Q1 2020 Earnings Call
Good morning, and welcome to the Highwoods properties earnings call. During the presentation, all participants will be in listen only mode.
Afterwards, we will conduct a question and answer session at the time. If you have a question. Please press the one followed by the four on your telephone.
If it anytime during the conference you need to reach an operator, Please press star zero.
As a reminder, this conference is being recorded Wednesday April 29, I would now let's turn the conference over to Brendan Maiorana Executive Vice President Finance. Please go ahead Mr. <unk>.
Thank you operator, and good morning, joining me on the call. This morning, our Ted Klinck, our Chief Executive Officer, Brian <unk>, Our Chief operating Officer, and Mark Mulhern, Our Chief Financial Officer as is our cost today's prepared remarks have been posted on the web if any of you have not received yesterdays earnings release.
Our supplemental they're both available on the Investor section of our web site at Highwoods Dot com.
On today's call. Our review will include non-GAAP measures, such as an FFO and NOI and even dare 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.
Certainties, which are discussed at length in our press releases as well as our FCC filings as you know actual events and results could differ materially from these forward looking statements and the company does not undertake no duty to update any forward looking statements. Currently what are the most significant factors that could cause.
Actual outcomes to differ materially from our forward looking statements is the potential adverse effect of the cobot 19, pandemic and federal state and or local regulatory guidelines to control. It on our financial condition operating results in cash flows are customers the real estate market in which we are.
Right, the global economy, and the financial markets, the extent to which the cobot 19 pandemic impacts us and our customers will depend on our future developments, which are highly uncertain and cannot be predicted but competence, including the scope severity and duration of the pandemic, the direct and indirect economic effect.
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're all well in your families were safe and healthy.
This has been an incredibly challenging six weeks were country the infer economy.
We are grateful for the upwards of all Americans, especially our first responders the nurses doctors and other healthcare workers, who have rallied around those affected by the cobot 19 pandemic.
Before I turn to the Pandemics impact on the economy.
Business I.
I would first want to update everyone, what our financial results for the first quarter.
We delivered Alphaville phone 93 cents per share.
Hi, it's in our company's history.
In same property cash in Hawaii, 4%.
We leased 893000 square feet of second Gen office space.
The GAAP rent growth of 13.6%.
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 represent the 500 million dollar investment, but 77% Preleased and 50% funded.
We're pleased to report construction work on her for in process projects.
Glenn like seven in Raleigh.
Virginia Springs to wouldn't Nashville.
Midtown one in Tampa and Assureon in Nashville.
It's continued throughout the pandemic.
We remain on budget and on schedule for the varying completion dates later this year in throughout 2021.
Our pipeline is projected to generate more than $40 million.
Hawaii upon completion and stabilization.
Less than 5 million, which will be generated in 2020.
During the quarter, we completed the first phase of our plan to exit the Greensborough and Memphis markets and reinvest that capital into the high growth market or Charlotte, What's the acquisition of Bank of America Tower.
All told we sold 332000 square feet and Memphis for 89.6 million during the fourth quarter 2019.
In 3.6 million square feet in Greensboro, and Memphis for 338.4 million during the fourth first quarter.
He said old garnered a blended 6.8% cap rate using 2020 gap in Hawaii.
Compared to the 6.4% cap rate for the acquisition of B of a tower, which will deliver strong cash flow for many years to come with its excellent roster of credit worthy customers.
As projected.
Our acquisition of Bank of America Tower.
In phase one of our Greensborough and Memphis market exits.
But would you need savings is neutral to our F O FFO run rate it accretive to our cash flow run rate.
Now turning to the Cobot 19 pandemic.
The unprecedented nationwide efforts to slow the spread of the cobot 19 virus.
It's obviously had a significant impact from U.S. economy.
It's still too early to predict how deep and how long it will take U.S. businesses to recover from the severe dislocations calls for the effective shutdown of large segments where economy.
Even with our strong first quarter performance, we believe it is likely or financial results for the remainder of 2020 will be adversely impacted by the cobot 19 pandemic.
Given the fluidity of the pandemic, it's uncertainty impact when economic activity.
