Q2 2020 Highwoods Properties Inc Earnings Call
Good morning, and welcome to the Highwoods properties earnings call.
During the presentation, all participants will be in I'll listen only mode. Afterwards, we will conduct a question and answer session.
Tom 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 July 29 to 2020, I would now like to turn the conference over to Brendan Maiorana. Please go ahead.
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 custom today's prepared remarks have been posted on the web if any of you have not receive yesterday's earnings release or supplemental are both available on the.
Investors section of our web site at Highwoods Dot Com on today's call. Our review will include non-GAAP measures, such as FFO and NOI and EBIT. There also the release and supplemental include a reconciliation of these non-GAAP measures that 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 FCC filings.
As you know actual events and results can differ materially from these forward looking statements and the company does not undertake no 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 cobot 19, pandemic and federal state and local regulatory guidelines private business actions to control it on our financial condition.
Operating results in cash flows our customers the real estate market in which we operate the global economy and the financial markets, the extent to which the cobot 19 pandemic impacts us in 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 then your families for safe and healthy.
We're pleased to report that our employees are healthy and that we.
Safe we returned over offices.
To ensure coworkers feel safe and productive wall in the office.
We have implemented a rotation schedule.
Everyone ample opportunity to comfortably practice social distancing.
This helped us achieve our twin objectives.
Which are to prioritize the health and safety of our employees.
You'd realize the benefits of sharing or companies unique culture together in the workplace.
Obviously this has been an incredibly challenging time for our country and or economy.
It remains difficult to predict the duration and severity of the cobot 19 pandemic and its overall impact on economic activity.
We believe we're well positioned operationally to handle the near term affects of this downturn given or lack of large customer expirations over the next few years in or substantially Preleased development pipeline.
Plus we can continue to maintain a fortress balance sheet April available liquidity to fund leasing capital expenditures in our development pipeline, well, having dry powder to capitalize on future growth opportunities.
In addition to having a high quality portfolio and strong balance sheet, we're well positioned given our geographic footprint.
The southeast continues to benefit from positive demographic trend.
With population and job growth.
Some notable office using job announcements in our markets have occurred even in the midst of a pandemic.
These include the Fortune 50 company Centene announcing the 6000 job 1 billion dollar East Coast headquarters in Charlotte.
Microsoft with 1500, new jobs in Atlanta.
Publicly traded software company bandwidth in Raleigh, with 1200, new jobs in a planned new headquarters campus.
These announcements illustrate the long term attractiveness of our markets and supports the notion that company still value a collaborative in person environment to foster creativity strengthen company culture.
In the second quarter, we delivered Elfa 93 cents per share, which equals our first quarter results.
Further the second quarter reflected a full quarter of lost in Hawaii.
From $338 million of properties sold in the first quarter.
Our financial results were excellent, especially considering the challenging economic conditions.
In addition to strong AFFO or portfolio metrics were solid.
Occupancy of 91.1%.
Up 20 basis points sequentially.
Same property cash in why gross 2.4%, excluding the impact of temporary rent deferrals.
And in place cash rents up 5.1% year over year.
We leased 80 821000 square feet of second Gen office space with GAAP rent rose, 13.6% in cash rent growth of 5.5%.
And this was done with limited leasing capex.
It's drove net effective rents, 7.6% higher than our prior five quarter average.
We stated last quarter, it was too difficult to predict where the economy would go from here and we still feel like predicting the shape of the <unk> economic recovery speculative.
So we're maintaining our focus on the following items. So we believe best position us in the near term.
Maintaining liquidity in a strong balance sheet.
Keeping are building fully open an operational.
Keeping our development projects on time and on budget.
Working with customers to maintain occupancy and timely rent payments.
Minimizing operating expenses without sacrificing operating performance or leasing opportunities.
And capturing as many renewals in real assets as possible given this uncertainty bought environment.
We've reported or rent collection figures each month since the start of the pandemic.
Which had been strong 99% every month, including July.
Temporary rent deferrals equate to 1.2% of annual revenues.
Modestly since our first quarter call.
Importantly, new rent relief requests have dropped off significantly since mid may.
We have long emphasize the importance of having significant customer geographic an industry diversification across our portfolio.
No market accounts for more than 20% of revenues.
No customer other than the federal government accounts for more than 4%.
No industry category accounts for more than 25%.
This diversification is serving us well in this uncertain macroeconomic environment.
Turning to our updated 22020 AFFO outlook.
Given the fluidity with a pandemic its impact on economic activity potential loss trends from customer defaults and noncash straight line rider write offs are still too speculative to project.
