Good morning and welcome to the Highwoods Properties Fourth Quarter 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, February 10, 2021. I would now like to turn the conference over to Brendan Maiorana. Please go ahead, Mr. Maiorana.

Thank you, operator and good morning everyone. 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. One of the most significant factors that could cause actual outcomes to differ materially from our forward-looking statements is the ongoing adverse effect of the COVID-19 pandemic 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 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 its ongoing impact on the US economy 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 continue to be safe and healthy. Our building remained open throughout the pandemic with protocols in place to keep our customers and their guests as safe as possible. Across our entire portfolio, we estimate utilization is now 25% to 30% on average, up slightly from the end of last year as we've seen a modest increase during the past couple of weeks. In general, while it's difficult to draw trends across markets or sub-markets, there is higher utilization by small and medium-sized companies than larger companies. We aren't assuming a meaningful increase in utilization in our portfolio until the second half of the year. As mentioned on our last call, the Highwoods teams across our markets have safely returned to the office and we've heard from many of our customers who are eager for their full return. As I mentioned last quarter, it remains difficult to predict the duration in the severity of the current recession and when leasing activity will recover. Overall leasing volume dipped in the fourth quarter, however, new leasing volume was relatively steady at 160,000 square feet. While below our long-term quarterly average, new leasing volume was well above the low experienced during the pandemic. We signed fewer renewals during the quarter partly due to low lease expirations. At year-end, we only had 8% of our revenue expiring in 2021 and 8.3% in 2022. This two-year cumulative expiration total is among the lowest in our history. So far this year we are seeing some modest green shoots with regard to prospective leasing activity. Since January 1, we've already signed 100,000 square feet of new leases. We continue to be optimistic about the long-term population and job trends in our markets. Small and large users from outside our footprint continue to seek office space in our markets with some of our new leasing activity already in 2021 attributable to out-of-town users. Turning to our results, we reported 2020 FFO of $3.58 per share. While our performance was impacted by the economic disruption caused by the pandemic, we were able to deliver per share FFO excluding one-time charges in line with our original expectations of $3.60 to $3.72. Our ability to control expenses, maintain strong rent collections of over 99%, keep our buildings open safely and continue to advance our development projects on time and on budget is a testament to the tenacity and the dedication of the entire Highwoods team. Our fourth quarter FFO was $0.87 per share, including a $0.02 severance charge that was not in our outlook. Cash rent spreads were flat, down from the mid-single digits over the past several quarters. The sequential drop was attributable to a few short-term deals where we provided aggressive economics to support occupancy, which had an outsized impact on our quarterly statistics. Given the below-average volume, occupancy held steady from the third quarter to the end of the year at 90.3%. Same property cash NOI growth was a solid 3.7% or 1.6% excluding the impact of temporary rent deferrals. As an aside, to date we've already been repaid on more than 60% of the temporary rent deferrals granted earlier in the pandemic. The positive same-store result was achieved even though average occupancy was down 130 basis points year-over-year as our average in-place rents were up 4.6%. Higher rents combined with tight control on operating expenses were more than enough to offset lower year-over-year occupancy. Turning to investments, we sold $129.7 million of non-core properties in the fourth quarter, all in Greensboro and Memphis. We now have only one office property in Memphis and four office buildings and one park in Greensboro. Subsequent to year-end, we sold a 100,000 square foot building in Atlanta for $30.7 million. It is 100% leased to the FAA. This was our only building in the airport submarket in Atlanta. We delivered this build-to-suit in 2009 for a total cost of $18.2 million which further illustrates the value creation from our development activities. We're planning to market additional non-core properties as we continue to strategically prune our portfolio and improve the overall quality. We didn't close any acquisitions in 2020 but in January of this year, we acquired our joint venture partner's 75% interest in the 636,000 square feet Forum office portfolio in Raleigh for $131.3 million. We have planned advertising to increase our investment to $138.4 million. We're bullish on the long-term upside for these assets given the wide array of walkable amenities, proximity to executive housing and easy access to Raleigh's major thoroughfares. We continue to evaluate additional acquisition opportunities. Even after the Forum purchase, we have plenty of balance sheet capacity with zero drawn on our revolving line of credit and $100 million of cash on hand. However, pricing remains competitive for the few high-quality buildings that have come to market since the pandemic started. Rest assured, we will remain disciplined allocators of capital and seek properties that we believe will deliver appropriate risk-adjusted returns over the long term for our shareholders. Our 1.2 million square feet, $503 million, 79% pre-lease development pipeline remains on budget and on schedule. To date, we've funded 79% and expect to spend most of the remaining $104 million by the end of 2021. Our pipeline will provide over $40 million of annual NOI upon stabilization, only $8 million of which is scheduled to be recognized in 2021. Now to our 2021 FFO outlook of $3.50 to $3.66 per share. In 2020, we were able to offset lower parking revenue and rents by reducing OpEx. We assume utilization across our portfolio will remain low in the first half of this year and gradually increase over the third and fourth quarters. We expect higher utilization will cause operating expenses to increase while we're assuming parking revenues will be slower to recover. At the midpoint of our per share outlook, we assume net operating expenses will be $0.06 higher than last year while parking revenues will only improve by $0.01. Over time we expect parking revenues will fully recover with the 7% drop we experienced in 2020. Same property cash NOI growth is projected to grow 3% to 5% in 2021. Our outlook for dispositions in 2021 is $100 million to $150 million in addition to the $30.7 million sale of the FAA building, completed in January. Our acquisition outlook is zero to $200 million, which is in addition to the Forum acquisition. We have a placeholder for development announcements of zero to $250 million. We continue to have conversations with build-to-suit and pre-lease prospects, but expect to be measured with regard to 2021 development commitments. Before I turn the call over to Brian, I'd like to reiterate the strong financial and operating performance we delivered in the midst of an unprecedented economic environment. Since the start of the pandemic, we've collected 99.9% of rents, sold $291 million of non-core properties, kept our $503 million, 79% pre-leased development pipeline on time and on budget and maintained a strong balance sheet with leverage of 36% and a debt to EBITDA ratio of five times. Even with the ongoing economic disruption caused by the pandemic, we still expect FFO per share to be higher in 2021 compared to a normalized 2019, the last full year before the pandemic. Plus, we have significant embedded growth potential as our development pipeline delivers and stabilizes, parking revenues recover and occupancy improves. We are cognizant of the near-term challenges ahead, but we're confident we have the ingredients to drive sustainable growth over the long term. Brian?

