Q2 2023 Highwoods Properties Inc Earnings Call
Good morning, ladies and gentlemen, welcome to the high was properties Q2 2023 earnings call. My name is strictly that I would be your moderator for today's call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
Please press star one on your telephone keypad, if you would like to ask a question I would now like to pass the conference over to your host kind of true manager I'm not incorporate.
Right.
Hello. Please go ahead.
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 <unk> NOI and EBITDA are the release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures.
Forward looking statements made during today's call are subject to risks and uncertainties. These risks and uncertainties are discussed at length in our press releases as well as our SEC filings as you know actual events and results can differ materially from these forward looking statements and the company does not undertake a duty to update any forward looking.
Statements with that I'll turn the call over to Ted.
Thanks, Renaud and good morning, everyone during.
During the second quarter, we once again had strong financial and operational results.
We further improved our portfolio quality and balance sheet are selling 51 million of noncore assets.
Leasing activity was healthy.
We demonstrated resiliency with our ever for our results in the face of higher interest rates.
Hosted solid cash flows.
Our markets continue to attract talent.
Bobby outsized population and job growth compared to other major U S cities.
C N B C recently published its annual ranking of top states for business.
Every core market in which we operate but at state ranked number eight or higher.
North Carolina, our homestay, which garners the largest share of our total revenues and where we generate 35% of our NOI was ranked number one for the second straight year.
It's no secret that the stage two biggest metros Raleigh, and Charlotte generate the majority of the economic growth for North Carolina.
Virginia, Tennessee, and Georgia, followed right behind two three and four while Texas was number six in Florida number eight.
We've long highlighted the benefits of the south Eastern U S with its strong demographic trends business friendly environments low cost of living and high quality of life.
In fact, according to Bloomberg the South East as accounted for two thirds of all job growth across the country since early 2020.
Almost double its pre pandemic share.
The main question. However is how do these demographics and national trends translate into results for highways.
Let's take a step back and look at our performance.
We generated positive same property cash NOI growth for 10 consecutive years.
Our total NOI over the last four quarters is 16% higher.
Full year 2019.
Our net effective rents on leases signed over the last four quarters is eight 5% higher than 2019 average.
And at the midpoint of our 2023 outlook or F. F O per share implies 7% growth over 2019.
Despite the headwind of higher interest rates.
While availability rates or a cyclical highs according to J O L. Construction starts are down 75% over the past 12 months compared to the prior five year annual average.
And lower quality office is being taken out of stock at an unprecedented pace.
These governors on supply should lead to a reduced amount of available office space, particularly after sublease space continues to get absorbed.
This plays directly to our strengths and user strongly prefer high quality office space and bvd locations with well capitalized landlords.
Population and job growth continue to be strong across our footprint demonstrated by 12 leases signed this quarter from users new to market.
Most of these are small to medium sized leases, which is our sweet spot.
Our customers continue to bring their talent back to the office.
And they are increasingly determining their long term space needs.
As an example, we signed two sizable renewals this quarter far in advance of the lease explorations and they've maintained or increased their leased space.
At quarter end occupancy was 89% leased.
Leasing volume was strong with 918000 square feet of second Gen space, including 222000 square feet of new leases.
Our leasing cat was robust with 110 total sign leases, including 39 new leases.
Leasing economics were healthy.
Rent spreads were plus 14, 7% on a GAAP basis, and plus 0.5% on a cash basis and.
Net effective rents were almost 6% higher than our trailing four quarter average and 12% higher than our pre pandemic average in 2019.
Average rental rates in our portfolio were 3% higher on a cash basis compared to one year ago.
Turning to our results, we delivered <unk> 94 per share in the second quarter.
As expected same property cash NOI growth was minus one 1% as we absorbed higher opex and lower occupancy driven by the temporary downtime on the former activity space.
As a reminder, we do not take vacant buildings out of our same property pool.
On the investment front, we sold three non core office buildings for total proceeds of $51 3 million at a combined 7% GAAP cap rate.
These sales were in Raleigh, and Tampa and non bvd locations.
Given the current capital markets environment, we are lowering our 2023 disposition outlook to a total of $200 million.
Including assets sold to date.
Our $518 million development pipeline continues to progress well with all projects on time and on budget.
We're 23% pre leased with at least two years until projected stabilization across all of our spec projects.
We have 300 million left to fund and we project annualized NOI of $40 million upon stabilization.
We're seeing good prospect activity across our development projects.
Glenn like three in Raleigh, We signed an 18000 square foot user and are seeing increased interest as this project nears completion.
We have strong demand at 'twenty three springs in Uptown, Dallas, and we expect 28 27 Peachtree in Atlanta to stabilize by year end.
Following lease up in Midtown West and Tampa to a 100% earlier. This year. We are seeing early interest in Midtown East, which is only just broken ground.
Midtown East is the only office development under construction in the entire Tampa market doesn't deliver until the first quarter of 2025.
Turning to our 2023 outlook, we now project full year <unk> of $3 69.
To $3 81 per share.
