Highwoods Properties, Inc.

Good morning. Thank you for joining today's iWood Properties Q3 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 the call over to Hannah True, Manager of Finance and Corporate Strategy. 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 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 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 reported excellent operating and financial performance once again in the third quarter. For the first three quarters of 2024, we delivered financial results that are ahead of our initial expectations. while building the foundation to drive sustainable growth over the long term. First, our bottom line financial results this year continue to be better than we originally anticipated back in February. During the quarter, we delivered FFO of 90 cents per share and generated strong cash flows. At the midpoint, our FFO outlook is up 6 cents per share since the beginning of the year including $0.03 increase this quarter. And this is even with interest rates higher than forecast and $84 million of non-core dispositions that were not included in our original outlook. Second, our new leasing volumes have been very strong throughout this entire year, and most prominently in the third quarter, which should drive strong organic growth after our long telegraphed occupancy trough and early 2025. With 1.3 million square feet of new second-gen leases signed through the first three quarters of 2024, our lease rate is over 300 basis points higher than our in-service occupied rate of 88%. Roughly two times our normal spread, indicating that we have a sizable pipeline of leases that have been signed but where occupancy hasn't yet commenced. Third, we continue to make progress on our development pipeline, which is now 49% leased, and we have a healthy pipeline of strong prospects to drive our leased rate higher. Our development pipeline will be a significant driver of cash flow growth going forward as these assets deliver and stabilize. Fourth, we continue to sell non-core assets and use the proceeds to recycle into higher quality buildings and reduce leverage. We closed on one small non-core land sale this quarter and are marketing additional properties. We're optimistic we'll close on more asset sales over the next several months. Finally, we're laying the foundation for future wish list acquisitions by meeting with owners and lenders of high-quality assets throughout our footprint. We have long believed it would take time for the bid-ask spread between buyers and sellers to narrow. With the first interest rate cut now behind us, we can see a pathway for the office investment sales market to open back up. Overall, we continue to outperform our financial expectations. We're making significant progress improving our portfolio quality and long-term growth rate while fortifying our already strong balance sheet. And we have a healthy number of signed but not yet commenced leases in our development pipeline and our in-service portfolio. that will further strengthen our cash flows. Turning to operations, the combination of our BBD locations, commute-worthy portfolio, strong balance sheet, and our hands-on approach to both customer service and property management is driving meaningful market share gains. New second-gen leasing during the quarter was strong at 530,000 square feet, and that doesn't include 39,000 square feet of net expansions which are included in renewals. In fact, growing users outpace contractions by a ratio of five to one. Net effective rents, which in our view are more meaningful than rent spreads, were the highest in our company's history and 25% higher than the previous five-quarter average. Plus, our weighted average lease term was 10.4 years, also the highest in our history. Sated vacancy rates remained elevated, but these market-wide stats mask the improving competitive dynamics for top-of-market assets in our BBD footprint. There's still some office under construction, most of which will deliver by the middle of next year, but new starts are essentially nonexistent. With high-quality blocks of space getting absorbed, there are less options for large users seeking Class A space with well-capitalized landlords. We expect these dynamics will continue over the next few years, which should allow us to drive occupancy and rents. In addition, return to office mandates have steadily increased over the past several quarters as employers are emphasizing the value of in-person collaboration and culture building that isn't easily replicated with remote work. According to a recent KPMG survey of U.S. CEOs, 79% expect a full return to the office over the next three years. The combination of dwindling large blocks of high-quality space, limited to no development starts, and increasing return to office requirements bodes well for the future of office demand. Turning to development. During the quarter, we signed 61,000 square feet of first-gen leases, including a small retail build-a-suit, bringing our 1.6 million square foot, $514 million pipeline to 49% lease. We have strong prospects for an additional 140,000 square feet that we expect to sign over the next several months. We don't expect to announce any other new development projects this year. New starts are very difficult for any developer to pencil, given the current environment. That being said, we've seen increasing inquiries for potential build-to-suits. I wouldn't characterize any of these as being close to a decision, but the renewed interest is anecdotal evidence that large users are coming back to the market and are focused on the in-person experience for their teams. As I mentioned earlier, we sold a small non-core land parcel during the third quarter, bringing our non-core asset sales to $84 million for the year. We've included up to an additional $150 million of non-core dispositions in our outlook. We may not hit the high end of the range before year end, but we expect to do so by early 2025. In conclusion, we believe the outlook for Highwoods is bright. As evidenced by this year's leasing, demand for our Sunbelt BBD portfolio continues to be strong. This will drive meaningful growth in occupancy and NOI following our trough in early 2025. Our $500 million development pipeline is seeing healthy interest and will drive meaningful increase in our earnings and cash flow as it delivers and stabilizes over the next few years. Our balance sheet is in excellent shape and will enable us to capitalize on investment opportunities. And finally, our underlying cash flows remain strong, which supports our attractive dividend and allows us to continue reinvesting in our portfolio. Brian?