Thank you all for joining. I would like to welcome you all to the Highwoods Properties Q1 2024 Earnings Call. My name is Brika, and I will be your moderator for today. And now I would like to pass the conference over to your host, Hannah True, Manager of Corporate Finance and Strategy to begin. So Hannah, 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 an excellent quarter executing on our key priorities and delivering solid financial results. First, we signed 922,000 square feet of second-generation leases including over 400,000 square feet of new leases and 36,000 square feet of net expansions. This volume of work will benefit us in future periods as the new leases commence. Second, we signed 157,000 square feet of first-generation leases in our development pipeline. We continue to see solid interest in these best-in-class projects, which will provide approximately $40 million of incremental NOI upon stabilization and be a significant growth driver for our cash flows. Third, we delivered Four Morrocroft, an 18,000 square foot $12 million build-to-suit that we developed at our Four Morrocroft property in the South Park BBD of Charlotte. As you may recall, this creative office development is situated on a surface parking lot with 0 basis. While Four Morrocroft is one of our smaller developments, it demonstrates our resourcefulness in cultivating and generating attractive risk-adjusted returns for our shareholders. Finally, we sold nearly $80 million of non-core properties in Raleigh, including over $60 million that closed early in the second quarter. These sales improve our portfolio quality, increase our long-term cash flow growth and further strengthen our liquidity and already strong balance sheet. We expect our solid leasing momentum to continue as our markets generate outsized population and job growth, given their high quality of life and business-friendly environments. Simply put, our markets and our BBDs are where people and companies want to live, work, and play. This is why our portfolio has outperformed the national average, our markets and our submarkets, all because customers and prospects are attracted to our commute-worthy buildings. Plus, being a long-term landlord with a strong balance sheet that can fund tenant improvements and leasing commissions and care for our best-in-class properties is proving to be a clear competitive advantage for us. Contrary to popular opinion, we're seeing strong demand across our portfolio, whether they be brand new trophy assets or well-located second-gen properties and whether they be suburban or urban. We believe financially capable landlords who provide value to customers and prospects will see healthy demand across a wide variety of price points. Turning to our quarterly results, we delivered FFO of $0.89 per share and same-property cash NOI growth of positive 0.3%. As expected, our occupancy dipped modestly to 88.5%. Our 2024 FFO outlook is $0.015 lower at the midpoint due to higher-than-expected interest rates and the dilutive impact of non-core asset sales already completed, neither of which were factored into our initial outlook. These items are partially offset by higher projected NOI. The strong leasing start to the year modestly helped 2024, but most of the new leasing will drive upside in 2025 and beyond. We've also had a successful start to the year with non-core asset sales, and we're prepping additional properties for potential disposition. We now expect to sell up to an additional $150 million during the remainder of the year. The volume and timing of dispositions will depend on how conditions are in the investment sales market, but we've been encouraged by the response we've seen in recent quarters to our marketing efforts and the modest improvement in capital markets for prospective buyers. While we don't have any acquisitions included in our 2024 outlook, we continue to build the foundation for future investment opportunities. Similar to the first few years coming out of the global financial crisis, we believe compelling investment opportunities will arise, but these will take time to play out. We're comfortable being patient as we continue to have conversations with owners and lenders of wishlist properties in our markets. Our development pipeline is now $506 million, following the delivery of the 100% leased Four Morrocroft building in Charlotte. With 157,000 square feet of first-gen leases signed during the quarter, our pipeline is now 41% leased. A big chunk of the activity was our 642,000 square foot, $460 million, 23Springs project in Uptown Dallas, which we are developing in a 50-50 joint venture with Granite. 23Springs is now 54% pre-leased, a year prior to scheduled completion and four years before the estimated stabilization. The largest lease signed was a current law firm customer at our 98% occupied McKinney & Olive property, just a couple of blocks away, who needs to expand by nearly 50%. Given we couldn't accommodate the growth of McKinney & Olive, we were able to accommodate the growth at 23Springs. We already have excellent activity to backfill their space at McKinney & Olive, more than two years before their scheduled move to 23Springs. We made modest leasing progress at Granite Park Six in Dallas and GlenLake III in Raleigh. Both of these developments delivered late last year and are projected to stabilize in 2026. These buildings are best-in-class in their respective BBDs and prospect activity is accelerating. We're confident in the long-term outlook to expect these developments to drive solid cash flow growth for us in future years. Midtown East and Tampa, our 143,000 square foot, $83 million project that we're developing in a 50-50 joint venture with Brownlee in the Westshore BBD, is seeing strong interest from prospects given we're the only office project currently under construction in the entire market. We're 16% pre-leased and are very encouraged by the strong interest, more than two years before scheduled stabilization. We don't expect to announce any new development projects during the year. Obviously, this isn't unique to Highwoods. It's very difficult for new starts to pencil in the current environment. We're not seeing meaningful reductions in hard costs and interest rates continue to be elevated. Plus, for other developers who are capital constrained, securing capital for new office construction is very challenging. As a result, new starts have plummeted. And with the current development pipelines that will largely be delivered across our markets over the next few quarters, the lack of new supply in future periods will play to our advantage as users seek high-quality properties from landlords with strong financial resources. In conclusion, as we have for the past few years, we acknowledge the headwinds in the office sector, yet we're bullish about the future for Highwoods. First, our portfolio has never been better and it will continue to improve as we sell additional non-core properties and deliver our $500 million development pipeline. Second, we have significant organic growth potential within our operating portfolio where we've already leased some of our existing vacancy and have solid interest on expected future vacancy. Third, our balance sheet is in excellent shape and will enable us to capitalize on future growth opportunities. And finally, even with higher interest rates, our underlying cash flows remain strong, which allows us to keep investing capital to generate higher returns on our existing portfolio. Brian?

