Highwoods (HIW) Q2 2025 Earnings Call Transcript

Image source: The Motley Fool.

DATE

• Wednesday, July 30, 2025, at 11 a.m. EDT

CALL PARTICIPANTS

• President and Chief Executive Officer — Ted Klinck
• Executive Vice President and Chief Operating Officer — Brian Leary
• Executive Vice President and Chief Financial Officer — Brendan Maiorana

Need a quote from one of our analysts? Email pr@fool.com

RISKS

• Elevated Leasing Capital Expenditures: Brendan Maiorana said, "commission levels ... have been high because of the volume, and those get paid more quickly than the TIs get dispersed," and continued, "It’s probably likely to be a little higher in 2025 ... and ... in 2026 as well as we kinda keep this occupancy build going for the next several quarters."
• Year-End Occupancy Lower Than Prior Target: Brendan Maiorana stated, "we expect to be towards the low end of our year-end 2025 occupancy outlook of 86% to 87%," due to proactive recapture of space that "moves 130,000 square feet of previously projected occupancy at year-end 2025 into the future."
• Guidance Range Driven by Expense Variability: Brendan Maiorana said, "a couple of expense items, timing-related things, ... probably around expense timing" could cause results to fluctuate within the 2025 FFO (non-GAAP) range of $3.37 to $3.45 per share.

TAKEAWAYS

• Funds From Operations (FFO): Reported FFO was $0.89 per share, with FFO (non-GAAP) totaling $97,700,000.
• Net Income: Net income (GAAP) reached $18,300,000, or $0.17 per share.
• Occupancy and Leased Rate: Portfolio occupancy held steady at 85.6%, while the leased rate increased 80 basis points sequentially to 88.9%.
• Leasing Activity: Total second-generation leasing activity was 923,000 square feet, with 371,000 square feet from new leases.
• Embedded NOI Growth: Eight properties have over $55,000,000 in annual NOI growth potential above the 2025 outlook. Of this, over $33,000,000 is secured via signed leases that are not contributing to 2025, and another $9,000,000 considered strong prospects.
• FFO Guidance Raised: The midpoint of 2025 FFO (non-GAAP) guidance increased by $0.02 to a range of $3.37 to $3.45 per share; The cumulative FFO guidance increase since the beginning of 2025 is $0.06 per share at the midpoint.
• Balance Sheet Position: Reported $700,000,000 in available liquidity, a debt-to-EBITDA ratio of 6.3x, and only one debt maturity ($200,000,000 variable rate term loan) before May 2026.
• Market Rent and Concessions Trend: Ted Klinck indicated, "concessions have generally peaked, and market rents are going up," though trends vary by submarket.
• Development Pipeline Status: Two 2023 deliveries (Glenlake III, Granite Park 6) have over $10,000,000 in annual NOI growth potential upon stabilization, with over $6,000,000 of that already signed but not yet commenced; New deliveries (23 Springs, Midtown East) add over $20,000,000 in annual NOI growth potential upon stabilization, are 59% leased, with prospects for another roughly 15% as of Q2 2025.
• Retention Rate Outlook: Expected lease retention through the end of 2025 is in the 45%-50% range, above historical averages for similar recent periods.

SUMMARY

Highwoods Properties (NYSE:HIW) demonstrated resilient operational performance in Q2 2025, highlighted by robust leasing activity and a higher leased rate, while average occupancy was unchanged due to proactive recapture of tenant space for long-term repositioning. Management secured a substantial portion of future NOI growth through signed leases across both operating and development properties, which are expected to commence over the next several quarters and materially lift financial results by late 2026. The balance sheet remained strong, with only one upcoming debt maturity and ample liquidity to support future capital deployment and asset recycling initiatives not yet included in current guidance.

• Brendan Maiorana cited $0.03 of "headwinds" in the updated 2025 FFO outlook not at the property level, attributable to "higher G&A," as well as deferred "interest income pushed out," and noted these were partially offset by $0.04 in higher NOI, resulting in an increase of $0.02 per share at the guidance midpoint.
• Ted Klinck observed, "the bid-ask spread is narrowing" and both "debt capital markets are opening up," and equity investors "are being more constructive on the underwriting," pointing to a more favorable transaction environment for office assets.
• Brendan Maiorana clarified that any material acquisitions or dispositions occurring this year "would be outside of the range" for current FFO guidance for 2025 and are unlikely to impact results due to timing.
• Brian Leary said the company’s core growth markets -- Charlotte, Dallas, Nashville, and Tampa -- were named as demand leaders, with portfolio highlights including Charlotte occupancy at 96.6% and Midtown East in Tampa, recently delivered at 40% preleased with strong prospects for another 40% of the building, as reported for Q2 2025.
• Brendan Maiorana indicated year-end occupancy would be "a little bit lower than where we thought." but stressed this shift is a function of timing on new leases and does not materially affect the same-store NOI outlook.
• The difference between the leased and occupied rates is 330 basis points as of Q2 2025, more than double the long-term average. Management expects all leases signed to date to commence by late 2026, supporting anticipated gains in occupancy and earnings through 2027.

INDUSTRY GLOSSARY

• BBD (Best Business District): Prime submarkets identified as most attractive for office users based on talent pools, amenities, and location.
• Second-Gen Leasing: Leasing of previously occupied (as opposed to newly built) office spaces.
• NOI (Net Operating Income): Total property revenues less operating expenses, before debt service, depreciation, and capital expenditures.
• FFO (Funds From Operations): A REIT-specific performance metric, calculated as net income plus depreciation and amortization (excluding gains on sales and unusual items), indicating cash flow available to shareholders.
• TI (Tenant Improvement): Landlord-funded customizations or build-outs within leased office space to meet tenant needs.

