HIGHWOODS PROPERTIES, INC. Q3 FY2026 earnings call

• Strong Market Fundamentals: Demand for high-quality office space is robust due to shrinking supply. National vacancy is declining, and asking rents are growing at the fastest pace since 2016. The development pipeline has nearly dried up, providing landlords with significant pricing power.
• Portfolio Quality Improvement: Management is actively recycling capital out of older, non-BBD, CapEx-intensive assets into higher-quality, more resilient investments. Year-to-date, they have sold $386 million of non-core assets, exceeding their initial target by approximately $150 million.
• Leasing Success: The company achieved its largest quarterly leasing volume since 2024. Strong lease economics were delivered, with the second-highest second-gen net effective rents in company history. The lease rate is now over 90%, supported by limited expirations and known move-outs.
• Key Market Highlights:
  • Charlotte: A scramble for space in the nation's fastest-growing city. Prime vacancy dropped >650 bps YoY. Uptown/South Park portfolios saw gap roll-ups of 77%.
  • Dallas: Strong demand with >1 million sq ft of positive net absorption in Q3. BBD submarkets like Preston Center and Uptown show low vacancy (<5.2%) and rents above $60/sq ft.
  • Nashville: Leasing volume leader with 455,000 sq ft signed in Q3. Supply pipeline shrunk to just 60,000 sq ft. Westwood South in Brentwood rose from 0% to 88% leased.
• Development Pipeline: Finishing '23 Springs' (95% leased, stabilizing Q2 next year). Planning to replenish pipeline with $100-$400 million in new development announcements, leveraging build-to-suit opportunities and anchor prospects.
• Balance Sheet & Liquidity: Debt-to-EBITDA ratio improved from 6.7x to 6.1x. Nearly $280 million in cash with no draws on the $750 million revolver. Repatriated ~$99 million from joint ventures via refinancing.
• Strategic Priorities: 1) Drive occupancy toward stabilized levels. 2) Capture strong rent growth on second-gen leasing. 3) Recycle non-core assets into better cash-flowing properties. 4) Maintain a strong, flexible balance sheet.

The provided transcript does not break down financial performance by specific product segments (e.g., Office vs. Industrial). However, it highlights that the company is primarily an office REIT with a portfolio focused on 'commute-worthy' assets in Best-in-Class Districts (BBDs) across the Southeast and Texas. Key operational metrics for the core office portfolio include:

• Occupancy: Increased by 130 basis points sequentially to 90.1%.
• Leasing Volume: 300,000 square feet of new second-generation leases signed.
• Rent Growth: Gap rent growth of 29% and cash rent growth of 4% on second-gen leases.
• Financial Results: FFO of $100.1 million (89 cents per share); Net Income of $31.8 million (29 cents per share).
• Disposition Proceeds: Sold $85 million of non-core properties in Q3; Year-to-date sales total $386 million.

• FFO Outlook Revised Upward: Full-year 2026 FFO outlook increased to $3.51–$3.70 per share (midpoint $3.605), which is 2.5 cents higher than the prior July outlook and 6.5 cents higher than the beginning-of-year guidance. This includes potential land sale gains.
• Occupancy Outlook Tightened: Year-end occupancy guidance tightened to 87.0%–88.0% (midpoint 87.5%), up from previous estimates, driven by a significant backlog of signed but not yet commenced leases.
• Disposition Targets: Expect to sell an additional $100 million to $250 million of non-core assets by year-end, bringing total YTD dispositions to approximately $486–$636 million.
• New Development Announcements: Plan to announce $100 million to $400 million in new development projects for the remainder of the year.
• Cash Flow Trajectory: Cash flow is expected to remain below normalized levels in 2026 due to upfront leasing capex spend (~$140 million YTD). Significant free cash flow growth is anticipated in 2027–2028 as free rent periods burn off and leasing CapEx moderates to the $110–$120 million range.
• 2027 Guidance: No specific FFO guidance provided for 2027; will be released in February 2027 alongside Q4 results.

• Capital Markets Environment: Higher interest rates and volatility are slowing down both acquisition and disposition activity. While deals are under contract, lining up capital stacks is taking longer, and return requirements for acquisitions have increased slightly.
• Acquisition Scarcity: Management has not found acquisitions meeting risk-adjusted return thresholds this year compared to last year ($600 million purchased in 2025). Some potential deals have been pulled or fallen through due to timing and pricing mismatches.
• Development Carry Risk: New developments involve a delayed NOI recognition period (2–4 years). While management believes risk-adjusted returns are attractive, there is inherent execution and leasing risk during the construction and stabilization phases.
• CapEx Intensity: High upfront leasing capital expenditure (TI and commissions) in 2026 suppresses near-term cash flow and dividend coverage, though this is expected to normalize in subsequent years.
• Maturity Profile: The only significant debt maturity between now and Q1 2028 is a $286 million bond maturing in March 2027, which can be repaid at par starting December 1st, 2026. While liquidity is strong, reliance on future disposition proceeds or JV financing remains necessary to fully optimize leverage.

Q: How are rising interest rates impacting transaction activity, and have your return requirements changed? / A: Ted Klinck noted that while everything is taking longer due to uncertainty in lining up capital stacks for dispositions, all current deals remain under contract. For acquisitions, activity has slowed significantly, and some assets have been pulled from the market. Consequently, required return expectations have increased slightly, though not materially. This difficulty in finding qualifying acquisitions is a key driver behind shifting focus toward development, where they perceive better risk-adjusted returns despite higher rates.

Q: What is the trajectory for leasing capital expenditures and free cash flow into 2027? / A: CFO Brendan Maiorana stated that 2026 YTD leasing CapEx is north of $140 million, which is elevated but expected to moderate in Q4. He anticipates normalized annual CapEx to settle in the $110–$120 million range as occupancy stabilizes. Free cash flow is expected to jump significantly in 2027 as free rent periods burn off and embedded cash rent growth accelerates, though full normalization to early-decade levels is more likely in 2028.

Q: How do you weigh development yields against immediate acquisition contributions, and are you concerned about the delay in NOI? / A: Management emphasized looking at risk-adjusted returns rather than just near-term NOI impact. Ted Klinck highlighted that many development opportunities are build-to-suit with open-book contracts, eliminating interest rate risk. Furthermore, development yields currently exceed acquisition cap rates by a wide margin, compensating for the carry period. They are not overly concerned about the negative carry of disposed assets sitting in cash because FFO outlooks have risen concurrently.

Q: Can you detail the composition of the remaining non-core assets slated for disposal and the status of the Block 83 option? / A: Ted Klinck clarified that after the current $250 million pipeline of dispositions (mostly under contract), remaining candidates include assets in Atlanta’s Century Center, Pittsburgh, and PPG. Regarding Block 83 in Charlotte, he confirmed they will absolutely exercise the option to acquire up to 50% ownership, but the timing is uncertain—it could happen late this year or next, depending on disposition proceeds and development planning.

Q: What is driving the divergence between GAAP and Cash Same-Property NOI, and what does it signal for the future? / A: Brendan Maiorana explained that the delta is principally driven by free rent associated with recent leasing activity. When GAAP NOI exceeds Cash NOI, it signals that Cash NOI growth is set to increase meaningfully in future periods as leases transition from free-rent phases to cash-paying status. He expects a substantial portion of these leases to commence cash pay in 2027 and 2028, supporting strong cash flow growth.