Q1 2023 Highwoods Properties Inc. Earnings Call
Okay.
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 April 26th 2023, I would now like to turn the conference with Q and a true. Please go ahead. Mr. <unk>. Please go ahead Mr. <unk>.
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 <unk> Dot com.
On today's call. Our review will include non-GAAP measures, such as episode NOI and EBITDA 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 will turn the call over to Ted.
Thanks, Anna and good morning, everyone.
During the first quarter, we once again had strong financial and operational results.
Leasing activity was solid same property cash NOI growth was positive.
<unk> per share was healthy with a sequential increase from the fourth quarter our.
Our cash flows continue to strengthen and.
And we reinforced our already fortress balance sheet by bolstering our near term liquidity.
Our well diversified high quality portfolio continues to outperform versus our markets and compared to other major metro areas throughout the U S.
As we stated last quarter, we believe that to be resilient, we must be diversified.
Which is a core component of our long stated simple and straightforward goal of generating attractive and sustainable returns over the long term.
With nearly 2000 customers our portfolio is located in eight core sunbelt markets with a sharp shooter focus on best business districts, which are both urban and suburban.
Our largest market is raleigh with just over 20% of our total NOI.
Our largest customer bank of America.
Less than 4% of total revenues.
Our largest industry.
Rachel services is less than 20% of our revenues.
Our average lease size is under 15000 square feet.
And our median lease size is 5000 square feet.
Further we believe there is a clear preference for quality when choosing office space.
Not just the high quality buildings, but.
But also high quality locations.
And of increasing importance high quality.
Actually stable landlords.
Our portfolio is outperforming our submarkets by an average of 590 basis points on occupancy.
This outperformance increases to 750 basis points when compared to the U S average.
We believe we are well positioned to increase this outperformance as customers and prospects focus even more intently on the quality of the building and the financial health of the property and its owner.
That being said our portfolio is not immune to the cyclical headwinds that all office landlords face during an economic downturn.
While tour activity remains encouraging we do expect demand will be negatively impacted as customers and prospects become more cautious about their own businesses in the near term.
We do believe that high quality awards with high quality portfolios will more often than not.
On the flight to quality.
Mainly using perspective, we can continue to be encouraged that our customers are increasingly returning to the ecosystem.
While the overall office utilization hasn't returned to pre pandemic levels customers in our markets from all industries are realizing the difficulties of replicating the culture creativity and productivity of their teams went away from the office.
Our goal is to provide our customers an environment, where their teams want to come into the office to be with her colleagues.
Or said another way provide workplaces that are committed worthy.
Turning to the quarter, we delivered <unk> of <unk> 98 per share.
Same property cash NOI was solid at plus <unk>, 8%, despite the headwinds of lower occupancy due to a large known customer move out of Nashville, which has already been backfill.
But whose lease doesn't commence until early next year.
At quarter end occupancy was 89, 6%.
While overall leasing square footage volume declined modestly with 520000 square feet of second Gen space, including 220000 square feet of new leases.
The number of leases signed remained stable at around 100 for the quarter.
Each year first quarter volumes typically lighter than subsequent quarters, given the rush of getting deals done before December 31.
Of note.
We saw net expansions of over 50000 square feet, which.
Which follows a strong fourth quarter.
And the number of expansions outpaced contractions by ratio of five to one.
Rent spreads were positive 15, 9% on a GAAP basis and positive 2% on a cash basis.
Average rental rates were 3% higher on a cash basis compared to one year ago.
While it was a quiet quarter on the investment front, we're actively assembling the building blocks to further strengthen the resiliency and long term growth of our portfolio.
We've been busy prepping potential dispositions and have a variety of noncore buildings and noncore land in the market for possible disposition.
Our disposition outlook remains up to $400 million for the year.
Though the upper half of the range seems unlikely given the current capital markets environment.
Over time, we're confident in our ability to recycle out of non core or non core assets, which will help replenish our dry powder for future investment opportunities.
Our $518 million development pipeline continues to progress well with all projects on time and on budget. We're.
With 22% pre leased with at least two years until projected stabilization across all of our spec projects.
We have about 300 million $320 million left to fund and we project NOI of approximately $40 million upon stabilization.
Our next development delivery 2008, 2007 Peachtree in Atlanta is scheduled for completion in the third quarter.
With projected stabilization in <unk> 25, and is already 88% pre leased with strong interest from additional prospects.
Turning to our 2023 outlook, we now project full year <unk> of $3 68.
To $3 82 per share.
Up a penny at the midpoint since our initial outlook in February .
Same property cash NOI is projected to be minus <unk>, 5% to positive, 1.0% up 25 basis points at the midpoint.
All other line items are unchanged.
Before I turn the call over to Brian I would like to briefly reiterate our performance and outlook.
