Highwoods Properties, Inc.

If you would like to ask a question and you have dialed in today, please press star one on your touch phone keypad. If you change your mind at any time, please press star then two. Thank you. And now I would like to pass the conference over to your host, Hannah True, Manager of Corporate Finance and Strategy to Begin. So, Hannah, 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 Brenda Mayorana, our Chief Financial Officer. For your convenience, today's prepared remarks have been posted on the web. If you have not received yesterday's earning 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 and NOI, and EBITDAIR. The release and supplemental included 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 an excellent quarter executing on our key priorities and delivering solid financial results. First, we signed 922,000 square feet of second-gen leases, including over 400,000 square feet of new leases and 36,000 square feet of net expansions. This volume of work will benefit us in future periods as the new leases commence. Second, we find 157,000 square feet of first-gen leases in our development pipeline. We continue to see solid interest in these best-in-class projects, which will provide approximately 40 million of incremental NOI upon stabilization and be a significant growth driver for our cash flows. Third, we delivered Four Moorcroft, an 18,000 square foot, $12 million build to suit that we developed at our Moorcroft property in the South Park BBD of Charlotte. As you may recall, this creative office development is situated on a surface parking lot with zero basis. While Four Moorcroft is one of our smaller developments, It demonstrates our resourcefulness in cultivating and generating attractive, risk-adjusted returns for our shareholders. Finally, we sold nearly 80 million of non-core properties in Raleigh, including over 60 million that closed early in the second quarter. These sales improve our portfolio quality, increase our long-term cash flow growth, and further strengthen our liquidity and already strong balance sheet. We expect our solid leasing momentum to continue as our markets generate outsized population and job growth, given their high quality of life and business-friendly environments. Simply put, our markets and our BBDs are where people and companies want to live, work, and play. This is why our portfolios outperform the national average, our markets, and our submarkets, all because customers and prospects are attracted to our commute-worthy buildings. Plus, being a long-term landlord with a strong balance sheet that can fund tenant improvements and leasing commissions and care for our best-in-class properties is proving to be a clear competitive advantage for us. Contrary to popular opinion, we're seeing strong demand across our portfolio, whether they be brand-new trophy assets or well-located second-gen properties, and whether they be suburban, or urban. We believe financially capable landlords who provide value to customers and prospects will see healthy demand across a wide variety of price points. Turning to our quarterly results, we delivered FFO of 89 cents per share and same property cash NOI growth of positive 0.3 percent. As expected, our occupancy dipped modestly to 88.5 percent. Our 2024 SFO outlook is a penny and a half lower at the midpoint due to higher than expected interest rates and the dilutive impact of non-core asset sales already completed, neither of which were factored into our initial outlook. These items are partially offset by higher projected NOI. The strong leasing start to the year modestly helps 2024, but most of the new leasing will drive upside in 2025 and beyond. We've also had a successful start to the year of non-court asset sales, and we're prepping additional properties for potential disposition. We now expect to sell up to an additional $150 million during the remainder of the year. The volume and timing of dispositions will depend on how conditions are in the investment sales market, but we've been encouraged by the response we've seen in recent quarters to our marketing efforts and the modest improvement in the capital markets for prospective buyers. While we don't have any acquisitions included in our 2024 outlook, we continue to build the foundation for future investment opportunities. Similar to the first few years coming out of the global financial crisis, we believe compelling investment opportunities will arise, but these will take time to play out. We're comfortable being patient as we continue to have conversations with owners and lenders of wish list properties in our markets. Our development pipeline is now $506 million, following the delivery of the 100% leased Ford and Warcroft building in Charlotte. With 157,000 square feet of first-gen leases signed during the quarter, our pipeline is now 41% leased. A big chunk of the activity was that our 642,000 square foot, $460 million 23 Springs project in Uptown Dallas that we're developing in a 50-50 joint venture with Granite. 23 Springs is now 54% pre-leased a year prior to schedule completion and four years before the estimated stabilization. The largest lease signed was a current law firm customer at our 98% occupied McKinney and Olive property just a couple blocks away. who needs to expand by nearly 50 percent. Given we couldn't accommodate their growth in McKinney and Olive, we were able to accommodate their growth at 23 Springs. We already have excellent activity to backfill their space at McKinney and Olive more than two years before their scheduled move to 23 Springs. We made modest wasting progress at Granite Park 6 in Dallas and Glen Lake 3 in Raleigh. Both of these developments delivered late last year and are projected to stabilize in 2026. These buildings are best in class in their respective VBDs and prospect activity is accelerating. We're confident in the long-term outlook to expect these developments to drive solid cash flow growth for us in future years. Midtown East in Tampa. Our 143,000 square foot, $83 million project that we're developing in a 50-50 joint venture with Bromley in the West Shore BBD is seeing strong interest from prospects given we're the only office project currently under construction in the entire market. We're 16% pre-leased and are very encouraged by the strong interest more than two years before scheduled stabilization. We don't expect to announce any new development projects during the year. Obviously, this isn't unique to Highwoods. It's very difficult for new starts to pencil in the current environment. We're not seeing meaningful reductions in hard costs, and interest rates continue to be elevated. Plus, for other developers who are capital constrained, securing capital for new office construction is very challenging. As a result, new starts have plummeted. And with the current development pipelines that will largely be delivered across our markets over the next few quarters, the lack of new supply in future periods will play to our advantage as users seek high-quality properties from landlords with strong financial resources. In conclusion, as we have for the past few years, we acknowledge the headwinds in the office sector, yet we're bullish about the future for Highwoods. First, our portfolio has never been better. and it will continue to improve as we sell additional non-core properties and deliver our $500 million development pipeline. Second, we have significant organic growth potential within our operating portfolio where we've already leased some of our existing vacancy and have solid interest on expected future vacancy. Third, our balance sheet is in excellent shape and will enable us to capitalize on future growth opportunities. And finally, even with higher interest rates, our underlying cash flows remain strong, which allows us to keep investing high with tithing capital to generate higher returns on our existing portfolio. Brian.