HIGHWOODS PROPERTIES, INC. Q4 FY2024 earnings call

Management Statement and Operational Highlights:

• Significant growth potential in core operating portfolio with four core buildings having over $25 million of stabilized annual NOI upside.
• Development pipeline with two delivered but unstabilized properties (GlenLake Three in Raleigh and Granite Park Six in Dallas) with 142,000 square feet signed in Q4 and strong prospects, and two additional developments to deliver in 2025 projecting over $20 million of annual NOI upon stabilization.
• Proactive dispositions: sold $166 million of non-core properties in Tampa and Raleigh in late 2024 and early 2025, with disposition proceeds to be recycled into new investments.
• Robust leasing activity in 2024: signed 4 million square feet of second generation leases, including 1.6 million square feet of new leases and 302,000 square feet of expansions, with a weighted average lease term of 7.5 years.
• Redevelopment efforts: Highwood-tizing projects in Atlanta, Nashville, and Symphony Place in Nashville, with Symphony Place set to feature curated amenities upon completion.

In the fourth quarter, Highwoods delivered FFO of $0.85 per share. For the full year 2024, FFO was $3.61 per share, nearly 2% higher than the mid-point of the original outlook. The company signed 4 million square feet of second generation leases in 2024, including 1.6 million square feet of new deals and 302,000 square feet of expansions, with a weighted average lease term of 7.5 years, the highest in company history. Second generation leasing volume for the year totaled 4 million square feet, and total rental revenue from second-generation leases signed was a record high of over $1 billion.

Guidance:

• Same property cash NOI outlook is minus 2% to minus 4% for 2025, due to four under-occupied buildings and recent dispositions.
• FFO range for 2025 is $3.26 to $3.44 per share, including a short-term dilutive effect from asset sales, equity raised, and ground purchase.
• Average occupancy outlook is 85% to 86.5%, expected to dip in the first half of 2025 but grow later in the year, with year-end occupancy likely between 86% to 87%.

Risks:

• Market uncertainties affecting leasing and property values.
• Potential delays in disposition of non-core properties, which are not included in FFO outlook.
• Economic factors impacting demand for office space and ability to execute on growth plans.

Q: Michael Griffin with Citi asked about leasing outlook for larger vacancies and acquisition opportunities.

A: Brendan Maiorana and Ted Klinck responded that large vacancies in core assets won't impact 2025 financials much, and Highwoods is looking at core to opportunistic acquisition opportunities with a balanced approach to capital from dispositions and equity.

Q: Ronald Kamdem with Morgan Stanley asked about impairment charge on EQT Plaza and leasing strategy changes.

A: Ted Klinck said EQT Plaza is a non-core asset with long-term desire to sell but patient on timing, and leasing strategy remains robust with focus on small to medium users and spec suite program.

Q: Robert Stevenson with Janney Montgomery asked about federal government revenue exposure and core markets performance.

A: Ted Klinck said federal government exposure is diverse with over 30 leases, and core markets like Nashville, Charlotte, Dallas, Tampa, etc., have varying recovery trajectories.

Q: Mike Lewis with Truist Securities asked about CapEx, dividend coverage, and development start feasibility.

A: Brendan Maiorana said CapEx is likely elevated with lumpy dividend coverage, and development start is unlikely unless rents are significantly above market.

Q: Nicholas Thillman with Baird asked about retention rates and timing of signed leases to commence.

A: Brendan Maiorana said retention rate is around 60%-65%, and signed leases to commence are more back half weighted.

Q: Tom Catherwood with BTIG asked about acquisition markets and lease economics.

A: Ted Klinck and Brian Leary said Highwoods is looking at all markets, and seeing ability to push face rents with flattening concession curve.

Q: Dylan Burzinski with Green Street asked about occupancy recovery trajectory.

A: Brendan Maiorana said occupancy expected to trough in first half of 2025 and build back later, with strong 2026 prospects.

Q: Young Ku with Wells Fargo asked about termination fees, OpEx in same-store guidance, and built-in escalator.

A: Brendan Maiorana said termination fees are episodic, OpEx tracks inflation, and built-in escalator is around 2.5%.

Q: Vikram Malhotra with Mizuho asked about confidence in second half recovery and sizable move-outs in 2026.

A: Ted Klinck said 2026 has some sizable move-outs but retention is expected to be higher, and second half 2025 and 2026 look favorable.

Q: Omotayo Okusanya with Deutsche Bank asked about regulatory impact on markets.

A: Brian Leary said regulatory environment is business-friendly with public-private partnerships driving economic development in core markets.