Thank you, Ted, and good morning all. As we mentioned on last quarter's call, our leasing teams got off to a strong start in 2024. We maintained our positive momentum through the end of the first quarter, signing 97 deals and exceeding our five-quarter average with 922,000 square feet signed. New leasing volume of 422,000 square feet was the second highest quarterly total since 2014. Average term was also strong at nearly 7 years, 1 year longer than our prior five-quarter average. Tampa, Atlanta, and Raleigh signed nearly three-quarters of this quarter's total volume with average terms of 7.5 years. Expansions outpaced contractions 2:1 and while lease economics reflect a highly competitive market, we will prioritize occupancy as needed over pushing rental rates to lean on our strength as a long-term owner while strengthening our long-term cash flows. In addition, we are seeing strong activity across our $500 million development pipeline. As Ted mentioned, we signed 150,000 square feet of first-generation leases, including 129,000 square feet at 23Springs, our JV development in Uptown Dallas. The 129,000 square feet of pre-leasing at 23Springs follows the 105,000 square foot lease we announced last quarter. 23Springs is now 54% pre-leased, 1 year before completion and 4 years before our estimated stabilization in the first quarter of 2028. The quality of our portfolio, our sponsorship, and the commute-worthy lifestyle office experience we provide our customers is giving us a clear edge in today's leasing environment. We're seeing strong demand at various price points across our portfolio. As demonstrated by strong leasing volume in our development pipeline, the top of the market is doing well, but we continue to see the most demand for our well-located second-gen assets. This is because a large segment of customers and prospects prioritized a premier office experience at rents that are more affordable than a trophy price point. Moving to our markets. Tampa recorded the most volume in the quarter with 267,000 square feet signed. Our 16% pre-leased Midtown East development is the only Class A office development under construction in Tampa and is on time and on budget for our Q1 2025 delivery. Solid inbound interest continues as the building advances toward completion. According to Cushman & Wakefield, Midtown East Westshore BBD was the most active submarket in Tampa during the quarter, capturing nearly one-third of all leasing activity. Further, CBRE is currently tracking several large users in the market and over 2.6 million square feet of demand. We leased a lot of our vacancy earlier this year at Tampa Bay Park, and we're now working to fill pockets of vacancy at Meridian, where we have solid traction. Moving to Atlanta, the MSA recently passed Philadelphia and Washington, D.C. as the nation's sixth largest and the second-largest metropolitan area on the East Coast, per the latest population estimates from the U.S. Census Bureau. Our Atlanta team signed 199,000 square feet for the quarter, of which 160,000 was new. This represents the greatest share of new leasing across the portfolio. Further north in Raleigh, which was recently ranked #2 in the Milken Institute's Annual Best Performing Cities report, our team signed 201,000 square feet in the quarter with an average of close to 8 years of lease term and over half of this leasing activity was new. Raleigh is joined by Nashville, Dallas, and Charlotte in Milken's top 10 best performing cities list. In summary, our leasing pipeline is healthy and we are pleased by the flow of inbound proposals and tour requests across our portfolio. We believe this is emblematic of our simple and straightforward strategy of creating commute-worthy experiences in the Sun Belt's best business districts. Brendan?

