Good morning, and welcome to the Highwoods Properties Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded, Wednesday, February 9th, 2022. It is now my pleasure to turn the conference over to Hannah True. Please go ahead, Ms. True.

Thank you, operator, and good morning, everyone. My name is Hannah True and I work with Brendan on the Finance and Investor Relations team here at Highwoods. Participating on the call this morning are Ted Klinck, our Chief Executive Officer; Brian Leary, our Chief Operating Officer; and Brendan Maiorana, our Chief Financial Officer. For your convenience, today's prepared remarks have been posted on the web. If you have not received yesterday's earnings release or supplemental, they're both available on the Investors section of our website at 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, including the ongoing adverse effect of the COVID-19 pandemic on our financial condition and operating results. These risks and uncertainties are discussed at length in our press releases as well as our SEC filings. As you know, actual events and results can differ materially from these forward-looking statements and the Company does not undertake a duty to update any forward-looking statements. With that, I'll now turn the call over to Ted.

Thanks, Hannah, and good morning, everyone. I'd like to start off by welcoming Hannah to our call today. It's great to have you with us. Our fourth quarter was representative of our execution throughout all of 2021 as we delivered strong financial results, solid leasing metrics and strengthening cash flows, all while improving the quality and resiliency of our portfolio, protecting our fortress balance sheet and laying the groundwork for additional long-term growth. Our simple and straightforward investment strategy is to generate attractive and sustainable returns over the long-term by developing, acquiring and owning a portfolio of high-quality, differentiated office buildings in the Best Business Districts, which we call BBDs. A core component of this strategy is to continuously strengthen the financial and operational performance, resiliency and long-term growth prospects of our portfolio, and recycle out of properties that no longer meet our criteria. To this end, in 2021, we acquired $800 million of high-quality office buildings in Raleigh and Charlotte, completed $356 million of 92% leased office development, acquired approximately $100 million of land for future development in three BBDs and sold $385 million of non-core properties. In addition, since our last call, we've announced $174 million of development that is a combined 36% pre-leased, even before putting the first shovel in the ground. Since the beginning of 2019, we have acquired 3.1 million square feet of best-in-class office assets for a total investment of $1.3 billion, delivered 1.4 million square feet of highly leased office development for a total investment of nearly $600 million and sold 6.7 million square feet of non-core properties for $1 billion. Because of these continuous and meaningful improvements, our portfolio is even more resilient and better poised for long-term growth. Plus, our cash flows have continued to strengthen as evidenced by 15% higher…

Thank you, Ted, and good morning everyone. The positive metrics we've posted for the quarter and throughout the global pandemic are a testament to the simple strategy we execute every day. This strategy has positioned Highwoods to be the beneficiary of a great migration to our markets, a great acceleration to our BBDs and a flight to quality buildings, all of which are both urban and suburban in nature. Most customers have plans to return to the office, are expanding more than they are contracting and now see the workplace as a vital part of their ability to retain and recruit, but specifically return, talent to their organization. Companies that create value through collaboration and culture have come to the clear conclusion that they are, simply, better together. We believe a workplace that attracts people and allows them to achieve together what they cannot apart will be full and command attractive economics. We're seeing this now throughout our portfolio and is evidenced in the results our team is producing. Occupancy increased 80 basis points from last quarter, ending the year at 91.2%. We expect occupancy to dip modestly in the first half of the year before increasing in the latter half. While utilization currently remains below pre-pandemic levels, we project it will increase steadily throughout the year. We continue to see healthy tour and RFP activity which is evident in the 884,000 square feet and 123 deals signed in the quarter, the highest quarterly deal count since 2016. Of these 123 deals, 54 were new totaling 284,000 square feet. Emblematic of our balanced portfolio, no one market disproportionately carried the load as five of our markets garnered eight or more new deals. In addition, we signed 158,000 square feet of first generation leases in the quarter for our developments in…

