Q3 2023 Highwoods Properties Inc Earnings Call

Hello, and welcome to the <unk> Q3, 2023 earnings call. My name is Alex there'll be coordination Nicole today.

If you'd like to ask a question at the end of the presentation. You can press star followed by one on your telephone keypad.

I'd like to remove your question you May press star followed by today.

I'll now hand, it over to your host Brendon Maiorana CSI to begin. Please go ahead.

Thank you operator, and good morning, everyone. Joining me on the call. This morning are Ted Klink, our Chief Executive Officer, and Brian Leary, Our Chief operating Officer, Hannah true our manager of finance and corporate strategy is under the weather for your convenience today's prepared remarks have been posted on the web.

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 EBIT there the release and supplemental include a reconciliation of.

These non-GAAP measures to the most directly comparable GAAP financial measures forward looking statements made during today's call are subject to risks and uncertainties. These risks and uncertainties are discussed at length in our press releases as well as our SEC filings as you know actual events and results can.

If a 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, Brendan and good morning, everyone.

During the third quarter, we once again had solid financial and operational results, while maintaining our balance sheet is among the strongest in the sector with healthy credit metrics and ample liquidity.

At the beginning of the year, we predicted the operating environment in capital markets, particularly for the office sector would remain challenged for an extended period of time.

So far this is playing out as expected.

We remain laser focused on operations and balance sheet management and believe the meaningful new investment opportunities will eventually surface.

With this backdrop these are our priorities.

First ensuring our portfolio operations remained healthy.

To that end, we're aggressively addressing future lease role proactively reinvesting in those assets with ample opportunity to drive outsized returns.

Focusing on net effective rents and maintaining strong cash flow.

And even more disciplined on discretionary capex.

Second continuing to sell noncore assets. Obviously this is currently challenging but we continue to believe there will be ready willing enable buyers for stabilized assets, especially bite size deals.

Third.

Further bolstering our already strong balance sheet by increasing liquidity and.

And finally canvassing our markets for future growth opportunities.

We firmly believe having a high quality resilient portfolio in the best markets in <unk> in the Sunbelt and.

And the balance sheet strength to weather this capital constrained environment.

Positions us well to capitalize on the long term growth opportunities that will inevitably come with the next cycle. Even if this current cycle left several more years.

Turning to the quarter, we delivered <unk> 93 per share and grew same property cash NOI, 2%.

Operator: Hello, and welcome to the Highwoods Q3 2023 earnings call. My name is Alex, I'll be causing a call today. If you'd like to ask a question out into the presentation, you can press star 5 by 1 on your telephone keypad. If you'd like to remove your question, may press star 5 by 2.

We signed 655000 square feet of second Gen leases, 19% lower than our trailing five quarter average.

With a steady, albeit modest increase in the return to office across our customer base since labor day, we're off to a solid start with our leasing volume so far in the fourth quarter.

Operator: And I hand it over to your host, Brendan Maiorana, CFO to begin. Please go ahead.

Brendan Maiorana: Thank you operator and good morning everyone.

Our net effective rents continue to be resilient.

Brendan Maiorana: Joining me on the call this morning are Ted Klinck, our chief executive officer, and Brian Leary. Our chief operating officer, Hannah True, our manager of Finance and Corporate Strategy, is under the weather. 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 investor's section of our website at highwoods.com. On today's call, our review will include non-gap measures such as FFO, NOI, and EBITDAIR.

As our year to date average is on pace to surpass our prior high watermark.

<unk> 2019 by 5%.

While rent spreads garner more headlines we have long believed it's more important to measure leasing performance by considering the entirety of lease economics were.

Please net effective rents have remained strong a direct result of a flight to quality.

Not just a flight to quality assets, but also a flight to quality owners, who have access to capital.

Brendan Maiorana: The release and end supplemental include a reconciliation of these non-gap measures to the most directly comparable gap 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.

Our sponsorship as a true differentiator when companies are making leasing decisions and this has only become more important since the pandemic.

I want to provide an update on the former <unk> building in Nashville.

Last year, we substantially backfill the building by signing a 223000 square foot lease with a single customer that currently leased with 50000 square feet and another high Woods building.

Unfortunately since that lease execution. This customer has experienced some challenging and unforeseen business conditions that are impacting their growth plans and cash flow.

Ted Klinck: With that, I'll turn the call over to Ted. Thanks, Brendan, and good morning everyone. During the third quarter, we once again have solid financial and operational results while maintaining a balance sheet is among the strongest in the sector with healthy credit metrics and ample liquidity.

We are currently in discussions with our customer that what makes the most sense going forward for both high woods and for them.

It's possible we may ultimately decide it's in our best long term interest to modify their lease which is scheduled to commence in early 2024.

Ted Klinck: At the beginning of the year, we predicted the operating environment and capital markets, particularly for the office sector, would remain challenged for an extended period of time. So far, this is playing out as expected. We remain laser focused on operations and balance sheet management and believe the meaningful new investment opportunities will eventually surface.

The quarter was quiet on the investment front, we completed three development projects with a total projected investment of $234 million and our share there were combined 30% pre leased.

2827, Peachtree is 88% pre leased and we have an LOI to bring the property to 92%.

Ted Klinck: With this backdrop, these are our priorities. First, ensuring our portfolio operations remain healthy. To that end, we're aggressively addressing future release rule, proactively reinvesting in those assets with ample opportunity to drive outsized returns, focusing on net effective rents and maintaining strong cash flow by being even more disciplined on discretionary catbacks. Second, continuing to sell non-core assets. Obviously, this is currently challenging, but we continue to believe there will be ready willing enabled buyers for stabilized assets, especially bite-sized deals. Third, further bolstering our already strong balance sheet by increasing liquidity. And finally, canvassing our markets for future growth opportunities.

The other two projects within like three in Raleigh, and granite Park six in Dallas arent projected to stabilize until 2026.

We signed a 20000 square foot lease at Midtown East in Tampa, and we're seeing additional strong interest in this development, which isn't scheduled to be completed until early 2025 and stabilized until mid 2026.

At 23 Springs are 642000 square foot tower in Uptown Dallas, we have LOI that will bring the pre lease rate to over 50%.

While we didn't close any dispositions during the quarter. We've remained active marketing additional non core properties for sale.

The current environment is obviously challenging but we're cautiously optimistic we'll close a few smaller deals in the coming months.

Ted Klinck: We firmly believe having a high quality, resilient portfolio in the best markets and BBDs in the Sun Belt and the balance sheet strength to whether this capital constrained environment positions us well to capitalize on long-term growth opportunities, that will inevitably come with the next cycle, even if this current cycle lasts several more years. Turning to the quarter, we delivered FFO of 93 cents per share and grew same property cash in a Y 2%.

We've been quiet on acquisition and development announcements this year.

I mentioned earlier, we believe there will be significant opportunities in the future.

We're consistently in discussions with owners of wishlist assets across our footprint.

Lenders are generally being patient with owners, but there is stress in the system and it will take time for these future opportunities to arise.

Our 2023 <unk> outlook is unchanged at the midpoint.

The steadiness of this year's F F O outlook masks better than anticipated NOI being offset by higher interest expense.

To that end, we increased the midpoint of our same property cash NOI outlook to revised range of zero to plus 1%.

Ted Klinck: Across our customer base since Labor Day, we're off to a solid start with our leasing volume so far in the fourth quarter. Our net effective rents continue to be resilient, as our year-to-date averages on pace to surpass our prior high watermark and exceed 2019 by 5%. While rent spreads garner more headlines, we have long believed it's more important to measure leasing performance by considering the entirety of lease economics. We're pleased net effective rents have remained strong, a direct result of the flight to quality, not just the flight to quality assets, but also flight to quality owners who have access to capital. Our sponsorship is a true differentiator when companies are making leasing decisions, and this has only become more important since the pandemic.

Before I turn the call over to Brian I'd like to summarize why we are optimistic about the future at high Woods.

The office business as a whole is under stress leasing portfolio metrics cash flows access to capital et cetera.

But during periods of stress the best positioned companies rise to the top and eventually thrive.

Well positioned to capitalize on dislocations in the office sector.

Our high quality Sunbelt portfolio is located in the best markets and BB days or.

Our balance sheet is among the strongest in the sector and our team is cycle tested and excited about the future opportunities that will arise Brian.

Thank you Ted and good morning, everyone.

Our leasing team was active for the quarter with our largest four markets each signing over 100000 square feet.

Ted Klinck: I want to provide an update on the formativity building in Nashville. Last year, we substantially backfilled the building by signing a 223,000 square foot lease with a single customer that currently leases 50,000 square feet in another highwoods building. Unfortunately, since that lease execution, this customer has experienced some challenging and unforeseen business conditions that are impacting their growth plans in cash flow. We are currently in discussions with our customer about what makes the most sense going forward for both highwoods and for them. It's possible we may ultimately decide it's in our best long-term interest to modify their lease, which is scheduled to commence in early 2024.

