Good morning, and welcome to the Highwoods Properties Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded Wednesday, April 29. I would now like to turn the conference over to Brendan Maiorana, Executive Vice President of Finance. Please go ahead, Mr. Maiorana.

Thank you, operator, and good morning. Joining me on the call this morning are Ted Klinck, our Chief Executive Officer; Brian Leary, our Chief Operating Officer; and Mark Mulhern, our Chief Financial Officer. As is our custom, today's prepared remarks have been posted on the web. If any of you have not received yesterday's earnings release or supplemental, they are both available on the Investors section of our website. On today's call, our review will include non-GAAP measures, such as FFO, NOI and EBITDAre. Also, the release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Forward-looking statements made during today's call are subject to risks and uncertainties, which are discussed at length in our press releases as well as our SEC filings. As you know, actual events and results can differ materially from these forward-looking statements, and the company does not undertake a duty to update any forward-looking statements. Currently, one of the most significant factors that could cause actual outcomes to differ materially from our forward-looking statements is the potential adverse effect of the COVID-19 pandemic, and federal, state, and/or local regulatory guidelines to control it, on our financial condition, operating results and cash flows, our customers, the real estate market in which we operate, the global economy and the financial markets. The extent to which the COVID-19 pandemic impacts us and our customers will depend on our future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the direct and indirect economic effects of the pandemic and containment measures, and potential changes in customer behavior, among others. With that, I'll now turn the call over to Ted.

Thanks, Brendan, and good morning, everyone. Let me first start by saying, I hope you are all well and your families are safe and healthy. This has been an incredibly challenging six weeks for our country and for our economy, but we are grateful for the effort of all Americans, especially our first responders, the nurses, doctors, and other healthcare workers, who have rallied around those affected by the COVID-19 pandemic. Before I turn to the pandemic's impact on the economy and our business, I would first like to update everyone on our financial results for the first quarter. We delivered FFO of $0.93 per share, the highest in our company's history, and same property cash NOI of 4%. We leased 893,000 square feet of second generation office space with GAAP rent growth of 13.6% and cash rent growth of 6%. Average in-place office cash rents grew 6.2% per square foot year-over-year. Development continues to be a growth driver for Highwoods. Our 1.2 million square foot development pipeline represents a $500 million investment that is 77% pre-leased and 50% funded. We are pleased to report construction work on our four in-process projects has continued throughout the pandemic. We remain on budget and on schedule for the varying completion dates later this year and throughout 2021. Our pipeline is projected to generate more than $40 million of NOI upon completion and stabilization, less than $5 million of which will be generated in 2020. During the quarter, we completed the first phase of our plan to exit the Greensboro and Memphis markets and reinvest that capital into the high-growth market of Charlotte with the acquisition of Bank of America Tower. All told, we sold 332,000 square feet in Memphis for $89.6 million during the fourth quarter of 2019 and 3.6 million square feet in Greensboro and Memphis for $338.4 million during the first quarter. These sales garnered a blended 6.8% cap rate using 2020 GAAP NOI, compared to the 6.4% cap rate for the acquisition of BofA Tower, which will deliver strong cash flow for many years to come with its excellent roster of creditworthy customers. As projected, our acquisition of Bank of America Tower and phase one of our Greensboro and Memphis market exits, coupled with G&A savings, is neutral to our FFO run-rate and accretive to our cash flow run-rate. Now, turning to the COVID-19 pandemic. The unprecedented nationwide efforts to slow the spread of the COVID-19 virus has obviously had a significant impact on the US economy. It is still too early to predict how deep and how long it will take US businesses to recover from the severe dislocations caused by the effective shutdown of large segments of our economy. Even with our strong first quarter performance, we believe it is likely our financial results for the remainder of 2020 will be adversely impacted by the COVID-19 pandemic. Given the fluidity of the pandemic and its uncertain impact on economic activity, potential lost rents from customer defaults and non-cash straight-line write-offs are too speculative to project. As a result, our updated FFO per share outlook of $3.55 to $3.68 excludes any 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 has been significantly lower than normal in April and is expected to remain low in May and June before gradually increasing in the third and fourth quarters. Fortunately, lower variable expenses, such as utilities and janitorial, will partially offset a corresponding decline in parking revenues. We expect the net impact on 2020 FFO 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 2020 FFO to be $0.02 to $0.04 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-risked our future rollover exposure even more with our leasing success, leaving us with only 6.8% of revenue expiring during the remainder of 2020 and our lowest cumulative three-year forward rollover exposure in 20 years. With regard to the pandemic's impact on our customer base, we have long emphasized the importance of having significant customer, geographic, and industry diversification. Currently, as a percentage of our revenues, no market accounts for more than 20%, no customer other than the federal government accounts for more than 4%, and no industry category accounts for more than 25%. Brian will go into more detail about customers that have requested some form of rent relief and our process for managing those requests, but I will highlight a few points: First, to date, we have collected 96% of our contractually-required rents for April. Second, customers that we currently believe have some merit for temporary relief represent about 10% of our revenues. Many of these are restaurants, amenity retailers, small healthcare practices, and flexible office providers. In some cases, we have agreed to defer, but not abate, the payment of rent for a limited period of time. In other cases, we have agreed to abate rent as a consideration for a lease term extension. To date, we have agreed to grant temporary rent deferrals that represent approximately 1% of our annualized revenues. Third, we have received requests from creditworthy customers who have made what many in the industry are referring to as opportunistic rent relief requests. Our view is these customers' contractual rent obligations do not merit temporary relief. Fourth, 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 under our $600 million credit facility and no debt maturities until June 2021; we believe we have ample liquidity. To be prudent, we have delayed certain projects originally planned for this year, including some lobby and restroom upgrades. Plus, with our expectation that spec leasing will slow, we currently expect lower leasing CapEx for the rest of 2020. The big question for everyone is where does the economy go from here? We don't know, but in the near-term, we are focused on: First, maintaining our liquidity and fortress balance sheet; Second, keeping our buildings open and fully operational; Third, keeping our development projects on time and on budget; Fourth, working with customers to creatively design mutually-beneficial solutions that maintain their long-term tenancy without significant financial impact on Highwoods; Fifth, minimizing all expenses to the greatest extent feasible without sacrificing operating performance or leasing opportunities; and Sixth, capturing as many renewals and re-lets as possible given this uncertain environment. Even during the stay-at-home orders, there continues to be some interest in back-filling available space. The volume of showings has obviously slowed during the past four to six weeks, but activity has not gone to zero and we are cautiously optimistic that demand will begin to rebound as the economy reopens. In the long run, given the strength of our balance sheet, we believe we are 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 and we have a better sense of customer demand, rents, valuations, and our own cost of capital in order to resume underwriting deals, we will be opportunistic, but 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 are pleased to report that the few employees and dependents of ours who tested positive for COVID-19 have fully recovered. Since mid-March, we have actively encouraged and supported employees who can work from home to do so. Employees who cannot work from home, such as maintenance and HVAC technicians, have collaborated with each other and our respective local leadership teams to handle essential property-related tasks. We continue to be amazed by the collegiality, the dedication, and the tenacity that our coworkers have been exhibiting every single day during this pandemic. Whether on the front lines keeping our buildings open and well-maintained or working from home keeping our business running smoothly, including closing our books, filing our 10-Q and preparing for this call. Our coworkers have continued to personify the Highwoods standard of excellence with everything they do and we sincerely thank them for their efforts.