Potential lost rents from customer default noncash straight line write offs were too speculative to project.
As a result or updated f. AFFO per share outlook of $3.55 to $3.68 excludes any potential losses.
All of our billings and parking facilities have remained open and available to our customers throughout the pandemic.
Obviously usage of our assets has been significantly lower than normal and April is expected to remain low in may and June before gradually increasing in third and fourth quarters.
Fortunately lower variable expenses, such as utilities in janitorial, partially offset a corresponding decline in parking revenues.
We expect the net impact on 2000 20-F, AFFO from these items to be flat to down a few pennies.
While still early we believe spec leasing will be slower than originally anticipated, although partially offset by higher renewal activity.
We currently estimate the net impact on 2000, 20-F, though to be two to four cents per share lower.
As Brian mentioned on our last call. We entered 2020 in a strong position with regard to our rollover exposure.
During the first quarter, we de risk or future rollover exposure, even more or leasing success.
Leaving us with only 6.8% of revenue expiring during the remainder of 2020.
In our lowest cumulative three your forward rollover exposure in 20 years.
Regarding with regard to the Pandemics impact on our customer base, we have long emphasized the importance of having so significant customer geographic in an industry diversification.
Currently that's a percentage were revenues new market accounts for more than 20% no customer other than the federal government accounts for more than 4% no industry category accounts for more than 25%.
Brian will go into more detail about customers that have requested some form of rent relief in our process from managing those requests.
But I will highlight a few points.
First to date, we have collected 96% or contractually required rents for April.
Second.
Customers who have.
We currently believe.
I have some merit for.
For temporary relief represent about 10% of our revenues.
Many of these are restaurants amenity retailers small health care practices and flexible office providers.
In some cases, we agree we have agreed to differ but not debate the payment of rent for limited period of time.
In other cases, we have agreed to a base rent as a consideration for lease term extension.
To date, we have agreed to agree a temporary rent deferrals represent approximately 1% or annualized revenues.
Third we have received requests from credit worthy customers, who have made what many in the industry, you're referring to opportunistic rent relief requests.
Our view is these customers contractual rent obligation not married merit temporary relief.
For the company is not currently aware of any customer specific facts or circumstances that indicate a likelihood of any material losses at this point during the second quarter.
Turning to our balance sheet with cash on hand full availability of under 600 million dollar credit facility and no debt maturities until June 2021, we believe we have ample liquidity.
To be prudent.
We have delayed certain b. I projects originally planned for this year, including some lobby and restroom upgrades.
Plus with or expectation that spec leasing will flow. We currently expect lower leasing capex for the rest of 2020.
The Big question for everyone is where does economy go from here.
We don't know, but in the mere near term we are focused on first.
Maintaining or liquidity in fortress balance sheet.
Second keeping our building open fully operational.
Third keeping or development projects on time and on budget.
Fourth working with customers to creative we design mutually beneficial solutions that maintain or long term tenancy without significant financial impact on highwoods.
Fifth minimizing all expenses to the greatest extent feasible without sacrificing operating performance we're leasing opportunities.
Six capturing as many renewals and relapse is possible given this uncertain environment.
Even during the stay at home orders.
There continues to be some interest from Backfilling <unk> available space. The volume of showings is obviously slowed during the past four to six weeks, but activity is not going to zero and we're cautiously optimistic that demand will begin to rebound as the economy reopened.
In the long run given the strength of our balance sheet. We believe we're well positioned to capitalize on any opportunities created by this economic disruption.
For now we are pencils down on potential acquisitions, although we continue to have discussions regarding a limited number of potential build to suits.
Rest assured once the economy reopens never better sense for customer demand rents valuations and our own cost of capital in order to reserve resume underwriting deals we will be opportunistic.
Let's stay true to our mantra of being disciplined capital allocators.
Before I turn the call over to Brian I'd like to say a few words about our incredible teammates here at Highwoods.
We're pleased to report that the few employees independence of hours tested positive for coated 19 to fully recovered.
Since mid March we have actively encouraged in supported employees you can work.