Our diversified portfolio across the best urban and suburban baby days in the Sunbelt continues to perform very well with.
Prudently investing in our portfolio through our spec suite program and <unk> projects that will drive additional portfolio outperformance.
Our $518 million development pipeline will generate meaningful cash flow as it delivers and stabilizes.
Our full year 2023 outlook for same property cash NOI and <unk> per share or higher at the respective midpoint than originally forecasted.
And our balance sheet is strong with a debt to EBITDA ratio of five nine times with ample existing liquidity to fund the remainder of our development spending and all debt maturities until.
Until 2026.
Brian .
Thanks, Ted and good morning, everyone.
Echoing Tej thoughts we are pleased with the performance of the portfolio this quarter and appreciate the hard work our teammates have put in to support our customers as they recruit retain and return their very best to the office.
We believe the high Woods portfolio is tailor made to capitalize on the flight to commute worthy experiences and are open for business and growing sunbelt markets as.
As Ted mentioned, we believe there are reasons to take a cautious approach around demand growth in the office space as we approach the rest of the year yet our team continues to see healthy interest from small to medium sized organizations and a clear preference towards quality, which includes locations buildings and.
Owners.
This dynamic plays directly to our strengths as our high quality Bvd's workplaces and sponsorship is resulting in strong outperformance for our buildings.
While our portfolio has historically operated at higher occupancy levels than our competition. This outperformance has increased by 490 basis points since the onset of the pandemic.
And is now nearly 6% higher than the markets, where we operate.
We believe this spread can continue to increase as customers and prospects focus even more on quality.
While some larger customers are holding off on real estate decisions are using this opportunity to streamline operations.
Our core customers small to medium sized businesses continue to grow and have consistently generated the highest office utilization in our portfolio.
Further we continue to see customers of all sizes, increasing their average number of days in the office.
To illustrate this point our same property parking revenues were up 19% in the first quarter compared to last year and up 9% sequentially from the fourth quarter.
In the fourth quarter, we added 80000 square feet of net expansions and then this quarter, we added an additional 50000 square feet.
We see our small and medium size average customer as a strength within our portfolio.
And they serve as a general proxy for the diversified sunbelt economy.
Turning to market activity for the quarter.
CBRE reports that in Tampa, there are $2 3 million square feet of tenant requirements in the market and it posted positive net absorption for the quarter.
Our team there led to quarter for leasing volume with 112000 square feet of leases signed.
In addition, we're already seeing steady interest and our recently announced 143000 square foot Midtown East development slated for completion in 2025.
This project is the only new construction underway in the west shore or downtown Bvd's.
With its neighboring project Midtown West now over 97% leased we have benefited from Midtown, becoming the premier West shore address to live work and play.
Atlanta proved to be our second most active market in terms of leasing activity during the quarter with 81000 square feet of leases signed.
It should be noted however that this number does not include leases signed at our joint venture development 28, 2007, Peachtree, which is now 88% pre leased up.
Up from 75% at year end and on schedule to be completed in the third quarter.
Consistent with our own portfolio and experience J L. L noted that the great majority of activity in Atlanta was by tenants less than 10000 square feet.
Moving to North Carolina, which was again named business facilities. Most recently best state for business.
And where we have approximately 35% of our NOI in the Raleigh, and Charlotte markets. We've.
<unk> seen strong activity at $6 50, south try them.
Our 367000 square feet asset in Charlotte, which has leased up to 88%.
Up from 79% when we acquired the building last August .
We have also begun construction on our boutique build to suit for United Bank in Charlotte South Park DVD.
In Raleigh, our team signed leases for 75000 square feet.
We ended the quarter with occupancy of 94% across our $6 3 million square foot portfolio.
Our Glen Lake III mixed use development is on track to be delivered on time and within budget by the third quarter of this year.
The work place, making experience, we are delivering to our customers as competitive currency as they recruit retain and return talent to the office.
They are telling us this in word and an action based on our sustained results throughout the pandemic and now into 2023.
We believe our ability to deliver the highest quality workplace experience has high woods well position for the long term.
These experience are delivered personally by our exceptional high which teammates who manage lease and maintain our buildings themselves.
And we so very much appreciate their hard work.
Brendan.
Thanks, Brian in the first quarter, we delivered net income of $43 $8 million or <unk> 42 per share and <unk> of $105 $7 million or <unk> 98 per share there were no significant unusual items in the quarter, we had a small term fee and an even smaller.
Land sale gain both of which were anticipated in our original 2023 outlook that we published in early February .
Rolling forward from last quarter's <unk>, we posted an increase of <unk> <unk> per share.
Higher NOI contributed <unk> <unk> driven.
Driven by higher rental revenue improving parking income and higher operating margins higher unconsolidated JV income contributed <unk> <unk> primarily.
