Good morning, and welcome to the Highwoods Properties earnings call. During the presentation, all participants will be in listen-only mode. Afterward, we will have a question and answer session. As a reminder, this conference is being recorded on Wednesday, April 26, 2023. I would now like to turn the conference over to Hannah True. Please proceed, Ms. True.

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 EBITDA. 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 and 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. During the first quarter, we once again had strong financial and operational results. Leasing activity was solid; same-property cash NOI growth was positive; FFO per share was healthy, with a sequential increase from the fourth quarter; our cash flows continue to strengthen; and we reinforced our already fortress balance sheet by bolstering our near-term liquidity. Our well-diversified, high-quality portfolio continues to outperform versus our markets and compared to other major metro areas throughout the U.S. As we stated last quarter, we believe that to be resilient, we must be diversified, which is a core component of our long-stated simple and straightforward goal of generating attractive and sustainable returns over the long term. With nearly 2,000 customers, our portfolio is located in eight core Sunbelt markets, with a sharp focus on the best business districts, which are both urban and suburban. Our largest market is Raleigh, with just over 20% of our total NOI. Our largest customer, Bank of America, is less than 4% of total revenues. Our largest industry, financial services, is less than 20% of our revenues. Our average lease size is under 15,000 square feet, and our median lease size is 5,000 square feet. Moreover, we believe there is a clear preference for quality when choosing office space, not just the high-quality buildings, but also high-quality locations and, of increasing importance, high-quality, financially stable landlords. Our portfolio is outperforming our submarkets by an average of 590 basis points on occupancy, and this outperformance increases to 750 basis points when compared to the U.S. average. We believe we are well positioned to increase this outperformance as customers and prospects focus even more intently on the quality of buildings and the financial health of the property and its owner. That being said, our portfolio is not immune to the cyclical headwinds that all office landlords face during an economic downturn. While tour activity remains encouraging, we do expect demand will be negatively impacted as customers and prospects become more cautious about their own businesses in the near term. We believe that high-quality rewards with high-quality portfolios will, more often than not, lead to a flight to quality. From a usage perspective, we are continually encouraged that our customers are increasingly prioritizing the office environment. While overall office utilization has not returned to pre-pandemic levels, customers in our markets from all industries are realizing the difficulties of replicating the culture, creativity, and productivity of their teams who are working remotely. Our goal is to provide our customers with an environment where their teams want to come into the office to be with their colleagues or, said another way, provide workplaces that are worth commuting to. Turning to the quarter, we delivered FFO of $0.98 per share. Same-property cash NOI was solid at plus 0.8%, despite the headwinds of lower occupancy due to a significant known customer move-out in Nashville, which has already been backfilled, but whose lease does not commence until early next year. At quarter end, occupancy was 89.6%. While overall leasing square footage volume declined modestly with 520,000 square feet of second-generation space, which includes 220,000 square feet of new leases, the number of leases signed remained stable at around 100 for the quarter. Each year, first quarter volume is typically lighter than subsequent quarters due to the rush of getting deals done before December 31. Notably, we signed net expansions of over 50,000 square feet, following a strong fourth quarter. The number of expansions outpaced contractions by a ratio of 5 to 1. Rent spreads were positive 15.9% on a GAAP basis and positive 2% on a cash basis. Average rental rates are 3% higher on a cash basis compared to one year ago. While it was a quiet quarter on the investment front, we are actively assembling the building blocks to further strengthen the resiliency and long-term growth of our portfolio. We've been busy prepping potential dispositions and have various non-core buildings and land in the market for possible sale. Our disposition outlook remains up to $400 million for the year, though the upper half of the range seems unlikely given the current capital markets environment. Over time, we are confident in our ability to recycle out of non-core assets, which will help replenish our dry powder for future investment opportunities. Our $518 million development pipeline continues to progress well, with all projects on time and on budget. We are 22% preleased, with at least two years until projected stabilization across all of our speculative projects. We have about $320 million left to fund, and we project NOI of approximately $40 million upon stabilization. Our next development delivery, 2827 Peachtree in Atlanta, is scheduled for completion in the third quarter, with a projected stabilization in Q1 2025, and is already 88% preleased with strong interest from additional prospects. Turning to our 2023 outlook, we now project full-year FFO of $3.68 to $3.82 per share, up $0.01 at the midpoint since our initial outlook in February. Same-property cash NOI is projected to be between minus 0.5% to positive 1.0%, up 25 basis points at the midpoint. All other line items are unchanged. Before I turn the call over to Brian, I would like to briefly reiterate our performance and outlook. Our diversified portfolio across the best urban and suburban areas in the Sunbelt continues to perform very well. We're prudently investing in our portfolio through our speculative suite program and Highwoodtizing projects that will drive additional portfolio outperformance. Our $518 million development pipeline will generate meaningful cash flow as it delivers and stabilizes. Our full-year 2023 outlook for same-property cash NOI and FFO per share are higher at their respective midpoints than originally forecasted. And our balance sheet is strong with a debt-to-EBITDA ratio of 5.9 times, with ample existing liquidity to fund the remainder of our development spending and all debt maturities until 2026. Brian?

