Good morning. Thank you for joining today's Highwoods Properties Q3 2024 Earnings Call. My name is Cole, and I will be the moderator for the call. All lines will be muted during the presentation portion, and there will be an opportunity for questions and answers at the end. I would now like to pass the call over to Hannah True, Manager of Finance and Corporate Strategy. 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 reported excellent operating and financial performance once again in the third quarter. For the first three quarters of 2024, we have delivered financial results that are ahead of our initial expectations, while building the foundation to drive sustainable growth over the long term. First, our bottom line financial results this year continue to be better than we originally anticipated back in February. During the quarter, we delivered FFO of $0.90 per share and generated strong cash flows. At the midpoint, our FFO outlook is up $0.06 per share since the beginning of the year, including a $0.03 increase this quarter. And this is even with interest rates higher than forecast, and $84 million of non-core dispositions that were not included in our original outlook. Second, our new leasing volumes have been very strong throughout this entire year, and most prominently in the third quarter, which should drive strong organic growth after our long telegraphed occupancy trough in early 2025. With 1.3 million square feet of new second-generation leases signed through the first three quarters of 2024, our lease rate is over 300 basis points higher than our in-service occupied rate of 88%, roughly 2 times our normal spread, indicating that we have a sizable pipeline of leases that have been signed but where occupancy hasn't yet commenced. Third, we continue to make progress on our development pipeline, which is now 49% leased and we have a healthy pipeline of strong prospects to drive our leased rate higher. Our development pipeline will be a significant driver of cash flow growth going forward as these assets deliver and stabilize. Fourth, we continue to sell non-core assets and use the proceeds to recycle into higher quality buildings and reduce leverage. We closed on one small non-core land sale this quarter and are marketing additional properties. We're optimistic we'll close on more asset sales over the next several months. Finally, we're laying the foundation for future acquisitions by meeting with owners and lenders of high quality assets throughout our footprint. We have long believed it would take time for the bid-ask spread between buyers and sellers to narrow. With the first interest rate cut now behind us, we can see a pathway for the office investment sales market to open back up. Overall, we continue to outperform our financial expectations. We're making significant progress improving our portfolio quality and long-term growth rate, while fortifying our already strong balance sheet, and we have a healthy number of signed but not yet commenced leases in our development pipeline and our in-service portfolio that will further strengthen our cash flows. Turning to operations. The combination of our best business district locations, commute-worthy portfolio, strong balance sheet, and our hands-on approach to both customer service and property management is driving meaningful market share gains. New, second-generation leasing during the quarter was strong at 530,000 square feet and that doesn't include 39,000 square feet of net expansions, which are included in renewals. In fact, growing users outpaced contractions by a ratio of 5:1. Net effective rents, which, in our view, are more meaningful than rent spreads, are the highest in our company's history and 25% higher than the previous five quarter average. Plus, our weighted average lease term was 10.4 years, also the highest in our history. Stated vacancy rates remained elevated but these market-wide stats mask the improving competitive dynamics for top-of-market assets in our best business district footprint. There's still some office under construction, most of which will deliver by the middle of next year. The new starts are essentially non-existent. With high-quality blocks of space getting absorbed, there are fewer options for large users seeking Class A space with well-capitalized landlords. We expect these dynamics will continue over the next few years, which should allow us to drive occupancy and rents. In addition, return to office mandates have steadily increased over the past several quarters as employers are emphasizing the value of in-person collaboration and culture building that is easily replicated with remote work. According to a recent survey of U.S. CEOs, 79% expect a full return to the office over the next three years. The combination of dwindling large blocks of high-quality space, limited to no development starts, and increasing return to office requirements bodes well for the future of office demand. Turning to development. During the quarter, we signed 61,000 square feet of first-generation leases, including a small retail build-to-suit, bringing our 1.6 million square foot $514 million pipeline to 49% leased. We have strong prospects for an additional 140,000 square feet that we expect to sign over the next several months. We don't expect to announce any other new development projects this year. New starts are very difficult for any developer to pencil given the current environment. That being said, we've seen increasing inquiries for potential build-to-suits. I wouldn't characterize any of these as being close to a decision, but the renewed interest is anecdotal evidence that large users are coming back to the market and are focused on the in-person experience for their teams. As I mentioned earlier, we sold a small non-core land parcel during the third quarter, bringing our non-core asset sales to $84 million for the year. We've included up to an additional $150 million of non-core dispositions in our outlook. We may not hit the high end of the range before year-end, but we expect to do so by early 2025. In conclusion, we believe the outlook for Highwoods is bright. As evidenced by this year's leasing demand for our Sunbelt best business district portfolio continues to be strong. This will drive meaningful growth in occupancy and NOI following our trough in early 2025. Our $500 million development pipeline is seeing healthy interest and will drive a meaningful increase in our earnings and cash flow as it delivers and stabilizes over the next few years. Our balance sheet is in excellent shape and will enable us to capitalize on investment opportunities. And finally, our underlying cash flows remain strong, which supports our attractive dividend and allows us to continue reinvesting in our portfolio.

