Highwoods Properties, Inc. (HIW) Earnings Call Transcript & Summary

Good morning, and thank you for attending today's Highwoods Properties Q1 2025 Earnings Call. My name is Jane and I will be your moderator for today. [Operator Instructions] I'd now like to turn the conference over to our host, Brendan Maiorana. Brendan, you may proceed.

Thank you, operator, and good morning, everyone. Joining me on the call this morning are Ted Klinck, our Chief Executive Officer; and Brian Leary, our Chief Operating Officer. For your convenience, today's prepared remarks have been posted on the web. If you have not received yesterday's earnings release or supplemental, they're both available on the Investors section of our website at highwoods.com. On today's call, our review will include non-GAAP measures such as FFO, NOI and EBITDAre. The release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Forward-looking statements made during today's call are subject to risks and uncertainties. These risks and uncertainties are discussed at length in our press releases as well as our SEC filings. As you know, actual events and results can differ materially from these forward-looking statements, and the company does not undertake a duty to update any forward-looking statements. With that, I'll turn the call over to Ted.

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 macro-economic 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 square feet 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 million, 135,000 square foot 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 square feet in a 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 square feet of second gen office space, including over 250,000 square feet of new leases plus 43,000 square feet of net expansion leases. Leasing economics were strong with net effective rents more than 20% higher than our prior 5-quarter average. Plus, April leasing volumes have accelerated with over 200,000 square feet of new second gen lease volume in just the first four weeks of the second quarter highlighted by a 145,000 square foot lease with a new Highwoods customer at Symphony Place in Nashville. This lease is scheduled to commence in Q2'26 and backfills nearly 2/3 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 Highwoodtizing 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 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 square foot lease at Symphony Place, we have already locked in over 40% of this future upside with leases that have been signed but haven't 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 Three in Raleigh and Granite Park Six 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 mid-point of our 2025 FFO outlook by $0.04 to a range of $3.31 to $3.47 per share. We continue to actively underwrite new investments. There are still many office owners that face nearterm 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 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 Sun Belt 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?

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 first quarter. Our team signed 88 deals for a total of 700,000 square feet 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 remains strong across our $474 million development pipeline. As Ted mentioned, we signed 97,000 square feet of first generation leases, including 48,000 square feet at Glenlake Three, our mixed-use development in Raleigh which is now 78% leased, and 43,000 square feet at Granite Park Six, our joint venture development with Granite Properties in Dallas' Plano BBD which is now 58% leased. Both of these developments are forecast to stabilize in the first quarter of 2026 and we are pleased with the continued prospect pipeline. During the quarter we delivered $272 million of development with the completion of 23Springs in Dallas and Midtown East in Tampa. These projects were delivered on time and on budget at a combined 58% pre-leased. As a reminder, we forecast 23Springs 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 lists of distinction such 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 #1 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 square feet and signed the most volume in the quarter with 316,000 square feet 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 Three 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 square foot 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 square feet, of which almost half represented new leases, rounding out our markets in Nashville and just a few months after a long-communicated move-out, we have backfilled over two-thirds of this vacancy with a 145,000 square foot customer new to Highwoods' portfolio at our Symphony Place tower downtown. The market response to our Highwoodtizing 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 a 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?

Thanks, Brian. In the first quarter, 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 disposition 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 giveback, 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 giveback, plus took additional space. Otherwise, there were no unusual items in the quarter. We are pleased with our first quarter 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 didn't 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 to $3.47 per share, which equates to a $0.04 increase at the mid-point. There are always a few moving parts when we update our outlook but at a high level, $0.03 is attributable to partial year impact from the Advance Auto Parts Tower acquisition and $0.01 is from operations. In our initial 2025 outlook in February, we provided detail around what our same property and occupancy outlook would be excluding 4 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 hasn't 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 don't plan to include them in future updates. We're 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 leases for over 40% of this total. The biggest component of this future growth is a combined 250,000 square feet across 2 leases, at Two Alliance Center and Symphony Place, with both leases projected to start mid-to-late Q2'26. Our GlenLake Three and Granite Park Six 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 haven't yet commenced. Most of this $6 million of annual upside will be in place by the middle of 2026. While we've provided a roadmap of the upside potential from these 6 specific properties, it's important to note that 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-1 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 longterm, 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 cap-ex 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 Instructions] Our first question comes from Rob Stevenson with the company, Janney.

