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, April 26th. I would now like to turn the conference over to you, 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 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, and good morning, everyone. During the first quarter, we once again had strong financial and operational results. Leasing activity was solid. same-property cash NOI growth was positive. FFO per share was healthy with a sequential increase from the fourth quarter. Our cash flows continue to strengthen, and we reinforced our already fortress balance sheet by bolstering our near-term liquidity. Our well-diversified, high-quality portfolio continues to outperform our markets and compared to other major metro areas throughout the U.S. As we stated last quarter, we believe that to be resilient, we must be diversified, which is a core component of our long-stated, simple, and straightforward goal of generating attractive and sustainable returns over the long term. With nearly 2,000 customers, our portfolio is located in eight core Sunbelt markets with a sharpshooter focus. on best business districts, which are both urban and suburban. Our largest market is Raleigh, with just over 20% of our total NOI. Our largest customer, Bank of America, is less than 4% of total revenues. Our largest industry, financial services, is less than 20% of our revenues. Our average lease size is under 15,000 square feet. and our median lease size is 5,000 square feet. Further, we believe there is a clear preference for quality when choosing office space. Not just the high quality buildings, but also high quality locations and of increasing importance, high quality, financially stable landlords. Our portfolio is outperforming our sub markets by an average of 590 basis points on occupancy, And this outperformance increases to 750 basis points when compared to the U.S. average. We believe we are well positioned to increase this outperformance as customers and prospects focus even more intently on the quality of the building and the financial health of the property and its owner. That being said, our portfolio is not immune to the cyclical headwinds that all office landlords face during an economic downturn. While tour activity remains encouraging, we do expect demand will be negatively impacted as customers and prospects become more cautious about their own businesses in the near term. We do believe that high-quality awards with high-quality portfolios will, more often than not, benefit from the flight to quality. From the usage perspective, we can continue to be encouraged that our customers are increasingly returning to the office. While the overall office utilization hasn't returned to pre-pandemic levels, customers in our markets from all industries are realizing the difficulties of replicating the culture, creativity, and productivity of their teams when away from the office. Our goal is to provide our customers an environment where their teams want to come into the office to be with their colleagues. or set another way, provide workplaces that are commute worthy. Turning to the quarter, we delivered FFO of 98 cents per share. Same property cash NOI was solid at plus 0.8% despite the headwinds of lower occupancy due to a large known customer move out in Nashville, which has already been backfilled, but whose lease doesn't commence until early next year. At quarter end, occupancy was 89.6%. While overall leasing square footage volume declined modestly with 520,000 square feet of second-gen space, including 220,000 square feet of new leases, the number of leases signed remained stable at around 100 for the quarter. Each year, first quarter volume is typically lighter than subsequent quarters, given the rush of getting deals done before December 31st. Of note, we saw net expansions of over 50,000 square feet, which follows a strong fourth quarter, and the number of expansions outpaced contractions by a ratio of 5 to 1. Rent spreads were positive 15.9% on a gap basis and positive 2% on a cash basis. Average rental rates are 3% higher on a cash basis compared to one year ago. While it was a quiet quarter on the investment front, we're actively assembling the building blocks to further strengthen the resiliency and long-term growth of our portfolio. We've been busy prepping potential dispositions and have a variety of non-core buildings and non-core land in the market for possible disposition. Our disposition outlook remains up to 400 million for the year, though the upper half of the range seems unlikely given the current capital markets environment. Over time, we're confident in our ability to recycle out of non-core assets, which will help replenish our dry powder for future investment opportunities. Our $518 million development pipeline continues to progress well with all projects on time and on budget. We're 22% pre-leased, with at least two years until projected stabilization across all of our spec projects. We have about $320 million left to fund, and we project NLI of approximately $40 million upon stabilization. Our next development delivery, 2827 Peachtree in Atlanta, is scheduled for completion in the third quarter with a projected stabilization in 1Q25, and is already 88% pre-leased with strong interest from additional prospects. Turning to our 2023 outlook, we now project full year FFO of $3.68 to $3.82 per share, up a penny at the midpoint since our initial outlook in February. Same property cash NOI is projected to be minus 0.5% to positive 1.0%, up 25 basis points at the midpoint. All other line items are unchanged. Before I turn the call over to Brian, I would like to briefly reiterate our performance and outlook. Our diversified portfolio across the best urban and suburban BBDs in the Sun Belt continues to perform very well. We're prudently investing in our portfolio through our spec suite program and highwitizing projects that will drive additional portfolio outperformance. Our $518 million development pipeline will generate meaningful cash flow as it delivers and stabilizes. Our full year 2023 outlook for saving property cash NOI and FFO per share are higher at the respective midpoints than originally forecasted. And our balance sheet is strong with a debt to EBITDA ratio of 5.9 times with ample existing liquidity to fund the remainder of our development spending and all debt maturities until 2026. Brian?

