Good morning, and welcome to the Highwoods Properties earnings call. As a reminder, this conference is being recorded, Wednesday, July 29, 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 are Ted Klinck, our Chief Executive Officer; Brian Leary, our Chief Operating Officer; and Mark Mulhern, our Chief Financial Officer. As is our custom, today's prepared remarks have been posted on the web. If any of you have not received yesterday's earnings release or supplemental, they're both available on the Investors section of our website at highwoods.com. On today's call, our review will include non-GAAP measures such as FFO, NOI, and EBITDAre. Also, the release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Forward-looking statements made during today's call are subject to risks and uncertainties, which are discussed at length in our press releases as well as our SEC filings. As you know, actual events and results can differ materially from these forward-looking statements, and the company does not undertake a duty to update any forward-looking statements. Currently, one of the most significant factors that could cause actual outcomes to differ materially from our forward-looking statements is the potential adverse effect of the COVID-19 pandemic and federal, state, and local regulatory guidelines and private business actions to control it on our financial condition, operating results, and cash flows, our customers, the real estate market in which we operate, the global economy and the financial markets. The extent to which the COVID-19 pandemic impacts us and our customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity, and duration of the pandemic and the resulting economic recession and potential changes in customer behavior, among others. With that, I'll now turn the call over to Ted.

Thanks, Brendan, and good morning, everyone. Let me start by saying I hope you are all well and your families are safe and healthy. We are pleased to report that our employees are healthy and that we have safely returned to all of our offices. To ensure our coworkers feel safe and productive while in the office, we have implemented a rotation schedule, giving everyone ample opportunity to comfortably practice social distancing. This helps us achieve our twin objectives, which are to prioritize the health and safety of our employees and realize the benefits of sharing our company's unique culture together in the workplace. Obviously, this has been an incredibly challenging time for our country and our economy. It remains difficult to predict the duration and severity of the COVID-19 pandemic and its overall impact on economic activity. We believe we are well positioned operationally to handle the near-term effects of this downturn, given our lack of large customer expirations over the next few years in our substantially pre-leased development pipeline. Plus, we continue to maintain a fortress balance sheet with ample available liquidity to fund leasing capital expenditures in our development pipeline while having dry powder to capitalize on future growth opportunities. In addition to having a high-quality portfolio and strong balance sheet, we are well positioned given our geographic footprint. The Southeast continues to benefit from positive demographic trends, both 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 a 6,000 job, $1 billion East Coast headquarters in Charlotte; Microsoft with 1,500 new jobs in Atlanta; and publicly traded software company, Bandwidth, in Raleigh, with 1,200 new jobs and a planned new headquarters campus. These announcements illustrate the long-term attractiveness of our markets and support the notion companies still value a collaborative in-person environment to foster creativity and strengthen company culture. In the second quarter, we delivered FFO of $0.93 per share, which equals our first quarter results. Further, the second quarter reflected a full quarter of lost NOI 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 FFO, our portfolio metrics were solid with occupancy of 91.1%, up 20 basis points sequentially; same-property cash NOI growth 2.4%, excluding the impact of temporary rent deferrals; and in-place cash rents up 5.1% year-over-year. We leased 821,000 square feet of second-gen office space with GAAP rent growth of 13.6% and cash rent growth of 5.5%. And this was done with limited leasing CapEx, which drove net effective rents 7.6% higher than our prior 5-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 economic recovery is speculative. So we are maintaining our focus on the following items that we believe best position us in the near term: maintaining liquidity and a strong balance sheet, keeping our buildings fully open and 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 and relets as possible given this uncertain environment. We've reported our rent collection figures each month since the start of the pandemic, which have been strong at 99% every month, including July. Temporary rent deferrals equate to 1.2% of annual revenues, up modestly since our first quarter call. Importantly, new rent relief requests have dropped off significantly since mid-May. We have long emphasized the importance of having significant customer, geographic, and 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%, and no industry category accounts for more than 25%. This diversification is serving us well in this uncertain macroeconomic environment. Turning to our updated 2020 FFO outlook. Given the fluidity of the pandemic and its impact on economic activity, potential lost rents from customer defaults and noncash straight-line write-offs are still too speculative to project. As a result, our updated FFO per share outlook of $3.59 to $3.68, which is up $0.04 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 was significantly lower than normal in the second quarter. As expected, parking revenue was negatively impacted, but we were 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 2 noncore properties in Memphis for $23.3 million. These properties were a combined 89% occupied and were sold at a low 7s cap rate based on projected 2020 GAAP NOI. 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 have other noncore dispositions in various stages of the sale process that could bring us to the high end of our outlook. Development continues to be a growth driver for Highwoods. Our 1.2 million square foot development pipeline represents a $503 million investment that is 77% pre-leased and 60% funded. Construction work on our 4 in-process projects, GlenLake Seven in Raleigh, Virginia Springs II in Nashville, Midtown One in Tampa, and Asurion in Nashville, has continued throughout the pandemic. We remain on budget and on schedule with these projects. As a reminder, our pipeline is projected to generate more than $40 million of annual NOI upon completion and stabilization, less than $5 million of which will be generated in 2020. New build-to-suit and anchor pre-lease conversations have slowed down compared to pre-pandemic levels, but there still are inquiries and activity from prospects. We remain hopeful we will 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 coworkers have exhibited every day since our normal daily routines and lives were disrupted by the pandemic. Their outstanding performance has 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 building operations, adapting to new processes to seamlessly file our 10-Q, adapting to virtual leasing tours, or countless other examples, we couldn't be more proud of our team, and we sincerely thank them for our efforts. Brian?

