Good morning. And welcome to Highwoods Properties' Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today, August 3, 2016. And I would like to turn the conference over to Mr. Ed Fritsch. Please go ahead.

Good morning. And thank you for joining us this morning. Mark is out today with flu-like symptoms. And while he would much rather be here, we would much rather he stay at home, eat chicken soup and keep his germs to himself. In the interim, per Mark, Brendan Maiorana, our newly minted VP of Finance and Investor Relations will pinch-hit for Mark and then he'll join Ted Klinck and I on the call. I welcome Brendan to our team and to his role as our Vice President of Finance and Investor Relations. As a reminder, he joined us three months ago and comes to us from Wells Fargo where he spent the last 11 years covering office REITs as a sell-side analyst. We are thrilled to have him on the team as he brings a wealth of information and intellect. And as expected, Brendan has hit the ground running. The rookie will now lead us off with our standard preliminary comments. Brendan.

Thanks, Ed. Good morning, everyone. I'm excited to be part of the Highwoods management team and to be here on the other side of the table. 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 IR section of our website at highwoods.com. On today's call, our review will include non-GAAP financial measures such as FFO and NOI. Also, the release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Before I turn the call back to Ed, a quick reminder that any forward-looking statements made during today's call are subject to the risks and uncertainties. And these are discussed at length in our annual and quarterly SEC filings. As you know, actual events and results can differ materially from these forward-looking statements. The company does not undertake the duty to update any forward-looking statements. I'll now turn the call back to Ed.

Thanks, Brendan. There are four main factors we believe underpin our operating results. First is the steady as she goes cadence of slow yet positive growth of the U.S. economy, which has resulted in an elongated cycle that is currently stable and relatively healthy. Second is the bridle on new competitive office supply. This bridle helps us drive rent growth in our second-generation product and also benefits our development activity given the lack of an abundance of competing projects. Third is the strength of our balance sheet and access to capital. Our balance sheet is as strong as it's ever been and we have multiple arrows in the quiver to fund organic and external growth. Fourth and most importantly is the quality of our individual markets. Across the board, we are seeing good leasing activity with active showings and solid customer interests. Positive job metrics and other relevant economic drivers in our markets generally continue to outperform national averages and are resulting in continued steady demand for our well-located BBD product. With this positive backdrop, we leased over 900,000 square feet of second-generation office space during the second quarter with very strong GAAP rent growth of positive 15.4%, cash rate growth of positive 3.0% and an average term of 5.6 years. Compared to last year's second quarter, we grew same-store cash NOI by 4.5%. And same-property average occupancy was up by 60 bps. We delivered FFO of $0.82 per share during the quarter thanks in great part to the four key factors I highlighted earlier. As you know from our first quarter earnings release, $230 million of net sales proceeds were placed in escrow on March 1 after the sale of our retail-centric Country Club Plaza assets for $660 million. Since March 1, we have invested $9 million to acquire…

Thanks, Ed, and good morning. As Ed noted, we had solid activity this quarter, signing 907,000 square feet of second-gen office space, which was in line with recent quarterly averages. We continue to see steady activity for our bread-and-butter, midsized customer base. As a reminder, our average lease size is approximately 12,000 square feet and we only have 58 leases for greater than 75,000 square feet. Further, year-over-year asking rents continue to increase across all of our markets. Average in-place cash rental rates across our office portfolio were $23.80 per square foot, 3.7% higher than a year ago. Occupancy was 92.5% as of June 30, which was down modestly from the end of the first quarter entirely due to the previously disclosed, quote, unquote, known near-term move-outs at recently acquired assets. We've reduced the high end of our 2016 year-end occupancy guidance by 30 basis points with our current forecast of 92.5% to 93.2%. Reduction for the top end is attributable to a couple of larger deals we had projected to start late in the year, now being forecast for early 2017. For office leases signed in the second quarter, starting cash rents were up 3% compared to expiring rents. And GAAP rents grew a robust 15.4%. Leasing CapEx was $3.18 per square foot per lease year. Our lease payback ratio or leasing CapEx over cash term rent was 14.5% in Q2, which was impacted by a higher proportion of new leases compared to recent quarters. Turning to our markets. We continue to see strong demographics benefiting the fundamentals in our BBD locations. This was driven by a high quality of life, well-educated workforce, a disproportionate share of population growth and a low business tax environment. As an example, a recent study by LinkedIn and Trulia ranked Pittsburgh as the…

