Good morning and welcome to the Highwoods Properties Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded, Wednesday, April 24, 2019. I would now like to turn the conference over to Brendan Maiorana. Please go ahead.

Thank you, operator and good morning. Joining me on this call are Ed Fritsch, Chief Executive Officer; Ted Klinck, President and Chief Operating 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 Investors section of our website at highwoods.com. On today's call, our review will include non-GAAP measures such as FFO, NOI and EBITDAre. 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. 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. Fundamentals in our business remain healthy with rents continuing to rise and stable demand from existing and prospective customers. Based on what we're experiencing on the ground and from the macro economic forecasts we read, we expect the low to mid-2% economic growth environment to continue, which should keep unemployment low, productivity high, inflation in-check and interest rates within the range we've seen during the past several years. We expect this steady-as-she-goes backdrop to support healthy demand and keep a bridle on speculative supply. Turning to our financial results, the sudden closure of Laser Spine on March 1 overshadowed an otherwise strong quarter of leasing and operating fundamentals. As many of you know, Laser Spine was an existing customer of Highwoods with an unblemished track record of timely payments and a strong credit profile when we came to terms on a build-to-suit for their corporate headquarters and surgery center in early 2014. Declining revenues following the negative outcome of a high-profile patient lawsuit, coupled with taking on debt, drove a deterioration in their financial condition, which led to the sudden closure of their operations last month. We provided detailed information regarding the financial impact of Laser Spine's sudden closure in our March 3 press release and again in last night's first quarter earnings release. Mark will provide additional financial details in his prepared remarks. While undoubtedly very disappointing and an unexpected sizable hit to our 2019 financials, the impact from Laser Spine is manageable. Even with losing a full year of NOI and cash flow from our 11th largest customer, we still expect to post positive same-property NOI growth and adequately cover our dividend. Please be assured, our entire team is heavily focused and working hard to backfill this space as quickly and…

Thanks, Ed, and good morning. During the quarter, we had strong leasing economics as evidenced by positive GAAP rent spreads of 17.5% and positive cash rent spreads of 4.3%, while also posting healthy net effective rents of $16.64 per square foot, 8% higher than our prior 5-quarter average. Atop virtually all of our leases having annual escalators, we've posted positive cash rent spreads in 11 of the past 12 quarters, including 8 quarters greater than 3%, while over the same period, increasing net effective rents by 14% and in-place cash rents by 10%. Our portfolio was 91.2% occupied at quarter end with 5 of our 9 divisions 92.5% or greater. Atlanta and Raleigh, our 2 largest divisions by square footage, ended the quarter with occupancy below 90%, and thus present sizable organic growth potential. In addition to a positive backdrop with market fundamentals, we're optimistic about our portfolio and expiration outlook. We made meaningful progress the last several quarters reducing future near-term rollover risk, which leaves us with only 6.3% of revenues expiring for the remainder of 2019, and we're upbeat about renewal prospects of our large expirations through the end of 2020. We expect occupancy to improve late in the year. Our year-end occupancy outlook is 91% to 92.3%, compared to 91.2% at the end of the first quarter. The midpoint of our year-end outlook of around 91.6% is 40 basis points higher than where we ended the quarter and assumes no year-end occupancy at 5332 Avion. In a typical review of expirations larger than 100,000 square feet, we have only one remaining in 2019. This 100,000 square foot build-to-suit for the FAA adjacent to the Atlanta airport that we delivered in 2009. We remain confident in renewal. We have 3 remaining large expirations in 2020 and are confident…

Thanks, Ted. For the first quarter, we delivered net income of $0.07 per share and FFO of $0.72 per share. The quarter included $0.12 per share of FFO charges relating to Laser Spine's sudden closure. I'll begin my comments on the quarter by walking through the details of the Laser Spine related charges. The $12.1 million of FFO-related charges includes $1.1 million of accounts receivable credit losses, a $4.1 million write-off of the remaining balance of a note receivable and the rest is attributable to noncash straight-line rent receivables and lease incentives. These items show up in our first quarter income statement in the rental and other revenue and other income line items. Let's start with the $7.9 million of items impacting rental and other revenues. It's easiest to walk you through the details using the table at the bottom of Page 4 in our supplemental. The $7.9 million is broken down into 3 components: first, the write-off of $2.3 million of lease incentives is included in contractual rents; second, the $4.5 million in straight-line rent credit losses are included in the straight-line rental income line item; and third, the $1.1 million in accounts receivable credit losses are included in other miscellaneous operating revenues. We also wrote off $4.1 million of notes receivable, which affects other income on the face of the income statement. These items make up the total $0.12 per share of FFO-related charges from Laser Spine recorded in the first quarter. Additionally, we wrote off $11.6 million of tenant improvements and deferred leasing costs associated with the building that effect only net income not FFO. These items were recorded in depreciation and amortization on the income statement. Excluding Laser Spine, the quarter was otherwise healthy and straightforward. We had no disposition or acquisition activity in the first…

[Operator Instructions]. And our first question comes from the line of a Blaine Heck with wells Fargo.