As a result or updated answer AFFO per share outlook, the $3.59 to $3.68.
Which is up four cents per share at the low end excludes any such potential losses.
All of our buildings and parking facilities have remained open and available to our customers throughout the pandemic.
Obviously usage of our assets were significantly lower than normal in the second quarter.
As expected parking revenue was negatively impacted.
But we weren't able to offset this with lower operating expenses.
We now expect building usage in the third and fourth quarters to remain low.
Which is reflected in our updated outlook.
In early July we sold two noncore properties and Memphis for $23.3 million.
These properties were combined 89% occupied and were sold at a low sevens cap rate based on projected 2020 gap in Hawaii.
We have another 72 million of properties under contract that are scheduled to close later this year.
These dispositions comprise the low end of our outlook of 95 million.
And we haven't we have other noncore dispositions in various stages of the sale process the could bring us to the high end of our outlook.
[noise] development continues to be a growth driver for Highwoods.
Our 1.2 million square foot development pipeline represents a 503 million dollar investment that is 77% Preleased and 60% fund.
Construction work on our four in process projects, Glenn like seven in Raleigh, Virginia Springs to Nashville, Midtown one in Tampa and assuring a Nashville.
Let's continue throughout the Pandemics.
We remain on budget and on schedule with these projects.
As a reminder, or pipeline is projected to generate more than $40 million of annual NOI upon completion and stabilization.
Less than $5 million, which will be generated in 2020.
New build to suit an anchor prelease conversations have slowed down compared to pre pandemic levels.
But there still are inquiries and activity from prospects.
We remain hopeful we'll be able to secure additional highly pre leased development opportunities during the next several quarters.
Before I turn the call over to Brian I'd like to say a few words about our incredible teammates here at Highwoods.
We greatly appreciate the hard work and dedication that our co workers hibbett exhibited everyday since our normal daily routines and lines were disrupted by the pandemic.
There are outstanding performance as shown through in our financial results in the second quarter.
But it is also evident in so many areas also.
Whether working tirelessly to maintain billing operations adapting to new processes to seamlessly Pharrell file our 10-Q.
Adapting to virtual leasing tours for countless other examples.
We couldn't be more proud of our team we sincerely thank them for our efforts.
Ryan.
Thank you Ted and good morning, everyone.
I'd like to begin with a quick review of our performance in the second quarter and then provide an update on what we're seeing real time across our markets.
As Ted noted signing a 100 821000 square feet of second generation leases with GAAP rent spreads the positive 13.6% in.
Cash rent growth of 5.5% as a testament to the quantity and quality of work put in by our exceptional team across the portfolio.
In addition to solid rent growth in the quarter securing terms on average of 8.8 years, which was driven higher by renewal of the FBI in Tampa.
And with limited leasing Capex is a win for the company.
Our payback ratio or total capital committed compare to contractual revenue was 6.7%.
Well below our recent average in the mid teens.
Consistent with the Highwoods playbook, we remain focused on reducing future lease expirations and not only have 21% of revenue expiring through the year end 2022.
Down from 29% at the end of 2019.
The largest lease in the quarter once the 138000 square foot full building long term renewal with the FBI in Tampa.
Following this lease and T Mobile's known July move out of 116000 square feet also in Tampa.
We have one remaining exploration over 100000 square feet to the end of 2022.
Which is the FAA in Atlanta.
Remains in holdover status.
With whom we continue renewal discussions.
Our in place cash rents grew 5.1% year over year.
Driven by higher rents on deals executed in the past 12 months.
And improved portfolio mix as a result of the market rotation plan.
And as always in place annual escalators.
As you know all of our buildings in parking facilities remain open and available for our customers who are returning to the workplace in varying degrees with any return at scale still ahead of us.
As Ted mentioned.
This reduced utilization has impacted our parking revenues.
With transit revenue nearly nonexistent and some reduction from contractual monthly parkers.
We've been able to offset the parking revenue delta with a lower operating expenses.
Moving forward, we expect parking revenues to remain tied to building occupancy, while we expect a sequential increase in opex as customers slowly returned to their offices.
The volume of rent relief requests received has slowed significantly and we continue to work with those customers with a demonstrated financial need created by the Cove at 19 pandemic.
These customers account for 7.8% of our total annual revenues.
And the temporary deferrals, we provided them represents approximately 1.2% of annual revenues.
We continue to see most of their crest fall into a few broad categories.
Our amenity retail and restaurants.
Flexible office providers.
Elective medical practices and other businesses impacted by social distancing measures.
While there are no silver linings to a global pandemic and near shutdown of the economy.
