Highwoods Properties, Inc. Q2 FY2026 earnings call

Leasing and Occupancy Progress

• Leasing volume was healthy in Q2, with total second-gen signings topping 1 million square feet (including 326,000 square feet of new leases) plus 63,000 square feet of first-gen signings in the development pipeline.
• Sequential occupancy increased 70 basis points, or 110 basis points after adjusting for properties held for the full quarter, with management expecting continued occupancy improvement through the second half of 2026.
• Rent growth remains positive: cash rent spreads are over 3%, gap rent spreads over 20%, and net effective rents are the second highest in company history, 8% above the prior five-quarter average.

Development Pipeline Update

• The only remaining active development project is 23 Springs in Uptown Dallas, which reached 93% leased during the quarter (up 10 percentage points), with just $28 million of projected spend remaining to reach stabilization.
• Stabilization for 23 Springs was accelerated nine months from Q1 2028 to Q2 2027, with achieved rents meaningfully higher than original underwriting.
• Management expects to announce between $100 million and $400 million in new development projects, mostly build-to-suit or substantially pre-leased, in the remainder of 2026, with opportunities across most core markets.

Capital Recycling and Balance Sheet

• The company sold nearly $260 million in properties in Q2 2026, consisting of the 100% occupied Bridgestone Tower in Nashville and a non-core land parcel in Richmond, and expects to close an additional $74 million in non-core dispositions within weeks, bringing 2026 year-to-date dispositions to $375 million.
• Management now expects to close at least an additional $100 million, and up to $300 million, in total non-core dispositions by the end of 2026, consisting of non-core buildings and land.
• The disposition of Bridgestone Tower represented a strategic capital swap: proceeds were used to acquire 600 South Tryon in Charlotte, an eight-year younger building with $30 million lower total investment, $1 million more in NOI upside at stabilization, higher annual rent bumps, longer average lease terms, and a more diversified rent roll.
• The balance sheet remains strong: debt to EBITDA declined from 6.7x to 6.2x in Q2, ending the quarter with $145 million in cash and no draws on the $750 million revolving credit facility. The $150 million term loan maturity was extended from 2027 to 2031 with a 15 basis point reduction in borrowing rate.
• After upcoming expected asset closings, pro forma cash will exceed $250 million with no revolver borrowings, and management has ample liquidity to address the $289 million March 2027 bond maturity without needing to raise new capital.

Market Fundamentals

• Highwoods' Sunbelt business district portfolio is benefiting from a structural lack of new supply: national office construction is at a 30-year low, and high-quality, commute-worthy space is increasingly scarce, giving landlords pricing power.
• Prime office vacancy is 640 basis points lower than non-prime vacancy, the widest spread on record according to CBRE, and Highwoods estimates its core high-quality assets have vacancy at least 5% lower than overall submarket vacancy rates.
• Strong market performance was particularly notable in three core markets: Charlotte, Nashville, and Dallas, all of which saw strong net absorption, falling vacancy, and rising asking rents for prime space.

Highwoods Properties operates as a single-segment office real estate company focused on Sunbelt business districts, with no separate product segments reported in this call. Total Q2 2026 GAAP net income was $93.5 million, or 85 cents per share, while non-GAAP FFO was $100.7 million, or 90 cents per share, which included 4 cents per share in land sale gains. Occupancy increased 70 basis points sequentially from Q1 2026; adjusting for the sale of the 100% occupied Bridgestone Tower, occupancy rose 100 basis points. The company completed over 1 million square feet of second-generation leasing, plus 63,000 square feet of first-generation leasing in its development pipeline, with 326,000 square feet of that total being new leases. Cash rent spreads came in at 3.2%, gap rent spreads hit 20.9%, and net effective rents were 8% higher than the prior five-quarter average, marking the second-highest level in company history.

