Highwoods Properties, Inc.

Good morning and welcome to the Highwoods Properties Earning 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 today, Wednesday, February 8, 2023. I would now like to turn the conference over to Hannah True. 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 investor 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. 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. Good morning, everyone. We had a strong end to a strong year for Highwoods. In the fourth quarter, we enjoyed solid leasing, in terms of both volume and economics, acquired a best-in-class property in uptown Dallas, placed in service our highly successful Midtown West development in Tampa, announced Midtown East, our second development in Midtown and Tampa, and delivered strong FFO of 96 cents per share. Our healthy leasing during the fourth quarter is somewhat contradictory to the broader macro environment. with interest rates up sharply, limited capital availability, and widespread concerns of a pending recession. We continue to believe that to be resilient, our portfolio must be diversified and not be overly reliant on any single customer, market, sub-market, industry, or lease size. This diversification is a core component to our long-stated, simple, and straightforward goal to generate attractive and sustainable returns over the long term. Our largest market, Raleigh, is less than 22% of revenues. Our largest customer, Bank of America, is less than 4%. Our top 20 customers account for less than 30%. Our largest industry, the highly diversified professional, scientific, and technical services category, is less than 30%. and our average lease size is under 15,000 square feet. We believe this purposeful diversification, our high quality portfolio, and continued strong population and job growth across our markets has driven our strong leasing since the onset of the pandemic, including throughout last year. In 2022, we signed 1.5 million square feet of new leases, the most in any year since 2014. We ended the year on a positive note with 337,000 square feet of new leasing and 924,000 square feet of total second-gen leasing. In the fourth quarter, we signed 28 expansions, nearly half of our renewal count, with expansions outpacing contractions by a ratio of 3.5 to 1, equating to 81,000 square feet of net expansions. In addition, we signed a 312,000 square foot renewal at a 50-50 JV property in Richmond. This renewal was for 100% of the customer's prior space with a roll-up in cash rents and limited TIs. As a reminder, JV leasing is not included in our overall leasing statistics. As we move into 2023, our occupancy and same property cash NOI will be negatively impacted by the 263,000 square foot move out by Tiviti in the Cool Springs BBD of Nashville at the end of this month, a space that we have already substantially backfilled. The backfill customer's lease isn't scheduled to commence until early 2024. As is our practice, we do not remove in-service buildings from our same property pool. In addition to our solid leasing efforts in 2022, we were also pleased with our investment activity during the year. We acquired $400 million of best-in-class assets in Charlotte and Dallas, both with meaningful long-term growth potential. We placed in service roughly $100 million of 99% lease development. We announced over $400 million of development in Dallas, Atlanta, Tampa, and Charlotte. and we sold 133 million of non-core land and buildings. This volume of work, combined with our high-quality office portfolio and the strongest BBDs throughout the Sun Belt, gives us the building blocks we need to generate additional long-term growth. Turning to our results, we delivered FFO of 96 cents per share in the fourth quarter. Our full-year FFO was $4.03 per share. including 13 cents of net land sale gains. Excluding land sale gains, our full year FFO was $3.90 per share, six cents above the midpoint of our initial 2022 outlook, even with the unanticipated sharp rise in interest rates. Turning to investments, in the fourth quarter, we expanded our presence in the dynamic Dallas market by once again partnering with local sharpshooter granite properties, this time to acquire McKinney and Olive in uptown Dallas in a 50-50 JV for a total investment of $197 million at our share. McKinney and Olive is a trophy mixed-use building with approximately 500,000 square feet of office and 50,000 square feet of retail. The building is well-leased with growing customers and average rents estimated to be 35% below market. This investment, priced below replacement cost, provides a unique combination of an attractive going-in cash flow yield with the opportunity to earn development-like returns as we roll rents up to market. Further, this building is only four blocks from our 23 Springs development, providing ample opportunity for leasing and operating synergies with what we believe will be two of the best buildings in Uptown. During the quarter, we also announced the Midtown East development in a 50-50 JV. This project will encompass 143,000 square feet in the highly successful Midtown Tampa mixed-use development. The total cost is estimated at $83 million, with our share being half of that. This announcement follows our first office development in Midtown Tampa, Midtown West, which we placed in service during the fourth quarter as originally scheduled. at 97% leased. We started Midtown West on a fully spec basis in late 2019. And despite the pandemic, the project leased up successfully at rents at or above our original pro forma. Our 1.6 million square foot development pipeline now represents a total investment of 518 million at our share. Across five different markets, it is a combined 21% pre-leased. Three of those developments, representing nearly 800,000 square feet and $234 million of total investment at our share, are scheduled to deliver in 2023, but are not projected to stabilize until 1Q25 through 1Q26. With rising interest rates and reduced debt availability, the investment sales market has slowed meaningfully over the past few quarters. Fortunately, our balance sheet is in excellent shape, which allows us to be patient with our disposition efforts. Over the long run, we will continue our strategy of monetizing properties we believe have below average growth prospects, limited upside, or are CapEx intensive. And we'll use the proceeds to replenish our dry powder and ultimately recycle into higher growth properties. As illustrated in our 2023 outlook, we expect to be a net seller this year, although the volume of dispositions will depend upon the stabilization of the office investment sales market. Our plan is to sell up to 400 million of non-core assets this year, while we believe acquisitions are unlikely. Our initial 2023 FFO outlook is $3.66 to $3.82 per share. At the midpoint, interest expense will be significantly higher due to rising rates, and we also project higher same property operating expenses. Same property cash NY growth is projected to be flat at the midpoint below our historical average due to higher CapEx and lower average occupancy, largely as a result of the TIVITY move out. While a 2023 FFO outlook is below 2022 actual results, As a reminder, we have grown normalized FFO per share each year for 12 consecutive years at a 4% compound average rate. Since the onset of COVID at the beginning of 2020, we have acquired 3.2 million square feet of best-in-class office assets for a total investment of $1.2 billion, delivered 1.2 million square feet of highly leased office development for a total investment of nearly $500 million, and sold 6.4 million square feet of non-core properties for $1 billion, all the while growing normalized FFO per share 11% and continuing to strengthen our cash flows. With our ever-improving portfolio quality, we're now even more resilient and better poised for long-term growth. In conclusion, while our high-growth BBDs and high-quality portfolio receive most of the attention from our shareholders, Our humble, hardworking, and talented teammates are the ones who drive our success. I would like to thank our entire Highwoods team for their continued commitment and tireless dedication to our company during the past year. It is their effort that has positioned us for continued success for many years to come. Brian?