Operator: Hello everyone. Thank you for joining us, and welcome to the Highwoods Properties Q3 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Brendan Maiorana, Executive Vice President and Chief Financial Officer. Brendan, please go ahead.
Brendan Maiorana: Thank you, operator, and good morning, everyone. Joining me on the call this morning are Ted Klinck, our Chief Executive Officer, and Brian Leary, our Chief Operating Officer. For your convenience, today's prepared remarks have been posted on the web. If you have not received yesterday's earnings release or supplemental, they are both available on the investors section of our website at highwoods.com. On today's call, our review will include non-GAAP measures such as FFO, NOI, and EBITDAre. 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.
Brendan Maiorana: As you know, actual events and results can differ materially from these forward-looking statements, and the company does not undertake a duty to update any forward-looking statements. With that, I will turn the call over to Ted.
Ted Klinck: Thanks, Brendan, and good morning, everyone. This quarter's operating results reflect the strengthening fundamentals we have anticipated across our portfolio and our markets. Demand for high-quality office space continues to be strong while supply continues to shrink, a powerful combination. The lack of high-quality office space with limited to no new construction in the strongest BBDs across the Sun Belt is driving a significant rent growth and higher occupancy in our portfolio. During the quarter, we posted GAAP rent growth of 29% and cash rent growth of 4% on over 1.2 million square feet of second gen leases, and delivered the second highest second gen net effective rents in our company's history. Further, our portfolio occupancy increased 130 basis points since the end of June, and our lease rate is now over 90%.
Ted Klinck: Strong lease economics, combined with a positive occupancy trajectory, bolsters our positive outlook for organic NOI growth over the foreseeable future. In addition to our robust operating performance, we also made progress improving our portfolio quality during the quarter by selling $85 million of non-core properties in Richmond, Atlanta, and Raleigh. Year to date, we have sold $386 million of properties at an average cap rate below 8%. This total is approximately $150 million more than our original target at the beginning of the year. Plus, we continue to market additional non-core assets for sale and expect to close at least $100 million more by year-end. These disposition proceeds provide us with meaningful dry powder for future investments.
Ted Klinck: As we continue to recycle out of older, non-BBD located properties and invest in commute-worthy office buildings in the strongest locations across the Southeast, we expect a corresponding increase in our long-term FFO and cash flow growth rates. Turning to our financial results, we delivered FFO of $0.89 per share, and once again increased our outlook for the full year, which is now $3.51 to $3.70 per share. At the midpoint, this is $0.025 higher than our prior outlook and $0.065 higher than the beginning of the year. We are especially pleased with the increase in our outlook since the beginning of the year, given $0.04 of higher than anticipated dilution due to increased disposition activity. With our strong operating results, our GAAP same-property NOI outlook has also strengthened.
Ted Klinck: These strong trends illustrate the quality of our portfolio and the health of our markets and gives us confidence the gains we have made during the past several quarters will sustain into future periods. As I mentioned earlier, our leasing performance was excellent in terms of both volume and economics. We once again posted strong net effective rents. In the past five quarters, we have recorded three of our four highest net effective rent quarters in our company's history. New leasing volume was healthy, with 300,000 square feet of new second gen deals, which helped drive the lease rate to 90.1%. Our high lease rate, combined with limited expirations and known move-outs, gives us confidence we will continue to drive occupancy higher. On the disposition front, we sold $85 million of non-core properties in Q3.
Ted Klinck: We sold a portfolio in Richmond for $53 million, a building in our Century Center Park in Atlanta for more than $20 million, and two buildings in Raleigh for nearly $12 million. As reflected in our outlook, we expect to sell an additional $100 million to $250 million of non-core assets by the end of the year. Going forward, we will continue to prune our portfolio and redeploy that capital into higher quality, more resilient investments. Turning to development. We are finishing up our current development pipeline with 23 Springs. Our $460 million, 642,000 square foot office tower in Dallas' Uptown BBD where we have a 50% JV interest. 23 Springs is now 95% leased and projected to stabilize by Q2 of next year.
Ted Klinck: We expect to replenish our pipeline and have included $100 million to $400 million of new development announcements in our outlook for the remainder of the year. To this end, we have received interest from build-to-suit and sizable anchor prospects for potential new projects, which is further evidence of the lack of available high-quality blocks across our markets. Companies are willing to pay premium rents, in many instances, substantially more than current top of market rents to secure space they need to recruit and retain their talent. With construction timelines typically extending two to four years, any near-term development announcements will take time to show up in our financial results. However, in the current environment, we believe new development with manageable leasing risks presents attractive risk-adjusted returns that will lead to higher FFO and cash flows, a faster growth rate, and better quality portfolio over the long run.
