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Highwoods Properties Inc (NYSE:HIW)
Q2 2020 Earnings Call
Jul 29, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Highwoods Properties Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded Wednesday, July 29, 2020.

I would now like to turn the conference over to Brendan Maiorana. Please go ahead.

Brendan Maiorana -- Executive Vice President, Finance

Thank you, operator, and good morning. Joining me on the call this morning are Ted Klinck, our Chief Executive Officer; Brian Leary, our Chief Operating Officer; and Mark Mulhern, our Chief Financial Officer. As is our custom, today's prepared remarks have been posted on the web. If any of you have not received yesterday's earnings release or supplemental, they're both available on the Investors section of our website at highwoods.com.

On today's call, our review will include non-GAAP measures such as FFO, NOI and EBITDAre. Also, the release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures.

Forward-looking statements made during today's call are subject to risks and uncertainties, which are discussed at length in our press releases, as well as our SEC filings. As you know, actual events and results can differ materially from these forward-looking statements, and the Company does not undertake a duty to update any forward-looking statements. Currently, one of the most significant factors that could cause actual outcomes to differ materially from our forward-looking statements is the potential adverse effect of the COVID-19 pandemic. And federal, state and local regulatory guidelines and private business actions to control it, on our financial condition, operating results and cash flows, our customers, the real estate market in which we operate, the global economy and the financial markets. The extent to which the COVID-19 pandemic impacts us and our customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, and the resulting economic recession and potential changes in customer behavior, among others.

With that, I'll now turn the call over to Ted.

Ted Klinck -- President, Chief Executive Officer and Director

Thanks, Brendan, and good morning, everyone. Let me start by saying I hope you are all well and your families are safe and healthy. We are pleased to report that our employees are healthy and that we have safely returned to all of our offices. To ensure our coworkers feel safe and productive while in the office, we have implemented a rotation schedule, giving everyone ample opportunity to comfortably practice social distancing. This helps us achieve our twin objectives, which are to prioritize the health and safety of our employees and realize the benefits of sharing our Company's unique culture together in the workplace.

Obviously, this has been an incredibly challenging time for our country and our economy. It remains difficult to predict the duration and severity of the COVID-19 pandemic and its overall impact on economic activity. We believe we are well-positioned operationally to handle the near-term effects of this downturn, given our lack of large customer expirations over the next few years and our substantially pre-leased development pipeline. Plus, we continue to maintain a fortress balance sheet with ample available liquidity to fund leasing capital expenditures and our development pipeline while having dry powder to capitalize on future growth opportunities.

In addition to having a high-quality portfolio and strong balance sheet, we are well-positioned given our geographic footprint. The Southeast continues to benefit from positive demographic trends, both population and job growth. Some notable office using job announcements in our markets have occurred even in the midst of the pandemic. These include the Fortune 50 company, Centene, announcing a 6,000 job, $1 billion, East Coast headquarters in Charlotte, Microsoft with 1,500 new jobs in Atlanta, and publicly traded software company, Bandwidth, in Raleigh with 1,200 new jobs and a planned new headquarters campus. These announcements illustrate the long-term attractiveness of our markets and support the notion that companies still value a collaborative, in-person environment to foster creativity and strengthen company culture.

In the second quarter, we delivered FFO of $0.93 per share, which equals our first quarter results. Further, the second quarter reflected a full quarter of lost NOI from $338 million of properties sold in the first quarter. Our financial results were excellent, especially considering the challenging economic conditions. In addition to strong FFO, our portfolio metrics were solid with occupancy of 91.1%, up 20 basis points sequentially, same-property cash NOI growth of 2.4% excluding the impact of temporary rent deferrals, and in-place cash rents up 5.1% year-over-year.

We leased 821,000 square feet of second gen office space with GAAP rent growth of 13.6% and cash rent growth of 5.5%, and this was done with limited leasing capex, which drove net effective rents 7.6% higher than our prior five quarter average.

We stated last quarter it was too difficult to predict where the economy would go from here, and we still feel like predicting the shape of the economic recovery is speculative, so we're maintaining our focus on the following items that we believe best position us in the near-term: maintaining liquidity and a strong balance sheet; keeping our buildings fully open and operational; keeping our development projects on time and on budget; working with customers to maintain occupancy and timely rent payments; minimizing operating expenses without sacrificing operating performance or leasing opportunities; and capturing as many renewals and relets as possible given this uncertain environment.

We've reported our rent collection figures each month since the start of the pandemic, which have been strong at 99% every month, including July. Temporary rent deferrals equate to 1.2% of annual revenues, up modestly since our first quarter call. Importantly, new rent relief requests have dropped off significantly since mid-May. We have long emphasized the importance of having significant customer, geographic and industry diversification across our portfolio. No market accounts for more than 20% of revenues, no customer other than the federal government accounts for more than 4% and no industry category accounts for more than 25%. This diversification is serving us well in this uncertain macroeconomic environment.

