Good morning, and welcome to the Highwoods Properties Earnings Call. This conference is being recorded on Wednesday, July 28, 2021. I would now like to turn the conference over to Mr. Brendan Maiorana. Please proceed.

Thank you, operator, and good morning. Joining me on the call 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. 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 including the ongoing adverse effect of the COVID-19 pandemic on our financial condition and operating results. These risks and uncertainties 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 forward-looking statements. With that, I'll now turn the call over to Ted.

Thanks, Brendan, and good morning. Let me start by saying we continue to see an increase in more normalized activity across our portfolio and markets. It remains difficult to predict the progression of the pandemic and economic recovery, particularly given the concerns over variants. The leasing and parking are both recovering nicely. Utilization rates have risen throughout the second quarter and are currently around 40% across our portfolio, up from 30% last quarter. Based on discussions with our customers, we expect a meaningful increase in the utilization after Labor Day. As I mentioned on our last call, leasing activity in the first quarter was relatively solid, especially for new deals. This trend accelerated during the second quarter, we signed 899,000 square feet of second-generation leases, our highest total since the fourth quarter of 2019 and included 323,000 square feet of new deals. This is above our long-term average of 250,000 square feet for new leases. We signed 52 new deals, also above our long-term average and our highest quarterly count of new leases since 2014. Obviously, the strong leasing activity in the quarter hasn't yet shown up in our occupancy stats where we ended the quarter at 89.5% across the entire portfolio. This leasing will benefit us in future quarters as our new customers move in. With the improving macro environment, especially in our markets, we're optimistic going forward. Rents on signed leases continue to be a little softer than they were pre-pandemic, but we believe are holding up reasonably well considering the challenges over the past 18 months. For the 899,000 square feet of second-generation leases signed during the quarter, rent spreads were down slightly at negative 0.6% on a cash basis, while up 8.9% on a GAAP basis. Overall, since the start of the pandemic, net effective rents across our markets are down, on average, 5% to 10%, primarily as a result of higher concessions. Fortunately, net effective rents have stabilized in the first half of the year. Further, we continue to see a migration to higher-quality buildings with well-capitalized owners, which plays to our strengths in our results. We delivered FFO of $0.93 per share in the second quarter. Our same-property cash NOI growth was very strong at 11.1%, which benefited from the repayment of temporary rent deferrals agreed to during the first months of the pandemic. Excluding these repayments, same-property cash NOI growth would still have been a robust 5.3%. As illustrated in last night's release, we have updated our 2021 FFO outlook to $3.62 to $3.73 per share, up $0.075 at the midpoint from our prior outlook. At the midpoint, $0.03 to $0.04 of the increase is due to our improved operational outlook and $0.04 is from the anticipated net impact of our planned investment activity which consists of the PAC acquisition and the sale of an additional $207 million to $257 million of existing non-core assets by year-end. In addition to the increase in our FFO outlook, we also raised our same-property cash NOI growth outlook to 4.25% to 5.5%, up 50 basis points at the midpoint, and we have increased the low end of our occupancy outlook. Our new range is 89.5% to 91.5%. Moving to investments. As you all know, we have agreed to acquire a portfolio of office assets from PAC and accelerate the sale of $500 million to $600 million of non-core assets by mid-2022. We're excited about doubling our presence in Charlotte and entering the South Hills BBD, adding to our leading position in downtown Raleigh and entering the North Hills BBD in Raleigh. We closed 1 disposition in the quarter, a 100% leased Preserve VII property in North Tampa for gross proceeds of $43 million. We have numerous other non-core properties in various stages of the marketing process. Our disposition plan is tracking our expectations, both in terms of pricing and timing. And we believe we are well positioned to meet our target of $250 million to $300 million of non-core sales by the end of 2021, including the $43 million already closed. As I mentioned, while we are highly focused on closing the portfolio acquisition from PAC and executing on our non-core disposition plan, we continue to assess additional investment opportunities. Outsized job growth and population growth continue to fuel interest in Sun Belt markets, which has caused pricing for high-quality assets in the BBDs of our markets to remain competitive. Rest assured, we will continue to be disciplined allocators of capital and seek only those opportunities that we believe provide healthy risk-adjusted returns. Turning to development. Our pipeline is $394 million and 78% pre-leased. Our $285 million Asurion project in Nashville is on time and on budget and will deliver in the fourth quarter. At Virginia Springs II, our recently delivered project in the Brentwood BBD of Nashville. We signed 2 leases totaling 20,000 square feet during the quarter, which brings the lease rate to 50%, 5 quarters ahead of pro forma stabilization, and we have strong interest in additional space. Finally, at our office project in Midtown Tampa. While we didn't sign any leases during the quarter, we have strong interest from a number of prospects and remain confident in the long-term outlook for the development. The overall Midtown mixed-use project is just now finishing up with additional retailers opening soon. There is growing energy around the project, whether from prospective office users, new residents, or customers shopping and dining. In addition, we are starting to see increased interest from prospective build-to-suit and anchor customers. We believe this is another sign of a return to healthy office fundamentals across our markets. We have up to $250 million of potential development announcements in our 2021 outlook for the land bank that can support more than $2 billion of future development, and we hope to announce new projects later in the year. Two other items before I turn the call over to Brian. First, we announced a $0.50 quarterly dividend last evening, which equates to an annualized amount of $2 per share. This represents an increase of 4.2% over the prior amount. It's our fifth dividend increase since the start of 2017. We've long stated that our cash flow continues to strengthen, which provides strong dividend coverage even with our higher payout. Second, as we also announced last evening, Mark plans to retire at the end of this year. Mark has been an exceptional contributor to Highwoods over the past decade, first as a Board member and second as our CFO. I know I speak on behalf of the entire Highwoods family when I say it has been our privilege to work alongside Mark. Under Mark's stewardship, we have maintained a fortress balance sheet, continued our long-standing practice of candor and transparency and further strengthened and streamlined our already strong financial reporting and accounting processes. We wish Mark, his wife Kelly and the rest of the Mulhern family the best as he embarks on his retirement. I'm thrilled that Brendan will assume the CFO role upon Mark's departure. As you all know, Brendan has been a key contributor to our leadership team since his first day at Highwoods in May of 2016, and he has been deeply involved in all of our strategic investment and financing activities. We expect a seamless transition.

