Good morning and welcome to the Highwoods Properties Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded today, Wednesday, February 8, 2023. I would now like to turn the conference over to Hannah True. Please, go ahead.

Thank you, operator, and good morning, everyone. Joining me on the call this morning are Ted Klinck, our Chief Executive Officer; Brian Leary, our Chief Operating Officer; and Brendan Maiorana, our Chief Financial 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 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. With that, I'll turn the call over to Ted.

Thanks, Hannah, and good morning, everyone. We had a strong end to a strong year for Highwoods. In the fourth quarter, we enjoyed solid leasing in terms of both volume and economics, acquired a best-in-class property in Uptown Dallas, placed in-service our highly successful Midtown West development in Tampa, announced Midtown East, our second development in Midtown in Tampa, and delivered strong FFO of $0.96 per share. Our healthy leasing during the fourth quarter is somewhat contradictory to the broader macro environment, with interest rates up sharply, limited capital availability and widespread concerns of a pending recession. We continue to believe that to be resilient, our portfolio must be diversified and not be overly reliant on any single customer, market, submarket, industry or lease size. This diversification is a core component to our long-stated simple and straightforward goal to generate attractive and sustainable returns over the long term. Our largest market, Raleigh, is less than 22% of revenues. Our largest customer, Bank of America, is less than 4%. Our top 20 customers account for less than 30%. Our largest industry, the highly diversified professional, scientific and technical services category is less than 30%. And our average lease size is under 15,000 square feet. We believe this purposeful diversification, our high-quality portfolio and continued strong population and job growth across our markets has driven our strong leasing since the onset of the pandemic, including throughout last year. In 2022, we signed 1.5 million square feet of new leases, the most in any year since 2014. We ended the year on a positive note with 337,000 square feet of new leasing and 924,000 square feet of total second-gen leasing. In the fourth quarter, we signed 28 expansions, nearly half of our renewal count, with expansions outpacing contractions by a ratio of 3.5:1 equating to 81,000 square feet of net expansions. In addition, we signed a 312,000 square foot renewal at a 50-50 joint venture property in Richmond. This renewal was for 100% of the customer's prior space with a roll-up in cash rents and limited TIs. As a reminder, joint venture leasing is not included in our overall leasing statistics. As we move into 2023, our occupancy and same-property cash NOI will be negatively impacted by the 263,000 square foot move-out activity in Cool Springs BBD of Nashville at the end of this month, a space that we have already substantially backfilled. The backfill customers’ lease isn't scheduled to commence until early 2024. As is our practice, we do not remove in-service buildings from our same-property pool. In addition to our solid leasing efforts in 2022, we are also pleased with our investment activity during the year. We acquired $400 million of best-in-class assets in Charlotte and Dallas both with meaningful long-term growth potential. We placed in service roughly $100 million of 99% leased development. We announced over $400 million of development in Dallas, Atlanta, Tampa and Charlotte, and we sold $133 million of non-core land and buildings. This volume of work combined with our high-quality office portfolio and the strongest BBDs throughout the Sunbelt gives us the building blocks we need to generate additional long-term growth. Turning to our results. We delivered FFO of $0.96 per share in the fourth quarter. Our full-year FFO was $4.03 per share including $0.13 of net land sale gains. Excluding land sale gains, our full-year FFO was $3.90 per share, $0.06 above the midpoint of our initial 2022 outlook even with the unanticipated sharp rise in interest rates. Turning to investments. In the fourth quarter, we expanded our presence in the dynamic Dallas market by once again partnering with local sharpshooter Granite properties, this time to acquire McKinney & Olive in Uptown Dallas and a 50-50 joint venture for a total investment of $197 million at our share. McKinney & Olive is a trophy mixed-use building with approximately 500,000 square feet of office and 50,000 square feet of retail. The building is well-leased with growing customers and average rents estimated to be 35% below market. This investment priced below replacement cost provides a unique combination of an attractive going-in cash flow yield with the opportunities to earn development-like returns as we roll rents up to market. Further, this building is only four blocks from our 2023 Springs development providing ample opportunity for leasing and operating synergies and with what we believe will be two of the best buildings in Uptown. During the quarter, we also announced the Midtown East development in a 50-50 joint venture. This project will encompass 143,000 square feet in a highly successful Midtown Tampa mixed-use development. The total cost is estimated at $83 million with our share being half of that. This announcement follows our first office development in Midtown Tampa, Midtown West which we placed in service during the fourth quarter as originally scheduled at 97% leased. We started Midtown West on a fully specked basis in late 2019. And despite the pandemic, the project leased up successfully at rents at or above our original pro forma. Our 1.6 million square foot development pipeline now represents a total investment of $518 million at our share across five different markets and it is a combined 21% pre-leased. Three of those developments representing nearly 800,000 square feet and $234 million of total investment at our share are scheduled to deliver in 2023 but are not projected to stabilize until 1Q 2025 through 1Q 2026. With rising interest rates and reduced debt availability, the investment sales market has slowed meaningfully over the past few quarters. Fortunately, our balance sheet is in excellent shape, which allows us to be patient with our disposition efforts. Over the long run, we will continue our strategy of monetizing properties we believe have below-average growth prospects, limited upside or are CapEx intensive, and we'll use the proceeds to replenish our dry powder and ultimately recycle into higher-growth properties. As illustrated in our 2023 outlook, we expect to be a net seller this year, although the volume of dispositions will depend upon the stabilization of the office investment sales market. Our plan is to sell up to $400 million of non-core assets this year while we believe acquisitions are unlikely. Our initial 2023 FFO outlook is $3.66 to $3.82 per share. At the midpoint, interest expense will be significantly higher due to rising rates and we also project higher same-property operating expenses. Same-property cash NOI growth is projected to be flat at the midpoint below our historical average due to higher CapEx and lower average occupancy largely as a result of the activity move out. While a 2023 FFO outlook is below 2022 actual results, as a reminder we have grown normalized FFO per share each year for 12 consecutive years at a 4% compound average rate. Since the onset of COVID at the beginning of 2020, we have acquired 3.2 million square feet of best-in-class office assets for a total investment of $1.2 billion delivered 1.2 million square feet of highly leased office development for a total investment of nearly $500 million and sold 6.4 million square feet of non-core properties for $1 billion. All the while growing normalized FFO per share 11% and continuing to strengthen our cash flows. With our ever-improving portfolio quality, we're now even more resilient and better poised for long-term growth. In conclusion, while our high-growth BBDs and high-quality portfolio received most of the attention from our shareholders, our humble, hard-working, and talented teammates are the ones who drive our success. I would like to thank our entire Highwoods team for their continued commitment and tireless dedication to our company during the past year. It's their effort that has positioned us for continued success for many years to come. Brian?

