Highwoods Properties(HIW) - 2025 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported FFO of $0.90 per share for Q4 2025, including $0.06 from land sale gains, resulting in a full-year FFO of $3.48 per share, which is 2% higher than the midpoint of the original outlook for 2025 [8][24] - Net income for Q4 was $28.7 million, or $0.26 per share [24] - The initial 2026 FFO outlook is set at a midpoint of $3.54 per share, which is 5.7% higher than the initial 2025 outlook [8][26] Business Line Data and Key Metrics Changes - The company leased 526,000 sq ft of second-generation space in Q4, including 221,000 sq ft of new leases, with a total of 3.2 million sq ft signed for the year [8][19] - The development pipeline is now 78% pre-leased, up from 72% last quarter and 56% one year ago [9] - Cash rent spreads were positive, with GAAP rent spreads in the mid-teens, and net effective rents were 20% higher than in 2024 [9][19] Market Data and Key Metrics Changes - The Sun Belt markets are experiencing strong demand, with limited new supply and positive net absorption [18][20] - Charlotte generated more nominal jobs than any other metro area except New York City in 2025, indicating robust economic activity [20] - Dallas is noted as the number one market to watch, with significant net absorption and a strong Class A office market [22] Company Strategy and Development Direction - The company is focused on investing in high-quality office and BBD locations in the Sun Belt, with a projected NOI growth potential of $50 million-$60 million across eight buildings [6][7] - Future investments are expected to drive additional growth, with approximately $800 million invested over the past 12 months [7] - The company plans to complete $190 million-$210 million of additional dispositions by mid-year 2026 to fund acquisitions and maintain a leverage-neutral position [16][26] Management's Comments on Operating Environment and Future Outlook - Management is optimistic about the next few years due to strong fundamentals in core markets, limited new supply, and ongoing demand from companies [5][6] - The company expects to drive occupancy higher by roughly 200 basis points from the end of 2025 to the end of 2026 [6] - Management noted that expansions outpaced contractions 2.5-to-1 for Q4 and over 3-to-1 for the year, indicating a positive leasing environment [19] Other Important Information - The company has filed a new S-3 shelf registration statement with the SEC, allowing for future capital market transactions [32] - The company plans to fund recent acquisitions on a leverage-neutral basis, primarily through the sale of non-core assets [25][26] Q&A Session Summary Question: When does the company expect to realize elevated growth rates from capital recycling? - Management indicated that the impact on 2026 numbers is one-time in nature, with growth expected to normalize in 2027 [34][35] Question: How is demand for the remaining leasing in the development pipeline? - Management reported strong demand, with continued progress in leasing throughout 2025 [37] Question: Has the company seen any impact from AI-related layoffs in its markets? - Management stated that they have not observed any significant impact from AI-related layoffs, with continued demand for office space [41][42] Question: What is the expected occupancy bridge throughout the year? - Management expects occupancy to improve steadily throughout the year, despite some initial drag from recent acquisitions [54][56] Question: What percentage of the $200 million non-core sales is related to land sales? - Management clarified that none of the $200 million is related to land sales, which are expected to occur later in the year [52] Question: What is the leasing target to grow occupancy? - Management indicated that approximately 700,000 to 750,000 sq ft of new leasing is needed to achieve the year-end occupancy target of 87.5% [73][75]