HIW - NYSE

Thank you all for joining. I would like to welcome you all to the Highwoods Properties Q1 2024 Earnings Call. My name is Brika, and I will be your moderator for today. [Operator Instructions] And now I would like to pass the conference over to your host, Hannah True, Manager of Corporate Finance and Strategy to begin. So Hannah, 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 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 turn the call over to Ted.

Thanks, Hannah, and good morning, everyone. We had an excellent quarter executing on our key priorities in delivering solid financial results. First, we signed 922,000 square feet of second-gen leases including over 400,000 square feet of new leases and 36,000 square feet of net expansions. This volume of work will benefit us in future periods as the new leases commence. Second, we signed 157,000 square feet of first-gen leases in our development pipeline. We continue to see solid interest in these best-in-class projects, which will provide approximately $40 million of incremental NOI upon stabilization and be a significant growth driver for our cash flows. Third, we delivered Four Morrocroft, an 18,000 square foot $12 million build-to-suit that we developed at our Four Morrocroft property in the South Park BBD of Charlotte. As you may recall, this creative office development is situated on a surface parking lot with 0 basis. While Four Morrocroft is one of our smaller developments, it demonstrates our resourcefulness in cultivating and generating attractive risk-adjusted returns for our shareholders. Finally, we sold nearly $80 million of noncore properties in Raleigh, including over $60 million that closed early in the second quarter. These sales improve our portfolio quality, increase our long-term cash flow growth and further strengthen our liquidity and already strong balance sheet. We expect our solid leasing momentum to continue as our markets generate outsized population and job growth, given their high quality of life and business-friendly environments. Simply put, our markets and our BBDs, aware people and companies that want to live, work and play. This is why our portfolio has outperformed the national average, our markets and our submarkets all because customers and prospects are attracted to our commute-worthy buildings, plus being a long-term landlord with a strong balance sheet that can fund tenant improvements and leasing commissions and care for our best-in-class properties is proving to be a clear competitive advantage for us. Contrary to popular opinion, we're seeing strong demand across our portfolio, whether they be brand-new trophy assets or well-located second-gen properties and whether they be suburban or urban. We believe financially capable landlords who provide value to customers and prospects will see healthy demand across a wide variety of price points. Turning to our quarterly results. We delivered FFO of $0.89 per share and same-property cash NOI growth of positive 0.3%. As expected, our occupancy dipped modestly to 88.5%. Our 2024 FFO outlook is $0.015 lower at the midpoint due to higher-than-expected interest rates and the dilutive impact of noncore asset sales already completed, neither of which were factored into our initial outlook. These items are partially offset by higher projected NOI. The strong leasing start to the year modestly helped 2024, but most of the new leasing will drive upside in 2025 and beyond. We've also had a successful start to the year with noncore asset sales, and we're prepping additional properties for potential disposition. We now expect to sell up to an additional $150 million during the remainder of the year. The volume and timing of dispositions will depend on how conditions are in the investment sales market, but we've been encouraged by the response we've seen in recent quarters to our marketing efforts and the modest improvement in capital markets for prospective buyers. While we don't have any acquisitions included in our 2024 outlook, we continue to build the foundation for future investment opportunities. Similar to the first few years coming out of the global financial crisis, we believe compelling investment opportunities will arise, but these will take time to play out. We're comfortable being patient as we continue to have conversations with owners and lenders of wish list properties in our markets. Our development pipeline is now $506 million, following a delivery of the 100% leased Four Morrocroft building in Charlotte. With 157,000 square feet of first-gen leases signed during the quarter, our pipeline is now 41% leased. A big chunk of the activity was that our 642,000 square foot, $460 million, 23Springs project in Uptown Dallas, that we are developing in a 50-50 joint venture with Granite. 23Springs is now 54% pre-leased, a year prior to scheduled completion and 4 years before the estimated stabilization. The largest lease signed was a current law firm customer at our 98% occupied McKinney & Olive property, just a couple of blocks away, who needs to expand by nearly 50%. Given we couldn't accommodate the growth of McKinney & Olive, we were able to accommodate the growth at 23Springs. We already have excellent activity to backfill their space at McKinney & Olive, more than 2 years before their scheduled move to 23Springs. We made modest leasing progress at Granite Park Six in Dallas and GlenLake III in Raleigh. Both of these developments delivered late last year and are projected to stabilize in 2026. These buildings are best-in-class in their respective BBDs and prospect activity is accelerating. We're confident in the long-term outlook to expect these developments to drive solid cash flow growth for us in future years. Midtown East and Tampa, our 143,000 square foot, $83 million project that we're developing in a 50-50 joint venture with Brownlee in the Westshore BBD, is seeing strong interest from prospects given we're the only office project currently under construction in the entire market. We're 16% pre-leased and are very encouraged by the strong interest, more than 2 years before scheduled stabilization. We don't expect to announce any new development projects during the year. Obviously, this isn't unique to Highwoods. It's very difficult for new starts to pencil in the current environment. We're not seeing meaningful reductions in hard costs and interest rates continue to be elevated. Plus for other developers who are capital constrained, securing capital for new office construction is very challenging. As a result, new starts have plummeted. And with the current development pipelines that will largely be delivered across our markets over the next few quarters, the lack of new supply in future periods will play to our advantage as users seek high-quality properties from landlords with strong financial resources. In conclusion, as we have for the past few years, we acknowledge the headwinds in the office sector, yet we're bullish about the future for Highwoods. First, our portfolio has never been better and it will continue to improve as we sell additional noncore properties and deliver our $500 million development pipeline. Second, we have significant organic growth potential within our operating portfolio where we've already leased some of our existing vacancy and have solid interest on expected future vacancy. Third, our balance sheet is in excellent shape and will enable us to capitalize on future growth opportunities. And finally, even with higher interest rates, our underlying cash flows remain strong, which allows us to keep investing Highwoodtizing capital to generate higher returns on our existing portfolio. Brian?