Thanks, Ted, and good morning everyone. As Ted mentioned, the strong fourth quarter capped off a strong 2022 and a strong three-year run through the pandemic that saw the team and portfolio meet every challenge and produce compelling results. We've leaned into our BBD strategy to upgrade markets and assets by taking a deliberate approach to diversify geographic reach across the Sunbelt high-growth markets, which include six of the top 10 and five of the top six US markets to watch for the most recent PwC, Urban Land Institute, Emerging Trends in Real Estate report. Within these markets, our BBDs are both urban and suburban and have proved successful in meeting our customers where they prefer to be. Suburban workplaces have proven to be competitive options when people and individuals and organizations consider the quality of life calculus, as evidenced by the highest physical occupancy and leasing activity across our portfolio in the Sunbelt. It is our belief that the greatest determining factor of a workplace being commute-worthy is the magnitude of the commute burden that needs to be overcome. Our urban and suburban BBD portfolio provides a variety of options and amenities with regard to commute worthiness and has attracted a customer base across a broad spectrum of industries and sizes. Small and medium-sized customers, which are our bread and butter with an average customer size of less than 15,000 square feet, are disproportionately back in the office and expanding. This customer mix has allowed our portfolio to weather the ebbs and flows of previous cycles, a pandemic, and evolutions in the so-called future of work. While concrete, steel, and glass may not be the most flexible of materials, we are formalizing the variety of flexible work options we offer under our Highwoods Commons banner based on the success we've had to date. Whether it's convening a town hall in our Spark conferencing hubs, taking occupancy in one of our dedicated full floor Spec Suite collections, or booking one of our ultimate Zoom rooms, we call the CoLab, the Commons platform provides our customers scalable flexibility with regard to space and duration and can be tailored to their specific needs. It includes both formal and informal spaces, all conceived around collaboration and the platform enters 2023 having delivered over 100 such spaces with healthy net new rental income associated with it. This deliberate diversification across a variety of factors makes our portfolio more resilient, coupled with our approach to creating compelling and competitive workplace experiences. We are confident that the Highwoods portfolio will continue to serve as a location of choice for the best and brightest individuals and organizations. To that end, our team finished the year with solid financial and operating results for the fourth quarter, signing 924,000 square feet, including 28 expansions, the most net expansions we have signed since the beginning of 2018. As Ted mentioned, this does not include the 100% renewal of our 312,000 square foot JV-owned property in Richmond through 2034. Net effective rents for the quarter were higher than our five-quarter average, and our net effective rents for the year represent a record high. While there is often much focus on cash or GAAP rent spreads, we have long stated that our leasing focus is securing the best overall economics. For example, we may trade lower face rents for lower TIs or free rent if the overall net effective rents are attractive. Our all-time high for net effective rents during the year is a strong endorsement of our Sunbelt, BBD, and diversified portfolio strategy. Trimming down our market activity, in Raleigh, we signed 263,000 square feet and ended the quarter 92% occupied, where market rents grew 5.1% year-over-year for CBRE. Our local team has seen healthy activity so far this year, and we expect this to continue, led by job growth in professional and financial service companies. Second, in terms of volume for the quarter, Nashville signed 225,000 square feet and is nearing the finish line on hybridizing almost 1 million square feet of assets in Brentwood and Cool Springs, the two BBDs that garnered the majority of leasing activity for the entire national market in 2022. Our signature reimagining and repositioning of these assets have been well-received, leading to the substantial backfill of our portfolio's largest 2023 lease roll in Tivity, five months prior to expiration. According to Cushman & Wakefield, the national market posted positive net absorption for the quarter and a 4.7% year-over-year increase in market rent. As Ted mentioned previously, occupancy will be lower in our natural portfolio in 2023 as Tivity vacates, and our replacement customers' lease doesn't commence until the beginning of 2024. Moving further south to Tampa, which leads the state of Florida for net New York City resident relocations, we placed in service our 97% leased Midtown West joint venture development in the quarter and announced Midtown East, a 143,000 square foot mixed-use development, which will offer the highest views in the Westshore BBD. Midtown has established itself as an address of choice for blue-chip organizations that prioritize recruiting, retaining, and returning talent. Our newest markets in Charlotte and Dallas are great examples of decisively leaning into our simple and straightforward strategy and executing successfully via the wide and deep relationships we've built over time. With the off-market acquisition of 650 South Tryon in Charlotte, the Queen City now stands as Highwood's fourth largest contributor to NOI. The December acquisition of McKinney and Olive, a 550,000 square foot 99% leased tower in the heart of Dallas' uptown BBD, which was tops in the market for annual absorption and rental growth for 2022, we're on track for Dallas to contribute 6% of pro forma NOI to our bottom line, following the completion and stabilization of our two development projects. In conclusion, each and every Highwoods teammate remains focused on making our diverse portfolio the most talent-supportive and commute-worthy it can be. We believe this approach will enable our customers and their teams to achieve together what they cannot apart, and when we do this, we will create value for our customers and in turn our shareholders. I'll now turn the call over to Brendan.