• Full year 2026 FFO guidance was increased to a range of $3.46 to $3.70 per share, a $0.04 per share increase at the midpoint from the prior guidance range. Excluding land sale gains, the midpoint of the FFO range increased $0.01 per share, even after accounting for $0.04 per share of dilution from higher-than-expected dispositions that have not yet been reinvested.
• Year-end 2026 occupancy is guided to a range of 86.5% to 88.5%, implying nearly 200 basis points of occupancy upside from Q2 levels at the midpoint; the guidance range was maintained even after selling the 100% occupied Bridgestone Tower, which created a 30 basis point headwind to the year-end number.
• Debt to EBITDA is expected to decline modestly by the end of 2026 and continue to fall throughout 2027, assuming leverage-neutral investment activity.
• Management expects FFO growth to accelerate in the second half of 2026, driven by a Q4-weighted occupancy ramp, steady NOI gains at 23 Springs, and typical seasonal OPEX patterns that weigh on Q3 margins. The company expects to return to dividend coverage next year, with normalized cash flow improving as free rent converts to cash rent, leasing CapEx declines from its current 2026 run rate, and NOI grows from rising occupancy and development stabilization.
• New development announcements are expected between Q4 2026 and early 2027, with total projected investment between $100 million and $400 million.

• Uncertainty around the timing and execution of additional non-core dispositions: some sales expected to close by the end of 2026 may slip into 2027 depending on market conditions and buyer negotiations.
• Retention risk for remaining 2026 lease expirations: lower-than-expected renewal rates could push full-year occupancy toward the lower end of the guidance range.
• Construction cost inflation remains a persistent headwind for new development, even though cost growth has moderated enough to make new projects underwritable.
• Near-term FFO dilution from excess disposition proceeds held as cash rather than being immediately deployed into income-producing assets, though this dilution is expected to be reversed once proceeds are reinvested.
• Near-term AFFO payout ratios are currently above 100%, though management expects this to normalize as cash flow grows over the next 12-18 months.

Q: An analyst asked about the sustainability of the current dividend with an AFFO payout ratio over 100%, and how upcoming development projects will be funded. / A: Management views the dividend as a core component of total shareholder return and does not plan to overreact to short-term cash flow shortfalls, noting they generated $150 million in free cash flow above the dividend in 2020 and expect to return to full dividend coverage next year. Three factors will drive normalized cash flow improvement: free rent will convert to cash rent adding $20-25 million in annual cash flow, rising occupancy and delivered development will add ~$40 million in NOI, and annual leasing CapEx will fall from a $170 million 2026 annualized run rate to ~$120 million longer-term, adding another $40-50 million in free cash flow. The company already has $375 million in disposition proceeds year-to-date with more coming, so there is no need to cut the dividend to raise funds for new projects. (357 words)

Q: An analyst asked what changed to make new development feasible after years of slow activity, specifically why tenants are now willing to pay the rents required to cover construction costs. / A: Management explained that record-low new construction across the U.S. means there is almost no high-quality large blocks of space available for tenants needing delivery in 2-3 years, so tenants know they must pay current market rates to secure the space they need. Many tenants also want custom-built buildings for corporate culture purposes, and construction cost growth has moderated enough that rent growth in tight core business districts now outpaces construction cost growth, making new deals underwritable. Additionally, more corporations are prioritizing high-quality work environments to support productivity and talent retention, since employee compensation makes up 90% of corporate G&A compared to just 9% for real estate, so they are willing to invest more in quality space. (339 words)

Q: An analyst asked how management balances the tradeoff between immediate-yield acquisitions and delayed-yield new development with dry powder available today. / A: Management stated that they constantly evaluate the best long-term use of capital and have rotated between acquisitions and development across market cycles, always prioritizing attractive risk-adjusted returns. In 2025 and early 2026, the company closed ~$600 million in acquisitions that have met or exceeded return expectations, but as development activity has picked up, new build-to-suit opportunities are now offering higher yields than typical available acquisitions. The company toggles between the two asset classes based on current opportunity set, with no fixed target allocation. (173 words)

Q: An analyst asked what is the strategy around holding versus selling land given the current scarcity of prime development land. / A: Management clarified that all land being sold is non-core land that is better suited for non-office uses (such as multifamily or retail) rather than the office development build-to-suit opportunities the company is pursuing. The company actively reviews its land bank a few times per year to prune parcels that no longer fit its office development strategy. Management retains all attractive zoned office land, noting that a strategic, appropriately sized land bank is a key competitive advantage for winning build-to-suit deals that the company could not pursue without controlling land already. (166 words)