HIW - NYSE

Hello, everyone, and welcome to the Highwoods Properties Fourth Quarter 2023 Earnings Call. My name is Pruno, and I'll be operating your call today. [Operator Instructions]. I will now hand over to your host, Hannah True. Please go ahead.

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'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. These risks and uncertainties are discussed at link 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 turn the call over to Ted.

Thanks, Hannah, and good morning, everyone. Before I talk about our solid financial and operating results for 2023, let me start by first outlining our strategic priorities for the next several years. First, we will continue to improve the quality of our portfolio. We are laser focused on owning a portfolio that is resilient throughout all business cycles, well positioned to attract, retain and return our customers' most valuable resource, their employees, to their workplaces. We do this by developing best-in-class properties acquiring high-quality assets with attractive risk-adjusted returns, redeveloping and repositioning well-located properties where substantial upside exists and selling buildings that no longer meet our criteria. Second, we are focused on solidifying our rent role in driving future occupancy. This means proactively renewing customers as early and prudently as possible, and backfilling pockets of vacancy within the portfolio. We continue to be bullish on the long-term demographics of the Sunbelt. Simply put, we are in the best markets and best business districts to create long-term value for our shareholders. Third, we are laying the groundwork for future investment opportunities. We believe this cycle will present us with opportunities to create shareholder value by acquiring high-quality assets in the BBDs of high-growth markets. We will be patient and we will be ready. And fourth, we will continue to maintain a best-in-class balance sheet. As demonstrated over the past 90 days, having ample liquidity and access to multiple sources of capital throughout the cycle is an important differentiator for us. We made meaningful progress in all of these strategic priorities during 2023. We sold over $100 million of non-core properties, including land and made solid progress on our development pipeline with the completion of 2827 Peachtree, Granite Park Six and GlenLake III. We expect these developments will provide meaningful growth in future years as they stabilize. Further, we completed significant highwoodtizing projects on existing buildings in Nashville and Raleigh, where we're already generating higher rental rates and increased leasing activity. We also made progress solidifying our future rent roll. We remain focused on our larger near-term expirations, and Brian will provide more detail shortly, and we're pleased with the traction we've had in Atlanta, Nashville and Tampa. Given the known move-outs that we've discussed for some time, occupancy is likely to dip in late 2024 and early 2025. But we're encouraged by the activity we've seen throughout the portfolio, which has already translated into significant lease signings, since the start of 2024. It's early, and while we don't expect a lot of transaction activity in the near term, we are setting the stage for future investments through exploratory discussions with owners and lenders of attractive properties in our markets. This is similar to the playbook we deployed in the years following the GFC. We further strengthened our balance sheet by raising nearly $600 million of debt capital during 2023. Plus, just a few weeks ago, we extended the term of our $750 million credit facility into 2029, with no change to the size or the borrowing spread. We now have over $900 million of current liquidity and no consolidated debt maturities until May 2026. We are confident in the long-term outlook for our markets and BBDs, based on the limited new supply expected to be added over the next few years. The current supply pipeline in our markets since half of what it was just a few years ago, with most of these developments projected to deliver over the next four quarters. By this time next year, minimal new product is expected to be under construction. This tightening supply picture further adds to our confidence, as we focus on leasing up high-quality blocks that are or will become available in our buildings. Our well-located and high-quality portfolio, reputation as a best-in-class operator and strong financial sponsorship, positions us to continue to gain market share. Turning to our results. We delivered FFO of $0.99 per share in the fourth quarter, with full year 2023 to $3.83 per share. Both the quarter and full year results included unusual items that net out to $0.08 of higher FFO. Excluding these items, our core 2023 FFO was $3.75 per share, $0.01 above the midpoint of our initial outlook. We are pleased with these financial results, given asset sales and the unanticipated rise in interest rates during the year, neither of which were factored into our initial outlook. We expect to be a net seller again in 2024, with $75 million to $200 million of noncore dispositions. Similar to 2023, the volume and timing of dispositions will depend on how conditions in the investment sales market play out. We do have about $75 million of properties under contract and expect those sales to close in the first half of the year. While we're actively building the foundation for future investment opportunities, we don't have any acquisitions included in our 2024 outlook. Our initial 2024 FFO outlook is $3.46 to $3.64 per share and same-property cash NOI growth is projected to be positive 1% at the midpoint. In addition, we have backfilled a significant amount of larger known move-outs that impacted 2023 NOI and occupancy. And while these backfills won't meaningfully contribute to 2024, they will drive NOI in future years. We're also seeing good activity on backfilling some of the larger known move-outs later in 2024 and early 2025. While there is obviously continues to be headwinds in the office sector, we're optimistic about the future. First, we have significant organic growth potential within our current operating portfolio with high-quality pockets of vacancy where we're seeing solid interest from prospects. Second, for $518 million development pipeline will provide meaningful upside as the deliveries and stabilizes in the next few years. Third, our balance sheet is in excellent shape, with ample liquidity and no need to raise capital for the next couple of years. And finally, our cash flows remain strong, even as we absorb headwinds from higher interest rates, and investing Highwoodtizing capital to generate higher returns on our existing portfolio. To wrap up, we're not only optimistic because of our markets in our portfolio, but also because of our engaged, hard-working and talented teammates to drive our success day after day. I would like to thank the entire Highwoods team for their commitment and tireless dedication. It is their effort that has positioned us for success for many years to come. Brian?

