Hello, everyone, and welcome to the Highwoods Properties Fourth Quarter 2023 Earnings Call. My name is Pruno, and I'll be operating your call today. Operator Instructions. I will now hand over to your host, 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 a link 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. Before I talk about our solid financial and operating results for 2023, let me start by first outlining our strategic priorities for the next several years. First, we will continue to improve the quality of our portfolio. We are laser-focused on owning a portfolio that is resilient throughout all business cycles, well-positioned to attract, retain and return our customers' most valuable resource, their employees, to their workplaces. We do this by developing best-in-class properties, acquiring high-quality assets with attractive risk-adjusted returns, redeveloping and repositioning well-located properties where substantial upside exists, and selling buildings that no longer meet our criteria. Second, we are focused on solidifying our rent roll in driving future occupancy. This means proactively renewing customers as early and prudently as possible and backfilling pockets of vacancy within the portfolio. We continue to be bullish on the long-term demographics of the Sunbelt. Simply put, we are in the best markets and best business districts to create long-term value for our shareholders. Third, we are laying the groundwork for future investment opportunities. We believe this cycle will present us with opportunities to create shareholder value by acquiring high-quality assets in the best business districts of high-growth markets. We will be patient, and we will be ready. And fourth, we will continue to maintain a best-in-class balance sheet. As demonstrated over the past 90 days, having ample liquidity and access to multiple sources of capital throughout the cycle is an important differentiator for us. We made meaningful progress in all of these strategic priorities during 2023. We sold over $100 million of non-core properties, including land, and made solid progress on our development pipeline with the completion of 2827 Peachtree, Granite Park Six, and GlenLake III. We expect these developments will provide meaningful growth in future years as they stabilize. Further, we completed significant highwoodtizing projects on existing buildings in Nashville and Raleigh, where we're already generating higher rental rates and increased leasing activity. We also made progress solidifying our future rent roll. We remain focused on our larger near-term expirations, and Brian will provide more detail shortly. We're pleased with the traction we've had in Atlanta, Nashville, and Tampa. Given the known move-outs that we've discussed for some time, occupancy is likely to dip in late 2024 and early 2025. However, we're encouraged by the activity we've seen throughout the portfolio, which has already translated into significant lease signings since the start of 2024. It's early, and while we don't expect a lot of transaction activity in the near term, we are setting the stage for future investments through exploratory discussions with owners and lenders of attractive properties in our markets. This is similar to the playbook we deployed in the years following the Great Financial Crisis. We further strengthened our balance sheet by raising nearly $600 million of debt capital during 2023. Plus, just a few weeks ago, we extended the term of our $750 million credit facility into 2029, with no change to the size or the borrowing spread. We now have over $900 million of current liquidity and no consolidated debt maturities until May 2026. We are confident in the long-term outlook for our markets and business districts based on the limited new supply expected to be added over the next few years. The current supply pipeline in our markets is half of what it was just a few years ago, with most of these developments projected to deliver over the next four quarters. By this time next year, minimal new product is expected to be under construction. This tightening supply picture further adds to our confidence as we focus on leasing up high-quality blocks that are or will become available in our buildings. Our well-located and high-quality portfolio, reputation as a best-in-class operator, and strong financial sponsorship position us to continue to gain market share. Turning to our results, we delivered FFO of $0.99 per share in the fourth quarter, with a full-year 2023 total of $3.83 per share. Both the quarter and full-year results included unusual items that net out to $0.08 of higher FFO. Excluding these items, our core 2023 FFO was $3.75 per share, $0.01 above the midpoint of our initial outlook. We are pleased with these financial results, given asset sales and the unanticipated rise in interest rates during the year, neither of which were factored into our initial outlook. We expect to be a net seller again in 2024, with $75 million to $200 million of non-core dispositions. Similar to 2023, the volume and timing of dispositions will depend on how conditions in the investment sales market play out. We do have about $75 million of properties under contract and expect those sales to close in the first half of the year. While we're actively building the foundation for future investment opportunities, we don't have any acquisitions included in our 2024 outlook. Our initial 2024 FFO outlook is $3.46 to $3.64 per share, and same-property cash NOI growth is projected to be positive 1% at the midpoint. In addition, we have backfilled a significant amount of larger known move-outs that impacted 2023 NOI and occupancy. While these backfills won't meaningfully contribute to 2024, they will drive NOI in future years. We're also seeing good activity on backfilling some of the larger known move-outs later in 2024 and early 2025. While there are still continuing headwinds in the office sector, we're optimistic about the future. First, we have significant organic growth potential within our current operating portfolio with high-quality pockets of vacancy where we're seeing solid interest from prospects. Second, our $518 million development pipeline will provide meaningful upside as the deliveries stabilize in the next few years. Third, our balance sheet is in excellent shape, with ample liquidity and no need to raise capital for the next couple of years. Finally, our cash flows remain strong, even as we absorb headwinds from higher interest rates and investing highwoodtizing capital to generate higher returns on our existing portfolio. To wrap up, we're optimistic not only because of our markets and our portfolio but also because of our engaged, hard-working, and talented teammates who drive our success day after day. I would like to thank the entire Highwoods team for their commitment and tireless dedication. It is their effort that has positioned us for success for many years to come. Brian?