Flat at the midpoint from our outlook in April despite a meaningful interest rate headwind in the past 90 days.
Before I turn the call over to Brian I do want to acknowledge the challenges currently facing the office sector, including hybrid work higher interest rates the difficulty of obtaining financing for office buildings today.
In addition, despite the resilient jobs market office owners are impacted by the cyclical demand headwinds when heading into a recession or a low growth environment.
As businesses become more cautious about their own growth prospects, they typically become more cautious about their space needs.
This will likely pressure occupancy and net effective rents until the office market regains its footing.
However, we remain confident over the long term because our sunbelt portfolios in a region of the country with a strongest demographics and job growth.
We have a high quality office portfolio and bvd locations that we believe will continue to outperform the market.
Our purposeful diversification, whether it be by market by industry by customer or by lease size should enable us to deliver resilient operational performance.
Which has been among the strongest in the office sector over the past several years.
Our $518 million development pipeline will generate meaningful NOI as it delivers and stabilizes and.
And our balance sheet is strong with ample liquidity to fund the remainder of our development spending and all debt maturities until 2026.
Brian .
Thank you Chad and good morning, everyone.
As Ted highlighted our performance in the second quarter showcases the robust and enduring demand for premium office space in the Sunbelt best business districts, and where our team signed 918000 square feet for the quarter.
20% above our five quarter average.
This includes 222000 square feet of new leasing over 39 deals.
Which is in line with our average quarterly new deal count for years 2018 and 2019.
Our leasing activity was diverse among industries with the law and engineering firms leading activity for the quarter.
We continue to see healthy interest from our small and medium sized businesses, our core customers, which continue to maintain the highest levels of physical occupancy throughout our footprint.
Echoing this trend J O L. The recently reported that year to date companies have enacted new attendance policies for 1.5 million office workers and another 1 million expected to face a similar requirements in the second half of 2023.
Delivering across five markets are 1.6 million square foot development pipeline is on time on budget generating significant inbound activity and it's generally delivering into voids in our markets and bvd is with regard to new and competitive inventory.
Starting with North Carolina, Cnbc's number one state for business for the second year in a row. The Raleigh market saw a 139000 square feet of positive net absorption for the quarter. According to CBRE.
Office using employment growth remained above the national average and Apple filed plans to begin work on its previously announced 281 acre campus.
Our team signed 276000 square feet of second generation leases with GAAP rent spreads of 16.4%.
Moving to our Glen Lake III development, where we remain on schedule for completion in the third quarter, our team signed over 18000 square feet, bringing the lease percentage to 23%.
And Charlotte as noted by CBRE or Bvd has experienced positive net absorption and quarter over quarter leasing activity for the overall market was up 46%.
During the quarter, we signed 104000 square feet and our 2 million square foot portfolio is 94.6% occupied.
Heading west in music City CBRE highlighted the markets positive quarterly net absorption of 744000 square feet.
Amazon occupied their HQ2 in downtown Nashville, and in California mainstay in out Burger announced they would be building their 100000 square foot Eastern territory office and Franklin.
Our team leased 89000 square feet in the quarter with positive GAAP rent spreads of 17%.
We are completing the highwood tightening of our cool Springs buildings, and we saw the greatest Brentwood tour activity since the start of the pandemic.
I should also note the nashville's teammates to the south and Orlando have been hard at work setting up their portfolio, which is now 97% occupied and has over 200 basis points of additional momentum in the leasing pipeline.
In conclusion, while we aren't immune to the global economic headwinds the prevalence of sublease space or hybrid future of work we're off to a good start for the third quarter. Our leasing pipeline is healthy and we are benefiting from the flight to quality and capital occurring in the marketplace.
We believe our people are our trophy assets and it is because of their commitment and ability to deliver the greatest commute where the experiences that we continue to deliver the positive results we have Brendan.
Thanks, Brian in the second quarter, we delivered net income of $42 3 million or <unk> 40 per share and <unk> of $101 million or <unk> 94 per share results were in line with our expectations with no significant unusual items rolling forward from last quarter.
<unk> <unk> decreased <unk> due to lower NOI, which reduced <unk> by <unk>.
Driven by lower topline revenue from reduced average occupancy due primarily to the activity move out and higher operating expenses. This reduced NOI was in line with our forecast.
Higher interest expense driven by an increase in sofa reduced <unk> by <unk> <unk>.
A total reduction of seven.
This was partially offset by lower G&A, which added three.
The combination of these items net to the <unk> reduction in sequential <unk> from the first quarter to the second quarter.
As Ted and Brian mentioned, our quarterly leasing stats were solid with net effective rents showing continued resilience.
And it's not just our leasing stats cash flows remain healthy despite the significant headwind from higher interest rates. We believe the resiliency of our cash flows is largely attributable to the asset to the active asset recycling, we've completed over the past several years since.
Since 2019, we've sold $1 2 billion of capital intensive noncore buildings and recycled into $2 2 billion of newer properties that are less capex intensive and have a higher long term growth rate.
