Good morning, ladies and gentlemen. Welcome to the Highwoods Properties Q2 2023 Earnings Call. My name is Juc Pietr. I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for question-and-answer at the end.

[Operator Instructions] I would now like to pass the conference over to your host, Hannah True, Manager Finance and Corporate Strategy, 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 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 turn the call over to Ted..

Thanks, Hannah, and good morning, everyone. During the second quarter, we once again had strong financial and operational results. We further improved our portfolio quality and balance sheet by selling $51 million of non-core assets. Leasing activity was healthy.

We demonstrated resiliency with our FFO results in the face of higher interest rates, and we posted solid cash flows. Our markets continue to attract talent as seen by the outsized population and job growth compared to other major U.S. cities.

CNBC recently published its annual ranking of top states for business, every core market in which we operate had its state ranked number eight or higher. North Carolina, our home state, which garners the largest share of our total revenues and where we generate 35% of our NOI was ranked number one for the second straight year.

It's no secret that the state's 2 biggest metros, Raleigh and Charlotte, generate the majority of the economic growth for North Carolina. Virginia, Tennessee and Georgia followed right behind at two, three and four, while Texas was number six and Florida number eight. We've long highlighted the benefits of the Southeastern U.S.

with its strong demographic trends, business-friendly environments, low cost of living and high quality of life. In fact, according to Bloomberg, the Southeast has accounted for two thirds of all job growth across the country since early 2020, almost double its pre-pandemic share.

The main question, however, is how do these demographics and national trends translate into results for Highwoods? Let's take a step back and look at our performance. We've generated positive same property cash NOI growth for 10 consecutive years. Our total NOI over the last four quarters is 16% higher than full year 2019.

Our net effective rents on leases signed over the last four quarters is 8.5% higher than our 2019 average. And at the midpoint of our 2023 outlook, our FFO per share implies 7% growth over 2019 despite the headwind of higher interest rates.

While availability rates are cyclical highs, according to JLL, construction starts are down 75% over the past 12 months compared to the prior five-year annual average and lower quality office is being taken out of stock at an unprecedented pace.

These governs on supply should lead to a reduced amount of available office space, particularly after sublease space continues to get absorbed. This plays directly to our strengths and users strongly prefer high-quality office space in BBD locations with well-capitalized landlords.

Population and job growth continue to be strong across our footprint, demonstrated by 12 leases signed this quarter from users new to market. Most of these are small- to medium-sized leases which is our sweet spot. Our customers continue to bring their talent back to the office, and they are increasingly determining their long-term space needs.

As an example, we signed six sizable renewals this quarter far in advance of the lease expirations, and they maintained or increased their leased space. At quarter end, occupancy was 89%, leasing volume was strong with 918,000 square feet of second gen space, including 222,000 square feet of new leases.

Our leasing count was robust with 110 total signed leases, including 39 new leases. Leasing economics were healthy. Rent spreads were plus 14.7% on a GAAP basis and plus 0.5% on a cash basis and net effective rents were almost 6% higher than our trailing four-quarter average and 12% higher than our pre-pandemic average in 2019.

Average rental rates in our portfolio were 3% higher on a cash basis compared to one year ago. Turning to our results. We delivered FFO of $0.94 per share in the second quarter. As expected, same-property cash NOI growth was minus 1.1% as we absorbed higher OpEx and lower occupancy driven by the temporary downtime on the former Tivity space.

As a reminder, we do not take vacant buildings out of our same property pool. On the investment front, we sold three non-core office buildings for total proceeds of $51.3 million at a combined 7% GAAP cap rate. These sales were in Raleigh and Tampa, in non-BBD locations.

Given the current capital markets environment, we are lowering our 2023 disposition outlook to a total of $200 million, including assets sold to date. Our $518 million development pipeline continues to progress well with all projects on time and on budget.

We're 23% pre-leased with at least two years until projected stabilization across all of our spec projects. We have $300 million left to fund, and we project annualized NOI of $40 million upon stabilization. We're seeing good prospect activity across our development projects.

At Glenlake III in Raleigh, we signed an 18,000 square foot user and are seeing increased interest as this project nears completion. We have strong demand at 23 springs in Uptown Dallas, and we expect 2827 Peachtree in Atlanta to stabilize by year-end.

Following lease-up of Midtown West and Tampa to 100% earlier this year, we are seeing early interest in Midtown East, which is only just broken ground. Midtown East is the only office development under construction in the entire Tampa market and doesn't deliver until the first quarter of 2025. Turning to our 2023 outlook.

We now project full year FFO of $3.69 to $3.81 per share, flat at the midpoint from our outlook in April despite a meaningful interest rate headwind in the past 90 days.

Before I turn the call over to Brian, I do want to acknowledge the challenges currently facing the office sector, including hybrid work, higher interest rates, the difficulty of obtaining financing for office buildings today.

In addition, despite the resilient jobs market, office owners are impacted by the cyclical demand headwinds when heading into a recession or a low-growth environment. As businesses become more cautious about their own growth prospects, they typically become more cautious about their space needs.

