Highwoods Properties : Management’s Remarks Prepared 1Q 2025 Conference Call

Published: 2025-04-30 11:05:17 ET HIW

Published on 04/30/2025 at 11:05

If you have not received yesterday's earnings release or supplemental, they are 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 EBITDAre. 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.

We had a strong quarter executing on our key priorities and delivering solid financial results. Despite rising concern over the macro-economic outlook and choppiness in the capital markets, we continue to set ourselves up for meaningful long-term growth, while at the same time improving our portfolio quality and delivering financial results that were stronger than our original expectations. First, our investment activity was robust with the recycling of $145 million of non-core disposition proceeds into the $138 million acquisition of Advance Auto Parts Tower, a commute-worthy, Class AA building in the vibrant North Hills BBD in Raleigh. This rotation of capital is a bullseye illustration of our investment objective of selling older, capital-intensive properties in non-BBD locations and rotating into high-quality buildings in locations where people want to live, work and play. This acquisition has meaningful long-term growth potential as existing rents are below market for North Hills, a BBD where we believe market rents will accelerate over the next several years. We now own nearly 650,000 square feet of Class AA office in North Hills with a diverse group of strong customers. Also, this leverage-neutral rotation of capital is immediately accretive to cash flow. Second, we placed in service 2827 Peachtree, a $79 million, 135,000 square foot development in the Buckhead BBD of Atlanta where we hold a 50% interest in the joint venture that developed and owns the property. 2827 Peachtree is 94% leased and 88% occupied. Third, we signed 97,000 square feet of first gen leases in our development pipeline. Our $474 million pipeline is now 63% leased, up 5% from last quarter, even after placing in service the 94% leased 2827 Peachtree development. We continue to garner solid interest in these best-in-class projects, which, upon stabilization, are projected to drive $30 million of incremental NOI above our 2025 outlook. Fourth, we leased 700,000 square feet of second gen office space, including over 250,000 square feet of new leases plus 43,000 square feet of net expansion leases. Leasing economics were strong with net effective rents more than 20% higher than our prior 5-quarter average. Plus, April leasing volumes have accelerated with over 200,000 square feet of new 2nd gen lease volume in just the first four weeks of the 2nd quarter - highlighted by a 145,000 square foot lease with a new Highwoods customer at Symphony Place in Nashville. This lease is scheduled to commence in Q2'26 and backfills nearly two-thirds of the space from a customer who vacated the building earlier this year. Securing this long-term lease, coupled with strong interest from others in the market, further validates the Highwoodtizing efforts underway at Symphony Place.

During our February call, I highlighted several growth drivers for the next few years. The first of these is lease-up efforts at four core buildings with current elevated vacancy. Upon stabilization, these four buildings alone will drive $25 million of NOI growth above our 2025 outlook. With the just-announced 145,000 square foot lease at Symphony Place, we have already locked in over 40% of this future upside with leases that have been signed but haven't yet commenced, and with strong prospects for additional upside. The second growth driver previously highlighted is $10 million of future NOI upside from two 2023 development deliveries that have not yet stabilized, GlenLake Three in Raleigh and Granite Park Six in Dallas. With the leases signed this quarter, we have now locked in over 60% of this future upside.

While we're mindful of the current uncertainties around the macroeconomic outlook, we're optimistic as we approach the midpoint of this year given the level of activity we continue to see across our portfolio and our already-executed lease deals.

Turning to our quarterly results, we delivered FFO of $0.83 per share and generated healthy cash flow. As expected, our occupancy dipped due to known customer move-outs that we have long communicated. We expect to drive occupancy growth over the next few years given our healthy backlog of signed, but not yet commenced leases and much more manageable lease roll. With our strong financial performance in Q1, positive outlook for the balance of the year and accretive acquisition of Advance Auto Tower, we have raised the mid-point of our 2025 FFO outlook by $0.04 to a range of

$3.31 to $3.47 per share.

We continue to actively underwrite new investments. There are still many office owners that face near-term refinancing challenges or simply plan to reduce their allocations to office, which we expect will provide opportunities to deploy capital into additional commute-worthy properties. We are also actively prepping additional non-core assets for sale. Since 2019, we have sold over $1.5 billion of non-core properties and recycled the proceeds into higher quality, higher growth and less capital intensive, commute-worthy office buildings. We expect to continue this strategy. Given the combination of high construction costs, elevated vacancy levels, and risk-adjusted yield requirements that we believe would make sense for our shareholders, we don't expect to announce any new development projects this year. While spec development deals continue to be difficult to pencil in this environment, for us or anyone else, their absence creates the opportunity for significant rent growth at high-quality second gen product as availability dwindles. We are having conversations with a few build-to-suit prospects, with both existing companies in our BBDs and new-to-market users. While these conversations are all in the very early stage, the increase in activity is a good indicator of the health of the office sector and illustrates the importance of the workplace experience.