Thank you, Ted, and good morning all. As we mentioned on last quarter's call, our leasing teams got off to a strong start in 2024. We maintained our positive momentum through the end of the first quarter, signed 97 deals and exceeded our 5-quarter average with 922,000 square feet signed. New leasing volume of 422,000 square feet was the second highest quarterly total since 2014. Average term was also strong at nearly 7 years, 1 year longer than our prior 5 quarter average. Tampa, Atlanta and Raleigh signed nearly 3/4 of this quarter's total volume with average terms of 7.5 years. Expansions outpaced contractions 2:1 and while lease economics reflect a highly competitive market, we will prioritize occupancy as needed over pushing rental rates to lean on our strength as a long-term owner, while strengthening our long-term cash flows. In addition, we are seeing strong activity across our $500 million development pipeline. As Ted mentioned, we signed 150,000 square feet of first-generation leases, including 129,000 square feet at 23Springs, our JV development in Uptown Dallas. The 129,000 square feet of pre-leasing at 23Springs follows the 105,000 square foot lease we announced last quarter. 23Springs is now 54% pre-leased, 1 year before completion, and 4 years before our estimated stabilization in the first quarter of 2028. The quality of our portfolio, our sponsorship and the commute-worthy lifestyle office experience we provide our customers is giving us a clear edge in today's leasing environment. We're seeing strong demand at various price points across our portfolio. As demonstrated by strong leasing volume in our development pipeline, the top of the market is doing well, but we continue to see the most demand for our well-located second-gen assets. This is because a large segment of customers and prospects prioritized a premier office experience at rents that are more affordable than a trophy price point. Moving to our markets. Tampa recorded the most volume in the quarter with 267,000 square feet signed. Our 16% pre-leased Midtown East development is the only Class A office development under construction in Tampa and is on time and on budget for our Q1 2025 delivery. Solid inbound interest continues as the building advances toward completion. According to Cushman & Wakefield, Midtown East Westshore BBD was the most active submarket in Tampa during the quarter, capturing nearly 1/3 of all leasing activity. Further, CBRE is currently tracking several large users in the market and over 2.6 million square feet of demand. We leased a lot of our vacancy earlier this year at Tampa Bay Park, and we're now working to fill pockets of vacancy at Meridian, where we have solid traction. Moving to Atlanta. The MSA recently passed Philadelphia in Washington, D.C. as the nation's sixth largest and the second-largest metropolitan area on the East Coast, per the latest population estimates from the U.S. Census Bureau. Our Atlanta team signed 199,000 square feet for the quarter, of which 160,000 was new. This represents the greatest share of new leasing across the portfolio, further north in Raleigh, which was recently ranked #2 in the Milken Institute's Annual Best Performing Cities report. Our team signed 201,000 square feet in the quarter. We averaged close to 8 years of lease term and over half of this leasing activity was new. Raleigh is joined by Nashville, Dallas and Charlotte in Milken's top 10 best performing city's list. In summary, our leasing pipeline is healthy and we are pleased by the flow of inbound proposal and tour requests across our portfolio. We believe this is emblematic of our simple and straightforward strategy of creating commute worthy experiences in the Sun Belt's best business districts. Brendan?