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 821,000 square feet of second-generation leases with GAAP rent spreads of a positive 13.6% and cash rent growth of 5.5% is 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 was driven higher by our renewal of the FBI in Tampa and with limited leasing CapEx is a win for the company. Our payback ratio for total capital committed compared 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 to the year-end 2022, down from 29% at the end of 2019. The largest lease in the quarter was the 138,000 square feet full building long-term renewal with the FBI in Tampa. Following this lease in T-Mobile's known July move-out of 116,000 square feet also in Tampa, we have one remaining expiration, over 100,000 square feet to the end of 2022, which is the FAA in Atlanta, who remains in holdover status and 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, an 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 and 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 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 return 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 COVID-19 pandemic. These customers account for 7.8% of our total annual revenues, and the temporary deferrals we've provided them represent approximately 1.2% of annual revenues. We continue to see most of the requests 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 the near shutdown of the economy, the second quarter has given us an opportunity to get even closer to our customers. Whether it's administering the protocols of a socially distanced and CDC-guided workplace, receiving inbound requests for help, or structuring win-win extensions, we believe these strengthened 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 through 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 have clearly slowed with only 91,000 square feet of new leases and 48,000 square feet of expansion signed in the second quarter. For perspective, we have little revenue at risk in 2020 attributable to 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 altered 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. Already 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 the 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 Centene's 6,000 new job announcement in July that they will build their own 1 million square foot campus in University City adjacent to UNC Charlotte. The continued economic attractiveness and diversification of our markets is a testament to having a low cost of doing business, a highly educated and diverse workforce, a strong transportation infrastructure, low cost of living, and the highest quality of life. Across the board, market rents are holding steady for the moment, while vacancy is marginally increasing and the level of sublease activity is consistent with the onset of a recession. We continue to pay close attention to sublet activity across our markets. The wave of development projects launched pre-COVID continue to advance through various stages of construction and varying degrees of pre-leasing. Charlotte's 1.2 million square feet is 30% pre-leased, Atlanta's 5 million square feet 60% pre-leased, Raleigh's 3 million square feet is 40% pre-leased, and Nashville's 2.8 million square feet is 28% pre-leased. Most of these projects don't deliver until 2021 or beyond, which grants them the benefit of time. As Ted mentioned, our development pipeline will deliver over $40 million of annual GAAP net operating income upon stabilization. This includes $32 million from 3 projects that are fully pre-leased, on schedule, and on budget. In closing, I couldn't be prouder of the effort and results our teammates delivered for Highwoods in the second quarter. Their support of our customers' short-term needs has positioned us favorably in our markets. While our long-term perspective and presence across the Southeast should benefit us in the changing landscape. Mark?