This will likely pressure occupancy and net effective rents until the office market regains its footing. However, we remain confident over the long term because our Sun Belt portfolio is in a region of the country with the strongest demographics and job growth.

We have a high-quality office portfolio in BBD locations that we believe will continue to outperform the market.

Our purposeful diversification, whether it be by market, by industry, by customer or by lead size, should enable us to deliver resilient operational performance which has been among the strongest in the office sector over the past several years.

Our $518 million development pipeline will generate meaningful NOI as it delivers and stabilizes and our balance sheet is strong with ample liquidity to fund the remainder of our development spending and all debt maturities until 2026.

Brian?.

Thank you, Ted, and good morning, everyone. As Ted highlighted, our performance in the second quarter showcases the robust and enduring demand for premium office space in the Sun Belt's best business districts and where our team signed 918,000 square feet for the quarter 20% above our five-quarter average.

This includes 222,000 square feet of new leasing over 39 deals, which is in line with our average quarterly new deal count for years 2018 and 2019. Our leasing activity was diverse among industries with law and engineering firms leading activity for the quarter.

We continue to see healthy interest from our small to medium-sized businesses, our core customers which continued to maintain the highest levels of physical occupancy throughout our footprint.

Echoing this trend, JLL recently reported that year-to-date, companies have enacted new attendance policies for 1.5 million office workers and another 1 million expected to face similar requirements in the second half of 2023.

Delivering across five markets, our 1.6 million square foot development pipeline is on time, on budget, generating significant inbound activity and is generally delivering into voids in our markets and BBDs with regard to new and competitive inventory. Starting with North Carolina, CNBC's number one state for business for the second year in a row.

The Raleigh market saw 139,000 square feet of positive net absorption for the quarter according to CBRE. Office using employment growth remained above the national average, and Apple filed plans to begin work on its previously announced 281-acre campus. Our team signed 276,000 square feet of second-generation leases with GAAP rent spreads of 16.4%.

Moving to our Glenlake III development, where we remain on schedule for completion in the third quarter. Our team signed over 18,000 square feet, bringing the lease percentage to 23%. In Charlotte, as noted by CBRE, our BBDs experienced positive net absorption and quarter-over-quarter leasing activity for the overall market was up 46%.

During the quarter, we signed 104,000 square feet in our 2 million square foot portfolio is 94.6% occupied. Heading west to Music City, CBRE highlighted the market's positive quarterly net absorption of 744,000 square feet.

Amazon occupied their HQ2 in downtown Nashville, and California Mainstay, In-N-Out Burger announced they would be building their 100,000 square-foot Eastern territory office in Franklin. Our team leased 89,000 square feet in the quarter with positive GAAP rent spreads of 17%.

We are completing the Highwoodtizing of our Cool Springs buildings, and we saw the greatest Brentwood tour activity since the start of the pandemic.

I should also note that Nashville's teammates to the South in Orlando have been hard at work filling up their portfolio, which is now 90.7% occupied and has over 200 basis points of additional momentum in the leasing pipeline.

In conclusion, while we aren't immune to the global economic headwinds, the prevalence of sublease space or a hybrid future of work, we're off to a good start for the third quarter. Our leasing pipeline is healthy, and we are benefiting from the flight to quality and capital occurring in the marketplace.

We believe our people are our trophy assets, and it is because of their commitment and ability to deliver the greatest commute worthy experiences we continue to deliver the positive results we have.

Brendan?.

Thanks, Brian. In the second quarter, we delivered net income of $42.3 million or $0.40 per share and FFO of $101 million or $0.94 per share. Results were in line with our expectations with no significant unusual items.

Rolling forward from last quarter, FFO decreased $0.04 due to lower NOI, which reduced FFO by $0.05, driven by lower top line revenue from reduced average occupancy due primarily to the Tivity move-out and higher operating expenses. This reduced NOI was in line with our forecast.

Higher interest expense driven by an increase in SOFR reduced FFO by $0.02 for a total reduction of $0.07. This was partially offset by lower G&A, which added $0.03. The combination of these items net to the $0.04 reduction in sequential FFO from the first quarter to the second quarter.

As Ted and Brian mentioned, our quarterly leasing stats were solid, with net effective rents showing continued resilience. And it's not just our leasing stats. Cash flows remain healthy despite the significant headwind from higher interest rates.

We believe the resiliency of our cash flows is largely attributable to the asset -- to the active asset recycling we've completed over the past several years.

Since 2019, we've sold $1.2 billion of capital-intensive non-core buildings and recycled into $2.2 billion of newer properties that are less CapEx-intensive and have a higher long-term growth rate.

While we're pleased with the progress we've made, portfolio improvement is a continuous process and therefore, we expect to sell additional assets over time.