Full Conference Call Transcript

Ted Klinck: Thanks, Brendan, and good morning, everyone. We had another strong quarter with robust second-gen leasing and excellent financial results. We entered 2025 with two key priorities. First, continue to upgrade our portfolio quality by rotating out of slower growth, more CapEx-intensive properties and rotating into higher growth assets. Make significant strides towards capturing the substantial NOI growth potential we have in our operating portfolio and development pipeline in future years on spaces that are currently vacant, and we continue to make progress on the remaining availability at our development properties. While we didn't close any acquisitions or dispositions during the period, we're actively underwriting potential new investments and have numerous assets in the market for sale.

We will continue to deliver on our proven strategy of rotating out of older, slower growth properties that are more CapEx-intensive into better-located, higher growth assets that are more capital efficient. We continued our healthy leasing volume in the quarter, with 920,000 square feet of second-gen leasing, including 370,000 square feet of new leasing. The consistent level of elevated leasing volumes for the past several quarters increases our confidence that our occupancy will steadily improve late in 2025 and escalate thereafter. We have also further unlocked the NOI growth potential in our four core assets with meaningful upside potential.

As a reminder, our core four are Alliance Center in Buckhead and three assets in Nashville: Symphony Place in the CBD, Westwood South in Brentwood, and Park West in Franklin. We have forecasted $25 million of annual NOI upside just from stabilizing these core four. After our leasing performance this quarter, we now have 50% of this upside secured with signed leases, and we have strong prospects for another 20%. Turning to our development pipeline, while we only signed 19,000 square feet during the quarter, we have advanced a number of prospects through the leasing process and remain confident we'll increase our lease rate by the end of the year.

We have over $10 million of NOI growth potential at Glenlake III in Raleigh and Granite Park 6 in Dallas, two development properties that delivered in 2023 that are not yet stabilized. We have over $6 million of this NOI potential already signed, but where occupancy hasn't yet commenced. In addition, we have over $20 million of NOI growth potential at the two developments that delivered earlier this year: 23 Springs in Dallas and Midtown East in Tampa. Our first customers of these developments recently moved in, and additional customers will take occupancy late in 2025 and in early 2026. Combined, these two properties are 59% leased, and we have strong prospects for another roughly 15%.

Given the combination of high construction costs, elevated vacancy levels, limited financing availability, and risk-adjusted yield requirements, starting a new spec development continues to be difficult for anyone in this environment. However, the absence of new deliveries and the dwindling availability over the next few years creates an opportunity for meaningful rent growth at high-quality, second-gen product. We're already seeing the benefits of limited supply, as large blocks of high-quality space across many of our markets are being absorbed, which is driving rent growth in the best locations across the Sunbelt. The powerful combination of ongoing stabilization of our development pipeline and continuous portfolio improvement should drive significant growth in earnings and cash flows in the foreseeable future.

You may have seen some press recently about Ovation, our future mixed-use development in Franklin, outside of Nashville. We recently submitted our development plan to the city. We remain confident Ovation represents one of the best mixed-use ground-up development sites in the entire country and will be a significant opportunity to create sizable value for Highwoods shareholders. We are working with our partner in the city of Franklin to finalize development plans and do not expect any development announcements until late next year at the earliest. Turning to our performance, we delivered excellent financial results in the quarter, including cash flows that continue to be resilient even with elevated leasing CapEx due to future occupancy build.

Delivered FFO of $0.89 per share in the quarter. Our occupancy was roughly flat from Q1 at 85.6%, while our leased rate increased 80 basis points to 88.9%. Leasing is off to another strong start early in Q3, with over 300,000 square feet of second-gen leases signed, including over 100,000 square feet of new leases. We remain optimistic we'll see the leased rate and occupancy levels increase by the end of the year. With our strong financial performance in Q2 and upbeat outlook for the balance of the year, we have once again raised the midpoint of our 2025 FFO outlook, up 2¢ to a range of $3.37 to $3.45 per share.

Since the beginning of the year, we've increased our FFO outlook by $0.06 at the midpoint, or nearly 2%. In conclusion, we're extremely excited about the next few years for Highwoods. We're operating in the strongest BBDs in the Sunbelt, that continually have proven to be the places where talent and companies want to be. We have a clear pathway to meaningful growth, growth in earnings, growth in cash flow, and growth in NAV, from our existing portfolio and development pipeline. Plus, we believe the next twelve months represents an excellent opportunity to deploy capital in new investments with strong returns and recycle out of older nonstrategic properties with risk-adjusted returns that don't meet our objectives.

With a strong balance sheet, including limited near-term debt maturities and ample liquidity, we are well-positioned to execute on the opportunities ahead of us. Brian?

Brian Leary: Thank you, Ted, and good morning, everyone. Kudos to our tremendous team for the results they delivered in the second quarter. With 923,000 square feet of quarterly leasing, of which 371,000 square feet was new, signaling future occupancy gains as those leases commence. Our Sunbelt states are repeat best for business winners. Our markets are outpacing the nation with higher population gains and lower unemployment rates. In our BBD portfolio, is outperforming as the beneficiary of our customer's preference for in-office occupancy and, in turn, their continued flight to quality, capital, and owners.

With corporate and now federal conviction behind the in-office value proposition, we believe equilibrium has been reached as it relates to remote work and no longer see it as an acute headwind to our portfolio. With greater numbers returning to the office, there's not only less commute-worthy options available at the top of the market, the bottom is shrinking as well. CBRE reporting at over 23,000,000 square feet of US office space is on track for demolition or conversion to other uses this year. Space being completed in 2025, which figure in itself is far below the ten-year annual average of 44,000,000 square feet of annual deliveries.

Coupled with a record low construction pipeline, and with the development period of an office building being measured in years, this slow squeeze play has started to move the market in an owner's favor in certain instances. Such as new trophy development, and in high barrier to entry DVDs with the potential for a meaningful and extended shortage of class A space in the not too distant future. Our Sunbelt BBD strategy, which is both urban and suburban in nature, is serving us well. All of our markets are in states that are repeatedly rated by CNBC as the best for business. With North Carolina, Texas, Florida, and Virginia taking the top four spots this year.