Thanks Ted. As Ed outlined, we delivered net income of $0.32 per share, an 18.5% increase year-over-year, and FFO of $0.82 per share, a 6.5% increase year-over-year. The primary drivers of our solid operation results this quarter were same-property cash NOI growth of 4.5% year-over-year due to higher rents and higher average occupancy. Contributions from value-add acquisitions particularly the Monarch and SunTrust acquisitions we closed on September 30, 2015. And highly pre-leased developments coming online. These positive drivers were slightly offset by lost NOI from dispositions including our retail-dominated Country Club Plaza assets and the impact of issuing 1 million shares of stock through the ATM. Turning to our balance sheet, our quarter-end leverage ratio was 37.5% and debt-to-EBITDA was 5.1 times, our strongest thus far. In late August, we expect to utilize the roughly $200 million of remaining escrow dollars to pay down outstanding amounts our revolving line of credit. This quarter we also executed a 67-month unsecured term loan facility with three banks for $150 million at LIBOR plus 110 basis points that comes due in 2022, a year in which we have no other maturities. We expect to begin drawing on that facility in September of this year. We also paid off $43.7 million of 7.5% secured debt, increasing our unencumbered NOI to a very stout 92.8%. We have no remaining debt maturities in 2016. As we continue to fund our active development pipeline, be opportunistic with respect to potential acquisitions and pay a special cash dividend of at least $0.75 per share; we have multiple options to fund our liquidity needs with operating cash flow, disposition proceeds, debt capacity and equity issuances. Overall, we have a strong platform to cost-effectively fund our business. As Ed mentioned, we've revised our 2016 FFO outlook to $3.20 to $3.28…

Thank you very much. [Operator Instructions] And our first question comes from the line of James Feldman, Bank of America. Please go ahead.

Thank you. Good morning.

Morning, Jamie.

So I guess just starting out, do you guys mind talking about the expirations you do see ahead in 2016 and even 2017 and maybe an update on HCA and how that backfilling is going?

Yeah. The largest we have is HCA. So they have a number of leases with us. The lion's share of it falls in two leases of approximately the same size, about 103,000 square feet in two different buildings in Nashville; 3322 in the West End and in Ramparts in Maryland Farms, Brentwood. Both leases expire in January. And the closer we're getting to that expiration, the more activity we've had. So we've had some very good showings of late for different pieces and parts of that. But activity is good and we remain 99% occupied in Nashville. So if we were going to get space back, that would be the place to get it. Beyond that, Jamie, the next largest exposure we have would be in Richmond where we have a company that's expiring in about 160,000 square feet of which we've already re-let about 60,000 square feet, 65,000 square feet of that space. And that doesn't expire until later in the year in 2017.

And our next question comes from the line of Manny Korchman with Citi. Please go ahead.

Guys, good morning. If we think about the acquisition environment and the fact that you didn't acquire anything, can you just give us more color as to whether it was pricing, quality, geography, something else that prevented you from finding suitable deals out there?

Yes. You in part answered your question. So -

I gave you lots of options.

Thank you. So it's a number of things. Obviously, we can only make so much come to market within the 1031 window, so that which sellers posted for sale and offering memorandums were published. And then there was a cadre of others where we approached owners and talked to them about being sellers. So really, one of three things occurred or a multitude of things. And it's either their pricing was too high, so the risk/reward profile was out of sync in our perspective of it. Second is that there were certainly, in our perception, fewer total count of bidders but still very, very capable bidders that were able to write a check for the asset. Or we didn't find meaningful upside through our typical venues such Highwoodtizing, increasing rents, being able to push occupancy, operating synergies et cetera. And I guess another rationale would be that there may have been some extraneous complexities that we felt would have eroded our return. So we did underwrite a number of things. And for those reasons, one or more didn't come together. And of what we looked at, more didn't trade than traded.

Great. Thanks, Ed.

You're welcome.

And the next question comes from the line of Dave Rodgers with Baird. Please go ahead.

I got maybe a few questions that, Ed or Ted, you can comment on it. As a follow-up to what Manny had said, I guess any fundamental concerns that you were seeing, market rent growth, time in terms of getting leases done with customers that maybe made you back off on some deals. And then I guess it's somewhat related, so I'll throw it into the same question as with regard to your development guidance. I guess update us on where you stand and how those conversations look as well. And you reiterated guidance of $100 million, $200 million in starts and kind of how you expect to come into that range in the second half of the year.

