Highwoods Properties, Inc. (HIW) Q2 2022 Earnings Report, Transcript and Summary

Good morning, and welcome to the Highwoods Properties Earnings Call. During the presentation, all participants will be in a listen-only mode. [Operator instructions] As a reminder, this conference is being recorded, Wednesday, July 27, 2022. I would now like to turn the conference over to Ms. Hannah True. Please go ahead, Ms. True.

Thank you, operator, and good morning everyone. Joining me 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 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. 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. We had another excellent quarter. Our financial results were strong. Our operations were healthy and our robust investment activities set the foundation for our continued long-term growth. This quarter's performance validates the strategy and execution we've deployed for many years to deliver steady financial growth and strengthening cash flows, while driving continuous portfolio improvement and setting the stage for future growth. As we've stated before, our simple and straightforward investment strategy is to generate attractive and sustainable returns over the long-term by developing, acquiring, and owning the portfolio of high-quality, differentiated office buildings in the BBDs of our markets. A key ingredient in this strategy is to select markets that consistently outpace national averages on population and employment growth and are affordable and business-friendly. North Carolina, which accounts for 35% of our NOI was recently ranked the No. 1 state for business by CNBC with Virginia, Texas, Tennessee, Georgia, and Florida, all in the Top 11. In other words, all of our core markets where we see the greatest opportunities over the long-term are ideally situated in the highest growth most business-friendly region of our country. Last week, we announced our entry into Dallas, which has long been at the top of our list for market expansion based on its strong demographic and economic trends. The Dallas metro area leads the nation in overall population growth and has been a premier destination for business relocations, particularly from the West Coast and the Northeast. In Dallas, we are principally focused on building out our presence over the long-run in three submarkets: Uptown Dallas, Frisco/Plano, and Preston Center. These are essentially the three BBDs that run the tollway spine from the downtown area up towards Frisco. We are excited to partner with Granite Properties, a prestigious, privately-held commercial real estate investment, development, and management company with deep roots in Dallas, to develop best-in-class assets in two of those BBDs. First is Granite Park Six, a 422,000 square foot office development in the Frisco/Plano BBD, that is 12% pre-leased and is located within the successful Granite Park mixed-use development, where Granite is headquartered and has developed and operates 1.8 million square feet of office that is 96% occupied. Granite Park Six has healthy leasing interest, with more than 3.5 years until projected stabilization. Second is 23Springs, a 642,000 square foot office and retail property located in the Uptown BBD that is 17% pre-leased. For those of you familiar with Dallas, 23Springs is across the street from the Crescent in the heart of Uptown. The development has a scheduled completion date in 1Q 2025 and estimated stabilization date in 1Q 2028. Given the iconic profile of the property, its location and excellent ingress and egress to and from Uptown, we’re confident about the project’s long-term outlook. These two development projects increase our total pipeline to $559 million, at our share, which is 32.7% pre-leased. Midtown West in Tampa and Virginia Springs II in Nashville, our two completed, not stabilized properties, comprise $95 million of investment and are a combined 93.6% leased. As you may recall, we started both of these projects completely spec in late 2019, and we are forecast to bring both properties to stabilization on time and on budget, with all of our lease-up occurring since the onset of the pandemic. The success of these projects illustrates our work-placemaking strategy: that the most talent-supportive workplace options in energized and amenitized BBDs will continue to be highly sought after by customers and their employees. We’re excited about our current development pipeline, which will help drive future growth, and the potential for meaningful additional development given our well-situated land bank. In total, our development land can support over 4 billion of future projects, including 2.2 billion of office spread out over nearly 5 million square feet in most of our BBDs. Given the volume of our investment activity in the quarter, it’s easy to forget it was just a little over two months ago when we announced a meaningful expansion in Charlotte. First, we agreed to buy 650 South Tryon, a 367,000 square foot office building located in Uptown, and connected to our BofA Tower. We’re scheduled to close on 650 later this quarter. We also acquired a mixed-use development parcel in the heart of Charlotte’s dynamic South End submarket that can support at least 300,000 square feet of office and 250 residential units. We sold $101 million of non-core properties in the quarter. This included $91 million of office and $10 million of land. With these sales, we delivered on our goal of returning our balance sheet metrics by mid-year 2022 to the same levels that existed prior to our 2021 acquisition of $683 million of office assets from PAC. The investment sales market has been uncertain over the past few months as interest rates have risen and capital has become more scarce. Fortunately, our balance sheet is in excellent shape and we have no need to raise external capital to help fund our acquisition of 650 South Tryon or our current development pipeline. We expect the investment sales market will remain choppy over the next few quarters. However, over the long run, operating with low leverage enables us to be opportunistic in seeking additional investments that improve the quality of our portfolio and increase our long-term growth rate. All the while staying true to our mantra of being disciplined allocators of our shareholders’ capital. We also announced our plan to fund our entry into Dallas by exiting Pittsburgh. Importantly, once completed, the stabilization of our new development projects in Dallas and our Pittsburgh market exit, coupled with anticipated G&A savings, is expected to be roughly leverage-neutral and accretive to our cash flows, while improving the quality of our portfolio and providing higher growth over time. Our two trophy assets in Pittsburgh, PPG Place and EQT Plaza, have consistently maintained among the best occupancies in our entire portfolio. We are grateful for the terrific work our teammates have done on the ground in Pittsburgh, most of whom will continue to lease and care for our assets wearing the jersey of a reputable third party service provider. As we stated in last week’s press release, we have no pre-set timetable to sell these properties. Turning to our results, during the second quarter, we delivered FFO of a $1 per share, 8% higher than the second quarter of 2021, while simultaneously restoring our balance sheet to pre-PAC acquisition metrics. Plus, as we’ve often said and can be seen clearly in our financial results, we continue to reap the benefits of strengthening cash flows. We’re proud of our track record of delivering what we believe is the right balance between enhancing our future growth outlook while at the same time delivering current results. Since the beginning of 2021, we have: announced the acquisition of $1 billion of high-quality office assets in the high-growth markets of Raleigh and Charlotte; we further bolstered our future development prospects by acquiring land in Atlanta, Nashville and Charlotte that can support an additional 800,000 square feet of office and 2 million square feet of mixed-use development; we’ve entered Dallas, a high-growth market with significant future upside opportunities, and announced our plan to exit Pittsburgh; we’ve sold $494 million of non-core buildings and land; we’ve delivered 5% core FFO growth in 2021 and 8% growth year-to-date in 2022; we’ve generated significant growth in free cash flow; and all the while maintained a fortress balance sheet and setting the foundation for future growth. We believe this track record is what sets us apart, the consistent delivery of compounded growth in earnings, cash flow, dividends and NAV per share. Most importantly, with our geographic footprint, BBD selection, portfolio quality, development pipeline, land bank, and fortress balance sheet, we firmly believe our best days are ahead. Brian?