With regard to the Tar Heel State, between Charlotte and Raleigh, North Carolina is home to 33% of our revenue and 36% of our NOI. Georgia and Tennessee aren't far behind rounding out the top eight of CNBC's rankings. Bloomberg Economics brings us to bear, highlighting that the Southeast accounted for more than two-thirds of all job growth across the US since early 2020. These three forces, improving in-office utilization, declining competitive supply, and strong demographics, all combined with a resilient economy are bearing fruit in our leasing activity. And make us optimistic our strong performance will continue. To that end, we signed 102 leases in the second quarter with expansions outpacing contractions almost three to one.

Net effective rents averaging $19.30 a square foot with an average payback of 17.2%. Of the 102 leases we signed, 42 were new, with almost 20% of those new to market. Cash and GAAP rent growth were strong at 3.6% and 17.6%, respectively. Above all, we are most enthusiastic about the progress we've made and continue to make on our occupancy upside across four core assets in Atlanta and Nashville. Three of these four have completed or are in the midst of completing our hybridizing redevelopment program, essentially positioning them to directly compete with new construction.

The fourth, in Westwood South, is in the highest of barrier to entry BBDs of Brentwood in Suburban Nashville, and it has a leasing prospect pipeline that would fill the building two times over. Symphony Place in Downtown Nashville started the quarter strong. The seven-floor lease with Nashville Mainstay and global law firm Holland and Knight was proof positive that the environment and experience we are curating there is what Nashville's best and brightest are looking for, and they are leasing prospects for over 80% of the building. While you never bat a thousand, with these prospects and in activity picking up in Nashville, Symphony Place is poised to deliver meaningful organic growth.

The backfill update from Nashville is a good segue into Music City's broader market performance. With the nation's lowest large metro unemployment rate, Cushman and Wakefield reported Nashville having the nation's third-highest positive net absorption, and the market's robust demand generated almost 1,000,000 square feet of leasing for the quarter, the highest for Nashville since 2021. JLL added that there are almost 2,000,000 square feet of active requirements in the market, and with a decade-low construction pipeline, delivering its 79% preleased, and with no new starts in the foreseeable future, vacancy should decline, rents should increase, and momentum should continue.

Second quarter leasing we did in Nashville led our markets for both total and new volume, had our highest dollar-weighted average lease term at nine years, of 23.8% and cash rent spreads of 12.4%. Southeast of Nashville, Charlotte continues to be a talent magnet with new data showing that the area's daily net migration count is up from 117 a day to 157, according to the Charlotte Regional Business Alliance, and where Cushman highlighted the region as one of the nation's top quarterly job generators with a 2.2% growth rate. Cushman also noted Charlotte's fourth consecutive quarter with leasing activity over 500,000 square feet where over 80% occurred in the submarkets of Uptown, Midtown, and South Park.

Our 2,000,000 square foot Charlotte portfolio, which is entirely located in the Uptown and South Park BBDs, leads the way at 96.6% occupied. Our 1,200,000 square foot Legacy Union Uptown portfolio sits squarely at the geographic center of Charlotte's class double A demand and is 95% occupied. While our six-building 800,000 square foot portfolio in South Park is 98% occupied. With Charlotte's construction pipeline empty, and with multiple large inbounds cited by the Charlotte Alliance, not including Citigroup or AssetMark's recent significant job announcements, market vacancy and rental rates should continue to move in opposite directions. Of all of our markets, Dallas continues to be an economic juggernaut with continued job and population growth, and positive net absorption.

JLO noted that 60% of Dallas' office pipeline is build-to-suit construction for Goldman Sachs and Wells Fargo, and that there are an additional 7,600,000 square feet of requirements in the market. Our Dallas development pipeline is benefiting from this demand with prospect activity at both our 422,000 square foot Plano BBD Granite Park 6 development, which is currently 59% preleased, and our 642,000 square foot 23 Springs development in 63% prelease. Also in Uptown and down the street from 23 Springs, is our 557,000 square foot in-service asset McKinney and Olive, which is over 99% leased. I would be remiss if I didn't share highlights from Tampa, both as a market and from our portfolio's perspective.

CBRE led this quarter's Tampa market report with a headline that reads, a positive path ahead as the office market builds on Q1 surge. The report noted that Tampa posted its fifth consecutive quarter of positive net absorption, and the pipeline for continued positive absorption is healthy, with 1,300,000 square feet of future tenant move-ins tied to already executed leases. With an additional 1,400,000 square feet of active prospects, and one of the lowest market-wide vacancies in the nation per CBRE, we are very pleased with our market activity. And where we ended the quarter at 86.1% occupied but more than 92% leased.

Our Midtown East development recently delivered 40% preleased and has strong prospects for another 40% of the building. Underwritten to stabilize in 2026, Midtown East was the only building under construction the better part of two years, and is the tallest building in the West Shore BBD and in the heart of Midtown Tampa's thriving mixed-use district, anchored by Whole Foods, two hotels, and luxury apartments. With a commute-worthy portfolio and a trophy asset team, Highwoods is creating compelling environments and experiences that are giving our customers a competitive advantage in recruiting and retaining the very best.

This advantage is recognized in our activity and economics, and we are steadfast in our conviction that great value is created when the best and brightest are better together. Brendan?

Brendan Maiorana: Thanks, Brian. In the second quarter, we delivered net income of $18,300,000 or $0.17 per share and FFO of $97,700,000 or $0.89 per share. The quarter included three atypical items. First, we received $3,000,000 from a Florida Department of Transportation for the impact of roadway improvements adjacent to a noncore property in Tampa. This payment, which is reflected in other income, was expected and has been included in our FFO outlook since the beginning of the year. Second, we received a million dollars of term fees. The largest was attributable to a customer where we proactively took back space early and have subsequently relet this space to a new user with a long-term lease.

This term fee temporarily boosted Q2 earnings but will be offset by downtime at the property. Third, we wrote off nearly a million dollars of predevelopment costs at sites where we no longer believe office to be the highest and best use. Otherwise, this was a very straightforward quarter. We are pleased with our results, which demonstrate the resiliency of our operations and cash flows. Our balance sheet remains in excellent shape. Our debt to EBITDA ratio was 6.3 times at quarter end. We only have $106,000,000 left to fund on our development pipeline and are currently maintaining over $700,000,000 of available liquidity.