Okay. Ted will take the first half. I'll go -

Sure, Dave. In terms of just fundamental changes, really, we're not at all – if you look at our fundamentals, I think we feel still steady customer demand in our markets, good tour activity from both existing customer for expansions, potential new customers. Certainly, some markets are stronger than others. But we continue to see good steady customer demand and again we spent a lot of time on acquisitions and certainly underwrote a lot. But nothing underlying from a customer demand standpoint.

And then, Dave, on the development side, we didn't change guidance for 2016. We're still $100 million to $200 million. We have the $41 million that's announced. And just as a reminder, these are announcements, not starts. Also, in my prepared remarks, I had referenced a $30 million built-to-suit transaction that we have agreed upon terms and we expect to fully announce before the end of this quarter. So that gets us to about $70 million on the $100 million to $200 million. We have a little bit more than a half a dozen proposals out in the market right now. Various projects, various markets of various sizes. They range from, say, $10 million to $90 million. Our typical average is in the $45 million to $50 million and if you do a simple average of these, it would be about the same. So we feel quite comfortable with the guidance that we have out.

Great, thank you.

You're welcome.

And our next question comes from the line of Tom Lesnick, Capital One Securities. Please go ahead.

Hi. Good morning and thanks for taking my question. It looks like you guys have been replenishing the land bank here a little bit as of late. I guess two parts. One, is there a limit as to the size of the land bank that you're willing to go and where your comfort range is? And then I guess, second, I noticed there was a $0.5 million land acquisition expense that's expected to be incurred in 3Q. I was just wondering if you could comment on that at all.

Sure. So in reverse order, the $0.5 million, Tom, is just a transfer tax for the parcel that we acquired in Pittsburgh which was the land underlying EQT Plaza which we'd bought in December of 2012. And so we obviously ended the land lease. So we mitigated $1.1 million of annual land lease payments for the ownership of that land. So we'll pay that transfer tax and that's what you saw. On the other side, with regard to just replenishing the land bank, we've dramatically reduced that over time. If you've looked at the trend for the past 10 years or so of the buying of land that we have, it is significantly small and it's gone out the door in two conduits. One is we've identified non-core land and we've sold well over $130 million worth of that. It's probably higher. And then the other is land that we put into service. Most of our development that we have delivered and have underway are on company-owned land. So this is just us being opportunistic to bring select parcels back in so that we continue to have the raw material that we want to, quote, project stuff when they consider our backyards.

All right. Thanks, Ed. I appreciate it.

You're welcome, Tom.

And our next question comes from the line of Jed Reagan with Green Street Advisors. Please go ahead.

Hey, guys.

Good morning.

So I guess related to that, what's the game plan at the downtown Raleigh site? How quickly do you think you may break ground there? And could that go forward on a spec basis?

Yeah. Hey, Jed. So it's really no different than any other parcel that we own. What we do as just standard operating procedure is we arm ourselves with conceptual drawings and massing site plans for what we can do on a site. So not all sites are just single footprint developments. Some are multi-building pads like GlenLake here in Raleigh, for example, where we can put a number of buildings on it or CentreGreen et cetera. So what we do is, with our land inventory, we help prospects and development people who work for the state or the county or the city envision what we would have to offer on that site. So we have conceptuals for most of the prime sites that we own. And then as far as whether or not we would start something, it all depends on what the then current circumstances are not only for that specific geographic location but for what we have across the entire portfolio. So if we have a number of spec projects within the portfolio, we may not start one that might be equally, let's say, deserving but just getting to the table later than the others because we want to keep in check what we have total exposure for the company as a whole. So that's how we decide. And I think we gave a good rationale, for example, when we started the 5000 CentreGreen building and that we have – all the buildings within CentreGreen are 100% occupied. And then within the Weston PUD where we have over 1 million square feet, we're 98%, 99% occupied. So we explained that we were going to start that building because either we or Brand X were going to capture the expansion of our existing customer base. So the land that we're in pursuit of in Raleigh is no dissimilar from land that we own in downtown Orlando or the land that we own beside SunTrust in downtown Tampa or other places where we've [indiscernible].

Are you seeing any interest in that CentreGreen project at the moment?

I'm sorry, are we what?

Are you seeing some interest in the CentreGreen project you're speaking about?

