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. [Operator Instructions] As a reminder, this conference is being recorded Wednesday, April 29. I would now like to turn the conference over to Brendan Maiorana, Executive Vice President of Finance. Please go ahead, Mr. Maiorana.

Thank you, operator, and good morning. Joining me on the call this morning are Ted Klinck, 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 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 and the company does not undertake a duty to update any forward-looking statements. Currently, one of the most significant factors that could cause actual outcomes to differ materially from our forward-looking statements is the potential adverse effect of the COVID-19 pandemic, and federal, state, and/or local regulatory guidelines to control it, 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 COVID-19 pandemic impacts us and our customers will depend on our future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the direct and indirect economic effects of the pandemic and containment measures, 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 first start by saying, I hope you are all well and your families are safe and healthy. This has been an incredibly challenging six weeks for our country and for our economy, but we are grateful for the effort of all Americans, especially our first responders, the nurses, doctors and other health care workers, who have rallied around those affected by the COVID-19 pandemic. Before I turn to the pandemic's impact on the economy and our business, I would first like to update everyone on our financial results for the first quarter. We delivered FFO of $0.93 per share, the highest in our company's history, and same property cash NOI of 4%. We leased 893,000 square feet of second gen office space with GAAP rent growth of 13.6% and cash rent growth of 6%. Average in-place office cash rents grew 6.2% per square foot year-over-year. Development continues to be a growth driver for Highwoods. Our 1.2 million square foot development pipeline represents a $500 million investment that is 77% pre-leased and 50% funded. We are pleased to report construction work on our four in-process projects, GlenLake Seven in Raleigh, Virginia Springs II in Nashville, Midtown One in Tampa and Asurion in Nashville, has continued throughout the pandemic. We remain on budget and on schedule for the varying completion dates later this year and throughout 2021. Our pipeline is projected to generate more than $40 million of NOI upon completion and stabilization, less than $5 million of which will be generated in 2020. During the quarter, we completed the first phase of our plan to exit the Greensboro and Memphis markets and reinvest that capital into the high-growth market of Charlotte with the acquisition of Bank of America Tower. All told, we sold…

Thank you, Ted, and good morning. I'm going to briefly review our performance in the first quarter and then address the impact of the COVID19 pandemic on our operations and outlook, before closing with our thoughts on leasing expectations for the remainder of the year. As Ted mentioned, we finished the quarter, which now seems like a distant memory, with record setting FFO per share and solid leasing metrics. Leasing volumes were healthy with 893,000 square feet of second generation leases signed with GAAP rent spreads of a positive 13.6% and cash rent growth of 6%. Leasing results in the quarter included a 238,000 square foot renewal in Atlanta with the State of Georgia that pulled our average rent per square foot and term down, but also carried lower leasing CapEx to drive a superlative payback for us. As we've discussed on prior calls, we have made significant progress reducing our lease expirations over the next few years. To that end, we now have 24% of revenue expiring through year-end 2022, down from 29% at the end of 2019, and there are no expirations greater than 100,000 square feet remaining in 2021 or 2022. We're close to finalizing a long-term renewal with the FBI on their 138,000 square foot building in Tampa that currently expires in the fourth quarter of this year and continue discussions with the FAA on their 100,000 square feet in Atlanta, which is currently in holdover status. Finally, T-Mobile, a long-known move-out, will vacate 116,000 square feet in north Tampa in the third quarter of this year. Our in-place cash rents are up 6.2% year-over-year. This growth is driven by higher rents on deals executed over the past 12 months, an improved portfolio mix due to the market rotation plan, and as always, in-place annual escalators.…

