HIGHWOODS PROPERTIES, INC. Q3 FY2024 earnings call

Bullet points:

• Excellent operating and financial performance in Q3 with FFO ahead of initial expectations despite higher interest rates and non-core dispositions.
• Strong new leasing volumes throughout the year, especially in Q3, with 530,000 square feet of new second-gen leasing and net expansions, driving organic growth post-occupancy trough in early 2025.
• Development pipeline at 49% leased with healthy prospects, set to drive cash flow growth as assets deliver and stabilize.
• Continued non-core asset sales to recycle into higher quality buildings and reduce leverage, with one small land sale closed in Q3 and more expected.
• Flight to quality trend in markets, with focus on quality buildings, landlords, and commute-worthy experiences, driving leasing momentum and market share gains.
• Strong performance in markets like Atlanta, Raleigh, Nashville, and Tampa, with leasing activity and renewals contributing to positive metrics.

In the third quarter, Highwoods Properties delivered FFO of $0.90 per share and net income of $14.6 million or $0.14 per share. For the first three quarters of 2024, FFO outlook is up $0.06 per share since the beginning of the year, including $0.03 increase this quarter. New leasing volumes have been strong, with 1.3 million square feet of new second-gen leases signed through the first three quarters, and net effective rents at the highest in the company's history. The development pipeline is 49% leased, and non-core asset sales are ongoing with $84 million sold in the year and up to $150 million of additional dispositions expected.

Bullet points:

• 2024 FFO outlook revised to $3.59 to $3.63 per share, midpoint up $0.03 from prior outlook, driven by higher NOI offset by modestly higher G&A.
• Midpoint of average occupancy range unchanged at 88%, implying lower occupancy in Q4 due to known move-outs, but trough occupancy in early 2025 expected to be higher than previously thought.
• Development pipeline, including projects like 23 Springs, expected to contribute to earnings and cash flow growth in 2025, weighted towards the back half of the year.
• Balance sheet in excellent shape with nearly $800 million of total available liquidity, enabling capitalization on investment opportunities.

Bullet points:

• Uncertainties in the office investment sales market due to bid-ask spread between buyers and sellers, though interest rate cuts may open up the market.
• Potential delays in asset sales if market conditions do not improve as expected.
• Impact of economic factors and market dynamics on leasing and occupancy trends, including continued competitive concessions in the market.

Q: Can you talk a little bit more about the rental rate strength you saw in the quarter? Were there any specific leases that drove that strength?

A: Ted mentioned there were larger deals, including financial services, professional services, and a GSA deal in Atlanta contributing, but even without those, the quarter had strong economics. It's a mix depending on submarkets and customer needs.

Q: How are you guys thinking about the Pittsburgh portfolio in the near to mid-term?

A: Ted stated they have a team working on leasing in Pittsburgh, but the transaction market is slow due to interest rates. They are patient, waiting for the right time to sell, and encouraged by leasing activity there.

Q: Just on the leasing front, which has sort of been pretty strong. I guess my question is just, number one, is it just more leasing activity overall in the market or is it really sort of this flight of quality where it's just a share gain?

A: Brendan said year-end occupancy is expected in the upper half of the 86-87 range, largely market share driven due to flight to quality buildings, landlords with access to capital, etc.

Q: Just wanted to get some color on kind of the larger users and requirements. We had heard in Atlanta, in particular, that there's some new to market customers really looking at more suburban markets like North Fulton and Central Perimeter. But just wondering if that's a trend you guys have kind of noticed in some of your other markets in particular?

A: Ted said absolutely, larger customers are coming back to office, seen in various markets, with in-migration and interest from large users in return to work and office importance.