Thank you, Ted, and good morning, everyone. With 2 quarters behind us, it's become apparent that the portfolio resiliency we highlighted last quarter is proving to be the foundation from which our team is delivering solid results. Our markets are open for business. Our customers have returned or are returning to the office and most customers see the workplace as an important tool in delivering results. There are signs across the portfolio that give us optimism for the future. From in-office utilization rates in Orlando that have climbed over 60% and Nashville's Airport surpassing 2019 passenger levels to one of our downtown Pittsburgh restaurants achieving sales 20% higher than at the same time in 2019. A couple of these anecdotal signs of life with major job announcements made since the start of the pandemic that represent 50,000 new jobs and over $7 billion of direct investment, and there's an undeniable momentum and a return of optimistic sentiments permeating our markets. With regard to our customers who received rent deferrals during the depth of the pandemic, over 80% have been repaid on schedule. For those restaurants repaying via percentage rent, the majority should be back in the black early next year. With these needs-based accommodations playing out as underwritten, this is hopefully the last time we need to discuss this subject on a call. As Ted highlighted, leasing accelerated in the second quarter with Raleigh, Atlanta, Nashville and Richmond representing 75% of our total volume. Occupancy was relatively flat sequentially and in the quarter at 89.5%. And as stated last quarter, we expect occupancy to remain steady throughout the third. Given our strong leasing activity and positive overall market fundamentals, we are confident this will improve in future quarters as reflected in the midpoint of our updated year-end occupancy outlook. Now to our markets. After weathering the pandemic, Atlanta, Charlotte and Raleigh posted positive net absorption for the quarter. Raleigh led the pack this quarter with 321,000 square feet signed. Occupancy in Raleigh decreased slightly from last quarter ending at 90.6%, with market rents up 4% and office employment growth up 4.5%, both on a year-over-year basis. And all of this is before the impact of recent announcements by Google and Apple that will add thousands of new jobs to the market. In Nashville, we signed 106,000 square feet at the end of the quarter and it was 94.1% occupied. Our 111,000 square foot Virginia Springs II development project is now 50% pre-leased, and we have solid interest in the balance. This project is scheduled to stabilize in the third quarter of 2022. We remain on schedule and on budget with Asurion's global headquarters and look forward to placing this $285 million asset into service in the fourth quarter. As noted earlier, Music City is back in business with travelers outpacing 2019 levels, including 350,000 downtown for the 4th of July. On the job front, positive momentum continues in this city where Oracle has now closed on approximately 60 acres for their $1 billion campus where they plan to hire over 8,500 new office-using employees. And Amazon has commenced construction on the second tower for their operations center of excellence, a sign they expect to continue hiring workers in the city to fulfill their 5,000 job goal there. Moving on to Atlanta, where our team signed over 150,000 square feet of leases in the quarter. Year-over-year, office employment growth was 6.1% higher than the national average of 5.5%. The Atlanta market experienced positive net absorption in the quarter, while market rents dipped slightly, down less than 1% year-over-year. Not to be outdone by its big arrivals, Richmond leased over 98,000 square feet for the quarter and is off to a great start in the third quarter with interest from tech, insurance and construction prospects. Overall, we're encouraged by the strong new leasing activity our team delivered in the first half of the year, and we're off to a solid start early in the third quarter with several new leases already signed and good prospect activity across our markets. Our markets and portfolio continue to not only show their resilience, but are centers for activity and growth. While we readily acknowledge that how and where people can and will work has been influenced by the forced experiment we've all been subject to these past 18 months, we are more enthusiastic than ever about the power of place in cultivating talent and culture, solving problems and achieving great things. It is through our workplace making efforts that we enable our customers and their teams to achieve together what they cannot apart. And because of this, we remain bullish on the days ahead.