Thanks, Ted, and good morning, everyone. I'd like to briefly hit our fourth quarter performance, macro trends and then drill down on our markets where we're off to a strong start for 2024 and where we are making progress towards backfilling our upcoming vacancies. In Q4 of 2023, our leasing team signed 698,000 square feet with an average lease term of 6.6 years. Atlanta, Nashville and Raleigh led the way with two-thirds of the quarter's volume. Charlotte and Orlando had the highest occupancies at 95.6% and 93.5%, respectively. In addition, we signed a 105,000 square foot first-generation lease at 2023 Springs, our JV development in Uptown Dallas. While many of our leasing metrics reflect the downward pressure of the current market, we're encouraged by our portfolio's occupancy out performance in comparison to our BBDs by over 640 basis points. And with the fourth quarter's average rent bumps at 2.7%, we believe we have meaningful rent growth embedded in the quarter's results. The quality of our portfolio, our sponsorship and the commute worthy lifestyle office experience we provide our customers gives us a clear edge in today's leasing environment. We're off to a strong start to 2024, having already signed over 500,000 square feet of second-generation leases, including 150,000 square feet of new leases and 52,000 square feet of expansions since January 1. We continue to see return to work programs and mandates, raise the tide on physical occupancy with the recognition that Fridays will be the latest days in the office, just as they were before the pandemic. This also goes with the fact that, our customers are telling us one-on-one, and via their lease activity. They value the physical workplace, by their best and brightest can collaborate and solve problems where talent can be onboarded and mentored, and where a company's culture can thrive. This flight to quality is a flight of quality. Quality companies with quality jobs, not easily exported to the couch today or to artificial intelligence tomorrow. From a market perspective, let's start in Atlanta, where we had the most leasing activity in the fourth quarter with 172,000 square feet signed. While the overall market saw another quarter of negative absorption Cushman and Wakefield noted, Buckhead broke from this trend of 240,000 square feet of positive absorption. With no new development underway, our four building 2 million square foot Buckhead collection of lifestyle office buildings being the beneficiaries of our upcoming Highwoodtizing project there. The team has backfilled 50,000 square feet and has more than 350,000 square feet of active prospects for the remainder of Novelis' Q3 2024 expiration. Staying in Atlanta, the Georgia Department of Revenue, as expected, will downsize, and we are successfully relocating them within the portfolio and 110,000 square feet at the beginning of 2025. To Music City, where we own 5.1 million square feet in Nashville’s four BBDs, our team signed 148,000 square feet in the quarter. Over the same period, Cushman noted that Nashville posted 170,000 square feet of positive absorption on a five markets in the nation to post greater than 150,000 square feet of absorption for the quarter. Last year, we Highwoodtized roughly 1 million square feet in our Brentwood and Franklin BBDs, where we signed more than half of Nashville's deals for the quarter and where these commute worthy workplaces are attracting customers. This supports our thesis that all things being equal and exceptional experience trumps a trophy tower, and that a lifestyle office building is more about the lifestyle than the building. You may recall that we shared an update last quarter on the five-storey 264,000 square foot Cool Springs five building, formerly occupied by Tivity and the substantial backfill of that space. We have modified the lease signed in the third quarter of 2022 from 223,000 square feet to 110,000 square feet. Under the modified terms of the lease, 55,000 square feet will commence in the fourth quarter of 2024 and the remaining 55,000 square feet in the fourth quarter of 2025. Free rent periods have been eliminated. Highwoods tenant improvement commitment has been reduced and the per square foot rental rate has been increased. With the aforementioned Highwoodtizing of these assets, we have significant interest in the property and our other adjacent Cool Springs assets. In Downtown Nashville, we will begin the Highwoodtizing of our 520,000 square foot Pinnacle tower later this year in anticipation of Bass, Berry & Sims known move-out in January of 2025. In the heart of Nashville, this well-located asset is next door to the newly opened Four Seasons Hotel & Residences and is directly connected to the only pedestrian bridge spanning the Cumberland River joining the new $2 billion enclosed NFL stadium starting construction later this year. We already have several multi-floor prospects a year in advance of Bass Berry's expiration. A quick update on our non-core Pittsburgh assets where we expect a 317,000 square foot customer at EQT Plaza to downsize in the fourth quarter of 2024. We backfilled the full floor and have prospects for additional space. I'd like to finish in the Sunshine state, where Cushman noted, Tampa ended 2023 number three in the nation for leasing as a percentage of inventory. Our Tampa team has been busy at Tampa Bay Park. Our approximately 1 million square foot collection of assets in Westshore by addressing prior move-outs, 120,000 square feet in aggregate across the park with 95,000 square feet of backfill leasing that has yet to commence. In conclusion, while we expect 2024 to bring many of the same challenges we faced over the past several years, we are encouraged by the level of activity we are seeing throughout our BBDs. Competitive development pipelines are at record lows, and we believe our resilient portfolio, ongoing [indiscernible] efforts, strong balance sheet, and sizable land bank will enable us to capitalize on opportunities in our markets as they arise. Brendan?