Thanks, Brian. In the fourth quarter, we delivered net income of $27.6 million or $0.26 a share and FFO of $103.1 million or $0.96 a share. There were no significant unusual items in the quarter. For the year, our FFO was $4.03 per share, coming in at the midpoint of the upwardly revised outlook we provided in October. This was $0.19 above our original 2022 FFO outlook. Excluding $0.13 per share of land sale gains, net of impairments, core FFO in 2022 was $3.90 a share or $0.06 above the midpoint of our original outlook. The upside in core FFO in 2022 compared to the midpoint of our initial outlook was due to the following: $0.08 of higher NOI, largely driven by lower than forecast OpEx and higher parking revenues; $0.02 from less disposition activity than originally planned; and $0.01 from acquisitions. These items combined for $0.11 of upside and were partially offset by $0.05 of higher interest expense attributable to higher than forecasted rates on our variable rate debt. In addition to strong FFO during the year, our cash flows continue to strengthen. Even with what we believe is an attractive current dividend yield of over 6.5%, we had strong coverage in 2022 with a CAD payout ratio under 75%, providing us meaningful retained cash flow to reinvest. We have been purposeful with our focus on strengthening cash flows. We've sold assets that were capital inefficient and recycled into acquisitions and development projects with higher long-term cash flow yields. To quantify this, since 2019, our cash NOI is higher by 16% or $75 million, and our capital spend, leasing and maintenance CapEx, is down 8% or $12 million resulting in $87 million more cash generated from our portfolio and a ratio of CapEx to NOI that has improved by 15%, without any meaningful increase in our equity base. CapEx spend is often lumpy quarter-to-quarter or year-to-year, but regardless of the short-term fluctuations, the trend is clear. Our portfolio has become more efficient and our cash flows have continued to strengthen. Our balance sheet is in excellent shape. We ended the year with debt-to-EBITDA of 5.9 times, up from the third quarter due to the acquisition of McKinney & Olive and continued investment in our development pipeline, but still low overall. We have ample liquidity, over $550 million between our line of credit and undrawn amounts on the construction loans at our Dallas development JVs, which provide us plenty of room to fund the remaining $359 million to complete our development pipeline. We have purposely set up the balance sheet with ample flexibility, as we have over $900 million of debt that is pre-payable without penalty, and no consolidated debt maturities until the end of 2025. This fits well with our investment plan for the year, where we expect to be a net seller. We expect to reduce our floating rate exposure as we move throughout the year with planned disposition proceeds. We also have a solid pool of unencumbered assets and the financial flexibility to obtain the longer-term fixed-rate debt. As Ted mentioned, our FFO outlook for 2023 is $3.66 to $3.82 per share. As you know, the largest headwind for 2023 is higher interest rates. Based on the current SOFR curve, we expect to incur $0.25 to $0.30 per share of higher interest expense in 2023 compared to what the forward curve implied just 12 months ago. As I mentioned earlier, we purposely structured our balance sheet to provide us optionality to be able to repay debt without penalty. While this means we expect higher projected interest expense in the short term, given the forecasted peak in SOFR during 2023, and with no fixed-rate debt maturities until 2027, we are positioned to benefit from a downward trend in the interest rate curve after this year. In our release last night, we stated an anticipated headwind of $0.08 per share at the midpoint from higher OpEx, net of anticipated recoveries. The higher projected OpEx combined with lower average occupancy, principally related to the Tivity move-out, has negatively impacted our same-property cash NOI outlook in 2023. Year-over-year same-property comparisons are often helpful, but 2023 is somewhat distorted by the unusually low OpEx from the first half of 2022. Using our more normalized second half of 2022 as a comparison point, we expect positive cash NOI growth in our same-property pool in 2023. Finally, as you may have noticed, we made some routine SEC filings yesterday and this morning. Under SEC rules, S-3 shelf registration statements sunset every three years. It has been three years since our last shelf filing. As a result, last evening, we filed a new S-3 with the SEC. This was a joint shelf filing by the REIT and the operating partnership that registers an indeterminate number of debt securities, preferred stock, and common stock for future capital market transactions. With this new shelf in place, we also needed to refresh our longstanding ATM program, which we filed via Form 424(b) this morning. As you know, keeping an ATM program in place is one of the many arrows we like to keep in our capital-raising quiver. To be clear, the FFO per share outlook that we provided in last night's release assumes no ATM issuances during 2023. Operator, we are now ready for questions.