This may result in some uneven quarters from an earnings perspective, but we believe the long-term result will be similar to what has occurred over the past several years, strengthening cash NOI with a more resilient portfolio of high-quality buildings, all while maintaining a flexible balance sheet with ample liquidity. Turning to our balance sheet.

We ended the quarter with net debt-to-EBITDAre of 6 times, nearly flat from Q1 and even though we continue to fund our development pipeline and had lower EBITDA attributable to the NOI headwinds I just mentioned.

Further, we improved our liquidity by selling $51 million of non-core properties and we received a net $40 million from the repayment of our preferred equity investment in the McKinney & Olive joint venture. We did provide $10 million of seller financing for a 6-month term at 50% LTV on our sale of Indi Park 1.

We expect this loan to be repaid in the fourth quarter. We now have nearly $750 million of total existing liquidity, more than enough to fund all of our current capital commitments, including development spending and debt maturities and which totaled roughly $500 million through the expiration of our revolving credit facility in March 2026.

We do expect disposition proceeds in future quarters and we may be opportunistic and potentially raise additional debt capital later this year or next, but our strong liquidity position allows us to be patient. As Ted mentioned, we've updated our outlook with no changes to the midpoint of our FFO range, which is now $3.69 to $3.81 per share.

We've lowered the year-end occupancy range to 88.5% to 90%. This is always a challenging metric to forecast given it's a point estimate on the last day of the year.

Part of the reason for the reduction is certain customers where we previously projected their leases would commence before year-end, but now expect their leases not to officially commence until early 2024. This change in timing has impacted our projected straight-line outlook for 2023. Otherwise, there were no major changes to our FFO outlook.

A couple of items to keep in mind going forward. First, our operating margin in Q1 and Q2 was higher than originally anticipated, which was largely attributable to lower OpEx. We expect lower operating margins in the second half of the year.

Some of this is normal seasonality, while we also expect some increased repairs and maintenance spending in the second half. Other items that could cause a notable change to our FFO outlook include whether we pursue additional capital raising or other capital recycling initiatives.

We did reduce our disposition outlook to up to $200 million for the full year, which includes the $51 million closed to date. As a reminder, any future dispositions are not included in our FFO outlook. Any disposition proceeds would bolster our liquidity and further improve our balance sheet metrics.

In summary, we're pleased with our financial and operating performance in the first half of the year, and we're encouraged by the resilience our portfolio has exhibited over the past few years.

Further, the lack of new development and capital challenges facing many of the office landlords we compete against, positions us for continued strong performance.

We believe our strategy of owning high-quality properties in BBD locations in the Sun Belt while maintaining a flexible balance sheet with ample liquidity is why we've been able to consistently grow earnings year after year while simultaneously upgrading our portfolio quality, improving our long-term growth rate and increasing our resiliency.

Operator, we are now ready for questions..

Absolutely. [Operator Instructions] The first question comes from the line of Camille Bonnel with Bank of America. You may proceed..

Hello. So Atlanta has been a key market in your portfolio where occupancy has never really gone above 90%.

Do you see where occupancy has been trending at the stabilized level for this market? Or do you expect you can achieve higher levels here?.

I think we can get to Atlanta is very similar to that. Like Buckhead has had its challenges in the last couple of years. We've had some large rollover and some move-outs. But I think in a good market, I would fully expect it to meet what we think we can do with the portfolio, which is 92% to 93%..

Okay. And great. In the past, you've talked about net expansion activity.

Can we just get an update for this quarter?.

Yeah, we had, again, expansions outweigh contractions. I think it's two to one this quarter, but we did lose a little bit of a negative square footage wise. I think we were negative 40,000 to 50,000 square feet. We had a couple of downsizes that you'll maybe see our occupancy when we renegotiated a couple of deals that contracted.

Both of those are actually in Pittsburgh. And that was one of the reasons on the occupancy decline. Really, our occupancy as a company was pretty flat over the quarter-over-quarter with the exception of Pittsburgh. In Pittsburgh in the quarter, we renewed and downsized really two customers.

First was really a long-term renewal, credit customer, long-term customer. They renewed early, and we took back about 45,000 feet and the second one we took back about 100 -- I'm sorry, we took back 75,000 feet. So again, that one was a vacancy upcoming vacancy, we knew it was going to happen for several years.

They've been subleasing their space for the last six or seven years. So in total, in Pittsburgh, we took back five floors, which is great space in the tower, 1 PPG, we've already signed one lease for a floor, and we've got good activity on a few other floors.

But so that was a big reason for our contract square footage outweighing our expansions this quarter..

Thank you for the color. And a final question. Can you talk about the latest discussions you're having on the space where you have large tenant leases expiring in 2024. I believe Novelis moved out last year and the space is being sublet and EQT is subleasing some of its space.

So how is leasing activity been there? And are there any updates on Bass Berry's plans?.

Sure. Yeah. Let me hit each of those. So our large lease expirations, you mentioned [indiscernible] third quarter of '24. First, when Novelis 168,000 square feet the end of September. They did move out. They moved across the street they're subleasing only about 43,000 feet. The rest of that space is vacant today.