In the aggregate, we signed over 655000 square feet and continued the trend of expansions outnumbering contractions three to one for the quarter.

73% of leasing activity for the quarter and 60% year to date occurred in our suburban Dvds.

We believe this supports our simple and steadfast strategy of delivering commute worthy workplace experiences in both urban and suburban best business districts.

Our 16% payback was the lowest since the third quarter of 2022.

While free rent was only four 3% of the cash term.

The lowest ratio since the third quarter of 2020.

Ted Klinck: The quarter was quiet on the investment front. We completed three development projects with a total projected investment of 234 million at our share that were combined 30% pre-least. 2827 peach tree is 88% pre-least, and we have an L.O.I, to bring the property to 92%. The other two projects, Glenn Lake 3 in Raleigh and Granite Park 6 in Dallas, aren't projected to stabilize until 2026. We signed a 20,000 square foot lease at Midtown East and Tampa, and we're seeing additional strong interest in this development, which isn't scheduled to be completed until early 2025 and stabilized until mid-20026.

As Ted mentioned these strong leasing economics translated into healthy net effective rents trending above our pre pandemic average.

While we are seeing a cyclical demand headwinds of a lower growth environment Labor day, Mark. The next phase of return to the office initiatives and uptick in physical occupancy with insurance financial services and telecom leading activity for the quarter.

Now, let's turn to our markets and in particular, the Sunshine state.

Where our team in Tampa had the highest volume in the quarter with 150000 square feet signed in our Orlando portfolio ended the quarter over 92% occupied.

CBRE highlighted at the Tampa market saw positive net absorption for the third consecutive quarter.

Ted Klinck: At 23 springs, our 642,000 square foot tower and uptown Dallas, we have L.O.I.s that will bring the pre-least rate to over 50%. While we didn't close any dispositions during the quarter, we've remained active marketing additional non-core properties for sale. The current environment is obviously challenging, but will cautiously optimistic, will close a few smaller deals in the coming months.

Is on pace to have the best year for positive absorption since 2017.

Vacancy is down and there are 2 million square feet of prospects looking for space.

Office employment growth remains well above the national average with the Tampa Metro ranking first in Florida for a year over year job growth.

As the only new building under construction in the market Midtown east or.

Our $83 million 143000 square foot development in the West shore Bvd is seeing good inbound activity as evidenced by the recently signed 20000 square foot new customer to our Tampa portfolio there.

Ted Klinck: We've been quiet on acquisition and development announcements this year. I mentioned earlier we believe there will be significant opportunities in the future. We're consistently in discussions with owners of wish list assets across our footprint. Lenders are generally being patient with owners, but there is stress on the system, and it will take time for these future opportunities to arise.

This follows our successful completion and lease up of our 152000 square foot Midtown West building now 100% occupied at rents above our underwriting.

In North Carolina, our Raleigh team signed 144000 square feet in the quarter and the overall market achieved 248000 square feet of positive net absorption according to CBRE.

Ted Klinck: Our 2023 FFO Outlook is unchanged at the midpoint. The steadiness of this year's FFO Outlook masks better than anticipated in a lie being offset by higher interest expense. To that end, we increase the midpoint of our same property cash in a lie outlook to revised range of 0 to plus 1%.

We completed our 218000 square foot Glen Lake III mixed use development on time and on budget, which brings our total Glen Lake development to nearly 1 million square feet.

Prospect activity is picking up with the ability to tour the space and amenities, we estimate stabilization in early 2026.

Ted Klinck: Before I turn the call over to Brian, I would like to summarize why we are optimistic about the future at Highwoods. The office business as a whole is under stress, leasing portfolio metrics, cash flows, access to capital, etc. But during period of stress, the best position companies rise through the top that eventually thrive. We're well positioned to capitalize on dislocations in the office sector. Our high-quality, sunbelt portfolio is located in the best markets and BB days. Our balance sheet is among the strongest in the sector.

Down to I, 85, and Charlotte, our 2 million square foot portfolio is now 95, 6% occupied and 97, 8% leased.

Last year and adjacent to our 33 storey bank of America Tower, We acquired 650, South Tryon a.

At 367000 square foot building that was 79% leased upon acquisition and is now 94% leased.

The overall market is seeing healthy activity, including continued inbound corporate relocations and is underexposed to sublease availability compared to other markets with equal amounts of space being leased and added to the market in recent quarters. According to J L.

Ted Klinck: Our team is cycle-tested and excited about the future opportunities that will arise.

Brian Leary: Brian.

The Atlanta team was also busy in the third quarter with 127000 square feet signed and subsequent to quarter end inked an additional 50000 square feet at two alliance and bucket.

Brian Leary: Thank you, Ted, and good morning, everyone. Our leasing team was active for the quarter with our largest four-market each signing over 100,000 square feet. In the aggregate we signed over 655,000 square feet and continued the trend of expansions outnumbering contractions three to one for the quarter. 73% of leasing activity for the quarter and 60% year-to-date occurred in our suburban BB days. We believe this supports our simple and steadfast strategy of delivering commute-worthy workplace experiences in both urban and suburban best business districts.

Bolstering the backfill of Novellus is Q3 2020 for exploration.

28, 27, Peachtree, our 135000 square foot development in Buckhead was delivered on time and on budget at 88, 4% pre leased and is expected to stabilize well before our pro forma stabilization date of early 2025.

We believe the quarters overall leasing stats bear out our simple strategy and resilient portfolio, if even across lower than average leasing volume.

Brian Leary: Our 16% payback was the lowest since the third quarter of 2022, while free rent was only 4.3% of the cash term, the lowest ratio since the third quarter of 2020. As Ted mentioned, these strong leasing economics translated into healthy net effective rents, turning above our pre-pandemic average. While we are seeing a cyclical demand headwinds of a lower growth environment, Labor Day marked the next phase of return to the office initiatives and uptick in physical occupancy with insurance, financial services, and telecom leading activity for the quarter.

We continue to witness the evolving consensus between managers and workers on when and where they will be better together to.

To this point there are real time evolutions across the portfolio, where customers previously entertained sub leasing.

Then signaled a downsize.

To then ultimately renew at a 100% of our existing footprint.

South performing our leasing property management and maintenance across the majority of the portfolio has given us a unique position to increase the breadth and depth of our customer relationships through the pandemic and into today's choppy waters.

Brian Leary: Now let's turn to our markets and in particular the sunshine state, where our team and Tampa had the highest volume in the quarter with 150,000 square feet signed and our Orlando portfolio ended the quarter over 92% occupied. CBRE highlighted that the Tampa market saw positive net absorption for the third consecutive quarter and is on pace to have the best year for positive absorption since 2017. Begging fee is down and there are two million square feet of prospects looking for Space.

Our relative performance to our markets and within our Bvd's is bearing witness to this under one roof approach.

We will remain proactive in addressing our future lease roll are committed to delivering meaningful new revenue via our development pipeline and believe our continued ability to create commute worthy workplaces yields a resilient portfolio and one positioned to thrive in the future Brendan.

Thanks, Brian in the third quarter, we delivered net income of $22 $1 million or 21 per share and <unk> of $99 $8 million or <unk> 93, a share results were in line with our expectations with no significant unusual items there wasn't much of a change.

Brian Leary: Office Employment Growth remains well above the national average with the Tampa Metro ranking first in Florida for a year-over-year job growth. As the only new building under construction in the market, Midtown East, our 83,143,000-square-foot development in the West Shore BBD is seeing good inbound activity as evidenced by the recently signed 20,000-square-foot new customer to our Tampa portfolio there. This follows our successful completion and lease-up of our 152,000-square-foot Midtown West Building, now 100% occupied at rents above our underwriting.

From the second quarter with overall <unk> down a penny sequentially. The slight change was driven by modestly lower NOI attributable to higher opex and the full quarter impact of dispositions completed in the second quarter and higher interest expense.

Our cash flows continue to exhibit resilience even in the face of higher interest rates, we've been highlighting the benefits of our asset recycling program for a few years, but in a year when challenges are more apparent these benefits become more obvious so far this year, we've invested over $115 million in our development.

Brian Leary: In North Carolina, our rally team signed 144,000-square-feet in the quarter, and the overall market achieved 248,000-square-feet of positive net absorption according to CBRE. We completed our 218,000-square-foot Glen Lake 3 mixed-use development on time and on budget, which brings our total Glen Lake development to nearly 1,000,000-square-feet. Prospect activity is picking up with the ability to tour the space and amenities. We estimate stabilization in early 2026. Down 85 in Charlotte, our 2,000,000-square-foot portfolio is now 95.6% occupied and 97.8% leased.