While we're pleased with the progress we've made portfolio improvement is a continuous process and therefore, we expect to sell additional assets over time.
May result in some uneven quarters from an earnings perspective, but we believe the long term results will be similar to what has occurred over the past several years strengthening cash NOI with a more resilient portfolio of high quality buildings, all while maintaining a flexible balance sheet with ample liquidity.
Turning to our balance sheet, we ended the quarter with net debt to EBIT there of six times nearly flat from Q1, even though we continued to fund our development pipeline and had lower EBITDA attributable to the NOI headwinds I just mentioned.
Further we improved our liquidity by selling $51 million of noncore properties, and we received a net $40 million from the repayment of our preferred equity investment in the Mckinney <unk> olive joint venture.
We did provide $10 million of seller financing for a six month term at 50% LTV on our sale of one.
In the park one.
We expect this loan to be repaid in the fourth quarter.
We now have nearly $750 million of total existing liquidity more than enough to fund all of our current capital commitments, including development spending and debt maturities, which total roughly $500 million.
Through the exploration of our revolving credit facility in March 2026, we do expect disposition proceeds in future quarters, and we may be opportunistic and potentially raise additional debt capital later this year or next but our strong liquidity position allows us to be patient.
As Ted mentioned, we've updated our outlook with no changes to the midpoint of our <unk> range, which is now $3 69 to.
To $3 81 per share we've lowered the year end occupancy range to 88, 5% to 90%.
This is always a challenging metric to forecast given its a point estimate on the last day of the year part of the reason for the reduction as certain customers, where we previously projected their leases would commence before year end, but now expect their leases not to officially commence until early 2024.
This change in timing has impacted our projected straight line outlook for 2023.
Otherwise there were no major changes to our <unk> outlook.
Couple of items to keep in mind going forward first our operating margin in Q1, and Q2 was higher than originally anticipated, which was largely attributable to lower Opex, we expect lower operating margins in the second half of the year. Some of this is normal seasonality while we also.
Some increased repairs and maintenance spending in the second half.
Other items that could cause a notable change to our <unk> outlook include whether we pursue additional capital raising or other capital recycling initiatives, we did reduce our disposition outlook to up to $200 million for the full year, which includes the $51 million closed to date as a reminder.
Any future dispositions are not included in our <unk> outlook.
Any disposition proceeds would bolster our liquidity and further improve our balance sheet metrics.
In summary, we're pleased with our financial and operating performance in the first half of the year and we're encouraged by the resilience of our portfolio has exhibited over the past few years.
Further the lack of new development and capital challenges facing many of the office landlords. We compete again positions us for continued strong performance we.
We believe our strategy of owning high quality properties and bvd locations in the sunbelt, while maintaining a flexible balance sheet with ample liquidity is why we've been able to consistently grow earnings year after year, while simultaneously upgrading our portfolio quality, improving our long term growth rate and increasing our.
Operator, we're now ready for questions.
Absolutely.
I would like to ask a question. Please press star followed by one on your telephone keypad. If you would like to remove Stat question. Please press star followed by two.
Again to ask a question press star one.
We will pause briefly to allow questions to register.
The first question comes from the line of code meal, but now with Bank of America. You May proceed.
Hello.
Atlanta has been a key market in your portfolio, where occupancy has never really gone above 90%.
Do you see where occupancy has been trending at a stabilized level for this market or do you expect you can achieve higher.
Levels here.
And I think we can get to Atlanta is very similar to that like Buckhead has.
It had its challenges the last couple of years we've.
We've had some large rollovers and some move outs, but I think.
And a good market.
I would fully expect it to meet meet what we think we can do with the portfolio, which is 92% 93%.
Okay great.
You've talked about net expansion activity can we just get an update for this quarter.
Yes.
Yeah, we had.
Again expansion outweighed contractions I think it's two to one this quarter, but we did lose a little bit of a negative square footage wise I think we were negative 40 to 50000 square feet.
We had a couple.
Downsizes that you'll maybe see our occupancy when we renegotiated.
Couple of deals.
The contracted both of those are actually in Pittsburgh.
And that was one of the reasons on the occupancy decline really our occupancy as a company was pretty flat over the quarter over quarter with the exception of Pittsburgh and Pittsburgh in the quarter, we renewed and downside is really two customers.
The first was really a long term renewal credit customer long term customer they renewed early and we took back about 45000 feet in the second one we took back about 100 I'm sorry, we took back 75000 feet.
So again that one was a.
Vacancy upcoming vacancy we knew was going to happen for several years they'd been sublease their space for the last six or seven years. So in total in Pittsburgh, We took back five floors.
Which is great space in the tower one PPG.
We've already signed one lease for a floor and we've got good activity on a few other floors, but.
So that was a big reason for our contractions square footage outweighing or expansions this quarter.
Thank you for the color and a final question.
Can you talk about the latest discussions you're having on the space, where you have large tenant leases expiring in 2024, I believe novellus moved out last year in the space is being sublet.
