Highwoods Properties - Q3 2024

Transcript

Operator (participant)

Good morning. Thank you for joining today's Highwoods Properties Q3 2024 Earnings Call. My name is Cole, and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you'd like to queue for a question, you can do so by pressing star one on your telephone keypad. I'd now like to pass the call over to Hannah True, Manager of Finance and Corporate Strategy. Please go ahead.

Hannah True (Manager of Finance and Corporate Strategy)

Thank you, operator, and good morning, everyone. Joining me on the call this morning are Ted Klinck, our Chief Executive Officer, Brian Leary, our Chief Operating Officer, and Brendan Maiorana, our Chief Financial Officer. For your convenience, today's prepared remarks have been posted on the web. If you have not received yesterday's earnings release or supplemental, they're both available on the investor 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.

Ted Klinck (CEO)

Thanks, Hannah, and good morning, everyone. We reported excellent operating and financial performance once again in the third quarter. For the first three quarters of 2024, we've delivered financial results that are ahead of our initial expectations, while building the foundation to drive sustainable growth over the long term. First, our bottom-line financial results this year continue to be better than we originally anticipated back in February. During the quarter, we delivered FFO of $0.90 per share and generated strong cash flows. At the midpoint, our FFO outlook is up $0.06 per share since the beginning of the year, including $0.03 increase this quarter, and this is even with interest rates higher than forecast and $84 million of non-core dispositions that were not included in our original outlook.

Second, our new leasing volumes have been very strong throughout this entire year, and most prominently in the third quarter, which should drive strong organic growth after a long-telegraphed occupancy trough in early 2025. With 1.3 million sq ft of new second gen leases signed through the first three quarters of 2024, our lease rate is over 300 basis points higher than our in-service occupied rate of 88%, roughly two times our normal spread, indicating that we have sizable pipeline of leases that have been signed, but where occupancy hasn't yet commenced. Third, we continue to make progress on our development pipeline, which is now 49% leased, and we have a healthy pipeline of strong prospects to drive our lease rate higher.

Our development pipeline will be a significant driver of cash flow growth going forward as these assets deliver and stabilize. Fourth, we continue to sell non-core assets and use the proceeds to recycle into higher quality buildings and reduce leverage. We closed on one small non-core land sale this quarter and are marketing additional properties. We're optimistic we'll close on more asset sales over the next several months. Finally, we're laying the foundation for future wish list acquisitions by meeting with owners and lenders of high-quality assets throughout our footprint. We have long believed it would take time for the bid-ask spread between buyers and sellers to narrow. With the first interest rate cut now behind us, we can see a pathway for the office investment sales market to open back up. Overall, we continue to outperform our financial expectations.

We're making significant progress improving our portfolio quality and long-term growth rate, while fortifying our already strong balance sheet, and we have a healthy number of signed, but not yet commenced leases in our development pipeline and our in-service portfolio that will further strengthen our cash flows. Turning to operations. The combination of our BBD locations, commute-worthy portfolio, strong balance sheet, and our hands-on approach to both customer service and property management is driving meaningful market share gains. New second gen leasing during the quarter was strong at 530,000 sq ft, and that doesn't include 39,000 sq ft of net expansions, which are included in renewals. In fact, growing users outpace contractions by a ratio of five to one.

Net effective rents, which in our view are more meaningful than rent spreads, were the highest in our company's history and 25% higher than the previous five-quarter average. Plus, our weighted average lease term was 10.4 years, also the highest in our history. Stated vacancy rates remained elevated, but these market-wide stats mask the improving competitive dynamics for top-of-market assets in our BBD footprint. There's still some office under construction, most of which will deliver by the middle of next year, but new starts are essentially non-existent. With high quality blocks of space getting absorbed, there are less options for large users seeking Class A space with well-capitalized landlords. We expect these dynamics will continue over the next few years, which should allow us to drive occupancy and rents.

In addition, return to office mandates have steadily increased over the past several quarters, as employers are emphasizing the value of in-person collaboration and culture building that isn't easily replicated with remote work. According to a recent KPMG survey of U.S. CEOs, 79% expect a full return to the office over the next three years. The combination of dwindling large blocks of high-quality space, limited to no development starts, and increasing return to office requirements bodes well for the future of office demand. Turning to development. During the quarter, we signed 61,000 sq ft in first gen leases, including a small retail build-to-suit, bringing our 1.6 million sq ft, $514 million pipeline to 49% leased. We have strong prospects for an additional 140,000 sq ft that we expect to sign over the next several months.

We don't expect to announce any other new development projects this year. New starts are very difficult for any developer to pencil, given the current environment. That being said, we've seen increasing inquiries for potential build-to-suits. I wouldn't characterize any of these as being close to a decision, but the renewed interest is anecdotal evidence that large users are coming back to the market and are focused on the in-person experience for their teams. As I mentioned earlier, we sold a small non-core land parcel during the third quarter, bringing our non-core asset sales to $84 million for the year. We've included up to an additional $150 million of non-core dispositions in our outlook. We may not hit the high end of the range before year-end, but we expect to do so by early 2025. In conclusion, we believe the outlook for Highwoods is bright.

