Highwoods Properties, Inc.

Greetings 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, October 26, 2022. I would now like to turn the conference over to Hannah Troup, Please go ahead.

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 Investors 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 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 turn the call over to Ted.

Thanks, Hannah, and good morning, everyone. We had another excellent quarter with strong financial results, robust leasing activity, and the third consecutive increase to our 2022 FFO outlook. Given continued investor uncertainty around the post pandemic demand for office space, there are naturally questions about whether or not office landlords can sustain their operating performance. We have enjoyed consistent healthy demand for office space across our Sunbelt portfolio for seven quarters in a row after only two quarters of below average new leasing during the first pandemic year of 2020. Customers and prospects have been making decisions on leasing space, and we have been benefiting from the flight to quality to our high-quality portfolio. In our portfolio, since the beginning of 2021, new customers, whether from organic growth, in-migration, or flight to quality, have generally offset those who downsize for work from home or hybrid work arrangements. Our portfolio occupancy has increased 40 basis points over those seven quarters. During this time, we've averaged 322,000 square feet of second-gen new leases per quarter, 16% above our prior 10-year average. We've averaged 12.7% gap rent growth and 1.2% cash rent growth. We've averaged 5.9 years of term in line with our long-term average. and we've averaged net effective rents 1.5% higher than our average from 2018 and 2019. While our second-gen leasing performance has been strong and consistent, the third quarter was especially noteworthy. New leasing volume of 518,000 square feet was our highest since 2014. Economics were robust on total volume more than 1 million square feet with an average term of 7.4 years, one and a half years more than both our five-quarter and 10-year averages, and net effective rents 22% above our five-quarter average. We believe this performance validates our strategy of owning high-quality workplaces in the most dynamic and vibrant BBDs of our growing Sunbelt markets. With this strategy, we have consistently delivered solid metrics throughout the ups and downs of many business cycles and periods of changing office use patterns. While we don't have a crystal ball, there are obvious headwinds facing the U.S. and global economy. To mitigate the impact of these potential headwinds, we bolstered our liquidity and proactively addressed our largest pending lease expirations. including substantially backfilling our largest 2023 lease expiration. This de-risks our forward leasing plan and leaves us with no remaining expirations representing more than 1% of revenues until late 2024. Turning to investments. In the middle of August, we completed the previously announced acquisition of 650 at Legacy Union in Uptown Charlotte for $203 million. We're seeing excellent activity at the recently completed building, which is 80% leased, and we're confident in the long-term outlook. With this acquisition, in less than three years since we entered the market, Charlotte now accounts for over 10% of our NOI. Occupancy in the rest of our Charlotte assets is 98%. During the quarter, we also sold a mixed-use land parcel in Richmond in our Innsbruck BBD for $23 million, recognizing a $9 million FFO gain. This sale will facilitate the development of retail, residential, and hotel uses adjacent to our 1.6 million square feet in Innsbruck. Importantly, the value of our existing and future office will be significantly enhanced by a growing amenity base. As we have mentioned previously, our land bank has never been more attractive, with full build out of nearly $4 billion. The vast majority of this is master planned for mixed use development, including office, and is adjacent to existing or future Highwoods assets. We announced a 100% leased boutique office building at Moorcroft in Charlotte's South Park BBD. Our team creatively manufactured this opportunity to build a $12 million high quality project on a surface parking lot that had previously not been considered for development. This quarter we placed in service Virginia Springs II in Nashville at 100% leased. This $38 million development encompasses 111,000 square feet and was started in late 2019 on a fully spec basis. The ability to deliver this project on time, on budget, and 100% leased at its scheduled stabilization date, despite the pandemic, is a testament to our development and leasing team and is a strong endorsement for the health of the Brentwood BBD. Our current development pipeline is $533 million at our share. Our Midtown West project in Tampa is now 92.5% leased and will move to our in-service portfolio next quarter, also in line with our original pro forma. Our five in-process developments represent a total investment of $476 million at our share and are a combined 22% pre-leased. In Dallas, Granite Park 6, our 422,000 square foot office development in the Frisco Plano BBD continues to have healthy leasing interest with more than three years until projected stabilization. In 23 Springs, or 642,000 square foot development in the uptown BBD, has a scheduled completion date in 1Q25 and an estimated stabilization date in 1Q28. We also have a strong pipeline of prospects for this project and continue to be confident about its long-term outlook. With rising interest rates and a reduced debt availability, the investment sales market has slowed, to state the obvious. Fortunately, our balance sheet is in excellent shape with low leverage and no debt maturities until 2025. We have existing liquidity to complete our development pipeline while maintaining ample dry powder, even without assuming any additional asset sales. Early in the third quarter, we announced our plan to exit Pittsburgh, albeit with no preset timetable. While we are now preparing these assets for sale, Given the uncertainty in the investment sales market and our strong balance sheet, we can afford to be patient. Over the long run, operating with low leverage enables us to be opportunistic in seeking investments and 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. Turning to our results. During the third quarter, we delivered FFO of $1.04 per share, which included $0.07 per share of net land sale gains. The strong performance in the quarter gives us confidence to increase our 2022 FFO outlook again this quarter, the third consecutive increase since we first announced our outlook in February, even with $0.01 to $0.02 per share of higher anticipated interest expense in the fourth quarter. The new range implies a midpoint of $4.03 per share, up 3.5% from last year on an apples-to-apples basis, excluding land sales. In addition to healthy FFO growth, as we've often said and can be seen clearly in our financial results, we continue to generate stronger cash flows. To summarize, our markets, BBDs, and portfolio have been resilient and continue to perform well as evidenced by our robust third quarter leasing and the de-risking of our forward lease expirations. Our attractive development pipeline is seeing strong prospect activity and is well positioned to deliver future growth in NOI, FFO, and cash flow. Our land bank has never been more attractive and provides a pipeline of future growth opportunities. Finally, our balance sheet is well positioned to allow us to capitalize on new investment opportunities. This powerful combination, together with our track record of delivering consistent and compounding growth in earnings, cash flow, and dividends, while maintaining low financial leverage, makes us confident that we are uniquely positioned to grow, and we firmly believe the best days for Highwoods are ahead of us. Brian?