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Text: Also, the release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures.
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.
Let me start by saying I hope you are all well and your family are safe and healthy.
As mentioned on our last call, the Highwoods teams across our markets have safely returned to our offices, which is allowing us to reap the benefits of collaboration and our company's unique culture.
Across our 27 million square foot portfolio, we estimate utilization is approximately 25% on average, which has increased since the end of the summer, but is below our first COVID revised outlook we provided in April.
We don't expect a sizable increase in utilization until at least early 2021.
It remains difficult to predict the duration and severity of the current recession and when leasing activity will recover.
While we're all hoping for a return to pre pandemic office fundamentals, we're still well positioned in the current environment given our lack of large customer expirations over the next few years, our ability to control opex and the built-in growth from our highly pre-leased development pipeline.
Plus, we further strengthened our fortress balance sheet this quarter by raising $400 million of 10.5 year bonds at an attractive rate.
We have ample liquidity to fund the remaining spend on our development pipeline and still have plenty of dry powder to capitalize on future growth opportunities.
In addition to having a high-quality portfolio and strong balance sheet, our markets continue to benefit from positive demographic trends, both population and job growth.
To this end, the Urban Land Institute's recently published 2021 Emerging Trends in Real Estate report listed Raleigh as the number one market for overall real estate prospects.
Nashville came in at number three, Charlotte number five, Tampa number six and Atlanta number 11.
These five markets constitute more than 75% of our NOI.
We're seeing this national story of jobs migrating to our footprint verified in the inquiries we're receiving.
We've hosted numerous out of town prospects seeking space, ranging from large to small, and our partners at the various economic development agencies across our markets indicate the pipeline of out of town users seeking relocations continues to be robust.
On a related note, the big elephant in the room for office landlords is obviously the long-term impact of work-from-home policies.
Brian will go into more detail about what we're seeing in our markets.
And while it's still early, work-from-home has not yet had any meaningful impact on leasing decisions by existing customers or prospects.
Thus far, we've only experienced a few small customers who elected not to renew based on their plan to work from home.
And some of these may be temporary solutions.
In the third quarter, we delivered FFO of $0.86 per share, which included a cumulative $0.05 impact from a debt extinguishment charge and noncash write-offs of straight-line rent due to the conversion of certain leases from fixed rent to percentage rent.
Adjusting for these items, our FFO would have been $0.91 per share, a solid performance given the challenging economic environment.
In addition to healthy FFO, our portfolio metrics were strong.
In-place cash rents are up 5.2% compared to a year ago, which helped drive same-property cash NOI of 2.2%, excluding the impact of temporary rent relief deals, even with average occupancy down.
This performance was consistent with last quarter's 2.4%.
As expected, occupancy dipped sequentially to 90.2%, driven predominantly by T-Mobile's expiration in Tampa.
We expect occupancy to hold firm around 90% in the fourth quarter.
We leased 660,000 square feet of second-gen office space with GAAP rent growth of 12.5% and cash rent growth of 5% and this was done with limited leasing capex, which drove net effective rents 7.2% higher than our prior 5-quarter average.
New leasing volume rebounded to 190,000 square feet.
And while still below our normal quarterly volume of 200,000 to 250,000 square feet, we're encouraged by the sequential uptick and improved level of prospect activity over the past month.
Since the start of the pandemic, our monthly rent collections have been consistently strong.
We collected 99.7% of our rents in the third quarter and have collected 99.7% of October rents.
Temporary rent deferrals equate to 1.2% of annual revenues, unchanged from last quarter, and repayments are occurring on schedule.
To date, we've received repayment of approximately 25% of total deferrals and remain on track to be largely repaid by the end of 2021.
We have made significant progress on Phase two of our market rotation plan to exit Greensboro and Memphis.
These sales will bring Phase two dispositions to $151 million for the year at prices that are in line with our pre pandemic expectations.
As reflected in our updated FFO outlook, these sales will be dilutive in the near term as we carry excess cash on our balance sheet, but we're confident we'll be able to replace this income as we redeploy the proceeds.