As evidenced by this year's leasing, demand for our Sun Belt BBD portfolio continues to be strong. This will drive meaningful growth in occupancy and NOI following our trough in early 2025. Our $500 million development pipeline is seeing healthy interest and will drive meaningful increase in our earnings and cash flow as it delivers and stabilizes over the next few years. Our balance sheet is in excellent shape and will enable us to capitalize on investment opportunities. And finally, our underlying cash flows remain strong, which supports our attractive dividend and allows us to continue reinvesting in our portfolio. Brian?

Brian Leary (COO)

Thanks, Ted, and good morning, all. Echoing Ted's overview on leasing, we couldn't be happier with the results our hardworking team posted in the third quarter. The quantity and quality of deals across our existing and service portfolio and development pipeline is emblematic of the flight to quality occurring across our markets. As we've mentioned previously, this flight to quality isn't just about the physical space, but rather is representative of a positive bias toward quality buildings, quality landlords with access to capital, and the quality of a commute-worthy experience, which is core to our DNA as both an owner and an operator. We're focused on building leasing momentum through year-end. With this, we signed 906,000 sq ft for the quarter.

New second-generation leasing of 530,000 sq ft represents the highest quarterly performance in over a decade and is a testament to our customers' willingness to make a move in order to secure a new workplace that helps them recruit, retain, and return their best and brightest to the office. Additionally, and subsequent to quarter end, we renewed two of our largest remaining expirations in 2025 and 2026 for approximately 300,000 sq ft in Nashville and Raleigh in the aggregate. Portfolio leasing stats achieved high water marks across a variety of metrics, including meaningful net effective rent and dollar-weighted average lease term. Our 10.4% cash and 22.4% GAAP rent spreads also reinforce our belief that customers see their relative investment in real estate as a real investment relative to their most valuable asset, their people.

Our 18.6% payback is in line with our previous 10-quarter average, highlighting our portfolio's resilience in the face of continued and competitive concessions in the market. Our development pipeline continues to fill up, adding 61,000 sq ft in the third quarter, which includes a new build-to-suit brewery and restaurant at our GlenLake mixed-use development in Raleigh. This regional draw will be a tremendous complement to the other food and beverage options we are curating to support the close to 1 million sq ft of office customers we have at GlenLake. Highwoods believes that customers aren't monolithic in their approach to the workplace. This relates to location and to one's measure of commute worthiness, which is greatly impacted by one's commute. This belief is representative of our best business district approach, where BBDs are both urban and suburban in nature....

This strategy is proving out in our year-to-date leasing performance, with approximately 20% of leasing activity in the CBDs, 50% in infill locations, and 30% in the suburbs. Turning to our markets, in Atlanta, JLL reported sublease availability reached the lowest level in seven quarters. Overall, office inventory shrank, and there were no new construction starts for the quarter. There, our team signed 271,000 sq ft, including 235,000 sq ft of new deals. Included in this number is the 104,000 sq ft substantial backfill of a customer who vacated Two Alliance in August. In Raleigh, CBRE reports that sublease space is down almost 30% from its peak, and Cushman & Wakefield highlighted the market's Class A properties are garnering the greatest leasing activity, with 79% of the quarter's leasing volume.

We signed 217,000 sq ft in Raleigh during the quarter and renewed 84,000 sq ft after quarter end, representing a modest downsize for the company's second-largest 2026 lease expiration. Moving to the market with the nation's lowest unemployment rate in Nashville, and where Highwoods owns more than 5 million sq ft, Cushman & Wakefield reported a positive net absorption in the quarter and noted close to 3 million sq ft of active prospects over 10,000 sq ft are looking for space in the market. Our seasoned team in Nashville signed 54,000 sq ft in the third quarter, and after quarter end, renewed the company's second-largest remaining 2025 lease expiration at 210,000 sq ft.

In downtown Nashville, our plans have been finalized for the repositioning of Symphony Place, where we have 300,000 sq ft of no move-outs in 2025. This asset represents the next great opportunity for our unique Highwoodizing approach to workplace making, which has been proven successful elsewhere in Nashville, both in the Brentwood and Cool Springs BBDs. While it will take time, the opportunity to reposition one of Nashville's most iconic towers is right in our wheelhouse and will provide meaningful upside and value creation upon stabilization. Wrapping up our markets in Tampa, I'd like to highlight the tremendous work of our Tampa team in light of the one-two impact of Hurricanes Helene and Milton. While many teammates are still personally dealing with the aftereffects of the storms, our portfolio fared well and was ready and waiting for our customers when the sun came back out.