Thanks, Ted, and good morning all. Echoing Ted's overview on leasing, we couldn't be happier with the results our hardworking team posted in the third quarter. The quantity and quality of deals across our existing and service portfolio and development pipeline is emblematic of the flight to quality occurring across our markets. As we've mentioned previously, this flight to quality isn't just about the physical space, but rather is representative of a positive bias toward quality buildings, quality landlords with access to capital, and the quality of a commute-worthy experience, which is core to our DNA as both an owner and an operator. We're focused on building leasing momentum through year-end. With this, we signed 906,000 square feet for the quarter. New second-generation leasing of 530,000 square feet represents the highest quarterly performance in over a decade and is a testament to our customers' willingness to make a move in order to secure a new workplace that helps them recruit, retain, and return their best and brightest to the office. Additionally, and subsequent to quarter-end, we renewed two of our largest remaining expirations in 2025 and 2026 for approximately 300,000 square feet in Nashville and Raleigh in the aggregate. Portfolio leasing stats achieved high watermarks across a variety of metrics, including meaningful net effective rent and dollar-weighted average lease term. Our 10.4% cash and 22.4% GAAP rent spreads also reinforce our belief that customers see their relative investment in real estate as a real investment relative to their most valuable asset, their people. Our 18.6% payback is in line with our previous 10-quarter average, highlighting our portfolio's resilience in the face of continued and competitive concessions in the market. Our development pipeline continues to fill up, adding 61,000 square feet in the third quarter, which includes a new build-to-suit brewery and restaurant at our GlenLake mixed-use development in Raleigh. This regional draw will be a tremendous complement to the other food and beverage options we are curating to support the close to 1 million square feet of office customers we have at GlenLake. Highwoods believes that customers aren't monolithic in their approach to the workplace. This relates to location and to one's measure of commute worthiness, which is greatly impacted by one's commute. This belief is representative of our best business district approach, where best business districts are both urban and suburban in nature. This strategy is proving out in our year-to-date leasing performance with approximately 20% of leasing activity in the CBDs, 50% in interior locations, and 30% in the suburbs. Turning to our markets. In Atlanta, JLL reported sublease availability reached the lowest level in seven quarters. Overall, office inventory shrank, and there were no new construction starts for the quarter. There, our team signed 271,000 square feet, including 235,000 square feet of new deals. Included in this number is the 104,000 square foot substantial backfill of a customer who vacated to Alliance in August. In Raleigh, CBRE reports that sublease space is down almost 30% from its peak, and Cushman & Wakefield highlighted that the market's Class A properties are garnering the greatest leasing activity of 79% of the quarter's leasing volume. We signed 217,000 square feet in Raleigh during the quarter and renewed 84,000 square feet after quarter-end, representing a modest downsize for the company's second largest 2026 lease expiration. Moving to the market with the nation's lowest unemployment rate in Nashville, where Highwoods owns more than 5 million square feet, Cushman & Wakefield reported positive net absorption in the quarter and noted close to 3 million square feet of active prospects over 10,000 square feet are looking for space in the market. Our seasoned team in Nashville signed 54,000 square feet in the third quarter. After quarter-end, renewed the company's second largest remaining 2025 lease expiration at 210,000 square feet. In Downtown Nashville, our plans have been finalized for the repositioning of Symphony Place, where we have 300,000 square feet of no move-outs in 2025. This asset represents the next great opportunity for our unique approach to workplace making, which has been proven successful elsewhere in Nashville, both in the Brentwood and Cool Springs best business districts. While it will take time, the opportunity to reposition one of Nashville's most iconic towers is right in our wheelhouse and will provide meaningful upside and value creation upon stabilization. Wrapping up our markets in Tampa, I'd like to highlight the tremendous work of our Tampa team in light of the one-two impact of Hurricanes Helene and Milton. While many teammates are still personally dealing with the aftereffects of the storms, our portfolio fared well and was ready and waiting for our customers when the sun came back out. Our portfolio's resilience is a testament to our team's resilience and we are greatly appreciative of their collaborative and solutions-oriented approach to serving our customers. JLL notes in their recent market report that Tampa is strong and stable, and the 2.3 million square feet of leasing activity completed year-to-date in the Tampa market represents the greatest leasing volume among all markets in Florida. Additionally, Cushman and Wakefield highlighted that Tampa is one of the four hottest job markets in the U.S. For the quarter, our Tampa team signed 97,000 square feet, including 26,000 square feet of first-generation leasing in our Midtown East development, the only office building under construction in the market, which is now 35% pre-leased. This exceptional asset joins our successful Midtown West development in the heart of Midtown's mixed-use district, which includes a Whole Foods market, shops, restaurants, hotels, and apartments. Midtown East delivers in the first quarter of 2025 and is projected to stabilize in the second quarter of 2026. In closing, the third quarter was a strong one for Highwoods. The hard work, foresight, and investment we've applied to our portfolio is delivering results. Our leasing volume and metrics are representative of a flight to quality of portfolio and people who deliver an exceptional experience. We will continue to invest in our approach through reenergizing our core portfolio and delivering the most exceptional customer experience in our Sunbelt best business districts.

