Highwoods Properties, Inc.

Good morning and welcome to the Highwoods Properties second quarter 2026 earnings call. All participants are in a listen-only mode. After the speaker's remarks, we'll conduct a question and answer session. To ask a question in time, you'll need to press star followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Brendan Maiorana, Executive Vice President and Chief Financial Officer. Thank you. Please go ahead.

Thank you, operator, and good morning, everyone. Joining me on the call this morning are Ted Klinck, 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. We had another excellent quarter delivering strong financial and operating results and executing on our key long-term initiatives. Let me start with six key highlights. First, leasing volume was healthy with over 1 million square feet of second gen signings, including 326,000 square feet of new leases. Plus, we signed 63,000 square feet of first gen leases in our development pipeline. Second, rent growth continued upward with cash rent spreads over 3% and gap rent spreads over 20%. Plus, our net effective rents were 8% higher then our prior five quarter average and the second highest in our company's history. Third, our occupancy increased by 70 basis points sequentially or 110 basis points when adjusting for properties owned and in service for the entirety of the second quarter. We expect occupancy will continue to improve as we move into the second half of the year. Fourth, our development pipeline now consists only of 23 springs in Uptown Dallas, where we increased the lease rate to 93%, up 10 percentage points during the quarter, and where we only have 28 million of projected spend to bring this property to stabilization. Given strong leasing, we've accelerated the projected stabilization date of 23 springs by nine months. From the first quarter of 2028, to the second quarter of 2027. Plus rents are meaningfully higher than the original underwriting. Fifth, we made significant progress pruning our portfolio and replenishing our dry powder for future investments. We sold nearly 260 million of properties in the second quarter and expect to close on an additional 74 million of non-core dispositions over the next few weeks. This will bring our disposition total to $375 million thus far in 2026. And sixth, we continue to advance discussions on potential new investment opportunities, mostly around build-a-suit or substantially pre-leased development projects. We have growing confidence that we'll have new development announcements later this year and into next year that will generate attractive risk-adjusted returns and replenish our future growth engine. This body of work over the past several quarters sets the stage for a significantly improved portfolio with an even stronger balance sheet than we currently have, all while delivering steady growth in earnings and cash flow over the foreseeable future. Turning to Sunbelt Office Dynamics, we believe our portfolio is well positioned to deliver outsized rent growth Given the lack of new supply currently under construction and dwindling blocks of high quality space in BBD locations. Simply put, existing customers and new prospects don't have a lot of options when seeking commute-worthy office space. We're pushing rents across most of our BBDs and buildings and believe this dynamic, combined with occupancy growth, will drive meaningful upside in NOI over the next few years. To this end, we estimate vacancy rates across high-quality buildings and our core BBDs are at least 5% lower than the stated overall vacancy rates for these submarkets. CBRE recently published a study highlighting prime office vacancy to 640 basis points lower than non-prime office, which is the widest spread since CBRE began tracking this metric. While a rising tide is likely to eventually buoy rent economics across a broad range of office products, current market dynamics are driving pricing power at commute-worthy buildings in the strongest BBDs across the Sun Belt. Turning to investment activity, we generated disposition proceeds of $260 million during the quarter, consisting of the sale of Bridgestone Tower in Nashville and a non-core land parcel, that we owned with a JV partner in Richmond. Bridgestone Tower is an excellent building in a BBD location that we developed and delivered in 2017. The tower is 100% occupied with over 11 years of lease term and annual rent bumps well below average for a portfolio. Essentially, we swapped Bridgestone Tower for 600 South Tryon in Charlotte, a building we acquired late last year is eight years younger for a total investment of $30 million less, with $1 million more in NOI upside upon stabilization, higher annual rent bumps, longer-awaited average lease term, and a diversified rent roll. We expect to close an additional $74 million of non-core dispositions in the next few weeks, including a fully leased building in the Century Center in Atlanta, a $6 billion portfolio in Richmond, These sales will bring our year-to-date disposition total to $375 million. We have several more assets currently in the market for sale at various stages and now expect to close at least an additional $100 million and maybe as much as $300 million by the end of the year. These potential sales include a combination of non-core buildings and land. With regard to acquisitions, as a reminder, We have the option to acquire an additional 40% interest in Block 83 in Raleigh for $85 million and have included this at the low end of our acquisition outlook for the balance of the year. Last quarter, I mentioned we are starting to see inquiries for build-a-suit and highly pre-leased development opportunities. These conversations have continued to advance, giving us confidence around future development announcements. These opportunities are all in existing core markets, some with potential development partners, and some on company-owned land. As a result of these conversations, we now expect to announce at least 100 million of new development during the remainder of the year, and potentially as much as 400 million. Turning to the quarter, we delivered FFO of 90 cents per share, which included 4 cents of land gains. Our occupancy improved. and given the strong leasing that we have completed in the first half of the year, we expect occupancy will continue to march higher in the second half of the year. Based on our strong results year to date and confidence for the remaining two quarters, we have increased our 2026 FFO outlook to a range of $3.46 to $3.70 per share, which equates to $3.58 at the midpoint. An increase of $0.04 per share. Excluding land sale gains, our range is up $0.01 per share despite $0.04 per share of dilution from higher than expected dispositions without reinvestment of excess cash proceeds. Given the meaningful dry powder we now have on the balance sheet, combined with a positive outlook for NOI growth across our portfolio, we expect to deliver healthy growth in NAV, FFO, and cash flow over the foreseeable future. Before turning the call over to Brian, I want to reiterate the strategic priorities we have highlighted over the past few years that will drive long-term value creation for our shareholders. First, we have mentioned for a couple years our focus on driving occupancy towards stabilized levels in order to deliver meaningful NOI growth. We continue to prioritize occupancy. We are also pushing rents more aggressively which adds to our long-term NOI growth outlook. Second, we have been focused on delivering and stabilizing our development pipeline. With our pipeline now delivered and nearing stabilization, we are focused on replenishing this pipeline with new projects that will generate attractive risk-adjusted returns. Third, we have been focused on improving our portfolio quality and long-term growth rate by recycling out of non-core CapEx Intensive Assets, and assets with lower growth profiles, and investing in properties with better cash flows and higher long-term growth rates. We have made meaningful progress in the first half of the year. Expect additional improvements in the second half of 2026 and beyond. And fourth, we continue to maintain a strong and flexible balance sheet and have significant dry powder available for new investments. With the progress we've made over the past several quarters, combined with a strong fundamental backdrop across our Sunbelt BBDs, we are well positioned to deliver significant organic growth from our current portfolio and deploy our dry powder into new investments that will generate attractive, risk-adjusted returns. Brian?