Q3 2024 Highwoods Properties Inc Earnings Call
So 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 differ materially from these forward looking statements and the company does not undertake a duty to update any forward looking.
With that I'll turn the call over to Ted.
Ted: Thanks, Dan and good morning, everyone.
Ted: We reported excellent operating and financial performance once again in the third quarter.
Ted: For the first three quarters of 2024, we delivered financial results that are ahead of our initial expectations.
Ted: Building the foundation to drive sustainable growth over the long term.
Ted: First our bottom line financial results. This year continued to be better than we originally anticipated back in February.
Ted: During the quarter, we delivered <unk> of <unk> 90 per share and generated strong cash flows.
Ted: At the midpoint, our <unk> outlook is up six cents per share since the beginning of the year, including three swim increase this quarter.
Ted: And this is even with interest rates higher than forecast.
Ted: And $84 million of noncore dispositions that were not included in our original outlook.
Ted: Second our new leasing volumes have been very strong throughout this entire year and most prominently in the third quarter, which should drive organic strong organic growth after a long telegraphed occupancy trough in early 2025.
With one 3 million square feet of new second Gen leases signed through the first three quarters of 2024, our leased rate is over 300 basis points higher than our in service occupied rate of 88%.
Ted: Roughly two times our normal spread.
Ted: Indicating that we have a sizable pipeline of leases that have been signed but where occupancy hasnt yet commenced.
Ted: Third we continue to make progress on our development pipeline, which is now 49% leased and we have a healthy pipeline of strong prospects to drive our leased rate higher.
Ted: Our development pipeline will be a significant driver of cash flow growth going forward as these assets deliver and stabilize.
Ted: Fourth we continue to sell noncore assets and used the proceeds to recycle into higher quality buildings and reduce leverage.
Ted: We closed on one small noncore land sale this quarter and our marketing additional properties.
Ted: We're optimistic we'll close on more asset sales over the next several months.
Ted: Finally, we're laying the foundation for future wishlist acquisitions by meeting with owners and lenders of high quality assets throughout our footprint.
Ted: We have long believed it would take time for the bid ask spread between buyers and sellers to narrow.
Ted: With the first interest rate cut now behind US we can see a pathway for the office investment sales market to open back up.
Ted: Overall, we continue to outperform our financial expectations, we're making significant progress improving our portfolio quality and long term growth rate.
Ted: While fortifying our already strong balance sheet.
Ted: And we have a healthy number of signed but not yet commenced leases in our development pipeline and our in service portfolio that will further strengthen our cash flows.
Ted: Turning to operations the combination of our bvd locations commute worthy portfolio strong balance sheet and our hands on approach to both customer service and property management is driving meaningful market share gains.
New second Gen leasing during the quarter was strong at 530000 square feet and that doesn't include 39000 square feet of net expansions, which are included in renewals.
Ted: In fact growing users outpaced contractions by ratio of five to one.
Ted: Net effective rents, which in our view are more meaningful than rent spreads were the highest in our company's history and 25% higher than the previous five quarter average.
Ted: Plus our weighted average lease term was 10 four years also the highest in our history.
Ted: Stated vacancy rates remained elevated but these market wide stats mask, the improving competitive dynamics for top of market assets and our bvd footprint.
Ted: There is still some office under construction most of which will deliver by the middle of next year.
New starts are essentially nonexistent.
Ted: With high quality blocks of space getting absorbed there are less options for large users seeking class a space with well capitalized landlords.
Ted: We expect these dynamics will continue over the next few years, which should allow us to drive occupancy and rents.
Ted: In addition return to office mandates have steadily increased over the past several quarters as employers are emphasizing the value of import in person collaboration and culture building that isn't easily replicated with remote work.
Ted: According to a recent KPMG survey of U S. Ceos, 79% expect a full return to the office over the next three years.
Ted: The combination of dwindling large blocks of high quality space limited to no development starts and increasing return to office requirements bodes well for the future of office demand.
Ted: Turning to development during the quarter, we signed 61000 square feet of first gen leases, including a small retail build to suit.
Ted: Our $1 6 million square foot $514 million pipeline to 49% leased.
Ted: We have strong prospects for an additional 140000 square feet that we expect to sign over the next several months.
Ted: We don't expect to announce any other new development projects this year.
Ted: New starts are very difficult for any developer to pencil given the current environment.
Ted: That being said, we've seen increasing inquiries for potential build to suits.
Ted: I wouldn't characterize any of these as being close to a decision.
Ted: For the renewed interest is anecdotal evidence that large users are coming back to the market and are focused on the in person experience for their teams.
Ted: As I mentioned earlier, we sold a small noncore land parcel during the third quarter.
Ted: Bringing our noncore asset sales to $84 million for the year.
Ted: We've included up to an additional $150 million of non core dispositions and our outlook.
Ted: We may not hit the high end of the range before year end, but.
Ted: But we expect to do so by early 2025.
Ted: In conclusion.
Ted: We believe the outlook for high Woods is bright.
Ted: As evidenced by this year's leasing demand for our Sunbelt bvd portfolio continues to be strong.