The second quarter has given us an opportunity to get even closer to our customers.
Whether its administering the protocols of a socially distance and CD site CDC guided workplace.
Receiving inbound requests for help our structuring win win extensions. We believe these strengthen relationships will benefit us in the years to come.
To that end our rent collections have been strong throughout the pandemic with 99% collected each month due July.
We believe we have a unique opportunity and responsibility to create desirable workplaces for our customers and we remain committed to working collaboratively and constructively with them. During these unprecedented times.
As expected inbound inquiries and new leasing activity has clearly slowed.
With only 91000 square feet of new leases and 48000 square feet of expansion signed in the second quarter.
For perspective, we have little revenue at risk in 2020 attributed to.
Too speculative new leasing and we've already completed the majority of spec renewals, we forecasted for the year.
At this point and in response to the alter landscape, we've shifted most of the spec leasing in our outlook into 2021.
However, we did see solid renewal activity with favorable economics in the second quarter.
Recognizing the challenge before US was also an opportunity our leasing teams have quickly pivoted to the challenging dynamics on the ground.
This includes showing our available space, virtually and bringing a level of flexibility and creativity to the leases as we navigate these uncertain times with our customers and prospects.
Now turning to our markets.
Our ready the second largest financial center in the United States and having passed the city of San Francisco This quarter with regard to population Charlotte continues to benefit from a great affordability migration already underway prior to the pandemic.
And consistent with all of our markets continues to see strong inbound interest.
This was illustrated most clearly and most recently by Seventeens 6000, new job announcement in July that they will build their own 1 million square foot campus and University city adjacent to you and see Charlotte.
The continued economic attractiveness diversification of our markets is a testament to having a low cost of doing business highly educated in diverse workforce, a strong transportation infrastructure low cost of living in the highest quality of life.
Across the board market rents are holding steady for the moment, while vacancy as marginally increasing and a level of sublease activity is consistent with the onset of recession.
We continue to pay close attention to sub with activity.
Across our markets.
The wave of development projects launch pre covered continue to advance do various stages of construction in varying degrees of pre leasing.
Charlotte's 1.2 million square feet is 30% Prelease, Atlanta is 5 million square feet, 60% prelease.
At least 3 million square feet is 40% prelease and Nashvilles 2.8 million square feet is 28% prelease.
Most of these projects done delivered until 2021 or beyond which transcends the benefit of time.
As Ted mentioned, our development pipeline will deliver over $40 million of annual GAAP net net operating income upon stabilization.
This includes 32 million from three projects that are fully preleased.
On schedule and on budget.
In closing I couldn't be prouder of the effort and results our teammates deleverage for Highwoods and the second quarter.
Their support of our customer short term needs has positioned us favorably in our markets, our long term perspective and presence across the southeast should benefit us and the changing landscape.
Mark.
Thanks, Brian in the second quarter, we delivered net income of 37 million or 36 cents per share an f. of 99.2 million or 93 cents per share.
As Ted mentioned, and we discussed last quarter, the 338 million of dispositions completed in the first quarter headed dilutive impact of two cents per share in the second quarter compared to the first quarter.
Additionally, the second quarter was negatively impacted by lower parking revenue.
Which also had an approximate two cents per share drag compared to the first quarter.
Offsetting these items was a significant reduction in net operating expenses and lower gionee.
Given the challenging economic environment, we are pleased with our performance.
The quarter was relatively clean from an F O perspective, except for a half a million dollar charge to straight line rents receivable.
[noise] excluded from at that.
Included in net income is at 1.8 million dollar impairment on a non core building in Memphis.
Our balance sheet is in excellent shape.
At quarter end, we had 586 million of liquidity, which has now increased over 600 million. Following the receipt of proceeds in early July from the sale of two non core properties in Memphis.
Our net debt to adjusted EBIT Dare ratio held steady in the quarter at 4.9 times at our leverage ratio, including preferred is 36.8%.
We have no debt maturities until June 2021, and expect to fund approximately $90 million on our development pipeline during the remainder of the year.
As we discussed last quarter, we expect lower leasing capex than our original 2020 projections, which should drive higher free cash flow and dividend coverage.
The combination of ample current liquidity.
Improving cash flows and projected disposition disposition proceeds later in the year.
Lets us in a strong position to fund our remaining $201 million to complete our development pipeline and repay our June 2021 bond maturity without the prerequisite of raising additional capital.
Turning to our outlook, we've updated our at that FFO range to $3 and 59 to $3.68 per share.
Which is up four cents per share at the low end.
