Highwoods Properties, Inc. Aktie

Good morning, and welcome to the Highwoods Properties First Quarter 2026 Earnings Call. [Operator Instructions]

As a reminder, this conference call is being recorded.

I would now like to turn the call over to Brendan Maiorana, Executive Vice President and Chief Financial Officer. Thank you. 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're both available on the Investors section of our website at highwoods.com.

On today's call, our review will include non-GAAP measures such as FFO, NOI and EBITDAre. The release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures.

Forward-looking statements made during today's call are subject to risks and uncertainties. These risks and uncertainties are discussed at length in our press releases as well as our SEC filings. As you know, actual events and results can differ materially from these forward-looking statements, and the company does not undertake a duty to update any forward-looking statements.

With that, I'll turn the call over to Ted.

Thanks, Brendan, and good morning, everyone. We had an excellent quarter executing on our key initiatives.

Leasing volume was strong across our in-service and development properties. This is clear from the 50 basis point increase in our leased rate on our in-service portfolio, 800 basis point increase in our leased rate on our developments. Both of these will deliver meaningful upside in NOI, cash flow and FFO over the next few years as occupancy ramps.

During the quarter, we invested $108 million in best-in-class commute-worthy properties in BBD locations in Dallas and Raleigh through joint ventures and sold $42 million of noncore properties in Richmond. All of this activity improves our portfolio and further cement the foundation for pushing our growth rate and cash flows meaningfully higher and will result in long-term value creation for our shareholders.

Even with our strong performance in the quarter, we recognize the broader narrative that advances in AI could reshape the workforce, and therefore, affect long-term office demand.

The range of potential outcomes is wide and varied, and at this point, there are many unknowns. What we do know, however, is that customers and prospects haven't diminished their appetite for space and are making long-term commitments to their in-office strategies, and activity across our portfolio, our markets and our BBDs is strong.

Leasing was solid in the quarter. Our leasing pipeline remains robust, high-quality space across our BBDs is dwindling, and there's little-to-no new supply expected during the foreseeable future.

This flight-to-quality dynamic creates a strong backdrop for occupancy gains and rent growth, both of which we experienced in the first quarter.

Additionally, creditworthy customers are willing to make long-term commitments as evidenced by our weighted average lease term on second gen lease volume of 7.5 years, more than 1 year longer than our recent average lease term.

Further, demographic trends across our footprint are favorable with business relocations and expansions reaccelerating, driving healthy population and job growth. We firmly believe high-quality commute-worthy properties in BBD locations owned by well-capitalized landlords are best positioned to capture increasing demand and improving economics.

Turning to the quarter. We delivered solid financial performance with FFO of $0.84 per share, and we maintained our outlook for the year. Our leasing performance was excellent. We signed 958,000 square feet of second-gen leases, including over 300,000 square feet of new leases.

We delivered GAAP rent growth of 19.4% and cash rent growth of 4.8%. Net effective rents were the second highest in company history and 9% higher than the prior 5-quarter average.

Expansions which we include as renewals, outpaced contractions at a ratio of nearly 2:1. In addition, we signed 107,000 square feet in the first gen leases across our development properties. Customers and prospects recognize the blocks of high-quality, BBD-located office space with well-capitalized owners are diminishing across our footprint, which gives us strong pricing power in the best submarkets.

We placed in service more than $200 million of 87% leased development properties during the quarter. GlenLake Three, which comprises 203,000 square feet of office and 15,000 square feet of retail is now 94% leased.

Across the street, we delivered GlenLake Two Retail, which is 100% leased to Crooked Hammock Brewery. The addition of 24,000 square feet of food and beverage options elevates GlenLake's offerings, and complements the nearly 1 million square feet of office we have here.

This has supported our ability to push rents across this park in West Raleigh. We also placed in service Granite Park Six in Dallas' Legacy BBD. This 422,000 square foot best-in-class office property is 80% leased. We also made strong progress leasing up our 2 remaining development properties. 23Springs, our 642,000 square foot development project in Uptown Dallas, continues to garner strong activity with the leased rate now 83%, up from 75% last quarter and 62% 12 months ago.

We have strong prospects to bring our leased rate at 23Springs into the 90s. In Tampa's Westshore BBD, our 143,000 square foot Midtown East development is now 95% leased, up from 76% last quarter, and 39% 12 months ago.

The office component at Midtown East is 100% leased. On a combined basis, the properties placed in service during the first quarter and in our remaining development pipeline are 86% leased, but only 48% occupied. As the leases commence, we will capture significant growth in NOI, cash flow and FFO.

We are starting to receive interest from build-to-suit and sizable anchor prospects for potential new developments. It's still early and it's hard to say whether any of these discussions will result in new projects, but the increased interest is encouraging and signifies limited inventory companies face in searching for large blocks of high-quality space.

On the disposition front, we sold a non-core portfolio in Richmond for $42 million. As reflected in our outlook, we expect to sell roughly $200 million of additional non-core assets by the middle of this year and are marketing other assets for sale. We believe we will be able to redeploy capital from non-core asset and land sales on a leverage-neutral basis that will further strengthen our cash flows and result in higher growth.

As we announced last week, we may also use noncore disposition proceeds to repurchase up to $250 million of outstanding shares of our common stock on a leverage-neutral basis.

We continue to evaluate acquisition opportunities and highly pre-leased developments but repurchasing our shares as another capital deployment option we now have in our arsenal.

Before turning the call over to Brian, I want to reiterate the priorities we have highlighted over the past few years that will drive long-term value creation for our shareholders. First, we will continue to drive occupancy towards stabilized levels in our operating portfolio.

Second, we will deliver and stabilize our development pipeline. Third, we will improve our portfolio quality and long-term growth rate by recycling out of noncore CapEx-intensive assets in non-BBD locations and invest in properties with better cash flows and higher long-term growth rates.

And fourth, we will do all this while maintaining a strong and flexible balance sheet. We made meaningful progress on each of these priorities during the first quarter. We believe the focus on these 4 areas, combined with a strong fundamental backdrop in our core BBDs due to the healthy demand and limited new supply will drive significant growth in cash flow and long-term value over the next several years. Brian?

Thanks, Ted, and good morning, everyone. Our operating results continue to reflect the advantage of owning commute-worthy, amenitized assets in the best business districts of high-growth SunBelt metros. .

Fundamentals across our markets continue to improve as evidenced by vacancy rates and sublease space declining. Rents are up, which combined with steady concession packages has resulted in higher net effective rents.

As far as supply goes, the best of the best and the best of the rest are in high demand with office construction in historic lows, or nonexistent in many markets, new office inventory is in scarce supply.

With demolitions outpacing deliveries nationwide, the flight to quality has become in many cases, an all-out sprint-to-quality, with users proactively inquiring for early extensions to lock in location and terms.

A common theme across our markets is that office rents pale in comparison to the investment customers have in their people, in that exceptional environments and experiences yield superior results when their people are in the office and being better together.

Customers are choosing well-located, highly amenitized Class A buildings with well-capitalized owners and customer-centric operations, and they are willing to pay for it.

They are moving to metro that continue to win people and companies with the highest quality of life and most business-friendly outlooks. This is the Highwoods portfolio. This is the Highwoods team and these are our SunBelt markets and BBDs.

Starting with Dallas, the metroplex remains 1 of the country's premier destinations for corporate headquarters and expansions, which shouldn't be a surprise at this point considering it is Site Selection Magazine's #1 city for headquarter relocations. And as in the state, Chief Executive Magazine has deemed as the best for business 21 consecutive years.

From 2018 through 2024, Dallas landed roughly 100 headquarter relocations with 11 more in 2025. The region continues to attract diverse firms across financial and professional services, advanced manufacturing, logistics and life sciences, seeking a central location, business-friendly environment and a deep labor pool. That macro story is consistent with the office fundamentals you see in the Q1 broker data.

According to Cushman & Wakefield, DFW recorded 117,000 square feet of positive net absorption in the first quarter of 2026, its fifth consecutive positive quarter with nearly 340,000 square feet of positive absorption in Class A as Class B continues to shed space.

Our Dallas portfolio is in Uptown, Legacy and Preston Center, which is the tightest submarket in the region with less than 6% vacancy and is home to 1 of our latest acquisitions, The Terraces. These BBDs are squarely in the path of demand. The mark-to-market, we're realizing via second-generation leasing, both in McKinney & Olive?and The Terraces is significant, generating GAAP rent spreads of 27%.

Turning to Charlotte. The city is increasingly recognized as a strategic hub that's being validated by headline corporate decisions. Among the 104 metros that Cushman & Wakefield tracks, Charlotte was #1 for job growth. To that end, and subsequent to our most recent earnings call in February, 3 global financial institutions have made major new job announcements. Already with an established home in Charlotte's South Park BBD, where we have almost 800,000 square feet, JPMorgan recently announced plans for an eventual 1,000 job regional hub, with 400 of those to be hired by 2028.

Two new entries to the market include Capital Group's planned new home in Uptown with 600 new employees, and after a nationwide search, Sumitomo Mitsui Banking Group, 1 of Japan's largest banks, selected Uptown as well for a second U.S. headquarters, creating 2,000 jobs by the end of 2032, with an average salary for these 2,000 jobs projected to be over $165,000 a year.

This macro backdrop aligns perfectly with Q1 office fundamentals. CBRE noted approximately 410,000 square feet of positive net absorption in the first quarter and total leasing volume of roughly 1.4 million square feet, up nearly 74% year-over-year, with about 70% of that volume in Class A buildings.

In Uptown, the denominator is shrinking as millions of square feet of office space are being taken out of inventory for conversions to residential, hotel and retail uses. Strong demand for high-quality space and limited new supply are yielding a landlord favorable environment for driving leasing fundamentals.

Our Charlotte assets are directly benefiting from this demand which is why we're seeing strong rent roll-ups in net effective rent growth in Charlotte.

In Raleigh, the long-term story of in-migration and organic growth remains intact. Recent census estimates show the Raleigh metro is 1 of 10 fastest growing in the country between 2024 and 2025.

And statewide, North Carolina ranked first in domestic net migration; and third, an overall population gain for the same period, adding an estimated 146,000 residents.

CBRE's Tech report noted that the Raleigh area also produces nearly 5,000 tech graduates annually, reinforcing a sustainable pipeline of skilled workers. Office fundamentals reflect that strength in the best business districts and our team was busy for the quarter, signing over 200,000 square feet of second-generation space.

Our 2 new developments at GlenLake, which offer a mix of uses and are 95% leased, and Bloc 83, our recent mixed-use JV acquisition, which is 97% leased in Raleigh'S CBD are directly aligned with where both in-migration and corporate demand is strongest.

Finishing in Nashville, where strong population growth and a diversified economy continued to attract brand name employers, just last month, Starbucks announced a $100 million plan to open a Southeast corporate office in downtown Nashville for 2,000 employees, with some relocating from Seattle and the balance, new hires in Nashville. Office data for the first quarter shows that demand is focused on newer or newly amenitized Class A nodes and our 287,000 square feet of quarterly leasing with a weighted average lease term of 9.8 years and cash and GAAP rent spreads of 9.4% and 26.5%, respectively, bears witness to this data.

Across our footprint, we're aligning capital with the metros and submarkets that continue to win people, jobs and corporate investment. We're making sure our portfolio and people are prepared to deliver commute-worthy experiences to our customers and their teams. Our success this quarter supports this strategy, and we're confident we'll continue to serve us well. Brendan?

Thanks, Brian. In the first quarter, we delivered net income of $31.3 million or $0.29 per share and FFO of $94 million or $0.84 per share. The quarter included a $17 million property sale gain from our disposition in Richmond that was included in net income but not included in FFO.

During the quarter, we received a term fee at an unconsolidated JV for a net $2.2 million or $0.02 per share from a customer moving from McKinney & Olive?to 23Springs, and we sold our interest in a third-party brokerage services firm, resulting in a $1.4 million gain.

These 2 items were included in FFO and were factored into our original FFO outlook. Otherwise, there were no unusual items in the quarter.

You may have noticed some minor changes to our supplemental package we released yesterday that we believe will make it easier to derive our share of joint venture NOI. We also broke out Dallas as its own market now that we have 3 in-service properties in Dallas, which will increase to 4 upon stabilization of 23Springs.

Our other markets now primarily consist of our noncore Pittsburgh and Richmond portfolios. We are pleased with our first quarter financial results, which demonstrate the resiliency of our operations and cash flows, even more consequential was this quarter's leasing activity on both the in-service portfolio and development pipeline, which positions us to increase occupancy and deliver NOI growth during the remainder of 2026 and beyond.

Our leased rate is 89.7%, up from 89.2%, 1 quarter ago. The spread between our leased and occupied rates of 470 basis points is 3x our normal historical spread, a strong indicator for future occupancy gains. We reiterated our year-end occupancy outlook of 86.5% to 88.5%, which implies a 250 basis point increase at the midpoint over the remaining 3 quarters of the year.