We're still in discussions with that customer that's subleasing. We hope to be able to go direct with them, but those discussions are ongoing. So really no update from last quarter there. With respect to EQT, that's October of next year 2024. Again, really no update there. EQT, we are assuming they're leaving.

So we think we'll get that space back and really no update on that. And then Bass Berry is February of '25. They're definitely moving out, and we're planning right now a significant amenity upgrade -- our basis is great in that building. We're going to be able to offer competitive rates, but it's still a little bit early.

We're still about two months away from that expiration. So no update there other than we are in active planning to Highwoodtize that building and add some amenities..

Thank you for taking my questions. .

Thank you. .

Thank you. The next question comes from the line of Blaine Heck with Wells Fargo. You may proceed..

Great. Thanks. Good morning. So I was hoping to touch a little bit more on the change in occupancy guidance.

I guess how far into 2024, are you expecting those leases to commence? And maybe just touch on why the move-in was delayed and whether the size of those move-ins has changed at all?.

Hey, Blaine, it's Brendan. I'll start. So yes, there is a combination of things that probably impacted that year-end occupancy outlook that we have. And as I mentioned in the prepared remarks, that's always a difficult metric to guide to because it's just a -- it's a point metric on one day on the year.

So really, what it was probably the vast maturity of the change was attributable to a few different leases that we had projected to kind of be in occupancy before year-end, where we now project them in early 2024. And then we had the proactive downsize that we took in Pittsburgh that was a mid-2024 expiration.

We proactively took that space back early to do a long-term extension with that customer. So a combination of those two things really kind of make up the majority of the decline in the year-end occupancy target that we talked about. We felt like the timing issue is just kind of from a timing perspective, but not really a big issue there.

And then we felt like the Pittsburgh proactive take-back was a good decision for us given that it locked up a long-term user long-term good credit user in that building for a long term..

Okay.

And just to be clear, excluding that Pittsburgh situation, the size of those leases that are moving in has not changed?.

That is correct..

Okay. Great. Just another one on guidance.

Can you just talk about some of the potential positive offset allowed you guys to keep the guidance midpoint unchanged despite incorporating the lower occupancy along with lower straight-line rent, the dispositions you guys completed and then higher interest rates?.

Yeah. So I would say that, I mean, from just a high level, interest rates probably kind of if you look at the at the SOFR curve, which is generally how we project interest. That hurt us by probably, let's call it $0.02 to $0.03 compared to where we were in April.

And then if we look at the change in occupancy really with respect to kind of where straight-line rent is, that was probably a penny or two. So we're talking in the neighborhood of kind of $0.03 to $0.04 of sort of headwinds now versus where we were three months ago.

Offsetting that, we probably have there's probably, let's call it, penny or two maybe that helps same-store, but not something that we felt like was enough to kind of move that range. So we still kept the range from down 50 basis points to up 1%.

And then we've probably got another penny, let's call it, of NOI that is not within the same-store pool, that's also positive versus kind of where we were in April. And then you got another, call it, penny or so of kind of other income items that are outside of the NOI line. So those kind of things all canceled each other out.

And really, so we felt comfortable kind of keeping the midpoint of the FFO outlook the same, even if there are a couple of movements within the P&L on some of the line items. And not really much impact.

I would say there's a little bit of headwind, but nothing noteworthy with respect to kind of where the disposition cap rates were versus the incremental cost of paying off debt with the proceeds from those..

Okay. Great. That's really helpful. Thanks, Brendan. And then lastly, Ted, in your prepared remarks, you mentioned that lower quality office buildings are being taken out of stock at an unprecedented pace.

Can you just expand on that? Is that space all being converted? And if so, what's it being converted to, I guess, alternatively, are you seeing demolition of space? And then are there any markets in which you're seeing this happen at a faster pace than other things [ph]..

Yeah, that comment really is JLL put out some research recently. So I think it was a global comment. So we're seeing it in our markets a little bit right now, but I think it's going to accelerate.

There are a few lower-quality office buildings that have been on the market that have been sitting vacant that are looking at what we're understanding is there may be some being converted to townhomes, be scraped and then redeveloped the town homes or apartments haven't seen a whole lot of conversions yet.

We're here to talk of a few in our markets, Blaine, but I think it's just sort of getting started in terms of some of the action -- the conversion -- apartment conversions in our markets..

Okay. Great. Thank you, guys..

Thank you. The next question comes from the line of Michael Griffin with Citi. You may proceed. .

Thanks. Ted, in your prepared remarks, you talked about kind of pressure you're expecting an occupancy and net effective rents.

Do you have a sense of where net effective rents are in the portfolio and maybe expectations for the back half of this year and then heading into 2024?.

Yeah, Michael, look, I think our net effective rents have held up, right? We had a pretty good quarter this quarter. It can be lumpy quarter-to-quarter just depending on releases signed and what's the building, what market is it in? What space? What's the expiring rents as well? So it's hard to predict where it's going to be.

