in the way of additional announcements in 18. But absolutely, if we have the right economics the right credit and the opportunity to deliver for another use of the scale, we would do that.

And question on Atlanta on the jobs front in our monthly note, we’ve seen a slowdown in office using employment in Atlanta. Do you guys have any thoughts there and are you guys seeing the same thing?

No, as Ed talked about earlier in his comments, Buckhead has been great, actually pickup in demand. I think we saw the stats for last couple of quarters and there are some IT jobs that maybe were lost in Atlanta that affected the numbers. But overall, I think Atlanta, we see demand as fairly broad based from an industry perspective. And we think fundamentals are still very good and the demand is really picked up in last couple of quarters.

And there’re no further questions queued up over the phone lines at this time. I will now turn the call back over to our presenters for any final remarks.

Thank everyone for joining us this morning. As always, if you have any additional questions, please reach out. Thank you. Thank you, Operator.