Thanks, Brian. In the fourth quarter, we delivered net income of $26.1 million or $0.25 per share and FFO of $96 million or $0.89 per share. There were no unusual items in the quarter. We are pleased with the quarterly results, which demonstrate the resiliency of our operations and continued strong cash flows. Rolling forward from the fourth quarter and excluding the $0.08 per share of unusual items in Q4, FFO per share was $0.02 lower in the first quarter. Higher G&A, which we incur every year during the first quarter due to the expensing of equity grants for certain employees and the full quarter impact of November's bond issuance, reduced FFO by $0.04 per share. These headwinds were partially offset by $0.02 per share of higher NOI, which nets to the $0.02 sequential reduction. Our balance sheet remains in excellent shape. At March 31, we had $850 million of available liquidity, which has increased to $915 million following the noncore dispositions we closed in early April. We have a little over $200 million left to fund on our development pipeline and no consolidated debt maturities until May of 2026. We do have 1 mortgage that matures in the third quarter of this year at our unconsolidated McKinney & Olive joint venture. This is a low leverage loan and we're reviewing financing options with Granite Properties, our partner. We may, ultimately, decide to jointly repay this loan upon maturity and seek longer-term financing when the lending environment is more attractive. Given our ample liquidity, we have many options available. This also demonstrates the strategic value of having such a financially capable joint venture partner in Granite. As Ted mentioned, we have updated our 2024 FFO outlook to $3.46 to $3.61 per share, which implies a $0.015 reduction at the midpoint. The reduction is driven by the $0.03 dilutive impact from the asset sales completed since our outlook was provided in February and higher-than-anticipated interest rates for the remainder of 2024, partially offset by $0.015 of higher anticipated NOI. It's still early in the year, and therefore, our range remains wide with several variables, most around projected property tax savings, which aren't assured yet. We're pleased with the noncore property sales completed thus far. While modestly dilutive to near-term FFO, as we have long stated, our capital recycling program has been accretive to our cash flows while also improving our long-term growth rate. We've increased the midpoint of our same-property cash NOI outlook and moved the high end of our total dispositions to $230 million including the $80 million we've closed so far. All other items in our outlook remain unchanged. As Ted and Brian mentioned, we had a strong leasing quarter, especially new leasing volume. Many of the new leases signed in the quarter won't commence until late this year or next year, and therefore, will not have a meaningful financial impact on 2024 results. This volume of work will obviously bolster our results in future years. As you know, we try to be as open and transparent as possible with our stakeholders, and we've stated for quite some time that we expect occupancy will trough in the first half of next year. We still expect this to be the case, but if we can continue to post strong leasing volumes, we believe our trough occupancy level will be higher than our original expectations and our recovery will be faster. You may have seen in our supplemental package that we have made some adjustments to how we present property-level operational information. Starting this quarter and going forward, we are now including in-service properties owned by consolidated and unconsolidated joint ventures at our share. We are doing the same thing with respect to the presentation of our same-property operational results in the supplemental. For those of you who would rather see same-property results on a consolidated basis only, all of the ingredients are itemized in the same property reconciliation table in the back of the earnings release. These changes have a relatively modest impact on our property level metrics this quarter as JVs today comprise less than 3% of our business, but will increase to around 8% as our development properties are placed in service. To wrap up, we're very encouraged about the future for Highwoods. Our high-quality Sun Belt portfolio is located in the BBDs where talent wants to be, which is clearly demonstrated by our performance this quarter. We have strong embedded growth potential within our operating portfolio and approximately $40 million of future NOI as our development pipeline stabilizes. Our balance sheet is in excellent shape, and our cash flows continue to be resilient. Operator, we are now ready for questions.

[Operator Instructions] We have our first question from the phone line from Camille Bonnel of Bank of America.

Great to see the pickup in leasing this quarter. I'd like to start with some questions around guidance. as you clearly laid out the puts and takes for bringing the top end of FFO down. Can you explain the drivers behind raising the low end of your same-store guide? And how confident are you in the bottom range here if there is a pullback in decision-making?

Camille, it's Brendan. I'll start. So I think in terms of the components of the driver of the higher NOI outlook that we talked about, both in terms of the same property growth and what we said is just overall better NOI with respect to the FFO outlook. I would say that it's roughly evenly split between better revenue and some expense savings. So that better revenue is driven by probably what I would characterize as modestly higher average occupancy. We didn't change the average occupancy range, but it is modestly higher overall. So it's a combination of top line and expense savings. And then in terms of how much spec leasing is in the forecast, we still have spec leasing that is there. I think if things really slowed down in for the remainder of the year, it probably doesn't have a very large impact in terms of the financial performance for 2024 as most of the spec leasing that we have slated to come in this year would be later in the year and therefore, not have a big impact on '24 results but obviously, that's going to carry more impactful to 2025 and future years. But I think we feel good about kind of where our leasing activity has been through the first almost 4 months of the year and are optimistic that, that will continue as we go forward.

To clarify, is the spec leasing the same as new leasing activity that you report?

We have -- within our spec outlook for the business plan for the year, there's a combination of that between both new and renewal. So it's with both.

Got it. Okay. Well, if we look back, it seems like you were able to improve your occupancy when new leasing volumes were above 1 million square feet. So are you able to expand a bit more on that specific assumption baked into guidance this year? And do you think you can sustain the pace of new leasing throughout the year? Or was the first quarter -- how did that track compared to your budget?

Yes. Maybe I'll start, and then I'll let Ted and Brian provide more color on specifics. But I think, certainly, the new leasing volume of 423,000 square feet, we don't expect that to continue. That was, I think, the second highest quarter that we've had over the past 10 years. So that's certainly above expectations. And the volumes are going to bounce from quarter-to-quarter. But I think if we could average around 300,000 square feet of new per quarter for the year, so call it, 1.2 million square feet of new during the year. I think that would place us in a good position to kind of build occupancy as we get through some of the large known expirations. And what I mentioned in the prepared remarks, we certainly expect to trough occupancy early in 2025 and then build from there. But I think if we're able to sustain good new leasing volume and manage reasonable levels of renewals, then I think that puts us in position to build kind of from the base. And as we stated earlier, trough at a higher level than what we previously expected and then recover faster.

Just one final question. If we were to dive deeper into your portfolio, are you seeing any areas where vacancy has been concentrated, whether that be by location like suburban, urban, infill or lease size?

Camille, it's Ted. I don't think so. I think we've seen pretty good demand across the portfolio. Our biggest vacancies as a company are the well-known Tivity move out. That building is still largely vacant, so that's 260-or-so thousand feet. And then the CDC vacated building in Atlanta, and that is leased, but it's vacant right now. So combine those 2, that's about 100 -- if I remember right, it's about 130 basis points of occupancy. But other than those 2 big holes, it's really not concentrated anywhere.

Your next question comes from Vikram Malhotra from Mizuho.

This is Georgi Dinkov on for Vikram. Can you just walk us through any known move-outs and the occupancy trajectory in 2024?