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 COVID-19 pandemic on our operations and outlook, before closing with our thoughts on leasing expectations for the remainder of the year. As Ted mentioned, we finished the quarter, which now seems like a distant memory, with record-setting FFO per share and solid leasing metrics. Leasing volumes were healthy with 893,000 square feet of second generation leases signed with GAAP rent spreads of a positive 13.6% and cash rent growth of 6%. Leasing results in the quarter included a 238,000 square foot renewal in Atlanta with the State of Georgia that pulled our average rent per square foot down, but also carried lower leasing CapEx to drive a superlative payback for us. As we've discussed on prior calls, we have made significant progress reducing our lease expirations over the next few years. To that end, we now have 24% of revenue expiring through year-end 2022, down from 29% at the end of 2019, and there are no expirations greater than 100,000 square feet remaining in 2021 or 2022. We're close to finalizing a long-term renewal with the FBI on their 138,000 square foot building in Tampa that currently expires in the fourth quarter of this year and continue discussions with the FAA on their 100,000 square feet in Atlanta, which is currently in holdover status. Finally, T-Mobile, a long-known move-out, will vacate 116,000 square feet in north Tampa in the third quarter of this year. Our in-place cash rents are up 6.2% year-over-year. This growth is driven by higher rents on deals executed over the past 12 months, an improved portfolio mix due to the market rotation plan, and as always, in-place annual escalators. I'll now turn to the current status of our portfolio and the impact we're seeing from COVID-19. All of our buildings and parking facilities are open and available for our customers, though utilization has been low. Fortunately, our portfolio has experienced limited exposure to the virus. Where we have had confirmed or suspected exposure within our buildings, we have a thorough process in place to sanitize all affected areas real-time and to ensure our customers and employees have access to their workplaces as soon as possible in a safe manner. The reduced utilization has impacted our parking revenue. We generate approximately $25 million in annual parking revenue, with approximately 20% of this attributable to transient parkers and the balance, monthly parkers. Transient revenue has ground to a halt, and we're seeing some monthly contracts cancelling. 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've received rent relief requests and are working with those customers with a demonstrated financial need due to the COVID-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 reduced economic activity. In general, the businesses in need fall into a few broad 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 customers submit applications for relief. These requests 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, with a 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 little-to-no leasing CapEx. To date, we've agreed with customers to defer rent of $4 million and have made proposals for another $2 million of deferred rent. In total, this equates to less than 1% of our annualized revenue. We expect this to increase as additional customers who have a demonstrated need complete their applications. Turning to rent collection, we've received 96% of April's rents. Adjusting for 1% of April rent billed, but that we have agreed to defer, our collection percentage is approximately 97%. We're extremely proud of our local and legal teams exemplifying Highwoods service-not-space ethos in the great work they are doing for our customers with a focus on a return to more-normal times ahead. We have been proactive in reaching out to customers who are behind in their April payments and will continue to monitor the portfolio with a laser focus 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 the year and have little revenue at risk in 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 2021. We do expect renewal activity will increase as certain customers previously projected to vacate have expressed interest in renewals, albeit some in the short-term. While leasing activity has slowed, there is still activity with inbound requests and assignments. With 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 in use. While we don't expect many new leases to be signed solely from virtual tours, we believe this proactive approach not only keeps our opportunities connected to potential customers, but it provides us a jump-start 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 in the commencement of signed leases due to in-process TI jobs. Similarly, the projects in our $500 million 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, and fortunately, 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. In this vein, we recently hosted a portfolio-wide forum with all of our general contractors to share best practices and to get the benefit of an up-to-the-minute conversation among the best and brightest in the business. A big thanks to these organizations and to our own development team for convening such a group. As Ted mentioned, our development pipeline will deliver over $40 million of GAAP NOI upon stabilization. This includes $32 million from three projects that are fully pre-leased such as the previously announced 126,000 square foot full-building lease with Martin Marietta at GlenLake Seven in Raleigh. In closing, we believe our sunbelt footprint, quality location, and high-quality portfolio, diversified customer base, and manageable near-term roll position us well in this period of economic uncertainty.