Our only debt maturity over the next eighteen months is a $200,000,000 variable rate term loan that is scheduled to mature in May 2026. Discussions with our bank group have been very positive, and we remain comfortable in our ability to extend this loan. As Ted mentioned, we have updated our 2025 FFO outlook to $3.37 to $3.45 per share, which equates to a $0.02 increase at the midpoint. The underlying picture is actually stronger than the headline implies. As I mentioned earlier, the second quarter included $0.01 of higher G&A due to the expensing of predevelopment costs that were not included in our prior outlook.

Plus, we pushed 2¢ of interest income out of the 2025 forecast and into future years. These items have been partially offset by a 1¢ increase to prior year property tax refunds expected during 2025. Overall, this equates to $0.02 of net headwinds that were not included in our April outlook. But these have been more than offset by $0.04 of higher anticipated NOI resulting in the increase of $0.02 per share at the midpoint.

Turning to leasing and our occupancy outlook, we expect to be towards the low end of our year-end 2025 occupancy outlook of 86% to 87%, largely driven by proactively taking space back early from users where we've subsequently relet these spaces to new users with leases that don't commence until after year-end. This activity, while reducing near-term occupancy, secures additional long-term tenancy across our portfolio and reduces our rollover risk in future years. We also proactively took back 35,000 square feet early from a user to secure a long-term lease extension on their remaining 70,000 square feet on an as-is basis.

Finally, we have one user that we originally expected would be able to take occupancy of their 50,000 square feet in the fourth quarter, but we now expect this lease to commence in 2026. These timing issues have moved 130,000 square feet of previously projected occupancy at year-end 2025 into the future. Lastly, I want to review in more detail the performance of the core four operating properties with meaningful occupancy upside that Ted highlighted, as well as our development properties. At the beginning of the year, we called attention to $25,000,000 of embedded annual NOI growth potential upon stabilization of the core four. At that point, we had locked in $5,000,000 of this future upside with signed leases.

Today, this number is now up to over $12 million, and we have strong prospects for another $5 million to $6 million. Our 2023 development deliveries, Granite Park 6 and Glenlake III, have over $10,000,000 of annual NOI growth potential upon stabilization, over $6 million of which has been secured with signed leases, up from $4 million at the beginning of the year. The two developments that delivered earlier this year, 23 Springs and Midtown East, have over $20 million of annual NOI growth potential upon stabilization. We have secured $14,000,000 of this upside with leases that will commence in the future, up from $11 million at the beginning of the year, plus we have strong prospects for another $3 million.

In total, these eight properties have over $55 million of annual NOI growth potential above our 2025 outlook. We have locked in over 60% or more than $33 million of this upside with leases that have been signed but are not contributing to 2025, plus we have strong prospects for another $9 million. To be clear, it will take time for these signed leases to come online. We are also still capitalizing interest and operating expenses at 23 Springs and Midtown East as these two development projects delivered earlier this year. So not all of the NOI from those two assets will be realized in future FFO or operating cash flow.

However, the leasing activity is encouraging, and we expect all of the leases signed to date to commence by late 2026, which gives us confidence about the trajectory of earnings and cash flow as we move into 2026 and even into 2027. To wrap up, we're ahead of our expectations in terms of executing on our embedded growth drivers, with the potential to secure even more of this upside over the next few quarters.

Operator: We're also encouraged at the potential to recycle additional capital.

Brendan Maiorana: And thereby further improve our long-term growth profile. Given our strong markets, BBD locations, proven operating and asset recycling strategies, and well-positioned balance sheet, we are encouraged about the next few years for Highwoods. Operator, we are now ready for questions.

Operator: Please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please Again, to ask a question, press star 1. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We'll pause here briefly as questions register. Question is from the line of Peter Abramowitz with Jefferies. Your line is now open.

Peter Abramowitz: Yes. Thank you for taking the question. Just wanted to kind of dig into the guidance a little bit.

Brendan Maiorana: So you had kind of significant beat in the second quarter here, and you had a kind of big other income item. Just wondering kind of, you know, what else went into the guidance that it didn't a slightly larger raise. Is there a degree of kind of conservatism still in there and kind of your expectations for the back half? Hey, Peter. It's Brendan. I'll try to take that. So I would say that I think as I kind of mentioned in the script, we had some other items that went against us. Right?

So there was 3¢ of kind of headwind, I would say, in the updated outlook that is not through the property level, not at the NOI level. So G&A is higher. We did incur that in the quarter, so that's part of the Q2 beat, I guess, relative to at least certainly Street expectations. But then there were some other income or interest income that we had forecast for late in the year that we now have pushed out of that. So that $0.03 of headwinds has been more than offset by call it $0.05 of NOI upside if you include a little bit more in terms of prior year property tax refund.

So I think you're getting $0.04 of higher kind of NOI in those numbers. That's the same property pool. So I think that's all pretty good. I would say, you know, a quarter or two to a full year outlook. I think what I would encourage everyone to do is kind of think about the end of the year and then think about kind of all of the building blocks of NOI growth that we've laid out. As you think about future periods going forward. There's always seasonality in numbers. There's moving of that can move from one quarter to another.

So I think if you extrapolate one quarter to another, it can kind of lead to a false positive or a false negative.

Peter Abramowitz: Alright. That's helpful. Thanks, Brendan. And then could you talk about kind of the opportunity set for acquisitions in your markets right now? Kind of what you'd be targeting potentially from a return perspective, whether going in yields or longer-term IRRs? And does it seem like activity has kind of picked up since maybe it slowed down post the liberation day announcement.

Ted Klinck: Hey, Peter. It's Ted. I'll take that one. Look. I think you nailed it. Capital markets are definitely starting to open up a little bit. We're starting to see more high-quality assets come to market. I think the bid-ask spread is narrowing. You know, debt capital markets are opening up, so the availability of debt for office acquisitions is better today than what it was earlier in the year and certainly last year. Equity capital is coming off the sidelines. I think they're actually underwriting office again and not they're being more constructive on the underwriting.

