Q1 2022 Highwoods Properties Inc Earnings Call
[music].
Good morning, and welcome to the high which properties earnings call. During the presentation. All participants will be in a listen only mode. Afterwards, we will conduct a question and answer session.
At that time, if you have a question. Please press the one followed by the four on your telephone.
And if at any time during the conference you need to reach an operator, Please press star zero.
As a reminder, this conference is being recorded Wednesday April 27th 2022.
I would now like to turn the conference over to Hana true manager of Finance and corporate strategy. Please go ahead Ms true.
Thank you operator, and good morning, everyone. Joining me on the call. This morning are Ted Klink, Our Chief Executive Officer, Brian Leary, Our Chief operating Officer, and Brendan Mayor Honor, 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 high was dot com.
On today's call. Our review will include non-GAAP measures such as F. F. A N O y and EBIT there.
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 now turn the call over to Ted.
Thanks, Anna and good morning, everyone.
We had excellent financial and operational results in the first quarter consistent with our performance since the start of the pandemic.
Leasing activity is robust same property cash NOI growth was solid.
We had our third consecutive quarter of record core F F O per share, which excludes land sale gains.
Our cash flows continue to strengthen our balance sheet is in excellent shape.
We believe our strong performance to start the year is largely attributable to continuing execution of our strategy.
As we've stated before our simple and straightforward investment strategy is to generate attractive and sustainable returns over the long term by developing acquiring and owning a portfolio of high quality differentiated office buildings in the BB DS where markets were set.
Another way workplaces that are commute worthy.
We were actively putting together the building blocks to further strengthen the financial and operational performance resiliency and long term growth prospects for our portfolio.
Our development team is exploring numerous potential starts we were optimistic about the potential to acquire additional high quality assets and we're continuing to make progress with our long proven plan a cycling out of non core assets.
Turning to our results we delivered F F O. The dollar and three cents per share in the first quarter.
Excluding four cents of land sale gains are F. F. O was 99 cents per share more.
More than 8% higher than the first quarter last year.
In addition to F F O. Our operations were also healthy.
Same property cash NOI growth was consistent with last quarter at three 1%.
Occupancy held relatively steady at 91, 1% and leasing maintained its momentum with 658000 square feet of second Gen space, including a robust 391000 square feet of new leases.
Rent spreads were positive 14, 9% on a GAAP basis, and roughly flat on a cash basis with average term increasing to six four years.
Average rental rates per square foot in our 27 4 million square foot in service portfolio were four 2% higher on a cash basis compared to one year ago.
The upbeat start to the year has given us confidence to increase our year end occupancy outlook as many of the new leases signed will commence later in the year.
Utilization across our portfolios increase to around 50% up.
Up about 10 percentage points during the past couple of months and we expect it to continue to pick up based on the return to work plans, we are hearing from our customers.
As we've stated before even though utilization is below pre pandemic levels and customers are figuring out their office workspace schedules, many of which who are hybrid we are encouraged by the consistently strong leasing activity, we've seen across our markets since the start of last year.
Turning to investments during the quarter, we sold a land parcel in Tampa West shore Bvd for $9 6 million, which included a $4 1 million dollar game.
This sale is a good example of our strategy to maximize value from our existing assets.
Other buildings where land.
We sold the pad to a developer who will construct a luxury multifamily community adjacent to our 209000 square foot base Center office building.
Our land bank has a value of approximately $340 million and.
And it has never been more attractive it can support $2 $2 billion of future office and another almost 2 billion of adjacent mixed use development.
The new apartments shops restaurants and hotels.
These mixed use sites create excellent optionality for us as we may choose to sell the parcels outright or participate in the ownership and development.
Either way the build out of this mixed use land will bring even more desirable amenities to our adjacent office properties.
And as will be the case at Bay Center.
Our $283 million 615000 square foot development pipeline is now 55% pre leased having leased another 223000 square feet since our February call.
We have healthy interest across our projects and remain confident that both Virginia Springs, two and Midtown West will stabilize by the end of the year.
As you remember as you May remember, we started both projects fully spec in 2019.
While we didn't announce any new developments in the quarter. Our team is busy working on potential build to suit and spec developments that could be announced later this year.
We're progressing with additional noncore dispositions, we have multiple properties under contract and we have others in various stages of the marketing process.
It has been as has been our plan we are on pace to return our balance sheet to pre pack acquisition metrics by the middle of the year.
On the acquisition front competition for high quality properties in our markets BB DS has continued to be strong.
As institutional investors recognize the excellent long term value of assets located in the best Submarkets across our footprint.
We're seeing opportunities arise and BB DS, but rest assured we will continue to be disciplined with our capital allocation as we seek to acquire office assets that would further strengthen our performance resiliency and long term growth prospects.
Now to our 2022 F F O outlook.
We project full year F F O $3.82 to $3 98 per share up six cents per share at the midpoint since our initial outlook in February .
Same property cash NOI is projected to grow with 0.5% to 2.0% up 25 basis points at the midpoint.
And we now expect to end the year with occupancy of 91.0% to 92.5% also up 25 basis points at the midpoint.