Thanks, Ted, and good morning, everyone. Echoing Ted's thoughts, we are pleased with the performance of the portfolio this quarter and appreciate the hard work our teammates have put in to support our customers as they recruit, retain, and return their best talent to the office. We believe the Highwoods portfolio is tailored to capitalize on the flight to commute-worthy experiences in our open-for-business and growing Sunbelt markets. As Ted mentioned, we believe there are reasons to take a cautious approach regarding demand growth in the office space as we move through the rest of the year. Yet, our team continues to see healthy interest from small to medium-sized organizations and a clear preference toward quality, including locations, buildings, and owners. This dynamic plays directly to our strengths as our high-quality business districts, workplaces, and sponsorship is resulting in strong outperformance for our buildings. While our portfolio has historically operated at higher occupancy levels than our competition, this outperformance has increased by 490 basis points since the onset of the pandemic and is now nearly 6% higher than the markets where we operate. We believe this spread can continue to increase as customers and prospects focus even more on quality. While some larger customers are holding off on real estate decisions or using this opportunity to streamline operations, our core customers, small to medium-sized businesses, continue to grow and have consistently generated the highest office utilization in our portfolio. Further, we continue to see customers of all sizes increasing their average number of days in the office. To illustrate, our same-property parking revenues were up 19% in the first quarter compared to last year and up 9% sequentially from the fourth quarter. In the fourth quarter, we added 80,000 square feet of net expansions, and in this quarter, we added an additional 50,000 square feet. We view our small to medium-sized average customer as a strength within our portfolio, and they serve as a general proxy for the diversified Sunbelt economy. Turning to market activity for the quarter, CBRE reports that there are 2.3 million square feet of tenant requirements in the Tampa market, which posted positive net absorption for the quarter. Our team there led the quarter for leasing volume with 112,000 square feet of leases signed. Additionally, we are already seeing steady interest in our recently announced 143,000 square foot Midtown East development, slated for completion in 2025. This project is the only new construction underway in the Westshore or downtown business districts. With its neighboring project, Midtown West, now over 97% leased, we have benefited from Midtown becoming the premier Westshore address to live, work, and play. Atlanta proved to be our second most active market in terms of leasing activity during the quarter, with 81,000 square feet of leases signed. It should be noted, however, that this number does not include leases signed at our joint venture development, 2827 Peachtree, which is now 88% preleased, up from 75% at year-end and on schedule to be completed in the third quarter. Consistent with our own portfolio and experience, JLL noted that the majority of activity in Atlanta was by tenants less than 10,000 square feet. Moving to North Carolina, which was again named Business Facilities' most recent Best State for Business and where we have approximately 35% of our NOI in the Raleigh and Charlotte markets, we have seen strong activity at 650 South Triumph, our 367,000 square foot asset in Charlotte, which has leased up to 88%, up from 79% when we acquired the building last August. We have also begun construction on our boutique build-to-suit for United Bank in Charlotte South Park business district. In Raleigh, our team signed leases for 75,000 square feet, and we ended the quarter with occupancy of 90.4% across our 6.3 million square foot portfolio. Our Glenlake 3 mixed-use development is on track to be delivered on time and within budget by the third quarter of this year. The work environment we are creating for our customers is competitive currency as they recruit, retain, and bring talent back to the office. They are telling us this through words and actions based on our sustained results throughout the pandemic and now into 2023. We believe our ability to provide the highest quality workplace experience has Highwoods well positioned for the long term. These experiences are delivered personally by our exceptional Highwoods teammates who manage, lease, and maintain our buildings themselves, and we greatly appreciate their hard work. Brendan?