EQT has suddenly seeing some of that space. So how is leasing activity then there and are there any updates on <unk> berries plans.
Sure Yeah, let me hit each of those.
So our large lease explorations you mentioned really strong third.
<unk> third quarter of 24 first one novellus 168000 square feet in the end of September .
They did move out to move across the street there.
Sublease in only about 43000 feet. The rest is that space is vacant today, we're still in discussions with that customer that sublease and we hope to be able to go direct with them but.
Those discussions are ongoing so really no update from last quarter there with.
With respect to EQT.
October of next year of 2024, again really no update there EQT, we are assuming they're leaving.
So we think we'll get that space back in really no update on that and then bass Berry is February of 'twenty five.
They are definitely moving out and were planning right now.
Significant amenity upgrades.
Our basis is great in that building, we're going to be able to offer competitive rates, but it's still a little bit early were still about 20 months away from that exploration. So no no update there other than we are in active planning to highwood ties that one building and add some amenities.
Thank you for taking my questions.
Thank you.
Thank you.
The next question comes from the line of Blake claim intake what Wells Fargo. You May proceed.
Great. Thanks, good morning.
So I was hoping to touch a little bit more on the change in occupancy guidance I guess, how far into 2024 are you expecting those leases commence and maybe just touch on why the move in was delayed and whether the size of that has changed at all.
Yes.
Hey, Blaine, it's Brendan ill start so yes, there was a combination of things that probably impacted that year end.
Occupancy outlook that we have and as I mentioned in the prepared remarks, thats always a difficult.
Metric to guide too because it's just it's a point metric on it.
One day on a year, so really what it was probably the vast vast majority of the change was attributable to a few different leases that we had projected to kind of be in occupancy before year end, where we now project them.
In early 2024, and then we had the proactive downsize that we took in Pittsburgh that was a mid 2020 for exploration. We proactively took that space back early to do a long term extension with that customer. So a combination of those two things really kind of make up the.
<unk> of the decline in the in the year end occupancy target that we talked about we felt like.
The timing issue is just used to just kind of from a timing perspective, but not really a big issue. There and then we felt like the Pittsburgh.
Proactive take back was a good decision for us given that it locked up a long term user.
Long term good credit user in that building for for for a long term.
Okay, and just to be clear, excluding that Pittsburgh situation. The size of those leases that are moving and have not changed.
That is correct.
Okay great.
Just another one on guidance can you just talk about some of the potential positive offsets that allowed you guys to keep the guidance midpoint unchanged, despite incorporating the lower occupancy along with lower straight line rent.
Dispositions you guys completed and then higher interest rates.
Yes.
So I would say that I mean from from just a high level of interest rates, probably kind of if you look at the at the Sofa curve, which is generally how we project interest.
That hurt us by probably let's call. It two to three <unk> compared to where we were in April and then if we look at the change in occupancy really with respect to kind of.
Straight line rent is that was probably a penny or two so we're talking in the neighborhood of kind of three to four of sort of headwinds.
Now versus where we were three months ago offsetting that we probably have.
Theres, probably let's call it a penny or two maybe that that help same store, but not something that we felt like was enough to kind of move that range. So we still kept the range from down 50 basis points to up 1%.
And then we've probably got another penny let's call. It of NOI that is not within the same store pool. That's also positive versus kind of where we were in April and then you've got another call. It penny or so of kind of other income items that are outside of the NOI line. So those kind of things all canceled each other.
Out.
And really so we felt comfortable kind of keeping the midpoint of the <unk> outlook. The same even if there are a couple of more.
Movements within within the P&L on some of the line items.
And not really much impact I would say theres, a little bit of headwind, but nothing noteworthy.
With respect to kind of where the disposition cap rates were versus the incremental cost of paying off debt with the proceeds from those.
Okay, Great. That's really helpful. Thanks, Brendan and then lastly, Ted in your prepared remarks, you mentioned that lower quality office buildings are being taken up stock at an unprecedented pace can you just expand on that as that space all being converted.
So what is it being converted to I guess Alternatively are you seeing demolition of space and then are there any markets in which youre seeing this happen at a faster pace.
Okay.
Yes that comment really is from Jay ill put out some research recently, so I think it was a global comment.
So we're seeing it in our markets a little bit right now.
But I think it's going to accelerate there are few lower quality office buildings that have been on the market that had been sitting vacant that are looking at.
What we're understanding is there may be some being converted.
Townhomes be scraped and then the redeveloped and town homes or apartments.
Haven't seen a whole lot of conversions yet we're hearing talk of a few in our markets Blayne, but I think it was just sort of getting started in terms of some of the.
Some of the action the conversion apartment conversions in our markets.
Okay, great. Thank you guys.
Yeah.
Thank you.
The next question comes from the line of Michael Griffin with Citi. You May proceed.
Great. Thanks, John in your prepared remarks, you talked about kind of pressure you're expecting that occupancy at net effective rents get a sense of where net effective rents on the portfolio and maybe expectations for the back half of this year and then heading into 2024.
Yes, Michael.