Thanks, Brian. In the second quarter, we delivered net income of $59.3 million or $0.57 per share and FFO of $99.5 million or $0.93 per share, an increase from $0.91 in the first quarter. The quarter included the $43 million sale of Preserve VII, which did not have much of an impact on our financial results since it didn't close until late in June. In other words, this was a relatively clean quarter without unusual items. Our results benefited from a full quarter contribution of the forum where we acquired our partner's 75% interest for $138 million incremental investment in January and included a full quarter of NOI from our GlenLake Seven development. As a reminder, GlenLake Seven is our $44 million, 125,000 square foot development in Raleigh that is 100% leased and was delivered in March. In addition, we had higher same-property NOI growth. The combination of these items approximately $0.01 from net investment activity and $0.01 from higher same property income drove the $0.02 sequential increase in the quarter. Our balance sheet is in excellent shape. In April, we used cash on hand plus borrowings on our revolver to repay at par the remaining $150 million of notes that had an effective interest rate of 3.36%, 2 months earlier than the stated June 2021 maturity. We funded $55 million of earnest money deposits for the planned acquisition of office assets back in the second quarter and deposited another $5 million subsequent to quarter end. This leaves approximately $200 million of cash required to initially fund the remaining cash portion of the purchase price. We have multiple sources of available liquidity to satisfy this obligation, including a 6-month unsecured $200 million bridge facility that we expect to obtain from JPMorgan. Nearly $600 million of remaining capacity on our $750 million revolver and $43 million of 1031 exchange funds held in escrow from Preserve VII. Said differently, once we close the PAC acquisition, we will still have plenty of liquidity available for potential future opportunities. Further, we are 87% funded on our $394 million development pipeline, which leaves roughly $50 million remaining to fully fund the 3 remaining projects, and we have no debt maturities until November 2022. During the quarter, we issued a modest amount of shares on the ATM at an average price of $46.11 per share for net proceeds of $6.8 million. This is our first issuance since the second quarter of 2017. ATM issuances remain one of the many arrows in our quiver, and we continue to believe are an efficient and measured way to fund incremental investments, particularly our development pipeline, on a leverage-neutral basis. Turning to our expectations for the rest of the year. We've updated our 2021 FFO outlook to $3.62 to $3.73 per share, with the midpoint up $0.075 since April and up $0.095 at the midpoint from our original 2021 outlook provided in February. Rolling forward from our prior outlook in April, we have increased the midpoint $0.035 on an apples-to-apples basis or up $0.06 at the low end and $0.01 at the high end. This improved operational outlook is driven by higher same-property NOI and increased contribution from development properties. In addition, the updated FFO outlook includes the anticipated impact from the planned acquisition from PAC and our plan to accelerate non-core dispositions of $250 million to $300 million by the end of the year, including the sale of Preserve VII that closed in the second quarter. This net investment activity is expected to have a $0.02 to $0.06 positive impact on 2021 FFO. The high and low ends of the range are largely dependent on the timing of the PAC acquisition and planned dispositions. In addition to our improved 2021 FFO outlook, we also increased our same-property cash NOI growth outlook to a range of 4.25% to 5.5%. That's up 50 basis points at the midpoint. Since the pandemic, we've regularly commented on parking revenues. And while we're still tracking well below 2019 levels, we have seen an uptick in parking over the past couple of months, contributing to our improving outlook. In addition to solid FFO, our cash flows continue to strengthen, something that we have often highlighted but where it's clearly materializing in our reported results. Our expectation for continued cash flow growth is being driven primarily by delivery of our development projects and continuous recycling out of older, more CapEx-intensive properties into newer, more capital-efficient properties. As Ted mentioned, this improved cash flow outlook helped drive our decision to increase the quarterly dividend 4.2% to an annualized rate of $2 per share. Finally, thanks to all of you on the phone for your patience and support during my time here at Highwoods. I hope to see many of you before I go at the end of the year. As you all know, Brendan is exceptionally well prepared for this role and will serve all Highwoods constituents well. The future here with Ted, Brian and Brendan at the helm is very bright, and I wish them all the best.

