HIW - NYSE

Good morning. Thank you for attending the Highwoods Properties Q2 2025 Earnings Call. My name is Matt, and I'll be the moderator for today's call. [Operator Instructions] I'd now like to pass the conference over to our host, Brendan Maiorana. Brendan, please go ahead.

Thank you, operator, and good morning, everyone. Joining me on the call this morning are Ted Klinck, our Chief Executive Officer; and Brian Leary, our Chief Operating Officer. For your convenience, today's prepared remarks have been posted on the web. If you have not received yesterday's earnings release or supplemental, they are both available on the Investors section of our website at highwoods.com. On today's call, our review will include non-GAAP measures, such as FFO, NOI and EBITDAre. The release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Forward-looking statements made during today's call are subject to risks and uncertainties. These risks and uncertainties are discussed at length in our press releases as well as our SEC filings. As you know actual events and results can differ materially from these forward-looking statements and the company does not undertake a duty to update any forward-looking statements. With that, I'll now turn the call over to Ted.

Thanks Brendan. Good morning, everyone. We had another strong quarter with robust second-gen leasing and excellent financial results. We entered 2025 with two key priorities: first, continue to upgrade our portfolio quality by rotating out of slower growth, more CapEx intensive properties and rotating into higher growth assets that are more capital efficient; and second, make significant strides towards capturing the substantial NOI growth potential we have in our operating portfolio and development pipeline, which will drive meaningful organic growth in future years. We continue to make progress towards both of these priorities. In the second quarter, our leasing volumes were strong, including signing several second-gen new leases on spaces that are currently vacant, and we continue to make progress on the remaining availability at our development properties. While we didn't close any acquisitions or dispositions during the period, we're actively underwriting potential new investments and have numerous assets in the market for sale. We will continue to deliver on our proven strategy of rotating out of older, slower growth properties that are more CapEx intensive into better located, higher growth assets that are more capital efficient. We continued our healthy leasing volume in the quarter with 920,000 (sic) [ 923,000 ] square feet of second-gen leasing, including 370,000 (sic) [ 371,000 ] square feet of new leasing. The consistent level of elevated leasing volumes for the past several quarters increases our confidence that our occupancy will steadily improve late in 2025 and escalate thereafter. We have also further unlocked the NOI growth potential in our four core assets with meaningful upside potential. As a reminder, our core four are Alliance Center in Buckhead and three assets in Nashville: Symphony Place in the CBD; Westwood South in Brentwood; and Park West in Franklin. We have forecasted $25 million of annual NOI upside just from stabilizing these core four. After our leasing performance this quarter, we now have 50% of this upside scotched with signed leases, and we will have strong prospects for another 20%. Turning to our development pipeline. While we only signed 19,000 square feet during the quarter, we have advanced a number of prospects through the leasing process and remain confident we will increase our leased rate by the end of the year. We have over $10 million of NOI growth potential at GlenLake III in Raleigh and Granite Park Six in Dallas, two development properties that delivered in 2023 but are not yet stabilized. We have over $6 million of this NOI potential already signed, but where occupancy hasn't yet commenced. In addition, we have over $20 million of NOI growth potential at the two developments that delivered earlier this year, 23Springs in Dallas and Midtown East in Tampa. Our first customers at these developments recently moved in and additional customers will take occupancy late in 2025 and in 2026. Combined, these two properties are 59% leased, and we have strong prospects for another roughly 15%. Given the combination of high construction costs, elevated vacancy levels, limited financing availability and risk-adjusted yield requirements, starting a new spec development continues to be difficult for anyone in this environment. However, the absence of new deliveries and dwindling availability over the next few years creates an opportunity for meaningful rent growth at high-quality second-gen product. We are already seeing the benefits of limited supply as large blocks of high-quality space across many of our markets are being absorbed, which is driving rent growth in the best locations across the Sunbelt. The powerful combination of signed leases moving into occupancy in our operating portfolio, ongoing stabilization of our development pipeline and continuous portfolio improvement should drive significant growth in earnings and cash flows in the foreseeable future. You may have seen some press recently about Ovation, our future mixed-use development in Franklin, outside of Nashville. We recently submitted our development plan to the city. We remain confident Ovation represents one of the best mixed-use ground-up development sites in the entire country and will be a significant opportunity to create sizable value for Highwoods shareholders. We are working with our partner in the city of Franklin to finalize development plans and do not expect any development announcements until late next year, at the earliest. Turning to our performance. We delivered excellent financial results in the quarter, including cash flows that continue to be resilient even with elevated leasing CapEx due to future occupancy build. We delivered FFO of $0.89 per share in the quarter. Our occupancy was roughly flat from Q1 at 85.6% while our leased rate increased 80 basis points to 88.9%. Leasing is off to another strong start early in Q3 with over 300,000 square feet of second-gen leases signed, including over 100,000 square feet of new leases. We remain optimistic we will see the leased rate and occupancy levels increase by the end of the year. With our strong financial performance in Q2 and upbeat outlook for the balance of the year, we have once again raised the mid-point of our 2025 FFO outlook, up $0.02, to a range of $3.37 to $3.45 per share. Since the beginning of the year, we have increased our FFO outlook by $0.06 at the midpoint, or nearly 2%. In conclusion, we are extremely excited about the next few years for Highwoods. We are operating in the strongest BBDs in the Sunbelt that continually have proven to be the places where talent and companies want to be. We have a clear pathway to meaningful growth, growth in earnings, growth in cash flow and growth in NAV – from our existing portfolio and development pipeline. Plus, we believe the next 12 months represents an excellent opportunity to deploy capital in new investments with strong returns and recycle out of older, non-strategic properties where risk-adjusted returns don't meet our objectives. With a strong balance sheet, including limited near-term debt maturities and ample liquidity, we are well-positioned to execute on the opportunities ahead of us. Brian?