Ted: This will drive meaningful growth in occupancy and NOI.
Ted: Following our trough in early 2025.
Ted: Our $500 million development pipeline has seen healthy interest and will drive meaningful increase in our earnings and cash flow as it delivers and stabilizes over the next few years.
Ted: Our balance sheet is in excellent shape and will enable us to capitalize on investment opportunities.
Ted: And finally, our underlying cash flows remained strong which supports our attractive dividend and allows us to continue reinvesting in our portfolio.
Ted: Brian.
Brian: Thanks, Tad and good morning, I'll Echo.
Brian: Echoing Ted's overview on leasing we couldnt be happier with the results our hard working team posted in the third quarter.
Brian: The quantity and quality of deals across our existing and service portfolio and development pipeline is emblematic.
Brian: <unk> of the flight to quality occurring across our markets.
Brian: As we've mentioned previously this flight to quality isn't just about the physical space.
But rather is representative of a positive bias towards quality buildings quality landlords with access to capital.
Brian: The quality of acute worthy experience, which is core to our DNA as both an owner and an operator.
Brian: We're focused on building leasing momentum through year end.
Brian: With this we signed 906000 square feet for the quarter.
New second generation leasing of 530000 square feet represents the highest quarterly performance in over a decade.
Brian: And as a testament to our customers' willingness to make a move in order to secure a new workplace that helps them recruit retain and return their best and brightest to the office.
Brian: Additionally, and subsequent to quarter end, we renewed two of our largest remaining expirations in 2025 and 2026 for approximately 300000 square feet in Nashville, and Raleigh in the aggregate.
Brian: Portfolio leasing stats achieved high watermarks across a variety of metrics, including meaningful net effective rent and dollar weighted average lease term.
Brian: Our 10, 4% cash and 22, 4% and GAAP rent spreads also reinforce our belief that customers see their relative investment in real estate as a real investment relative to their most valuable asset their people.
Brian: Our 18, 6% payback is in line with our previous 10 quarter average highlighting our portfolio's resilience in the face of continued and competitive concessions in the market.
Brian: Our development pipeline continues to fill up.
Brian: Adding 61000 square feet in the third quarter.
Brian: Which includes a new build to suit brewery in restaurant at our mixed use development in Raleigh.
Brian: This regional draw will be a tremendous complement to the other food and beverage options. We are curating to support that close to 1 million square feet of office customers, we have a glimmer.
Brian: I always believe that customers arent monolithic in their approach to the workplace.
Brian: This relates to location and to one's measure of commute worthiness, which is greatly impacted by once commute.
Brian: This belief is representative of our best in business District approach, where Dvds are both urban and suburban in nature there.
Brian: Our strategy is proving out and our year to date leasing performance with approximately 20% of leasing activity in the CBD is.
Brian: 50% in infill locations and 30% in the suburbs.
Brian: Turning to our markets in Atlanta, <unk> reported a sublease availability reached the lowest level in seven quarters.
Brian: Overall office inventory shrink and there were no new construction starts for the quarter.
Brian: There our team signed 271000 square feet include.
Brian: Including 235000 square feet of new deals.
Brian: Included in this number is the 104000 square foot substantial backfill of a customer who vacated two alliance in August.
Brian: And Raleigh, CBRE reports that sublease space is down almost 30% from its peak and Cushman and Wakefield highlighted the markets class a properties are garnering the greatest leasing activity with 79% of the quarter's leasing volume.
Brian: We signed 217000 square feet in Raleigh during the quarter and renewed 84000 square feet after quarter end, representing a modest downside for the Companys second largest 2026 lease exploration.
Brian: Moving to the market with the nation's lowest unemployment rate in Nashville, and where high was owns more than 5 million square feet pushing.
Cushman and Wakefield reported positive net absorption in the quarter and noted close to 3 million square feet of active prospects over 10000 square feet are looking for space in the market.
Speaker Change: Our seasoned team in Nashville, assigned 54000 square feet in the third quarter and after quarter end renewed the company's second largest remaining 2025 lease exploration at 210000 square feet.
Speaker Change: In downtown Nashville, our plans have been finalized for the repositioning of Symphony place, where we have 300000 square feet of known move outs in 2025.
Speaker Change: This asset represents the next great opportunity for our unique <unk> approach to workplace, making which has been proven successful elsewhere in Nashville, both in the Brentwood and cool Springs Dvds.
Speaker Change: While it will take time the opportunity to reposition one of Nashville's most iconic towers is right in our wheelhouse, and we will provide meaningful upside and value creation upon stabilization.
Speaker Change: Wrapping up our markets in Tampa I'd like to highlight the tremendous work of our Tampa team in light of the one two impact of Hurricanes Helene and Milton Wild.
Speaker Change: While many teammates are still personally dealing with the after effects of the storms, our portfolio fared well and was ready and waiting for our customers when the Sun came back out.
Speaker Change: Our portfolio's resilience is a testament to our team's resilience and we are greatly appreciative of their collaborative and solutions oriented approach to serving our customers.
Speaker Change: J L O notes in a recent market report that Tampa is strong and stable and a $2 3 million square feet of leasing activity completed year to date in the Tampa market represents the greatest leasing volume among all markets and Florida. Additionally.