So I think sellers have been waiting for this, and they're starting to bring assets to market, and some of which are our wish list assets. So a lot more in the market, a lot of higher quality assets. Some of those are core, some are value add. Some are core plus. So we look at everything. We're gonna price it based on our evaluation of risk and certainly, from a return standpoint, it'll be based on the risk-adjusted yields. So, again, we look at everything and but we are starting to see some attractive opportunities that are that we've been sort of waiting for.

Operator: Alright. Thank you. Thank you for your question. Next question is from the line of Seth Berger with Citi. Your line is now open.

Seth Berger: Thanks. You talk a little bit about your expectations for just concessions and TIs for some of the leasing that you've done in the quarter?

Ted Klinck: Yes, Seth. It's Ted. You know, from a leasing perspective, as you know, we had another really strong leasing quarter. Our tour activity remains strong. You know, it's the same trends we've seen for a while continuing to see a flight to quality. Flight to capital, flight to amenities. Flight to location. Same thing we've seen now for several years. Been you know, I think we've we're leveling off. I think we've certainly peaked. You know, our net effective rents were incredibly strong this quarter. So our concessions, while it varies by submarket, and market. We've got some very strong submarkets where we're seeing concession packages come down.

In addition to rates going up, you know, it's still high in some markets. So but overall, I think if you if you have a mix, it's gonna jump around a little bit quarter to quarter. But in general, I think it's fair to say concessions have generally peaked, and market rents are going up. So it should bode well for net effective rents.

Seth Berger: Great. Thanks. Thank you. Thank you for your question.

Operator: Next question is from the line of Rob Stevenson with Janney. Your line is now open.

Rob Stevenson: Good morning, guys. Just to ask the last question in a different way. Given all the leasing, when you take a look at the you know, the building improvements, second-gen tenant improvements, leasing commissions, is there a spike that we should be expecting in a couple of the upcoming quarters given when this stuff hits? Or is that sort of low $40,000,000 a quarter that you've been averaging, you know, for the last few years been about where it's gonna wind up being on a sort of smoothed out basis?

Brendan Maiorana: Rob. It's Brendan. I'll take that one or at least start. I think what I would say is, you've probably seen the commission levels, I think, are have been high. Because of the volume, and those get paid more quickly than the TIs get dispersed. So you've probably seen it kinda show up in commission I would say last year when leasing volumes were very high, particularly new, and in the first half of this year as well. For PI dollars, I would say that I think your question is a good one. I think we're gonna remain at elevated levels in we were there last year. I think it's probably likely to be a little higher in 2025.

And probably a little higher than where we were in the first half of the year. We think in all likelihood, it will remain there in 2026 as well as we kinda keep this occupancy build going for the next several quarters. So we do think it's going to be elevated I would say not dramatically higher than where we were over the past year or so. But I would say that I do think it's gonna be high. The remainder of this year and in all likelihood next year as well.

Rob Stevenson: Okay. That's incredibly helpful. Thank you. And then I guess, Brendan, at this point in the year with a bunch of line items more or less locked in, what's the biggest swing factors between you guys hitting the sort of three thirty seven versus the three thirty five. What's the biggest unknown for you at this point to keep the guidance range that wide?

Brendan Maiorana: Yeah. It's prob so there's probably a couple of expense items, timing-related things that are in there. I would say that there's there's a little bit of that, variability within the guide. So that's in there. And then to the extent that we do anything that's meaningful, that we have done a little bit of this year, which is proactively kinda take space back early and for long-term benefits. So we've done that a few times. I think I highlighted some of that in the prepared remarks. That we've done. There's there's some of that which could happen as well, with some conversations that are out there.

And then we've got a little bit of what I would say are probably a little bit of variability in terms of lease spec lease that's out there. There's some renewals that could happen or could not. So there's a little bit of positive and negative on the lease side. But for the most part, I would say it's probably around expense timing. But in the year.

Rob Stevenson: Okay. And is it safe to say that given that the timing that any acquisitions or dispositions at this point of any material amount would probably wind up being sort of mid to late fourth quarter in terms of sort of being able to be closed at that point in time. And sort of not really impacting numbers at this point very much. Yeah. Still an opportunity for you guys to do stuff of materiality?

Brendan Maiorana: Any acquisitions or dispositions are not included in kind of the range. That would be out outside of the range. But to the extent of where we sit in the year, the likelihood of an acquisition or a disposition having a meaningful impact on numbers is probably fairly low. I think that's fair.

Rob Stevenson: Okay. And then you talked about the term loan. That you thought that you'd be able to extend that. Is that the sort of most attractive sort of cheapest form of debt capital for you guys at this point in time?

Brendan Maiorana: I don't know that I would characterize it as the most attractive cheapest form of capital that's available, but we'd like to have diversity in the debt stack that's there. And that's in that's a good source of capital for us given that, it's variable. If we do have a lot of disposition proceeds at any point in time, that becomes freely prepayable. And we like to have a little bit of variable rate in the stack because, you always just wanna kinda diversify the risk in there in terms of your interest rate exposure. So I think for all those reasons, it's an source of capital.

I don't know if I would necessary necessarily characterize it as the cheapest form of capital.

Rob Stevenson: Okay. Thanks, guys. Appreciate the time this morning.

Operator: Thank you for your question. Next question is from the line of Nick Thillman with Baird. Hey, good morning, guys. Maybe Ted will start off with this. Obviously, COVID and kind of the pandemic transferred a lot of just conversations on flight to quality and the type of assets. Kind of curious, have you taken a look at potential impacts of AI on demand? And that impacts longer term the type of assets you guys want to own, whether it be individual submarkets or size of buildings and how are you guys are evaluating that? Is it still early days, but just longer term sort of view?