Thanks, Ted, and good morning, everyone. I'd like to briefly hit our fourth quarter performance, macro trends, and then drill down on our markets where we're off to a strong start for 2024 and where we are making progress towards backfilling our upcoming vacancies. In Q4 of 2023, our leasing team signed 698,000 square feet with an average lease term of 6.6 years. Atlanta, Nashville, and Raleigh led the way with two-thirds of the quarter's volume. Charlotte and Orlando had the highest occupancies at 95.6% and 93.5%, respectively. In addition, we signed a 105,000 square foot first-generation lease at 2023 Springs, our joint venture development in Uptown Dallas. While many of our leasing metrics reflect the downward pressure of the current market, we're encouraged by our portfolio's occupancy outperformance in comparison to our business districts by over 640 basis points. With the fourth quarter's average rent bumps at 2.7%, we believe we have meaningful rent growth embedded in the quarter's results. The quality of our portfolio, our sponsorship, and the commute-worthy lifestyle office experience we provide our customers gives us a clear edge in today's leasing environment. We're off to a strong start to 2024, having already signed over 500,000 square feet of second-generation leases, including 150,000 square feet of new leases and 52,000 square feet of expansions since January 1. We continue to see return-to-work programs and mandates raise the tide on physical occupancy with the recognition that Fridays will be the latest days in the office, just as they were before the pandemic. This also aligns with the fact that our customers are telling us, one-on-one, and via their lease activity that they value the physical workplace, where their best and brightest can collaborate and solve problems, where talent can be onboarded and mentored, and where a company's culture can thrive. This flight to quality is a flight for quality. Quality companies with quality jobs, not easily exported to home today or to artificial intelligence tomorrow. From a market perspective, let's start in Atlanta, where we had the most leasing activity in the fourth quarter with 172,000 square feet signed. While the overall market saw another quarter of negative absorption, Cushman and Wakefield noted Buckhead broke from this trend with 240,000 square feet of positive absorption. With no new development underway, our four-building, 2-million square foot Buckhead collection of lifestyle office buildings is set to benefit from our upcoming highwoodtizing project there. The team has backfilled 50,000 square feet and has more than 350,000 square feet of active prospects for the remainder of Novelis' Q3 2024 expiration. Moving to Nashville, where we own 5.1 million square feet in Nashville’s four business district markets, our team signed 148,000 square feet in the quarter. Over the same period, Cushman noted that Nashville posted 170,000 square feet of positive absorption, ranking as one of five markets in the nation to post greater than 150,000 square feet of absorption for the quarter. Last year, we highwoodtized roughly 1 million square feet in our Brentwood and Franklin business districts, where we signed more than half of Nashville's deals for the quarter and where these commute-worthy workplaces are attracting customers. This supports our thesis that, all things being equal, an exceptional experience trumps a trophy tower, and that a lifestyle office building is more about the lifestyle than the building itself. You may recall that we shared an update last quarter on the five-story, 264,000 square foot Cool Springs building, formerly occupied by Tivity and the substantial backfill of that space. We have modified the lease signed in the third quarter of 2022 from 223,000 square feet to 110,000 square feet. Under the modified terms of the lease, 55,000 square feet will commence in the fourth quarter of 2024 and the remaining 55,000 square feet in the fourth quarter of 2025. Free rent periods have been eliminated, Highwoods' tenant improvement commitment has been reduced, and the per square foot rental rate has been increased. With the aforementioned highwoodtizing of these assets, we have significant interest in the property and our other adjacent Cool Springs assets. In Downtown Nashville, we will begin the highwoodtizing of our 520,000 square foot Pinnacle tower later this year in anticipation of Bass, Berry & Sims' known move-out in January of 2025. In the heart of Nashville, this well-located asset is next door to the newly opened Four Seasons Hotel & Residences and is directly connected to the only pedestrian bridge spanning the Cumberland River, joining the new $2 billion enclosed NFL stadium starting construction later this year. We already have several multi-floor prospects lined up a year in advance of Bass Berry's expiration. A quick update on our non-core Pittsburgh assets where we expect a 317,000 square foot customer at EQT Plaza to downsize in the fourth quarter of 2024. We backfilled the full floor and have prospects for additional space. I'd like to finish in the Sunshine State, where Cushman noted Tampa ended 2023 number three in the nation for leasing as a percentage of inventory. Our Tampa team has been busy at Tampa Bay Park, our approximately 1 million square foot collection of assets in Westshore by addressing prior move-outs, 120,000 square feet in aggregate across the park with 95,000 square feet of backfill leasing that has yet to commence. In conclusion, while we expect 2024 to bring many of the same challenges we faced over the past several years, we are encouraged by the level of activity we are seeing throughout our business districts. Competitive development pipelines are at record lows, and we believe our resilient portfolio, ongoing highwoodtizing efforts, strong balance sheet, and sizable land bank will enable us to capitalize on opportunities in our markets as they arise. Brendan?

