Good morning, and welcome to the Highwoods Properties Earnings Call. During the presentation all participants will be in a listen-only mode. Afterword’s we will conduct a question and answer session. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, July 28, 2020. I would now like to turn the conference over to Brendan Maiorana. Please go ahead, sir.

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 local regulatory guidelines and private business actions 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 future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic and the resulting economic recession 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 start by saying I hope you are all well and your families are safe and healthy. As mentioned on our last call the Highwood's teams across our markets have safely returned to our offices, which was allowing us to reap the benefits of collaboration and our company's unique culture. Across our 27 million square foot portfolio, we estimate utilization is approximately 25% on average, which has increased since the end of the summer, but is below our first COVID revised outlook, we provided in April. We don't expect a sizeable increase in utilization until at least early 2021. It remains difficult to predict the duration and severity of the current recession, and leasing activity will recover. While we're all hoping for a return to pre-pandemic office fundamentals, we're still well-positioned in the current environment, given our lack of large customer explorations over the next few years, our ability to control OpEx and the built-in growth from our highly pre-leased development pipelines. Plus, we further strengthened our fortress balance sheet this quarter by raising $400 million of 10.5 year bonds at an attractive rate. We have ample liquidity to fund the remaining spend on our development pipeline. We still have plenty of dry powder to capitalize on future growth opportunities. In addition to having a high-quality portfolio with a strong balance sheet, our markets continue to benefit from positive demographic trends, both population and job growth. To this end, the Urban Land Institute recently published 2021 emerging trends in real estate report listed Raleigh as a number one market for overall real estate prospects. Nashville came in at number three, Charlotte number five, Tampa number six and Atlanta number 11. These five markets constitute more than 75% of our NOI. We're seeing this…

Thank you, Ted, and good morning, everyone. While leasing volume was lower in the third quarter than the second, we did see a sequential increase in activity levels. During the quarter, we signed 660,000 square feet of second-generation leases with GAAP rent spreads of a positive 12.5%, cash rent growth of 5% and net effective rents that were 7% above our prior five-quarter average, just short of the record set in the fourth quarter of 2019. With regard to new leasing, activity picked up in the third quarter with 190,000 square feet of new deals and 8,000 square feet of expansions. The renewal of the Federal Aviation Administration in Atlanta during the quarter finalized our last remaining expiration over 100,000 square feet during the next two-plus years. With this renewal in hand, we now have only 18% of our portfolio expiring over the next nine quarters, which is down over 500 basis points compared to this point a year ago and our long-term historical average. As Ted discussed, rent relief deals held steady at 1.2% of our annual revenues. With inbound relief request slowing to a trickle, we're focused on rent collections and creative solutions for customers with needs-based requests. To that end, and is a testament to the quality of our customers, our collections are strong with 99.7% of all rents collected in the third quarter and for the month of October. As we mentioned in the press release, we also converted a small number of leases from fixed rent to percentage rent. These few leases were done for customers whose businesses have been severely impacted by social distancing measures, and we preserve the potential to receive full rent over the life of the lease. Let's now drill down and take a closer look at our markets where activity…

Thanks, Brian. In the third quarter, we delivered net income of $40.3 million or $0.39 per share, the FFO of $91.7 million or $0.86 per share. As Ted mentioned, the quarter included a debt extinguishment charge and noncash straight-line credit losses, which reduced FFO by $0.05 per share. Neither of these items were included in our prior FFO outlook. Excluding these two items, our FFO would have been $0.91 per share which compares favorably to $0.88 per share in last year's third quarter, also after excluding onetime items associated with the market rotation plan from a year ago. To put this in context, clean FFO is up about 3.5% year-over-year, with leverage essentially unchanged, while we've entered Charlotte with a trophy building, exited the majority of our Greensboro and Memphis properties and operated during a pandemic and severe recession. This growth was due to higher rents, reduced operating expenses, keeping tight control on G&A and taking advantage of the debt markets to reduce interest expense. The macro environment remains challenging but we've been pleased with our ability to adapt quickly and deliver strong financial results. Our balance sheet is in excellent shape. We issued $400 million of 10.5 year bonds with an interest rate of 2.65%. We used some of the proceeds to retire $150 million of our 2021 bonds early. And repaid a $100 million term loan due in early 2022. After repaying the balance outstanding on our revolving line of credit, and continuing to fund development, we ended the quarter with $119 million of cash on hand. Our net debt-to-adjusted EBITDAre ratio was steady at 5 times, and our leverage ratio, including preferred stock is 36.6%. We have $138 million left to spend to complete our development pipeline and no debt maturities until June 2021. The combination of…