Thank you, Ted. Good morning, everyone. Kudos to our tremendous team for the results they delivered in the second quarter with 923,000 square feet of quarterly leasing, of which 371,000 square feet was new, signaling future occupancy gains as those leases commence. Our Sunbelt states are repeat best-for-business winners, our markets are outpacing the nation with higher population gains and lower unemployment rates and our BBD portfolio is outperforming as the beneficiary of our customers’ preference for in-office occupancy and, in turn, their continued flight to quality, capital and owners. With corporate, and now federal conviction behind the in-office value proposition, we believe equilibrium has been reached as it relates to remote work and no longer see it as an acute headwind to our portfolio. With greater numbers returning to the office, there's not only less commute-worthy options available at the top of the market, the bottom is shrinking as well with CBRE reporting that over 23 million square feet of U.S. office space is on track for demolition or conversion to other uses this year, far outpacing the almost 13 million square feet of new office space being completed in 2025 which figure in itself is far below the 10-year annual average of 44 million square feet of annual deliveries. Coupled with a record low construction pipeline and with the development period of an office building being measured in years, this slow squeeze play has started to move the market in an owner's favor in certain instances such as new trophy development and in high-barrier-to-entry BBDs with the potential for a meaningful and extended shortage of Class A space in the not-too-distant future. Our Sunbelt BBD strategy, which is both urban and suburban in nature, is serving us well. All of our markets are in states that are repeatedly rated by CNBC as the “best for business” with North Carolina, Texas, Florida and Virginia taking the top four spots this year. With regard to the Tar Heel State, between Charlotte and Raleigh, North Carolina is home to 33% of our revenue and 36% of our NOI. Georgia and Tennessee aren't far behind rounding out the top eight of CNBC's rankings. Bloomberg Economics brings this to bear highlighting that the Southeast accounted for more than 2/3 of all job growth across the U.S. since early 2020. These three forces, improving in-office utilization, declining competitive supply and strong demographics, all combined with a resilient economy, are bearing fruit in our leasing activity and make us optimistic our strong performance will continue. To that end, we signed 102 leases in the second quarter with expansions outpacing contractions almost 3:1. Net effective rents averaging $19.30 per square foot with an average payback of 17.2%. Of the 102 leases we signed, 42 were new with almost 20% of those new-to-market. Cash and GAAP rent growth were strong at 3.6% and 17.6%, respectively. Above all, we are most enthusiastic about the progress we've made, and continue to make, on our occupancy upside across four core assets in Atlanta and Nashville. Three of these four have completed or in the midst of completing, our Highwoodtizing redevelopment program, essentially positioning them to directly compete with new construction. The fourth, in -- Westwood South, is in the highest of barrier-to-entry BBDs of Brentwood in suburban Nashville, and it has a leasing prospect pipeline that would fill the building 2x over. Symphony Place in Downtown Nashville started the quarter strong. The seven-floor lease with Nashville-Mainstay and global law firm Holland & Knight was proof-positive that the environment and experience we are curating there is what Nashville's best-and- brightest are looking for and there are leasing prospects for over 80% of the building. While you never bat 1000%, with these prospects and inbound activity picking up in Nashville, Symphony Place is poised to deliver meaningful organic growth. The backfill update from Nashville is a good segue into Music City's broader market performance with the nation's lowest large-metro unemployment rate. Cushman & Wakefield reported Nashville having the nation’s third highest positive net absorption, and the market's robust demand generated almost 1 million square feet of leasing for the quarter, the highest for Nashville since the second quarter of 2021. JLL added that there are almost 2 million square feet of active requirements in the market and with a decade-low construction pipeline delivering at 79% preleased, and with no new starts in the foreseeable future, vacancy should decline, rents should increase and momentum should continue. The second quarter leasing we did in Nashville led our markets for both total and new volume, had our highest dollar-weighted average lease term at nine years and was tops with GAAP rent growth of 23.8% and cash rent spreads of 12.4%. Southeast of Nashville, Charlotte continues to be a talent magnet with new data showing that the area's daily net migration count is up from 117 a day to 157 according to the Charlotte Regional Business Alliance and where Cushman highlighted the region as one of the nation’s top quarterly job generators with a 2.2% growth rate. Cushman also noted Charlotte's’ fourth consecutive quarter with leasing activity over 500,000 square feet where over 80% occurred in the submarkets of Uptown, Midtown and South Park. Our 2 million square foot Charlotte portfolio, which is entirely located in the Uptown and South Park BBDs, leads the way at 96.6% occupied. Our 1.2 million square foot Legacy Union Uptown portfolio sits squarely at the geographic center of Charlotte's Class AA demand and is 95% occupied, while our Six-building, 800,000 square foot portfolio in South Park is 98% occupied. With Charlotte's’ construction pipeline empty and with multiple large inbounds cited by the Charlotte Alliance, not including Citigroup or AssetMark's recent significant job announcements. Market vacancy and rental rates should continue to move in opposite directions. Of all of our markets, Dallas continues to be an economic juggernaut with continued job and population growth and positive net absorption. JLL noted that 60% of Dallas' office pipeline is build-to-suit construction for Goldman Sachs and Wells Fargo and that there are an additional 7.6 million square feet of requirements in the market. Our Dallas development pipeline is the benefitting from this demand with prospect activity at both our 422,000 square foot Plano BBD Granite Park Six development, which is currently 59% preleased, and our 642,000 square foot 23Springs development in Dallas' Uptown BBD, which itself is 63% preleased. Also in Uptown and down the street from 23Springs is our 557,000 square foot in-service asset, McKinney & Olive, which is over 99% leased. I would be remiss if I didn't share highlights from Tampa, both as a market and from our portfolio’s perspective. CBRE led this quarter's Tampa market report with a headline that reads a positive path ahead as the office market builds on Q1 surge. The report noted that Tampa posted its fifth consecutive quarter of positive net absorption and the pipeline for continued positive absorption is healthy with 1.3 million square feet of future tenant move-ins tied to already-executed leases. With an additional 1.4 million square feet of active prospects and one of the lowest market-wide vacancies in the nation per CBRE, we are very pleased with our market activity where we ended the quarter at 86.1% occupied but more than 92% leased. Our Midtown East development recently delivered 40% preleased and has strong prospects for another 40% of the building. Underwritten to stabilize in the second quarter of 2026, Midtown East was the only building under construction the better part of two years and is the tallest building in the Westshore BBD and in the heart of Midtown Tampa's thriving mixed-use district anchored by Whole Foods, two hotels and luxury apartments. With a commute-worthy portfolio and a trophy-asset team, Highwoods is creating compelling environments and experiences that are giving our customers a competitive advantage in recruiting and retaining the very best. This advantage is recognized in our activity and economics, and we are steadfast in our conviction that great value is created when the best and brightest are better together. Brendan?

