Q2 2022 Highwoods Properties Inc Earnings Call
Good morning, and welcome to the Highwood 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 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 July 27th 2022, I would now like to turn the conference.
Over to MS. Hannah true. 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 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 high was dot com.
On today's call. Our review will include non-GAAP measures such as F. S. 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.
We're 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, Hannah and good morning, everyone.
We had another excellent quarter for <unk>.
Financial results were strong our operations were healthy and our robust investment activities set the foundation for continued long term growth.
This quarter's performance validates the strategy and execution, we've deployed for many years to deliver steady financial growth and strengthening cash flows while driving continuous portfolio improvement and setting the stage for future growth.
As we stated before our <unk>.
Simple and straightforward investment strategy to generate attractive.
And sustainable returns over the long term by developing acquiring and owning a portfolio of high quality differentiated office buildings and the <unk> of our markets.
A key ingredient in this strategy is to select markets that consistently outpace national averages on population and employment growth in our affordable and business friendly.
North Carolina, which accounts for 35% of our NOI was recently ranked the number one state for business by CNBC.
With Virginia, Texas, Tennessee, Georgia, and Florida, all in the top 11.
In other words, all of our core markets, where we see the greatest opportunities over the long term are ideally situated in the highest growth most business friendly region of our country.
Last week, we announced our entry into Dallas, which has long been at the top of our list for market expansion.
Based on its strong demographic and economic trends.
The Dallas Metro area leads the nation in overall population growth.
<unk> been a premier destination for business relocations, particularly from the West coast and the northeast.
In Dallas, we are principally focused on building out our presence over the long run in three submarkets.
Uptown Dallas.
Frisco, Plano and Preston Center.
These are essentially the three <unk> that run the tollway spine from the downtown area of towards Frisco.
We are excited to partner with granite properties, a prestigious privately held commercial real estate investment development and management company with deep roots in Dallas to develop best in class assets and two of those <unk>.
First is Granta Park six a 422000 square foot office development in the Frisco, Plano BBB, but its 12% pre leased is located within the successful granite Park mixed use development. We were granted is headquartered.
And he has developed and operates 1.8 million square feet of office, but it is 96% occupied.
Granted park six as healthy leasing interest with more than three and a half years until projected stabilization.
Second is 23 Springs, a 642000 square foot office and retail property located in the Uptown BBB with a 17% pre leased.
For those of you familiar with Dallas 23 Springs is across the street from the Crescent and the heart of Uptown.
The development has a scheduled completion date in <unk> 25, an estimated stabilization date and <unk> 28.
Given the iconic profiles of a property.
Its location and excellent ingress and egress to and from Uptown, We're confident about the projects long term outlook.
These two development projects increase our total pipeline to $559 million at our share which is 32, 7% pre leased.
Midtown West in Tampa, and Virginia Springs, II in Nashville.
Our two completed not stabilized properties comprised $95 million of investment in a combined 93, 6% leased.
As you May recall, we started both these projects completely spec in late 2019, and we are forecast to bring both properties to stabilization on time and on budget.
With all of our lease up occurring since the onset of the pandemic.
The success of these projects illustrates our work place making strategy.
But the most talent supportive workplace options and energized and monetized Bvd's will continue to be highly sought after by customers and their employees.
We're excited about our current development pipeline, which will help drive future growth and the potential for meaningful additional development.
Given our well situated land bank.
In total our development land can support over $4 billion of future projects, including $2 2 billion of office.
Spread out over nearly 5 million square feet and most of our <unk>.
Given the volume of our investment activity in the quarter, it's easy to forget that it was just over two months ago, when we announced a meaningful expansion in Charlotte.
First we agreed to buy the two by 650, South try on a 600 and 367000 square foot office building located in Uptown.
Connected to our Bofa tower.
We're scheduled to close on 650 later this quarter.
We also acquired a mixed use development parcel in the heart of Charlotte's dynamic South end Submarket that can support at least 300000 square feet of office and 250 residential units.
We sold $101 million of noncore properties in the quarter.
This included $91 million of office and $10 million of land.
With these sales we delivered on our goal of returning our balance sheet metrics by midyear 2022 to the same levels that existed prior to our 2021 acquisition of $683 million of office assets from pack.
The investment sales market has been uncertain over the past few months as interest rates have risen and capital has become more scarce.
Fortunately our balance sheet is in excellent shape, and we have no need to raise external capital to help fund our acquisition of 650, south try on or our current development pipeline.
We expect the investment sales market will remain choppy over the next few quarters.
However over the long run operating with low leverage enables us to be opportunistic in seeking additional investments that improve the quality of our portfolio and increase our long term growth rate.
All the while staying true to our mantra of being disciplined allocators of our shareholders' capital.
We also announced our plan to fund our entry into Dallas by exiting Pittsburgh.
Importantly, once completed the stabilization of our new development projects in Dallas, and our Pittsburg market exit cut.