Yes. Maybe I'll take the first part, and Brendan can jump in on the trajectory and the occupancy. So look, the known move-outs, we've talked about these for several quarters. I'm going to hit it just at a high level. We're seeing some good activity on the Novelis space in Atlanta. It's 168,000 square feet. And so we're seeing really good activity there. We're seeing good activity actually in Pittsburgh. Now as we're getting closer to the EQT expiration later this fall. As you know, we -- I think last quarter, we indicated we went direct with 1 customer, and we've got strong prospects for another 50,000 feet and over 100,000 square feet of proposals that are out. So we feel good about the activity we're getting there. We'll see where that goes. In Nashville, Bass, Berry moves out next February, and still a little bit early there, but we're well on our way on Highwoodtizing plans for the project that will be getting underway really the day they move out. So we're excited about our plans there. Activity is a little slower there just because we're still 10 months away from them vacating. And then really the other big one is the Department of Revenue at the end of this year, 1800 Century Center. There the one consolidating and downsizing to another one of our buildings in that same park. We're still evaluating our plans for that building, whether it be office lease-up or potential residential conversion. So we're well underway. We've been analyzing that for a while. And hopefully, we'll know more in the next couple of months with respect to what our plans are with that.

And Georgi, it's Brendan. Just in terms of the trajectory as we move throughout the year. So we'll probably dip a little bit in Qs 2 and 3. So maybe around that average for the year around 88% or so. There's just a little bit of movement within the portfolio. There are some spaces that we're proactively taking back early in the second quarter that we have then backfilled and expect to move the new users in by year-end. And then as we've stated, we think year-end will be the low point for us for this year, given what Ted talked about, which is principally the EQT expiration in the fourth quarter. But we do think that we're going to end the year at a higher level than what we had previously expected when we provided our original outlook in February. So we think we're tracking well. But certainly, the year-end will be -- should expect to have the low point in terms of occupancy for the year.

And just a second question for me. We've noticed occupancy decline in Tampa and Orlando quarter-over-quarter, can you just comment on what was the driver? And is this a sign of challenges in these specific markets? And I guess, can you just comment on your markets, which ones are performing better and which one are kind of like lagging behind?

Georgi, this is Brian. I'll take it. A couple of things. First, you mentioned Orlando and Tampa specifically. Last quarter, Orlando really hit a high watermark in terms of their occupancy over a great period of time. They're doing a fantastic job. Nothing is under construction in Orlando. They have the best buildings in downtown. So they're doing a good job there. We feel good about the long-term maintenance of occupancy within a bandwidth of the high watermark last quarter and where they are this year. So I think nothing to really expound upon more with regard to Orlando. Tampa is a dynamic market. We have multiple parks kind of within the Westshore BBD. And so you're seeing ebbs and flows across there. Nothing to highlight anything specifically. We're very happy with the movement in Tampa, the folks continuing to grow there. Now globally, in terms of the other markets, they're all our favorite children, so there's none that are favorite. But look, Nashville continues to be a place people want to be. It posted as an overall market, positive quarterly absorption last quarter, which stood out nationally for the year of 2023. It was [ 4 ] in the country for positive absorption. Some of you may have noticed just yesterday, Larry Ellison was getting interviewed by Bill Frist in Nashville. And referenced that Nashville will become Oracle's global headquarters at some point in the future, which supports the story that CBRE put out there that Nashville is top 5 in the country for new headquarters. So Nashville is in a good space. Charlotte, well, in some ways, it's a tale of two cities. In some cases, there's a clear delineation in separation between location, lineage and landlord in terms of who's winning and who's not in Charlotte. We're sitting here at 96.2% occupied. We feel really good about our assets. Charlotte continues to grow lots of interesting things going on there. Dallas -- Dallas will soon -- they say in the next 5 years past Chicago in terms of population. It's the fourth largest metro right now led the U.S. and 23 population growth. We couldn't be happier with our partnership there in the Granite, happy with the existing McKinney & Olive asset in Uptown. The leasing momentum at 23 Springs and leasing that's picking up an interest in inbounds and tours at [indiscernible]. So I think that sort of kind of gives you a little bit of color of the spectrum of markets. I don't know if Ted has anything else to add.

We now have Blaine Heck from Wells Fargo.

Ted, you mentioned this in your prepared remarks, but recently, we've been hearing a lot about the flight to capital or tenants looking for landlords that are willing and able to fund TIs on new leases. I guess can you just give a little bit more color on that trend broadly? And then maybe comment on how much of the market vacancy might be attributable to space that's owned by a landlord that's unwilling to fund TIs? And then lastly, I'm just wondering whether there are any specific instances you can cite where you think you've won out on a deal because of that ability that you guys have to fund TIs?

Sure. A lot to unpack there. Remind me if I don't hit all parts of that. So in general, it's exactly what you said. We're seeing a -- there's a bifurcation of assets and ownership that there are some cases we've heard that landlords or brokers aren't showing space, if they understand the capital stack. The capital stack is upside down or there's just risk of the building just effectively become the zombie-type building. So there's many instances out there, one in particular here in Raleigh, we got a full floor user from a building that was in distress and it was really from a cold call. And this was very similar to what all of our leasing reps are doing. It's -- all the buildings that have got maturing debt that we're targeting those buildings because of the capital that we can invest in the TIs and commissions that we can pay. So this was a direct result of cold call that we got. We got a full floor user. The user didn't want to stay in the building because they couldn't get enough money to recap to redo their space. So it was a great win for our team and it shows that just the resourcefulness of our team and that we're seeing that in other markets as well. In terms of the number of -- the amount of vacancy, it's concentrated. It's really the vacancy is concentrated in [indiscernible] buildings in general. It's concentrated in less desirable submarkets and then it's concentrated in the buildings that have been really in distress for the last call it, 2 or 3 years. As we all know, the lenders have been kicking the can. Lenders don't want to take a lot of these assets back. A lot of the owners don't have the money or the ability or in some cases, even the desire to keep -- remain in the ownership. So those buildings are going to be starved for capital. Occupancy is going to be under pressure. So -- and those occupancies are declining. So I think it's those 3 areas. Did I hit all parts of your question?