Thank you. Our first question is from the line of Camille Bonnel with Bank of America. Please go ahead.

Good morning. Just a few questions on the same-store NOI outlook you provided. When we think about your occupancy guidance excluding the impact of the large move-out in Q1, what sort of retention ratio is embedded in your outlook?

Hey, Camila, it's Brendan. Thanks for the question. So our retention when we look at 2023, in terms of what's remaining at year-end 2022 is below average. So with the Tivity move out that overall including that we're probably around 40% of the 2023 expiration. So if we back that number out, that goes back up to we're probably a little bit under 50% overall. I need to kind of just grab that right in front of me but that's probably about where that number would be, which is roughly in line with average when we're at this point in the year where you have just the forward four quarters. Over time, we do a lot of early renewals so that number tends to be higher. But 50%, as we roll into a new year for the forward four quarters is about average for us.

Thank you. And really solid leasing last year. Looking forward though, and I understand it's a very challenging time, but can you also talk to your expectations for new leasing volume this year?

Sure, Camila. It's Ted. Look, obviously, last year, we had a really good year. We signed 3.3 million square feet of leases, 1.5 million square feet of new leasing new customers. Coming to Highwoods is roughly 180 new customers that came into our portfolio, which was a great number. I think that was the most new leasing we had since 2014. And I think in three of the four quarters, we had over 300,000 square feet of new leasing. So we've been very pleased with leasing. And obviously, it's quarter-to-quarter. But we're off to a good start in the first quarter. Our leasing pipeline is active in all of our markets. I will say, as we look at the pipeline, it's a lot of smaller deals. I think we've all seen that and you've heard it from others, and that was a case for us really in 2022 as well. Leasing activity, the large users sort of hit the pause button late in the year. But just the demand we're seeing right now plays to what our core portfolio is, smaller and medium-sized customers where we continue to see demand. So first quarter, it's continuing, but it is a lot of small customers, but the volume in tour activity is pretty good, maybe a little bit slower than the second half of last year, but still pretty decent.

Camila, Brian Leary here. I might just add on for a little additional complexion into that momentum that Ted talked about the small or midsized, who are they law firms? So what's interesting, I know there's a theory that law firms just move around. But what we're seeing in our markets are a number of law firms that are coming in from out of market, planting a flag and then growing. So we've seen that, say, in Charlotte, where we landed an inbound law firm from New York, open an office in one of our spec suites, grew into the space next door, and is now looking at growing further. Financial services, engineering, we're seeing the engineering firms I think start to get the momentum with the infrastructure bill starting to find its way down into the local markets as well, so just a little extra color.

Appreciate the detail there. Thank you for taking my question.

Next question is from the line of Michael Griffin with Citi. Please go ahead.

Good morning. This is Ari Tyres on for Michael Griffin. My first question is on the return to office. How are you seeing return to office faring across your Sunbelt markets? Are there any markets or tenant types that are coming back stronger than others from a utilization perspective?

Hi Ari, it's Ted. Look, as you know, the Sunbelt markets have probably come back quicker than a lot of the larger gateway markets. I think not necessarily types of tenants, really size of tenants. Our return to the office has really been the smaller customers, suburban customers, as well have been the first ones back. They've been back for a really long time. It's the larger companies, large public companies as well, have been a little slower in terms of their returns. So, I think it's more customer size than it has been a type of customer or type of industry.

Hi Ari, Brian Leary to clip on there. The three days of the week, Tuesday, Wednesday, Thursday is absolutely when we're seeing our occupancy. So financial services in Charlotte, the buildings are full, top level of the parking garage is getting parked on. And so, we're even seeing the larger ones have implemented their hybrid work week. Three-two is what we hear a lot of. So Tuesday, Wednesday, Thursday is when we're seeing the majority of folks in our buildings, driving restaurant sales, sundry sales, things like that.

Helpful. Thank you. My follow-up question is on the activity backfill. Wondering if you can comment on what the backfill rent is in 2024 relative to activity was paying?