Our investment activities acquisitions dispositions and development announcements are unchanged from our prior outlook.
Before I turn the call over to Brian I'd like to briefly recap our performance and outlook.
Our leasing activity has rebounded to pre pandemic levels, especially new leasing as evidenced by this quarter's 391000 square feet.
Our full year 2022 outlook for all three of our primary financial and operational indicators yearend occupancy same property cash NOI and <unk> per share or higher at the respective mid points than originally forecasted.
Our $283 million development pipeline is 55% pre leased and will generate meaningful cash flow as it delivers.
And our balance sheet is strong with leverage of 39% and a debt to EBITDA ratio of five three times.
We're confident that we continue to have the building blocks in place to drive sustainable growth over the long term Brian .
Thank you Ted and good morning all.
Our team continued to deliver solid results for the quarter with a well located high quality invest resilient portfolio, it's capturing layton and inbound customer growth.
And as walgreen back its occupants.
Albeit.
On different timelines.
Our simple strategy of owning commute worthy workplaces and the best business districts of our markets, which are both urban and suburban in nature has position high woods at the Nexus of a number of accelerating trends.
And proven capable formula for maintaining occupancy growing rents and increasing term.
As important our work place, making approach is providing our customers a compelling and competitive advantage for retaining and recruiting and returning talent to the office.
They've told us they can achieve together what they cannot apart culled.
Culture collaboration and collective creativity.
The results for the first quarter bear evidence of this as our team signed 102 deals representing 658000 square feet.
Of which 391000 square feet were new.
These 58, new deals represent our highest quarterly count since Q2 of 2014.
As this leasing comes online we expect occupancy currently at 91, 1% to increase in the latter half of the year.
Two our markets, where the in migration of residents in jobs continues and where unemployment rates have returned to pre pandemic levels or below.
Let's start in Tampa, where unemployment is below 3%.
Office employment is up almost 4% year over year and.
And market rents have increased 8% from last year.
Our leasing team has been busy signing 250000 square feet for the quarter.
We released our portfolio's largest vacancy at 50 332 avionics.
Which will bring this assets occupancy to 95% by the end of the year and.
In addition, we back filled our company's two largest remaining 2022 explorations bowl at one independence with no downtime via long term 112000 square foot lease to a tech company.
Our success at one independence is a clear marker for our work place, making strategy Hasnt taken a 44 acre single use the independents Park site.
Do it mixed use rezoning to add residential and retail uses to the master plan.
For the quarter GAAP rents were up 23, 8% in Tampa and the average term for the 260000 square feet of signed leases was over seven years.
These leases emphasize our strategy of owning maintaining and operating the strongest most commute worthy buildings in the bvd is of our markets as they demonstrate the desirability of our properties to diverse corporate users.
Not to be outdone, the Richmond team posted a strong quarter, signing 93000 square feet of leases with market rents rising 4% year over year and were costars commitment to Richmond was reinforced by their announcement of a $416 million expansion of their research and technology innovation.
Campus, where 2000, new employees will occupy a new twenty-six story tower.
The Raleigh, and Nashville markets posted positive net absorption for the quarter.
Unemployment rates are at or below 3% and.
And our collective 11.4 million square foot square feet in these markets.
Holds main and main positioning in each of these markets BB DS.
We're all these rents continue to grow up 6% compared to last year, and where J L. O notes the market has averaged over 4% year over year increases in rent over the last five years.
Our team, they're signed 83000 square feet of leases and ended the quarter at 93, 2% occupied.
In Nashville, we ended the quarter, 95% occupied and our Virginia Springs, II development is 90% leased and on schedule to stabilize by the end of the year.
Having acquired the bandwidth of ovation is 145 acres in Nashville's burgeoning Franklin Cool Springs Bvd.
As master developer, we are re envisioning a more integrated mixed use plan and we'll be working with the city.
And best in Class third party retail and residential developers to advance a mixed use town center over the next several quarters.
As Ted mentioned earlier our development.
<unk> pipeline and potential is as solid as ever with either construction or design underway across our footprint with anchor or build to suit rfps in hand.
The team's success in delivering on time.
On budget and leasing up throughout the pandemic gives us confidence looking ahead at the new development opportunities before us.
While we continue to operate in a dynamic and ever changing industry, a few things have become clear.
The first is that a hybrid work model that provides for flexibility most specifically throughout the workweek is currently a matter of fact for many of our customers.
This being said these same customers have led us to believe that their teams are better together in the office, where they can onboard new hires mentor, a rising talent cultivate culture and collaborate to solve problems or develop new products.
It is our opportunity to provide these places and spaces and we couldnt be realizing the results we are without a total team effort.
Two are high which teammates thank you for giving our customers your very best every day.
Unwavering commitment to providing the best possible customer care has been the foundation from which the portfolio has proven resilient and from which we will continue to grow.
Hand, it off to Brendan.
Thanks, Brian and good morning, everyone in the first quarter, we delivered net income of $40 3 million or <unk> 38 cents per share in F. O up $110 4 million or $1 three per share as Ted mentioned the quarter included a land sale gain of four cents and a termination fee of one said while the <unk>.