Thanks, Brian. In the fourth quarter, we delivered net income of $26.1 million or $0.25 per share and FFO of $96 million or $0.89 per share. There were no unusual items in the quarter. We are pleased with the quarterly results, which demonstrate the resiliency of our operations and continued strong cash flows. Rolling forward from the fourth quarter and excluding the $0.08 per share of unusual items in Q4, FFO per share was $0.02 lower in the first quarter. Higher G&A, which we incur every year during the first quarter due to the expensing of equity grants for certain employees and the full quarter impact of November's bond issuance, reduced FFO by $0.04 per share. These headwinds were partially offset by $0.02 per share of higher NOI, which nets to the $0.02 sequential reduction. Our balance sheet remains in excellent shape. At March 31, we had $850 million of available liquidity, which has increased to $915 million following the non-core dispositions we closed in early April. We have a little over $200 million left to fund on our development pipeline and no consolidated debt maturities until May of 2026. We do have one mortgage that matures in the third quarter of this year at our unconsolidated McKinney & Olive joint venture. This is a low leverage loan and we're reviewing financing options with Granite Properties, our partner. We may, ultimately, decide to jointly repay this loan upon maturity and seek longer-term financing when the lending environment is more attractive. Given our ample liquidity, we have many options available. This also demonstrates the strategic value of having such a financially capable joint venture partner in Granite. As Ted mentioned, we have updated our 2024 FFO outlook to $3.46 to $3.61 per share, which implies a $0.015 reduction at the midpoint. The reduction is driven by the $0.03 dilutive impact from the asset sales completed since our outlook was provided in February and higher-than-anticipated interest rates for the remainder of 2024, partially offset by $0.015 of higher anticipated NOI. It's still early in the year, and therefore, our range remains wide with several variables, mostly around projected property tax savings, which aren't assured yet. We're pleased with the non-core property sales completed thus far. While modestly dilutive to near-term FFO, our capital recycling program has been accretive to our cash flows while also improving our long-term growth rate. We've increased the midpoint of our same-property cash NOI outlook and moved the high end of our total dispositions to $230 million including the $80 million we've closed so far. All other items in our outlook remain unchanged. As Ted and Brian mentioned, we had a strong leasing quarter, especially in new leasing volume. Many of the new leases signed in the quarter won't commence until late this year or next year, and therefore, will not have a meaningful financial impact on 2024 results. This volume of work will obviously bolster our results in future years. As you know, we try to be as open and transparent as possible with our stakeholders, and we've stated for quite some time that we expect occupancy will trough in the first half of next year. We still expect this to be the case, but if we can continue to post strong leasing volumes, we believe our trough occupancy level will be higher than our original expectations and our recovery will be faster. You may have seen in our supplemental package that we have made some adjustments to how we present property-level operational information. Starting this quarter and going forward, we are now including in-service properties owned by consolidated and unconsolidated joint ventures at our share. We are doing the same thing with respect to the presentation of our same-property operational results in the supplemental. For those of you who would rather see same-property results on a consolidated basis only, all of the ingredients are itemized in the same property reconciliation table in the back of the earnings release. These changes have a relatively modest impact on our property-level metrics this quarter as JVs today comprise less than 3% of our business, but will increase to around 8% as our development properties are placed in service. To wrap up, we're very encouraged about the future for Highwoods. Our high-quality Sun Belt portfolio is located in the BBDs where talent wants to be, which is clearly demonstrated by our performance this quarter. We have strong embedded growth potential within our operating portfolio and approximately $40 million of future NOI as our development pipeline stabilizes. Our balance sheet is in excellent shape, and our cash flows continue to be resilient.

We are now ready for questions.

Great to see the pickup in leasing this quarter. I'd like to start with some questions around guidance. as you clearly laid out the puts and takes for bringing the top end of FFO down. Can you explain the drivers behind raising the low end of your same-store guide? And how confident are you in the bottom range here if there is a pullback in decision-making?

Camille, it's Brendan. I'll start. So I think in terms of the components of the driver of the higher NOI outlook that we talked about, both in terms of the same property growth and what we said is just overall better NOI with respect to the FFO outlook. I would say that it's roughly evenly split between better revenue and some expense savings. So that better revenue is driven by probably what I would characterize as modestly higher average occupancy. We didn't change the average occupancy range, but it is modestly higher overall. So it's a combination of top line and expense savings. And then in terms of how much spec leasing is in the forecast, we still have spec leasing that is there. I think if things really slowed down for the remainder of the year, it probably doesn't have a very large impact in terms of the financial performance for 2024 as most of the spec leasing that we have slated to come in this year would be later in the year and therefore, not have a big impact on '24 results but obviously, that's going to carry more impact to 2025 and future years. But I think we feel good about kind of where our leasing activity has been through the first almost four months of the year and are optimistic that, that will continue as we go forward.

To clarify, is the spec leasing the same as new leasing activity that you report?

We have a combination of new and renewal leasing activity in our business plan for the year.

If we look back, it seems like you were able to improve your occupancy when new leasing volumes were above 1 million square feet. Can you elaborate on that specific assumption included in this year's guidance? Do you believe you can maintain the pace of new leasing throughout the year, or how did the first quarter perform compared to your budget?

Yes. Maybe I'll start, and then I'll let Ted and Brian provide more color on specifics. But I think, certainly, the new leasing volume of 423,000 square feet, we don't expect that to continue. That was, I think, the second highest quarter that we've had over the past 10 years. So that's certainly above expectations. The volumes are going to bounce from quarter-to-quarter. But I think if we could average around 300,000 square feet of new leasing per quarter for the year, so call it, 1.2 million square feet of new during the year, I think that would place us in a good position to build occupancy as we get through some of the large known expirations. And what I mentioned in the prepared remarks, we certainly expect to trough occupancy early in 2025 and then build from there. But I think if we're able to sustain good new leasing volume and manage reasonable levels of renewals, then I think that puts us in a position to build kind of from the base. And as we stated earlier, trough at a higher level than what we previously expected and then recover faster.