Thanks, Brian. In the first quarter, we delivered net income of $43.8 million or $0.42 per share and FFO of $105.7 million or $0.98 per share. There were no significant unusual items in the quarter. We had a small term fee and an even smaller land sale gain, both of which were anticipated in our original 2023 outlook that we published in early February. Rolling forward from last quarter's FFO, we posted an increase of $0.02 per share. Higher NOI contributed $0.05, driven by higher rental revenue, improving parking income, and higher operating margins. Higher unconsolidated joint venture income contributed $0.02, primarily driven by the full quarter contribution of McKinney and Olive and also included the deconsolidation of our 50% interest in the Markel joint venture. Other income and miscellaneous items added $0.01, totaling $0.08 of upside, which was partially offset by $0.03 of higher general and administrative expenses, mostly due to the accounting impact of our annual long-term equity incentive grants, which are customarily made in the first quarter each year, and $0.03 of higher interest expense. The combination of these items netted the $0.02 increase in core FFO from the fourth quarter of 2022 to the first quarter of 2023. Turning to our balance sheet, we ended the quarter with a net debt-to-EBITDA ratio of 5.9 times, flat from year-end, even though we continue to fund our development pipeline and had no meaningful disposition proceeds. We further strengthened our liquidity by obtaining a $200 million five-year interest-only mortgage with a 5.69% fixed rate secured by Bank of America Tower in Charlotte. This execution highlights the benefit of our low-levered, largely unsecured balance sheet, combined with our high-quality portfolio. We were able to pivot to the mortgage market where pricing is currently more efficient and attractive than the unsecured market, yet still maintain a largely unencumbered asset pool and strong credit metrics for our bondholders and banking partners. At quarter end, we had $685 million of existing liquidity, which increased to $725 million following the redemption of our preferred equity investment in the McKinney and Olive joint venture. We have only $329 million remaining to fund on our development pipeline and no consolidated debt maturities until the fourth quarter of 2025. We have ample liquidity to fund all of our capital needs, including development spending and debt maturities through the expiration of our line of credit in March 2026 without the need to raise any additional capital or receive any disposition proceeds. To be clear, we do expect disposition proceeds as we progress through this year. We plan to be opportunistic about raising additional debt capital later this year or next, but our liquidity position affords us the ability to be patient. In addition, our investment-grade credit ratings were recently affirmed by both of our rating agencies with stable outlooks. As Ted mentioned, we've updated our outlook with an increase to the midpoint of same-property cash NOI and FFO. Our revised FFO range is $3.68 to $3.82 per share, up $0.01 at the midpoint. The primary changes from our prior outlook at the midpoint of the range include a $0.02 increase from higher anticipated NOI attributable to stronger leasing, better parking revenues, and lower operating expenses, partially offset by a $0.01 reduction from the net impact of the $40 million redemption of our MNO preferred equity investment. As mentioned earlier, we started with a strong first quarter. A couple of items to keep in mind going forward. First, our operating margin in Q1 was higher than originally anticipated, largely due to lower operating expenses. Some of the reduced expense items are expected to be incurred later in the year, and therefore, we project operating margins will be 100 to 150 basis points lower for the full year compared to Q1. Second, we will incur the full quarterly impact of two large customer move-outs that occurred in Q1, most of which has been backfilled but will not commence until next year. Lastly, with the redemption of the preferred equity investment in the M&O joint venture, which had been paying us monthly distributions at a rate of SOFR plus 350 basis points, other income will be lower. We have included up to $400 million of potential dispositions in our outlook. While the upper half of the range may be challenging to reach this year given the current state of the investment sales market, we are observing strong interest in smaller buildings and some of our land parcels that are better suited to non-office development. We expect any disposition proceeds would bolster our liquidity and further improve our balance sheet metrics. Finally, as we've mentioned many times over the past several years, our cash flows continue to strengthen. This quarter is an excellent example as our cash available after distribution was $20 million, even after absorbing a full quarter's impact from higher interest rates. The ability to recycle capital back into the business, whether into development, acquisitions, or Highwoodtizing projects, is a major reason why we've consistently grown earnings year after year on a leverage-neutral basis, while simultaneously upgrading our portfolio quality, improving our long-term growth rate, and increasing our resiliency. Operator, we are now ready for questions.