Coupled with anticipated G&A savings is expected to be roughly leverage neutral and accretive to our cash flows while improving the quality of our portfolio and providing higher growth overtime.
Our two trophy assets in Pittsburgh, PPG place and EQT Plaza.
Have consistently maintained among the best Occupancies, where our entire portfolio.
We are grateful for the terrific work our teammates have done on the ground in Pittsburgh.
Most of whom will continue to lease and care for our assets were in New Jersey have a reputable third party service provider.
As we stated in last week's press release, we have no preset timetable to sell these properties.
Turning to our results during the second quarter, we delivered F F over one dollar per share.
8% higher than our second quarter of 2021, while simultaneously restoring our balance sheet to pre pack acquisition metrics.
Plus as we've often said it can be seen clearly in our financial results. We continued to reap the benefits of strengthening cash flows.
We're proud of our track record of delivering what we believe is the right balance between enhancing our future growth outlook.
At the same time delivering current results.
Since the beginning of 2021, we have.
Announced the acquisition of $1 billion of high quality office assets in high growth markets of Raleigh and Charlotte.
We further balance bolstered our future development prospects by acquiring land in Atlanta, Nashville, and Charlotte that can support an additional 800000 square feet of office and 2 million square feet of mixed use development.
We've entered Dallas, a high growth market with significant future upside opportunities and announced our plan to exit Pittsburgh.
We've sold $494 million of noncore buildings and land.
We've delivered 5% core <unk> growth in 2021, and 8% growth year to date in 2022.
We generated significant growth in free cash flow.
And all the while maintaining a fortress balance sheet and setting the foundation for future growth.
We believe this track record is what sets us apart the consistent delivery of compounded growth in earnings cash flow dividends and <unk> per share.
Most importantly, with our geographic footprint Bvd selection.
Portfolio quality <unk>.
<unk> pipeline.
Land Bank and fortress balance sheet, we firmly believe our best days are ahead.
Brian .
Thanks, Tad and good morning call.
For the second quarter, our people and portfolio have once again delivered excellent results.
While there is yet to be consensus around what the future of work actually it looks like there does seem to be a general consensus among our customers.
Their best and brightest R&D better together and that they are increasingly counting on their workplaces, we provide to be at a compelling and competitive currency for retaining and recruiting and returning the talent they need to wind down or whatever playing field there on.
To that end our team signed 117 second generation deals in the second quarter for a total of 683000 square feet.
Which included 243000 square feet of new deals and expansions outnumbered the contractions two to one.
We signed 49, new deals in the quarter exceeding our historical average and off to a good start this quarter with more than 350000 square feet of second generation leases signed in July , including 130000 square feet of new deals.
In the second quarter, we achieved GAAP rent growth of 12, 6%.
And net effective rents of $16 98 per foot.
10% higher than our prior five quarter average and the highest since the third quarter of 2020.
As we have long stated we pay close attention to the net effective rents when assessing our leasing economics.
Turning to our markets. We're in migration continues across the sunbelt.
And unemployment rates are lower than the national average.
Utilization continues to increase with Tuesday, and Thursdays generating the greatest physical occupancy.
With multiple Dvds and assets at or approaching pre pandemic levels.
Most of the second quarter's activity occurred amongst smaller users and predominantly in our suburban B B DS.
Raleigh ended the quarter at 91, 9% occupied and achieve the greatest leasing volume with.
199000 square feet signed.
Raleigh market rents have increased 6% year over year in the market posted positive net absorption for the third consecutive quarter.
In Charlotte, where we ended the quarter at 94% occupied we signed a 33000 square feet, including 22000 square feet of new deals.
Bank of America tower.
And are seeing good leasing momentum at 650, South try on which we expect to close on later this summer.
This quarter in Nashville, our team signed 95000 square feet, including 17 new deals.
Occupancy held steady at 95% and our Virginia Springs II development is now 100% leased.
Nashville market rents are up 6% year over year unemployment growth exceeds the national average at five 5%.
As Ted mentioned earlier, our development pipeline is strong.
<unk> completed not yet stabilized properties are a combined 93, 6% lease.
With 27000 square feet signed at our Midtown West development in Tampa since last quarter.
And the last 11000 square feet of remaining availability at Virginia Springs, II in Nashville was signed as well.
Our team's track record of success and delivering on time and on budget gives us confidence looking ahead at both our current development pipeline and the opportunities before us, including the over $4 billion of future potential development supported by our current land bank.
I'd like to close with an additional outlook on near and long term growth.
Since our last call in April we've announced the pending acquisition of $6 50, South try on a.
A 367000 square foot multi customer office tower of the highest quality at the pin corner of where Charlotte's Uptown and south Mvpds meat.
650 joins our 841000 square foot Bank of America Tower ASP.
The second high was asset amid a dynamic legacy union mixed use development.
Legacy unions location represents the redefined main and main addressed in Uptown.
With unparalleled access to the Interstate in Charlotte Light rail system in.