Thanks, Ted, and good morning, everyone. Echoing Ted's thoughts, we are pleased with the performance of the portfolio this quarter and appreciate the hard work our teammates have put in to support our customers as they recruit, retain and return their very best to the office. We believe the Highwoods portfolio is tailor made to capitalize on the flight to commute worthy experiences in our open for business and growing Sunbelt markets. As Ted mentioned, we believe there are reasons to take a cautious approach around demand growth in the office space as we approach the rest of the year. Yet our team continues to see healthy interests from small to medium sized organizations and a clear preference towards quality, which includes locations, buildings, and owners. This dynamic plays directly to our strengths, as our high-quality BBDs, workplaces, and sponsorship is resulting in strong outperformance for our buildings. While our portfolio has historically operated at higher occupancy levels than our competition, This outperformance has increased by 490 basis points since the onset of the pandemic and is now nearly 6% higher than the markets where we operate. We believe this spread can continue to increase as customers and prospects focus even more on quality. While some larger customers are holding off on real estate decisions or using this opportunity to streamline operations, our core customers small to medium-sized businesses continue to grow and have consistently generated the highest office utilization in our portfolio. Further, we continue to see customers of all sizes increasing their average number of days in the office. To illustrate this point, our same property parking revenues were up 19% in the first quarter compared to last year and up 9% sequentially from the fourth quarter. In the fourth quarter, we added 80,000 square feet of net expansions. And in this quarter, we added an additional 50,000 square feet. We see our small to medium-sized average customer as a strength within our portfolio. And they serve as a general proxy for the diversified Sunbelt economy. Turning to market activity for the quarter. CBRE reports that in Tampa, There are 2.3 million square feet of tenant requirements in the market, and it posted positive net absorption for the quarter. Our team there led the quarter for leasing volume with 112,000 square feet of leases signed. In addition, we're already seeing steady interest in our recently announced 143,000 square foot Midtown East development, slated for completion in 2025. This project is the only new construction underway in the West Shore or downtown BBDs. With its neighboring project, Midtown West, now over 97% leased, we have benefited from Midtown becoming the premier West Shore address to live, work, and play. Atlanta proved to be our second most active market in terms of leasing activity during the quarter, with 81,000 square feet of leases signed. It should be noted, however, that this number does not include leases signed at our joint venture development, 2827 Peachtree, which is now 88% pre-leased, up from 75% at year-end, and on schedule to be completed in the third quarter. Consistent with our own portfolio and experience, JLL noted that the great majority of activity in Atlanta was by tenants less than 10,000 square feet. Moving to North Carolina, which was again named the business facility's most recent best state for business, and where we have approximately 35% of our NOI in the Raleigh and Charlotte markets, we've seen strong activity at 650 South Triumph, our 367,000 square feet asset in Charlotte, which has leased up to 88%, up from 79% when we acquired the building last August. We have also begun construction on our boutique build-a-suit for United Bank in Charlotte's South Park BBD. In Raleigh, our team signed leases for 75,000 square feet, and we ended the quarter with occupancy of 90.4% across our 6.3 million square foot portfolio. Our Glenlake III mixed-use development is on track to be delivered on time and within budget by the third quarter of this year. The work placemaking experience we are delivering to our customers is competitive currency as they recruit, retain, and return talent to the office. They are telling us this in word and in action based on our sustained results throughout the pandemic and now into 2023. We believe our ability to deliver the highest quality workplace experience has Highwoods well positioned for the long term. These experiences are delivered personally by our exceptional Highwoods teammates who manage, lease, and maintain our buildings themselves, and we so very much appreciate their hard work. Brendan?

