Good morning, and welcome to the Highwoods Properties Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, October 23, 2019. 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, Chief Executive Officer; Brian Leary, Chief Operating Officer; and Mark Mulhern, 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, the company does not undertake a duty to update any forward-looking statements. I'll now turn the call to Ted.

Thank you, Brendan, and good morning everyone. It was a busy quarter for us. We had transitions in the CEO and COO roles, announced our market rotation plan to inter Charlotte and exit Greensboro and Memphis, broke ground on our $38 million Virginia Springs II development in Nashville, completed a $400 million bond offering, and at top of all this posted excellent leasing activity and delivered strong financial results. At the beginning of last month our long-standing CEO, Ed Fritsch retired. Ed has been a phenomenal leader and mentor for many of us at Highwoods. Ed maybe gone from his day-to-day role at Highwoods, but his legacy remains firmly in place throughout our company, and the strategic plan that has served us well over the years will continue to guide the company. The four tenants of the plan are to continuously improve the portfolio with a focus on key infill BBDs, maintain a strong balance sheet, retain and attract unmatched commercial real estate professionals, and communicate clearly and transparently with our investors and other stakeholders. Consistent with our strategy, we announced the market rotation plan in August. This is our exit from Greensboro and Memphis and entry into Charlotte with the purchase of Bank of America Tower at Legacy Union. Once completed, the market rotation will improve the overall quality of our portfolio, further strengthen our cash flows, all the while being leverage neutral. Also during the quarter we issued $400 million of 10-year bonds at an effective rate of 3.24%. Our balance sheet continues to be very strong with our debt-to-EBITDA ratio at 4.9 times, nothing borrowed under our line, and $117 million of cash on-hand at quarter-end. We also had a strong quarter operationally and financially. Sequential occupancy improved 70 basis points for the office portfolio and 50…

Thanks, Ted, and good morning. During the quarter we had strong leasing performance. Second generation office leasing volume was a robust 939,000 square feet including 367,000 square feet of new leases and we captured GAAP rents spread of positive 19.4% and cash rent spreads of positive 5.6%. While virtually all of our leases had annual rent bumps. We have consistently posted positive cash rent spread. Specifically during 13 of the past 14 quarters we've reported positive cash rent spreads and increased net effective rents by 18% over the same period. Our healthy leasing volume and strong rent economics support future growth in occupancy and NOI. In the third quarter, we posted same property NOI growth of 0.5% or up 1.9% excluding 5332 Avion Park. Our portfolio occupancy increased 50 basis points sequentially to 91.4%. Our year-end occupancy outlook is now 91.7% to 92.3% with a midpoint of 92%. Our improved year-end occupancy outlook is driven by a significant number of leases that have been signed, but where occupancy has yet to commence this outlook assumes no year-end occupancy for 5332 Avion. We made meaningful progress in the past several quarters, reducing near term rollover risk. We have 23% of revenues expiring through 2021, which is approximately 200 basis points lower than the past several years. We expect our future rollover to diminish further as we complete the market rotation as Greensboro and Memphis carry a disproportionate share of our near-term role and the Bank of America Tower in Charlotte, has a weighted average term of more than 14 years. In our typical review of expirations larger than 100,000 square feet. We have only one remaining in 2019, two in 2020 and one in 2021. For 2019, we remain optimistic for a renewal with the FAA located in 100,000 square feet…

Thanks, Brian. We delivered net income of $27.9 million or $0.27 per share and FFO of $88.2 million or $0.83 per share. As Ted mentioned, excluding $0.05 per share of items relating primarily to the market rotation plan FFO per share would have been $0.88. This compares favorably to the $0.86 per share we reported last year which included five months of rent from Fidelity at 11,000 Weston and full NOI contribution from Laser Spine. Fortunately, growth in the remainder of the business has offset these two items, which illustrates the diversified strength of the company and positions us well for additional growth given our solid leasing trends including backfilling the majority of 11,000 Weston. Excluding the $0.05 of market rotation items, the quarter was clean from a reported FFO perspective with no significant capital recycling activity or term fees. There was an unrelated $0.01 land sale gain that we felt was appropriate to net against the costs associated with the market rotation plan as none of these items were included in the 2019 FFO outlook we provided in our second quarter release. The total of these items comprises the $0.05 impact discussed previously. We revised and narrowed our 2019 FFO outlook to $3.31 to $3.33 per share. The $0.03 reduction at the midpoint is driven by the $0.05 per share net impact from items relating to the market rotation plan offset by $0.02 per share of improvement in the business. Our updated per share outlook imputes to $0.90 in 4Q at the midpoint. As we detailed in last night's press release, we estimate $0.03 of NOI from BOFA Tower in 4Q, which will be offset by $0.02 a share of additional interest expense for the pre-funding and funding of the acquisition and $0.01 of additional accrued severance costs. Sequential…