Thanks, Brian. In the fourth quarter, we delivered net income of $124.9 million, or $1.19 per share, and FFO of $113.5 million, or $1.06 per share. As Ted mentioned, the only significant unusual item in the fourth quarter were land sale gains of $0.09. Excluding the fourth quarter land sale gains, our 2021 FFO per share was $3.77, a penny above the high end of our revised outlook of $3.73 to $3.76. The better than expected FFO in the fourth quarter, which was primarily driven by higher occupancy and lower operating expenses, was consistent with the rest of the year as our FFO of $3.77 per share was $0.19 higher than the original mid-point of the outlook we provided last February. The upside for the full year was driven by: $0.08 from operations due to lower than anticipated OpEx, recovering parking revenues and higher occupancy; $0.05 from higher than anticipated NOI from development, the majority of which was from the early delivery of Asurion's headquarters; and $0.06 from the net impact of the PAC acquisition partially offset by the acceleration of $353 million of non-core dispositions. Our balance sheet is in excellent shape. We ended the year with debt-to-EBITDAre 5.4x, down from 5.6x at the end of the third quarter. Last April when we announced the acquisition from PAC, we stated our plan was to return our balance sheet to pre-acquisition metrics by mid-year 2022. We're on pace to meet this target with a plan to sell another $150 million to $200 million of non-core properties in the first half of this year. We sold $353 million of non-core properties since the announcement of the PAC acquisition. These sales had average in-place occupancy of 80% and had a projected cap rate of less than 6% on a GAAP basis and…

Thank you. [Operator Instructions]. That first question comes from Blaine Heck of Wells Fargo. Please go ahead.

Great, thanks. Good morning, everyone and thanks for all that detail. Brendan, can you talk a little bit about the operating expense guidance and what's driving that -- that increase this year? And maybe also remind us of the proportion of leases outstanding that are in a net lease structure versus some variation of gross leases in which you're not getting fully reimbursed for those expenses?

Yes, good morning, Blaine. Thanks for the question. So just first the easy answer on the triple net versus full-service. So we've got about 25% of the portfolio that has triple net leases, the remainder is full-service gross leases. And the full-service gross is where there's movement in terms of operating expenses. So I'm going to try to be as concise on this sort of complicated and complex answer as I can. So first, what we expect in terms of operating expenses is really to be in a pretty now let's call it "normalized OpEx" environment for most of 2022. I think OpEx will probably be a little bit lower in the first quarter than normal. And then we'll be back to normal in the second, third and fourth quarters with the thought being, we expect the vast majority of customers to be back in their space by the second quarter. And while that may not be their full teams, it's difficult to heat and cool half a suite. So we think we'll be incurring a full load of OpEx for the vast majority of the portfolio over the majority of the year. And operating expenses were low in 2020 and 2021, as utilization was low across the portfolio, and that benefited us. And so for a number of our leases, our operating expenses that were incurred were below the base year expense stop. And so that accrued to our benefit. As expenses return back to normal and increase, we don't receive recoveries until we get back to that base year expense stop. And so, as expenses increase in 2022, we think the vast majority of our leases will be at or above those expense stops. But we won't receive the recoveries until we get to those levels. So we…

Okay, that's very helpful. And just to be clear, I guess, we're talking about you should be able to kind of phase out the debt in OpEx burden. As leases expire, this shouldn't be kind of multi-year headwinds for you all. It should kind of normalize next year as you explained, is that correct?

Yes, that's right. I would say as leases expire so what I would pay attention to, to just determine whether or not there's any issue with respect to OpEx increases over time is probably looking at rent spreads. So when we calculate and provide rent spreads, which I think, we're what plus 3.2% this quarter. What we do is we take the operating expenses, and if we're getting $2 of recovery, let's call it in a lease. We add that to the expiring rent. So the expiring rent on the base rent is $35. And we're getting $2 of recovery; we would say that the expiring rent is $37. And then we would compare the new rent to that. So if we were absorbing anything in terms of higher OpEx, you would see that show up in the rent spreads. And as you can see our rent spreads have held up reasonably well. So it hasn't been an issue thus far. To the extent going forward, I think I would pay attention to those rent spreads to make sure that they're holding up in line with historical norms.

Yes, that's very helpful. Second question for you and then I'll turn it back over. Can you give us any color on your expectations for AFFO or FAD during the year in 2022? Is there any reason we should expect growth in AFFO or FAD should be materially different from FFO growth that you're expecting?