Turning to our updated 2020 FFO outlook. Given the fluidity of the pandemic and its impact on economic activity, potential lost rents from customer defaults and non-cash straight-line write-offs are still too speculative to project. As a result, our updated FFO per share outlook of $3.59 to $3.68, which is up $0.04 per share at the low-end, excludes any such potential losses.

All of our buildings and parking facilities have remained open and available to our customers throughout the pandemic. Obviously, usage of our assets was significantly lower than normal in the second quarter. As expected, parking revenue was negatively impacted, but we were able to offset this with lower operating expenses. We now expect building usage in the third and fourth quarters to remain low, which is reflected in our updated outlook.

In early July, we sold two non-core properties in Memphis for $23.3 million. These properties were a combined 89% occupied and were sold at a low-7s cap rate based on projected 2020 GAAP NOI. We have another $72 million of properties under contract that are scheduled to close later this year. These dispositions comprise the low-end of our outlook of $95 million, and we have other non-core dispositions in various stages of the sale process that could bring us to the high-end of our outlook.

Development continues to be a growth driver for Highwoods. Our 1.2 million square foot development pipeline represents a $503 million investment, that is 77% pre-leased and 60% funded. Construction work on our four in-process projects, GlenLake Seven in Raleigh, Virginia Springs II in Nashville, Midtown One in Tampa and Asurion in Nashville, has continued throughout the pandemic. We remain on budget and on schedule with these projects. As a reminder, our pipeline is projected to generate more than $40 million of annual NOI upon completion and stabilization, less than $5 million of which will be generated in 2020.

New build-to-suit and anchor pre-lease conversations have slowed down compared to pre-pandemic levels, but there still are inquiries and activity from prospects. We remain hopeful we'll be able to secure additional highly pre-leased development opportunities during the next several quarters.

Before I turn the call over to Brian, I'd like to say a few words about our incredible teammates here at Highwoods. We greatly appreciate the hard work and dedication that our coworkers have exhibited every day since our normal daily routines and lives were disrupted by the pandemic. Their outstanding performance has shown through in our financial results in the second quarter, but it's also evident in so many other areas also, whether working tirelessly to maintain building operations, adapting to new processes to seamlessly file our 10-Q, adapting to virtual leasing tours or countless other examples, we couldn't be more proud of our team and we sincerely thank them for their efforts.

Brian?

Brian Leary -- Executive Vice President and Chief Operating Officer

Thank you, Ted, and good morning, everyone. I'd like to begin with a quick review of our performance in the second quarter, and then provide an update on what we're seeing real-time across our markets. As Ted noted, signing 821,000 square feet of second generation leases with GAAP rent spreads of positive 13.6% and cash rent growth of 5.5% is a testament to the quantity and quality of work put in by our exceptional team across the portfolio. In addition to solid rent growth in the quarter, securing terms on average of 8.8 years, which was driven higher by our renewal of the FBI in Tampa, and with limited leasing capex, is a win for the Company. Our payback ratio, or total capital committed compared to contractual revenue, was 6.7%, well below our recent average in the mid-teens.

Consistent with the Highwoods playbook, we remain focused on reducing future lease expirations and now only have 21% of revenue expiring through the year-end 2022, down from 29% at the end of 2019. The largest lease in the quarter was the 138,000 square foot full-building long-term renewal with the FBI in Tampa. Following this lease and T-Mobile's known July move-out of 116,000 square feet also in Tampa, we have one remaining expiration over 100,000 square feet through the end of 2022, which is the FAA in Atlanta, who remains in holdover status and with whom we continue renewal discussions.

Our in-place cash rents grew 5.1% year-over-year, driven by higher rents on deals executed in the past 12 months, an improved portfolio mix as a result of the market rotation plan, and as always, in-place annual escalators. As you know, all of our buildings and parking facilities remain open and available for our customers who are returning to the workplace in varying degrees with any return at scale still ahead of us. As Ted mentioned, this reduced utilization has impacted our parking revenues, with transient revenue nearly non-existent and some reduction from contractual monthly parkers. We've been able to offset the parking revenue delta with lower operating expenses. Moving forward, we expect parking revenues to remain tied to building occupancy, while we expect a sequential increase in opex as customers slowly return to their offices.