Ted Klinck: We remain active in identifying and evaluating potential acquisitions. To date, we have not found opportunities with strong risk-adjusted returns like last year, when we closed on nearly $600 million of best-in-class properties across Dallas, Raleigh, and Charlotte. Before I turn the call over to Brian, I want to reiterate the priorities we are focused on to drive long-term value creation for our shareholders. First, we will continue to drive occupancy towards stabilized levels in our operating portfolio. Second, we will capture strong rent growth and attractive economics on second gen leasing. Third, we will recycle out of non-core CapEx intensive assets in non-BBD locations and invest in properties with better cash flows and higher long-term growth rates. Fourth, we will do all of this while maintaining a strong and flexible balance sheet.
Ted Klinck: We made meaningful progress on each of these priorities during the first three quarters of the year, and believe we have an opportunity to significantly improve our growth rate, BBD mix, and portfolio quality over the next few years. We believe the focus on these four areas, combined with a strong fundamental backdrop in our core BBDs due to healthy demand, limited new supply, and increasing rents, will drive significant growth in cash flow and long-term value over the next several years. Brian?
Brian Leary: Thanks, Ted, and good morning, everyone. Kudos to our team for another standout quarter. Ted touched on the supply and demand setup in our BBDs, and the national data shows just how broad it has become. Major brokerage houses are now telling the same story. Nationally, CBRE reported a 10th consecutive quarter of positive net absorption, with vacancy declining for a fifth straight quarter to 18.2%, and national asking rents growing 3.1% year over year, the fastest pace since 2016. JLL added that each of the past four quarters saw more leasing than any single quarter since 2019, with tenants now growing their footprints by an average of 13%. At the same time, the office supply pipeline has all but dried up. CBRE projects 2026 will deliver 76% less square feet year over year and would represent the lowest year of deliveries since it began tracking the figure in 1990.
Brian Leary: Piling on, JLL reported that 9.6 million square feet was removed from the national inventory this quarter alone, and a total of more than 45 million square feet has been taken out of service since late 2023. Describing landlord leverage in the trophy and new construction segments as extreme. The result is pricing power for what Cushman & Wakefield calls, "Workplaces that are driving engagement and facilitating employee development." Or what Highwoods defines as commute-worthy environments and experiences. Amidst this backdrop, our team posted its largest quarterly leasing volume since 2024, and coupled with greater renewal success and consistent new leasing, our occupancy gains continue to track ahead of our original guidance earlier this year. Turning to our markets, three once again stood out, Charlotte, Dallas, and Nashville. In Charlotte, the flight to quality is turning into a scramble for space in the nation's fastest-growing city per the Census Bureau.
Brian Leary: Of the region's 2.9 million people, approximately one million live in the city of Charlotte, almost doubling in size since 2000. CBRE reported the fourth consecutive quarter of positive net absorption, 456,000 square feet, and for the second quarter in a row, every class of office posted occupancy gains. At the top of the market, what CBRE calls prime, vacancy has dropped more than 650 basis points year over year to 7.7%, while asking rents in turn have climbed nearly 20%. With more than one million square feet of already leased space set to take occupancy market wide over the next year and new construction 78% pre-leased, Charlotte is essentially out of the very best space. Our Uptown and SouthPark portfolio is capturing that scarcity directly, as evidenced by GAAP roll-ups of 77% and cash roll-ups of 19% during the quarter. In Dallas, demand keeps getting stronger.
Brian Leary: Following nearly 920,000 square feet absorption last quarter, CBRE reported more than 1 million square feet of positive net absorption in Q3. Demand is most concentrated in the BBDs we have built our Dallas strategy around. Preston Center posted the lowest vacancy in all of Dallas-Fort Worth at 5.2%. Uptown was among the market's absorption leaders, and average asking rents in both submarkets are now well above $60 a square foot triple net. Third to Nashville, which was once again our leasing volume leader and where we signed 455,000 square feet across 24 deals in Q3. 15 of these represents 111,000 square feet of new leasing, furthering the occupancy build-back Nashville is achieving this year.
Brian Leary: Year to date, our Nashville team has now signed nearly 1 million square feet of leases, including more than 360,000 square feet across 41 new deals. The quarter was buoyed by two renewals, a 203,000 square foot commitment in Brentwood, and a 77,000 square foot lease in the West End. At Westwood South in Brentwood, a building we have highlighted on recent calls, we signed 38,000 square feet of new leases in the quarter and are now 88% leased, up from 0% at the beginning of the year. Our leasing activity in Music City is happening amid the recurring refrain of a dwindling supply in development pipeline. Last quarter, we noted active construction was limited to 450,000 square feet.