Our first question comes from the line of Blaine Heck at Wells Fargo.

Can you talk a little bit more about potential sales this year? It seems like you've pivoted from targeting the large sales in Pittsburgh or elsewhere to focusing more on smaller, bite-sized assets. Can you give us some color around the timing and size of those potential sales? And just in general, what are the characteristics in an office property? What is the return profile that prospective investors are looking for in an office transaction these days?

In terms of the disposition, you're right; we have shifted to smaller deals. That's what the investor pool is looking for right now. There's plenty of buyers to make a market, we think, in that $20 million asset range. We've actually picked buyers on all three of the buildings that we have out in the market. We have a couple of land transactions as well. Two of the three buildings are single-tenant, single-customer with good credit and pretty good weighted-average lease terms. One is a multi-customer building, with buyers; one is institutional and two are private. So it's a cross-section there. The bidding pool was great to see. It wasn't as deep as it was a couple of years ago, but we have plenty of buyers to make a market. They are all in the due diligence process, and I'm optimistic we'll get something over the finish line and be prepared to talk about pricing at the earnings call in July. Regarding the land, we have a few parcels in the market, and buyers are currently going through due diligence. I'm hopeful that we will finalize at least a land transaction or two, maybe just one, by the next call. Overall, we're feeling good about getting some disposition proceeds in the door.

Second question, can you discuss leasing activity on the development pipeline and whether you've seen much of a change in demand for those projects recently, especially for those that are delivering in the near term, like Granite Park 6 and Glenlake 3?

Yes, if you don't mind, I'll address all of them briefly. We mentioned in the prepared remarks 2827 Peachtree, which moved from 75% to just shy of 88% this quarter. We're progressing well and we feel great about that one. The next project, also in the third quarter, just a month or two behind 2827, is Glenlake 3 in Raleigh. This one is about 213,000 square feet, which includes some retail we are adding to the overall Glenlake Park. We have put out a lot of proposals, and activity has increased in the last 90 days with several tours occurring. While we do not currently have strong prospects, we are encouraged by the increased activity there. Granite Park 6 in Plano, which delivers in the fourth quarter, has also seen increased tour activity this year. Thus far, in 2023, we've put out 585,000 square feet of proposals. We've had 60,000 square feet of new proposals in the last 30 days. The decision-making for all the major prospects is just slow. Activity is out there, and we are submitting proposals, but the decision-making has been slow. 23 Springs delivers in Q1 2025, and tour activity has been very good there, with 560,000 square feet of proposals so far this year, including 160,000 in just the last 30 days. I would say a couple of those prospects seem to be moving along quicker in their decision-making. Lastly, we just started construction on Midtown East this first quarter, and we have already seen some pretty good early interest with two or three inquiries already for proposals. All in all, I would love to see a little more activity from Raleigh on the development, but overall, it appears that activity is picking up.

So it sounds like the activity is a little better at 23 Springs and Granite Park 6. What's the difference there?

It's about the same number of proposals; it's just that the decision makers at 23 Springs are in a position to make those decisions faster. The leasing decision has been a bit slower for Granite Park. It is not necessarily anything negative about Uptown as a submarket, but it is just the specific prospects we are working with. They might have a shorter timeline or other factors influencing their decisions.

Next question from the line of Rob Stevenson with Janney.