One cent termination fee was factored into our original F. O outlook provided in February the four cent land sale gain was not.
Rolling forward from last quarter's F O and excluding land sales from both the fourth quarter and first quarter. Our F. O increased <unk> <unk> per share the increase in the first quarter compared to the fourth quarter was attributable to the following higher NOI contributed four sense, including the aforementioned term fee.
The remaining three <unk> increase was driven by higher average occupancy and lower opex.
And lower interest expense contributed <unk> 10, primarily attributable to lower average debt balances, which were primarily offset by.
Three cents of higher G&A, mostly due to the accounting impact of our annual long term incentive grants, which are customarily made in the first quarter each year.
The combination of these items netted to send increase in core <unk> from the fourth quarter of 2021 to the first quarter of 2022.
Turning to our balance sheet, which remains in excellent shape. We ended the quarter with net debt to EBIT. There of five three times down from five four times at the end of 2021, we're on pace to return our balance sheet to pre pack acquisition metrics as we complete the last few noncore dispositions we plan.
<unk>.
Even if we don't sell any additional noncore assets or raise equity our balance sheet still has plenty of dry powder to be opportunistic with future investments.
To this end we estimate we can complete our existing development pipeline and invest up to half a billion dollars in additional opportunities without the prerequisite of selling any assets or raising equity and still maintain our net debt to EBITDA ratio of under six times.
In addition, we have a limited debt maturities, which creates optionality with our financing plans are only two debt maturities prior to 2022, six or $200 million term loan that matures in the fourth quarter of this year and a $250 million unsecured bond that matures in January 2023.
<unk> that we can repay without penalty in October we plan to satisfy these maturities with noncore disposition proceeds retained cash flow and other financings Sim.
Similar to recent quarters, we issued a modest amount of shares on our ATM program at an average price of $46 50 per share for net proceeds of $6 million ATM issuances remain one of the tools. We believe are inefficient and measured way to fund incremental investments, particularly our development.
Pipeline on a leverage neutral basis, as Ted and Brian mentioned, our development team is busy exploring potential projects and we believe creating some additional dry powder on our balance sheet ahead of future announcements is prudent and conservative financial planning.
As Ted mentioned, we've updated our F O outlook to $3 82 to $3 98 per share up six cents per share at the midpoint from the original range. We introduced in February the major changes from our prior outlook at the midpoint of the range are the following.
<unk>.
And four cent increase from land sale gains recorded in the first quarter.
Five cent increase from anticipated higher anticipated NOI attributable to stronger leasing better parking revenues and lower opex and a one cent pickup from lesser anticipated dilution in 2022 from planned dispositions primarily related to time.
These items add up to 10 cents of upside, which are partially offset by three cents of higher projected interest expense due to rising interest rates and one cent higher projected G&A expense. These items equate to a net increase of six cents per share at the midpoint.
Finally as mentioned many times during the past several years, our cash flows continue to strengthen this quarter is an excellent example of the of this improvement as our cash available after distribution was $27 million, while cat and cash flow can be lumpy from quarter to quarter or year to year. The trend is clear that our.
Cash flows continue to strengthen cash flow improvement over the long run was one of the primary drivers behind the plan. We executed in late 2019, and early 2020 to cycle out of the slower growth markets of Greensboro, and Memphis, and redeploy that capital into the higher growth market of Charlotte. It was again a primary driver.
Or behind the more recent plan of funding the acquisition of a portfolio of high quality office assets from pack with the sale of additional non core assets in our existing markets as we recycle capital going forward, we expect to continue to improve our portfolio quality resiliency and long term growth.
While also further strengthening our cash flows.
Operator, we are now ready for questions.
Thank you.
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Our first question is from Vikram Malhotra with Mizuho. Please go ahead.
Morning, Thanks for taking the question.
I guess first just maybe Brendan you can walk us through your latest views on just exploration in the back half and into it into 'twenty three.
Maybe just update us on any known move outs any ones, where <unk> and <unk>.
It's still in process and just how much of that kind of next 12 months do you actually have covered at this point.
Hey, Vikram good morning, sure so I'll start and I'll, probably pass that off to Brian to talk about the specific.
Explorations and and the activity that we're seeing there, but overall I think as you saw in the updated outlook we did increase.
Our year end occupancy target so the midpoint moved up 25 basis points to nine.
91.75 at at that midpoint.
And we ended the quarter at 91, one so I think for our expectations as we think about migrating throughout 'twenty 'twenty. Two we do expect the occupancy ramp to be backend loaded. So we would expect occupancy to accelerate as we move into the back half of the year.
But we do have good good overall activity throughout our markets and then I'll hand, it off to Brian to maybe talk about some of the specific explorations and activity were seeing there. Thanks.
Thanks, Brendan and thanks Vikram for the question.
<unk> heard earlier in the remarks that we have been working in the garden. If you will to take care of those 22 explorations and getting ahead in the 'twenty three specifically the largest ones in the entire company where in one building in Tampa that we've since back filled with no downtime to a tech company. So that's.