Thank you. [Operator instructions] We have a question from a Emmanuel Korchman with Citi. Please go ahead.

Hey, good morning guys. Just in terms of the market rotation plan. I guess a couple of questions. The first is, why now? Is there anything specific happening in those markets or others where you felt like this was the time to do it?

Hi, Manny it's Ted. Well, look, obviously market rotation, it is driven by or the asset we found in Charlotte. And this is again, Charlotte, has been at the top of our new market wish list for a really long time we've been spent a lot of time there of chase different opportunities and we thought this was sort of a bull's-eye, in terms of what we're looking for. So from an acquisition standpoint, you know and Charlotte was one of our strategic goals, and so in terms of obviously -- now in terms of funding it, we -- Greensboro was a -- with industrial portfolio, we think it's just an ideal time to maximize the value generated there. Obviously being one of our smaller markets, so we saw this as an opportunity to buy a new asset and rotate out of slower growing markets into a higher growth market. So it's really asset driven on the buy as well. Just an opportune time to sell some of our other slower growth assets in the slower growth markets.

And Manny it's Brendan. Just to add on to that a little bit, specifically with respect to the financial outlook. As Ted mentioned the opportunity to cycle into Charlotte and the opportunity with BOFA Tower at Legacy Union was a big driver of that I think if the question is, why exit Memphis in Greensboro now regardless of whether or not you've found an opportunity to recycle that capital into another acquisition, I think we've looked at those opportunities over time, it's highly disruptive if we just sell those assets, given the tax gains that we have there to both FFO and cash flow of the company. And so we wanted to be opportunistic, to find the right timing to recycle some of those proceeds into a good growth opportunity.

Thanks, Brendan. And I think in your prepared remarks you guys mentioned that there is a disproportion amount of near-term lease roles in those markets. How is that impacting the marketing process?

I think in terms of the comment was primarily based just in general in those markets, we've over time. It's not just at this point in time there is a disproportionate amount. It's just over time. Our average lease term in those markets is below significantly below the company average. So that's just a function of the actual market we're in that has short-term leases.

Thanks, everyone.

We have a question from Jamie Feldman with Bank of America Merrill Lynch, please go ahead.

Thanks. Can you talk more about the appetite for the assets there, it sounded like you're pretty confident. You'll get the sales done, but maybe a little bit more color on the depth of buyer pool and timing?

Sure. Jamie, it's -- all the Phase 1 assets are officially in the market now, but they are at various stages so we've sort of trickle amount over the last 60 days. So, it's still early, but I will tell you I think we feel pretty confident just based on the broker opinions of value we got as we are analyzing this and the initial feedback of the assets that were early out in the market. I think we're confident in our ability to execute really at the prices that we originally anticipated, and time will tell. I think you'll see we did up our dispo guidance at the high end. We included the entire market rotation plan in the dispo guidance. But having said that, we anticipate the majority of the Phase 1 assets will close in the first quarter of next year. We may get a couple this quarter depending on when we finally get pricing in and all that, but we do feel pretty good just based on what we've seen so far.

Okay. And then how much and how soon do you expect to grow more in Charlotte.

It's a good question. So we close -- as we said, we closed November '14. We have had people in that market. We spend a lot of time there looking at both acquisitions as well as land development opportunities. So I guess the answer is as quick as it makes sense for us, but we are looking at the development fairly closely and obviously development takes time to build up. So we definitely plan on growing it modestly where the opportunities come. We're not going to force anything by any stretch.