Thanks, Brian. In the fourth quarter, we delivered net income of $38 million or $0.36 per share and FFO of $106.7 million or $0.99 per share. As Ted mentioned, there were unusual items in the quarter that netted to $0.08 per share. None of these items were included in our updated FFO outlook provided in October. Excluding these items, FFO per share was $0.91 in the fourth quarter and $3.75 for the year, $0.01 above our initial 2023 FFO outlook provided last February. We are pleased with these full year results as $0.04 of upside, mostly from higher NOI, overcame the $0.03 we lost from the combination of higher interest rates, asset sales, and the earlier-than-expected repayment of our preferred investment in M&O. Just a few details on the unusual items. The predevelopment costs written off in the fourth quarter were $3.6 million. $2.6 million of this shows up in G&A, while $1 million shows up in the form of reduced income from unconsolidated affiliates as it was attributable to a joint venture. The remaining unusual items such as land sale gains, debt extinguishment costs, and the write-off of straight-line rents due to moving a customer to cash basis accounting are reflected as you would expect on the income statement. During 2023, we further strengthened our balance sheet by putting out our maturity ladder, which puts us in excellent shape for the next several years. During the fourth quarter, we raised $350 million of 10-year bonds with strong support from a broad group of fixed-income investors. We also obtained a $45 million five-year secured loan at Midtown West, a consolidated joint venture property in Tampa, where we own an 80% interest. We also obtained a $200 million secured loan in March. In total, we raised almost $600 million of debt capital during the year. After year-end, we recast our $750 million credit facility with no change to our borrowing capacity or credit spread. In the past 12 months, we've accessed the bond market, the mortgage market, and the bank market for over $1.3 billion of total capital. We now have no consolidated debt maturities until May 2026 and over $900 million of available liquidity, along with less than $250 million of capital left to complete our development pipeline. Our strong balance sheet with ample liquidity, combined with our high-quality portfolio in the best business districts of high-growth Sunbelt markets, is a significant reason why Moody's affirmed our Baa2 credit rating with a stable outlook just last week. I'd like to spend some time highlighting our cash flow trajectory. In 2023, we once again had healthy cash flows, demonstrating the resiliency of our portfolio and platform. Digging a little deeper, an even clearer picture emerges. First, as you know from prior calls, we had two sizable properties in 2023 that were vacant nearly the entire year: Cool Springs V and 2500 Century Center. These have now been substantially re-leased with additional solid interest in the balance of the space, but they generated negative NOI during 2023. Because our practice has long been not to take in-service properties available for lease out of our operating or same-store portfolio regardless of occupancy, these two empty buildings negatively impacted FFO and cash flow. Second, we had above-average tenant improvement spend during 2023, as we funded committed capital for the high volume of new leases signed in 2022. Third, we invested heavily in renovation and repositioning capital to highwoodtize existing properties during the year. Even with these three factors, we still generated healthy cash flows that provided positive dividend coverage. We believe the resiliency of our cash flows should give our shareholders confidence in our long-term outlook. As Ted mentioned, our FFO outlook for 2024 is $3.46 to $3.64 per share. You'll also note that we are now providing our full year outlook for average occupancy rather than a single date year-end projection as we have done in prior years. We think average occupancy should provide better insight into our overall outlook for the year. Same-property cash NOI growth is projected to be flat to up 2%. This includes the full headwinds of the Cool Springs Century Center and Tampa Bay Park vacancies we've detailed as the backfill customers do not begin to take occupancy until later this year or early 2025, as well as the known pending vacancies at two Alliance Centers in Atlanta and EQT Plaza in Pittsburgh in the second half of the year. While 2024 share FFO is projected to be down compared to the core results in 2023, the decline is primarily attributable to higher financing costs associated with our capital raising activities in the fourth quarter of 2023 and the modification of the lease and accounting treatment related to our backfill customer at Cool Springs V in Nashville. These items have a combined dilutive impact of approximately $0.15 per share split roughly evenly between the two. We expect Cool Springs V will generate negative NOI in 2024. However, based on the modified lease we've discussed and the solid interest we're seeing from prospects, we believe Cool Springs V will be a significant driver of growth in future years. This is also the case in Tampa and Atlanta based on signed leases that have not yet commenced. In addition, we have meaningful future growth potential from our development pipeline. We delivered three properties in late 2023—28.27 Peachtree, Granite Park 6, and Glenlake Three. On a combined basis, these properties are projected to be roughly neutral to our 2024 FFO, as we will stop capitalizing interest later this year. However, we have healthy prospect activity for these properties, which should provide growth to NOI, FFO, and cash flow in future years. In summary, our balance sheet is in excellent shape, our high-quality Sunbelt portfolio is located in the best business districts where talent wants to be, and our team is cycle-tested and optimistic about future value creation. Operator, we are now ready for questions.

