Highwoods Properties - Earnings Call - Q1 2025
April 30, 2025
Transcript
Operator (participant)
Good morning, and thank you for attending today's Highwoods Properties Q1 2025 earnings call. My name is Jayla, and I'll be your moderator for today. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. I'd now like to turn the conference over to our host, Brendan Maiorana. Brendan, you may proceed.
Brendan Maiorana (EVP and CFO)
Thank you, Operator, and good morning, everyone. Joining me on the call this morning are Ted Klinck, our Chief Executive Officer, and Brian Leary, our Chief Operating Officer. For your convenience, today's prepared remarks have been posted on the web. If you have not received yesterday's earnings release or supplemental, they are both available on the investors' section of our website at highwoods.com.
On today's call, our review will include non-GAAP measures such as FFO, NOI, and EBITDA. 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.
Ted Klinck (CEO)
Thanks, Brendan, and good morning, everyone. We had a strong quarter executing on our key priorities and delivering solid financial results. Despite rising concern over the macroeconomic outlook and choppiness in the capital markets, we continue to set ourselves up for meaningful long-term growth while at the same time improving our portfolio quality and delivering financial results that were stronger than our original expectations.
First, our investment activity was robust, with the recycling of $145 million of non-core disposition proceeds into the $138 million acquisition of Advance Auto Parts Tower, a commute-worthy Class AA building in the vibrant North Hills BBD in Raleigh. This rotation of capital is a bullseye illustration of our investment objective of selling older, capital-intensive properties in non-BBD locations and rotating into high-quality buildings in locations where people want to live, work, and play.
This acquisition has meaningful long-term growth potential as existing rents are below market for North Hills, a BBD where we believe market rents will accelerate over the next several years. We now own nearly 650,000 sq ft of Class AA office in North Hills, with a diverse group of strong customers. Also, this leverage-neutral rotation of capital is immediately accretive to cash flow.
Second, we placed in service 2827 Peachtree, a $79,135,000 sq ft development in the Buckhead BBD of Atlanta, where we hold a 50% interest in the joint venture that developed and owns the property. 2827 Peachtree is 94% leased and 88% occupied. Third, we signed 97,000 sq ft in first-gen leases in our development pipeline. Our $474 million pipeline is now 63% leased, up 5% from last quarter, even after placing in service the 94% leased 2827 Peachtree development.
We continue to garner solid interest in these best-in-class projects, which, upon stabilization, are projected to drive $30 million of incremental NOI above our 2025 outlook. Fourth, we leased 700,000 sq ft of second-gen office space, including over 250,000 sq ft of new leases, plus 43,000 sq ft of net expansion leases. Leasing economics were strong, with net effective rents more than 20% higher than our prior five-quarter average.
Plus, April leasing volumes have accelerated with over 200,000 sq ft of new second-gen lease volume in just the first four weeks of the Q2, highlighted by a 145,000 sq ft lease with a new Highwoods customer at Symphony Place in Nashville. This lease is scheduled to commence Q2 2026 and backfills nearly two-thirds of the space from a customer who vacated the building earlier this year.
Securing this long-term lease, coupled with strong interest from others in the market, further validates the Highwoodizing efforts underway at Symphony Place. During our February call, I highlighted several growth drivers for the next few years. The first of these is lease-up efforts at four core buildings with current and elevated vacancy. Upon stabilization, these four buildings alone will drive $25 million of NOI growth above our 2025 outlook.
With the just-announced 145,000 sq ft lease at Symphony Place, we have already locked in over 40% of this future upside with leases that have been signed but have not yet commenced and with strong prospects for additional upside. The second growth driver previously highlighted is $10 million of future NOI upside from two 2023 development deliveries that have not yet stabilized: GlenLake III in Raleigh and Granite Park VI in Dallas.
With the leases signed this quarter, we have now locked in over 60% of this future upside. While we're mindful of the current uncertainties around the macroeconomic environment, we're optimistic as we approach the midpoint of this year, given the level of activity we continue to see across our portfolio and our already executed lease deals. Turning to our quarterly results, we delivered FFO of $0.83 per share and generated healthy cash flow.
As expected, our occupancy dipped due to known customer move-outs that we have long communicated. We expect to drive occupancy growth over the next few years, given our healthy backlog of signed but not yet commenced leases and much more manageable lease roll.
With our strong financial performance in Q1, positive outlook for the balance of the year, and accretive acquisition of Advance Auto Tower, we have raised the midpoint of our 2025 FFO outlook by $0.04 to a range of $3.31-$3.47 per share. We continue to actively underwrite new investments.