Thanks, Brian. In the second quarter, we delivered net income of $37 million or $0.36 per share and FFO of $99.2 million or $0.93 per share. As Ted mentioned and we discussed last quarter, the $338 million of dispositions completed in the first quarter had a dilutive impact of $0.02 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 $0.02 per share drag compared to the first quarter. Offsetting these items was a significant reduction in net operating expenses and lower G&A. Given the challenging economic environment, we are pleased with our performance. The quarter was relatively clean from an FFO perspective, except for a $0.5 million charge to straight-line rents receivable. Excluded from FFO but included in net income is a $1.8 million impairment on a noncore building in Memphis. Our balance sheet is in excellent shape. At quarter end, we had $586 million of liquidity, which has now increased to over $600 million following the receipt of proceeds in early July from the sale of 2 noncore properties in Memphis. Our net debt to adjusted EBITDAre ratio held steady in the quarter at 4.9x, and our leverage ratio, including preferreds, 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 proceeds later in the year puts 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 FFO range to $3.59 to $3.68 per share, which is up $0.04 per share at the low end. Adjusting for the dilutive impact from the $23 million noncore disposition completed in July and the second quarter's straight-line rent credit loss, neither of which was included in our previous range, our outlook is up $0.05 per share at the low end and $0.01 per share at the high end on an apples-to-apples basis. Last quarter, we provided a list of projected impacts from COVID-19-induced economic slowdown. We've updated these items and included a table in last evening's press release, and I'd like to provide a little more color. Number one, we lowered our parking forecast by an additional $0.01 to $0.02 per share for a total reduction of $0.05 to $0.09 per share compared to our original February 4 outlook. We previously expected improved utilization of our garages 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 $0.06 to $0.08 per share lower than our original February 4 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 $0.01 per share. In addition to the specified COVID-19-induced changes to our outlook, we increased the low end of the prior range by $0.03 per share. The result is an updated range of $3.59 to $3.68 per share. In total, the midpoint of our range is down $0.025 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 filed bankruptcy or otherwise irrevocably default on their leases and noncash credit losses of straight-line rent receivables. Given the fluidity of the pandemic and its effect on the collectibility of rents over the remainder of existing lease terms, such losses are still too speculative to 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 NOI growth outlook is 1% to 2%, excluding potential lost rental revenues attributable to COVID-19, but inclusive of the negative impact of temporary rent deferrals. Our prior range was 1.5% 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 FFO. As is our custom, we don't include the effect of future acquisitions, dispositions, or development announcements in our FFO outlook. Ted 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 as a placeholder in our current outlook with a low end of $0 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.

We are now ready for your questions.

How are you considering the possibility of additional sales beyond what has already been discussed for the latter half of the year? Have you considered increasing your market offerings if discussions about changes to 1031 exchanges escalate? Are you generally satisfied with your current position? Is this a situation where you need to seek out acquisitions or development opportunities for using your capital? Please help me understand your thoughts on the latter part of 2020 and into 2021 regarding this matter.

Rob, it's Ted. So as we mentioned, we sold $23 million in 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, that's about the high end of our guidance, about $150 million or so. And historically, in any typical year, we're in that $100 million to $150 million of disposal range. So I'd say this is going to be somewhat of a typical year for us is sort of the way we look at it.

Rob, I want to emphasize that we have some flexibility from a tax perspective. Therefore, we don't necessarily need to conduct all 1031 exchanges. We have some leeway and the ability to manage that. Regarding the potential future of 1031 exchanges, I believe it's a bit premature to speculate on that. We haven't yet analyzed its impacts as we move into 2021.

I was wondering if you guys can update us on where that activity or utilization is in the buildings, whether through parking or key fob swipes? And I guess, maybe trying to get a better sense on when you will have visibility on that new leasing volume, where do you think those numbers need to get to here in the near term to start to see the speculative leasing pick up a bit?

Sure, Dave, it's Ted. I'll begin, and Brian and Brendan might add to this. We monitor building utilization weekly. Every Tuesday, we receive a report from all our divisions. It's a bit subjective since we're tracking paid parking buildings by checking swipes in and out. For others, we count cars in the parking lot and monitor foot traffic in the buildings. Generally, I'd estimate our buildings are utilized at 20% to 30%, depending on the market. We anticipated an increase after the Fourth of July but haven't observed that yet. Utilization has been fairly stable since mid-May, with minor fluctuations week to week, but most of our markets remain in the 20% to 30% range. Brian, would you like to discuss leasing?