Our first question comes from Manny Korchman with Citi.

Brendan, maybe it would be helpful just so we can figure out what the trajectory is going forward here. If we could talk about sort of where your lease rate is versus your occupied rate? And whether you're seeing any difference there in the spread between those two versus history?

Yes, that's a good question. While we don't disclose our lease rate, I can say that our current lease rate is higher, and the gap between our lease rate and occupied rate is wider than it has been historically. The leasing activity we completed in the second quarter is contributing to this lease rate, which has boosted our confidence to raise the year-end occupancy range. Although we don't share the specific lease rate figure, it plays a significant role in our decision to increase our year-end occupancy target by 50 basis points at the midpoint and 100 basis points at the lower end. This leasing activity is reflected in our future outlook, but it wasn't evident in the second quarter results.

Great. And then the other question I had was just on the Atlanta market. It looks like it has been slow to recover occupancy there. Just what are you seeing in the broader market? And is that just a timing thing? Or are you a little bit more worried about Atlanta?

Manny, it's Ted. I'll start, and maybe Brian can jump in. Yes, look, I think we've had some expirations in our bucket assets over the last few quarters or whatever. But we're still bullish, incredibly bullish on Atlanta. Job growth there has been very strong. Obviously, pretty broad-based as well. The technology companies get a lot of the headlines. But there's been many more inbound opportunities. So it's a competitive market right now. There is an elevated vacancy, but we feel very confident long term, we have the right assets, and we're in the right submarkets.

Manny, Brian here. Not much to add other than Atlanta is the biggest of all the markets. It's probably the most complex in terms of the kind of the BBDs within it. And many of those could stand on their own nationally. And so we are seeing tremendous growth from some of the bigger movers that we've seen even into the Central Perimeter on tech. They're just now starting to move in and turn lights on. And so it is kind of a rule of thumb on economic development that one job at a minimum creates another job. I'm not saying they're necessarily office occupying, but we definitely do like the momentum. Atlanta does have some great things going forward, and we do see things improving there.

Next, we have a question from the line of Jamie Feldman with Bank of America.

First, congratulations to Mark and Brendan. We'll miss you in the REIT sector but look forward to seeing what you do next. Brendan will do a great job.