So I mean, cash flow is always more volatile than FFO. So I would say that, I mean, there always tends to be a little bit more variability from year-to-year. But in general, sort of the major movers between what's going to move cash flow versus what's going to move FFO are probably two main line items. So there's the level of non-cash rent, and we disclose that amount. And that ought to be relatively consistent, I think, between 2021 and 2022. And then there's the amount of CapEx both leasing and building CapEx. In 2021, we probably had leasing CapEx that was a little bit lower than what it otherwise would be. And some of that there tends to be a lag. So I think we reported $79 million of leasing CapEx that we spent during 2021. And we committed $91 million of CapEx during the year. I would say the amount of commitments in terms of that leasing CapEx is probably a better gauge of what we are likely to spend on a go-forward basis. So that means that maybe there's a little bit more leasing CapEx that we would incur. I'd say on a normalized basis, but it is hard to tell kind of year-to-year. But regardless of that, as Ted mentioned, our cash flow is up over 30% over the past few years. So even with a $10 million or $12 million increase in leasing CapEx, it still means that cash flow would be very healthy. And I think, because of that strong cash flow, that was part of the reason why we increase the dividend a couple of quarters ago by over 4%.

The next question comes from Jamie Feldman, Bank of America. Please go ahead.

Great. Thanks and good morning. Just a quick follow-up on the last question. So you talked about the $91 million committed in 2021? I mean, do you think there's a catch-up also, that you'll have to spend in 2022 that would take it above the $91 million?

Yes, that's a good question, Jamie. It is hard to I mean, that's hard to. I would say that that's -- it's hard to predict. I don't -- I wouldn't say that it's particularly likely, it certainly could happen. I mean, there's always a little bit of a backlog of leases that are committed to and then the spend comes later. I think we feel like the backlog is pretty stable. So I think from this point, if we continue to commit leasing capital that is in that range of call it $20 million or so a quarter then I think that number will be pretty stable. But it is hard to kind of predict on a quarter-to-quarter or year-to-year basis. But I wouldn't think there's any major drivers that are going to cause it to be substantially higher than the commitment levels.

Okay, thank you. And then I know you gave core guidance, but then you also talked about potential dispositions potential acquisitions. If you hit those ranges, how should we think about what that could do to the earnings? And then I know you would, during the call, you guys talked about how your guidance has gone up from kind of initial guidance over the years. What are the upside and downside drivers to guidance here?

Yes, I'll take that, and then maybe Ted or Brian will add in. So I think in terms of the acquisitions, so we put the range in there for the $150 million to $200 million of the first half 2022 dispositions that we project. And then the remaining acquisitions or dispositions, we didn't put that effect into guidance. We put the $0.04 to $0.08 range in for the first half disposition. So if we were at $200 million of dispositions, and they happen earlier in the first half of the year, then obviously that's going to be probably be closer to the $0.08 of dilution, if we are at $150 million of those dispositions, and their call it towards the latter part of the second quarter we will probably be more in the $0.04 range. On the remainder, I think that's just hard to tell, right. I mean, that's just -- it depends on the cap rates that we sell, it depends on what we would buy, it depends on timing, all that kind of stuff. So I don't know, Ted, you might want to provide color in terms of what we're looking at.

Look as Brendan mentioned, we left a placeholder of $0 million to $200 million, both on additional dispositions on top of the remaining $150 million to $200 million and then $0 million to $200 million on acquisitions as well. So it's just a matter of what hits really, I mean, we're looking at the acquisitions that are in the market. We're underwriting several things right now. But who knows, we're going to be successful or not. So I would think, if we get -- if we're successful on acquisition, we'll match that with a disposition or whatever. So a timing and if we're successful, it's just hard to tell at this point.

Okay, thank you. And then, Brian had mentioned a pretty competitive acquisition market. Can you maybe talk about asset values in your markets and cap rates and maybe some movement to just kind of how they move, just to give us a better sense of what the investment market looks like?

Sure. Anything, high quality asset with long weighted average lease term, high credit, and certainly the new buildings, the cap rates are pre or below pandemic levels for sub in that in that five range. We said, we've had several trades in our markets in the 4s as well for some single tenant buildings. So incredibly competitive both from domestic capital sources and international capital as well in our markets. So anything of high quality is going to be changed very hard. On the value add side, I think the pool is not quite as deep. But it's still there. It's still deep enough to make a market. I think we've seen that on our own dispositions, as well as value add transactions are worth chasing in the market. I do think buyers are becoming more comfortable with the underlying fundamentals in market. So they're able to underwrite vacancy, maybe a little bit more aggressive. So it's just competitive all the way around out there right now, Jamie.

Okay, thanks. And then last for me. Can you just talk about your thoughts on retention? I know you said that occupancy is going to be dipping early in the year and then recover. How are you thinking about the expiration schedule and retention ratio?