Thank you, Ted, and good morning all. Our 26 million square foot portfolio is well balanced across the best submarkets in the Southeast. Our diversification is purposeful across markets, across urban and suburban submarkets and across customer size and industry. This balance has served us well and provided noted resiliency as we posted healthy portfolio metrics in 2020 despite the most challenging macro environments. We believe this will prove beneficial as the nation emerges from the pandemic and recession. The common belief shared by each and every member of the Highwoods team is that we are in the workplace making business and it is through our portfolio that our customers can achieve together what they cannot apart. Before jumping into the quarterly statistics, I'd like to first reflect on our overall 2020 performance. We collected 99% of rents contractually due since the beginning of the pandemic. Note that this is from all of our customers including amenity retail, restaurants and co-working. This does not include the effect of temporary rent deferrals which have totaled approximately $8 million and of which 60% has already been repaid. Even with the traditional leasing environment shut down for three quarters of the year, we leased 2.8 million square feet with cash re-leasing spreads of a positive 4.6% and net effective rents in line with our high watermark in 2019. This positive outcome is a testament to our diversified portfolio resiliency and our team's ability to leverage technology and meet our customers' needs in spite of the challenging environment. We achieved these leasing results while spending limited leasing CapEx; we ended the year with portfolio occupancy of 90.3% to slightly lower than we expected at the beginning of 2020. As Ted mentioned, we have only 8% of rents expiring in 2021 and 8.3% in 2022 and we have no remaining expirations in either year greater than 100,000 square feet. We're starting to see forward momentum in leasing activity across our markets based on the velocity of inbound inquiries, a number of RFPs received and the number of tours occurring in our buildings. Coupled with the portfolio's limited lease roll in a few pockets of high-quality vacancy, we're well positioned to capture leasing demand when the recovery takes hold. Focusing on the fourth quarter, we finished the year by executing 466,000 square feet of second-generation leases including 160,000 square feet of new leases. As we've mentioned previously, overall volume can ebb and flow depending on expirations and renewals. While new leasing trends can often be more indicative of market activity, we've been pleased that new leasing volume has picked up measurably since the depths of the pandemic in the second quarter. As Ted noted, we've seen good new leasing volume already in the early part of 2021 and we are cautiously optimistic that recent activity will translate to additional signed deals. We posted GAAP rent spreads of a positive 8.4% and flat cash rent spreads. We made the conscious decision to provide aggressive lease economics in a few instances where we felt it was important to maintain occupancy or bridge a customer through the pandemic and while these deals were small, given the limited lease volume in the quarter, they had an outsized impact on reported rent spreads. Temporary rent deferrals granted since the start of the pandemic remain static in the quarter at 1.2% of our annual revenues. For some added color, we convened a rent relief task force starting in March that met daily for almost three months. Come summer, we were able to pare back our meetings to twice a week and we now convene every other week to monitor customer progress and performance. I would like to commend our local teams down to each and every Highwoods property manager, whose in-place relationships were key to supporting our customers and resulted in best-in-class rent collections throughout the pandemic. Now to our markets, which continue to garner national attention for their above-average population and job growth forecast. Their fiscal health and low taxes, business friendly climate, lack of dependence on mass transit, affordability, and overall high quality of life have accelerated the great migration to our footprint. To this end, US News & World Report listed three of our markets in the top eight best places to live. Additionally, Green Street recently identified Raleigh, Charlotte, Tampa, Orlando and Nashville in the top quadrant of National Cities in terms of both population growth and lower susceptibility to work-from-home risk. Where else to start but Tampa, the new Supercity by the Bay where the Stanley Cup, American League pennant and the Vince Lombardi Trophy all call home and where success on the field of play is bringing success in the halls of the city's economic developers, as evidenced by Pfizer's decision to create a new 100,000 square foot enabling functions hub. Furthermore, Tampa ranked number 4 in the United States for net residential growth in 2020. In addition to Pfizer's news, Fisher Investments, a Highwoods customer, has made a large commitment to growth in Tampa announcing the planned addition of 600 jobs in the year ahead. Moving to our Tampa portfolio at 5332 Avion, we're seeing solid interest in the remainder of the availability we have there. Also in the rest assured BBD, our 150,000 square foot Midtown West development that sits above the nearby Whole Foods Market, Shake Shack and True Food Kitchen is finishing construction, hosting hard hat tours and where we're seeing solid interest from prospects. Now to Raleigh, where we saw another quarter with positive net absorption and where California-based Gilead Sciences just announced the addition of 275 new jobs with an average annual salary of $142,000 and national mortgage lender PennyMac Financial Services announced 322 new jobs last month. The Raleigh leasing team signed 130,000 square feet of deals in the quarter. Life sciences users continue to be the most active in the market, where we're also seeing good activity from technology, financial services, and corporates. Atlanta also posted a healthy volume of 130,000 square feet with solid rent spreads and we are seeing increased prospect activity and believe it can translate into signed leases later in the year. Finally, back down to Central Florida to wrap up in Orlando where we leased 91,000 square feet including 20,000 square feet of new deals. Our CBD portfolio and spec program there are seeing good interest from prospects across a combination of small and medium-sized requirements. We expect occupancy will continue to improve as we move throughout the year. In closing, we're looking forward to 2021 when we will deliver new trophy assets such as Asurion's headquarters in Nashville and where we are fortunate to be well-positioned with our dynamic and growing markets, our high-quality and diversified portfolio, our roster of strong and performing customers with a limited forward lease roll across a wide array of industries.