I know during COVID, I think they went down mid-single digits in our portfolio. And I think if you just look back at general downturns, economic downturns for office, there's going to be pressure on net effective rents. TIs are higher today, concessions are a little bit higher.

As we've said, we've been able to hold face rents and even grow face rents in some markets. So it's -- I think there's downward pressure just because it's more of a tenant market. But in general, we've been -- we've done a pretty good job and again, it can be lumpy quarter-to-quarter..

Great. Thanks. Next one, I noticed that AFFO came in a bit below consensus in this quarter. I know there's some lumpier components related to that, particularly on the second-gen tenant improvements.

But just how are you thinking about some of those line items from a run-rate perspective? And are there any worries around dividend coverage being elevated or thoughts you can add on that would be helpful..

Hey, Michael, it's Brendan. So I would say a couple of things on that. So if you look at the amount of capital that we spent in terms of leasing, which, as you noted, can be lumpy, right? In this quarter, we spent $31 million. That's $6 million higher than what the prior five quarter average was. So that number was higher.

And that number is going to bounce around. So I would expect that in a more normalized quarter, that number is going to be a little bit lower. So that has a benefit as we think about that in a normalized quarter versus where we were this quarter.

And then similarly, you can see from the straight-line guidance in terms of kind of the amount of straight-line rent that we have incurred thus far in the first half of the year compared to kind of what the full year guidance is that it's likely that our straight line is going to go down as well.

So as you think about that, that's more cash flow that's coming in. So I think for the combination of all of those things that makes us feel pretty constructive in terms of the cash flow outlook.

And I would say that, that's in context of still cover having good cash flow this quarter even with higher TI and leasing commission spending and a higher straight-line amount this quarter compared to kind of what we think in the future quarters..

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

Thank you. The next question comes from the line of Georgi Dinkov with Mizuho. You may proceed..

Hi, thank you for taking my question.

I was just wondering, can you give any examples of tenant assessing paid needs to the positive, given remote work moderating and -- can you comment on the recent utilization trends in your portfolio?.

Sure. No, we've got -- as we've mentioned, we've -- our expansions for the last several quarters from a numbers perspective, have outweighed our contractions. So we have a lot of growing customers. Now a lot of those are not taken -- they're not taking an additional floor. They're not taking two floors, but they're taking 3,000-5,000-10,000 feet.

We just had an engineering firm last quarter, take another 10,000 feet. And so it's -- it's across the board. We've got some law firms, several law firms that are growing their footprints right now. So it's fairly broad-based. But again, it's not large chunks, we're seeing them take, again, smaller chunks here and there..

Georgi, it's Brian. I might add on to that is that you think about on the sublease side, we've seen within our markets and within the portfolio, some large customers who we're contemplating putting large chunks on the sublease market or had and have now pulled that back off because they're returning their people to occupy the space.

In one case, one that's been widely reported in Atlanta, AT&T vacated a number of buildings. And in fact, in the last couple of weeks came back and leased up a whole other building. So we do see that as positive for sure..

And just on the utilization trends in your portfolio, if you can give some color in the recent months, has that picked up?.

Regarding utilization, yes, we have seen that continue to pick up.

I think there is not only within our portfolio, but we're -- kind of the national momentum is post Labor Day, there's a number of policies that have gotten pretty public out there, as you mentioned in the remarks of JLL talking about this year, 1.5 million employees have kind of had to adjust to new return to work or attendance policies with another 1 million kind of announced starting at the end of the summer to the end of the year..

Okay. Great. And just last one for me. Given what you know until today, no move outs and move-ins.

I guess what is the low point in occupancy and same-store NOI growth over the next two quarters?.

Hey, Georgi, it's Brendan. I would expect that occupancy probably is in line to -- there could be -- we'll kind of see where the third quarter shakes out. But I would say in broad strokes, where we are now is probably likely to be kind of around below, at least with respect to kind of 2023. And then same thing in terms of same-property NOI growth.

I think we had always forecast that second quarter -- the second quarter of '23 was going to be a difficult quarter for us given the comp versus last year. I think if you look at where expenses trended in the second half of last year kind of compared to where they are now, the comps become much easier in that regard in terms of the expenses.

So we do see a little bit of improvement on same property as we go forward in the back half of the year..

Thank you. The next question comes from the line of Rob Stevenson with Janney. You may proceed..

Good morning, guys. Ted, the two sizable renewals that did their renewals for in advance of the expirations you talked about in your comments, are they doing anything different with that space going forward, reconfiguring it in any material way.

Curious when the larger space users renew and that far in advance what's driving that decision?.

Well, I think that's exactly what you're seeing, Rob. So both of them had expirations that were several years away. And they came to us and saying, look, we want to get our people back to the office. And to do that, we need to reconfigure our space, so we'd like a little bit of TI. So that was the conversations we had.