Okay. And then can you talk about the demand profile for the LSI building? It sounds like you think there's pretty good demand for office users, but maybe some more thoughts on timing there. And then how soon could you actually have those converted 3 floors ready for office leasing?

So as we said in our prepared remarks, obviously looks increasingly like we're going to convert the 3 floors that are currently medical to office. As we said 4, 5 and 6 are all ready to go. So the last couple of calls we've mentioned, we've been dancing with a medical user, but we're still doing that. It's just going a lot slower than we thought. As a result, we've really increased our tour activity and our marketing for the office side. So right now, we've got prospects both full-building and partial building users. And in terms of the timing, as you know, decisions with these larger customers, it's very binary. If we land a large one I think there's a good chance we could get occupancy and cash rent quicker, but if we end up doing a floor by floor it's going to be a grind and take longer. So we're hopeful. We've got some very good discussions going on, but still too early to tell which way it's going to go from an office standpoint.

Okay. But how long do you think the build will take for the conversion take before it's even can be occupied as offices?

I think its 3 or 4 months probably. No more than 6 but I think we can get it done quicker than that.

Okay. And then I saw you guys took down your development starts outlook for the year, at least the high end. Can you talk about that and has anything changed in terms of the build-to-suit you're looking at?

I don't think anything has changed. I think certainly, it's always -- we've got several discussions going on. It's just hard to predict the timing and when new development is going to hit. And given that it's just 2 months left this year we just thought it appropriate to bring down the high end of the guidance.

Okay, thank you.

Thank you, Jamie.

We have a question from Blaine Heck with Wells Fargo. Please go ahead.

Thanks, good morning. I'll start with Mark and Brendan. Year-to-date cash same-store NOI. I think it's plus 1.3%. And Mark as you said, you've got operating margins that are usually better in Q4 than Q3. And you're expecting continued occupancy growth. So I guess we're kind of surprised guidance was an increased. Are there any specific headwinds in same-store growth and in Q4 that we should keep in mind that might have kept you at that same store NOI guidance?

Hey, Blaine, it's Brendan. So I guess, first thing I would mention is we had a comparable ramp in terms of occupancy in Q4 of last year. So from with respect to the occupancy ramp Q3 to Q4 in 2019 it's comparable in terms of this ramp that we had in 2018. We also had lower straight-line rent expense in 2018, both in Q3 and Q4 versus our expectations for Q4 for 2019. So there is a little bit of a headwind with respect to the straight line outlook in Q4 versus the prior year quarter. So I'd say those are probably the majority of the headwinds in terms of the outlook for Q4 relative to raising the guidance range. The other aspect is, there is only a quarter and so to raise the range for one quarter's worth of activity, I think is a little bit challenging. And then the last thing I'll mention is, if you look at where we were in the 3rd quarter of this year on a cash and GAAP basis. Typically, our cash NOI on a same store basis is higher than GAAP because of the development assets that are in the same-store pool, which are flat from a GAAP basis, but have growth each year from the rent bumps that are in there. In this quarter, we were lower on a cash basis than we were on a GAAP basis, which generally signals that there can be some expected drivers of cash NOI growth over the subsequent quarters.

Great, that's very helpful. Switching gears and just follow up on Jamie's Charlotte question when did you decide to become active on the acquisition side? Do you guys have an opportunity or first look at acquiring the adjacent buildings to Bank of America Tower in Legacy Union or do you think you'll focus elsewhere in that market?

Sure. We do not have a first right on the other additional buildings. That doesn't mean we won't look at them, but we don't have any contractual rights at all. So in terms of where we're going to grow I think CBD Uptown is still one of our preferred markets as is South end and South Park. I think our primary, Midtown sort of another submarket that we're looking at. So really, those are the 3 or 4 submarkets we're spending time on.

Okay, that's helpful. And then last one for me. Ted you've seen co-working come into your markets in a bigger way in the last 2 to 3 years. Clearly, WeWork has been a hot topic in the press recently and you talk about whether the transparency into we numbers have changed. How do you guys view them and other co-working tenants: number one, as a tenant within your portfolio; and number two, as a driver of demand within the markets and maybe any risk you guys see going forward, given the rapid expansion we've seen.