Brian, I think you spoke about it a little in your prepared comments, but can you expand on the renewals in the first quarter? What do you have under discussion currently for the remainder of '23? Specifically, I'm trying to gauge the relative breakdown of the amount of tenants pursuing expansions versus those looking to contract, as well as those looking to maintain their same footprint. It seems like the market narrative is that employers will reduce their office space by 10% to 20% on renewals. What are you seeing within your portfolio?

Thanks, Rob, for the question. Yes, as you mentioned and as I said in the prepared remarks, for this past quarter, most of the activity was from our small- and medium-sized bread-and-butter customers. They expanded versus contracted at a rate of 5:1 for the quarter. Just to provide some color on what we have seen for this quarter, we're off to a good start. We're feeling very enthusiastic about how this quarter will turn out based on everything that's gone on, either to lease or have negotiated terms. My guidance is that we will probably remain consistent in our expansion-contraction ratio with more volume this quarter. The larger users have mentioned either delaying or streamlining and rightsizing their space. I truly believe that it's less about work-from-home headwinds but more about how we intend to utilize our space going forward. Overall, companies are recognizing that the workplace is essential to their operations, and they are leaning in to make it a differentiating factor regarding their talent.

And Ted, how are you and the Board considering unlocking value now, given your comments that dispositions at the upper end of the range appear unlikely in the current environment? I'm thinking of this in the context of your stock price, which has recently dipped below $20 for the first time since the global financial crisis, which seems to contradict your performance and guidance for '23.

Yes. Look, obviously, we discuss this a lot. I think that all office REITs are facing similar challenges. Our view is to keep our heads down and continue to operate effectively. We cannot control our stock price in challenging times. The perception of the office business is tough, and it may not align with what we're experiencing on the ground. Historically, during any recession, we often see an increase in vacancies, sublease spaces, and other similar challenges. We are focused on execution and believe that there will be great opportunities over time. Coming out of the Great Financial Crisis was when we acquired many of the best buildings in our portfolio. I think we will encounter similar opportunities this time around. We just need to remain patient. While being patient, we must execute as best we can, both on leasing and dispositions, while establishing some dry powder to take advantage of future opportunities. So we will continue to follow our established practices.

And then lastly, not to leave Brendan out. Brendan, is the second quarter going to be the lowest FFO per share quarter in '23, given everything you know at this time?

Well, with that caveat, I would say that is probably likely. Both second and third quarters are expected to be lower based on everything we know right now. Occupancy is likely to remain flat in the next couple of quarters, and then we expect it to rebound in the fourth quarter. Given we had activity move out in early March, we faced a couple of substantial customer departures in mid-January, which contributed to Q1 results and will not contribute in the second and third quarters because the backfill will not commence until next year. We also anticipate that operating margins will be lower for the remainder of the year. So yes, that likely means the second and third quarters will be lower.

Next question from the line of Camille Bonnel with Bank of America.

I know your opening remarks noted that the first quarter is typically lighter from a leasing perspective. However, compared to historic averages, the majority of the slowdown seems to be related to renewals. Can you comment on how the slowdown compares to your expectations for retention? Any insight on what tenants are saying as reasons for not renewing their leases would be appreciated.

Camille, it's Brendan. I'll start and then pass it along to Brian and Ted for additional insight. I would say the low level of renewals and retention in the quarter was largely anticipated, given the activity move-out we discussed for a long time. That accounted for 263,000 square feet, which was known in advance. We also had the CDC, which represented 116,000 square feet. Combined, there were 380,000 square feet of anticipated non-renewals. Additionally, we proactively took back 77,000 square feet from a user in Raleigh to extend their remaining leases. We have since substantially backfilled the 77,000 square feet that we reclaimed. All of these factors contributed to reduced renewal leasing, but it was all known and very much in line with expectations.

The only thing I would add is that in any economic downturn, companies tend to contract their space. They consolidate operations if they have multiple offices in a submarket. We've seen companies exit in the current climate due to hybrid work and reconfiguration. Our retention rates are impacted by the economic situation and other factors, such as consolidation of offices and company closures. This situation is quite similar to previous downturns, though hybrid work adds an additional challenge.