Thanks, Brian. In the first quarter, we delivered net income of $185 million, or $1.79 per share, and FFO of $99 million, or $0.93 per share. The quarter included the net benefit of $0.02 per share from properties sold, which was offset by severance costs associated with the closure of the Memphis and Greensboro Offices and higher G&A expense that we incur in the first quarter each year associated with our typical annual equity grants. As expected, occupancy declined 130 basis points sequentially to 90.9%, with approximately 30 basis points attributable to disposition of properties. As mentioned previously, we completed the first phase of our market rotation plan with the sale of $338 million of properties. Including $90 million of properties sold in the fourth quarter, we received $428 million of phase one disposition proceeds, which approximates the $436 million acquisition of Bank of America Tower in Charlotte. GAAP NOI on the properties sold was projected to be $29.2 million for 2020, which compares to $27.9 million for BofA Tower, and we're more than making up for the slight shortfall in NOI with G&A savings. As we stated last August, we projected the market rotation plan to be FFO neutral and cash flow accretive. After completion of phase one, we now believe we're modestly ahead of our original expectations. At quarter-end, we had over $630 million of liquidity and returned our net debt-to-adjusted EBITDAre ratio to prior levels at 4.86 times. We used the sale proceeds from the last phase one disposition to fully repay the outstanding balance on our $600 million revolving credit facility. We have no debt maturities until June 2021 and expect to fund approximately $130 million on our development pipeline during the remainder of the year. As we disclosed in our press release, we have reduced…

Thank you. [Operator Instructions] Our first question comes from the line of Jamie Feldman with Bank of America Merrill Lynch. Please proceed.

Good morning, gentlemen. This is Elvis on for Jamie. Can you give us an update on how your watch list is looking today versus the end of Q4? And then I know you didn't take any of those assumptions into your FFO guidance, but maybe walk us through the moving pieces on bringing cash NOI down by 150 basis points, but on your GAAP revenues only come down by 1%?

Sure, Elvis. Thanks. It's Mark Mulhern. On the watch list question, not much change. We did take a small straight-line write-off in the quarter related to one customer that had been on the watch list that we knew was experiencing some issues. But we're -- as you heard Brian's comments, we are laser focused on this credit valuation and issue. We've gotten a number of requests in. We're meeting every day going through it in detail all the executive team is involved in that. We've got in-house council very engaged and they're trying to be responsive and turnaround request as quickly as we can. We're asking for pretty detailed information in terms of updated financials on what they're doing to apply for a government assistance, if that's applicable. So those are all kind of the highlights of that. But the watch list in general, hasn't changed much. In other words, there hasn't been any developments in the customer base, specifically that would cause us any great concern. I'm going to let Brendan take you through the same-store NOI question.

Yes. Elvis, good morning. So on same-store, so the specific components that we laid out that would flow through same-store NOI in the guidance change. There is about $4.5 million at the midpoint. So that's parking net of OpEx savings is about $1.5 million. And then we went through the revenue change, which is about $3 million. The change on same-store is about $6.5 million, if you take the prior guidance compared to the updated guidance. So you're right, there's about a $2 million difference. And really that's driven by some of the rent deferrals that we talked about and some other items that switch between kind of cash and GAAP, since we guide to a cash same-store number. What I would say is, I think, if you look at the outlook for the remainder of the year, we've got about, let's call it, to get to the midpoint of the updated range, there's about 1.5% to 2% kind of per quarter to hit the midpoint of that range. That's below what we've talked about as a normalized run rate assuming kind of flat occupancy and no major change in terms of burn-off of free rent. And really -- so what we would say is, bumps and rent spreads probably drive higher than what we have assumed in the back half of the year. But then that's offset by lower occupancy and lower revenue from parking, and that kind of gets you into that, call it, 1.5% to 2% outlook for the balance of the three quarters of the year.

That's very helpful. And then on the 10%, could you share a split of what you believe is going to be deferral versus sort of lease extensions via like a short-term abatements?

Yes, it's -- I would say that, probably, so that the 1% that we talked about is deferrals. The abatements are a much smaller -- the abatements with lease extensions or, let's call it a lease extension with a modest amount of free rent is a much smaller piece of that. That's not part of that 1%. We would just consider that kind of a lease amendment where we think those are positives to us. But it would be significantly smaller than the 1% of the deferrals that we disclosed.