Our balance sheet remains in good shape. We had over $650 million of available liquidity at the end of the quarter and subsequent to quarter end, we closed a $100 million secured mortgage at Granite Park Six, resulting in over $50 million of capital to Highwoods. We expect to close 1 or more additional financings at JVs during the remainder of the year, which will repatriate capital back to Highwoods and improve our liquidity and unencumbered debt-to-EBITDA ratio.

Based on our current expectations of NOI growth and assuming $200 million of noncore asset sales, we expect to end the year with debt-to-EBITDAre in the low to mid-6s with additional reductions likely in future periods as NOI grows. We have only $40 million of remaining capital needed to complete our share of the development properties. These properties, combined with the developments placed in service this quarter, will deliver over $20 million of annual NOI growth compared to the Q1 '26 run rate.

As Ted mentioned, we have maintained our FFO outlook of $3.40 to $3.68 per share. It's still early in the year. And while we're off to a strong start with our leasing activity, most of these leases will have a financial benefit to 2027 and thereafter.

Before we turn the call over for questions, there are a couple of items to note. First, I mentioned the term fee and gain on sale we recorded in the first quarter, we do expect some additional term fees in the remainder of the year as is typical, but these are expected to be lower in subsequent quarters. We also expect some additional other income items in the second half of the year.

In total, these items are expected to be around $0.06 to $0.07 for full year 2026, which is approximately $0.05 lower than 2025.

Second, capitalized interest is expected to be lower for the foreseeable future as we will no longer capitalize interest expense at 23Springs or Midtown East. There is significant embedded NOI growth at these properties due to leases that are signed, but won't be fully online before the middle of 2027.

Third, as is typical G&A was higher in Q1 due to the expensing of annual equity grants. G&A is expected to be lower for the remaining quarters of the year. Given these factors and our expectation of steadily increasing occupancy during the final 3 quarters of 2026, we expect FFO to increase in the second half of the year.

Operator, we are now ready for questions.

[Operator Instructions]

Our first question comes from Seth Bergey from Citi.

I guess I just wanted to go back to some of your comments in the prepared remarks about discussions around potential new developments and then you obviously announced kind of the share reauthorization. I'm just curious kind of how do you think about capital allocation priorities? And how does those 2 opportunities kind of compare to each other today.

Seth, it's Ted. Look, I think -- we're always looking at the best ways to improve our long-term growth rate, strengthen our cash flows, make us more resilient cash flows and improve the quality of the portfolio. So I just think our stock buyback gives us another option to think about and gives us optionality.

I think over the years, we've proven to be pretty disciplined allocators of capital. We've rotated between acquisitions and development throughout various cycles, always looking at what's the best risk-adjusted return. And again, the stock buyback just gives us 1 more option to consider.

Last year, we were very active on the acquisition side. We acquired on our shared interest about $580 million worth of assets at what we can consider very attractive pricing. Now as you alluded to, we're becoming more constructive on development. There's the shortage of high-quality space. So we're fielding calls, whether it be build-to-suits or preleased office development that -- and development is hard these days, right? It's expensive. It's hard to finance. Interest costs are higher. So everything about development is really hard right now. But we think there's opportunities for well-capitalized developers to earn pretty attractive risk-adjusted returns.

So again, we look at everything, but development is certainly becoming more constructive.

And then just on the potential opportunity for dispositions. Just given kind of Iran and some of the changes in the 10-year and maybe some of the macro headlines around AI. Are you seeing any changes towards the type of capital that are interested in investing in office products and any changes in pricing?

I'd say the short answer is no, at least not yet. If you think about, since last year, call it, since early '25 through the disposition we had in January, we sold about $270 million roughly right at an 8% cap rate, which sort of matched up with our acquisitions.

So we've got a lot of assets out in the market. I think we've said we're going to try and get $190 million to $210 million done by midyear. We're on track to doing that. And we have other assets that are in the market as well and at various stages of the process. So we have not seen really any changes whatsoever in the profile of the buyers.

Next question comes from Blaine Heck from Wells Fargo.

You've had a solid start to the year on the leasing side. So I was hoping you could comment on the leasing economics you've seen thus far? And maybe how you would expect rent spreads and concessions to trend during the full year of 2026?

Maybe I'll start, Blaine and then Brian or Brendan can jump in. Look, as you alluded, we had a great start to the year with up almost 5% on cash, 19-plus percent on GAAP. And it can vary quarter-to-quarter. It can just be a mix, as you know. But I think in general, the macro -- our macro view is, look, there's a pretty good setup for office owners over the long term. Again, quarter-to-quarter can bounce around a little bit.

But look, what we know is demand remains strong in our markets. We're not seeing any impact whatsoever thus far on AI impact on AI. In fact, it's been a net positive to us. We signed a couple AI related users. So we're not seeing anything there. There's absolutely to Brian's point in his prepared remarks, there's a dwindling supply of high-quality space in the BBDs.

There's going to be a shortage of this space. I think in the next couple of years, given that no new construction -- ongoing constructions that I think, a historic low according to JLL.

So we're starting to see that, and that's going to accrue to the benefit, I think, to office owners. So look, again, we don't know exactly what the metrics are going to look like, but we do think there's a pretty good setup for owners of high-quality office space in our BBDs.

And then also, 1 other thing we've got to wind at our back is the in-migration. It's just continuing. Brian alluded to a few big announcements in Charlotte, but we're seeing that in Dallas. We're seeing that in other markets as well, obviously, to varying degrees. But just in general, everything about the supply-demand backdrop feels pretty good right now.

Hi, Blaine, this is Brian. I might just add a little anecdote to add on to that. But we've mentioned on previous calls that we have been proactive in many cases in connecting with customers well in advance of expirations since we had term and arguably kind of a catch market to push out those extensions because we don't have pending secured debt expirations and things like that, we could look beyond.

And they're now reaching out to us, too. So that's a kind of unique change. They want to secure where they're at. They want to secure terms and not get kind of caught at a mark-to-market a few years down. So I think that's also helpful. And so if you think about that K-shaped recovery, well, maybe it's not universal in terms of the entire portfolio, but we feel really good that the great majority is on the top side of that K, and we're benefiting from that.

Great. That's helpful color. And then, Ted, I wanted to follow up on your commentary on the potential for build-to-suit opportunities. Are there specific markets that you're seeing that demand increase in? Is there any color on the profile of tenants that you might be talking to? And then lastly, would those potential build-to-suits occur on land you already own? Or might you need to acquire some land if those come to fruition?

Yes. Let me make sure I hit all these. But market-wise, in various markets, so multiple markets, it's some of our top markets. I don't want to get real specific. We're competing on some of these. And some of them are still multistate competitions as well that we haven't won it from a market perspective. But it's in our larger markets, as you'd expect.

And customer wise, it varies from -- it can be financial services, regular corporates as well. So really, it varies across the board there. There's no -- I'd say there's no real theme to it. The only theme being shortage of space in the market, in the submarket they want to be in. So across the board, but it is in our larger markets, but multiple markets.

Great. That's helpful. And then is it on land that you already own? Or might you have to go out and purchase?

Yes. Sorry about that. I missed that one. It's both.

I just want to be clear, it's -- we wouldn't go out and buy land to land bank. I think it would only be subject to a build-to-suit that's there. So I don't want anybody to get the impression that the land inventory is going to go up. It's more likely to go down from here.

Our next question comes from Peter Abramowitz from Deutsche Bank.

Yes. I think last quarter, you talked about -- you needed around 700,000 square feet this year of vacancy leasing that would actually take occupancy to kind of hit the midpoint of your guidance and also mentioned, I think, a retention rate of around 35% or 40% under '26 expirations.

So just curious, I guess, on the leasing you did this quarter, the 300,000 square feet of new leasing, how much of that will kind of go towards that 700,000 for the full year that will actually take occupancy before year-end? And is kind of the math is still the same on the retention and the renewal side as well?

Yes. Peter, it's Brendan. Yes, good question. So the math pretty much rolls forward from everything that we did in the first quarter. And so the good thing is we moved that lease rate up. I think we had talked about at the beginning of the year that we had about 1.2 million square feet of leases that were signed that would commence by the end of 2026. .

We have moved a number of those leases into occupancy during the first quarter. But fortunately, we've replaced that. And so we still have about 1.2 million square feet of signed leases that will commence by the end of the year.

And then we had expirations. So what we have out of the remaining expirations, there's probably somewhere in the neighborhood of 850,000 to 900,000 square feet of likely kind of move outs based on what's left over.

So that leaves us positive net absorption from 3/31 of 300-plus thousand square feet, which means we have another 300,000 to 400,000 square feet to sign and start to get into this year. So we feel good about that. So that's down from that 700,000 that you mentioned kind of at the beginning of the year. And if we keep that pace of roughly 100,000 square feet of new per month, that kind of puts us right on track to get to the midpoint of that year-end occupancy range of 87.5%.

Okay. I appreciate that. That's helpful, Brendan. And then on the Richmond sales, I think you talked about sort of an overall blended cap rate for sales last year through January, but I wanted to ask, what was the cap rate specifically on that portfolio that you sold in Richmond?

Yes. Peter, it was again the blended. That's up on the upper end of that. I think it was maybe a low double-digit type cap rate but very low double digit.

Okay. And that's kind of incorporated in that blended number, I think you said around 8%.

That's correct.

Okay. Got you. And then 1 more, if I could. It looks like the -- in the same-store pool, operating expense growth was a little bit elevated in the quarter. Was there anything kind of unique to first quarter results that you wanted to call out? Or anything that we should kind of be mindful of going forward?

Yes, Peter, just as you can probably expect from the winter, right, we had some pretty cold weather, particularly kind of in February. So utility costs were up pretty significantly kind of year-over-year. That really drove the sizable increase in expenses. That was probably the biggest 1 that's there.

Given we were, I think, negative 60 basis points on same-store in the quarter, and we're expecting roughly flat kind of for the year. We think that, that number is probably going to be low again in Q2 and then positive in the back half of the year to average out to be flat for the full year on a cash basis and positive on a GAAP basis.

Our next question comes from Ronald Kamdem from Morgan Stanley.

Great. Just following up on that sort of same-store thread. And I just wonder if you can give some of the breadcrumbs as we're thinking about into 2027. So as the occupancy starts to ramp, presumably, you'd be at a better pace as you're comping into next year. Any other sort of puts and takes that we should be thinking about potential acceleration?

Yes, Ron. Yes, thanks for the question. Yes, I think you'll see that kind of second half '26 improvement in same store, I think in all likelihood carries into '27. So you should see good same-store results there. I think if -- from an earnings perspective, what I can kind of give some bread crumbs there in terms of thinking about first half of this year and then as you go into the back half of this year, which should be helpful as you think about next year numbers.

We had -- I mentioned in prepared remarks, right, we had the gain on the third-party brokerage sale. We had the term fee. Those combined were $0.03 in the quarter.

G&A is similarly sort of $0.03 higher in the first quarter. So those things kind of offset each other. I think we've got cap interest that will go away on 23Springs and Midtown East. That's probably a couple of pennies that is probably partially offset by a little higher NOI in Q2.

And then we mentioned that we've got the $200 million of dispositions that we expect to kind of have and that will be a little bit dilutive in terms of we're just going to kind of pay down the line of credit and probably keep the remainder in cash for the balance of the year in preparation for paying off the 2027 bonds.

All that means probably your second quarter is going to be a little lower than where Q1 was from an FFO perspective. And then if you think about getting to the midpoint of guidance ex-land sale gains, it obviously implies a pretty meaningful ramp in the back half of the year. So I think that's positive kind of as you think about the second half of '26 and then ultimately into '27.

Got it. That's helpful. My second question is just on the capital recycling front. So on the buy side, is it all -- it sounds like Dallas obviously is really interesting. Is the acquisition opportunities all in existing markets? Or is there some new markets in there? And then on the sell side, maybe an update on just the Pittsburgh portfolio situation and what you think timing maybe too soon for pricing, but that would be helpful as well could be on that.

Sure, Ron. On the acquisition side, yes, we're primarily focused on our existing footprint. We're very pleased with our footprint. We do want to grow in Dallas over time. So we'll see where the acquisitions are you sort of got to go where the opportunity is. But -- so it's been largely in our -- entirely in our existing markets for now.

And then on the dispo, really no update on Pittsburgh. We are going to be bringing to market 1 of the smaller assets here soon. And then -- but for the big asset, PPG Place. really no update. We're continuing to get some leasing done before we bring it to market. I think we're pleased with the capital markets are improving both the debt and the equity capital markets. So I think we're getting closer to launching, but I haven't set a date yet, we're trying to nail down a few leases before we do that.

Our next question comes from Dylan Burzinski from Green Street.

I guess just 1 on the build-to-suit opportunities, what sort of stabilized yield on cost that you guys require to kick 1 of those off in today's environment?