Thank you. Operator Instructions. We do have our first question registered; it comes from Blaine Heck from Wells Fargo. Blaine, your line is now open.

Okay. Great. Good morning. So it sounds like leasing has picked up, but some context would be great. So I guess, can you talk about the overall leasing pipeline that you guys are working on right now? How the size of that pipeline or activity levels compared with what you saw last year? Maybe what the mix is between new and renewal leases and whether the composition has changed at all from a tenant size or industry perspective?

Good morning, Blaine. Sure, it's Ted. I'll start, and maybe Brian can add to it. Look, obviously, we are pleased with our leasing in the fourth quarter just shy of 700,000 square feet. We did 100 deals, which is sort of right on par with our historical average. Forty-four of those were new leases. We also had seven new-to-market customers, primarily companies that were opening up small regional offices, 2,000 or 3,000 square feet. So no big inbound relocations. But look, it's been small. It's the same trend we've seen in the last few years with smaller companies, but a couple of trends we're seeing. The activity is pretty evenly divided among our markets. But a couple of the trends we're observing is there's really been a growing gap between the 'haves' and 'have-nots' for office owners. We're hearing from brokers that some companies want even really nice buildings, ones that have low debt and certainly not near-term maturities, sort of a binary qualifier for some buildings. The brokers, as I think I've talked about in prior calls, are doing a really good job this cycle of understanding the capital stack for office buildings. So I think given the amount of debt maturities that are coming up, this really plays to our strength and we're actively talking to brokers. We've got a highly unencumbered portfolio. We don't have a lot of single asset secured loans. So we're taking advantage of the situation. I think we've been able to capture more than our fair share over the last couple of quarters. As we stated in our prepared remarks, we're off to a great start this quarter. Another trend is that we are seeing larger deals starting to come back. While the last year has been mainly smaller deals, the 25 to 50, we're seeing a lot more of those. Another trend is the smaller companies are the ones that are growing, and the larger companies are the ones that are shrinking. We're starting to see more of that. We had, I think, 13 expansions, as I mentioned earlier. Companies are also willing to sign longer terms—they don't want to come out of pocket for tenant improvements. So they'll give term to get additional TI. The final trend is the flight to quality; certainly, that's real. It's quality buildings, quality amenities, and certainly quality ownership. So I hope that answered your question.

Yeah, that's very helpful color there, Ted. I appreciate that. So just switching gears for my second question. Can you just talk about your appetite for investment at this point? Are you guys actively pursuing any opportunities on the acquisition side? Or would you say you're currently more focused on the development lease-up and leasing in the operating portfolio, making sure some of the backfill activity gets done?