Ted Klinck: Yeah. Look. It's definitely early days. Right? I mean, obviously, the demand side, yeah, the West Coast is seeing a lot of demand for AI companies. So that's been great for them. In terms of us, look, very early on, I think, know, companies are obviously I think every company in America is probably looking at how impact how AI may impact their business going forward. But look, we've been through this before, whether it be on densification. You know, I remember twenty years ago, law firms were gonna be reducing their space by a significant percentage because of the law libraries and all the other things they need. So we've been through different challenges.

I think as an office, industry for several years. And we're we've been able to manage through it and get as the markets continue to grow. So AI, don't know what the answer is. Right?

Nick Thillman: Okay. And then just question on you guys are kinda through a lot of the large like expirations you had within the portfolio. I guess what do you guys kind of view as like a normalized run rate when it comes to retention as we look at expirations into the next 18 to 24 months?

Brendan Maiorana: Hey, Nick. It's Brendan. I'll take that. So we always struggle a little bit answering this question. I think when you look at early renewals that get done and you kinda think about a full cycle, our retention level tends to be, call it, kinda 60 to 65%. I think if you're looking at expirations that are going to occur kinda over the next twelve to eighteen months, those numbers go down because, you've got, you know, anti, adverse selection bias that's in kind of in the rent roll because you obviously don't early renew customers that are ultimately gonna move out.

So I would say if you think about, you know, the next eighteen months, so from where we are now, through the 2026, we really, as you point out, have kinda worked through those large known move outs. And I think the retention level that we have from here kinda through the end of next year is probably in that 45 to 50% range if I kinda had to give you a number that, on a range. And that's probably a little bit higher than where we've been historically and certainly much higher than where we were over a twelve or 18-month period if you look at the proceeding 12 to 24 months.

So I think that gives us confidence that we're well set up to build occupancy as we go forward over the next eighteen months or so.

Nick Thillman: Very helpful. That's it for me. Thanks.

Operator: Thank you for your question. Next question is from the line of Dylan Brzezinski with Green Street Advisors. Your line is now open.

Dylan Brzezinski: Good morning, guys. For taking the question. Appreciate the comments on sort of the demand backdrop and how things are improving. But are you able to talk about sort of how that demand backdrop differs across your guys' market footprint? Are there any markets which you guys have a portfolio concentration in that are experiencing outsized demand versus others?

Ted Klinck: Look, Dylan. I say certainly Charlotte, Dallas, and Nashville. If you had to rank our markets, it'd be one a, one b, and one c. All three of those markets are outperforming. You know, we're very well leased in Charlotte, so we're not able to move occupancy. But if you just think about the core four, that we've talked about now for the last couple quarters, three of the four of those are in Nashville. And we're making significant progress, certainly well ahead of our business plan. On what we thought. So the demand, in Nashville continues to be really strong.

Then what we're seeing in Dallas, on our development projects and then just the inbound in net migration to Dallas has been extremely strong, specifically to the submarkets we're in. So we love the demand in those three markets in particular. But at the same time, Tampa's performing very, very well. Brian talked about it on the preferred on our prepared remarks. We're seeing a lot of great demand there. So I'd say it's pretty broad-based, and certainly, concentrated in those four markets. But broad-based in general.

Brian Leary: Hey, Dylan. Brian here. I might just add Charlotte think I mentioned it in the remarks, you know, Citi. And AssetMark announced in aggregate over 700 new jobs, and that's know, financial services. And so that's pretty well expected for Charlotte. I think they've done a great job of kind of capturing that. But the Charlotte Regional Alliance, is sort of the evolution of the chamber there, recently highlighted, there's six inbounds. That Charlotte's looking at. Only one of those inbounds currently has a US headquarters. So this is not just inbound domestically even inbound internationally. And those six represent about 5,000 office you know, using jobs. And then I also sort of mentioned this.

Net migration, daily net migration, and this is you know, sort of maybe silly math if you think about it. But adding almost another 50 people a day over a year, it's close to 14,000 new people. I mean, you can figure out what the impact is in terms of the demand there. So think that's a good one. And then Dallas, Ted mentioned, there's seven and a half over seven and a half million square feet of requirements in the market, and Dallas is a huge market. But where we're focused we're getting great demand there. Nashville's got almost 2,000,000 square feet of active requirements in the market.

Many kind of code name, multi market, The CBD was the most active. Submarket this last quarter. And Ted highlighted Tampa is over a million of active prospects in Tampa as well, and we're really happy with the inbounds we've seen in our development there. Some really kind of blue chip names looking at investing in the best space in Tampa.

Dylan Brzezinski: Appreciate that color, guys. And then, Ted, I think you mentioned, obviously, development pipelines across your markets are shrinking significantly, and no new ground-up construction is likely to start given how pressured development economics are today. Can you sort of help sort of frame that in terms of where you think replacement rents would need to be versus where market rents are today?

Ted Klinck: I think it certainly varies by market. Right? The differential the closest market we are to new development is probably Dallas. Right? I think Dallas is proving out whether it be an uptown in the Knox Henderson area, Preston Center, those three submarkets in particular. In Dallas are probably at or approaching cost justified rents. Outside of that, you know, most of our markets is probably 20 to 40% off, and that's new development today where rates they're getting versus what you'd need to build something more, you know, the last few years when the starts haven't been all that high, the construction costs have continued to go up.

You'd think they'd level off, but they have continued to go up. So the rents you need that's whether it'd be hard cost, financing costs, what have you. So the rents you need are, you know, quite a bit higher than what they are in the existing development pipeline. So again, varies by market, but it's it's a pretty big delta.

Operator: Great.

Dylan Brzezinski: Thanks for the color, guys. Appreciate it.

Operator: Thank you for your question. Next question is from the line of Vikram Malhotra with Mizuho. Your line is now open.

Vikram Malhotra: Thanks for taking the questions. I wanted to go back, I guess, Brendan, to something you mentioned about sort of '26. Given the signed but not commenced leases or the lease rate and the benefit of that going into '26. You mind just walking us I'm not a kind of moving pieces, that make either much better than you've had in the in past years, or is there some other swing factor?