Thanks, Brian. In the first quarter, we delivered net income of $185 million, or $1.79 per share, and FFO of $99 million, or $0.93 per share. The quarter included the net benefit of $0.02 per share from properties sold, which was offset by severance costs associated with the closure of the Memphis and Greensboro offices and higher G&A expense that we incur in the first quarter each year associated with our typical annual equity grants. As expected, occupancy declined 130 basis points sequentially to 90.9%, with approximately 30 basis points attributable to the disposition of properties. As mentioned previously, we completed the first phase of our market rotation plan with the sale of $338 million of properties. Including $90 million of properties sold in the fourth quarter, we received $428 million of phase one disposition proceeds, which approximates the $436 million acquisition of Bank of America Tower in Charlotte. GAAP NOI on the properties sold was projected to be $29.2 million for 2020, which compares to $27.9 million for BofA Tower, and we're more than making up for the slight shortfall in NOI with G&A savings. As we stated last August, we projected the market rotation plan to be FFO neutral and cash-flow accretive. After completion of phase one, we now believe we're modestly ahead of our original expectations. At quarter-end, we had over $630 million of liquidity and returned our net debt-to-adjusted EBITDAre ratio to prior levels at 4.86 times. We used the sale proceeds from the last phase one disposition to fully repay the outstanding balance on our $600 million revolving credit facility. We have no debt maturities until June 2021 and expect to fund approximately $130 million on our development pipeline during the remainder of the year. As we disclosed in our press release, we have reduced 2020 planned capital expenditures and expected leasing capital expenditures 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 bond maturity with our existing liquidity. Turning to our outlook; our original FFO range was $3.60 to $3.72 per share. As a result of the COVID-19 induced economic slowdown, we've made the following revisions: One, we lowered our parking forecast by $0.03 to $0.08 per share, which will be partially offset by lower OpEx, net of recoveries, of $0.03 to $0.05 per share for a net reduction of $0.00 to $0.03. Two, we assume rental revenues will be lower by $0.02 to $0.04 per share due primarily to lower than anticipated speculative leasing. And three, finally, we expect G&A to be lower by approximately $0.01 per share. The net effect is an expected reduction of FFO by $0.01 to $0.06 per share. In addition to these specified COVID-19 induced changes to our outlook, we lowered the top end of our prior range by $0.03 per share and raised the low end by $0.01. 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 file 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 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 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 rental revenues attributable to COVID-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 operational expense. 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 placeholder 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 COVID-19 induced uncertainties. We have ample liquidity to fully fund our development pipeline and debt maturities through year-end 2021, our leverage is low, and we have proactively reduced our capital expenditure spending 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 regain its footing, and 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 are now ready for your questions.