Adjusting for the dilutive impact from the $23 million noncore disposition completed in July and the second quarter straight line rent credit loss, neither of which was included in our previous range.
Our outlook is up five cents per share at the low end had a penny per share at the high end on an apples to apples basis.
Last quarter, we provided a list of projected impacts from the covert 19 induced economic slowdown.
Weve updated these items and included a table last evening's press release, and I'd like to provide a little more color.
Number one we lowered our parking forecast by and it is an additional one to two cents per share for a total reduction of five to nine cents per share compared to our original February 4th outlook.
We previously expected improved utilization of our garage is in the third and fourth quarters, but we now expect parking income will approximate the second quarter level in the third and fourth quarters.
Second in Opex net of recoveries is now expected to be six to eight cents per share lower than our original February 4th outlook, which mostly offsets the reduction in parking income.
And finally, the dilutive impact from the $23 million noncore disposition and straight line rent credit loss has lowered our outlook by a penny per share.
In addition to the specified cobot 19 induced changes to our outlook, we increased the low end of the prior range three cents per share.
The result is an updated range of 359 to three $3.68 per share.
In total the midpoint of our range is down two and half sense or less than 1% from our original February outlook.
As we stated in our press release, our updated outlook excludes the potential impact of customers that file bankruptcy or otherwise irrevocably default on their leases.
And non cash credit losses of straight line rent receivables.
Given the fluidity of that pandemic and its effect on the collectability of rents over the remainder of existing lease terms such losses are still too speculative project at this time.
Our year end occupancy assumption is 89% to 91%.
Which we lowered 100 basis points at the high end due to slower new leasing activity.
Our same property cash and allied growth outlook is 1% to 2% excluding potential lost rental revenues attributable to covert 19, but inclusive of the negative impact of temporary rent deferrals.
Our prior range was wanting to ask to 3%.
The change from our prior outlook is driven primarily by the negative impact of temporary rent deferrals and free rent associated with early lease extensions.
These items reduced 2020 cash NOI, but will benefit cash flow in future years, while they have no impact on current year, GAAP NOI or f., though.
As is our custom we don't include the effect of future acquisitions dispositions or development announcements in our FFO outlook.
Had mentioned that we have 72 million of dispositions under contract that are scheduled to close later this year and these have not been included in our updated FFO range.
The low end of our disposition range is 95 million and the upper end is 150 million.
We have maintained the original upper end of our acquisitions and development announcement categories has a place holder and our current outlook with a low end of zero given the current uncertain economic environment.
So to wrap up we believe we are well positioned to weather the uncertain economic environment, given our balance sheet, our portfolio, our development pipeline and geographic diversification.
Operator, we're now ready for your questions.
Thank you if you'd like to register for a question. Please first one followed with a four in your telephone you will hear a three tone from to acknowledge request. If your question has been answered you would like to withdraw your registration. Please press. The one followed by the Threed. Once again, that's fun for tourists tougher question one before for the first question.
Yeah.
And we have a question from Rob Stevenson from Janney. Please go ahead.
Hi, good morning, guys.
How are you guys thinking about the potential for additional dispositions beyond what you guys have just talked about in the back half of the year have you guys thought about.
Putting more onto the market if the rhetoric on making changes at 10 31 exchanges continues to grow are you pretty much comfortable with that is with what you are worth where you are now is that a situation where you need to identify some acquisitions or developments for use of capital. How are you guys help me understand how you guys are thinking about the backend.
2020 and into 2021 on that front.
Hi, Rob it's Ted.
So as we mentioned.
Sold 23 million early July we've got another 72 million of properties that are under contract and then we do have additional assets that are in various stages of marketing. So if you add all those together.
Thats about the high end of our guidance for about 150 million or so and historically in any typical year. We were in that 100 150 million of Dispo range. So I'd say this is going to be somewhat of a typical year for us the sort of way we look at it.
Rob the only thing I'd add fits Mark we we've got some flexibility from a tax perspective, so we don't necessarily need to do you know all 10 31 exchanges on that we've got some room and ER and an ability to manage some of that with respect to them.
Maybe future at 10, 31, I think it's a little too early to speculating that we really haven't gone through an analyze maybe the impacts of that going into 21, just yet.
Okay. We have a question from Dave Rodgers from Baird. Please go ahead.
Yes, I was wondering if you guys can update us on where that activity or utilization is in the buildings, whether through parking or key files whites and I guess, maybe trying to get a better sense on when you will have visibility on kind of that new leasing volume, where you think those numbers get the need to get to here in the near term to start to see the speculative leasing pickup.
Good.
Sure, Dave It's Ted I'll start maybe.