Brendan Maiorana: Yeah. Hey, Vikram. It's a good question. It's we've obviously built a lot of embedded growth through the leasing that we've done to date. And I think if you look at the leased rate versus the occupied rate, a 330 basis point spread is the highest that I can remember that we've had. Certainly within the past, you know, several years. That's the highest spread. And is more than double what the average is. So our normal lease to occupied spread is, call it, a 100 to 200 basis points, so a 150 at the midpoint.

To be more than double that is a good indicator that occupancy is likely to grow as we go forward, and a lot of those leases are signed as you point out. Now, clearly, we're assuming that the economy and the leasing market are gonna hold up from here and go forward at, you know, roughly where we've been. So I think drive and realize kind of the growth potential as we go out the next year and beyond. So there's a little bit of we need things to kinda continue to hold up, but we've certainly done a lot the good legwork that's there and are well positioned to deliver on that growth.

I think the way that I would think about this and, again, I know you know this, but we're not in position to sort of talk about with any specifics in terms of numbers for next year or thereafter. To grow occupancy as we migrate late in this year. And then throughout 2026. So I think we've talked in the past where we would say, year-end occupancy kinda twenty five, through '26. I think we have the opportunity to grow that a 100 to 200 basis points. In a fairly steady manner throughout the year.

So unlike in years past where we've often have a seasonal dip early in the year and then build back, I think you know, we're likely to see a more steady cadence of occupancy build as we go forward. Beyond that, we've got some of the development deliveries that are there. So I think I talked about in the prepared remarks, where we are with GP six and Glenlake three, neither of those assets are we capitalizing any cost associated with those. So as those leases commence and come online, all of that falls to the bottom line.

We have the two development deliveries that were earlier this year, those should also be additive, but we are capitalizing cost operating and interest on those two assets. So that NOI will come online and will be additive but will be somewhat offset by some. Expensing of interest and operating it expenses compared to 2025. But all of that gives good growth potential and gives some good growth drivers over the next several quarters. And then outside of that, I would say it's more just the things that are kind of unknown. Don't expect to do a lot of financing. Over the next eighteen months. The balance sheet's in pretty good shape.

And then it would come down to what we may do on the acquisition or disposition side.

Vikram Malhotra: That's helpful. And just one more. I mean, I think the team talked a lot about these big RFPs, and, you know, I think you've mentioned, like, four or five non-foreign firms looking for headquarter space. One, just how competitive do you think this process is? Like, what sort of competition is there from landlords to kinda win these deals? You mind giving us a little bit more color, like, what type of is this demand coming from, especially the foreign entities you mentioned? Thanks.

Brian Leary: Hey, Vikram. Brian here. I'll take a shot. Couple things. They're they're all generally code named, and what's interesting is because of the markets we're in, we will sometimes see them pop up in multiple markets. So whether it's Charlotte and Atlanta, whether it's Nashville and Charlotte, whether it's Atlanta and Raleigh. So it's interesting there. You know, in the Charlotte area, yes, there's a there's a financial services bent, but at the same time, there are some kind of headquarter or US headquarter locations for international firms that manufacture things that are bringing Bayer manufacturing, the products they build, stateside, to sell of a domestic product made here.

So not sure you can necessarily connect that to the change in international trade. This is stuff kinda been working for while. One thing I will say is almost all of these, the states those same states that I mentioned are getting ranked for the best for business by CNBC, they're all at the table. And the states have incentive plans. They have partnerships. They're open for business. They are working with these companies and these site selectors. So it's a very much a public-private partnership in every place. And then they're they're looking at the BBDs that we're in because that's when they kinda bring a external sensitivity in terms of talent. They're very much focused on exceptional experience.

And so that's where we're seeing a lot of them. Unfortunately, in Charlotte, we don't have any room at the end. But because of that, we're getting a good look and understanding who's coming in.

Operator: Thank you for your question. Question is from the line of Ronald Camden with Morgan Stanley. Your line is now open.

Ronald Camden: Hey, just two quick ones. Going back to the comments on the acquisition front, just digging it a little bit there, just any curiosity in terms of markets, in terms of situations. Are distressed? Are these funds? And, also, you may have mentioned the cap rate before, but if you could remind us sort of cap rate and IRR ranges. Thanks.

Ted Klinck: Sure, Ron. Markets, look, there's opportunities out there in multiple markets. You know, just I think sellers, again, have been waiting to for this time for the cap office capital markets to open up. So we're seeing some high-quality assets really across our footprint. Right? And, you know, cap rates, you know, I'd I'd tell you for a high-quality trophy core asset, well leased with a decent wall, it's plus or minus 7% or so. But, again, that varies by market a little bit, by the weighted average lease term, the credit, whether there's below or above market rents. So there's just a lot of variables.

That go into it that may cause the cap rate to be a little bit higher or a little bit lower. IRRs are in the, you know, probably high to high single digit to low double digit, you know, type range. Again, depending on the market and the and the specific profile of the acquisition specific deal.

Ronald Camden: Great. And then my second question, just commentary about maybe the capital markets feeling a little bit better. Does this mean you guys are sort of closer to sort of bringing Pittsburgh back online for a sale? Potentially maybe end of this year, even next year, just how are guys thinking about sort of that market exit? Thanks.

Ted Klinck: Yeah. Certainly. I do think we're closer today than what we were, you know, three months ago, six months ago, two years ago. So we're still waiting. We're having a lot of leasing success. In Pittsburgh. So we're gonna be patient and to bring it out the right time. Still might be a little bit early, but we've got you know, if you look at our dispo guidance, it's another $150,000,000 this year. Got a number of buildings that are out in the market right now. And others we're prepping to bring to market. So we look. We if I had different profile, it's a lot like what we've sold the last couple years. And or last several years.

It's a mix of single tenant longer-term lease, buildings together with some older higher CapEx lower growth assets as well. So we've got, you know, a number of those out in the market that we're we're marketing in multiple markets. So Pittsburgh would be in that mix at the right time.