Speaker Change: Additionally, cushman and Wakefield highlighted that Tampa is one of the four hottest job markets in the U S.
Speaker Change: For the quarter, our Tampa team signed 97000 square feet, including 26000 square feet of first generation leasing and our Midtown East development. The only office buildings under construction in the market and which is now 35% pre leased.
Speaker Change: This exceptional asset joins our successful Midtown West development in the heart of Midtown mixed use district.
Speaker Change: Which includes a whole foods market shops, restaurants hotels and apartments.
Midtown East delivers in the first quarter of 2025 and is projected to stabilize in the second quarter of 2026.
Speaker Change: And in closing the third quarter was a strong one for high words.
Speaker Change: Hard work foresight, and Investor and we've applied to our portfolio is delivering results.
Speaker Change: Our leasing volume and metrics are representative of a flight to quality of portfolio and people who deliver an exceptional experience. We will continue to invest in our hydro tyzine approach to reenergizing, our core portfolio and delivering the most exceptional customer experience and our sunbelt Dvds Brendan.
Brendan: Thanks, Brian in the third quarter, we delivered net income of $14 6 million or <unk> 14 per share and <unk> of $97 1 million or <unk> 90 per share the quarter was relatively clean from an <unk> perspective dupree.
Brendan: Depreciation and amortization expense, which doesn't impact <unk>, but it does flow through net income was modestly higher during the quarter. This was due to the write off of tenant improvements and deferred leasing costs associated with the cancellation of a future 110000 square foot lease at the former activity building.
Brendan: In Nashville, you May recall, we mentioned this was a possibility on last quarter's conference call. The former customer has agreed to repass, our upfront investment over the next five years.
Brendan: Our balance sheet remains in excellent shape at September 30th we had nearly $800 million of total available liquidity, including cash on hand available capacity on our $750 million revolving credit facility and undrawn capacity from our joint venture construction loans as.
Brendan: We mentioned last quarter early in Q3, our unconsolidated Mckinney <unk> olive in granite Park, six joint ventures repaid over $200 million of secured loans.
Brendan: And granted our joint venture partner each contributed over $100 million to these joint ventures. These properties will likely be a future source of capital as we plan to obtain long term financing at some point in the future when conditions in the secured market are more favorable.
Brendan: As Ted and Brian mentioned, we had a strong leasing quarter, especially new leasing volume, which has driven our leased rate 310 basis points higher than our actual occupancy of 88%.
Brendan: This includes currently occupied space plus leases signed but not yet commenced on vacant space.
Brendan: Net effective rents and average lease terms on signed leases. This quarter were all time highs and we locked in over $340 million of total lease revenue from second Gen lease signings also a record for the company.
Brendan: With such strong new leasing volume rent and term obviously comes more leasing capital. This is a natural part of the real estate cycle when capable landlords with high quality portfolios are able to drive occupancy higher we.
Brendan: We expect this trend to continue in the near term as we fill the pockets of vacancy in the portfolio and push for longer weighted average lease terms.
Brendan: We believe we are well positioned to handle any short term uptick in leasing capex, given our healthy current cash flows and future embedded growth drivers.
Brendan: For 2024 hour updated <unk> outlook is $3 59 to $3 63 per share, which implies a <unk> <unk> increase at the midpoint compared to our prior outlook the.
Brendan: The increase is essentially all from higher NOI, driven by a combination of reduced expenses and higher revenues, partially offset by modestly higher G&A.
Brendan: The midpoint of our average occupancy range is unchanged at 88%, which implies a lower occupancy in Q4. This has been expected given our long telegraphed known move outs at.
Brendan: At the beginning of this year, we projected year end occupancy to be somewhere between 86% to 87%.
We now believe the upper half of that range is most likely as we mentioned last quarter. The strong leasing we've achieved this year makes us confident that our trough occupancy early next year will be higher than we previously expected in our recovery will be faster.
Brendan: A few items to note about our fourth quarter expectations first we expect to incur a higher level of Opex in Q4 compared to the prior 2024 quarters. This is largely attributable to the timing of certain expense items that were pushed late into the year rather than being spent ratably.
Brendan: Over the four quarters.
Brendan: Second as I mentioned, the average occupancy is projected to be lower in Q4.
Brendan: Third the Glen Lake three in Granta Park, six developments, which were completed in the third quarter of last year, we will have no interest or opex capitalization during the fourth quarter.
Brendan: While these items create short term headwinds to our financial results as occupancy recovers and our in service portfolio and our development properties stabilize we expect meaningful growth in our earnings and cash flow.
Brendan: To wrap up we're very encouraged about the future for highlights with our strong balance sheet and high quality portfolio and bvd locations across the Sun belt, we are gaining market share and expect rent economics to strengthen over time.
Brendan: This backdrop combined with the meaningful embedded upside potential we have in our in service portfolio and development pipeline provides us a strong runway for future growth.
Brendan: Finally, our balance sheet is in excellent shape, which positions us to capitalize on future investment opportunities.
Brendan: Operator, we are now ready for questions.