Yes, I think so. That's really helpful color. I really appreciate that. Just switching gears for the second question. I guess, how are you thinking about the Pittsburgh portfolio then near in the midterm? Do you think dispositions are still likely off the table in the near term? Are you seeing any kind of signs that the transaction market might be returning there? I guess, are there any of those properties in the potential $150 million of dispositions that you're forecasting for the rest of the year? And then just generally, maybe how do you think about the balance between waiting for a decent price to exit versus maybe selling sooner wherever market pricing is, but likely saving some capital needed for lease-up and any renovation or refreshing projects that you might have?

Sure. So with regard to Pittsburgh, it's going to be a tough sell. My gut is -- and we don't have our next wave totally identified yet. Clearly, when we announced we were exiting Pittsburgh in the fall of 2022. It's not unlike what we did getting out of Memphis and Greensboro. It took us about 3 years to get out. I think the timing -- the capital markets still aren't back in my view. I think there we've had a lot of success selling small- and medium-sized assets sort of bite-sized transactions that are easier to finance. But to sell a big transaction like a PPG, it's a very difficult debt market today. So my gut is we're going to just keep focused on blocking and tackling, leasing space, and wait for the capital markets to recover. So I wouldn't expect Pittsburgh to be in that next 150. But certainly, it's our desire to get out when the timing is right. And we are trying to balance do you sell it now versus waiting. But I don't think there's a market for that asset today. So in terms of what we do want to sell the next 150, I think it's going to be a lot like what we've sold the last couple of years is going to be smaller assets that we think have liquidity in the market. And we've been successful selling both value-add and core assets over the last couple of years. And there's local banks. There's high net worth individuals got relationships that can finance these type of assets. So my gut is the next 150 is going to be multiple buildings. They're going to look a lot like what we sold the last year or 2. And then we can use those proceeds, plow that back into the renovation capital and to use throughout the portfolio.

Your next question comes from Michael Griffin of Citi.

Just curious on the renewal leasing. What are you seeing in terms of retention rates and whether or not most firms are upsizing, downsizing or keeping the same space? And is the average lease signed by size changed at all?

Michael, I'll start out and if Brendan or Brian have anything to add. Look, our retention ratio the last couple of years has, in fact, gone down, right? But it's not atypical of what we see in any economic downturn. Certainly, there's been some, obviously, work-from-home, so that's hurt. But then just the cyclical downturn as well. Companies are closing up regional shops or combining local offices or what have you. So our retention has, in fact, gone down. But if you look at our overall portfolio, we've had many, many quarters where our expansions are outweighing contractions. I think this quarter, we had 10 expansions, 5 contractions for a net positive 36,000 feet, expansions were 63,000 less 26,000 square feet of contractions. And that's -- if you look back just since the beginning of 2023, we've had 55 customers expand 21 contract over the last 5 quarters. So it's a lot of the small -- the larger customers are the ones contracting. Thankfully, our average-sized customer is about 13,000 or 14,000 feet. Those are the customers that, a, they're making the decisions; b, they're the ones that are still growing. So we're seeing a lot of expansions. And these expansions are maybe 2,000 feet, 3,000 feet and the contractions, again, the contractions we've had have been a little bit bigger, it might be a floor or half a floor, but it's been slow and steady for us of expansions outweighing contractions. In terms of lease size, again, our bread and butter is at 5,000 to 15,000 feet. And that's -- again, that's -- most of our activity this quarter, we had a couple of larger deals. But in general, our normal is at 5 to 15. We're signing a lot of them. I think we did almost 100 again this quarter. So in and out, we're signing about 100 a quarter.

Great. And then I was curious if you could just give some color on the development leasing in Dallas. It seems like Sidley Austin is moving from MNO to 23Springs. Was that always the plan when you bought the property and announced when you started the development? Or did [indiscernible] about relatively recently? And what are you tracking in terms of demand on that space? Is it going to be a single user? Could it be -- could you multi-tenant that space that they have there? Just maybe some more color around that would be helpful.

Sure. Certainly, when we bought MNO, that was not the business plan. Sidley Austin, I think their leases going until 2028 or so. But as we got into it, their growth needs we are just thrilled that we were able to accommodate their growth needs. They loved McKinney & Olive and would love to stay, but we couldn't accommodate them. The building is full, and everybody seems pleased with the buildings. So we just -- we weren't able to accommodate their growth. So it just is very fortunate that we have the space down the street. In terms of the other activity in the building or just our development pipeline in general, obviously, we signed 157,000 square feet in the first quarter. We've got another, I'd call it, 125,000 square feet of prospects, strong prospects that we've either agreed and we're papering or we're close to agreeing to. It's throughout our development pipeline. Of that 125, virtually every one of our development projects has a prospect -- strong prospect. So we're looking forward to moving the needle a little bit more there. And then we've got over 800,000 square feet of recent tour activity. That's on top of the 125,000 square feet of strong prospects. So activity seems to be picking up. We have a lot of work to do to get those over the goal line and get done. But we couldn't be more thrilled with really the activity. Certainly, we're getting a lot of deals signed at 23Springs. But across our development pipeline, the activity seems to be picking up.