Independents, one so we're feeling really good about the team's work there, but as these expirations come up we get ahead of them and so even as we look into 'twenty three where we have the Tivoli exploration two we're feeling really good about prospects and good activity for a full re let on that building as well so to Brendan's point.
We do feel optimistic about being able to address these early and were staying on the front foot.
And sorry, if you could just clarify the tech company.
What was the mark to market on that.
Vikram that one was about flat that was our long term debt on a cash basis. It was positive on a GAAP basis and that was if you'll recall that was the backfill as Brian mentioned, the two largest expirations that we had in 2022 remaining and we backfill that with with no downtime, so and we felt good about that.
Transaction in Tampa.
Okay and then just.
On the Opex side.
And the boss, given where utilization is given the.
Are there some of the variable income coming back can you just update us on what's embedded.
In Opex.
This year and should we expect any variability in that.
Yeah, So I would say so what we disclosed in the beginning of the year and I know, we chatted a lot about this with you and many others on the phone.
We said, we thought opex net of recovery would be a headwind to the tune of eight to 12 cents per share for 2022 compared to 21 that number we probably think that that has lessened a little bit. So it's probably more in the eight to 10 cent range in terms of.
Headwind is kind of our updated outlook, but more than offsetting that our improvement in terms of <unk>.
Parking revenue overall.
Overall occupancy levels and other kind of growth within within NOI. So our as I think I mentioned in the prepared remarks, our NOI were up about <unk>.
<unk> a share compared to where we thought we would be in the beginning part of the year. So we've more than offset some of the headwinds that we've seen elsewhere in the financial plan.
Got it okay. Thanks, so much.
Our next question is from Blaine Heck with Wells Fargo. Please go ahead.
Great. Thanks, good morning.
Brendan Thanks for the color on the ins and outs related to guidance. Just one more question on that can you talk about whether the two to four cents of increased interest expense.
That you're now expecting is driven solely by the increased expense on your loading rate term loan and credit facility or were there other balance sheet moves that were contemplated this year that might be a little bit more costly in this environment.
Yeah, No Blaine. Thanks for the question. Good morning, Yeah, it's solely attributable to tariff rate overall, and just to give you a little bit of perspective, I mean, we don't we don't speculate on what rates are going to do we just look at the forward curve and layer that into our expenses Sean assumption. So the forward curve has moved up fairly substantially.
Over the past two and a half months and that's really driving that two to four cent increase but just as a reminder, our overall variable rate debt is about 10% of our total debt and it's less than 4% of our total asset. So we're talking about a significant increase in terms of rates overall over.
The past several months and it's impacting us by about three cents a share on an overall base that's $3.90 of F O.
Got it that's helpful and then maybe for Ted or Brian .
Land Bank is the largest it's been in quite a while maybe in the company's history can you comment on whether some of the leasing that you guys did during the quarter on projects under development makes you a little bit more comfortable starting something on land that you own in the near term and where that might be.
Nashville kind of jumps off the page as as the largest opportunity for you guys from a development point of view, but you know that market has seen a lot of supply as well. So if you could comment generally and then then on the prospects there in Nashville, specifically that would be helpful.
Sure Blayne.
Maybe start off and Brian can jump in on National specifically, but yeah, you're right look at 340 million of our land Bank is.
Is probably close to the higher end of what we've had historically I think having a well located land bank.
Extremely helpful for us.
Our raw material for growth and development so.
You know gets in front of us gets us in front of prospects gets us a seat at the table and I can tell you our development team. They are probably as busy as they've been in a long time, we've got numerous active discussions going on.
Really most of our markets.
It either whether it be a build to suit or what would be a pre leased pre leased so it would kick off a building. So it's the development teams are working hard.
Most of these are on our own land that we've had our own existing land bank. So.
We're hopeful we can have some starts things are taking longer and I've talked about our guys are working hard for the last couple of quarters and all of the discussions we've alluded to in the last quarter or two all of them are still ongoing and we've added a few theyre just taken a long time for.
For one reason or another so it's hard to predict when if and when we can get more developments, but.
Again, we're excited about the land bank and Brian do you want to touch on National Yes, sure and I might just clip onto it that the 10000 foot level on that land bank is one of the <unk>.
Things that give us a little advantage competing in these markets against more typical kind of merchant development is having that land bank gives us.
The time to design right now with I'm sure it will be out there escalations and supply chain disruptions as we can advance design and getting better visibility into costing.
In terms of what we're going to build it gives us an advantage to then start so blayne you you hit on it with Nashville.
We are very fortunate in having really three significant land bank positions and the three most significant BB DS.
In Nashville kind of working the way inside out of those three two of the three.
We were working through some nuances in and with the local jurisdictions on site plan approval. So we can really be in the starting house to move very quickly, but the one that has already cleared that is there in the Gulf.
Where it's our golf Central Assembly of basically a couple of city blocks surrounding assure in between Broadway in church.
We received all of our approvals from the city for maximum density and we envision that as a mixed use development, which would include an upwards of a million square feet of office and so we are kind of vetting. The other uses as part of that which would probably be high end residential and hotel and retail uses so that is <unk>.