Just one final question. If we were to dive deeper into your portfolio, are you seeing any areas where vacancy has been concentrated, whether that be by location like suburban, urban, infill or lease size?

Camille, it's Ted. I don't think so. I think we've seen pretty good demand across the portfolio. Our biggest vacancies as a company are the well-known Tivity move out. That building is still largely vacant, so that's 260-or-so thousand feet. And then the CDC vacated building in Atlanta, and that is leased, but it's vacant right now. So combine those two, that's about 130 basis points of occupancy. But other than those two big holes, it's really not concentrated anywhere.

Your next question comes from Vikram Malhotra from Mizuho.

This is Georgi Dinkov on for Vikram. Can you just walk us through any known move-outs and the occupancy trajectory in 2024?

Yes. Maybe I'll take the first part, and Brendan can jump in on the trajectory and the occupancy. So look, the known move-outs, we've talked about these for several quarters. I'm going to hit it just at a high level. We're seeing some good activity on the Novelis space in Atlanta. It's 168,000 square feet. And so we're seeing really good activity there. We're seeing good activity actually in Pittsburgh. Now as we're getting closer to the EQT expiration later this fall. As you know, I think last quarter, we indicated we went direct with one customer, and we've got strong prospects for another 50,000 feet and over 100,000 square feet of proposals that are out. So we feel good about the activity we're getting there. We'll see where that goes. In Nashville, Bass, Berry moves out next February, and still a little bit early there, but we're well on our way on Highwoodtizing plans for the project that will be getting underway really the day they move out. So we're excited about our plans there. Activity is a little slower there just because we're still 10 months away from them vacating. And then really the other big one is the Department of Revenue at the end of this year, 1800 Century Center. There they're one consolidating and downsizing to another one of our buildings in that same park. We're still evaluating our plans for that building, whether it be office lease-up or potential residential conversion. So we're well underway. We've been analyzing that for a while. And hopefully, we'll know more in the next couple of months with respect to what our plans are with that.

And Georgi, it's Brendan. Regarding the trajectory as we progress through the year, we may experience a slight decrease in the second and third quarters, possibly averaging around 88% for the year. There is some movement within the portfolio, and we are proactively taking back certain spaces early in the second quarter, which we plan to backfill and expect to have new users in by year-end. Additionally, we believe that year-end will be the lowest point for us this year, primarily due to the EQT expiration in the fourth quarter. However, we anticipate finishing the year at a higher level than we initially expected when we provided our outlook in February. Overall, we feel we are on the right track, but we should anticipate that year-end will represent the lowest occupancy for the year.

And just a second question for me. We've noticed occupancy decline in Tampa and Orlando quarter-over-quarter, can you just comment on what was the driver? And is this a sign of challenges in these specific markets? And I guess, can you just comment on your markets, which ones are performing better and which one are kind of like lagging behind?

Georgi, this is Brian. I'll address a few points. You mentioned Orlando and Tampa specifically. Last quarter, Orlando achieved an excellent occupancy rate over an extended period. They are performing very well, and there are no constructions underway in Orlando. They have the best buildings downtown, so we are confident about maintaining occupancy at levels similar to last quarter and where they currently stand this year. There's not much more to elaborate on regarding Orlando. Tampa, on the other hand, is a vibrant market. We have several parks in the Westshore BBD area, which leads to fluctuations. However, we are pleased with the progress in Tampa and how the market is growing. Globally, all our markets are priorities, with no favorites among them. Nashville remains a sought-after location. It reported positive quarterly absorption last quarter, ranking fourth nationally for the year 2023. Recently, Larry Ellison mentioned in an interview that Nashville would eventually become Oracle's global headquarters, aligning with CBRE's assertion that Nashville is among the top five cities for new headquarters. Nashville is in a strong position. In Charlotte, the situation is a bit mixed. There is a noticeable divide in performance based on location, lineage, and landlord. Our properties are 96.2% occupied, and we are optimistic about our assets. Charlotte is still experiencing growth and has many exciting developments. As for Dallas, it is projected to surpass Chicago in population within the next five years. It is currently the fourth largest metro area and leads the U.S. in population growth. We are very satisfied with our partnership in Granite and the existing McKinney & Olive asset in Uptown, along with the leasing momentum at 23 Springs and increasing interest and tours at our properties. This should give you some insight into the range of market performances. I’m not sure if Ted has anything to add.

We now have Blaine Heck from Wells Fargo.