Thanks, Brian. In the third quarter, we delivered net income of $14.6 million or $0.14 per share and FFO of $97.1 million or $0.90 per share. The quarter was relatively clean from an FFO perspective. Depreciation and amortization expense, which doesn't impact FFO, but does flow through net income, was modestly higher during the quarter. This was due to the write-off of tenant improvements and deferred leasing costs associated with the cancellation of a future 110,000 square foot lease at the former Tivity building in Nashville. You may recall, we mentioned this was a possibility on last quarter's conference call. The former customer has agreed to repay us our upfront investment over the next five years. Our balance sheet remains in excellent shape. At September 30, we had nearly $800 million of total available liquidity, including cash on hand, available capacity on our $750 million revolving credit facility, and undrawn capacity from our joint venture construction loans. As we mentioned last quarter, early in Q3, our unconsolidated McKinney & Olive and Granite Park Six joint ventures repaid over $200 million of secured loans. We and Granite, our joint venture partner, each contributed over $100 million to these joint ventures. These properties will likely be a future source of capital as we plan to obtain long-term financing at some point in the future when conditions in the secured markets are more favorable. As Ted and Brian mentioned, we had a strong leasing quarter, especially new leasing volume, which has driven our leased rate 310 basis points higher than our actual occupancy of 88%. This includes currently occupied space plus leases signed but not yet commenced on vacant space. Net effective rents and average lease terms on signed leases this quarter were all-time highs, and we locked in over $340 million of total lease revenue from second-generation lease signings, also a record for the company. With such strong new leasing volume, rents, and term, obviously comes more leasing capital. This is a natural part of the real estate cycle when capable landlords with high-quality portfolios are able to drive occupancy higher. We expect this trend to continue in the near term as we fill the pockets of vacancy in the portfolio and push for longer weighted average lease terms. We believe we are well positioned to handle any short-term uptick in leasing CapEx, given our healthy current cash flows and future embedded growth drivers. For 2024, our updated FFO outlook is $3.59 to $3.63 per share, which implies a $0.03 increase at the midpoint compared to our prior outlook. The increase is essentially all from higher NOI driven by a combination of reduced expenses and higher revenues, partially offset by modestly higher G&A. The midpoint of our average occupancy range is unchanged at 88%, which implies lower occupancy in Q4. This has been expected given our long telegraphed known move-outs. At the beginning of this year, we projected year-end occupancy to be somewhere between 86% to 87%. We now believe the upper half of that range is most likely. As we mentioned last quarter, the strong leasing we've achieved this year makes us confident that our trough occupancy early next year will be higher than we previously expected, and our recovery will be faster. A few items to note about our fourth quarter expectations. First, we expect to incur a higher level of OpEx in Q4 compared to the prior 2024 quarters. This is largely attributable to the timing of certain expense items that were pushed late into the year rather than being spent ratably over the four quarters. Second, as I mentioned, average occupancy is projected to be lower in Q4. Third, the GlenLake III and Granite Park Six developments, which were completed in the third quarter last year, will have no interest for OpEx capitalization during the fourth quarter. While these items create short-term headwinds to our financial results, as occupancy recovers in our in-service portfolio and our development properties stabilize, we expect meaningful growth in our earnings and cash flow. To wrap up, we're very encouraged about the future for Highwoods. With our strong balance sheet and high-quality portfolio in best business district locations across the Sunbelt, we are gaining market share and expect rent economics to strengthen over time. This backdrop, combined with the meaningful embedded upside potential we have in our in-service portfolio and development pipeline, provides us a strong runway for future growth. Finally, our balance sheet is in excellent shape, which positions us to capitalize on future investment opportunities.