Brian and Brendan May jump in terms of building utilization, we track that weekly.
To your Monday night or to the morning, we get to report from all of our divisions.
Nuts.
Somewhat subjective and that we're looking at the paid parking buildings are easy because we can check swiping swipe out from a marketing standpoint, but otherwise it's counting cars in the parking lot of and walk in the buildings, but on average depending on the market, It's I'd say, 20% to 30%.
Utilized our buildings today and that really we were expecting an uptick after the fourth of July and really haven't seen that so it's been fairly consistent starting I'd say, maybe mid may up till now.
Go up or up or down a little bit week over week, but generally most of our market through that 20% to 30% range from a building standpoint, Brian you want to touch on leasing.
Sure Ted just following up on on that I think the occupancy and leasing activity of sort of track each other little bit Ted's point on the July 4th day, we did start to see more people coming back in the buildings previous quarter no tours whatsoever everything was virtual we have absolutely seeing people touring the buildings now.
Kicking the tires the number of proposals are up but it's slow right we're seeing the sublease.
Market to start to attract similar to what you would expect at the beginning of a recession.
Generally larger users.
You know with the excess space that they may have taken.
Previously to it but we have gone ahead and projected most of the new spec leasing into 21 that we had in the remainder of 20, so we feel pretty conservative in our thinking through year end.
And Dave just to answer the parking question. So I think we did a little bit better than what our internal forecast was in the second quarter on parking.
But what we've seen thus far into I'd say in the latter part of the second quarter and then thus far in July as maybe less of a ramp up than what we had.
Projected when we updated guidance in in April so our expectations are that parking revenues are in the third and fourth quarter are likely to be roughly in line with a level that we experienced in the second quarter and previously I think we thought there would be some ramp up in those parking revenues in the back half a year.
Thank you I've a question from Jamie Feldman with Bank of America. Please go ahead.
Thank you.
I spent a lot of discussion around work from home suburban satellite offices, and you know where people are going to preferred.
I serve incentives more centered more setting is more urban or suburban as you think about your market footprint.
And the balance what are the conversations like with tenants when they're even considering that or is there view like theres really no advantage either way given that can be times are probably pretty equal.
Yeah, it really saving that much I'm just curious what the discussions.
Yes, Jamie it's Ted let me start maybe Brian ill add onto it look I think it's still pretty early in terms of these discussions with you know companys first and foremost they've been have been making sure.
Their employees are safe and healthy of a planned for the return to the office and as we've talked about most companies are even pushing off that return so.
Lot of these decisions unsure whether in the background, we're here and we're having discussions internally, but they haven't made it up to actual im talking about making new leases or or or move in are doing the hub and spoke or what have you I do think in our markets. We think we may become both more hub as well as folks.
Right, whether it be Microsoft's big take down.
Obviously other technology companies and all that but we're also seeing corporate headquarters common or whether it be the 17, where there's been three or four here and here in Raleigh. The continue to grow. So we think the southeast is well positioned both if the hub and spoke concept starts to get some traction we could be open hub in us.
Spoken a lot of our markets.
Brian do you want to.
One thing maybe to pose a thread on your question Jamie. Thanks, So much for asking it. It's obviously something we're paying close attention to and we think we're in a pretty good spot. So you asked about is a chance you're going to saving that much in these maybe lower costs non transit dependent low friction.
For Q mute markets that we have here in the Sunbelt I think you've probably heard this this kind of one 990 were aware most organizations that are annual investment every year, 1% is in kind of utilities, keeping the lights on 9% is in real estate and 90% in people and if ever what we've heard from companies in fact, one of.
Our largest customers Ceos quote is it's not if we will return to work, but when they focus on the 90%.
Just on culture, and productivity where value is truly great and the companies.
We are generally feeling that im hearing specifically that it's within an office under roof together now it might be a with a little more room between each other.
I would also argue I think we've seen some different experiments in this space before coded and folks continue to.
Talk about when they're getting back and not if.
We have a question front line of Emmanuel Korchman from Citi. Please go ahead.
Hi, everyone. Good morning.
If we go back to the corporate expansions that you highlighted at the beginning of the call I think you mentioned Sanjay Microsoft.
Bandwidth and others is there any change or sort of.
I don't know if you were part of the discussions with them or if you know people that work, but but are they talking about sort of the way that they're using a space whether that be the densities, whether it'd be the flexibility or otherwise as they make those decisions. So that's my first question on the same topic.
It looks like a lot of those were driven or at least supported by.
France or other financial support from the states.
Is there any conversation on on that environment, changing either to the better or worse. Thanks.