<unk> pipeline, while receiving only $40 million of net disposition proceeds and another $40 million from the repayment of our preferred equity investment and our Mckinney <unk> olive joint venture.

Said differently, we've been a net investor monetizing income producing assets, while investing in development that isn't yet providing NOI, while holding our debt to EBITDA metrics flat at six times and keeping our overall debt balance essentially unchanged at $3 2 billion.

Brian Leary: Last year, in adjacent to our 33-story Bank of America tower, we acquired 650 South Triumph, a 367,000-square-foot building that was 79% leased upon acquisition, and is now 94% leased. The overall market is seen healthy activity, including continued inbound corporate relocations, and is under-exposed to sub-leased availability compared to other markets, with equal amounts of space being leased and added to the market in recent quarters according to JLL. The Atlanta team was also busy in the third quarter with 127,000-square-foot signed and subsequent to quarter-end, inked an additional 50,000-square-foot at two alliance and bucket, bolstering the backfield of Novellis' Q3 2024 expiration. 2827-peach tree, our 135,000-square-foot development in bucket, was delivered on time and on budget at 88.4% pre-leased. It is expected to stabilize well before our performance stabilization date of early 2025.

And this doesn't count the approximate $40 million of NOI, we expect to garner upon stabilization of the development pipeline.

In addition to maintaining strong leverage metrics, we further strengthened our liquidity throughout the year.

As disclosed in last evening's press release, our Midtown West joint venture closed a five year mortgage for $45 million at a fixed interest rate of 729%. The net proceeds received from the joint venture were used to pay down our credit facility. That's.

This further improves our current liquidity, which is now over $770 million and gives us ample dry powder to fund our $270 million of remaining development expenditures.

Since the beginning of the year, we proactively increased our total available liquidity by over $200 million.

While reducing future investment obligations by $100 million.

Our healthy current liquidity combined with limited near term debt maturities provides us flexibility and we do expect additional disposition proceeds in future quarters. However, as mentioned last quarter, we may be opportunistic in our raise additional debt capital later this year or next.

Brian Leary: We believe the quarter's overall leasing stats bear out our simple strategy and resilient portfolio, if even across lower than average leasing volume. We continue to witness the evolving consensus between managers and workers on when and where they will be better together. To this point, there are real-time evolutions across the portfolio where customers previously entertain sub-leasing, then signal the downsides, to then ultimately renew at a 100% of their existing footprint. Self-reforming our leasing, property management and maintenance across the majority of the portfolio has given us a unique position to increase the breadth and depth of our customer relationships through the pandemic and into today's choppy waters. Our relative performance to our markets and within our BBDs is bearing witness to this under-one roof approach.

As Ted mentioned, we've updated our outlook with no change to the midpoint of our <unk> range, which is now $3 73 to $3 77 per share given our performance to date. This year, we've revised our same property cash NOI outlook upward to zero to plus 1%.

All other outlook line items that impact <unk> are unchanged, but I will note, we expect to be towards the low end of the year end occupancy range. As we've mentioned before this is a challenging metric to forecast given its a point estimate on the last day of the year.

Brian Leary: We will remain proactive in addressing our future lease role, are committed to delivering meaningful new revenue via our development pipeline and believe our continued ability to create commute-worthy workplaces yields a resilient portfolio in one position to thrive in the future.

A couple of items to keep in mind for the fourth quarter first we expect lower operating margins due to pushing some discretionary opex late into the year and second interest expense is expected to increase due to higher average sofa rates and the new fixed rate mortgage at Midtown West.

Brendan Maiorana: Brendan? Thanks, Brian. In the third quarter, we delivered net income of $22.1 million or $21 cents per share and FFO of $99.8 million or $93 cents a share. Results were in line with our expectations with no significant, unusual items. There wasn't much of a change from the second quarter with overall FFO down at pennies sequentially. The slight change was driven by modestly lower NOI, attributable to higher op-ax and the full quarter impact of dispositions completed in the second quarter, and higher interest expense.

Finally, as you know we plan to provide our 2024 outlook in February when we release, our fourth quarter results in the interim there are some items I would like to highlight.

First operating margins in future years may move closer to our pre pandemic average as we absorb the impact of higher inflation across major opex line items and portfolio utilization increases.

Second we may be opportunistic raising additional debt capital, which would likely result in higher interest expense. Finally, we are optimistic that we will close additional dispositions over the next few months, which would likely be a headwind to <unk> in the short term there could be a net benefit to cash flow.

Brendan Maiorana: Our cash flows continue to exhibit resilience even in the face of higher interest rates. We've been highlighting the benefits of our asset recycling program for a few years, but in a year when challenges are more apparent, these benefits become more obvious. So far this year, we've invested over $150 million in our development pipeline while receiving only $40 million of net disposition proceeds and another $40 million from the repayment of our preferred equity investment in our McKinney and Olive Joint Venture.

In summary, we're encouraged by the resilience of our portfolio and cash flows have exhibited in 2023 and over the past few years and we're excited about the future. We have the right portfolio balance sheet and team to weather the current environment and XL once the cycle turns operator, we are now ready for questions.

Brendan Maiorana: Said differently, we've been a net investor monetizing income-producing assets while investing in development that isn't yet providing NOI, while holding our debt-to-eat-dom metrics flat at six times and keeping our overall debt balance essentially unchanged at $3.2 billion. And this doesn't count the approximate $40 million of NOI, we expect a garner upon stabilization of the development pipeline. In addition to maintaining strong leverage metrics, we further strengthened our liquidity throughout the year. As disclosed in last evening's press release, our Midtown West Joint Venture closed a five-year mortgage for $45 million at a fixed interest rate of 7.29%.

As a reminder, if you'd like to ask a question. He compressed style led by one on your telephone keypad.

To remove your question you May press Star two.

Please ensure you're on mute like Cleveland asking your question.

Our first question for today comes from Camilo bundled from Bank of America.

Your line is now open. Please go ahead.

Good afternoon, and good morning.

Retention in your portfolio overall seems healthy leasing volumes continue to slow.

Imagine the general economy is weighing on this decision making process.

Can you talk to what Youre seeing.

Brendan Maiorana: The net proceeds received from the joint venture were used to pay down our credit facility. This further improves our current liquidity, which is now over $770 million, and gives us ample drive powder to fund our $270 million of remaining development expenditures. Since the beginning of the year, we proactively increased our total available liquidity by over $200 million, while reducing future investment obligations by $100 million. Our healthy current liquidity, combined with limited near-term debt materities, provides us flexibility, and we do expect additional disposition proceeds in future quarters.

From your conversations with tenants for companies, who had relocation plan to set up hubs in your market are you seeing them start to pull back and focus more on their cultural HQ.

Good morning, <unk>, it's Ted and I can start and Brian has anything to add look I think in general leasing.

We continue to have steady tour activity certainly post labor day.

I think the biggest thing for us that we're seeing is the decision making has just been delayed is just taking longer.

So I think the Ceos are seen there, they're having some hesitation.

General economic backdrop the environment, we're in we actually did lose a couple of deals.

Brendan Maiorana: However, as mentioned last quarter, we may be opportunistic and raise additional debt capital later this year or next. As Ted mentioned, we've updated our outlook with no change to the midpoint of our FFO range, which is now $373 to $377 per share. Given our performance to date this year, we revised our same property cash NOI outlook upward to 0 to plus 1%. All other outlook line items that impact FFO are unchanged.

That we thought we were going to get done and the CEO ended up pulling back into doing some short term renewals just to sort of wait out the current economic.

Situations. So we continue to see inbound so you mentioned new companies come to our markets. We had 10, new signed 10 leases with new inbound customers, who are opening up small hubs.

Our markets across really five different markets. So we continue to see that in migration, but decision, making is definitely taking longer.

Brendan Maiorana: But I will note we expect to be toward the low end of the year end occupancy range. As we've mentioned before, this is a challenging metric to forecast given its point estimate on the last day of of the year.

Camille Brian here, one little add on to Ted which was the very last point of your question are we getting a sense that folks are may be changing their enthusiasm or momentum on the sunbelt kind of relocation or posting and retrenching back to coastal.

Brendan Maiorana: A couple of items to keep in mind for the fourth quarter. First, we expect lower operating margins to pushing some discretionary off-ex late into the year. And second, interest expense is expected to increase due to higher average sofa rates and the new fixed rate mortgage at Midtown West.

Headquarters I would say the answer is no just in general.

There are still even relocations occurring.

We've seen it in Charlotte relocating out of Gateway, we see it in Dallas continued these are corporations moving their whole operations not just hubs. So.