Ted, would you do any significant level of incremental dispositions from here without a corresponding acquisition lined up? Or are those separate discussions in terms of your thoughts?

Rob, Sure. No, I think as you saw in our guidance, we've left -- we've closed the obviously $145 million sale. We've got another up to $150 million of additional dispose. We've got a couple of 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 '25 closings. So yes, we're going to -- whether we find something or not, we're going to continue to recycle non-core assets. We want to create some dry powder.

Okay. And then 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, where they're not, we're in a recession, et cetera, before they make commitments to maintain or how much space they would downsize or upsize?

Yes, Rob, I think that's a great question. We ask that internally all the time of our leasing agents, and 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. But 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. So we have not seen that. But we are -- we ask ourselves that as well.

Okay. And then last one for me. Is the second quarter '26 occupancy on the Two Alliance Center and Symphony Place leases due to expiration of their existing leases. Or is there a more extensive time frame that's going to take you guys to do the improvements there?

No. We're in the process of doing the improvements now. So the customer -- as you know, I think you said Alliance Center. So the former customer moved out last fall and then the new customer backfilled of a big law firm, they'll take occupancy in the second quarter of next year. So they're in process of starting to build that now.

Okay. And Brendan, how significant -- is the CapEx and 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?

Yes, Rob, it's not unusual give the sense that it's a long-term lease, and we've done the one sizable lease in Nashville as a long-term lease for 145,000 square feet. So that TI is very much kind of in line with what you would probably expect in terms of market. And then the other new leasing that we disclosed another over 50,000 square feet is also kind of in line with what you would expect. But I would say, I think our expectation is you will see leasing capital higher over the next -- the 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. So I think we expect leasing capital to be higher in terms of spend for the next several quarters.

Next question comes from Vikram Malhotra with the company Mizuho.

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 first quarter or first half. Can you just give us a sense of how you think -- how the cadence will go based on the puts and takes as you outlined in the new guide?

Yes, Vikram, good question. It's 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. And then we'll grow kind of late in the year. And I think that, that still holds. There's probably a little bit more movement in the occupancy trends for maybe the second and third quarter 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.

Okay. And just to clarify, what level of new leasing have you baked in to kind of hit your occupancy guide?

There's -- so -- there's some 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 '25, most of that, if we're able to be successful and lease-up is going to drive occupancy higher in 2026. And so 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 square feet of new per quarter on average puts us well positioned, we think, to drive occupancy higher. And I think if we're able to do that during 2025, it should position us well to grow occupancy as we migrate throughout 2026.

Okay. Great. And 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?

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 from in-migration from that estate. But we're starting to see more office inquiries which I think is fantastic. None of the ones -- well, there's a few big ones out there that are poking around that project names or multi-market searches that just take a long time. But there's a lot of singles with doubles out there that might be a floor or two floors. So I'm encouraged just in general, by the activity and what we're hearing from the economic development folks.

Next question comes from Blaine Heck with the company Wells Fargo.

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?

Blaine, it's Brian. I can take the first shot at that. Generally, no. We used to be still always have a few folks who might be consolidating their company, looking to moving in and looking to short term 3 years to kind of figure that out. But that's not at a specific response to necessarily, at least what they're telling us, the economy. But our wallet that came through on this latest amount of leasing, the commitment and Nashville Symphony Place is a long-term one. So we're 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.

And then, look, the only thing I would add is our expansions are outnumbering our contractions 4:1 this quarter. And we had 20 expansions only 5 contractions and that 20 -- just the count, it is the second highest count we've had in over 5 years since 2019. So our customers are expanding. They're growing and they are willing to take -- make space commitments.

One other little nuance I'll add, Blaine, is that the pipeline for new construction, new deliveries has basically stopped, but for maybe 2 markets, Dallas and maybe Charlotte and then a small building elsewhere. And so I think what we're seeing from many customers is realizing their options will be dwindling, particularly on best-in-class commute-worthy space. And so they feel like the idea of making the decision sooner or 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.

Okay. Great. And Ted, and just a 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?

Yes. Maybe I'll start and let Ted follow on. So yes, 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. So I think that's been the focus of the company for a long time. And we continue to think about growing the business by growing risk-adjusted free cash flow. But 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. So we really program that in to just thinking about the business over the cycle. And that goes into both balance sheet strategy, but then also planning capital projects or Highwoodtizing projects as we think about reinvesting within the portfolio. But with all of that, we understand that capital is going to be lumpy, and it's going to cause cash flow to be lumpy. And so we just program that in. And so we think that cash flow will be lower over the next couple of years than it has been over the past few years but that's just a normal part of the business. And 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.