Look I think our net effective rents have held up right. We had a pretty good quarter. This quarter it can be lumpy quarter to quarter, just depending on release of <unk>.
And what's the building what market is it in what space, what's the expiring rent as well so it's hard to predict.
Where it's going to be I know during during Covid I think they went down mid single digits and our portfolio and I think if you just look back at general downturns economic downturn for office and Theres going to be pressure on net effective rents tis are higher today concessions are a little bit higher as we've said, we've been able to hold face rents.
And even grow face rents in some markets.
So I.
I think theres downward pressure, just because it's more of a tenant market.
But in general we've been we've done a pretty good job in that can again, it can be lumpy quarter to quarter.
Great. Thanks next one I had noticed that came.
Came in a bit below consensus and this quarter I know, there's some lumpier components related to that particularly on the second Gen tenant improvements, but just how are you thinking about some of those line items from a run rate perspective and are there are there any worries around dividend coverage being elevated or thoughts you can add on that would be helpful.
Okay.
Okay.
Yeah, Hey, Michael it's Brendan.
So I would say a couple of things on that so if you look at the.
Amount of capital that we spent in terms of leasing which as you noted can be lumpy right. In this quarter, we spent $31 million, that's $6 million higher than what the prior five quarter average wise, so that number was higher and it.
And number is going to bounce around so I would expect that in a more normalized quarter that number is going to be a little bit lower so that has a benefit as we think about that in a normalized quarter versus where we were this quarter.
And then similarly, you can see from the straight line guidance in terms of kind of the amount of straight line rent that we have incurred thus far.
In the first half of the year compared to kind of what the full year guidance is that it's likely that our straight line is going to go down as well. So as you think about that that's more cash flow that's coming in so I think for the combination of all of those things that makes us feel pretty.
Constructive in terms of the cash flow outlook and I would say that that's in context of still cover having good cash flow this quarter, even with higher Ti and leasing Commission Commission spending.
And.
In a higher straight line.
Amount this quarter compared to kind of what we think in the future quarters.
Great. That's it for me thanks for the time.
Yeah.
Thank you.
Our next question comes from the line of Georgia.
Co with Mizuho you May proceed.
Hi, Thank you for taking my question I was just wondering can you give any examples of tenants you're assessing state needs to the positive.
Given the already more towards moderating and.
Can you comment on utilization trends in your portfolio.
Sure No. We've got as we've mentioned, we've our expansions for last several quarters from a numbers perspective have outweighed or a contraction. So we have a lot of growing customers now.
Now a lot of those are not taken they're not taking on additional floor or theyre not taken two floors, but they're taken three 510000 feet. We just had an engineering firm last quarter take another 10000 feet.
So it's it's.
It's across the board we are we've got some law firms several law firms that are growing their footprints right now.
So it's fairly broad based but again, it's not large chunks.
Seeing them take again smaller chunks.
Here and there.
George It's Brian I might add on to that is that you think about.
Suddenly side, we've seen within our markets and within the portfolio. Some large customers who are contemplating putting large chunks on the sublease market or had and have now pulled that back off because they are returning their people to occupy their space in one case, one that's been widely reported in Atlanta.
<unk> vacated a number of buildings and in fact, the last couple of weeks came back and leased up a whole other building.
So we do see that as positive for sure.
And just on utilization trends in your portfolio as you can give some color in the recent months has that picked up.
Regarding utilization, yes, we have seen that continue to pick up and I think there is not only within our portfolio, but we're kind of a national momentum is post labor day Theres a number of.
Policies that have gotten pretty public out there as you mentioned in the remarks of Ngls I was talking about this year are $1 5 million employees have kind of had to adjust to new returned to work or attendance policies with another million.
Kind of announced starting at the end of summer through the end of the year.
Okay, Great and then just a last one for me.
You know until today, no move outs and moving I guess, what is the low point in occupancy and same store NOI growth over the next few quarters.
Hey, George it's Brendan.
I would expect that occupancy probably is.
In line too there could be what kind of see where the third quarter shakes out, but I would say in broad strokes, where we are now is probably likely to be kind of around the low at.
At least with respect to kind of 2023, and then same thing in terms of same property NOI growth I think we always forecast that the second quarter.
Second quarter of 'twenty, three was going to be a difficult quarter for us given the comp versus last year. I think if you look at where expenses trended in the second half of last year kind of compared to where they are now the comps become much easier in that regard in terms of the expenses. So we ought to see a little bit of improvement on same property as we go forward in the back half of the year.
Thank you.
The next question comes from the line of Rob Stevenson.
Jamie you May proceed.
Good morning, guys.
The two sizable renewals they did their renewals far in advance of the exploration did you talked about your comments are they doing anything different with that space going forward reconfiguring in any material way curious when the larger space users renew in it that far in advance what's driving that decision.
Well I think thats exactly what what what Youre seeing Rob So both of them had exploration that we're several years away and they came to us and say look we want to get our people back to the office and to do that we need to reconfigure space. So we'd like a little bit of Ti. So that was the conversations we had there really it's more.