Thanks, Brian. In the first quarter, we delivered net income of $43.8 million, or 42 cents per share, and FFO of $105.7 million, or 98 cents per share. There were no significant unusual items in the quarter. We had a small term fee and an even smaller land sale gain, both of which were anticipated in our original 2023 outlook that we published in early February. Rolling forward from last quarter's FFO, we posted an increase of $0.02 per share. Higher NOI contributed $0.05, driven by higher rental revenue, improving parking income, and higher operating margins. Higher unconsolidated JV income contributed $0.02, primarily driven by the full quarter contribution of McKinney & Olive, and also included the deconsolidation of our 50% interest in the Markell JV enrichment. Other income and miscellaneous items added one cent for a total of eight cents of upside, which was partially offset by three cents of higher G&A, mostly due to the accounting impact of our annual long-term equity incentive grants, which are customarily made in the first quarter each year, and three cents of higher interest expense. The combination of these items nets to the two cent increase in core FFO from the fourth quarter of 22 to the first quarter of 2023. Turning to our balance sheet, where we ended the quarter with net debt to EBITDA of 5.9 times, flat from year end, even though we continued to fund our development pipeline and had no meaningful disposition proceeds. We further strengthened our liquidity by obtaining a $200 million five-year interest-only mortgage with a 5.69% fixed rate secured by Bank of America Tower in Charlotte. This execution highlights the benefit of our low-levered, largely unsecured balance sheet combined with our high-quality portfolio. We were able to pivot to the mortgage market where pricing is currently more efficient and attractive than the unsecured market yet still maintain a largely unencumbered asset pool and maintain strong credit metrics for our bondholders and banking partners. At quarter end, we had $685 million of existing liquidity, and this amount increased to $725 million following the redemption of our preferred equity investment in the McKinney & Olive JV. We have only $329 million remaining to fund on our development pipeline, and no consolidated debt maturities until the fourth quarter of 2025. We have ample liquidity to fund all of our capital needs, including development spending and debt maturities, through the expiration of our line of credit in March 2026, without the need to raise any additional capital or receive any disposition proceeds. To be clear, we do expect disposition proceeds as we move throughout this year, And we plan to be opportunistic about raising additional debt capital later this year or next. But our liquidity position affords us the ability to be patient. In addition, our investment grade credit ratings were recently affirmed by both of our rating agencies with stable outlooks. As Ted mentioned, we've updated our outlook with an increase to the midpoints of same property cash NOI and FFO. Our revised FFO range is 368 to 382 per share, up one penny at the midpoint. The major changes from our prior outlook at the midpoint of the range are a two cent increase from higher anticipated NOI, attributable to stronger leasing, better parking revenues, and lower OpEx, partially offset by a one cent reduction from the net impact of the $40 million redemption of our M&O preferred equity investment. As mentioned earlier, we started with a strong first quarter. A couple of items to keep in mind going forward. First, our operating margin in Q1 was higher than originally anticipated, which was largely attributable to lower OpEx. Some of the reduced expense items are expected to be incurred later in the year, and therefore we project operating margins will be 100 to 150 basis points lower for the full year compared to Q1. Second, we will incur the full quarter impact of two large customer move-outs in Q1, most of which has been backfilled but won't commence until next year. Finally, with the redemption of the preferred equity investment in the M&O JV that had been previously paying us monthly distributions at a rate of SOFR plus 350 basis points, other income will be lower. We have included up to $400 million of potential dispositions in our outlook. While the upper half of the range may be challenging to reach this year, given the current state of the investment sales market, we are seeing good interest in smaller buildings and some of our land parcels that are better suited to non-office development. We expect any disposition proceeds would bolster our liquidity and further improve our balance sheet metrics. Finally, as we've mentioned many times during the past several years, our cash flows continue to strengthen. This quarter is an excellent example as our cash available after distribution was $20 million even after absorbing a full quarter's impact from higher interest rates. The ability to recycle capital back into the business, whether into development, acquisitions, or prioritizing projects, is a major reason why we've been able to consistently grow earnings year after year on a leverage-neutral basis while simultaneously upgrading our portfolio quality, improving our long-term growth rate, and increasing our resiliency. Operator, we are now ready for questions.

Thank you. If you would like to register in question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt technology request. If your question has been answered and you would like to withdraw your registration, please press 1-3. One moment, please, for the first question. Our first question comes from the line of Lane Haag, Wells Fargo.

Please go ahead. Great. Thanks. Good morning. Can you talk a little bit more about potential sales this year? It seems like you've pivoted from targeting the large sales in Pittsburgh or elsewhere to focusing more on smaller kind of bike size assets. Can you just give some color around the timing and size of those potential sales? And just in general, I guess, what are the characteristics in an office property and what's the return profile that we're perspective investors are looking for in an office transaction these days?

So in terms of the dispos, you're right. We have shifted to smaller deals. That's sort of what the investor pool out there is looking for right now. There's plenty of buyers to make a market, we think, in that $20 million asset range. So we've got In terms of what's in the market, we've actually picked buyers on all three of the buildings that we've got at the market. Then we've got a couple land transactions as well. But the buildings, two of the three are single tenant, single customer, good credit, pretty good waltz as well. And then we've got one multi-customer building. Buyers, you know, one's institutional, two of them are private. So it's sort of a cross-section there. But the bidding pool when we took these out, I'll tell you, it was sort of surprising and it was great to see. It wasn't as deep as it was a couple years ago, but we had plenty of, again, plenty of buyers to make a market. So I think that was encouraging from our standpoint. So they're all in the due diligence process in terms of the buildings. We're running through that. And, you know, I'm optimistic. you know, we'll get something over the goal line and be prepared to talk about pricing maybe at the earnings call in July. And then same thing on the land. You know, we've got a few land parcels out there. Buyers are going through due diligence, working on our closing conditions. So I'm hopeful we'll get, you know, a land transaction or two, maybe just one by the next call. So, you know, overall we're feeling pretty good about getting some DISPO proceeds in the door.