Brendan Maiorana: Finally, as you know, we plan to provide our 2024 Outlook in February when we release our fourth quarter results. In the interim there are some items I would like to highlight. First, operating margins in future years may move closer to our prepandemic average as we absorb the impact of higher inflation across major off-ex line items and portfolio utilization increases. Second, we may be opportunistic raising additional debt capital, which would likely result in higher interest expense. Finally, we are optimistic that will close additional dispositions over the next few months, which would likely be a headwind to FFO in the short term, though could be a net benefit to cash flow.

That reversion to the mean has not occurred yet.

Okay.

Activity I appreciate it's still developing situation, but what's the likelihood that they remain in the same office footprint or do you see risk of them potentially downsizing.

Yes, it can be all again, it's very early.

Look they've been a good customer of ours for a few years. They started out with us at 25000 feet. Then quickly grew to 50000 feet. So it's a very fast growing company and so I think it's still fluid the situations. So hopefully we'll have more we've met with them a couple of times I understand their business and the situation there and hopefully we'll have more to <unk>.

Brendan Maiorana: In summary, we're encouraged by the resilience our portfolio and cash flows have exhibited in 2023 and over the past few years, and we're excited about the future. We have the right portfolio, balance sheet, and team to weather the current environment and excel once the cycle turns.

Report in the coming months.

Okay and final question, you've termed out the balance sheet well. So can you provide a latest update on your thoughts around how you're thinking about managing your variable rate exposure, if we persist in this higher rate environment.

Operator: Operator, we are now ready for questions. Thank you. As a reminder, if you'd like to ask a question, you can press star, flowed by one on your telephone keypad. If you'd like to remove your question, you may press star, flowed by two. Please ensure you're unmuted locally when asking your question.

Hey, good morning, it's Brendan so I'll take that so what I would say is.

The the strategy would be to do what we've done this year, which is focused more on improving our liquidity. So we have increased liquidity by $300 million proactively throughout this year now of $100 million of that got used up by.

Camille Bottorff: Our first question for today comes from a Camille bottle from Bank of America. Your line is now open. Please go ahead. Good afternoon. Good morning. Retention in your portfolio overall seems healthy, but leasing volumes continue to slow. Imagine the general economy is weighing on this decision making process, but can you talk to what you're seeing from your conversations with tenants for companies who had relocation plans to set up hubs in your market? Are you seeing them start to pull back and focus more on their coastal HQs?

Some.

Through development, so the net liquidity improvement from the beginning of the year to now is up $200 million.

And I think we will focus on continuing to improve that liquidity and push out any near term debt maturities, which we don't have any <unk> for two years, but that would be the focus I would say over worrying.

Worrying about kind of floating versus fixed exposure. However, with all of that I would say that the capital raising probably opportunities are more on the fixed rate side than the variable rate side. So I do think that you will see variable rate continue to migrate downward, but really our focus would be to.

Ted Klinck: Good morning, Camille. It's Ted. I can start with Brian as anything to add. Look, I think in general leasing, we continue to have steady tour activity, certainly post-labor day. I think the biggest thing for us that we're seeing is the decision making has just been delayed. It's just taking longer. So I think the CEOs are seeing, they're having some hesitation, just the general economic backdrop, the environment we're in. We continue to see end bounds.

Ted Klinck: You mentioned new companies come to our markets. We had 10 new end bound customers who are opening up small hubs in our markets across really five different markets. We continue to see that in migration, but the decision making has definitely taken longer. Camille Bryan here, one little add on to Ted, which was the very last point of your question. Are we getting a sense that folks are maybe changing their enthusiasm or momentum on the sunbelt kind of relocation or posting up and retrenching back to coastal headquarters.

Increase current liquidity as opposed to focusing more on fixed versus variable.

Thank you.

Thank you.

Our next question comes from Michael Griffin of Citi. Your line is now open. Please go ahead.

Hey, Good morning, Mr. David Harrison for Michael Griffin I'm, just wondering if you can expand on the JV decision to close on the Midtown West mortgage and just generally how you're thinking about in conferences as a percent of the asset pool or NOI I mean, clearly highlights that we're in compliance with its covenants. So I'm wondering if you could see you continue to tap the secured debt market and just how you balance that versus drawing on.

Your line of credit and I guess, if you have a floor on in conferences as a percent of NOI or death.

Hi, Good morning, it's Brandon I'll take that so.

As you know as is typical with a JV right I think our partner would like to put some financing some longer term permanent financing beyond the construction facility on on that building and given the <unk>.

Ted Klinck: I would say the answer is no, just in general. There are still even relocations occurring. We've seen it in Charlotte relocating out of Gateway. We've seen it in Dallas. Continued. These are corporations moving their whole operation is not just hub. So just that reversion to the mean is not occurred yet. Okay. And on Tivity, appreciate it's still a developing situation. But what's the likeliness that they remain in the same office footprint?

Success that we had at that building. It is 100% occupied NOI is above pro forma. So it is a very good fact pattern on a building that we started back in late 2019 and leased up throughout Covid.

There was.

And we made the decision with our partner to go ahead and put.

Five year mortgage on that.

So that was an easy decision and Thats a lot of capital that gets repatriated back to highway so improves our liquidity overall.

I'd say with with.

Ted Klinck: Or do you see risk of them potentially downsizing? Yeah, Camille, again, it's very early. So look, they've been a good customer of ours for a few years. They started out with us at 25,000 feet and quickly grew to 50,000 feet. So it's a very fast growing company. And so I think it's still fluid the situation. So hopefully we'll have more. We've met with them a couple of times, understand their business and the situation they're in and hopefully we'll have more to report in the coming months. Okay.

The second part of your question is there additional room to do secured financing over unsecured.

Sure.

There probably is but I would say that that probably isn't our preference I think where we stand now so we're in the mid <unk> in terms of our unsecured NOI.

And while we could probably move that number a little bit I think our preference would be to.

To look for sources of capital on the unsecured pool as opposed to the secured pool.

Brendan Maiorana: And final question. You've turned out the balance sheet well. So can you provide a latest update on your thoughts around how you're thinking about managing your variable rate exposure if we persist in this higher rate environment? Hey, Camille. Good morning. It's Brendan. So I'll take that. So what I would say is I think the strategy would be to do what we've done this year, which is focus more on improving our liquidity.

That makes sense. Thanks for the color Brendan and my follow up question is just on sublease space. So the past few quarters, you've talked about some larger space takers I believe you talked about AT&T last.

Last quarter, basically pulling sublease space. They had put on the market. Originally given just these renewed space requirements, resulting from the turn to office mandates. So I'm just wondering if youre seeing any additional examples of this and just generally how sublease space is bearing sunbelt.

Sunbelt markets.

Hey, Brian here I'll take this one.

Brendan Maiorana: So we've increased liquidity by 300 million proactively throughout this year. Now 100 million of that got used up by some through development. So the net liquidity improvement from the beginning of the year to now is up 200 million dollars. And I think we will focus on continuing to improve that liquidity and push out any near term debt maturities, which we don't have any for two years, but that would be the focus.

So look there's still from a national standpoint.

Yeah.

The high watermark for sub leasing kind of coast to coast. We have seen. The addition of sub leasing in our submarkets level off we've seen it actually decrease across kind of within our own portfolio of folks doing that so for your exact example from last quarter. We had another one who had it on a submarket that they talked about.

And I mentioned in my prepared remarks, and they came back and renewed for the full amount.

Brendan Maiorana: I would say over worrying about kind of floating versus fixed exposure. However, with all of that, I would say that the capital raising probably opportunities are more on the fixed rate side than the variable rate side. So I do think that you will see variable rate continue to migrate downward, but really our focus would be to increase current liquidity as opposed to focusing more on fixed versus variable. Thank you.

Not in one of our buildings, but a nice print and Tampa Mitsubishi United Finance Group opened 80000 square foot officers opening 80000 square foot office and sublease space in Tampa West shore market, that's a new to market.

Operator that was not there before and Theyre, taking a big chunk out so we are seeing that.

Happen. We are also seeing again kind of across the board.

Not all sublease space is the same right so as it moves.

Through its own lease explorations with its initial lease some of that is moving over to vacancy across the markets, but we.

Michael Griffin: Our next question comes from Michael Griffin of city. Your line is now open. Please go ahead. Good morning.

We do feel like in general, it's kind of leveling out for now.

Brendan Maiorana: This is the entire song for Michael Griffin. Just wondering if you can expand on the JV decision to close on the mid-town west mortgage. And just generally how are you thinking about encompasses of the percent of the asset puller and why I mean clearly how it's well and compliant with its covenants. So one of you could see you continue to tap the secured debt market and just how you balance that versus drawing on your line of credit.

Thanks, Brian that's all for me thanks for the time.

Thank you.