The volume of rent relief requests received has slowed significantly. And we continue to work with those customers with a demonstrated financial need created by the COVID-19 pandemic. These customers account for 7.8% of our total annual revenues and the temporary deferrals we've provided them represents approximately 1.2% of annual revenues. We continue to see most of the requests fall into a few broad categories: our amenity retail and restaurants; flexible office providers; elective medical practices; and other businesses impacted by social distancing measures. While there are no silver linings to a global pandemic and near shutdown of the economy, the second quarter has given us an opportunity to get even closer to our customers. Whether it's administering the protocols of a socially distanced and CDC-guided workplace, receiving inbound requests for help or structuring win-win extensions, we believe these strengthened relationships will benefit us in the years to come.

To that end, our rent collections have been strong throughout the pandemic with 99% collected each month through July. We believe we have a unique opportunity and responsibility to create desirable workplaces for our customers, and we remain committed to working collaboratively and constructively with them during these unprecedented times.

As expected, in-bound inquiries and new leasing activity has clearly slowed, with only 91,000 square feet of new leases and 48,000 square feet of expansions signed in the second quarter. For perspective, we have little revenue at risk in 2020 attributable to speculative new leasing and we've already completed the majority of spec renewals we forecasted for the year. At this point, and in response to the altered landscape, we've shifted most of the spec leasing in our outlook into 2021. However, we did see solid renewal activity with favorable economics in the second quarter.

Recognizing the challenge before us was also an opportunity, our leasing teams have quickly pivoted to the challenging dynamics on the ground. This includes showing our available space virtually and bringing a level of flexibility and creativity to the leases as we navigate these uncertain times with our customers and prospects.

Now, turning to our markets. Already the second largest financial center in the United States and having passed the city of San Francisco this quarter with regard to population, Charlotte continues to benefit from the great affordability migration already under way prior to the pandemic, and consistent with all of our markets, continues to see strong inbound interest. This was illustrated most clearly and most recently by Centene's 6,000 new job announcement in July that they will build their own 1 million square foot campus in University City adjacent to UNC Charlotte. The continued economic attractiveness and diversification of our markets is a testament to having: a low cost of doing business; highly educated and diverse workforce; strong transportation infrastructure; low cost of living; and the highest quality of life.

Across the board, market rents are holding steady for the moment, while vacancy is marginally increasing, and the level of sublease activity is consistent with the onset of a recession. We continue to pay close attention to sublease activity across our markets.

The wave of development projects launched pre-COVID continue to advance through various stages of construction and varying degrees of pre-leasing. Charlotte's 1.2 million square feet is 30% pre-leased, Atlanta's 5 million square feet is

60% pre-leased, Raleigh's 3 million square feet is 40% pre-leased, and Nashville's 2.8 million square feet is 28% pre-leased. Most of these projects don't deliver until 2021 or beyond which grants them the benefit of time. As Ted mentioned, our development pipeline will deliver over $40 million of annual GAAP net operating income upon stabilization. This includes $32 million from three projects that are fully pre-leased, on schedule and on budget.

In closing, I couldn't be prouder of the effort and results our teammates delivered for Highwoods in the second quarter. Their support of our customers' short-term needs has positioned us favorably in our markets, while our long-term perspective and presence across the Southeast should benefit us in the changing landscape.

Mark?

Mark Mulhern -- Executive Vice President and Chief Financial Officer

Thanks, Brian. In the second quarter, we delivered net income of $37 million, or $0.36 per share, and FFO of $99.2 million, or $0.93 per share. As Ted mentioned and we discussed last quarter, the $338 million of dispositions completed in the first quarter had a dilutive impact of $0.02 per share in the second quarter compared to the first quarter. Additionally, the second quarter was negatively impacted by lower parking revenue, which also had an approximate $0.02 per share drag compared to the first quarter. Offsetting these items was a significant reduction in net operating expenses and lower G&A.

Given the challenging economic environment, we are pleased with our performance. The quarter was relatively clean from an FFO perspective except for a $0.5 million charge to straight-line rents receivable. Excluded from FFO, but included in net income, is a $1.8 million impairment on a non-core building in Memphis.

Our balance sheet is in excellent shape. At quarter-end, we had $586 million of liquidity, which has now increased to over $600 million following the receipt of proceeds in early July from the sale of two non-core properties in Memphis. Our net debt-to-adjusted EBITDAre ratio held steady in the quarter at 4.9 times and our leverage ratio, including preferreds, is 36.8%. We have no debt maturities until June 2021 and expect to fund approximately $90 million on our development pipeline during the remainder of the year.

As we discussed last quarter, we expect lower leasing capex than our original 2020 projections, which should drive higher free cash flow and dividend coverage. The combination of ample current liquidity, improving cash flows and projected disposition proceeds later in the year puts us in a strong position to fund our remaining $201 million to complete our development pipeline and repay our June 2021 bond maturity without the prerequisite of raising additional capital.