Great. Our first question is from Blaine Heck with Wells Fargo. Your line is now open.

Great. Thanks. Good morning. Can you talk a little bit more about the rental rate strength you saw in the quarter? Were there any specific leases that drove that strength? It looks like Atlanta was a standout. And then maybe you can comment on whether there are specific industries or tenant sizes that you're finding are more active in the market and willing to pay premium rents for the right space?

Hi, Blaine. Good morning. It's Ted. Yeah. Look, obviously, we did have a great quarter on the leasing front. We had a couple of larger deals that did contribute, and you nailed it in Atlanta. We had two, in particular, one that drove the cash rent growth. One was a financial services company, and one was a professional services law firm, and then one was a GSA deal that was driving those economics. But even without those, we had a very strong quarter on the economics if you back those out. So we're sort of seeing it—it just—it's a mix, right? It sort of depends on the submarkets in the markets we're in. But all in all, we're seeing some strength in our leasing this past quarter. And then with respect to smaller or larger really, it just depends. I mean, I think it depends on the tenant improvements that customers want. If we can get longer terms, we're willing to provide tenant improvements, and they're willing to pay for it. I think we're seeing some customers that are willing to pay for it, and that works out well. What's pretty interesting is, we always talk about the flight to quality, the flight to amenities, and the flight to capital. It's a common theme we've talked about the last few quarters, and that continues but it's not always the brightest, shiniest, newest buildings. And you've heard me say that several times. We've been on both sides of what I'm getting ready to talk about where we've been down to one of two for a customer, and they chose the new construction, even though it's $20 higher than what our offering is. And we've also been down to one of two where we've won because we've been the more value play. So it's just—it all depends on who the customer is, what industry they're in, who the CEO is in many cases, and the ability to— in terms of the type of space they want?

Great. Thanks for all that color. Super helpful. So it looks like you guys are a little ahead of schedule on leasing up 23 Springs. You've got an estimated stabilization date on that project in the first quarter of 2028, but you're already 60% leased with completion expected in the quarter. I guess, how do you guys feel about potentially recognizing some revenue and NOI at that project maybe even as early as next year? And does that contribute to any of your positivity on 2025?

Yeah. No, 23 Spring is going very well. I think we moved it last quarter, it was 56%, and we moved it to 60% this quarter, and we continue to see very strong activity. We have more strong prospects. I think you'll see hopefully some movement next quarter if we can get a couple of things to go. And I think in general, our pipeline, we have about 140,000 square feet of strong prospects for our development pipeline. So yes, with respect to 23 Springs, we're probably ahead of schedule. But as a reminder, it's a big building. We still have quite a ways to go. The ability will be finished towards the end of the first quarter next year. I think our first customer moves in in June. And then, Brendan, do you want to take the rest of that?

Yeah, Blaine. It's Brendan. So just—it's a good question. And as Ted mentioned, we would expect some contribution in terms of earnings from 23 Springs in 2025. That will be weighted towards the back half of the year and probably even weighted more towards the fourth quarter than it will be the third quarter, because we do have some customers that move in kind of the middle part of the year, but then even more that would move in later in '25. So I think we feel good that, that will be a contributor, along with, I think, the other development projects should all be kind of additive as we build throughout the quarters in '25.