Advancing and then so we looked down to Brentwood, where we are leasing up Virginia Springs II, we have activity on the balance of that building that building hopefully will be not only stabilized but at the end of the year, but moving towards 100% committed.
We've got to have the inventory write to Ted's point, you mentioned Lance the raw materials for our pipeline and so we're working with the city of Brentwood, there for a multi building opportunity then obviously ovation.
I mentioned that previously now that we have full control and ownership of its 145 acres in the full entitlements, there which is.
Currently at a million four of office 950 residential units at multiple hotels, we see that is a tremendous opportunity to stars are aligning for Nashville and for Franklin in Williamson County, So we are going through the process of vetting other third party developers to be part of that and we look.
Forward to coming out of the gate. So the end of this year for a re imagination of those opportunities.
Yeah.
Very helpful. Thanks, guys.
Yeah.
Our next question is from Rob Stevenson with Janney Montgomery Scott. Please go ahead.
Good morning, guys, Ted or Brian can you talk about construction costs I mean, I know that you have the land bank, but in terms of just the materials and labor construction costs, if you're starting something later this year.
How substantial is that Ben.
What will that have been on a year over year basis. When you start something in the back half of the year in terms of material and labor and what is that doing.
To the rental rate that you need and or the expected yield on new developments.
Hey, Rob Great Great question, I sort of probably threw that out there a little bit in that last answer.
First off I don't think we are compromising development yields we're not having to do that yet they're holding steady based on a couple of things. Let me tell you what we're seeing we're seeing about a half to 1% of escalation.
Escalation kind of month over month, and we really see that continuing for the next year. This is primarily.
A delta between demand and supply.
And that's kind of throughout the markets now a couple of things I just wanted to hit on again, we have the ability to mitigate this in a way that others may not end and more of the folks we're competing on the ground within the merchant build typically the merchant developers will have to get to a 100% G. M P priced with their general.
Contractor then secure construction financing to then go forward and since we're developing on balance sheet without typically construction lending. So we can go ahead and get ahead of that half to 1% month to month escalation by buying out some major trades with the GC and the subs glass site works.
Deal asphalt in some cases getting on that early that represents about 60% of our projects cost. So if we can lock in that early in many cases six.
Six months to a year, maybe if some others.
It's helping us kind of control that that yield erosion and not having to accept that because rates are growing.
Rental rates are growing particularly for the flight to quality and we're seeing that in the buildings that we're developing and we're seeing the ones that are in the market.
So that's basically how we're addressing it but it's a real deal and what can we monitor daily.
Okay, and then how big of an issue is the cost and general lack of availability of APA.
<unk> in your markets in terms of office utilization and incremental demand in your markets. We've been hearing that there's a number of employers that are having issues getting their 2022 College, graduating classes in the office. This summer because they can't find housing are you guys seeing that in your tenants experiencing that issue or is that not yet an issue for you and your mom.
Markets.
Yeah, I don't think that's an issue with US certainly has been a fair amount of multifamily construction going on in our markets. So that's the that's the first I've heard of it I know demand is extremely strong for multifamily product rents or death.
Definitely increase I think affordability versus availability might be more of the issue here rents have risen in some of our markets 20, 25% in the last year year and a half. So I don't think I'd say availability issue in our markets.
The clip on to Ted's answer.
You've hit on something that we're trying to we've been trying to get ahead over the last actually couple of years and it wasn't.
Seeing the pandemic coming or seeing the the housing shortage I mean as a country. We're about 2 million housing units short from our typical delivery over the last say 50 years and so you may have noticed that as Ted mentioned, we recently sold a pad site next to our base Center office building in Tampa for the construction.
The high rise residential multifamily tower, we're doing that so we can have some of that mitigation of available and nearby residential housing as part of the office story. So you can kind of live here and work there and so we're looking at that across the entire portfolio. We've gone through a major rezoning in there.
Assemblage of land enrichment around our major Innsbruck collection of office buildings to have multifamily obviously in Nashville, we're doing that and so if we can create that live work play all within one step of the office, we're pretty bullish on that office's ability to stay full.
Okay, and then last one for me Brendan how what's your expected use of the 140 <unk> hundred 90, <unk> disposition proceeds is that going to be to pay down the line and maybe part of the term loan.
Is that something else how are you anticipating using that proceeds when you get it in the next 60 days or so.
Yeah. So the basics are and theres going to be a little bit of a timing mismatch. So it may impact a quarter or two with respect to our F O N and earnings, but it's solely kind of timing mismatch related but if you think about what we have coming due from an overall.
From that perspective, I mentioned, we have the $200 million term loan and then we have the $250 million bond that matures in January of 'twenty three that we can pay off in October so that's $450 million of of debt maturities that that we really classify as 2022.
We expect to do is probably refinance the term loan and upsized that maybe by $100 million and then take let's call. It 150 million of of debt proceeds of the disposition proceeds.
Use and that would be 450 million of capital. So we'll take those and pay off.
The remainder that we don't take from the from the Upsized term loan used those proceeds to pay off the January 2023 bond in October .
Okay and all of that is included in the guidance at this point or not it is yes.
