Release Date: July 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Highwoods Properties Inc (HIW, Financial) reported FFO of $0.98 per share, representing a 4% year-over-year growth.
- The company raised its full-year FFO outlook, increasing the midpoint by $0.03.
- Strong leasing activity with 909,000 square feet of second-generation leases and 352,000 square feet of new leases.
- Balance sheet remains strong with a debt-to-EBITDA ratio of 5.8x at quarter-end.
- Development pipeline is robust, with $506 million worth of projects that are 45% leased, expected to significantly bolster cash flow and earnings.
Negative Points
- Occupancy remains steady at 88.5%, not yet reflecting the strong leasing over the past few quarters.
- Potential lease cancellation at the former Tivity building in Nashville could impact occupancy and financial outlook.
- Higher interest rates have impacted the company's financial performance.
- Operating expenses are expected to be higher in the third quarter due to seasonal utility costs.
- The company faces challenges in the leasing environment, with continued pressure on net effective rents and high tenant improvement costs.
Q & A Highlights
Q: Just wanted to ask about expenses. It seems rental expenses were a bit lower this quarter. Just curious if there was anything specific driving that.
A: Hey, Andrew, it's Brendan. There is always a little bit of seasonality, but the biggest item was a tax payment related to 2023 in a triple-net building recorded in the first quarter, which did not recur in the second quarter. Additionally, there were some seasonal savings in operating expenses.
Q: Just curious if the buyer pool has expanded at all and any particular markets where you're sensing more interest?
A: Andrew, it's Ted. We closed about $80 million so far this year. We don't have anything else out in the market right now, but we're hearing there's a lot of money on the sidelines, and people are starting to think we're hitting closer to the bottom on the capital markets. So there are more bidders looking at assets now.
Q: Can you talk about mark to market? And what do you see that trending over the next few quarters?
A: This is Ted. I think mark to market is pretty flat and I would expect it to remain roughly the same over the next few quarters, given the challenging leasing environment and headwinds.
Q: Just wanted to go back to your comment on the Tivity backfill lease. Any details would be helpful.
A: We don't think it's going to change a whole lot. We have great prospects for backfilling that space. We're working out something with the current customer that makes sense for both of us. We have assumed no revenue from the backfill user in our current outlook for 2024.
Q: Can you talk about the ins and outs of your guidance?
A: On same property, we didn't change those assumptions. We did take a $1 million charge related to prior years into same property NOI. We've offset some negative impacts with better activity elsewhere in the portfolio, allowing us to keep the same-property outlook unchanged.
Q: Can you give a sense of the leasing environment and expectations there?
A: We've had a strong leasing quarter, and our leasing teams are busy. Our pipeline is as full as it's been in quite some time. We're seeing larger deals getting done, and we continue to benefit from some market distress. Overall, our activity is very good, and I'm optimistic about the second half of the year.
Q: How are you looking at these dispositions? Has pricing for assets improved as we get closer to rate cuts?
A: We don't have anything in the market right now, but we're hearing there's more capital looking to come back. Smaller deals are easier to get done, and I expect pricing to improve. The yields on future dispositions might be higher than what we achieved earlier this year.
Q: Can you comment on the role of distressed activities in the transaction market?
A: There's definitely distressed transactions out there, but it's taking a long time. We're looking for high-quality buildings, and while there's a fair amount of distress in lower quality assets, those aren't the assets we want. It's difficult to get our hands on the assets we desire.
Q: How do you think about the potential acquisition environment versus the balance sheet?
A: We're focused on continuing to build our dry powder and get more dispositions out the door. We've proven we can flex our balance sheet if needed, but right now, we're focused on the disposition side and finding the right acquisition at the right price.
Q: Would you consider issuing stock even below NAV to fund an investment if it was accretive?
A: We've been successful in monetizing non-core assets and recycling that capital into development and acquisitions. Equity is an option, but our first choice is to use proceeds from non-core asset sales, which has been balance sheet neutral and beneficial for portfolio quality.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