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

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

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

Yes, Elvis, good morning. Regarding same-store, the specific components contributing to the change in guidance for same-store NOI amount to approximately $4.5 million at the midpoint. This includes about $1.5 million from parking after accounting for OpEx savings, and a revenue change of around $3 million. The total change for same-store is about $6.5 million when comparing prior guidance to the updated guidance, which results in a $2 million difference. This difference is mainly influenced by some of the rent deferrals we've discussed, along with other items that vary between cash and GAAP, since our guidance is focused on a cash same-store number. Looking at the outlook for the rest of the year, to reach the midpoint of the updated range, we need between 1.5% to 2% growth per quarter. This is lower than our earlier expectations for a normalized run rate, assuming stable occupancy and no significant changes in free rent burn-off. We anticipate that rent increases will likely be higher than what we've projected for the latter half of the year, but this will be counterbalanced by reduced occupancy and decreased revenue from parking, leading us to that 1.5% to 2% outlook for the remaining quarters of the year.

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

Yes, I would say that the 1% we mentioned consists mainly of deferrals. The abatements, such as lease extensions with some free rent, represent a much smaller portion of that and are not included in the 1%. We view those as lease amendments that are beneficial for us, but they will be significantly less than the 1% of the deferrals we disclosed.

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

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

Thank you.

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

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

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

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

Yes. Depending on the dates and the leases, the collection process is staggered. Not everyone pays on the first of the month, leading to some staggered collections. The numbers we reported, that 96%, were updated through Friday, prior to this call. So I have a fairly good understanding of the early weeks.

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

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

Yes. Rob, I would say you were considering things. We obviously want to be transparent, as Ted mentioned. However, we also don't want to get bogged down in every small detail of what we're doing here. If something significant occurs, we will definitely be open about it, reflecting the history of our company's actions.

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

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

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

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

No, that's a great question. We don't really track it because it’s always changing. We handle so many leases with different companies that have various build-out standards and layouts. However, in the near term, I believe there will be reduced densities as companies implement phased returns with alternating days and staggered hours. There will be a variety of approaches to de-densification at least for the near future. Some companies have already indicated plans to install plexiglass between bench seating to enhance social distancing. There certainly isn’t a single solution for how companies will address this issue.

Okay, thanks guys. Appreciate it.

Sure.

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

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

There wasn't much to report in the first quarter. The Georgia Building Authority lease did impact our term for that period. It’s mainly a mix of different deals in the market rather than a distinct trend. However, since then, we've signed about 23 leases in April, and we are noticing a trend towards shorter lease terms. Companies are reassessing their space requirements and focusing on capital preservation along with the costs associated with moving. We anticipate an increase in renewals, but the lease terms may be shorter in the near future.

Okay, great. That's helpful. And then I also wanted to ask about your 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?

We recently responded to a build-to-suit request for proposal that originated at the very start of the pandemic. It has been an ongoing process, and in the past few months, we have also engaged in discussions for two or three other projects that have been underway for six or seven months. Although progress has slowed, brokers indicate that these opportunities are still active. Many of our development transactions take a considerable amount of time, often spanning multiple quarters, so we are treating these discussions as still alive until we receive further updates.

So Brendan, I want to add that we are still having ongoing discussions. We have a land bank that we are interested in utilizing. However, we are assessing the returns on all these projects. Previously, we might have been more open to some speculative exposure, but given the buildings we currently own, like the two in Tampa and Virginia Springs that are vacant, our primary focus is on filling those spaces. If we do undertake any new projects, it would involve a small percentage of speculative development in the near term. As things progress, we will have a clearer understanding, but that’s our outlook for now.

Great. Can you hear me?

We can.

Yes.

Great. Thank you. First, a very nice job. Quick question on operating expenses. Could you discuss the savings in 2020? Intuitively, we would expect operating expenses to increase due to the COVID-19 situation. Can you provide any insight on that? Additionally, the first quarter was likely busy because of the significant disposition during that period. Can you elaborate on whether the operating expense figures for the first quarter represent a good run rate?