So yes. Good question I think certainly state incentives are important I think thats moved to always has been in the southeast I think it's.
You know states or or a bad when each other for for the bring jobs. Other states I think that is essential element, but it's only one piece of the puzzle.
I think what we're seeing on the inbound these companies want corporate campuses right. They are.
Designing them around having their employees in the office and.
And you know work like that traditionally have it's not necessarily going to be work from home aspect. They want that people together. So they can collaborate they can create this corporate culture that they did so hard to hard to do if you're doing on Microsoft teams and all that so that's those are some of things we're seeing.
That again southeast of attractive the economic incentives I think companies or or it states are chasing these companies like they always have been but the corporate campus a very important hey, Manny it's Brian here that the grants the open for business nature of these sunbelt Mark.
It is not the defining factor that is.
Securing these wins.
Its first and foremost that 90% we talked about earlier, one 990, it's the talent and the quality of life and the people are being drawn here, you're seeing the inbounds and so we're actually seeing on a number of our leasing costs across the different markets. Some of the same code worded prospects coming inbound in multiple markets. So it's interesting to see that there.
Just to that into the economic development officials that bdcs have been receiving the same amount of activity.
The last few months or they did pre coverage. So we think that's a good sign.
Thanks very much.
And we had a question from Vikram Malhotra with Morgan Stanley. Please go ahead.
Hi, Thanks for taking the questions just maybe on the topic of density and as it pertains to work from home.
And any kind of early indication of going into any conversations you've had with tenants on how they need to reuse their space.
Now and maybe boast vaccine and relate that you have a sense of what density is across your portfolio today.
So vikram. This is Brian good question on the last one it's so varied and terms across the portfolio and the actual densities, whether it's you know 250 square feet per person on 350 square feet per person I do think as a general statement, we're probably less dense.
Something you might see and a 50 story tower, because we've had the ability to spread out land costs are lower construction costs and lower operating costs are lower.
We have a number of a tenant fit ups and whether its anchor tenants are customers excuse me going into our buildings. They are not making wholesale changes to their layouts.
So they are not going ahead and spreading people out even farther beyond the guidelines that are out there, but I think they're thinking in the way that they were laying out the space previously met the guidelines. So I think thats generally what we're seeing is that theres no big changes.
A lot of folks are in terms of coming back to work, they're waiting and seeing taking a wait and see approach in terms of or whether it's a spike and incidences or changes in the science, but that's what we're seeing is more wait and see approach.
Okay Fair enough and then just a second when you talked about kind of activity or maybe alluded to activity or interest.
For the looking for incentives for corporates to move continuing in the last few months and versus pre Colgate at similar levels.
Im just wondering.
Haskell of it maybe on the margin changed your mines or or bought in new ideas in terms of markets you'd want to look at our explore or even sub markets I know, you've obviously done through efficient plant into Charlotte, but in any changes on the margin that you can get a sense of.
Hey record Recruitments, Ted I'm, not really I think you know most of our footprint is in the high growth southeast.
Markets and I think those are the ones that we think this historical population growth in migration job growth.
And has been very strong and have outperformed other markets. So we want to continue to be in high growth markets. We think long term, they're going to continue to outperform so really no changes on what we're looking at.
Thank you.
All right we have a question from Brendan Fin with Wells Fargo. Please go ahead.
Great. Thanks, you guys mentioned that.
Leasing volume included somebody's blended explodes leases or.
Early lease expenses.
So I was wondering you still having these types of discussions with tenants or have you already kind of executed on doses as opportunities and then maybe could you just comment on the economics of these types of extensions like.
How much free rent you guys are offering upfront relative to.
The length of the extension.
Hey, Brandon Brian here.
So I would say these kinds of conversations regarding blend and extend with customers.
Are they are kind of real time as they come in different customers are getting to the end of their initial occupancy throughout the year through the end of this year into next year and so we do have the opportunity to engage some of them as they actually are coming to the end or in advance so.
I think we have the opportunity to continue to use that as a tool to.
Maintain occupancy and strengthen these relationships maybe turnover Brendan on some of the different mechanisms on the economics.
Yeah, Brendan Hi, good morning.
So in terms of the economics, I'd say on balance, it's probably let's call it.
A month of a blended rent for a year or term kinda give or take a rough numbers I think in terms of how that's impacted our financials and cash flow for 2020.
It's probably about a 25 basis point reduction to cash same property NOI growth. So that's outside of the deferrals that we disclosed in and last Night's press release. So the combination of kind of kind of the abatements, that's about 25 basis points the deferrals that.
