Highwoods Properties, Inc. Q3 FY2025 earnings call

• Strategic priorities: Securing NOI growth in operating portfolio by leasing up key vacancies, capturing NOI growth in development pipeline, recycling noncore assets, and maintaining strong balance sheet.
• Leasing: Strong second-gen leasing volume with over 1 million sq ft signed in Core 4 properties, leased rate 340 basis points higher than occupancy rate at quarter end, net effective rents at high watermark.
• Development pipeline: Signed 122,000 sq ft of leases, lease percentage at 72%, locking in over 70% of stabilized NOI growth potential from 4 completed but not yet stabilized development properties.
• Investment activity: Acquired Legacy Union parking garage for $111.5 million, sold noncore property in Richmond for $16 million, funded on leverage-neutral basis.
• Balance sheet: Extended debt maturity, $625 million available liquidity, no consolidated debt maturities until 2027.

No specific product segment breakdown with revenue contribution % provided. Key highlights include strong second-gen leasing volume with over 1 million square feet signed in Core 4 operating properties, development pipeline with 122,000 square feet of leases signed lifting lease percentage to 72%, and investment activity involving acquisition of Legacy Union parking garage and sale of a noncore property in Richmond.

• Updated 2025 FFO outlook to $3.41 to $3.45 per share, midpoint increased by $0.02. Year-end occupancy outlook implies 70 basis points growth in final 3 months of 2025.
• Potential for up to $500 million of acquisitions and dispositions in next few quarters.
• Plan to provide 2026 outlook in February 2026, with items like beginning to expense interest on 23Springs and Midtown East development projects by end of Q1 '26.

• Forward-looking statements subject to risks and uncertainties discussed in press releases and SEC filings.
• Potential impact of elevated leasing CapEx on cash flow in the short term.
• Market and capital market fluctuations affecting acquisitions, dispositions, and overall portfolio performance.

Q: Just in kind of the outlook items, you noted the potential for increased acquisitions or dispositions, would those kind of take you into any new markets? Or where would you like to kind of increase your concentration into? Or would those reduce your exposure to any of your markets that you're currently in?

A: Seth, thanks for the question. Yes. So the acquisition opportunities we're looking at right now, none of them are new markets. They would all be adding to existing holdings in our existing markets. So -- and the ranges we put out there, as with the capital markets opening up, we're starting to see more opportunities really across the risk and return spectrum. So bid-ask spread seems to be narrowing. So sellers are bringing high-quality assets to the market. So yes, so we're taking a look at various opportunities across that spectrum, all in our existing markets. And then on the dispose side, I think right now, we have -- we've closed year-to-date $168 million. That includes a small $7 million asset that closed after quarter end. And we've got several other assets in the market. I think we're going to close a couple next week even that the buyer is hard on and maybe even a few extra -- a few other deals by the end of the year and then a few will leak into early next year. And I think we have assets on the market in all of our markets with the exception of Charlotte and Dallas. So it's really just trimming the noncore assets across our portfolio. And I think you know we've been a regular seller of assets over the years. So I think we're just continuing the portfolio rotation that we've been doing for many years.

Q: It seems as though during the pandemic, we saw Atlanta benefit a lot from tenant migration from other markets. But in your prepared remarks, it struck me like maybe Dallas was leading in that trend at this point. So I was hoping you could just give us an update on which markets are benefiting most from migration from other markets and whether the level of that activity has changed significantly in any of your specific markets?

A: Sure, Blaine. Thanks for the question. No, I think you're right. Based on Brian's comments, it's really Dallas is seeing a significant amount of in-migration that Brian alluded to 10 significant office requirements that the Raleigh -- the Dallas Chamber is working on right now. That may be down to 9 now given the recent announcement of Scotiabank putting a pretty big presence in Dallas, which Dallas won that requirement from Charlotte. So Dallas is incredibly busy right now, a lot of new requirements. Charlotte, I'd say, is right behind. Brian alluded to 17 office requirements that are greater than 50,000 feet. Most recently, there's a news article yesterday about Pacific Mutual, 300-and-something jobs, high-paying jobs, I think averaged like $179,000 per job. So Charlotte has been incredibly busy. Right behind that is Nashville. We actually had our Board meeting in Nashville last week. And at the Board dinner, we brought both the economic development person for the Chamber of Commerce as well as the state-wide economic development person. They spoke to our Board and they basically said they're as busy as they've been in a long time. So from the office perspective. So I feel really good there. Raleigh is busy. The North Carolina economic development folks are actually in our headquarters building here in Raleigh. So we see them quite a bit. And the office requirements are picking up in Raleigh as well. There's been a couple of good announcements in Atlanta as well. Tampa, we just got somebody from a new out-of-state requirement in one of our buildings. So really, we're seeing it across our footprint. The in-migration is really -- it seems to be accelerating.

Q: Brendan, you have been messaging sort of this ramp-up in occupancy 100 to 200 basis points throughout '26. Just wanted to double check on your comfort level there. And then the underpinning assumptions, is that similar leasing volume of this 300,000 square feet of new deals plus 50% retention, and that's how we get there. Is that the math? Just kind of -- just walk us through sort of that setup there.

A: Yes. Nick, thanks for the question. Yes. So just to reiterate, I think last quarter, we talked about -- we thought we'd sort of be around 86% for year-end '25. We put that outlook in -- we formalized that in the outlook last night in terms of there, so right around 86%. And then yes, I think as we sit here late in '25, haven't given '26 guidance yet, but I think that 100 to 200 basis points of increase between year-end '25 to year-end '26, I think we're comfortable with that as we stand here now. Now, we'll sharpen our pencil and kind of look at those assumptions and provide formal guidance in February. But I think as we sit here, I think we feel comfortable with that kind of outlook and believe we've got a good pathway of growth between year-end '25 and year-end '26. And then I would say, in rough numbers, I think that's about right in terms of there's probably around 50% retention. That number always goes down the closer you get to kind of those expirations. So it might be mid-40s as it stands now. But I think if we can do 300,000 square feet of new a quarter and we're kind of at the retention levels that we've -- in that level, that's going to put us in position to be between 87%, 88% by year-end '26.