Okay, thank you. And then, maybe just one more for Ted; just a big picture question on conversations with tenants. Anything we can read-through on your conversations regarding companies potentially looking to relocate from the Northeast to the Southeast or to some less densely populated cities given the COVID-19 pandemic? Thank you.

Yes, sure. I think it's too early to see that. I think, if you go back to the first couple of months of the year, activity was incredibly robust. I mentioned, I think on the call last time that we are in discussions with a lot of different customers, both for build-to-suits as well as partially pre-lease development opportunities, and many of those were in fact from out of town. In fact, since the call, we lost one, one of our pitches was a large build-to-suit, it chose another city. But the in-bounds, they continue to come in. We've had one build-to-suit RFP that we've responded to in the last six weeks. So really since the crisis started. So just, we believe our markets, Sunbelt markets, less dense markets high growth, all the things we've been touting for years are going to continue to serve us well and attract a lot of companies going forward. So we feel good about the demand. Once we get past this period of time, we feel good, the demand is going to kick-started and still be there.

Thank you.

The next question comes from the line of Rob Stevenson with Janney Montgomery Scott. Please proceed.

Good morning, guys. What percentage of your tenants pay electronically versus old school mailing in the checks? And at what point in the month, you really know what's your collections are going to be for the year or for the month?

So Rob, it's Mark. We have migrated a lot of customers to pay by ACH and by wire. I would say, it's probably in the 60-40 kind of range. We still get 40-ish percent by check. They go to lock boxes, that type of thing, but somewhere in that neighborhood.

At what point during the months, I mean, when you have the lag from the mailing into the checks, do you really know what your collections are going to be?

Yes. So depending on the dates and the leases, it's kind of a staggered thing. So not everybody pays on the first of the month. There are some staggered collection. So the numbers that we reported to you, that 96%. We kind of obviously updated all the way through Friday, before this call. And so we do have a pretty good sense in the first couple of weeks is what I kind of -- what I'd kind of say.

Okay. Are you going to be disclosing the monthly numbers going forward for the period that we're dealing with COVID, or is this just point in time?

No, I think that's a fair question. Look, we want to be as transparent as possible. So we're going to communicate more regularly. I think, than we otherwise would have. So that's a good question. I think I would expect us to provide more information.

Yes. Rob, I'd say, you were kicking around. We obviously want to be -- as Ted said, we want to be as transparent as possible. We also don't want to be in the minutia completely on every little thing we're doing here. So, I think if something big happens, we obviously would be transparent about it, just kind of the history of what we've done as a company.

Okay. And on the deferrals, are you guys pushing for more term, higher rate, interest costs, et cetera. I mean, I know that you were getting term on abatements. But just curious on the deferrals, which is the bigger piece, whether or not you're pushing for that, or this is just basically a short-term sort of relief for the tenant? And you're not trying to extract that.

Yes, it's more of the latter. Typically, our deferrals have been one-month to three months, probably on average, I guess, it's probably two thus far. Then we're getting paid back anywhere from six months to 12 months on average, I think. So we're not really going much beyond that.

Rob, the only thing I would add is, obviously, amenity, retail, we want those spaces occupied. So we're going to be a little more amenable to terms into what we're doing with restaurants and any amenity retail. It's obviously important for those spaces to be occupied rather than being dark and re-tenanting them all the things that go into connection with that. So we're a little more liberal, I'd say, with respect to what we really think is important in terms of many retail for the buildings.

Okay. And then, last one from me. Do you guys track some sort of tenant average square foot per employee? Just curious to know as to how tightly packed your tenants are and whether or not they're going to be able to meet social distancing guidelines in the office sort of large chunks of employees are going to need to work from home on a rotating basis even if things open back up?

No. Look, I think that's a great question. We really don't track it, just because it's always changing. We do so many leases. You've got different companies that have different build out standards and layouts and all that. But I do think what near term, I do think you're going to have reduced densities as companies -- they're going to -- some are going to do phase returns alternating days and weeks, staggered hours. I think we're going to have all kinds of different varieties of how companies are going to deal with the de-densification over at least for the near term. So at least -- maybe it's still there's mass testing or a vaccine or whatever. I think some companies we've already heard are going to be putting some flex a glass in between their bench seating to create more social distancing. So, I think there is no one answer to how companies are going to solve it.