Yes. Dylan, again, it's hard to do a comparison, really hard to say. I mean, it's -- we don't really talk about just from a competitive standpoint. And virtually, every deal can be different, it's obviously based on the market, the submarket, the credit, the term, what annual bumps are getting. So it's hard to say. What I would tell you, though, is on a risk-adjusted basis, we think they're pretty attractive opportunities out there right now.

And then I guess just thinking about sort of '27 and obviously not going to get into guidance, but retention around 40% this year, I think for '26 expirations. Do you guys sort of view that as a low point in retention as we think about '27 and beyond? Or is there any 1 larger tenants in '26 that might not make sense to use that as like a '27 assumption? Just sort of trying to get a sense for the trajectory on retention as we think about the outer years.

Yes, Dylan, it's Brendan. Yes, I think your number is correct on '26 in that 40%-ish range as we were kind of migrating into '26. But just keep in mind, the '26 renewals, most of the '26 renewals that we did, we do early. So as you kind of migrate into any given year, you've got adverse selection bias because you early renew folks and then the ones you don't renew, they remain in that expiration schedule.

I think as we think about '27 as of now, we're probably somewhere in that 50% to 60% retention range on what's remaining in '27 and even that number is probably lower than what the ultimate kind of likelihood is given that we've got a number of expirations in '27 where we've got the underlying tenant that they have subleased to somebody else. That assumes that, that underlying tenant vacates and then we renew with the subtenant. That's not part of our retention calculation. So that would be part of a move-out and then signing on a new.

I think we'll do pretty well on '27 in terms of retention, which creates a good environment for us to continue to drive occupancy higher from year-end '26 as we migrate throughout '27.

[Operator Instructions]

Our next question comes from Vikram Malhotra from Mizuho.

Just 2 quick ones. I guess, first, on the trajectory from here, what do you kind of need to do? Maybe I missed this, what do you need to do new leasing wise for the rest of the year, kind of to hit that higher end or maybe even the midpoint of the year-end occupancy?

And then is there anything new in terms of additional move-outs or anything big we should just remind us going into next year in terms of potential move-outs. So that's just the first one.

And then the second, AI and leasing has been a big topic in San Fran in particular. Obviously, we've heard some in New York. I'm just wondering in your markets, are you hearing any AI-oriented firms look for space or expand away from sort of the West Coast.

Vikram, it's Brendan. Maybe I'll start on just kind of leasing needed to kind of hit those year-end numbers and then turn it over to Ted and Brian to talk about some of the specifics on the role in AI. So just in terms of leasing, I would say, to get to the year-end 2026 occupancy range that we have, and let's talk about the midpoint.

We think that's where we probably need to do roughly 100,000 square feet of new leasing per month kind of through probably June or July. That kind of gets us pretty well positioned, and those leases will move into. We think that those leases in all likelihood are going to move into occupancy by end of year.

But I think to continue to have occupancy move higher as we go forward into 2027, we'd like to see that pace continue in the back half of the year. And that, in all likelihood, will create a good environment for us to continue to drive occupancy higher as we go throughout 2027.

So I think we feel like we're in good shape kind of as we're through the first quarter of the year here. And we think we feel positive about the backdrop to allow us to continue to drive occupancy higher in '27, and I don't think there's any significant expirations in '27 that we're particularly worried about.

And then on the second question, AI, I alluded to it, maybe, I think, earlier in the call, we signed on AI-related tenant. They're focused on data centers, and that was in Dallas, Vikram. Other than that, throughout our markets, we really haven't seen much AI demand at all.

Our last question comes from Nick Thillman from Baird.

Can you hear me?

Yes.

Yes.

Okay. I cut out for a second. Sorry. Just 1 quick question on just overall utilization within the portfolio and just maybe getting an understanding of just sublease availability within the portfolio. Do you guys have like a number on just occupied space that's currently listed for sublease.

Yes. Actually, our sublease space is actually going down. I think it was down 6% or 7% last quarter. It is something we monitor. Now some of it just to be transparent. Some of it is it goes to direct vacancy. But some is being taken off the market and utilized by our customers.

So we have roughly 500 -- a little over 500,000 square feet in our portfolio that is currently being subleased today. But it is getting better, and we're seeing it both getting better in our portfolio, but the market as well.

We have no further questions. I would like to turn the call back over to Ted Klinck for any closing remarks.

Well, thanks, everybody, for joining the call, and thanks for your interest in Highwoods. We look forward to seeing you all at NAREIT, if not before, or the next call. Thank you.

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

Good morning, everyone, and thank you for joining today's Highwoods Properties Q4 2025 Earnings Call. My name is Regan, and I'll be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to Brendan Maiorana, Executive Vice President and Chief Financial Officer. Please proceed.

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're both available on the Investors section of our website at highwoods.com.

On today's call, our review will include non-GAAP measures such as FFO and NOI and EBITDAR. 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, Brendan, and good morning, everyone. Before I talk about our Fourth Quarter and outlook for 2026, I'd like to begin by highlighting some of the reasons why we're upbeat about the next few years for Highwoods. First, -- the fundamental backdrop across our core Sunbelt BBDs is as strong as it's been in many years.

There is limited to no new supply across our markets, and dwindling blocks of available high-quality space. New users continue to migrate to the SunBelt. And even with mixed signals about the health of the overall economy, many existing companies in our footprint continue to grow their businesses. This dynamic has created rental rate growth, not just in face rates, but growth in net effective rents, including rent spikes in our best BBDs.

Given limited development starts forecasted for the foreseeable future, well-capitalized landlords with high-quality office in BBD locations in the SunBelt are positioned to drive meaningful growth in rents. Second, the convergence of occupancy gains, rental rate growth and stabilization of our development pipeline, should enable Highwoods to deliver outsized NOI and earnings growth the next few years.

We expect to drive occupancy higher by roughly 200 basis points from the end of 2025 to the end of 2026, plus our development properties are projected to deliver year-over-year growth in each of the next 3 years. For the last few quarters, we've been emphasizing approximately $50 million to $60 million of NOI growth potential across 8 buildings, 4 existing operating properties and 4 developments.

We have realized some of this growth in 2026, but most will benefit our NOI trajectory in 2027 and beyond. Third and finally, we are positioned to invest at attractive risk-adjusted returns. Future investments are also likely to drive additional growth. We've invested approximately $800 million or nearly $600 million at our share over the last 12 months.

These acquisitions, which were in the strongest BBDs of Charlotte, Raleigh and Dallas have a weighted average vintage of 4 years an initial lease rate of 93.5%, Walts of 9 years, rents approximately 15% below market and projected stabilized cash yields of roughly 8%. The combination of strong fundamentals for high-quality BBD office and limited buyer pools creates an excellent opportunity for us to deploy capital at attractive risk-adjusted returns.

These items, combined with our proven track record and strong balance sheet gives us confidence that we're well positioned to grow for the foreseeable future. Our initial 2026 FFO outlook is 5.7% higher at the midpoint than our initial 2025 outlook.

Now turning to our fourth quarter. We had solid financial performance with FFO of $0.90 per share including $0.06 of land sale gains, resulting in full year 2025 FFO of $3.48 per share. Excluding land sale gains, full year FFO was $0.07 per share or 2% higher than the midpoint of our original outlook provided at the beginning of 2025.

We leased 526,000 square feet of second-gen space during the fourth quarter, including 221,000 square feet of new leases. In addition, we signed 95,000 square feet of first-gen leases on our development pipeline. Signings on second-gen space were a bit lower in the fourth quarter compared to earlier in the year. We believe that was largely just timing as already in 2026, signings have accelerated and the long-term trend continues to be positive.

Leasing economics continue to be healthy in the fourth quarter. Cash rent spreads were positive with GAAP rent spreads in the mid-teens. As we've long stated, we're most focused on net effective rents, which are strong again in the fourth quarter and helped make full year 2025 or high water mark.

For the year, net effective rents were 20% higher than in 2024 and 19% higher than 2022, our prior peak year. This performance underscores the improving fundamentals we're seeing across our markets and BBDs. Our $474 million development pipeline is now 78% pre-leased up from 72% last quarter and 56% 1 year ago.

GlenLake 3, our 218,000 square foot office and amenity retail development in Raleigh is 84% leased, with strong prospects to bring the property to the mid-90s. At Granite Park VI, our 422,000 square foot building in the legacy BD of Dallas, -- we signed 44,000 square feet since our last earnings call and are now nearly 80% leased.

We signed 51,000 square feet at 23 Springs, our 642,000 square foot mixed-use development in uptown Dallas, bringing the property to nearly 75% leased, up from 67% last quarter. At 23 Springs, current rents are 40% above our pro forma underwriting. Lastly, Midtown East and Tampa, our 143,000 square foot development is 76% leased and we have strong prospects for the remaining office space.

Given the strong demand we've experienced with our current developments and demand from sizable users across many of our markets, we're starting to have conversations with prospective build-to-suit and anchor customers for new projects. We've included the potential for up to $200 million of development announcements in our 2026 outlook.

We've been active on the investment front, especially late in 2025 and early in 2026. We acquired $472 million in 2025, including our $223 million acquisition of 600 at Legacy Union in the fourth quarter. 600 is a 411,000 square foot class AA office tower in Uptown Charlotte. This property was completed in 2025 and is currently 89% leased, up from 84% when we acquired the building in November.

We have strong prospects to bring the building into the mid-90s. Because the property has just delivered and is currently only mid-40s percent occupied, NOI will be temporarily lower in 2026. We expect to reach stabilized yields of around 8% on both a cash and GAAP basis with projected stabilization occurring on a GAAP basis in 2027 in cash in 2028.

In January, we acquired 2 buildings in the BBDs of Raleigh and Dallas for a total expected investment of $318 million. which our share was $108 million plus $13 million of preferred equity. First, we acquired the tariffs in Dallas for $109 million in a JV with our longtime local partner, Granite properties, in which we have an 80% interest.

The tariffs is a 173,000-square-foot best-in-class property that was built in 2017 and is located in Preston Center, a new BBD for Highwoods. We believe Preston Center is the most supply-constrained BBD in Dallas, where rents have grown substantially over the past few years giving us more than 30% mark-to-market upside on in-place leases.

After signing a lease following our acquisition, we are now 100% leased at the terraces. Second, we acquired Block 83 in Raleigh, a 492,000 square foot mixed-use asset that includes 2 10-story best-in-class office buildings with 27,000 square feet of ground floor amenity retail located in CBD Raleigh. We initially own a 10% interest in the joint venture that was formed to acquire Block 83. The North Carolina Investment Authority a new strategic investment partner for Highwoods owns the remaining 90%.

We have the option to increase our ownership in Block 83 to 50%. And -- on a combined basis, we expect the initial GAAP yield on Block 83 in terraces to be in the low to mid-8% range during 2026, while our initial cash yield will be around 7%, which is temporarily low due to free rent and terraces that will burn off during 2026 and result in stabilized cash yields in the mid- to upper 7s on a combined basis prior to achieving rent roll-ups at the terraces.

We expect to fund our recent acquisition activity on a leverage-neutral basis, primarily through the sale of noncore assets were properties where value has been maximized. We sold $66 million of noncore buildings and land across various markets in the fourth quarter and an additional $42 million of noncore properties in Richmond subsequent to year-end.

Our 2026 FFO outlook assumes we close $190 million to $210 million of additional dispositions by midyear. Upon stabilization of $600 million we expect this leverage-neutral rotation of capital to be modestly accretive to our unaffected FFO run rate while improving our long-term growth rate strengthening our cash flows and the increase in our portfolio quality.

To wrap up, we're excited about the outlook for Highwoods. First, given strong fundamentals across our markets pricing power is shifting towards well-capitalized landlords who own high-quality buildings. Second, organic growth potential embedded in the Highwoods portfolio will be realized primarily through occupancy gains in our operating portfolio and stabilization of our development pipeline.

Third, given our proven track record, we expect to continue to deploy capital at attractive risk-adjusted returns that enhance our long-term growth outlook, increase our portfolio quality and strengthen our cash flows. These factors, combined with our strong balance sheet and strong platform provide the foundation for sizable momentum over the next few years. I'm also confident in our outlook because of our engaged, hard-working and talented teammates who have long driven our consistent success. I thank the entire Highwoods team for their commitment and tireless dedication. Brian?

Thank you, Ted. Our Sunbelt markets delivered a strong finish to 2025, validating our BBD strategy and setting us up for another year of occupancy and rent growth in 2026. These cities are net winners with regard to inbound talent, corporate relocations and job growth, all are in the top 15 of the Urban Land Institute in PwC's top markets to watch and widely finished the year posting positive net absorption with office development pipelines at record lows, our best-in-class commute worthy portfolio and a strong balance sheet were the beneficiaries of a market in full flight to quality mode, which is driving healthy lease economics across our BBD portfolio. .