Driven by the full quarter contribution of Mckinney <unk> Olive and also included the deconsolidation of our 50% interest in the Markel JP enrichment.
Other income and miscellaneous items added <unk> for a total of <unk> <unk> of upside, which was partially offset by.
<unk> of higher G&A, mostly due to the accounting impact of our annual long term equity incentive grants, which are customarily made in the first quarter each year and <unk> <unk> of higher interest expense. The combination of these items net to the <unk> <unk> increase in core <unk> from the fourth quarter of 'twenty two.
To the first quarter of 2023.
Turning to our balance sheet, where we ended the quarter with net debt to EBIT. There of five nine times flat from year end, even though we continued to fund our development pipeline and had no meaningful disposition proceeds we further strengthened our liquidity by obtaining a 200 million dollar five year interest only mortgage.
With a $5 six 9% fixed rate secured by bank of America tower in Charlotte. This execution highlights the benefit of our low levered largely unsecured balance sheet combined with our high quality portfolio, we were able to pivot to the mortgage market where pricing is currently more.
<unk> and attractive in the unsecured market, yet still maintain a largely unencumbered asset pool and maintain strong credit metrics for our bondholders and banking partners at quarter end, we had $685 million of existing liquidity and this amount increased to 725 million.
Following the redemption of our preferred equity investment in the Mckinney <unk> olive JV.
We have only $329 million remaining to fund on our development pipeline and no consolidated debt maturities until the fourth quarter of 2025, we have ample liquidity to fund all of our capital needs, including development spending and debt maturities through the exploration of our line of credit.
March 2026, without the need to raise any additional capital or receive any disposition proceeds.
To be clear, we do expect disposition proceeds as we move throughout this year and we plan to be opportunistic about raising additional debt capital later this year or next but our liquidity position affords us the ability to be patient in.
In addition, our investment grade credit ratings were recently affirmed by both of our rating agencies with stable outlooks.
As Ted mentioned, we've updated our outlook when the with an increase to the midpoint of same property cash NOI and <unk>.
Our revised <unk> range is $3 68 to $3 82 per share up one penny at the midpoint.
The major changes from our prior outlook at the midpoint of the range or a <unk> <unk> increase from higher anticipated NOI attributable to stronger leasing better parking revenues and lower opex, partially offset by a one <unk> reduction from the net impact of the $40 million.
<unk> of our <unk> preferred equity investment.
As mentioned earlier, we started with a strong first quarter a couple of items to keep in mind going forward.
Our operating margin in Q1 was higher than originally anticipated, which was largely attributable to lower opex.
Some of the reduced expense items are expected to be incurred later in the year and therefore, we project operating margins will be 100 to 150 basis points lower for the full year compared to Q1.
Second we will incur the full quarter impact of two large customer move outs in Q1, most of which has been backfill, but won't commence until next year.
Finally, with the redemption of the preferred equity investment in the <unk> JV that had been previously paying us monthly distributions at a rate of sofa, plus 350 basis points other income will be lower.
We have included up to $400 million of potential dispositions in our outlook, while the upper half of the range may be challenging to reach this year given the current state of the investment sales market. We are seeing good interest in smaller buildings and some of our land parcels that are better suited to non office development we.
<unk> any disposition proceeds would bolster our liquidity and further improve our balance sheet metrics.
Finally, as we've mentioned many times during the past several years, our cash flows continue to strengthen this quarter is an excellent example, as our cash available after distribution was $20 million, even after absorbing a full quarter's impact from higher interest rates the ability to recycle capital back in.
To the business.
Whether into development acquisitions or <unk> projects is a major reason why we have been able to consistently grow earnings year after year on a leverage neutral basis, while simultaneously upgrading our portfolio quality, improving our long term growth rate and increasing our resiliency.
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.
We'll hear a switch on context I'll show request.
If your question has been answered or you would like to withdraw your registration. Please press one three.
One moment please for the first question.
Our first question comes from the line of Blaine Heck Wells Fargo. Please go ahead.
Great. Thanks, good morning can.
Can you talk a little bit more about potential sales. This year. It seems like you've pivoted from targeting the large sales in Pittsburgh or elsewhere to focusing more on smaller kind of bite sized asset can you just give some color around the timing and size of those potential sales and just in general I guess, what are the characteristics and an office property in.
The return profile that <unk>.
Prospective investors are looking for.
And an office transaction these days.
So in terms of the dispose youre right we have shifted.
Smaller smaller deals that sort of what the investor pool out there is looking for right now there's plenty of buyers to make a market. We think in that $20 million asset range. So we've got in terms of what's in the market.
Actually picked buyers on all three of the buildings that we've got out in the market. Then we've got a couple of land transactions as well, but the buildings two of the three are single tenant.