Our portfolio's resilience is a testament to our team's resilience, and we are greatly appreciative of their collaborative and solutions-oriented approach to serving our customers. JLL notes in their recent market report that Tampa is strong and stable, and the 2.3 million sq ft of leasing activity completed year to date in the Tampa market represents the greatest leasing volume among all markets in Florida. Additionally, Cushman & Wakefield highlighted that Tampa is one of the four hottest job markets in the U.S. For the quarter, our Tampa team signed 97,000 sq ft, including 26,000 sq ft of first-generation leasing in our Midtown East development, the only office building under construction in the market, and which is now 35% pre-leased.

This exceptional asset joins our successful Midtown West development in the heart of Midtown's mixed-use district, which includes a Whole Foods Market, shops, restaurants, hotels, and apartments. Midtown East delivers in the first quarter of 2025 and is projected to stabilize in the second quarter of 2026. In closing, the third quarter was a strong one for Highwoods. The hard work, foresight, and investment we've applied to our portfolio is delivering results. Our leasing volume and metrics are representative of a flight to quality of portfolio and people who deliver an exceptional experience. We will continue to invest in our Highwoodizing approach to reenergizing our core portfolio and delivering the most exceptional customer experience in our Sun Belt BBDs. Brendan?

Thanks, Brian. In the third quarter, we delivered net income of $14.6 million, or 14 cents per share, and FFO of $97.1 million, or 90 cents per share. The quarter was relatively clean from an FFO perspective. Depreciation and amortization expense, which doesn't impact FFO, but does flow through net income, was modestly higher during the quarter. This was due to the write-off of tenant improvements and deferred leasing costs associated with the cancellation of a future 110,000 sq ft lease at the former Tivity building in Nashville. You may recall we mentioned this was a possibility on last quarter's conference call. The former customer has agreed to repay us our upfront investment over the next five years. Our balance sheet remains in excellent shape.

At September thirtieth, we had nearly $800 million of total available liquidity, including cash on hand, available capacity on our $750 million revolving credit facility, and undrawn capacity from our joint venture construction loans. As we mentioned last quarter, early in Q3, our unconsolidated McKinney & Olive and Granite Park Six joint ventures repaid over $200 million of secured loans. We and Granite, our joint venture partner, each contributed over $100 million to these joint ventures.... These properties will likely be a future source of capital as we plan to obtain long-term financing at some point in the future, when conditions in the secured market are more favorable.

As Ted and Brian mentioned, we had a strong leasing quarter, especially new leasing volume, which has driven our leased rate 310 basis points higher than our actual occupancy of 88%. This includes currently occupied space, plus leases signed, but not yet commenced on vacant space. Net effective rents and average lease terms on signed leases this quarter were all-time highs, and we locked in over $340 million of total lease revenue from second gen lease signings, also a record for the company. With such strong new leasing volume, rents, and term, obviously comes more leasing capital. This is a natural part of the real estate cycle, when capable landlords with high-quality portfolios are able to drive occupancy higher.

We expect this trend to continue in the near term as we fill the pockets of vacancy in the portfolio and push for longer weighted average lease terms. We believe we are well positioned to handle any short-term uptick in leasing CapEx, given our healthy current cash flows and future embedded growth drivers. For 2024, our updated FFO outlook is $3.59-$3.63 per share, which implies a $0.03 increase at the midpoint compared to our prior outlook. The increase is essentially all from higher NOI, driven by a combination of reduced expenses and higher revenues, partially offset by modestly higher G&A. The midpoint of our average occupancy range is unchanged at 88%, which implies lower occupancy in Q4. This has been expected, given our long-telegraphed known move-outs.

At the beginning of this year, we projected year-end occupancy to be somewhere between 86%-87%. We now believe the upper half of that range is most likely. As we mentioned last quarter, the strong leasing we've achieved this year makes us confident that our trough occupancy early next year will be higher than we previously expected, and our recovery will be faster. A few items to note about our fourth quarter expectations. First, we expect to incur a higher level of OpEx in Q4 compared to the prior 2024 quarters. This is largely attributable to the timing of certain expense items that were pushed late into the year rather than being spent ratably over the four quarters. Second, as I mentioned, average occupancy is projected to be lower in Q4.

Third, the GlenLake III and Granite Park Six developments, which were completed in the third quarter last year, will have no interest or OpEx capitalization during the fourth quarter. While these items create short-term headwinds to our financial results, as occupancy recovers in our in-service portfolio and our development properties stabilize, we expect meaningful growth in our earnings and cash flow. To wrap up, we're very encouraged about the future for Highwoods. With our strong balance sheet and high-quality portfolio in BBD locations across the Sun Belt, we are gaining market share and expect rent economics to strengthen over time. This backdrop, combined with the meaningful embedded upside potential we have in our in-service portfolio and development pipeline, provides us a strong runway for future growth. Finally, our balance sheet is in excellent shape, which positions us to capitalize on future investment opportunities. Operator, we are now ready for questions.

Operator (participant)

Great. If you'd like to queue for a question, you can do so by pressing star one on your telephone keypad. If for any reason you'd like to remove your question, it's star two. Again, to join the question queue, please press star one. Our first question is from Blaine Heck with Wells Fargo. Your line is now open.