We have the next question from Rob Stevenson with Janney.

Ted, how much of that up to an additional $150 million of dispositions is somewhat dependent on redeployment opportunities. I mean, would you sell $225 million and just either pay down debt or sit on the cash and fund the development pipeline if needed?

Yes, Peter. I think we would. It's not dependent on redeploying into acquisitions or development. This is just doing our normal cadence and sell them like we have -- I'm sorry, yes, Rob. So really it's not, it's just identifying assets to create some liquidity to get our dry powder ready to take advantage of opportunities at the time. But it's not going to be dependent on us buying something.

Okay. And then your commentary about lack of acquisitions, is that due to assets -- the assets available right now aren't of the right quality or location? Or is it mostly the pricing is still too high or some combination? What's the thing that's sort of making the acquisition environment not advantageous to you right now?

I think it's a combination of all 3 of those, right? So the assets that have sold don't meet the quality. There are several out there now, I'd say, a handful of assets that are sort of going through a pricing exercise and so we're going to be patient. We're doing a lot of practice underwriting and all that. But it's certainly got to be the quality. Most importantly, it's got to be the location and certainly pricing as well. So we continue to monitor. We're hanging around the hoop and we'll see where it plays out. But certainly, there's nothing imminent by any stretch.

Okay. And then if a Dallas acquisition or development opportunity came up over the next year, would that still likely be in a JV? Or are you comfortable at this point able to be going solo on a deal in that market?

Yes. Well, first, I'd tell you, I think it's -- our entry into Dallas could not have gone better. I think we picked the right partner and it's in and out every day. In fact, we had our Board meeting in Dallas last week, and the Granite guys joined us for dinner and tours and a like-minded of a JV partners Highwoods is probably ever have. So we're thrilled with our partnership. Now having said that, our goal is to continue to grow Dallas, and it's with Granite great. But I can certainly see an opportunity that we may -- they may not be interested in that we would go ahead and do on our own. We feel very comfortable with that market now.

All right. And then last one for me. Brendan, what is the -- when do you expect to know the outcome of the bulk of the property tax savings potentially? And what's the magnitude of the swing there in that range? How much should we talk about how material is that?

Yes, Rob, it's a good question. It's meaningful, there's no doubt about that. I would say that I think we will have more clarity in Q2 and then even more clarity as we get into Q3. But I mean, there's certainly a possibility in terms of challenging some of the assessments that these could drag on beyond 2024. So we will see where that is. But it could certainly swing us a few pennies in either direction, depending on what the ultimate resolution of these assessments are.

And where did you -- are you just in the middle in terms of the guidance? How is that impacted into the guidance?

Yes. We have assumed savings within the guidance. We haven't assumed at the top end of what is possible. So I think that it is roughly in the middle in terms of kind of the high end and the low end in terms of what we have factored in or I would say more than what's in the middle, I think it's really where we think the most likely outcome is going to be.

We now have Michael Lewis from Truist.

Great. You talked about kind of the characteristics of some of the potential noncore dispositions. As far as the ones you've already done, right, I'm looking at $79 million with $6 million of NOI. That's about a mid-7 cap rate. Is it fair to look at this and say, Highwoods is selling some of their assets that are noncore that are not their best assets at a mid-7 in the stock, even though it's been a big outperformer recently, we still have it at like a 10 implied cap rate Am I comparing apples and oranges? Or is it fair to kind of look at -- you closed some sales, you proved out some pricing and we can read through into the rest of your portfolio a little.

Maybe I can start and anybody else wants to jump in. Look, I think if you look at the assets we did sell, we're thrilled with the mid-7 cap rate. Now look, they were incredible location, which very similar to most of our assets in our portfolio. They are -- they do have some medical components, right? And I think there's a very liquid market on the MOB stuff. But certainly, we're pleased with the mid-7 cap rate. And I think it was certainly by selling them enhanced our overall portfolio quality as well. So I think the rest of our portfolio is higher quality or a vast majority of these assets. So certainly trading at a 10% cap rate, we think, is way too high. And I think we've proven out over the last 2 or 3 years, we've had multiple sales that have been well below those cap rates over the last 2 or 3 years. So I think it's just indicative of the assets we own.

Second, you talked a lot on this call about the timing of the trough occupancy and Brendan kind of laid out how 2024 might go in terms of cadence. Could you just remind us or have you said what you think that trough occupancy will be in early next year? And how much is better now or you talked about trending better than that. So maybe you could answer both parts of that or one part of it. Just trying to figure out kind of where this bottoms and how much better you might be doing than you first expected?