Hey, Ari, it's Brendan. Yes we had a modest roll up from a cash basis versus where Tivity was. And then a more normalized kind of GAAP roll-up in the double-digit range. So, we found that that was – we were very pleased with that execution given that Tivity was a build-to-suit done in 2007, 2008 and had healthy bumps that compounded over 15 years. So, I think we were pleased with the execution from a leasing standpoint to be able to roll that up on a cash and GAAP basis for the new customer.

Great. Thanks for the time.

Our next question is from the line of Blaine Heck, Wells Fargo. Please go ahead.

Great. Thanks. Good morning. You guys talked about the flexible work options you guys are providing within the portfolio. Can you just expand a little bit on that? Are there specific buildings or markets that those suites or flexible spaces work best in? And how much of your office space do you think could eventually be converted to more of a flexible use?

Hey, Blaine, Brian Leary here, good morning, thanks for the question. This is how much time does everyone have, because I'm obviously pretty passionate about this. So I'll be honest with you, it started with the momentum that we garnered a few years ago with rolling out the spec suite program. And as we started to realize that not all spec suites are the same or customers are the same, or BBDs are the same, or buildings are the same. We started to flush out a matrix that can be applied across markets and BBDs to custom tailor, for instance in Brentwood. We've been very successful in Nashville rolling out floor by floor of our common spec suites, where there's a certain different complexion of the user that goes in there, what the rents are and that carries a certain amount of amenity base, where you look at a Buckhead collection, the type of customers that's there, will be able to demand and pay for something different. And so what we're doing is, we're also realizing that folks want to collaborate and kind of get out of their own office. It's not even just a potential of growing 110% occupancy, if you will. It's just giving them a diversity of spaces. So I don't think I could give you an idea of what percent could be transformed over time. I think this is just now going to be embedded in the offerings that we provide. Yes, we've been fairly opportunistic when vacancies presented themselves to do this, and it's been successful, but we really see this rolling up as kind of our flexible option by having a long-term relationship with Highwoods and not necessarily having to engage with the more typical kind of co-working environments.

Great. Thanks, Brian. That's helpful. For my second question, can you just talk a little bit more about your capital needs this year? I know, Brendan, you mentioned no ATM issuance was included in guidance, but should we expect you to issue any additional debt this year? And how should we expect leverage to trend as we progress throughout 2023?

Yeah, Blaine, it's a good question. So we do have a lot of flexibility within the capital stack. So, as I mentioned in the prepared remarks, no scheduled debt maturities until really the end of 2025. So, we have no need to be in the capital markets. However, we do have a lot of freely pre-payable debt that is outstanding. So the two options there are, one, I mean, we would like to have some of the non-core disposition proceeds come in the door. As Ted mentioned, that's highly dependent on the investment sales market in terms of how much proceeds we get in the door there, but that would be used to help pay down some of that debt. And then, I think we also have options with respect to longer-term financing to reduce the floating rate exposure that we have. And on that, we would be opportunistic. But I do think it's probably reasonable to assume that at some point, it's more likely than not that we'll do some form of financing to term out some of the floating rate exposure that we have during this year. It's just we'll be opportunistic as to when and what form that takes.

Great. Thank you.

Next question is from the line of Georgi Dinkov with Mizuho. Please go ahead.

Hi. Thank you for taking my questions. So could you please walk us through the occupancy trajectory through the year? And what gets you to the low versus the high end of the guidance?

Hey, George, this is Brendan. I'll start with that and maybe Ted and Brian will add in some color. So yes, I mean, as we talked about, we obviously have the headwind from Tivity, the 263,000 square feet. That's in the first quarter, so that's 100 basis points. So we ended the year at 91%. And then you expect that number to go down in Q1 with Tivity and the backfill customer's lease isn't scheduled to commence until the beginning of 2024. And then, we have some other expirations that are – some move-outs that will occur as well. We had a government user that was in a soft term that gave us back a sizable amount of square footage, so that also is impacting us. And then, we have some leases that are queued up to commence into occupancy later in the year. So with all of that, that's where we think when we mix all that stuff together, we think we'll end 2023 about 100 basis points lower than where we ended 2022. But keep in mind we'll also have then as we start 2024 we will have the backfill customer for Tivity that will be in a sizable amount of that space. They do leg into that space over time but they'll take the majority of their space at the beginning of 2024.

Okay. Great. And what was the size of the space that was given back to you?

This is Ted. We had a couple of significant changes, as Brendan mentioned. One involved a government customer who has been under a soft term arrangement, allowing them to terminate their lease on relatively short notice, I believe it was a 90-day notice. They returned 116,000 square feet in Atlanta, notifying us around mid-January. That has impacted us significantly for most of the year. Additionally, we had another instance where a 120,000 square-foot customer in Raleigh went through a merger and downsized to 46,000 square feet. They returned approximately 77,000 square feet as part of a long-term renewal, effective January 1, 2023, which also negatively affected our occupancy. On a positive note, we have already re-leased 55,000 of the 75,000 square feet with customers who will be starting throughout this year. Those are the three major changes we've encountered.

Great. That was very helpful. And just my last question, can you talk about the sublet market. How is that trending in your markets and specifically in your portfolio?

