Highwoods Properties, Inc.

Good morning, everyone, and thank you for joining today's Highwoods Properties Q4 2025 earnings call. My name is Regan, and I'll be your 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. And if you'd like to ask a question, you may do so by pressing star one on your telephone keypad. I would now like to pass the conference over to Brendan Majorana, Executive Vice President and Chief Financial Officer. Please proceed.

Thank you, operator. And good morning, everyone. Joining me on the call this morning are Ted Klink, our chief executive officer, and Brian Leary, our chief operating 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, Brendan, and good morning, everyone. Before I talk about our fourth quarter and outlook for 2026, I'd like to begin by highlighting some of the reasons why we're upbeat about the next few years for Highwoods. First, the fundamental backdrop across our core Sunbelt BBDs is as strong as it's been in many years. There's limited to no new supply across our markets and dwindling blocks of available high-quality space. New users continue to migrate to the Sun Belt. And even with mixed signals about the health of the overall economy, many existing companies in our footprint continue to grow their businesses. This dynamic has created rental rate growth not just in face rates, but growth in net effective rents, including rent spikes in our best BBDs. Given limited development starts forecasted for the foreseeable future, well-capitalized landlords with high-quality office and BBD locations in the Sunbelt are positioned to drive meaningful growth in rents. Second, the convergence of occupancy gains, rental rate growth, and stabilization of our development pipeline should enable Highwoods to deliver outsized NOI and earnings growth the next few years. We expect to drive occupancy higher by roughly 200 basis points from the end of 2025 to the end of 2026. Plus, our development properties are projected to deliver year over year growth at each of the next three years. For the last few quarters, We've been emphasizing approximately 50 to 60 million of NOI growth potential across eight buildings, four existing operating properties, and four developments. We will realize some of this growth in 2026, but most will benefit our NOI trajectory in 2027 and beyond. Third and finally, we are positioned to invest at attractive risk adjusted returns. Future investments are also likely to drive additional growth. We've invested approximately $800 million or nearly $600 million at our share over the last 12 months. These acquisitions, which were in the strongest BBDs of Charlotte, Raleigh, and Dallas, have a weighted average vintage of four years, an initial lease rate of 93.5%, waltz of nine years, rents approximately 15% below market and projected stabilized cash yields of roughly 8%. The combination of strong fundamentals for high quality BBD office and limited buyer pools creates an excellent opportunity for us to deploy capital at attractive risk adjusted returns. These items combined with our proven track record and strong balance sheet gives us confidence that were well positioned to grow for the foreseeable future. Our initial 2026 FFO outlook is 5.7% higher at the midpoint than our initial 2025 outlook. Now turning to our fourth quarter, we had solid financial performance with FFO of 90 cents per share, including 6 cents of land sale gains, resulting in full year 2025 FFO $3.48 per share. Excluding land sale gains, full year FFO with $0.07 per share were 2% higher than the midpoint of our original outlook provided at the beginning of 2025. We leased 526,000 square feet of second gen space during the fourth quarter, including 221,000 square feet of new leases. In addition, we signed 95,000 square feet of first-gen leases on our development pipeline. Signings on second-gen space were a bit lower in the fourth quarter compared to earlier in the year. We believe that was largely just timing, as already in 2026, signings have accelerated and the long-term trend continues to be positive. Leasing economics continued to be healthy in the fourth quarter. Cash rent spreads were positive, with gap rent spreads in the mid-teens. As we've long stated, we're most focused on net effective rents, which are strong again in the fourth quarter, and help make full year 2025 our high watermark. For the year, net effective rents were 20% higher than in 2024 and 19% higher in 2022, our prior peak year. This performance underscores the improving fundamentals we're seeing across our markets and BBDs. Our $474 million development pipeline is now 78% pre-leased, up from 72% last quarter and 56% one year ago. Glenlake III, our 218,000 square foot office and amenity retail development in Raleigh, is 84% leased with strong prospects to bring the property to the mid-90s. At Granite Park 6, our 422,000 square foot building in the