Thank you, James.

Sorry, go ahead.

No, thanks. I appreciate it, and I look forward to catching up before I go. Really appreciate it.

Absolutely. We've noticed that some of your peers in the office market are expressing more willingness to engage in the value-add acquisition market. What are your thoughts on this? You mentioned having a substantial amount of capital available. How open are you to starting to purchase properties with vacancies in your markets?

We are absolutely looking at everything that's in the market. Our pencils will be sharpened, we're underwriting some different actions that are out there. So again, what's been nice is to be able to see the activity we're seeing in the markets. Just having the boots on the ground with our local leasing teams seeing the momentum and the activity in the market gives you more confidence if we want to go out and buy the vacancy. So we continue to work through that and update on a quarterly basis. And we're open for business that we can find the right opportunity that's priced appropriately from our standpoint.

Okay. And I guess, along the same lines, I mean, now that you're starting to see the signs of coming out of the pandemic, if you think about your market exposure heading in versus where it is today or maybe where you think you want it to be given some of the changes you have seen in terms of tenant demand and where you've seen more growth than others. Do you have any interest in changing your portfolio exposure at this point?

When we complete the PAC acquisition, we will have increased our presence in Charlotte from 0% to 6% or 7% in approximately 18 months. We are excited about the developments we are observing in Charlotte and appreciate the exposure it provides. We believe there is potential for further growth over time. So far, our strategy has focused on acquisitions, but we also aim to pursue development opportunities in the future. In addition, we have a positive outlook on our exposure in Raleigh, Atlanta, and Nashville. The areas where we see the most activity correspond to where we have the most presence, and we feel that our current market mix is strong.

Jamie, Brian here. One of the other things we're doing is when we look at the existing portfolio and opportunities for those kind of value-add is an opportunity to bring in the mix of uses to leverage existing parking or structured parking with hotel and residential unions, and we have that. We've gone through some rezonings during this time too to enable us to do that. And so we see that to kind of to your question on the mix, we do see talent as really that currency that all of our customers are so focused on. And so they're communicating to us that the workplace is kind of core to their culture and core to creating this compelling position of growth and bringing the people back. So that's part of the look when we take a look at the existing portfolio and opportunities to add.

All of us answering your question. It's Brendan. What I would say is, I think, certainly expect a continued rotation of assets throughout the portfolio as we typically have. I mean the preferred transaction or the market rotation plan. Those are obviously large ones or similar to the Kansas City acquisition with purchasing Monarch and SunTrust a few years ago. But the normal cadence of non-core dispositions, $100 million to $150 million a year with recycling that into additional growth opportunities. I think usually expect that to continue. And I would say the pace of that rotation is unlikely to change going forward.

Okay. And then as you look ahead to your expiration even through '22. Are there any large move-outs at this point that we need to be thinking about?

Sure. Not really. The largest one we have is 322 is December 22, it's a 62,000 square foot expiration. And we do know they're vacating. But after that, it's less than 10 full floors. Even with expirations, we've got 50 that's mid next year, and then it's some 25 and 30. So not a lot of big expirations in the next 18 months.

Okay. And then you guys have a couple of unsecured, I think term loans expiring at the end of the year or at least the swap burns off. I'm just curious what your thoughts are on financing there.

Yes, the swap will end in January, but the loan's natural maturity isn't until November of 2022. I believe we discussed this in April regarding the expected proceeds from dispositions to finance the preferred acquisition. Since we can pay off the term loan early without a penalty, the plan is to use the initial proceeds from those dispositions to pay down the line and the acquisition bridge loan. Any additional proceeds, which we expect to receive in the first half of 2022, will likely be used to pay down the term loans, assuming there is nothing outstanding on the line, which seems probable. Yes, it depends on the amount of proceeds that come in, but those would both be available. When we announced the acquisition, we mentioned that it would likely take until the third quarter of 2022, possibly even the fourth quarter, to normalize the debt stack. There will be some challenges associated with when certain debts roll and the need for optimization, so expect some fluctuation in the debt stack throughout 2022. However, we anticipate that by the second half of the year, it should stabilize. We expect to have all the disposition proceeds in by then. The acquisition should close sometime in the third quarter, and our balance sheet should return to normalized levels by the third quarter of next year.