Thanks, Brian. In the second quarter, we delivered net income of $18.3 million or $0.17 per share, and FFO of $97.7 million or $0.89 per share. The quarter included three atypical items. First, we received $3 million from the Florida Department of Transportation for the impact of roadway improvements adjacent to a noncore property in Tampa. This payment, which is reflected in other income, was expected and has been included in our FFO outlook since the beginning of the year. Second, we received $1 million of term fees. The largest was attributable to a customer where we proactively took back space early and have subsequently re-let this space to a new user with a long-term lease. This term fee temporarily boosted 2Q earnings but will be offset by downtime at the property. Third, we wrote off nearly $1 million of predevelopment costs at sites where we no longer believe office to be the highest and best use. Otherwise, this was a very straightforward quarter. We are pleased with our results, which demonstrate resiliency of our operations and cash flows. Our balance sheet remains in excellent shape. Our debt-to-EBITDAre (sic) [ debt-to-adjusted EBITDAre ] ratio was 6.3x at quarter-end. We only have $106 million left to fund on our development pipeline and are currently maintaining over $700 million of available liquidity. Our only debt maturity over the next 18 months is a $200 million variable rate term loan that is scheduled to mature in May 2026. Discussions with our bank group have been very positive, and we remain comfortable in our ability to extend this loan. As Ted mentioned, we have updated our 2025 FFO outlook to $3.37 to $3.45 per share, which equates to a $0.02 increase at the mid- point. The underlying picture is actually stronger than the headline implies. As I mentioned earlier, the second quarter included $0.01 of higher G&A due to the expensing of pre-development costs that were not included in our prior outlook. Plus, we pushed $0.02 of interest income out of the 2025 forecast and into future years. These items have been partially offset by a $0.01 increase to prior year property tax refunds expected during 2025. Overall, this equates to $0.02 of net headwinds that were not included in our April outlook, but these have been more than offset by $0.04 of higher anticipated NOI, resulting in the increase of $0.02 per share at the midpoint. Turning to leasing and our occupancy outlook, we expect to be towards the low end of our year-end 2025 occupancy outlook of 86% to 87%, largely driven by proactively taking space back early from users where we have subsequently re-let these spaces to new users with leases that don't commence until after year-end. This activity, while reducing near-term occupancy, secures additional long-term tenancy across our portfolio and reduces our rollover risk in future years. We also proactively took back 35,000 square feet early from a user to secure a long-term lease extension on their remaining 70,000 square feet on an as-is basis. Finally, we have one user that we originally expected would be able to take occupancy of their 50,000 square feet in the fourth quarter but we now expect this lease to commence in the first quarter of 2026. These timing issues have moved 130,000 square feet of previously projected occupancy at year-end 2025 into the future. Lastly, I want to review in more detail the performance of the core four operating properties with meaningful occupancy upside that Ted highlighted, as well as our development properties. At the beginning of the year, we called attention to $25 million of embedded annual NOI growth potential upon stabilization of the core four. At that point, we had locked in $5 million of this future upside with signed leases. Today, this number is now up to over $12 million, and we have strong prospects for another $5 to $6 million. Our two 2023 development deliveries, Granite Park Six and GlenLake III have over $10 million of annual NOI growth potential upon stabilization, over $6 million of which has been secured with signed leases, up from $4 million at the beginning of the year. The two developments that delivered earlier this year, 23Springs and Midtown East, have over $20 million of annual NOI growth potential upon stabilization. We have secured $14 million of this upside with leases that will commence in the future, up from $11 million at the beginning of the year, plus we have strong prospects for another $3 million. In total, these eight properties have over $55 million of annual NOI growth potential above our 2025 outlook. We have locked in over 60% or more than $33 million of this upside with leases that have been signed, but are not contributing to 2025, plus we have strong prospects for another $9 million. To be clear, it will take time for these signed leases to come online. We are also still capitalizing interest and operating expenses at 23Springs and Midtown East as these two development projects delivered earlier this year, so not all of the NOI from those two assets will be realized in future FFO or operating cash flow. However, the leasing activity is encouraging, and we expect all of the leases signed to date to commence by late 2026, which gives us confidence about the trajectory of earnings and cash flow as we move into 2026 and even into 2027. To wrap up, we are ahead of our expectations in terms of executing on our embedded growth drivers, with the potential to secure even more of this upside over the next few quarters. We are also encouraged at the potential to recycle additional capital and thereby further improve our long-term growth profile. Given our strong markets, BBD locations, proven operating and asset recycling strategies and well-positioned balance sheet, we are encouraged about the next few years for Highwoods. Operator, we are now ready for questions.