On the acquisition side.
For the few high-quality buildings that have come to market since the pandemic started, pricing has been very competitive, especially for buildings with high occupancy, limited near-term lease roll and creditworthy customers.
We're actively looking for opportunities to deploy capital, which is why we've kept our 2020 acquisition outlook range unchanged at $0 to $200 million.
However, we'll stay true to our mantra of being disciplined allocators of capital and only seek opportunities where risk-adjusted returns make sense for our shareholders.
Our 1.2 million square foot $503 million development pipeline remains on budget and on schedule.
We funded 73% to date and expect to fund most of the remaining $138 million by the end of next year.
Since our last call, we've signed leases at both of our spec projects, one at Midtown West in Tampa and the other at Virginia Springs II in Nashville.
These deals bring our overall pre-leased rate to 79%.
In addition to the signed leases, we have seen increased prospect activity at both these projects in the past several weeks.
The three other projects in our development pipeline are fully pre-leased and on schedule to meet their delivery dates.
Upon stabilization, our pipeline will provide more than $40 million of NOI, of which more than $32 million is already secured through signed leases.
New build-to-suit and anchor pre-lease conversations have slowed down compared to pre-pandemic levels.
We don't expect any new project announcements this year, and therefore, we took the possibility of new development announcements out of our updated 2020 outlook.
However, we're still having conversations with prospects that could lead to build-to-suits or highly pre-leased development announcements in 2021.
Now to our updated 2020 FFO outlook of $3.59 to $3.61 per share.
As I mentioned earlier, we incurred $0.05 of expenses this quarter due to debt extinguishment charges and noncash straight-line rent write-offs.
In addition, fourth quarter dispositions will be dilutive by $0.01 per share.
These items, which negatively impact our full year results by $0.06 in the aggregate were not in our prior outlook of $3.59 to $3.68.
Excluding these items, the midpoint of our updated range is up $0.025 compared to the last quarter.
As a reminder, potential lost rents from customer defaults and noncash straight-line credit losses for the remainder of 2020 are too speculative to project.
Finally, our performance the past few quarters demonstrates our ability to quickly adapt to changing macro conditions through reduced opex and meeting customers' needs with flexible and creative lease solutions.
Plus, our limited lease expirations puts us in good position to mitigate the impact from the recession.
We also have built-in growth from our development pipeline and have a balance sheet with plenty of capacity to pursue additional growth opportunities.
We're cognizant of the near-term challenges facing us from the current environment, but we're confident we have the ingredients to drive sustainable growth over the long term.
While leasing volume was lower in the third quarter than the second, we did see a sequential increase in activity levels.
During the quarter, we signed 660,000 square feet of second-generation leases with GAAP rent spreads of a positive 12.5%, cash rent growth of 5% and net effective rents that were 7% above our prior 5-quarter average, just short of the record set in the fourth quarter of 2019.
With regard to new leasing, activity picked up in the third quarter with 190,000 square feet of new deals and 8,000 square feet of expansions.
The renewal of the Federal Aviation Administration in Atlanta during the quarter finalized our last remaining expiration over 100,000 square feet during the next 2-plus years.
With this renewal in hand, we now have only 18% of our portfolio expiring over the next nine quarters, which is down over 500 basis points compared to this point a year ago and our long-term historical average.
As Ted discussed, rent relief deals held steady at 1.2% of our annual revenues.
With inbound relief requests slowing to a trickle, we're focused on rent collections and creative solutions for customers with needs-based requests.
To that end and as a testament to the quality of our customers, our collections are strong with 99.7% of all rents collected in the third quarter and for the month of October.
These few leases were done for customers whose businesses have been severely impacted by social distancing measures, and we preserved the potential to receive full rent over the life of the lease.
Let's now drill down and take a closer look at our markets where activity has picked up since Labor Day.
Across the board and specifically in Tampa, Raleigh, Nashville and Atlanta, tours are up.