Ted, you mentioned this in your prepared remarks, but recently, we've been hearing a lot about the flight to capital or tenants looking for landlords that are willing and able to fund TIs on new leases. I guess can you just give a little bit more color on that trend broadly? And then maybe comment on how much of the market vacancy might be attributable to space that's owned by a landlord that's unwilling to fund TIs? And then lastly, I'm just wondering whether there are any specific instances you can cite where you think you've won out on a deal because of that ability that you guys have to fund TIs?

Sure, there's a lot to address. Please remind me if I miss anything. Essentially, it aligns with what you mentioned. We're noticing a division in assets and ownership, where in some cases, landlords or brokers are not showcasing certain spaces if they recognize issues with the capital stack, which might be upside down or at risk of the property becoming abandoned. We have several examples of this; one notable one is in Raleigh, where we secured a full-floor user from a distressed building through a cold call. This is consistent with the efforts of all our leasing representatives as we are targeting buildings with maturing debt because we can invest in tenant improvements and pay commissions. This particular case resulted directly from our cold call, leading to a full-floor user who opted to leave their previous building due to insufficient funds for renovations. It was a significant success for our team, demonstrating their resourcefulness, which we are also observing in other markets. Regarding vacancy rates, they are primarily concentrated in undesirable buildings and submarkets, particularly those that have been struggling over the past few years. Lenders have been hesitant to reclaim these assets, and many owners lack the financial means or desire to maintain ownership. Consequently, those buildings will experience a shortage of capital and declining occupancy. Overall, these three factors are critical. Did I cover all aspects of your question?

Yes, I think so. That's really helpful color. I really appreciate that. Just switching gears for the second question. I guess, how are you thinking about the Pittsburgh portfolio then near in the midterm? Do you think dispositions are still likely off the table in the near term? Are you seeing any kind of signs that the transaction market might be returning there? I guess, are there any of those properties in the potential $150 million of dispositions that you're forecasting for the rest of the year? And then just generally, maybe how do you think about the balance between waiting for a decent price to exit versus maybe selling sooner wherever market pricing is, but likely saving some capital needed for lease-up and any renovation or refreshing projects that you might have?

With respect to Pittsburgh, it will present significant challenges. Currently, we haven't fully identified our next wave of activities. When we announced our exit from Pittsburgh in fall 2022, it was reminiscent of our exits from Memphis and Greensboro, which took around three years to complete. The timing is tricky, as I feel the capital markets are still not stabilized. We have successfully sold smaller and medium-sized assets through manageable transactions that are easier to finance. However, selling a larger asset like PPG is challenging due to the current debt market. Therefore, we will continue focusing on core operations like leasing space and wait for the capital markets to improve. I don't anticipate Pittsburgh being part of the upcoming $150 million in sales. We certainly aim to exit when the timing is right and are weighing the option of selling now versus holding off. Right now, I don't believe there's a viable market for that asset. Regarding the planned $150 million in sales, I expect it will resemble our recent transactions—smaller assets with greater market liquidity. We have had success in selling both value-add and core assets over the past couple of years. There are local banks and high net worth individuals who are well-positioned to finance these types of sales. Therefore, I believe the next $150 million will consist of multiple properties similar to those we sold recently. The proceeds from these sales will be reinvested into renovation capital and utilized across our portfolio.

Your next question comes from Michael Griffin of Citi.

Just curious on the renewal leasing. What are you seeing in terms of retention rates and whether or not most firms are upsizing, downsizing or keeping the same space? And is the average lease signed by size changed at all?

Michael, I'll begin, and Brendan or Brian can add if needed. Our retention ratio has indeed decreased over the past couple of years, which is not unusual during economic downturns. There have been factors like work-from-home arrangements that have impacted this, along with a broader cyclical downturn as companies close regional branches or consolidate local offices. While our retention has gone down, our overall portfolio shows that our expansion successes outweigh the contractions. This quarter, we recorded 10 expansions and 5 contractions, for a net gain of 36,000 square feet, with expansions totaling 63,000 square feet and contractions at 26,000 square feet. Since the start of 2023, we've seen 55 customers expand compared to 21 that contracted over the last five quarters. It's primarily larger customers who are downsizing, while our average-sized customer occupies about 13,000 to 14,000 square feet, and they are the ones making growth decisions. We're experiencing a significant number of expansions, typically ranging from 2,000 to 3,000 square feet, while the contractions tend to be larger, such as an entire floor or half a floor, but overall, expansion continues to outpace contraction steadily. Regarding lease size, our core range continues to be between 5,000 and 15,000 square feet, which represents most of our activity this quarter. We completed almost 100 transactions again this quarter, maintaining a steady rate of about 100 leases per quarter.

Great. And then I was curious if you could just give some color on the development leasing in Dallas. It seems like Sidley Austin is moving from MNO to 23Springs. Was that always the plan when you bought the property and announced when you started the development? Or did this come about relatively recently? And what are you tracking in terms of demand for that space? Is it going to be a single user? Could it be multi-tenant that space that they have there? Just maybe some more color around that would be helpful.