Brian Leary is addressing the question regarding sublet activity. We have previously discussed our focus on sublet growth and its variations. Raleigh stands out as the market with the highest proportion of sublet space available. However, almost 60% of that subletting is concentrated in the Research Triangle Park, which does not impact our portfolio. It's important to analyze who is leasing, who the sub-lessors are, and their motivations for renting out space. In our portfolio, the average lease term of our sub-lessors exceeds six years; if we exclude one sub-lessor with over 14 years, the average remains above four years. This gives us confidence in our high-risk portfolio's visibility and exposure. Regarding overall market trends, Nashville is experiencing a decline, and we are witnessing some backfilling there. When sublet space exceeds 25% of availability, we typically see an impact on rents, and Raleigh is currently showing this trend. Nonetheless, the total amount of sublet space has remained stable from quarter to quarter, and while there is an increase year-over-year both nationally and in our markets, the quarter-to-quarter changes have been minimal.

Great. Appreciate the color. Thank you so much for the time.

Next question is from the line of Rob Stevenson with Janney. Please go ahead.

Good morning, guys. Brian, you guys had north of $135 million of combined building improvements and second-gen expenses in 2022 and just shy of $120 million in 2021, what are you expecting in 2023 at this point given Tivity retenanting and other known spending?

Hey, Rob, that number fluctuates quite a bit. I think the leasing we did is the most challenging to assess. We believe leasing will likely remain reasonably stable, although it does depend on the volume and nature of the leases. We committed more dollars to leases in 2022 than what we actually spent, so we expect those figures to normalize. We anticipate that leasing capital expenditures will remain steady and maintenance capital expenditures typically are quite consistent as well. Therefore, we project that 2023 will be similar to 2022, but it is a difficult number to estimate.

Okay. And then given Ted's commentary about the continued dislocation in the acquisition market, are dispositions in 2023 likely to be back-end loaded? Do you have stuff teed up that could close in the first half of the year? How are you guys positioning that at this point?

No, I think you're absolutely correct. We've established a broad range of zero to $400 million for our disposition activities, which will largely depend on the return of a stable and functional investment sales market. We're beginning to observe some encouraging signs, particularly with other property types, although I believe the office sector will lag a bit. There are still some challenges, but we are witnessing some positive trends on the debt side, which is promising. Any dispositions we make are likely to be weighted towards the latter part of the year. We currently have a few buildings and land transactions on the market, and thus far, they seem to be progressing well. Therefore, we may have a couple of deals closing late this quarter or in the first half of the year, while additional activities will likely be more concentrated in the second half of the year.

Okay. And then Ted, any updated thoughts on the Pittsburgh portfolio and the potential sale now? Is that tabled for now? Is that more likely to be a 2024 transaction, or are you still thinking that might wind up going to market this year?

Yeah. Look I think we can afford to be patient with Pittsburgh. There's no real rush. And again until we get a fully functioning debt market and fully functioning investment sales market, I think it's probably put on hold. We've hired the broker. We're preparing it for market. We do want to sell. But in the meantime, again, while we're being patient, we're seeing some really good leasing activity in Pittsburgh. So we're going to try and take advantage of the holes we have there and button that up. But we'll wait and see, but likely not going to be for a while.

Okay. And then last one for me. Brian, you were talking about utilization before. Have you seen any change, an uptick since the beginning of the year with more companies having a definitive plan with the date of January 1 coming back, or has it not been really noticeable in your markets?

No, I think it has, Rob. That's a great point and question. I think the big firms, they're not necessarily making decisions about moving or expanding. Some are putting stuff on the sublet market if they're contracting. They have a plan to get their people back in the office. They have their rhythm for the hybrid. And I think you all have seen a number of leaders, CEOs be pretty definitive on this. We're a work-from-work company. It's hard to manage by 'Hollywood squares' things like that. And if you look at the again the makeup of our customer base, if you kind of go ahead and capture the small and medium customers, as I mentioned our bread and butter, which makes up a great majority, they have been back and they are back. And then you look at the bigger users, the corporates, the publicly traded, folks in the financial services, or what have you, they have their plan, and we absolutely have seen it. I mean so much so as we’re working on how to exit the garages faster because now what we've done is we've been deliberately engaged with our customers, how do we kind of help them with their return to work policy because they are committed that they are better together and they want to see their productivity increase. Their productivity increases when they're in the building. So that's kind of what we're doing. We have kind of a campaign where we're literally partnering with them specifically on recruiting and bringing their teammates back to the office.

And where is utilization midweek for you across the portfolio these days?

Peers have been struggling. Those areas that involve higher commute challenges tend to be affected. Interestingly, although Atlanta is often viewed as central to the Sunbelt, its longer commute times and distances are causing it to lag behind cities like Nashville. Pittsburgh, on the other hand, follows a more traditional hub-and-spoke commuting model. Atlanta appears to have stabilized between 50% and 75%. We've definitely observed this trend on Mondays, Tuesdays, Wednesdays, and Thursdays. Restaurant and cafe sales have been much busier, returning to levels seen before the pandemic.

Okay. Thanks, guys. Appreciate the time.

Our next question is from the line of Dave Rodgers with Baird. Please go ahead.