Okay, thanks guys. Appreciate it.

Sure.

The next question comes from the line of Brendan Finn with Wells Fargo. Please proceed.

Hey, guys. Thanks for taking my question. Just looking at the leasing stats for the quarter, I recognize that the lower lease term was driven in part by the State of Georgia lease and I guess probably an overall mix shift towards more renewal leasing. But are you guys seeing the tenants now kind of broadly asking for less lease term than they were before the COVID-19 crisis?

Really, there wasn't -- we weren't seeing that in the first quarter, I think you pretty much hit it that the Georgia Building Authority lease did drag down our term for the quarter. And then there is just a mix of other deals in the market. So it's really more of a mix thing versus seeing a trend. Now since then, I do think some of the leases we've done. We signed about 23 leases so far in April, and the trend has been a little shorter term. I think companies are reevaluating their space needs. They're considering capital preservation as well. And just the cost to move. So we do think renewals are going to increase, and the term may be a little shorter lease for the near term.

Okay, great. That's helpful. And then I also wanted to ask about you guys development strategy for the remainder of the year. Just given that you did leave the high-end of your development announcement guidance at $250 million. So are you having discussions with tenants currently for development projects, or have those kind of come to a halt?

So, we've got -- as I mentioned just a couple of minutes ago, we do have one that we recently we responded to. So we just submitted a week or so ago on a build-to-suit. And that's actually an RFP that came out really the very beginning of the pandemic. So that one is ongoing, and we've got two or three others that we've responded to over the last few months that we've been in discussions for probably six-month or seven-month of those have slowed down. But from everything the brokers are telling us they haven't gone away. So again, the discussions have slowed down, but there's still -- we consider them active. A lot of our development build-to-suit transactions take a really long time. Some of them are multi -- many, many quarters it takes. So we consider them still alive until we hear their debt.

So Brendan, the only thing I would add to that is, we do have these ongoing discussions. We obviously -- you know we have a land bank that we're obviously interested in putting into service. But we're obviously looking at the returns on all these things. And whereas, before we might have had a more appetite for some spec exposure, just given the buildings that we have. We've got that the two buildings, Tampa and Virginia Springs that don't have any leasing on them. We're very much focused on that, filling those vacancies. And so if we did something it would be a very low percentage of spec on a development basis, at least, in the near-term. Again as things shake out here, we'll have a better view. But in the near-term, that's kind of how you should think about that from our perspective.

Got it. Thanks.

The next question comes from line of John Guinee with Stifel. Please proceed.

Great. Can you hear me?

We can.

Yes.

Great. Thank you. First, a very, very nice job. Quick question on operating expenses. You could talk about -- talking about 2020 savings. And just intuitively, we would expect, I think, that operating expenses would be going up with the COVID-19 situation. Can you offer any color on that? And then also 1Q was probably a busy quarter because you had the big disposition in it for part of the quarter. Can you give any detailed color on, if the operating expense numbers for 1Q is a good run rate?

Hey John, it's Brendan. So, you're right. I mean, I think in terms of operating expenses in total, that number should come down as you move sequentially into the second quarter for a couple of reasons. So one is, typically the second quarter is a little bit lower in terms of OpEx Just for the normal seasonality that happens. Number two, you identified that correctly that you do have the assets that we sold, so that does have a benefit there as well. I think given the utilization of the buildings that probably has more of a direct impact than whatever OpEx changes may occur related to the pandemic and additional cleaning and sanitation and things like that. So, I think we put that guidance out there in terms of the net operating expense savings that we expect for the year. That's relative to what our prior expectations were. So I think you will -- you should expect to see it migrate downward in the second quarter as utilization has been low. And then as we stated in prior remarks, we think there is a gradual resumption of utilization in the third and fourth quarters, and I think you'd see a corresponding change in OpEx as we go throughout the year.