Great. That's very helpful. And then just one last question, if I can. How are you guys thinking about the Pittsburgh portfolio in the near to mid-term? Do you think those dispositions are kind of off the table still through now or are you seeing any signs of the transaction market returning there? Are there any Pittsburgh properties in the potential $150 million that you've identified for potential dispositions? And I guess just strategically, maybe talk about how you think about the balance between waiting for an acceptable price to exit versus selling sooner or wherever the market pricing is, but maybe saving some capital needed for lease-up and any renovation or refreshing projects there?

Sure. Blaine, look, I think—in fact, we've got a team up in Pittsburgh today, working on some leasing deals. So look, obviously, we want to get out of Pittsburgh at the right time. But as you know, the last 2.5 years since interest rates started rising, the capital markets sort of locked up, it's hard to get any office deal done, right? You got to get financing, and it's really hard to get a big office deal done. So I don't think a whole lot has changed over the last couple of years. As we look at Pittsburgh from an investment sales standpoint, I think we’re going to sell at the right time. But we are—I think we’ve now hit the start of the interest rate cuts. If we can get a few more cuts done, whether it be a couple this year and into next year, I think that’s going to do a lot to open up the overall investment sales market. And then certainly, that would include Pittsburgh. But in the meantime, what’s been pretty encouraging is the leasing activity we’re seeing in Pittsburgh. So we like the activity we’re seeing there, both PPG and EQT. So I’m encouraged overall by both the fundamentals and then eventually our ability to get out, but it’s just going to take time, and we’re going to be patient.

Our next question is from Ronald Kamdem with Morgan Stanley. Your line is now open.

Hey. Just two quick ones from me. Just starting on the leasing front, which has sort of been pretty strong. I think you talked about ending the year sort of at the better half of the 87, 87-plus sort of range and so forth. I guess my question is just, number one, is it just more leasing activity overall in the market or is it really sort of this flight of quality where it's just a share gain? And then number two, just any more commentary in terms of the bottoming of occupancy next year? Could you share sort of what levels are you guys sort of thinking at all else equal? Thanks.

Hey, Ron. It's Brendan, good morning. So yeah, so just first on kind of that outlook for year-end. So I think what we've said for the past quarter or so is I think we initially part of the year, we said 86 to 87; I think we feel in terms of year-end occupancy. We feel comfortable in the upper half of that range now, so kind of somewhere between 86.5 and 87 is where we think we'll kind of end the year. So that's kind of where we expect those levels to be. I think the reason why we feel better overall or why that number is higher is just the leasing activity that we've had this year has been better. And I do think that that's largely market share driven. If you look at our occupancy relative to the markets that we operate in, that spread has continued to widen, and we think that that's likely going to be the case as we go forward for all the things that Ted mentioned earlier, which is kind of flight to quality buildings, flight to quality landlords, and landlords that have access to capital. So we would expect that would continue there. When you get past year-end, there are still some known vacates that we have in the early part of 2025 that we've talked about. We think we have mitigated a lot of that risk through the leasing that we've done thus far on future leasing that will commence generally later in '25. So the trough is still going to be lower in the first half of the year than it is for year-end '24. But we think we're going to build that back as we progress throughout 2025, because once you get through the first part of the year, there really aren't a lot of large known vacates in the portfolio. And as we disclosed last night in the press release, our second-largest remaining 2025 expiration, we renewed. So we feel good about that. So we think we will end next year from an occupancy standpoint probably somewhere comparable to where we'll end 2024.

Great. That's really interesting. So sort of flattish next year. Just switching gears a little bit to the capital market. I know we had a couple of conversations about getting back on offense and start especially this part of the cycle. Maybe could you just provide some updated thoughts on what you're seeing out there in terms of whether it's distressed or not distressed opportunities. Any sort of cap rate commentary to get back on offense?

Sure, Ron. Look, we continue to look at everything that's in the market. There's just not a lot of wish-list quality assets that are out there. A couple of maybe traded in the last quarter or so, but there's not a lot. So I think the distress continues to build. I think there's a lot of—as well as the bid-ask spread is still there. So the sellers that—even if they're not distressed, a lot of sellers don't want to sell in this environment. So I think my optimism is we can get a couple more cuts the next two quarters by the Fed, by the end of the year, next couple of months and then maybe into the first quarter of next year, the capital markets are going to open back up and there's going to be a fair amount of assets that do come to market early next year. But, as of right now, there's just not a lot out there. We continue to hang around the hoop and work our wish list of assets, but just not a lot out there right now.