Great. Thanks for all that color, Ted. Second question, can you just talk about leasing activity on the development pipeline and whether you've seen much of a change in demand for those projects recently, especially for those that are delivering in the near term like Granite Park 6 and Glen Lake 3?

Yeah, if you don't mind, maybe I'll hit all of them just real quick. We mentioned on the prepared remarks 2827 Peachtree. So that one did move, I think, from 75% to we're just shy of 88%. I think it's 87.5% maybe this quarter. And we've got good prospects to get us in the 90s. So that building, we delivered, again, in the third quarter, and it's come along very nicely. So we feel great about that one. The building looks great. The next one, also in the third quarter, just a month or two behind 2027, is Glen Lake 3 here in Raleigh. That one's, you know, about 213,000 square feet, which includes a little bit of retail. We're adding to the overall Glen Lake Park. So that one, you know, we put a lot of proposals out, and the activity has increased in the last 90 days. Several tours. Larry's been on a couple. I've been on a couple. with our Raleigh team, but I wouldn't say we have any strong prospects at this time, but we're encouraged by the increased activity there. Granite Park 6 up in Plano in Dallas, that delivers in the fourth quarter of this year. Tour activities picking up there, too. So far this year, in 2023, we've had 585 people. thousand square feet of proposals we've put out there, 60,000 just in the last 30 days. So decision making for all the big prospects is just slow. So, you know, it's we've got activity out there and proposals submitted, but the decision making has been slow. Twenty three springs that delivers in the first quarter, 25. And the tour activity, I'd say, has been very, very good there. You know, 560,000 square feet of proposals so far this year, 160,000 just in the last 30 days. And, you know, I'd say a couple of those are pretty strong prospects that seem to be moving along a little quicker in decision-making. So no update yet, but we're making progress on that. And then the last one is just Midtown East and Tampa. You know, we just started construction in the first quarter of that building. We've fences up and we're starting to put in the pilings. But we've already seen some pretty good early interest, I think two or three inquiries already that we'll be making proposals on. So, again, that doesn't deliver for another two full years. So, you know, all in all, I'd love to have a little more activity maybe in Raleigh on the development. But, you know, activity seems to be picking up.

So it sounds like the activity is a little better at 23 Springs and Granite Park 6. You know, what's the difference there?

So it's about the same number of proposals there. It's just the 23 springs, the decision makers are in a position to make those decisions, the leasing decisions. It's just been a little slower up at Grand Park. So I don't think it's anything. Uptown's a great, obviously a great sub-market, but it's just the specific prospects we're chasing. Maybe they've got a shorter timeline to make decisions or what have you.

Got it. Thanks for all that, Cutler.

Thanks, Brian.

Next question from the line of Rock Stevenson with Tanny.

Good morning, guys. Brian, I think you spoke about it a little bit in your prepared comments, but can you expand on the renewals in the first quarter and what you have under discussion currently for the remainder of 23, specifically here trying to figure out the relative breakdown between of the amount of tenants pursuing expansions versus those looking to contract and those that are more or less seeking to maintain their same footprint these days. Seems like the market narrative is still that employers are gonna give up 10 to 20% of their office space on renewals and curious as to what you're seeing within your portfolio.

Thanks, Rob, for the question. Yeah, as you mentioned, and as I said in prepared remarks, for this past quarter, Most of the activity for folks kind of leaning in are small or medium-sized bread-and-butter customers. They expanded versus contracted five to one for the quarter. Just to give you a little color into what we're seeing already for this quarter, we're off to a good start. We're feeling very enthusiastic about how this quarter is going to come in based on everything that's gone either to lease or have agreed to terms. So my gut is we're going to be fairly consistent from first to second quarter on that expansion contraction with more volume for the quarter. The bigger users, as we've kind of mentioned, they're either delaying or streamlining rightsizing their space. And I really do think it's maybe less from a work from home, headwind from a this is how we're going to use space going forward. And, again, a little bit of talk in our book is that they're all telling us that it matters, the workplace matters, and that they're leaning in to make it a differentiating factor with regard to their talent.

Okay, that's helpful. And Ted, how are you and the board thinking about unlocking value now, given your comments that dispositions at the upper end of the range weren't likely given the current environment? Thinking of this in the context of your stock price, which has recently dipped below $20 for the first time since the global financial crisis, which seems to totally contradict how your business did in your 23 guidance?