Blaine Heck (Executive Director of Senior Equity Research Analyst)

Great, thanks. Good morning. Can you talk a little bit more about the rental rate strength you saw in the quarter? Were there any specific leases that drove that strength? It looks like Atlanta was a standout, and then maybe you can comment on whether there are specific industries or tenant sizes that you're finding are more active in the market and willing to pay premium rent for that right space.

Ted Klinck (CEO)

Hey, Blaine. Good morning, it's Ted. Yeah, look, obviously, we did have a great quarter on the leasing front. We had a couple larger deals that did contribute, and you nailed it in Atlanta. We had two in particular, one that drove the cash rent growth. One was financial services, and one was, I'm sorry, it was professional services, a law firm, and then one was a GSA deal that were driving those economics. But even without those, we had a very strong quarter on the economics if you back those out. So we're sort of seeing it. It just, it's a mix, right? It just sort of depends on the submarkets and the markets we're in.

But all in all, you know, we're seeing some strength in our leasing this past quarter, and then with respect to smaller or larger, it really just depends. I mean, I think it depends on the TIs that customers want. If we can get longer terms, we're willing to provide TIs, and they're willing to pay for it. I think we're seeing some customers that are willing to pay for it, and that works out well. What's pretty interesting is, you know, we always talk about the flight to quality and flight to amenities and flight to capital. It's a common theme we've talked about the last few quarters, and that still continues, but it's not always the brightest, shiniest, newest buildings, and you've heard me say that several times.

We've been on both sides of what I'm getting ready to talk about, where we've been down to one of two for a customer, and they chose the new construction, even though it's $20 higher than what our offering is, and we've also been down to one of two, where we've won because we've been the more value play, so it's just, it all depends on who the customer is, what industry they're in, who the CEO is, in many cases, on the ability to, you know, in terms of type of space they want.

Blaine Heck (Executive Director of Senior Equity Research Analyst)

Great. Thanks for all that color. Super helpful. So it looks like you guys are a little ahead of schedule on leasing up 23Springs. You've got an estimated stabilization date on that project in the first quarter of 2028, but you're already 60% leased, with completion expected in a quarter. I guess, you know, how do you guys feel about potentially recognizing some revenue and NOI at that project, maybe even as early as next year? And does that contribute to any of your positivity on 2025?

Ted Klinck (CEO)

Yeah. No, 23Springs is going very well. I think we moved it last quarter, it was 56%, and we moved it to 60% this quarter, and we continue to see very strong activity. We do have more strong prospects. I think you'll see, hopefully, some movement next quarter if we can get a couple of things going. And I think in general, our pipeline, we have about 140,000 sq ft of strong prospects for our development pipeline. So, yeah, with respect to 23Springs, we're probably ahead of schedule, but it, as a reminder, it's a big building. We still have quite a ways to go. The building will be finished towards the end of the first quarter next year, and I think our first customer moves in in June.

And then, Brendan, do you want to take the rest of that?

Brendan Maiorana (CFO)

Yeah, Blaine. It's Brendan. So just it's a good question, and as Ted mentioned, we would expect some contribution in terms of earnings from 23Springs in 2025. That will be weighted towards the back half of the year and probably even weighted more towards fourth quarter than it will be even third quarter, because we do have some customers that move in kind of middle part of the year, but then even more that would move in later in 2025. So I think we feel good that that'll be a contributor, along with I think the other development projects should all be kind of additive as we build throughout the quarters in 2025.

Blaine Heck (Executive Director of Senior Equity Research Analyst)

Great. That's very helpful. And then just one last question, if I can. You know, how are you guys thinking about the Pittsburgh portfolio in the near to midterm? Do you think those dispositions are kind of off the table still for now, or you know, are you seeing any signs of the transaction market returning there? You know, are there any Pittsburgh properties in the potential $150 million that you've identified for potential dispositions? And I guess just strategically, maybe talk about how you think about the balance between waiting for an acceptable price to exit versus selling sooner, wherever the market pricing is, but maybe saving some capital needed for lease-up and any renovation or refreshing projects there.

Ted Klinck (CEO)

Sure. Blaine, look, I think in fact, we've got a team up in Pittsburgh today, working on some leasing deals. So look, obviously, you know, we want to get out of Pittsburgh at the right time, but as you know, the last two, two and a half years, since the interest rates started rising up and the capital markets sort of locked up, it's hard to get any office deal done. All right? You got to get financing, and it's really hard to get a big office deal done. So I don't think a whole lot's changed over the last couple of years as we look at Pittsburgh from an investment sales standpoint. I think we're gonna sell at the right time, but I think we've now hit the start of the interest rate cuts.