Speaker Change: Great if you'd like to queue for a question you can do so by pressing star one on your telephone keypad.
If for any reason you'd like to remove your question at Star two.
Speaker Change: Again to join the question queue. Please press star one.
Our first question is from Blaine Heck with Wells Fargo. Your line is now open.
Blaine Heck: Great. Thanks, good morning.
Blaine Heck: Can you talk a little bit more about the rental rate strength you saw in the quarter were there any specific leases that drove that strength.
Blaine Heck: Like Atlanta was the standouts and then maybe you can comment on whether there are specific industries or tenant sizes that you're finding are more active in the market and willing to pay premium rents for that space.
Blaine Heck: Hey, Blaine, it's good morning, it's Ted.
Ted: Look obviously, we did have a great quarter on the leasing front, we had a couple of larger deals.
Blaine Heck: That did contribute and you nailed it in Atlanta.
Blaine Heck: We had to.
Blaine Heck: In particular, one that drove the cash rent growth one was financial services and one was I'm sorry as professional services a law firm and then one was the GFS GSA deal.
Blaine Heck: That were driving those economics, but even without those we had a very strong quarter on the economics. If you back those out so we're sort of seeing it.
Blaine Heck: It just it's a mix right into sort of depends on the submarkets of the markets, we're in but but all in all we're <unk>.
Blaine Heck: Seeing some strengths.
Blaine Heck: And our leasing this past quarter, and then with respect to smaller or larger.
Blaine Heck: Really.
Blaine Heck: It just depends I mean, I think it depends on the Ti is that customers want if we can get longer terms are willing to provide <unk> and they're willing to pay for it I think we're seeing some customers that are willing to pay for it and that works out well was pretty interesting is we always talk about the flight to quality in flight to amenities and flight to capital.
Blaine Heck: It's a common theme we've talked about the last few quarters.
Blaine Heck: And Thats still that continues but it's not always the brightest Chinese newest buildings and you've heard me say that.
Blaine Heck: Several times, we've been on both sides. So what I am getting ready to talk about where we've been down to one of two for a customer and they chose the new construction, even though it's $20 higher than what our offering is and we've also been down to one or two where we've won because we have been the more value play. So it's just it all depends on who the.
Blaine Heck: <unk> with industry, there and who the CEO is.
Blaine Heck: In many cases on the ability to.
Blaine Heck: In terms of type of space they want.
Speaker Change: Great. Thanks for all that color is super helpful.
Speaker Change: So it looks like you guys are a little ahead of schedule on leasing up 23 brings you have got an estimated stabilization date on that project in the first of our 2028, but youre already 60% leased with completion expected in the quarter I guess, how do you guys feel about potentially recognizing some revenue and NOI at.
Speaker Change: That project, maybe even as early as next year and does that contribute to any of your positivity on 2025.
Speaker Change: Yes, No 23 springs is going very well I think we moved it last quarter. It was 56% and we moved it to 60% this quarter and we continue to see very strong activity.
Speaker Change: We have more strong prospects I think you'll see hopefully some movement next quarter. If we can get a couple of things.
Speaker Change: And I think in general our pipeline, we have about 140000 square feet of strong prospects for our development pipeline. So yeah with respect to 'twenty three springs will probably ahead of schedule, but it is a reminder, its a big building, we still have quite a ways to go building will be finished towards the end of the first quarter next year and I think our first customer moves in and.
Speaker Change: June and then Brendan do you want to take the rest of it.
Brendan: Yes Blayne.
Brendan: It's Brendan so just it's good question and as Ted mentioned, we would expect some contribution in terms of earnings from 'twenty three springs in 2025 that will be weighted towards the back half of the year and probably even weighted more towards fourth quarter than it will be even.
Brendan: <unk> third quarter, because we do have some customers that move in kind of middle part of the year, but then even more of that would move in later in 2025. So I think we feel good that that'll be a contributor along with I think the other development projects should all be kind of additive as we build throughout the quarters in 2005.
Brendan: Yeah.
Great. That's very helpful. And then just one last question. If I can how are you guys thinking about the Pittsburg portfolio in the near to mid term.
Speaker Change: Those dispositions are kind of off the table filter now or are you seeing any signs of the transaction market returning there.
Brendan:
Speaker Change: Are there any Pittsburgh properties and the potential $150 million that you have.
Brendan: Identified.
Brendan: For potential dispositions.
Brendan: Yes.
Brendan: Strategically maybe talk about how you think about the balance between waiting for an acceptable price to exit versus selling sooner wherever the market pricing is that maybe saving some capital needed for lease up and any renovation or refreshing projects there.
Speaker Change: Sure Blaine look I think our in fact, we've got a team up in Pittsburgh today.
Speaker Change: We are working on some leasing deals. So look obviously, we want to get out of Pittsburgh at the right time, but as you know the last two two and a half years since the.
Speaker Change: Interest rates started rising up in the capital market sort of locked up it's hard to get any office deal done Alright, you got to get financing and it's really hard to get a big office deal done. So I don't think a whole lot has changed over the last couple of years as we look at Pittsburgh.