From home to do so.
Employees, who cannot work from home such as maintenance and H.B.A.C. technicians have collaborated with each other in our respective local leadership teams to handle essentially essential property related tasks.
We continue to be amazed by the collegiality predicted the dedication and the tenacity their co workers had been exhibiting every single day during this pin debit.
Whether on the front lines, keeping our building opened in well maintained for working from home, keeping our business running smoothly, including closing or books filing our 10-Q.
And preparing for this call.
Our co workers have continued to personify the Highwood standard of excellence with everything they do we sincerely thank them for efforts.
Brian.
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 covert 19 pandemic on our operations and outlook.
Before closing with her 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 893000 square feet of second generation leases signed with GAAP rent spreads have a positive 13.6% and cash rent growth.
Up 6%.
Leasing results in the quarter included a 238000 square foot renewal in Atlanta with the state of Georgia, I pulled our average rent per square foot in term down, but also carried lower leasing cap apps to drive a superlative pay that for us.
As we've discussed on prior calls we've made significant progress reducing our lease expirations over the next few years.
Right and we now have 24% of revenue are expiring through the year end 2022 down from 29% at the end of 2019, and there are no expirations greater than 100000 square feet remaining and 2021 or 2022.
We're close to finalizing a long term renewal with the FBI on their 138000 square foot building in Tampa that currently expires in the fourth quarter. This year and continue discussions with the FAA on their 100000 square feet in Atlanta, which is currently and hold over status.
Finally, T mobile a long known move out well vacate 116000 square feet in north Tampa and the third quarter. This year.
[noise] are 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 and improve portfolio mix due to the market rotation plan and as always in place annual escalators.
I'll now turn to the current status of our portfolio and the impact we're seeing from Cobot 19.
All of our buildings in parking facilities are open and available for our customers the utilization has been low.
Fortunately our portfolio has experience limited exposure to the virus.
Where we have had confirmed or suspected exposure within our buildings, we have a thorough process in place to sanitized all affected areas real time and to ensure our customers employees have access to their workplaces as soon as possible in a safe and sound manner.
Reduced utilization has impacted our parking revenue.
We generated approximately $25 million and annual parking revenue with approximately 20% of this attributable to transient parkers and the balance monthly parkers transient revenue has grown to a halt and we're seeing some monthly contracts canceling.
We expect parking revenue will be $3 million to $8 million lower this year than our original outlook, which assumes a gradual recovery in building utilization over the third and fourth quarters.
Like many landlords, we receive rent relief request and are working with those customers with a demonstrated financial need due to the cove at 19 pandemic.
Based on our current outlook, we believe customers representing approximately 10% of our annual revenues warrant temporary financial assistance, including rent deferral to bridge them through this period of reduce economic activity in general the businesses in need of fall into a few broadcasts.
Categories.
Our amenity retail and restaurants flexible office providers elective medical practices and businesses that cater to a customer base significantly impacted by social distancing measures.
We have established a process through which customer summit applications for relief.
These request must include.
Cost mitigation and business plans recent financial statements and evidence of application for government assistance, such as PPP loans.
We have formed a task force comprised of our corporate officers and market leaders that meets daily reviews, each application and recommends a course of action.
In general most relief granted is for rent deferral for a period of one to three months, where the payback typically over 12 months or less there are certain instances, where we've offered free rent in exchange for a meaningful lease extension.
This is beneficial for highwoods as it increases our average lease term and carries a little to no leasing capex.
Today, we've agreed with customers to defer rent a $4 million and have made proposals for another $2 million of deferred rent.
In total this equates still less than 1% of our annualized revenue.
We expect this two increases additional customers, who have a demonstrated need complete their applications.
Turning to rent collection, we received 96% of April's rents adjusting for 1% of April rent build but that we have agreed Jennifer our collection percentages approximately 97%.
We're extremely proud of our local on legal teams exemplifying Highwoods service not space Itos and the great work, they're doing for our customers with a focus on a return to more normal times ahead.
We have been proactive and reaching out to customers who are behind in or April payments and we'll continue to monitor the portfolio with a laser focused on credit.