Sure. I can start and either Brian or Brendan can jump in. I think from our expiration schedule. I do think our retention might be a little bit lower this year than historically. But the nice thing is, we don't have a lot of large expirations this year. I think I've talked about on prior calls really nothing above 100,000 square feet expiring this year. Our largest is 62,000 feet in December then we've got 50,000 square feet in May and both are known vacates. But we've got a strong prospect to backfill both of those with not a lot of downtime. Then after that, it's a 44,000 square foot expiration in Pittsburgh, that we know the vacate that don't have strong prospects at this point. So in general, just lower expiration schedule, I think our retention ratio is a little bit lower, but to not weigh off historical levels.

And Jamie, the only thing I would just add to that is, I mean normally, we typically have a seasonal dip with respect to occupancy in the first quarter just because we have a lot of leases that expire at the end of the year and invariably some of those are not going to renew. So we have a normal seasonal dip of typically 40 to 50 basis points in the first quarter or first half of the year, and then tend to build back up in the back half of the year, that is going to work. Our 2022 plan is consistent with that seasonal pattern or normal pattern. And we do expect occupancy by the end of 2022 to be a little bit higher than where we ended 2021. So we think all those trends are positive for us in terms of what's happening from a leasing perspective throughout the portfolio.

Jamie, Brian here. Just to follow-on to both what Ted and Brendan just said we're highly focused and inarguably aggressive on retention looking into the future. So you may have noticed in the past quarters, term was a little shorter, we're actually talking to a number of customers that are renewing years in advance now it's only maybe a three year extension, so we're getting them, thinking out of them in 2023/20'24, and they're pushing out three or four years. And so that is falling down that term, but we're being direct with them, a lot of them are excited about coming back into the space and want to reposition their space, want to upgrade their space as they bring people back and they're seeing the space is an opportunity to recruit folks and return them. So that's also another kind of nuance that's coming out of some of our focus on renewals.

That's a good point. So did that show-up in your 4Q leasing volume?

It does, it primarily on that shorter term that you're seeing is being driven partly by that. It's not a -- it was about 20% or so of that kind of approach. But it's something we're going to continue to do. We found some good success with it. And we're going to continue to maintain those conversations with our customers going forward. We're not going to apologize for kind of extending someone out years ahead and keeping them in the space. It's kind of a bad joke among the leasing team. When I have had the leasing calls I say to them, I feel much more confident about renewing someone who's in the portfolio than it's not. So we're taking that approach.

Okay. And the Pittsburgh move out, when does that hit?

That is in September this year.

Thank you. The next question comes from Rob Stevenson of Janney. Please go ahead.

Good morning, guys. Can you talk to where parking revenues were in fourth quarter of 2021 versus 2019 and then also, how much additional expenses are there as that ramps back up, in other words for each million dollars of incremental parking revenues that come in the door, how much incremental expenses do you have associated with that?

Hey, Rob, it's Brendan. So yes, I would say parking revenues, we're kind of running probably about a million a quarter below where we thought we would be at the onset of the pandemic on a same property basis. So it's certainly gotten better. We've improved from the depths of 2020 but not all the way back there. So there's probably another $4 million or so to go and I think the vast majority of that revenue line is going to fall to the NOI line. So there's not a lot of incremental costs associated with additional revenue.

Okay. So you're basically down about $0.04 a share, given your shares outstanding in rough numbers in terms of parking revenue, still on an annual basis?

Yes, that's right.

Okay. And then how significant is the amount of your space that existing tenants are currently look to sublease at this point?

Hey, Rob, Brian. I got my finger stuck on that -- the mute button. Couple of things, just from a broad perspective, sublet space is down across our markets, there is one single user in Tampa kind of a university, medical university that has gone remote in the near-term. And so that is kind of made the biggest move on our numbers, but it's still trending down. So I would say, we're down probably across our total marks about 4%. And then within Highwoods, it's just slightly ticked up. So in terms of percent, Brendan, what -- sure kind of your number on that one, it's still a very small amount within the portfolio, and holding steady, and we're seeing good movements. You're seeing Atlanta going down; you're seeing most of them across the board. Again, Tampa was the one spot where we had to go up.

Okay. So it's -- you wouldn't say that it's an overhang on your leasing existing vacancy at this point.

No, we're not.

You would be competitive with tenants trying to sublease space at a lower -- possibly at lower rate than what you're offering?

No, we're not.