Yes. Look, as you know, we always look at everything that's out there. We certainly answer the phone when we get inbound calls from folks as well. We also stay close to lenders. So, as we said, we're actively watching the market, trying to see where the data points are for trades. I'll talk about one in a second. But we don't have anything imminently on our radar; there's a lot on our wish list that we're just monitoring right now. I'd say early discussions, but nothing imminent for sure. At the same time, we are laser-focused on filling our backfills. As we all know, we've got several coming up later this year and spilling into the first quarter next year. So our leasing teams are highly focused on that. Again, we like the inbound activity we're seeing on these backfills early. So it’s like we’re not just laser-focused on acquisitions; we’re sort of doing both. I will mention one trade that happened as we look at the comps: there was a high-quality building that traded here in Raleigh just a month or two ago; it closed as a high-quality asset. It actually sold for a higher price than it did in 2018. It did have some better-than-market seller financing, but it's basically a 6.5% cap rate if you adjust for the better-than-market seller financing. There were over 100 CA signed with double-digit bids. So we're in a pretty good market for that type of asset. We're watching a few others as well.

Great. And just to follow up on that. In this interest rate environment and given where office fundamentals are today, what pricing metrics would get you guys excited about an opportunity? In other words, where is your targeted going-in cap rate threshold, IRR threshold, or even price per square foot threshold?

Yes. Look, obviously, discount replacement cost is one bar for us in this environment. As I mentioned, it's similar to the playbook we used coming out of the Great Financial Crisis. We bought partially leased assets with a lot of upside. So cap rates are pretty irrelevant for us. We look at a stabilized cap rate, and we would love to take some leasing risk if we can get the asset at the right price and then lease it up ourselves. We're looking at what we think we can acquire at pretty attractive yields. What those are, I guess we'll have to see. But I think acquisitions are going to pencil out better than development for the next couple of years. We'll just have to see what the risk-adjusted return is.

Great. Thanks a lot, Ted.

Our next question comes from Michael Griffin from Citi. Michael, you may proceed with your question.

Great. Thanks. Maybe just sticking back on the leasing front. Are you noticing tenants are quicker to make decisions about leasing space? Are the timelines still elongated in making decisions? Any color around that would be helpful.

Yes, Michael, unfortunately, it's still elongated. It's been slow on the decision-making front. Deals we thought might close one quarter are getting pushed a quarter, sometimes two. So decision-making is still taking time. I do believe that we're seeing some of the larger users that have been putting off decisions now starting to make them as they understand what the return-to-work policies are of their companies. While decisions will still take time to complete, they are going to happen instead of being delayed for a year or a year and a half. More deals will close over time, but it's still taking longer.

Michael, I might add—this is Brian. Just as a footnote to what Ted said, a lot of tenants or customers in the market have engaged, maybe farther out from expiration than they might have in the past. So they actually have a little bit of free board to take longer, while at the same time, when you look at national portfolios or portfolios in our submarkets, there’s a natural roll that’s coming due, and that forces decisions. So we are starting to see tenants making decisions.

Thanks. That's helpful. This is Nick Joseph here with Michael. Just on the potential Pittsburgh asset sales. Can you provide an update on where those stand, how that plays into the capital plan for 2024, and the timing around it, just given some of the lease expirations later this year?

Yeah, Michael, it's Ted. On Pittsburgh, as you all know, we announced in the third quarter of 2022 that our intention was to exit Pittsburgh. We didn't put a timeline on it. Just as a reminder, we announced back in 2019 that we were going to get out of Memphis and Greensboro. It ultimately took us about three years to exit those markets. Our intention is still to exit Pittsburgh, but given a very difficult capital market environment for office, it's just not an opportune time. So, we are focused on leasing up the upcoming vacancies and running the assets as we normally would.

And Nick, this is Brendan. Just in terms of the capital plan for the year, there really isn't anything that we don't need any of those proceeds. I mean, we have over $900 million of existing liquidity and we'll spend some money on the development pipeline. Even if we didn't sell anything during the year, I think from a sources and uses standpoint, we have ample liquidity for several years.

Thank you very much.

Our next question comes from Rob Stevenson from Janney. Rob, your line is now open.

Good morning, guys. Ted, given your comments about brokers not touring assets with debt issues, are these just turning into zombie buildings that can't fund TI and are no longer competitive? Is there something else going on there?

Well, I think some of those are exactly that. And you also have to factor in that anyone with a loan coming up is having discussions with their lender right now. The lenders want to pay down, but the borrower may not be willing to do a pay down. There's tension between a lot of lenders and borrowers. It’s a challenging conversation that many borrowers are having; this may be leading to difficulties for many buildings.

And have you guys seen lenders taking good quality assets back in your core markets? Or is it just lower-tier assets that we're seeing as the headlines, and they're just kicking the can down the road on the better quality assets?