Thanks Ted and good morning all. For the second quarter, our people and portfolio have once again delivered excellent results. While there is yet to be consensus around what the future of work actually looks like, there does seem to be a general consensus among our customers that their best and brightest are indeed better together and that they are increasingly counting on the workplaces we provide to be the compelling and competitive currency for retaining, recruiting and returning the talent they need to win on whatever playing field they are on. To that end, our team signed 117 second generation deals in the second quarter for a total of 683,000 square feet, which included 243,000 square feet of new deals and expansions outnumbered contractions two to one. We signed 49 new deals in the quarter, exceeding our historical average, and are off to a good start this quarter with more than 350,000 square feet of second generation leases signed in July, including 130,000 square feet of new deals. In the second quarter, we achieved GAAP rent growth of 12.6% and net effective rents of $16.98 per foot, 10% higher than our prior five-quarter average and the highest since the third quarter of 2020. As we have long stated, we pay closest attention to net effective rents when assessing our leasing economics. Turning to our markets, where in-migration continues across the Sunbelt and unemployment rates are lower than the national average. Utilization continues to increase with Tuesday-through-Thursdays generating the greatest physical occupancy, with multiple BBDs and assets at or approaching pre-pandemic levels. Most of the second quarter’s activity occurred among smaller users and predominantly in our suburban BBDs. Raleigh ended the quarter at 91.9% occupied and achieved the greatest leasing volume with 199,000 square feet signed. Raleigh market rents have increased 6% year-over-year and the market posted positive net absorption for the third consecutive quarter. In Charlotte, where we ended the quarter 94% occupied, we signed 33,000 square feet, including 22,000 square feet of new deals at our Bank of America Tower and are seeing good leasing momentum at 650 South Tryon, which we expect to close on later this summer. This quarter in Nashville, our team signed 95,000 square feet, including 17 new deals, occupancy held steady at 95% and our Virginia Springs II development is now 100% leased. Nashville market rents are up 6% year-over-year and employment growth exceeds the national average at 5.5%. As Ted mentioned earlier, our development pipeline is strong. Our two completed, not-yet-stabilized properties are a combined 93.6% leased, with 27,000 square feet signed at our Midtown West development in Tampa since last quarter and the last 11,000 square feet of remaining availability at Virginia Springs II in Nashville was signed as well. Our team’s track record of success in delivering on-time and on-budget gives us confidence looking ahead at both our current development pipeline and the opportunities before us, including the over $4 billion of future potential development supported by our current land bank. I’d like to close with an additional outlook on near and long-term growth. Since our last call in April, we’ve announced the pending acquisition of 650 South Tryon, a 367,000 square foot multi-customer office tower of the highest quality at the pin corner of where Charlotte’s Uptown and South End BBDs meet. 650 joins our 841,000 square foot Bank of America Tower as the second Highwoods asset amid the dynamic Legacy Union mixed-use development. Legacy Union’s location represents the redefined “main-and-main” address in Uptown with unparalleled access to the interstate and Charlotte’s light rail system amid a mixed-use district served by a Whole Foods, a new JW Marriott hotel and a variety of restaurants. Also in the second quarter, and a half-mile to the south in the heart of Charlotte’s South End business district, we closed on a land parcel off-market that provides a tremendous opportunity for office and mixed-use development, and where we’ve already received a healthy dose of inbound interest from retail, residential and hotel developers looking to be part of our plans there. With this development site, along with the 2 million square feet of best-in-class office space our Charlotte portfolio represents, in just three years we’ve established a formidable presence in the Queen City with growth opportunities in all three of the BBDs we targeted when we entered the market in 2019. Growth into Dallas via JV development is a very effective and efficient way to enter this high-growth market in two of the three BBDs we’ve long had our eye on. Our partnership with Granite Properties at Granite Park Six and 23Springs provides a bedrock foundation from which to build and gives Highwoods visibility into a long-term and productive presence in [Big D] [ph]. The Dallas economy is home to the second most Fortune 500 headquarters in the United States and leads the nation in three-year job growth. We believe Dallas’ robust and diversified economy, coupled with best-in-class BBD positions in Uptown and Frisco/Plano provides fertile ground from which to grow. This is consistent with our long-term and simple strategy of owning the best workplaces in the best business districts of markets that are outperforming the nation on a variety of factors. Our urban and suburban BBD focus, portfolio quality and robust development pipeline serve as a strong foundation from which we will continue to deliver for our customers and shareholders in the years ahead. Brendan?