Amid a mixed use district served by a whole foods, a new J W. Marriott hotel in a variety of restaurants.
Also in the second quarter and a half mile to the south in the heart of Charlotte South end business District, we closed on a land parcel off market that provides a tremendous opportunity for office and mixed use development.
And where we've already received a healthy dose of inbound interest from retail residential and hotel developers looking to be part of our plans there.
With this development site.
Along with the 2 million square feet.
Our of best in Class office space, our Charlotte portfolio represents an.
In just three years, we've established a formative it'll presence and the Queen city with growth opportunities in all three of the BB DS we targeted when we entered the market in 2019.
Growth into Dallas via JV development is a very effective and efficient way to enter this high growth market and two of the three bvd is we've long had our eye on.
Our partnership with granite properties at Granite Park, six and 'twenty three Springs provides a bedrock foundation from which to build and gives hybrids visibility into our long term and productive president and Big D.
The Dallas economy is home to the second most fortune 500 headquarters in the United States and leads the nation in three year job growth.
We believe Dallas robust and diversified economy.
Coupled with best in class B BD positions in Uptown and Frisco, Plano provides fertile ground from which to grow.
This is consistent with our long term and simple strategy of owning the best workplaces and the best business districts of markets that are outperforming the nation on a variety of factors.
Our urban and suburban B BD focus portfolio quality and robust development pipeline serve as a strong foundation from which we will continue to deliver for our customers and shareholders in the years ahead.
<unk>.
Thanks, Brian and good morning, everyone in the second quarter, we reported net income of $58 5 million or <unk> 48 per share and <unk> of $108 1 million or a dollar per share.
Quarter included a land sale gain of <unk> <unk> and losses of two cents related to a single customers lost rental revenues and noncash credit losses of straight line rents receivable. Neither of these items were included in our prior <unk> outlook and essentially offset one another adjusting for the quarter to quarter fluctuations.
And land sale gains term fees credit reserves and seasonal G&A changes core operations in the second quarter were similar to the first quarter. The main difference was modestly lower operating margins in <unk>, which we forecast when we provided our original outlook in February .
Our strong start to the year, an upbeat outlook for the second half of the year give us confidence to increase our <unk> outlook again this quarter. Our updated range is $3 92 to $4 per share up six cents at the midpoint, which is on top of the 6% increase at the midpoint that we provided last quarter.
In total we've increased the midpoint of our F O outlook more than 3% since we introduced our 2022 outlook in February .
As you may have seen in our press release last night other than including the expected impact of acquiring 650, south try on when do we expect to close later this quarter. We have returned to our customary practice of excluding the impact of any potential acquisitions or dispositions from our F O outlook. Besides the updated it.
Investment items, which provide you some context of what we could announce for the remainder of the year. There were minimal changes to other line items in our 2022 outlook now to our balance sheet, our leverage remains relatively low and we have limited debt maturities, which creates optionality with our financing plans.
During the quarter, we recast the company's $200 million unsecured bank term loan by extending the maturity date from November 2022 to May 2026, and lowering the borrowing rate approximately 15 basis points. We also obtained a $150 million delayed draw unsecured bank term.
Loan, which must be drawn by August 2022, and is scheduled to mature in May 2027, our only debt maturity. Prior to 2026 is a $250 million unsecured bond that matures in January 2023 that we can repay without penalty in October .
<unk> of this year, we plan to satisfy this maturity with a combination of proceeds from the delayed draw term loan borrowings on our revolving credit facility retained cash flow and noncore dispositions, we have approximately $600 million left to spend to complete the acquisition of $6 50, South try on.
And finished our share of the current development pipeline, we have ample existing liquidity, including 60% loan to cost construction loans for our Dallas joint venture developments to satisfy these long term obligations and repay the $250 million bond due in January 2023.
We believe we can fund these growth opportunities without the prerequisite of selling any assets or raising equity and still maintain a net debt to EBITDA ratio under six times as Ted mentioned, we've returned our metrics to pre pack acquisition levels by mid 2022, which satisfies the timeline, we set a year.
Year ago, with our debt to EBITDA ratio of five two times at June 30th.
We sold $463 million of noncore assets following our announcement to acquire the portfolio of high growth office assets from Pac slightly below our original forecast of $500 million to $600 million. However, we were able to achieve we were still able to achieve our balance sheet target by growing EBITDA more than our original.
Expectations, increasing retained cash flow and raising a modest amount of equity through our ATM program, albeit none in the second quarter to provide context since we announced our planned acquisition from pack, we've completed net investments of over $350 million grew.
<unk> year over year F O, 8% increased our annual dividend, 4% and retained over $80 million of operating cash flow in excess of our dividend payments all while returning our balance sheet to pre pack acquisition levels. As we've stated for several years, our cash flow has continued to strengthen which.
Combined with solid organic EBITA growth gives us the platform to be a net investor on a leverage neutral basis without the prerequisite of issuing new equity.