Thanks Brian. In the fourth quarter, we delivered net income of $38 million or $0.36 per share and FFO of $106.7 million or $0.99 per share. As Ted mentioned, there were unusual items in the quarter that netted to $0.08 per share. None of these items were included in our updated FFO outlook provided in October. Excluding these items, FFO per share was $0.91 in the fourth quarter and $3.75 for the year, $0.01 above our initial 2023 FFO outlook provided last February. We are pleased with these full year results as $0.04 of upside, mostly from higher NOI, overcame the $0.03 we lost from the combination of higher interest rates, asset sales, and the earlier-than-expected repayment of our preferred investment in M&O. Just a few details on the unusual items. The predevelopment costs written off in the fourth quarter were $3.6 million. $2.6 million of this shows up in G&A, while $1 million shows up in the form of reduced income from unconsolidated affiliates as it was attributable to a JV. The remaining unusual items land sale gains, debt extinguishment costs, and the write-off of straight-line rents due to moving a customer to cash basis accounting are reflected as you would expect on the income statement. During 2023, we further strengthened our balance sheet by putting out our maturity ladder, which puts us in excellent shape for the next several years. During the fourth quarter, we raised $350 million of 10-year bonds with strong support from a broad group of fixed income investors. We also obtained a $45 million five-year secured loan at Midtown West, a consolidated JV property in Tampa, where we own an 80% interest. We also obtained a $200 million secured loan in March. In total, we raised almost $600 million of debt capital during the year. After year-end, we recast our $750 million credit facility with no change to our borrowing capacity or credit spread. In the past 12 months, we've accessed the bond market, the mortgage market, and the bank market for over $1.3 billion of total capital. We now have no consolidated debt maturities until May 2026 and over $900 million of available liquidity and having less than $250 million of capital left to complete our development pipeline. Our strong balance sheet with ample liquidity, combined with our high-quality portfolio in the BBDs of high-growth Sunbelt markets, is a large reason why Moody's affirmed our Baa2 credit rating with a stable outlook just last week. I'd like to spend some time highlighting our cash flow trajectory. In 2023, we once again had healthy cash flows, demonstrating the resiliency of our portfolio and platform. Digging a little deeper and even clearer picture emerges. First, as you know from prior calls, we had two sizable properties in 2023 that were vacant nearly the entire year. Cool Springs V and 2,500 Century Center. These have now been substantially re-leased with additional solid interest in the balance of the space, but they generated negative NOI during 2023. Because our practice has long been not to take in-service properties available for lease out of our operating or same-store portfolio regardless of occupancy, these two empty buildings negatively impacted FFO and cash flow. Second, we had above average TI spend during 2023, as we funded committed capital on the high volume of new leases signed in 2022. Third, we invested heavily in renovation and repositioning capital to highwatize existing properties during the year. Even with these 3 factors, we still generated healthy cash flows that provided positive dividend coverage. We believe the resiliency of our cash flows should give our shareholders confidence in our long-term outlook. As Ted mentioned, our FFO outlook for 2024 is $3.46 to $3.64 per share. You'll also note that we are now providing our full year outlook for average occupancy rather than a single date year-end projection as we have done in prior years. We think average occupancy should provide better insight into our overall outlook for the year. Same-property cash NOI growth is projected to be flat to up 2%. This includes the full headwinds of the Cool Springs Century Center and Tampa Bay Park vacancies we've detailed, as the backfill customers do not begin to take occupancy until later this year or early 2025, as well as the known pending vacancies at two Alliance Center in Atlanta and EQT Plaza in Pittsburgh in the second half of the year. While 2024 share FFO is projected to be down compared to the core results in 2023, the decline is primarily attributable to higher financing costs associated with our capital raising activities in the fourth quarter of 2023 and the modification of the lease and accounting treatment related to our backfill customer at Cool Springs V in Nashville. These items have a combined dilutive impact of approximately $0.15 per share split roughly evenly between the two. We expect Cool Springs V will generate negative NOI in 2024. However, based on the modified lease we've discussed and the solid interest we're seeing from prospects, we believe Cool Springs V will be a significant driver of growth in future years. This is also the case in Tampa and Atlanta based on signed, but not yet commenced the leases. In addition, we have meaningful future growth potential from our development pipeline. We delivered three properties in late 2023, 28.27 Peachtree, Granite Park 6 and Glenlake Three. On a combined basis, these properties are projected to be roughly neutral to 2024 FFO, as we will stop capitalizing interest later this year. However, we have healthy prospect activity for these properties, which should provide growth to NOI, FFO and cash flow in future years. In summary, our balance sheet is in excellent shape, our high-quality Sunbelt portfolio is located in the BBDs where talent wants to be, and our team is cycle-tested and optimistic about future value creation. Operator, we are now ready for questions.

Thank you. [Operator Instructions] We do have our first question registered comes from Blaine Heck from Wells Fargo. Blaine, your line is now open.

Okay. Great. Good morning. So it sounds like leasing has picked up, but some context would be great. So I guess, can you talk about the overall leasing pipeline that you guys are working on right now? How the size of that pipeline or activity levels compared with what you saw last year? Maybe what the mix is between new and renewal leases and whether the composition has changed at all from a tenant size or industry perspective?