Thank you, Brian and good morning. In the fourth quarter, we delivered net income of $82.1 million or $0.79 per share and FFO of $92.5 million or $0.87 per share. The quarter included a one-time severance charge, which reduced FFO by $0.02 per share. For full year 2020, we delivered FFO of $3.58 per share. Adjusting for the severance charge, our FFO was in line with the midpoint of our updated 2020 outlook provided in October. I'd like to take a moment to review our 2020 results compared to our original expectations. As I mentioned, we reported FFO of $3.58 per share. Included in our full-year numbers were $0.05 of one-time charges, the $0.02 severance charge I mentioned earlier that we took in the fourth quarter and a $0.03 debt extinguishment charge we disclosed with our third-quarter results. Adjusting for these items, our FFO would have been $3.63 per share. Additionally, we had $153 million of non-core dispositions and no acquisitions that were not in our original 2020 outlook, which reduced FFO by $0.02 for the year. Moreover, we incurred a penny of additional interest expense from the excess cash we held on the balance sheet following our $400 million bond offering in the third quarter. This financing also wasn't included in our original FFO outlook. We believe all of these items—non-core dispositions, obtaining long-term financing, and reducing G&A—will benefit the company over the long term. Excluding these non-operational items, our FFO would have been higher by $0.08 or $3.66 per share, which was the midpoint of our original FFO outlook. Given the economic harm and disruption to our industry caused by the pandemic, we're extremely pleased our overall financial performance was generally in line with our pre-pandemic expectations. Our balance sheet is in excellent shape. Following the acquisition of our joint venture partner's 75% share of the Forum, we have $100 million of cash on hand and nothing outstanding on our $600 million revolving line of credit. We only have one remaining debt maturity before late 2022, which is the $150 million remaining on our 3.36% interest rate bonds that we plan to pay off at par in April. We have a little over $100 million left to fully fund our $503 million development pipeline, most of which will be spent by the end of this year. As Ted mentioned, our leverage remains low at 36%, while our net debt to adjusted EBITDA is 5 times. Clearly, we have plenty of liquidity and ample room to pursue additional investments if we see attractive opportunities. Turning to 2021, in last night's release, we provided our initial FFO outlook of $3.50 to $3.66 per share. This includes $0.04 to $0.08 per share of lower FFO due to higher anticipated year-over-year operating expenses, as we assume higher utilization in the second half of the year. We're optimistic on the long-term prospects for our parking facilities recovering to pre-pandemic levels, but we don't expect significant improvement in 2021. At the midpoint of our range, we are assuming increased net operating expenses combined with higher parking revenue will have a $0.05 per share headwind compared to 2020. The annualized dilutive impact of the $153 million of dispositions late last year that were not included in our original 2020 outlook is expected to be offset by the accretive net impact of the Forum acquisition and the asset base sale in 2021. We expect the $0.05 headwind from net OpEx and parking revenues in 2021 to offset the other non-operational charges in 2020 I mentioned earlier that are not forecasted to recur in 2021. As a result, we expect overall FFO results in 2021 to be in line with 2020. Finally, last week we announced a quarterly dividend of $0.48 per share, which is unchanged from our prior dividend. In the past few years, we've announced dividend increases in conjunction with our fourth quarter earnings releases. As a reminder, our dividend strategy is to generally target a level that approximates our taxable income over time. Given our income projections, combined with the uncertain economic environment around the pandemic, we believe it is prudent to use our excess cash flow to fund our development pipeline and for other investment opportunities. We continue to be constructive on the long-term cash flow outlook of the company and expect strong dividend coverage in 2021. Operator, we are now ready for your questions?

Thank you. Our first question comes from Blaine Heck with Wells Fargo. Please proceed.

Great, thanks, good morning. Maybe for Mark or Brendan, I just wanted to touch a little bit more on what seems to be a little bit of a disconnect between a lot of positive assumptions baked into guidance, cash same-store NOI guidance being one of those major positives and an FFO that's relatively flat year-over-year. Is there a material difference between GAAP same-store NOI growth and cash given the decrease expected in straight-line rent or are there other things announced that might help us bridge that gap?