legacy BBD of Dallas, we signed 44,000 square feet since our last earnings call and are now nearly 80% leased. We signed 51,000 square feet at 23 Springs, our 642,000 square foot mixed use development in Uptown Dallas, bringing the property to nearly 75% leased, up from 67% last quarter. At 23 Springs, current rents are 40% above our pro forma underwriting. Lastly, Midtown East in Tampa, our 143,000 square foot development is 76% leased, and we have strong prospects for the remaining office space. Given the strong demand we've experienced with our current developments and demand from sizable users across many of our markets, we're starting to have conversations with prospective build the suit, and anchor customers for new projects. We've included the potential for up to 200 million of development announcements in our 2026 outlook. We've been active on the investment front, especially late in 2025 and early in 2026. We acquired 472 million in 2025, including our 223 million acquisition of 600 at Legacy Union, the fourth quarter 600 is a 411 000 square foot class double a office tower in uptown charlotte this property was completed in 2025 and is currently 89 percent least up from 84 percent when we acquired the building in november we have strong prospects to bring the building into the mid 90s because the property is just delivered and is currently only mid 40s percent occupied NOI will be temporarily lower in 2026. We expect to reach stabilized yields of around 8% on both a cash and gap basis, with projected stabilization occurring on a gap basis in 2027 and cash in 2028. In January, we acquired two buildings in the BBDs of Raleigh and Dallas for a total expected investment of $318 million. of which our share was 108 million plus 13 million of preferred equity. First, we acquired the Terraces in Dallas for 109 million in a JV with our longtime local partner, Granite Properties, in which we have an 80% interest. The Terraces is a 173,000 square foot best in class property that was built in 2017 and is located in Preston Center, a new BBD for Highwoods. We believe Preston Center is the most supply-constrained BBD in Dallas, where rents have grown substantially over the past few years, giving us more than 30% mark-to-market upside on in-place leases. After signing a lease following our acquisition, we are now 100% leased at the Terraces. Second, we acquired Block 83 in Raleigh, a 492,000 square foot mixed-use asset That includes two 10-story best-in-class office buildings with 27,000 square feet of ground floor amenity retail located in CBD Raleigh. We initially only 10% interest in the joint venture that was formed to acquire Block 83. The North Carolina Investment Authority, a new strategic investment partner for Highwoods, owns the remaining 90%. We have the option to increase our ownership in Block 83 to 50%. On a combined basis, we expect the initial gap yield on block 83 in terraces to be in the low to mid 8% range during 2026, while our initial cash yield will be around 7%, which is temporarily low due to free rent of terraces that will burn off during 2026 and result in stabilized cash yields in the mid to upper sevens on a combined basis prior to achieving rent roll-ups at the terraces. We expect to fund our recent acquisition activity on a leverage neutral basis, primarily through the sale of non-core assets or properties where value has been maximized. We sold 66 million of non-core buildings and land across various markets in the fourth quarter and an additional 42 million of non-core properties in Richmond subsequent to year end. Our 2026 FFO outlook assumes we close 190 to 210 million of additional dispositions by mid-year. Upon stabilization of 600, we expect this leveraged neutral rotation of capital to be modestly accretive to our unaffected FFO run rate, while improving our long-term growth rate, strengthening our cash flows, and increasing our portfolio quality. To wrap up, we're excited about the outlook for Highwoods. First, given strong fundamentals across our markets, pricing power is shifting towards well-capitalized landlords who own high-quality buildings. Second, organic growth potential embedded in the Highwoods portfolio will be realized primarily through occupancy gains in our operating portfolio and stabilization of our development pipeline. Third, given our proven track record, we expect to continue to deploy capital attracted risk-adjusted returns that enhance our long-term growth outlook, increase our portfolio quality, and strengthen our cash flows. These factors, combined with our strong balance sheet and strong platform, provide the foundation for sizable momentum over the next few years. I'm also confident in our outlook because of our engaged, hardworking, and talented teammates who have long driven our consistent success. I thank the entire Highwoods team for their commitment and tireless dedication. Brian?