Brian Leary: Today, CBRE notes that same pipeline has shrunk to just 60,000 square feet across the entire market. While prime asking rents rose nearly 8% in a single quarter to $62 a square foot. With virtually nothing new on the way, commute-worthy space across our core BBDs of downtown, West End, Brentwood, and Cool Springs is becoming scarce, reinforcing the organic growth embedded in our Nashville portfolio and pipeline. We also saw encouraging results in Atlanta and here at home in Raleigh. In Atlanta, we signed 111,000 square feet across 12 deals with cash roll-ups of 10% and GAAP roll-ups of 25%. In Raleigh, we signed 105,000 square feet across 15 deals with GAAP rents up 15% and net effective rents above our portfolio average.
Brian Leary: With no new construction underway in either Atlanta or the Triangle, our well-located assets in both markets are positioned to benefit. In summary, with a commute-worthy portfolio, a vanishing supply picture, and a trophy asset team operating the nation's most business-friendly states and markets, Highwoods is well positioned to keep delivering on occupancy gains, rental growth, and long-term value creation. I will now turn the call over to Brendan.
Brendan Maiorana: Thanks, Brian. In the Q3, we delivered net income of $31.8 million or $0.29 per share, and FFO of $100.1 million or $0.89 per share. It was a relatively clean quarter as we did not record any land sale gains and there were no significant or unusual items to highlight. Our balance sheet is in excellent shape. We made significant progress lowering our debt to EBITDA ratio from 6.7x at the beginning of the year to 6.1x in the Q3. We have nearly $280 million of cash on hand and nothing drawn on our $750 million revolving credit facility. During the quarter, we closed a $56 million secured mortgage at our 50/50 Midtown East JV, repatriating over $44 million from this recently stabilized development back to Highwoods.
Brendan Maiorana: We also closed a $370 million delayed draw secured mortgage at our 50/50 23 Springs joint venture, which refinanced an existing construction loan at the joint venture level and repatriated an additional $55 million back to Highwoods. The only debt maturity we have between now and Q1 2028 is our March 2027 bond, which has a remaining balance of $286 million. This debt can be repaid at par starting on 1 December of this year. Given our strong cash position, we don't anticipate a need to raise capital to address this maturity. We are working on one additional JV financing that we expect to close later this year or early next year, which will repatriate even more capital back to Highwoods and further strengthen our liquidity and unencumbered debt to EBITDA ratio.
Brendan Maiorana: Based on our current projections for NOI growth, we expect debt to EBITDA to be modestly lower at year-end and continue to decline throughout 2027, assuming otherwise leverage neutral investment activities. We agreed to sell 1,056,000 shares on a forward basis through our ATM program at an average gross price of $32.24 per share for total net proceeds of $33.5 million. Given our strong cash position and no balance outstanding on our revolving credit facility, we have not yet settled these forward sale agreements. We expect to use this dry powder as we deploy capital into future investments. As Ted mentioned, our occupancy improved 130 basis points from the end of Q2, and our lease rate is now 90.1%, up 50 basis points sequentially.
Brendan Maiorana: We tightened our year-end occupancy outlook to 87.0% to 88.0%, with the midpoint remaining 87.5%. Given our significant backlog of signed but not yet commenced leases, we remain confident occupancy will move higher by year-end. As you know, for the past few years, we have set a 300,000 square feet in new leasing second gen volume as a good quarterly marker for us to drive occupancy higher. Given our lease rate is now above 90% and we have a more manageable forward lease expiration schedule with limited large known move-outs, we expect new leasing volumes will moderate going forward. We expect to continue pushing occupancy higher in future years, although it will obviously be more difficult to replicate the 250 basis points of improvement we expect in 2026. As Ted discussed, we had strong financial and operating results during the quarter, with FFO of $0.89 per share.
Brendan Maiorana: Same property NOI growth, occupancy, and rent growth are all trending better than we originally anticipated. As expected, cash flow has been below normalized levels during 2026 as we spend upfront leasing capital to build occupancy before realizing the benefit of higher cash revenues. This is a normal part of the office business cycle. As occupancy increases, free rent periods will burn off and leasing CapEx will normalize and ultimately result in a significant jump in free cash flow and dividend coverage more in line with our annual metrics earlier this decade. Before I turn the call back to the operator for questions, I would like to give some color on our financial outlook.
