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 one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded Wednesday, July 27, 2022. I would now like to turn the conference over to Ms. Hannah True. 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 Brenda 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 risk and uncertainties. These risk 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 another excellent quarter. Our financial results were strong, our operations were healthy, and our robust investment activities set the foundation for our continued long-term growth. This quarter's performance validates the strategy and execution we've deployed for many years to deliver steady financial growth and strengthening cash flows while driving continuous portfolio improvement and setting the stage for future growth. As we 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. A key ingredient in this strategy is to select markets that consistently outpace national averages on population and employment growth and are affordable and business friendly. North Carolina, which accounts for 35% of our NOI, was recently ranked the number one state for business by CNBC, with Virginia, Texas, Tennessee, Georgia, and Florida all in the top 11. In other words, all of our core markets, where we see the greatest opportunities over the long term, are ideally situated in the highest growth most business-friendly region of our country. Last week, we announced our entry into Dallas, which has long been at the top of our list for market expansion, based on its strong demographic and economic trends. The Dallas metro area leads the nation in overall population growth and has been a premier destination for business relocations, particularly from the West Coast and the Northeast. In Dallas, we are principally focused on building out our presence over the long run in three submarkets. Uptown Dallas, Frisco Plano, and Preston Center. These are essentially the three BBDs that run the tollway spine from the downtown area up towards Frisco. We are excited to partner with Granite Properties, a prestigious, privately held commercial real estate investment, development, and management company with deep roots in Dallas, to develop best-in-class assets in two of those BBDs. First is Granite Park 6, a 422,000 square foot office development in the Frisco Plano BBD, that is 12% pre-leased is located within the successful Granite Park mixed-use development where Granite is headquartered and has developed and operates 1.8 million square feet of office that is 96% occupied. Granite Park 6 has healthy leasing interest with more than three and a half years until projected stabilization. Second is 23 Springs, a 642,000 square foot office and retail property located in the Uptown BBD that is 17% pre-leased. For those of you familiar with Dallas, 23 Springs is across the street from the Crescent in the heart of Uptown. The development has a scheduled completion date in 1Q25, an estimated stabilization date in 1Q28. Given the iconic profile of the property, its location, and excellent ingress and egress to and from Uptown, we're confident about the project's long-term outlook. These two development projects increase our total pipeline to 559 million at our share, which is 32.7% pre-leased. Midtown West in Tampa and Virginia Springs II in Nashville Our two completed not stabilized properties comprise 95 million of investment and are a combined 93.6% leased. As you may recall, we started both these projects completely spec in late 2019 and we are forecast to bring both properties to stabilization on time and on budget with all of our lease up occurring since the onset of the pandemic. The success of these projects illustrates our workplace-making strategy, that the most talent-supportive workplace options in energized and amenitized BBDs will continue to be highly sought after by customers and their employees. We're excited about our current development pipeline, which will help drive future growth and the potential for meaningful additional development given our well-situated land bank. In total, our development land can support over four billion of future projects, including 2.2 billion of office, spread out over nearly five million square feet in most of our BBDs. Given the volume of our investment activity in the quarter, it's easy to forget that it was just over two months ago when we announced a meaningful expansion in Charlotte. First, we agreed to buy the to buy 650 South Tryon, a 367,000 square foot office building located in Uptown and connected to our B of A tower. We're scheduled to close on 650 later this quarter. We also acquired a mixed use development parcel in the heart of Charlotte's dynamic south end sub market that can support at least 300,000 square feet of office and 250 residential units. We sold 101 million of non-core properties in the quarter. This included 91 million of office and 10 million of land. With these sales, we delivered on our goal of returning our balance sheet metrics by mid-year 2022 to the same levels that existed prior to our 2021 acquisition of 683 million of office assets from PAC. The investment sales market has been uncertain over the past few months. as interest rates have risen and capital has become more scarce. Fortunately, our balance sheet is in excellent shape and we have no need to raise external capital to help fund our acquisition of 650 South Tryon or our current development pipeline. We expect the investment sales market will remain choppy over the next few quarters. However, over the long run, Operating with low leverage enables us to be opportunistic in seeking additional investments that improve the quality of our portfolio and increase our long-term growth rate, all the while staying true to our mantra of being disciplined allocators of our shareholders' capital. We also announced our plan to fund our entry into Dallas by exiting Pittsburgh. Importantly, once completed, the stabilization of our new development projects in Dallas in our Pittsburgh market exit, coupled with anticipated G&A savings, is expected to be roughly leverage neutral and accretive to our cash flows, while improving the quality of our portfolio and providing higher growth over time. Our two trophy assets in Pittsburgh, PPG Place and EQT Plaza, have consistently maintained among the best occupancies in our entire portfolio. We are grateful for the terrific work our teammates have done on the ground in Pittsburgh, most of whom will continue to lease and care for our assets, wearing the jersey of a reputable third party service provider. As we stated in last week's press release, we have no preset timetable to sell these properties. Turning to our results, during the second quarter we delivered FFO of a dollar per share. 8% higher than our second quarter of 2021, while simultaneously restoring our balance sheet to prepack acquisition metrics. Plus, as we've often said, and can be seen clearly in our financial results, we continue to reap the benefits of strengthening cash flows. We're proud of our track record of delivering what we believe is the right balance between enhancing our future growth outlook, while at the same time delivering current results. Since the beginning of 2021, we have announced the acquisition of one billion of high quality office assets in high growth markets of Raleigh and Charlotte. We further bolstered our future development prospects by acquiring land in Atlanta, Nashville, and Charlotte that can support an additional 800,000 square feet of office and two million square feet of mixed use development. We've entered Dallas, a high growth market with significant future upside opportunities, and announced our plan to exit Pittsburgh. We've sold 494 million of non-core buildings and land. We've delivered 5% core FFO growth in 2021, and 8% growth year to date in 2022. We've generated significant growth in free cash flow, and all the while maintaining a fortress balance sheet and setting the foundation for future growth. We believe this track record is what sets us apart. The consistent delivery of compounded growth and earnings, cash flow, dividends, and NAV per share. Most importantly, with our geographic footprint, BBD selection, portfolio quality, development pipeline, land bank, and fortress balance sheet, we firmly believe our best days are ahead. Brian?