Next question comes from young Ku of Wells Fargo. Your line is.

Please go ahead.

Okay.

Yes. Thank you Brendan I think this can be for you.

Looks like your same store guidance increase this quarter, but straight line year end occupancy guidance didn't change if you could talk about the discrepancy between.

Brendan Maiorana: And I guess if you have a floor on encompasses a percent of that a wire or death. Hi, Avery. Good morning. It's Brendan. I'll take that. So, yeah, I think as is typical with a JV, right? I think they, you know, our partner would like to put some financing, some longer term permanent financing beyond the construction facility on that building. And given the success that we had at that building, it is 100% occupied.

The different items.

Yeah, Hey, good morning, yes, so I mean, I think that's really probably just a toggle between.

<unk> is a little bit better overall and then.

Interest expense is a little bit higher so those two things kind of offset one another.

We probably could add maybe move tightened the straight line outlook, a little bit, but just kept that number that kept that number the same so there might be a little bias towards that number coming in a little bit more towards the lower end of that range, but but we just decided to keep the range. We gave ourselves a little bit of room on that particular line item.

Brendan Maiorana: NOI is above pro forma, so it's a very good fact-packed pattern on a building that we started spec in late 2019 and leased up throughout COVID. There was, we made the decision with our partner to go ahead and put a five-year mortgage on that. So, that was an easy decision and that's a lot of capital that gets repatriated back to highwoods that improves our liquidity overall. I would say with, you know, with the second part of your question, is there additional room to do secured financing over unsecured?

Okay, it's part of the improvement due to kind of better than expected opex.

Yes, that's certainly part of it I think is probably.

Brendan Maiorana: There probably is, but I would say that that probably isn't our preference, I think, where we stand now. So, we're in the mid-80s in terms of our unsecured NOI. And while we could, you know, probably move that number a little bit, I think our preference would be to look for sources of capital on the unsecured pool as opposed to the secured pool. That makes sense. Thanks for the color, Brendan.

Probably the biggest driver even if we go back to the beginning part of the year. So yes that is a that is a fair comment I know we've talked about this really since the onset of the pandemic that forecasting opex has been challenging for us.

So we've done better on Opex than what we had predicted at the beginning part of the year. So given that yes, that's probably the biggest driver as opposed to top line.

Okay, and then just looking at it next year.

You guys haven't provided guidance, yet, but in terms of the impact.

Brian Leary: And my follow-up question is just on sub-least space. So, the past few quarters, you've talked about some watcher space takers at movie talks about AT&T. Our last quarter basically pooling sub-least space, they had put on the market originally given just these renewed space requirements resulting from return to office mandates. So, just one of them you've seen in the additional example of this and just generally how sub-least space is staring in your Sun Belt markets.

Impact that utilization has on Opex margin, how should we think about the lag.

Yes, it's a good question and you're right I mean, we haven't given guidance and we're not prepared to do that this morning.

I guess, what I would say is if you look at kind of where.

Margins have trended this year and what we've talked about we.

Brian Leary: Hey, Avery Bryan here. I'll take this one. So, look, still from a national standpoint, high watermark for sub-leasing kind of coast to coast, we have seen the addition of sub-leasing in our sub markets level off. We've seen it actually decrease across kind of within our own portfolio folks during that. So, for your exact example from last quarter, we had another one who had it on the sub market, then they talked about downsizing.

You've seen that margins are probably down, we'll see where the fourth quarter shakes out, but let's call. It kind of in the neighborhood of 75 to 100 basis points kind of lower 2023 versus 2022.

So.

And utilization as you point out that has increased cost throughout 'twenty three compared to 22. So that's been a driver of it inflation has been a little bit higher we do recoup a lot of that through recovery, but it still does hurt the margin outlook. So as I mentioned in the prepared remarks I think we.

Brian Leary: I mentioned in my prepare remarks when they came back and renewed for the full amount. Not in one of our buildings, but a nice print in Tampa, Mitsubishi, not a finance group, open 80,000 square foot officers opening 80,000 square foot office in sub-least space in Tampa's West Shore market. That's a new to market operator that was not there before and they're taking a big chunk out. So, we are seeing that happen.

We believe that there could be some margin pressure as we migrate over the next several quarters given inflation remains relatively high.

And utilization has has been picking up, especially when you compare it to three to four quarters ago. So I do think that there is some of that headwind that that exists.

Brian Leary: We are also seeing, again, kind of across the board, not all sub-least space is the same, right? So, is it moves through its own least aspirations with its initial lease. Some of that is moving over to vacancy across the markets, but we do feel like in general, it's kind of leveling out from now. Thanks Brian.

Great and just one last question I think this can be for Ted could you guys talk about your federal government leases and whether there are any larger ones that are expiring over the next couple of years and what kind of conversations.

Having with them.

And in terms of renewal cycle.

Yes.

Michael Griffin: That's all for me. Thanks for the time. Thank you.

Sure.

So the biggest government lease we have expiring we've got it's really a state government as the department of revenue.

Young Ku: Our next question comes from Young at Koo of World Fargo. Your line is out open. Please get ahead. Yeah, thank you. Brendan, I think this could be for you. It looks like you're seeing strong guidance increases quarter, but straight line, year end occupancy, and ethical guidance didn't change. Could you talk about the discrepancy between the different items? Yeah, hey, young, good morning. Yeah, so I mean, I think that's really probably just a toggle between analyze a little bit better overall and then interest expense is a little bit higher, so those two things kind of offset one another.

Got in Atlanta about 250000 square feet or so that we've talked about that expires the end of 2024.

One we've talked about in terms of they put an RFP out to downsize and we're pretty confident they're going to be leaving the building there in and we've talked about that and we do think we've got a decent shot at keeping them.

Just move them to another building, but the process is still in place. So that's our biggest.

<unk>.

We've got another one that's about 85000 square feet.

Young Ku: We probably could have maybe moved, tightened the straight line outlook a little bit, but just kept that number, kept that number the same. So, you know, there might be a little bias towards that number coming in a little bit more towards the lower end of that range, but we just decided to keep the range, give ourselves a little bit of room on that particular line item. Okay, is part of the improvement due to kind of better than expected op-x?

Early 2025.

I still don't know whats going to happen there.

We've just renewed a couple of Nashville.

We're probably 60 or 70000 feet in the last couple of quarters. So after that it's a bunch of smaller smaller government tenants across really several of our markets.

And then just a small exploration roll over the next few years other than the two big ones.

And Ted that 85000 square feet in early 'twenty five is that J S daily.

Young Ku: Yeah, that's certainly part of it. I think is probably probably the biggest driver, even if we go back to the beginning part of the year. So, yes, that is a fair comment. I know we've talked about this really since the onset of the pandemic that forecasting op-x has been challenging for us, so we've done better on op-x than what we had predicted at the beginning part of the year. So, given that, yeah, that's probably the biggest driver as opposed to top line.

Yes.

Got it okay. Thank you.

Thank you.

Our next question comes from Rob Stevenson of Janney.

Your line is now open. Please go ahead.

Good morning, guys are there any incremental known move outs of size from last quarter.

Coming up.

No I think we've talked about all of them.

Young Ku: Okay, and then just looking out into next year, I know you guys have a lot of guidance here, but in terms of the impact that utilization has on op-x margin, how should we think about the magnitude? Yeah, that's a good question, and you're right. I mean, we haven't given guidance, and we're not prepared to do that this morning. I guess what I would say is if you look at kind of where margins have trended this year and what we've talked about, we've seen that margins are probably down.

Okay, and then how aggressive or landlords in your core markets today in terms of Ti dollars to bolster occupancy or your core markets still staying relatively rational at this point.

Good morning.

Yeah look I think it varies by by market by sub market and by deal really it's obviously theirs.

More competition on the big ones because there are fewer large customers. These days, but there are certainly some markets. If you go to our top markets maybe of Brentwood Nashville, South Park in Charlotte, which are a.

Young Ku: We'll see where the fourth quarter shakes out, but let's call it kind of in the neighborhood of 75 to 100 basis points kind of lower 2023 versus 2022. So, and utilization as you point out that has increased kind of throughout 23 compared to 22, so that's been a driver of it. Inflations have been a little bit higher, and now we do recoup a lot of that through recovery, but it still does hurt the margin outlook.

Very tight market. So I think the concessions and Ti packages aren't as competitive as it is maybe in bucket like Buckhead right now the demand is lower vacancies higher so it's a more competitive situation. So it varies really just varies by by market sub market and deal.

Okay, and then you guys have talked about dispositions.

Thinking that youre going to be able to close additional dispositions over the next few months.

What does that market like today, I mean can you sell more than what you currently have teed up as the market fluid enough deep enough.