[Operator Instructions]. Thank you. The first question comes from Brendan Finn of Wells Fargo. Please go ahead.

I wanted to follow-up on your commentary about the level of cash that you're carrying on the balance sheet since it's significantly more than what you normally have. You mentioned that it was going to be dilutive in the near-term. But can you just give us a little more detail in terms of the deployment of that cash? And then if you can maybe quantify, I guess, the level of dilution, which I assume will be seen in Q4 and then again in Q1 '21?

Hey Brendan. This is Brendan Maiorana. Maybe I'll take that one. So first, I think I'd just say that I think we were really pleased with the execution of the $400 million bond offering, 10.5 year bond offering that we did. So I think we're pleased with that decision to issue those bonds in August. But you are correct. We're carrying more cash now on the balance sheet about $120 million, as Mark mentioned. And then we've got another, call it, roughly $125 million that will come in the door through the dispositions. So out of that, call it, $240 million to $250 million of cash. There's not a lot of near-term uses of that other than spending on the development pipeline. So it does carry near-term dilution, which we put into our outlook for the fourth quarter. And really, that dilution, while it's a headwind in terms of cash flow and FFO for a couple of quarters, that will go away largely in the second quarter as there's the April bond maturity, those June 2021 bonds, we can pay early with no prepayment penalty in April. And at that point, then I think the headwind from carrying that excess cash really because of tailwind as those bonds carry a higher interest rate than what we'll be replacing them with. But kind of specific to your question, I'd say, in terms of our updated FFO outlook, it's about $0.01 in kind of the fourth quarter is the drag that we're taking from carrying the excess cash in the fourth quarter, which is in addition to the $0.01 that we mentioned for the disposition of the fourth quarter.

Okay. Thanks. That's very helpful. I just wanted to switch gears quickly to volume. Looking at your new leasing volume doubled or -- more than doubled from Q2. So I guess, I was wondering if there's any specific tenant groups or geographies that really drove that figure higher this quarter? And were you leasing conversations that began before the pandemic and then were initially put on pause and then resumed this quarter? Or were these primarily discussions that began after the onset of the pandemic?

Hi Brendan, this is Ted. So the first question in terms of the industry groups. I think the most activity we had this quarter was really health care government law firms and financial services firms. And from a market standpoint, I think most new activity was Nashville, Raleigh and Orlando. In terms of the conversations, I think it's probably a little bit of both. But things just with the pandemic, it slowed down decision-making. But in general, it's probably both, but majority of that's probably happened since summertime. So since the onset of the pandemic, but activity just picked up really post Labor Day, even more tours in virtually all of our markets. Like obviously, you've got the forced expiration you've got to deal with. But I think just new tenant tours in general have really picked up in the last month or so.

And Brendan, this is Brian. Your specific question around Raleigh. We have both within the portfolio and in the market, seeing new activity with regard to life science, gene therapy, other kind of software-based therapeutic companies, one that's in the portfolio is opening office in Raleigh. It will join their offices in Boston and San Francisco. That is new since the pandemic, and they will be moving into the space soon. So that was a quick one.

Thank you. Our next question comes from Manny Korchman of Citi. Please go ahead.

Hey. Good morning everyone. Maybe we can just talk about the out of market tenants that are looking at your portfolio. Could you help us understand how much of that is new incremental space versus moves out of other markets? And as they talk to you, are they taking a targeted strategy and saying we want to be in Raleigh or we want to be in Richmond or wherever that might be? Or are they just saying we're thinking about leaving New Jersey and we'd like to be in the Sun Belt, show us what you've got?