Single customer good credit.
Pretty good Walt.
As well and then we've got one multi customer building buyers.
One's institutional two of them are private.
So sort of a cross section there, but the bidding pool. When we took these out I'll tell you is sort of surprising and and.
It was great to see wasn't as deep as it was couple of years ago, but we had plenty of again plenty of buyers.
To make a market so that was encouraging from our standpoint. So they are all in the due diligence process in terms of the buildings, we're running through that and I'm optimistic.
We will get something over the goal line and be prepared to talk about pricing maybe at the earnings call in July .
And then same thing on the land.
We've got a few land parcels out there buyers are going through due diligence working on a closing conditions.
I'm hopeful, we'll get a land transaction or two.
Maybe just one bye bye bye.
By the next call. So overall, we're feeling pretty good about getting some discipline leads in the door.
Great. Thanks for all that color.
Second question can you just talk about leasing activity on the development pipeline and whether you've seen much of a change in demand for those projects recently, especially for those that are delivering in the near term like granted six and Glenn like three.
Yes, if you don't mind, maybe I'll take.
Hit all of them just real quick we mentioned on the prepared remarks, 2008, 2017, Peachtree. So that one did move I think from 75% to we're just shy of 88% to $87 five maybe this.
This quarter and we've got good prospects to get us in the 90%. So that building we delivered again in the third quarter and is coming along come along very nicely.
So we feel great about that one in the building looks great. The next one also in the third quarter, just a month or two behind 2027 as Glenn like three here in Raleigh that one was about 213000 square feet, which includes.
A little bit of retail read into the overall Glenn like park. So that one we put a lot of proposals out and it's the activity has increased in the last 90 days. Several tours lately has been on a couple had been on a couple with our Raleigh team.
But it's I wouldn't say, we have a strong prospects at this time, but we're encouraged by the increased activity there.
Granted park six up in Plano.
And Dallas that delivered in the fourth quarter of this year.
Tour activity is picking up there too so far this year in 2023, we've had 585000 square feet of proposals we've put out there 60000, just in the last 30 days so decision, making for all the big prospects is just slow.
So we've.
We've got activity out there in proposal submitted but the decision making has been slow.
'twenty three springs that delivers in the first quarter 'twenty five and the tour activity I'd say has been very very good there 560000 square feet of proposals. So far this year 160000, just in the last 30 days and I'd say a couple of those are pretty strong prospects seem to be moving along.
A little quicker.
And decision, making so nothing nothing no update yet, but we're making progress on that and then the last one is just Midtown east in Tampa. We just started construction in the first quarter of that building leaf fences up and were starting to put it in the pilings, but we've already seen some pretty good early interest I think two or three.
Inquiries already that we'll be making proposals on so again that doesn't have doesn't deliver for another two full years. So.
All in all love to have a little more activity maybe in Raleigh on the development.
Activity is seems to be picking up.
So it sounds like the activity is a little better at 'twenty three springs in granite Park six whats the difference there.
So it's about the same number of proposals there is just.
'twenty three springs the.
The decision makers are in a position to make those decisions leasing decisions. There's just been a little slower up of Granta Park. So I don't think it's anything Uptown is a great obviously, great sub market.
The specific prospects, we're chasing maybe if you've got a shorter timeline to make decisions or what have you but.
<unk>.
Got it thanks for all that color.
Thanks, Brian .
Next question from the line of Rob Stevenson with Janney. Please go ahead.
Good morning, guys.
Brian I think you've spoken about it a little bit in your prepared comments, but can you expand on the renewals in the first quarter and what you have under discussion currently for the remainder of 'twenty three specifically here trying to figure out the relative breakdown of the amount of tenants pursuing expansions versus those looking to contract and those that are more or less seeking to maintain.
<unk> the same footprint. These days seems like the market narrative is still that employers are going to give up 10% to 20% of their office space on renewals I'm curious as to what Youre seeing within your portfolio.
Thanks, Rob for the question, Yes, as you mentioned and I as I said.
The prepared remarks for this past quarter most of the activity for folks kind of leaning into our small and medium sized bread and butter customers.
Expanded versus contracted five to one for the quarter just to give you a little color into what we're seeing already for this quarter, we're off to a good start.
We're feeling very enthusiastic about how this quarter is going to come in base of everything that's gone either too.
Lease or have agreed to terms so.
My gut is we're going to be fairly consistent in from first to second quarter on that expansion contraction with more volume.
For the quarter.
The bigger the bigger users as we've kind of mentioned there are either delaying or streamlining of right sizing.
Their space and it's I really do think it's maybe less from a work from home headwind from a this is how we're going to use space going forward.
And again this is a little bit of talking our book is that they're all telling us that it matters to workplace matters.