Yeah, look, obviously we talk about that a lot, and I think it's All office REITs are sort of being tagged with the same issues. So, look, I think our view is we're going to keep our head down. We're going to continue to operate. We can't control, you know, what our stock price is doing right now in times like this. Obviously, you know, we're in a – the office business is in a tough spot, perception is, and perception may not necessarily be what we're seeing on the ground. But any recession or economic slowdown, you tend to see increasing vacancy, subway space increases, flight to quality, and so forth. So, you know, we're experiencing today the same thing we experienced in 2000, 2008, and so forth. So we are intently focused on just, you know, going out and execute. We think, you know, over the long term, there's going to be great opportunities over time. And I think coming out of the GFC, that's where we end up buying a lot of great office buildings, some of the best buildings in our portfolio. We're just coming out of the GFC. So I think there's going to be similar type opportunities this time around, but we've got to be patient. And while we're being patient, we need to execute as best we can, both on the leasing side, on the disposition side, while creating some dry powder to go take advantage of these opportunities. So it's really the same old stuff, but it's our playbook.

Okay. And then lastly, not to leave Brendan out, Brendan, is second quarter going to be the low FFO per share quarter in 23, given all you know at this point?

Given all you know at this point. Well, with the caveat that you put on the last part of that question, probably with all we know, I think that that's probably likely. It depends a little bit on – I would say second and third quarters are probably the low for what we are expecting – So occupancy is probably likely to kind of bounce around where we are currently for the next couple of quarters, and then we expect it to rebound in the fourth quarter. So given we had activity that moved out in the beginning of March, we had the CDC that moved out kind of mid-January, you know, those contributed in the first quarter. They will not contribute in the second and third quarters because those backfill users won't be back in that space. And then we do expect that operating margins will be lower in the remainder of the year. So with all that, yes, that probably means second and third quarters would likely be below.

Okay. Thanks, guys.

Next question from the line of Camille Bono with Bank of America. Please go ahead.

Hi. I know you're opening – Your remarks noted that the first quarter is typically lighter from a leasing perspective, but looking a bit further into the activity this quarter compared to historic averages, the majority of the slowdown seems to be related to renewal. So, can you comment on how this slowdown compared to your expectations for retention and any color on what tenants are saying as the reason to not renew for their lease would be much appreciated?

Hey, Camille, it's Brendan. I'll start and then maybe pass that along to Brian and Ted for additional color. But I would say the low level of whether renewals or retention in the quarter was largely expected given we had the TIVITY move out that we talked about for a long time. So that's 263,000 square feet. So that was a non-renewal in the quarter. We had the CDC, which was 116,000 square feet. So combine those two are 380,000 square feet of kind of known non-renewals. And then recall that we also proactively took back 77,000 square feet with a user in Raleigh to extend their remaining square footage over a long lease. And with that, we have substantially backfilled the 77,000 square feet that we took back. So all of those things combined reduced the amount of renewal leasing that we did. But that was all known. So it was very much in line with expectations.

So the only thing I would add is, you know, in any, again, any downturn, you see companies contract their space. You see companies consolidate operations if they have more than one office in a sub-market. You've got companies going out of business. Obviously, flight to quality. In flight to quality, we talk about it a lot now, but at any downturn, people are looking for a deal and they may want to upgrade their space. we're losing our retention ratios being impacted just by the overall economic environment and some of just what's going on with the customers, whether, again, consolidation of offices, closing regional offices, and so forth. So not too dissimilar to any other downturn. Again, with the caveat that certainly hybrid work is one of the additional headwinds.

And just to follow up on that point, I think you mentioned excluding those first quarter move-outs. you're expecting retention for the rest of the year to remain around that 50%. So, is there any change to the assumption for the back half of this year?

No, I think that's very much in line with kind of our expectation. So, yeah, no change to the outlook for the year. I think you can see that generally in the outlook that we provided. We still expect year-end occupancy to be between 89 And 91%, I'd say we're feeling maybe a little bit better about the business overall, given we did nudge up our same property NOI growth outlook. So all those things are very much in line with expectations. I'd say net-net, we probably feel a little bit better sitting here in late April compared to when we provided that outlook in the beginning of February.

That's helpful. And finally, I know you've commented on having the flexibility around timing to execute on the Pittsburgh disposal. and the fact that the market could look very different when you do. Historically, you've also had a very good track record in exiting markets while growing FFO. So just stepping back, how do you think about Highwood's ability to continue to deliver FFO growth in this tough market environment and the potential dilution from this sale?