Collaborative type.
Space.
Some of them are doing.
Few more offices actually the other ones doing a few less offices, but so it just it depends on what their space looks like but in general the biggest trend as more collaborative space more huddle rooms areas to meet when the group when they come in the office.
Okay. That's helpful and then I guess a.
A follow up on that one are you seeing any more upward pressure today in terms of the Ti dollars.
On a per square foot basis than you have over the last couple of years is there anything changing there.
Well I think over the last couple of years, yes.
Think we've seen it any more than the last three to six months, but certainly the last couple of years, just as it's become more of a customer or a tenant market. So yeah look I think it's market by market and submarket by Submarket, but clearly there is in general there is upward pressure on <unk> not only because of the.
The competitive nature, but also just costs are up construction costs are up so that's one of the reasons why we've been able to keep face rates.
<unk>.
It is.
Just because of the cost structure in general, but but yes, we're seeing upward pressure in the last couple of years.
But nothing materially different in 2023 versus the back half of 'twenty two.
Yeah.
No I don't think so.
Okay.
And then Brendan.
Up to another $150 million of dispositions that you may do this year is that going to be mostly fourth quarter weighted. If you do are you guys kind of stuff under contract now that will close in the third quarter, how should we be thinking about that and the impact on the back half of the year.
Yes, Rob I would yeah, I think it's fair to say that likely in terms of closing if if anything additional closes here would be fourth quarter is most likely yes.
It depends on timing, certainly and obviously pricing and all that kind of stuff. So could have sort of a negligible impact on <unk> could have.
Obviously, it could could have something that would be notable depending on timing and pricing and all that.
And what would you do today with pros.
$150 million of disposition proceeds what's the what's the number one bullet in terms of.
Either paying down debt or funding development et cetera, what's number one on the on the to do list with that money.
Yes, so we have.
We've got 100, and I think at quarter end, we had $190 million outstanding on the credit facility and then we've got $550 million of term loans that are pre payable without penalty. So it would be some combination of those two and obviously we are spending money on the development pipeline using the credit facility to fund to fund our portion.
<unk> of of those expenditures so it would be some combination I think we'd have to kind of consider the amount.
And timing in terms of whether or not we repaid a piece of of maybe the next term loan thats coming due or whether we just pay down the credit facility, but it would be one of those two would be likely use of proceeds.
Okay. Thanks, guys I appreciate the time.
Got it.
Thank you.
The next question comes from the line of Nick Ellman with Baird. You May proceed.
Hey, good morning, guys seemed like a pretty big pickup in renewal activity. So just wanted an update on like how early you are beginning of renewal discussions and then in those discussions as there been any like preference from tenants.
Free rent component or the Ti sounded those larger tenants kind of wanted the refresh of the space, but just curious on if there's any changes there.
Yes.
Hey, Nick it's Ted I can start Brian I have anything to add.
I think in general renewals it all depends on the tenant right typically they are coming we try and do as much outreach as we can but it sort of depends on their timing what their return to work plan is and how theyre looking at it but in general the larger the customer the earlier they start renewal discussions.
So I don't think anything has really changed from that standpoint.
In terms of <unk> versus free rent again, I think it's very individualized to the tenant what does their space look like do they need to do a significant upgrade or not really looking to save costs and rather toggle the concession to two.
Free rent so I don't think we're necessarily seeing a trend it sort of depends on the customer and what theyre looking for.
Nick I don't know if it'll add much more color, but we're not looking to self inflict any pain on early renewals in a tenant's market into it from someone who started maybe in a landlord's market. However, we have a captive audience in our portfolio that is fairly unique and <unk> in our markets.
We have a hungry brokerage community, who is looking to be helpful.
With their clients, maybe looking upstream and so to Ted's point, it's varied for sure.
We're not necessarily knocking on the door of everyone say, hey, you want to renegotiate by any stretch, but sometimes are coming to us and saying, Hey, we really need to up the amenity of our office space. We believe in it and we want to invest in it we're committed to this space and what are we talking about Pittsburgh that happening in Charlotte a great firm didn't want to.
Take any of that space are happy with their space. They just want to push out additional term and upgrade some things so.
It's been a bit of a mix, but we.
We see that.
Embedded occupancy we have right now is a captive audience to secure future commitments with.
That's helpful. And then maybe just I like the new leasing it looks like the new leases signed around the 5000 square foot relative to total lease volume is unlike 8000 square feet. So looking at like the larger tenants in the market. I think you said you saw like a slight uptick graduated from a very low basis, but have you seen any changes in.
Behavior there.
We're looking at some of these large explorations in 24 do you think thats going to be continue to be a small tenant market or do you think that they will eventually come back in the next like 18 months.
Yes sure look.
<unk>.
Clearly our activity has been small and medium sized prospects, that's our bread and butter has been for a long time, but.
But if theres any green shoots we are seeing some prospects in that say 30 to 50000 square foot range and then our development pipeline Theres even theirs.
Over 100000 square foot prospects. So again, the large prospects are taking longer.