They really -- it's more collaborative type space. Some of them are doing a few more offices. Actually, the other one is doing a few less offices. But so it just -- it depends on what the space looks like. But in general, the biggest trend is more collaborative space, more huddle rooms, areas to meet when the group when they come in the office..

Okay. That's helpful. And then I guess a follow-up on that one.

Are you seeing any more upward pressure today in terms of the TI dollars on a per square foot basis than you have over the last couple of years? Or anything changing there?.

I think over the last couple of years, yes. I don't think we've seen it anymore in the last three to six months, but certainly the last couple of years, just as it's become more of a customer or a tenant market. So yeah, look, I think it's market by market and submarket by submarket.

But clearly, there's in general, there's upward pressure on TIs, not only because of the competitive nature, but also just costs are up, construction costs are up. So -- and that's one of the reasons why we've been able to keep face rates and is just because of the cost structure in general.

But yeah, we're seeing upwards pressure the last couple of years..

But nothing materially different in 2023 versus the back half of '22?.

No, I don't think so..

Okay.

And then Brendan, the up to another $150 million of dispositions that you may do this year, is that going to be mostly fourth quarter weighted, if you do or you guys have stuff under contract now that will close in the third quarter? How should we be thinking about that and the impact on the back half of the year?.

Yeah, Rob. I would -- yes, I think it's fair to say that likely in terms of closing, if anything additional closes here would be fourth quarter is most likely. And it depends on timing, certainly and obviously pricing and all that kind of stuff.

So could have sort of a negligible impact on FFO could have -- obviously could have something that would be notable depending on timing and pricing and all that..

And what would you do today with pro -- $150 million of disposition proceeds.

What's the number one bullet in terms of either paying down debt or funding development, et cetera? What's the number one on the to-do list with that money?.

Yeah. So we've got 100 -- I think at quarter end, we had outstanding on the credit facility. And then we've got $550 million of term loans that are prepayable without penalty. So it would be some combination of those two.

And obviously, we are spending money on the development pipeline, using the credit facility to fund our portion of those expenditures. So it would be some combination.

I think we'd have to kind of consider the amount and timing in terms of whether or not we repaid a piece of maybe the next term loan that's coming due or whether we just pay down the credit facility, but it would be one of those two would be likely use of proceeds..

Okay. Thanks, guys. Appreciate it. .

Thank you. The next question comes from the line of Nick Thillman with Baird. You may proceed..

Hey, good morning, guys. It seems like a pretty big pickup in renewal activities. So I just wanted an update on like how early you're beginning renewal discussions.

And then in those discussions, has there been any like preference from tenants on the free rent component or the TI -- some of those larger tenants kind of wanted the refresh of the space, but just curious on if there's any changes there?.

Nick, it's Ted. I can start and if Brian has anything to add. Look, I think in general, renewals -- it all depends on the tenant, right? Typically, they're coming -- we try and do as much outreach as we can, but it sort of depends on their timing what their return to work plan is and how they're looking at it.

But in general, the larger the customer, the earlier they start renewal discussions. So I don't think anything has really changed from that standpoint. In terms of TIs versus free rent, again, I think it's very individualized to the tenant.

What does their space look like? Do they need to do a significant upgrade or not? Or are they looking to save costs and rather toggle the concession to a free rent. So I don't think we're necessarily seeing a trend. It just sort of depends on the customer and what they're looking for..

Nick, I don't know if it will add much more color, but we're not looking to self-inflict any pain on early renewals in a tenants market from someone who started maybe in a landlord market. However, we have a captive audience in our portfolio that is fairly unique in our BBDs in our markets.

We have a hungry brokerage community who is looking to be helpful with their clients, maybe looking upstream. And so to Ted's point, it's varied for sure.

We're not necessarily knocking on the door of everyone and say, hey, you want to renegotiate by any stretch? But sometimes they're coming to us and saying, hey, we really need to up the amenity of our office space. We believe in it. We want to invest in it. We're committed to this space.

And what we talked about, Pittsburgh that happened in Charlotte to a great firm. I didn't want to take any of the space. They're happy with their space. They just want to push out additional term and upgrade some things.

So it's been a bit of a mix, but we see that embedded occupancy we have right now is a captive audience to secure future commitments with..

That's helpful. And then maybe just on like the new leasing, it looks like the new leases signed around like 5,000 square foot relative to total lease volume is around like 8,000 square feet. So looking at like the larger tenants in the market, I think you said you saw like a slight uptick, granted it from a very low basis.

But have you seen any changes in behavior there? And as we're looking at some of these large expirations in '24, do you think that's going to be -- continue to be a small tenant market? Or do you think that they will eventually come back in the next like 18 months?.

Yeah, sure. Look, clearly, our activity has been small and medium-sized prospects. That's our bread and butter has been for a long time. But if there's any green shoot, we are seeing some prospects in that, say, 30,000 to 50,000 square foot range. And then in our development pipeline, there's even -- there's over 100,000 square foot prospects.

So again, the large prospects are taking longer and a little slower the decision-making, but we're starting to see a little bit of activity on larger prospects..