Our next question is from Rob Stevenson with Janney. Your line is now open.

Good morning, guys. Ted, how much beyond the sort of $150 million of dispositions are you guys thinking about teeing up over the next, call it, six months? I mean, is this it for a while until you start to see some of these acquisition opportunities or are you going to continue to be active regardless of acquisition opportunities selling down some of the assets over the next six months to nine months?

Yeah. Hey, Rob. Look, I think we have continuous asset recyclers. So we're always sort of pulling from the bottom, selling assets, and repositioning and into higher quality stuff. So I think you're going to see us continue to do that. And just a reminder, that $150 million, I think Blaine asked the question, it does not include Pittsburgh. So the $150 million is other assets we have out in the market that we're actively marketing. And most of them, what you're going to see us sell is a lot like what we've sold the last several years. I think largely multi-tenant, some of our larger assets that are more capital intensive. So I think you're going to continue to see us do that and hopefully rotate into higher quality assets once the capital markets opened back up.

Okay. That's helpful. And then beyond the actual income-producing assets, are you guys also out there looking for office development sites for the next cycle? And how is pricing there? Has it gone down materially? Stayed relatively flat? Or has that just been re-entitled for apartments or something else at this point? How would you characterize your desire for land as well as pricing?

Yeah. Look, if you look at our land bank, I think we've done a great job over the last several years selling off older land that maybe had a higher and better use that was not office. We sold several parcels to multifamily developers over the last several years, as well as we bought what we think is better best business district or mixed-use type development land. So when I look at our land bank today, it's probably in the best shape it's been in a long time. And so we're really not actively looking for any land right now. In fact, we just sold a small parcel this past quarter, and then we have a couple of other parcels that will likely sell next year. So it's hard to characterize it, given we're not out there making offers on land to buy. But I do think there's plenty of buyers out there for the right parcels.

Yeah. Rob, sorry, it's Brendan. I'm just going to add to that a little bit. In the sub, we've got kind of $300 million plus of land held for development between core and non-core. I think you should expect that number to go down over time. So that's probably a little bit higher than what we would expect to carry. So if anything, I think we'll get net proceeds from land sales that will be helpful in terms of capital coming in the door rather than looking to acquire additional land for development?

Okay. Is there any of that contemplated in the fourth quarter guidance?

No. Nothing in fourth quarter.

Okay. All right.

Nothing in the fourth quarter and nothing in that $150 million.

Okay. And then you guys fortunately only reported one FFO number. Is there any impact to fourth quarter earnings from the hurricanes at this point for you guys?

Yeah. It's a good question. It's—there's probably a little bit that is in there that we would expect to incur in terms of some non-recoverable operating expense items. I wouldn't say it's a big needle mover, but if you're kind of looking for something at the margin, there's a modest impact there, but not something that we felt like was significant, and we would expect to recover most of those costs, but not all of them.

All right. That’s helpful. Thanks, guys. Appreciate the time this morning.

Our next question is from Michael Griffin with Citi. Your line is now open.

Great. Thanks. I wanted to ask my first question just on the leasing pipeline, and particularly on the weighted average lease terms this quarter, they seem pretty strong. I know that it can fluctuate around quarter-to-quarter and maybe it's largely impacted by some large leases that you've done. But should we take this as kind of an expectation that there has been more confidence in real estate decision-makers signing leases, or are people still kind of dragging their feet when it comes to committing to kind of rightsizing their office footprint?

Yeah, Michael. Look, I do think the decision-making has really slowed down the last couple of quarters, and I think that's partially economy, but it's also the return to work. I think there's more mandates that are requiring their teammates to come back to the office. I do think some companies over-disposed or shrank their offices. We've seen several come back to us after they sign the lease and need more space. So the decision-making in general has slowed down. In terms of the lease terms, I think it has more to do with the build-out of their space and their tenant improvements. Again, we're able to keep face rents on our lease economics today. Face rents are still high and in some cases, climbing, but TIs are as well, and to get the tenant and customer to get the build-out dollars they need, they've got to commit to more term. And we're seeing the willingness to do that. So I think that's had an impact on the length of the term. Does that make sense?