Brendan Maiorana: We updated our 2026 FFO outlook to $3.51 to $3.70 per share, which is up 2.5 cents per share at the midpoint since our prior outlook in July and includes the possibility of 14 cents per share of land sale gains at the high end and none at the low end. We have one possible transaction that could close prior to year-end and result in a large gain. At this point, it is difficult to know whether this transaction will close in 2026 or move into a future year. Excluding land sale gains already recorded this year, we have increased the midpoint of the outlook by 4.5 cents. Stripping out all land sale gains, the midpoint of our outlook implies FFO of more than 90 cents per share for Q4, which puts us in strong position as we head into 2027.
Brendan Maiorana: Consistent with our typical practice, we plan to provide our 2027 FFO outlook in February, at the same time that we report Q4 2026 results. Our Q4 outlook obviously does not factor in the potential impact of any capital recycling activities. As Ted mentioned, we have $100 million to $250 million of potential additional dispositions that could close by year-end. Overall, given our implied FFO outlook for the end of 2026, combined with ample cash on hand available for future deployment, we are upbeat about the trajectory of FFO and cash flow for the foreseeable future. Operator, we are now ready for questions.
Operator: We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Your first question comes from the line of Seth Bergey with Citi. Your line is now open. Please go ahead.
Seth Bergey: Hey, good morning. Thanks for taking my question. I just wanted to gather your comments about the potential to do more dispositions and then continue to recycle capital into higher quality acquisitions. Just given the movement and the ten-year, can you just talk a little bit about the transaction environment? Have pricing expectations changed? As debt costs have gone up, how do you think about your required return expectations?
Ted Klinck: Hey, Seth. Thanks for the question. Yeah, look, as we mentioned, we have about $100 million to $250 million more of dispos. That is the guidance through the rest of this year. Look, with interest rates going up, I think everything is just taking more time, right? I think just the uncertainty there, but I will tell you, every one of the deals is under contract and we are working through due diligence. So we have not lost anything. Nothing has been dropped yet. It is really a mix of assets. It is Atlanta, Raleigh, Nashville, Tampa, Richmond, and one asset in Pittsburgh as well. So we have got a pretty good insight on what is going on, just given the number of transactions we have. So, I think we are waiting and seeing, but so far everything is holding together. It is just taking longer to line up the capital stack from a disposition standpoint.
Ted Klinck: Now, in acquisitions, I think it has slowed down. I think some of the assets around the market have been pulled, and I think, again, just everything is harder. So I think our return requirements have probably gone up a little bit, but not materially. But we continue to look, and we just have not found anything this year. Last year, we successfully bought about $600 million of assets. We just have not found acquisitions that meet our risk-return requirement this year, which is, again, one of the reasons we are sort of shifting towards development where we think there is better risk return requirements.
Seth Bergey: Great. Thanks. Then maybe one more on your comments towards the end of the prepared remarks around just the CapEx spend, just what is kind of where you are in the office leasing cycle. How should we think about the levels of CapEx as we think about Q4 and then just maybe as we think about the trajectory into 2027 relative to 2026?
Brendan Maiorana: Yeah. Hey, Seth, it's Brendan. Maybe I'll take that one. We have been spending a lot of capital on the leasing side in 2026, as expected. I think year to date, I believe we are north of $140 million of total leasing CapEx. That number is high. I think it will moderate a little bit in Q4 from where we have been for the first three quarters of the year, but still be pretty elevated for all of 2026. We still think that on a normalized basis, as occupancy stabilizes and as we look at the forward lease expiration schedule that we have, that our leasing CapEx, both in terms of TIs and leasing commissions, is going to moderate into the low hundred million dollar range, so probably $110, $115 million, maybe $120.
Brendan Maiorana: That reduction in leasing CapEx on a go forward basis, combined with the significant embedded cash NOI growth that we have as leases commence and cash commence, is going to create a pretty big jump in terms of free cash flow over time. We feel good about that. My expectation in terms of 2027 is it will be an okay year from a cash flow perspective, but certainly not back to what we think of as normalized levels. We think that that is more likely in 2028 and thereafter.
Seth Bergey: Great. Thank you for taking my questions.
Operator: Your next question comes from the line of Blaine Heck with Wells Fargo. Your line is now open. Please go ahead.