Im little slower in their decision, making but what we're starting to see a little bit of activity on the larger prospects.
Helpful. And then maybe last one for me for Brendan Youre comments on additional debt capital.
Is that more a function of the expected more muted disposition activity in the next 18 months or is there like some pressure from say banks when it comes to the amount that will lend on velocity just interesting comments there.
No I think it's just more I would say whether or not we.
A window and want to be opportunistic when it's there so.
I think we've got to manage.
Certainly I think we feel comfortable with kind of where we are from a bank group perspective, I think we feel good about where our standing is with our fixed income investors. So I think we've got good access to capital and want to ensure that we maintain that access to capital. So if we feel like there is a reason for us to be proactive and there is there is an opportune.
<unk> I think we will consider that but certainly nothing as I mentioned in the prepared remarks, there is no need for us to come to market so to purely be from if.
If we felt like it made sense and there was a good opportunity.
That's it for me thanks, guys.
Yeah.
Thank you.
The next question comes from the line of Valent Bernstein with Green screen you May proceed.
Hi, guys. Thanks for taking the question.
I appreciate your comments on sort of construction start slowing but just looking at what's under construction today and whats set to deliver over call. It. The next two to three years you guys view this as sort of a risk to further improvement in property fundamentals.
Look I think.
I guess the answer is yes in general right. If you got I don't know.
We've got several of our markets Theres really nothing under construction Dylan I think we've got nothing in Tampa either in the building, where we're developing nothing Orlando nothing and.
Richmond.
Certainly theres deliveries coming in Raleigh.
<unk> and.
In Nashville.
Certainly that's always a risk now I do think the rental rates that are necessary.
Our top of the market rents are rising tide lifts all boats, which is what's happened.
Throughout just about any cycle, so while it's a risk I also think.
It's.
It's something we deal with and all of our markets.
And.
<unk>.
We'll deal with it but it's.
I don't see it as significant.
Dylan, Brian here clipping onto that.
The amount of stock that's under construction is from a competitive side, that's about one 1% so just from a.
Macro standpoint, we don't think that is probably going to be that big of a headwind, but single individual buildings sure. When you think about even Charlotte, which has just a few buildings under construction for the first time in over a decade and I think started.
So we are absolutely seeing that slowdown and we do believe when our development pipeline is delivering is delivering into voids of competition.
That's helpful. And then just going back to some of the comments you made around an outsized population and job growth across your markets are you guys seeing any slowdown at all associated with any inbound or new to market tenants coming to you from some of the coastal markets or are you guys started seeing those trends continue.
Relative to what we saw over the last several years.
Yes, the migration to the south has really been occurring for many many years I'd say the last couple of decades. It accelerated during the pandemic and then look I do think it's slowed just with the overall economy over the last six to nine months.
We meet with the economic development folks in our markets. While they are incredibly active theres less office inbounds today as we sit here today than there were a year or two ago, but that doesn't mean, it's stopped either so they're making pictures is just fewer most of the the inbound economic activity today is more on the industrial and manufacturing.
Factoring second versus office, but having said that the 39 leases we signed new leases. We signed this quarter 12 were were a new opening up company is opening up new offices in our markets.
And it was in five different markets. Those 12, so I think we're continuing to see the in migration has slowed yes, but it's still very positive.
And again, just Brian here, one little footnote, we have good anecdotal evidence to within the portfolio, where we have for instance in Charlotte a law firm opens there.
Shop in New York from New York, and Charlotte for the first time, they take one of our spec suites, we kind of nurture that occupancy and then they move next door to take a full floor.
To your first point on population.
I think actually the population in migration is actually ramped up even more so over this last quarter as we start to see how many hundreds of people are moving to these different markets every day so.
<unk> point, the economic developers.
Our busy and.
And we do see that converting I think about it apples announcement and what they are doing here in Raleigh 281 acre cap.
Campus that they've committed to hire 3000 people there the average salary of a 187000 a year.
We believe that's a pretty strong mover that will have a ripple effect.
Great I appreciate the details guys. Thank you.
Thank you.
Your next question comes from the line of Ronald Camden with Morgan Stanley .
Proceed.
Hey, good morning, guys, just sticking to the occupancy numbers.
Yes.
Like most of that decline in occupancy was just driven by Pittsburgh and Richmond.
As we look out into the future are there any other exploration in those markets, we should be mindful about.
I understand you have <unk>.
Next year, but just anything else beyond that.
Okay.
Specifically in those two markets.
Ron not really as im looking at our explorations in 2000, and we've got a couple of other things in Richmond.
Later this year, what have you, but looking into 2024.
Other than EQT, which is October 2024, I don't think we have any large expirations is really similar enrichment beyond getting through the rest of this year.
I, certainly think we will ramp up in Richmond in terms of the new deal flow, we're starting to see there so.
No not in those two markets.
Got it makes sense and then Brian I think you talked about one <unk> positive.
Non same store NOI relative to expectations.
Does that relate at all to Grant Park.
