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. And 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, April 27, 2022. I would now like to turn the conference over to Hannah True, Manager of Finance and Corporate Strategy. Please go ahead, Ms. True.

Hannah True Thank you, Operator, and good morning, everyone. Joining me 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 section of our website at highwoods.com. On today's call our review will include non gap measures such as FFO, NOI and EBITDAIR. The release and supplemental include a reconciliation of these non gap measures to the most directly comparable gap financial measures. Forward-looking statements made during today's call are subject to risks and uncertainties. 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. We had excellent financial and operational results in the first quarter, consistent with our performance since the start of the pandemic. Leasing activity is robust. Same property cash NOI growth was solid. We had our third consecutive quarter of record core FFO per share, which excludes land sale gains. Our cash flows continue to strengthen, and our balance sheet is in excellent shape. We believe our strong performance to start the year is largely attributable to continuing execution of our strategy. As we've stated before, 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 BBDs of our markets. Or said another way, workplaces that are commute worthy. We are actively putting together the building blocks to further strengthen the financial and operational performance, resiliency, and long-term growth prospects for our portfolio. Our development team is exploring numerous potential starts. We are optimistic about the potential to acquire additional high-quality assets, and we're continuing to make progress with our long-proven plan of cycling out of non-core assets. Turning to our results, we delivered FFO of $1.03 per share in the first quarter. Excluding 4 cents of land sale gains, our FFO was 99 cents per share, more than 8% higher than the first quarter last year. In addition to FFO, our operations were also healthy. Same property cash NOI growth was consistent with last quarter at 3.1%. Occupancy held relatively steady at 91.1%, and leasing maintained its momentum with 658,000 square feet of second gen space, including a robust 391,000 square feet of new leases. Rent spreads were positive 14.9% on a gap basis and roughly flat on a cash basis, with average term increasing to 6.4 years. Average rental rates per square foot in our 27.4 million square foot in-service portfolio were 4.2% higher on a cash basis compared to one year ago. The upbeat start to the year has given us confidence to increase our year-end occupancy outlook as many of the new leases signed will commence later in the year. Utilization across our portfolio has increased to around 50%. up about 10 percentage points during the past couple months, and we expect to continue to pick up based on the return-to-work plans we are hearing from our customers. As we've stated before, even though utilization is below pre-pandemic levels and customers are figuring out their office workspace schedules, many of which are hybrid, we are encouraged by the consistently strong leasing activity we've seen across our markets since the start of last year. Turning to investments. During the quarter, we sold a land parcel in Tampa's West Shore BBD for 9.6 million, which included a $4.1 million gain. This sale is a good example of our strategy to maximize value from our existing assets, whether buildings or land. We sold the pad to a developer who will construct a luxury multi-family community adjacent to our 209,000 square foot base center office building. Our land bank has a value of approximately 340 million and has never been more attractive. It can support $2.2 billion of future office and another almost two billion of adjacent mixed-use development via new apartments, shops, restaurants, and hotels. These mixed use sites create excellent optionality for us, as we may choose to sell the parcels outright or participate in the ownership and development. Either way, the build out of this mixed use land will bring even more desirable amenities to our adjacent office properties, as will be the case at Bay Center. Our $283 million, 615,000 square foot development pipeline is now 55% pre-leased, having leased another 23,000 square feet since our February call. We have healthy interest across our projects and remain confident that both Virginia Springs 2 and Midtown West will stabilize by the end of the year. As you may remember, we started both projects fully spec in 2019. While we didn't announce any new developments in the quarter, our team is busy working on potential build-a-suit and spec developments that could be announced later this year. We're progressing with additional non-core dispositions. We have multiple properties under contract and we have others in various stages of the marketing process. As has been our plan, we are on pace to return our balance sheet to pre-pack acquisition metrics by the middle of the year. On the acquisition front, competition for high-quality properties in our markets, BBDs, has continued to be strong, as institutional investors recognize the excellent long-term value of assets located in the best sub-markets across our footprint. We're seeing opportunities arise in BBDs, but rest assured, 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. Now to our 2022 FFO outlook. We project full-year FFO of $3.82 to $3.98 per share, up six cents per share at the midpoint since our initial outlook in February. Same property cash NOI is projected to grow at 0.5% to 2.0%, up 25 basis points at the midpoint, and we now expect to end the year with occupancy of 91.0% to 92.5%, also up 25 basis points at the midpoint. Our investment activities, acquisitions, dispositions, and development announcements are unchanged from our prior outlook. Before I turn the call over to Brian, I'd like to briefly recap our performance and outlook. Our leasing activity has rebounded to pre-pandemic levels, especially new leasing, as evidenced by this quarter's 391,000 square feet. Our full year 2022 outlook for all three of our primary financial and operational indicators, year-end occupancy, same property cash NOI, and FFO per share, are higher at the respective midpoints than originally forecasted. Our $283 million development pipeline is 55% pre-leased and will generate meaningful cash flow as it delivers. And our balance sheet is strong with leverage of 39% and a debt to EBITDA ratio of 5.3 times. We're confident that we continue to have the building blocks in place to drive sustainable growth over the long term. Brian?