Highwoods Properties, Inc.

Good morning. Thank you for attending today's Highwoods Properties Q2 2024 earnings call. My name is Cole, and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you'd like to queue for a question, you can do so by pressing star 1 on your telephone keypad. I'd now like to pass it 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 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, 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, Hannah, and good morning, everyone. We delivered excellent operating and financial performance in the second quarter. First, we reported FFO of 98 cents per share, representing 4% year-over-year growth and we raised our full year FFO outlook. Since the beginning of the year, we've increased the midpoint of our FFO outlook by three cents, even with selling 80 million of non-core properties and absorbing the impact of higher than expected interest rates, neither of which were included in our original outlook. Further, Our disciplined and ongoing efforts to further improve our high-quality BBB portfolio continue to pay off in the form of resilient cash flows. Second, we signed 909,000 square feet of second-gen leases, including over 350,000 square feet of new leases. This is the third consecutive quarter of strong new leasing volume. This is a testament to our Sunbelt markets our BBD locations, our high-quality asset base, and our talented team. Our leasing pipeline continues to be robust, which makes us optimistic we'll sustain strong leasing volumes for the remainder of the year. Third, we signed seven first-gen leases encompassing 61,000 square feet across our development pipeline. Upon stabilization, we expect these projects will provide approximately $40 million of incremental NLI and be a significant growth driver for our cash flows. Finally, our balance sheet is in excellent shape, with debt to EBITDA of 5.8 times at quarter end. Being a long-term landlord with a strong balance sheet is a clear differentiator in today's market, as we are able to fund leasing CapEx and reinvest in our best-in-class properties. Our occupancy, which was steady at 88.5 percent, doesn't yet fully reflect the strong leasing over the past few quarters. We have a meaningful amount of space that has been leased but where occupancy hasn't yet commenced, primarily in Atlanta, Nashville, Richmond, and Tampa. And we'll start to contribute NOI later this year and in 2025. I want to provide an update on the former TIVITY building in Nashville. As we mentioned at the beginning of this year, we modified a lease with a backfill customer for 110,000 square feet that currently leases 50,000 square feet in another Highwoods building. Since then, this customer has further reevaluated their long-term space needs. 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 that we may agree to cancel their lease in exchange for recouping our investment. Regardless of what happens, We have healthy prospect interest for this space and, in fact, have already signed 66,000 square feet of new leases in this building. We do not expect any potential lease cancellation to have a meaningful impact to our near or long-term financial outlook. Turning to development, our $506 million pipeline is now 45% leased. Activity is solid at Glen Lake III our $94 million, 218,000 square foot development in Raleigh. We're now 34% leased and have healthy interest from additional prospects. At our $200 million, 422,000 square foot Granite Park 6 development in Dallas that we are developing with our 50-50 joint venture partner, Granite Properties, We signed a full floor user for 27,000 square feet to bring the lease rate to 26%. We still have seven quarters to go before pro forma stabilization at both Glen Lake 3 and Granite Park 6 and remain confident in the long-term outlook for both developments. Staying in Dallas, Activity is steady at our 642,000 square foot, $460 million 23 springs project in Uptown that we're also developing in a 50-50 joint venture with Granite. The property is currently 56% leased and we have an LOI for another full floor user with healthy interest from additional prospects. As a reminder, this project is scheduled for completion in the first quarter of 2025. and stabilization in the first quarter of 2028. Midtown East and Tampa, our 143,000-square-foot, $83 million project we're developing in a 50-50 joint venture with Bromley in the West Shore BBD, continue to generate strong interest. Midtown East is the only office project currently under construction in the entire market. We're 16% pre-leased. two years before scheduled stabilization and have a pipeline of additional prospects. As mentioned earlier this year, we don't expect to announce any new development projects during the remainder of the year. New starts are very difficult for any developer to pencil given the current environment, which is benefiting our existing portfolio as large requirements are seeing dwindling options of quality space available across our footprint. As we previously disclosed, we sold a little over $60 million of non-core assets early in the quarter to bring our year-to-date total to $80 million. We're prepping additional properties to bring to market, have included up to an additional $150 million of non-core dispositions in our outlook. While we don't have any acquisitions included in our outlook, we are having conversations with owners and lenders of wish list properties in our markets. While we're comfortable being patient, we do believe compelling investment opportunities will arise. To be clear, our criteria for capital deployment is highly selective. Target acquisition opportunities must be well located in a solid BBD, have good bones, and be well positioned to generate attractive, risk-adjusted returns over the long term. In conclusion, we're confident about the long-term outlook for Highwoods. First, demand for our Sunbelt BBD portfolio continues to be strong, which positions us to drive meaningful growth in occupancy and NOI following our long telegraphed trough in early 2025. Second, our $500 million development pipeline will come online over the next few years and significantly bolster our cash flow and earnings. Third, we've been successful monetizing non-core assets and believe we can continue to create additional dry powder, which will also further improve our portfolio and cash flow. Fourth, our balance sheet is in excellent shape and will enable us to capitalize on acquisition opportunities. Fifth, even with higher interest rates, our underlying cash flows remain strong. This supports our attractive dividend and allows us to continue reinvesting in our portfolio. And finally, I want to thank my 350 Highwoods teammates who deliver for our customers and shareholders every day. It is their effort that has positioned us for success for many years to come. Brian?