Sure, Ted. Just following up on that. I think the occupancy and the leasing activity have sort of tracked each other a little bit. To Ted's point on the July 4 date, we did start to see more people coming back in the buildings. Previous quarter, no tours whatsoever, everything was virtual. We have absolutely seen 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 start to track similar to what you would expect at the beginning of a recession, generally larger users with 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 then, 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, I'd say, in the latter part of the second quarter and thus far in July is maybe less of a ramp-up than what we had projected when we updated guidance in April. So our expectations are that parking revenues in the third and fourth quarter are likely to be roughly in line with the 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 of the year.

There's been a lot of discussion about working from home and the preference for suburban satellite offices versus urban centers. As you consider your market presence and balance, what are the conversations like with tenants when they think about this? Do they feel there is no real advantage either way since commute times are likely similar and there's not much saving? I'm interested in what those discussions entail.

Yes, Jamie, it's Ted. Let me begin, and Brian may want to contribute as well. I think we're still in the early stages of these discussions. Companies have primarily been focused on ensuring their employees' safety and health as they prepare for returning to the office. As we've mentioned, many companies are delaying that return. There are discussions happening internally, but they haven't progressed to the point of making new leases or decisions about locations. In our markets, we believe we might become both hubs and spokes, especially given significant moves like Microsoft's. We've also observed corporate headquarters expanding, such as Centene and others in Raleigh. Therefore, we see the Southeast being well positioned; if the hub-and-spoke model gains traction, we could serve as both a central hub and a spoke in many markets. Brian, would you like to add anything?

One thing to consider regarding your question, Jamie, and thank you for bringing it up. It's something we are paying close attention to, and we believe we are in a solid position. You asked about the likelihood that savings might not be significant in the lower-cost, non-transit dependent, low-friction commute markets we have in the Sunbelt. You may have heard of the 1-9-90 rule, where most organizations allocate their annual investment such that 1% goes to utilities, 9% to real estate, and 90% to people. According to feedback from companies, including a quote from the CEO of one of our largest customers, the discussion is not about if we will return to work, but when. They emphasize the 90%, focusing on culture and productivity where true value is generated within companies. We generally sense and hear that this occurs best in an office setting together, possibly with a bit more space between individuals. Additionally, I believe we've observed various experiments in this area prior to COVID, and people continue to discuss when they will return, not if.

Regarding the corporate expansions you mentioned at the start of the call, including Centene, Microsoft, Bandwidth, and others, can you share if there have been any updates or discussions regarding how they are utilizing their spaces? Specifically, are they considering aspects like density and flexibility in their decision-making? Additionally, it seems that many of these developments were influenced or supported by state grants or financial assistance. Is there any indication of how that environment might be changing, either positively or negatively?

Yes, that's a great question. State incentives are definitely significant, particularly in the Southeast. States are competing to attract jobs, which makes these incentives a crucial factor, though just one part of a larger strategy. What we’re observing is that companies are seeking corporate campuses that foster in-office work rather than remote setups. They prefer to have employees physically present to encourage collaboration and develop a strong corporate culture, which is challenging to achieve through platforms like Microsoft Teams. These trends highlight the Southeast's appeal, with states actively pursuing businesses as they've traditionally done, but the importance of the corporate campus cannot be overlooked.

Manny, it's Brian here. The grants and the openness of these Sunbelt markets aren't the main factors driving our successes. The key element is the 90% we've mentioned before; it's all about talent. Additionally, the quality of life and the people living here are already attracting interest, as evidenced by the inbound inquiries we're receiving. We've noticed similar coded prospects reaching out in various markets during our leasing calls. It's intriguing to observe this trend. Furthermore, economic development officials, or EDCs, have been experiencing the same level of activity in recent months as they did before COVID, which we consider a positive indication.

On the topic of density and its relationship to work from home, have you had any early conversations with tenants about how they might repurpose their space now and after the vaccine? Additionally, do you have an idea of the current density across your portfolio?

So Vikram, this is Brian. Good question on the last one. It's quite varied across the portfolio regarding densities, whether it's 250 square feet per person or 350 square feet per person. Generally speaking, we're probably less dense than what you'd find in a 50-story tower because we have the ability to spread out; land costs are lower, construction costs are lower, and operating costs are lower. We have several tenant fit-ups, and our customers moving into our buildings are not making major changes to their layouts. They aren't spreading people out beyond the existing guidelines, but the way they previously arranged the space generally met those guidelines. So, as a trend, we're not seeing significant changes. Many people are adopting a wait-and-see approach concerning returning to work, considering possible spikes in incidents or shifts in the science. What we observe is that this wait-and-see mindset is prevalent.

