Highwoods Properties, Inc.

Good morning and welcome to the Highwoods Properties Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded Wednesday, February 9, 2022. It is now my pleasure to turn the conference over to Hannah True. Please go ahead, Ms. True.

Thank you, operator, and good morning, everyone. My name is Hannah True, and I work with Brendan on the finance and investor relations team here at Highwoods. Participating on the call this morning are Ted Klink, our chief executive officer, Brian Leary, our chief operating officer, and Brendan Majorana, our chief financial officer. For your convenience, today's prepared remarks have been posted on the web. If you have not received yesterday's earnings release or supplemental, they're both available on the investor's section of our website at highwoods.com. On today's call, our review will include non-GAAP measures such as FFO, NOI, and EBITDAIR. The release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Forward-looking statements made during today's call are subject to risk and uncertainties, including the ongoing adverse effect of the COVID-19 pandemic on our financial condition and operating results. These risks and uncertainties are discussed at length in our press releases as well as our SEC filings. As you know, actual events and results can differ materially from these forward-looking statements and the company does not undertake a duty to update any forward-looking statements. With that, I'll now turn the call over to Ted.

Thanks, Hannah, and good morning, everyone. I'd like to start off by welcoming Hannah to our call today. It's great to have you with us. Our fourth quarter was representative of our execution throughout all of 2021 as we delivered strong financial results, solid leasing metrics, and strengthening cash flows, all while improving the quality and resiliency of our portfolio protecting our fortress balance sheet and laying the groundwork for additional long-term growth our simple and straightforward investment strategy is to generate attractive and sustainable returns over the long term by developing acquiring and owning a portfolio of high-quality, differentiated office buildings in the best business districts, which we call BBDs. A core component of this strategy is to continuously strengthen the financial and operational performance, resiliency, and long-term growth prospects of our portfolio, and recycle out of properties that no longer meet our criteria. To this end, 2021 we acquired 800 million of high quality office buildings in Raleigh and Charlotte, completed 350 million of 92% leased office development, acquired approximately 100 million of land for future development in three BBDs, and sold 385 million of non-core properties. In addition, since our last call, we've announced 174 million of development that is a combined 36% pre-leased, even before putting the first shovel in the ground. Since the beginning of 2019, we've acquired 3.1 million square feet of best-in-class office assets for a total investment of 1.3 billion, delivered 1.4 million square feet of highly leased office development for a total investment of nearly 600 million, and sold 6.7 million square feet of non-core properties for one billion. Because of these continuous and meaningful improvements, our portfolio is even more resilient and better poised for long-term growth. Plus, our cash flows have continued to strengthen, as evidenced by 15% higher average in-place office rents and a meaningful reduction in our capex spend over these three years. During the same period, we've grown core FFO 9% and our dividend 8% while maintaining a strong balance sheet and investing in the building blocks for additional long-term growth. Turning to our results, we delivered FFO of $1.06 per share in the fourth quarter. which includes nine cents of land sale gains. Even when we exclude these land sale gains, our full year FFO was $3.77 per share, one cent above the high end of our revised outlook in October, and 19 cents above the midpoint of our original outlook last February. In addition to FFO, our operations were also healthy. Same property cash NOI growth was solid at plus 3.2% for the quarter and plus 5.5% for the year. We leased 884,000 square feet of second gen space, including 284,000 square feet of new leases and 47,000 square feet of net expansions. Rent spreads were a positive 3.2% on a cash basis and plus 11.6% on a gap basis. We also signed 158,000 square feet of first gen leases since our last call. Solid leasing activity helped drive year end occupancy up to 91.2%. Similar to last quarter, utilization across our portfolio hovers around 40%. We anticipate more customers returning to the office later in the first quarter and during the spring months. Utilization tends to be higher in our suburban buildings and among smaller customers. Despite overall utilization continuing to be significantly below pre-pandemic levels, we are encouraged by the strong customer and prospect interest we're