Highwoods Properties, Inc.

Hello, and welcome to the Highwoods Q3 2023 earnings call. My name is Alex. I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can press star 5x1 on your telephone keypad. If you'd like to remove your question, you may press star 5x2. And I'll hand it over to your host, Brendan Mayorana, CFO, to begin.

Please go ahead. Thank you, Operator, and good morning, everyone. Joining me on the call this morning are Ted Klink, our Chief Executive Officer, and and Brian Leary, our Chief Operating Officer. Hannah True, our Manager of Finance and Corporate Strategy, is under the weather. 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, Brendan, and good morning, everyone. During the third quarter, we once again had solid financial and operational results while maintaining a balance sheet that is among the strongest in the sector with healthy credit metrics and ample liquidity. At the beginning of the year, we predicted the operating environment and capital markets particularly for the office sector, would remain challenged for an extended period of time. So far, this is playing out as expected. We remain laser focused on operations and balance sheet management and believe the meaningful new investment opportunities will eventually surface. With this backdrop, these are our priorities. First, ensuring our portfolio operations remain healthy. To that end, we're aggressively addressing future lease rule, proactively reinvesting in those assets with ample opportunity to drive outsized returns, focusing on net effective rents, and maintaining strong cash flow by being even more disciplined on discretionary CapEx. Second, continuing to sell non-core assets. Obviously, this is currently challenging, but we continue to believe there will be ready willing and able buyers for stabilized assets, especially bite-sized deals. Third, further bolstering our already strong balance sheet by increasing liquidity. And finally, canvassing our markets for future growth opportunities. We firmly believe having a high-quality, resilient portfolio in the best markets and BBDs in the Sun Belt and the balance sheet strength to weather this capital-constrained environment positions us well to capitalize on long-term growth opportunities that will inevitably come with the next cycle, even if this current cycle lasts several more years. Turning to the quarter, we delivered FFO of 93 cents per share and grew same property cash NOI 2%. We signed 655,000 square feet of second-gen leases, 19% lower than our trailing five-quarter average. With a steady, albeit modest, increase in the return to office across our customer base since Labor Day, we're off to a solid start with our leasing volume so far in the fourth quarter. Our net effective rents continue to be resilient, as our year-to-date average is on pace to surpass our prior high water mark and exceed 2019 by 5%. While rent spreads garner more headlines, We have long believed it's more important to measure leasing performance by considering the entirety of lease economics. We're pleased net effective rents have remained strong, a direct result of the flight to quality, not just the flight to quality assets, but also flight to quality owners who have access to capital. Our sponsorship is a true differentiator when companies are making leasing decisions, and this has only become more important since the pandemic. I want to provide an update on the former TIVITY building in Nashville. Last year, we substantially backfilled the building by signing a 223,000 square foot lease with a single customer that currently leases 50,000 square feet in another Highwoods building. Unfortunately, since that lease execution, this customer has experienced some challenging and unforeseen business conditions that are impacting their growth plans and cash flow. We are currently in discussions with our customer about what makes the most sense going forward for both Highwoods and for them. It's possible we may ultimately decide it's in our best long-term interest to modify their lease, which is scheduled to commence in early 2024. The quarter was quiet on the investment front. We completed three development projects with a total projected investment of $234 million at our share. that were combined 30% pre-leased. 2827 Peachtree is 88% pre-leased, and we have an LOI to bring the property to 92%. The other two projects, Glen Lake 3 in Raleigh and Granite Park 6 in Dallas, aren't projected to stabilize until 2026. We signed a 20,000 square foot lease at Midtown East in Tampa, and we're seeing additional strong interest in this development. which isn't scheduled to be completed until early 2025 and stabilized until mid-2026. At 23 Springs, our 642,000 square foot tower in uptown Dallas, we have LOIs that will bring the pre-lease rate to over 50%. While we didn't close any dispositions during the quarter, we've remained active marketing additional non-core properties for sale. The current environment is obviously challenging, but we're cautiously optimistic we'll close a few smaller deals in the coming months. We've been quiet on acquisition and development announcements this year. I mentioned earlier we believe there will be significant opportunities in the future. We're consistently in discussions with owners of wish list assets across our footprint. Lenders are generally being patient with owners, but there is stress in the system, and it will take time for these future opportunities to arise. Our 2023 FFO outlook is unchanged at the midpoint. The steadiness of this year's FFO outlook masks better than anticipated NOI being offset by higher interest expense. To that end, we increase the midpoint of our same property cash NOI outlook to revised range of zero to plus 1%. Before I turn the call over to Brian, I'd like to summarize why we are optimistic about the future at Highwoods. The office business as a whole is under stress. Leasing, portfolio metrics, cash flows, access to capital, etc. But during periods of stress, the best positioned companies rise to the top and eventually thrive. We're well positioned to capitalize on dislocations in the office sector. Our high-quality Sunbelt portfolio is located in the best markets and BBDs. Our balance sheet is among the strongest in the sector. Our team is cycle-tested. and excited about the future opportunities that will arise. Brian?