Blaine Heck: Great. Thanks. Good morning. With 23 Springs now essentially stabilized and the outlook contemplating up to $400 million of development announcements, can you just talk about what yields you are targeting given today's construction costs, and whether the interest rate elevation and volatility is impacting your decision to commit to a development? Then maybe just expand on how you weigh the delayed NOI from developments against acquisitions where you are getting immediate contribution. Do you think you can achieve enough of a spread in development yields versus cap rates to compensate you for that delayed NOI recognition?
Ted Klinck: Hey, Blaine, this is Ted. Maybe I will take the first part and then Brendan can jump in. Look, I do think higher interest rates are impacting our decisions a little bit, or at least we are weighing it. I do think that the headwinds with the higher interest rates are somewhat offset by tailwinds of just the fundamentals. I think the demand is so good that we are seeing out there, since we started looking at some of these developments, that we are feeling a lot of conviction that we can meet our underwritten yields. So it sort of weighs off each other a little bit. But in general, I think it is not going to stop us from doing anything, at least right now. Again, our developments that we are looking at are, some of them are build-to-suit and they are open book.
Ted Klinck: So really there is no real interest rate risk on that because it is an open book contract with the developer or with the tenant. On the multi-tenant deals, again, the fundamentals seem really, really strong to us. Again, as we look at the yields, the development yields we can achieve relative are far in excess of acquisition cap rates. So we like that spread that is there today.
Brendan Maiorana: Then Blaine, it is Brendan. Just in terms of how we think about the NOI near term with acquisitions relative to development, where obviously the time cycle on development takes time for that NOI to show up in financial results. We really look at risk adjusted returns and think about where the highest risk adjusted returns are, including everything associated with development and acquisitions. Those development returns that we look at include that carry that we have over the time frame. So we think about that there. We do not get too hung up in terms of the near term financial impact if the risk adjusted returns are higher on development. The one thing that I would point out though, is we have sold $150 million more in terms of dispositions this year than what we thought at the beginning of the year.
Brendan Maiorana: That capital is sitting in cash, has not been reinvested. At the same time, we have increased our outlook for FFO as we have migrated throughout the year. I do not think we are too concerned about the negative impact, the negative carry in terms of disposition assets being recycled into development in the near term if we feel like those are going to be good projects and good risk adjusted returns upon delivery and stabilization.
Brian Leary: Hey, Blaine. Brian, one little thing on maybe a color into the users or anchors who we are talking to about potential developments or build-to-suits. The question comes up as to the rate volatility impacting their strategic capital decisions. What we continue to hear, and I know I am a bit of a broken record on this, is that it is really a strategic talent decision as much as it is a capital decision, which is their greatest investment. This week, everyone is down in Miami for ULI, and the emerging trends report has come out. The number 7 trend that they highlighted is AI and the human premium. We are seeing that while the interest rates are definitely impacting the broader economy, folks who are pretty convicted around getting their people under one roof and growing.
Brian Leary: They are not rate agnostic per se, but they are not rate sensitive in getting their folks together.
Blaine Heck: That is all really helpful. Thanks, everyone. Brendan, maybe sticking with you. Same property cash NOI was essentially flat at 0.2%, while GAAP NOI grew 4.1%. Straight line rent jumped to $14 million versus $5.5 million a year ago. Can you just walk us through how much of that gap is the free rent associated with the large amount of new leasing you have done, and whether there are any specific leases where the free rent burn off is going to meaningfully change that cash same-store trajectory?
Brendan Maiorana: Yeah, Blaine. Most of that delta is attributable to the occupancy build that you have seen, which initially carries that free rent that is there. The delta between GAAP and cash is principally driven by that. We have said this before, but there is a structural advantage or that cash NOI growth, cash same property NOI growth has over GAAP same property NOI growth, principally because of development, a little bit because of acquisitions. Any time GAAP is higher than cash, that is a very strong indicator that cash NOI growth is set to increase meaningfully in future periods. We expect that will be the case as we go forward, as a number of these leases that are under free rent today, that free rent burns off and then they start cash paying.
Brendan Maiorana: There is a number that are out there, that will move into cash pay, in 2027, and then there is even some that will commence in 2027 that will be in 2028. I think we feel good about the outlook in terms of cash, same property NOI growth, for the foreseeable future.
Blaine Heck: Great. Thanks, guys.
Operator: Your next question comes from the line of Rob Stevenson with Huntington. Your line is now open. Please go ahead.
Rob Stevenson: Good morning, guys. Ted, if you exclude the non-core markets, how much of the portfolio today is outside of your BBDs and are likely recycling candidates over time?
