Highwoods Properties, Inc. Q2 FY2025 earnings call

• Key priorities: Upgrade portfolio quality by rotating out slower growth, CapEx-intensive properties and into higher growth, capital-efficient assets; capture NOI growth potential in operating portfolio and development pipeline.
• Leasing volumes: Strong second-gen leasing, including new leases on vacant spaces; development properties making progress on remaining availability.
• Core assets: Four core assets (Alliance Center, Symphony Place, Westwood South, Park West) have $25M annual NOI upside, with 50% of this upside already scotched with signed leases.
• Development pipeline: GlenLake III and Granite Park Six have over $10M NOI growth potential, 23Springs and Midtown East have over $20M, with first customers moving in and more to take occupancy late 2025/2026.
• Market performance: Sunbelt markets performing well; Nashville, Charlotte, Dallas, Tampa showing strong leasing activity, low unemployment, positive net absorption.

In Q2, Highwoods Properties delivered FFO of $0.89 per share. Occupancy was 85.6%, slightly flat from Q1, while leased rate increased to 88.9%. Leasing volumes were strong with 923,000 square feet of second-gen leasing, including 371,000 square feet of new leasing. Financially, net income was $18.3 million or $0.17 per share. In terms of revenue contribution, North Carolina accounts for 33% of revenue and 36% of NOI, with Georgia and Tennessee also significant.

• Updated 2025 FFO outlook to $3.37 to $3.45 per share, mid-point increase of $0.02. Factors include $0.03 headwind from G&A and interest income adjustments, offset by $0.04 NOI upside from prior year property tax refunds and development NOI.
• Occupancy outlook: Expected to be at low end of 2025 year-end 86%-87% range due to proactively taking back space early with re-letting to new users with leases commencing after year-end.

• Economic uncertainties that could impact leasing and property performance.
• Interest rate fluctuations affecting debt servicing and financing costs.
• Competition in markets leading to potential pressure on leasing and rental rates.
• Early impacts of AI on demand still early to fully assess, but could potentially affect long-term asset demand and type.

Q: Just wanted to kind of dig into the guidance a little bit. So you had kind of significant beat in second quarter here and you had a kind of big other income items. Just wondering kind of what else went into the guidance that it didn't necessarily flow through to a slightly larger raise?

A: Brendan C. Maiorana mentioned there were $0.03 headwinds from G&A and interest income adjustments, offset by $0.04 NOI upside from prior year property tax refunds and development NOI.

Q: Can you talk a little bit about your expectations for just concessions and TIs for some of the leasing that you've done in the quarter?

A: Ted Klinck said concessions have generally peaked, market rents are going up, net effective rents were strong this quarter, with concessions varying by submarket but overall peaking and rents increasing.

Q: Maybe, Ted, we'll start off with this. Obviously, COVID and kind of the pandemic transferred a lot of these conversations on flight to quality and the type of assets. Kind of curious if you've taken a look at potential impacts of AI on demand and if that impacts longer term, the type of assets you guys want to own?

A: Theodore J. Klinck said AI is early days, but the office industry has navigated previous challenges and will continue to manage through, with AI's impact on demand still uncertain in the long term.

Q: I wanted to go back, I guess, Brendan to something you mentioned about sort of '26. Given the signed but not commenced leases or the lease rate and the benefit of that going into '26. You mind just walking us, I am not looking for a number, but just like what are the other kind of moving pieces that make probably '26 visibility either much better than you've had in past years?

A: Brendan C. Maiorana discussed the large leased rate to occupied rate spread (330 basis points), indicating potential occupancy growth, embedded growth from leasing, and development deliveries contributing to '26 visibility.