Six and Glen Lake III, and then can you just talk about how leasing is trending for those two near.
Near term completion.
How should we think about the financial impact of those development late 'twenty three 'twenty.
<unk> 24.
Yeah.
Yeah, So nothing on Granta Park, six or Glen Lake three I would say out of kind of the non same store pool had some good activity at 650, South try on in Charlotte had some good activity at Midtown West and Tampa.
And Virginia Springs II in Nashville, So, yes, those are probably kind of the primary ones outside of the non same store pool, where things have gotten a little bit better in 2023, I think for for the development projects, whether it's Glen Lake three or granted park's six.
There probably is some potential as you think about 2024 in terms of just what happens with respect to kind of lease up versus kind of capitalizing the cost associated with those so if we do lease up faster there is probably a little bit of positive impact in terms of.
24 numbers on those two projects, if it's slower not likely to be a lot of major downside, but but could be.
But but but if we're able to lease those up and get some NOI that probably benefits us a little bit in 2000 and for at least relative to kind of where the 'twenty three outlook is.
Yeah.
Great and then just last one you guys talked about potentially raising debt back half of the year would that be secure unsecured and just give us a sense of how you would think about that trade off there.
Yes, I mean, I think there we have well I guess, what I would say is we have a largely unsecured balance sheet without near term expirations and a lot of liquidity so that puts us in position to be opportunistic and we can be flexible.
I think.
Options are available to us.
And I think I mentioned this in response to another question, there's no need for us to be in the market, but I think if we feel like there is a.
Good window, and we would like to increase liquidity, a little bit more I think that is available to us so whether or not we pursue that we will see but I think we're certainly paying attention to it but could pursue.
Could pursue secured or unsecured financing because of the shape of our balance sheet as soon as it stands now.
Yes.
Got it thank you guys.
Thank you.
The next question.
That is from the line of Peter Abram might switch.
Frey you May proceed.
Thank you, yes, I just wanted to ask about.
Tenant behavior tenant psychology.
Certainly it's being reflected in the equity markets.
Soft landing is.
That's really becoming the <unk>.
Based on my narrative here is that having any impact.
The tenant behavior in terms of are they feeling better about things.
Is that bringing anyone back to the market.
Look yes.
Our tour activity.
Feel really good I mean, despite being mid summer when we typically see a summer slowdown if you could talk to any of our market leaders. We're busy. So I think the biggest thing from a tenant behavior standpoint is we're seeing more people come back to the office.
Almost on a weekly basis, we are hearing from our.
From our market leaders and leasing folks and property managers that more and more companies are coming back. One example, we had a large customer we define large as being over 100000 feet that.
Three months ago, they had their space on the sublease market.
Just a few weeks ago, they pulled it off the sublease market and said, they're going to keep it because they are bringing their all their people back and theyre going to need it I think Brian on an earlier question mentioned AT&T, which is one been in the headlines they are.
Over contracted and went back and leased another 120000 square feet. So from a tenant behavior standpoint, I think we're continuing to see the return to the office more companies are building to be more populated we're seeing it come through in our parking revenues as well our restaurants or continue to do really well at the base of the buildings. So I think the tenant behavior.
It's just it's more of a return to work as much as anything else and a little nuance on into the conviction of that return to work too is we're hearing it's I think there's been very much.
Carrot approach.
We're in a little more stick and then when those larger customers are bringing their folks back to the space. They already have I do think they are not necessarily sticking their head in the sanish and okay. We're bringing these folks back we got to give them a reason to stay and so that's how we're having some of those conversations around the workplace, making efforts, we do around the programming and the food and beverage and.
And all of those different things that really differentiate the experience that we deliver.
Gotcha. Thanks.
And then one other one I know the focus for us.
Excess proceeds right now is probably more on debt reduction.
But just as things come across your desk assets that you're underwriting.
Are things opening up our seller expectations adjusting or are there things out there that.
If you have a little bit more capital freed up would be attractive.
At the price of sellers are looking at today.
Look there's certainly there is.
Our bid ask spread going on today I think price discovery as we're still in the middle of that certainly we're pleased with the three dispositions we got over the goal line, but there's still an expectation of on buyers and sellers that theres a big difference there today so.
We're looking at everything.
But I think we're going to stay disciplined and be patient as well I think I think a lot of buyers right now want to wait and see what the fed's going to do when are they going to stop raising interest rates and I think once we see that it's going to open things up maybe a little bit more and once we as well as the lenders once the I think the lending spigot opens up a little bit more.
We're being patient and disciplined and in depth.
And really focus on our liquidity today versus acquisitions, but.
That can change if that if a nice asset comes out and we see it priced right, but but in general we're going to be patient and disciplined.
Got it thank you.
Thank you.
There are no additional questions waiting at this time I would now like to turn the call back over to the management for any additional questions.
Well, thanks, everybody for being on the call. This morning, if you have any additional questions. Please feel free to follow up with any of us.
Thank you and we'll talk to you next quarter.
That concludes today's conference call. Thank you for your participation you may now disconnect your lines.