That they're leaning in to make it a differentiating factor with regard to their talent.
Okay. That's helpful and Ted how are you and the board thinking about unlocking value now given your comments that dispositions at the upper end of the range likely given the current environment thinking of this in the context of your stock price, which has recently dipped below $20 for the first time since the global financial crisis, which seems to totally caught.
<unk>, how your business did in your 'twenty three guidance.
Yeah.
Yes look obviously, we talk about that a lot and I think it's.
All office, Reits or sort of being tagged with the same.
Jim issue so.
Look I think our view is we're going to keep our head down were going to continue to operate we can't control what are.
Our stock price is doing right now in times like this.
Obviously.
We're in the.
The office business is in a tough spot perception is.
Reception may not necessarily be what we're seeing on the ground, but any recession or economic slowdown you tend to see increasing vacancy sublease space increases quite the quality and so forth. So.
We're experiencing today the same thing we experienced in 2000 2008, so forth. So we are intently focused on just.
Going out and execute we think.
Over the long term, there's going to be great opportunities over time, and I think coming out of the GSA, that's where we ended up buying a lot of great office building. So the best buildings in our portfolio. We're just coming out of the <unk>. So I think theres going to be similar type opportunities. This time around but we got to be patient and why we're being patient we need to execute.
As best we can both on the leasing side on the disposition side while.
Creating some dry powder to take advantage of these opportunities. So it's really the same old stuff, but.
It's our playbook.
Okay, and then lastly, not to leave Brendan.
Brendan second quarter going to be the low.
<unk> per share quarter in 'twenty three given all you know at this point.
At this point.
Well with the caveat that you put on the last part of that question, probably with all we know I think that thats, probably likely depends a little bit on I would say second and third quarters are probably the low for what we are expecting.
So occupancy is probably likely to kind of bounce around where we are currently for the next couple of quarters and then we expect it to rebound.
In the fourth quarter. So given we had activity that moved out in the beginning of March we had the CDC that moved out kind of mid January .
<unk> contributed in the first quarter, they will not contribute in the second and third quarters.
Because those backfill users won't won't be back in that space and then we do expect that operating margins will be lower in the remainder of the year. So with all of that yes that probably means second and third quarters.
Likely be below.
Okay. Thanks, guys.
Yes.
Next question from the line of Ken <unk> with Bank of America. Please go ahead.
Hi, I know you are opening.
Net it but the first quarter is typically lighter from a leasing perspective.
Looking at that further in today's activity this quarter compared to historic averages.
The majority of the slowdown seems to be related to the meal.
So can you comment on how this slowdown compared to your expectations for pension and any color on what tenants are saying that's the reason cannot when used for the.
Air lease would be much appreciated.
Hey, Camilo, it's Brandon I'll start and then maybe pass that along to Brian and Ted for additional color, but I would say the low level of whether renewals our retention in the quarter was largely expected given we had the <unk> move out that we talked about for a long.
Time, so thats 263000 square feet of that was a non renewal in the quarter. We had the CDC, which was 116000 square feet. So combined those two or 380000 square feet of kind of known non renewals.
And then recall that we also proactively took back 77000 square feet with a user in Raleigh to extend their remaining square footage over a longer.
Long lease.
And with that we have substantially backfill the 77000 square feet that we took back so all of those things combined reduced the amount of renewal leasing that we did but that was all known.
So it was very much in line with expectations.
So the only thing I would add is in.
Again, any downturn you see companies.
Contractor space, you see companies consolidate operations that they have more than one office in the sub market you got companies going out of business.
Obviously flight to quality in flight to quality, we talk about a lot now, but any downturn people are looking for a deal and they may want to upgrade their space. So we're losing our retention ratio is being impacted just by the overall economic environment and some of the just what's going on with the customers whether again consolidation of offices closing regional office.
<unk>.
And so forth so not too dissimilar to any other downturn I guess with the caveat that certainly hybrid work is as one of the additional headwinds.
And just a follow up on that point I think you mentioned excluding those.
First quarter move out Youre expecting your attention to the rest of the year.
At 50%.
And is there any change to the SME.
Assumption.
Half of this year.
Okay.
No I think that's very much in line with kind of our expectation so yes and.
No change to the outlook for the year and I think you can see that generally in the in that outlook that we provided we still expect year end occupancy to be between 89, and 91% I'd say, we're feeling maybe a little bit better about the business overall, given we did nudge up our same property NOI growth outlook. So all those things.
We're very much in line with expectations I'd say net net we probably feel a little bit better sitting here in late April compared to when we provided that outlook in the beginning of February .
That's helpful and finally, I know you've commented on having the flexibility around timing to execute on the Pittsburgh disposal and.
And the fact that the market could look very different when you do historically, you've also had a very good track record in exiting markets slow growing SSO.