Perfect. Thanks, guys appreciate the time.
Okay.
Our next question is from Dave Rodgers with Baird. Please go ahead.
Hey, guys, it's Nick on for Dave.
Just wanted to touch on rent economics, it seemed as though economic slipped in the quarter was that more of a function of more new leasing and our geographical mix or is that more an indictment of the current economics.
Yeah sure.
Well as you know, we did 391000 square feet of new leases that was really 59% of our total leasing with new that's the highest percentage of new leasing and I think it's over 20 years, our finance team told US. This morning. So it's strictly bay, it's a mix just given the new leasing volume relative to total leasing.
We're thrilled to be able to welcome 58, new customers to our portfolio. This quarter alone. So it's a function of the activity in just the new new leasing we're bringing in the portfolio.
Great and then touching on utilization up a little bit you mentioned, 50% utilization and <unk>.
Higher calls you mentioned that smaller tenants were more active than larger tenants and maybe some of the suburban assets, we're seeing a little bit more activity.
Is that still the case or has there been any changes there.
No that's exactly what it is the only changes that now the bigger guys are starting to come to the come back to the office the big public companies are.
Now just as you've seen in the papers, they're bringing their workers back many of them and shifts over time, but that's been the again the small companies have remained back suburban again take more than urban but.
The large companies are helping that utilization.
Hey, Nick its Brian one thing I might add onto that and I know in general you on these calls.
Everyone wants to kind of put together some major trends to project in the future, but I would like to add some anecdotes one is in Charlotte at our large bank of America Tower Bank. There has brought their people back officially in during the pandemic, we worked really hard and got in a best in class coffee and cafe operator.
In all of Charlotte and built that out as part of.
And amenity, we want to make sure when people came back they were properly caffeinated and we've seen sales there double monthly basically for the last three months. So we're seeing that utility.
And real time come back now.
As for our utilization Tuesday, Thursday, it's going to be the highest we're still seeing kind of across the board Mondays and Fridays.
Company's granting more flexibility to the teammates.
That's great and then maybe lastly, maybe some additional commentary on your vacancies in buckhead and or the activity Youre seeing there in particular.
Sure Nick Brian again, so buckhead.
It's busy and we are seeing renewals, we're seeing folks grow we're seeing some inbounds as well, but very little inventory has been added or can I was in the pipeline, which is a good thing for Buckhead. You know we are doing a development there right now 28 27, Peachtree, so you're seeing that.
That flight to quality, when that's leasing up very well and it's barely even in the ground forget coming out of the ground. So there's prospects of all sizes, we buck.
Buckhead one of our assets, we were able to land a law firm coming out of downtown and came in at Buckhead.
And so you know we're bullish that the blend of quality of life regional access <unk>.
<unk> in our restaurants is pretty well unmatched.
Maybe midtown would be the closest so we're still pretty busy there Ted.
No I think that's right I think the demand we're seeing from professional services firms and financial services companies are largely dominion law firms as well, but to Brian's point I mean, we signed during the quarter.
Just kicked off 28, 27, Peachtree and find another 15000 square feet and we continue to see good demand on that product is again the flight to quality. So we're we still are big.
Big fan of Buckhead, and that's doing well.
Thanks, guys.
Our next question is from Jamie Feldman with Bank of America. Please go ahead.
Hey, guys.
Filling in for Jamie.
Could you talk about the investor appetite for assets in your markets and how would you characterize it and have cap rates or buyer demand changed with the rising interest rate environment.
Yeah.
Sure.
What you're seeing and obviously rates are just start picking up the last couple of months, but pricing that we've seen for high quality core assets with great credit long weighted average lease term.
Has generally held up we've been a few in the in the in the market in the last couple of months. So.
Wouldn't surprise me to see the single tenant market.
Could be affected just given how low cap rates have gotten for some little single tenant deals, but generally core assets have held up.
We are hearing of some some pressure on some value add deals that attract leverage buyers for the exact reason you just said with interest rates going up but we're still early in the in the rising interest rate environment. So we'll see how it plays out the nice thing is the investor pool, but wants to be in our markets is incredibly deep.
Both unlevered that are chasing the core deals, but also the levered buyers are trying to get in our markets.
And unbundle, a capital is chasing and the fundamentals are good. So I do think buyers are able to underwrite some of the vacancy or the value add aspects.
He's more easily than they were a year ago. So we'll see how that counterbalances, but net net a lot of investor appetite for assets still.
Okay, great. Thank you and then.
Kind of along those lines.
Rising rates or recession concerns in general.
Tenant leasing decision, making or do any of any market stand out on that front.
No not not at all I mean, the activity is robust and I think you saw our numbers both on the second Gen. We made good progress on some of our development projects as well we've signed leases. We mentioned the 28 27, but Virginia Springs, two went from 81% to 90% this quarter Midtown one in Tampa went from 60.
465, I think to 71%, we've got prospects really to fill those buildings up so we're seeing robust demand really across our markets.
I might argue that we're at.
I think it is independent from your very specific question on rates and decision, making or activity, but we are sensing from a number of customers that they've been sitting on the sideline or their hands for two years kicking the can I'm, making decisions and now realize that their workplace has to be part of that competitive advantage for recruiting.