Okay. Fair enough. And then just the second one, you talked about activity or maybe alluded to activity or interest for looking for incentives for corporates to move continuing in the last few months versus pre-COVID at similar levels. I'm just wondering, has COVID maybe on the margin changed your minds or brought in new ideas in terms of markets you want to look at or explore or even sub-markets? I know you've obviously done the rotation plan into Charlotte. But any changes on the margin that you can give us a sense of?

Vikram, it's Ted. Not really. I think most of our footprint is in the high-growth Southeast markets. And I think those are the ones that we think the historical population growth in migration, job growth has been very strong and have outperformed other markets. So we want to continue to be in the high-growth markets. We think long term, they're going to continue to outperform. So really no changes on what we're looking at.

You guys mentioned that Q2 leasing volume included some of these blended extend leases or early relief extensions. So I was just wondering, are you still having these types of discussions with tenants? Or have you already kind of executed on most of these opportunities? And then maybe could you just comment on the economics of these types of extensions, like maybe how much free rent you guys are offering upfront relative to the length of the extension?

Brendan, Brian here. So I would say that these kinds of conversations regarding blend and extend with customers, they are 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 turn it over to Brendan on some of the different mechanisms on the economics.

Yes, Brendan. So in terms of the economics, I'd say, on balance, it's probably, let's call it, a month of abated rent for a year term, kind of give or take, 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 last night's press release. So the combination of the abatements, that's about 25 basis points. The deferrals, the net impact in 2020, which will be repaid over time, primarily in 2021, it's 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 COVID changes, and that's probably, let's call it, about 75 basis points. So all in, that's kind of the 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, Brendan, is 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.

I was wondering if you could discuss the largest vacancies in the portfolio, explain where your discussions currently stand, and whether any of those have fallen through, given that you mentioned there's not much speculative leasing occurring and you adjusted your expectations until 2021.

Sure, it's Ted. The largest vacancy we have is T-Mobile, whose lease expires at the end of this week. We've signed about 11,000 square feet there, which is a good start, but overall, prospects are slow, similar to most of our markets. We're encouraged to have our first deal lined up for later this year. The second largest vacancy is at 5332 in Tampa, the former Laser Spine building, where we have around 84,000 square feet available for lease. Currently, there are no strong prospects for that space, even though we had good activity a month or two ago that has since declined. Those two are the biggest vacancies, and besides that, we have a couple of development projects. One is Virginia Springs II in Nashville, which is about 111,000 square feet. We see strong potential for a small 6,000 square foot project that we feel optimistic about. Before the pandemic, Virginia Springs had incredible activity, with a prospect list much larger than the building itself. We are in close communication with brokers to see if those prospects might become viable again in the coming months. Finally, at Midtown Tampa, there's a 150,000 square foot building where we're negotiating a lease for 10,000 square feet and also receiving tours, but overall, the pace of companies making decisions is quite slow.

You mentioned Centene's headquarters moving to Charlotte. Do you think there will be any overflow demand in that market, or will it be mainly self-contained?

Well, you certainly hope so, right? I mean just given the size of the transaction, $1 billion, 1 million square feet type transaction. But I can't say we know for sure, but typically, these have overflow and add-on type requirements. So I think we're hopeful for the market.

And Jamie, to your question, Brian here. I think most economic developers would say that for an inbound move like that for a headquarters, it's typically at the low end of 1:1, but more commonly a 2:1 job creation. Not all of those 2:1 jobs take office space, so that includes all kinds of jobs generated by those inbound people. But I believe that's what Charlotte is feeling pretty positive about, along with the investment made by the state of North Carolina.

Okay. And then finally for me, you had mentioned an expectation that sublease space will tick up in some of your markets. Which markets are you most concerned about that are having an impact on market rents or vacancy?