Yeah, look, I think, as you stated, we had 12 consecutive years of FFO growth, which has been, you know, very few companies have done that. I do think it's a tougher environment, right? There's no question. We recognize it, and it's going to be tougher to do that. So, you know, we're going to obviously wait for Pittsburgh. We're in no huge hurry to sell Pittsburgh, but certainly when we do, just given capital market environment, you know, we've got the headwinds there, so there will be some FFO dilution. I do think, same time, our development pipeline is going to deliver over the next couple of years, and that's helped us in the past. I think it's over $40 million of NOI when we stabilize that. So that's going to help on the growth standpoint. I think that's one of the benefits of Highwoods is having that development value creation platform that can deliver some solid NOI growth with the development deliveries.

Our next question from the line of Michael Griffin with Citi. Please go ahead.

Great, thanks. As much as I love the office, I'm actually down in Atlanta this week, so I'll have to stop by 2827 in Glen Lake at some point. But on that day, my question was about the state of Georgia. I noticed I think there was a footnote in y'all's queue. Looks like they're going to be taking about 60% less space on that 290,000 in 1800 century. Just curious how you're thinking about backfilling that, you know, other tenant needs, You know, maybe it's not. I think it's a little bit past Buckhead, but anything you can add there would be great.

Sure. Specifically in the Department of Revenue, as you know, we put the note in the 10-Q. That asset is a non-core asset for us. So when we got the RFP less than two weeks ago, just given our, you know, conservatism and transparency, we wanted to add that because it is – They've been in that building for a long time, over 20 years, and up until, again, a couple weeks ago, we thought is a good chance for renewal. So, you know, we're looking at it right now. There's a chance they'll, you know, we could keep them in that same building. There are other options in our portfolio that they may be interested in as well. So it's early days on that, but it will be a significant downsize if we keep them. Again, there's an RFP out there, and we're going to be competing for it. You know, I'm hopeful, but, you know, we'll see. It's definitely going to be a competitive. It's a big, big requirement, so I'm sure a lot of folks will be chasing it. So, anyway, that's that one. And then the other big ones, you know, Novellus is the other big one in Atlanta, Michael, and that's, you know, it's 169,000 square feet, expires in September of 24. They moved out late last year, crossed the street to Phipps Plaza, so we now have That space is vacant. We're still paying rent on it. But we're showing it. We had two large tours just in the last 30 or 45 days. And as we've mentioned in the past, they have subleased about 43,000 square feet. And, you know, who knows if we can keep those guys or not. It's another competitive opportunity just given the size. So it's great space, great building, great location. So, you know, I think over time we'll be able to lease that up. to a great customer going forward.

Great, thanks. And then my second question is just on Tampa, circling back on those developments and the presence there. You know, obviously it's a growing market, but I'm curious what makes it as attractive as it is. I mean, I was reading somewhere recently, I think Tampa has around the same population growth over the last decade as Little Rock, Arkansas. I'm not saying Little Rock is bad per se, but, like, you've got Midtown West, you know, to the majority lease to Tampa Gas and Electric, I think. starting midtown east. Maybe talk about why that's such a beneficial market, if you could.

We've been in Tampa since, I think, the 90s, and I think it's been a good long-term performer for us. If you look at our assets there, they're largely in West Shore and the CBD are the two best business districts there. And when you drill down specifically on these assets, midtown east, that is in part of a 22-acre midtown Tampa mixed-use development. There's really a unique type project for Tampa. And the success we had at Midtown West, if you remember right before the pandemic, like it was maybe summer or fall of 2019, we started 150,000 square foot office building, 100% spec. And during the pandemic, we completed it on time, on schedule, and we leased it up on time and better than our pro forma from a rental rate standpoint. So just the demand that we saw that is looking for a mixed-use, integrated mixed-use project in Tampa gave us the conviction to go in Midtown East. And as you know, Midtown East, it is a It's about a 438 or 40,000 square foot building that Tampa Electric, TECO, is going to be buying a condominium interest in that building. So we've only got about 140,000 square feet of office to lease up. But we just think it's a unique mixed-use environment. It's very vibrant. Again, it's going to help companies recruit and retain their employees.

Michael, I might just add on. If we think of all of our different markets having different ages in their life, many of them are farther along in their development and evolution. And Tampa has fundamentally kind of changed its perception. Maybe years ago, it was sort of known as back office kind of location, some defense connectivity with CENTCOM headquartered there. What's happened really over the last few years and accelerated is by the pandemic and the outward flow of companies from maybe the gateways. You know, I think we've mentioned this before. Tampa is the number one relocation destination for companies out of the Northeast into Florida. It's not South Florida, it's Tampa. So that's, you know, a great story. In terms of the Little Rock growth rate, we'll definitely look into that. But we've seen the quality of the customers that are leasing space, as Ted mentioned, in Midtown. And now our Midtown West is north of 97% at least. The combination of the diversified economy in Tampa, they're spending billions of dollars of expanding the airport. You're seeing new investment with folks from around the country in downtown through the Water Street development in Midtown, what we're doing with our partners there. It feels like Tampa is kind of taking its next seat at the table with the likes of Raleigh and Nashville and Austin and Charlotte. It feels like that.