<unk> and returning their talent in the office, where they've told us that they are better they are better together and start to that and they're also seen.
Escalations on fit ups going up they're seeing potential rates going up and so I do believe we're are seeing some urgency for some.
Who wanted to be in office space to make decisions now because they see it rates going up and costs going up.
Okay, great. Thank you.
All for me.
Our next question is for is from Manny Korchman with Citi. Please go ahead.
Hey, I actually I just wanted to follow up on the on the last topic in terms of the tenant decision making process.
How are they thinking about the timeline of getting into a space or they still thinking about we want to we're going to look at that that's building that highlights hasn't even been built yet and we'll wait a couple of years. So that's come out of the ground. Another move in or are they looking at existing space because they can get to a quickly or just how are they thinking about sort of today versus tomorrow and how long it.
To get into some of these spaces.
Sure I think the answer is yes and yes.
I know, we've got some that are willing to wait and some that aren't willing to wage. We've also you know one thing we've done and we've talked about is really.
Ramped up our spec suite program, we've got customers, who are just wanted to do plug and play they want to look at it on Friday and show up for work a week later. So there is good demand for that space as well. So I can just sort of depends on each individual companies decision, making process on their own timeline, but we're seeing it again examples of.
Both.
And then Ted are you seeing any differences in utilization between <unk>.
New releases in older leases, so if somebody's head of states for longer time do they only have I'll throw out a number 20% of people showing up in the new spaces are 80% or is that kind of a wrong conclusion.
Yes, I think it's too early to figure out where that conclusion is the company the big the bigger companies just in the last couple of months are coming back. So I don't think we've got enough data points again as we've mentioned on other calls the smaller companies they've been back and Theyre generally back in you know pretty close to what they were pre pandemic may be a little bit less but we're still.
Just trying to figure out and wait and see on what the larger companies as they return to work with its going to look like.
Great. Thanks, so much.
<unk>.
Our next question is from Ronald Camden with Morgan Stanley . Please go ahead.
Hey, just a couple quick ones just starting with the occupancy guidance raise here. If you take a step back just what levels of occupancy do you think just historically in the portfolio have you started to see you start to get a lot of pricing power, where that's sort of the balances towards the landlord.
So forth.
Sure I think it's a good question I think historically I would tell you when when the market vacancy gets down to about 10%.
The the leverage shifts a little bit for two two landlords. So you know where were elevated we're above that today, we're below it back in 18 and 19, so it's still.
Without a doubt I do think it's a tenant market in most of our markets today, certainly theres nuances by market and sub market and they're also building as well.
But we typically historically have thought about 10% as the the tipping point from a leverage standpoint, maybe just a clip on it doesn't.
It might sound a little silly, it's less rate driven as opposed to kind of quality driven in many ways too. So I think that we're also seeing that.
Great and just to dig in on some of the specific lease explorations that Odyssey no large ones in 'twenty two.
Just on activity space as I think you said in the past and I think there was some tenant subletting.
Are the tenants still there and there is theres still opportunities for maybe some of those tenants to take space or will it have to be just a new user.
This is all activity space sure.
Sure Good question and good visibility into that specific asset. So we do have some sub tenancy in the air with other users.
And we could have the option to deal with them directly and we've stayed in touch obviously, but there is good activity. We have started the process for a re imagination of that collection of what is in a sense kind of three buildings around a real central Park and we've started the process to bring in retail.
To bring in performing.
Our music venue and even have pickle ball and so we've started that.
Kind of repositioning and we're getting really good traction with the food that wants to come in there and so with that we have some good interest and activity to realize that entire building.
With a single user so.
So hopefully talk about that in the future, but we are feeling pretty good.
Got it and then my last question was just on the lease structure.
I think you talked about sort of your you got more term great great leasing quarter, obviously, but it is still sort of two and a half rent bumps is there any change.
Sure.
On the newer vintages versus maybe historically thank you.
Hey, Ron it's Brendan.
I would say I mean, I think our bumps in the quarter were a little bit higher than average. So they were they were a little bit above that two and a half per cent range, but two and a half is I think going forward I would say, that's probably about where we think it will continue to be I suppose if we remain in an.
<unk> inflationary environment, there's probably some upward pressure on those annual escalators, but and.
And we did we did get better than that this quarter, but I think our expectation is we probably will continue to be average around two and a half per cent as we move forward over the next several quarters.
Great. That's all my questions. Thank you.
As a reminder to register you May press. The one followed by the four our next question is from Michael Lewis with <unk> Securities. Please go ahead.
Alright, great. Thank you.
So I'm going to ask just one question, but it is potentially a long one and I'll try to be succinct.
I've had more than one investor.
Like in the current office situation to what mall space in the recent past.
Where investors I think.
B plus malls will be okay, and then they thought.
Minus or better and then a and then pretty soon investors just wanted to own the trophy assets.
Is there potential you think that office is going to be like that and do you feel any sense of urgency to sell those lower quality assets and focus on your best ones in your development opportunities and maybe some capital into some assets.