To follow up on that point, I think you noted that excluding the first quarter move-outs, you're expecting retention for the remainder of the year to remain around 50%. Is there any adjustment to this assumption for the second half of the year?

No, I think that is aligned with our expectations. There is no change to our outlook for the year. We still expect year-end occupancy to be between 89% and 91%. I would say we're feeling a bit better about the business overall now, as indicated by our increase in same-property NOI growth outlook. Net-net, we likely feel a little better sitting here in late April compared to our earlier outlook from early February.

I know you've mentioned the flexibility around timing to execute on the Pittsburgh disposal and the possibility that the market could shift significantly when you do. Historically, you've been quite successful in exiting markets while growing FFO. How do you think about Highwood's ability to maintain FFO growth in this challenging market environment and the potential dilution from this sale?

Yes. Our track record shows that we have had 12 consecutive years of FFO growth, which is quite rare. We recognize that the current environment is tougher. Our perspective is that we will wait for the right time for Pittsburgh; there's no urgent rush to sell. When we do, given the capital market conditions, we anticipate some FFO dilution. However, our development pipeline should deliver stable growth over the next couple of years. That will help us, as we expect new projects will contribute to NOI growth when stabilized. One of the strengths of Highwoods is our development value creation platform, which can yield solid NOI growth with these new deliveries.

Our next question is from the line of Michael Griffin with Citi.

As much as I love the office and was in Atlanta this week, my question is about State of Georgia. I noticed that you will be taking about 60% less space on that $290,000 lease at 1800 Century. I'm curious about how you're thinking about backfilling that and what other tenant needs may arise.

Regarding the Department of Revenue, we included the notice in the 10-Q. That asset is a non-core asset for us. When we received the RFP less than two weeks ago, we wanted to acknowledge it due to its significance. They've occupied that building for over 20 years, and not long ago, we thought they would renew. We're currently exploring options to keep them in that building or possibly transition them to other locations within our portfolio. It's still early in the process, and we'll be competing against other options they are considering. I am hopeful, but we will see if we can retain them as it will be competitive. As for another significant tenant, we have 169,000 square feet that expires in September 2024. They moved out late last year to another location. We have a space available, but they are still paying rent on it. I've had two large tours in the last 45 days, and they have subleased about 43,000 square feet. Maintaining a good position here will be competitive, but it is great, functional space.

On Tampa, can you discuss the attractiveness of the market? I read somewhere that Tampa has experienced similar population growth as Little Rock over the last decade. I'm not suggesting that Little Rock is undesirable, but why is Tampa such an attractive market?

We've been in Tampa since the '90s, and it has been a strong performer for us over the long term. If you look at our assets there, they are primarily located in Westshore and the CBD, both of which are the top business districts. When you specifically evaluate these assets, Midtown East is part of a 22-acre Midtown Tampa mixed-use development, which is unique for the area. The success we experienced at Midtown West gives us strong confidence. In 2019, right before the pandemic, we initiated the development of a 150,000 square-foot office building entirely on speculation. During the pandemic, we completed it on schedule and successfully leased it out, surpassing our pro forma rental rates. The demand we observed for mixed-use projects in Tampa brought us conviction to go forward with Midtown East. Midtown East is a larger building, about 438,000 square feet, where Tampa Electric is purchasing a condominium interest. There are about 140,000 square feet of office left to lease up. We strongly believe in the benefits of this vibrant mixed-use environment for attracting and retaining top talent.

Michael, it's Brian. I'd like to add that our various markets have different stages of development. Many of the other locations are further along in their evolution. Recently, Tampa has changed its perception. Years ago, it was seen as a back-office location, partially due to the defense connectivity with CENTCOM headquarters. Currently, during the pandemic, we've seen a significant shift as companies relocate from the Northeast to Florida, specifically to Tampa. This trend puts us in a favorable situation. In contrast, while Little Rock may have seen similar growth, Tampa offers a vibrant landscape attracting quality customers. Billions of dollars are being invested to expand the airport, and new investments are flowing into Downtown through the Water Street development. We believe that Tampa is solidifying its status alongside Raleigh, Nashville, Austin, and Charlotte.