Importantly, we have replenished our balance sheets, dry powder, which enabled us over the past two plus months to commit $530 million of future investments knowing that we can fund these commitments without significantly increasing leverage or jeopardizing, our fortress balance sheet.
Finally, I want to touch on our announcement last week about our entry into Dallas and planned exit from Pittsburgh.
As many of you know we have completed two similar market rotations over the past three years in.
In 2019, when we announced our plan to enter Charlotte and exit Memphis, and Greensboro, We stated phase one of that plan would be F. One neutral leverage neutral and cash flow accretive we completed that plan within our 12 month timeline and in the first full quarter. Following the completion of phase one.
Our <unk> was 7% higher than the prior year and our balance sheet was returned to pre plan metrics.
Similarly, we announced the planned acquisition of office assets from pack last year with a corresponding plan to accelerate noncore dispositions. We also stated we expected this planned recycling to be <unk> neutral leverage neutral and cash flow accretive upon completion as I stated earlier, we've returned our balance sheet.
Pre announcement levels or F. O is 8% higher than a year ago, and our cash flow has strengthened with more than $80 million of retained cash flow in the last four quarters.
Our entry into Dallas combined with our planned exit from Pittsburgh has many of the same financial benefits as our prior capital recycling plans, namely leverage neutrality and cash flow accretion upon completion.
Given the construction timetable for the Dallas developments. The primary difference. This time is that we may not be able to match up the timing of the dispositions with the commencement of NOI from our investments as seamlessly as we've done in the past while this could create some choppiness in short term earnings over the long term we are caught.
<unk> that our latest capital recycling plan will result in higher cash flows and an enhanced long term growth rate without compromising our fortress balance sheet.
Operator, we are now ready for questions.
Thank you.
If you would like to register a question. Please press the one followed by the four on your telephone you will hear a threefold prompt talking larger request answer your.
<unk> has been answered then you would like to withdraw your registration. Please press. The one followed by the three once again to register a question. Please press star one four on your telephone keypad.
Our first question comes from Jamie Feldman with Bank of America. Please proceed.
Thank you good morning.
Just can you provide more color on the straight line write off the impairment to come in in the quarter, maybe some context on that and then also the credit Watch list do you think we're going to continue to see this as we kind of work our way through this downturn.
Sure Jamie Thanks for the question. Good morning, It's Brandon I'll start and maybe Cheddar, Brian will add some color. So that was that was a customer that we had in Nashville.
<unk> had.
Had some contracts canceled and therefore business was down for them.
So we took the conservative tact, where we wrote off their straight line rent reserve.
And and wrote off the Ah that is there as well I think the fortunate thing for US is they had sublet some of that space. So we believe that we will be able to go direct with those sub tenants. So our exposure going forward is.
Fairly modest, but but that was the reason for that and I would say, we don't see that as.
Representative or indicative of additional credit issues within the portfolio.
And this has been the case since since the onset of the pandemic. We've collected 99 plus percent of rents every month.
And this was no different I mean this was this was an impact for us, but it certainly didnt impact that 99% number we still collected those rents even with without collecting that's a R.
And really the majority of the of the charge in the second quarter was attributable to the straight line rent write off as opposed to the E. R.
Thanks can you say, what what sector, they're in and so are they still in the portfolio.
Actually vacate.
We have we have taken them out of occupancy there in the health care sector, we have taken them out of occupancy and that was part of the reason for lowering the high end of the occupancy range for our year end outlook, we did strip them out of occupancy and have not assumed a backfill of the of the dirt.
Correct space that they had.
So that's that's part of the reason for that occupancy change as well.
Okay. Thank you and then as you think about guidance.
With acquisitions or dispositions I mean, what's the likelihood here that you do more asset sales in numbers didn't come down.
By year end.
Well, Hey, Jamie it's Ted well look as you know capital markets are pretty choppy today.
Not a lot of price discovery out there. So look if capital markets were open and functioning efficiently I think there would be some more dispositions, but just given where we are today I think there's certainly some uncertainty out there. We are we've got a few transactions out in the market, but mostly land.
So not necessarily income producing building that would cause a dilution. So I think at this point, just given where the capital markets are the increased cost of debt lower availability of debt.
Just given the macro headwinds I think we're pretty conservative on dispositions the remainder of the year.
Jamie the only thing that I would add to that is just given the timing of where they would be right. I mean, if any disposition proceeds that we would likely get would be late in the year.
Therefore.
In terms of our F O outlook would likely have a minimal impact.
Okay, and then finally, along those lines I mean any view on price discovery in your markets any <unk>.
Change in cap rates or IRR is there a price per foot that you can point to.
Sure we're waiting from some more trades you know theres been a I'd say a handful of trades that have closed in June and July .
But there are obviously priced before back in May and so forth we've been the one.
Pretty high profile deal in Atlanta, the traded that I don't think they hit their guidance, but we still had a really strong number the mid four type cap rate. So we're sort of waiting as everybody else. We have to see what deals are priced in the last 45 days, which ones of those and up close in several of our under contract we've heard a couple.