Turning to our outlook, we've updated our FFO range to $3.59 to $3.68 per share, which is up $0.04 per share at the low-end. Adjusting for the dilutive impact from the $23 million non-core disposition completed in July and the second quarter straight-line rent credit loss, neither of which was included in our previous range, our outlook is up $0.05 per share at the low-end and $0.01 per share at the high-end, on an apples-to-apples basis.

Last quarter, we provided a list of projected impacts from the COVID-19 induced economic slowdown. We've updated these items and included a table in last evening's press release, and I'd like to provide a little more color. Number one, we lowered our parking forecast by an additional $0.01 to $0.02 per share for a total reduction of $0.05 to $0.09 per share compared to our original February 4 outlook. We previously expected improved utilization of our garages in the third and fourth quarters, but we now expect parking income will approximate the second quarter level in the third and fourth quarters.

Second, in opex, net of recoveries, is now expected to be $0.06 to $0.08 per share lower than our original February 4 outlook, which mostly offsets the reduction in parking income.

And finally, the dilutive impact from the $23 million non-core disposition and straight-line rent credit loss has lowered our outlook by $0.01 per share.

In addition to these specified COVID-19 induced changes to our outlook, we increased the low-end of the prior range $0.03 per share. The result is an updated range of $3.59 to $3.68 per share. In total, the mid-point of our range is down $0.025, or less than 1%, from our original February outlook.

As we stated in the press release, our updated outlook excludes the potential impact of customers that file bankruptcy or otherwise irrevocably default on their leases and non-cash credit losses of straight-line rent receivables. Given the fluidity of the pandemic and its effect on the collectability of rents over the remainder of existing lease terms, such losses are still too speculative to project at this time.

Our year-end occupancy assumption is 89% to 91%, which we lowered 100 basis points at the high-end due to slower new leasing activity.

Our same-property cash NOI growth outlook is 1% to 2%, excluding potential lost rental revenues attributable to COVID-19, but inclusive of the negative impact of temporary rent deferrals. Our prior range was 1.5% to 3%. The change from our prior outlook is driven primarily by the negative impact of temporary rent deferrals and free rent associated with early lease extensions. These items reduce 2020 cash NOI but will benefit cash flow in future years, while they have no impact on current year GAAP NOI or FFO.

As is our custom, we don't include the effect of future acquisitions, dispositions or development announcements in our FFO outlook. Ted mentioned that we have $72 million of dispositions under contract that are scheduled to close later this year, and these have not been included in our updated FFO range. The low-end of our disposition range is $95 million and the upper end is $150 million. We have maintained the original upper-end of our acquisitions and development announcement categories as a placeholder in our current outlook, with a low-end of zero given the current uncertain economic environment.

So to wrap up, we believe we are well-positioned to weather the uncertain economic environment given our balance sheet, our portfolio, our development pipeline and geographic diversification.

Operator, we are now ready for your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And we have a question from Rob Stevenson from Janney. Please go ahead.

Robert Stevenson -- Janney Montgomery Scott LLC -- Analyst

Good morning, guys. How are you guys thinking about the potential for additional dispositions beyond what you guys have just talked about in the back half of the year? Have you guys thought about putting more under the market if the rhetoric on making changes to 1031 exchanges continues to grow? Are you pretty much comfortable with that? Is -- with what you are -- where you are now? Is that a situation where you need to identify some acquisitions or developments for use of capital? How you guys -- help me understand how you guys are thinking about the back-end of 2020 and into 2021 on that front?

Ted Klinck -- President, Chief Executive Officer and Director

Hey, Rob, it's Ted. So, as we mentioned, we sold $23 million in early July. We've got another $72 million of properties that are under contract. And then we do have additional assets that are in various stages of marketing. So, if you add all those together, that's about the high-end of our guidance, we're about $150 million or so. And historically, in any typical year, we're in that $100 million to $150 million of dispo range. So, I'd say, this is going to be somewhat of a typical year for us, is sort of the way we look at it.

Mark Mulhern -- Executive Vice President and Chief Financial Officer

Rob, the only thing I'd add -- it's Mark. We've got some flexibility from a tax perspective. So, we don't necessarily need to do all 1031 exchanges on that. We've got some room and an ability to manage some of that. With respect to the -- maybe future 1031, I think it's a little too early to speculate on that. We really haven't gone through and analyzed maybe the impacts of that going into 2021 just yet.

Operator

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

David Rodgers -- Robert W. Baird -- Analyst

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

Ted Klinck -- President, Chief Executive Officer and Director

Sure. Dave, it's Ted. I'll start, maybe Brian and Brendan may jump in. In terms of building utilization, we track that weekly. Every Tuesday or Monday night or Tuesday morning we get a report from all of our divisions. And that's -- it's somewhat subjective and that we're looking at the paid parking buildings are easy because we can check swipe in, swipe out from a parking standpoint. But otherwise, it's counting cars in the parking lot and walk in the buildings. But on average, depending on the market, it's -- I'd say, 20% to 30% utilized our buildings today and that really -- we were expecting an uptick after the 4th of July, and really haven't seen that. So it has been fairly consistent starting, I'd say, maybe mid-May up till now. It may go up or down a little bit week-over-week, but generally most of our markets are in that 20% to 30% range from a building standpoint.