Yes, Rob. I mean it's in the -- I mean we're -- we will call it probably 5%, maybe a little bit less in terms of just kind of overall space that would be available for sublet. So it's a very small portion of the portfolio.

And Rob, let me just jump in. A lot of the subleased space has pretty short-term on it. So it's just not necessarily competitive. With a lot of our leave or vacant space, it's just hard for owners once you get below two years to sublease their space. So we do have some that's have some longer-term on it, but would be competitive. And we've lost a couple deals over the last couple of years, probably less than a handful. But most of the sublease space just isn't competitive or vacant space.

The last thing on that is typically you might have to write a check as kind of the lessor for sublease in a deal. And so a lot of the folks who were putting space on the market don't want to necessarily write a check to move someone in there either. So that's kind of one of the things we're seeing in the sublet market.

Okay. And then, how much of the $150 million to $200 million of first half dispositions, you guys already either have under contract or letter of intent at this point? I mean, what's the likelihood that that is sort of more first quarter weighted than second quarter weighted in terms of the $0.04 to $0.08 of dilution?

Yes. So we don't have any of it under contract, yes, we do have some out in the market. And we're talking with potential buyers on some of it. But there is -- none of it is under contract, but we do feel comfortable, we're going to hit that $150 million to $200 million by mid-year. And we'll have probably just about everything out in the market in the next few weeks of what we plan to sell, so still feel comfortable, we'll get a bit likely going to be towards the back half of the second quarter.

Okay,

And just remember, Rob, we thought what we said for 2021 was $250 million to $300 million of dispositions that we expected there, we ended up doing $353 million. So we were at the mid-point $75 million, $80 million ahead of our 2021 plan. So the 2022 plan was probably to have a fair portion of that $75 million to $80 million kind of occur in the middle or the early part of the first quarter, we accelerated that into 2021. And so the 2022 stuff is naturally just going to hit a little bit later in the first half of the year.

Okay. And then one quick one, are there any incremental mark retirement costs in 2022, was that all taken in 2021?

No, zero.

Thank you. The next question is from Emmanuel Korchman of Citi. Please go ahead.

Hey, good morning, everyone. Brian, maybe just a follow-up to your earlier comment, just as we think about the differentiation of quality and the different demands from tenants for that difference in quality. How does that get defined in your markets? Is it location, is it age of asset, is it amenity, I assume you'll say all of that. So help us figure out like as we think about quality, how your tenants think about it. And second to that, what happens to the non-prime product in these markets? Is it just more capitals pumped in to make it prime product? Or is a conversion of use to more likely happen?

Great, great question and thanks for asking. First, I think from a quality standpoint right now it's convenience and amenity right. And so I do believe what we've heard in talking to customers is that they do -- they want to get back in the office. Now they're all coming back at different times and depending how big they are, multi-city or multinational. They're a little more conservative because when they move, there's a ripple effect across there, but the small or medium size are back in. Those that believe in space they all see it as a competitive advantage to bringing the talent in. So as I mentioned on in my remarks, we absolutely believe it's both urban and suburban. And so, you are seeing our suburban offices, as Ted noted their follow then the high rises in central business districts just because there's so much more convenient, there have access to fresh light and park space and things like that. So it is a little bit of all of the above. I hate to say that, obviously, the buildings, they tell a story of health and wellness, LEED certifications, as well as what we're doing on the new development. Food and beverage is a big driver, making sure that's convenient. And access to the outdoors is something that we're also focused on. Then the last thing I'll add to the quality component is having a bit of flexibility built into either a building or a park or kind of adjacent from a portfolio standpoint. And so, we've talked about our spec suite program before. We've talked about kind of co-working before. We do see users coming back and wanting to be able to flex in and out of their space primarily for larger gatherings, town halls, things like that. And so we're seeing more requests for that as we bring people back. Ted, did I leave anything out on that, Manny.

Yes. The only thing I would add is I think we're also seeing a migration to quality owners, long-term owners who are willing to reinvest in their assets. And they're not necessarily the quality is not necessarily the newest and shiny of assets, either it's buildings are in great locations. And I think we're the flight to quality is really playing out we're seeing in our portfolio. Manny, I think, last quarter, I mentioned it on summarizing my prepared remarks. Last quarter we signed up -- for last year 2021, we signed a 194 new leases highest we've done since 2006. Then you add that -- add to that we find 18 in our development portfolio or development projects, 18 leases, as well and so 212 new customers to Highwoods that want to come into our portfolio. So I think we're benefiting from a flight to quality.