The year's body of work included 3.2 million square feet signed with strong GAAP rent spreads of 16.4%, all-time high net effective rents, significant leasing across the development pipeline and the meaningful backfill of long-communicated vacancies.

In the fourth quarter, we signed 88 deals with cash rent spreads of a positive 1.2% and weighted average lease terms of almost 6 years. Expansions outpaced contractions 2.5 to 1 for the quarter, over 3:1 for the year, and we ended 2025 over 89% leased with competitive supply decreasing construction pipelines at record lows and with our customers' conviction on having their best and brightest in the office resolute.

2025's positive leasing environment is continuing into the new year. Across our Sunbelt BBDs, market fundamentals continue to outperform the nation. New supply is almost nonexistent and inbound corporate relocations and growth marches on. Starting in Charlotte. The Queen City has not only kept its post-pandemic momentum, it found another gear according to the Bureau of Labor Statistics finishing 2025, having generated more nominal jobs than any other metro area, except New York City, which is 7x the size of Charlotte.

The City's economic development office reinforced this highlight naming 2025, the best year for business recruitment in a decade with 15 announcements totaling 4,000 jobs and with no sign of a slowdown in 2026. This included major corporate relocations or new regional hubs for the likes of Global Logistics Giants Maersk, Dollar Truck, Pack Life, SoFi, American Express, our new customer joining the recently acquired 600 at Legacy Union and Scout Motors 1,200 job global headquarters in the uptown adjacent neighborhood of plasma Midwood. CBRE noted leasing activity in 2025 echoed the region's job productivity, reaching its highest level in more than 6 years, roughly 5.2 million square feet of deals were signed with 75% of the volume related to leases that were either new or expansions, trophy and top-tier Class A space in uptown, South Park and South End are effectively full.

Development under construction is largely pre-leased and there is virtually no new speculative product in the pipeline. Against this backdrop, our 2.4 million square foot Charlotte portfolio already in the mid-90s leased, is positioned to capture further rate growth as leases roll.

This is evident in our portfolio by the pace and healthy economics of any reletting as well as the activity Ted mentioned at 600 since our acquisition. Heading west to Yal Street, Dallas is the #1 market to watch according to ULI and PwC for the second straight year.

In Big D, CBRE noted 2025 net absorption near its post-pandemic high. Class A office posted its fifth consecutive quarter of positive absorption. And with the recent acquisition of the Terraces impression Center, we now own 1.8 million square feet with our partners at Granite across Uptown, legacy and Preston Center, the 3 BBDs we initially targeted for investment when we entered Dallas 4 years ago and where the market strength is largely concentrated to the volunteer state where Cushman highlighted at Nashville's 2025 net absorption was 12th nationally overall with 900,000 square feet for the year and asking rents reaching all-time highs.

Avish & Young noted that after absorbing a wave of new construction, the pipeline has dropped to historical lows. Trophy office availability declined at a nationally leading rate and up to 2 million square feet or 13% of downtown office stock is being converted to announced hotel and residential uses.

Our portfolio concentrated in downtown Franklin and Brentwood is benefiting from this environment with steady leasing velocity and prospects that should allow us to both fill remaining vacancy and mark rents to market. To that end, Symphony Place in Downtown Park Place West in Franklin and our Westwood South building in Brentwood, all have strong pipeline of prospects to bring these buildings to stabilized levels.

Stepping back, 2025 confirm that our Sunbelt BBD focused portfolio is aligned with where tenants want to be. We are overweighted in the submarkets with the greatest absorption, tighter supply and rising Class A rents. This combination gives us line of sight to further occupancy gains and mark-to-market economics in 2026. This underscores our confidence in our ability to unlock the durable growth that is embedded within the Highwoods platform. Brendan?

Thanks, Brian. In the fourth quarter, we reported net income of $28.7 million or $0.26 per share. Our FFO was up $100.8 million or $0.90 per share, which includes $0.06 per share of land sale gains.

During the quarter, we issued $350 million of unsecured bonds and acquired 600 at legacy Union, which as Ted described, is a just completed trophy office building with low initial NOI as several signed leases have not yet commenced.

The impact of the bond issuance and the acquisition of 600 reduced FFO by $0.01 per share. Excluding these 2 items and the land sale gains, our fourth quarter results were in line with the midpoint of our upwardly revised 2025 outlook provided in October. Since our last earnings call, we've invested over $330 million to acquire best-in-class office and amenity retail properties across the strongest PBDs in Charlotte, Dallas and Raleigh.

We plan to fund these acquisitions on a leverage-neutral basis primarily through the sale of noncore assets or other properties where value has been maximized. We closed $66 million of dispositions in the fourth quarter and another $42 million so far this year.

Our early fourth quarter 2025 ATM issuances provided about $20 million of leverage-neutral purchasing capacity leaving us roughly $200 million of additional dispositions required to complete our asset rotation on a leverage-neutral basis. We plan to complete these additional dispositions by mid-year.

Before I review the impact of the recent investment activities on our 2026 outlook, I want to first highlight our asset recycling over the past 12 months. We've invested $580 million to acquire high-quality office buildings in the strongest BBD locations in the Sunbelt and sold $270 million of noncore properties upon stabilization of $600 million and after we sell another $200 million of assets, this leverage-neutral rotation will be modestly accretive to our near-term FFO, strengthen our cash flow, increase our long-term growth rate and improve our market mix and portfolio quality.

This rotation has resulted in a reduction to our portfolio age by over 2 years to a weighted average vintage of 2007. That's not easy on a roughly 27 million square foot portfolio. Now to our 2026 outlook. We're introducing an initial FFO range of $3.40 to $3.68 per share, which equates to 3.54 at the midpoint.

Since our last call in late October, we've completed a number of investment and financing transactions that will temporarily impact 2026, but not impact 2027 and thereafter. First, the acquisition of 600 at Legacy Union will have a dilutive impact on 2026 by approximately $0.07 per share, given the building is 89% leased, but currently only 44% occupied as several large leases won't commence until late in the year.

GAAP NOI at $600 is projected to be approximately $10 million in 2026 and more than $18 million in 2027 upon stabilization. Second, we opportunistically accelerated bond issuance into late 2025, that we had originally planned for late 2026 or early 2027. We made this decision given the strong backdrop in the bond market and to provide us temporary liquidity to fund the acquisitions of 600, the terraces and Block 83 prior to completing that leverage-neutral rotation of capital I described earlier.

This will leave us with excess cash on the balance sheet and no borrowings on our credit facility for much of 2026 but eliminates the need for a bond issuance later this year and will enable us to repay our $300 million March 2027 bond maturity with cash on hand and borrowings on the credit facility.

This short-term excess liquidity is expected to reduce 2026 FFO by $0.03 per share, but should not have any impact on our previously unaffected run rate for FFO for 2027 and beyond.

Third, because we have another $200 million of dispositions to go to complete our leverage-neutral rotation of capital, our leverage is temporarily elevated which increases our projected 2026 FFO by $0.01 per share. Said differently, if we had completed the planned additional $200 million of dispositions in January instead of the first half of the year, our FFO outlook would be $0.01 lower. Adding all these items together results in $0.09 per share of temporarily lower FFO in 2026 at the midpoint of our outlook, but doesn't have any impact on our 2027 FFO or subsequent years.

Finally, we've included up to $0.16 per share of land sale gains or $0.08 at the midpoint of the range. The potential land sale gains all relate to parcels that are under contract and scheduled to close later in 2026. Taken together, these items, none of which were known when we reported third quarter 2025 results in October have reduced the midpoint of our otherwise unaffected 2026 FFO outlook by $0.01 per share.

Just a couple of other items to note. First, we provided our projected year-end occupancy outlook rather than average occupancy, primarily due to the outsized impact of 600 at Legacy Union. At the midpoint, our year-end occupancy projection of 87.5% appears consistent with what we discussed on our last call, but it's actually a little stronger as our planned asset recycling activities are projected to reduce our year-end 2026 occupancy by 25 basis points compared to our portfolio at the end of the third quarter of 2025.

Second, same-property cash NOI is expected to be roughly flat in 2026, but GAAP NOI is estimated to be 150 basis points higher than cash NOI. As you know, when GAAP same-property NOI is higher than the corresponding cash metric, it's typically a strong indicator for future same-property cash NOI growth.

Finally, we expect our debt-to-EBITDA ratio to start the year elevated, but steadily decline after Q1 as planned disposition proceeds are used to reduce debt and EBITDA steadily grows as we migrate throughout the year.

Lastly, as you may have noticed, we made some routine SEC filings yesterday and this morning. Under SEC rules, S-3 shelf registration statements sunset every 3 years. It has been 3 years since our last shelf filing. As a result, last evening, we filed a new S-3 with the SEC.

This was a joint shelf filing by the REIT and the operating partnership that registers an indeterminate number of debt securities, preferred stock and common stock for future capital markets transactions. With this new shelf in place, we also needed to refresh our long-standing ATM program, which we filed via Form 424(b) this morning.

As you know, keeping an ATM program in place is 1 of the many arrows we like to keep in our capital-raising quiver. To be clear, the FFO per share outlook that we provided in last night's release assumes no ATM issuances during 2026.

Operator, we are now ready for questions.

Thank you. We will now begin our Q&A session. [Operator Instructions] Our first question comes from the line of Seth Bergey of Citi.

I guess just to start off with kind of on the capital recycling. You talked a little bit in the opening comments around kind of enhancing your long-term growth rate. Just kind of in the context of kind of the 2026 guidance. Like when do you kind of expect to realize that elevated growth rate. Is that kind of like a 2027 story or something further beyond that.

Seth, it's Brendan. Maybe I'll try to answer that. So I think there's a couple of different things going on with the recycling activity. Obviously, the impact on 2026 numbers is onetime in nature that we try to lay out.

So that's that kind of $0.01, $0.09 onetime impact that's there. That goes away in 2027. So I think if you thought about stabilized growth and you reverted back to what your estimates were in October for 2027, nothing that we've done since October should have any impact on your 2027 outlook.

The asset recycling is neutral to modestly accretive to FFO in 2027. And the outlook on occupancy for year-end '26 is right in line with what we've mentioned in October. If anything, it's probably up 25 basis points kind of on a same-store basis. So that feels a little bit better.

So I guess, if you looked at the '26 numbers and backed out the land sale gains, you'd get a lower growth in '26, but then a very significant amount of growth in 2027. But I think the way that we think about it from a long-term perspective is if the internal growth of the portfolio is just a 3% NOI over time.

We continue to kind of grind that number higher by recycling into higher-growth assets and recycling out of lower-growth assets.

That's helpful. And then just going back to kind of the development pipeline and hitting kind of that 8% pre-lease number. How is kind of demand for kind of kind of the balance of that leasing on the development pipeline?

Seth, it's Ted. Look, I think demand. We're still seeing really good demand. I think if you think about the progress we made throughout '25, a year ago, we were 56% leased and then the last quarter, 72. So we just continue to grind higher throughout 2025.

And the demand remains good. As I mentioned, I think, on our prepared remarks, 2 of our developments, GlenLake 3 here in Raleigh, in Midtown East and Tampa. We have -- what we classify as strong prospects for the remaining space effectively. For Midtown East, it's all the remaining office space and for GlenLake, 3 gets us to mid-90s, I think, percent. And then you go over to Dallas. The 23 Springs, we're currently around 70%, almost 75%. We've got prospects to move higher there as well.

And then on Granite Park VI, it's a little quieter. We've got a couple of smaller prospects. I think it's just going to be a long slog. And there are any big users out there to get us from -- I think we're just shy of 80 today. So I think we're just going to hit some singles and we'll continue to march that higher as well over time. But we feel, overall, really, really good about our prospects.

Our next question comes from the line of Blaine Heck of Wells Fargo.

Great. I guess just digging in a little bit more to your tenant conversations. There's a narrative out there that the Sunbelt is more prone to AI displacement. So I was hoping you could comment on whether you've seen any impact to your investor or tenant base, I should say, from AI-related layoffs? And do you see any of your markets as having elevated exposure to potential displacement of jobs driven by AI kind of efficiency? .

Blaine, it's Ted. I'll start, and if Brendan or Brian want to jump in. Look, we really haven't. I mean, obviously, what we're trying to tell you on the call is what we're seeing with boots on the ground and we all see the narrative on AI, whether it be software companies a week or so ago, financials the other day. It's just not what we're seeing from our customers, and the demand. I mean we continue to see in migration coming to our markets. Companies are taking more space, not less space in our own operating portfolio. Expansions continue to outpace contractions.

So look, who knows what the ultimate outcome is going to be. I do think back office jobs are probably more susceptible to AI versus client-facing jobs, and that's most of our portfolio is client-facing jobs. So it's yet to be seen. But look, we're not hearing any of that out of our client base yet. .