Our next question comes from the line of Rob Stevenson with Janney.

Can you talk a little bit about what you're seeing on the development side? Are you getting close to any development starts? Or could we see the pipeline essentially go to 0 when Asurion completes in the fourth quarter? How should we be thinking about that?

Sure. So obviously, our outlook for the year is 0 to 250. We've got multiple conversations going on right now in multiple markets, both build-to-suit and pre-leased, what would be a pre-leased development starts. So I think we're making good progress. These things just take time. And we've been in discussions with several for a long time. But I'm hopeful that we can be in a position for some announcements later this year.

And just maybe to pile on, we are seeing a number of customers again. This is kind of definitely talking my own book. But they see the workplace as a core component of their culture and creating a new place is an important component to compete against their competitors for talent. And so we've seen that pick up of companies looking to maybe move into new buildings, new space. And so that's part of that inbound development interest.

The other question regarding development is about the effective rents being lower than before. How do you see the yield on a development project you start today in light of current market pricing compared to pre-pandemic levels? Are you anticipating slightly lower yields, or do you think that, considering escalators and other factors, the yield on similar developments will remain about the same? How should we approach this?

Yes. So Rob, Brian, again. Great question. From our perspective, there's really kind of 2 ways to mitigate the escalation and kind of preserve yield. First, just to highlight, we do see escalations on costs kind of across the board. We're actively completing some complicated big projects across multiple markets right now. So we have real-time pricing with our GCs and selves, which is super helpful. So we're getting good information. First and foremost, we believe a lot of the cost escalation is a function of supply chain inefficiency and delays, everything from commodity raw materials moving through the system to even just HVAC being delivered. So we're looking forward to that leveling out as goods and materials began moving through the system. That being said, we don't see it going down. I'd love to see a construction price really go down, but we haven't really seen that over the last decades. Tongue in cheek, the good thing is we're not building anything out of wood. And so we're really looking at more of the more sophisticated material providers in GC. So coming back to cost containment on preserving the yield. A lot of folks are reevaluating right now because many are emphasizing their soft cost spend and keep going back to the GC community to get updated pricing. With less visibility into actually what we've built and when it will be built, GCs and subs have quite a lot of cushion and contingency in there. So what we've done is we've continued to advance design. We found that greater certainty equals greater pricing visibility and in some way savings. So we're actively finishing that as we move closer to get visibility there. Now on the revenue side, back to something I've already mentioned, the quality of the workplace is being recognized as a key consideration in competing and retaining talent. And so I think some of you before had to listen to me talk about this thing called the “workplace.” While Jones Lang LaSalle used it a little differently. Jones Lang LaSalle says a typical organization is going to spend $3 a foot on utilities, $30 a foot on rent, and $300 a foot on people. And so what we're seeing is that, that workplace that $30 a foot, if it's a key contributor to maintaining or attracting that $300 a foot, companies are happy to pay for it. And so we're kind of attacking it in 2 ways. Sorry for the long answer.

No, no, that's helpful. And then, Mark, you talked in your prepared comments about parking still tracking below 2019 levels. Where are you actually parking today in the most recent month or quarter tracking on parking and other occupancy-dependent revenue versus pre-pandemic?

Yes, Brendan can provide you with more specifics on the exact numbers. However, I would say we have around 40% occupancy in the buildings, distributed across various markets, with smaller tenants coming in sooner than larger companies. We've also seen good transient parking in some markets, particularly in Orlando, which has performed well. Overall, I would say we're on track with our original forecast. Again, I'll let Brendan share some numbers.

Sure. Yes, Rob. So we've done about $10 million year-to-date on parking revenue, and we probably think that will accelerate a little bit in the second half of the year because of the trends that Mark mentioned. So let's call it maybe in the second half of the year, kind of $11 million, which puts us at $21 million for the year. That compares to our original 2020 budget, which was about $26 million. So we're still down about $5 million and about 20% on parking revenue. We do like the trends that we're seeing and we're hopeful that those things will fully recover as we get past the next quarters, but still a little bit of a shortfall compared to where we were 1.5 years ago.