And then I'll remind you on the second part of the question is what happens to the non-quality assets? Whether it be the ones that are get vacated, or the ones that have been vacant?

Yes, look, I think it's going to be a conversion. In some cases, I think you've probably seen there's been a few big buildings that have sold and being converted to, they're going to be converted to industrial. I think you're going to see some multi-family conversions, maybe some hotel conversions over time as well. So I think it all depends on where the lower quality product is located and what the highest and best use is going forward.

One last little thing Manny on that is you're also seeing kind of a densification, in addition of mix of uses around some of these assets. So in many cases, they're well located, but might have either age or kind of the mouse trap is a little different than what you might build more recently. And so we're seeing surface parking lot converted into structured parking with multi-family. You're seeing retail added and that seems to be the kind of doubling down on place. And location, location -- location is still a pretty strong amenity.

Thank you. The next question comes from Dave Rodgers of Baird. Please go ahead.

Good morning, everybody. Ted and Brian, I think early on in the prepared comments, you said 40% utilization driven by smaller and suburban tenants. I was curious, two questions, one on the vacancy leasing. Is that also being driven by CBD or suburban? Is there a clear distinction kind of between where the new leasing is happening or is it following really the utilization? And I guess the second question is on RFP and tour activity that you mentioned is up. How does that compare to pre-pandemic levels, Brian?

Great -- great question. First on the urban suburban now, as there's a little bit of a footnote on my answers that a good deal of the leasing activity has been suburban actually greatly. So but that's also where we have the ability to do that leasing. So a lot of our -- the urban was had higher occupancy, too. So you have that kind of corporate occupancy in the urban locations that was a bit of a ballast, if you will, and we were able to do a good deal of suburban. So that's, I think that's part of it. Ted you want to kind of staple on to that.

No, I think that's it. I think we can only lease the space we are vacant. So it's been heavily suburban side in the past. We don't have as a company, a lot of large vacancies either. So it has been a lot of small -- small customers this past year, which obviously goes to the 194 a lot of those were smaller customers, but I think pretty much covers it.

All right, that's fair. And then the RFP and tour activity, maybe versus pre-pandemic levels on a like-for-like basis so how does that compare?

Sure, absolutely. Thanks for the reminder. I knew there was a second part to that. So cliché, let's all go back to the first week of March of 2020. It felt like the economy was hitting on all cylinders. And things were going well. So I think we had a good amount then. But at the same time, I feel like it sure feels like right now, the RFP in tours equal that let me tell you why. Because I think a lot of customers are now viewing their workplace and it has to be a tool, and it has to be part of their competitive advantage, to not only retain and recruit talent, but to return that talent. So they've made a decision that we have got to upgrade our workplace story and our workplace, from an asset standpoint. And so we're getting inbounds for folks that would probably lean in before they might have just wanted to be a tenant in someone else's building, they're leaning in to create a workplace. And what's interesting is that to build a new building today with escalations, inflation, sometimes, podium parking, it is not inexpensive. And so what you're seeing is, customers issuing RFPs, engaging in a process, willing and down with clear visibility in the price near the rent premiums that are going to need to be paid to achieve this workplace. And I know I'm going to be kind of labeled as a broken record, but that is -- it's bearing fruit, and the whole kind of cliché of the 1990, right. Customers that don't build gigantic power plants and things like that. 1% of their annual revenue is on utilities, 9% on real estate, 90% on people and they're realizing how important the 9% can be to bring back their 90% and make them collaborative and to continue that culture. So we're seeing now. We don't have any to announce, or but we're seeing that that price to pay the premium for a great workplace is something that these companies are doing. So I'd say we're right on it right now it feels very similar. Now, are we getting exercised and what will happen by the end of year the time will tell? It'd be interesting to ask the same question at the end of the year and see which ones came to roost.

Thanks for that color, Brian. I really appreciate it. And then Ted, maybe just last for you on the disposition. It's been asked a couple times, but I guess I wanted to get better color. Are you moving forward with the dispositions regardless? Or is it the acquisitions and the development that'll drive the dispositions? I guess I heard it two different ways in the call and I just kind of curious on kind of what comes first in the order of magnitude for your investment strategy right now for the additional sales?