Brian, do you want to touch on the leasing?

Brian Leary -- Executive Vice President and Chief Operating Officer

Sure, Ted. Just following up on that, I think the occupancy and the leasing activity have sort of tracked each other a little bit. To Ted's point on the July 4 date, we did start to see more people coming back in the buildings. Previous quarter, no tours whatsoever, everything was virtual. We have absolutely seen people touring the buildings now, kicking the tires, the number of proposals are up, but it's slow, right? We're seeing the sublease market start to track similar to what you would expect at the beginning of a recession, generally larger users with the excess space that they may have taken previously to it. But we have gone ahead and projected most of the new spec leasing into 2021 that we had in the remainder of 2020. So, we feel pretty conservative in our thinking through year-end.

Brendan Maiorana -- Executive Vice President, Finance

And then Dave, just to answer the parking question. So, I think we did a little bit better than what our internal forecast was in the second quarter on parking. But what we've seen thus far, I'd say, in the latter part of the second quarter and then thus far in July is maybe less of a ramp up than what we had projected when we updated guidance in April. So, our expectations are that, parking revenues are -- in the third and fourth quarter are likely to be roughly in line with the level that we experienced in the second quarter. And previously, I think, we thought there would be some ramp up in those parking revenues in the back half of the year.

Operator

Thank you. We have a question from Jamie Feldman with Bank of America. Please go ahead.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Thank you. There has been a lot of discussion around work from home in suburban satellite offices and are people going to prefer less urban centers, more center -- more settings, more urban or more suburban. As you think about your market footprint and the balance, what are the conversations like with tenants when they're even considering that? Or is there a views like there isn't really no advantage either way given the commute times are probably pretty equal and you're not really saving that much? I'm just curious what the discussion are like.

Ted Klinck -- President, Chief Executive Officer and Director

Yeah. Jamie, it's Ted. Let me start, maybe Brian will add onto it. Look, I think it's still pretty early in terms of these discussions. As you know, companies first and foremost, have been making sure their employees are safe and healthy as they plan for the return to the office. And as we've talked about, most of the companies are even pushing off that return. So, a lot of these decisions, I'm sure they are in the background, we are hearing, or having discussions internally, but they haven't made it up to actually talking about making new leases or moving or doing the hub-and-spoke or what have you.

I do think in our markets, we think we may become both more hubs, as well as spokes, right, whether it'd be Microsoft big take down, obviously, other technology companies and all that, but we're also seeing corporate headquarters come and whether it'd be the Centene, where there has been three or four here in Raleigh that continue to grow. So, we think the Southeast is well positioned, both -- if the hub-and-spoke concept starts to get some traction, we could be both a hub and a spoke in a lot of our markets.

Brian, do you want to jump in?

Brian Leary -- Executive Vice President and Chief Operating Officer

One thing maybe to pull a thread on your question, Jamie, and thanks so much for asking it. It's obviously something we're paying close attention to, and we think we're in a pretty good spot. So, you asked about, is there a chance, you really not saving that much in these maybe lower costs, non-transit-dependent, low friction for commute markets that we have here in the Sun Belt? I think you've probably heard this, there's kind of 1/9/90 rule, where most organizations, their annual investment every year, 1% is in kind of utilities, keeping the lights on, 9% is in real estate, and 90% is in people. And if ever -- what we've heard from companies, in fact, one of our largest customers, CEOs quote is, it's not if we will return to work, but when. They focus on the 90%. Focus on culture and productivity, where value is truly creating the companies. We're generally feeling and hearing specifically that it's within an office under a roof together. Now, it might be a -- with a little more room between each other. I would also argue, I think, we've seen different experiments in this space before COVID. And folks continue to talk about when they're getting back in, not if.

Operator

We have a question from the line of Emmanuel Korchman from Citi. Please go ahead.

Emmanuel Korchman -- Citigroup -- Analyst

Hi, everyone. Good morning. If we go back to the corporate expansions that you highlighted at the beginning of the call. I think you mentioned Centene and Microsoft, Bandwidth and others. Is there any change or sort of -- I don't know if you're part of the discussions with them or if you know people that were, but are they talking about sort of the way that they're using the space, whether that be the densities, whether that be the flexibility or otherwise as they make those decisions? So that's my first question.

On the same topic, it looks like a lot of those were driven or at least supported by grants or other financial support from the states. Is there any conversation on that environment changing either to the better or worse? Thanks.