If we can get a few more cuts done, whether it be a couple this year and into next year, I think that's gonna do a lot to open up the overall investment sales market, and then certainly that would include Pittsburgh. But in the meantime, what's been pretty encouraging is the leasing activity we're seeing in Pittsburgh. So we like the activity we're seeing there, both PPG starting to see more activity at EQT as well. So I'm encouraged overall by both the fundamentals and then eventually our ability to get out, but it's just gonna take time, and we're gonna be patient.

Blaine Heck (Executive Director of Senior Equity Research Analyst)

Very helpful. Thank you, guys.

Brendan Maiorana (CFO)

And-

Operator (participant)

Our next question is from Ronald Kamdem with Morgan Stanley. Your line is now open.

Ronald Kamdem (Managing Director of Head of US REITs and CRE Research)

Hey, just two quick ones from me. Just starting on the leasing front, which has sort of been pretty strong. I think you talked about, you know, ending the year sort of at the, you know, better half of the 87, 87+ sort of, range and so forth. I guess my question is just, number one, is it just more leasing activity overall on the market, or is it really sort of this flight to quality, where it's just a fair game? And then, number two, just any more commentary in terms of the bottoming of occupancy next year, you know, what could you share sort of what levels are you guys sort of, thinking at, all else equal? Thanks.

Brendan Maiorana (CFO)

Hey, Ron, it's Brendan. Good morning. Yeah, so just first on kind of that outlook for year-end. I think what we've said for the past quarter or so is, I think originally part of the year, we said 86%-87%. I think we feel in terms of year-end occupancy, we feel comfortable in the upper half of that range now. So kind of somewhere between 86.5% and 87% is where we think we'll kind of end the year. So that's kind of where we expect those levels to be. I think the reason why we feel better overall, or why that number is higher, is just the leasing activity that we've had this year has been better, and I do think that is largely market share driven.

If you look at our occupancy relative to the markets that we operate in, that spread has continued to widen, and we think that that's likely gonna be the case as we go forward for all the main things that Ted mentioned earlier, which is kind of flight to quality buildings, flight to quality landlord, and landlords that have access to capital, so we would expect that would continue. When you get past year-end, there's still some known vacates that we have in the early part of 2025 that we've talked about. We think we have mitigated a lot of that risk through the leasing that we've done thus far on future leasing that will commence generally later in 2025.

So the trough is still gonna be lower in the first half of the year than it is for year-end 2024. But we think we're gonna build that back as we progress throughout 2025, because once you get through the first part of the year, there really aren't a lot of large known vacates in the portfolio. And as we disclosed last night in the press release, our second largest remaining 2025 expiration, we renewed. So we feel good about that. So we think we will end next year, from an occupancy standpoint, probably somewhere comparable to where we'll end 2024.

Ronald Kamdem (Managing Director of Head of US REITs and CRE Research)

Great. That's really interesting to sort of fly this next year. Just switching gears a little bit to the capital markets. I know we had a couple conversations about getting back on offense and, you know, start especially at this part of the cycle. Maybe you could just provide some updated thoughts, what you're seeing out there in terms of whether it's distressed or not distressed opportunities, and any sort of cap rate commentary, to get back on offense. Thanks.

Ted Klinck (CEO)

Sure, Ron. Look, we continue to look at everything that's in the market. There's just not a lot of wish list quality assets that are out there. A couple may be traded in the last quarter or so, but there's not a lot. So I think the distress continues to build. I think there's a lot of as well as the bid-ask spread is still there. So the sellers that even if they're not distressed, a lot of sellers don't wanna sell in this environment.

So I think my optimism is, if we can get a couple more cuts the next two quarters by the Fed, by the end of the year, next couple months, and then maybe into the first quarter of next year, capital markets are gonna open back up, and there's gonna be a fair amount of assets that do come to market, early next year. But, as of right now, there's just not a lot out there. We continue to hang around the hoop and work our wish list assets, but just not a lot out there right now.

Ronald Kamdem (Managing Director of Head of US REITs and CRE Research)

Great. That's it for me. Thanks so much.

Ted Klinck (CEO)

Thank you.

Operator (participant)

Our next question is from Rob Stevenson with Janney. Your line is now open.

Rob Stevenson (Managing Director and Head of Real Estate Research)

Good morning, guys. Ted, how much beyond this sort of $150 million of dispositions are you guys thinking about teeing up, you know, over the next, call it, six months? I mean, is this it for a while until you start to see some of these acquisition opportunities, or are you gonna continue to be active, regardless of acquisition opportunities, selling down some of the assets over the next six-to-nine months?

Ted Klinck (CEO)

Yeah, Rob, look, I think we're, if you look at our, you know, history, we're continuous asset recyclers, so we're always sort of pulling from the bottom and selling assets and repositioning and into higher quality stuff. So I think you're gonna see us continue to do that, and just a reminder, that $150 million, I think, Blaine asked the question, it does not include Pittsburgh. So the $150 million is other assets we have out in the market that we're actively marketing, and, you know, most of them, what you're gonna see us sell is a lot like what we've sold the last several years. I think largely multi-tenant, some of our larger assets that are more capital intensive.