In conclusion, we're bullish about the future of Highwoods. We're operating in the strongest BBDs in the Sun Belt that have continually proven to be the places where talent and companies want to be. We're making significant progress locking in our future organic growth drivers by signing long-term leases with strong customers, both in our operating portfolio and in our development pipeline. Finally, backed by a strong balance sheet with limited near-term maturities and ample liquidity, we are well-positioned to execute on our proven strategy of asset recycling and drive our long-term growth rate even higher, further strengthen our cash flows and improve our portfolio quality.

Our SunBelt BBD strategy has proven resilient over the past several years and we believe we're well-positioned to continue this outperformance amid the economic uncertainty of government cutbacks, global tariffs and the potential of a looming recession, just to name a few. We recognize that our markets and business are not sheltered from these headwinds on the whole, but on the margin, we can report that to-date they have not deterred our customers and prospects from executing leases and committing to office space. Because of this, our leasing pipeline is full and we've made substantial progress backfilling our long-communicated known move-outs and pre-leasing our development pipeline. We completed this volume of work at strong leasing economics for the first quarter.

Our team signed 88 deals for a total of 700,000 square feet with expansions outpacing contractions four to one. Net effective rents grew to $20.56 with average annual rent escalations of 2.7% and GAAP rent growth of 12.8%. While our average term of 5.3 years was lower than recent quarters, it includes a number of early as-is renewals that kept lease concessions low and drove strong net effective rents. In addition, activity remains strong across our $474 million development pipeline. As Ted mentioned, we signed 97,000 square feet of first generation leases, including 48,000 square feet at Glenlake Three, our mixed-use development in Raleigh which is now 78% leased, and 43,000 square feet at Granite Park Six, our joint venture development with Granite Properties in Dallas' Plano BBD which is now 58% leased. Both of these developments are forecast to stabilize in the first quarter of 2026 and we are pleased with the continued prospect pipeline. During the quarter we delivered $272 million of development with the completion of 23Springs in Dallas and Midtown East in Tampa. These projects were delivered on time and on budget at a combined 58% pre-leased. As a reminder, we forecast 23Springs to stabilize in early 2028 and Midtown East in mid-2026. We remain confident in our ability to lease up both of these projects at, or before, scheduled stabilization.

The SunBelt continues its positive momentum with its talent-attractive and open-for-business environment. The region dominates lists of distinction such ULI's Emerging Trends' Markets to Watch and Site Selection Magazine's best states for business. With these tailwinds, our markets and BBDs are outperforming national trends and our portfolio is outperforming locally.

In Raleigh, the Milken Institute named the City of Oaks the #1 best-performing large city in the United States highlighting its robust job growth, wage increases and thriving tech sector. Here we own almost 6 million square feet and signed the most volume in the quarter with 316,000 square feet of second generation space. CBRE noted that for the first time since 2011, 14 years ago, the construction pipeline is empty. This dearth of new supply benefits our recently delivered Glenlake Three development and the balance of our best-in-class portfolio.

Moving south to Tampa where JLL highlighted the Downtown submarket's vacancy rate at 9.8%, making it the lowest office vacancy among major U.S. office markets' CBDs. During the quarter, the region heralded Foot Locker's Fortune 500 relocation out of New York and major lease signings by Fisher Investments and by GEICO - who with their lease announcement committed to adding 1,000 jobs at its new campus. Our recently delivered 143,000 square foot Midtown East mixed-use JV development is 39% leased, welcomed its first customer move in and has prospects for the balance of the building. With this completion there are no buildings under construction in the Tampa market. Across our operating portfolio, the Tampa team signed 18 second gen leases in the quarter for a total of 95,000 square feet, of which almost half represented new leases.

Rounding out our markets in Nashville and just a few months after a long-communicated move out, we have backfilled over two-thirds of this vacancy with a 145,000 square foot customer new to Highwoods portfolio at our Symphony Place tower downtown. The market response to our Highwood-tizing plans, which are now underway, has been exceptional and has generated healthy additional interest. This progress, coupled with the prospect pipeline at Westwood South and Park West in the Brentwood and Cool Springs BBDs, respectively, provides confidence in the long-term embedded NOI growth potential of the existing portfolio.