All of maybe fallen out of contract, but so we're still sort of waiting on that visibility as well.
What is the buyer pool look like.
More cash buyers.
Thank God.
For transactions that they want to clear again the debt markets are just really hard right now. So if you can be an all cash buyer.
Obviously, we would be.
There's maybe some opportunities out there for sellers that need to sell whether they if they just wanted to get a market clearing price.
There's potential opportunities out there, but I think it's shallower buyer pool and more are all cash buyer pool.
Okay, great. Thank you.
Thanks, Jamie.
Our next question comes from Rob Stevenson with Janney Montgomery Scott. Please proceed.
Good morning, guys Brendan.
The 650 try an acquisition any known items at this point materially impacting third or fourth quarter <unk> per share positively or negatively at this point.
Yeah, Rob not I mean, there's not a lot.
Would say I think the biggest and really the I would say the biggest movement in terms of what's likely to happen on quarterly progression of F. O and again I mean, we don't give quarterly guidance, but we do give enough ingredients to kind of give you some sense of how it's likely to progress in the third and fourth quarter.
We do have the acquisition of $6 50 try on.
We do.
When we look at interest rates right. We certainly use the forward curve to project what our interest expense is going to be so the forward curve is up from where it. Currently is now so that you can expect to see higher interest rates in our outlook, but as we've stated from the beginning of the year I think probably what's <unk>.
Let it happen is you will see.
Margins impact a little bit from higher expense. So we did see that somewhat in the second quarter and I mentioned that just briefly in the prepared remarks that was part of the movement from first quarter to second quarter. The third quarter typically for US is our seasonally our lowest quarter from a margin perspective, so we do forecast that.
That will be the case.
And then typically the fourth quarter from a margin perspective looks very similar to the second quarter. So outside those those movements probably.
Should should kind of get you to.
The midpoint of what we're thinking about in terms of our <unk> range and you can kind of figure out how that progresses in third and fourth quarter.
Okay. That's helpful because the guy at the.
Upper end of guidance more or less assumes 98 cents of core <unk> that you guys did in the second quarter continues. So I was just trying to figure out what pushes that down to get your board or mid point, but thats helpful. Thank you.
And then.
Is <unk> still in discussions or is that a known move out at this point.
Sure, Rob it's definitely a known move out.
So we've known that for a while and hopefully we've telegraphed that for a while now the good news is we're in discussions for a backfill for a majority of that building.
Negotiations are ongoing and we're encouraged but obviously nothing's done until it's signed but we do have a strong prospect for a majority of that space.
Alright, and then what is the timing for you guys on the South end development in Charlotte is that multiple buildings, where you could sell off.
Somebody start the apartment without it being tied to the start of the office.
Hey, Rob, it's Brian I might want to keep one more thing under Ted's point on the activity question is that we also have good visibility and connectivity to some of the sub tenants that were sub leasing in that space and feel pretty good that we're going be able to keep them in the portfolio as that whole building gets back for by a single user and then we can move those folks out too.
Another building, we have close by so just one of the staple that onto that one now to your specific question on the south end sites, a little more than an acre and a half.
Has frontage on three streets, which is we think really fantastic. So there's a couple of ways to do it.
It's going to have a single shared kind of parking facility is not fully designed yet but.
We can build that as a podium.
And then the residential could go first and then get out of the office on top later.
There's strong interest from hotel as well to add a component it starts to get a little more complicated.
We do think there's a lot of these mixed use developments go residential it's ready to go and we generally like some pre leasing someone commit to be part of that.
So we feel like we've got some good flexibility there. The other thing is we've got some current occupancy in the.
Theres buildings on the site that have some term so we have the ability to collect that rent and go ahead and planned to go into next couple of years.
Okay, and then last one from me Brendan when does Pittsburgh move into the held for sale and discontinued ops buckets and is there going to be an impairment.
Oh impact items like severance and such hitting the financials for the second half of 2022 or is that more likely a 2003 event.
Yeah. Good question, so with respect to disc ops.
Don't go into disc ops, just because it's not an individual segment. So that's not the way that that we classify that so it would not be in disc ops on our held for sale that would be the case.
Largely if if it goes under contract so as Ted mentioned.
And I mean work with no preset timetable on selling those two assets. There. So I think that just depends on when we would move that on.
Their contract. So we will see that's a that's a TBD at this point and then I don't expect any material impact with respect to.
Severance charges or any any impact from costs associated with closing closing the office there that those that you shouldnt see any any major movements in our G&A line associated with that.
Okay. Thanks, guys I appreciate the time.
Yeah.
Our next question comes from Michael Griffin with Citi. Please proceed.
Thanks, I wanted to touch on the expansion into Dallas can you maybe give some color as to why this JV development structure kind of makes sense, particularly given the elevated supply that youre seeing in that market.
Sure.
Look I think we're extremely excited about our entry into Dallas I think.