Yes. So obviously, we're definitely moving forward with the $150 million to $200 million. So that'll get done, just to finish up the vortex transaction to match fund that. The remaining, $0 million to $200 million, look, I think that'll likely be dependent on if we find investment opportunities, whether it be development or acquisitions.

Thank you. The next question comes from Ronald Kamdem of Morgan Stanley. Please go ahead.

Hey, just I want to follow-up on the expenses question, maybe asking a little bit of a different way, maybe a little bit more color on just what are the line items that are driving and is it like cleaning utilities, like things like that? And then is there -- is it sort of spread out across the portfolio or is there certain markets maybe that that have the LION's share of that would be helpful? Thanks.

Yes. Hey, Ron, good morning. So it's really I mean, I guess I would put it into let's just put it into maybe two main buckets, right. So there's taxes, which are, we're certainly seeing those increases across a number of our municipalities. So we're -- that's part of it. And then really, it's sort of just the building operating expenses, the day-to-day, right. And so most of the day-to-day stuff is increasing, because our customers are coming back to the buildings. And so it's just sort of getting back to normal operations. There is some, certainly inflation is higher now than it has been for a number of years. So there's a little bit of inflationary pressure that's on there. But the vast majority of the increase that we're absorbing that we expect to absorb and not get recovery on is really just getting those OpEx those building operations got back to normalize levels.

Thank you. Our final question comes from Daniel Ismail of Green Street. Please go ahead.

Great. Thank you. Ted, I think you stated previously that the net effect of rents across your markets are probably down around 5% to 10% from pre-COVID highs. I'm curious; your outlook for net effective rent growth is in 2022. Are you anticipating a recovery to pre-COVID levels? Or is that still a 2023 timeframe?

Sure, Danny, you're right. I think we've said, 5% to 10%, I think it's probably right at the maybe the lower end of that now, right. Mid-single-digits down. Look, I do think it's going to come back. But it's going to take time; it's going to be vary by market. The markets competitive still. Right, and that there's still pressure on TIs both from a competitive standpoint, but then it just costs more on top of that, and then free rent as well. So I think it's going to come back, maybe differently, or different cadence by market. Certainly, we're seeing already rent increases occurring in Nashville that does come with the corresponding increases in TIs. But I would hope we've hit the bottom and we're going to be starting our way back to get to pre-pandemic level. But look we're not there yet. And, and there's, see now, again, there's increased pressure on costs.

Great. And then can you remind us what international rent bumps are today in the portfolio? And then maybe, what are you guys negotiating for contractual bumps for today's leases?

Yes, Danny. So we're in the mid-twos, just kind of broadly across the portfolio. That's been very steady, I would say throughout the pandemic. So it's a -- it really didn't dip too much. And actually this quarter, we were higher than that, in terms of those leases, signs. I think we're at 2.7%. So a little bit higher than the average. So we've been successful, kind of increasing those annual bumps a little bit. But that has certainly been helpful in terms of those net effect is that we're able to keep capturing annual rent bumps across virtually all of our leases.

And then, Brendan, maybe, since I have you on. I appreciate all the details on the operating expense side, maybe just going back to the split between triple net and full service gross leases. Is there any interest in pivoting more towards triple net leases? Or is this hold into market conventions that you guys are responding through?

Yes, I mean it depends. I mean, I think we do often push for triple net leases, and do get those often. The one thing I'd like to just mention is full service leases have actually been beneficial to us over time, because over time, we have typically been able to control expenses and often reduce expenses. And those reduced expense levels accrue to our benefit. So it's only been we and I think we received a lot of benefit from lower operating expenses in 2020 and 2021, as OpEx was low and building utilization was low. And that helped offset a lot of the decline in parking revenue in both 2020 and 2021. Now, as expenses kind of come back up, then we are absorbing that increase. But keep in mind, we got the benefit. So we're really just getting back to kind of normal. So over time, full service leases have actually worked well for us, because we've enjoyed the benefit of our control on OpEx. And I think if you look at our same property growth over time, typically, we have had same property NOI growth, that has outpaced our same property revenue growth, because we've been able to control those expenses. So we often I mean, we will push for triple net leases where we feel like we can get them but full service leases for us typically are not problematic. And we are protected on increased expenses, as long as those expenses are above the base year expense.

That was our final question. I'll turn the call back over for any closing remarks.

I just want to thank everybody for being on the call with us this morning. And thank you for your interest in Highwoods. If you have any follow-up questions, please feel free to reach out. Thank you.

Thank you. This does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a good day.