Thanks Brian and good morning everyone. In the second quarter, we reported net income of $50.5 million, or $0.48 per share, and FFO of $108.1 million, or $1 per share. The quarter included a land sale gain of $0.02 and losses of $0.02 related to a single customer’s lost rental revenues and non-cash credit losses of straight-line rents receivable. Neither of these items were included in our prior FFO outlook and essentially offset one another. Adjusting for the quarter-to-quarter fluctuations in land sale gains, term fees, credit reserves and seasonal G&A changes, core operations in the second quarter were similar to the first quarter. The main difference was modestly lower operating margins in 2Q, which we forecast when we provided our original outlook in February. Our strong start to the year and upbeat outlook for the second half of the year give us confidence to increase our FFO outlook again this quarter. Our updated range is $3.92 to $4.00 per share, up $0.06 at the mid-point, which is on top of the $0.06 increase at the mid-point we provided last quarter. In total, we’ve increased the mid-point of our FFO outlook more than 3% since we introduced our 2022 outlook in February. As you may have seen in our press release last night, other than including the expected impact of acquiring 650 South Tryon, which we expect to close later this quarter, we’ve returned to our customary practice of excluding the impact of any potential acquisitions or dispositions from our FFO outlook. Besides the updated investment items, which provide you some context of what we could announce for the remainder of the year, there were minimal changes to the other line items in our 2022 outlook. Now, to our balance sheet. Our leverage remains relatively low and we have limited debt maturities, which creates optionality with our financing plans. During the quarter, we recast the company’s $200 million unsecured bank term loan by extending the maturity date from November 2022 to May 2026, and lowering the borrowing rate approximately 15 basis points. We also obtained a $150 million delayed-draw unsecured bank term loan, which must be drawn by August 2022, and is scheduled to mature in May 2027. Our only debt maturity prior to 2026 is a $250 million unsecured bond that matures in January 2023 that we can repay without penalty in October of this year. We plan to satisfy this maturity with a combination of proceeds from the delayed-draw term loan, borrowings on our revolving credit facility, retained cash flow, and non-core dispositions. We have approximately $600 million left to spend to complete the acquisition of 650 South Tryon and finish our share of the current development pipeline. We have ample existing liquidity, including 60% loan-to-cost construction loans for our Dallas joint venture developments, to satisfy these long-term obligations and repay the $250 million bond due in January 2023. We believe we can fund these growth opportunities without the pre-requisite of selling any assets or raising equity, and still maintain a net debt-to-EBITDAre ratio under 6x. As Ted mentioned, we’ve returned our metrics to pre-PAC acquisition levels by mid-2022, which satisfies the timeline we set a year ago, with our debt-to-EBITDAre ratio of 5.2x at June 30. We sold $463 million of non-core assets following our announcement to acquire the portfolio of high growth office assets from PAC, slightly below our original forecast of $500 million to $600 million. However, we were still able to achieve our balance sheet target by growing EBITDA more than our original expectations, increasing retained cash flow and raising a modest amount of equity through our ATM program, albeit none in the second quarter. To provide context, since we announced our planned acquisition from PAC, we’ve completed net investments of over $350 million, grew year-over-year FFO 8%, increased our annual dividend 4% and retained over $80 million of operating cash flow in excess of our dividend payments, all while returning our balance sheet to pre-PAC acquisition levels. As we’ve stated for several years, our cash flows continue to strengthen which, combined with solid organic EBITDA growth, gives us the platform to be a net investor on a leverage-neutral basis without the pre-requisite of issuing new equity. Importantly, we have replenished our balance sheet’s dry powder, which enabled us over the past two plus months to commit $530 million of future investments knowing that we can fund these commitments without significantly increasing leverage or jeopardizing our fortress balance sheet. Finally, I want touch on our announcement last week about our entry into Dallas and planned exit from Pittsburgh. As many of you know, we have completed two similar market rotations over the past three years. In 2019, when we announced our plan to enter Charlotte and exit Memphis and Greensboro, we stated Phase I of that plan would be FFO neutral, leverage neutral, and cash flow accretive. We completed that plan within our 12-month timeline, and in the first quarter following the completion of Phase I, our FFO was 7% higher than the prior year and our balance sheet was returned to pre-plan metrics. Similarly, we announced the planned acquisition of office assets from PAC last year with a corresponding plan to accelerate non-core dispositions. We also stated we expected this planned recycling to be FFO neutral, leverage neutral and cash flow accretive upon completion. As I stated earlier, we’ve returned our balance sheet to pre-announcement levels, our FFO is 8% higher than a year ago, and our cash flow has strengthened with more than $80 million of retained cash flow in the last four quarters. Our entry into Dallas, combined with our planned exit from Pittsburgh, has many of the same financial benefits as our prior capital recycling plans, namely leverage neutrality and cash flow accretion upon completion. Given the construction timetable for the Dallas developments, the primary difference this time is that we may not be able to match-up the timing of the dispositions with the commencement of NOI from our investments as seamlessly as we’ve done in the past. While this could create some choppiness in short-term earnings, over the long-term we are confident that our latest capital recycling plan will result in higher cash flows and an enhanced long-term growth rate without compromising our fortress balance sheet. Operator, we are now ready for questions.