Just stepping back how do you think about <unk> ability to continue to deliver growth and less tough market environment.
On the potential dilution from the sale.
Yeah look I think.
As you say, we had 12 consecutive years <unk> growth, which has been very few companies have done that I do think it's a tougher environment right Theres no question, we recognize it.
And it's going to be tougher to do that so.
Going to obviously wait for Pittsburgh, where no huge hurry to sell Pittsburgh, but certainly when we do just given capital market environment. We got we got the headwinds there. So there will be some <unk> dilution I do think same time, our development pipeline is going to deliver over the next couple of years and that's helped us in the past I think it's over 40.
<unk> million dollars of NOI, when we stabilize that so that's going to help on the growth standpoint, I think that's one of the benefits of high Woods is having that development value creation platform.
They can.
Can deliver some solid NOI growth with the development deliveries.
Okay.
Our next question from the line of Michael Griffin with Citi. Please go ahead.
Great. Thanks.
I Love the office IMAX was down in Atlanta.
Bye bye.
Kevin and Glenn leg at some point, but I'm not saying my question was about the state of Georgia I noticed I think there is a footnote in the Q it looks like you're going to be thinking about 60% less space on that 290800 hundred century, just curious how youre thinking about back filling that other kind of needs.
Maybe it's not I think it's a little bit past, bobcat, but anything you'd add there would be great.
I am sure on specifically with the department of revenue.
We put the note in the in the 10-Q.
That asset is a noncore asset for us so when we got the RFP less than two weeks ago.
Just given our conservatism and transparent so you wanted to add that because it is it's a.
<unk> been in that building for a long time over 20 years and up until again couple of weeks ago. We thought is a good chance for renewals so.
We're looking at it right now there is a chance, though we can keep them in that same building.
There are other options in our portfolio that they may be interested in as well. So it's early days on that but it will be a significant significant downside. If we keep them again, it's there's an RFP out there and we're going to be competing for it so.
I am hopeful, but we will say it's a good it's.
They are definitely going to be a competitive it's a big big requirement. So I'm sure a lot of folks will be chasing it but.
So anyway, that's that one.
And then the other big ones Novellus is the other big one in Atlanta.
Michael and Thats as you know, it's 169000 square feet expires in September of 2004, they moved out late last year across the street to Phipps Plaza. So we now have.
Space vacant they are still paying rent on it.
So, but we're showing it we had two large tours just in the last 30 or 45 days.
And then as we've mentioned in the past they have sublease that 43000 square feet.
Who knows if we can keep those guys are not another competitive opportunity just given the size but.
So it's great space, Great building great location. So it's I think over time, we're going to lease that up.
To a great customer going forward.
Great. Thanks, and then my second question just on Tampa circling back on those developments and the pricing.
They're obviously, a growing market, but I'm curious what makes it as attractive as it is I mean I was reading somewhere recently I think Tampa has around the same population growth over the last decade, as little rock, Arkansas, not saying little rock bad per se, but like you've got Midtown west.
Majority leased to Tampa gas electric I think starting to Tony So maybe talk about why that's such a beneficial market yet.
Sure.
We've been in Tampa since I think the 90 days and I think it's been a good long term performer for us if you look at our assets there, they're largely in west shore in the CBD or the two best business districts. There and then when you drill down specifically on these these assets Midtown east that is in part of a 22 acre.
Midtown Tampa mixed use development is really a unique type project for Tampa and the success, we had at Midtown West If you remember right before the pandemic like is maybe summer or fall of 2019, we started 150000 square foot office building, 100% spec and during the pandemic we completed it.
On time on schedule and we leased it up.
On time and better than our pro forma from a rental rate standpoint. So just the demand that we saw that is looking.
Looking for a mixed use integrated mixed use project in Tampa was gave us the conviction to go in Midtown East Midtown East. It has a larger bill it's about a 438 or 40000 square foot building that Tampa electric Teco was going to be buying a condominium interest in that building.
So we've only got about 140000 square feet of office to lease up but we just think it's a unique.
Mixed use environment. It's a very vibrant is again is going to help companies recruit recruit and retain their employees.
Michael This is Brian I might just add on if we think of all of our different markets having different.
Ages and their life.
Many of them are further along in their development and evolution.
Tampa has is fundamentally kind of change its perception, maybe years ago sort of known as back office.
Location for some defense connectivity with Centcom headquarters headquarter there what's happened really over the last few years and accelerated by the pandemic and the outward flow of companies from maybe the gateways I think we've mentioned this before Tampa was as the number one relocation destination for companies out of the north.
<unk> in our Florida, it's not South Florida Tampa.
So that's a great story in terms of the little rock growth rate, we'll definitely look into that.