Good morning, Blaine. Sure, it's Ted. I'll start, and maybe Brian can add to it. Look, obviously, we are pleased with our leasing in the fourth quarter just shy of 700,000 feet. We did 100 deals, which is sort of right on par with our historical average. 44 of those were new leases. We also had seven new-to-market customers, primarily companies that were opened up small regional offices, 2,000 or 3,000 square feet. So no big inbound relocations. But look, it's been small. It's the same trend we've seen in the last few years. and smaller companies, but a couple of trends we're seeing. And the activity is pretty evenly divided among our markets. But couple of the trends we're seeing is there's really been a gap that's widening between the haves and have-nots for office owners. We're hearing from brokers that some companies want even to buildings, buildings that have debt and certainly near-term maturities, sort of a binary qualifier for some buildings. And I think the brokers, as I think, I've talked about on prior calls, they're doing a really good job this cycle of understanding the capital stack for office buildings. So I think just given the amount of debt maturities that are coming up, this really plays to our strength, and we're out talking to brokers. We've got a highly unencumbered portfolio. We don't have a lot of single asset secured loans. So we're taking advantage of the situation. And I think we're capturing -- we're trying to capture more than our fair share always, but I think we've been able to do that, in the last -- certainly, last couple of quarters. And as you know, as we stated in our prepared remarks, we're off to a great start this quarter. So another trend, look, we are seeing larger deals are starting to come back, while it's been the last year, so smaller deals, the 25 to 50, we're seeing a lot more of those. A trend -- another trend probably is the smaller companies are the ones that are growing and the larger companies are the ones that are shrinking. So we're starting to see more of that. We had, I think, 13 expansions, as I mentioned earlier. Companies are also willing to do longer terms. They don't want to come out of pocket for TI. So they'll give term to get additional TI. I guess the final trend, we always talk about the flight to quality. Certainly, that's real. It's quality buildings, quality amenities and certainly the quality ownership. So I hope that answered your question.

Yeah. That's very helpful color there, Ted. I appreciate that. So just switching gears for my second question. Can you just talk about your appetite for investment at this point? Are you guys actively pursuing any opportunities on the acquisition side? Or would you say you're currently more focused on the development lease-up and leasing in the operating portfolio, making sure some of the backfill activity gets done?

Yes. Look, I mean as you know, we're always -- we look at everything that's out there. We certainly we answer the phone when we get inbound calls from folks as well. We also stay close to lenders. So as we said, we're actively watching the market, trying to see where the data points are for trades, and I'll talk about one in a second. But -- so we're not -- there's nothing -- we have a lot on our radar on our wish list that we're just monitoring right now. I'd say early discussions, but there's nothing imminent without a doubt. But at the same time, look, we're laser focused on filling our backfills. As we all know, we've got several coming up late starting in the fourth quarter this year, leaking over in the first quarter next year. So our leasing teams are highly focused on that. Again, we like the inbound activity we're seeing on these backfills early. So sort of we're not just laser-focused on one we're sort of doing both. And I will talk about one trade that's happened as we look at the comps, and there's a couple of others we think are coming, but there was a high-quality building that traded here in Raleigh, just, I don't know, a month or two ago, it closed, is a high-quality asset. It actually sold for a higher price than what it did in 2018. It did have some seller -- better-than-market seller financing, but it's basically a 6.5% cap rate if you adjust for the better-than-market seller financing. Maybe it ticked up to just shy of a 7, something like that. But from our understanding is there's 100 CA signed double-digit bids. And so we're a pretty good market for that type of asset. And again, we're watching a few others.

Great. And just to follow up on that. I guess, in this interest rate environment and given where office fundamentals are today, I guess, what pricing metrics would get you guys about an opportunity. In other words, where is your targeted going in cap rate threshold or IRR threshold or even price per square foot threshold?

Yes. Look, obviously, discount replacement cost is one bar for us in this environment. Again, it's I mentioned the playbook we used coming out of GFC, we bought a lot of partially leased assets with a lot of upside. So cap rates pretty irrelevant for us. We look at a stabilized cap rate, and we would love to take some leasing risk if we can get the asset at the right price and then lease it up ourselves. And so obviously, we're looking at -- we think we're going to be able to get some acquisitions at a pretty attractive yields and what those are. I guess we'll have to see. But I think acquisitions are going to pencil better than development, I think, for the next couple of years. So again, we'll just have to see what the risk-adjusted return is.

Great. Thanks a lot, Ted.

Thank you.

Our next question comes from Michael Griffin from Citi. Michael, you may proceed with your question.

Great. Thanks. Maybe just sticking back on the leasing front. Are you noticing tenants, are they quicker to make decisions about leasing space? Are the time still elongated in making decisions? Any color around that would be helpful.

Yes, Michael, it's -- unfortunately, it's still elongated. It's been slow on the decision-making. I mean deals we thought might close one quarter getting pushed a quarter, sometimes two quarters. So decision-making is still taking time. I do think that we are seeing some of the larger users that have been kicking the can. They're now starting to make decisions. They understand what the return to work policies are of the companies. So while the decisions are going to be -- take longer to get done, they are going to make those decisions instead of delaying them for a year, year-and-half, whatever. So more deals are going to get done over time, but it's still taking more time.

Michael, I might add -- this is Brian. Just one little footnote what Ted said is that, and we're guilty of this. A lot of tenants or customers in the market have gotten engaged, maybe farther out from exploration than they might have in the past. So they actually have a little bit of free board to take longer while at the same time, when you look at the national portfolio or the portfolio in our submarkets, there's a natural role and that's coming due, and that forces decisions. And so we're starting to see that. I think there were some kind of kick the can one year, two year that definitely happened during the pandemic. But now as you start to get that cross lines of debt maturities and assets we're competing against and roll, you are starting to see some folks make -- you have to make decisions.