Yes, great question. I think the answer there is probably both as well. I think you've got some companies that are going to open up new offices. They will be relocating from some of these markets as well as you've got some companies who is opening up a regional office, they'd be a new to market, but it's just a regional office versus moving a significant operation, just picking up and moving down to our market. In terms of what markets are looking at, look, I think a lot of them are looking at -- and this really hasn't changed from the last several years, just the trend is, they're looking to move to lower cost cities with great workforce, low tax markets, high-quality of life. So, I think we're seeing that just continue. Some of the inbounds are both multi market. We've got to compete against other markets in the Southeast. And then others have already picked the market when we get the RFP. So it's really a little bit of everything that you mentioned.

Just adding to that too, is you're seeing some into the markets, new organization starting with a toe in the water, if you will, kind of getting a landing point on the beach. We're also seeing, to Ted's point, kind of sometimes under code names from an economic development standpoint, the same prospects showing up in similar markets. So we may look at something in Raleigh that's also looking at Tampa, looking at Richmond or Nashville. So those aren't necessarily -- some of the same folks that were before, but we are seeing acceleration, as Ted mentioned, of folks who were already spending some time in the markets, but there are some new folks, again, particularly around kind of life science and tech. Here in the Raleigh area, they imbalance from California or a noted uptick as well.

And are they looking at primarily new space? And how much of that is driving your acquisition decisions or volumes?

Well, I think some of them are doing it fairly quickly and making decisions to get into space. In some cases, that might not be new space, that might be a spec suite that we've created or space as is with plans for expansion. So the previously mentioned kind of therapeutic company that we signed that was opening out of say, Boston and San Francisco, their initial need might be close to 10,000 square feet, but they project over the next few years, a real growth plan. And so we're seeing a lot of that, I think, in the inbounds is to get a beachhead to a new market that they don't have an experience with but they've be en looking at and with an opportunity for growing. So to your specific question on new space versus existing space, I think one thing we are seeing is as folks come out of higher dense, more expensive markets, say, in the Northeast, Midwest or California, this office space and even the new space is a really good deal in these markets. So if you go back to some of the things we've talked about previously on calls, 1% of organization's annual fixed cost is usually around utilities, 9% is around real estate and 90% around people. And so, playing around the margins on the 9% to deliver a significant improvement of their 90% or value propositions that we're hearing from customers coming inbound.

Thank you. The next question comes from Dave Rogers of Baird. Please go ahead.

Brian and Ted, you guys talked a lot about prospect lists during your prepared comments. And I was wondering if you can dovetail the comment that you've had to many and others. Along with the same lines of, is there any evidence in the activity in your portfolio of kind of utilization differences, whether it be in Buckhead or whether it be in suburban Tampa. Trying to get a sense of parking utilization by metro, by asset type? And do you see any differences as these tenants are kind of looking from other markets or as your prospect list grows, is there a clear distinguishing factor in what those tenants want today?

Great question, Dave. And the good thing is we are kind of monitoring daily utilization of the buildings and the parking. And so, those buildings that you drive right up to the door, walk in and walk up have been pretty busy. Again, we're running about 25% physical utilization. One thing just to kind of note, as you look at all of our suburban BBDs, every one of those locations, submarkets and school districts now have a return to school in the classroom plan that's going on in one form or the other. And while that hasn't resulted in a whipsaw of everyone being back in the office, 100%, 100% of the time, we do believe that return to school is a good tailwind to return to work.

The only thing I would add is, I think we're seeing a lot more smaller customers, virtually in all of our markets come back versus the larger customers, the national companies and all that are sort of holding their workforces at home for the meantime. So, smaller customers are coming back versus the larger.

And maybe just to drill down on that one comment, Brian said, is the drive up walk up assets that are performing better from a utilization standpoint. Is there a notable difference?