I think you're gonna continue to see us do that and hopefully rotate into higher quality assets once the capital markets are open back up.

Rob Stevenson (Managing Director and Head of Real Estate Research)

Okay, that's helpful. And then beyond the actual income-producing assets, are you guys also out there looking for office development sites for the next cycle? And how is pricing there? Has it gone down materially, you know, stayed relatively flat, or has that just been re-entitled for apartments or something else at this point? How would you characterize your desire for land as well as pricing?

Ted Klinck (CEO)

Yeah, look, guys, if you look at our land bank, I think we've done a great job over the last several years, selling off older land that maybe had a higher and better use that was not office. We sold several parcels to multifamily developers over the last several years, as well as we've bought what we think is better BBD or mixed-use type development land. So when I look at our land bank today, it's probably in the best shape it's been in a long time. And so we're really not actively looking for any land right now. In fact, we just sold a small parcel this past quarter, and then we have a couple other parcels that will likely sell next year.

So, hard to characterize it, given we're not out there making offers on land to buy, but I do think there's plenty of buyers out there for the right parcels.

Brendan Maiorana (CFO)

Yeah, Rob, and I'm just gonna add...

Rob Stevenson (Managing Director and Head of Real Estate Research)

Last one for me.

Brendan Maiorana (CFO)

Yeah, Rob, sorry, it's Brendan. I'm just gonna add to that a little bit. In the Sun Belt, we've got kind of $300 million plus of land held for development between core and non-core, I think you should expect that number to go down over time. So that's a, you know, that's probably a little bit higher than what we would expect to carry. So if anything, I think we'll get net proceeds from land sales that will be helpful in terms of, in terms of capital coming in the door, rather than looking to acquire additional land for development.

Rob Stevenson (Managing Director and Head of Real Estate Research)

Okay. Is there any of that contemplated in the fourth quarter guidance?

Brendan Maiorana (CFO)

No, nothing in fourth quarter.

Rob Stevenson (Managing Director and Head of Real Estate Research)

Okay. All right.

Brendan Maiorana (CFO)

And nothing in fourth quarter, and nothing in that 150.

Rob Stevenson (Managing Director and Head of Real Estate Research)

Okay. And then, you guys fortunately only report one FFO number. Is there any impact to fourth quarter earnings from the hurricanes at this point for you guys?

Brendan Maiorana (CFO)

Yeah, it's a good question. There's probably a little bit that is in there that we would expect to incur in terms of some non-recoverable operating expense items. I wouldn't say it's a big needle mover, but if you're kind of looking for something at the margin, there's a modest impact there. But it, you know, not something that we felt like was significant. And, you know, we would expect to recover most of those costs, but not all of them.

Rob Stevenson (Managing Director and Head of Real Estate Research)

All right. That's helpful. Thanks, guys. Appreciate the time this morning.

Operator (participant)

Our next question is from Michael Griffin with Citi. Your line is now open.

Michael Griffin (Senior Equity Research Analyst)

Great, thanks. I wanted to ask my first question just on the leasing pipeline and particularly on the weighted average lease terms this quarter. They seem pretty strong. I know that, you know, it can fluctuate around quarter to quarter, and maybe it's, you know, largely impacted by some large leases that you've done. But should we take this as kind of an expectation that there has been, you know, more confidence in real estate decision makers signing leases? Or are, you know, people still kind of dragging their feet when it comes to committing to kind of right sizing their office footprint?

Ted Klinck (CEO)

Yeah, Michael. Look, I do think the decision making has really slowed down the last couple of quarters, and I think that's partially economy, but it's also the return to work. I think there's more mandates that are requiring their teammates to come back to the office. I do think some companies over disposed or shrank their offices. We've seen several come back to us after they've signed a lease and need more space. So but the decision making in general has slowed down. In terms of large, the term, I think it has more to do with the build-out of their space and their TIs. Again, we're able to keep face rents. On our lease economics today, face rents are still high and in some cases climbing, but TIs are as well. And to get...

For the tenant and customer to get the build-out dollars they need, they've got to commit to more term, and we're seeing the willingness to do that. So I think that's had an impact on the length of the term. Does that make sense?

Michael Griffin (Senior Equity Research Analyst)

Great. That's very helpful, Ted, and then just maybe going back to kind of transaction opportunities. I know you said the bid-ask spreads are still wide, and you haven't found anything that's in your wheelhouse or meet your criteria yet, but when you're underwriting transactions, can you give us a sense of maybe the IRR or return hurdles that you're looking at, maybe relative to your cost of capital, and then in terms of potential funding needs, you know, have you seen an openness in the debt markets, in the capital markets, you know, would you use it for equity funding, just trying to get a sense of how you might structure a prospective transaction.