Mark, maybe, I'll stick with you real quick for the first question. I wanted to touch a little bit more on the revised same-store NOI guidance. So it seemed like you had 2 kind of competing factors that would change things. So with a negative 1.5% from the loss of Laser Spine and then the positive from the increase in occupancy expectations. But it seems like only the negative was taken into account in terms of full year same-store expectation. So were there any factors considered in that revision? Or is there may be some conservative -- conservatism built in at this point?

Hey Blaine, it's Brendan. I'll start and then maybe Mark will chime in. So from the occupancy standpoint, the occupancy outlook that we give is really a year-end number as opposed to average for the entirety of the year. And so while we do expect that our year-end occupancy outlook, excluding the impact from Laser Spine, is better compared to what we provided in February, most of that occupancy isn't programmed to move into the portfolio until late in the year and likely doesn't carry a lot of cash impact. So I think that's probably the biggest adjustment versus -- the occupancy versus what you saw in terms of same-property change. So you're right though, the change in same-property outlook, the production of 150 basis point at both ends of the range is solely attributable to Laser Spine.

Okay. So just more of a timing issue there on the occupancy.

Correct.

Okay. That's helpful. And then Ed or Ted, can you give a little bit more color on T-Mobile. We're about a year out after the expansion. So how would you characterize the interest there? And is it a situation where you could potentially have something signed before T-Mobile moves out? Or kind of, what sort of downtime are we looking at there?

Blaine, so their expiration isn't until now April of 2020 because we did that extension, as you mentioned. We have good prospects for half to 100% of the building. We've done showings. It's a strong submarket as far as just blocks of available quality space, it would be in our favor. I think I would be reticent to predict when we would have something signed. But given the level of activity, I wouldn't think that we would endure any significant amount of downtime between when they would come out and when we'd be able to have the space recommitted to a large degree. Ted, will you?

I think that's right. I think that's right. Good activity so far, but still early.

Okay. Good to hear. And then Ed, you guys are fortunate to have some land adjacent to Nashville Yards, where Amazon will be going. There's a lot of construction waiting to be leased in Nashville as a whole. But given your location there, are you guys having any discussions with potential anchor tenants or build-to-suit tenants that you can talk about? Is there -- is it a possibility to go under construction there, in that additional space while you're still building out Asurion, assuming you would get a lease?

Yes. Great questions. So just to put a little context to that for every one. So right across from where Nashville Yards is and where Amazon's going, we're developing the 551,000 square foot build-to-suit for Asurion's headquarters. And then immediately across the street from there, we have another track of land that house the Tennessean Newspaper, and we acquired that in total. And half of that land is what's going to Asurion, the other half will support between 900,000 and 1.2 million square feet in 2 separate towers on a podium. And so we have full design concepts for both of those towers, so that prospects can get a complete sense for the design of the building, the feel of the building, the functionality, everything from backhouse to lobby to floor plates. And yes, we have presented this to a number of prospective users who have been looking at the market and maybe not just looking at this market, but this market in concert with other places that they may consider going. But I guess what I would say in summary is, I think we have a very attractive design. We have some significant flexibility in that. We could do 2 towers in total for over 1 million square feet for a or multiple users or we could do the shorter tower for a user or the bigger. So it gives us a lot of flexibility and the design is well advanced. And we're in the field of play with others as we compete for those considering that very active market.

And the next question is from Jamie Feldman, Bank of America Merrill Lynch.

I guess just sticking with potential development, can you talk about some of your sites in other markets that are getting some interest? And maybe what those prospects look like?