Packed in 2020, which will be repaid over time, primarily in 2021 is probably about is probably about 100 basis points on those same property numbers.
And then just to kind of tie it back to our original outlook that we had in February we disclosed how much we expected.
Rents to be impacted due to the.
Kobe changes and that probably let's call. It about 75 basis points. So all in that's kind of a 200 basis point reduction in terms of the original range in February that we provided of same property growth compared to the 1% to 2% that we updated last evening.
One other little thing on the blend and extend concept Brent and isn't many times they are low capex.
Opportunities, so maintaining occupancy and they're not at least many of them long term. So we know at some point you'll have to come back to that but they are.
Good payback ones for us.
Great. Thanks doesn't.
We had a question from Jamie Feldman with Bank of America. Please go ahead.
Thank you I was just hoping I know you said there is really not a lot of speculative leasing going on and you pushed out. Your estimates are your expectations. So 21, but can you just talk us through the largest vacancies in the portfolio and where are your discussions do stand and have any of those falling out of bed.
Sure Jamie it's Ted in terms of largest vacancies, obviously largest would be T. Mobile T. Mobile's lease expires at the end of this week of into this month, So I guess on Friday.
We have signed.
About 11000 square feet, we got a good start.
But other than that.
Prospects are slow activity slowed just like it is for most space most of our markets. So we're encouraged that we got our first.
First bite done on that starts later this year, a second largest would be.
50, 332 also in Tampa, former laser spine building, we have about 84000 square feet left to lease there and again really I'd say no strong prospects on that one right now as well.
No we've had pretty good activity.
Month, or two ago, and then activity sort of died back down after that so I think those two or biggest and then after that we got a couple well really on top of that couple of our development projects as well.
They are in that same category, we've got Virginia Springs to in Nashville, but a 111000 square feet. We've got strong prospects for a little 6000 square foot kick off.
Prospect that we feel pretty good about.
And then activity there in Virginia Springs, Jamie pre coated.
We had incredible activity, we probably had a prospect list that was two or three times the size of the building.
Hopefully a lot of those are on hold for staying in close contact with the brokers on those.
And hopefully those will.
Maybe come back to fruition over the next several months is as things get better.
And then on find when Midtown Tampa, It's about 150000 square foot building, we've got a strong prospect for 10000 feet that we're negotiating a lease with right now so and outside of that again, we'll get into or is there as well, but activity in general terms of companies willing to step up and make the decisions. It's it's certainly slow.
Okay, and then you had mentioned Centene headquarter move to Charlotte do you think there's going to be I know they do another on.
Project, but like any over fill demand you think you might see in that market or it's pretty much going to be self contained.
Well certainly hope so right I mean, just given the size of the.
The size of the transaction $1 billion million square feet.
Transaction, but can't say, we know for sure but typically these have overflow and add on type type a requirement. So I think we're hopeful for the market.
Jamie to your question, Brian Here I think most economic developers will tell you on a inbound move like that for headquarters. It's it's a it's a low and a one to one but typically two to one job creation those two to ones aren't all taken office space. So that would include.
All kind of jobs generated by those inbound folks.
But I think Thats whats Charlotte feels pretty good about in the state of North Carolina investment they've made.
Okay and then finally from me you had mentioned.
Expectation that sublease space will tick up in some of your markets, which markets you most concerned about that having an impact on.
Market rents.
Vacancy.
Well good question, Jamie So one of the things we looked at right as a Canary in a coal mine as the sublet space and I would say again out of the gate Atlanta and Nashville.
Other ones that are starting to get our attention first Atlanta as the just the largest market in general they've got two and a half million square feet and sublet space majority of that are in one single place 1 million square feet in the central perimeter, but from a high which perspective, we have very little.
Kind of within our portfolio our customers within our portfolio look in a sublet from Atlanta perspective Nashville.
Much smaller market, but a higher percentage of that market about 8% of that market. Scott. Some sublet activity again, you want to talk about a nominal number it's about 375000 square feet. So those are the two.
We're highly focused on those are also the two with a great deal of construction underway.
So if you fast forward over the next couple of years, you'll see new product being brought in.
With long stabilization periods, probably so those are where we're focused in keeping an eye on it but I'm not.
Next quarter, we'll have more to talk about probably.
Okay, you have a big physician essential perimeter facing that's not competitive space or it's just not in your portfolio.
So Jamie really our position is it's really three buildings, it's about 625000 feet or so.
It's pretty well leave so it's not a not a huge position, but certainly its competitive space without a doubt.
Okay all right. Thank you.
If you like the rest tougher question. Please press the one followed by the four on your total.