Ted Klinck (CEO)

Yeah, maybe I'll hit the sort of way we look at the underwriting. Look, I mean, I think there's a lot of levers to pull there, and it all depends. You know, we look, as you know, as we've bought coming out of the GFC last cycle, it was, we bought a lot of opportunistic and value add office, but we're also buying core and core plus, so it's all risk adjusted for us. Well, we may need a double-digit IRR on a value add deal, and if it's a core asset with long, long lease term, great credit, it, it'll be a little bit below that. So we're all over the board. We're looking for high-quality assets we can get attractive risk-adjusted returns on. And that's, you know, over a longer period of time.

Brendan Maiorana (CFO)

Michael, it's Brendan. Just on the funding, I think you've seen the bond market's been there, and I think you've seen good response from the bond market, so that capital is certainly available. And then, as Ted mentioned earlier, you know, we've been successful monetizing non-core asset sales and would have those funds available to recycle into higher quality assets that have a better long-term growth path. So I think those would be sources of capital for us.

Michael Griffin (Senior Equity Research Analyst)

Great. Appreciate that color, Brendan. That's it for me. Thanks for the time.

Operator (participant)

We have a question from Nick Thillman with Baird. Your line is now open.

Nick Thillman (Senior Research Analyst)

Hey, good morning, guys. Just wanted to get some color on kind of the larger users and requirements. We had heard in Atlanta, in particular, that there's some new to market customers really looking at more suburban markets like North Fulton and Central Perimeter. But just wondering if that's a trend you guys have kind of noticed in some of your other markets in particular?

Ted Klinck (CEO)

I think absolutely, you're seeing larger customers come back to the office or come back to the market, right? And many of our markets, there are a lot of large users that were out there in the fall of 2022, and then interest rates started to tick up fairly quickly. A lot of those went to the sidelines. They continue to reevaluate the return to office, but we're seeing them, and we're seeing it both, not only some of the in-migration, some of the inbound activity, we're seeing it, as I mentioned on our prepared remarks, in the development there, the outreach for potential development deals from very large users. So again, it's all anecdotal, right? We are starting to see more customers. We didn't define large.

I mean, during COVID, we got to the point where we defined large as 25,000 sq ft or more, but certainly those that size is back, but even the 50s, 100s, 200s, you're starting to see more activity.

Nick Thillman (Senior Research Analyst)

That's helpful, Ted. And then, Brendan, it sounds like repositioning plans for Symphony Place are kind of. Do you have, like, a rough estimate of what the cost is gonna be for that? And then, as we look at same store, I know you guys traditionally don't move assets out of the pool, but, are you planning on keeping that within the pool or not for 2025?

Brendan Maiorana (CFO)

Yeah. Hey, Nick, it's Brendan. So on the Highwoodizing plans there, that is-- I mean, we have a pretty regular and robust what I would call pool of renovation dollars that go back into the portfolio on a normal basis, kinda every year. Symphony Place kind of fits within that, so we've been planning for this. So I wouldn't expect that you would see anything dramatically different in terms of capital spend associated with the Highwoodizing plans there, versus kind of what you've seen us do over the past many years. And we've done that successfully in our headquarters building here at 150 Fayetteville Street. We've done it at assets in Brentwood and Cool Springs, recently in Nashville as well. So that spend will kind of be consistent with what we've done over long periods of time.

And then, with respect to same store, yeah, as you correctly point out, we're not, we don't take assets that are office buildings, that are gonna remain office buildings, out of our same store pool. So, that will be in there. We will expense all of the operating expenses associated with that building, and we'll expense all of the capital on leasing associated with that building, through the normal channels.

Nick Thillman (Senior Research Analyst)

That's it for me. Thank you.

Operator (participant)

We have a question from Peter Abramowitz with Jefferies. Your line is now open.

Peter Abramowitz (Equity Research SVP)

Yeah, thank you. Just wondering if you could comment on any uplift in the rents on the Vanderbilt lease, as well as the other lease you called out in the press release, and sort of how that impacted the leasing spreads in the quarter.

Brian Leary (COO)

Hey, Peter, Brian here. We've had a long relationship with Vanderbilt. They kind of renew in place as they have kind of every five years, and it's a good economic deal, and there's not much more to talk about the specifics on that, but we were happy with the net effectives on that and low capital committed to it.

Peter Abramowitz (Equity Research SVP)

Sorry. So when you say they renew in place, there's no uplift in rents when the renewal kicks in next year? It's just kind of flat.

Brendan Maiorana (CFO)

Yeah, Peter, it's Brendan. Yeah, it's just sort of a continuation of kind of the normal rent escalators that we've had there. So shouldn't expect to see any big needle movers there with respect to that renewal.

Peter Abramowitz (Equity Research SVP)

Okay, got it. And then, stepping back overall on the higher effective rents and the better leasing spreads, overall in the quarter, I guess, should we kind of take it overall as a sign of increasing pricing power? Or was there anything sort of that's more one-off? I know. I think, Brendan, in the past, and it's still been the case recently, that you talk about typically kind of plus or minus 5% mark to market cash on the portfolio. So, just curious if we should take, you know, this quarter's results as a sign of that getting better, going forward.