Speaker Change: From an investment sales standpoint, I think.
Speaker Change: We're going to sell at the right time, but we are I think we've now hit us.
The start of the interest rate cuts if we can get a few more cuts done whether it be a couple this year and into next year I think that's going to do a lot to open up the overall investment sales market and then certainly that would include Pittsburgh, but in the meantime, what's been pretty encouraging as our leasing activity, we're seeing in Pittsburgh.
So we like the activity, we're seeing there both the PPG starting to see more activity at EQT as well. So I'm encouraged overall by both the fundamentals and then eventually our ability to get out, but it's just going to take time, and we're going to be patient.
Speaker Change: Okay.
Speaker Change: Very helpful. Thank you guys.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Our next question is from Ronald Camden with Morgan Stanley. Your line is now open.
Ronald Camden: Hey, just two quick ones for me just starting on the leasing front, which has sort of been pretty strong I think you talked about.
Speaker Change: I think the year sort of at the <unk>.
Speaker Change: Better half of the 80, 787, plus sort of range and so forth.
Ronald Camden: I guess my question is just on number one is it just more leasing activity overall in the market or is it really sort of this flight to quality, where it's just a share gain and that number two just any more commentary in terms of the bottoming of occupancy next year.
Ronald Camden: You know what could you share sort of what levels are you guys sort of thinking at all else equal.
Ronald Camden: Hey, Ron its Brendan good morning, so yeah. So just first on kind of that outlook for year end. So I think what we've said for the past quarter or so is I think were originally part of the year. We said 86 to 87 I think we feel in terms of a year end occupancy we.
Ronald Camden: Feel comfortable in the upper half of that range now so kind of somewhere between 86, 5% and 87 is where we think we'll kind of end the year.
Ronald Camden: So that's kind of where.
Ronald Camden: We expect those levels to be I think the reason why we feel better overall are why that number is higher is just the leasing activity that we've had this year has been better and I do think that that is largely market share driven if you look at our occupancy relative to the markets that we operate in that.
Ronald Camden: Fred has continued to widen.
Ronald Camden: And we think that that's likely going to be the case as we go forward for all the things that Ted mentioned earlier, which is kind of a flight to quality buildings flight to quality landlord and landlords that have access to capital. So we would expect that would continue.
Ronald Camden: There when you get past year end.
Ronald Camden: There is still some known vacates that we have in the early part of 2025 that we've talked about and we think we have mitigated a lot of that risk through the leasing that we've done thus far on future leasing that will commence generally later in 'twenty five so the trough is still going to be lower in the <unk>.
First half of the year than it is for a year end 'twenty four but we think we're going to build that back as we progress throughout 2025, because once you get through the first part of the year, there really arent a lot of large known vacates in the portfolio and as we disclosed last night in the press release, our second largest remaining 2025.
Ronald Camden: Exploration, we renewed so we feel good about that so we think we will end next year from an occupancy standpoint, probably somewhat comparable to where we'll end 2024.
Ronald Camden: Yeah.
Ronald Camden: Okay.
Great that's really interesting so sort of flattish next year.
Speaker Change: Just switching switching gears, a little bit to the capital market, but now we had a couple of conversations about getting back on offense there.
Speaker Change: And start, especially at this part of the cycle, maybe you could just provide some updated thoughts what youre seeing out there in terms of whether it's distressed or not distressed opportunities any sort of cap rate commentary.
Speaker Change: To get back on offense.
Speaker Change: Okay.
Speaker Change: Sure Ron.
Ronald Camden: Look we continue to look at everything Thats in the market. There's just not a lot of wish list quality assets that are out there a couple of millions to be traded.
Ronald Camden: And the last quarter or so, but there's not a lot. So I think the distress continues to build I think theres a lot of as well as the bid ask spread is still there. So the sellers that even if theyre not distressed a lot of sellers don't want to sell in this environment. So I think the.
Ronald Camden: My optimism is if we can get a couple more cuts. The next two quarters by the fed by the end of the year next couple of months and then maybe into the first quarter of next year capital market is going to open back up and Theres going to be a fair amount of assets that do come to market early next year, but as of right now there's just not a lot out there we continue.
Ronald Camden: Hanging around the hoop and work our wishlist assets, but just not a lot out there right now.
Speaker Change: Great. That's it for me thanks, so much.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: Our next question is from Rob Stevenson with Janney. Your line is now open.
Speaker Change: Okay.
Rob Stevenson: Hey, good morning, guys, Ted how much beyond the sort of $150 million of dispositions are you guys thinking about paying up over the next call. It six months I mean is this it for a while until you start to see some of these acquisition opportunities or are you going to continue to be active regardless.
Speaker Change: Acquisition opportunities selling.
Speaker Change: Selling down some of the assets over the next six to nine months.
Speaker Change: Yes, Hey, Rob.
Speaker Change: Look I think if you look at our history, we were continuous.
Speaker Change: Asset recycler, so we're always solar pulling from the bottom and selling assets and repositioning.
Speaker Change: And of higher quality stuff, so I think youre going to see us continue to do that.
Speaker Change: And then just a reminder that $150 million I think Blaine asked the question it.