Now I'll turn to our current leasing activity and outlook for the remainder of the year.
At this point, we aren't assuming a lot of new lease starts for the balance of year and have little revenue at risk and 2020 attributable to speculative new leasing.
We have shifted most of the spec leasing in our original 2020 outlook to the end of 2020 or into 2000 <unk> 21.
We do expect renewal activity will increase a certain customers previously projected to vacate have expressed interest in renewals, albeit some in the short term.
Well leasing activity has slowed there is still activity with inbound requests and assignments.
Social distancing and work from home measures in place our teams have quickly pivoted to producing virtual tours in every market with over 40 already completed and use.
Well, we don't expect many new leases to be sign solely from virtual tours. We believe this proactive approach not only keeps our opportunities connected to potential customers.
It provides us a jumpstart on omni channel engagement going forward.
Thankfully construction has been deemed an essential business function across the vast majority of our markets and as a result, we expect little to no delay and the commencement of sign leases due to end process T.I. jobs.
Similarly, the projects in our 500 million dollar development pipeline remain on schedule and on budget.
Our contractors have protocols in place to minimize the risk of infection for workers at our job sites. Unfortunately, we haven't experienced any major supply chain disruptions for materials.
Since most materials are sourced from domestic producers, we don't expect many if any delays.
And this vein, we recently hosted a portfolio wide for him with all of our general contractors to share best practices and to get the benefit of an up to them in a conversation among the best and brightest in the business a big thanks to these organizations into our own development team for convening such group.
As Ted mentioned, our development pipeline would deliver over $40 million of gap in Hawaii. Upon stabilization. This includes $32 million from three projects that are fully pre leased.
Such as the previously announced 126000 square foot full building lease with Martin Marietta Glenlake seven in Raleigh.
In closing, we believe our sunbelt footprint BBD located in high quality portfolio diversified customer base and manageable near term roll position us well in this period of economic uncertainty.
Mark.
Thanks, Brian in the first quarter, we delivered net income of 185 million or $1.79 per share and FFO of 99 million or 93 cents per share.
Quarter included the net benefit of two cents per share from properties sold which was offset by severance costs associated with the closure of the Memphis in Greensboro offices, and higher gene a expense that we incurred 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 330 million of properties.
Including 90 million of property 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 property sold was projected to be $29.2 million. It for 2020, which compares to $27.9 million for B of a tower.
And were more than making up the slight shortfall and an ally which in a savings.
As we stated last August we project the market rotation plan to the phone neutral and cash flow accretive.
After completion of phase one we now believe were modestly ahead of our original expectations.
At quarter end, we had over 630 million of liquidity and read chart returned our net debt to adjusted EBIT Dare ratio to prior levels at 4.86 times.
We use the sale proceeds from the last phase one disposition to fully repaid the outstanding balance on our 600 million dollar 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 2020 plan to be I, capex and expected leasing capex will be lower than original expectations.
We believe we have ample room to fund the remaining 239 million on our development pipeline and repay our June 2021.
Non maturity with our existing liquidity.
Turning to our outlook our original FFO range was 360 to 372 per share.
As a result to covert 19 induced economic slowdown we've made the following revisions.
And we lowered our parking forecast by three to eight cents per share.
Which will be partially offset by lower opex net of recoveries of three to five cents per share.
For a net reduction of zero to three cents.
Two we assumed rental revenues will be lower by two to four cents per share due primarily to lower than anticipated spec leasing.
And three finally, we expect Gionee will be lower by approximately one cents per share.
Net effect is an expected reduction of that fell by one to six cents per share.
In addition to these specified covert 19 induced changes to our outlook, we lowered the top end of our prior range three cents per share and raise the low end one said.
The result is an updated range of $3.55 to $3.68 per share.
As we stated in the press release, our updated outlook excludes the potential impact of customers that filed bankruptcy or otherwise irrevocably default on their leases and non cash credit losses of straight line rent receivables.
Given the fluidity of the pandemic and its effect on the collectability of rents over the remainder of the existing lease terms.
Such losses are too speculative to project at this time.