Thanks. That's helpful. This is Nick Joseph here with Michael. Just on the potential Pittsburgh asset sales. Can you provide an update on where those stand, how that plays into the capital plan for 2024 and then the timing around it, just given some of the lease expirations later this year?

Yeah, Michael, it's Ted. Look, on Pittsburgh, as you all know, we announced in the third quarter 2022 that our intention was to exit Pittsburgh. We didn't put a time line on it. And just as a reminder, we announced back in 2019 that we're going to get out of Memphis and Greensboro. It ultimately took us about three years to get out of those markets. So our intention is still to exit Pittsburgh, but just given a very difficult capital market environment for office and then you layer on a very big office transactions. It's just -- it's not an opportune time. So we are focused on leasing up the vacancies, the upcoming vacancies and just running the assets like we normally would.

And Nick, this is Brendan. Just in terms of the capital plan for the year, there really isn't anything that we don't need any of those proceeds. I mean, we have over $900 million of existing liquidity and we'll spend some money on the development pipeline. But even if we didn't sell anything during the year, I think from a sources and uses standpoint, we've got ample liquidity for several years.

Thank you very much.

Our next question comes from Rob Stevenson from Janney. Rob, your line is now open.

Good morning guys. Ted, given your comments about brokers not touring assets with debt issues, are these just turning into zombie buildings that can't fund TIs and no longer competitive. Is there something else that's going on there?

Well, I think some of those are -- it's exactly right. And you also got a -- anybody who's got a loan coming up with a secured loan, they're having discussions with their lender right now. So it's -- the lender wants to pay down, the borrower may not be willing to do a pay down. So you've just got those -- tension in the room, I think, between a lot of lenders and borrowers. So right now, yeah, who's going to fund the TIs of the lender going to do it if they haven't worked out an extension with the borrower. So I think they are difficult conversations that are going on with a lot of loans that are -- have near-term maturities.

And have you guys seen lenders taking good quality assets back in your core markets? Or is it just the lower-tier assets that we're seeing as the headlines and they're just kicking the can down the road on the better quality assets.

Yes. I think that's generally it. Lower quality typically is the prior cycles, lower quality is what goes back first. So we're starting to see it, but there have been a -- I'd say, maybe a handful of high-quality assets that have, in fact, gone back to lenders over the past 12 to 15 months. I think there's going to be some more. So it's just -- you just got to be patient. But coming out of the GFC, we didn’t [ph] buy-in high-quality assets until 2012 and 2013, GFC started 8 or 9. So it takes a few years just to cycle through the quality of the assets we want. So we've got several on our radar on our -- what we call our wish list. But again, it's just going to -- we have to be patient.

Okay. And then just to ask the leasing question in a different way. How rational are your markets today? Are you seeing other landlords overpaying for occupancy out there and driving cost up? Or are people remaining fairly reasonable at this point given market conditions and length of lease, et cetera?

Yes. Look, I think this environment, it's similar to what the office market experience is during any economic downturn, right? It becomes a tenant's market. So you got not knowing what each intention is, and what the situation is with each building landlord, there's -- landlords are getting very aggressive. Vacancy is increasing. You got to increased sublease space. Capital costs are increasing. So look, there's -- I would argue there's some irrational deals going on, but we're highly competitive as well. We're going to compete for all the leases, but it's just a -- it's a tenant's market and it's an environment that we saw, we see every 10 or 15 years.

Okay. And then, Brendan, just to follow-up on that, tenant improvements that you mentioned in your comments, up almost $20 million year-over-year, like 23%, like $94 million and change. Given the amount of rollover in leasing, that you guys are slated to do in 2024 and 2025. What are you guys budgeting there? Is it likely to remain elevated at these levels over the next year or two until you get the occupancy up?

Yes, Rob, that's a good question. We think it's probably more likely to kind of migrate down during 2024 at least that's what we kind of have baked into the outlook. So I expect a lot of 2023 was all of the leasing volume, particularly the new leasing volume that was done in 2022, a lot of those dollars got spent in 2023 [ph] was an above-average amount. I think 2024 is likely to look more like a normalized year. So our expectations are we'll see those numbers come down and will look more like probably prior years that you saw before prior to 2023 in terms of that spend. So might be in the kind of $15 million to $20 million reduction range would be our expectation. But again, that -- it's that is based on kind of the current business plan. I think it would be a nice result if leasing volume remains very high, the way that it has for the first month of the year here, and we spend a lot of capital. If that's the case, I think we'd be happy with that result. But I think our expectation and what's in the business plan now is it's going to look much more, spend is going to much look much more like it did prior to 2023, but we'll see kind of how that goes.

Okay. That's helpful. Thanks guys. Appreciate the time.

Our next question comes from Nick Thillman from Baird. Nick, your line is now open.

Hey, good morning, guys. Maybe starting with some comments from Ted or Brian on kind of the lease term dynamics you guys are -- you commented on earlier. Some of your West Coast peers mentioned that tenants are kind of seeking like shorter-term deals, but that doesn't really seem to be the case for like your guys' markets based on lease duration increased quarter-over-quarter for the last four to five quarters. I guess what's driving that? Is that just the type of tenants in your markets or the size of your tenants?