Ted Klinck: Maybe I will answer it a different way. We have this $250 million or so that we want to get. Most of it is under contract for all that is under contract. Then, once we get done with that, so that is $250 million, we will have still a few remaining assets in our Century Center, in Atlanta. One is a long-term single-tenant deal, government leased building, and a couple of multi-tenant buildings. Then it is really what we have in Pittsburgh, in PPG primarily. After that, I think it is the $250 million and then it is Century Center in Pittsburgh.
Rob Stevenson: Okay. That is helpful. Given Brian's positive comments on Raleigh and access to capital from the sales, is there any reason why you would not exercise your option of Bloc83?
Ted Klinck: No. The answer is no. I think the nice thing about it is it is an ongoing option. So it is based on timing. Again, if we can get some of the dispo proceeds in the door, if we can figure out these development opportunities. It is really more just a timing thing. We will absolutely. We have been thrilled with that acquisition and how it has performed over the past year. So it is definitely going to happen. It is just a timing thing.
Rob Stevenson: Okay. Last one for me, Brendan, what is the magnitude of the signed, not opened backlog that you talked about in your comments?
Brendan Maiorana: It is about 800,000 square feet. That will come on over time. But again, don't expect that occupancy is going to move to 90% over the next several quarters, like, in line with that lease rate, right? There is going to be puts and takes that come there. But I think the spread, which is 310 basis points today, is wide versus where we historically operate. Usually it is 200 or less. So we expect that lease to occupied spread will narrow over time. But we do feel good just given that we have got roughly 800,000 square feet of new leases that are set to come into occupancy over time. We think that creates a positive trajectory in terms of our occupancy outlook as we go forward over the next several quarters.
Rob Stevenson: Okay. I guess one follow-up to that would be, any sort of incremental, known move-outs at this point versus what you guys have talked about in the past that we need to be aware of as we are thinking about 2027?
Brendan Maiorana: Nothing major. I think we feel good about the expiration outlook, and we have talked about this before, in terms of kind of, I think often you and others ask about retention levels. I think we feel good about the retention levels, both for where we are for Q4 and then as we think about 2027. What is remaining there, which excludes all of the early renewals that we have done and pushed out into future years, I think we are around 50% or so retention on the remaining expirations for the next five quarters. That is higher than where we historically are. So that feels good to us, and is another reason why we feel optimistic about the occupancy trajectory as we go forward.
Rob Stevenson: Okay. Thanks, guys. Appreciate the time this morning.
Operator: Your next question comes from the line of Nick Thillman with Baird. Your line is now open. Please go ahead.
Nick Thillman: Hey, good morning, guys. Maybe commenting a little bit and looking into 2027 for a run rate adjusting for these potential disposition bucket. Ted, you made the comment that blended sales today are around 8% on a cap rate basis. You kind of alluded to some of the markets like Richmond, Century Center. I guess, how should we be thinking about the bucketed assets in that $100 million to $250 million of potential sales in Q4 for like a cap rate basis? Is it closer to that 8%? Is it lower than that with the Bridgestone assets, or is it more to that upper end of the low double digits that we saw in Q3?
Ted Klinck: Hey, Nick. Really, it is all of that. As I mentioned, the $250 million is really in six different markets. It is a mix of assets. I think if we sold all $250 million, the cap rate would be, call it, low to mid-9s, just a tick below mid-9s cap rate.
Nick Thillman: That is helpful. Brendan, you made the comment on new leasing. You had put that bogey out there, 300,000 per quarter to continue to build occupancy. But now with the progress you have made on that front, that number might be a little bit lower just given availability within the portfolio. I guess, what is the target that we should be looking at here. Is it closer to 200. Just some commentary there would be helpful.
Brendan Maiorana: Yeah, Nick. It is probably, I think, to achieve the occupancy levels that we talked about a quarter ago, which is kind of, let us say, up 100 basis points or so as we migrate throughout 2027, so for 87.5%, give or take, at the end of this year, kind of in that 88.5% context by the end of next year. It is probably around 250,000 a quarter, give or take. Again, it depends probably a little bit on where some of the expirations fall and whether or not we are able to renew those, but I think 250,000 is probably a pretty good lower bogey to continue to drive occupancy higher.
Nick Thillman: Then maybe just following up on a question Blaine asked earlier on development yields. If we look at some, maybe, your newer acquisitions with market rents, say maybe Bloc83 or The Terraces, I guess, how do those rents compare to the rents that you are talking with on build-to-suit projects. Is the differential 20%, 25%. I am just trying to get a gauge on some of the opportunity there to push rate.