Yes. We just started scratching the earth there three weeks ago and we have an LOI out for 20% of the building.

Okay. How's just kind of overall fundamentals in Raleigh? Maybe talk a little about the dynamics between urban versus suburban demand in that market and then how you're feeling about the supply picture there.

Sure. So with Raleigh, it's not dissimilar again to a lot of the mid-tier size cities within our footprint and elsewhere. The canvas in downtown Raleigh is really very different than it was 10 years, 12 years ago. So it's really an added submarket that didn't exist with the same vitality that it has today a dozen years ago or any year prior back to a long time. So certainly there are many people living down in Raleigh that weren't there before. The amenity base is in-filled nicely. There was a recent announcement of a grocery store that will – I think that helps define that it is a long-term viability for a place for people to live and that supports the office side. So the downtown market has become part of the menu of choices that users have but not to the demise of the suburbs. There are still obviously plenty of great locations in the suburbs that users would prefer to be as opposed to being downtown. I think a pinnacle example of that is our conversations with MetLife when they came to town and they were considering our area and they ended up locating their nearly 0.5 million square feet out in the suburbs as opposed to downtown. So it really comes down to choice. And with the vitality in the infrastructure that we have downtown, we just have an additional submarket to offer prospective users.

Thanks, that's helpful. And then just one more for me. So you guys are trading at a pretty healthy premium to NAV these days. And it seems like you enjoy a superior cost of capital to a number of your peers on the public and private side. How do you think about that in the context of external growth? And does it make you want to be a little bit more aggressive in terms of pursuing new acquisitions or developments?

Well, I think that we want to continue to be the best stewards we can and understand all the arrows that are in our quiver and leverage them to the best benefit of the shareholder while still being our traditional conservative selves. And that's how we came to the conclusion with these dollars that remain from the unused escrowed proceeds from CCP. I think that, as an example, our being able to use the ATM to fund our development pipeline has been a great instrument for us. And to be able to do it at these numbers has been a very good thing for the company particularly given – with the volume of pre-lease we have and the girth of the overall development pipeline and the prospects that we have to continue to grow that. I also think that this has enabled us to further unencumber our existing portfolio to have basically 93% of our NOI unencumbered gives us significant flexibility as well.

Great, that makes sense. Thank you.

Thanks, Jed. [Operator Instructions]

Our next question comes from the line of Kyle McGrady with Stifel. Please go ahead.

Great, thank you. John Guinee here. First I guess, Brendan, welcome aboard officially. If you were sitting in our seat, what really difficult question would you come up with and recommend?

Thanks, John. I'm sure that you'll easily come up with some difficult questions. But I think it was a pretty straightforward quarter. So there's not a lot of stuff that you wouldn't have seen last night in the release.

All right, okay. This is a kind of a – good job – big picture question. Average lease, 12,000 square feet, only 58 leases over 75,000 square feet. Do you have a preference or can you talk through the pluses and minuses for being in the large lease, corporate leasing business and the cost associated with re-tenanting those but the benefits due to good credit et cetera versus being in the sub-5,000 square foot lease, mostly paint and carpet versus moving demising walls et cetera? Do you have a preference as you're looking at assets and as you're running your business?

So John, I'll start with that. First is that we do have a preference and we have a preference that there's a good diversification and mix of that. So not dissimilar to the fact that we don't have any customer that represents more than 2%, 2.5% of revenues other than the federal government. And we don't have a market that represents more than 19%, 20% of revenues. We have a diversification. We also look at it by SIC codes, so we don't have an overweighting in that either. So the 58 leases that represent 75,000 square feet or more are about a third – less than a third, about 30% of our total annualized revenues. So we think that it's good to have a mix and that's what we look at. So when we looked at – I'll use the MetLife example again. And when we looked at that, we looked at their credit, Fortune 500, all the aspects of the company and that they've been around since the Earth cooled et cetera. And we thought it was a very good thing to add into our corporate mix. So not being overexposed to any one customer is an important aspect of what we look at. And in fact, we asked the board years ago to edict to us that if we ever have a customer that would represent more than 3% of revenues, that we would present that with a comprehensive business case as to why we would pursue that lease/re-lease instrument.

Okay. But how about the actual cost to re-lease when you're dealing with big multi-floor tenants versus the cost of sort of sub-5,000 square foot local businesses and the ability to push rents in one versus the other?