When we acquired MNO, that wasn't part of our original business plan. Sidley Austin's lease is set to last until around 2028. However, as we engaged with them, we were excited to meet their growth requirements, but ultimately, we couldn't accommodate them due to full capacity in the building. They wanted to remain at McKinney & Olive but we didn't have the space. Fortunately, we have available space nearby. Regarding our development pipeline, we signed 157,000 square feet in the first quarter and have an additional 125,000 square feet of strong prospects that we are currently negotiating. Nearly all our development projects have strong prospects, and we're optimistic about making progress there. Additionally, we've had over 800,000 square feet of recent tour activity, which complements the 125,000 square feet of solid prospects. Overall, activity is increasing, and while we have challenges ahead to finalize these deals, we are very pleased with the current momentum, especially at 23Springs and throughout our development pipeline.

We have the next question from Rob Stevenson with Janney.

Ted, how much of that up to an additional $150 million of dispositions is somewhat dependent on redeployment opportunities? I mean, would you sell $225 million and just either pay down debt or sit on the cash and fund the development pipeline if needed?

Yes, Rob. I think we would. It's not reliant on redeploying into acquisitions or development. This is really about maintaining our usual rhythm and selling as we have been. Essentially, it's about identifying assets to generate some liquidity to prepare for future opportunities. However, it's not contingent on making a purchase.

Okay. And then your commentary about lack of acquisitions, is that due to the assets available right now aren't of the right quality or location? Or is it mostly the pricing is still too high or some combination? What's the thing that's sort of making the acquisition environment not advantageous to you right now?

I think it's a combination of all three of those, right? So the assets that have sold don't meet the quality. There are several out there now, I'd say, a handful of assets that are sort of going through a pricing exercise and so we're going to be patient. We're doing a lot of practice underwriting and all that. But it's certainly got to be the quality. Most importantly, it's got to be the location and certainly pricing as well. So we continue to monitor. We're hanging around the hoop and we'll see where it plays out. But certainly, there's nothing imminent by any stretch.

Okay. And then if a Dallas acquisition or development opportunity came up over the next year, would that still likely be in a JV? Or are you comfortable at this point able to be going solo on a deal in that market?

Yes. First, I want to say that our entry into Dallas has been very successful. We chose the right partner, and things are running smoothly every day. We even had our Board meeting in Dallas last week, where the team from Granite joined us for dinner and tours, reinforcing our positive partnership. We are excited about our collaboration. However, our goal is to continue expanding in Dallas, and while Granite is a great partner, I can see opportunities that they might not be interested in, which we could pursue independently. We feel very confident in that market now.

All right. And then one last question for me. Brendan, when do you expect to know the outcome of the majority of the potential property tax savings? And what is the extent of the variation in that range? How significant should we consider that?

Yes, Rob, it's a good question. It's meaningful, there's no doubt about that. I would say that I think we will have more clarity in Q2 and then even more clarity as we get into Q3. But I mean, there's certainly a possibility in terms of challenging some of the assessments that these could drag on beyond 2024. So we will see where that is. But it could certainly swing us a few pennies in either direction, depending on what the ultimate resolution of these assessments are.

And where do you stand regarding the guidance? How is that affecting it?

Yes. We have assumed savings within the guidance. We haven't assumed at the top end of what is possible. So I think that it is roughly in the middle in terms of kind of the high end and the low end in terms of what we have factored in or I would say more than what's in the middle. I think it's really where we think the most likely outcome is going to be.

We now have Michael Lewis from Truist.

You mentioned the characteristics of some potential non-core asset sales. Regarding those you’ve already completed, I see $79 million with $6 million of NOI, which indicates a mid-7 cap rate. Is it reasonable to conclude that Highwoods is divesting some of its non-core assets, which aren’t their top performers, at a mid-7 cap rate? Although the stock has recently outperformed, we still estimate it at about a 10 implied cap rate. Am I making a valid comparison, or is this more of an apples to oranges situation? Is it appropriate to consider that you've made some sales, demonstrated pricing, and can infer insights about the rest of your portfolio from that?

I can begin, and others can chime in. We are very pleased with the mid-7 cap rate from the assets we sold. These were exceptional locations, similar to most of our portfolio, and they included some medical components. There is definitely a healthy market for medical office buildings. We are happy with the mid-7 cap rate, and selling these assets has improved the overall quality of our portfolio. The majority of our remaining assets are of higher quality. We believe an implied cap rate of 10% is too high, and our sales over the last couple of years have consistently been below those cap rates. This reflects the strength of the assets in our portfolio.

Second, you talked a lot on this call about the timing of the trough occupancy and Brendan kind of laid out how 2024 might go in terms of cadence. Could you just remind us or have you said what you think that trough occupancy will be in early next year? And how much is better now or you talked about trending better than that. So maybe you could answer both parts of that or one part of it. Just trying to figure out kind of where this bottoms and how much better you might be doing than you first expected?