Hey John, it's Brian. One little nuance to Brendan's point about the lower utilization kind of making up for any additional work regarding COVID. The good thing about our asset management team is that they have the vendor relationships that are already in place in our assets in our portfolio to handle all of this work. It wasn't a big need to go out and source new people. We didn't have relationships with or agreements with. So that also helps in kind of pushing this down.

Okay, thanks. And then the second, you guys rarely talk about your Pittsburgh portfolio. But if you look at Pittsburgh kind of a colder -- older economy city versus the Sunbelt cities. Any effected significant differences in your operations going forward in assets such as your Pittsburgh assets versus assets, such as Raleigh or Atlanta?

John, it's Ted. I don't think so. I think, you know Pittsburgh continues to be a good market for us. We've seen that market evolve. Even in the years we've been up there, it's a significant technology orientation from a customer base, from a growth standpoint. So it continues to be a good market for us. It is a little slower growth. But I mean, over the last several years been several decent sized technology users that have entered the market, a couple of build-to-suits we've chased. So, I think still remains a good market for us and one we like the underlying fundamentals.

Yes, John. I would just -- just to add to that, I mean, the occupancy in Pittsburgh has remained steady and probably on balance over the past number of years. I mean, it's -- the average occupancy is probably been the highest across the portfolio. So while maybe we haven't had major announcements there, I think it's been really a steady performer from us, from both an NOI and cash flow perspective over the past several years.

Great, thank you.

Thanks, John.

The next question comes from the line of the Dave Rodgers with Baird. Please proceed.

Yes, good morning, everyone. Brian, wanted to start with you. You talked about how leasing had slowed, but hasn't stopped. And if there are new leases being done, can you give us a little bit of color on kind of the industries that are still active, that are still wanting to do those virtual tours that have full commitment? And then on the renewal side, how far out are tenants now looking? I mean, typically a small tenant might not be in the market right away, but between small and large tenants, are they in the market much earlier today to do a short-term deal or one-year or two-year deal. So just some thoughts into kind of where those companies are today would be helpful.

Thanks, Dave. Great questions, both of those. So first off, the makeup of those in-bounds for leasing, it's fairly diverse, consistent kind of with the portfolio. So a lot of the professional services across the board, whether it's health care in Nashville or research here in the triangle or banking finance, even in Charlotte. So I think we still have a pretty good diversification of in-bounds. A lot of that has to do with where they currently are, where they're rolling looking to upgrade space, looking to right size up or down depending on the utility. And again, that's really kind of qualifying in the pre-COVID square feet per person, as we talked about a little earlier. Now, I think you touched on something that we are seeing a little bit of a change in is on the how long out will people engage. I might say, and this is real-time into the last few days and few weeks, customers are inquiring and maybe a little sooner than they might have in the past. Just so they can look at options, look at maybe renewals, they can kind of take care and push our decision-making. Through this, wherever that time maybe. So I think that's interesting. We're having a little earlier conversations with folks. Some of that is proactive. Some of that's us reaching out sooner than we might not, we might normally do that. But that's -- hopefully that answers your question, but two good ones here.

Okay. Thanks for the color on that, Brian. Maybe, Mark, Brendan, two questions for you guys. How does the 10%, that, that you quoted today in terms of maybe tenants that you think or revenues that you think maybe deserve some kind of financial credit over time compared to the financial crisis? And then the second side of that is. Mark, you mentioned that there was $0.03 of FFO taken out of the top-end of guidance non-COVID related. And if you've detailed that, I missed that, can you just kind of point to that specifically?