Awesome, guys. Well, that's it for me. Thanks for the time.

Our next question is from the line with Morgan Stanley. Please go ahead.

Hey, a couple quick ones back on the leasing. Is there a way to sort of quantify what the pipeline, what the activity is, and then maybe just some qualitative comments on sort of tech? and some of the lifeline hubs that were in some of your markets. Just curious what you're seeing from them. Thanks.

Hey, Ron. Brian here. I'll take the first shot and let Ted and Brennan grade my paper. A couple of things. We have low exposure to tech in general. I think you probably know that. Not that we're down on tech. It's just a fact. As you look into the crystal ball of what we're seeing in the second quarter already, a few weeks in, Nashville, Raleigh, are going to be stuff we talk about next quarter we feel pretty good about. You know, even Richmond is going to have something to talk about. Tampa was our leader this quarter, the 112,000 square feet. The momentum continues there following on kind of Michael's question. So in general, those markets, we like the economics that are coming in. As Ted kind of mentioned, it's something that, you know, people ask, is it more expensive to do deals? What are the fundamental economics around the leasing that's going on? Yes, it's competitive. We haven't seen costs come down per se in the build out of spaces. Has it leveled out? We believe so. And we're optimistic that as other projects are slowed down that maybe we have a chance to pick up some things there. You know, for those deals that will give us term and have the credit, we're inclined to win those deals. I have a kind of a bad joke with our entire leasing team. that I'm more optimistic about renewing someone who's in the portfolio than is not. And we have the ability within our own portfolio to look ahead two years, three years with renewals and maybe do deals, work with customers in a way that the private side singularly financed building that we compete with might not be able to.

Great. Helpful. The other one is I have that same question on 1800th Century Boulevard, the 10Q. If I could ask it a different way, obviously it's not core, as you mentioned at the top, but if I could ask it a different way, is this idiosyncratic? Was there something unique about how they were using the building that you sort of looked at this and said, okay, that sort of made sense? Were there any sort of clues? Just looking at their usage versus other tenants, maybe that could have shown this was coming.

Yeah, Ron. Well, certainly, they were slower. Like most government users, they're slower on the return to work over the last couple years. But really, they've been in there forever. So space is tired. It does need to get redone. So, I think it's probably a hybrid work combined with just needing to reconfigure their space like we're seeing in others. Obviously, they're in a building that's built in 1975, so it's an older building, right? So, there's not only to re-tenant it, there's the VI and the TI associated with their lease, but they're just building capital that will need to be invested in that asset on sort of an irregular floor plate. It's just really, they've been there a long time, and they're reevaluating their space like a lot of folks are.

Great. And the last one, if I may, just the life insurance deal you did in the quarter at a pretty good rate. Obviously, Brendan went through sort of the funding plans, and you're well-funded. I'm just curious, are you getting more calls from life insurance companies in terms of other assets where – there's interest, there's opportunity down the road. Thanks.

Yeah, Ron, it's Brendan. And thanks. Yeah, we were pleased with the execution on the mortgage at B of A Tower. I would say, I mean, in general, we are predominantly an unsecured borrower. So, you know, mortgages are not something that we're looking to do a lot of. However, the benefit of us having a largely secure unsecured asset pool with a high quality portfolio of assets is there are those options that are out there should we choose to pursue some mortgages. So I think it's an option that's open to us and we'll evaluate whether or not it makes sense. But we do want to balance the unsecured pool that we have out there with others. And just, you know, just as a reminder, I mean, we're We're in great shape from a liquidity standpoint. So, I mean, we can fund all of the development pipeline and all of our debt maturities through the expiration of the line, which is in March of 2026, without the need to raise any additional capital. So it's not something that we actively need to go out and raise capital. It's just an option should we, you know, choose to do so.

Great. Thanks so much.

Next question from the line of Dillion Personside with Green Street. Please go ahead.

Hi, guys. Thanks for taking the question. Just curious if you can kind of provide your thoughts or expectations for net effective rents throughout the remainder of 2023. I know leasing costs have probably continued to remain elevated, and something that surprised us over the last several years is that base rents have held up surprisingly well. I guess could 2023 be the year that we start to see pressure on base rents?