Yes, it's Brendan. We're not ready to provide guidance for 2025 during this call. However, I can share some insights that might help you with that question. For the end of 2024, we've shifted to average guidance, which we believe is a more meaningful metric. We initially anticipated ending the year around 86% to 87%. Currently, we are trending towards the high end of that range and could even exceed it slightly. This reflects an improvement of about 50 basis points compared to what we previously expected. Additionally, we have significant expirations planned for early 2025, primarily in Nashville, along with some leasing activity this year that will begin in 2025, which will help offset any losses. Overall, we are in a stronger position. As we continue to have more quarters of good leasing volume, it will strengthen our recovery after hitting the lowest point. So as we move forward, our ability to lease well throughout 2024 will greatly enhance our performance in 2025 and beyond.

Okay. That's a perfect lead into my last question, which do we know why the pickup in leasing over the last four, five or six months? And I'm asking the why because maybe that's important to understanding whether this is sustainable or not. Or has this just been surprising to you as well, I don't know?

Yes. Good question, Michael. I think there are a few factors at play. A couple of years ago, many companies opted for short-term lease renewals. That trend seems to have shifted, as landlords are no longer accepting it and companies are getting closer to making decisions about returning to work and their office layouts. There was a backlog of lease expirations that had been deferred, and now they need to be addressed. Additionally, I believe that distress levels have increased over the last couple of years, prompting customers to decide whether to remain in their current buildings or relocate. On another note, we are starting to see an uptick in in-migration within our markets. We’ve been pursuing several clients, and recently, Raleigh won a client from Dallas, underscoring the competition between the two cities. Until now, the focus for economic development has primarily been on manufacturing and industrial users, but we are now observing an influx of office-using clients. In this quarter alone, we secured 10 leases from new market entrants, mostly small regional offices. The largest lease was for 27,000 square feet, with others ranging from 17,000 down to around 2,000 or 3,000 square feet, totaling over 60,000 square feet from companies moving in and establishing new offices in our market. Overall, it seems like we are beginning to witness some positive momentum.

We now have Tayo Okusanya from Deutsche Bank.

Just a quick one from me. In terms of just overall demand, could you talk a little bit about demand for some of the recently vacated space like activity space in the CDC space? I think you already gave color about some of the upcoming vacancies. We're curious about those two spaces, in particular, and if any of the new leasing this particular quarter was related to backfilling any kind of recent vacancies?

Yes, Tayo. I think specifically on Tivity, as you know, we redid the landmark lease earlier this quarter. I think earlier last quarter, we took back about 110,000 feet. We have really good activity, multiple prospects on it. So we did a big Highwoodtizing project a couple of years ago or a year or so ago, and it finished and it's really generated demand. It's been very well received in the market. So that's about 110,000 feet, and we've got prospects, I'd say, prospects either agreed to or strong prospects that we're trading paper with for about 80,000 feet or so. I don't know if we'll make all those, but we feel pretty good about a lot of those. So we feel really good about that. I don't think much of the leasing activity this quarter was really backfilling anything other than maybe one or two of the Tivity spaces that we've signed.

We now have Peter Abramowitz of Jefferies.

Yes. So just kind of want to dive into some of the comments around potential future growth opportunities, some of the underwriting you're doing. I guess we have a decent sense from whether it be non-core asset sales or the unsecured bond deal that you did last year where your cost of capital might be today. So I was just wondering if you could talk about from a pricing perspective, whether initial yields or IRR relative to that cost of capital kind of what you're hopeful for? What's realistic when deals do finally kind of start to come back to market and start to pencil like where are your expectations for where those would be from an underwriting perspective?

Sure, Peter. We're focused on growing the business and enhancing the quality of our portfolio through both core and value-add acquisitions. Following the global financial crisis, we primarily pursued value-add opportunities. Our goal is to acquire quality assets in the best business districts of our markets, aiming to improve our cash flow growth over time. We were quite successful in achieving that post-GFC. In terms of our underwriting process, we generally seek a discount to replacement cost and look at various metrics. Currently, we are underwriting to a low double-digit unlevered internal rate of return. There are still some potential deals in the market that we're evaluating, and we're optimistic about securing acquisitions that provide a stabilized cap rate in the high single-digit to low double-digit range, along with an unlevered IRR around 11%. If we can acquire assets that meet these criteria, it will enhance the quality of our portfolio.

That's helpful. And then one on the leasing market. Could you just comment on sort of the length of deal cycles? I know that was both for you guys and for office overall became more of a challenge last year that tenant decision-making was just a little bit slower. Could you talk about kind of that dynamic and where that's at in the first couple of months to start the year?