Sure, Jamie. It's Ed. We have -- I would say, of our top 5 prospective opportunities as they sit today. And obviously, the jockeying of these changes, as presentations progress and people decide which and which markets they want to be in and not. One of our top 5, they're spread across 4 different markets, which is a positive for us. It's not 5 prospects all considering a site in a market. Since our top 5 are spread across 4, we take that as a continuing positive sign. They're at different points of interest. And some of it is anchor customer versus a complete build-to-suit but enough where we, from a conservative perspective, would feel comfortable initiating construction based on the volume of space that they would take and what their forecast for growth would be as we work through the design and construction process. So yes, I hate to say much more than that because you know these -- until you have something inked, it's not inked. But I would say that our conversations are positive and given the volume of design work that we have for trophy Class A buildings across our footprint, we feel like we're in the hunt on a number of them.

Okay. And then you had mentioned in many of your markets that there is supply coming in, a lot of it's not necessarily in competitive submarkets. But can you talk about the impact on rent growth? And what you're seeing and what you're expecting in rent growth across your markets?

Yes. I'll start and then Ted can give you some addition to that. But our perspective of that is, even though that we and the markets have enjoyed an uplift in rental rates, and I think we've underscored that in Ted's comments in the script, the spread between first gen and second gen remains wide, and we've been saying that for a number of years now. But given the cost of new construction, despite the appreciation of second-gen rates that gap continues to remain quite wide and that's in the -- like the 20% to 35% range. So you still have to have a very deliberate need or want to be in first-gen space versus second-gen space and a willingness to pay that first-gen premium as a result of what it just flat out costs to build it from scratch nowadays. And I think that, that GAAP has been there for three years now, maybe more. And we don't see that subsiding in a way that construction prices continue to increase, as I referenced in my script, the approximate 0.5%. So I think, Jamie, again, it's a bit of a bridle on new development. I think it will keep -- continue to keep it in check. But certainly, there are those who are recognizing that cost and willing to pay it. But there is a premium to pay, and I think as a result, others are opting to take an appreciation in second gen but not making that full lift of the 20% to 35% increase to first gen.

Okay. So I guess, when you think about the second-generation space, are you seeing any slowdown in rent growth there?

Jamie, this is Ted. We really are -- I mean, just to add on what Ed said, really the new construction has really served a lift, the second-gen buildings as well given that wide gap. So the second-gen buildings have been able to draft off the new construction. So we continue to see rents grow in virtually all of our markets. I continue to think it's in that 2% to 5% range depending on the market, probably the most is Raleigh, Tampa, Nashville right now for us.

Okay. And then last question for me. I mean it sounds like you guys are pretty surprised by LSI as was the market. I mean, is there any thing as you look back that you thought you should have or could have done differently in terms of whether it was like having more of a credit watch or communicating differently based on what went down?

Yes, Jamie, it's Mark. Whenever these things happen obviously, you look back and try to figure out what we missed or what we could have done differently. We've got 1700-or-so customers, and we've got a pretty regular approach to getting financials, reviewing forecast, we monitor credit reports, follow the news about our customers, and we stand pretty close communication with them and obviously monitor the payment history. In this particular case, we were aware they were having some financial issues, and we had been following them closely. And we -- and so we relayed to you, they started paying us on a weekly basis and so we were pretty close to this one. But we really didn't have any anticipation that this thing was going to go the direction it went. We thought potentially, if they went to a bankruptcy, it would be a restructuring, not certainly a one where they shut their doors. But we're going to continue to look at our process and make sure that we're staying on top of all of this. We -- but we have, again, a pretty regular process and it's been well tested over time. So it's unfortunate the timing was obviously not good for anybody. But we've got a great building and a great piece of real estate, so we're optimistic about the outcome here, and we just have to play through this little patch here.

The next question is from Manny Korchman with Citi.

Ted or Ed, just sticking to Laser Spine. Best case scenario, if you got a single-tenant user for the building and when would they need to come in for us to see the financial benefits with regards to 2020. When will we get the lease sort of signed? And if it had to go multitenant, how much of an investment would that take? And similar question on timing?

Manny. So there is such a wide array of what could backfill this building. And so it could be anything from somebody taking it as is, to us dividing the building up into a multicustomer situation where it could be both medical and office or all of one and none of the other. So I think that the safest thing and most appropriate thing for us is just to underscore that we don't include in our revised outlook any occupancy in the building for the remainder of the calendar year. In the interim, we're working these number of conversations very actively and has our undivided attention. But I think for us at this juncture, particularly with the given number of active conversations that we're hosting, that it's probably best at this point in time to just underscore that there could be quite a mosaic of different terms and conditions. And best for us to get a little bit further into this so that we could -- we can give you something that's more definitive as we worked towards an agreement with a party or parties. We've obviously done some costing of what it would take to convert pieces and parts or all of the building in one direction or another. And we've had CAD drawings available for prospective users to study, which a number of them are. We're very thrilled with where we are from a legal situation as far as the lease being terminated and us having full possession and control of the building and free to move about the cabin and lease it with whomever we like at this juncture. But I just think that there's such a wide array of possibilities that we might catch ourselves in going down one rabbit hole or the other at this juncture. But I think the positive thing is that the volume of activity that we have is virtually all on an unsolicited basic. We haven't sent out a teaser, we haven't held a broker function, et cetera, et cetera. These are inbound inquiries that we're feeling.