There are still many office owners that face near-term refinancing challenges or simply plan to reduce their allocations to office, which we expect will provide opportunities to deploy capital into additional commute-worthy properties. We are also actively prepping additional non-core assets for sale. Since 2019, we have sold over $1.5 billion of non-core properties and recycled the proceeds into higher quality, higher growth, and less capital-intensive commute-worthy office buildings. We expect to continue this strategy.
Given the combination of high construction costs, elevated vacancy levels, and risk-adjusted yield requirements that we believe would make sense for our shareholders, we don't expect to announce any new development projects this year. While spec development deals continue to be difficult to pencil in this environment, for us or anyone else, their absence creates the opportunity for significant rent growth at a high-quality second-gen product as availability dwindles.
We are having conversations with a few build-to-suit prospects, with both existing companies in our BBDs and new-to-market users. While these conversations are all in the very early stage, the increase in activity is a good indicator of the health of the office sector and illustrates the importance of the workplace experience. In conclusion, we're bullish about the future of Highwoods.
We're operating in the strongest BBDs in the Sunbelt that have continually proven to be the places where talent and companies want to be. We're making significant progress locking in our future organic growth drivers by signing long-term leases with strong customers, both in our operating portfolio and in our development pipeline.
Finally, backed by a strong balance sheet with limited near-term maturities and ample liquidity, we are well-positioned to execute on our proven strategy of asset recycling and drive our long-term growth rate even higher, further strengthen our cash flows, and improve our portfolio quality. Brian?
Brian Leary (EVP and COO)
Thanks, Ted, and good morning, everyone. Our Sunbelt BBD strategy has proven resilient over the past several years, and we believe we're well-positioned to continue this outperformance amid the economic uncertainty of government cutbacks, global tariffs, and the potential of a looming recession, just to name a few.
We recognize that our markets and business are not sheltered from these headwinds on the whole, but on the margin, we can report that to date they have not deterred our customers and prospects from executing leases and committing to office space. Because of this, our leasing pipeline is full, and we've made substantial progress backfilling our long-communicated known move-outs and pre-leasing our development pipeline.
We completed this volume of work at strong leasing economics for the Q1. Our team signed 88 deals for a total of 700,000 sq ft with expansions outpacing contractions four to one. Net effective rents grew to $20.56 with average annual rent escalations of 2.7% and GAAP rent growth of 12.8%.
While our average term of 5.3 years was lower than recent quarters, it includes a number of early as-is renewals that kept lease concessions low and drove strong net effective rents. In addition, activity remained strong across our $474 million development pipeline.
As Ted mentioned, we signed 97,000 sq ft of first-generation leases, including 48,000 sq ft at GlenLake III, our mixed-use development in Raleigh, which is now 78% leased, and 43,000 sq ft at Granite Park 6, our joint venture development with Granite Properties in Dallas's Plano BBD, which is now 58% leased. Both of these developments are forecast to stabilize in the Q1 of 2026, and we are pleased with the continued prospect pipeline.
During the quarter, we delivered $272 million of development with the completion of 23 Springs in Dallas and Midtown East in Tampa. These projects were delivered on time and on budget at a combined 58% pre-lease. As a reminder, we forecast 23 Springs to stabilize in early 2028 and Midtown East in mid-2026.
We remain confident in our ability to lease up both of these projects at or before scheduled stabilization. The Sunbelt continues its positive momentum with its talent-attractive and open-for-business environment. The region dominates a list of distinctions such as ULI's Emerging Trends: Markets to Watch and Site Selection Magazine's Best States for Business. With these tailwinds, our markets and BBDs are outperforming national trends, and our portfolio is outperforming locally.
In Raleigh, the Milken Institute named the City of Oaks the number one best-performing large city in the United States, highlighting its robust job growth, wage increases, and thriving tech sector. Here, we own almost 6 million sq ft and signed the most volume in the quarter with 316,000 sq ft of second-generation space. CBRE noted that for the first time since 2011, 14 years ago, the construction pipeline is empty.
This dearth of new supply benefits our recently delivered Glenlake 3 development and the balance of our best-in-class portfolio. Moving south to Tampa, where JLL highlighted the downtown submarket's vacancy rate at 9.8%, making it the lowest office vacancy among major U.S. CBDs.
During the quarter, the region heralded Foot Locker's Fortune 500 relocation out of New York and major lease signings by Fisher Investments and by Geico, who, with their lease announcement, committed to adding 1,000 jobs at its new campus. Our recently delivered 143,000 sq ft Midtown East mixed-use JV development is 39% leased, welcomed its first customer move-in, and has prospects for the balance of the building.
With this completion, there are no buildings under construction in the Tampa market. Across our operating portfolio, the Tampa team signed 18 second-generation leases in the quarter for a total of 95,000 sq ft, of which almost half represented new leases. Rounding out our markets in Nashville, in just a few months after a long-communicated move-out, we have backfilled over two-thirds of this vacancy with a 145,000 sq ft customer new to Highwoods Properties' portfolio at our Symphony Place Tower downtown.