Well, good question, Jamie. So one of the things we look at, right, as a canary in a coal mine is the sublet space. And I would say, again, out of the gate, Atlanta and Nashville are the ones that are starting to get our attention first. Atlanta is just the largest market in general. They've got 2.5 million square feet in sublet space. The majority of that are in one single place, 1 million square feet in the Central Perimeter. But from a Highwoods perspective, we have very little kind of within our portfolio or customers within our portfolio looking to sublet from an Atlanta perspective. Nashville, much smaller market, but a higher percentage of that market, about 8% of that market, has got some sublet activity. Again, you want to talk about a nominal number, it's about 375,000 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 and with long stabilization periods probably. So those are where we're focused and keeping an eye on it. But next quarter, we'll have more to talk about probably.

Okay. And you have a big position in Central Perimeter. Are you saying that's not competitive space? Or it's just not in your portfolio?

So yes, Jamie, our position really consists of three buildings that total about 625,000 square feet, which are mostly leased. It's not a significant position, but it is certainly a competitive space.

I guess, Ted, on the build-to-suit RFPs, are you seeing much change in that relative to sort of, say, a year ago in terms of the level of activity and stuff you're looking at?

Well, it's certainly slowed down quite a bit. The level of activity was very strong pre-COVID. We had numerous conversations as recently as March, and one even came in after COVID started but has since gone on hold. We're hopeful that these opportunities haven't disappeared; they are just temporarily paused. Right now, things are quite slow from a transaction perspective. The brokers are indicating that the activity hasn't ceased, but it's on hold for an unknown duration. However, there are still encouraging signs.

And then as it relates to CapEx spend, how do you guys think about sort of your building improvement program that you would normally schedule? Are you trying to accelerate that given the lack of activity in the building from tenants so that you kind of respond and deal with that in a less intrusive environment? Or are you managing that CapEx from a cash flow perspective? Or just going about it as you normally would?

I’d say the answer is probably both. At the onset of COVID, when the buildings were much less used, we took that time to work on some capital expenditure projects and customer work that would typically be done over time or during nights and weekends. We completed a lot of painting and other smaller projects over the past few months. From a capital expenditure standpoint, we assessed what was essential versus what was nice to have. To manage cash flow, we focused on the essential projects and scaled back on the non-essential ones. Brendan, do you want to provide more details?

Yes, Chris. I think just to set expectations maybe for the balance of the year. I think what we expect is the leasing capital spend will go down relative to the first half of the year, certainly over the next several quarters, we expect that to happen. And you can probably see between the leasing page, the commitments that we've had, both on a TI and leasing commission basis, in the first half of the year are 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 BI spending in the second half of the year. And to your point, we have decided to accelerate some BI projects because, one, it's efficient for us to do so, as you mentioned, while buildings are empty. And then two, 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 BI projects.

One other just footnote, I might add to Ted and Brendan, this is Brian, that we are able to self-perform some of this work with our own teams since we operate and maintain our own buildings. And so we have a fantastic set of maintenance techs, who were able to do some of the stuff, including some make-ready and kind of preliminary work with regards to our spec suites. So that way, we had space that was ready, plug and play for folks when they come back.

Understanding that things have been limited given the COVID-19-related shutdowns, but any signs of life on the investment sales markets across any of your markets? And then related to that, given the drop in overall debt costs, is it your expectation that cap rates could actually move lower for well-located, stabilized Sunbelt office properties?

Sure. Danny, it's Ted. I believe that transaction activity declined by over 70 percent in the second quarter, but there are signs of recovery. Most buildings that were on the market in the first two quarters have been pulled, and we're beginning to see some of those reappear. Brokers indicate there's significant activity and a lot of capital pursuing these opportunities, both from unlevered and levered buyers. Regarding interest rates, historically, they have positively influenced prices and real estate. There's a possibility that cap rates may remain stable or decrease, keeping prices high, but that's still uncertain. We've even heard of a deal going under contract at a higher price than its pre-COVID level. So, I think there's ample capital available with low interest rates, which is promising for the transaction market as more properties are introduced.

And given some of the headline issues facing some of the coastal markets, have you noticed any changes in the bidding tenants or the potential buyers who might be looking at some of the markets you're in?

I don't believe we've seen that yet. The transactions we're focused on are primarily phase 2 of the market rotation plan. These assets are mostly targeted towards local and regional buyers. Therefore, we haven't observed any signs of new buyers or new sources of capital for those transactions at this time.

And there are no further questions at this time.

All righty. Well, thank you, everyone, for joining the call this morning and your continued support and interest in Highwoods. Hope everyone stays safe and healthy. Thank you very much.

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