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?