If you think about Dallas, it's very similar to Charlotte.
Spent a fair amount of time several years looking for the right entry point into Charlotte.
<unk> was able to find that in 2019 and been able to grow that since we got in so.
Dallas, we'd see the same we've been spending a lot of time in Dallas. The last few years and certainly the market participants have known we've been spending time. There. So just if you think about Dallas one of the fastest growing markets in the country and I think the growth has only accelerated during COVID-19.
So we're thrilled to be able to get in the ground with an established prestigious development company is very like minded I would tell you the high Woods, our management team, we've known for a very long time.
Granted is based in Dallas are headquartered there than there are operating there for 30 years. Their headquarters is actually in a building adjacent to Granta Park six so we thought this the opportunity to get in on the development side.
Where you can achieve far better returns than if we were to go in and buy at the market type building with this group that's got proven.
<unk> experience in the best B B DS in Dallas, they've developed in Uptown they've developed obviously seven buildings, even though this was called Granta Park six they've developed seven buildings in Granta Park.
And have great success throughout throughout cycles as well so they are cycle tested on their development and the Dallas. So we thought this is just a tremendous way for us to get in alignment of interest. This isn't a 95 five or a 90 10 JV. This is a 50 50 shoulder to shoulder JV. So we don't think there's probably a better way.
We could've enter the Dallas market.
Thanks, and then maybe on the planned Pittsburgh exit you talked to us pretty reasonably in the Investor day as the Investor day positively about the market I just wanted to think how long has this planned exit kind of even thinking about it.
Yes, it makes sense in conjunction with the <unk>.
Pension into Dallas, but any color you can talk around kind of the timing of that would be it would be helpful.
Yeah, I mean look I mean.
Pittsburgh has been a good performer for us if you look at the last several years the occupancy of our Pittsburgh portfolio has been at or near the top of our markets right. So it's been a good market for us I think.
When you're Dallas opportunity came up just given where.
Our stock price was trading and we had to fund it similar to how we've had to fund Charlotte is through asset sales. So we look through our portfolio Pittsburgh.
Does it seem like it was the right.
On the right match for our entry into Dallas.
So we got a great team up there. So it was an incredibly difficult decision we spent months.
Cogitate over this and deciding what the best thing for the company is long term, but when you match those up look at the long term growth rate, but we think Dallas is going to provide.
It just that's.
That's how we came to the decision.
Great. That's it for me thanks for the time.
Thank you.
Our next question comes from Blaine Heck with Wells Fargo. Please proceed.
Great. Thanks, Good morning, Brendan can you just comment on the major drivers behind the increase in <unk> guidance. This quarter. It seemed like there were several moving parts I guess would you characterize the increase is more driven by fundamentals or by asset and capital recycling.
Yeah. Good morning, Blaine good question. So yes, so what we're up six cents at the midpoint. So I'll just use the midpoint, because it's probably easier to speak to that in the overall range and as I mentioned earlier, we had two cents of land sale gains in the quarter.
But then we also had a two cent loss related to the credit reserve neither of those were in our prior <unk> outlook. So those two have essentially offset one another so the remaining net 6% increase.
Is at a high level I would characterize it as about two cents a share associated with call. It net investment activity.
In terms of the acquisition of 650.
A little bit less in terms of dispositions with the corresponding impact in terms of interest expense all of that netted to about <unk> <unk> positive for us. The other four cents is core higher NOI. Some of that is attributable to lower opex. Some.
That is attributable to higher rents some of that is attributable to higher parking revenue. So all three of those things are contributing.
Now I think probably it.
Your one of your questions may be well, how come that didn't translate into a higher same property NOI growth outlook given that its NOI growth and there are a couple of reasons for that so one is probably about two to three cents of that <unk> increase is on the non same store pool, mostly the assets from <unk>.
<unk>, which are doing much better than what we had originally expected.
There is a penny to two cents of impacted from the same store pool now.
Now some of that is is net of the.
A R write off associated with the credit reserve, which we do take into same store, but the penny or two of higher just on the remaining same store pool, we felt like it wasn't enough to increase the range. We do have a range of half a percent to 2% and that's not enough to move kind of the range around there. So we decided to keep the range in line.
Alright, great very helpful color, there and then probably for Brian or Ted.
Can you talk about leasing velocity and what you've seen even in the last 30 to 60 days, obviously, there have been some negative headlines with respect to tech companies many of whom.
Really a major drivers of the leasing you guys saw in some of your markets. During the pandemic. So can you just talk about whether you've seen any let up in demand from them and what the implications may be not only in your portfolio, but market wide in some of your target markets.
Sure Blaine, it's Ted I'll start out and Brendan Brian I'll jump in I think.
Look as we said that Brian mentioned in the prepared remarks, we're off to a great start leasing in the third quarter. So just so far in July we still have a few days left we signed 350000 square feet of leases, including 133000 square feet of new customers that will be coming into our portfolio. So we've.