Good morning, Blaine, it's Brendan. I'll address that and go through some of these points. Overall, I would say there is a significant difference between cash and GAAP NOI growth. At the midpoint of our outlook, cash NOI growth is at plus 4%, while GAAP is relatively flat or possibly slightly down. The main factors contributing to this are elements included in GAAP that are not part of cash, mainly due to the expiration of straight-line rent and free rent from leases signed in late 2019 and early 2020. We anticipate about a $22 million decline in straight-line rent at the midpoint. Part of this decline is due to temporary rent deferrals we offered in 2020, which provided a $5.5 million benefit to same-store in 2021 on a year-over-year basis. Parking revenue, as Mark noted, adds approximately $1 million positively, leading to a total of $6.5 million positive on cash, but this is counterbalanced by increased net operating expenses, which are also around $6.5 million negative at the midpoint. Therefore, these factors offset each other, leaving a remaining straight-line reduction of about $16 million to $17 million at the midpoint, which impacts cash directly. This situation largely stems from leasing activities in late 2019 and 2020, where the leases entered free rent periods that have now ended, with a notable example being Fanatics at 5332 Avion, which started generating cash this month. These elements are the primary reasons for the discrepancy between positive cash and the GAAP figures. As we have indicated, our cash flow is improving with portfolio adjustments and successful leasing efforts. We feel optimistic about the long-term cash flow outlook for the company.

Okay, great, that's really helpful detail. And then along the same lines, again we appreciate all the color you guys have given in guidance and the decrease in straight-line rent, it seems like it should be a positive for CAD or AFFO growth, but can you also talk about how you guys are thinking about CapEx and how that might trend year-over-year and the implications for AFFO growth relative to that flat FFO growth that your guidance implies?

Yes. So, we just talked about the drop. So from a cash perspective, as we think about kind of AFFO or CAD, we just talked about at the midpoint of the range $22 million kind of drop in terms of straight line versus 2020 versus 2021. So that's a positive for CAD that is not impacted in terms of an FFO or GAAP number. In addition to that, I would point out, we spent $90 million of leasing CapEx that we expensed in 2020 and we only committed less than $50 million of leasing CapEx in 2020 and typically what we commit is foreshadows kind of what we spend going forward. Now I think it's unlikely that we would have a $40 million reduction in leasing CapEx spend year-over-year, I think that's probably more aggressive than we would assume and obviously that's pretty lumpy, but we do think that it's likely that leasing CapEx in 2021 at least in the base case that we've laid out in the guidance outlook is likely to be a little bit lower than what it was in 2020. And so the combination of more cash from rents that are commencing and likely lower leasing CapEx means we expect dividend coverage is likely to improve as we think about 2021 versus 2020. And I again point out that we've been saying that for a while that we feel like the cash flow outlook of the company is strengthening, so we think 2021 will be a good example of that.

Perfect. Last one for me, maybe for Ted or Brian. Can you talk about the acquisition prospects out there, are you guys focused on any market in particular like growing in Charlotte? And can you comment on whether you'll be looking at core deals, which I think as Brian mentioned make up the majority of deals that are being marketed right now or do you have enough conviction in the markets to bid on anything that might come to the market with a value-add component at this point?

Sure, Blaine. It's Ted, look, I mean, we look at everything that's out in the market, whether it's core value-add, core plus, and opportunistic. So when we look at or BBD is an asset, we want to own long-term, as it is priced appropriately on a risk-adjusted return basis. So as you mentioned, as we said on our prepared remarks, core acquisitions today are very aggressively pursued and really haven't seen any price deterioration from the start of COVID and then based on the value-add deals, we're looking at all those, but it's got to be priced right. So we're looking at it from a lease-up perspective, what do we think market rents are going to be, clearly if it's in a market that we're in, we understand the current dynamics of the leasing market, so if we can underwrite it based on our assumptions that we feel like we can get a good risk-adjusted stabilized return we would absolutely chase value-add as well.

All right. Great, thanks.

Our next question comes from Manny Korchman with Citi. Please proceed.

Hey, good morning everyone. Brendan, at the beginning of your script, I think you went through a few risks that could come from the pandemic and the potential pressure on tenants from that, in the 10-K you had similar language. How are you thinking about sort of those bigger risks versus how you're planning for whether it be the year or the next couple of years?

Yeah, I mean the risk factors that may be, it's Ted, obviously the risk factors in the 10-K, it's sort of just required. So we've got to really put to the kitchen sink in there. So look, our outlook, that we've got in our guidance reflects the current situation we're in, we're in a recession, we're still in the middle of COVID, so I think the way we put our guidance, the range we put out really factors in all of the risk factors that we've laid out in the 10-K that just factors based on where we are in today's environment. Did I answer your question?

Yeah, I think so, but you talked about some out-of-towners looking at space in your portfolio, are the characteristics, are sort of the requirements of those any different from the end-market users that you're talking to receive?

No, not really, again, it's a combination of smaller companies, they are looking to expand their office here, just access to talent and labor, the same thing we've really seen for many years now and the larger customers, it's the same thing. I mean if you just think about just in the last couple of weeks, there have been three announcements in our markets, the new inbound announcements two in Raleigh, Gilead is creating 275 jobs and PennyMac, I think 322 jobs both of those announcements were in the last week or so. They both cited the things we talk about—the migration to the Southeast is the high-quality talent, low cost, low tax, high quality of life and all of that. So I think they're looking to use access to that and get out of some of the higher cost cities.

Hey, Manny, it's Brian. Maybe just to pile on a little bit and we've talked about this previously. I think what we're hearing and are seeing is that while prior to the pandemic, a lot of these moves might have just been around affordability, a lot of these conversations that we're hearing now is really about the talent. If we remember kind of 1% of an organization's annual investment in their businesses is around utilities, 9% is on real estate, but 90% is on their talent, and so they're seeing that these markets and then submarkets or BBDs are their places for them to retain and recruit the talent going forward. From what I think what we hear, it's really a 90% kind of decision-making that supports the 9% which obviously these markets are competitive from an affordability standpoint.