The market response to our highwoodizing plans, which are now underway, has been exceptional and has generated healthy additional interest. This progress, coupled with the prospect pipeline at Westwood South and Park West in the Brentwood and Cool Springs BBDs, respectively, provides confidence in the long-term embedded NOI growth potential of the existing portfolio.
We are not naive to the reality that economic uncertainty is a headwind to decision-making, but in the present, our current leasing activity and pipeline bears little evidence to the expected cause and effect. I would provide the caveat that all meaningful construction scopes and bids are now qualified but not yet escalating with regard to tariffs.
If and when that chicken comes home to roost, the question is, will construction costs for office fit-ups be able to bear the brunt of any increases, or will potential escalations be mitigated with construction pipelines at all-time lows?
Time will tell. In the meantime, our leasing pipeline is healthy, and we are pleased by the progress of our development portfolio. We are confident that we will continue to drive organic growth by leaning in with our exceptional people, portfolio, and positioning. Brendan?
Brendan Maiorana (EVP and CFO)
Thanks, Brian. In the Q1, we delivered net income of $97.4 million or $0.91 per share and FFO of $91.7 million or $0.83 per share. The quarter included a large property sale gain from our disposeition in Tampa that was included in net income but not included in FFO. During the quarter, we received a term fee for a net $1.8 million as part of an early give-back, which was factored into our original FFO outlook.
This fee will be partially offset by downtime in 2025 before rent commences with a new Highwoods customer who fully backfilled this early give-back plus took additional space. Otherwise, there were no unusual items in the quarter. We are pleased with our Q1 financial results, which demonstrate the resiliency of our operations and cash flows. Even more consequential were the quarter's investment activity and leasing results, which positions us for future growth.
Our balance sheet remains in excellent shape. We did not issue any shares on the ATM and had $710 million of available liquidity at the end of the quarter. We only have approximately $125 million left to fund on our development pipeline and no debt maturities until May of 2026. As Ted mentioned, we have updated our 2025 FFO outlook to $3.31-$3.47 per share, which equates to a 4-cent increase at the midpoint.
There are always a few moving parts when we update our outlook, but at a high level, 3 cents is attributable to partial year impact from the Advance Auto Parts tower acquisition, and 1 cent is from operations. In our initial 2025 outlook in February, we provided detail around what our same property and occupancy outlook would be, excluding four operating properties where vacancy is elevated this year.
Similar to our overall same property and occupancy outlooks, our view of this adjusted same property growth outlook has not changed since February, nor have our expectations for occupancy. We offered this additional color in February given the outsized impact of a few select assets to our overall NOI growth and occupancy metrics. However, our preference is to present results on the full portfolio rather than on an adjusted basis that excludes certain properties.
Therefore, we removed these adjusted metrics in our updated outlook and do not plan to include them in future updates. We are off to a strong start so far in 2025, locking in some of our forecasted organic growth potential. Of the $25 million of NOI growth upside we have on the four core operating assets Ted discussed, we have signed but not yet commenced the leases for over 40% of this total.
The biggest component of this future growth is a combined 250,000 sq ft across two leases at Two Alliance Center and Symphony Place, with both leases projected to start mid to late Q2 2026. Our Glenlake 3 and Granite Park 6 developments are projected to generate over $10 million of additional upside compared to our 2025 outlook, with over 60% already secured via leases that are signed but have not yet commenced.
Most of this $6 million of annual upside will be in place by the middle of 2026. While we have provided a roadmap of the upside potential from these six specific properties, it is important to note we still expect additional growth in occupancy and NOI from the remainder of our operating portfolio over the next few years, plus meaningful NOI from the two development properties we delivered this quarter.
Lastly, I'd like to touch on our asset recycling performance and future outlook. As Ted mentioned, since 2019, we've sold over $1.5 billion of mostly non-core buildings and land and acquired $1.8 billion of commute-worthy properties. On average, the dispositions carried a nominal exit cap rate roughly 50 basis points higher than the year-one acquisition cap rates.
While this rotation of capital caused a modest headwind to short-term FFO, it has significantly strengthened our cash flows both in the near and long term and is a large component that drove over $150 million of cumulative free cash flow above our healthy dividend payout since the onset of the pandemic. As you know, the office business is CapEx intensive, which is why we're focused on driving our risk-adjusted cash flows higher over the long term.
We expect our asset recycling efforts will continue to strengthen our cash flows and improve our portfolio quality, thereby making our NOI more resilient over the long term, all while maintaining a low levered balance sheet. To wrap up, we're ahead of plan executing on our embedded growth drivers with potential to secure more of this upside over the next few quarters.