Well, if you look at the general portfolio and you look at, say, take Tampa, for example, while we're still developing Midtown Tampa, and it is a suburban but urban kind of place that we're creating. I don't know if I would say it's remotely measurable,if I could tell you X more are out there. But those places where you are driving up,walking in. We do have the activity. I think it also might correlate a little bit to Ted'spoint about the size of some of these customers that are in there. So we have a greaterdiversity of the tenant or customer mix in those buildings. And so I think that's maybepart of the underlying aspect as well.

Okay. I appreciate that. And then Ted, you guys talked about opportunities and using the balance sheet, cash on hand to take advantage of opportunities. I guess if you were to think about what opportunities you expect to see, it doesn't sound like you see some of the higher priced core deals. But do you expect to do more on the land side? Will you find some kind of broken developments in process? I mean, what do you expect to see? And kind of how do you know is the right time to really lean into that?

Sure. We're sort of looking at everything that comes out. We're looking at whether it's the core assets, the value add assets as well as land. So, you sort of hit on all three components. I do think we're starting to see some price discovery. There's several transactions that came out in the springtime that subsequently were pulled as a result of COVID. They're now back on the market. We've seen probably a handful trade in the last, call it, 60-days or so, and there's a few more that are under contract. So we've looked at those. And look, as we do with any acquisition, we look at a risk reward and make sure it hits our return requirements for the way we look at it and given the current environment and all that. So we look at everything. We've got our wish list, so we continue to hone virtually every quarter. Those wish lists include both existing assets. They also include developments that are under construction. And then obviously, we're pursuing land. Land is just it's a natural it's our raw material, if you will, for development. So, we're always looking to recycle land. We're looking to upgrade that. So we're looking at that as well. So, I don't know exactly what's going to hit, but we're looking at all those opportunities you mentioned.

The next question comes from Jamie Feldman of Bank of America. Please go ahead.

I appreciate all the color on how your markets rank in terms of kind of future growth. But if you look at the stats, they also show some of the largest development pipelines as a percentage of total stock. Can you talk about those projects in your markets and how they're impacting your ability to lease space and demand for your assets specifically?

Sure, Jamie. I think it sort of depends by market and submarket. And a lot of, obviously, take, for example, downtown Nashville. Downtown Nashville, really, what's being delivered there is the majority of what's under construction in Nashville is in the CBD. Our CBD assets really don't have any expirations until 2025. So we're not competing at all against any of that new development. If you go down to Brentwood or Coo l Springs will compete little bit but the differential in rate is still pretty substantial. Then you go to Raleigh. I think Raleigh's development is really spread out among six different submarkets. And a lot of that, again, won't be delivered for a while, and it's significantly different rental rates than what a lot of our assets are in Raleigh. In Midtown Atlanta, Midtown Atlanta got a majority of the new development going on, and we don't have any exposure in Midtown Atlanta. Now Midtown does compete a little bit with Buckhead. So we do have some competition there. Right now, again, it's different submarkets and all that in different price points as well. So we're watching the deliveries, are competing on some deals. But it's not like we're competing against all the new development in all of our submarkets.

Okay. And just to summarize, so you would say Midtown, if there was one you had to pick, that was the most competitive, that would probably be it?

Yes. Yes.

At the same time on Midtown, this is Brian. Jamie. You've seen Google go into -- building that started with some spec availability and kind of the word on the street is that's taken the balance of the building. It's got Microsoft taking 2 billion, that we started from a spec standpoint in Midtown Atlanta, too. So I would also argue well Atlanta, as we know, has a history of being an aggressive kind of speculative place. Tom Wolf wrote a whole book about it, right? It's also showing that they're filling up their buildings and they're winning when they're competing, I think, market-to-market.

Okay. That's helpful. And then I guess back to the investment sales market. So the sales that you've announced for the fourth quarter was there any repricing on those? Or any renegotiation? And then also, just what are your thoughts on how much prices have moved for assets?