Thanks, Brian. And I have one more for you, you talked about the 8% rolling in '21 and again in '22, if you had to predict how much of that becomes sort of typical long-term leasing versus the shorter term that led to you may be some extra influence in the numbers which way would you lean on that 8% expiring this year?

Well, good question, one thing I might also just put it as a footnote to your question, Manny, is the amount of firms that we're still seeing kind of coming out of the space and maybe going to work from home, most of them on a temporary basis are still very small in number and size—1,500 square feet, 1,700 square feet. If they're still in business, all of them are saying that they plan on coming back but they have the ability and flexibility to wait it out. So we are seeing the interest of those that are looking to renew looking at longer terms because I think folks, let's be honest, it's a little bit more of a tenants' market and they see the opportunity to kind of make a commitment long-term. We aren't seeing reconfigurations particularly, folks kind of downsizing; I think they are balancing the need for maybe more square feet per person and their plans for a flexible workplace, but I think we'd see that fairly consistent, Brendan. Do you have a perspective on that as well?

Yeah. Manny, I think likely at least what's kind of our base case expectations is they'll probably be a comparable amount in the quarters at least as we've kind of laid out the expectations for 2021. So I don't think we expect a major snap back in terms of net effectives or lease terms extending out, but we will see how that plays out and that's part of the reason why we have a range of possibilities in our 2021 outlook.

Great, thanks all.

Our next question comes from Jamie Feldman with Bank of America. Please proceed.

Thank you. Good morning. So I guess, sticking with the '21 outlook, maybe if you could just talk us through how you got to your base case general assumptions and maybe where there is meaningful room for upside or potentially downside, the key potential drivers that would really move numbers?

Yeah, Jamie. I'll start maybe turn it over to Mark or Brendan. I mean, look, obviously, the base cases we started really it's no different than any other year, it's a sort of a bottoms-up from a leasing standpoint so we hit that. And this year is, look it is a little more difficult on the OpEx side just given COVID, last year was not a normal year on the OpEx side on the parking side. So it was virtually everything we do is bottoms up and drilling down and building-by-building, line-by-line on the budget. So that's sort of just an overview and then Brendan, do you want to run through sort of that?

Sure, Jamie. Yeah, I mean as we tried to lay out in the press release, I think we took a fairly conservative view with respect to OpEx, I think OpEx, the increase in OpEx is not linear to the increase in utilization of the buildings and so that's why we saw at the midpoint, about a $0.06 headwind in 2021 versus 2020 even though we don't expect utilization to improve significantly until the back half of the year and I would say that general outlook with respect to utilization mimics the leasing assumptions that we have in our outlook range. So we don't have, we don't expect a lot of lease up to happen and what's likely to happen for us and occupancy is we will probably have occupancy dip in the first quarter, that is a normal seasonal pattern for us and then often what happens in a normal year as we make that back up in the remaining three quarters of the year. This year, we think that it will dip a little bit and then probably not make nearly as much of that back as we often do in a normal year.

Okay. Okay, that's helpful. And then as we think about sublease space that has been rising in some of your markets, as well as some of the markets we hear about where it's really spiked, can you just talk about how much you think that space will impact market conditions and economics going forward and how much you think is going to come right back off the market as things reopen?

Sure, I'll start, maybe Brian can jump in and add additional color, obviously sublease space, I think it's rising and maybe at all but a couple of our markets, we've seen some sublease space was competitive, we in fact over the last 9 months we lost a couple of deals to sublease space, but at the same time, not all sublease space is created equal. Some have short terms; the lessor may not provide TIs; there are no renewal options on most of this stuff. We've actually even heard from brokers that companies are just putting it out there because they're not at work right now anyway. So they're just putting it on the sublease market to see if there's a taker, but I think the company is actually going to need it when they come back to the office. Look, I think the other issue is the creditworthiness of the sub-landlord is also a question these days, we've heard a little bit about the sub-tenants are worried about what if the primary tenant goes bankrupt, what's going to happen to their rent, and all of that. So again, while there is definitely some competitive sublease space, not all of it is. So how that plays out is sort of building-by-building, sublease by sublease, but I think some is competitive, some is not.

Hey, Jamie, Brian here. Good morning. To Ted's point, it's kind of a broad spectrum just to give you some bullet points. Richmond and Pittsburgh total sublease space was down, in fact JLL's calling for 46% of Richmond sublease to be absorbed in the first half of '21. Atlanta where it might look like a large nominal number, Cumberland, Buckhead, Midtown sublease space is all down. The sublet space comes through interesting handcuffs too in terms of who goes in there, is the sub-lessor ready to write a check for TI or not and I think a lot of it is opportunistic, we haven't seen it drag any fundamentals down yet in terms of competitive, just across the board, maybe anecdotally one or two, but it's obviously something we are tracking daily in fact.

Okay, that's helpful. I mean, are there certain markets you're more concerned than others?

I don't think, I don't think so, maybe a quarter or so ago we might have said, look, Atlanta, it looks like they have a lot of sublease space and then you start seeing it disappear in the sub-markets, you look at Highwoods portfolio alone our sublease space within our portfolio has gone down in Atlanta and in Pittsburgh, in Richmond, I think we're looking across the board, our previous markets that were and continue to be a lot of the areas of inbound activity Atlanta, Nashville, Raleigh, Tampa, that's also where we're watching the sublease space grow and compete.