Hey John, it's Brendan. You're right. I believe that overall operating expenses should decrease as we transition into the second quarter for a few reasons. Firstly, the second quarter typically experiences lower OpEx due to seasonal trends. Secondly, you correctly pointed out that we sold some assets, which provides a benefit. I think the utilization of our buildings likely has a more direct impact than any OpEx fluctuations related to the pandemic and additional sanitation measures. We shared guidance regarding the net operating expense savings we anticipate for the year, which is based on our previous expectations. Therefore, you should expect to see a decrease in the second quarter as utilization has been low. As we mentioned before, we expect a gradual increase in utilization in the third and fourth quarters, which should reflect a corresponding change in operating expenses as the year progresses.

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

Thank you. I have a follow-up question about your Pittsburgh portfolio. It seems that Pittsburgh has an older economy compared to the Sunbelt cities. Are there any significant differences in your operations or management of assets in Pittsburgh compared to those in Raleigh or Atlanta?

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

Yes, John. To add to that, the occupancy in Pittsburgh has remained steady and has likely been the highest across our portfolio over the past few years. Although we may not have had significant announcements there, it has consistently performed well for us in terms of NOI and cash flow over the last several years.

Great, thank you.

Thanks, John.

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

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

Thanks, Dave. Great questions. First, the in-bounds for leasing are quite diverse, which is consistent with our portfolio. We have a variety of professional services, including health care in Nashville, research in the Triangle, and banking finance in Charlotte. There’s still a good mix of in-bounds, influenced by their current locations and their need to upgrade or resize their spaces depending on requirements. This relates to our earlier discussions about the pre-COVID square footage per person. Notably, we are observing a shift in how far ahead companies are engaging with us. Recently, customers seem to be inquiring earlier than they have in the past to explore options and possible renewals, which is helping to accelerate our decision-making process. We're initiating earlier conversations, sometimes proactively reaching out sooner than usual. I hope that answers your question; both were good ones.

Yes, I think just to add, too. So at least for leasing, the majority I think would be a portion of it is just timing of transactions and how long they take to put together more than anything else. But I'd echo the same things Brian said. We've had a diverse base of customer inquiries.

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

Hey Dave, it's Brendan. Regarding the 10%, the first thing to note is that our office portfolio is significantly different compared to the last financial crisis. Additionally, we had industrial and retail properties like Country Club Plaza in Kansas City. At our peak in 2009, write-offs were around 125 basis points of revenues, which we believe isn't directly comparable to the current situation. For the 10%, we've arranged deferrals with most tenants and we feel confident in our ability to support them during this economic shutdown. While I wouldn't say the situations are directly comparable, we believe we have solid solutions to assist our customers. As for the $0.03 adjustment, that wasn't specified in our original outlook, so you didn't overlook it in the prepared remarks. There are generally positive developments that could occur during the year as we presented in our initial guidance. For example, leasing a significant portion of 5332 Avion might have been included in that original outlook, but it's not something we expect or forecast now, which is why it has come out of the top end of the range.

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

We are pleased to have completed the first phase and closed the left disposition at the end of March. We estimate that we have around $250 million in assets remaining, and it's publicly known that we are exiting Greensboro and Memphis. Despite the current crisis, we continue to receive interest from potential buyers for these assets. Although we have adjusted the low end of our disposal guidance to zero with no set timeline, we are in talks with various groups interested in purchasing our assets. If any of these groups meet our pricing expectations, we might proceed with some off-market deals, but it's still too early to determine. Progress is slow, and we are waiting for the debt markets to stabilize. Overall, we feel positive about our remaining assets, which attract a lot of local, regional, and national interest. So, we are optimistic about our current situation.

All right, great. Thanks for all the color.

Thank you. The next question comes from Manny Korchman with Citi. Please go ahead.

Thank you, everyone. I have a quick question. Ted, in your earlier remarks, you mentioned that you are currently not pursuing acquisitions. I would like to know if this is primarily due to the market being stagnant and the lack of opportunities, or if it is a directive from you indicating that your team should hold off on purchases because you are not comfortable with buying at this time. If it is the latter, what would lead to a change in that stance?

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

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

I think that's a great question. I don't believe we have enough time to determine if that's the case yet, as we don't have enough data points. One specific instance we encountered during the recent crisis involved an out-of-town company entering one of our markets. They are seeking modern space that offers a cost-effective alternative with good access to labor and a high quality of life. This represents a new opportunity in the market. However, we have not observed any other changes regarding satellite offices at this time.

Okay. Thanks, Ted.

And we have no further questions on the telephone lines.

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

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