But we've seen the quality of the customers that are leasing space as Ted mentioned in Midtown and Midtown.
Midtown West is north of 97% leased the combination of the diversified economy in Tampa, they're spending billions of dollars of expanding the airport.
Seeing new investment with.
With folks from around the country in downtown to the water Street development in Midtown what we're doing with our partners there.
Tampa is kind of taking its neck seat at the table with the likes of Raleigh, and Nashville, and Austin and Charlotte It feels like that.
Okay.
Awesome guys. That's it for me thanks for the time.
Our next question is from the line of Ronald Camden with Morgan Stanley . Please go ahead.
Hey, a couple quick ones back on the leasing.
Is there a way to sort of quantify what the pipeline what the activity is and then maybe just some qualitative comments on sort of attack.
And some of the life science hubs that were in some of your markets just curious what youre seeing from that thanks.
Hey, Ron Brian here I'll take the first shot and let Ted and Brendan Grade My paper a couple of things we have low exposure to tech in general I think you probably know that.
And not that we're down on Tac as just as a fact as you look into the Crystal ball of what we're seeing in <unk>.
Second quarter already a few weeks then.
Nashville, Raleigh are going to be stuff, we talk about next quarter, we feel pretty good about.
Even Richmond is going to have something to talk about Tampa was our leader this quarter. The 112000 square feet. The momentum continues there following on Michaels question. So in general those those markets.
Like the economics that are coming in as Ted.
Kind of mentioned is something that people ask is it more expensive to do deals what are the fundamental economics around the leasing that's going on yes, it's competitive we havent seen costs come down per se and the.
Build out of spaces has it leveled out we believe so and.
We're optimistic that as other.
Other projects or slowdown that maybe we have a chance to pick up some things there.
For those deals that will give us term and have the credit.
We're inclined to win those deals I have a kind of a bad joke with our entire leasing team that I'm more optimistic about renewing someone who's in the portfolio.
And we have the ability.
Within our own portfolio to look ahead.
Two years three years with renewals and maybe do deals work.
Work with customers in a way that the private side singularly.
Financed building that would compete with might not be able to.
Great helpful.
The other one I had that same question on <unk> hundred century Boulevard.
10-Q.
If I could ask it a different way obviously its non core as you mentioned at the top but if I could ask the different ways. There is this idiosyncratic is there was there something unique about how they were using the building that.
You sort of looked at this and say, okay that that sort of made sense were there any sort of clues.
Just looking at their usage versus other tenants maybe that that color. So in his comments.
Yeah, Ron It will certainly.
They are slower.
Like most government users they are slower on the return to work.
Over the last couple of years.
But really the ability to have been in there forever. So the space is tired it does need to get redone. So I think it's probably a hybrid work combined with just needing to reconfigure their space like we're seeing.
C N and others, obviously there are.
They're in a building that's built 1975, so it's an older building right. So there's capex not only to re tenanted theirs.
And Ti associated.
Associated with their lease, but they're just building capital.
They will need to be invested in that asset.
Sort of an irregular floor plate. So it's just a really they've been there a long time and they are reevaluating their space like a lot of folks are.
Great and then the last one if I may just.
Life.
Licensed Sharon's deal you did in the quarter.
At a pretty pretty good rate.
Obviously, Brendan went through sort of the funding plans in your world.
I'm just curious are you getting more calls from life insurance companies.
In terms of other assets, where there is interest there is opportunity down the road.
Okay.
Yes, Ron it's Brendan.
Thanks, Yeah, we were pleased with the execution on the <unk>.
Jet at Bofa tower.
I would say I mean in general we are predominantly a.
And unsecured borrower so mortgages are not something that we're looking to do a lot of however, the benefit of us having a largely unsecured asset pool with a high quality.
Portfolio of assets is there are those options that are out there should we choose to pursue.
Some mortgages. So I think it's an option that is open to us.
And we will evaluate whether or not it makes sense, but we do want to balance the unsecured pool that we have out there.
With with others.
And just just as a reminder, I mean, we're we're in great shape from a liquidity standpoint. So I mean, we can fund all of the development pipeline and all of our debt maturities through the exploration of the line which is in.
March of 2026 without the need to raise any additional capital. So it's not something that we actively need to go out and raise capital. It's just an option should we choose to do so.
Great. Thanks, so much.
Yeah.
Next question from the line of.
<unk> <unk> with Green Street. Please go ahead.
Hi, guys. Thanks for taking the question.
Just curious if you can kind of provide your thoughts or expectations for net effective rents throughout the remainder of 2023.
Leasing cost Tal I continue to remain elevated and something that surprised us over the last several years is that face rents have held up surprisingly well.
I guess could 2023 would be the year that we started to see pressure on base rents.