[Operator Instructions] First question is from the line of Peter Abramowitz with Jefferies.

Just wanted to kind of dig into the guidance a little bit. So you had kind of significant beat in second quarter here and you had a kind of big other income items. Just wondering kind of what else went into the guidance that it didn't necessarily flow through to a slightly larger raise? Is there a degree of kind of conservatism still in there and kind of your expectations for the back half?

Peter, it's Brendan. I'll try to take that. So I would say that I think as I kind of mentioned in the script, we had some other items that went against us, right? So there was $0.03 of kind of headwind, I would say, in the updated outlook that is not through the property level, not at the NOI level. So G&A is higher. We did incur that in the quarter. So that's part of the Q2 beat, I guess, relative to at least certainly Street expectations. But then there were some other income or interest income that we had forecast for late in the year that we now have pushed out of that. So that $0.03 of headwind has been more than offset by call it, $0.05 of NOI upside, if you include a little bit more in terms of prior year property tax refunds. So I think you're getting $0.04 of higher kind of NOI in those numbers. That's split between development NOI and the same property pool. So I think that's all pretty good. I would say I would maybe caution you and others to extrapolate a quarter or two to a full year outlook. I think what I would encourage everyone to do is kind of think about the totality of the year and then think about kind of all of the building blocks of NOI growth that we laid out as you think about future periods going forward. There's always some seasonality in numbers, there's moving of expenses that can move from 1 quarter to another. So I think if you extrapolate 1 quarter to another, it can kind of lead to a false positive or a false negative.

All right. That's helpful. And then could you talk about just kind of the opportunity set for acquisitions in your markets right now, kind of what you'd be targeting potentially from a return perspective, whether going in yields or longer-term IRRs? And does it seem like activity has kind of picked up since maybe it slowed down post the Liberation Day announcements?

Peter, it's Ted. I'll take that one. Look, I think you nailed it. Capital markets are definitely starting to open up a little bit. We're starting to see more high-quality assets come to market. I think the bid-ask spread is narrowing. Debt capital markets are opening up. So the availability of debt for office acquisitions is better today than what it was earlier in the year and certainly last year. Equity capital is coming off the sidelines. I think they're actually underwriting office again and not -- and they're being more constructive on the underwriting. So I think sellers have been waiting for this, and they're starting to bring assets to market and some of which are wish list assets. So a lot more in the market, a lot of higher-quality assets. Some of those are core, some are value-add, some are core plus. So we look at everything, and we're going to price it based on our evaluation of risk and certainly, from a return standpoint, it will be based on the risk-adjusted yield. So again, we look at everything and -- but we are starting to see some attractive opportunities that we've been sort of waiting for.

Next question is from the line of Seth Bergey with Citi.

Can you talk a little bit about your expectations for just concessions and TIs for some of the leasing that you've done in the quarter?

Yes, Seth, it's Ted. From a leasing perspective, as you know, we had another really strong leasing quarter. Our tour activity remains strong. It's the same trends we've seen for a while, continuing to see a flight to quality, flight to capital, flight to amenities, flight to location, same thing we've seen now for several years. Our leasing CapEx, it's been -- I think we're leveling off. I think we've certainly peaked. Our net effective rents were incredibly strong this quarter, so our concessions. While it varies by submarket and market, we've got some very strong submarkets where we're seeing concession packages come down. In addition to rates going up, it's still high in submarkets. So -- but overall, I think if you have a mix, it's going to jump around a little bit quarter-to-quarter, but in general, I think, it's fair to say concessions have generally peaked and market rents are going up. So it should bode well for net effective rents.