That's helpful. And then maybe last one for me for Brendan. Your comments on additional debt capital, is that more a function of expected more muted disposition activity in the next 18 months? Or is there like some pressure from, say, banks when it comes to the amount they'll lend on the line. Just looking for some comments there..

No, I think it's just more, I would say, whether or not we window and want to be opportunistic when it's there. So I mean, I think we've got to manage -- certainly, I think we feel comfortable with kind of where we are from a bank group perspective. I think we feel good about where outstanding is with our fixed income investors.

So I think we've got good access to capital and want to ensure that we maintain that access to capital. So if we feel like there's a reason for us to be proactive and there's an opportunity, I think we will consider that. But certainly nothing, as I mentioned in the prepared remarks, there's no need for us to come to market.

So it would purely be from if we felt like it made sense and there was a good opportunity..

That's it for me. Thanks guys..

Thank you. The next question comes from the line of Dylan Burzinski with Green Street. You may proceed..

Hi, guys. Thanks for taking the question.

Appreciate your comments on sort of construction starts slowing, but just looking at what's under construction today and what's said to deliver over call it the next two to three years, do you guys view this as sort of a risk to further improvement in property fundamentals?.

Look, I think -- I guess the answer is yes, in general, right? If you got -- I don't know -- we've got several of our markets. There's really nothing under construction. Dylan. I think we've got -- there's nothing in Tampa other than the building we're developing nothing Orlando, nothing in Richmond.

Certainly, there's deliveries coming in Raleigh, Atlanta and Nashville. But certainly, that's always a risk. Now I do think the rental rates that are necessary are top-of-the-market rents rising title is all boats, which is what's happened throughout just about any cycle.

So while it's a risk, I also think it's something we deal with in all of our markets, and we we'll deal with it. But it's -- I don't see it as significant..

Dylan, Brian here clipping on to that. The amount of stock that's under construction is from a competitive side, it's about 1.1%. So just from a macro standpoint, we don't think that is probably going to be that big of a headwind, but single individual buildings, sure.

But you think about even Charlotte, which has just a few buildings under construction for the first time in over a decade, nothing started. So we are absolutely seeing that slowdown. And we do believe when our development pipeline is delivering us delivering into voids of competition..

That's helpful.

And then just going back to some of the comments you made around outsized population and job growth across your markets, are you guys seeing any slowdown at all associated with any inbound or new-to-market tenants coming from some of the coastal markets? Or are you guys start seeing those trends continue relative to what we saw over the last several years?.

Yeah. The migration of the South has really been occurring for many, many years, I'd say, in the last couple of decades, it accelerated during the pandemic and then look, I do think it's slowed just with the overall economy over the last six to nine months.

I -- we meet with the economic development folks in our markets and while they're incredibly active, there's less office inbounds today as we sit here today than there were a year or two ago. But that doesn't mean it's stopped either. So they're making pictures is just fewer.

Most of the inbound economic activity today is more in the industrial and manufacturing sector versus office. But having said that, the 39 leases we signed new leases we signed this quarter, 12 were a new opening up -- company as opening up new offices in our markets. And it was in five different markets, those 12.

So I think we're continuing to see the in-migration has it slowed? Yeah, but it's still very positive..

Dylan, just Brian here, one little footnote. When we have good anecdotal evidence to within the portfolio where we have, for instance, in Charlotte, the law firm opens their shop in from New York and Charlotte for the first time. They take one of our spec suites. We kind of nurture that occupancy and then they move next door to take a full floor.

And to your first point on population, I think actually the population migration has actually ramped up even more so over this last quarter as we start to see how many hundreds of people are moving to these different markets every day.

So to Ted's point, the economic developers are busy, and we do see that converting like you think about Apple's announcement and what they're doing here in Raleigh, 281-acre campus that they've committed to hire 3,000 people there, the average salary of 187,000 a year. We believe that's a pretty strong mover that will have a ripple effect..

Great. Appreciate the details, guys. Thank you. .

Thank you. The next question comes from the line of Ronald Kamdem with Morgan Stanley. You may proceed. .

Hey, good morning, guys. Just sticking to the occupancy numbers. It seems like most of the decline in occupancy was just driven by Pittsburgh and Richmond.

Just as we look out into the future, are there any other expirations in those markets we should be mindful about understanding if EQT next year, but just anything else beyond that?.

Specifically in those two markets, Ron, not really, as I'm looking at our expirations in 2000. We've got a couple of other things in Richmond that I think later this year or what have you.

But looking into 2024, other than EQT, which is October 2024, I don't think we have any large expirations really similar in Richmond beyond getting through the rest of this year. And I certainly think will ramp up in Richmond in terms of the new deal flow we're starting to see there. So no, not in those two markets..

Got it. Makes sense. And then, Brendan, I think you talked about $0.01 of positive nonsame-store NOI relative to expectations.

Is that related at all to Granite Park Six and Glenlake III and then can you just talk about how leasing is trending for those two near-term completions? And just how we should think about the financial impact of those developments late '23 and into '24?.