Brian here, just to clip on, and Ted has mentioned this in the past, our bread and butter are smaller customers in general. So that has a sort of insulator effect on the AI, at least right now. I think folks are seeing it as a productivity tool as opposed to a job elimination towards the moment. But we know we're not inert the impacts we'll have on the overall job market. .

Okay. That's great to hear. Brendan sorry for the broken record question, but we're getting a lot of questions on cash flow. We've touched on the elevated CapEx before with all the leasing you're doing, but it does look like straight line will also be much higher this year. So I guess, again, can you give us an update on how long you see these elevated expenditures impacting cash flow -- and related to that, just touch on the payout ratio and your comfort of riding through some period of depressed cash flow as it pertains to the dividend.

Yes, Blaine, thanks. So what I would say, I guess, if we look at 2025 levels, and I think we were, call it, on overall cash flow, we might have been $13 million or $14 million kind of shy of coverage on the dividend, but that included $145 million of spend on leasing capital in 2025. And a normal year for us is about $100 million. .

And we committed $115 million during 2025. So any time there's more spend than what is committed, that's typically a pretty good indicator that your spend on future periods is going to go down. So I think it's likely that 2026 spend is probably going to be a little bit lower than $25 million.

I don't know if we'll be $30 million lower, but we think it's going to be lower. And then when you think about the amount of straight-line rent that's kind of in those numbers. That is future cash flow that's going to come online. And so we feel very good about kind of the long-term outlook of cash flow going forward from a combination of increased cash NOI that will come online over the next several quarters and a return to normalized leasing CapEx over time.

So that's going to create a significant amount of increased cash flow and we're comparing that to last year's numbers, where we were a little bit shy. But I think if you kind of normalize for all those things, that gets you back into that context of where we were a few years ago, which keep in mind from 2021 through 2024, I think we've retained a cumulative $150 million of cash flow above the dividend. So I think we feel very good about our ability to kind of get back there.

Our next question is from the line of Nick Thillman of Baird.

Maybe touching on the $200 million of noncore sales and the 0 to $17 million of land sale gains embedded in the guidance here. I guess, overall, as we're viewing that noncore sales, what percentage of that or if you could put a number around of that is related to landfills versus core asset sales and the type of -- maybe touching on the type of buildings you're also looking to dispose of within that pool.

Nick, it's Ted. Yes. Of that $200 million or so, none of that land is not any part of that. The land sales we have will probably be later in the year, we would anticipate -- so look, as you know, we're regular sellers of noncore assets every year. And I think this year is going to be really no different. It's either as noncore assets or assets where we've maximized, we think we've maximized the value. So it's going to be a variety of markets as well. I think last year, we sold assets in Richmond, Atlanta, Raleigh, Tampa, Orlando, sold land in Orlando.

So it's just going to be a mix of older assets or assets where we've maximized the value as well. So it's going to look a lot like prior years probably.

That's helpful. And then, Brendan, maybe just a little bit on the occupancy bridge throughout the year. I know you remove the average occupancy within the press release, but in the U.K., you did mention it's going to be average occupancy of 85% to 87% throughout the year. I know there's a little bit of a drag related to some developments coming online. But maybe just touch on how you expect that occupancy to progress throughout the year?

Yes, Nick, good question. Yes, it is -- so we ended the year at 85.3%. That obviously included kind of a 70 basis point drag associated with the acquisition of 600 -- and then as you correctly point out, we've got developments, GlenLake 3 and Granite Park 6 that will move into the operating pool in the first quarter. Those are low in terms of occupancy, will not be low in occupancy by end of year, because the lease rate on those is relatively high.

But that's going to depress kind of first quarter numbers a little bit. And also keep in mind, we just sold roughly a little over 500,000 square feet of very highly occupied assets that are going to come out of that number and then what we're planning on selling for the remaining roughly $200 million also is fairly occupied.

So that's going to kind of bring the number down a little bit early in the year and then steadily improve kind of as we migrate second quarter, third quarter, fourth quarter.

Our next question is from the line of Dylan Bazinsky of Green Street.

You guys talked a lot about sort of how you're expecting to sort of complete the current capital recycling program within the first half of this year. I think in your guys' press release, you guys mentioned also potentially up to another $250 million of dispositions.

Just sort of curious, as you guys look at the portfolio today, I mean, do you guys get the sense that you're sort of nearing the final innings of pairing down some of the -- what you guys might call noncore assets. And then as you sort of think about uses of that capital, you also mentioned potential acquisitions. Just sort of curious how you guys are looking at things now that the stock has sold off quite a bit now or share repurchases, a potential use of that capital?

Dylan, it's Ted. I'll start. Look, I think as you know, you know us pretty well. I think if you've looked at our strategy throughout the years where we've been consistent capital recyclers always selling the bottom assets and recycling into newer, higher growth assets.

So I think that's something we're going to continue. And there's still -- obviously, we still have Pittsburgh that we do want to get out of and some other older assets on top of that. So there's still some work to do, but we've been -- again, as we said, we've been incredibly successful to do this capital rotation time and time again on a leverage neutral and FFO neutral to slightly accretive basis.

So -- and we feel comfortable with our ability to do that as well and that dilution. So Anyway, we feel comfortable about our long-term capital rotation plan. In terms of the buybacks, look, I think we talk about it with our board quarterly. It's obviously a capital allocation decisions you alluded to -- we're always looking to what's the best use of our capital. And we look at all of our alternatives, whether it's buybacks, acquisitions, development, which I think is becoming more interesting these days advertising in which we constantly get very attractive yields on our advertising projects, I think you're familiar with. So again, we look at what we're going to do over the long term. I'd never say never, but right now, I wouldn't say we're going to deviate from our standard operating procedure.

That's helpful. And then maybe just 1 last one. you mentioned potential development opportunities. I guess what sort of yield requirement would you guys need in today's investment environment to start any sort of either build-to-suit or that development project? .

Yes. Look, I think you've seen what we're buying on. One of the nice things about Highwoods is we're both a developer in an acquirer, so we can sort of toggle back and forth throughout the cycle. And just given the dearth of new development, we're starting to field more incoming calls on both developments and whether it be a build-to-suit or substantially pre-leased, pre-leased development starts.

So there's got to be a premium, right, on acquisitions to new developments. So look, we don't really discuss our development yields primarily from a competitive standpoint. I mean there's a lot of things that go into a development yield, whether it be it's the market, the submarket where we think the exit cap rate is, the term, the credit of the lease, what annual bumps are, so just a lot of factors that come into it. So we really don't get into those yields. But suffice it to say it'd be a premium over sort of what acquisition cap rates are today.

Our next question comes from the line of Ronald Kamden of Morgan Stanley.

Just 2 quick ones. Just going back to sort of the guidance, if you sort of back out the land sale gain and so forth. Just trying to think as the -- when you think about '25 versus '26, was there anything else sort of going into the number other than the dilution from the sales and the financing. Just wondering if there was anything else sort of fundamental driving that number.

Yes, Ron, it's Brendan. The only other thing that we've talked about is there's probably on a year-over-year basis, kind of call it, $0.05 of headwind on that other income line item that's there, which I think we talked about maybe on 1 of the last calls that the '25 was sort of elevated, '26 -- it's not 0, but it's probably more in line with a normalized year compared to kind of an elevated outlook.

So I think if you adjust for the onetime items associated with the acquisition and the financing in 2026 and you formalize kind of that other income line item, you get to a pretty healthy kind of growth rate at the core, which I think gives us confidence as we think about kind of the company going forward, where we've got good growth levers that are in there. So I think that's probably a fair way to think about kind of at the core, how much we're growing and how we think about that over an extended period of time.

Great. And then my second question was just on the leasing. Can you just remind us what sort of the new leasing bogey we should be thinking about to grow occupancy. It looked like it maybe it was a little bit lighter during the quarter. then picked up post quarter. Is that right? Just any color there would be helpful quarter .

As you mentioned, it certainly picked up here in the early part of the year. So just to kind of lay out context in terms of where we need to get to, to be at that 87.5 number by end of year. We've got about 2.1 million square feet of remaining expirations in 2026.

There's probably -- we expect about $1.3 million of that is likely to kind of move out. We currently have 1.2 million square feet of leases that are signed that are not yet in occupancy, that will be in occupancy during 2026. So that leaves kind of compared to where we are at the end of 2025. We're down about 100,000 square feet, maybe a little bit less than that. So what we need to do from a new leasing standpoint is do about 750,000 square feet of new, 700,000 to 750,000 square feet of new. And generally, we probably need to get those signed to have them in occupancy by kind of middle of the third quarter. So that's about 300,000 square feet of new per quarter.

And that creates about 250 basis points of net absorption our occupancy guide is 220. So we're going to lose about 25 basis points or so from the asset recycling that we talked about, just selling some of the things that we did, early in this year and then what we expect to do. So hopefully, that all makes sense, but we feel like all of that is very attainable relative to kind of what the business plan is.

Our next question comes from the line of Vikram Malhotra of Mizuho.

I guess, Brendan, I just wanted to go back, to be clear, on your comments around sort of the unaffected rate. I mean the FFO run rate not being affected as we go into '27. Just thinking about the positive benefit from the land sales, that's 1 time versus the dilution or the run rate occupancy from the acquisition trending up.

Do you mind just sort of going over that math again, just so we understand as we go from 4Q '26 into 1Q '27 kind of that step-up that you're alluding to versus maybe what we have modeled for 2027 FSO?

Yes, Vikram. So I guess what the NOI that we have for -- I'll break it down into kind of the 3 items. The NOI that we have at $600 million we disclosed when we acquired the building, our expectation for GAAP NOI in 2026 is $10 million. That number, we think, will be greater than $18 million in 2027 and there's really not a lot of leases that we need to do at this point to achieve that NOI projection for 2027.

NOI there will be low throughout the majority of 2025, but it will build a little bit as we progress throughout the year. So it's not going to be $2.5 million a quarter. It's going to start a little bit lower than that. But the largest lease that is not currently in occupancy is American Express, which Brian mentioned, and that comes into occupancy on December 1 of '26. So we really don't get a lot of benefit from that.

So most of that $8 million annual increase will kind of show up early in 2027 relative to 2026. So you're going to get most of that kind of in in '27. And then we're going to be fairly inefficient from a capital standpoint based on our projections as the disposition proceeds come in the door, and we'll have cash on hand for much of 2026, at least based on our current expectations.

We will use that cash and then likely borrowing on the credit facility to repay the March 2027 bond. So whereas that probably in your outlook for 2027, 3 to 4 months ago, you probably had some refi headwind in that number. Now in all likelihood, that's not going to be much of a headwind because kind of between cash and borrowing rate on the line that's roughly in line with kind of where where the interest rate is on that.

So those items kind of give you sort of built-in growth in 2017. And then we're obviously moving occupancy up throughout the year. The development properties are going to build in terms of the NOI contribution that they have throughout the year. So the combination of kind of all of those things drives a lot of build as we migrate throughout 2026 and then into 2027.

That's helpful. And just on that occupancy build, do you mind just walking through any large expirations or new known move-out side of this year or next year that could potentially cause that occupancy to take a step back, just relative to the last few years when you've had bigger move-outs, I'm just trying to get a sense of what the next 2 years look like.

Vikram, it's Ted. The nice thing is our forward, I'd say, 3-year outlook on expirations. It doesn't look anything like what it did in the last 3 years. So we feel really good about where we are. I mean we don't have any expiration or no move out greater than 100,000 square feet. Any expiration greater than 100,000 square feet until mid-27 and there's only 1 is greater than $100,000. That 1 we have is the only 1 we have through all the '27.

And we think that's a decent chance of renewing that one. So again, we feel really good with -- we have a few known move-outs that are in that 50,000 to 60,000 feet, but we've already backfilled half to 2/3 to even all of it. on some of those. So I think it's -- we feel really good about where we stand today about our forward expirations.

Our next question comes from the line of Peter Abramowitz of Deutsche Bank. .

Yes. Just wondering if you could talk about the expected pricing on asset sales, not only what you closed so far in fourth quarter and subsequent to year-end, but also the $200 million or so that you're going to close over the next 6 months. Just from a modeling perspective, kind of what's the NOI impact or cap rate on that. .

Maybe I'll start, then Brendan can jump in with any details. But look, as you alluded to, we sold $270 million in 2025 in the first month or so this year. And the blended cap rate there was -- it was a mix of assets. We sold -- really, we sold 8 assets to users last year. So we feel good about getting user pricing.

We sold 1 to a triple net lease buyer, sold 1 to a 1031 guy. So it's been a variety of assets in a variety of buyers. So sub-8% cap rate on that $270 million. And I think it's going to be similar or maybe a little bit better than that on the remaining couple of hundred million.

All right. And then maybe 1 for Brian. Just wondering if you could kind of go around the horn to some of the major markets and talk about concessions to bring tenants into occupancy there? Are they generally stable or still increasing or even declining? Just any color you can provide there would be helpful.