Hey, Dylan, it's Ted. Look, I think so, right? I mean, again, it's an economic slowdown, just like any other slowdown in the office business. Right now, we've got vacancy rates increasing, we've got the sublease space increasing, so you've got those headwinds, and then you've got cost pressures, right? We keep thinking or maybe hoping that, you know, costs are going to come back in line. And as development starts to fall off, you may see some contractors that are getting a little bit more aggressive. But up to this point, the TIs, it's still, you know, there's still cost pressures that continue to increase. Free rent is increasing. Again, I'm making a blanket statement. There are pockets in submarkets that they're all different. But in general, you know, there's upward pressure on TIs. upward pressure on free rent. Now, the nice thing is, since COVID, we've been able to maintain, if not increase, face rents. So when you throw all that into the mix, you know, we've done a good job on net effectives, but just entering the slowdown we're entering, it wouldn't surprise me to see some downward pressure on net effective rents.

And Dylan, it's Brendan. Just one thing I would add, we did do a lot of, spec suite deals during the quarter, you saw that the average kind of size lease that we did during the quarter was around 5,000 square feet. Those spec suite deals initially tend to carry a pretty low net effective because we spend a lot of capital up front. As we re-let those, then the net effectives are very high. So if we adjust for the spec suite deals in the quarter, the net effective looks a lot more comparable to previous quarters. So I think it had a negative drag by around 65 cents a square foot on our overall net effective. So I think we will do more of that during this year because we've been very successful and seen a lot of leasing traction there. But that will probably, from a headline perspective, cause the initial net effectives as we sign those spec suites to be lower than they otherwise would be.

Dylan, Brian, just to add on on this kind of counterintuitive face rates, as the new development is delivered and leases up, market face rates will actually drop because that higher end top of the market face rate is no longer in the pool to quote face rates. So we're actually seeing where you have seen the market face rates drop. It's because some of the top stuff is leased up. And we're seeing, to Ted's point, we've done a pretty good job of folks who see space as a differentiating factor, that face rate is a smaller part of their equation when they're talking about bringing their talent back.

That's all very helpful details. I appreciate that. Just one more quick one, if I may. Are you guys able to share sort of the underwritten LTV at Bank of America Tower in Charlotte?

Well, it depends on who you ask for the V, I guess. But, you know, it's probably, I mean, I think, you know, the lender had a probably a more conservative outlook of value than we think it would garner if you were to market that asset for sale. But let's call it, you know, probably in round numbers, 50% is probably a pretty good benchmark in terms of what the LTV is.

Great. Thank you.

Next question from the line of Nick Feldman with Baird. Please go ahead.

Hey, this is Daniel Hogan. I'm with Nick. I had a question. I know you were mentioning the mortgage, but given, you know, any potential slowdown in the market and transaction market and your deals, would you look to equity then as a potential way of de-levering those?

Hey, Daniel, it's Brendan. I'm not sure I totally understand the question, but I mean, I guess if would we consider a JV partner for assets, if that's maybe the question, probably not a profile of kind of Okay, got it. Yeah, I would say probably for the type of assets that Ted talked about, you know, kind of those smaller buildings that we have out on the market, I would say that that's not really kind of something that we're contemplating on the assets that we have out in the market for potential sale.

Okay, great. Thanks for the clarification. Once again, please press 1-4 if you have any phone questions. Next question from the line of Peter Abramowitz with Jefferies. Please go ahead.

Thank you. Ted mentioned possibly some opportunities on the acquisition side. I know there's nothing in your guidance, and maybe it's kind of looking a little bit further out. Could you just quantify how we should think about, you know, what you're targeting in terms of In terms of your returns on those, you know, I know there's not a ton of deal activity in the market today on the financing side, so cost of capital isn't totally clear, but just wondering if you can kind of quantify your return hurdles if you do start to get active.

Yeah, I think you said it. We're really not looking at anything right now. We're being patient, trying to replenish our dry powder, get some dispos over the goal line. So, you know, I think we're going to be patient. And the bar has definitely been raised, whether it be, obviously, development or acquisition. So I don't think we've had, you know, the cost of capital discussion because we don't have our pencils are sorted down on the acquisition side right now. And there aren't a whole lot of assets that are out there right now. And what we've got is our well-developed wish list that we're tracking. Actually, I say there are a couple assets that are out there we're tracking that, you know, would be good proxy for pricing if and when they trade. But right now we're sort of sitting back and waiting. We think there may be better opportunities a little bit down the road versus today. So I really don't have an answer for you on the cost of capital question. Okay.

Got it. That's it for me. Thank you.

And we have no further questions on the phone line.

Well, I want to thank you, everybody, for being on the line today. Thanks for your interest in Highwoods, and we look forward to seeing many of you at NAERI in June. Thanks so much.

And that concludes today's call. We thank you for your participation and ask you to please disconnect your lines.