Hey Nick, it's Brian. I think it's probably just the conviction of the folks who are opting to make the workplace a priority. So, the return to work is -- return of the office has got team here in our markets. And I think folks have kicked the can and done the shorter term deals previously. So, that's where we're getting conviction and a little larger size. I don't know if it's anything other than that. I don't think it's some weird stat that popped out, but that's what we're seeing.

And maybe following up on that, Brian. Just on Orlando and specific. You didn't call it out in your commentary, but rate change there was over 22%. So, anything to call out in that specific market, what you're seeing, whether it be like tenant type or the type of deals you're doing that?

Well, I think what's interesting about Orlando, right, there's so many macro delays trends that are heading to Orlando in Central Florida and Florida. And so there's zero new development underway. There is zero new development that's been added as competitive. And so we have well-positioned assets. We've been able to invest in them kind of through this period. So, some of the earlier questions about

That's helpful. And then maybe last one for me. On the dispositions, maybe can we break out the difference between just land sales and regulated property sales? And then kind of -- are we going to assume more of these bite sizes deal similar to the one you did in Nashville in 4Q, like $25 million to $30 million transaction?

Sure. So, just let me summarize what we did for dispositions in 2023. We closed roughly $104 million of dispos that included both land and buildings. There was four buildings, totaling $83 million and then $21 million of land in two separate parcels, as sort of a mix between single customer buildings and multi-customer buildings and then the land. We've sold them throughout the year, the cap rates range really high 5s for a single customer long-term lease to low 9s for the multi-customer with sort of a low wall. So, most recently, it was Ramparts in the fourth quarter, it was 97% lease building, three and a half year Walt, and that was sort of low 9 cap rates. So, I think that mix is sort of what you'll see this year as well. It's going to be probably a mix of land and multi-tenant buildings may not have any single tenant. I need to think about that. But we do have about $79 million under contract and due diligence, and we think that will close somewhere in the first half of the year, and that's sort of multi-tenant -- similar to what we saw last year on the multi-tenant side. Smaller assets. Those are the ones that are easier to get done. Smaller is easier and larger harder. And so it's a very similar mix, probably what you'll see this year.

That's it for me. Thanks, guys.

Thank you.

Our next question comes from Camille Bonnel from Bank of America. Camille, your line is now open.

Hi, everyone. Good to see the progress on backfilling some of your larger expiries. Just given your strategic priorities of renewing tenants as early as possible, how are the early renewal discussions tracking in your leasing pipeline?

Hi, Camille. Brian here. They're tracking well. And one of the earlier questions, too, is why we're maybe seeing more term in our portfolio. We're also able to lean in on the TI. As Ted mentioned earlier, customers would trade that TI for term, and we have that ability being unencumbered by property level debt in most cases. So I think that's kind of helped. The other thing, too, is you have that kind of captured audience. So we have that relationship. We lease our own buildings. We operate our own buildings. We manage our own buildings, and so we have that -- those relationships with our customers. So it's a little more of a natural conversation to start thinking about how to upgrade their space to make it as competitive to recruit, retain and return their talent back to the office?

So are you seeing that activity start to pick up compared to a year ago? Because we've been hearing liking just continue to kick down the can down the road?

So yeah, let me jump in and try. So I'm thinking about just some of our upcoming maturities. I mean, Brian talked about it in his prepared remarks on in Buckhead, the 168,000 square feet in September, we've already backfilled 50,000 of that. We have over 350,000 square feet of tour activity and some interest, a lot of interest in the assets. So we feel good about backfilling that specific space. And you go up to EQT Plaza, Brian mentioned, we've already backfilled one floor there, and we have interest. We have proposals out on several other floors. So again, the activity has really picked up I think from mid last year at EQT Plaza, you go to Bass. Berry. We're getting ready to start to implement high wotizing plan there. We're still a year out Bass, Berry, Levin [ph] in February of 2025 but we've got several multi-floor users that we've got proposals and they're touring on. Nothing is etched by any stretch, but just the activity, seeing the tour activity pick up is pretty encouraging from our standpoint.

Got it. And you've placed a big emphasis on securing additional liquidity in the past year and have been very successful at raising capital. So given you've pretty much covered your capital needs, how much more liquidity are seeking to raise?

Hey, Camille, it's Brendan. I would say that, there's not capital that we feel that we need to raise. But I do think if you go back to just Ted's comments at the beginning of the year -- at the beginning of the script, just talking about continual portfolio improvement. I do think we feel like there are asset sales that we likely will get done. So I think the capital raising that will get done during this year is likely to be done via asset sales as opposed to it's going out to the debt markets, whether it's -- I don't think we envision raising debt capital this year, but I do think we'll get capital in the door through disposition proceeds.

Finally, then looking at your cash flows for this next year, has there been discussions with the Board on whether this could, the dividend could be a source of capital just given the high yield? Or is the view to continue paying it as long as it's covered?

Sure. Let me start off and maybe Brendan may want to supplement the answer. But look, it's something we talk about virtually every quarter with the Board. As we look at our dividend, it is covered by our cash flow. And we think the dividend is an important part of total return for us. So -- and we've been pretty proactive the last few years with respect to our CapEx spend and our cash flows have been improving. So based on the outlook that we see for the business, we feel very comfortable with the dividend at this time.

