Executive Summary / Key Takeaways

• Highwoods Properties is strategically focused on owning, developing, and operating high-quality office properties in the most desirable Best Business Districts (BBDs) across the Sunbelt, a region characterized by strong job growth and in-migration.
• The company is actively executing an asset recycling strategy, selling older, non-core assets to fund investments in higher-quality properties and development projects, a move that strengthens the portfolio and enhances long-term cash flow, despite modest near-term FFO dilution.
• Recent strong leasing activity, including significant new and expansion leases with favorable economics and long terms, is building a substantial backlog of signed but not yet commenced leases, positioning the company for occupancy and NOI growth starting in the latter half of 2025.
• A robust development pipeline, now 63% leased, is expected to deliver substantial incremental NOI upon stabilization over the next few years, further bolstering earnings and cash flow.
• Highwoods maintains a conservative and flexible balance sheet with ample liquidity and no significant debt maturities until 2026, providing the capacity to fund operations, capital expenditures, and pursue opportunistic acquisitions in a thawing transaction market.

The Sunbelt Strategy: Building Resilience in Best Business Districts

Highwoods Properties, Inc. operates as a fully integrated office REIT, primarily through its Operating Partnership, focusing on owning, developing, acquiring, leasing, and managing office properties. The core of its strategy is concentrated within the Best Business Districts (BBDs) of key Sunbelt markets: Atlanta, Charlotte, Dallas, Nashville, Orlando, Raleigh, Richmond, and Tampa. This geographic focus is deliberate, targeting regions that have consistently demonstrated robust job growth, population in-migration, and a favorable business environment, often outperforming national trends. The company's vision is centered on "work-placemaking," creating environments and experiences designed to attract and retain talent for its customers, thereby delivering value to both tenants and shareholders.

The company's history is marked by a strategic evolution, notably through a consistent and disciplined asset recycling program. Since 2019, Highwoods has divested over $1.5 billion in non-core properties – typically older, more capital-intensive assets located outside the prime BBDs. These sales have funded approximately $1.8 billion in acquisitions and development projects in higher-quality, "commute-worthy" locations. This capital rotation, while sometimes causing a modest short-term headwind to FFO due to exit cap rates often being slightly higher than initial acquisition yields (around 50 basis points difference on average), is explicitly aimed at improving the overall portfolio quality, enhancing long-term growth prospects, and strengthening the resilience of cash flows. The recent sale of $146.3 million in Tampa buildings and Pittsburgh land in Q1 2025, coupled with the $137.9 million acquisition of the Class AA Advance Auto Parts (AAP) Tower in Raleigh's vibrant North Hills BBD, exemplifies this strategy in action – a leveraged-neutral rotation into a higher-quality asset with embedded growth potential from below-market rents.

Within the broader office market landscape, Highwoods operates amidst significant shifts. The industry is experiencing a pronounced "flight to quality," where tenants increasingly favor well-located, amenity-rich buildings owned by financially stable landlords capable of investing in their properties. This trend is amplified by the ongoing, albeit uneven, return-to-office movement, with a significant percentage of CEOs anticipating a full return over the next few years. Concurrently, the supply pipeline for new office construction has diminished significantly across Highwoods' markets, with the under-construction inventory representing only about 1% of existing stock and largely pre-leased. This limited new supply, coupled with the absorption of high-quality space and decreasing sublease availability in some markets, is creating a more favorable competitive dynamic for owners of desirable assets.

Highwoods positions itself competitively by leveraging its deep market expertise in its chosen Sunbelt BBDs and its vertically integrated owner-operator model. While direct quantitative comparisons across all competitors are complex, Highwoods' focus on operational efficiency in its regional markets allows it to maintain competitive operating costs. Against larger, gateway-market focused REITs like Boston Properties (BXP), Highwoods offers geographic diversification and potentially faster lease-up times in its growth markets, though BXP may hold an edge in scale and technological investment in its core urban centers. Compared to specialized REITs like Alexandria Real Estate Equities (ARE), which focuses on life sciences, Highwoods' broader office strategy offers diversification, but ARE's niche focus and higher R&D spending may yield higher growth rates and margins in specific tech-heavy submarkets. Highwoods' "Highwood-tizing" strategy – reinvesting in and repositioning existing core assets like Symphony Place in Nashville or Two Alliance Center in Atlanta – serves as a key operational differentiator, enhancing the appeal of its second-generation space and driving leasing velocity, although specific quantifiable technological advantages over peers in areas like energy efficiency are not readily apparent. The company's strong balance sheet and liquidity are critical competitive assets, enabling it to fund necessary tenant improvements and building upgrades that less capitalized owners may struggle to provide.

Performance, Pipeline, and Path Forward

Highwoods' recent financial performance reflects both the strategic shifts underway and the broader market dynamics. In the first quarter of 2025, the company reported net income of $100.0 million, a significant increase from $27.2 million in Q1 2024, primarily driven by substantial gains on property dispositions ($82.2 million vs. $7.2 million year-over-year). Rental and other revenues, however, saw a decrease of 5.2% to $200.4 million, largely attributable to lower consolidated same property revenues resulting from decreased occupancy and lost revenue from property sales. Operating expenses decreased by 4.9% to $148.9 million, benefiting from lower same property expenses (driven by reduced property taxes) and the impact of dispositions. Consolidated same property NOI was down 2.3% year-over-year in Q1 2025. Overall NOI decreased by 3.9% to $135.3 million, a result of lower same property performance and disposition impacts, partially offset by contributions from recent acquisitions and development deliveries.