Further, our asset recycling playbook has a demonstrated track record of success, and we're encouraged about future investment opportunities. We believe we have the markets, portfolio, balance sheet, and team to realize the meaningful growth potential available to us over the next few years. Operator, we are now ready for questions.
Operator (participant)
At this time, if you would like to ask a question, it is star followed by one on your telephone keypad. If for any reason you would like to remove that question, it is star followed by two. Again, to ask a question, it is star one. As a reminder, if you're using a speakerphone, please remember to pick up your headset before asking a question. I'll pause briefly here as questions are registered. Our first question comes from Rob Stevenson with the company Jefferies. Rob, your line is now open.
Robert Stevenson (Managing Director and Head of Real Estate Research)
Thank you. Good morning, guys. Ted, would you do any significant level of incremental disposeitions from here without a corresponding acquisition lined up, or are those separate discussions in terms of your thoughts?
Ted Klinck (CEO)
Hey, Rob, good morning. Sure. No, I think, as you saw in our guidance, we've closed the, obviously, $145 million sale. We've got another up to $150 million of additional disposee. We've got a couple assets that are out in the market right now, dispose, nothing of size, but we are prepping a few others to bring to market.
I think all of these are going to be second half 2025 closings. Yeah, we're going to, whether we find something or not, we're going to continue to recycle out of non-core assets. We want to create some dry power.
Robert Stevenson (Managing Director and Head of Real Estate Research)
Okay. Okay. Even given the macro uncertainty, are you guys sensing any reluctance from tenants to engage on the 2026 expirations early here, where they want to wait and see whether or not we're in a recession, etc., before they make commitments to maintain or how much space they would downsize or upsize?
Ted Klinck (CEO)
Yeah, Rob, I think that's a great question. We ask that internally all the time of our leasing agents. We have, to a person, we've not seen any of that. We haven't seen any impact. Obviously, we're seeing the tariffs and economic uncertainty maybe have an investor confidence, maybe impacting investor confidence. In our business, in our leasing, we haven't lost any deals. Our deal flow hasn't slowed down. Our tour activity hasn't slowed down. We have not seen that, but we ask ourselves that as well.
Robert Stevenson (Managing Director and Head of Real Estate Research)
Okay. Last one for me: is the Q2 2026 occupancy on the Two Alliance Center and Symphony Place leases due to expiration of their existing leases, or is there a more extensive timeframe that's going to take you guys to do the improvements there?
Ted Klinck (CEO)
No, we're in the process of doing the improvements now. The customer, as you know, I think you said Two Alliance Center. The former customer moved out last fall, and then the new customer, backfilled of a big law firm, they'll take occupancy in the Q2 of next year. They're in the process of starting their build-out now.
Robert Stevenson (Managing Director and Head of Real Estate Research)
Okay. Brendan, how significant is the CapEx and the TIs for these leasing that you've done thus far in April? Is it meaningful in terms of the spend for 2025 here, or is it just as per usual? How heavy is that?
Brendan Maiorana (EVP and CFO)
Yeah, Rob, it's not unusual given the sense that it's a long-term lease, and we've done the one size of a lease in Nashville is a long-term lease for 145,000 sq ft. That TI is very much kind of in line with what you would probably expect in terms of market. The other new leasing that we disclosed, another over 50,000 sq ft, is also kind of in line with what you would expect.
I would say, I think our expectation is you will see leasing capital higher over the next balance of this year and likely into 2026 as well, just given the occupancy build that we expect and all of the leasing that we've done. I think we expect leasing capital to be higher in terms of spend for the next several quarters.
Robert Stevenson (Managing Director and Head of Real Estate Research)
Okay. That's helpful. Thanks, guys. Appreciate the time this morning.
Operator (participant)
Our next question comes from Vikram Malhotra with the company Mizuho. Vikram, your line is now open.
Vikram Malhotra (Managing Director, Real Estate Equities)
Thanks so much for doing the question. Brendan, maybe I can just start. You earlier referenced sort of troughing occupancy and more so FFO growth kind of in the, I think it was either Q1 or first half. Can you just give us a sense of how the cadence will go based on the puts and takes as you outline in the new guide?
Brendan Maiorana (EVP and CFO)
Yeah, Vikram, good morning and good question. Yes, what we've talked about, and I would say things aren't too much different in terms of the updated outlook relative to what we provided initially in February is we thought first half would be low both in terms of occupancy and then generally FFO sort of tracks occupancy without some unusual items on either the financing side or investment side.
We will grow kind of late in the year. I think that that still holds. There's probably a little bit more movement in the occupancy trends over maybe the second and Q3 than what we expected in February, but I still think that that year-end outlook of what we talked about last quarter between 86% and 87%, I think it's still a good guide for year-end.