And our next question is from Dave Rodgers with Baird.

Maybe, I start with Ted. Ted, you talked a couple of times about occupancy strength, but mostly near year-end. Can you talk about how much of that might be signed in leases, i.e., the Century Center leases that you talked about earlier versus kind of what's just still in the prospect stage? So what gives you that confidence into the year-end to have that occupancy boost?

Sure, Dave. Certainly, we still have some more wood to chop this year. But just given the number of tours that we're conducting, the demand we're seeing from customers out there. And I think we've pulled forward a lot of the demand as well. We have like, what, 6.5% remaining is year. But a lot of that is in the queue but there is still some work to do. But just given where we're seeing the demand and seeing the customers and the tours and all of that, I think we feel pretty good about where we are. But there is still some work to be done this year.

Dave, it's Brendan. I'm just going to follow-up on that a little bit. With respect to, kind of, the same-store and cash commencement of leases, and clearly, we put up 0.1% in the quarter. The average -- the guidance for the year, the range is 0.5% to 1.5%. So there's obviously a clear indication that we expect same-property growth to improve as we move throughout the year. And I think just to give you a little bit of color, we would expect that both the second and third quarters would be probably towards the lower half of that range with a strong fourth quarter. There -- as Ted mentioned, there is some leasing to get to, which we have programmed in which will impact that fourth quarter from a cash perspective on same-store NOI growth. But most of that are leases that either have been signed, but haven't yet commenced, or are leases that may have commenced from a GAAP perspective, but where cash hasn't commenced yet. So I think we've got a lot of built-in growth into the same-property pool. And then in addition to that, we've got a quite a bit of growth from the development pipeline, which will come online from leases that have been signed, but haven't yet commenced. And there's about, compared to what we put up in the first quarter on an annualized GAAP basis, there is about $5 million to $6 million of additional NOI from projects that have delivered, but where we haven't fully -- have not yet fully stabilized. And then in addition to that, on a cash basis, that number on an annualized NOI basis cash is around $10 million to $12 million. So there's quite a bit of built-in growth into our current portfolio.

Yes, that's helpful. And maybe Ted, sticking with you just for one more question, with regard to the demand from tenant that you're seeing, are you still seeing a fairly broad-based demand, not necessarily by market, but by tenant type in terms of maybe tech tenants versus financial tenants? What are you seeing, kind of, in that process?

It's definitely broad based, but at the same time, it is somewhat market dependent. I think the overarching themes just overall would be certainly technology, financial, professional services and then certainly co-working continues to lease space and grow in most markets. So I think it's those three categories, primarily.

Great. That's helpful. And then maybe just the last question for Ed or Ted. And I don't know if you commented on this earlier, but just obviously with the big M&A announcement in your space, is there anything you can or would comment with regard to Boston, your interest there and potentially any involvement with you?

No.

[Operator Instructions]. Our next question is from Adam Gabalski of Morgan Stanley.

Just one last question on Laser Spine. As you have sort of started to have discussions with potential new tenants. As you start to think about the impact on 2020, do you have any idea what the mark-to-market could be at that asset? Or what the potential upside could be?

Yes. Good question, Adam. We ask ourselves that about 8 times a day. And I kind of give you a political answer here. I just go back to there's such an array of possibilities that I think it's just early for us to even put a range out there in a way of as a line in the sand as to what we would expect. Obviously, we're trying to relet this as prudently as possible with the appropriate level of speed and our success. I just think it's early for us to try and post that at this point in time. Excellent question, but we're looking for the right blend of user creditworthiness and timing. And as soon as we have a dialing on that, we'll be the first ones to put something out, I promise.

And gentlemen, there are no further questions. I'll turn the call back over to you.

Thank you, operator, and thank you, everyone for dialing in. As always, feel free to give us holler if you have any additional questions. Thank you.

Ladies and gentlemen, that concludes the call for today. We thank you for your participation. Everyone, have a great rest of your day, and you may disconnect your lines.