Speaker Change: It does not include Pittsburgh.
Speaker Change: So the 150 as other assets, we have out in the market that we're actively marketing in and most of them what you're going to see us sell is a lot like what we sold the last several years.
Speaker Change: I think largely multi tenant some of our larger assets that are more capital intensive. So I think youre going to continue to see us do that and hopefully rotate into higher quality assets once the capital markets.
Speaker Change: Our open back up.
Speaker Change: Okay. That's helpful and then beyond the actual income producing assets are you guys also out there looking for office development sites for the next cycle and how is pricing there has gone down materially stay relatively flat or has that just been re entitled for.
Speaker Change: Or something else at this point, how would you characterize your demand your desires.
Speaker Change: For land as well as pricing.
Speaker Change: Yeah.
Speaker Change: Yes, well guys. If you look at our land Bank I think we've done a great job over the last several years selling off.
Speaker Change: Older land that maybe you had a higher and better use that was not office, we sold several parcels to multifamily developers over the last several years as well as we bought what we think is better bvd.
Speaker Change: <unk> use type development land, so when I look at our land bank today, it's probably in the best shape. It's been in a long time and so we're really not actively looking for any land right. Now in fact, we just sold a small parcel.
Speaker Change: This past quarter and then we have a couple of other parcels will likely sell next year. So.
It's hard to characterize given we're not out there making offers on land to buy.
Speaker Change: But I do think there is plenty of buyers out there for the right parcels.
Speaker Change: Yes Robin.
Speaker Change: Okay.
Speaker Change: Yes, Rob sorry, it's Brendan I'm, just going to add to that a little bit.
Brendan: In the sub we've got kind of 300 million plus of of of.
Brendan: Of land held for development between core and noncore I think you should expect that number to go down over time. So that's.
Brendan: That's probably a little bit higher than what we would expect to carry so if anything I think we'll get net proceeds from land sales that will be helpful. In terms of in terms of capital coming in the door rather than looking to acquire additional land for development.
Okay is there any of that contemplated in the fourth quarter guidance.
Brendan: No nothing in fourth quarter Okay.
Speaker Change: Alright, nothing in the fourth quarter.
Nothing in that 150.
Speaker Change: Okay and then.
Speaker Change: You guys. Fortunately only report one <unk> number.
Speaker Change: Is there any impact to fourth quarter earnings from the Hurricanes at this point for you guys.
Speaker Change: Okay.
Speaker Change: Yes, it's a good question.
Speaker Change: There is there is probably a little bit that is in there that we would expect to incur in terms of some non recoverable operating expense items I wouldn't say, it's a big needle mover, but if youre kind of looking for something at the margin. There is there is a modest impact there but.
Speaker Change: Not something that we felt like was significant.
Speaker Change: And we would expect to recover most of those costs, but not all of them.
Speaker Change: Alright, that's helpful. Thanks, guys I appreciate the time this morning.
Speaker Change: Yes.
Speaker Change: Our next question is from Michael Griffin with Citi. Your line is now open.
Michael Griffin: Great. Thanks, I wanted to ask my first question just on the leasing pipeline and particularly on the weighted average lease terms this quarter. They seem pretty strong I know that can fluctuate around quarter to quarter and maybe it's <unk>.
Michael Griffin: Largely impacted by by some large leases that you've done but should we take this as kind of a expectation that there has been more confidence in <unk>.
Michael Griffin: Real estate decision makers, signing leases or are.
Michael Griffin: People still kind of dragging their feet when it comes to committing to kind of right sizing their office footprint.
Speaker Change: Yes, Michael look I do think the decision, making has really slowed down.
Michael Griffin: Last couple of quarters, and I think that's partially.
Michael Griffin: Economy, but it's also the return to work I think is more mandates.
Speaker Change: Requiring their teammates to come back to the office I do think some companies over over disposed our shrink their offices, we've seen several come back to us after they signed the lease with need more space, so, but the decision making in general has slowed down in terms of large the term I think it has more to do with the build out of their space.
Speaker Change: <unk> and their Ti's again, we're able to keep face rents on our lease economics today face rents are still high and in some cases climbing, but <unk> as well and to get for the tenant and customer to get the build out dollars. They need they have got to commit to more term and we're seeing the willingness to do that so.
Speaker Change: And I think Thats had an impact on the link of the term does that makes sense.
Speaker Change: Great.
Speaker Change: That's very helpful. Ted and then just maybe going back to kind of transaction opportunities. I know you said the bid ask spreads are still wide and you haven't found anything that's in your wheelhouse or meet your criteria, yet, but when you're underwriting transaction can you give us a sense of maybe the IRR or return hurdles that you're looking at maybe relative to your <unk>.
Speaker Change: Cost of capital and then in terms of potential funding needs have you seen an openness.
Speaker Change: In the debt markets and the capital markets would you use it for equity funding just trying to get a sense of how you might structure or prospective transactions.
Speaker Change: Yes, maybe I'll hit the sort of the way we look at the underwriting look I mean, I think there's a lot of levers to pull there and.
Speaker Change: It all depends we look as you know as we bought coming out of the GSA.