Sure, Peter. Thanks for the question. I would say, in general, they are stabilized. What we are seeing is that customers want the best space and that cost, it costs more than it did before. So they're willing to kind of commit to term to do that. So that's sort of how Brendan mentioned the amount of CapEx that's associated with leasing over the last year or so. I think we're seeing that, and we're happy to trade that.

Just going through the markets. So I'll tell you, Charlotte, Dallas, Nashville and Tampa, very competitive. Any space we might have available in Charlotte, we're getting looks well in advance, folks sort of jockeying for it. You heard in my prepared remarks, amount of job growth in Charlotte. There's really no space left for prime and top-tier Class A in uptown, South and/or South Park.

So that does help moderate that kind of pressure on concessions. Dallas, we're very fortunate in Dallas, obviously being uptown with the top of the market, building that's delivered and available now at 23 Springs, Preston Center with our new addition at the Terrace is full, 100%, as Ted mentioned, recently signed, and that's the lowest vacant BBD in the entire market, we will continue to lean in on the Granite Park 6 lease up there.

We underwrote it from a development standpoint to do that. So maybe that BBD at legacy has got bigger kind of spaces and typical bigger users. And we've been very, very happy with the development delivery of Midtown East and Tampa.

We're looking at triple net rents now into the 50s. So no, I'll tell you, it's competitive out there. We are still committed to occupancy, but we are able to move rate and obviously moderate concessions across the board and reduce them where we were most competitive.

Thank you. There are no questions at this time. [Operator Instructions] There seem to be no questions waiting at this time. So I'll pass it back over to management for any closing or further remarks.

Well, thank you, everybody, for joining the call today. We appreciate your time and your questions. If you have any follow-up questions, please feel free to reach out to us. Have a great day. .

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

Good morning, everyone. And thank you for joining today's Highwoods Properties Q3 2025 Earnings Call. My name is Regan, and I'll be your moderator today. [Operator Instructions]

I will now pass the conference over to our host, Brendan Maiorana of Executive Vice President, Chief Financial Officer. Please proceed.

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're both available on the Investors section of our website at highwoods.com. On today's call, our review will include non-GAAP measures such as FFO, NOI and EBITDAre. The release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures.

Forward-looking statements made during today's call are subject to risks and uncertainties. These risks and uncertainties are discussed at length in our press releases as well as our SEC filings. As you know, actual events and results can differ materially from these forward-looking statements, and the company does not undertake a duty to update any forward-looking statements. Finally, we know many of you will be attending NAREIT's Annual Conference in December in Dallas. We are hosting a property tour the afternoon of Monday, December 8, to showcase our Uptown Dallas portfolio. If any of you would like to join the tour, please let us know.

With that, I'll turn the call over to Ted.

Thanks, Brendan, and good morning, everyone. We entered 2025 focused on the following strategic priorities: securing the embedded NOI growth potential in our operating portfolio by leasing up key vacancies. Capturing the embedded NOI growth potential in our development pipeline by leasing up our 4 completed but not yet stabilized assets. Continuing our proven playbook of recycling out of noncore assets that are more CapEx-intensive into higher quality, higher growth and better located properties that have stronger long-term cash flows and maintaining a strong and flexible balance sheet.

We made meaningful progress on each of these priorities during the quarter, and believe we have opportunities to advance our progress even more significantly over the next few quarters. First, our second-gen leasing volume was strong with several sizable new leases inked in what we call our core 4 operating properties that have elevated vacancy. Alliance Center in Atlanta, In Symphony Place, Park West and Westwood South, all located in Nashville. We signed over 1 million square feet of second-gen volume, including 326,000 square feet of new leases. Our leasing volumes have been strong now for 8 consecutive quarters. These strong volumes have driven our leased rate 340 basis points higher than our occupancy rate at quarter end, which explains why we are so confident occupancy will rise by year-end 2025 and throughout 2026.

Back in February of this year, we stated that our core 4 had approximately $25 million of stabilized NOI upside above our 2025 outlook. At quarter end, we have locked in over 50% of this upside with signed leases and have strong prospects to lock in another 25%. In addition to the strong volumes, pricing power is starting to improve as office users encounter a dwindling supply of high-quality space owned by well-capitalized landlords. This is demonstrated by growth in net effective rents which hit a high watermark for us this quarter. We have long viewed net effective rents as the best indicator of underlying rent economics, which have been 18% higher over the trailing 4 quarters compared to our 2019 average.

Second, we signed 122,000 square feet of leases across our development pipeline, driving the lease percentage to 72%, up from 64% last quarter. This means we have now signed leases for over 70% of the $30 million stabilized annual future NOI growth potential from the 4 completed but not yet stabilized development properties. Plus, we have a strong pipeline of prospects to drive our lease percentage even higher over the next few quarters. We expect these properties will be a large driver of NOI growth in 2026 and 2027.

Third, we were active with investment activity as we acquired the Legacy Union parking garage in Charlotte's uptown BBD for a total investment of $111.5 million and sold a noncore property in Richmond for $16 million. The Legacy Union garage was funded on a leverage-neutral basis through a combination of noncore disposition proceeds, proceeds from common equity issuances via our ATM program and incremental borrowing. In the short time since the acquisition of the garage in August, we've signed a 16,000 square foot ground floor retail customer and secured 150 additional monthly parkers from a corporate user that is not a tenant in our Legacy Union portfolio. Given limited CapEx associated with garage ownership and a weighted average contractual term of roughly 9 years for 70% of our projected revenue, we believe our investment represents an excellent risk-adjusted return.

Fourth and finally, our balance sheet is in great shape. During the quarter, we extended our only consolidated debt maturity prior to 2027, which gives us plenty of flexibility as we evaluate future investment opportunities that would significantly enhance our portfolio quality and BBD locations.

Turning to the quarter. We delivered FFO of $0.86 per share. We have once again raised the midpoint of our FFO outlook. Our third consecutive quarter increasing our 2025 outlook, with the FFO midpoint now $0.08 higher than our initial outlook provided in February. We also raised the midpoint of our same-property cash NOI outlook by 50 basis points. While our year-end occupancy outlook leads to meaningful upside over the final 3 months of the year.

In addition to updating our financial and operational outlook, we also updated our outlook for investment activity, which indicates the potential for meaningful asset recycling over the next few quarters. We've highlighted the potential of up to $500 million of both acquisitions and dispositions during the next few quarters. So far this year, we've acquired 2 properties, both of which are high-quality, well-located assets with significant long-term growth potential. These assets were both acquired off market and an estimated combined cash NOI yield around 8% after factoring in the upside from the recent leasing activity and additional monthly parkers at Legacy Union.

We have a healthy pipeline of additional acquisition opportunities, coupled with numerous noncore properties in various stages of marketing for sale. With these asset recycling opportunities, we could make significant progress over the next several quarters with regard to further strengthening our portfolio quality, growth rate and cash flow. Similar to other major asset rotations that we've completed during the last decade.

To wrap up, we're extremely excited about the next few years for Highwoods. We expect to deliver strong embedded NOI growth from signed leases that haven't yet commenced across both our operating portfolio and development pipeline. And we have strong leasing prospects that could drive our future embedded growth even higher. As signed leases convert into occupancy, we see a clear pathway to higher earnings and cash flow and meaningful value creation across our 26.5 million square foot portfolio. Further, we see additional opportunities to sell older nonstrategic properties where risk-adjusted returns don't meet our objectives and recycle that capital into high-growth assets in the BBDs of our markets and attractive risk-adjusted returns.

With our proven playbook and a strong balance sheet, we are well positioned to execute on the opportunities ahead of us. Brian?

Thanks, Ted, and good morning, everyone. Thank you for joining us. Our commute worthy strategy, centered on creating exceptional environments and experiences continues to differentiate Highwoods in a market constrained by a limited supply and a dearth of well-capitalized owners.

This quarter, our team once again delivered strong results. We signed more than 100 leases while maintaining a robust leasing pipeline spanning early, mid- and late-stage prospects across our entire platform. Most particularly in our Dallas, Tampa and Raleigh developments and our Highwoodtizing redevelopments in Nashville. The quarter's achievements were notable.

Net effective and GAAP rents reached new highs, while our 15.9% payback improved by 240 basis points relative to our 5-quarter average. Average net effective rents hit a new quarterly high led by strength in Dallas, Charlotte, Atlanta and Tampa. Our trailing 12-month average is now 18% above our pre-pandemic peak reached in 2019. GAAP rents were strong with an 18% increase compared to expiring rents at a record of $40-plus per square foot. We ended the quarter 85.3% occupied and 88.7% leased, consistent with what we've long communicated as our occupancy trough. With a [ limited ] near-term exploration outlook and more than 325,000 square feet of new leases signed during the quarter, we're well positioned to grow occupancy from here.

This quarter, once again, expansions outpaced contractions, 41 this time. Year-to-date, we've signed 47 total expansions, outpacing our full year results each of the past 2 years and net expansion so far this year approximate 70,000 square feet, our highest year since before the pandemic. We also signed 122,000 square feet of first-generation leases in our development pipeline, lifting our lease percentage to 72%, up 800 basis points sequentially. While leasing momentum was balanced across our markets, Dallas, Nashville, Charlotte and Tampa were standout performers.

Let's start with Dallas, a market that continues to shine across our portfolio. Dallas is, in many ways, an overnight success that's been decades in the making. Once defined by energy, it's now one of the most diverse and dynamic economies in the country. The Dallas metro population is projected to grow nearly 50% over the next 25 years, and about 400 new residents are moving in every single day. For 20 consecutive years, Chief Executive Magazine has named Texas, the best date for Business, and the Dallas Regional Chamber recently noted 10 major corporate and significant office using prospects are considering headquarter moves or large expansions. That strength is showing up in the data.

CBRE and Cushman & Wakefield both reported positive net absorption for the fourth straight quarter and both highlighted Uptown as the top submarket with regard to rate and demand. Our partnership with Granite Properties continues to perform exceptionally well.

In uptown, McKinney & Olive remained 99% occupied and our new 23Springs Tower, which opened this quarter has already reached 67% leased, up 500 basis points quarter-over-quarter with rents well above underwriting. Similar success is occurring at [indiscernible] at Granite Park Six where our lease percentage has increased 1,000 basis points to 69%. We have strong prospects for both of these buildings that will bring the lease rate to the mid-70s or higher.

Moving to Nashville. It remains one of the most compelling and resilient markets in the Sunbelt. Unemployment sits at just 2.9%, the lowest among our markets and is the epitome of an emerging landlord favorable market with the intersection of dwindling supply, increased inbound inquiries and a surging local economy, the construction pipeline has reached historical lows and nearly 12% of the downtown inventory, about 1.4 million square feet is being converted to hotel and residential uses. CBRE sums it up well, landlords in Nashville now have considerable pricing power with asking rates up more than 11% year-over-year. Our own portfolio mirrors that strength. Downtown Symphony Place is now 70% leased or out for leased with another 20% in active negotiation. In Franklin, Park Place West is over 80% leased or out for leased and Westwood South in Brentwood is progressing with solid mid-stage prospects for the entirety of the building. With over 100,000 square feet signed this quarter, our 5 million square foot natural portfolio continues to benefit from broad-based demand across all 4 of Nashville's core BBDs.

In Charlotte, the same fire and [ TAMI ] industries fueling growth in Dallas and other major markets are driving strong demand for the best Class A space available. According to CBRE, leasing is up 77% year-over-year, with 80% of that activity from new or expanding tenants and there are 17 active prospects, larger than 50,000 square feet in the market. Our 96% occupied portfolio and strong inbound activity validates these trends. With very little new supply, top end rents continue to rise and the calculus for new development is becoming more viable.

During the quarter, we signed 200,000 square feet in Charlotte, with net effective rents over $30 a square foot, gap rents approaching $50 a square foot and a low 10% payback. Office using employment in Charlotte grew 3.4% year-over-year reinforcing our confidence in the city's ongoing strength.

And finally, Tampa, where momentum continues to accelerate. CBRE reports 6 consecutive quarters of declining vacancy and the strongest absorption in the years with 1 million square feet of known move-ins ahead, the trend remains firmly positive. We signed 190,000 square feet of second-generation leases in Tampa this quarter. Plus our Midtown East development doubled its lease percentage after signing 53,000 square feet of first-gen leases across 2 full floors with triple net rents in the mid-40s. With only a corner restaurant space and one last floor of office remaining, they couldn't be happier with where we are in Midtown Tampa. Across our diversified Sunbelt portfolio, we benefit from a broad tenant base, spanning industries, company sizes and geographies, anchoring in both urban and suburban BBDs.

When you combine that diversification with our measured development activity, our continuous reinvestment in existing assets and our targeted acquisitions, the result is a portfolio built for resilience and sustained long-term growth. We're incredibly proud of how our team continues to execute, market by market and building by building. Delivering outcomes that reinforce the strength and momentum of the Highwoods value proposition. Brendan?