Ted Klinck -- President, Chief Executive Officer and Director

So, yeah, good question. I think, certainly, state incentives are important. I think that's -- it's always has been in the Southeast. I think it's -- states are battling each other for the bring jobs to their state. So, I think that is an essential element, that's only one piece of the puzzle. And I think what we're seeing on the inbounds is, these companies want corporate campuses, right? They are designing them around having their employees in the office and work like they traditionally have. It's not necessarily going to be a work from home aspect, they want the people together, so they can collaborate, they can create this corporate culture that they -- that's so hard to do if you're doing on Microsoft Teams and all that. So that's -- those are some of the things we're seeing is that, again, Southeast is attractive. The economic incentives, I think, companies are -- or states are chasing these companies like they always have been, but the corporate campus is very important.

Brian Leary -- Executive Vice President and Chief Operating Officer

Hey, Manny, it's Brian here. The grants -- the open for business nature of these Sun Belt markets is not the defining factor that is securing these wins. It's, first and foremost, that 90%, we talked about earlier 1/9/90, it's the talent. And the quality of life, and the people are being drawn here. You're seeing the inbounds. And so, we are actually seeing on a number of our leasing calls across the different market, some of the same code-worded prospects coming inbound in multiple markets. So it's interesting to see that there is -- and just to that end, too, the into the economic development officials, the EDCs, have been receiving the same amount of activity in the last few months as they did pre-COVID. So, we think that's a good sign.

Emmanuel Korchman -- Citigroup -- Analyst

Okay. Thanks very much.

Operator

And we have a question from Vikram Malhotra with Morgan Stanley. Please go ahead.

Vikram Malhotra -- Morgan Stanley -- Analyst

Thanks for taking the questions. Just maybe on the topic of density and as it pertains to work from home. Any kind of early indication of tenancy -- any conversations you've had with tenants on how they may look to reuse their space now and maybe post-vaccine? And related to that, do you have a sense of what density is across your portfolio today?

Brian Leary -- Executive Vice President and Chief Operating Officer

So, Vikram, this is Brian. Good question on the last one. It's so varied in terms across the portfolio and the actual densities, whether it's 250 square feet per person, 350 square feet per person. I do think, as a general statement, we are probably less dense than something you might see in a 50-storey tower because we've had the ability to spread out, land costs are lower, construction costs are lower, operating costs are lower.

We have a number of tenant fit-ups and whether it's anchor tenants or customers, excuse me, going into our buildings, they are not making wholesale changes to their layouts. So, they are not going ahead and spreading people out, even further beyond the guidelines that are out there. But I think they're thinking in the way that they were laying out the space previously met the guideline. So, I think that's generally what we're seeing is that, there is no big changes. And a lot of folks are, in terms of coming back to work, they are waiting and seeing. Taking a wait-and-see approach in terms of whether it's a spike in incidences or changes in the science. But that's what we're seeing is more a wait-and-see approach.

Vikram Malhotra -- Morgan Stanley -- Analyst

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

Ted Klinck -- President, Chief Executive Officer and Director

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

Vikram Malhotra -- Morgan Stanley -- Analyst

Thank you.

Operator

All right. We have a question from Brendan Finn with Wells Fargo. Please go ahead.

Brendan Finn -- Wells Fargo Securities -- Analyst

Great. Thanks. You guys mentioned that Q2 leasing volume included some of these blend-and-extend leases or early lease extensions. So, I was just wondering, are you still having these types of discussions with tenants. Or have you already kind of executed on most of these opportunities?

And then maybe could you just comment on the economics of these types of extensions, like maybe how much free rent you guys are offering upfront relative to the length of the extension?

Brian Leary -- Executive Vice President and Chief Operating Officer

Hey, Brendan, Brian here. So, I would say, that these kinds of conversations regarding blend-and-extend with customers, they are kind of real-time as they come in, different customers are getting to the end of their initial occupancy throughout the year, through the end of this year into next year. And so, we do have the opportunity to engage some of them as they actually are coming to the end or in advance. So, I think we have the opportunity to continue to use that as a tool to maintain occupancy and strengthen these relationships.

Maybe turn over to Brendan on some of the different mechanisms on the economics.

Brendan Maiorana -- Executive Vice President, Finance

Yeah, Brendan. Hi. Good morning. So, it -- in terms of the economics, I'd say, on balance, it's probably, let's call it, a month of abated rent for a year term kind of give or take, rough numbers. I think in terms of how that's impacted our financials and cash flow for 2020? It's probably about a 25 basis point reduction to cash, same-property NOI growth. So, that's outside of the deferrals that we disclosed in last night's press release. So, that combination of kind of the abatements, that's about 25 basis points. The deferrals, the net impact in 2020 which will be repaid over time primarily in 2021 is probably about 100 basis points on those same-property numbers.