Next question is from the line of Rob Stevenson with Janney.

Just to ask the last question in a different way. Given all the leasing, when you take a look at the building improvement, second-gen tenant improvements and leasing commissions. Is there a spike that we should be expecting in a couple of the upcoming quarters given when this stuff hits? Or is that sort of low $40 million a quarter that you've been averaging for the last few years, been about where it's going to wind up being on a sort of smoothed out basis?

Rob, it's Brendan. I'll take that one or at least start. I think what I would say is you've probably seen the commission levels, I think, are -- have been high because of the volume and those get paid more quickly than the TIs get dispersed. So you've probably seen it kind of show up in commissions. I would say, last year when leasing volumes were very high, particularly new and in the first half of this year as well. For TI dollars, I would say that I think your question is a good one. I think we're going to remain at elevated levels in -- we were there last year. I think it's probably likely to be a little bit higher in 2025 and probably a little higher than where we were in the first half of the year. And we think in all likelihood, it will remain there in 2026 as well as we kind of keep this occupancy build going for the next several quarters. So we do think it's going to be elevated. I would say not dramatically higher than where we were over the past year or so. But I would say that I do think it's going to be high for the remainder of this year and in all likelihood next year as well.

Okay. That's incredibly helpful. And then I guess, Brendan, at this point of the year with a bunch of line items more or less locked in, what's the biggest swing factors between you guys hitting the sort of $3.37 versus the $3.35 (sic) [ $3.45 ] What's the biggest unknown for you at this point to keep the guidance range that wide?

Yes, it's -- so there's probably a couple of expense items, timing-related things that are in there. So I would say that there's a little bit of that variability within the guide. So that's in there. And then to the extent that we do anything that's meaningful that we have done a little bit of this year, which has proactively kind of take space back early. And for long-term benefits. So we've done that a few times. I think I highlighted some of that in the prepared remarks that we've done. There's some of that, which could happen as well with some conversations that are out there. And then we've got a little bit of what I would say are probably a little bit of variability in terms of lease -- spec lease that's out there. There are some renewals that could happen or could not. So there's a little bit of positive, negative on the lease side. But for the most part, I would say it's probably around expense timing, but probably not a huge amount of variability in terms of where we are now as you point out where we sit in the year.

Okay. And is it safe to say that given the timing that any acquisitions or dispositions at this point of any material amount would probably wind up being sort of mid- to late fourth quarter in terms of sort of being able to be closed at that point in time and sort of not really impacting numbers at this point very much, but there is still an opportunity for you guys to do stuff of materiality?

Yes. So just to be clear, any acquisitions or dispositions are not included in kind of the range, that would be outside of the range. But to the extent of where we sit in the year, the likelihood of an acquisition or a disposition, having a meaningful impact on numbers is probably fairly low. I think that's fair.

Okay. And then you talked about the term loan that you thought that you'd be able to extend that. Is that the sort of most attractive sort of/cheapest form of debt capital for you guys at this point in time?

I don't know that I would characterize it as the most attractive/cheapest form of capital that's available, but we'd like to have diversity in the debt stack that's there. And that's a good source of capital for us given that it's variable. If we do have a lot of disposition proceeds at any point in time, that becomes freely prepayable. And we like to have a little bit of variable rate in the stack because you always just want to kind of diversify the risks in there in terms of your interest rate exposure. So I think for all those reasons, it's an efficient source of capital. I don't know if I would necessarily characterize it as the cheapest form of capital.

Next question is from the line of Nick Thillman with Baird.

Maybe, Ted, we'll start off with this. Obviously, COVID and kind of the pandemic transferred a lot of these conversations on flight to quality and the type of assets. Kind of curious if you've taken a look at potential impacts of AI on demand and if that impacts longer term, the type of assets you guys want to own, whether it be individual submarkets or size of buildings and kind of how you guys are evaluating that as it's still early days, but just longer term sort of view?

Yes. Look, it's definitely early days, right? I mean obviously, the demand side, the West Coast is seeing a lot of demand for AI companies. So that's been great for them. In terms of us, look, very early on, I think companies are obviously -- I think every company in America is probably looking at how AI may impact their business going forward. But look, we've been through this before, whether it be on densification. I remember, 20 years ago, law firms were going to be reducing their space by a significant percentage because of the law libraries and all the other things they didn't need. So we've been through different challenges I think as an office industry for several years, and we've been able to manage through it and get as the markets continue to grow. So AI, I don't know what the answer is. Right now [Audio Gap].

Okay. And then just a question on -- you guys are kind of through a lot of the large like expirations you had within the portfolio. I guess what do you guys kind of view as like a normalized run rate when it comes to retention as we look at the expirations into the next 18 to 24 months.