Thanks, Brian. In the third quarter, we delivered net income of $12.9 million or $0.12 per share and FFO of $94.8 million or $0.86 per share. The quarter was relatively clean without any notable unusual items. Our leasing metrics during the quarter were healthy with net effective rents the highest in our history. The strength in leasing economics, combined with the embedded NOI growth in our operating portfolio and development pipeline bodes well for our long-term cash flow outlook.

Cash flows during the quarter were impacted by the high expenditures of leasing capital ahead of our projected occupancy build. As leasing volumes normalize and NOI grows, we expect cash flow levels will improve significantly. Our balance sheet remains in excellent shape. Our debt to EBITDAre was 6.4x at quarter end. Similar to our cash flow outlook, we expect our debt-to-EBITDAre ratio will improve meaningfully as customers were signed but not yet commenced leases in our operating portfolio and development pipeline move into occupancy which should result in higher NOI and higher EBITDA. All else being equal, these move-ins would reduce our debt-to-EBITDAre by 0.5x.

We currently have $625 million of available liquidity with only $96 million left to complete our development pipeline. During the quarter, we extended the maturity on our $200 million variable rate term loan from 2026 to 2031, leaving us no consolidated debt maturities until 2027. While we have no immediate refinancing requirements, we are closely monitoring the capital markets and may seek to raise capital opportunistically to derisk future needs.

As Ted mentioned, we acquired the Legacy Union garage during the third quarter for a total investment of $111.5 million, including near-term planned building improvements. We funded this acquisition on a leverage-neutral basis, mostly through $59 million of equity issuances via our ATM program since the beginning of the third quarter plus some incremental borrowing and modest proceeds from noncore asset sales.

As a reminder, during the first quarter, we acquired the Advanced Auto Parts Tower for $138 million also on a leverage-neutral basis, but match funded that transaction entirely with proceeds from a noncore portfolio sale in Tampa. Both of these transactions demonstrate our proven track record of creatively funding acquisitions on a leverage-neutral basis. This is what we mean by frequently saying we have multiple arrows in our quiver. Acquiring Advanced Auto Parts Tower and the Legacy Union parking garage this year significantly improved our portfolio quality in BBD locations were immediately accretive to cash flow and roughly neutral to near-term FFO while providing long-term upside to these financial metrics.

As Ted mentioned, we updated our 2025 FFO outlook to $3.41 to $3.45 per share, which equates to a $0.02 increase at the midpoint. We added a year-end occupancy range to our outlook which implies 70 basis points of occupancy growth at the midpoint during the final 3 months of the year and underpins our confidence in growing occupancy as we move into 2026.

Finally, as you know, we plan to provide our 2026 outlook in February when we release our fourth quarter results. In the interim, there are 2 items I would like to highlight. First, we will begin expensing interest on our investments in the 23Springs and Midtown East development projects by the end of Q1 '26. Second, as Ted mentioned, we have secured nearly 2/3 of the $55 million to $60 million of stabilized NOI growth potential across the core 4 operating properties and are completed but not yet stabilized development through signed leases. All of these signed leases are projected to commence by the end of 3Q '26 which should create a positive NOI and earnings trajectory as we migrate throughout next year.

Operator, we are now ready for questions.

[Operator Instructions] Our first question goes from the line of Seth Bergey of Citi.

I guess just in kind of the outlook items you noted the potential for increased acquisitions or dispositions. Would those kind of take you into any new markets or wherever you like to kind of increase your concentration into? Or would those reduce your exposure to any of your markets that you're currently in?

Seth, thanks for the question. Yes. So the acquisition opportunities we're looking at right now, none of them are new markets. They would all be adding to existing holdings in our existing markets. So -- and the ranges we put out there, it's -- as with the capital markets opening up, we're starting to see more opportunities really across the risk and return spectrum. So bid-ask spread seems to be narrowing. So sellers are bringing high-quality assets to the market. So yes, so we're taking a look at various opportunities across that spectrum, all in our existing markets.

And then on the dispose side, I think right now, we have -- we've closed year-to-date $168 million. That includes a small $7 million asset that closed after quarter end. And we've got several other assets in the market. I think we're going to close a couple of next week even that are -- the buyer is hard on and maybe even a few extra -- a few other deals by the end of the year and then a few will leak into early next year. And I think we have assets on the market and all of our markets with the exception of Charlotte and Dallas. So it's really just trimming the noncore assets across our portfolio. And I think you know we've been a regular seller of assets over the years. So I think we're just continuing the portfolio [indiscernible] that we've been doing for many years.

Great. And then just on financing assets, any potential acquisitions? Would you look to do more on the ATM? Or would you primarily fund those through other dispositions?

Seth, it's Brendan. I think Plan A would be recycling capital with disposition proceeds used to fund acquisitions or new investments. But I would say there's -- we've done both so far this year. So we funded the Advance Auto Parts Tower with a rotation of capital from disposition proceeds. We funded the garage in Charlotte on a leverage-neutral basis, primarily through ATM issuance. So I think both are available, but I would say that our Plan A would be used disposition proceeds. And given where the share price is now, the equity currency really isn't competitive. So I think disposition proceeds are most likely.

Our next question comes from the line of Blaine Heck of Wells Fargo.

It seems as though during the pandemic, we saw Atlanta benefit a lot from tenant migration from other markets. But in your prepared remarks, it's trucking like maybe Dallas was leading in that trend at this point. So I was hoping you could just give us an update on which markets are benefiting most from migration from other markets and whether the level of that activity has changed significantly in any of your specific markets?

Sure, Blaine. Thanks for the question. No, I think you're right. Based on Brian's comments, it's really Dallas is seeing a significant amount of in-migration. Brian alluded to 10 significant office requirements, the Dallas Chamber is working on right now. That may be down to 9 now given the recent announcement of Scotiabank putting a pretty big presence in Dallas, which Dallas won that requirement from Charlotte. So Dallas is incredibly busy right now, a lot of new requirements. Charlotte, I'd say, is right behind. Brian alluded to 17 office requirements that are greater than 50,000 feet. Most recently, there's a news article yesterday about Pacific Mutual 300-and-something jobs, high-paying jobs, I think average like $179,000 per job. So Charlotte's been incredibly busy.

Right behind that is Nashville. We actually had our board meeting in Nashville last week. And at the board dinner, we brought both the economic development person for the Chamber of Commerce as well as the state-wide economic development person. They spoke to our Board and basically said they're as busy as they've been in a long time. So from the office perspective. So I feel really good there.

Raleigh is busy. The North Carolina economic development folks are actually in our headquarters building here in Raleigh. So we see them quite a bit. And the office requirements are picking up in Raleigh as well. There's been a couple of good announcements in Atlanta as well. Tampa, we just got somebody from new out-of-state requirement in one of our buildings. So really, we're seeing it across our footprint. The in-migrations really, it seems to be accelerating.

Blaine, Brian here. One thing I might add is where they're coming from, still usual suspects, California, Midwest and Northeast, but we're also seeing some international inbound putting a toehold here in the states in these markets and growing.

Great. Second question, Brendan, you guys are clearly going through a period of elevated leasing activity. And with that comes to elevated CapEx, which you touched on in your remarks. I guess how long should we kind of expect these elevated capital expenditures to impact AFFO or FAD or cash flow. And related to that, anything you can say just to touch on your or the Board's comfort with the dividend level here would be helpful.

Yes. Good question, Blaine. I think it probably depends on how long we think the occupancy build goes for. So I think it's clear that we would expect elevated levels of CapEx kind of through next year as we've got kind of the signed but not yet commenced leases as you spend that capital. We've spent some of it already, but we're certainly planning on spending that as we migrate throughout 2026. But I think we are optimistic that our leasing pipeline is full, and we're going to kind of refill that signed but not yet commenced bucket of future customers. which will carry with it a high level of CapEx or an elevated level of CapEx. So I think we're optimistic that, that occupancy build is going to continue throughout 2027, which means in all likelihood, you're going to have higher leasing capital in not only just next year but in '27 as well.

But what I would say to that is I think if you look year-to-date, our leasing capital, we're probably trending $40 million sort of above what's a normalized year. And we're doing -- cash flow is low, but it's not -- it's still reasonable. We've got a lot of NOI growth. So even if you assume that leasing capital remains high, there's a lot of NOI growth that will come online next year and into early '27. So I think just from the NOI growth coming online, cash flow levels are going to improve.

And then as you have leasing costs normalize, they're going to improve even more. So I think we see a really clear pathway to very strong cash flow growth over the next several years, but there are a few legs to kind of -- or a few steps to kind of get to, to be there. But hopefully, leasing will continue to be strong. and leasing CapEx will probably remain elevated for the next couple of years.

Thank you. Our next question comes from the line of Rob Stevenson of Janney Montgomery Scott.

Brendan, what drives the $0.04 gap in the fourth quarter earnings guidance, what swings to the high and low end variable wise?

Rob, I would say, I mean, there's a little bit of discretion around expenses and those can be volatile quarter-to-quarter when you recognize kind of the reimbursement on a normalized level kind of ratably throughout the year. So I would say the biggest swing factor in terms of kind of normalized in that range is probably some discretionary expense spend. And so that probably kind of moved it you would say, a couple of pennies on either side. And then we always bake in a little bit of something here or there. So you never know, we factor in some bad debts those could be at the high end of the range or they could be 0. So that kind of moves things around.

And then to the extent that anything other unusual happens usually just take a little bit that's in there. But I would say from a leasing perspective, there's really not a lot of spec leasing that's going to drive revenue substantially higher or lower based in the forecast.

Okay. And then the commentary that you made looking out the next year with the core 4 leasing, does the occupancy there hit relatively ratably? Or there are certain quarters where there's a couple of big leases that hit that will really spike occupancy as we start thinking about the volatility of the occupancy number going forward?

Yes. I would say that it's pretty ratable from a build from Q2 through Q4. I think Q1, there's a little bit -- we typically kind of go down a little bit in terms of occupancy in Q1 just on normal seasonal factors. And then I think if you -- if we go through some of the biggest kind of expirations that we have, they tend to be early in the year, most of those are backfilled, but you've got downtime on those. So we've got a large lease in Dallas that's going to go from MNO. There's going to be downtime there. It is substantially back to -- so that's large lease kick in second quarter and then a little bit in third quarter.

So I think you'll probably see occupancy dip a little bit in Q1 from where it was at year-end '26, not -- I wouldn't say it's a huge amount. And then I think from Q2 to the end of the year, we think there's a pretty substantial increase from there.

Okay. That's very helpful. And then lastly, Ted, given the positive market comments around the portfolio that both you and Brian made earlier, can you talk about the Pittsburgh market and how close you may be getting there to the right time to exit some or all of those assets?

Sure. Every quarter, the capital markets have been getting better for the last 2 or 3 quarters. So we have regular dialogue with our adviser on those assets. And certainly, we're going to bring those to market when the time is right. Rob, I don't think we're quite there yet, but certainly, I think over the next couple of quarters, we may come to a decision, leasing velocity is really good and combine that with capital markets improving, I think we're getting closer.

Thank you. Our next question comes from the line of Nick Thillman of Baird.

Brendan, you have been messaging sort of this ramp-up in occupancy 100 to 200 basis points throughout '26. Just wanted to double check on your comfort level there and then the underpinning assumptions is that similar leasing volume of this 300,000 square feet of new deals plus 50% retention, and that's how we get there is up the math. Just kind of just walk us through sort of that setup there.

Nick, thanks for the question. Yes. So just to reiterate, I think last quarter, we talked about -- we thought we'd sort of be around 86 for year-end '25. We put that outlook in -- we formalized that in the outlook last night in terms of their so right around 86. And then, yes, I think as we sit here late in '25, haven't given '26 guidance yet, but I think that 100 to 200 basis points of increase between year-end '25 to year-end 26, I think we're comfortable with that as we stand here now. Now we'll sharpen our pencil and kind of look at those assumptions and provide formal guidance in February. But I think as we sit here, I think we feel comfortable with that kind of outlook and believe we've got a good pathway of growth between year-end '25 and year-end '26.

And then I would say in rough numbers, I think that's about right in terms of -- there's probably around 50% retention. That number always goes down the closer you get to kind of those expirations. So it might be mid-40s as it stands now. But I think if we can do 300,000 square feet of new a quarter and we're kind of at the retention levels that we in that level, that's going to put us in a position to be between 87, 88 by year-end '26.

That's helpful. And then Ted, with the leasing volume remaining healthy here. On the acquisitions, what's the appetite for lease-up risk on sort of the pool of assets you're looking at? And along those lines, as we think about the earnings impact of selling versus buying, are you -- is this FFO dilutive, neutral? How should we think about that?