Thank you. [Operator instructions] Our first question comes from Jamie Feldman with Bank of America. Please proceed.

Thank you. Good morning. I guess just can you provide more color on the straight-line write-off, the impairment – the tenant impairment in the quarter, maybe some context on that? And then also the credit watch list, do you think we're going to continue to see this as we kind of work our way through this downturn?

Sure, Jamie. Thanks for the question. Good morning. It's Brendan. I'll start and maybe, Ted or Brian will add some color. So, that was a customer that we had in Nashville that had some contracts canceled and therefore, business was down for them. So, we took the conservative tact where we wrote off their straight-line rent reserve and wrote off the AR that is there as well. I think the fortunate thing for us is they had sublet some of that space. So, we believe that we will be able to go direct with those subtenants. So, our exposure going forward is fairly modest, but that was the reason for that. And I would say, we don't see that as representative or indicative of additional credit issues within the portfolio. We – and this has been the case since the onset of the pandemic, we've collected [99-plus percent] [ph] of rents every month, and this was no different. I mean this was an impact for us, but certainly didn't impact that 99% number. We still collected those rents even without collecting this AR. And really, the majority of the charge in the second quarter was attributable to the straight-line rent write-off as opposed to the AR?

Thanks. Can you say what sector they're in? And so are they still in the portfolio or they’ve actually vacated?

We have taken them out of occupancy. They're in the healthcare sector. We have taken them out of occupancy. And that was part of the reason for lowering the high-end of the occupancy range for our year-end outlook. We did strip them out of occupancy and have not assumed a backfill of the direct space that they had. So, that's part of the reason for that occupancy change as well.

Okay, thank you. And then as you think about guidance, I know you said you don't include acquisitions or dispositions. I mean what's the likelihood here that you do more asset sales and numbers do come down by year-end?

Well, hi Jamie, it's Ted. Look, as you know, capital markets are pretty choppy today, not a lot of price discovery out there. So look, if capital markets were open and functioning efficiently, I think there would be some more dispositions, but just given where we are today, I think there's certainly some uncertainty out there. We've got a few transactions out in the market but mostly land. So, not necessarily income-producing buildings that would cause the dilution. So, I think at this point, just given where the capital markets are, the increased cost of debt, lower availability of debt just given the macro headwinds, I think we're pretty conservative on dispositions for the remainder of the year.

Yes. Jamie, the only thing that I would add to that is just given the timing of where they would be, right, I mean if any disposition proceeds that we would likely get would be late in the year and therefore, would – in terms of our FFO outlook would likely have a minimal impact.

Okay. And then finally, along those lines, I mean, any view on price discovery in your markets? Any change in cap rates or IRRs or price per foot that you can point to?

Sure. We're waiting from some more trades. There's been, I'd say, a handful of trades that have closed in June and July, but they're obviously priced before back in May and so forth. We've been the one pretty high-profile deal in Atlanta that traded that I don't think they hit their guidance, but they still had a really strong number, the mid-4 type cap rates. So, we're sort of waiting as everybody else here is to see what deals have priced in the last 45 days, which ones of those end up closing. Several are under contract. We've heard a couple have maybe fallen out of contract, but – so we're sort of waiting on that visibility as well.