And Rob, Brian here. I might just add a little additional color just on the operational side. Those markets where our parking supports special events, say, Orlando next to the Dr. Phillips Performing Art Center in Nashville, had 350,000 people for July 4, and Pittsburgh that has things coming back to the plaza there, is driving transient parking in a way that might have even been higher than we might have had in 2019. So Florida is getting back right on track. Nashville, in some cases, outperformed in 2019. So we're feeling optimistic there.

And are there any notable expense savings that you're still realizing from not having tenants back at full occupancy that are going to dissipate as we go forward, which could offset some of those parking revenue gains?

Yes, there is a bit of that. You can see it in the trends we've observed both year-to-date and from a same-store and FFO perspective. Typically, the third quarter tends to be a seasonal low for us due to higher operating expenses. Additionally, as some tenants return to the office, this will also increase operating expenses. However, we believe the returning parking revenue will outpace the normalization of operating expenses, resulting in a net positive for us. Still, we anticipate some pressure on operating expenses as the year progresses with more people returning to their offices.

Okay. And then last one for me. What's the current expected timing for closing the Preferred Apartment acquisition?

We're getting close. It's a big transaction, very evolved, lots of moving pieces. So we're pleased with the way closing is going. The due diligence is obviously done. So we're on track to meet the timeline we've outlined and very confident it's going to close. There's a loan assumption we have to complete. So we feel good about it closing along the timeline we set.

And that 1 asset that they were trying to market that you may or may not acquire. Is that, at this point, likely to be acquired by you guys? Or is that likely to be sold elsewhere?

It's currently being marketed for sale. I think the way the process is going, it's going pretty well. So I don't know for sure, but I think there's a good chance it won't be included.

Congratulations, Mark and Brendan.

Thanks, Rob.

Up next, we have a question from Dave Rodgers with Baird.

Mark, thanks for all the help over the years. Good luck, and congrats Brendan. Well-deserved recognition for all your hard work. I wanted to start with Brian, if I could, on some of the leasing topics. Maybe 2 specific questions on leasing. The first I would say is it seems like given the larger amount of leases you signed or a number of leases that there's maybe a bend towards smaller lease signings? And do you think that's a function of what we expect to see going forward? Is that a function of your availability or the markets you're leasing in, if that's a possible takeaway? A second question on leasing would be the terms in the leases, are you seeing more lease termination options from tenants or earlier lease termination options from tenants? Any changes in kind of how that is unfolding here in the near term?

Dave, thank you for your questions. There are a couple of points to address. Generally, larger users are postponing their significant decisions related to returning to work, specialization, and potential relocations. We've observed this trend broadly. Aside from a few considering moves into new buildings a couple of years down the line, most are taking their time to assess returning their teams. This may not necessarily indicate future trends or apply to our entire portfolio, as we have a healthy mix of small, medium, and large customers. Regarding lease terms, it's interesting to note that this past quarter showed a marked increase in the length of deal terms. During the pandemic, we had about 28% to 30% of deal churn classified as short-term (2 years or less), which has dropped to only 9% this quarter. Now, as we head into the third quarter, average lease terms are exceeding 5 years, which is promising. While some clients are still delaying major decisions, there's a growing sense of confidence in seeking longer commitments. As for termination options, this is a key area for us because many customers invest significantly in tenant improvements. We need a certain rental period to recoup these investments. Therefore, any termination options we see are likely to be at least 7 years out, and there will be a full reconciliation for unamortized tenant improvements and commissions. We're not seeing short termination options. Some customers may have their occupancy tied to state contracts or other substantial agreements, and we aim to be good partners, but we also assertively manage these discussions.

Yes, Dave. We have a variety of assets available in the market. We have closed $43 million so far, which was for a single tenant asset, and we achieved exceptional pricing for that. The interest in single-tenant assets is very strong, and the pricing has been favorable, often surpassing our expectations. For our multi-tenant or value-add deals, which may have some vacancies, the pricing has aligned with our expectations. While the buyer pool for these is not as deep, there are still enough buyers to maintain a market. Overall, our programs are progressing well in terms of timing and pricing.