Yes. Mike, it's Brendan. So we're obviously not in a position to kind of give '25 guidance and outlook on this call. But what I can do is maybe provide some ingredients that will help you think through that question, which is a good one. So for year-end '24, which we switched to give average guidance, which we think is a more meaningful metric, I think we're probably -- originally embedded sort of within that outlook was probably ending the year at around, call it, between 86% and 87%. I think we are trending towards the high end of that range and potentially could be even a little bit above the upper end of that range. So that's better call it, 50 basis points better by year-end than previously what we thought. And then we've talked about some of the big expirations that we have kind of in early '25 principally in Nashville, but some of the leasing activity that we have done so far this year and some other prospect activity that we have are leases that will commence in '25. So that will offset some of that. So I think that, that just puts us in better position. And then the longer that we go on with having additional quarters of good leasing volume, that really builds the base to kind of get the recovery post the trough number. So I think as we go on and what we're paying attention to and what I think you and others will pay attention to in terms of our performance is if we continue to lease well as we go progress throughout '24, that's really going to [indiscernible] our benefit in '25 and thereafter.

Okay. That's a perfect lead into my last question, which do we know why the pickup in leasing over the last 4, 5 or 6 months? And I'm asking the why because maybe that's important to understanding whether this is sustainable or not. Or has this just been surprising to you as well, I don't know?

Yes. Good question, Michael. Look, I think it might be a few things. A couple of years ago, there were a lot of companies that were sort of kicking the can and doing short-term renewals. And I don't think landlords and companies are doing that anymore. Landlords don't want them to and companies are getting closer to making their return to work decisions and seeing how their layouts are going to be. So I just think there was a wall of maturities that got lease maturities that got pushed out, they're now having to be dealt with. And then I also think -- look, I do think the distress is also increasing from the last couple of years. And some of those customers are also having to make those decisions that they're going to stay in that -- in a building or move. I do think -- the other thing I do think is from in-migration is starting to pick up a little bit in our markets. I mean we've been chasing a couple of customers. We just -- Raleigh just won one from Dallas. We were chasing them both in Raleigh and Dallas our corporate relocation, which is sort of fun to see those. If you talk to the economic development folks for the last couple of years has largely been manufacturing and industrial users. We're now starting to see there's more office using customers come in. Just this quarter, we did 10 leases to new-to-market customers. Now they are largely small regional offices. The largest was 27,000 feet and then about a 17,000 footer, and that goes down to 2,000 or 3,000 feet is over 60,000 feet of in-migration Companies that are moving and open up new offices, largely just opening up new offices in our market. So I just think the things just we're starting to just see it open up a little bit.

We now have Tayo Okusanya from Deutsche Bank.

Just a quick one from me. In terms of just overall demand, could you talk a little bit about demand for some of the recently vacated space like activity space in the CDC space? I think you already gave color about some of the upcoming vacancies. We're curious about those 2 spaces, in particular, and if any of the new leasing this particular quarter was related to backfilling any kind of recent vacancies?

Yes, Tayo, I think specifically on Tivity, as you know, we redid the landmark lease earlier this quarter. I think earlier last quarter, the -- we took back about 110,000 feet. We have really good activity, multiple prospects on it. So we did a big Highwoodtizing project a couple of years ago or a year or so ago and it finished and it's really generated demand. It's been very well received in the market. So that's about 110,000 feet, and we've got prospects, I'd say, prospects either agreed to or strong prospects that we're trading paper with for about 80,000 feet or so. I don't know if we'll make all those, but we feel pretty good about a lot of those. So we feel really good about that. I don't think much of the leasing activity this quarter was really backfilling anything other than maybe 1 or 2 of the Tivity spaces that we've signed.

We now have Peter Abramowitz of Jefferies.

Yes. So just kind of want to dive into some of the comments around potential kind of future growth opportunities some of the underwriting you're doing. I guess we have a decent sense from whether it be noncore asset sales or the unsecured bond deal that you did last year where your cost of capital might be today. So I was just wondering if you could talk about from a pricing perspective, whether initial yields or IRR relative to that cost of capital kind of what you're hopeful for? What's realistic when deals do finally kind of start to come back to market and start to pencil like where are your expectations for where those would be from an underwriting perspective?

Sure. Peter, as you know -- I mean, look, we're interested in growing the business and improving the quality of the portfolio, both core and value-add acquisitions. Coming out of the GFC, we primarily did value-add acquisitions. We want to own quality assets, the best business districts of our markets. And we're looking to create where we can improve our cash flow growth over time as well. And I think coming out of GFC, we were able to do that very successfully. So where are we now in terms of the underwriting? I think, obviously, we look for a discount to replacement cost and a lot of different metrics. . IRR, we're sort of underwriting to a double-digit -- low double-digit unlevered IRR, Peter, is sort of what we're doing today. And again, there's a handful of deals out there that we're seeing where they're going to price, but we'll see. But it's those type of metrics, if we can get a stabilized cap rates in the high single digit, low double digit with an 11% or low double-digit unlevered IRR, those feel pretty good for us that we can improve the quality of the portfolio. If we can get acquisitions under our belt that are like that.

That's helpful. And then one on the leasing market. Could you just comment on sort of the length of deal cycles? I know that was both for you guys and for office overall became more of a challenge last year that tenant decision-making was just a little bit slower. Could you talk about kind of that dynamic and where that's at in the first couple of months to start the year?