Young Ku: So as I mentioned in the prepared remarks, I think we believe that there could be some margin pressure as we migrate over the next several quarters given. Inflation remains relatively high, and utilization has been picking up especially when you compare it to three to four quarters ago. So I do think that there's some of that headwind that exists. Great.

And at this point are the proceeds just going to be used to fund the remainder on the development pipeline are you going to be able to reduce debt and any appetite to repurchase stock with it now under $18.

Yes, I'll take the first part of that maybe Brendan can jump in on use of proceeds but look.

I think you know this capital markets are incredibly challenging.

Ted Klinck: And just one last question, I think this could be for Ted. Could you guys talk about your federal government leaches?

For all property types, but especially for office.

Ted Klinck: And whether there are any larger ones that are expiring over the next couple of years and with kind of conversations you've been having with with them in terms of renewal and potential size of the Sure, so the biggest government we have, expiring, we've got, it's really a state government if the Department of Revenue, we've got in Atlanta about 250,000 square feet or so that we've talked about, that expires the end of 2024, and that's when we've talked about in terms of, they put an RFP out, that to downsize, and we're pretty confident they're going to be leaving the building they're in, and we've talked about that, and we do think we've got a decent shot keeping them, just moving them to another building, but that process is still in place, so that's our big exposure, we've got another one that's about 85,000 square feet, that's early 2025, that still don't know what's going to happen there, we've just renewed a couple in Nashville, that we're probably 60 or 70,000 feet in the last couple quarters, so after that it's a bunch of smaller, smaller government tenants across really several of our markets, and then just a small exploration role for the next few years, other than the two big ones. And Ted, that 85,000 square feet and early 25, is that it, the GSA Lee? Yes. Got it, okay, thank you.

That's a function of.

Obviously the rates interest rates today, the constrained lending environment I think it's very difficult to get an office loan today. So the real estate market as you all know.

Fully functioning investment sales market and a healthy banking system and right now the lenders are wanted to reduce our exposure to office. So.

Getting deals across the goal line sold a very hard today, we sold three assets so far.

$51 million, we sold one that was all cash and two of them did find financing.

And the assets, we have out in the market today, largely going to be levered buyers, maybe not in one or two cases, but largely levered buyers and they're having a lot of its high net worth capital. They have banking relationships I think having a banking relationship is incredibly important.

Today to get deals done so it's very difficult to get any any asset sold and the nice thing is there is more capital for bite size deals and those are generally what we have out in the market today.

Okay, Hey, Rob, it's Brendan I'll, just kind of it for use of proceeds.

<unk> of that so I mean, I think at the margin.

It would be we would pay down debt, but we do have development spending thats going to go there. So you could sort of toggle those two things, but I would say I think we're we feel good is that cash flow has continued to hold up extremely well even in the face of higher interest rates. So we feel very good about that.

And we don't we haven't received any significant NOI contribution from the development that is under construction, even with a fairly modest level of financing left to get done or funding left to get done to complete those projects. So I think we feel like there's a lot of good embedded growth and the development.

Rob Stevenson: Our next question comes from Rob Stevenson, Elf Janne, Rob, go on this now open, please go ahead. All right, good morning guys, are there any incremental known move outs of size from last quarter? Coming up?

<unk> and given that cash flows have held up pretty well. It provides us a lot of optionality with respect to <unk>.

Ted Klinck: No, I think we've talked about all of them. Okay, and then, how aggressive are landlords in your core markets today in terms of T.I, dollars to bolster occupancy, or your core markets still staying relatively rational at this point? Yeah, look, I think it varies by market, by sub-market and by deal, really, it's, you know, obviously there's more competition on the big ones because there's fewer large customers these days, but there's certainly some markets to go to our top markets, maybe a Brentwood in Nashville, a South Park in Charlotte, which are very tight markets, I think the concessions and T.I, packages aren't as competitive as it is, maybe in Bucket. Bucket right now, the demand is lower, vacancies higher, so it's a more competitive situation, so it really just varies by market, sub-market and deal.

Disposition dollars that come in the door.

Okay. Thanks, guys appreciate the time.

Thank you.

Our next question comes from Joe Ritchie thing ultimately.

Eitan. Please go ahead.

Hi, Thank you for taking my question can you just spoke about the portfolio mark to market today, and how these various mark Mike or Mike sorry by market.

Hey, Jordan this is Brandon I'll start and maybe.

I'll, let Bryan and Ted give their views on color on the market, but just overall I mean, I think we would say that it's let's call. It roughly flat, which is kind of on a cash basis, which is where you've seen cash rent spreads.

In broad strokes over the past many quarters. So we think that that's representative of probably where the portfolio is if you had to pin us down we'd say, it's modestly positive, but there are some long term leases in place that are below market. So I think flat is as good enough a guidepost as any and maybe I'll turn it over to Brian to give.

Ted Klinck: Okay, and then, you guys have talked about, you know, dispositions and, you know, thinking that you're going to be able to close additional dispositions over the next few months. You know, what is that market like today? I mean, can you sell more than what you currently have teed up? Is the market fluid enough, and deep enough? And, you know, at this point, or the proceeds just going to be used to fund the remainder on the development pipeline?

Some color on how we see the different markets.

Yeah I'll jump in first I mean look I think our markets.

Ted Klinck: Are you going to be able to reduce debt and any appetite to repurchase stock with it now under $18? Yeah, I'll take the first part of that, maybe Brendan can jump in on use of proceeds, but look, and I think you know, this capital markets are incredibly challenging, really, for all-proper types, but especially for office, and I think that's a function of obviously the rates, interest rates today, the constrained lending environment, I think it's very difficult to get an office loan today, so, you know, the real estate market, as you all know, we need a fully-functioning investment sales market and a healthy banking system, and right now the lenders are wanting to reduce their exposure to office, so, you know, getting deals across the goal line sold are very hard today.

Tampa is a great market for US right now we're seeing a lot of good inbound migration to Tampa, Tampa and Orlando, the sort of the Sunshine State Brian mentioned on his prepared remarks continue to do very well for us.

And then Charlotte Nashville continue to do well as well.

Look I think from a Raleigh perspective, I think there's a little more sublease space in Raleigh.

So the market in a fair amount of new construction as a percent of stock. So I think Raleigh is.

Historically been one of our top two markets I think right now, there's a little bit more softness.

In Raleigh.

And then.

Lance I think I mentioned is probably a little bit soft in buckhead as well, so and then Pittsburgh and Richmond, Richmond has actually got a fair amount of activity our occupancy down is down in Richmond, but the market vacancies roughly about 10% or so it just so happens we had a fair amount of move outs.

Ted Klinck: We sold three assets so far, $51 million. We sold one that was all cash, and two of them did find financing, and the assets we have out in the market today, largely going to be leveraged buyers, maybe not in one or two cases, but largely leveraged buyers, and they're having to, a lot of it's high net worth capital, they have banking relationships, I think having a banking relationship is incredibly important today to get deals done, so, it's very difficult to get any asset sold, and the nice thing is, there is more capital for bite-sized deals, and those are generally what we have out in the market.

And then the last couple of quarters, So we're well hopefully will be rebounding.

Enrichment.

Thank you and just in terms of demand you're seeing in terms of size and tenant profile.

I think smaller definitely seeing small and medium sized users or it's been this trend we've had probably for several quarters now last fall bigger users went to the sidelines when the fed started raising interest rates and then we're starting to see some of them come back now.

Brendan Maiorana: Hey, Robert's friend and I'll just, you know, kind of, for use of proceeds side of that. So, I mean, I think at the margin, you know, it would be, we would pay down kind of debt, but we do have development spending that's going to go there, so you could sort of toggle those two things. But I would say, you know, I think where we feel good is that cash flow has continued to hold up extremely well, even in the face of, you know, higher interest rates that we feel very good about that.

But still a majority of our activity is that it's really our bread and butter, it's that $5 to 15000 square foot customer who has been the most active and that's really with our expansion contractions as well we had expansions outnumber contractions I think is three to one this quarter, but a lot of us just small small companies that are growing.

Brendan Maiorana: And we don't, we haven't received any significant and a high contribution from the development that is under construction, even with, you know, a fairly modest level of financing left to get done, or funding left to get done to complete those projects. So, I think we feel like there's a lot of good embedded growth in the development pipeline and given that cash flows have held up pretty well, it provides us a lot of optionality with respect to disposition dollars that come in the door.

Georgia, the sectors are kind of the fire sectors as we talked about financial services insurance Telecom.

You see a little bit of Tammy in there to kind of coming back, but it's the <unk>.

General nature of the users.

Great. Thank you so much for taking my question.

Thank you.

Next question comes from.

<unk> of Green Street Dylan.

Your line is now open. Please go ahead.

Rob Stevenson: Okay, thanks guys, appreciate the time.