Despite the near-term pressure on occupancy and NOI from known move-outs, Highwoods is building significant momentum for future growth through robust leasing activity. The company signed 700,000 square feet of second-generation leases in Q1 2025, including over 250,000 square feet of new leases and 43,000 square feet of net expansions. Leasing economics were strong, with GAAP rents on new and renewal leases signed in Q1 2025 averaging $35.88 per rentable square foot, 12.8% higher than previous leases in the same spaces. Net effective rents were more than 20% higher than the prior five-quarter average, although the weighted average lease term in Q1 2025 (5.2 years) was shorter than recent quarters, influenced by early renewals. This strong leasing volume has created a significant backlog, with the company's leased rate (including signed but not yet commenced leases) notably higher than its occupied rate, positioning it for future occupancy gains.

The development pipeline remains a key component of the growth story. As of Q1 2025, the $474 million pipeline was 63% leased, even after placing the 94% leased 2827 Peachtree development in Atlanta into service. Projects like Glenlake 3 in Raleigh and Granite Park 6 in Dallas, which were completed in 2023 but not yet stabilized, are seeing healthy leasing progress and are expected to contribute significantly to NOI growth. The recently delivered 23 Springs in Dallas and Midtown East in Tampa are also expected to drive future earnings as they lease up towards their stabilization targets (early 2028 and mid-2026, respectively). Upon stabilization, the current development pipeline is projected to add $30 million in incremental NOI above the 2025 outlook. While new speculative development starts are not anticipated in 2025 due to market conditions, the company notes increasing inquiries for potential build-to-suit projects.

Highwoods maintains a strong and flexible balance sheet, crucial for executing its strategy in the current environment. As of April 22, 2025, the company had approximately $18.0 million in cash and $604.9 million of available capacity on its $750.0 million revolving credit facility.

The leverage ratio stood at 42.8% of the undepreciated book value of assets as of March 31, 2025. Importantly, the company faces no scheduled debt maturities until May 2026.

This liquidity and financial strength enable Highwoods to fund necessary capital expenditures, including expected higher leasing capital in 2025 and 2026 as occupancy builds, and to pursue potential acquisition opportunities as the transaction market thaws.

Outlook and Risk Considerations

Highwoods has raised the midpoint of its 2025 FFO outlook by $0.04 to a range of $3.31 to $3.47 per share. This increase is primarily attributed to the accretive impact of the Advance Auto Parts Tower acquisition ($0.03) and a modest improvement from operations ($0.01). The outlook anticipates average office occupancy to range from 85.0% to 86.0% for the remainder of 2025, with same property NOI expected to be lower compared to 2024 due to anticipated lower occupancy and higher expenses. Rental revenues are also projected to be lower, offset partially by contributions from the recent acquisition and development deliveries. Interest expense is expected to be higher due to increased average debt balances and lower capitalized interest.

Management explicitly characterizes 2025 as a "temporary trough" for same property NOI and occupancy, with the expectation that the strong leasing momentum and development deliveries will drive growth starting in the latter half of the year and accelerating into 2026. They anticipate leasing capital expenditures to be higher in the near term as they invest to capture occupancy gains.

Investing in Highwoods is not without risks. The financial health of customers remains a key variable, and potential deterioration could impact revenues and increase credit losses. Macroeconomic uncertainty, including the potential impact of tariffs on construction costs and decision-making, could pose headwinds. The ability to successfully lease vacant space, particularly in the identified "Core 4" buildings with elevated vacancy, and to stabilize development projects on time and budget is crucial for realizing projected growth. Increases in interest rates could raise floating-rate debt costs and impact the ability to refinance or obtain capital on favorable terms, potentially restricting future investment or distribution capacity. Competition from other office owners, including those with different strategic or technological approaches, and the long-term impact of work-from-home trends on overall office demand, also present ongoing challenges.

Conclusion

Highwoods Properties is executing a clear and consistent strategy focused on high-quality office assets in resilient Sunbelt BBDs. While facing a temporary period of lower occupancy and NOI in early 2025 due to known tenant move-outs, the company's aggressive leasing efforts are building a strong foundation for recovery. The combination of a robust backlog of signed leases, a maturing development pipeline, and a disciplined asset recycling program positions Highwoods for meaningful occupancy and earnings growth starting in the latter half of 2025 and extending into 2026. Supported by a strong balance sheet and ample liquidity, Highwoods is well-equipped to navigate current market uncertainties, fund necessary investments, and capitalize on potential acquisition opportunities. The investment thesis hinges on the successful execution of its leasing and development pipeline, the continued strength of its target Sunbelt markets, and the ability of its BBD-focused, high-quality portfolio to capture market share in a bifurcated office landscape. Investors should monitor leasing velocity, development progress, and the impact of the asset recycling program on both portfolio quality and financial metrics as key indicators of the company's trajectory.