And then just to kind of tie it back to our original outlook that we had in February, we disclosed how much we expected rents to be impacted due to the COVID changes and that's probably, let's call it, about 75 basis points. So, all-in, that's kind of a 200 basis point reduction in terms of the original range in February that we provided of same-property growth compared to the 1% to 2% that we updated last evening.

Brian Leary -- Executive Vice President and Chief Operating Officer

One other little thing on the blend-and-extend concept, Brendan is that, many times they are low capex opportunities. So maintaining occupancy, and they are not -- at least many of them long-term. So, we know at some point you'll have to come back to that. But they are good payback ones for us.

Brendan Finn -- Wells Fargo Securities -- Analyst

Great. Thanks, guys.

Operator

We have a question from Jamie Feldman with Bank of America. Please go ahead.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Thank you. I was just hoping -- I know you said there is really not a lot of speculative leasing going on and you've pushed out your estimates or your expectation until 2021. But can you just talk us through the largest vacancies in the portfolio? And where your discussions do stand? And have any of those fallen out of the bed?

Ted Klinck -- President, Chief Executive Officer and Director

Sure. Jamie, it's Ted. In terms of largest vacancies, obviously, the largest would be T-Mobile. T-Mobile's lease expires at the end of this week, at the end of this month, I guess, on Friday. We have signed about 11,000 square feet. So, we've got a good start. But other than that, prospects are slow, activity is slow, just like it is for most space, in most of our markets. So, we're encouraged that we got our first bite done and that starts later this year.

The second largest would be 5332, also in Tampa, former Laser Spine building. We have about 84,000 square feet left to lease there. And, again, really, I'd say, no strong prospects on that one right now as well. We've had pretty good activity a month or two ago and then activity sort of died back down after that. So, I think those two are the biggest, and then after that, we got a couple -- well, really on top of that a couple of our development projects as well, they are in that same category. We've got Virginia Springs II in Nashville, about 111,000 square feet. We've got strong prospects for a little 6,000 square foot kick off prospect that we feel pretty good about.

And then activity there in Virginia Springs, Jamie, pre-COVID, we had incredible activity. We probably had a prospect list that was two or three times the size of the building. Hopefully, a lot of those were on hold. We're staying in close contact with the brokers on those. And hopefully, those will -- maybe come back to fruition over the next several months as things get better.

And then on -- finally on Midtown Tampa, it's about 150,000 square foot building. We've got a strong prospect for 10,000 feet that we're negotiating a lease with right now. So -- and outside of that, again, we'll get in tours there as well. But activity in general in terms of companies willing to step up and make the decisions, it's certainly slow.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Okay. And then you had mentioned Centene's headquarter moved to Charlotte. Do you think there's going to be -- I know they're doing on their own project. But like any overfill demand you think you might see in that market? Or it's pretty much going to be self-contained?

Ted Klinck -- President, Chief Executive Officer and Director

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

Brian Leary -- Executive Vice President and Chief Operating Officer

And Jamie to your question, Brian here, I think most economic developers will tell you on a inbound move like that for a headquarters, it's a low-end of 1:1, but typically a 2:1 job creation. Those 2:1s aren't all taking office space, so that would include all kind of jobs generated by those inbound folks. But I think that's what Charlotte feels pretty good about and the state of North Carolina and the investment they've made.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

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

Brian Leary -- Executive Vice President and Chief Operating Officer

Well, good question, Jamie. So one of the things we look at, right, as a canary in a coal mine is the sublet space. And I would say, again, out of the gate, Atlanta and Nashville are the ones that are starting to get our attention first. Atlanta is the -- just the largest market in general. They've got 2.5 million square feet in sublet space. Majority of that are in one single place. 1 million square feet in the Central Perimeter, but from a Highwoods perspective, we have very little kind of within our portfolio or customers within our portfolio, looking to sublet from an Atlanta perspective.

Nashville, much smaller market, but a higher percentage of that market, about 8% of that market has got some sublet activity. Again, you want to talk about a nominal number, it's about 375,000 square feet. So, those are the two we're highly focused on. Those are also the two with a great deal of construction under way. So, if you fast forward over the next couple of years, you'll see new product being brought in and with long stabilization periods probably. So those are where we're focused, and keeping an eye on it. But next quarter, we'll have more to talk about, probably.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

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

Ted Klinck -- President, Chief Executive Officer and Director

So, yeah, Jamie, really our position is -- it's really three buildings. It's about 625,000 feet or so, that's pretty well leased. So, it's not a huge position, but certainly, it's competitive space without a doubt.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Okay. All right. Thank you.

Operator

[Operator Instructions] And we do have a question from Chris Lucas from Capital One Securities. Please go ahead.