Great. That's very helpful, Ted. And then just maybe going back to kind of transaction opportunities. I know you said the bid-ask spreads are still wide, and you haven't found anything that's in your wheelhouse from your criteria yet. But when you're underwriting transactions, can you give us a sense of maybe the IRR or return hurdles that you're looking at, maybe relative to your cost of capital? And then in terms of potential funding needs, have you seen an openness in the debt markets, in the capital markets? Would you use it for equity funding? Just trying to get a sense of how you might structure a prospective transaction?

Yes, maybe I'll hit the sort of the way we look at the underwriting. Look, I mean, I think there's a lot of levers to pull there. And it all depends—we look, as you know, as we bought coming out of the GFC last cycle, it was—we bought a lot of opportunistic and value-add office, but we're also buying core and core plus. So it's all risk adjusted for us. We may need a double-digit IRR on a value-add deal, and if it's a core asset with a long lease term, great credit, it will be a little bit below that. So we're all over the board. We're looking for high-quality assets. We can get attractive risk-adjusted returns on. And that's over a longer period of time.

Michael, it's Brendan. Just on the funding, you've seen the bond market has been there, and I think you've seen good response from the bond market so that capital is certainly available. And then as Ted mentioned earlier, we've been successful monetizing non-core asset sales and would have those funds available to recycle into higher quality assets that have a better long-term growth path. So I think those would be sources of capital for us.

Great. Appreciate that color, Brendan. That's it for me. Thanks for the time.

We have a question from Nick Thillman with Baird. Your line is now open.

Hey. Good morning, guys. Just wanted to get some color on kind of the larger users and requirements. We had heard in Atlanta, in particular, that there's some new-to-market customers really looking at more suburban markets like North Fulton and Central Perimeter. But just wondering if that's a trend you guys have kind of noticed in some of your other markets in particular?

I think absolutely, you're seeing larger customers come back to office or come back to the market, right? And many of our markets, there are a lot of large users that are out there in the fall of '22, and then interest rates started to pick up fairly quickly. A lot of those went to the sidelines. They continue to reevaluate the return to office, but we're seeing them. And we're seeing them both not only some of the in-migration, some of the inbound activity. We're seeing it, as I mentioned in our prepared remarks, in the development, the outreach for potential development deals from very large users. So again, it's all anecdotal, right? We are starting to see more customers. We didn't define large. I mean, during COVID, we got to the point where we defined large as 25,000 square feet or more. But certainly, those— that size is back, but even the 50s, 100s, 200s, you're starting to see more activity.

That's helpful, Ted. And then, Brendan, it sounds like repositioning plans for Symphony Place are kind of—do you have like a rough estimate of what the cost is going to be for that? And then as we look at same-store, I know you guys traditionally don't move assets out of the pool, but are you planning on keeping that within the pool or not for 2025?

Yeah. Hey, Nick. It's Brendan. So on the Highwoodtizing plans there, that is—I mean, we have a pretty regular and robust, what I would call, pool of renovation dollars that go back into the portfolio on a normal basis kind of every year. Symphony Place kind of fits within that. So we've been planning for this. So I wouldn't expect that you would see anything dramatically different in terms of capital spend associated with the Highwoodtizing plans there versus kind of what you've seen us do over the past many years. And we've done that successfully in our headquarters building here at 150 Fayetteville Street. We've done it at assets in Brentwood and Cool Springs recently in Nashville as well. So that spend will kind of be consistent with what we've done over long periods of time. And then with respect to same-store, yes, as you correctly point out, we're not—we don't take assets that are office buildings that are going to remain office buildings out of our same-store pool. So that will be in there. We will expense all of the operating expenses associated with that building, and we'll expense all of the capital on leasing associated with that building through the normal channels.

Yeah. Thank you. Just wondering if you could comment on any uplift in the rents on the Vanderbilt lease, as well as the other lease you called out in the press release, and sort of how that impacted the leasing spreads in the quarter?

Hey, Peter. Brian here. We've had a long relationship with Vanderbilt. They kind of renew in place as they have kind of every five years. And it's a good economic deal, and there's not much more to talk about the specifics on that, but we were happy with the net effectives on that and low capital committed to it.

Right. So when you say they renew in place, there's no uplift in rents when the renewal kicks in next year? Is it just kind of flat?

Yes, Peter. It's Brendan. Yes, it's just sort of a continuation of the normal rent escalators that we've had there. So we shouldn't expect to see any big needle movers there with respect to that renewal.