Speaker Change: Last cycle. It was we bought a lot of opportunistic and value add office.
Speaker Change: But we're also buying core and core plus so it's all risk adjusted for US we may need a double digit IRR on a value add deal and if its a core asset with long long lease term great credit.
Speaker Change: A little bit below that so we're all over the board we are looking for high quality assets, we can get attractive risk adjusted returns on.
Speaker Change: Thats.
Speaker Change: Over over a longer period of time.
Speaker Change: Yeah.
Speaker Change: Michael It's Brendan on the funding front <unk>.
Speaker Change: <unk> seen the bottom the bond market has been been there and I think <unk> seen good response from the bond market. So that capital is certainly available and then as Ted mentioned earlier, we've been successful in monetizing noncore asset sales.
Speaker Change: Would have those funds available to recycle into higher quality assets that have a better long term growth path. So I think those would be sources of capital for us.
Speaker Change: Yeah.
Speaker Change: Great I appreciate that color Brandon that's it for me thanks for the time.
Speaker Change: We have a question from Nick <unk> with Baird.
Speaker Change: Your line is now open.
Speaker Change: Yeah.
Speaker Change: Hey, Good morning, guys just wanted to get some color on kind of the larger users and requirements. We had heard in Atlanta in particular that there are some new to market customers really looking at more suburban markets like north Fulton and central perimeter, but just wondering if that's a trend you guys are kind of noticed that some of your other markets in particular.
Speaker Change: Yes.
Speaker Change: I think absolutely youre seen larger customers come back to the office or come back to the market right and many of our markets. There are a lot of large users that are out there in the fall of 'twenty, two and then interest rates start to tick up fairly quickly a lot of those went to the sidelines.
Speaker Change: They continue to reevaluate the return to office, but we're seeing them and we're seeing it both not only.
Speaker Change: Some of the in migration some of the inbound activity.
Speaker Change: <unk> seen it as I mentioned on our prepared remarks, and the development there the outreach for potential development deals from very large users again.
Speaker Change: All anecdotal right, we are starting to see.
Speaker Change: More customers, we define large I mean during COVID-19, we got to a point, where defined largest 25000 square feet or more but certainly those those that sizes back, but even the <unk> hundred's two hundreds youre starting to see more activity.
Speaker Change: That's helpful and then Brendan it sounds like repositioning plans for our symphony place or kind of.
Speaker Change: Do you have like a rough estimate of what the cost is going to be for that and then as we look at same store I know you guys traditionally don't move assets out of the pool, but.
Speaker Change: Are you planning on keeping that within the pool or not for 2025.
Speaker Change: Yeah, Hey, Nick it's Brendan so on the <unk> plans. There that is I mean, we have a pretty regular and robust what I would call pool of renovation dollars that go back into the portfolio on a normal basis kind of every year.
Year.
Speaker Change: Symphony place kind of fits within that so we've been planning for this so I wouldn't expect that you would see anything dramatically different in terms of capital spend associated with the <unk> plans, there versus kind of what you've seen us do over the past many years and we've done that successfully.
Speaker Change: In our headquarter building here at 150, Fayetteville Street, we've done it assets in Brentwood, and Cool Springs recently in Nashville, as well so that spend will kind of be consistent with what we've done over long periods of time.
Speaker Change: And then with respect to same store yeah. As you correctly point out we're not we don't take assets that are office buildings that are going to remain office buildings out of our same store pool. So that will be in there. We will expense all of the operating expenses associated with that building and we will expense all of the capital on leasing associated with that.
Speaker Change: Building through the normal channels.
Speaker Change: That's it for me thank you.
Okay.
Speaker Change: Okay.
We have a question from Peter Abramowitz with Jefferies. Your line is now open.
Speaker Change: Yes. Thank you.
Just wondering if you could comment on any uplift in the rents on the Vanderbilt lease as well.
Speaker Change: Other lease you called out in the press release and sort of how that impacted it.
Speaker Change: Leasing spreads in the quarter.
Brian: Hey, Peter Brian here.
We've had a long relationship with Vanderbilt they kind of renew in place as they have kind of every five years and it's a.
Brian: Good economic deal.
Brian: And there's not much more to talk about the specifics on that but.
Brian: We were happy with the net effect is on that and.
Brian: Low capital committed to it.
Brian: Alright.
Brian: They renew in place Theres no uplift in rents when the renewal kicks in next year.
Brian: This is kind of flat.
Brian: Yes, Peter this is Brendan yes, it's just it's just sort of a continuation of kind of the normal rent escalators that we've had there so.
Brian: Shouldn't expect to see any any big needle movers, there with respect to that renewal.
Brian: Yeah.
Speaker Change: Okay got it and then stepping back overall on on the higher effective rents in the better leasing spreads.
Speaker Change: Overall in the quarter.
Speaker Change: I guess should we kind of take it overall as a sign of increasing pricing power.
Speaker Change: Was there anything sort of.
Speaker Change: More one off I know I think Brian in the past and it's still been the case recently that you're talking about typically.
Speaker Change: Plus or minus 5% mark to market cash on the portfolio. So.