seeing across our portfolio, which translated into healthy leasing in the fourth quarter. Turning to investments. In the quarter, we sold 1 million square feet of non-core assets for $191 million that were a combined 77.5% occupied. These sales helped bring our debt-to-EBITDA ratio down to 5.4 times. We have sold over $350 million of non-core properties since the middle of last year, with another $150 to $200 million to go to return our balance sheet to pre-PAC acquisition metrics. On the acquisition front, competition for high-quality properties in our markets, BBDs, has continued to increase since the beginning of the pandemic. Institutional investors, both foreign and domestic, recognize the excellent long-term value of assets located in the best submarkets across our footprint. We will continue to be disciplined with our capital allocation as we seek to acquire office assets that would further strengthen our performance resiliency, and long-term growth prospects. Our $283 million development pipeline is 51% pre-leased. Leasing was healthy for our completed but not yet stabilized developments. As you may remember, we started both Virginia Springs II and Midtown West fully spec in 2019. At our Virginia Springs II project, in Nashville's Brentwood BBD are now 90% leased and have healthy interest in the balance of the space. At Midtown West in Tampa, our 150,000 square foot, $71 million property is 65% leased, and we have solid interest from additional prospects. During the quarter, we announced the 218,000 square foot, $95 million Glen Lake III office and amenity retail project in Raleigh. that is currently 15% pre-leased. We have just broken ground on this property, which will be LEED and FITWELL certified. We have 732,000 square feet of in-service product in Glen Lake that are a combined 97% occupied. Glen Lake 3, which is scheduled to be completed in late 2023 and stabilize in early 2026, will provide growth opportunities for existing customers and new users. After year end, we announced 135,000 square foot 2827 Peachtree office development in a 50-50 joint venture with Brand Properties. This $79 million boutique office development has a healthy mix of onsite and nearby amenities, which has helped drive strong activity. The development is already 62% pre-leased and talks with prospects continue. Our land bank has never been more attractive, it can support 2.3 billion of future office in another almost 2 billion of adjacent mixed use development via new apartments shops restaurants and hotels. Now to our 2022 FFO outlook of $3 and 76 cents to $3 and 92 cents per share. We assume utilization of our portfolio will gradually increase throughout the rest of the year. At the midpoint of our per share outlook, we project same property operating expenses will be 10 cents higher than last year, while parking revenues will improve by only one cent. As we have long foreshadowed, as usage increases, OPEX will recover faster than parking revenues, and this is incorporated in our zero to 2% same property cash NOI growth outlook for 2022. As previously stated, we plan to sell 150 to 200 million of non-core assets to return our balance sheet metrics to prepack acquisition levels. We currently project the dilutive impact of these dispositions to be four to eight cents per share. In addition, our outlook includes up to an additional 200 million potential dispositions, the effect of which is not assumed in our 2022 FFO outlook. We have included a placeholder for acquisitions of zero to 200 million. We also continue to have conversations with build a suit and anchor customers for additional developments and project 100 to 250 million of development announcements inclusive of of the $79 million 2827 Peachtree development. Before I turn the call over to Brian, I would like to briefly recap 2021. During the year, we generated 5% growth in core FFO, increased our dividend 4%, delivered 5.5% same property cash in Y growth, signed 194 new second-gen leases, the most in any single year since 2006, totaling 1.1 million square feet, acquired 800 million of high-quality office assets in Raleigh and Charlotte, completed 356 million of 92% leased office development, acquired 100 million of development land, and maintained a strong balance sheet with year-end leverage of 39% and a debt to EBITDA ratio of 5.4 times. While we're pleased with our 2021 results, we're even more confident that we continue to have the building blocks in place to drive sustainable growth over the long term. In conclusion, while our high quality BBDs and buildings are the beneficiaries of a flight to quality, it is our humble hardworking, talented teammates, leasing, operating, and maintaining our portfolio as a single team wearing the same Highwoods jersey that are our true trophy assets. I would like to take time to thank the entire Highwoods team for their continued hard work and commitment throughout 2021. This type of dedication has put our company in a great position for years to come. Ryan?