Thank you for taking my questions.

Thank you.

Our next question comes from Ronald Kamdem from Morgan Stanley. Ronald, your line is now open.

Hey. Just a couple of quick ones. Staying with the dispositions. You talked about 75 in the market, maybe more to come. Any sort of sense on the cap rates on those? And -- how are you guys thinking about the quality of those assets, seller financing? Just any more color on those would be helpful

Sure. With respect to what we have in the market, again, they haven't closed, I'm hesitant to talk about cap rates. Hopefully, we'll have something to talk about maybe next call, Ron. Seller financing, there is one building of what we have out there that we're providing a short-term I think it's a 12-month short-term financing, very similar to -- I guess earlier last year, we did a six-month financing on one. So one small asset of that $79 million we'll have a seller financing for one year. But other than that, it's all equity purchase.

Ron, I'll just say in terms of cap rates, I think it's fair if you kind of looked at the cap rates and the average sort of blended for 2023. If you thought of something kind of comparable to that in broad strokes, I would say, not with the $75 million that we expect in the first half of the year. But just kind of as you think about that over the course of 2024, 2025, I think that's a reasonable gauge to kind of use if you're trying to model that.

Helpful. And then my second one is just going back to the questions on sort of the cash flow situation and so forth. So as you think about the lease expirations starting at the back half of this year into 2025, potential Pittsburgh sales. Have you guys sort of looked at an analysis of where leverage could potentially go in those scenarios and how you think about preserving cash flows under those scenarios and so forth. So the question really is just with the lease expirations, potential bid for sale, how does the balance sheet leverage sort of trend under those. . Thanks.

Yes, Ron, it's a good question. So I think we are pretty comfortable with kind of where we are. Now of course, we're going to be spending dollars on the development pipeline as we migrate throughout 2024 and even into 2025 without really a corresponding increase certainly in 2024 on EBITDA or NOI. So I think you'll see a little bit of upward movement in the debt-to-EBITDA ratio as you kind of go throughout the year. But that is going to be then will come down as those development properties deliver and stabilize and generate significant amounts of NOI. So with all of that, I think we're very comfortable kind of when we forecast even when we get to peak levels of debt-to-EBITDA, where we'll be with then the embedded growth that, that number will come down. And all the while, I think we're very comfortable also with where our cash flows are with respect to the dividend. So I think we feel like we've got a lot of a lot of good growth drivers, and we're coming at this from a position of strength if you think about dividend coverage in 2023 going forward. So I think not only do we have a lot of growth drivers with respect to kind of cash flow going forward, we're also coming at it from a position of strength from thinking about it from 2023 levels.

Helpful. Thanks so much.

Our next question comes from Vikram Malhotra from Mizuho. Vikram, your line is now open.

Hey, good morning. This is Georgi on for Vikram. Can you just walk us through the occupancy trajectory in 2024? And can you provide more color on known move-outs over the next two years?

Hey, Georgi, it's Brendan. I'll start, and then maybe I'll hand it over to Ted or Brian for some color on the large expirations coming up. So as is typical kind of seasonally for us, and we've talked about this in years past, we usually have kind of a seasonal dip in the first quarter. So no single large users, but there's a handful of expirations that happened at the beginning of January that our single floor users. So we expect occupancy to kind of dip a little bit in the first quarter and then sort of hold steady, maybe migrate up a little bit as you kind of migrate into second and third quarters. And then we've got the expiration with Novelis late in the third quarter. And then in the beginning of the fourth quarter with EQT. So I think you'll see occupancy kind of low at the end of this year with that average kind of in the range of 87% to 89% as we discussed. But that doesn't -- I just -- I'll mention this. We have -- and I think Brian talked about this on the call, but we've got about 320,000 square feet of signed, not yet commenced leases just between CoolSprings 5 2,500 Century Center and Tampa Bay Park. There's only about 100 of that that we expect to kind of move into occupancy by year-end 2024. So even when you kind of go into 2025, there's still a fair amount of leasing that we've done that will come into occupancy in 2025. So I think -- and then we'll -- we expect to continue to lease space on existing or future vacancy as we kind of go forward throughout 2024, which we don't expect to be in occupancy in 2024, but will contribute to future years.

And then this is Ted. Why do I jump in, I sort of went through a few of the known move-outs. I'll go through quickly one more time. Novelis, we backfilled 50,000 feet. So Novelis is 168,000 feet, September 2024. We’ve backfilled 50. We have good prospects for 350 of the remaining 100 or so, 120,000. So we feel really good there the activity. EQT is October 2024, and 17,000 feet. We've backfilled 16,000 square feet. Basically, I said backfill. We went direct with a subtenant of EQT. So we're happy to do that. We've got pretty good activity on some additional space. So we'll see there. It's still early. Then Department of revenue, we have not talked about that one. They're like some -- I think, 255,000 feet that expire at the very end of the year 2024. So they're vacating, but we're -- we've retained them. As we mentioned, the in our prepared remarks, removing them. They're downsizing. We're moving within that same park to about 110,000 square feet in a different building, and we would have loved to keep them in the building they're in. They just -- is just very difficult from a layout perspective. So we've got that. And then on that building, we're actually looking at various scenarios, what the strategy is for the building the DORs vacating, including a potential residential conversion. So more on that, we'll know more in the next 90 to 120 days, probably with respect to the DOR. We do have a 150 Fayetteville, our headquarter building here in Raleigh that we're sitting in, Wells Fargo is vacating 78,000 square feet at the end of October of this year. And we knew that. We bought this building back in 2021. And it was a known vacate at that point. So we're actually excited to get that 78,000 square feet includes about 16,000 square feet of a branch location that's on the first floor of the building that we're going to turn into state-of-the-art amenities for the building, which has been our plan since 2021. So we're excited to get that back, total of about 60,000 square feet to re-lease there, and we've got some really neat plans for that. So that's one we'll get taken care of. And then the vast, Barry [ph], which I mentioned on a prior question that we've got several multi-tenant floors interest in those. Again, early prospects just to our activity, but we feel good given we're still a year away.