Vikram Malhotra (Managing Director, Real Estate Equities)
Okay. Just to clarify, what level of new leasing have you baked in to kind of hit your occupancy guide?
Brendan Maiorana (EVP and CFO)
New leasing that is required, there's some spec leasing that is required to get to that year-end occupancy guide, but I would say what's in 2025 is fairly limited. I think as you're thinking about the occupancy ramp and the level of new leasing activity that gets done over the balance of 2025, most of that, if we're able to be successful and lease up, is going to drive occupancy higher in 2026.
What we've kind of talked about as a good marker for driving occupancy higher over time is usually somewhere in the neighborhood of 300,000 sq ft of new per quarter on average puts us well positioned, we think, to drive occupancy higher. I think if we're able to do that during 2025, it should position us well to grow occupancy as we migrate throughout 2026.
Vikram Malhotra (Managing Director, Real Estate Equities)
Okay, great. Then just last one, I guess, Ted, big picture, I mean, with all the tariffs and economic concerns now, any update you can share from your conversations with kind of the local economic councils that are sort of the gatekeepers for migration or expansion into your markets?
Ted Klinck (CEO)
Sure, Vikram. It's very positive. I think the last couple of years, while they've been very busy, it's largely been more manufacturing and industrial-related inquiries in migration from out of state. We're starting to see more office inquiries, which I think is fantastic.
None of the ones—there's a few big ones out there that are poking around that project names are multi-market searches that just take a long time. There's a lot of singles and doubles out there that might be a floor or two floors. I'm encouraged just in general by the activity and what we're hearing from the economic development folks.
Operator (participant)
Next question comes from Blaine Heck with the company Wells Fargo. Blaine, your line is now open.
Blaine Heck (Executive Director, Senior Equity Research Analyst)
Great. Thanks. Good morning. I guess just digging in a little bit more on your tenant conversations, have you seen any tenants shift kind of relocation plans or expansion plans with an increased preference to sign short-term renewals in place to kind of wait out some of the uncertainty in the market, or are you not even seeing that yet?
Brendan Maiorana (EVP and CFO)
Hey, Blaine, it's Brian. I can take the first shot at that. Generally, no. We still always have a few folks who might be consolidating their company, moving in and looking to short-term three years to kind of figure that out. That is not a specific response to necessarily, at least what they're telling us, the economy.
Our wall that came through on this latest amount of leasing, the commitment in Nashville, Symphony Place is a long-term one. We are getting some pretty good conviction from our customers and prospects around term with the fundamental belief that they want their people together under one roof and creating value.
Ted Klinck (CEO)
Look, the only thing I would add is our expansions are outnumbering our contractions four to one this quarter. We had 20 expansions, only five contractions. That 20, just the count, is the second highest count we have had in over five years since 2019. Our customers are expanding, they are growing, and they are willing to make space commitments.
Brendan Maiorana (EVP and CFO)
One other little nuance I'll add, Blaine, is that the pipeline for new construction, new deliveries is basically stopped, but for maybe two markets, Dallas and maybe Charlotte and then a small building elsewhere. I think what we're seeing from many customers is realizing their options will be dwindling, particularly on best-in-class commute-worthy space. They feel like the idea of making the decision sooner, locking something in, maybe locking even build-out pricing and lease pricing before if and when things change. That's basically what we're seeing.
Blaine Heck (Executive Director, Senior Equity Research Analyst)
Okay. Great. Thanks for that color, Brian and Ted. Just to follow up on one of Rob's questions, Brendan, you talked about elevated leasing capital over the next several quarters. How do you see that impacting AFFO or cash flow and kind of related to that? Can you just touch on your comfort with the dividend level here?
Brendan Maiorana (EVP and CFO)
Yeah, maybe I'll start and let Ted follow up. Yeah, as you mentioned, I think firstly what I would say is, as we talked about in the prepared remarks, we're really focused on driving risk-adjusted free cash flow higher over time. I think that's been the focus of the company for a long time. We continue to think about growing the business by growing risk-adjusted free cash flow.
With that, we recognize that we're in a cyclical and CapEx-intensive business, and capital spend is going to be lumpy from quarter to quarter and year to year. We really program that into just thinking about the business over the cycle. That goes into both balance sheet strategy, but then also planning capital projects or hypothesizing projects as we think about reinvesting within the portfolio.
With all of that, we understand that capital is going to be lumpy, and it's going to cause cash flow to be lumpy. We just program that in. We think that cash flow will be lower over the next couple of years than it has been over the past few years. That's just a normal part of the business. That's going to happen as you're driving occupancy higher because obviously you're spending that leasing capital upfront before you get the corresponding revenue as leases commence.