We don't provide quarterly guidance, but we assume parking revenues will bottom in the second quarter before gradually improving in the third and fourth quarters.
Our year end occupancy assumption is 89% to 92%, which compares to a quarter end occupancy of 90.9%.
Given the uncertainty of the economic and leasing environment for the remainder of the year, we have a wider than normal year end occupancy range.
Our same property cash NOI growth outlook is 1.5% to 3% excluding potential lost revenues attributable.
To covert 19.
This change from our prior outlook is driven by an assumed reduction in parking revenues and lower projected average occupancy partially offset by lower opex.
As is our custom we don't include the effect of future acquisitions dispositions or development announcements in our FFO outlook.
We have maintained the original upper end for each of these categories as a place holder in our current outlook, while we've reduced the low end to zero given the current uncertain economic environment.
To wrap up we believe we are well positioned to navigate the cobot 19 induced uncertainties.
We have ample liquidity to fully fund our development pipeline in debt maturities through year end 2021.
Our leverage is low and we have proactively reduced our capex spend to further bolster our liquidity.
We have a highly pre leased development pipeline that will provide 40 million of stabilized NOI.
And finally, our lease rollover schedule is favorable with few large expirations remaining over the next few years.
We are hopeful the economy will soon reopen and regained its footing and we can.
We can then focus on driving improved portfolio performance, including pushing rents and occupancy announcing development projects with strong risk adjusted returns and continuously improving our portfolio quality, all while delivering strong results for shareholders.
Operator, we're now ready for your questions.
Thank you if you'd like to register question could you specify one qualified for on your telephone.
You'll hear through some bumps are not your request.
My question has been answered.
So Steve.
Once again to register questions Muslims floor.
Okay.
Our first question because I know, Jamie Feldman Bank of America Merrill Lynch seats.
Good morning, gentlemen, this led to solid agenda Jamie.
Can you give us an update on the are you watch list as looking today versus the end up in Q4 and then.
I know you didn't take any of those assumptions into your AFFO guidance, but maybe walk us through the moving pieces on bringing cash NOI down by 160 basis points, but.
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 rent write off in the in the quarter related to one customer that had been on the watch this that we knew it was experiencing some some issues, but you know where as you heard Brian's comments, we are laser focused on this credit.
Well, you Asian issue, we've gotten a number requests and worse meeting everyday going through it in detail all the executive team is involved in that we've got in House Council very engaged in it trying to be responsive and and a turnaround request as quickly as we can we're asking for pretty detailed information in terms of update.
Financials, what they're doing to apply for government assistance that thats 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 and the customer base specifically that would.
Cause us any great concern and I'll, let Brendan take you through the the same store NOI question.
Yeah, Hey, all of US good morning, So on same store so that specific components that we laid out that would flow through same store NOI in the guidance change, there's about four and a half million dollars at the midpoint. So that's parking net of Opex savings.
Is about 1 million and a half and then we went through the revenue change, which is about $3 million that 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 that we talked about and some other items that switch between kind of cash and GAAP. Since we we guide to a a cash same store number.
You know 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 a free rent and really.
You know 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 a lower revenue from parking and that kind of gets you into that and call it 1.5% to 2% out.
Look for 'em for the balance of the three quarters of the year.
That's very helpful. And then on the 10% could you share split of what you believe is going to be deferral.
Versus sort of lease extensions like a short term abatements.
Yeah, It's I would say that probably.
So the one the 1% that we talked about is deferrals. The 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 I kind of out lease amendment.
We think those are are positives to us, but it would be significantly smaller than than the 1% of deferrals that we disclosed.
Okay. Thanks, and then maybe just one more for Ted I've, just a big picture question on conversations with tenants.
Any thing we can read through on your conversations regarding companies potentially looking to relocate from the northeast to the southeastern to some less densely populated cities given called the 19th.
Thank you.
Sure I was I don't I think it's too early to see that I think if you go back to the first couple of months. The year. You know activity was incredibly robust I mentioned I think on the call last time that we're in discussions with a lot of different customers. Both for build to suits was wells, partially pre leased development opportunity.