Ted Klinck: Yeah, Nick. So our most recent acquisitions where we have done subsequent leasing, I would tell you, 600 Tryon we acquired roughly a year ago. So we leased up that vacancy. I think the building is like 83% leased when we bought it, and we are now in the mid-90s. We leased it up quicker and at much higher rents, over 10% higher rents than what we underwrote. So the market rents are really moving quickly, and I would tell you today, if we did a lease today, it would be even quite a bit higher than that. The Terraces, I think we have just done one lease, and it is like 23% or 24% higher than our underwriting. Again, we bought that building in January. So rents continue to move both in Charlotte and Dallas very quickly. Different cadence through all of our markets, but more so in Dallas and Charlotte.
Ted Klinck: In Raleigh, actually, we just did one renewal there, and I think it was maybe 4% or 5% higher. Not quite the level of Dallas and Charlotte.
Brian Leary: The one clip on is that is just to our underwriting, but to mark-to-market is even more than that, right, Ted, in terms of that?
Ted Klinck: Yeah.
Nick Thillman: Very helpful. Thank you all.
Operator: Your next question comes from the line of Peter Abramowitz with Deutsche Bank. Your line is now open. Please go ahead.
Peter Abramowitz: Yeah, thank you for taking the question. You've seen a nice acceleration in pricing power as reflected through the leasing spreads over the past couple of quarters. Just wondering if you could talk about your updated thoughts on how you see mark-to-market across the portfolio, and specifically, if you could help us frame how you're thinking about that in terms of lease trade-offs for 2027 and how that will impact the earnings trajectory.
Brendan Maiorana: Hey, Peter, it's Brendan. Maybe I'll take that. Just to answer the question directly, it's probably up about, let's call it about +10%, I think, +7% mark-to-market across the portfolio. I think if you look at market rents across our portfolio, we're probably up about 10% year on year. Then we've got in-place annual escalators that are, call it, up around three. So you take that three off of kind of the in-place that's gone up that much versus 10 of market rents, and you kind of get to about a +7% compared to roughly flat a year ago. That's on a cash basis. Cash spreads in any given quarter are going to kind of bounce around a little bit. So, we'll see where those numbers shake out as we go forward.
Brendan Maiorana: Obviously, on a GAAP basis, we've been successful pushing term out longer, and we've been successful with pushing annual bumps. Free rent has come down a little bit, so all of those things benefit the GAAP spread. So I think that's part of the reason why you've seen those GAAP spreads accelerate faster than where we've seen the cash rent spreads.
Peter Abramowitz: All right. That's all I had. Appreciate the time.
Operator: Your next question comes from the line of Tom Catherwood with U.S. Bancorp. Your line is now open. Please go ahead.
Tom Catherwood: Thanks, and good morning, everybody. Just wanted to go back to your answer to Nick's question and get a little bit more specific on the development rents. Maybe in your strongest markets, like your Nashvilles and Dallas and Charlottes, what rents do you need to justify new development, and what is that gap to the market rents right now?
Ted Klinck: Sure. Look, Dallas is currently getting market rents in that, call it $100 net, call it maybe $90 to $100 net, or $85 to $100 net rate. That is what you need to justify new development today. So Dallas, we are there. Second, Charlotte probably needs $90 on a more of a gross basis, 90 to 95, probably. Highest rents achieved, probably in the 70s, low 70s today. So what is that? Maybe 20% off, if you will. Nashville is probably in that same ballpark as well.
Tom Catherwood: Perfect. All right. Last one from me. In general, with space getting tighter in your markets, how much are tenants coming to you for early renewals? Could that have a benefit to cash flow in the coming years if you are able to do more renewals instead of new leasing?
Ted Klinck: Yeah, look, you hit on a trend that we are seeing. I might even mentioned, I cannot remember if it was last quarter. But we are absolutely seeing customers that have expirations. Typically, the larger customers have expirations. It used to be maybe 2 years out. Now I would say it is 3 to 5 that are coming to us, and they are seeing that there is not going to be any new supply in the next several years. So they want to renew, probably lock in favorable economics, but also make sure they have got space that accommodates their needs, if they want to upgrade their space. So without a doubt, we are seeing, and we are renewing, certain customers that have expirations that are well before their natural expiration date.
Brian Leary: Thomas, Brian Leary here real quick, and I think we have mentioned this in the past. We have not been shy about being proactive kind of in this space, where the majority of our assets are unsecured with regard to debt. We do not have a debt partner. We can reach forward with certain anchors and larger customers to secure them now and extend them. At the same time, many of them are expanding too. So they want to go ahead and take care of that before they run out of space.
Tom Catherwood: That is great. Appreciate it. Thanks, everyone.