Ted Klinck (CEO)
The only thing I would add, Blaine, is Brendan mentioned it in his prepared remarks that since the onset of the pandemic, we've generated over $150 million of free cash flow above our dividend. It is going to be lumpy with the big move-outs to release the space, but we feel comfortable with where we are.
Brendan Maiorana (EVP and CFO)
Yeah. Blaine, sorry, I forgot to mention just the $150 million of cash flow, that's a true free cash flow metric. I think you mentioned AFFO. When we really think about generating cash flow for the business, we think about what you would consider growth capital in that number because that's a normal part of the business, and we typically reinvest within our portfolio. That's included in that number. Even with that capital factored in, we still generated over $150 million of retained cash flow above the dividend over the past few years.
Blaine Heck (Executive Director, Senior Equity Research Analyst)
Okay. Very helpful. Thanks, guys.
Operator (participant)
Our next question comes from Peter Abramowitz with Jefferies. Peter, your line is now open.
Peter Abramowitz (Equity Research SVP)
Yes. Thank you for taking the question. Just wondering if you could comment on the rents on the new lease at Symphony Place and mark to market, how it compares to where Bass, Berry & Sims' rents were.
Ted Klinck (CEO)
Yeah, it's essentially flat, Peter.
Peter Abramowitz (Equity Research SVP)
Okay. Got it. That's helpful. Elsewhere on the core four, you have made the progress here at Symphony and some progress down at Two Alliance Center. Just wondering if you could comment on sort of the other assets, where sort of tenant requirements you are seeing on the space, how much leasing coverage you have would be helpful.
Ted Klinck (CEO)
Sure. Yeah. You alluded to obviously backfill down in Two Alliance Center, vast majority of the Novella space. We touched on Pinnacle Symphony Place, backfilled Bass, Berry & Sims, 68% of that. The other ones are Westwood South. It's a building in Nashville. Earlier this year, we had a 128,000 sq ft customer vacate. We've got a lot of prospects for that space. We've got a full building user.
We've got a user that would take 70-80% of the building. We've also got some smaller guys who are sort of just waiting to see how these other two play out. We're very confident and excited about the activity we have at Westwood South. Down at Cool Springs V, the former Tivity building, we've leased 40% of that. We've got prospects for, I'll tell you, probably more than the remaining vacancy there.
Again, nothing's signed yet, but the tour activity, just the hypothesizing, the response we're getting to the hypothesizing efforts down there has really spurred demand. We are incredibly excited and optimistic about the activity we're seeing across the board on the core four.
Peter Abramowitz (Equity Research SVP)
That's helpful, Ted. One more if I can. You touched on sort of it would be naive to think you won't see an impact to your conversations eventually from sort of the uncertainty that's been introduced to the macro outlook, but you're not necessarily seeing it yet. That's helpful on, I guess, the leasing side. Curious what you're seeing just more broadly across your markets on the capital market and transaction side. Does it seem like deal velocity has changed much since Liberation Day? General thoughts on the transaction market in the Sunbelt?
Ted Klinck (CEO)
Sure. Look, the office capital markets, I think we're starting to see them open up a little bit. Certainly, when the calendar turned this year, we have seen it. The debt capital markets are starting to open up, and that helps deal flow, right? CMBS is open to office now. Certainly, the SASB market within CMBS is very active.
You're also starting to see some life companies and some banks come back and start looking at office loans, which is great. On the equity capital side, look, there's been a ton of dry powder the last several years looking to invest. I think office, they're being more constructive on now and starting to underwrite office now.
I think that's all good for the office capital markets. I think you've seen a few deals close. I think you're going to see a few more. I think the office capital markets are thawing, and I'm optimistic you're going to see a higher transaction volume this year than we had the last few years.
Peter Abramowitz (Equity Research SVP)
All right. That's helpful. Thanks for the time.
Operator (participant)
Question comes from Nick Thillman with the company Baird. Nick, your line is now open.
Nick Thillman (Senior Research Analyst)
Hey, good morning, guys. Congrats on the partial backfill at Symphony Place. I guess that's the second large law firm you guys kind of have landed within the portfolio in recent months. What's the behavior you're kind of seeing there? Are they downsizing from their initial footprints? What's really appealing about your sort of assets in these markets? Is it lack of availability or just location? A little bit more commentary there would be helpful.
Brendan Maiorana (EVP and CFO)
Hey, Nick, it's Brian. I'll take the first shot on your very specific question about kind of space needs and appetite. I don't want to speak for our new customer, but they spoke to the local paper overnight. What they said is that while they are taking less square feet, they are growing as a firm because this is a much more efficient location for them and how they're now working.
They are growing with attorneys and teammates, but actually taking less square feet technically from where they were and to where they're coming with us from Symphony Place. There is also kind of M&A activity across a number of these law firms, folks moving around, folks getting bigger.