Even in many of those were in fact from out of town in fact sense would call. We've we lost one one of our pitches was a large build to suit chose another city, but the imbalance.
They are they continue to come in we've had one build to suit RFP that we've responded too in the last six weeks are really since the since the crisis started so just we believe our markets sunbelt markets less dense markets high growth all the thing that we've been touting for years, we're 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 on line up Rob Stevenson Janney Montgomery Scott.
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 gonna be for the year or for the month.
So rabbits, Mark we Oh, we have migrated a lot of customers to pay.
They see agent by wire I would say, it's probably in the 60 40 kind of range, we still get fortyish percent by check.
They go to lock boxes that type of thing, but somewhere in that neighborhood.
At what point during the month I mean, when those when you have to lag from the bailing into the checks do you really know what's your collections are going to be.
Yes, so you know depending on the dates in the leases that it's kind of a staggered thing so not everybody pays on the first to the month. There are some staggered collection. So the numbers that we reported to you that 96%, we kinda 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'd kind of what I'd kind of say.
Okay are you gonna be disclosing the monthly numbers going forward.
Appeared that we're dealing with coded or is this just you know point in time.
No I think Thats a fair question.
I would look we want to be as transparent as possible. So we're going to communicate.
More regularly I think than than we otherwise would've. So that's a good question I think I would expect us to provide more information, yes, Rob I'd say, where you were kicking around you know, 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 were doing here. So I think if something big happens, we obviously would be a transparent about it just kind of the history of what we've done you know as a company.
Okay and on the deferrals are you guys pushing for more term higher rate.
Interest cost 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.
Lee for the tenet and you're not trying to extract.
Yeah, it's more of a ladder.
Typically our deferrals have been one to three months probably on average I guess, it's probably too thus far and we're getting paid back.
Anywhere from six to 12 months on average I think so we're not really going much beyond that.
Hey, Rob the only thing I'd add is you know obviously amenity retail we want those spaces occupied so we're going to be a little more amenable to terms and to what we're doing with recent with restaurants in 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.
And then last one for me you guys track some sort of a tenant average square footage per employee just curious to know as to how tightly packed your tenants are whether or not they're going to be able to meet social distancing guidelines in the office or a 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 are we really don't track. It just because it's always changing we do so many weeks is you've got different companies have different buildout standards and layouts and all that but I do think what near term I do think you're going to have reduced densities of company.
They're going to some are going to do phase returns.
Alternating days and weeks staggered hours I think you're going to have all kinds of.
Different.
Varieties of how companies are going to deal with a de densification over at least for the near term. So Lisa maybe it's still the mass testing or a vaccine or whatever like some companies. We've already heard are going be putting some plexiglass in between there been seating to create more social distancing. So I think there's no no one answer to too.
So how companies are going to fall with.
Okay. Thanks, guys appreciate it.
Sure.
The next question comes why though.
At Wells Fargo. Please proceed.
Hey, guys. Thanks for taking my question.
Just looking at your leasing stats.
The quarter I recognize that the lower lease term was driven impart by that's sort of Georgia lease and I guess, probably in overall mix shift towards more renewal leasing.
What are you guys seeing tenants now kind of broadly asking for less lease term than they were both for the co. The 19 crisis.
Really there wasn't we weren't seeing that the first quarter I think you pretty much here that the Georgia building authority lease did dragged down our term for the quarter.
And then there's just a mixed with other deals in the market. So it's really more of a mix thing versus I've seen a trend now since then I do think.
You know some releases we've done we've signed about 23 leases so far in April and the trend has been who'll shorter term like companies are reevaluating their space needs, we're considering capital preservation as well and just the cost to move. So we do think renewals are going to increase and the term maybe may maybe a little.
Shorter or at least 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 a.
Mentioned, just a couple of minutes go we do have one that we recently we responded too. So we just submitted a week or so ago on on a build to suit and that's actually an RFP that came out really the very beginning of the pandemic.
So.
Yes, so that we have ongoing than 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 or seven months of those have slowed down but from everything the brokers are telling us they haven't gone away. So again, the discussion that slowed down but they're still we consider him active you know a lot of.