Nick, it's Brendan. I'll take that. So we always struggle a little bit answering this question. I think when you look at early renewals that get done and you kind of think about a full cycle, our retention level tends to be, call it, kind of 60% to 65%. I think if you're looking at expirations that are going to occur kind of over the next 12 to 18 months, those numbers go down because you've got anti-adverse selection bias that's in kind of in the rent roll because you obviously don't early renew customers that are ultimately going to move out. So I would say, if you think about the next 18 months, so from where we are now through the end of 2026, we really, as you point out, have kind of worked through those large known move-outs and I think the retention level that we have from here kind of through the end of next year is probably in that 45% to 50% range, if I kind of had to give you a number that on a range, and that's probably a little bit higher than where we've been historically and certainly much higher than where we were over a 12- or 18-month period if you look at the preceding 12 to 24 months. So I think that gives us confidence that we're well set up to build occupancy as we go forward over the next 18 months or so.

Next question is from the line of Dylan Burzinski with Green Street Advisors.

Appreciate the comments on sort of the demand backdrop and how things are improving, but are you able to talk about sort of how that demand backdrop differs across your guys' market footprint? Are there any markets in which you guys have a portfolio concentration in that are experiencing outsized demand versus others?

Look, Dylan, I'd say certainly Charlotte, Dallas and Nashville, if you had to rank our markets, it'd be 1A, 1B and 1C. All three of those markets are outperforming. We're very well leased in Charlotte, so we're not able to move occupancy. But if you just think about the core four that we've talked about now for the last couple of quarters, three of the four of those are in Nashville. And we're making significant progress, certainly well ahead of our business plan on what we thought. So the demand in Nashville continues to be really strong. And then what we're seeing in Dallas on our development projects and just the inbound net migration to Dallas has been extremely strong, specifically to the submarkets we're in. So we love the demand in those three markets in particular. But at the same time, Tampa is performing very, very well. Brian talked about it on the preferred -- on our prepared remarks. We're seeing a lot of great demand there. So I'd say it's pretty broad based and certainly concentrated in those four markets, but broad-based in general.

Dylan, Brian here. I might just add. Charlotte, I think I mentioned it in the remarks, Citigroup and AssetMark announced in aggregate over 700 new jobs. And that's financial services, and so that's pretty well expected for Charlotte. I think they've done a great job of kind of capturing that. But the Charlotte Regional Alliance, which is sort of the evolution of the chamber there, recently highlighted there are six inbounds that Charlotte is looking at. Only one of those inbounds currently has a U.S. headquarters. So this is not just inbound domestically, even inbound internationally, and those six represent about 5,000 office using jobs, then I also sort of mentioned this net migration -- daily net migration, and this is sort of maybe silly math if you think about it. But adding almost another 50 people a day over a year, it's close to 14,000 new people. I mean you can just figure out what the impact is in terms of the demand there. So I think that's a good one. And then Dallas, Ted mentioned there's 7.5 million -- over 7.5 million square feet of requirements in the market, now Dallas is a huge market. But where we're focused, we're getting great demand there. Nashville's got almost 2 million square feet of active requirements in the market. Many from kind of code name, multi-market. CBD was the most active submarket this last quarter. And Ted highlighted Tampa, there's over 1 million of active prospects in Tampa as well. And we're really happy with the inbounds we've seen in our development there, some really kind of blue-chip names looking at investing in the best space in Tampa.

Appreciate that color, guys. And then, Ted, I think you mentioned, obviously, development pipelines across your markets are shrinking significantly and no new ground-up construction is likely to start given how pressured development economics are today. Can you sort of help -- sort of frame that in terms of where you think replacement rents would need to be versus where market rents are today.

I think it certainly varies by market, right? The differential, the closest market we are to new development is probably Dallas, right? I think Dallas is proving out whether it be in Uptown, in the Knox-Henderson area, Preston Center, those three submarkets in particular, in Dallas are probably at or approaching cost-justified rents. Outside of that, most of our markets is probably 20% to 40% off. And that's new development today, what rates they're getting versus what you'd need to build something more. The last few years when the starts haven't been all that high, the construction costs have continued to go up. You'd think they level off, but they have continued to go up. So the rents you need and that's whether it be hard costs, financing costs, what have you. So the rents you need are quite a bit higher than what they are in the existing development pipeline. So again, varies by market, but it's a pretty big delta.

Next question is from the line of Vikram Malhotra with Mizuho.

I wanted to go back, I guess, Brendan to something you mentioned about sort of '26. Given the signed but not commenced leases or the lease rate and the benefit of that going into '26. You mind just walking us, I am not looking for a number, but just like what are the other kind of moving pieces that make probably '26 visibility either much better than you've had in past years? Or is there some other swing factor? Just how much derisked is '26 growth from here on.