In fact, the customer that we recruited to Symphony Place is sort of a mainstay, long-known pillar of the community in Nashville, but is now part of an international top 20 law firm on the planet. That is kind of a good thing. Yeah. Nick, the only thing I would just add to that is we've seen, as Ted and Brian mentioned earlier, we've seen good expansion activity across the portfolio.
The largest lease that we did in the quarter was a large financial services user who expanded during the quarter. We had another Fortune 500 company who was new, came in, new to market growth. While there have been two prominent deals that are law firm deals within our portfolio in the core four, if you will, I think we've seen a pretty broad-based growth across our customer base.
Nick Thillman (Senior Research Analyst)
No, that's very helpful. I just wanted to touch a little bit on 2026. You said 2025 retention a little bit lower, but 2026 you felt like that the renewal activity was going to be there and pretty high retention. Is that still the case? Is kind of is spec leasing overall kind of tracking with your initial outlook for 2025 as well?
Brendan Maiorana (EVP and CFO)
Yes. I would say so with respect to 2025, I think we're kind of right on track with what we thought probably early part of the year. I'd say maybe even a little bit ahead. I think what that means in terms of the renewal activity for the conversations that we're having on 2026, I think that those all feel constructive as well.
I think we'll be back to more normalized levels of retention in 2026 relative to kind of where we've been late in 2024 and then in 2025. I think that positions us, given the limited role that we have and then more normalized levels of retention and then the new leasing volume, I think that creates a good environment where we ought to be able to grow occupancy as we migrate through our 2026.
Nick Thillman (Senior Research Analyst)
Very helpful. Thank you.
Operator (participant)
Our next question comes from Dylan Burzinski with the company Green Street. Dylan, your line is now open.
Dylan Burzinski (Senior Analyst, Equity Research)
Hey, guys. Thanks for taking the question. I guess just sort of going back to Peter's line of question around capital markets changes. Ted, I think you mentioned having smaller assets in the market today. Have you seen any change as it relates to pricing expectations or buyer appetite since sort of April 2nd's Liberation Day?
Ted Klinck (CEO)
Not at all, Dylan. Again, we don't have a lot of data points on our—we don't have anything of size out in the market. We've got a couple of small buildings, but there's plenty of investor interest in the couple of buildings we have out there. It wouldn't surprise me. Just to your point, again, we'll have to wait and see the next 30-60 days or whatever. To date, we haven't really seen an appetite.
We're having people continue to call us, whether it be users or local buyers that are interested in assets. Some of our assets we don't even have on the market, which is similar to what happened last year with BayCare and we sold those buildings. That was an inbound call. We're continuing to field calls from users as well as potential buyers that are looking to transact. I think there's a lot of money on the sidelines that's looking to invest in office buildings these days.
Dylan Burzinski (Senior Analyst, Equity Research)
Great. Appreciate those comments, Ted. I guess just going back to the demand side not changing as well, but are you starting to see any cracks on free rent periods moving higher, TI packages being higher? I know you guys commented on just net effective in the quarter being higher than they were five quarters ago, but any change in the last several weeks as it relates to just leasing economics?
Ted Klinck (CEO)
Not really. In fact, I would say the concessions in many of our submarkets are starting to level off. I think we've probably hit peak TIs and peak free rent. Depending on the submarket and in some cases, the specific deal and location, you're starting to see concessions subside a little bit even, which is, again, that's encouraging for the overall office market, especially given there's no new deliveries the next couple of years or very few.
We think that things are going to tighten up. Vacancy rates have probably peaked in our markets and concessions we think they have as well. We are encouraged about the overall fundamental picture improving over the next couple of years as well.
Dylan Burzinski (Senior Analyst, Equity Research)
Perfect. Thanks.
Operator (participant)
Our next question comes from Omotayo Okusanya with Deutsche Bank. Omotayo, your line is now open.
Omotayo Okusanya (Managing Director)
Yes. Good morning, everyone. Again, congrats on a solid quarter and great momentum there. Wanted to understand guidance a little bit better. You talked about a 1 cent increase from operations, but there really are no big changes to your guidance assumptions. Trying to understand maybe something's happening on the non-same store pool.
The 3 cents associated with acquisitions, again, I think your initial guidance had up to $300 million of acquisitions. You've done $138 million so far, calling for potential additional $150 million. Acquisition guidance doesn't seem like it's changed much as well, but you're expecting a 3 cents pickup on that end as well. If you could just help us kind of understand the 4 cents increase, that would be helpful.
Brendan Maiorana (EVP and CFO)
Yeah. Hey, Ty. It's Brendan. I'll take that. Thanks for the question. Just firstly on the acquisition, we provide the guidance in terms of color on acquisition activity, but we do not include that in the FFO number. What happened with the February outlook is we had sold the assets in Tampa, that $145 million.