Got it.
Good activity the pipeline behind that is good as well.
Tour activity is still good across our markets despite being a middle of the summer when we typically things see things slow down so and the demand has been pretty diverse.
If you look in the second quarter numbers most activity most leases we signed.
In terms of new leasing was a financial and business services law firms. We did several law firm deals insurance and engineering firms as well and then the other positive stat that we're seeing is our expansions and Brian Brian mentioned this was well our expansions are exceeding our contractions two to one so we've got more companies expanding.
And contracting and then I guess, a third data point would be we started tracking new customers. They are coming into our portfolio from other places, but are they expanding when they come to us or they contract they take more space or less space and over half of them. However have our new customers are taking more space, so theyre actually expanding.
Coming to our portfolio via expansion as well so demand has been pretty good.
Great. Thank you guys.
Thank you Brian .
Our next question comes from Dave Rodgers with Baird. Please proceed.
Yes, good morning, everybody, maybe Ted or Brendan going back to Pittsburgh and the exit there can you talk about kind of the hurdles that you'd like to get through maybe before exiting.
And some of the major issues around leasing or Vacates or the next net tax gains that you might have that you've got to think about in terms of kind of making that exit happen for you guys.
Sure, Dave It's Ted I'll start.
Obviously, we have to two assets, we have a little piece of land as well with two operating assets.
PPG itself.
As you know it would be ready to go if not for the Choppiness of the capital markets.
So we're going to wait for the right time as we said we're in no hurry to sell assets are operating well, they're well leased our team when we transfer the leasing to a third party management company. It's the same team so while we're going to.
Benefit the same great people who've been working on the assets for us. So the biggest hurdle there is really a capital market's returning.
A PPG EQT as we all know and we've telegraphed.
They've got a upcoming exploration and I think it's September of 2024.
So we've got to work through we don't the uncertainty there is we don't know what theyre going to do they do have.
Seven or eight floors I think on the sublease market.
So that's something we're working through as well. So I think it's we've just got to work through that and see what theyre going to do and.
Look at different opportunities that are out there and we're chasing prospects. So there is some work to do on that asset, but so it's not quite as ready to go as PPG.
And Dave just to.
Answer to your question about taxes, I think we likely if we could transact both of those within the same tax year that probably would be the most advantageous for us because our likely game would offset would be offset by a likely tax loss.
On one asset versus the other so that probably gives us the most flexibility optionality I think if that were not to occur and we had to deal with a sizeable gain we do have some tax strategies, where we believe we'd be able to mitigate the significant impact of that but I think if you know if it did work out where we could sell them both within the same tax here that would be that'd be.
Ideal for us.
Yes, that's helpful and then Ted maybe going back to Dallas or you're under construction on both of those projects just looking at the completion and stabilization dates they are fairly long dated particularly the stabilization on those so.
Do you need to see more leasing to come vertical a lot of the ground or are you fully committed to that project those two projects right now.
No great question no. We're fully committed the construction loan is closed and <unk>.
Granted park six was well underway.
And we're seeing very good leasing activity. There so were optimistic there we will see.
Obviously doesn't complete for until the end of fourth quarter 2023. So like you said still fair amount of time and then on 23 Springs were demo ing the existing buildings right now and.
And that is gonna be subterranean parking so the construction periods are longer longer period, obviously bigger building as well, but the demo as well underway there.
Dave Brian here my pile on a little bit to that granted part six we're actually not only glad that it turned to construction, but when it was bought out and got under a GMP contract was.
Some time ago and gets the benefit I think of her being insulated from some of the Choppiness, we've seen in the construction and pricing.
Inflation markets as well.
Yeah.
Great I appreciate that that's helpful. And then Brian maybe finishing up with you. It sounds like the pipeline. Overall is good can you talk about maybe regionally where that activity and I know, sometimes you can get a little bit more regional color today, it's been a little more time on go to Dallas, which is great, but I guess as you look at the occupancy trend in Florida, let's say versus Florida and Atlanta.
Both of which.
It's been a little lower versus maybe the Carolinas can.
Can you kind of talk about where the regional movement has been in the portfolio and whether anything stand out as particularly strong or particularly weak for you.
On the leasing side.
Yes, no great great question.
So it's it's a little bit across the board, you know and and I'm going to slice and dice. Your question a couple of different ways first the suburbs, we're getting I know its not geographic per se, yet, but tremendous act.
Activity tours and performance kind of suburbs in general my drilling specifically, but it's interesting we go come to Florida.
Our development and Midtown Tampa, right, that's filling up and it will be.
On schedule as underwritten prior to the pandemic and so seeing that occur.
It's something we are excited about Tampa has sort of taken its place at the adult table in terms of inbounds and growth Orlando had 12 companies relocated into the city.
That created 1300, new jobs and so we're seeing the tide rising and our portfolio in Orlando in a good way, it's not a big portfolio, but.
Its punching above its weight there Nashville is obviously one of our bigger markets and one that has.