Okay. Got it. And then stepping back overall on the higher effective rents and the better leasing spreads overall in the quarter, I guess should we kind of take it overall as a sign of increasing pricing power, or was there anything sort of more one-off? I know I think, Brendan, in the past, and it's still been the case recently that you talked about typically kind of plus or minus 5% mark-to-market cash on the portfolio. So just curious if we should take this quarter's results as a sign of that getting better going forward?

Yeah, Peter. It's Brendan. And I'll start and maybe let Ted or Brian add to it. I still think what we've talked about is kind of on a cash basis. I mean, mark-to-market, plus or minus, flattish, we think is still probably a good kind of guide post. Obviously, in any given quarter, things are going to be volatile. So this quarter was high at over 10% positive. I think we were negative, maybe modestly in the first couple of quarters of the year. So those things are going to bounce around a little bit. I still think it's probably a pretty good guide to kind of be flat to low single-digit positive is probably a good gauge from a cash rent spread perspective.

The only thing I would add, Peter, is again, we focus more on net effective rents versus the spreads just because we do every quarter, quarter-in, quarter-out, we do several as-is deals that really don't require any capital. And in those cases, sometimes you do have a little bit of a roll down in rents, but if we can get an attractive net effective rent, we're okay doing those types of deals.

Thanks, Ted. And one more, if I could. You called out the renewed interest in build-to-suits. I know the conversation is still early, but I'm just wondering if you could comment on which specific markets there's to be interested in?

Yeah. Probably early to do that. What I will share—look, we've had more than—well, I had a handful type of conversations. One is that would be a new market, or it might end up being a fee-type thing if it goes anywhere who knows. All these are early. Our development team is just ecstatic that we've got stuff to work on. But it's great to see the inbounds again. It's been quite some time. It's been three to four years since we've had the practice. But just receiving the call and getting the inquiry and the interest level was great from an in-migration standpoint, but it’s also great to see large users and some of their views on return to work and the importance of being in the office. So, again, these things are going to take a long time, as I think we’ve talked about in the past, some of our development deals take two or three years to play out. But even just being at the table, I think is nice to see.

Hi, guys. Ted, just sort of continuing with the build-to-suit theme here. I mean, I know it's still in the early stages, but sort of curious what sort of return hurdles or yield on cost hurdles you guys would need in order to progress with those build-to-suit opportunities?

Yeah. Dylan, look, the bar is high, right, on development, very similar to what it is on acquisitions. So we're going to look at our cost of capital, but really what's the big hurdle here is the rental rate necessary. We're not seeing costs come down. So, without a doubt, the return on cost is going to be higher, the financing costs are higher even to go get a loan. There's build-to-suits out there that have had a very difficult time even obtaining financing. So that gets factored into the mix, and then the hard and soft costs aren't coming down either. So the bar is high, and I think customers are getting educated on that right now. But it's just given the environment, the bar is pretty high from a yield perspective, which translates to pretty high rent.

And then maybe just touching on net effective rent growth prospects. I know you guys highlighted sort of having the highest net effective rent in leases signed in the quarter, but as you sort of look at the portfolio today, you're approaching high 80s occupancy. Obviously, you'll have some vacancy early next year, but you kind of alluded to recovering a lot of that occupancy in the latter half of 2025. So just sort of trying to get a sense for prospects for a continuation of further net effective rent growth as you sort of approach that 90% portfolio level occupancy.

Yeah. Maybe I'll start and Brendan or Brian can jump in. Look, I think net effective rents jump around. There’s still pressure on net effective rents from a TI perspective and then certainly free rent too. I think our markets are still challenging without a doubt, right? You still have elevated market vacancy rates. So I think that's going to continue for a while. So I think if we can maintain net effective rents, maybe grow them a little bit, I think we'd be happy with that. But I don't think anybody should have the illusion that there's a lot of pricing power in most of our markets. I do think it's submarket by submarket and best business district by best business district. So it depends on the mix of leases you do in a certain quarter. But the leasing market is still challenging, and it's competitive. And so maintaining those effective rents is sort of our goal and to grow them a little bit if we can.

Thanks, Ted. Appreciate that.

Thank you.

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Well, thanks, everybody, for joining our call today. We appreciate your interest in Highwoods and we look forward to seeing everybody maybe at NAREIT next month. Have a great day.

That concludes today's call. Thank you all for your participation. You may now disconnect your lines.