Yes, Dave, that's a good question. Just in general, I think that it goes to show just kind of the movement and the lumpiness by quarter. But in effect, what happened last year, particularly in the first half of the year, if you recall, we had a lot of strong leasing activity that occurred in late 2019, those leases generally commenced in the first half of 2020 and carried with them some free rent attached to it. So we're kind of anniversarying against some of that, which is driving that difference that you talked about and probably making the delta between kind of that cash and GAAP same-store NOI growth wider in the first half of the year. That will kind of normalize as we go into the second half of the year. And even in the second half of the year, we've actually got a little bit of a headwind from the deferral payments that we had in the third and fourth quarter last year compared to this year. So all those things are going to kind of balance out. But what I would probably point you to is last year, if we exclude the net deferral payments, we were up about 3% on our same-store pool. This year, our guidance overall, which includes the net deferrals is, let's call it, about 5% at the midpoint of the range. We've said that net deferral repayments are going to add about 125 basis points to that. So we're going to be in that 3.5% to 4% range, excluding the deferrals. And I think that's a pretty good trend line over those couple of years, which kind of negates some of the noise that happens from a quarter-to-quarter perspective.

And now we have a question from the line of Vikram Malhotra with Morgan Stanley.

Congratulations, Mark and Brendan for all the hard work; I really appreciate it. Brendan, to clarify, you mentioned the 2.5% to 4% same-store run rate, which we are historically familiar with. I'm not asking for specific guidance for '22, but considering all the leasing that has taken place and the increase in new leasing, can you provide some insight into the trajectory or any significant factors we should consider as we think about updating our models for '22?

Yes. While we are not ready to provide an outlook for 2022, I can share some insights on significant developments. We anticipate year-end occupancy to exceed our earlier expectations from the beginning of the year, which is a positive sign. However, I should note that some leases might involve incentives like free rent, leading to various factors affecting occupancy. Overall, we are optimistic about the occupancy trends for the latter half of 2021, and this should have favorable implications for 2022. It appears that there won't be many changes in the same-store pool for 2022 at this point. Therefore, I believe 2022 will be stable from that perspective, and the positive occupancy trends in the second half of the year should positively influence future quarters.

Okay. And then just one more. Clearly, the demand continues to pick up from tech. The job growth is pretty strong. I'm just wondering, if you look at Charlotte specifically, a market where you're clearly looking to expand further cyclically, there's a lot of supply that's not released and hitting the market. I'm just wondering what risks you're considering across some of your key markets?

Vikram, Brian here. I also serve as the lead for our Charlotte division. Charlotte is quite intriguing; a few years back, we had a couple million square feet under construction, and by the time it was completed, it was completely leased. We currently have another couple million square feet in progress, and we're receiving interest from companies outside the market looking to move to Charlotte. Recently, a fully speculative building in the south end was under construction but remained mostly vacant until USAA announced they would occupy around 100,000 square feet, relocating several employees from out of state. Nearby, at Legacy Union and Uptown, Robinhood has leased 50,000 square feet. This reflects the positive demand we see in Charlotte, with many inbound companies contributing to occupancy. There are essentially three submarkets for Class A offices: Uptown remains the largest and most prominent, South End is an emerging area adjacent to Uptown, and South Park is also significant. This makes for a fairly limited market within these submarkets, which we view positively. In Nashville, there's been considerable development, with about half occurring downtown, a lot of which was pre-leased. Interestingly, some speculative development started during the pandemic, something we haven't seen elsewhere. We're still optimistic about Nashville and traditional speculative development, but our involvement in downtown Nashville won't begin until 2025. We're also confident in our development projects around Asurion's headquarters. Overall, we're closely monitoring all ongoing construction and development, and demand remains robust.

I'll now turn the presentation back to our presenters for their concluding remarks. Thank you.

Well, thank you all for your interest in Highwoods and thank you for joining the call today. If you have any follow-up questions, please feel free to reach out to any one of us. Thanks again.

And that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines. Thank you once again. Have a wonderful day.