We are not naïve to the reality that economic uncertainty is a headwind to decision-making but in the present our current leasing activity and pipeline bears little evidence to the expected cause and effect. I would provide the caveat that all meaningful construction scopes and bids are now qualified, but not yet escalating, with regard to tariffs. If and when that chicken comes home to roost, the question is: will construction costs for office fit ups be able to bear the brunt of any increases or will potential escalations be mitigated with construction pipelines at all-time lows? Time will tell. In the meantime, our leasing pipeline is healthy and we are pleased by the progress of our development portfolio. We are confident that we will continue to drive organic growth by leaning in with our exceptional people, portfolio and positioning.

In the first quarter, we delivered net income of $97.4 million, or $0.91 per share, and FFO of $91.7 million, or $0.83 per share. The quarter included a large property sale gain from our disposition in Tampa that was included in net income but not included in FFO. During the quarter, we received a term fee for a net $1.8 million as part of an early giveback, which was factored into our original FFO outlook. This fee will be partially offset by downtime in 2025 before rent commences with a new Highwoods customer who fully backfilled this early giveback, plus took additional space. Otherwise, there were no unusual items in the quarter. We are pleased with our first quarter financial results, which demonstrate the resiliency of our operations and cash flows. Even more consequential were the quarter's investment activity and leasing results, which positions us for future growth.

Our balance sheet remains in excellent shape. We didn't issue any shares on the ATM and had $710 million of available liquidity at the end of the quarter. We only have approximately $125 million left to fund on our development pipeline and no debt maturities until May of 2026.

As Ted mentioned, we have updated our 2025 FFO outlook to $3.31 to $3.47 per share, which equates to a $0.04 increase at the mid-point. There are always a few moving parts when we update our outlook, but at a high level, three cents is attributable to partial year impact from the Advance Auto Parts Tower acquisition and one cent is from operations.

In our initial 2025 outlook in February, we provided detail around what our same property and occupancy outlook would be excluding four operating properties where vacancy is elevated this year. Similar to our overall same property and occupancy outlooks, our view of this "adjusted" same property growth outlook hasn't changed since February, nor have our expectations for occupancy. We offered this additional color in February given the outsized impact of a few select assets to our overall NOI growth and occupancy metrics. However, our preference is to present results on the full portfolio rather than on an adjusted basis that excludes certain properties. Therefore, we removed these adjusted metrics in our updated outlook and don't plan to include them in future updates.

We're off to a strong start so far in 2025 locking in some of our forecasted organic growth potential. Of the $25 million of NOI growth upside we have on the four core operating assets Ted discussed, we have signed, but not yet commenced leases for over 40% of this total. The biggest component of this future growth is a combined 250,000 square feet across two leases, at Two Alliance Center and Symphony Place, with both leases projected to start mid-to-late Q2'26. Our GlenLake Three and Granite Park Six developments are projected to generate over $10 million of additional upside compared to our 2025 outlook, with over 60% already secured via leases that are signed but haven't yet commenced. Most of this $6 million of annual upside will be in place by the middle of 2026. While we've provided a roadmap of the upside potential from these six specific properties, it's important to note that we still expect additional growth in occupancy and NOI from the remainder of our operating portfolio over the next few years, plus meaningful NOI from the two development properties we delivered this quarter.

Lastly, I'd like to touch on our asset recycling performance and future outlook. As Ted mentioned, since 2019 we've sold over $1.5 billion of mostly non-core buildings and land and acquired $1.8 billion of commute-worthy properties. On average, the dispositions carried a nominal exit cap rate roughly 50 basis points higher than the year-1 acquisition cap rates. While this rotation of capital caused a modest headwind to short-term FFO, it has significantly strengthened our cash flows, both in the near and longterm, and is a large component that drove over $150 million of cumulative free cash flow above our healthy dividend payout since the onset of the pandemic. As you know, the office business is cap-ex intensive, which is why we're focused on driving our risk-adjusted cash flows higher over the long-term. We expect our asset recycling efforts will continue to strengthen our cash flows and improve our portfolio quality, thereby making our NOI more resilient over the long-term, all while maintaining a low-levered balance sheet.

To wrap up, we're ahead of plan executing on our embedded growth drivers with potential to secure more of this upside over the next few quarters. Further, our asset recycling playbook has a demonstrated track record of success, and we're encouraged about future investment opportunities. We believe we have the markets, portfolio, balance sheet and team to realize the meaningful growth potential available to us over the next few years.

Disclaimer

Highwoods Properties Inc. published this content on April 30, 2025, and is solely responsible for the information contained herein. Distributed via Public Technologies (PUBT), unedited and unaltered, on April 30, 2025 at 15:04 UTC.