What does the buyer pool look like?

More cash buyers. I think for transactions that they want to clear. Again, the debt markets are just really hard right now. So, if you can be an all-cash buyer like, obviously, we would be, there's maybe some opportunities out there for sellers that need to sell, whether they – if they just want to hit a market clearing price, there's potential opportunities out there. But I think it's a shallower buyer pool and more all-cash buyer pool.

Okay, great. Thank you.

Thanks Jamie.

Our next question comes from Rob Stevenson with Janney Montgomery Scott. Please proceed.

Good morning, guys. Brendan, beyond the 650 Tryon acquisition, any known items at this point materially impacting third or fourth quarter FFO per share positively or negatively at this point?

Yes, Rob, not – I mean, there's not a lot. I would say, I think the biggest – and really the – I would say the biggest movement in terms of what's likely to happen on quarterly progression of FFO. And again, I mean, we don't give quarterly guidance, but we do give enough ingredients to kind of give you some sense of how it's likely to progress in the third and fourth quarters. We do have the acquisition of 650 Tryon. We do – when we look at interest rates, right, we certainly use the forward curve to project what our interest expense is going to be. So, the forward curve is up from where it currently is now. So that can expect to see higher interest rates in our outlook, but as we've stated from the beginning of the year, I think probably what's likely to happen is you will see margins impact a little bit from higher expense. So, we did see that somewhat in the second quarter, and I mentioned that just briefly in the prepared remarks that was part of the movement from first quarter to second quarter. The third quarter typically for us, is our seasonally our lowest quarter from a margin perspective. So, we do forecast that that will be the case. And then typically, the fourth quarter from a margin perspective, looks very similar to the second quarter. So, those movements probably should, kind of get you to the mid-point of what we're thinking about in terms of our FFO range and you can kind of figure out how that progresses in the third and fourth quarter.

Okay. That's helpful because the upper end of guidance more or less assumes the $0.98 of core FFO that you guys did in the second quarter continue. So, I was just trying to figure out what pushes that down to get you more to a midpoint, but that's helpful. Thank you. And then, is [Tivity] [ph] still in discussions or is that a known move-out at this point?

Sure, Rob. It's definitely a known move-out. So, we've known that for a while, and hopefully, we've telegraphed that for a while. Now the good news is, we're in discussions for a backfill for a majority of that building. Those negotiations are ongoing, and we're encouraged, but obviously, nothing is done until it's signed, but we do have a strong prospect for a majority of that space.

All right. And then what is the timing for you guys on the South End development in Charlotte? Is it that multiple buildings where you could sell off and have somebody start the apartment without it being tied in the start of the office?

Hey Rob, it's Brian. I want to put one more thing on to Ted's point on the [Tivity] [ph] question is that we also have good visibility and connectivity to some of the subtenants that we're subleasing in that space and feel pretty good that we're going to be able to keep them in the portfolio as that whole building gets backfilled by a single user, and then we can move those folks out to another building we have close by. So, just want to staple that onto that one. Now, to your specific question on the South End side, it's a little more than 1.5 acre has frontage on three streets, which is, we think, really fantastic. So, there's a couple of ways to do it. It's going to have a single shared kind of parking facility. It's not fully designed yet, but we can build that as a podium and then the residential could go first, and then we could add the office on top later. There's strong interest from hotel as well to add a component. It starts to get a little more complicated. We do think as a lot of these mixes to elements go residential is ready to go, and we generally like some pre-leasing, someone commit to be part of that. So, we feel like we've got some good flexibility there. The other thing is, we've got some current occupancy in the – there's buildings on the site that have some term. So, we have the ability to collect that rent and go ahead and plan to get going in the next couple of years.

Okay. And then last one for me, Brendan, when does Pittsburgh move into the held-for-sale and discontinued ops buckets? And is there going to be an impairment and FFO impact items like severance and such, hitting the financials in the second half of 2022 or is that more likely a 2023 event?

Yes. Good question. So, with respect to disc ops, it won't go into disc ops just because it's not an individual segment. So that's not the way that we classify that. So, it would not be in disc ops. On a held for sale, that would be the case largely if it goes under contract. So, as Ted mentioned, I mean, we're – with no preset timetable on selling those two assets there. So, I think that just depends on when we would move that under contract. So, we will see that's a TBD at this point. And then don't expect any material impact with respect to severance charges or any impact from costs associated with closing the office there. Those will – you shouldn't see any major movements in our G&A line associated with that.

Okay. Thanks guys. Appreciate the time.

Our next question comes from Michael Griffin with Citi. Please proceed.

Thanks. I want to touch on the expansion into Dallas. Can you maybe give some color as to why this JV development structure, kind of makes sense, particularly given the elevated supply that you're seeing in that market?