Yes. Good morning, everybody. Brian, I wanted to talk about rent a little bit and you talked about economic or effective rents earlier. Maybe they're not where you'd love them to be, but they haven't been terrible, but your average deal size has been about 10,000 square feet. So as you roll forward, is there any good evidence that you have now or that you're starting to have negotiations on, where these bigger deals, say 50,000 to 100,000 or north of 100,000 square feet are getting done, where you're seeing a substantially greater amount of pressure on rents or effective rents. It just feels like that comp could start to come out and maybe surprise us, but I'd love to know what you're seeing on that front.

Dave, I haven’t really seen that yet. I know it may sound like I’m just talking my book, but our customers, even the larger ones, through representatives, are indicating that they want to bring their people back. They see the workplace experience as part of that. Currently, rents are stable, and there is definitely free rent available. I think they would like to finance their tenant improvements through higher rents. While I don't want to revert back two years, and I realize I may sound repetitive, many of these organizations are focused on costs. However, only 1% of their annual expenditures is on utilities, 9% on real estate, and 90% on people, and they are very focused on that 90%. This, of course, ties back to the 9%. So, there's nothing yet to link those two aspects. I apologize for the lengthy response to a fairly straightforward question. Ted, perhaps you have a thought?

Yes. I would add that last year, we completed Landmark, which was over 200,000 square feet and had a high rent for that space. It’s been interesting to analyze our portfolio, which ties into the discussion. We only secured nine leases over 50,000 square feet last year, which I found to be an interesting statistic. There seems to be a focus on smaller and medium-sized users, which aligns well with our portfolio.

And that's out of 425 deals, right? So that gives you an idea.

And then, some of the larger deals you have talked about the backfill of Tivity, or the deal that you did in Richmond. The larger transactions seemingly have focused on suburban markets. Is that not enough data to make that conclusion or leap, or are you seeing that definitely happening where the larger tenants aren't gravitating to Buckhead but maybe are gravitating towards Riverwood, or something similar across your markets?

I don't think there's really been enough data points to know and some of it is on renewals, right? You can only renew the ones you have and it's where the holes you have as well in your portfolio. So, obviously, Tivity, we had a hole, so we're able to go aggressively try and backfill it. And then some of the other ones. So it sort of just depends. But I will say, a blanket statement. I think we've said this before that during the pandemic, we have seen a disproportionate leasing out in suburbs versus urban, but I don't think there's enough data points to say if there's any trend, one way or the other.

I believe this has been developing over decades, where people tend to live where they prefer to work. There is a significant and ongoing trend of millennials migrating to the suburbs for homeownership and buying homes. The idea that suburbs are a straightforward commodity is not accurate, as many suburbs are quite competitive. When considering our discussions, we have focused on repositioning our properties in areas like Brentwood and Cool Springs. In Cool Springs, for example, we have been enhancing the environment to be more amenity-rich and walkable, including places to get coffee, have lunch, or exercise outdoors. We aim to incorporate features like fitness centers and collaborative workspaces. Simply placing a property in the suburbs or even in urban areas won't automatically resolve challenges; that is what we have observed.

And then last for me on the dispositions. Ted you mentioned in your last comment maybe some land and maybe not Pittsburgh as a kind of full exit this year. So what do you anticipate being able to sell this year? And I guess maybe the point of the question really is if you're selling $400 million how dilutive is that relative to the debt cost as you think about late 2023 into 2024?

Sure, I'll address the first part and then Brendan can add. The asset mix includes a couple of land deals and some single-tenant transactions currently on the market. It will resemble our recent large transactions, where we acquire an asset like we did in McKinney & Olive, slightly increase our investment, and then gradually reduce the balance sheet over time. Therefore, we will have a mix of single-tenant, land, and multi-tenant assets, likely with a lower growth profile moving forward. This is similar to past situations we have encountered. Pittsburgh might be part of this, but since it's a large transaction, larger deals tend to be more challenging to execute. Brendan, would you like to add anything?

Sure, Dave. I would say that the marginal cost of borrowing for what we plan to pay off, based on our forecast for 2023, is likely in the mid to upper 5s. You can apply the cap rates that you consider against those figures. From a cash flow perspective, which we are focusing on, there is ongoing capital expenditure related to the assets we intend to sell. When we reduce debt, the interest savings will go directly to our bottom line, with no associated capital expenditure. So, from a cash flow standpoint, it’s much less dilutive. Additionally, as we add the development deliveries that will come online, we believe our cash flows will gradually improve, even with the planned asset sales we have.

Hi, guys. Thanks for taking the question. Just curious, sort of, if you can kind of touch on the development leasing pipeline and where it stands today?