Hey Dave, it's Brendan. So on the 10%, I mean, I think the first thing I would say about the last -- the GFC is we got a significantly different portfolio in terms of our office portfolio. And then we also had industrial and retail with Country Club Plaza in Kansas City. So there, we had about -- at our peak year in '09, write-offs were about 125 basis points of revenues. So we don't think that that's kind of directly comparable. So on the 10%, we've agreed to deferrals with the majority of them. And we think that we have a good solution to kind of bridge them through this time period, this kind of economic shut down. So I wouldn't say that, that is -- I wouldn't say it's directly comparable, but we do feel like we've got pretty good solutions with our customers to bridge them through. In terms of the $0.03, I mean, really in our original outlook there is -- we didn't specify it. So you didn't miss it in the prepared remarks. There's just generally some positive things that can happen in the year as we lay out the original guidance outlook. And some of those for instance, you could say that while not specifically called out within guidance perhaps leasing a significant portion of the balance of 5332 Avion could have been in that original outlook. That's not really in our forecast now or not something that we think is likely. So some things like that have come out of the top end of the range.

Okay, great. Last question. Ted, I wanted to just talk about asset sales, obviously good to get Memphis and Greensboro downsized ahead of all this, no telling what happens longer term. But I mean, how well do you think you're positioned on the remaining asset sales there? And do you think that, that kind of gets pushed off much further until kind of normality comes back to you guys on the leasing front and the ability to acquire? I mean, I guess, is there a bigger delta today in your mind between the sell and the buy, just kind of given what's happened?

Sure. Obviously, we are pleased to have gotten the first phase done, get that left disposition closed at the end of March. So really what we have left is, call it, $250 million or so, we believe of assets, and it's widely known in the markets that where we're getting out of Greensboro and Memphis. So we would continue to feel -- even during this crisis, we continue to feel inbound calls from people that are interested in the assets. So, while there is no timetable as we've laid out, we did reduced the low end of the dispo guidance to zero. But we are -- in discussions with some various groups on assets that they are interested in. And I think, if any of these groups hit our pricing, we may proceed forward on a few of these deals on an off-market basis, but too early to tell. Things are going slow. We're waiting for the debt markets to come back. But in terms of, do we -- how do we feel, I think we feel pretty good. We like our assets that are there, a lot of local interest as well as a regional and national interest in what we have left. So, I still feel pretty good about where we are.

All right, great. Thanks for all the color.

[Operator Instructions] The next question comes from line of Manny Korchman with Citi. Please proceed.

Hey, thanks guys. Just a quick question. I think, Ted earlier in the prepared remarks, you said you guys were pencils down on acquisitions. I was wondering, how much of that is that the markets are paused, and there's not a lot to do versus that being sort of a mandate from you to your team, I'm saying we're just --we're not comfortable buying right now? And if it's the latter, what makes you change that opinion?

Sure. It's really, you hit on it, sort of both, right. I mean, the investment sales market today is largely on hold. Most, if not all the deals that were in the market that six weeks ago, they've all been pulled. There are some deals that are getting done, if the buyer is hard money at risk. But I think, look, I think the investment sales market is going to be on pause for a little while, at least, until people can get on airplanes. It's hard to do a virtual property tour where we're going to go commit $100 million on an acquisition. So I do think acquisition market is going to be tough for a while, unless there is some local buyers maybe hit a seller's number. But look also on the acquisition side, I think we want to see how things play out. I think it's still early from our perspective as well. We want to take a pause, see with the pandemic, how we get through it, when the economy gets started, what's demand going to look like, what's the cost of capital going to look like. So I think it's sort of a combination of both.

And in your conversations with those companies are looking for the build-to-suits, where they are looking to maybe relocate our headquarters or major division. Are there any conversations about sort of going to smaller satellite offices versus the large headquarters or secondary headquarters location?

I think that's a great question. I don't think we've -- it's been enough time just to see if that's the current yet, none of data points. The one in particular that we -- that came in during the crisis that we just responded to, it's an out-of-town company coming to one of our markets. So they are looking for modern space, a low cost alternative has got good access to labor and a great quality of life is sort of what they're doing. So it would be a new-to-market opportunity. But we just haven't seen any other changes on the satellite offices or not yet.

Okay. Thanks, Ted.

And we have no further questions on the telephone lines.

Well, thank you, everybody for taking the time, joining the call and your good questions. If you have any further follow-up, feel free to reach out, and we look forward to see you soon. Thank you.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.