Hey, guys. Thanks for taking the question I appreciate the commentary on the situations going on them productivity backfill, but I guess just curious if theres any other larger tenants that you guys are worried about from a credit or ability to pay rent perspective.

Georgi Dinkov: Thank you. Our next question comes from a Georgie think of of me, so you have your lunch and open please go ahead. Hi, thank you for taking my question. Can you just talk about the portfolio market market today, and how this varies by market, bar market, sorry, by market. Hey, Georgie, this is Brandon, I'll start and maybe, you know, let Brian and Ted give their views on color on the market, but just overall, I mean, I think we would say that it's, you know, let's call it roughly flat, which is kind of on a cash basis, which is where you've seen cash rent spreads be in broad strokes over the past many quarters.

Hey, John it's Brendan.

I don't think that's the case I mean, we've got a pretty.

Robust credit review process and watch process So I.

I would say that there are certainly no large ones that are out there.

The it has what I would say is kind of overall.

Bad debt expense, if you will or credit risk has picked up a little bit over the past several quarters, but it's picked up from what was effectively a negligible level. So any sort of change from from a de minimis level feels like it's a large percentage increase even if the overall dollar exposure is relative.

Georgi Dinkov: So, we think that that's, you know, representative of probably where the portfolio is, if you had to pin us down, we'd say it's modestly positive, but there are some long term leases in place that are below market.

Modest so that's kind of what we've seen we've continued to collect a greater than 99% of rents every month, that's been consistent since the onset of the pandemic. So there hasnt been a real big change there, but I would say that bad debts are up a little bit but from.

Ted Klinck: So, you know, I think flat is as good enough a guidepost as any, and maybe I'll turn it over to Ted or Brian to give some color on, you know, how we see the different markets. Yeah, I'll jump in first, I mean, look, I think our markets, if Tampa is a great market for us right now, we're seeing a lot of good inbound migration to Tampa. So, I'd put Tampa and Orlando, the sort of the sunshine state Brian mentioned on his prepared remarks continue to do very well for us.

As I said earlier effectively.

Zero levels.

And then just maybe go into.

Market rent growth.

Ted Klinck: And then, you know, Charlotte and national continue to do well as well. You know, look, I think from a rally perspective, I think there's a little more subtly space in rally, so that market in the fair amount of new construction is a percent of stock. So, I think rally has historically been one of our top two markets. I think right now there's a little bit more softness in rally. And then Atlanta, I think I mentioned is probably a little bit soft and bucket as well.

Here's your the comments you guys provided the prepared remarks on net effective rents, but just curious if youre seeing any landlord sort of capitulate and start to lower the asking rents that they are looking at are looking to achieve it in certain buildings.

I think in general a general comment as face rates have held up right. It costs more to build out spaces. These days with Ti as are higher so I think a lot of customers understand that.

Ted Klinck: And then Pittsburgh and Richmond, you know, Richmond's actually got a fair amount of activity or occupancy down is down in Richmond, but to the market vacancies roughly about 10% or so. It just so happens, we had a fair amount of move outs in the last couple quarters, so we're hopefully will be rebounding in Richmond.

So again, that's one of the reason we focus on net effective rents throw everything into the lease economics, whether it be free rent Ti face rents. So in general face rents have held up pretty well are there instances where some.

Landlords, we've gotten really aggressive to really get more aggressive on the free rent versus lowering the face rates. So generally holding up but again, we pay attention to the net effective rents.

Brian Leary: Thank you. And just in terms of demand, what have you seen in terms of size and tenant profile. I think smaller, you know, definitely seeing small, medium-sized users are, it's been this trend we've had probably for, you know, several quarters now. Last fall, you know, bigger users went to the sidelines when they said, start raising interest rates and they were starting to see some of them come back now, but still, the majority of our activity is that, it's really our bread and butter, it's that five to fifteen thousand square foot customer who's been the most active and that's really with our expansion contractions as well.

Dylan, it's Brian I might just add on this might come across a little more philosophical, but we are seeing the bifurcation of flight to quality flight to capital flight to landlord and so there is a bifurcation of.

A certain pool of assets that are competing and keeping face rates and getting those net effect is and I would argue that those that arent relative or commute worthy.

Yeah, they are probably getting more desperate, but theyre not leasing up either so.

I'll leave it at that.

Brian Leary: We had expansions out number of contractions, I think is three to one, this quarter, but a lot of it's just small, small companies that are growing. George, you the sectors are kind of the fire sectors as we talked about financial services, insurance, telecom. It's a little bit of Tammy in there too, kind of coming back, but it's the general nature of the users.

I appreciate the commentary thanks guys.

Thank you next.

Next question comes from our Pizza up I'm Gonna fit from Jefferies. Your.

Georgi Dinkov: Great, thank you so much for thinking my question.

Your line is now open. Please go ahead.

Dylan Burzinski: Thank you.

Thank you I was wondering if you could just talk a little bit about the supply outlook in your markets for 'twenty for kind of near to medium term and how we should think about.

The impact just to your occupancy and to market rents.

Dylan Burzinski: Our next question comes from Dylan Buzinski of Greenstreet. Dylan, your line is now open, please go ahead. Hi guys, thanks for taking the question.

And Thats all new deliveries.

Yes, yes, yes.

Yes.

Yes, that's one of the.

Brendan Maiorana: I appreciate the commentary on the situation going on for the activity back though, but I guess just curious if there's any other larger tenants that you guys are worried about from credit or ability to pay rent perspectives. Hey Dylan, it's Brendan. No, I don't think that's the case. I mean we've got a pretty robust credit review process and watch process, so I would say that there aren't certainly no large ones that are out there.

Silver linings, I think as you've seen constructions starts go way down for several of our markets. There's really very little if any new construction Orlando theres, not Tampa, where the only spec building under construction. If you go to Raleigh, and Nashville, I've mentioned about Raleigh Theres more under construction there will be delivered in the next.

Really 12 to 18 months Nashville really only in downtown.

New supply coming on Midtown Atlanta, where we don't have any presence you still got some supply coming so in general.

Brendan Maiorana: It has, what I would say is kind of overall bad debt expense, if you will, or credit risk has picked up a little bit over the past several quarters, but it's picked up from what was effectively a negligible level. So any sort of change from a diminished level feels like it's a large percentage increase even if the overall dollar exposure is relatively modest. So that's kind of what we've seen. We've continued to collect greater than 99% of rents every month.

I think there is.

Lot less supply coming on and there has been the last several years nothing new is going to get out of the ground very difficult to finance new construction today. So I think anything thats delivering between now and the next 18 months is going to have a window to really lease lease up when the demand starts coming back so so in general demand.

Not as big issue would have been for the last several years in our markets, maybe save Raleigh in downtown Nashville.

Got it and then in terms of the.

Brendan Maiorana: That's been consistent since the onset of the pandemic. So there hasn't been a real big change there, but I would say that bad debts are up a little bit, but from, as I said earlier, effectively zero levels.

Secured deal.

Can you just talk a little bit about the other avenues of financing that were on the table.

Consider and I guess, just relative attractiveness of it.

Of what's available in the capital markets right now kind of what what else.

Brendan Maiorana: And then just, just maybe going to market rent growth, and I appreciate the comments you guys provided and the camera marks on that effect of rent, but just curious if you're seeing any landlord sort of capitulate and then start to lower the, the asking rents that they're looking at or looking to achieve in certain buildings. I think in general, a general comment is, face rates have held up, right? It costs more to build out spaces these days, so TIs are higher, so I think a lot of customers understand that, and so again, that's one of the reasons we focus on net effective rents.

It really drove that decision to go that route.

Yes, Peter so at Midtown west that that.

That is a JV property rights. So that's not a decision that is kind of sold to highwood. So we've got to work with our partner in terms of.

The capital that is appropriate for the venture so.

For the venture too.

To term out the construction loan.

It's either kind of going the secured route or its equity for for the partners. So I think in that in that regard.

The financing at Midtown West we felt like was an attractive option in our partner felt like that with an attractive option. So that was the decision there I think with respect to kind of the prepared.

Brendan Maiorana: It's throw everything into the lease economics, whether it be free rent, TIs, face rents. So in general, face rents have held up pretty well. Are there instances where, you know, some landlords have gotten really aggressive? They're really getting more aggressive on the free rent versus lower in the face rates. So generally holding up, but again, we pay attention to the net effective rent. Dylan, it's Brian, I might just add on, this might come across a little more philosophical but we are seeing the bifurcation of flight to quality, flight to capital, flight to landlord and so there is a bifurcation of a certain pool of assets that are competing and keeping face rates and getting those net effectives and I would argue that those that aren't relative or community worthy, yeah they are probably getting more desperate but they're not leasing up either. So I'll leave it at that. I appreciate the commentary. Thanks, guys. Thank you.