Okay. And then finally, you had mentioned solid interest for 5332 Avion & Midtown West, can you just talk about what that pipeline really looks like and I guess throw Virginia Springs into that mix as well?

Sure, Jamie. A couple of things if you look at those two Tampa assets, we just finished construction of repositioning of Avion and so it wasn't really even available to be seen and now that is kind of just kind of shiny and renewed, there's been a lot of great interest and there's three hotels right next to it, there is a world of beer that's still pretty popular. So we're getting some good traction there plus, you've got Fanatics in the building, showing that being used and it's a very kind of young and exciting company so it definitely shows well. Score to Midtown, not to experience over my 25 years working in this kind of complicated mixed-use developments and what's so key is delivering enough critical mass at once to kind of create that they are there and that's one thing that Midtown is actually doing. So the two hotels opened up right before the Super Bowl, the restaurants are finishing up and so Midtown hasn't even really been open for people to experience that live-work-play aspect of it. Now that we have the elevator work and we can take people up on a hard hat tour, there is a lot of folks coming now and so we're moving the marketing center into the building from a trailer and so that is real and having experience like this in other markets and other projects, once it's actually open and people can walk the streets and go to Shake Shack and then catch a concert in the park, it will really get its sea legs under it. Just as a reminder, Midtown is delivering in the second quarter of this year. We don't yet have underwritten it to stabilize into the fourth quarter of '22 and so, to your point on Virginia Springs and Brentwood and Nashville that just recently delivered and we've kind of projected that to stabilize in the third quarter of '22 and its sister building Virginia Springs I, as you know is full next door and so those two buildings coming together now have a whole set of outdoor amenities, we're pursuing some additional certifications for that building that will be sharing with the market and so it's the best-in-class building in the entire 6.2 million square feet Brentwood submarket. So now that you can actually show people the space, get them out there, the team—all teams in Tampa and Nashville have been very busy with tours and inbound interest in those two or three assets actually.

Okay. So you're saying Virginia Springs is seeing a similar uptick in interest as the other two you mentioned?

I think so. I think it's different; Brentwood is a different submarket, very suburban driving surface part, stable kind of submarket, and then Midtown is a very shiny and new dynamic West Shore market and so it's a little different vibe in Brentwood, but we also have some bigger users who could take a couple of different floors. So I think it's different, but I, we're happy with the activity that's occurring right off the bat in '21.

Yes, so Jamie, looking at the prospects sheet we've got about 280,000 square feet of prospects, some of those are sub-sects as well right now with people that are touring with the brokers that have asked for brochures, information and pricing and all of that. So it's a pretty solid list just given that we're still in the pandemic and a lot of companies, especially the bigger companies being alluded to aren't making those types of decisions yet, just to get the inquiries, I think is good. In Tampa, our prospect list is right at 200,000 feet. Actually, most of those have actually done the hard hat tours and coming back for either second tours or asking for more information as well. So the activity has significantly picked up from what it has been over the last six months in both those assets again, as they get completed you can see what they're going to look like and what the surrounding areas like, so, I'm encouraged but again, I wouldn't say anything as a strong prospect yet, but we like the general activity.

Okay. So just a couple more questions if I can, just with regard to 2021, looking at the disposals target range you set forth, how much of that do you think is attributable to the conditions you described and how much is attributable to something more fundamental in your portfolio that's consistent with the market?

Our next question comes from Rob Stevenson with Janney. Please proceed.

Good morning, guys. Brian, can you talk a little bit more about your market expectations for 2021. Overall, the best markets in 2021 be the same from 2020, you're expecting any meaningful improvement or deterioration in any markets?

So, hey, thanks for the question. Rob, maybe taking that last part of the question first. No, I don't think we see any notable expected deterioration in these markets across the board, and those that were performing well pre-pandemic have seen accelerated inbound interest. And so, while there was a more of a natural flow. Looking at the great migration, I think we're seeing an increase and again, the economic developers are saying they've never been busier, the pipeline has never been more full, the prospects to Ted's point and suspects have been busy. So Atlanta has obviously seen a number of wins there, Microsoft isn't just growing by 1,500 people, in Midtown they're buying land to the west side, the emerging area, they're doing a cloud computing center south of town. Nashville, we're seeing lots of inbounds from the West Coast and Chicago folks coming in through our kind of different fields as we have out there and then obviously Raleigh with the life science and technology inbounds. We're talking billions of dollars of new investment, some that probably aren't even getting above the fold, I mean, ApiJect vaccine is building a Gigafactory, a $800 million investment, it's a million square foot facility here in Raleigh, it will have 650 jobs, they will be able to trade 15 different drugs simultaneously, 8 million a day of pre-filled injectors. I mean just stuff like that is happening in Raleigh through the pandemic. And then look at Tampa, Tampa winning Pfizer's interest in an investment of over 100,000 square feet and that's can be understated in terms of Tampa as now joining kind of a lead company in this country of winning with kind of the economic development and competition.

Okay. I mean I guess as part of that, I mean, which markets, do you have that are expected to be at or above the sort of 5% high-end same-store NOI growth range and which markets are going to be below, sort of 3% as we start thinking about the contributions to earnings in 2021?

Hey, Rob. It's Brendan. Yeah, it's probably from a cash perspective, which is where we provide the outlook, I think it's going to be a little bit more asset-specific associated with some of that conversion of straight-line rent to cash rent. So I mentioned 5332 Avion probably be the largest example of that. Also, another asset in Tampa, where there is straight-line rent that will convert to cash in 2021 compared to 2020, Atlanta has a couple of assets that are in that category as well. So those will probably be the major ones that I'm sort of running down the list here, but it will be a little bit more asset-specific, then it would be necessarily driven by market dynamics.