Yes. Great question. Maybe I'll start and then Brendan can chime in. Look, so we look at everything across the risk return spectrum, and we will absolutely take leasing risk. That's been our playbook coming out of GFC, and we will do so in instances where we feel very comfortable about the leasing prospects, the momentum in the market. And if we think we can lease it up and get paid for that lease-up risk, more importantly, right? So we are absolutely looking at assets to have vacancy risk that we can come in and add the Highwoodtizing, and lease those up and get paid for it.

Yes. Nick, just in terms of the earnings impact, there's obviously a lot of balls in the air. There's a lot of variables that likely means that things are going to be kind of -- could potentially be noisy sort of quarter-to-quarter.

I think the best way that we could probably frame this is, if we go back to some of the other large kind of asset rotations that we've done. So think about the market rotation plan where we went into Charlotte exited Memphis and Greensboro or the portfolio of office assets that we acquired from PAC and then subsequently sold a bunch of noncore. I think what we told you is if you sort of give us a year, the unaffected the FFO run rate should be unaffected from where it is pre all of those transactions. And our cash flow should be higher, and we will return our leverage to the normalized kind of glide path.

So there's obviously a lot of timing. So if dispositions happen first versus acquisitions that likely impacts it. There are some lease-up stuff that's there. But I think we feel pretty confident that if we're able to do things on a leverage-neutral basis that long-term FFO outlook is probably going to be unchanged. Cash flow is going to be higher. Leverage is probably unchanged, and we certainly think that there will be an uptick in terms of long-term growth rate and portfolio quality.

Our next question comes from the line of Dylan Burzinski of Green Street.

Ted, I think you mentioned that the capital markets environment continues to improve as we progress throughout 2025. But can you kind of just talk about sort of where for assets that you have sold where pricing expectations have come in relative to your initial expectations? And maybe if you can follow that up with just any sort of color or detail around bidding tents. Are we starting to see more institutional capital come back? Or is it still for the large part, mostly high net worth family office type money looking at the office space today?

Sure. First, on the pricing on the dispositions. And Dylan, it's all over the board. I mean, sort of what we're selling today, it's a mix of long-term single tenant with long weighted average lease term to land, to lower occupied assets to some of our older assets that are going to have a higher cap rate. But I would tell you pricing is all over the board. But in general, our pricing is, I would say, meeting or exceeding our expectations of when we are -- when we initially took the assets out to market.

So the bidder pools are a little deeper. And the buyers, if you go back 2 or 3 years, we didn't recognize a lot of buyers on the bid sheets. We're now starting to recognize the buyers on the bid sheets, so more familiar capital. Certainly, the debt capital markets are helping. I think on pricing, as they've gotten better, whether it be CMBS, the debt funds, you're starting to see some of the banks get more active as well. So just in general, there's more liquidity in the capital markets today, and that's starting to help on pricing.

With regard to the acquisitions, look, I do think there's more institutional capital coming making bids. It seems like from what we hear from the brokers, there's more bids on every deal, every subsequent deal that comes out to market. So I think there's been a lot of capital that if you go back a couple of quarters, they were office curious and now they're getting more active and really constructive on underwriting office acquisitions. So I think that is just going to help get this capital markets flywheel turn even more and which is going to be helpful for the office sector.

And then maybe one more, if I could. Just -- I know you guys are constantly turning the portfolio and selling noncore assets and reallocate that capital. But I guess as you look at the portfolio today, I mean, is there some percentage of it that you would sort of deem as noncore or that you have interest in disposing of over time?

We often get asked that, and it's really just a continuous portfolio improvement for us as we buy new assets, fund them with dispositions were sort of pulling from the bottom of the assets. So -- and what I would tell you is what was core or noncore a few years or core a few years ago, it might be noncore today just as a result of growth trends or where we think the long-term growth rate maybe is not what it was a few years ago. So we're always evaluating our portfolio. We do it a couple of times a year as a main management team and always reevaluating.

[Operator Instructions] Our next question comes from the line of Ronald Kamdem of Morgan Stanley.

Just 2 quick ones. Clearly, the capital recycling is pretty imminent, as in the next sort of 6 months. Just curious in terms of just markets, are these all sort of existing markets, any new markets in there? And just remind us what markets you like to lean into, whether it's Dallas, Atlanta, what stands out?

Sure, Ron. Yes, you must have missed the early part of the call. We had the same question. So really, it's -- what we're looking at now, we're pretty happy with our footprint. And so we're going to -- we're looking at assets that are in our existing footprint that would upgrade the portfolio. So I don't think we've got any market -- our core markets that we wouldn't add to if the right opportunity comes in. But so we're looking at stuff really across our entire existing platform.

Great. And then my second question is just on an update on Ovation. I know you guys are not looking to do any sort of M&A development and so forth. But just current thinking there, sort of excitement, could that be at '26, '27? Just what the timing could be on that and what the thoughts are?

Ron, thanks for tossing one over the plate. This is Brian on Ovation. So we now have control over the entire site. So for a number of years, we were counting on others to deliver the place-making part of that, the core of the community. So we stepped up over the last few years to kind of take our fate into our hands. And we went through an exercise with the city of Franklin to get it completely kind of re-entitled in a more integrated mixed-use way that actually got us some additional residential density to go into this vibrant mixed-use place. We have the right retail and multiple use partners kind of being lined up. We've been in front of the prospects who would come in open shops and restaurants, and it's been really warmly received.

Nashville has very much shown up on every market for a retailer to fashion label, and so we feel like we're timing it right, things are lining up well. So timing, to your question. Ideally, we have some utility and site work to do next year and could be coming out of the ground vertically with the first phase, which would include office, retail and multifamily and the potential hotel in '27 opening in the fall of '28. We also love to see the rent growth in the market for mixed-use office, generating about a 20% premium. So that will be kind of core to the underwriting. But thanks for asking about Ovation and more to come.

Thank you. There are currently no questions at this time. [Operator Instructions]

Well, thank you, everybody, for joining the call today, and thank you for your interest in Highwoods. And if you have any follow-up questions, please feel free to reach out to any of us. Thank you.

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

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.

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're both available on the Investors section of our website at highwoods.com.

On today's call, our review will include non-GAAP measures such as FFO, NOI and EBITDAre. The release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Forward-looking statements made during today's call are subject to risks and uncertainties. These risks and uncertainties are discussed at length in our press releases as well as our SEC filings.

As you know, actual events and results can differ materially from these forward-looking statements, and the company does not undertake a duty to update any forward-looking statements. With that, I'll now turn the call over to Ted.

Thanks, Brendan, and good morning, everyone. We had another strong quarter with robust second-gen leasing and excellent financial results. We entered 2025 with 2 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 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 square feet of second-gen leasing, including 370,000 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 4 core assets with meaningful upside potential. As a reminder, our core for our Alliance Center in Buckhead and 3 assets in Nashville. Symphony Place from 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 4.

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'll increase our lease rate by the end of the year.

We have over $10 million of NOI growth potential at GlenLake 3 in Raleigh and Granite Park 6 in Dallas, 2 development properties that delivered in 2023 that 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 of the 2 developments that delivered earlier this year, 23 Springs and Dallas and Midtown East and Tampa.

Our first customers of these developments recently moved in and additional customers will take occupancy late in 2025 and in 2026. Combined, these 2 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 with new spec development continues to be difficult for anyone in this environment.

However, the absence of new deliveries and the dwindling availability over the next few years, creates an opportunity for meaningful rent growth and high-quality second-gen product. We're already seeing the benefits of limited supply at 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 Highwood 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 lease 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'll see the lease rate in occupancy levels increase by the end of the year. With our strong financial performance in Q2, an upbeat outlook for the balance of the year, we have once again raised the midpoint of our 2025 FFO outlook, up $0.02 to a range of $3.37 and to $3.45 per share. Since the beginning of the year, we've increased our FFO outlook by $0.06 at the midpoint or nearly 2%.

In conclusion, we're extremely excited about the next few years for Highwoods. We're 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 nonstrategic properties for 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, and 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 at 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 and an owner's favor in certain instances, such as new trophy development and in high barrier-to-entry DVDs 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 4 spots this year.

With regard to the Tar Hill 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 8 of CNBC's rankings. Bloomberg Economics brings us to bear highlighting that the Southeast accounted for more than 2/3 of all job growth across the U.S. since early 2020.

These 3 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 a 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 4 core assets in Atlanta and Nashville. Three of these 4 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 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 7 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 they are leasing prospects for over 80% of the building.

While you never about 1,000, 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 its 79% pre-leased 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 9 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 or over 80% occurred in the submarkets 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 6-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's 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 benefiting from this demand with prospect activity at both our 422,000 square foot, Plano BBD Granite Park 6 development, which is currently 59% pre-leased and our 642,000 square foot, 23 Springs development in Dallas' uptown BBD, which itself is 63% pre-leased.

Also in uptown and down the street from 23 Springs is our 557,000 square foot in-service asset, McKinney and Olive, which is over 99% leased. I would be remissed 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 our 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 for CBRE, we are very pleased with our market activity and where we ended the quarter at 86.1% occupied, but more than 92% leased.

Our Midtown East development recently delivered 40% pre-leased 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 2 years, and is the tallest building in the West Shore BBD and in the heart of Midtown Tampa's thriving mixed-use district anchored by Whole Foods to 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 3 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 relet the 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 the resiliency of our operations and cash flows. Our balance sheet remains in excellent shape. Our debt-to-EBITDA 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 midpoint. 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 predevelopment 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've subsequently relet 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 4 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 4. 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 million to $6 million.

Our two 2023 development deliveries, Granite Park, Dicks and Glenlake 3 have over $10 million of annual NOI growth potential upon stabilization, over $6 million of which has been secured with buying leases up from $4 million at the beginning of the year. The 2 developments that delivered earlier this year, 23 Springs in 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 8 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 23 Springs and Midtown East as these 2 development projects delivered earlier this year. So not all of the NOI from those 2 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're 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're 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 a 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 rate? 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 2 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.

That's helpful. And then could you talk about 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 has come off the sidelines. And 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 wishlist 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 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 smooth 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 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, Brenden, at this point in 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 337 versus the 335? 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 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 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. which 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 risk 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 necessarily characterize it as the cheapest form of capital.

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

Maybe, Ted, we'll start off with this. obviously, COVID and kind of the pandemic transferred a lot of just 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 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 our business going forward. But look, we've been through this before, whether it be in densification. I remember, 20 years ago, law firms we're going to be reducing our 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 [indiscernible].

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 is like a normalized run rate when it comes to retention as we look at 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 what you guys have a portfolio concentration and that are experiencing outsized demand versus others?

Look, Dylan, I say certainly Charlotte, Dallas and Nashville, if you had to rank our markets, it'd be 1A, 1B and 1C. All 3 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 4 that we've talked about now for the last couple of quarters, 3 of the 4 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 3 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 4 markets, but broad-based in general.

Dylan, Brian here. I might just add. Charlotte, I think I mentioned it in the remarks, Citi Group 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 they recently highlighted. There are 6 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 6 represent about 5,000 office using jobs. And then I also sort of mentioned this net migration diet 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, and 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 kind of code name, multi-market. The CBD was the most active submarket this last quarter and antenna highlighted Tampa there's over 1 million 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 and whether it be an uptown in the Knox-Henderson area, Preston Center, those 3 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 need to build something more. The last few years when the starts haven't been been all that high, the construction costs have continued to go up. You 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 -- 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 lease 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 into 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 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 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. Beyond that, we've got some of the development deliveries that are there. So I think talked about in the prepared remarks, where we are with GP6 and Glenn Lake 3, neither of those assets, are we capitalizing any costs associated with those.

So as those leases commence and come online, all of that falls to the bottom line, we have the 2 development deliveries that were earlier this year those should also be additive, but we are capitalizing cost operating and interest on those 2 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 give 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 4 or 5 nonforeign 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 industry 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 business by CNBC. They are at the table and the states have incentive plans. They have partnerships. They're open for business. They are working with these companies to 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. So that's where we're seeing a lot with. Unfortunately, in Charlotte, we don't have any room at the end. 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 2 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 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, a little bit lower.

IRRs are in the probably high to 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 commentary about maybe the capital market is 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 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 bringing 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 were prepping to bring to market.

So we -- look, we -- if I had a 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, 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 marked 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 in Dallas in 2021. And -- so -- and then we've exited 3 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, the 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 regards 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 [indiscernible] like the 50,000 to 100,000 square foot leases and if there could be a couple of the rate kind of tender occupancy growth.

Yes. Let me start, 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 million type 1,000 square foot user. So we're going to pick off a floor or 2 here and there, but we're -- our bread and butter is still going to be at $5 to $15 million, then when you -- 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 accounting firms, engineering firms, health care 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 next 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 8 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 4 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 or 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 3.1 million square feet that we've got between now and 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 lease occupied spread narrow, and that's going to add more in terms of -- 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 Min Ku with Wells Fargo.

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, Yang. 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% or a little more than that in the quarter, which was driven, as you pointed out by the FDA 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.

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 LI 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.

Thank you for your question. 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.

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.