Operator: Your next question comes from the line of Dylan Burzinski with Green Street. Your line is now open. Please go ahead.
Dylan Burzinski: Hi, guys. Good morning. Thanks for taking the question. Brendan, I think you mentioned, I joined late, so excuse me if I am misquoting you, but I think you mentioned market rent is up 10% year over year across the portfolio. Ted, I know you walked through some of the markets versus underwriting, but could you walk through how that 10% shakes up across the various markets in which you own assets?
Ted Klinck: Sure. Look, I think our strongest two markets where you have seen well in excess of 10%, again, it is Dallas and Charlotte, and I would say Nashville is moving at a pretty good pace as well. After that, I think Tampa, we are seeing some real movement there. The interesting thing about Tampa is there is no new first-gen space. That may temper some of the rent growth for a bit. But again, it is flight to quality, so I think owners are going to have a good tailwind there as well. Then I think you are seeing smaller rent increases in maybe Atlanta, Raleigh, and Orlando, I would say. But I think you are going to start seeing, we are starting to see a lot of momentum in Raleigh.
Ted Klinck: There just happened to be a lot of first-gen spaces still being absorbed, but the demand has been pretty good, so I think that is going to pick up. Again, all of our markets are increasing. It is just the pace is different across the markets.
Dylan Burzinski: I guess with that in mind, I know a lot of focus on the capital markets environment has been related to higher rates. As you think about or as you look at or as you have seen buyer underwriting, as you guys are out in the market, are you seeing people lean into that rent growth story as they look out the next 2, 3 years, and how has that maybe impacted pricing?
Ted Klinck: No, I think they have, Dylan. Again, we look at all the acquisitions that are out there and the pricing that we've seen on the deals that we've pursued, we just haven't matched up with our pricing expectations. I think there are buyers out there that have got a pretty good view of or opinion of rent growth. They may be right at the end of the day. But we've seen some fairly aggressive pricing on some high-quality assets.
Dylan Burzinski: Thanks.
Operator: Your next question comes from the line of Ronald Kamdem with Morgan Stanley. Your line is now open. Please go ahead.
Ronald Kamdem: Hey, great. Just looking for some breadcrumbs on same-store NOI, as we're thinking about sort of this year and how it could play out. Obviously, occupancy's been building, so it should be a tailwind next year. Just curious if you could provide some high-level comments on either any known expirations or commencements or free rents, like how do we think about the puts and takes with same-store NOI as we start to flip the calendar?
Brendan Maiorana: Hey, Ron. Yeah, it's Brendan. Yeah, I think the biggest indicator, as I mentioned earlier, is just when GAAP is high and it's higher than cash, then that's a strong signal that you're going to see cash have a corresponding increase in future periods. So, there is likely to be a lot of conversion of current free rent, non-cash rent into cash. This year, I think our straight line guidance is mid $40 million range. That number is normally kind of low to mid-$20 million. So that gives you a pretty good indication of how much higher we are in terms of non-cash rent or free rent.
Brendan Maiorana: A lot of that will come online, combined with some occupancy gains, I think will drive same property outlook on a cash basis, and probably in all likelihood on a GAAP basis next year to above trend levels would be expectations, at least as we sit here today.
Ronald Kamdem: Great. My second one, and sorry if this was asked, but on the acquisitions, the potential obviously number went down, the ones that slipped away, what happened there? Was it pricing? Was it competition? Just curious what happened to those deals that you guys thought could be possible but are no longer possible. Thanks.
Ted Klinck: Yeah, Ron, you might be referring to when we took the guidance down from $85 million at the low end to zero, and that is solely the timing of the acquisition on Bloc83, where we have an ongoing option to acquire. We currently own 10% of that asset with our partner, and we have an option to buy up to 50%, and it is really just a timing issue. We do not know if we will actually exercise that option late this year or sometime next year. There is not a question of if, it is just when right now.
Ronald Kamdem: Got it. That is what drove the revision downwards. Okay. That makes sense.
Ronald Kamdem: Right.
Ronald Kamdem: That is it for me. Thank you.
Ted Klinck: Thank you.
Operator: There are no further questions at this time. I will now turn the call back to Ted Klinck for closing remarks.
Ted Klinck: Well, thank you all for joining the call this morning, and thank you for your continued interest in Highwoods. We look forward to seeing everybody at Nareit, and we will be having a bus tour. So if you are interested, just reach out to Brendan and get on the schedule. Thanks, everybody.
Operator: This concludes today's call. Thank you for attending. You may now disconnect.