Sure, Dylan. Good morning. Let me go through each of the properties in order of their delivery timelines. The 2827 Peachtree project has now topped out and will be delivered in the third quarter of this year. We expect it to stabilize in the first quarter of 2025. At the end of last year, we were 75% leased and have strong prospects to reach the mid-80s before delivery, so we feel optimistic about that. GlenLake III in Raleigh also delivers in the third quarter of this year, with stabilization expected in the first quarter of 2025. We started with 15% pre-leased but have not signed any new leases since then. However, since topping off the building, we've seen increased activity and are encouraged by the progress as we see the retail shell being built as an amenity. The third project, Granite Park VI in the Plano, Frisco submarket, is a 50-50 joint venture with Granite Properties and is set to deliver in the fourth quarter with 12% pre-leased. Mid last year, we had significant activity with larger users, but that slowed down in late last year when many paused their decisions. Despite this, smaller activities continue, and the building's location is great, which gives us confidence. The fourth project, 23 Springs, also with Granite, will be completed in the first quarter of 2025 and is expected to stabilize in 2028. Activity there has been very strong, even with the completion a couple of years out. Finally, Midtown East will break ground in the next week or two and is expected to be completed in 2025. Interestingly, we've received some inquiries since the fence went up, which was unexpected since Tampa is typically not a pre-lease market. These inquiries are still in early stages, but we are seeing some activity, and there is time before we complete that one. Did that answer your question?

Yes. That was perfect. I appreciate the color on that. And then I guess just you mentioned Granite Park, just a follow-up on Granite Park VI. Have you guys underwritten or underwriting expectations changed, given sort of the drop-off in leasing activity, or just kind of how should we be thinking about that?

Not at all. Not at all. I think we feel very good about the underwriting. Again, we don't stabilize that until I think first quarter 2026. So again, we've got plenty of time. There's no rush here. We didn't have a lot of pre-leasing coming in before the building was done. So we think we are pretty conservative. The proposals we're putting out are well in line with our underwriting. So no, we still feel very good about it.

Yes. Thank you. I just want to ask what's kind of built into your guidance in terms of the mark-to-market that you're expecting for the year?

Hey, Peter, it's Brendan. I would say, I mean, it's on a cash basis we've been roughly kind of around flat for the pack really almost since the onset of COVID. So that's probably a good marker. And in the low double digits on a GAAP basis. So those are probably good markers. Again, a little bit difficult to forecast just given the mix of expirations and new lease signings and things like that. But I think if you use those guideposts that probably gets you to kind of where – that probably ought to be in line with what we've got included in our outlook.

Okay. Got it. And then I guess a slightly different way of asking something that was asked earlier, but a lot of your coastal competitors have talked about a pickup in activity pretty meaningfully since the New Year. Are you seeing any signs of that in your markets and – or generally kind of any signs of an inflection in terms of business confidence and business leaders being more willing to make decisions, or is it still kind of the same that they've been for the past year or so?

Hey, Peter. Brian here. So a couple of things to that kind of comparison. Our markets, our submarkets or BBDs are buildings we're already ahead of that curve. So that's kind of the first thing. But – so again, our smaller and medium-sized and particularly suburban were first back, then they came back kind of across the board. Now the start of this year, I do think the bigger corporates, the ones that you've read about their CEOs saying that they want to get their folks back. We have absolutely seen that. Now what the great thing I think and we hope that this is the case, the issues around the pandemic, which still were hovering a year ago just as a potential back, those are really kind of abated in terms of the reason why folks are not coming back. So I think that's a good thing. Hopefully, that's in the rearview mirror. We have been fairly consistent ahead of the curve, that curve continues to go up, peak occupancy is Tuesday, Wednesday, Thursday for sure, Fridays are quiet, you're seeing more on Mondays than you did at the end of last year. But I do believe that to a company there is a plan now that folks are back in the office three days a week.

Hi. I just have one follow-up. Given the big debate on whether the weakness of CBD urban office is temporary or not, can you remind us of the breakdown of the urban versus suburban in your portfolio? And within that, are you seeing any clear distinction between the operating performance between the two, whether it would be leasing activity, occupancy or rents?

Hey, Camille, it's Brendan. So, I would say we classify our properties into three categories: CBD, infill, and suburban. The suburban properties are not evenly distributed; suburban makes up about a quarter of the total. Infill and CBD are more evenly split. That's the breakdown of our portfolio. For performance details, I'll pass that to Brian or Ted to address.

Camille just to add on. And our CBDs are fundamentally different from a CBD of the gateways. So, our customers and their teammates who are commuting to our CBDs on the whole are not spending an hour on the train each way. So, our CBDs have a different kind of complex. I keep using that term. Now, as I mentioned earlier, those regions that do look more like a gateway in terms of longer commutes and kind of that hub-and-spoke from the burbs and then back out again, they are looking more like kind of the coastal gateways in terms of the return. But to Brendan's point, the CBD, infill, and suburban kind of nature of how we break out our markets; infill, that's basically a Buckhead in Atlanta if you know that, it has a solid residential base with incredible incomes and educational attainment. Then what happened is they added the shops and restaurants for that high net worth population to service. And then because they already live there and they play there, they wanted to work there. And so that's Buckhead, that's South Park Charlotte, that's North Hills here in Raleigh. So that is a little bit of a nuance between the CBD within the Highwoods Sunbelt portfolio and a CBD analog to the gateways of coastals.

Well, thanks everybody for joining the call today. We appreciate your interest in Highwoods and we look forward to talking to you all again soon. Thank you.

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