Yes. I think that's generally the case; lower-quality assets typically go back first. We are starting to see it, but I'd say, maybe a handful of high-quality assets have also gone back to lenders over the past twelve to fifteen months. I think there's going to be more over time, so we just need to be patient. Coming out of the Great Financial Crisis, we didn't begin buying high-quality assets until 2012 and 2013, while the crisis started in 2008 or 2009. So it takes a bit of time to cycle through to the quality of the assets we want. We've got several on our radar for our wish list.

Okay. And then just to ask the leasing question in a different way. How rational are your markets today? Are you seeing other landlords overpaying for occupancy out there and driving costs up? Or are landlords remaining fairly reasonable given market conditions and lease lengths, etc.?

Yes. Look, I think this environment is similar to what the office market experiences during any economic downturn, right? It becomes a tenant's market. Not knowing what each owner's situation is, some landlords are getting very aggressive. Vacancies are increasing. You have increasing sublease space; capital costs are rising. I would argue there are some irrational deals on the market, but we're highly competitive as well. We'll compete for all leases, but it's generally a tenant's market now, and that's typical in this environment every 10 to 15 years.

Okay. Then Brendan, just to follow-up on that. Tenant improvements that you mentioned in your comments, which are up almost $20 million year-over-year, about 23% to $94 million and change. Given the amount of rollover in leasing, that you guys have slated to do in 2024 and 2025, what are you budgeting there? Is it likely to remain elevated at these levels over the next year or two until you get the occupancy up?

Yes, Rob, that's a good question. We think it’s likely to migrate down during 2024; at least that's what we have baked into the outlook. A lot of 2023 spent, particularly from new leases signed in 2022, led to above-average costs in 2023. I think 2024 will look more like a normalized year. Our expectations are to see spends come down to levels we experienced prior to 2023, so there might be a reduction of about $15 million to $20 million. Again, that’s based on our current business plan. It would be a nice result if leasing volume remains high as it has in the first month of the year; we would be happy with that. But our current expectation is a decrease in spending compared to 2023.

Okay. That's helpful. Thanks, guys. I appreciate your time.

Our next question comes from Nick Thillman from Baird. Nick, your line is now open.

Hey, good morning, guys. Maybe starting with some comments from Ted or Brian on the lease term dynamics you guys commented on earlier. Some of your West Coast peers mentioned that tenants are seeking shorter-term deals, but that doesn't seem to be the case for your markets based on increased lease duration quarter-over-quarter for the last four to five quarters. What's driving that? Is it just the type of tenants in your markets or the size of your tenants?

Hey Nick, it's Brian. I think it's probably just the conviction of the folks opting to make the workplace a priority. The return to in-office work has really got traction here in our markets. I think folks have kicked the can and done shorter-term deals. That's where we're seeing increased conviction and a bit of larger tenant sizes. I don't think there’s anything unusual about it; it's simply what we're observing.

And maybe following up on that, Brian, just on Orlando specifically. You didn't call it out in your commentary, but the rate change there was over 22%. Is there anything to call out in that specific market concerning tenant type or the nature of the deals you're doing?

Well, I think what's interesting about Orlando is that there are many macro trends heading into Orlando and Central Florida. There is zero new development underway, so we have well-positioned assets. We've been able to invest in them through this period, ensuring we have a competitive edge. Many of the earlier questions about 'zombie buildings' have raised challenges with funding TIs and repositioning; we've done that through the pandemic and our productive approach is yielding returns in the Orlando portfolio, hence the excellent results we ‘re experiencing there.

That's helpful. Lastly, on the disposals, can we break out the difference between land sales and regulated property sales? Are we going to assume more of these bite-size deals, similar to the one you did in Nashville in Q4, like $25 million to $30 million transactions?

Sure. So, just let me summarize what we did for dispositions in 2023. We closed roughly $104 million in dispositions, which included both land and buildings. Four buildings totaled $83 million, and then $21 million of land in two separate parcels, a mix between single-customer buildings and multi-customer buildings, along with the land sales. We have sold throughout the year, and the cap rates range from the high 5s for a single-customer long-term lease to the low 9s for the multi-customer with a low weighted average lease term. Recently, the Ramparts building sold in the fourth quarter; it was 97% leased with a three-and-a-half-year weighted average lease term, and that was classified with low 9 cap rates. That mix will likely resemble what you see this year as well. We expect to see a mix of land and multi-tenant buildings, but probably no single tenant sales. We have about $79 million under contract and in due diligence, which we think will close in the first half of the year and will be similar to what we saw last year, on the multi-tenant side—not large assets. Smaller assets are easier to get done.

That's all for me. Thanks, guys.

Thank you.

Our next question comes from Camille Bonnel from Bank of America. Camille, your line is now open.