Speaker Change: I'm just curious if we should take.
Speaker Change: This quarter's results as a sign of that getting better.
Speaker Change: Going forward.
Speaker Change: Okay.
Speaker Change: Yes, Peter it's Brian I'll start and maybe let Brian add to it.
Speaker Change: Still think what we've talked about is kind of on a cash basis, mark to market plus or minus flattish. We think is still probably a good kind of guidepost, obviously in any given quarter things are going to be volatile. So this quarter was it was high at over 10% positive, yes, I think we were negative.
Speaker Change: Maybe modestly in the first couple of quarters of the year. So those things are going to bounce around a little bit I still think it's probably a pretty good guide to kind of be flat.
Speaker Change: Low single digit positive is probably a good gauge from a from a cash rent spread perspective.
Speaker Change: The only thing I would add Pete.
Speaker Change: Peter is again, we focus more on net effective rents versus the spreads just because we do every quarter.
Speaker Change: In quarter out we do several as is deals that really don't require any capital and in those cases, sometimes you do have a little bit of a roll down in rents, but if we can get an attractive net effective rent.
Speaker Change: Okay doing those type of deals.
Speaker Change: Yeah.
Speaker Change: Thanks.
Speaker Change: One more if I could.
Speaker Change: You called out the renewed interest in build to suits under the conversation that's still early but just wondering if you could comment on which specific markets.
Speaker Change: There seems to be interested in.
Speaker Change: Yes, probably.
Speaker Change: Early to do that what I will share look we've had more than a well thought out a handful type of conversations.
Speaker Change: One is it.
Speaker Change: It would be a new market or it might end up being a fee type thing if it goes anywhere who knows all of these are early we're just our development teams just a static debt we've got stuff to work on.
Speaker Change: But it's great to see the inbounds again, it's been quite some time.
Speaker Change: It's been three or four years since we've had the practice, but just receiving the call and getting the inquiry and the interest level is great from an in migration standpoint, but it's also great to see large users.
Speaker Change: And some of their views on return to work and the importance of being in the office. So again. These things are going to take a long time as I think we've talked about in the past some of our development deals take two or three years to play out, but even just being at the table. I think is is nice to see.
Speaker Change: Alright, Thats all for me.
Speaker Change: Yeah.
Speaker Change: Our question is from Dillon Brzezinski with Green Street. Your line is now open.
Hi, guys can you just sort of continuing with the build to suit theme here I mean, I know, it's still in the early stages, but sort of curious what sort of return hurdles or yield on cost hurdles you guys would need in order to progress with those build to suit opportunities.
Speaker Change: Yes, Dillon look the bar is high right now and on development very similar to what it is on acquisitions. So.
Speaker Change: We're going to look at our cost of capital, but really what's what.
The big hurdle here is the rental rate necessary, we're not seeing costs come down so without a doubt the return on cost is going to be higher.
Speaker Change: The financing costs are higher even to go get alone.
Speaker Change: There's build to suits out there that have had very difficult time, even obtaining financing so that gets factored into the mix and then the hard and soft costs aren't coming down either so.
Speaker Change: The bar is high.
Speaker Change: I think customers are getting educated on that right now but.
Speaker Change: But it's just just given the environment. The bar is pretty high from a yield perspective, which translates to know pretty high rent.
Speaker Change: And then maybe just touching on net effective rent growth prospects I know you guys highlighted sort of having the highest net effective rent.
Speaker Change: And leases signed in the quarter, but as you sort of look at the portfolio today I know youre approaching high <unk> occupancy, obviously youll have some vacancy early next year, but you kind of alluded to recover and a lot of that occupancy in the latter half of 2025, So just sort of trying to get a sense for prospects for a continuation of.
Speaker Change: Further net effective rent growth as you sort of approach that 90% portfolio level occupancy.
Speaker Change: Maybe I'll start and Brandon or Brian can jump in look I think net effective rents jump around there's still pressure on net effective rents from a ti perspective, and certainly free rent too.
Speaker Change: I think our markets Brazil's challenging without a doubt right you still have elevated market vacancy rates. So I think that's going to continue for a while so I think I.
Speaker Change: I think if we can maintain net effective rents maybe grow them a little bit I think we'd be happy with that but I don't.
Speaker Change: I don't think anybody should have the illusion that.
Speaker Change: There's a lot of pricing power in most of our markets I think I do think its submarket by Submarket and bvd by Bvd. So it depends on the mix of leases you do in a certain quarter, but.
Speaker Change: The leasing market is still challenging and it's competitive and.
Speaker Change: So maintaining net effective rents are sort of our goal to grow grow them a little bit if we can.
Speaker Change: Thanks, Dan I appreciate it.
Speaker Change: Thank you.
Speaker Change: There are no further questions in the queue at this time so as a final reminder, it is star one to join the question queue.
Speaker Change: Well thanks, everybody.
Speaker Change: Joining our call today, we appreciate your interest in <unk> and we look forward to seeing everybody maybe at NAREIT next month.
Speaker Change: Good day.
Speaker Change: That concludes today's call. Thank you all for your participation you may now disconnect your lines.