Okay. And then last one from me. How are you guys thinking about the remaining JV assets, are there more buying opportunities in there, is it a source of dispositions in 2021 there continue to just hold on. And can you remind me if any of the JVs are coming up on a sunset?

Sure. This is Ted, we've really only got five buildings left in JVs and three JVs we still have, just to remind you what they are we've got a three-building JV with our customer in Richmond and that's not in data on that one. We've got a JV on the Midtown development project as well in Tampa. So that's a second JV and the third is, we still have a 50-50 JV with a local partner in Kansas City, I'd say, if there is any of the three, the Kansas City, just given we've sold the Plaza will be one that we would exit out of, but unlikely from a buy perspective down the road. Obviously, we're going to want to own 100% of Midtown Tampa and that's provided for with our development partner, but other than that, Richmond we bought those assets, but it's again the JVs that no time soon probably going to unwind that.

Okay, thanks guys. Appreciate it.

Our next question comes from a Dave Rogers with Baird. Please proceed.

Hi guys, thanks for all the information so far. Brian maybe wanted to go to some of the expirations and the renewals that you're doing. One that you mentioned, I think over 100,000 square feet coming up here in the near-term if I remember you had a 350,000 square-foot maybe rolling out, is that number growing, changing, evolving? And then maybe a second more qualitative question on the expirations and renewals, are you having discussions for swing space, do people want to redo their space or are those discussions happening or is it just hey, I'm contracting, I'm expanding, I'm exiting without a really repurposing of the space?

Hey Dave, it's Ted. I'll maybe start out and Brian can jump in. In terms of the exploration, we have remaining for this year, there is a 75,000 square feet that's at the very end of the year in December, December 1 actually and they are still a prospect to renew, it would be a downside that they renew, that's not COVID related downside, that's something we've known has been out there for a while and then we've got really two, one of the '50s is in September that's likely a downside. We think we've got a decent chance of renewing them for one floor and then we have another 48,000 that we just left on February 1, and we've already backfilled about 9,000, so those are really the last remaining three we've got for this year that are in that side. After that, it gets down to about 35,000 feet or so. In terms of swing space to renew it to redo their space, we really have just not seen much of that yet; companies are still holding back the slide and what they're going to do. The small companies, most of those so it's already in hard wall offices, the density is not very great anyway so they're not going to redo, the bigger companies that are have more dense space, they are still figuring it out. While they don't want to spend money yet against the same thing we've been seeing for the last nine months, they are waiting to get their employees back, they are certainly planning behind the scenes but there hasn't been any inbound calls for us to help give them capital to redo their space or things like that.

Hey, Dave. Just to kind of not to contradict what Ted said, but there are a few that are not in this space now working from home that sees this as an opportunity to naturally do work in their space and not necessarily prepare redo and spread out but it's time, they've been in this space for a while, it's time to upgrade and reduce. So we have seen some folks being opportunistic and said hey, right now we don't have to go through the nightmare of kind of redoing our space, while we're in it. And so I think some folks are realizing there is an opportunity to do that.

That's helpful, thanks for that. And maybe Mark or Brendan it looked like there was maybe a million-and-a-half or so of lost revenue whether bad debt or straight-line rent write-off in the fourth quarter. Can you confirm, kind of where that was and then what's the expectation in your guidance for 2021 for any kind of bad debt or losses, are those largely out of the mix at this point?

I'll start with that, I think Mark is confirming that fourth quarter number, that sounds about right, but I think we'll give you a confirmation on that number. In terms of '21 expectations at least, call it midpoint of the outlook is more of a normalized year. So it would be more comparable to 2019 as opposed to 2020 and 2020 wasn't a year that was I would say dramatically different from a straight-line rent write-off perspective, but it was a little bit higher than normal to the tune of call it and maybe $3 million to $4 million higher than a normal year. I think for 2021, we expect it to be back in line with the 2019 levels than prior years.

Yeah, Dave. The only thing I'd say additive, as you see, we did have $1 million, you're correct on that. We did have, as you know amenity co-working and some amenity—retail amenity customers that we had some write-offs during the year, but our collections will continue to be really strong, obviously the 99 plus percent numbers we've quoted to you. Our watchlist doesn't really have any material risk on it. So we obviously have a watch list process that we go through every quarter. So overall we couldn't be happier about the collection and Brian, the divisional folks have done just a great job of staying after all this. So we feel really good about where we are including the collection of the deferrals. So from a credit and collections perspective, we couldn't be happier.

And Mark, maybe let's finish up with you. I think in your prepared comments you said that the severance in the fourth quarter was unexpected or something along those lines, anything there related with a development. Was it just kind of leaning out with COVID, broad color there would be helpful?

Yeah. Listen, as everybody kind of prudently manages the business, we obviously earlier in the year had some of the impact of the market rotation plan of getting out of Memphis and Greensboro, but we just look for efficiencies all across our business. We've obviously had less travel, less activity, less showings, all those things that have kind of impacted our business and so we did make some adjustments in the workforce and took that severance charge, we obviously didn't have that in our outlook. So that's kind of how we've talked about.

Okay, great. Thank you.

Sure.

Our next question comes from Venkat Kommineni with Mizuho. Please proceed.

Hi, good morning. Just a few quick ones. Last two quarters, you guys have mentioned that utilization has tended to be higher among smaller tenants versus larger, if you had to break that out, what do you think that utilization figure is for both segments?