Operator: Great. That's it for me. Thank you. You for your question. Next question is from the line of Omotayo Okusanya with Deutsche Bank. Your line is now open.

Omotayo Okusanya: Hi, yes. Good morning. I just wanted to follow-up on Ron's question again. Just as you guys kind of take a look at different markets and what's happening with demand supply fundamentals, as we kinda look at what's happened with capital markets. Just wondering if there's any scenario where we could see you enter new markets or pop also exit additional markets apart from Pittsburgh that's earmarked for exit.

Ted Klinck: Pleased with our footprint. We've announced, obviously, exit out of Pittsburgh over time. But we're we're pleased with our market selection at this time.

Omotayo Okusanya: Okay. That's helpful. And then also following up on Vikram's last question, again, Brendan, I appreciate all the colors in regards to how occupancy could kind of shape up over the next eighteen months or so. Just kinda curious within that while there are no big kind of 100,000 square foot kinda, like, the next level below that? Like, the 50,000 to a 100,000 square foot leases, and if there could be know, a couple of those that could kind of hinder occupancy growth?

Ted Klinck: Yeah. Let me start if either Brian or Brendan wanna jump in. Look. Demand we're seeing across our markets clearly, a trend we've seen the last couple quarters is starting to see some larger some larger users out there. But I would tell you, our bread and butter is still that five to 15 type thousand square foot user. So, you know, we're gonna pick off a floor or two here and there, but we're you know, our bread and butter is still gonna be you know, that five to 15.

You know, And when then when you and we're seeing that in most of our markets, Then when you look at you know, who's doing it, it continues to be professional service firms the law firms, the banks, accounting firms, engineering firms, health care, been pretty good. That's continuing to be a good demand. Driver. For us. And then the other thing that sorta has been slow and steady the last several quarters we've talked about is our expansions, our next expansion activity. Just in the last four quarters, we've had 53 companies expand, 21 contract for net of over 200,000 square feet of net absorption.

And then it worked a fourth demand driver is the in migration that Brian talked about. Earlier. You know, this quarter, had eight companies that are new to our markets. All of them, they weren't relocations, but they're companies that are coming to our markets adding offices. That's another 27,000 square feet across four different markets. So it's been pretty diversified, both larger tenants, as well as, just our bread and butter.

Brendan Maiorana: Yeah, Tayo. So what I would just add to Ted's comments are just rather than kinda go space by space kinda getting into the weeds on things. There's always gonna be customers that move out. There's always gonna be customers that move in. I think in I forgot who asked the question. But you know, over the next eighteen months or so, you know, if we're in that kinda 4050% retention level of those remaining leases, that 3,100,000 square feet, that we've got between now and year end and year end 2026.

If we continue at 300,000 square feet, a quarter of new, that's gonna replace more than replace, what the likely kind of move outs would be, to the positive by probably two to 300,000 square feet. And then what I think is likely is you're gonna see that least occupied spread narrow, and that's gonna add more in terms of occupancy. So that creates the environment. To drive occupancy higher. So I think that sets us up well. But, again, we've gotta continue to lease space. And, you know, we feel confident about that given the pipeline that's out there. But, certainly, you know, there's there's a long way between now and the next six quarters.

Omotayo Okusanya: Gotcha. Thank you.

Operator: Thank you for your question. Next question is from the line of Young Ku with Wells Fargo. Your line is now open.

Young Ku: Yes, great. Thank you. Brendan, just wanted some clarification on the other income. Thank you for that detail on the $3,000,000 payment from Florida. How should we think about that other income line item for the rest of the year? And then are there similar type of opportunities in '26?

Brendan Maiorana: Yeah. Young, it's a good question. Yeah. We've kinda been running at that, call it, you know, on a normalized basis, a million 5 a quarter. And then, obviously, this quarter, I think you saw that number spike up to, you know, 4 and a half or little more than that in the quarter, which was driven, as you point out, by the, f. Payment. I would expect that other income line would be more consistent with that million 5 or so a quarter kinda going forward. There we tend to get some unusual items that happen you know, once a year kinda give or take. Right? So last year, we had a large repayment on tax from Nashville.

That's why if you look at the year over year comparison to Q2, '24, it's actually down in that line item. So I would say that in all likelihood, there's probably something that happens sometime between now and, you know, over the next few quarters or happens next year, but it's always a little bit difficult to forecast, and we don't have visibility into that level yet. So we'll kinda see where that stuff shakes out, but wouldn't be surprising to me if there's some you know, one timers or whatever like that for 2026.

But I think your question is good that could be there could be a little bit less of that next year than what we have this year.

Young Ku: Got it. Thank you, Brendan. And then just one last from me. So it looks like the year-end occupancy target might be a little lower than previously expected. Does that impact your same-store NOI outlook by any chance?

Brendan Maiorana: Yeah. Good question. Not really. So I think the average occupancy, we didn't change. We are probably a little bit higher in terms of average occupancy in the first half of the year than what we thought kinda coming into the year. But we're we're because of a few of those lease that I mentioned that we took back some of the space earlier, we've got one customer that we moved from late in '25 occupancy to early in '26 occupancy. That year-end number is coming in a little bit lower than where we thought. But those are generally all for pretty good reasons.

So it didn't have a huge impact in terms of the same-store NOI outlook even though it does have less occupancy on one day of the year at the end of the year, but that's that's timing issue more than more than anything else.

Young Ku: Gotcha. Perfect. Thank you.

Operator: Thank you. Thank you for your question. There are no additional questions waiting at this time, so I'll pass the call back to the management team for any closing remarks.

Ted Klinck: Just wanna thank everybody for joining the call today, and thank you for your interest in Highwoods. Look forward to seeing everybody soon. Take care.

Operator: That concludes the conference call. Thank you for your participation. You may now disconnect your lines.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 1,039%* — a market-crushing outperformance compared to 182% for the S&P 500.

They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.

See the stocks »

*Stock Advisor returns as of July 29, 2025

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.