So I think it all depends on the circumstances of the day. So if we had that big exposure in March of 2009; it would be different, we feel, than if we had that exposure in August of 2016. And so what we tried to do is we tried to do the best deal we could do that day. It's no different than when you borrow money from the bank or issue bonds et cetera. You do what you need to do with the arrows that are available to you and you try to do the best you can with the circumstances of the day. So when we do a lease, we do – and I think we've shown to you our in-house-built software tool that we call Lease Link which enables our in-house brokers and division heads and folks here in Raleigh to look real-time at each lease proposal and how it compares to budget. We look at NER and we look at NPV. We look at percent of budget. We look at payback et cetera. And so we do that on every deal. Every deal has a completed Lease Link and we evaluate those. But then on a more global perspective, we also maintain an asset report card where we do routine updates of the August run on all of our assets. And of course, that helps us decide what's core and non-core. So there's a comprehensive report card that we maintain through the routine update to the August run as well as the hard look that we take at each deal whether it be for 100,000 square feet or 2,000 square feet through our Lease Link process.

Great, thank you.

Thanks, John.

And our next question comes from the line of John Feldman (sic) [Jaime Feldman] (40:38), Bank of America. Please go ahead.

Thanks. Just a quick follow-up. So you guys had talked about rent growth across your markets. Can you just give us maybe some numbers around the percentage growth you're seeing year-over-year and is that truly across all markets? Just trying to get a sense of where you think we are in the cycle.

Yeah, Jamie. Look, I think we're seeing it across all markets. It varies by market. Certainly, our stronger markets, Nashville, Atlanta, Raleigh, are seeing the highest rent growth. I'd say year-over-year, it's certainly 5%-plus. Atlanta is on the very high end of that along with Nashville. Then the next grouping – most of our other markets, I'd tell you, are probably in that 2% to 5% range. So we're seeing it across all markets. It just varies. One thing that's helping drive it obviously is the – and we mentioned it in our remarks is just the lack of new construction. So there's not a lot of spaces for new product for customers to go to. So it's enabling existing landlords to push rents.

Okay. And it's probably a – it's a broad question. But where do you think you are in construction cost versus rent that would justify new construction? Is there still material upside in all these markets?

Varies by market again. Certainly, Nashville, I think we're seeing we're at cost-justified rents for the most part. Atlanta, you're getting there for the trophy assets. But after that, we're still probably – most of our other markets, we're still anywhere from 10% to, I'd say, 25% below a cost-justified rent for new construction versus high-quality existing product.

Okay. And in this quarter, I know from the broker reports that Atlanta had a slower leasing quarter. Are you seeing any leasing slowdown or maybe these are just quarterly pockets of slowing?

Not really. I think there's always a summer slowdown with a lot of guys on vacation and all that and some of the brokers and all that. But we haven't seen it. I think activity remains good. Showings are still active. We continue to get good leasing activity in Buckhead. So no, we still feel good about Atlanta.

Okay. And then nice job, Brendan. Thanks, everyone.

Thanks, Jamie.

And the next question comes from the line of Manny Korchman, Citi. Please go ahead.

Hey, guys. Just one quick follow-up. If we think about Nashville and your prepared remarks about both upcoming supply and potential big vacates, do the vacates sort of play into the prepared remarks? Are you already assuming those are vacates or is there still a – is there a chance that they'll renew? And how much more sort of risk can that market take before rents give up a little bit?

Yeah. No, Manny. I think the vacates of the size that we have that we addressed is HCA. So they have a built-to-suit underway, it appears from a casual observance of it that it should be delivered on time [Technical Difficulty] (43:55) definitely moving out. That's what we said. The closer we get to their expiration in January of 2017, the more activity we have.

Great, thanks.

Sure.

And our last question comes from the line of Tom Lesnick, Capital One Securities. Please go ahead.

Hey. Just one follow-up from me. Just curious, now that you guys have acquired the land from underneath EQT, what was the total going-in yield on that asset inclusive of the land? Do you know that offhand?

Well, yeah. Mid-5%s, we paid $18.5 million and our annual rental rate was $1.1 million currently.

Okay, appreciate that. I'll follow up offline. Thanks.

And gentlemen, there are no other questions at the moment.

Okay. Thank you, everyone. And as always, please don't hesitate to give us a call if you have any questions. Thank you.

And ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation and have a great rest of the day, everyone. You may disconnect your line.