Our development build to suit transactions take a really long time some over multi.
Many many quarters. It takes so we consider I'm still alive until we hear their debt.
Hey.
During 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 at all these things and.
Whereas before we might have had a more appetite for some spec exposure just given that buildings that we have you know we've got that.
The two buildings in Tampa and in Virginia Springs that don't have any leasing on them, we're very much focused on that.
Well in 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, it's things shake out here, we'll we'll we'll have a better view, but in the near term that's kind of how you should think about that from our perspective.
Thanks.
The next question comes on the John Guide with Stifel. Please proceed.
Great and you hear me.
We can't yes.
Oh, great. Thank you.
First a very very nice job.
Quick question on operating expenses, you talk about talking about Twentytwenty savings.
And just intuitively, we would expect I think.
Operating expenses would be going up with the opened 19 situation.
Can you offer any color on that and then also.
One Q is probably a busy quarter because you had the Vega.
Disposition nineth for part of the quarter can you give any detailed color on the.
The operating expense numbers for up one Q as a good run rate.
Hey, John it's Brendan.
So you're.
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 in 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 it given the utilization of the buildings that probably has more of a direct impact than whatever opex changes may occur related to a 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 worse. So I think you will you should expect to see it migrate downward in the second quarter as utilization has been low and them as we stated in prior remarks, you know, we think theres a gradual resumption of utilization.
In the third and fourth quarters, and I think you'd see a corresponding change in opex as a as we go throughout the year, Hey, John It's Brian one little nuance to Brennan's point about the lower utilization kind of making up for any additional work regarding cove at the good thing about our asset management team is that they have the vendor relationship.
That are already in place.
Our assets in our portfolio to handle all of this work at wasn't.
A big need to go out and source new people, we didnt have relationships with or agreements were so that also helps and I'm kind of pushing this down.
Okay. Thanks, and then separately.
You got the rarely talk about your Pittsburgh portfolio, but.
You look at Pittsburgh, but kind of a colder.
Older economy city versus the Sunbelt cities.
Any.
Back to significant differences in your operations going forward in.
Asset that change your Pittsburgh assets versus assets, such as Raleigh 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 that even in the years. We've we've been up there too significant technology orientation from a customer base from a growth standpoint.
So.
Continues to be a good market force the duvall slower growth.
But over the last several years been several decent size technology users that have entered the market a couple of build to suits weve chased. So I think still remains a good good market for us one we like the underlying fundamentals.
Yeah, John I would just just add to that I mean, the occupancy in Pittsburgh has remained steady and probably on balance over the past number of years and hence the average occupancy has probably been the highest across the portfolio. So well, maybe we haven't had a major announcements there I think it's been really a steady performer from us from both an NOI and cash.
Oh perspective over the past several years.
Great. Thank you.
Thanks, John.
The next question comes from the line of Dave Rodgers with Baird. Please proceed.
Yeah. Good morning, everyone. Brian wanted to start with you talked about how leasing has 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 too or is that at full commitment and then on the renewal side, how far out our tenants now looking I mean, typically a small tenant might not being.
The market right away, but between small and large tenants are they in a market much earlier today to do a short term deal or one or two your deal. So just some thoughts into kind of where those companies are today would be helpful.
Thanks, Dave Great Great questions. Both of those so first off the makeup of those inbounds for leasing it's fairly diverse consistent kind of with their portfolio. So a lot of the professional services across the board, whether its health care and Nashville or.
You know research here and the triangle or banking finance, even in Charlotte. So I think we still have a pretty good.
Diversification of inbounds, a lot of that has to do with where they currently are aware there are rolling looking to upgrade space looking to right size up or down depending on the utility and again, that's really kind of qualifying and the pre coded square feet per person as we've talked about a little earlier now.
I think you touched on something that we are seeing a little bit of change in is on the how long how will people engage.
Might say and this is a real time into the last few days and few weeks customers are inquiry 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 out decision making.