That dilution, if you will, was kind of in that number, but we had not closed on Advance Auto Parts Tower. We closed on that a month or so after we had provided that initial outlook. The closing of that, then that obviously goes into the number, and that is 3 cents there if you just take roughly nine months of ownership in that asset relative to the cost of capital to pay for that.
The penny of better operations, I mean, could you move the numbers around a little bit in terms of the metrics? Sure, but we've got a 200 basis point range on same store. That's $10 million-$12 million of kind of play in there. I didn't think it was kind of updating those numbers. Same with occupancy.
What we did move up, and really this kind of goes maybe to your question a little bit, is you saw the straight line number move up a couple million bucks. You kind of have some of that is just in play there as well.
It doesn't impact cash same property NOI, which is where we are, but we did take the same property number up a little bit, and there's a variety of reasons for that. A bunch of stuff moves around, but I think the general parameters of same store guide, occupancy guide, not much really has changed there.
Omotayo Okusanya (Managing Director)
Gotcha. That's helpful. Thank you.
Operator (participant)
Our next question comes from Ronald Kamdem with Morgan Stanley. Ronald, your line is now open.
Ronald Kamdem (Managing Director, Head of US REITs and CRE Research)
Hey, just two quick ones for me. I think one on just the potential additional dispositions and acquisitions not included in guidance. I know you talked about some dispositions being prepped, but any updated thoughts on the Pittsburgh assets and what you're thinking is there would be helpful. Similarly, on the acquisition side, is it all speculative at this point, or are there sort of deals that you guys are sort of looking, evaluating, closing in on? Thanks.
Ted Klinck (CEO)
Sure. Hey, Ron. First on Pittsburgh, really no update on Pittsburgh. We continue to monitor the situation just like we have the last couple of years. I think when the capital markets open up more for large assets like the ones we own, we'll go and find the right time to sell those assets. Really no update there.
On the acquisition front, we're underwriting stuff. Our pencils are we're underwriting various opportunities, but really nothing to talk about. We'll just see how things play out. It is just nice to have acquisition opportunities that are out there right now, but really nothing to talk about.
Ronald Kamdem (Managing Director, Head of US REITs and CRE Research)
Great. My second one was just on the cadence for the same store. The midpoint is 3%, which is where you sort of were in Q1. Should we be expecting sort of a dip in Q2 and then a recovery in the back half of the year? Just how should we think about how that's going to trend? Thanks.
Brendan Maiorana (EVP and CFO)
Yeah, Ron, it's Brendan. Good question. Yeah. I think it's likely to be if you go back and look at last year, right, we were higher in Q2 and then higher again in Q3. Obviously, anniversarying against those prior quarters is a challenging comp. I would expect it to be weak in Q2 and weak in Q3. As we had occupancy down in Q4 last year, I think we'll do better on a relative basis in Q4 of this year. I think that's in terms of expectations on same property guidance, I think that's a good way to think about it.
Peter Abramowitz (Equity Research SVP)
Great. Thanks so much.
Operator (participant)
Our next question comes from Seth Bergy with Citi. Seth, your line is now open.
Seth Bergy (Senior Equity Analyst)
Hi. Thanks for taking my question. I just kind of want to go back to some of the discussion around acquisitions. How is kind of the uncertainty out there? Has that changed kind of the yields or IRRs you guys are underwriting to? Are there any markets you're kind of looking you would look to kind of grow in or any color there would be helpful as well?
Ted Klinck (CEO)
Sure. Hey, Seth. Look, I do not think necessarily uncertainty is impacting us a whole lot. We look at the fundamentals when we underwrite deals, whether it is a core, core plus, value-add opportunity. We look at the submarket and what kind of rent growth can we get? What kind of lease-up can we have if there is vacant space? There are a lot of levers that go into coming up with our overall underwriting assumptions.
I do not think we have changed a whole lot in the last 30 days or so. It is very micro as we look at the asset in the submarket. What was the second part? Oh, I am sorry, Seth, on markets. The second part. Yes, second part of the markets. We have entered Charlotte five years ago, Dallas three years ago. I think we like our footprint right now. We poke around other markets, but we're sort of pretty pleased with the markets we're in right now.
Seth Bergy (Senior Equity Analyst)
Great. Thanks.
Operator (participant)
There are no more questions registered in Q. Again, if you would like to ask a question, it is star followed by one on your telephone keypad.
Ted Klinck (CEO)
All right. Doesn't look like we have any additional questions. Thank you all for joining the call today. Thanks for your interest in Highwoods. We look forward to seeing everybody in Nareit in early June. Thank you.
Operator (participant)
That will conclude today's conference call. Thank you for your participation and enjoy the rest of your day.