Sure. A lots of questions in there. So may come back, if I miss 1 or 2. In terms of the co-working I do want to mention, we don't have any exposure to WeWork. Our exposure just as a reminder is 6 leases. It's less than 1% of revenues. So we've sort of the last couple of years, sort of dipped our toe into the water in terms of the co-working and have not done the WeWork. Again, we chose to go with other operators. But just given the headlines what I do think landlords are going to be more cautious, probably in the near term. Just given all the headlines. They're going to closely evaluate the risk profile and sort of what credit enhancement, I think they're getting, which is really no different than what we've done throughout the last 4 or 5 years that we've signed these leases we focused on. We have our property managers and folks walk through all of our current leases and all of ours look like they're operating very well. They are full. So I think we will feel comfortable with what we have. So I think we're feeling pretty good. In terms of just co-working and flexible space, I think that the term is migrating from co-working to flexible office space, just as the enterprise business is becoming more a bigger part of it. I just think it's here to stay. And I think over time the flexible space market is going to continue to grow. I think companies want space quicker and they want more flexible terms. So we constantly look at that as we roll out our spec suites program. We're looking to do a sort of a co-working light-type model as well that would be -- we won't have a lot of amenities that won't be manned and all that, but we may put out snacks or whatever so we're working on that. We just like the way office space is being used is changing and landlords need to make sure we're providing the right kind of space that our customers want.

Great, thanks for the commentary.

Thank you.

We have a question from Rob Stevenson with Janney Montgomery Scott. Please go ahead.

Good morning, guys. The development pipeline is currently Raleigh, Nashville, Tampa and that's where the bulk of your land bank is. How much competing new supply are you seeing in these markets that are going to be coming online in 2020 and 2021 competing with your buildings, other than [indiscernible] which is already leased?

Sure. I think there is a couple of submarkets that we watch more closely than others. Most of our markets where we feel comfortable that supply is meeting demand, the ones that for the most part stick out that we're watching very closely is really downtown Nashville. Further significant new supply coming on, really, over the next, call it 24 months or so. So CBD Nashville is one. What gives us ambient at night is we don't have any meaningful rollover downtown Nashville until 2025. So assuming demand stays about where it is today, but the new construction should deliver and hopefully get leased up in time before we have any rollover. So, but we are watching it without a doubt. Obviously there's a lot in Charlotte. If you look at percentage of stock that's a new one that's on our radar. The nice thing about that is 91% pre-leased. There are 3 million square feet or so. The large percentage of stock but highly preleased pipeline. And we look at Midtown Atlanta. And Midtown Atlanta has a significant amount of new construction as well underway. It doesn't compete directly. We don't have anything that competes directly in Midtown Atlanta. But there is a fair amount of product coming online. Historically midtown and Buckhead where most of our product is, they don't compete that often. Occasionally they do. But we feel pretty comfortable again that we're insulated from Midtown new construction for the most part. Then lastly be Raleigh. I think more CBD overall Raleigh, we've looked at, but really Raleigh continues to be incredibly strong market. We think supply is meeting demand and that, so we think it's not a huge risk there. Other than that our markets feel pretty good. Tampa has got about 1 million square feet we're tracking and it's 45% pre-leased. So we feel pretty good about that as well.

Okay. And are you seeing any significant enough demand to start projects on your land in Richmond, Orlando and Atlanta at this point in the cycle?

Richmond, we've pitched a couple of build-to-suit deals but there is still a pretty high rent differential needed relative to in-place rents to what you need. So I think we want to see that narrow some before we start a project there. Atlanta, we're certainly out marketing our River with 300 site. We had a lot of success with Riverwood 200s. So we've got a building design that our Atlanta folks are out pitching for prospects and we'd love to be able to do something there if we find a prospect. Then in Orlando, same in Orlando. There's always been really one new delivery in Orlando in the CBD, which is our primary market, but we have the land in its deliver almost full. So we're very active in marketing that as well. We've made several initial pitches on that. So we'd love to get something done if we can.

Okay. And then if I look at the trailing 6 or 8 quarters of building improvements, tenant improvements and lease commissions as a bucket, they've been elevated for quite a while now. When you think about the road ahead with Laser Spine T-Mobile and various other leasing and re-tenanting ahead and then factor in the sale of part of the Greensboro and Memphis portfolio, how should we be thinking about this going forward? Is there a normalization of those lines coming or is a trailing 6 to 8 quarters pretty much likely to be the new normal as we extrapolate in 2020 and 2021?