Hi, everyone. Good to see the progress on backfilling some of your larger expiries. Given your strategic priorities of renewing tenants as early as possible, how are the early renewal discussions tracking in your leasing pipeline?

Hi, Camille. Brian here. They're tracking well. One of the earlier questions was why we're seeing more term in our portfolio. We can lean in on TI, as Ted mentioned earlier; customers would trade TI for longer terms. We have that ability as we are unencumbered by property-level debt in most cases. This allows for natural conversations about how to upgrade their space to keep it competitive to recruit and retain talent.

So are you seeing that activity start to pick up compared to a year ago? Because we've been hearing tenants continue to kick the can down the road.

So yeah, let me add to that. I'm thinking about some of our upcoming maturities. Brian mentioned in his prepared remarks about the 168,000 square feet in Buckhead that expires in September; we've already backfilled 50,000 of that. We have good interest in over 350,000 square feet with tour activity, so we feel optimistic there. You also have EQT Plaza in October with a total of 17,000 square feet; we've backfilled 16,000 square feet with proposals out for additional space. The Georgia Department of Revenue is downsizing from about 255,000 square feet by the end of 2024, and we're working on relocating them. We're looking at various strategies for the building they're vacating, including a potential residential conversion. We'll know more in the next 90 to 120 days regarding the department. We have a contract for our headquarters building in Raleigh where Wells Fargo is vacating 78,000 square feet in October of this year. So we're excited to use that space to increase amenities for the building, which has been our plan since 2021. So we're encouraged by the activity we're experiencing.

Got it. You've placed a big emphasis on securing additional liquidity in the past year and have been successful at raising capital. Given you've pretty much covered your capital needs, how much more liquidity are you seeking to raise?

Hey, Camille, it's Brendan. I would say there's not capital that we feel we need to raise. However, I do think if you look back at Ted's opening comments at the beginning of the script, we think continual portfolio improvement is essential. Therefore, we believe the asset sales will bring in the necessary capital, not additional debt capital raising this year.

Finally, looking at your cash flows for this next year; are there discussions with the Board regarding whether the dividend could be a source of capital, given the high yield? Or is the view to continue paying it as long as it's covered?

Let me start, and Brendan may want to add to that. Look, it's something we discuss every quarter with the Board. As we evaluate our dividend, it's covered by our cash flow, and we believe it is a critical piece of total return at this point. We've been proactive in our CapEx spend, and our cash flows have improved. Based on our outlook for the business, we feel very comfortable with the dividend at this time.

Thank you for taking my questions.

Our next question comes from Ronald Kamdem from Morgan Stanley. Ronald, your line is now open.

Just a couple of quick ones. Staying with the dispositions. You talked about the $75 million in the market, maybe more to come. Can you provide any sense on cap rates on those? Also, how are you thinking about the quality of those assets and seller financing? Any more color would be helpful.

Sure. With respect to what we have in the market, I’m hesitant to talk about cap rates until they close. However, we do have one element of what we have out there where we're providing a short-term, I believe it's a 12-month seller financing. Very similar to earlier last year, we did a six-month financing on another property. So one small asset of that $79 million will involve seller financing for a year. Beyond that, it's all equity purchase.

Ron, I'll just say in terms of cap rates; if you looked at the average blended cap rates for 2023 and just think about that comparably for 2024—if you consider something similar to the average you'd expect for your models. That’s a reasonable gauge for the $75 million expected in the first half of the year.

Helpful. Regarding the cash flow situation and potential lease expirations leading to 2025, have you guys evaluated how leverage could trend under those scenarios and how you think about preserving cash flows?

Yes, Ron, it's a good question. We're comfortable with where we are. Of course, we will be spending on the development pipeline throughout 2024 and into 2025 without a corresponding increase in EBITDA or NOI. So you might see an upward movement in the debt-to-EBITDA ratio as you progress through the year. However, that's going to trend down as those properties deliver and stabilize to generate NOI. We feel confident about the dividend coverage as well, which we expect to see growth driven by our solid foundational growth drivers as we move forward.

Helpful. Thanks so much.

Our next question comes from Vikram Malhotra from Mizuho. Vikram, your line is now open.

Hey, good morning. This is Georgi on for Vikram. Can you walk us through the occupancy trajectory in 2024? Can you provide more color on known move-outs over the next two years?