Thank you. That's very helpful. And just a last one for me. With all the news about tech layoffs, how do you think that translates to your markets?

Yeah. We're not a big tech market. Our -- as you know, Raleigh, more than probably anybody. But in general, we're pretty diversified customer base, don't have a lot of exposure to tech. I think several years ago, maybe we wish we did when tech was gobbling up the space. But we don't have a lot of exposure in our markets to tech.

Our next question comes from Dylan Burzinski from Green Street. Dylan, your line is now open.

Thanks for taking the question guys. And just one for me. So I guess just as we think about occupancy dipping throughout 2024 into early 2025, if I sort of pair that up with some of the comments you just made, Brendan, and the comments around sort of good activity on near-term move-outs. I guess, it seems to us that the lease percentage, the drop-off in lease percentage moving forward should be a lot less than the drop-off in occupancy and therefore, as we think about occupancy into 2025 and beyond, you should recover what is lost relatively quickly. Is that fair to say?

Yeah, Dylan, it's a good question. I certainly think that if the activity that we're seeing in terms of prospect activity translates into leases as we're hopeful that it will, that your outlook would prove correct. Now there's execution that needs to get done. So it's not to say that this is -- that's a foregone conclusion. But I think if activity levels hold up and we're able to translate what we think are the good prospect activity into leases, then I do think that, that is -- that your outlook would prove correct.

Great. Thanks guys.

Our next question comes from Peter Abramowitz from Jefferies. Peter, your line is now open.

Thank you. Yes. Most of my questions have been answered, but just one here. Have you noticed any change in the last, call it, sort of 60, 90 days as the macro backdrop and the rate backdrop has sort of shifted here? Have you noticed any change in the environment and demand for office buildings in your market in general? I guess just from a general perspective and then also as it relates to the assets that that you're out in the market with. I guess, has there been any change in appetite for office transaction.

No, I don't think so. I think the assets we're in the market with have sort of already been tied up. So, we don't have a whole lot of real-time data points with respect to that. I do think what we're hearing is you're going to see some more stuff coming to the market from the brokers. I do think after the year turned, rates came down brokers are a little bit more confident. There's a lot of dry powder sitting on the sidelines. So, I would fully expect once buyers have a clear understanding of what their cost of capital is going to be and the availability of capital it's still tough to get on office alone today. I think virtually all the capital sources is very difficult. But I do think it may loosen up in the next six to nine months. So, I think transaction activity is going to pick up, but I think it's going to be in the back half of the year likely before we see a whole lot of that. But there's a lot of money that still wants to invest.

Got it. Thanks Ted.

Our next question comes from Omotayo Okusanya from Deutsche Bank. Omotayo, your line is now open.

Yes, good afternoon everyone. Just in regards to the tenant that was moved to cash accounting, which again, I'm assuming is the same tenant taken the [indiscernible]. Curious again, since you have to move them to cash accounting. How do you kind of get comfortable with the renegotiated lease that, again, 12 months down the line, you're not kind of back in the same situation?

Yes, Tayo. It's a good question overall. Yes, I mean, I think -- so first of all, the standard to kind of put somebody on GAAP accounting is that you have -- you're more than probable in terms of collecting that rent throughout the duration of the term. So, this is a very long-term lease that we have and the business cycle is a little bit uncertain. And I think we're comfortable with kind of where we are because there's not a lot of capital that we will incrementally invest into the space. And there is a meaningful amount of rent that we expect over the life of the term. But I think just due to being conservative in terms of how we would like to account for this I think we felt it was prudent, and we talked to our auditors about this to put them on a cash basis. So, it's not to suggest that we don't think that there is collection that's likely or collect a significant amount of rent, but I think just out of an abundance of caution, we move them on a cash basis accounting. And I will say that, that's not dissimilar from things that we do other industries that we tend to view as a little bit more volatile than maybe our core customer base. So, as an example, most of the retailers that we have within our portfolio, we just move them on a cash basis. That's just standard practice for us. So, I think we feel very good about the modifying lease that's there. I think we feel very optimistic about the long-term outlook for that building in particular, but just out of an abundance of caution, we didn't want to start to record GAAP revenue in 2024, given the long-term nature of that lease.

Great. Thank you. Great to see that all leasing in the BBD portfolio as well.

Thanks, Tayo.

We currently have no further questions, so I'd like to hand back to the management team for closing remarks. Over to you.

Well, thanks, everybody, for joining the call today. Thanks for your great questions, and thank you for your interest in Highwoods. And we look forward to talking to you next quarter, if not before. Have a great day.