Yes, Rob, it's Mark. Obviously, we've seen higher costs. So there has been a trend upwards there, but we did have some and as Ted has gone through here in his prepared remarks, especially and Brendan. We have gotten some of the explorations out of the way, the upcoming exploration. So 11,000 Weston probably cost us a little more than to refill and do than maybe has historically. So I wouldn't say it's a new trend. I think you mentioned T-Mobile and some of Laser Spine activity, I think that we're optimistic that we can have good economics on those re-tenanting opportunity. So I would say that probably a little lower going forward than we have maybe in the last 6 quarters or 8 quarters.

Okay. And then last one from me. I mean, given that we're almost to November 1 the FAA is expiring this year. I mean what could they possibly do? Wouldn't they have already needed to sign a lease in order to move out for 2019 exploration at this point or is it just waiting for government bureaucracy to sign the lease or is there something more involved there?

No, it's largely what you just said. Its deal with the government just been slow. We remain incredibly confident that that's going to get done. It's just taken certainly a lot longer than we had hoped, but not totally unusual dealing with the government leases. So we still feel very confident the FAA is going to get done.

Okay. Because it's not like it's two guys in a pickup truck going to move them right?

It's exactly right.

All right guys. Thank you. Appreciate it.

And we have a question from John Guinee with Stifel. Please go ahead.

Great, thank you. Let me ask the obvious rip the band-aid off question. Until you guys get Memphis and Greensboro sold, until you get to Laser Spine leased up, people are just going to continue to ask and ask and ask about this. And what you need to get to is a position where you can direct people towards your development delivering in 2022, good lease economics, good balance sheet. Have you ever thought about just ripping off the band-aid and getting out of all these pesky little deals?

John, I think specifically thinking about the Laser Spine 5332. Certainly, we've had offers on vacant buildings. But I'll tell you, if you haven't seen that building it is a high-quality assets. We think we can continue to create value on that. It's a building that we'd love to have in our portfolio. So really no desire on that building to do it. We like it. It's likely a long-term hold for us once we get it leased up. In terms of just the Memphis stuff and all that I look, we're going to continue to grind through it. I think we feel very confident in what our plan is. It is going to take a little bit of time, but hopefully 2 quarters from now we'll have answered that both on 5332 and in the market rotation plan. So it's just going to take some time, but no need to really do a fire sale in our opinion.

Great. All right. Good luck.

Thank you.

We have a question from Dave Rodgers with Baird. Please go ahead.

Hey guys, just a couple of quick follow-ups for me. At Avion just to get a little bit into your thought process. Would you begin to convert those floors before you had an office lease in hand or do you feel confident enough to kind of continue with the way the building is until you have something that you're holding onto?

Good question. We're likely going to be pulling a permit just to speed up the time as we go down the parallel paths with the different users. So we could, but as long as the medical guy is still lingering around and which they are. Had conversations as recently as I think last Friday with them, but we don't see a need to start that, but we will. We've got drawings done, plans done and we're just -- all we need is to pull a permit and starts so which is some more probably likely at least pull permit here soon.

What replacement got to be Avion building if it was just straight office today?

Hey there, Dave. Brian Leary here. If you had to buy that and build it from scratch, you're getting close to 450 a foot in that submarket and so we still like the position where we're at to re-lease it at favorable economics below replacement.

Okay, that's helpful. Ted, I wanted to go back to your comments. You talked about the $2 billion of potential development on the land that you own. Would you continue to hold all of that land? I get similar to the question you got from Rob earlier. And then maybe can you drive down the path, a little bit more of kind of the activity of the discussions you are having on the land that you own in related to beyond 2019 starts.

