Highwoods Properties Inc. 2026 Q3 Earnings Call

Brendan, 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 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 EBITDA. The release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures.

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. This quarter's operating results reflect the strengthening fundamentals we have anticipated across our portfolio and our markets. Demand for high quality office space continues to be strong while supply continues to shrink. A powerful combination. The lack of high quality office space with limited to no new construction in the strongest BBDs across the Sun Belt is driving a significant rent growth and higher occupancy in our portfolio. During the quarter, we posted GAAP rent growth of 29% and cash rent growth of 4% on over 1.2 million square feet of second gen leases, and delivered the second highest second gen net effective rents in our company's history. Further, our portfolio occupancy increased 130 basis points since the end of June, and our lease rate is now over 90%.

Strong lease economics, combined with a positive occupancy trajectory, bolsters our positive outlook for organic NOI growth over the foreseeable future. In addition to our robust operating performance, we also made progress improving our portfolio quality during the quarter by selling $85 million of non-core properties in Richmond, Atlanta, and Raleigh. Year to date, we have sold $386 million of properties at an average cap rate below 8%. This total is approximately $150 million more than our original target at the beginning of the year. Plus, we continue to market additional non-core assets for sale and expect to close at least $100 million more by year-end. These disposition proceeds provide us with meaningful dry powder for future investments.

As we continue to recycle out of older, non-BBD located properties and invest in commute-worthy office buildings in the strongest locations across the Southeast, we expect a corresponding increase in our long-term FFO and cash flow growth rates. Turning to our financial results, we delivered FFO of $0.89 per share, and once again increased our outlook for the full year, which is now $3.51 to $3.70 per share. At the midpoint, this is $0.025 higher than our prior outlook and $0.065 higher than the beginning of the year. We are especially pleased with the increase in our outlook since the beginning of the year, given $0.04 of higher than anticipated dilution due to increased disposition activity. With our strong operating results, our GAAP same property NOI outlook has also strengthened.

These strong trends illustrate the quality of our portfolio and the health of our markets, and gives us confidence the gains we've made during the past several quarters will sustain into future periods. As I mentioned earlier, our leasing performance was excellent in terms of both volume and economics. We once again posted strong net effective rents. In the past five quarters, we have recorded three of our four highest net effective rent quarters in our company's history. New leasing volume was healthy with 300,000 square feet of new second gen deals, which helped drive the lease rate to 90.1%. Our high lease rate, combined with limited expirations and known move-outs, gives us confidence we'll continue to drive occupancy higher. On the disposition front, we sold $85 million of non-core properties in the third quarter.

We sold a portfolio in Richmond for $53 million, a building in our Century Center park in Atlanta for more than $20 million, and two buildings in Raleigh for nearly $12 million. As reflected in our outlook, we expect to sell an additional $100 million-$250 million of non-core assets by the end of the year. Going forward, we will continue to prune our portfolio and redeploy that capital into higher quality, more resilient investments. Turning to development, we are finishing up our current development pipeline with 23 Springs. Our 642,000 square foot office tower in Dallas is Uptown BBD, where we have a 50% JV interest. 23 Springs is now 95% leased and projected to stabilize by the second quarter of next year. We expect to replenish our pipeline and have included $100 million-$400 million of new development announcements in our outlook for the remainder of the year.

To this end, we have received interest from build to suit and sizable anchor prospects for potential new projects, which is further evidence of the lack of available high-quality blocks across our markets. Companies are willing to pay premium rents, in many instances, substantially more than current top of market rents, to secure space they need to recruit and retain their talent. With construction timelines typically extending two to four years, any near term development announcements will take time to show up in our financial results. However, in the current environment, we believe new development with manageable leasing risks presents attractive risk-adjusted returns that will lead to higher FFO and cash flows, a faster growth rate, and better quality portfolio over the long run. We remain active in identifying and evaluating potential acquisitions.

To date, we haven't found opportunities with strong risk-adjusted returns like last year, when we closed on nearly $600 million of best in class properties across Dallas, Raleigh, and Charlotte. Before I turn the call over to Brian, I want to reiterate the priorities we are focused on to drive long-term value creation for our shareholders. First, we will continue to drive occupancy towards stabilized levels in our operating portfolio. Second, we will capture strong rent growth and attractive economics on second gen leasing. Third, we will recycle out of non-core CapEx intensive assets in non-BBD locations and invest in properties with better cash flows and higher long-term growth rates. Fourth, we will do all of this while maintaining a strong and flexible balance sheet.

We made meaningful progress on each of these priorities during the first three quarters of the year and believe we have an opportunity to significantly improve our growth rate, BBD mix, and portfolio quality over the next few years. We believe the focus on these four areas, combined with a strong fundamental backdrop in our core BBDs due to healthy demand, limited new supply, and increasing rents, will drive significant growth in cash flow and long-term value over the next several years.

Brian? Thanks, Ted, and good morning, everyone.

Kudos to our team for another standout quarter. Ted touched on the supply and demand setup in our BBDs, and the national data shows just how broad it has become. Major brokerage houses are now telling the same story. Nationally, CBRE reported a 10th consecutive quarter of positive net absorption, with vacancy declining for a fifth straight quarter to 18.2%, and national asking rents growing 3.1% year-over-year, the fastest pace since 2016. JLL added that each of the past four quarters saw more leasing than any single quarter since 2019, with tenants now growing their footprints by an average of 13%. At the same time, the office supply pipeline has all but dried up. CBRE projects 2026 will deliver 76% less square feet year-over-year and would represent the lowest year of deliveries since it began tracking the figure in 1990.