The only thing I would add, Blaine, is Brendan mentioned it in his prepared remarks, since the onset of the pandemic we have generated over $150 million of free cash flow above our dividend. So it is going to be lumpy with the big move-outs to re-lease the space, but we feel comfortable with where we are.

Yes. And Blaine, sorry, I forgot to mention just the $150 million in cash flow, that's a true free cash flow metric. So 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. So that's included in that number. So even with that capital factored in, we still generated over $150 million of retained cash flow above the dividend over the past few years.

Next question comes from Peter Abramowitz with the company Jefferies.

Yes. 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's rents were?

Yes, it's essentially flat, Peter.

Okay. Got it. That's helpful. And then elsewhere on the core 4. So you've made the progress here at Symphony and some progress down to Alliance Center. Just wondering if you could comment on sort of the other assets, where sort of tenant requirements you're seeing in the space, how much leasing coverage you have would be helpful.

Sure. Yes, you alluded to obviously backfilled down to Alliance center, a vast majority of novel space. We touched on Pinnacle Symphony Place, backfilled Bass, Berry, 68% of that. The other ones are Westwood South. It's a building in Nashville. So that's -- we had -- earlier this year, we had 128,000 square foot customer vacate. And 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% to 80% of the building. And then we've also got some smaller guys who are sort of just putting sort of wait and see how these other two play out. So we're very confident and excited about the activity we have at Westwood South. And then down at Cool Springs V and former Tivity building, we believe 40% of that, and we've got prospects for, I'd tell you, probably more than the remaining vacancy there. Again, nothing signed yet, but the tour activity, just the Highwoodtizing the response we're getting to the Highwoodtizing efforts down there has really spurred demand. So we're incredibly excited and optimistic about the activity we're seeing across the board in the core 4.

But -- and one more, if I can. So 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. So that's helpful on, I guess, the leasing side. Curious kind of what you're seeing just more broadly across your markets on the capital market and transaction side and sort of -- does it seem like deal velocity has changed much since Liberation Day and kind of just general thoughts on the transaction market in this SunBelt.

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've 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, very active. But you're also starting to see some life companies and some banks come back and start looking at office loans, which is great. Then 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. So 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. So I think office capital markets are fine and I'm optimistic you're going to see a higher transaction volume this year than we have in the last few years.

Question comes from Nick Thillman with the company Baird.

So 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. So what's the behavior you kind of seeing there? Are they downsizing from their initial footprint? And I guess what's really appealing about your sort of assets in these markets? Is it lack of availability or dislocation? A little bit more commentary there would be helpful.

Nick, it's Brian. I'll take the first on your very specific question about kind of space needs and appetite. And I don't want to speak for our new customer, but they spoke to the local paper overnight. And 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 are now working. So 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. So that's -- there's 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. So that's kind of a good thing.

Yes. The only thing that 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. So the large lease that we did in the quarter was a large financial services user who expanded during the quarter. And then we had another Fortune 500 company who was new, who came in new to market growth. So while there's been 2 prominent deals that are law firm deals within our portfolio and the core 4, if you will, I think we've seen a pretty broad-based growth across our customer base.

No, that's very helpful. And then I just wanted to touch a little bit on 2026. You said 2025, retention a little bit lower, but '26, you felt like that the renewal activity was going to be there and pretty high retention. So is that still the case? And or kind of spec leasing overall kind of tracking with your initial outlook for '25 as well?

Yes. I would say. So with respect to '25, 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. And then 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. And I think we'll be back to more normalized levels of retention in 2026 relative to kind of where we've been late in '24 and then in '25. So 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 throughout '26.

Our next question comes from Dylan Burzinski with the company, Green Street.

I guess just sort of going back to Peter's line of question around capital market changes. Ted, I think you mentioned having smaller assets in the market today. Have you seen any change as it relates to the pricing expectations or buyer appetite since sort of April 2, Liberation Day?

Not at all, Dylan. Again, we don't have a lot of data points on our -- because 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. But it wouldn't surprise me just to your point, again, we'll have to wait and see the next 30, 60 days or whatever. But 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 want to -- 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, so we're continuing to field calls from users as well as potential buyers that are looking to transact. So I think there's a lot of money on the sidelines that's looking to invest in office buildings these days.