Sure. In terms of our land. I mean it's our process of evaluating the land is very similar to what we do with our buildings. We're always going to look and make sure we've got the right land. If we don't for if for some reason if we decide if there is a higher and better use for multifamily we're going to sell it. So over the last several years, we sold land that at one point was core land that we've sold for hotel uses, multifamily uses. So we are not wed or married to any land by any stretch. We sell some land. We'll rotate in to better land for mixed-use developments or whatever. So we're constantly looking at it. You saw we sold some this quarter as well, that, some of which could have been office uses. So not wed to it. We're going to continually evaluate our land. In terms of development prospects. We've got, like I said, more than a handful of discussions going on. Couple of build-to-suit opportunities. One of which even hadn't chosen the city yet. So we've pitched a lot of these multi-market deals. So we'll see where they land, so it's just too hard to tell right now. But at the same time, we're also pitching pre-lease just be a decent pre-lease for a spec building to be partially pre-leased when we start. And we've got a handful of those on land that we own. So I think virtually all of our pitches that we've made or are making are on owned of land. It's no land we have tied up that we don't control. So just having land that we control is incredibly important for these pitches. So again, nothing we're ready to report by any stretch, but we like the amount of activity we have.

Great. And then maybe last on the Raleigh CBD. I think I just heard you mentioned maybe it's an area where you have seen some more supply. You bought a plot there I think recently as well and so that would give you kind of 2 different development sites in the Raleigh CBD. Maybe just give us a sense of the 2 separate projects there that you could pursue on those land parcels and kind of how you think about that.

Sure. So we've got two parcels that you said. Actually one -- two parcels, one in the center CBD. The second was in what's called warehouse district, so which is off roughly a less than a 6 or 7 blocks away or so. We think it's 2 totally different products that we can build there so we have, as you said, 2 different options for users. One building in the CBD we can build up to about 300,000 feet. The other one is closer to 200,000 feet and maybe a little more of a creative type office. But both of those -- the second one that's in the warehouse district, we're actually part of a symbol that we're putting together. We've closed on one piece. We have another piece that we need under contract that we'll be closing here shortly. So we like both positions and I think we can deliver 2 different products for our potential customers.

Right. Thanks, Ted.

We have a question from Jon Petersen with Jefferies. Please go ahead.

Great, thanks. On the coming-back-to-the-market rotation plan, when you were looking at new markets to enter, were there other markets you looked at besides Charlotte?

I'm sure, I mean we've got certainly a list of markets that we spend time in, some of the Texas markets, most recently, actually for a fairly long time, we've spent time in Austin and Dallas and strict time over the years in Houston. I think that we've decided Houston is not a market we want to go into. But it's other markets that are very similar to the ones we're in the Sunbelt.

Okay. Is there anything we should think about in terms of timing, I mean, do you have an appetite to expand the footprint of the company overall?

I think it depends on the opportunity. I think we've, again, we spend a lot of time in Charlotte chasing things before we're able to get in and find the right entry point. So, it's just our normal course of business and normal part of our strategy is to continually evaluate other markets. Again, we want to be in markets where the demographics outperform national averages. So, suffice it to say, we have wish-list [ph] assets in most of our target markets that we constantly -- we know who owns them, who own the assets, we know what their typical hold period is and we're staying in touch with those on an ongoing basis just to the normal course of business.

Got you. And then, in terms of two government leases coming up, the FAA and the FPI [ph]. I guess, how should we think about where those rents are versus market, or probably more likely, where you guys will renew them, should we expect any significant movement up or down on those?

Yes, good question, we think both of them are going to be roughly flat.

And then, with -- one last one, how much interest rates have moved down in the past few months, have you seen any change? You guys are obviously active in the acquisition and disposition market, have you seen any change in terms of cap rates and the buyer pool?

If you think about the buyer pool for our non-core assets, I think the number of buyers is probably down a little bit from, call it, 3 or 4 years ago, but there’s certainly enough of a market, a deep enough buyer pool to make a market at our expected pricing. I do think interest rates are probably helped buoy the market a little bit. Again, we're still in process and we'll see how the market rotation is, but the debt financing, there's abundant of equity capital and debt capital out there, certainly a low rates, so it should be buoyed in the market a little bit.

Great, thanks for the color.

And we have a question from Daniel Ismail with Green Street Advisors. Please go ahead.

Great, thanks. Hi, guys. I think there was a comment earlier on the cost of backfilling a few pieces being higher than expected. How much of that is a function of just rising construction cost versus any meaningful changes in our tenant concessions?