New requests for proposals have come in, and we are seeing inbound interest from out of town prospects, looking to grow or relocate to our markets.
To this end, 25% of new deals in the quarter are new to market, coming from the West Coast, Midwest and the Northeast.
We've consistently touted our BBD location strategy, which contains a mix of highly amenitized urban and suburban locations across our footprint.
We've seen validation of this strategy in the superlatives provided in the recently released 2021 Emerging Trends in Real Estate report, published annually by ULI and PricewaterhouseCoopers.
Four of our markets place in the top six including our hometown of Raleigh, where we own and operate close to five million square feet, coming in at number one.
As one might expect, and consistent with previous recessions, the availability of sublease space is increasing.
However, in our portfolio, sublease space remains steady in Q3.
Price discovery on rents is limited due to the low volume and high proportion of short-term renewals.
But for the moment, face rates are holding steady, while we do expect downward pressure on net effective rents as concessions increase.
Vacancy increased 20 basis points across our markets for the quarter.
As Ted mentioned, we haven't seen work-from-home policies have a big impact on customer leasing decisions.
Specifically, in 2020, we've had seven customers ranging in size from 1,200 square feet to 4,300 square feet who did not renew leases in favor of working from home.
And several of these indicated, this decision may be temporary.
We believe the characteristics that made our markets centers of growth prior to the pandemic are receiving increased attention as organizations and individuals reevaluate their geographic plans and preferences.
Anecdotal evidence suggests the attractiveness of our markets could be an accelerant for inbound relocations for corporate users and individuals.
To Charlotte, where after five years straight of positive quarterly absorption, the market recorded its first negative quarter in Q3, with the footnote that rents are up 3% and major inbound announcements, such as Centene's one million square feet and 3,000 new job announcements are just now getting going.
While construction on major new offices for Honeywell, Lending Tree, Duke Energy and the Lowes Global Technology Center are still finishing up.
Markedly different from the previous recession, Charlotte is now recognized as a growing and stable tech hub, exemplified by its number one ranking atop of Robert Charles Lesser & Co's and CapRidge's STEM Job Growth Index.
In good company on the same index at number five for growth, and with an already established global reputation as a tech hub, the Raleigh market posted positive net absorption in the third quarter.
Our portfolio there held firm and we signed 167,000 square feet.
Let's now go down to the home of the Stanley Cup winners, the World Series competitors at the very least, Super Bowl hosters in Tampa, where rents have increased 4% year-over-year, and the market saw over 200,000 square feet of inbound inquiries from out of market prospects this quarter.
Labeled a boom market and a member of the Super Sun Belt by ULI's report, Tampa is highlighted as a metro area with less exposure to industries most affected by COVID-19, in addition to its low cost of living and business-friendly government.
Our talented Tampa team was busy in the third quarter.
The team signed 80,000 square feet of leases and toured several prospects through Avion and Midtown Tampa, where the mixed-use development is racing toward delivery next year and where our new 150,000 square foot office building is rising directly above an REI, next door to Whole Foods and luxury apartments and down the block from Shake Shack and two new hotels.
In closing, we wouldn't be where we are today without the tireless dedication of our amazing team.
From every maintenance tech, property manager and leasing agent, each Highwoods colleague adds their individual excellence in the pursuit of superlative results.
By developing, leasing, operating and maintaining our own portfolio, we do so as stewards entrusted with creating and sustaining the ideal environment for our customers to thrive in.
Doing so in normal times is exceptional.
Doing so throughout a pandemic is extraordinary.
Now let me hand it over to Mark.
In the third quarter, we delivered net income of $40.3 million or $0.39 per share and FFO of $91.7 million or $0.86 per share.
As Ted mentioned, the quarter included a debt extinguishment charge and noncash straight-line credit losses, which reduced FFO by $0.05 per share.
Neither of these items were included in our prior FFO outlook.