Sure. So for our specific sales, a large majority of the buildings, there was no change in pricing from pre-COVID. There was a small adjustment, I think it's sort of mid-single digits on one of the buildings, I think, is all it was. So really very nominal difference. The way we've seen pricing so far, what's come out for the high-quality assets, the core buildings that have long-term leases, high credit customers. There's really little or no change in pricing is what we've seen, plenty of capital chasing those deals on what you might call a value-add property that's got some near-term rollover, maybe some existing vacancy. I think pricing has adjusted downward just because buyers are putting more conservative underwriting assumptions on the lease- up or the rollover. So maybe those are down 5% to 10%, maybe 5% to 15%, depending on the building the market, submarket and all that.

Okay. And then finally, you'd mentioned some small tenants that did move out to save money on work from home. Can you give more color on those types of leases? And do you think that do you think you'll continue to see that? And what kind of impact does that even have on occupancy?

So it's a good question. Brian, here to answer this one. As noted in the remarks, those were basically 1,200 square feet to the largest was 4,300 square feet. The 4,300 witha 4,000 square foot or was a small law firm. And they are going to be workingremotely and coming back. They basically said, we're going to sit this quarter out in aquarter, like from a game standpoint. And but they absolutely coming orwill becoming back. So to the extent that you have those that may be rolling against smallcustomers who can kind of do that, who don't have to be in front or connected to theirown customers. I think you'll continue to see that, but it's such a small amount fromthe overall portfolio. I think we feel pretty good about going to that. Brendan?

Yes. And Jamie, I think in the quarter, it was probably about a 10 basis point impact in terms of occupancy. So it was pretty modest in the quarter.

Okay. I mean, I guess the question is do you think that remains a 10 basis point impact until things get better? Or is this -- these are the ones that we've been talking about since the beginning and they finally decided?

Yes. It's good. I mean, it's hard to know. It's still early in this process, and we're evaluating that. So, we'll see, I mean, sort of disaggregating work from home with the recession impact and everything else, I think it's hard to know specifically what all of those moving parts do. But obviously, it's a the overall leasing environment is certainly more challenged now than it was a year ago. So, we'll see where that is. But I think our evidence to date is that the customers who have expirations the work from home has been at least has been modest thus far.

Another thing we've done has been fairly proactive to all of those that are coming up in the next few years, these smaller ones. Most of them to a person, prefer to keep their office as a moment of pride and a place where they do work and where they continue to nurture the culture of each of these organizations. And so what we ended up doing is we are looking at some shorter-term renewals that allow them to stay in this space. And as we do that, we can give a little bit of concession based on term that they'll commit to renewing to kind of get them and bridge them through this period. So we've actually had a lot of success doing that more so than folks just designed to kind of work off the laptop on the couch.

The only other thing I would say is five of the sevem that have elected to work from remote all happened before June 30th. So, it was really in the earlier part of the COVID. And we only had $0.02 June 30th to do that. Now again, our leasing activity, two our activity for these small guys has been really good. So, it will be interesting to see how it plays out. I still think it's early, but I do think just the deal flow we've seen on smaller users have been very positive.

Okay. And then how are you feeling on dividend coverage and sensitivity to that?

So Jamie, it's Mark. Obviously, you see the CapEx numbers down, leasing CapEx, TI, CapEx down. So we're probably obviously have better cash flow coverage than we anticipated maybe coming into the year. So, we feel pretty good about that. With some of these dispositions, we expect our future CapEx to be lower over time. So, I think we feel comfortable around coverage.

Jamie, the only thing I would add to that is what you've seen thus far, if you look at the CAD page that we have versus the leasing page that we've had, we've expensed from a CAD perspective, about $73 million of second-gen TI and leasing commissions. We've only committed this year under second-gen TI and leasing commissions. We've only committed this year under $39 million. So there's always a lag between the commitments and the expense. And because our commitments have been low, I think that signifies that going forward, the cash flow outlook ought to improve a little bit or coverage ought to improve a little bit as those commitments translate to expenses a couple of quarters down the line.

[Operator Instructions] And we show no further questions at this time. I'll turn the call back over to our speakers.

Thanks, everyone, for being on the call this morning. If you have any follow-up questions feel free to give us a call and be safe and healthy. Thank you very much.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you, and have a good day.