I think it's -- really we got great term there and so, the biggest cause this quarter of the elevated TIs were 11,000 Weston, if you back those out, I think we're pretty much in line with our historical average, but we did have just the mix of deals, as I think Brendan and Mark alluded to. We had significantly higher percentage of new leases this quarter versus renewals, so make some stats stick out a little bit, but we did get over a year longer term. So, combined with new leasing mix in term [ph] is really what called the elevated levels.

Yes, Danny. The other thing I would mention is, and we talked about this before, but we've continued to see the net effective really move up in a pretty significant way. So, I think that that shows that, while there is some level of higher TIs, we're getting that back with respect to higher rents and term. So, I think we generally have felt good that our net effective rents have moved up fairly significantly over the past few years, even while TIs have moved up on a per square foot basis.

And, then maybe just a follow-up on the land bank comments, can you give a change in year-over-year, how many of those discussions you're having with potential build-to-suit tenants have been from out of town or tenants who are not currently in those markets, versus those tenants that are currently in those markets?

Yes, I just took us [indiscernible] probably half and half. Certainly, our markets, we're seeing a disproportionate amount of inbound traffic and all that, so we were constantly seeing new inbound calls and all that, but also it's both organic and new to market. So, maybe half and half if you -- over a number of years.

And is that pretty typical with what you guys have noticed historically?

Yes, I think so, I mean it's again the activities. Overall, the good thing is the activity is good. I think that's probably been overtime.

Okay, that's helpful, thanks guys.

And we have a follow-up question from Jamie Feldman with Bank of America Merrill Lynch, please go ahead.

Just two quick follow-ups. One, do you think the leasing spreads you're seeing are sustainable?

So we've had positive rent spreads in 13 of the last 14 quarters. Again this quarter, Jamie, was buoyed as the TI cost in the capital cost at 11000 Weston, we had a 20% cash rent growth in both those leases. So, which did help our cash rent growth. If you back those out, our capital would be in line and our cash rent growth would have been down a couple of hundred basis points, so would have been that three-ish range. So do I think we can continue with cash rent growth? Absolutely, 5.6 this quarter might be a little bit high.

And I guess as you think about next year, similar level of leasing spreads is probably reasonable?

Yes, I think we continue to -- our fundamentals in our markets are just really, really good. Our tour activity to a person as we have our leasing calls on a monthly basis, tour activity is really good in the market. Our economic development groups in our markets are active as well, so both organic and inbound. So I think it's sustainable.

Okay. And then you had mentioned a couple of markets where you're thinking about supply or potentially excess supply. Are you seeing any submarkets in any of these markets where it’s weighing on the ability to push rent?

Not yet. A lot of it is still under construction, so we haven't seen a lot of deliveries, but haven't leased up and delivered with a significant amount of vacancy. So I think a lot of our markets are sub 10% vacancy as well. So it's still a landlord market in most of our markets. So we just haven't seen any signs yet.

And what are -- I know in Atlanta, you guys flagged Midtown, but I know there has been some moves around in Central Perimeter too like, is that a market that just seems as tight as it’s been, or you starting to see some weakness there or slowdown there?

Yes, so Central Perimeter -- a good question. Central Perimeter, I think activity is slow right now and I think it's two things. One is there is a couple billion dollar road improvement project that -- I think it's gone as well as it could, but it's clearly impacting the psyche of customers in that submarket. So I think that's contributed maybe to a slower activity there. As well as State Farm is going to continually vacate. They are completing another couple of buildings there and they're going to be vacating space that they currently occupy, which is going to put some excess space on the market. So I do think that the Central Perimeter could be softening some.

Are there any other submarkets like that across your markets where you could see some kind of unique moves putting some pressure on demand or on condition?

Off the top of my head, Jamie, maybe Cool Springs in Nashville, a little bit. Nissan is a big occupier there. They put a fair amount of space on the sublease market and there's a couple of other sub leases in the market, but I don't think that's materially impacting the market there. But I think that's one that we've got to watch as well.

Okay, all right, great. Thank you.

Thank you.

And there are no further questions at this time.

All right. Well thank you all for your interest in Highwoods. And if you have any follow-up questions, please feel free to reach out. Thank you.

That does conclude the call for today. We thank you for your participation. Now, will you please disconnect your line.