Christopher Lucas -- Capital One Securities -- Analyst

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

Ted Klinck -- President, Chief Executive Officer and Director

Certainly, it's slowed down quite a bit. The level of activity, I would have told you, pre-COVID, it was very strong. We had numerous conversations, more than a handful of conversations going on as recent as March. And we had one come in actually even post -- beginning of COVID, that has since gone on hold. So, we're hopeful that these didn't go away, they're just put on hold. But right now things are just pretty slow from a transaction standpoint. The brokers are saying they haven't died, but they are just on hold, whether that's an indefinite hold or what have you, we don't know yet, but still encouraging, though.

Christopher Lucas -- Capital One Securities -- Analyst

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

Ted Klinck -- President, Chief Executive Officer and Director

Well, that's the answer I'll start off and Brendan can jump in. It's probably both, right? So, the onset of COVID when the buildings really emptied out or became much less used, we were -- we are using that time to do some capex projects, some customer work that otherwise would be done over -- to having over time needed to do it or nights and weekends and all that. So, we use -- we did a lot of painting and other smaller projects over the last few months.

From a capex standpoint, again, what -- we looked at what's the nice to have versus the need to have. A lot -- and so, somewhat to manage cash flow and all that we kept the need to have and dialed back from the nice to have.

And Brendan, do you want to give more detail?

Brendan Maiorana -- Executive Vice President, Finance

Yeah. Chris, I think just to set expectations maybe for the balance of the year, I think what we expect is the leasing capitalable [Phonetic] spend will go down relative to the first half of the year. Certainly, over the next several quarters, we expect that to happen. And you can probably see between the leasing page, the commitments that we've had, both on the TI and leasing commission basis in the first half of the year or about $20 million less than what we expensed through the AFFO or CAD statement. So, I think typically those commitments run ahead of the expense. So, we think leasing capital will go down over the next few quarters. And seasonally we do typically see a pickup in terms of BI spending in the second half of the year.

And to your point, we have decided to accelerate some BI projects because, one, it's efficient for us to do so, as you mentioned, while buildings are empty; and then two, as we disclosed last quarter, we do think cash flow is improving for the Company. So we took the opportunity to go ahead and accelerate some of those BI projects.

Brian Leary -- Executive Vice President and Chief Operating Officer

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

Christopher Lucas -- Capital One Securities -- Analyst

Thank you. That's all I had today.

Operator

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

Daniel Ismail -- Green Street Advisors, LLC -- Analyst

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

Ted Klinck -- President, Chief Executive Officer and Director

Sure. Hey, Danny, it's Ted. Look, I do think, as you know, transaction activity probably was down 70-plus percent in the second quarter. I think there are some signs of life. Virtually every building that was on the market in the first and second quarter got pulled. And we're starting to see a few of those come back to market. And if we were understanding from the brokers, there's pretty good activity and a lot of capital chasing that and it's both unlevered buyers but also levered buyers. Sort of to your point on the interest rates, historically, as you know, interest rates have boded well for prices and for real estate.

And so, I do you think there is a chance that cap rates can -- whether they go down or not or stay stable and prices stay high, I think to be determined. But I do think we've even heard one example of a deal that is actually going under contract at a higher price than it was pre-COVID when it was under contract. So, fell out of contract, went under contract recently with at a higher price. So, I think there's a lot of capital out there with low interest rates, I think that bodes well for the transaction market when properties start coming back to market.

Daniel Ismail -- Green Street Advisors, LLC -- Analyst

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

Ted Klinck -- President, Chief Executive Officer and Director

I don't think we got anything where we've seen that yet. The transactions we're working on, just -- it's largely Phase 2 of the market rotation plan and those assets are more geared toward buyers of more local and regional buyers for the most part. So, we haven't seen any indicators of new buyer, new capital sources coming for those transactions yet.

Daniel Ismail -- Green Street Advisors, LLC -- Analyst

Great. Thank you.

Operator

And there are no further questions at this time.

Ted Klinck -- President, Chief Executive Officer and Director

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

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

Brendan Maiorana -- Executive Vice President, Finance

Ted Klinck -- President, Chief Executive Officer and Director

Brian Leary -- Executive Vice President and Chief Operating Officer

Mark Mulhern -- Executive Vice President and Chief Financial Officer

Robert Stevenson -- Janney Montgomery Scott LLC -- Analyst

David Rodgers -- Robert W. Baird -- Analyst

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Emmanuel Korchman -- Citigroup -- Analyst

Vikram Malhotra -- Morgan Stanley -- Analyst

Brendan Finn -- Wells Fargo Securities -- Analyst

Christopher Lucas -- Capital One Securities -- Analyst

Daniel Ismail -- Green Street Advisors, LLC -- Analyst

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