Remarks that I made in terms of thinking about.

Securing additional liquidity as we go forward and looking at those avenues.

Yes, the options.

That that we have and that we've used over the past several years. If you go back a few years.

We've been in the bond market. If you go back a few years, we've gone to the bank term loan market and we've gone the secured route so each of those kind of is still available, but they all present sort of certain benefits and challenges that are there.

So I think.

We will kind of evaluate but we do believe that we've got access to capital across a number of different sources and we'll see what we think makes the most sense for us in the long term.

I should also mention.

Peter Abramowitz: Our next question comes from Peter Abramowitz from Jeffreys. Your line is not open, please go ahead. Thank you. I was wondering if you just talk a little bit about the supply outlook in your markets for 24 kind of near-to-medium term and how we should think about the impact just to your occupancy and to market rents. And that's all new deliveries? Yeah, yeah. Yeah, that's one of the silver linings I think is that your team construction starts to go way down.

We also as I think Ted mentioned and I mentioned.

Disposition proceeds are another source of capital Thats out there as well so that's another option. That's there to in addition to just kind of raising additional debt capital.

Peter Abramowitz: For several of our markets it's really very little if any new construction or land there's not. Tampa, we're the only spec building under construction. If you go to Raleigh and Nashville I mentioned about Raleigh there's more under construction. They'll be delivering the next really 12 to 18 months. Nashville's really only in downtown. There's a new supply coming on midtown Atlanta where we don't have any presence. You still got some supply coming.

Alright, thank you.

Thank you.

Our next question comes from Ronald Camden of Morgan Stanley.

Open. Please go ahead.

Hey, good morning, guys Timmy monitor Ron Camden.

You guys talked a little bit in the prepared remarks about potential dilution.

From some of the asset sales, maybe just give us a sense for what the incremental dilution might be relative to whatever you guys. He's on the line of credit.

Just a sense of cap rates and whatnot.

Hi, good morning, it's Brendan.

Sure.

It's hard I mean, the the I'll, maybe let Ted give a little more color in terms of the capital markets, but obviously theyre challenge as it stands right now.

Peter Abramowitz: So in general I think there's a lot less supply coming on than there has been the last several years. Nothing's news going to get out of the ground. Very difficult to finance new construction today. So I think anything that's delivering between now and the next 18 months is going to have a window to really lease up when the demand starts coming back. So in general demand is not as big issue it has been for the last several years in our markets. Maybe save Raleigh in downtown Nashville.

We were successful selling little over $50 million in the first half of the year I think those carried an average cap rate of 7%. So.

I mean, depending on where deals get done going forward you'd see kind of that that cap rate relative to the debt that we would be paying off which is largely probably what would be our line balance or maybe one of the term loans, which is a sofa plus call. It in rough numbers, a 100 basis.

Brendan Maiorana: Got it. And then in terms of the your deal at midtown you're just talking a little bit about the other avenues of financing that we're on the table that you consider. And I guess just relative of track from this of what's available in the capital markets right now kind of what would ultimately drove that decision to go that route. Yeah Peter so at midtown west that you know that that is a JV property right so that's not a decision that is kind of sold to highwood so we've got to work with our partner in terms of the capital that is appropriate for the venture.

Points. So you can do the math there.

It will be much more impactful kind of on an <unk> basis, what we've seen over the past several years is a lot of the dispositions that we've done have actually been accretive on a cash flow basis. So we will see you'd never count anything until the deal gets over the finish line and we will see where those deal metrics shake out.

Makes sense and then just a year end occupancy guidance understand that it's tough to kind.

Pinpoint it.

Point in time at the end of the quarter, but just yes.

How are you guys thinking about the wide range there.

It was maintained.

Brendan Maiorana: So you know for the venture to to term out the construction loan I mean it's it's either you know kind of going the secured route or it's it's equity for you know for the partner. So I think you know in that in that regard the financing at midtown west we felt like was an attractive option and our partner felt like that was an attractive option. So that was the decision there. I think with respect to kind of the prepared remarks that I made in terms of thinking about securing additional liquidity as we go forward and looking at those avenues.

And any moving pieces are.

Just whats.

What's driving that the high and the low end of the range there.

Yes, I mean, there it's.

Yes, its good question and I know, we've talked about this last quarter as well.

Is hard because you move a commencement from January to December or vice versa, and it can move the numbers pretty meaningfully because we're talking about a point estimate on the last day of the year.

There's some stuff that is that we moved out last quarter, and then I think Ted alluded to it but there are a couple of deals that we felt like we're close to the finish line, which which then we don't feel as confident in getting those deals done. So some of that stuff caught some of the conservatism with respect to kind of the comments and.

Brendan Maiorana: Yeah the options that that we have and that we've used over the past several years if we go back a few years. We've been in the bond market if you go back a few years we've gone to the bank term loan market and we've gone the secured route so you know each of those kind of is still available but you know they all present sort of certain benefits and challenges that are there.

The year end outlook, but we always keep a fairly wide range there because it's like I said, it's just trying to pinpoint a number on the last day of the year is always a little bit challenging.

Okay makes sense. Thank you guys.

Brendan Maiorana: So I think we will kind of evaluate but you know we do believe that we've got access to capital across a number of different sources and we'll see what we think makes the most sense for us in the long term. And I should also mention, you know, we also, as I think Ted mentioned and I mentioned, you know, disposition proceeds are another source of capital that's out there as well. So, you know, that's another option that's there too, in addition to just kind of raising additional debt capital. All right, thank you. Thank you.

Okay.

Thanks.

Thank you at this time, we currently have no further questions. So I'll hand back to Ted Klinck for any further remarks.

Thanks, everybody for joining the call today. Thanks for your interest in Hi, Woods, and we look forward to seeing many of you out in la for NAREIT in a couple of weeks. Thanks again.

Thank you for joining today's call you may now disconnect your lines.

Yes.

Yeah.

Okay.

Yes.

Yes.

Ronald Kamdem: Our next question comes from Ronald Kamdem of Morgan Family. You're on the final open. Please go ahead. Hey, good morning, guys. To me, I'm for Long-Candon.

Yeah.

Yes.

Yeah.

Okay.

Brendan Maiorana: Let's talk a little bit in the third March about potential delusion from some of the asset sales. Maybe just give us a sense for, you know, what the incremental delusion might be relative to, you know, whatever you guys use on the line of credit. You know, just sense of cap rates and whatnot. Hey, to me, good morning, it's Brendan. You know, it's hard. I mean, the, the, I'll maybe let Ted give a little more color in terms of the capital markets, but, you know, obviously they're challenged as it stands right now.

Brendan Maiorana: We were successful selling a little over $50 million in the first half of the year. I think those carried an average cap rate of 7%. So, you know, I mean, depending on where deals get done going forward, you'd see kind of the, that cap rate relative to the debt that we would be paying off, which is largely that probably what would be our line balance or maybe one of the term loans, which is a so-for-plus call it, you know, in rough numbers, 100 basis points.

Brendan Maiorana: So, you could do the math there. You know, it will be much more impactful kind of on an FFO basis. What we've seen over the past several years is a lot of the dispositions that we've done have actually been accretive on a cash flow basis. So, you know, we'll see, you'd never count anything until a deal gets over the finish line and we'll see where those deal metrics shake out. Makes sense.

Brendan Maiorana: And then, you know, just the year I'm not thinking you got and understand it. It's tough to kind of pinpoint it to point at point time in the quarter. But just, you know, how are you guys thinking about the wide range there? Those maintained just any any moving pieces or, you know, what's driving that the high and the low end of the range or? Yeah, I mean, there it's, yeah, it's a good question.

Brendan Maiorana: And I know we talked about this last quarter as well. It is hard because you move a commencement from January to December or vice versa and it can move the numbers pretty meaningfully because we're talking about, you know, a point estimate on the last day of the year. So there's some stuff that we moved out last quarter. And then I think Ted alluded to it, but there were a couple of deals that we felt like were close to the finish line, which then we don't feel as confident in getting those deals done.

Brendan Maiorana: So some of that stuff, you know, caused some of the conservatism with respect to kind of the comments and the year end outlook. But we always keep a fairly wide range there because, you know, it's like I said, it's just trying to pinpoint a number on the last day of the year is always a little bit challenging. Makes sense. Thank you, yes. Thanks. Thank you.

Ted Klinck: At this time, we currently have no further questions, so I'm back to Ted Klinck for any further remarks.

Operator: Thanks, everybody, for joining the call today. Thanks for your interest in Highwoods, and we look forward to seeing many of you out in L.A, for Nairid in a couple weeks. Thanks again.

Thank you for joining today's school. You may now disconnect your lines.