Yes, it's definitely been frustrating. It is taking longer to finalize deals, especially larger ones. Some we thought would close are getting delayed by a quarter or even up to three quarters. Generally, bigger deals take more time as they have to go through more levels of approval, all the way up to the CEO, and a lot depends on the CEO's confidence in the economy, including how interest rates play into that. Larger deals have longer timelines, while smaller deals, which are our main focus, are still being completed, though they are also taking more time, just not as long as those for users looking for 100,000 square feet or more. Interestingly, in the past couple of quarters, we've noticed an increase in the number of mid-sized users, particularly those looking for full floors or two floors, and decisions are being made more frequently by these types of customers. Does that make sense?

Peter, it's Brian. The other thing that's taken a little while is people are continuing to price and price work. We don't have a punchline yet on that, but it seems like escalations have stopped or leveled out or plateaued on build-outs. And so there is potential visibility into maybe getting a better price. So people kind of are holding on to see some of that TI that build-out that cost of moving into new space come down.

That's helpful. And one last one if I could. Just trying to think through from a modeling aspect, the earnings impact of any potential disposition through the rest of the year? I mean, are the deals that you've done so far in Raleigh, is that kind of a good barometer of what we should expect pricing-wise?

Peter, it's Brendan. First, I want to mention that while the dispositions we've made this year have had a negative impact on FFO, they have actually been beneficial for our cash flow. I anticipate similar outcomes for any future sales we may pursue this year or moving forward. The cap rates will vary, as each deal has its own unique factors influencing it. We'll have to see how they ultimately shake out, but there seems to be a possibility of slightly higher cap rates compared to those of early this year. Overall, the capital recycling activities we engage in should lead to a better cash flow outlook for the company, enhance our portfolio quality, and consequently lower our overall risk as a business.

We now have Ronald Kamdem of Morgan Stanley.

Just the first question, you guys talked about some of the expirations through the year and how that might be a headwind to occupancy. Maybe just give us a picture of what retention would look like in '24 if we were to exclude those move-outs. So just the retention on everything else.

Yes, Ron, it's Brendan. I'll take that. Retention is a challenging question for us because we have many early renewals, which means the count can vary depending on when you start measuring. Before this year, we had already renewed 1 million square feet of original 2024 expirations to future years. Looking at what's left at the beginning of the year, we encounter adverse selection bias, resulting in a low retention level. The retention rate for what remains this year, including known move-outs, is approximately 40%. If we exclude those large known expirations from the calculations, the percentage would be about 10-plus points higher. This provides a clear idea of our current situation.

Got it. And the second one on McKinney & Olive. You guys talked about paying down that loan potentially. I guess, with the sales you guys have executed on and potential additional $150 million to come. Should we take that to mean you're just going to use existing corporate liquidity or could we potentially see you guys tap the unsecured market to get here?

Yes. We do not have any plans for capital raising this year. Currently, we have almost nothing drawn on the line, with the full $750 million available, and we have construction loans in place for the two Dallas development projects, which will cover most of our remaining spending. We have plenty of liquidity. Regarding potential dispositions on the horizon, the challenge lies more in determining what capital we should pay off with the proceeds from any dispositions rather than contemplating capital raising.

Got it. And then I think you guys talked about Pittsburgh and Bass, Berry. Maybe just an update on Novelis as well would be helpful.

Yes. So on Novelis, again, we like the prospect activity. As you all know, we went direct with one of the sublease customers, and we've got over 200,000 square feet of prospects to backfill the remaining, call it, 100 or so thousand feet, maybe a little more than 100. So we feel pretty good about the prospect activity, a lot of tours.

We now have Dylan Burzinski from Green Street.

Most of my questions have been asked. But I guess, Brian, going back to your comments on focusing on occupancy over rental growth. I mean, is it your expectation that we'll continue to see some degradation in net effective rents across the portfolio? Or how should we be thinking about that?

Dylan, I'm accused among the three around this table to be the eternal optimist. So I'll lean into that a little bit. Now look, obviously, headwinds, I think tenants feel like it's a tenant's market and it is. But I do feel constructive on our ability to hold kind of where we're at based on the quality of the assets, based on the seven different things Ted highlighted why maybe our leasing momentum is maybe more than previous averages regarding flight to quality, flight to capital. I don't see it greatly improving anytime soon, maybe as costs come down to fit up. But in general, I feel pretty optimistic about where we're at. Brendan?

Dylan, I would add that considering the current competitive dynamics in the leasing environment, our ability to fund tenant improvements is advantageous for us. However, we are looking for customers and prospects that offer higher face rates and longer terms. This approach is expected to maintain our net effective rents at a reasonable level, which has generally been the trend. While this might require more upfront capital, it secures longer lease terms at attractive rates. Therefore, I don't anticipate a significant decline in net effective rents, although there may be an increased need for upfront capital.

Thank you. We have no further questions on line. So I'd like to hand it back to Ted Klinck for some final remarks.

Thank you for everybody for joining us on the call today, and thank you for your interest in Highwoods. And we look forward to talking to you next quarter, if not before. Have a great day.

Thank you for joining the Highwoods Properties Q1 2020 Earnings Call. You may now disconnect your lines, and please enjoy the rest of your day.