Great question. I think I'm not sure, I'd break it out by market, but I don't know—is it 50%, 18%, something along those lines, very few large companies are coming in or if they are it's a skeleton crew. One big example for us is Charlotte where we've got the Bank of America as a large customer there as well and accounting firm KPMG. They have got skeleton crews and the big large customers that we've got a couple of smaller firms also in the building, they are back in the office. So I think it just depends on the large company and the mix we've got, but I'd say somewhere in that range.

I might add on that, it feels like 100% of the law firms are back in and accounting firms and so they've been busy and working through non-stop.

Okay. And of the 100 to 150 potential dispositions in 2021, how much of that is part of the market rotation program? I think you mentioned in the prepared remarks there was a building in Memphis, four property parking in Greensboro, just wondering with that kind of dollar figure it looks like?

Sure. So we sold all of those of last remaining five buildings, let's call it $90 million to $100 million, so that if we sold all that, that gets us close to the bottom end of the range, so our midpoint of our range does include a few assets that are outside of those but depending on, again it depends on pricing and all of that is with respect we sell all of the remaining Greensboro and Memphis assets.

Okay. And I apologize if I missed this in your prepared remarks, Brian, but on rent deferrals, how much do you expect will be repaid in 2021, should we expect around $3.5 million based on 5.5 deferred and $2 million repaid so far?

Venkat, it's Brendan. I'll take that one. It's probably on a net basis going to be $1.5 million to $2 million. It's a net positive cash that will be repaid in '21. There is a little bit of nuance kind of into some of those numbers because there are some customers where we provided temporary rent relief based upon percentage of sales and so there could be some additional deferrals that happen in '21. So the net impact is about $1.5 million to $2 million positive on cash versus GAAP in '21.

Hey, Brendan. Maybe to add and not to be overly optimistic but prior to the Thanksgiving spike, we saw a number of those say restaurants or folks on that percent rent actually start to get a good amount of business and get close back to their contracted rent. Obviously that kind of hit the wall a little bit into the end of the year. So that might be an area that we continue to look for as people return to some kind of normalcy.

Great, thank you.

Our next question comes from Vikram Malhotra with Morgan Stanley. Please proceed.

Thanks for taking the questions. Apologies if this was answered, I've jumped on late. Just sort of thinking of the potential rebound like you alluded to sublease space potentially coming down in the back half, these JLL highlighting that and just still a decent amount of interest in terms of the pipeline. I'm just wondering as you talk to your tenants or potential tenants any insights into kind of their posture in terms of their ability, their desire to grow and where specifically in your markets are new tenants that may be considering relocating from the cost growing in a post-pandemic world. So sort of in a work-from-home environment that may persist in a hybrid way, which seems to be what we're hearing from a lot of corporates? What are you seeing specifically in your current tenant base and then new tenants what type of buildings or submarkets are they considering?

Pardon me, sir. We cannot hear you at this time.

I'm sorry.

Is it better now?

Yeah, I'm sorry, I think it was on our end. So what we're hearing from our customers first and foremost, we need to get them back in the office but what we're hearing is ready to come back on the offers are ready to get their employees back in the office and they're not going to work from home companies is what we're hearing from a majority of our customers. So what that looks like when they're not going to be work from home company, are they're going to go to a hybrid model, the hub-and-spoke, I think it's still too early to tell, I think we do, what we are hearing is there is going to be more flexibility, right. So customers are going to have some of their employees and some of their departments work at home for some of the time. But again, what that looks like are they going to have a signed seating, they're going to have hot desk we just check in and check out over time, I think it depends on the company, the industry, the department that our customer is using the space for. So I don't think there's any one size fits all or one solution that fits for all of our customers at all by any stretch. In terms of the locations what I think, I mean BBD is like they want to amenitized submarkets is what we continue to hear, it doesn't necessarily have to be urban markets, right. I think the suburban for being cut down on their employees' commute, so we can provide some of the flexibility that way, you're seeing a little bit of that, but not a lot yet again, I think it's early, it's going to take a while to play out. In terms of the customers, you say prospects that and inbound and it's sort of the same thing, right. They're looking at our markets for a reason, it's all the reasons we've talked about, it's low cost of living, high quality of life, adjacent to the highly educated workforce and so forth and so on. And once they find that market, they want to be in amenitized markets whether it's urban or suburban. So I think it's very similar, whether it's an inbound or existing customer base.

Got it. Okay, that's helpful. And then just on the debt stack sort of going forward, just sort of wondering your ability, looking out a couple of years, your ability to maybe get at some of that debt. Maybe you alluded to some of this in sort of 2020, but just looking forward, any plans to potentially kind of get a little ahead of kind of some of the majorities?

Yes, Vikram, this is Mark. We're in a strong position regarding our debt maturity schedule. We have a $150 million bond, part of which was paid in 2020, and we will fully pay it off by April 15. There are no maturities after that in 2021 or 2022; we have a bank term loan with a floating LIBOR rate, mostly low-cost with only a small fixed portion, and a bond maturing in 2023. Therefore, in the immediate future, we don’t see any significant opportunities for refinancing economically. Overall, we have a good number of open years after these maturities, so we’re in a solid position concerning our debt.

Okay, great, thanks so much.

There are no further questions at this time.

All right. Well, thank you everybody for being on the call this morning, and thank you for your continued interest in Highwoods. And we look forward to talking to you next time. Thank you.

That does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your line. Have a great day, everyone.