Brendan Maiorana (CFO)

Yeah, Peter, it's Brendan. I'll start and maybe let Ted or Brian add to it. I still think, you know, what we've talked about is kind of on a cash basis, I mean, mark to market, plus or minus, you know, flattish, we think is still probably a good kind of guidepost. Obviously, in any given quarter, things are gonna be volatile, so this quarter was, you know, was high at over 10% positive. You know, I think we were negative, maybe modestly, in the first couple quarters of the year. So those things are gonna bounce around a little bit. I still think it's probably a pretty good guide to, you know, to kind of be flat to, you know, low single digit positive, is probably a good gauge from a cash rent spread perspective.

Ted Klinck (CEO)

The only thing I would add-

Peter Abramowitz (Equity Research SVP)

That's helpful.

Ted Klinck (CEO)

Peter, again, we focus more on net effective rents versus the spreads, just because we do every quarter, quarter in, quarter out, we do several as is deals that really don't require any capital. And in those cases, sometimes you do have a little bit of a roll down in rents, but if we can get an attractive net effective rent, you know, we're okay doing those type of deals.

Peter Abramowitz (Equity Research SVP)

Thanks, Ted. And one more, if I could. You called out the renewed interest in build-to-suit, so I know the conversation is still early, but just wondering if you could comment on which specific markets there seems to be interest in.

Ted Klinck (CEO)

Yeah, probably early to do that. What I will share, look, we've had more than a, well, about a handful type of conversations. One is that it would be a new market, or it might end up being a fee type thing if it goes anywhere. Who knows? All these are early. We're just our development team is just ecstatic that we've got stuff to work on. But it's great to see the inbounds again. It's been quite some time.

You know, it's been three or four years since we've had the practice, but just receiving the call and getting the inquiry and the interest level was great from an in-migration standpoint, but it's also great to see large users and some of their views on return to work and the importance of being in the office. So again, these things are gonna take a long time. As I think we've talked about in the past, some of our development deals take two or three years to play out, but even just being at the table, I think is nice to see.

Rob Stevenson (Managing Director and Head of Real Estate Research)

All right, that's all for me. Thanks.

Operator (participant)

Our question is from Dylan Burzinski with Green Street. Your line is now open.

Dylan Burzinski (Senior Analyst)

Hi, guys. Ted, just sort of on continuing with the build-to-suit theme here. I mean, I know you're, it's still in the early stages, but sort of curious what sort of return hurdles or yield on cost hurdles you guys would need in order to progress with those build-to-suit opportunities.

Ted Klinck (CEO)

Yeah, Dylan, look, the bar is high, right, on development, very similar to what it is on acquisition. So, you know, we're gonna look at our cost of capital, but really, what's the big hurdle here is the rental rate necessary. We're not seeing costs come down, so without a doubt, the return on cost is gonna be higher. The financing costs are higher, even to go get a loan. There's build-to-suits out there that have had very difficult time even obtaining financing, so that gets factored into the mix. And then the hard and soft costs aren't coming down either. So, the bar is high, and I think customers are getting educated on that right now.

But it's, you know, just given the environment, the bar is pretty high from a yield perspective, which translates to a pretty high rent.

Dylan Burzinski (Senior Analyst)

And then maybe just touching on net effective rent growth prospects. I know you guys highlighted sort of having the highest net effective rent in leases signed in the quarter. But as you sort of look at the portfolio today, you know, you're approaching, you know, high eighties occupancy. Obviously, you'll have some vacancy early next year, but you kind of alluded to recovering a lot of that occupancy in the latter half of 2025. So just sort of trying to get a sense for prospects for a continuation of further net effective rent growth as you sort of approach that 90% portfolio level occupancy.

Ted Klinck (CEO)

Yeah, maybe I'll start, and Brendan or Brian can jump in. Look, I think net effective rents jump around. There's still pressure on net effective rents from a TI perspective and certainly free rent, too. I think, you know, our markets are still challenging, without a doubt, right? You still have elevated market vacancy rates, so I think that's gonna continue for a while. So I think, you know, I think if we can maintain net effective rents, maybe grow them a little bit, I think we'd be happy with that. But I don't think anybody should have the illusion that there's a lot of pricing power in most of our markets. I think I do think it's submarket by submarket and BBD by BBD.

So it depends on the mix of leases you do in a certain quarter. But the leasing market is still challenging, and it's competitive. And you know, maintaining net effective rents is sort of our goal and to grow them a little bit if we can.

Dylan Burzinski (Senior Analyst)

Thanks, Ted. I appreciate it.

Ted Klinck (CEO)

Thank you.

Operator (participant)

There are no further questions in the queue at this time, so as a final reminder, it is star one to join the question queue.

Ted Klinck (CEO)

Thanks, everybody, for joining our call today. We appreciate your interest in Highwoods, and we look forward to seeing everybody, maybe at Nareit, next month. Have a great day.

Operator (participant)

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