Yes. Vikram, it's a good question. It's -- we've obviously built a lot of embedded growth through the leasing that we've done to date. And I think if you look at the leased rate versus the occupied rate, a 330 basis point spread is the highest that I can remember that we've had, certainly within the past several years, that's the highest spread and is more than double what the average is. So our normal lease to occupied spread is, call it, 100 to 200 basis points, so 150 at the midpoint, to be more than double that is a good indicator that occupancy is likely to grow as we go forward. And a lot of those leases are signed, as you point out. Now clearly, we're assuming that the economy and the leasing market are going to hold up from here and go forward at roughly where we've been to, I think, drive and realize kind of the growth potential as we go out into next year and beyond. So there's a little bit of we need things to kind of continue to hold up. But we've certainly done a lot of the good leg work that's there and are well positioned to deliver on that growth. I think the way that I would think about this. And again, I know you know this, but we're not in a position to sort of talk about with any specifics in terms of numbers for next year or thereafter. We do think we have a good opportunity to grow occupancy as we migrate late in this year and then throughout 2026. So I think we've talked in the past where we would say, year-end occupancy kind of '25 through '26. I think we have the opportunity to grow that 100 to 200 basis points in a fairly steady manner throughout the year. So unlike in years past where we've often have a seasonal dip early in the year and then build back. I think we're likely to see a more steady cadence of occupancy build as we go forward. But beyond that, we've got some of the development deliveries that are there. So I think I talked about in the prepared remarks where we are with GP Six and GlenLake III. Neither of those assets are recapitalizing any costs associated with those, so as those leases commence and come online, all of that falls to the bottom line. We have the two development deliveries that were earlier this year, those should also be additive, but we are capitalizing cost operating and interest on those two assets. So that NOI will come online and will be additive but will be somewhat offset by some expensing of interest and operating expenses compared to 2025. But all of that gives good growth potential and gives some good growth drivers over the next several quarters. And then outside of that, I would say, it's more just the things that are kind of unknown. Don't expect to do a lot of financing over the next 18 months. The balance sheet is in pretty good shape, and then it would come down to what we may do on the acquisition or disposition side.

That's helpful. And just one more. I mean I think the team talked a lot about these big RFPs, and I think you've mentioned like four or five non- or foreign firms looking for headquarter space. One, just how competitive do you think this process is? Like what sort of competition is there from landlords to kind of win these deals, and do you mind giving us a little bit more color, like what type of industries is this demand coming from, especially the foreign entities you mentioned?

Vikram, Brian here. I'll take a shot. Couple of things. They're all generally code named and what's interesting is because of the markets we're in, we will sometimes see them pop up in multiple markets. So whether it's Charlotte and Atlanta, whether it's Nashville and Charlotte, whether it's Atlanta and Raleigh. So it's interesting there. In the Charlotte area, yes, there's a financial services bent. But at the same time, there are some kind of headquarter or U.S. headquarter locations for international firms that manufacture things that are bringing -- they are manufacturing the products they build, state side, to sell kind of a domestic product made here. So I'm not sure you can necessarily connect that to the change in international trade. This is stuff that's kind of been working for a while. One thing I will say is almost all of these, the states, those same states that I mentioned are getting ranked for the best-for- business by CNBC. They are all at the table and the states have incentive plans. They have partnerships. They're open for business. They are working with these companies and these site selectors, and so it's very much a public private partnership in every place. And then they're looking at the BBDs that we're in because that's when they kind of bring external sensitivity in terms of talent, they are very much focused on exceptional experience. And so that's where we're seeing a lot of them. Unfortunately, in Charlotte, we don't have any room at the inn. But because of that, we're getting a good look and understanding who's coming in.

Next question is from the line of Ronald Kamdem with Morgan Stanley.

Just two quick ones. Going back to the comments on the acquisition front. Just digging a little bit there. Just any curiosity in terms of markets, in terms of situations. Are these distressed. Are these funds? And also, you may have mentioned the cap rate before, but just if you could remind us sort of cap rate and IRR ranges.

Sure, Ron. Markets, look, there's opportunities out there in multiple markets. Just -- I think sellers again have been waiting to -- for this time for the office capital markets to open up. So we're seeing some high-quality assets really across our footprint, right? And cap rates, I'll tell you for a high-quality trophy core asset, well leased with a decent WALT. It's plus or minus 7% or so. But again, that varies by market a little bit by the weighted average lease term, the credit, whether there's below or above market rents. So there's just a lot of variables that go into it that may cause the cap rate to be a little bit higher or a little bit lower. IRRs are in the probably high single-digit to low double-digit type of range. Again, depending on the market and the specific profile, the acquisition-specific deal.

Great. And then my second question, just a commentary about maybe the capital markets feeling a little bit better. Does this mean you guys are sort of closer to sort of bringing Pittsburgh back online for a sale potentially maybe at the end of this year or even next year, just how are you guys thinking about sort of that market exit.

Yes, certainly, I do think we're closer today than what we were 3 months ago, 6 months ago, 2 years ago. So we're still waiting. We're having a lot of leasing success in Pittsburgh. So we're going to be patient and to bring it out the right time. Still might be a little bit early. But we've got -- if you look at our dispo guidance, it's another $150 million this year. We've got a number of buildings that are out in the market right now and others that we're prepping to bring to market. So we -- look, we -- if I had different profile, it's a lot like what we've sold the last couple of years. And over the last several years, it's a mix of single tenant longer-term lease buildings together with some older higher CapEx, lower growth assets as well. So we've got a number of those out in the market that we're marketing in multiple markets. So Pittsburgh would be in that mix at the right time.

Next question is from the line of Omotayo Okusanya with Deutsche Bank.

I just wanted to follow up on Ron's question. Again, just as you guys kind of take a look at different markets and what's happening with demand and supply fundamentals, as we kind of look at what's happened with capital markets, just wondering if there's any scenario where we could see you enter new markets or possibly also exit additional markets apart from Pittsburgh, that's earmarked for exit.