Excluding these two items, our FFO would have been $0.91 per share which compares favorably to $0.88 per share in last year's third quarter, also after excluding onetime items associated with the market rotation plan from a year ago.
To put this in context, clean FFO is up about 3.5% year-over-year, with leverage essentially unchanged, while we've entered Charlotte with a trophy building, exited the majority of our Greensboro and Memphis properties and operated during a pandemic and severe recession.
This growth was due to higher rents, reduced operating expenses, keeping tight control on G&A and taking advantage of the debt markets to reduce interest expense.
The macro environment remains challenging but we've been pleased with our ability to adapt quickly and deliver strong financial results.
Our balance sheet is in excellent shape.
We issued $400 million of 10.5 year bonds with an interest rate of 2.65%.
We used some of the proceeds to retire $150 million of our 2021 bonds early and repaid a $100 million term loan due in early 2022.
After repaying the balance outstanding on our revolving line of credit and continuing to fund development, we ended the quarter with $119 million of cash on hand.
Our net debt-to-adjusted EBITDAre ratio was steady at five times, and our leverage ratio including preferred stock is 36.6%.
We have $138 million left to spend to complete our development pipeline and no debt maturities until June 2021.
The combination of more than $700 million of current liquidity and projected fourth quarter disposition proceeds puts us in a strong position to fund our remaining capital obligations while leaving us ample room for future growth opportunities without the need to raise additional capital.
Turning to our outlook.
We've updated our FFO range to $3.59 to $3.61 per share.
This includes $6.5 million or $0.06 per share of dilution from the following items that weren't in our prior outlook: $3.7 million debt extinguishment charge, a $1.5 million noncash straight-line rent credit losses mostly due to conversion of leases from fixed rent to percentage rent and $1.3 million net impact of lower FFO from fourth quarter dispositions.
Excluding these items, our FFO outlook would have been up $0.025 at the midpoint.
Last quarter, we detailed $0.01 of dilution from items that weren't in our original FFO outlook.
When adjusting for these nonoperational or noncash items that were not in our original outlook, the midpoint of our revised range would be $0.01 per share above the midpoint of our original FFO outlook that we provided in early February.
Given the significant impact the pandemic and ensuing recession has had on the economy and our business, we believe our operating and financial results have been excellent.
Last quarter, we provided a list of projected impacts from the COVID-19 induced economic slowdown with the primary takeaway that parking revenues were expected to be low for the remainder of the year but this reduction would largely be offset by lower operating expenses.
We also continue to expect cash flow to improve in the near term due to lower leasing capex.
As Ted mentioned, we expect to close $123 million in dispositions before year-end, which will bring 2020 dispositions to $151 million, excluding the $338 million of phase one market rotation dispositions we completed in the first quarter.
We have maintained our original acquisition outlook of $0 to $200 million as we're currently evaluating certain opportunities.
We don't expect any development announcements this year and thus have eliminated this potential from our outlook.
However, here are a few noteworthy items to highlight as we get close to the new year: First, we're fortunate as we have ample liquidity and low leverage to deploy capital into potential growth opportunities.
Second, we're carrying more cash than normal on our balance sheet, following our debt issuance in the third quarter, which will be dilutive in the near term but should normalize as we pay off the remainder of the 2021 bonds in April and fund development expenditures.
Third, we expect $40 million of NOI from our development pipeline upon completion and stabilization.
Most of this is secured through signed leases.
GlenLake Seven will deliver in early 2021, while the other projects in the pipeline are expected to contribute more substantially in 2022.
Last, we've been able to quickly adapt to the current environment by reducing opex to offset lower parking revenues.
And while we expect opex will rise as portfolio utilization increases, we believe we'll be able to hold on to some of those savings even as utilization levels recover.
Looking forward, we continue to remain positive about the long-term outlook for Highwoods.

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compname posts qtrly net income per share of $0.39.
qtrly net income per share $0.39.
updates 2020 ffo outlook to $3.59 to $3.61 per share.
qtrly earned ffo of $0.86 per share.

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