Through this wherever that time, maybe so I think thats interesting, we're having a little earlier conversations with some of that's proactive some of that's us reaching out sooner than we might not or we might normally do that.
But that's hopefully that answers your question, but two good ones there.
Yes, thanks to the color on that Brian maybe Mark Brennan two questions for you guys. How does that 10% that you quoted today in terms of maybe tenants that you think or revenues that you think maybe deserves some kind of financial credit overtime.
Compared to the financial crisis, and then the second side of that as Mark you mentioned that there was three cents of taken out of the top end the guidance non covered related and if you 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 that the first thing I would say about the last the GFC is we had a significantly different portfolio.
In terms of our office portfolio and then we also had industrial and and retail with country Club Plaza in Kansas City. So you know there we had about.
At the our peak year and own online.
Write offs were about 125 basis points of revenues. So we don't think that that's kind of directly comparable.
So on the on the 10% we've agreed to deferrals with with the majority of them.
And we think that we have a good solution to kind of bridge them through.
Through this.
This time period, this kind of economic shut down so I wouldn't say that that is.
No I wouldn't say, it's directly comparable but we do feel like we've got we've got pretty good solutions with them with our customers to to bridge them through in terms of in terms of the three cents.
It really in our original outlook. There's you know there's we didn't specify it so you didnt Miss it in the prepared remarks Theres. Just generally you know 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 not while not specifically called out within guidance, perhaps leasing a significant portion of the balance of 50 332 Avianca could have been in that original outlook, that's not really in in our forecast now and not something that we think is likely so some things like that have come out.
At the top end of the range.
Okay. Great last question Ted wanted to just talking about asset sales, obviously, good to get Memphis in Greensboro downsized ahead of all this no telling what happened 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.
Back to you guys on the leasing front on the ability to acquire I mean, I guess is there a bigger delta today in your mind between the cell in the by just kind of given what's happening.
Sure.
Lastly, we.
We're pleased to have gotten the first phase done get that last disposition closed at the end of March So really what we have left it's.
Call It 250 million or so we believe of assets and.
It's widely known in the markets that are where we're getting out of Greensborough Memphis. So we continue to field 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 reduce the what we know the dispo guidance to zero, but we are you know in discussions with some various groups on assets. They are interested in and I think of what if any of these groups hit our pricing we made.
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 lot of local interest as well as a regional and national interest and what we have left so I still feel.
Pretty good about where we are.
All right great. Thanks for all the color.
I was reminded terrestrial question, it's one for on your telephone keypad. The next question comes one of many Kaufman with Citi. Please proceed.
Hey, Thanks, guys. Just a quick question I think had earlier in a in the prepared remarks. You said you guys were pencils down on acquisitions I was wondering how much of that is that the markets or pause and there's not a lot to do a versus that being sort of a mandate from you to your team on saying, we're just we're not comfortable buying right now and if it is.
The latter Oh, what makes you change that opinion.
Oh sure. It's really you hit on it sort of both right I mean, yes investment sales market today largely on hold most if not all the deals that were in the market.
Six weeks ago, they've they've all been polled.
There are some deals that are getting done if the buyers hard money at risk.
Well 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 or we're going to go commit $100 million on an acquisition. So I do think acquisition markets going to be tough for awhile unless there's some local buyers maybe hit hit us sellers.
But look also on the acquisitions 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 a 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 combination of both.
And your conversations with those companies are looking for the build to suits, where it where there were looking to maybe relocate our headquarters are major division.
There are 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 been enough time, just to see if that's occurring yet not enough data points. The one in particular that we the came in during the crisis that we just responded to its an out of town company coming to one of our markets. So there are looking for modern space a low cost alternative.
Got it good access to waiver.
In in a great quality of life sort of what they're doing so we would be in.
New to market.
Opportunity, but we just haven't seen any other changes on the satellite offices are not yet.
Thanks.
And we have no further questions on the telephone lines.
Well. Thank you everybody for taking the time joining the call in your good questions. You have any any further follow up feel free to reach out and we look forward to see you soon thank you.
That does conclude the conference calls today, we thank you for your participation in that so you. Please disconnect your lines.
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