Great. I appreciate those comments, Ted. And I guess just going back to the demand side not changing as well. But are you starting to see any cracks on free rent period moving higher, TI packages being higher. I know you guys commented on this net effective in the quarter being higher than they were 5 quarters ago, but any change in the last several weeks as it relates to the leasing economics?

Not really. In fact, I would tell you the concessions in many of our submarkets are starting to level off. I think we've probably hit peak TIs and peak free rent. So depending on the submarket and in some cases, a specific deal and location, you're starting to see concession subside a little bit even. So -- which is, again, that's encouraging for the overall office market, especially given there's no new deliveries in the next couple of years or a 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. So we're encouraged about the overall fundamental picture improving over the next couple of years as well.

Our next question comes from Omotayo Okusanya with the company, Deutsche Bank.

Yes. Again, congrats on to a solid quarter and great momentum there. Wanted to understand guidance a little bit better. You talked about a $0.01 increase from operations but there really are no big changes to your guidance assumption. So trying to understand maybe something is happening on the non-same-store pool. And then the $0.03 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 a potential additional $150 million. So acquisition guidance doesn't seem like it's changed much as well, but you're expecting the $0.03 pickup on that end as well. So if you could just help us kind of understand the $0.04 increase that would be helpful.

Tayo, it's Brendan. I'll take that. Thanks for the question. So just firstly, on the acquisition. So we provide the guidance in terms of color on acquisition activity, but we don't include that in the FFO number. And so what happened with the February outlook is we had sold the assets in Tampa, that $145 million. So that was -- that dilution, if you will, was kind of in that number, but we hadn't closed on Advanced Auto Parts Tower. We closed on that a month or so after we had provided that initial outlook. So the closing of that, then that obviously goes into the number, and that's $0.03 there, if you just take roughly 9 months of ownership in that asset relative to the cost of capital to pay for that. And then the penny of better operations, I mean, could you move the numbers around a little bit in terms of 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 of million bucks. So really, you kind of have -- some of that is just in play there as well. So 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, but a bunch of stuff moves around. But I think the general parameters of same-store guide, occupancy guide, not much really has changed there.

Our next question comes from Ronald Kamdem with the company Morgan Stanley.

Just two quick ones from me. I think one on the 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 your thinking is there would be helpful. And 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?

Sure. Ron, first on Pittsburgh, really no update on Pittsburgh. We continue to monitor the situation, just like we have in the last couple of years. And I think when the capital markets open up, more for large assets like the ones we own, we'll be -- we're going to find the right time to sell those assets. So really no update there. And then on the acquisition front, we're underwriting stuff. We're -- our pencils are -- we're underwriting various opportunities, but really nothing to talk about. And we'll just see how things play out. But it's just nice to have acquisition opportunities that are out there right now, but really nothing to talk about.

Great. And then my second one was just on the cadence for the same-store. The midpoint is 3%, which is where you sort of were in 1Q. Should we be expecting sort of a dip in 2Q and then a recovery in the back half of the year? Just how should we think about how that's going to trend?

Yes, it's Brendan. Good question. Yes, 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 to obviously anniversarying against those prior quarters is a challenging comp. So I would expect it to weak in Q2 and weak in Q3 and then as we had occupancy down in Q4 last year, I think we'll do better on a relative basis in Q4 of this year. So I think that's -- in terms of expectations on same property guidance, I think that's a good way to think about it.

Our next question comes from Seth Bergey with Company Citi.

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? And then 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.

Sure. Seth. Look, I don't think necessarily uncertainty is impacting us a whole lot. We look at the fundamentals when we underwrite deals, whether it's 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's vacant space? So there's a lot of levers that go into coming up with our overall underwriting assumptions. So -- but I don't think we've changed a whole lot in the last 30 days or so. It just -- but it's very micro as we look at the asset in the submarket -- or second part? I'm sorry, Seth, on the markets... Yes. Second part, on the markets. Look, we've entered Charlotte 5 years ago, Dallas 3 years ago. So I think we like our footprint right now, and we poke around other markets, but we're sort of pretty pleased with the markets we're in right now.

There are no more questions registered in the queue. [Operator Instructions]

All right. It doesn't look like we have any additional questions. So 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.

That will conclude today's conference call. Thank you for your participation, and enjoy the rest of your day.