Our next question is from the line of Ronald Kamdem with Morgan Stanley.

Could you quantify the pipeline activity? Additionally, can you provide qualitative comments on the tech and life sciences hubs in your markets? I'm interested in what you're observing there.

We have low exposure to tech in general. As we look ahead to the second quarter, we anticipate strong performance from both Nashville and Raleigh this quarter. We expect Richmond to provide positive contributions as well. Tampa led our performance this quarter with 112,000 square feet leased. There is ongoing momentum there. Regarding the fundamental economics, people may wonder if it's more expensive to close deals these days. While the market remains competitive, we believe we have the potential to win deals with the term and credit we prefer. I often joke with our residential leasing team that I'm more optimistic about renewing tenants already in the portfolio than we are about acquiring new tenants.

Relating to 1800 Century Boulevard as mentioned in the 10-Q, can you provide insights on any idiosyncratic factors that might have influenced that situation? Were there unique aspects of their operation that you saw coming?

Yes, regarding the Department of Revenue, they have historically been slower in returning to the office like many government entities. However, they have occupied that space for a long time, and it is aging and needs to be updated. Hybrid work is also influencing how organizations view their space utilization. Companies often reevaluate their locations in times of economic change, like we are experiencing now. Addressing our retention ratios is critical, as our clients are also looking to optimize their office space.

Yes, we were pleased with the success of the mortgage executed at Bank of America Tower. In general, we lean towards being an unsecured borrower, and mortgages aren’t a primary focus for us. That said, our largely unsecured asset pool and high-quality portfolio give us the option to consider mortgages if advantageous. Overall, we're in a solid liquidity position, enabling us to meet development pipeline needs without needing to raise capital. Still, it remains an option we could explore.

Next question from the line of Dylan Burzinski with Green Street.

Could you share your expectations for net effective rents through the remainder of 2023? Leasing costs have likely continued to be high, recent trends have shown base rents holding up well. Should we expect pressure on base rents in 2023?

Dylan, I think we could see some pressure. Economic slowdowns, similar to other office downturns, bring rising vacancy rates and increased sublease spaces. The challenges we face include cost pressures as well. We hope to see costs normalize, but so far, TIs remain high, and we are seeing an increase in the amount of free rent. While some markets may hold steady, overall, entering this slowdown, I wouldn’t be surprised to see downward pressure on net effective rents.

Dylan, I just want to add. We've done a number of speculative suite deals this quarter. The average size of leases was around 5,000 square feet. Initially, these speculative deals tend to have lower net effective rents due to upfront capital spent. But as those leases are relet, the net effectives are much higher. If we adjust for the speculative suite deals, the net effective looks more comparable to previous quarters. Overall, the headline net effective has been dragged down by those initial leases.

As for face rates, we see that market face rates may drop due to new developments entering the market. When high-end developments lease, they come out of the larger pool; thus, market face rates could decrease due to that dynamic.

Could you share the underwritten LTV at Bank of America Tower in Charlotte?

It depends on the viewpoint, but our lender probably assessed a more conservative value than we anticipate. Let's say roughly 50% is a reasonable benchmark for the LTV.

Next question from Peter Abramowitz with Jefferies.

Ted mentioned possible acquisition opportunities down the road. While there's nothing in your guidance currently, could you provide insight into your targeted returns for those? Understanding that market conditions are unclear, what are your return hurdles if you begin to pursue them?

Yes, as I mentioned, we're not actively seeking acquisitions at this time. We're focusing on dispositions and replenishing our dry powder. The benchmark for acquisitions has risen. Consequently, we have not engaged in discussions surrounding cost of capital since we haven’t finalized our own acquisition parameters yet. We are currently monitoring some assets that could provide valuable pricing insights if they trade in the future, but for now, we're holding off.

And we have no further questions on the phone line.

I want to thank everyone for being on the call today. We appreciate your interest in Highwoods, and we look forward to seeing many of you at NAREIT in June. Thanks so much.

And that concludes today's call. We thank you for your participation and ask you to please disconnect your lines.