Had negative absorption last quarter after positive the previous quarter that negative absorption was really.
Two major sublease has kind of been announced even though they're not being particularly marketed and that moved it right there but rates are still growing their nashville, but our suburban activity there.
Is going very well and then Charlotte.
You know you may know that one of the other hats I Where's the Charlotte DDP and.
The interest and our Uptown asset Bank of America tower.
The interest we're seeing in the future as at 650 <unk>.
Really strong, but even out there at South Park, which is kind of a suburban Charlotte market, we're having to kind of manufacture space. We're filling in in a second floor kind of atrium lobby to create more GLA that's already leased so.
I think it's kind of across the board, Dave no one's really kind of sticking out negatively or positively.
In Raleigh, Jaylo claims that downtown is the hottest submarket in Raleigh, and so we're seeing.
Downtown.
Really what's very suburban probably too many of the folks from the northeast and.
It's coming back to so Ted what did I leave out anything on that kind of color.
You've got to cover thank you.
Thanks, everyone.
Our next question comes from Tayo Okusanya with credit Suisse. Please.
Hi, Yes. Good morning, I, just wanted to talk about the entry into Dallas, where a little bit again, you discussed the mismatch between selling assets in Pittsburgh versus kind of funding development.
And Dallas, but curious whether in Dallas, there could be opportunities to just kind of make accretive acquisitions right away, which may kind of change kind of some of the the leverage and earnings accretion math that you guys are probably thinking about today regarding that.
That market rotation.
Sure No I think that's a good question. We are you know, obviously and Charlotte we went in with a buy first and then we were following up with development. This is just the opposite of that we're sort of going on in development, but we are actively looking for acquisitions, obviously, it's a it's a difficult environment there, but we are being a cash.
<unk> buyer for the assets, we want if there's sellers want to transact. We are looking at some opportunities whether we'll be successful or not don't know, but I do think the opening up the Dallas market to us. These three bvd that we want to be and are going to provide growth opportunities for us whether it's now or in the future.
Overtime.
Gotcha.
And then.
Just in regards to market rotation as well any of the markets. At this point that you guys may have your eye on that and maybe over the next year or two we could hear about another market rotation.
Nothing nothing right now I think we're very pleased with our platform our footprint you know we're gonna be.
Essentially 100% in the Sunbelt, where we've seen the higher growth and in migration.
Beat it up since Covid, even so I think we're happy with our footprint right now, but again part of our just normal business planning is spending time in other markets.
Just like we did in Charlotte and now Dallas There are other markets. We spend time in so you can never say never but there's certainly nothing more nothing on the front burner right now.
Gotcha. Thank you.
Thank you.
We have a follow up from Jamie Feldman with Bank of America. Please proceed.
Great. Thanks, I just wanted to follow up on activity coming.
And what's your thoughts on how soon you can get a tenant in there and the mark to market.
Yeah, So I should've I skipped that I should have hit that when he was asked at the first time Jamie.
Spectrum downtime. So again, it's a majority of the building they expire at the end of February of 'twenty. Three so I would expect you know whether it's six or seven months, maybe a downtime Brendan can correct me if I'm wrong and then you know what we're contemplating is it may be sort of a leg in over some period of time as well.
And then the Mark to market I think it's roughly flat.
Okay alright, thank you.
Thanks, Jamie.
Our next question comes from Daniel email.
With Green Street. Please proceed.
Great. Thank you just a quick question for me I'm curious your thoughts or updated thoughts on share buybacks at this time.
Just curious given your thoughts on the resiliency of the Sunbelt markets and high quality office versus what we're seeing in the share price today.
Sure Danny.
Look it's as you know, it's something we discuss with our board we.
We will be discussing as early as this afternoon, when our board meeting start but it certainly consideration as you said just given our stock is trading at a discount and when.
We're allocating capital we do look at all of our alternatives, whether it be development buying back stock high with ties and et cetera.
But we also want to make sure we're doing what's right for the long term.
And we do think you know obviously, we considered it.
With respect to our Dallas entry and we just think with regard to Dallas, just a great long term opportunity for the company, it's going to enhance our growth rate as we enter a fast growing market. So I don't think these things are mutually exclusive either.
You know I think.
Buyback would still be on the table, but it's it's going to be situational.
We want to continue to protect our fortress balance sheet don't want to lever up to buy our stock, especially just given the uncertain economy. These days so you know.
I think over the long term, it's something we're going to continue to continue to think about.
Alright, thanks, guys.
Thank you Danny.
There are no further questions at this time.
Well, thanks, everybody for your interest in Hi, Woods and before being on the call today, we look forward to seeing you next quarter.
Care.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect. Your line have a great day everyone.
Okay.
[music].
Okay.
Okay.
[music].
Uh huh.
[music].
Okay.
Uh huh.
Sure.
Okay.
[music].
Yeah.
Okay.
[music].
Okay.
[music].
Okay.
Okay.
Okay.
[music].