Sure. Look, I think we're extremely excited about our entry into Dallas. I think – if you think about Dallas, it's very similar to Charlotte. We spent a fair amount of time, several years looking for the right entry point into Charlotte and was able to find that in 2019 and been able to grow that since we got in. So, Dallas, we see the same. We've been spending a lot of time in Dallas over the last few years, and certainly, the market participants have known we've been spending time there. So, just if you think about Dallas, one of the fastest-growing markets in the country, and I think the growth has only accelerated during COVID. So, we're thrilled to be able to get in the ground with an established prestigious development company. It's very like-minded. I would tell you the Highwoods or management team, we've known for a very long time. Granite is based in Dallas, headquartered there, and they're operating there for 30 years. Their headquarters is actually in a building adjacent to Granite Park Six. So, we thought this, the opportunity to get in on the development side where you can achieve far better returns than if we were to just go and buy it at the market type building with this group that's got proven experience in the best BBDs in Dallas. They've developed in uptown. They've developed obviously, seven buildings, even though this is called Granite Park Six, they've developed seven buildings in Granite Park, and have great success throughout cycles as well. So, they're cycle tested on their development into Dallas. So, we thought this is just a tremendous way for us to get in alignment of interest. This is in a [95:5 or a 90:10] [ph] JV. This is a 50/50 shoulder-to-shoulder JV. So, we don't think there's probably a better way we could have entered the Dallas market.

Thanks. And then maybe on the planned Pittsburgh exit. You talked to us pretty recently in the Investor Day – at the Investor Day positively about the market. I just wanted to think how long has this planned exit, kind of you've been thinking about it? And I mean, I guess, it makes sense in conjunction with the expansion into Dallas, but any color you can talk around kind of the timing of that would be helpful.

Yes. I mean, look, I mean, the Pittsburgh has been a good performer for us. If you look at the last several years, the occupancy of our Pittsburgh portfolio has been at or near the top of our markets, right? So, it's been a good market for us. I think when the Dallas opportunity came up just given where our stock prices trade, and we had to fund it similar to how we've had to fund Charlotte is through asset sales. So, we look through our portfolio. Pittsburgh just seemed like it was the right match for our entry into Dallas for us. We've got a great team up there. So, it's an incredibly difficult decision. We spent months cogitating over this and deciding what the best thing for the company is long-term, but when you match those up, look at the long-term growth rate that we think Dallas is going to provide it just – that's how we came to the decision.

Great. That’s it for me. Thanks for the time.

Thank you.

Our next question comes from Blaine Heck with Wells Fargo. Please proceed.

Great. Thanks. Good morning. Brendan, can you just comment on the major drivers behind the increase in FFO guidance this quarter? It seems like there were several moving parts. I guess would you characterize the increase as more driven by fundamentals or by asset and capital recycling?

Yes. Good morning, Blaine. Good question. So, yes, so we're up $0.06 at the midpoint. So, I'll just use the midpoint because it's probably easier to speak to that than the overall range. And as I mentioned earlier, we had $0.02 of land sale gains in the quarter, but then we also had a $0.02 loss related to the credit reserve. Neither of those were in our prior FFO outlook. So, those two have essentially offset one another. So, the remaining net $0.06 increase is at a high level, I would characterize it as about $0.02 a share associated with call it, net investment activity in terms of the acquisition of 650, a little bit less in terms of dispositions with the corresponding impact in terms of interest expense. All of that netted to about $0.02 positive for us. The other $0.04 is core higher NOI. Some of that is attributable to lower OpEx. Some of that is attributable to higher rents. Some of that is attributable to higher parking revenue. So, all three of those things are contributing. Now, I think probably one of your questions may be, well, how come that didn't translate into a higher same-property NOI growth outlook given that it's NOI growth. And there are a couple of reasons for that. So, one is probably about $0.02 to $0.03 of that $0.04 increase is on the non-same-store pool, mostly the assets from PAC, which are doing much better than what we had originally expected. There is $0.01 to $0.02 of impacted from the same-store pool. Now, some of that is net of the AR write-off associated with the credit reserve, which we do take in to same-store, but the $0.01 or $0.02 of higher just on the remaining same-store pool, we felt like it wasn't enough to increase the range. We do have a range of 0.5% to 2%, and that's not enough to move kind of the range around there. So, we decided to keep the range in-line.

All right. Great. Very helpful color there. And then probably for Brian or Ted, can you talk about leasing velocity and what you've seen, even in the last 30 days to 60 days. Obviously, there have been some negative headlines with respect to tech companies, many of whom were really major drivers of the leasing you guys saw in some of your markets during the pandemic. So, can you just talk about whether you're seeing any letup in demand from them and what the implications may be not only in your portfolio, but market-wide in some of your target markets?