Hey, Dan It's Ted look I think look I think so right I mean again, it's an economic slowdown dislike.
Any other any other slow down the office business right now we've got.
Vacancy rates, increasing and you've got the sublease space, increasing so you got those headwinds and they've got cost pressures right, we keep thinking or maybe hoping that.
Costs are going to come back in line and as development starts start to fall off you may see some contractors that are getting a little bit more aggressive but up to this point. The <unk>. It's still it's still there's still cost pressures that continue to increase.
Free rent is increasing again, making blanket statement there are pockets in submarkets that theyre all different but in general there is upward pressure on ti's upward pressure on free rent now the nice thing is since Covid, we've been able to maintain if not increase face rents. So when you throw all that in the mix.
We've done a good job on net effective but just entering the slowdown we're entering it wouldn't surprise me to see some downward pressure on net effective rents.
At.
John It's Brandon just to add just one thing I would add we did do a lot of spec suite deals during the quarter you saw that the average kind of size.
Size lease that we did during the quarter was around 5000 square feet. Those spec suite deals initially tend to carry a pretty low net effective because we spend a lot of capital upfront as we re let those then the net effect of US are very high so if we are.
Just for the.
Spec suite deals in the quarter, the net effective looks a lot more comparable to previous quarters. So I think it had a negative drag by around 65, a square foot on our overall net effective. So I think we will do more of that during this year, because we've been very successful and seen a lot of leasing traction there, but that will probably from a headline perspective.
Cause the initial net effective as we sign those spec suites to be lower than they otherwise would be.
And Brian just to add on on this kind of counterintuitive face rates as the new development is delivered and lease leases up.
Market face rates will actually drop because that higher end top of the market face rate is no longer in the pool to quote face rates. So we're actually seeing where you have seen the market faced rates drop it's because some of the top stuff is leased up and we're seeing to Ted's point.
We've done a pretty good job of folks who see space as a differentiating factor that face right.
Is a smaller part of their equation when theyre talking about bringing their talent back.
That's all very helpful detail. So I appreciate that just one more quick one if I may are you guys able to share sort of the underwritten LTV at Bank of America tower in Charlotte.
Well it depends on who you ask for the V I guess, but.
It's probably I mean, I think the lender had a probably a more conservative outlook of value. Then we think it would it would garner if you.
We're in a market that asset for sale, but let's call it probably and in round numbers, 50% is probably a pretty good benchmark in terms of what the LTV.
Great. Thank you.
Next question from the line of Nick <unk> with Baird. Please go ahead.
Hey, This is Daniel open on with Nick.
A question I know you were mentioning the mortgage.
Given.
Any potential slowdown in the market and transaction market in your <unk>.
Deals would you look to equity than as a potential way of Delevering with those.
Hey, Daniel it's Brendan.
I'm not sure I totally.
I understand the question, but I mean, I guess, if if would.
Would we consider a JV partner for assets. If that's maybe the question probably not a profile of kind of.
Okay got it yes.
Yes, I would say probably for the type of assets that Ted talked about kind of those smaller buildings that we have out in the market I would say that that's not really kind of something that we're contemplating on the assets that we have out in the market for potential sale.
Okay, great. Thanks for the clarification.
Once again, please press one for if you have any phone questions.
Next question from the line of Peter Abramowitz with Jefferies. Please go ahead.
Thank you Ted.
Ted mentioned, possibly some some opportunities on the acquisition side I know theres nothing in your guidance and maybe it's kind of looking at a little bit further out could you just quantify.
How we should think about.
What you're targeting in terms of.
In terms of your returns on those.
No there's not a ton of deal activity in the market today.
Financing side, so cost of capital in a totally clear but.
Just wondering if you could kind of quantify your return hurdles.
If you do start to get access.
Yes look I think.
Thank you said it we're really not looking at anything right now, we're being patient trying to replenish our dry powder get some dispose over the goal line. So.
I think we're going to be patient and the bar has definitely been raised.
Whether it would be obviously development or acquisitions. So I don't think we've had.
The cost of capital discussion because we don't have our pencils are sorted down on the acquisition side right now and their own a whole lot of assets that are out there right now and we're well we've got as our well developed wish list.
We're tracking there are actually I would say there are a couple of assets that are out there were tracking that would be good.
Proxy for pricing, if and when they trade, but right now we're sort of sitting back and waiting we think there may be better opportunities a little bit down the road versus today.
So really don't have an answer for you on the cost of capital question.
Okay got it that's it for me thank you.
And we have no further questions on the phone line.
Well I want to thank you everybody for being on your on the line today. Thanks for your interest in Hi, Woods, and we look forward to seeing many of you at NAREIT.
NAREIT in June thanks, so much.
And that concludes today's call. We thank you for your participation and ask you to please disconnect your lines.
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