Hey, Georgi, it's Brendan. I'll start, and then maybe I'll hand it over to Ted or Brian for some color on the large expirations coming up. As is typical seasonally, we usually experience a dip in the first quarter. So, while there are no single large users, several expirations happen at the beginning of January, leading to a small drop. We expect occupancy to dip a little in the first quarter, holding steady thereafter or gradually increasing into the second and third quarters. We’ve got Novelis' expiration later in the third quarter, and then EQT's expiration at the beginning of the fourth quarter. The end-of-year average is likely to stay around 87% to 89%. However, we have about 320,000 square feet of signed but not yet commenced leases across Cool Springs 5, 2500 Century Center, and Tampa Bay Park. About 100,000 of that is expected to move into occupancy by year-end 2024. Even as we get into 2025, a fair amount of leasing already done will come into occupancy. We expect to continue leasing out space on existing or future vacancies over the next few years.

I want to add on known move-outs. I'll summarize some quickly. Novelis: we backfilled 50,000 square feet. They are vacating 168,000 square feet by September 2024. We have good activity on the rest of the space with 350,000 square feet of prospects. For EQT, they are vacating in October 2024, with 17,000 square feet total; we've backfilled 16,000 square feet. As we’ve noted, the Department of Revenue will downsize and will vacate about 255,000 square feet at the end of 2024. We have been successfully relocating them. We are looking at several redevelopment options for the vacated building. For our headquarters in Raleigh, Wells Fargo is vacating 78,000 square feet in October of this year. We expect to turn that space into modern amenities for the building, which has been our vision since 2021, allowing us to reclaim the space for competitive leasing. So we’re optimistic about what we are seeing in terms of interest and activity. In general, we don’t have significant exposure to tech layoffs. Our customer base is quite diversified, and we don’t heavily rely on tech markets. That said, we've found a balance that doesn't overly lean towards any single industry. In some respects, we’re glad we did not rely extensively on the tech sector when it was booming.

Our next question comes from Dylan Burzinski from Green Street. Dylan, your line is now open.

Thanks for taking the question, guys. As we think about occupancy dipping throughout 2024 into early 2025, if I sort of pair that up with some of the comments you just made, Brendan, it seems that the lease percentage drop-off moving forward should be a lot less than the drop-off in occupancy. Therefore, as we think about occupancy into 2025 and beyond, you should recover what is lost relatively quickly. Is that fair to say?

Yeah, Dylan, it's a good question. If the activity we’re seeing in prospect translates into leases as we hope, your outlook would appear correct. Of course, there’s execution that needs to get done. It’s not to say it’s a foregone conclusion, but if prospects move forward and we convert that activity into leases, then I think you’d be correct.

Our next question comes from Peter Abramowitz from Jefferies. Peter, your line is now open.

Thank you. Yes. Most of my questions have been answered, but just one here. Have you noticed any change in the last 60 to 90 days with the macro backdrop and the rates affecting demand for office buildings in your market? Has there been any change in appetite for office transactions?

No, I don’t think so. The assets we have in the market are already tied up; we don't have many real-time data points right now. However, I do think you'll see more activity coming from brokers; after the year turned and rates decreased, they're more confident. There is a lot of dry powder sitting on the sidelines. I expect once buyers understand their cost of capital and funding availability, which is still challenging for office loans, I think activity will increase. However, I'd anticipate that it may be later in the year, probably in the back half before we see that activity increase.

Our next question comes from Omotayo Okusanya from Deutsche Bank. Omotayo, your line is now open.

Yes, good afternoon, everyone. Just regarding the tenant that was moved to cash accounting, I'm assuming it's the same tenant you discussed earlier. Since you had to move them to cash accounting, how do you get comfortable with the renegotiated lease so that you aren’t in the same situation a year down the line?

Yes, Tayo, that’s a good question. First, moving someone to GAAP accounting is typically due to confidence in rent collection throughout the lease term. This is a long-term lease for us, and while the business cycle appears uncertain, we're optimistic with our standing because there's not much capital that will be incrementally invested in this space, and we expect to collect a meaningful amount of rent over that timeline. We wanted to be cautious; we consulted with our auditors before moving them to cash basis; we believe it's prudent to do so. It’s also our standard practice with other volatile industries, including several of our retail spaces that we routinely put on cash basis. We’re satisfied with the modified lease terms we’ve established here.

Great! Thank you. Happy to see that all leasing in the business district portfolio is doing well.

Thanks, Tayo.

We currently have no further questions, so I'd like to hand back to the management team for closing remarks. Over to you.

Well, thanks, everybody, for joining the call today. Thanks for your great questions, and thank you for your interest in Highwoods. We look forward to talking to you next quarter, if not before. Have a great day.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.