Sure, Blaine. It's Ted. I'll start out and Brian will jump in, I think. Look, as we said, as Brian mentioned in the prepared remarks, we're off to a great start leasing in the third quarter. So, just so far in July, we still have a few days left. We signed 350,000 square feet of leases, including 133,000 square feet of new customers that will be coming into our portfolio. So, we've got a good activity. The pipeline behind that is good as well. Tour activity is still good across our markets, despite being in the middle of the summer when we typically see things slow down. And the demand, it's been pretty diverse. If you look in the second quarter numbers, most activity, most leases we signed were, in terms of new leasing was financial and business services, law firms, we did several law firm deals, insurance, and engineering firms as well. And then the other positive stat that we're seeing is our expansions, and Brian mentioned this as well, our expansions are exceeding our contractions two to one. So, we've got more companies expanding and contracting. And then I guess a third data point would be we started tracking new customers. They're coming into our portfolio from other places, but are they expanding when they come to us or are they contracting? They've taken more space or less space. And over half of them – over half of our new customers are taking more space. So, they're actually expanding coming to our portfolio via expansion as well. So, demand has been pretty good.

Great. Thank you guys.

Thank you, Blaine.

Our next question comes from Dave Rodgers with Baird. Please proceed.

Yeah. Good morning, everybody. Maybe Ted or Brendan, going back to Pittsburgh and the exit there, can you talk about kind of the hurdles that you'd like to get through maybe before exiting and some of the major issues around leasing or vacates or the net tax gains that you might have that you've got to think about in terms of kind of making that exit happen for you guys?

Sure, Dave. It's Ted. I'll start. Obviously, we have two assets. We have a little piece of land as well, but two operating assets. PPG itself is – it'd be ready to go, if not for the choppiness of the capital markets. So, we're going to wait for the right time. As we said, we're in no hurry to sell. Assets are operating well. They're well leased. Our team when we transfer the leasing to a third-party management company, it's the same team. So, we're going to benefit the same great people who have been working on the assets for us. So, the biggest hurdle there is really the capital markets returning in terms of PPG. EQT, as we all know, and we've telegraphed. They've got an upcoming expiration in; I think it's September of 2024. So, we've got to work through. The uncertainty there is, we don't know what they're going to do. They do have seven or eight floors, I think, on the sublease market. So, that's something we're working through as well. So, I think it's – we've just got to work through that and see what they're going to do and look at different opportunities that are out there, and we're chasing prospects. So, there is some work to do on that asset, but – so it's not quite as ready to go as PPG.

And, Dave, just to answer your question about taxes. I think we likely – if we could transact both of those within the same tax year, that probably would be the most advantageous for us because a likely gain would be offset by a likely tax loss on one asset versus the other. So that probably gives us the most kind of flexibility optionality. I think if that were not to occur and we had to deal with a sizable gain, we do have some tax strategies where we believe we'd be able to mitigate the significant impact of that, but I think if it did work out where we could sell them both within the same tax year, that would be ideal for us.

Got it. That's helpful. And then, Ted, maybe going back to Dallas. Are you under construction on both of those projects? Just looking at the completion and stabilization date there, fairly long-dated, particularly stabilization on those. So, do you need to see more leasing to come vertical out of the ground or are you fully committed to kind of that project – those two projects right now?

No, great question. No, we're fully committed. The construction loan is closed and Granite Park Six is well underway, and we're seeing very good leasing activity there. So, we're optimistic there. We'll see. Obviously doesn't complete for until the end of fourth quarter 2023. So, like you said, still a fair amount of time. And then on 23 Springs, we're demoing the existing buildings right now and that is going to be sub-training and parking. So, the construction period is a longer period, obviously, bigger building as well, but demos well underway there.

Dave, Brian here. Might pile on a little bit to Granite Park Six. We're actually minimally glad that it's under construction, but when it was brought out and got under a GMP contract was some time ago and gets the benefit, I think, of being insulated from some of the choppiness we've seen in the construction and pricing inflation markets as well.

Great. I appreciate that. That's helpful. And then Brian, maybe finishing up with you. It sounds like the pipeline overall is good. Can you talk about maybe regionally where that activity is. I know sometimes you give a little bit more regional color today, spend a little more time on kind of Dallas, which is great, but I guess as you look at the occupancy trend in Florida, let's say, versus Florida and Atlanta, both of which have been a little lower versus maybe the Carolinas. Can you kind of talk about where the regional movement has been in the portfolio and whether anything stands out as particularly strong or particularly weak for you on the leasing side?