Yes. Certainly, that's been the frustrating part. It's definitely taking longer to get deals done. Bigger was really taking longer. I mean some are -- we think we're going to get it done. It may get pushed a quarter, 2 quarters, in some cases, even 3 quarters. It's taken a long time. So the bigger the deal, the longer it takes, in general, just whether it has to go up through the corporate real estate department up to the CEO. And a lot of it is based on the CEO's confidence level in the economy as well. I think interest rates plays into that as well. So longer -- bigger deal takes longer. Smaller deals, our bread and butter, we're still getting a lot of those done. Those are even taking longer, but not nearly as long as, call it, the 100,000 square foot users and above. The nice thing we've seen in the last, I'd say, quarter or 2, is we've seen full floor, more full floor users, more 2-floor users. So that's sort of mid size type user, we're seeing a lot more of those and some of the decisions getting made with those sized customers. Does that make sense?

Peter, it's Brian. Other thing that's taken a little while, people are continuing to price and price work. We don't have a punchline yet on that, but the -- it seems like escalations have stopped or leveled out or plateaued on build-outs. And so there is potential visibility into maybe getting a better price. So people kind of are holding on to see some of that TI that build out that cost of moving into new space come down.

That's helpful. And one last one, if I could. Just trying to think through from a modeling aspect, the earnings impact of any potential disposition through the rest of the year? I mean, are the deals that you've done so far in Raleigh is that kind of a good barometer of what we should expect pricing-wise?

Peter, it's Brendan. So first, what I would say is while the dispositions that we did so far this year are dilutive to FFO, I think to your first question, they are accretive to our cash flow. So I think we would expect comparable dynamics in terms of any future dispositions that we may do this year or on a go-forward basis. Where the cap rates shake out, it depends. Every deal is unique. So it depends on the particular circumstances for that particular deal. I think it's -- we'll see where they -- where cap rates shake out. I would say the bias is maybe a little bit higher than the cap rates that we transacted at early this year, but we'll see. But I think in general, the capital recycling activity that we do, what you ought to see is an improved cash flow outlook for the company and improved portfolio quality and therefore, a lower risk overall for us as an enterprise.

We now have Ronald Kamdem of Morgan Stanley.

Just the first question, you guys talked about some of the expirations through the year and how that might be a headwind to occupancy. Maybe just give us a picture of what retention would look like in '24 if we were to exclude those move-outs. So just the retention on everything else [indiscernible].

Yes. Ron, it's Brendan. I'll take that. So retention, we always struggle with this answer and question that we get often because we do so much early renewals that it depends on the date that you start kind of counting retention. So prior to coming into this year, we had already renewed 1 million square feet of original 2024 expirations that are pushed out into future years. So when you look at what's left over, as you kind of come into the year, you have adverse selection bias there. And clearly, like that's where the retention level on the remainder is low. So that number probably for kind of what we had left in the year, including the known move-outs, was probably, call it, in round numbers, around 40%. We talked about some of the large known expirations that are there. So that number would be a little bit -- would be 10-plus percentage points higher if you excluded those from kind of the numerator and denominator. But that gives you a sense of kind of where we are.

Got it. And the second one on McKinney & Olive. You guys talked about paying down that loan potentially. I guess, what the sales you guys have executed on and potential additional $150 million to come. Should we take that to mean you're just going to use existing corporate liquidity or could we potentially see you guys tap the unsecured market to get here?

Yes. No, no plans to -- for capital raising for this year. So I mean, I think as we here right now, we have almost nothing drawn on the line. So have that full $750 million that's available, certainly have construction loans in place for the 2 Dallas development projects. So that would satisfy the bulk of the remainder of spend there. So we really have plenty of liquidity. And I think to your point, with potential dispositions that are on the horizon. I think it's more of a challenge in terms of deciding what capital we want to pay off with any disposition proceeds that come in the door rather than thinking about capital raising.

Got it. And. then I think you guys talked about Pittsburgh and Bass, Berry. Maybe just an update on Novelis as well would be helpful.

Yes. So on Novelis, again, we like the prospect activity. As you all know, we went direct with one of the sublease customers, and we've got over 200,000 square feet of prospects to backfill the remaining, call it, 100 or so thousand feet, maybe a little more than 100. So we feel pretty good about the prospect activity, a lot of tours.

We now have Dylan Burzinski from Green Street.

Most of my questions have been asked. But I guess, Brian, going back to your comments on focusing on occupancy over rental growth. I mean, is it your expectation that we'll continue to see some degradation in net effective rents across the portfolio? Or how should we be thinking about that?

Dylan, I'm accused among the 3 around this table to be the eternal optimist. So I'll lean into that a little bit. Now look, obviously, headwinds, I think tenants, feel like it's a tenant's market and it is. But I do feel constructive on our ability to hold kind of where we're at based on the quality of the assets, based on the 7 different things Ted highlighted why maybe our leasing momentum is maybe more than previous averages with regard to flight to quality, flight to capital. I don't see it greatly improving anytime soon, maybe as costs come down to fit up. But in general, I feel like. I feel pretty optimistic about where we're at. Brendan?

Dylan, what I would just add to that is, I think given the kind of competitive dynamics that are in the leasing environment as it stands now, our ability to fund TIs is a benefit to us. But what we're looking for in terms of customers and prospects to get in consideration for that is higher face rates and longer term. So I think what that's going to do is drive -- is going to keep net effectives holding up reasonably well, which is what we've seen generally happen. Now that might mean that there's a little bit more upfront capital, but that secures longer lease term at attractive rate. So I don't think you're likely to see significant degradation in terms of net effectives, but it might mean there's a little bit more upfront capital.

Thank you. We have no further questions on line. So I'd like to hand it back to Ted Klinck for some final remarks.

Thank you for everybody for joining us on the call today, 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.