Or do you think I'm overstating the situation because I think if there's a if there's a pivot here that needs to be made in office.
Don't know that there does but but if there does it seems like youre positioned with what Brendan said about the balance sheet and the flexibility in your development capability.
That you guys could do that.
Do you think that's a necessary thing or maybe like I said, maybe I'm overstating it.
Yes, Michael a lot to unpack there who may tag team. This between three of them, but look I think.
Well, we measure is we're talking to our customers, we're talking to Ceos, and Ceos and our customers want to come back to the office they want to be together, it's a cultural thing.
And so we think the office is going to thrive, we do think theres a flight to quality, but it's not just the newest the brightest shiny buildings, it's quality buildings and quality locations with quality landlords that have got the ability and the willingness to invest in their assets over the long term I mean, if you break down.
102 leases, we signed this quarter or specifically, even the 58, new leases, we signed or if you go back to 2021, when we signed roughly 400 leases with 194, new leases a lot of those are done in older buildings that are just incredibly well located near the decision makers home.
And the and the best demographics near the high transportation corridors.
That that are in our markets and Submarkets. So we're big believers in.
And having the best locations in high quality assets and then you think about.
Obviously, it's going to drive development.
As well from our portfolio, we're going to develop buildings and the same in the same submarkets. So we're.
Big believers in the office, we think it's going to <unk>.
Continue at the same time, we are selling we've been active recycles, we sold I think over $1 billion in the last three years or so so we are recognizing if as a result of whatever trends Covid. We think those assets are going to be less resilient or less commute worthy, we're going to move them to the.
<unk>. So I had a couple of examples we sold a couple of suburban assets in Tampa.
Tampa this past year that historically, they've been good performers for us Michael but we saw as a result of Covid that our call Center is.
<unk> call Center type customers and there are a lot of that technology can be shifted to home you can actually be done that some of that back office call Center work can be done more efficiently out of the home. So we thought they were going to be less resilient going forward. So we called those from our portfolio. So we've been doing those type of things if we don't think the low.
Patients are going to stand up.
The standards will stand the test of time, we're going to move those assets out. So that's a I don't know if I hit on everything.
O'brien here to kind of flip on.
Love the question.
I love the potential analogue with malls and retail in general and so if you kind of see.
Slice and dice the.
Level of experience and he put experiencing quotes across malls.
To your point, the A's and the fortress malls have kind of gotten potentially even stronger through all of this right, but what's also from a retail experience standpoint that has gotten even stronger that's got an even busier as that strip retail so I'll comment and I'll come back to the term that Ted Hughes, which is what we call commute worthy.
Assets that if the if the building the workplace isn't providing a competitive and compelling advantage to our customers to win the war for talent and to return that talent. Together, then we gotta do something about that so when you think about something it's can be worthy. The first place you start is that first word commute so the easier the commute.
The easier it is to make something commute worthy right and so that's just a general statement about our entire footprint and in particular as some of the previous folks have asked about is those suburban located assets that happened to be closer to where most of America lives and shops and so as we look at.
Making these commute worthy.
It's a number of uses so it's interesting you look at like Brentwood, one of the Bvd is in Nashville, and large collection of office buildings. There is a place called Maryland farms, and where we have a number of buildings.
That we are repositioning right now and we've re imagined them and we're gonna be repositioning them and we're already gaining rent lift just off the renters that we got to build what we've shown because we feel like that's going to even surpass our original underwriting.
But with the.
Everyone doesn't need the Taj Mahal people throw around words like trophy well our trophy assets are our people and we're focusing that work experience around the occupants that are going to be in the building and we're finding out that just these small touches any super convenient commute worthy places are winning.
So Michael just because we might as well all three answer your question.
Excellent question something that we talk about regularly as a team what I would say just to point out from a financial perspective.
Is I think we have you know we have used the playbook in the past of selling assets that we feel like over the long term create some level of risk whether it be NOI deterioration or value deterioration or some level of outsize risk and so as Ted mentioned, we've sold $1 billion.
Over the past three years most of that done during COVID-19 since the onset of Covid.
And so I think we have the playbook in place to be able to monetize assets and redeploy that capital in a way and still grow our company and strengthen our cash flows over time. So I think we still have those building box in paint in place and I think feel confident about that.
And I will mention just as a maybe as a quick plug for our Investor day that I know you're signed up for we're going to show. Some of these assets in Nashville that have performed very well as Brian mentioned throughout the pandemic. So I think we feel good about how we have segregated the assets and the ones that we think will be winners.
Long term versus those where we see the outsized risks and have.
Push to increase the monetization of those assets.
Great. Thanks, Thanks for the thought.
I'll answer to what I think.
Easy question.
Yes.
And we have no further questions. At this time you may continue with your presentation or closing remarks.
Well, thanks, everybody for being on the call today and thank you for your interest in Highwood. If anybody has any follow up questions feel free to reach out. Thank you.
And that does conclude the conference call for today, we thank you all for your participation and kindly ask that you. Please disconnect your lines have a great day everyone.
Okay.
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Okay.
Yes.
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Okay.
Uh huh.
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