Yes. No, great question. So, it's a little bit across the board, and I'm going to slice and dice your question in a couple of different ways. First, the suburbs, we're getting – I know it's not geographic per se yet, but tremendous activity towards and performance kind of suburbs in general, [indiscernible] specifically. But it's interesting, we come to Florida, our development in Midtown Tampa, right, that's filling up and it will be on schedule as underwritten prior to the pandemic. And so seeing that occur is something we are excited about. Tampa is sort of taking its place at the adult table in terms of in-bounds and growth. Orlando had 12 companies relocate into the city that created 1,300 new jobs. And so, we're seeing the tide rising in our portfolio in Orlando in a good way. It's not a big portfolio, but it's punching above its weight there. Nashville is obviously one of our bigger markets and one that has had negative absorption last quarter after positive the previous quarter that negative absorption was really two major subleases, kind of being announced, even though they're not being particularly marketed and that moved it right there. But rates are still growing there in Nashville, but our suburban activity there is going very well. And then Charlotte. You may know that one of the other [hats I wear] [ph] is the Charlotte [DVP] [ph] and the interest in our Uptown asset, Bank of America Tower and the interest we're seeing in the future assets 650 is really strong. But even out there at South Park, which is kind of the suburban Charlotte market we're having to kind of manufacture space. We're filling in a second floor kind of atrium lobby to create more GLA that's already leased. So, I think it's kind of across the board, Dave. No one's really kind of sticking out negatively or positively. In Raleigh, JLL claims that downtown is the hottest submarket in Raleigh, and so we're seeing downtown Raleigh looks very suburban probably to many of the folks from the Northeast and it's coming back too. So Ted, what did I leave out? Anything on that kind of color?

No, I think you got it covered. Thank you. Q – David Rodgers: Thanks everyone.

Our next question comes from Tayo Okusanya with Credit Suisse. Please proceed.

Yes. Good morning. I just want to talk about the entry into Dallas for a little bit. Again, you discussed the mismatch between selling assets in Pittsburgh versus, kind of funding development in Dallas, but curious whether in Dallas, there could be opportunities to just kind of make accretive acquisitions right away, which may kind of change kind of some of the leverage and earnings accretion math that you guys are probably thinking about today regarding that market rotation.

Sure. No, I think that's a good question. We are – obviously, in Charlotte, we went in with a buy first and then we're following up with development. This is just the opposite of that. We're sort of going on in development, but we are actively looking acquisitions. Obviously, it's a difficult environment there, but we are being a cash buyer for the assets we want. If there's sellers that want to transact, we are looking at some opportunities, whether we'll be successful or not, I don't know, but I do think the opening up the Dallas market to us, these three BBDs that we want to be in are going to provide growth opportunities for us, whether it's now or in the future over time.

Got you. And then just in regards to market rotation as well. Any other markets at this point that you guys may have your eye on that maybe over the next year or two, we could hear about another market rotation?

Nothing right now. I think we're very pleased with our platform, our footprint. We're going to be essentially 100% in the Sunbelt, where we've seen the higher growth and the migration that speeded up since COVID even. So, I think we're happy with our footprint right now, but again, part of our just normal business planning is spending time in other markets. And just like we did in Charlotte, now Dallas, there are other markets we spend time in. So, you never say never, but there's certainly nothing on the front burner right now.

Got you. Thank you.

Thank you.

We have a follow-up from Jamie Feldman with Bank of America. Please proceed.

Great. Thanks. I just wanted to follow up on the Tivity comment. What's your thoughts on how soon you can get a tenant in there and the mark-to-market?

Yes. So, I should have – I skipped that. I should have hit that when you asked it the first time, Jamie. Expect some downtime. So again, it's a majority of the building that expired at the end of February of 2023. So, I'd expect, whether it's six or seven months, maybe a downtime, Brendan can correct me if I'm wrong. And then what we're contemplating is it may be, sort of a leg in over some period of time as well. And then the mark-to-market, I think it's roughly flat.

Okay. Alright, thank you.

Thanks, Jamie.

Our next question comes from Daniel Ismail with Green Street. Please proceed.

Great. Thank you. Just a quick question for me. Curious your thoughts or updated thoughts on share buybacks at this time. Just curious, given your thoughts on the resiliency in the Sunbelt markets and high-quality office versus what we're seeing in the public share price today?

Sure, Danny. Look, it's – as you know, it's something we discuss with our Board. We'll be discussing as early as this afternoon when our boards meeting start, but it's certainly consideration, as you said, just given our stock is trading at a discount. And when we're allocating capital, we do look at all of our alternatives, whether it be development, buying back stock, [indiscernible] etcetera, but we also want to make sure we're doing what's right for the long-term. And we do think – obviously, we considered it with respect to our Dallas entry. And we just think with regard to Dallas, just a great long-term opportunity for the company. It's going to enhance our growth rate as we enter a fast-growing market. So, I don't think these things are mutually exclusive either. I think buyback would still be on the table, but it's going to be situational. We want to continue to protect our fortress balance sheet. We don't want to lever up to buy our stock, especially just given the uncertain economy these days. So, I think over the long-term, it's some we're going to continue to think about.

Great. Thanks guys.

Thank you, Danny.

There are no further questions at this time.

Well, thanks, everybody, for your interest in Highwoods and for being on the call today. We look forward to seeing you next quarter. Take care.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day everyone.