Sorry, that's one foreign your telephone and we do have a question from Chris Lucas from capital One Securities. Please go ahead.
Hey, good morning, guys.
Okay.
Ted on the build to suit or.
Are you seeing much change in that relative to sort of say a year ago.
Level of activity, if you're looking at.
Certainly it slowed down quite a bit the level activity I would have told you pre cove. It was very strong we had.
Numerous conversations more than a handful of conversations going on as recent as March.
We had one coming on actually even pre or post beginning a co bid that a sense going on hold so.
We're hopeful that these didnt go away there just put on hold but right now things are just on pretty slow from a transaction standpoint. The brokers are saying they haven't died but they're just on home whether that's an indefinite holder for what have you. We don't know yet, but it's still encouraging though.
And then Rick the Capex earned.
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How are you guys think about sort of your building improvement program that you would normally scheduled are you trying to accelerate that given the lack of activity in the building from tenants are sort of.
Respond and deal with that in a lessened the environment or you managing that capex from a cash flow perspective, we're just going about it actually normally would.
Well I'd say to answer I'll start off and Brendan can jump in its probably both right. So the onset.
Coded when the building really emptied out or became much less used we were we are using that time to do.
Some capex projects and some customer work that otherwise would be done overt having overtime needed to do it or nights and weekends and all that so we use we did a lot of painting another smaller projects over the last last few months from a capex standpoint, again, well, we looked at what or what's the nice to have.
Versus the need to have a lot and slowed somewhat to manage cash flow and all that we kept the the need to have dialed back on the nice to have Brendan will give more detail yeah, Chris I think just a set expectations maybe for the balance of the year I think what would we expect is the leasing capital spend.
And we'll go down relative to the first half of the are certainly over the next several quarters, we expect that to happen and you can probably see between the the leasing page the commitments that we've had both on a ti and leasing commission basis in the first half of the year or about $20 million less than what we expensed through the AFFO or.
CAD statement. So I think typically those commitments run ahead of the expense. So we think leasing capital will go down over the next few quarters and seasonally we do typically see a pickup in terms of B. I spending in the in the second half a year and.
Your point, we have decided to accelerate some VI projects because wanted sufficient for us to do so as you mentioned, while while buildings are empty and then too as we disclosed last quarter. We do think cash flow is improving for the company. So we took the opportunity to go ahead and accelerate some of those VI project.
One other just footnote I might add to Ted and brand and this is Brian that we able to self perform some of this work with our own team since we.
Operate maintain our own buildings and so we have a fantastic set of maintenance tax who are able to do some of the stuff, including some make ready and kind of preliminary work with regard to our spec suites. So that way, we had space that was ready plug and play for folks when they come back.
Thank you that's all I Hector.
[noise] annually. The question from Daniel is filled with Green Street Advisors. Please go ahead.
Great. Thank you.
Just any that that things have been limited given the co the 19 related shutdowns, but.
Any signs of life on the investment sales markets at across any of your markets and then.
Related to that given their troponin overall debt cost.
And your expectations that cap rates could actually move lower for a while located stabilized Sunbelt office properties.
Sure Hey, Dan It's Ted look I do think of you know transaction activity, probably was down 70 plus percent and the second quarter.
I think there are some signs of life virtually every building that was on the market in the first and second quarter got pulled the into we're starting to see a few of those come back to market.
And before we're understanding from the brokers, there's pretty good activity and a lot of capital chasing that and as both unlevered buyers, but also levered buyers sorta to your point on the interest rates historically as you know interest rates of of boding, well for prices and for real estate and so I do think there's a chance.
That cap rates can whether they go down or not or stay stable and prices stay high I think to be determined but I do think we've even heard one example of a deal that is actually going under contract at a higher price was pre coded when it was under contract to fill out a contract went under contract right.
We were at a higher price. So I think there's a lot of capital out there with low interest rates like that bodes well for the transaction market when when properties could start coming back to market.
And.
Given some of the.
Headline issues facing some of the coastal markets have you noticed any changes and and the bidding tanks or the potential buyers who might be looking at some of the markets here.
No I don't think we've got anything where we've seen that yet the transactions were working on.
It's largely phase two of the market rotation plan and those assets are more geared towards buyers of more local and regional buyers for the most part so we haven't seen any indicators of new buyer new capital sources coming for those transactions yet.
Great. Thank you.
And there are no further questions at this time.
All righty will thank you everyone for joining the call. This morning, and your continued support and interest in Highwoods hope, everyone stay safe and healthy.
Thank you very much.
That does conclude the call for today, we thank you for your participation I think please disconnect your lines.
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