Yes, this is Ted. I'll take that. Look, I think, as you know, we've entered 2 markets in the last 6 years. We went into Charlotte in 2019, Dallas in 2021. So I would -- and then we've exited three markets during that same period. So look, we're always looking at new markets. But I'd tell you right now, we're sort of pleased with our footprint. We've announced, obviously, exit out of Pittsburgh over time. But we're pleased with our market selection at this time.

Okay. That's helpful. And then also following up on Vikram's last question. Again, Brendan, I appreciate all the color in regard to how occupancy could kind of shape up over the next 18 months or so. Just kind of curious within that while there are no big kind of 100,000 square foot move-outs that are kind of known. Can you just talk a little bit about kind of like the next level below that like the 50,000 to 100,000 square foot leases and if there could be a couple of those that could kind of hinder occupancy growth?

Yes. Let me start, if needed Brian or Brendan might jump in. Look, demand we're seeing across our markets, clearly, a trend we've seen in the last couple of quarters is starting to see some larger users out there. But I would tell you, our bread and butter is still that 5,000 to 15,000 square foot user. So we're going to pick off a floor or two here and there, but we're -- our bread and butter is still going to be that 5,000 to 15,000 square foot user. Then when you're -- and we're seeing that in most of our markets, then when you look at who's doing it, it continues to be professional service firms, the law firms, the banks, the accounting firms, engineering firms, healthcare has been pretty good. That's continuing to be a good demand driver for us. And then the other thing that sort of has been slow and steady the last several quarters we've talked about is our expansions, our net expansion activity. Just in the last 4 quarters, we've had 53 companies expand, 21 contracts for a net of over 200,000 square feet of net absorption. And then look, the fourth demand driver is the in-migration that Brian talked about earlier. This quarter, we had eight companies that are new to our markets. All of them, they weren't relocations, but there are companies that are coming to our markets, adding offices. That was another 27,000 square feet across four different markets. So it's been pretty diversified. Both larger tenants as well as just our bread and butter.

Yes, Tayo. So what I would just add to Ted's comments are just rather than kind of go space by space kind of getting into the weeds on things. There's always going to be customers that move out. There's always going to be customers that move in. I think in -- I forgot who asked the question, but over the next 18 months or so, if we're in that kind of 45%, 50% retention level of those remaining leases, that's 3.1 million square feet that we've got between now and year-end 2026. If we continue at 300,000 square feet a quarter of new that's going to replace -- more than replace what the likely kind of move-outs would be to the positive by probably 200,000 to 300,000 square feet. And then what I think is likely is you're going to see that leased occupied spread narrow, and that's going to add more in terms of occupancy, so that creates the environment to drive occupancy higher. So I think that sets us up well. But again, we've got to continue to lease space, and we feel confident about that given the pipeline that's out there. But certainly, there's a long way between now and the next 6 quarters.

Next question is from the line of Young Ku with Wells Fargo.

Wells Fargo Securities, LLC, Research Division Yes. Great. Brendan, I just wanted some clarification on the other income. Thank you for that detail on the $3 million payment from Florida. How should we think about that other income line item for the rest of the year? And then are there similar type of opportunities in '26?

Yes, Young. It's a good question. Yes, we've kind of been running at that, call it, on a normalized basis, $1.5 million a quarter and then obviously, this quarter, I think you saw that number spike up to $4.5 million or a little more than that in the quarter, which was driven, as you pointed out by the FDOT payment. I would expect that, that other income line would be more consistent with that $1.5 million or so a quarter kind of going forward. There -- we tend to get some unusual items that happen once a year kind of give or take, right? So last year, we had a large repayment on tax from Nashville, that's why if you look at the year-over-year comparison to Q2 '24, it's actually down in that line item. So I would say that in all likelihood, there's probably something that happens sometime between now and over the next few quarters or happens next year, but it's always a little bit difficult to forecast, and we don't have visibility into that level yet. So we'll kind of see where that stuff shakes out, but it wouldn't be surprising to me if there's some one-timers or whatever like that for 2026. But I think your question is good, that, that could be -- there could be a little bit less of that next year than what we have this year.

Wells Fargo Securities, LLC, Research Division Got it. And then just one last from me. So it looks like the year-end occupancy target might be a little bit lower than previously expected. Does that impact your same-store NOI outlook by any chance?

Yes, good question. Not really. So I think the average occupancy, we didn't change. We are probably a little bit higher in terms of average occupancy in the first half of the year than what we thought kind of coming into the year. But we're -- because of a few of those leases that I mentioned that we took back some of the space earlier. We've got one customer that we moved from late in '25 occupancy to early in '26 occupancy, that year-end number is coming in a little bit lower than where we thought. But those are generally all for pretty good reasons. So it didn't have a huge impact in terms of the same-store NOI outlook even though it does have less occupancy on one day of the year at the end of the year, but that's a timing issue more than anything else.

There are no additional questions waiting at this time. So I'll pass the call back to the management team for any closing remarks.

Just want to thank everybody for joining the call today, and thank you for your interest in Highwoods. We look forward to seeing everybody soon. Take care.