Yeah. So nothing on Granite Park Six or Glenlake III. I would say out of kind of the non-same-store pool, had some good activity at 650 South Trion in Charlotte, had some good activity at Midtown West in Tampa and Virginia Springs II in Nashville.

So those are probably kind of the primary ones outside of the non-same-store pool, where things have gotten a little bit better in 2023.

I think for the development projects, whether it's Glenlake III or Granite Park Six, there probably is some potential as you think about 2024 in terms of just what happens with respect to kind of lease up versus kind of capitalizing the costs associated with those.

So if we do lease up faster, there's probably a little bit of positive impact in terms of '24 numbers on those two projects.

If it's slower, not likely to be a lot of major downside, but could be -- but -- but if we're able to lease those up and get some NOI, that probably benefits us a little bit in '24, at least relative to kind of where the '23 outlook is..

Great. And then just last one. You guys talked about potentially raising debt back half of the year.

Would that be secured or unsecured? And just give us a sense of how you would think about that trade-off there?.

Yeah. I mean I think there -- we have -- well, I guess what I would say is we have a largely unsecured balance sheet without near-term expirations and a lot of liquidity. So that puts us in position to be opportunistic and we can be flexible. So I think options are available to us. And I think I mentioned this in response to another question.

There's no need for us to be in the market. But I think if we feel like there is a good window, and we would like to increase liquidity a little bit more. I think that is available to us. So whether or not we pursue that, we'll see.

But I think we're certainly paying attention to it, but could pursue -- certainly could pursue secured or unsecured financing because of the shape that our balance sheet is in as it stands now..

Got it. Thank you, guys. .

Thank you. The next question comes from the line of Peter Abramowitz with Jefferies. You may proceed..

Thank you. Yes, I just wanted to ask about kind of tenant behavior, tenant psychology. Certainly, it's being reflected in the equity markets that soft landing is potentially becoming the baseline narrative here.

Is that having any impact to tenant behavior in terms of are they feeling better about things? And is that bringing anyone back to the market?.

Look, yeah, our tour activity, it's still really good I mean, despite being mid-summer when we typically see a summer slowdown, if you talk to any of our market leaders, we're busy. So I think the biggest thing from a tenant behavior standpoint is we're seeing more people come back to the office. It's almost on a weekly basis.

We're hearing from our market leaders and leasing folks and property managers that more and more companies are coming back. One example, we had a large customer, we define large as being over 100,000 feet that three months ago, they had their space on the sublease market.

And just a few weeks ago, they pulled it off the sublease market and said they're going to keep it because they're bringing all their people back and they're going to need it. I think Brian on an earlier question mentioned AT&T, which is the one in the headlines. They overcontracted and went back and leased another 120,000 square feet.

So from a tenant behavior standpoint, I think we're continuing to see the return to the office, more companies or buildings to be more populated. We're seeing it come through in our parking revenues as well.

Our restaurants are continue to do really well at the base of the buildings, so I think the tenant behavior is just -- it's more of a return to work as much as anything else..

Little nuance -- it's the conviction of that return to work too as we're hearing. It's -- I think there's been very much a carrot approach. We're hearing a little more stick and then when those larger customers are bringing their folks back to the space they already have.

I do think they're not necessarily sticking their head in the sand and saying, okay, we're bringing these folks back, you got to give them a reason to stay.

And so that's how we are having some of those conversations around the workplace making efforts we do around the programming and the food and beverage and all of those different things that really differentiate the experience that we deliver..

Got you. Thanks. And then one other one. I know the focus for excess proceeds right now is probably more on debt reduction.

But just as things come across your desk assets that you're underwriting, are things opening up, are seller expectations adjusting? Are there things out there that if you had a little bit more capital freed up would be attractive at the prices that sellers are looking at today?.

Look, there's a -- certainly, there's bid-ask spread going on today. I think price discovery is, we're still in the middle of that. Certainly, we're pleased with the three dispositions we got over the goal line, but there's still an expectation on buyers and sellers that there's a big difference there today.

So we're looking at everything, but I think we're going to stay disciplined and be patient as well. I think a lot of buyers right now want to wait and see what the Fed is going to do. When are they going to stop raising interest rates? And I think once we see that, going to open things up maybe a little bit more.

And once we -- as well as the lenders, once the -- I think the lending pick it opens up a little bit more. So we're being patient and disciplined and if there's -- and really focus on liquidity today versus acquisitions. But that can change if that if a nice asset comes out and we see it priced right.

But in general, we're going to be patient and disciplined..

Got it. Thank you. .

Thank you. There are no additional questions waiting at this time. So I would now like to turn the call back over to the management team for any additional questions..

Well, thanks, everybody, for being on the call this morning. If you have any additional questions, please feel free to follow up with any of us. Thank you, and we'll talk to you next quarter..

That concludes today's conference call. Thank you for your participation. You may now disconnect your lines..